ITEM 1: BUSINESS
General
The Vons Companies, Inc. ("Vons" or the "Company") is the second largest supermarket chain in Southern California based on sales. As of December 29, 1996, Vons operated 320 supermarket and food and drug combination stores. Vons also operates a fluid milk processing facility, an ice cream plant, a bakery and distribution facilities for meat, grocery, produce and general merchandise. The Company's stores operate under the "Vons" and "Pavilions" names. The Company's marketing platform is built on offering the customer greater value than found elsewhere by combining competitive pricing with superior service, quality, selection and convenience.
Vons grocery business was founded in 1906. From 1969 until December 1985, it was owned, along with certain other merchandising businesses, by Household International, Inc. In 1985, these merchandising businesses were acquired in a leveraged buyout by a newly-formed corporation which kept the grocery business and sold all of the other merchandising businesses. The newly-formed corporation was subsequently merged in 1987 with and into Allied Supermarkets, Inc., a Michigan corporation ("Allied"), and the surviving corporation was renamed The Vons Companies, Inc., a Michigan corporation. Simultaneously with the merger, substantially all of the business previously operated by Allied was sold to a company organized by the former management of Allied, leaving the Company with operations located only in Southern California, as they existed prior to the merger.
On August 29, 1988, the Company purchased substantially all of the Southern California operations of Safeway, Inc. ("Safeway"). At the time of the acquisition (the "Safeway Acquisition"), these operations included 162 supermarkets and manufacturing and distribution facilities. As a result of the Safeway Acquisition and other purchases of Vons common stock, Safeway, through a wholly owned subsidiary, is Vons largest shareholder, with approximately 34.3% of the outstanding shares of Vons common stock. Safeway is currently an affiliate of Kohlberg Kravis Roberts & Co.
The Proposed Merger
On December 15, 1996, Vons entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement"), with Safeway for a business combination in which, among other things, Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock that Safeway does not currently own and Vons will be merged with and into a wholly owned subsidiary of Safeway (the "Merger"). The transaction, which was unanimously approved by a special committee of the Vons Board of Directors, comprised of directors who are not affiliated with Safeway, is subject to approval by a majority of the outstanding Vons common shares not held by Safeway and its affiliates, and certain other conditions. The combined company will be the second largest grocery chain in North America, with 1,377 stores and sales in excess of $22 billion. The proposed merger is expected to close early in the second quarter of 1997. Safeway, Inc. is one of the world's largest food retailers, operating 1,052 stores in the United States and Canada at the end of fiscal 1996.
Store Formats
The Company operates its stores under the Vons and Pavilions formats. Each format is designed for a different customer segment as evidenced by the store location, appearance and product offerings. A key strategy of the Company is to tailor its store and merchandise offerings to reflect its diverse customer base.
The Company supports its stores with centralized functions for marketing, advertising, buying, real estate development, management information systems, distribution, manufacturing, accounting and administration to maximize operating leverage and profitability.
Both store formats, Vons and Pavilions, offer extensive assortments of food products, including departments for dry groceries, produce, meat, seafood, dairy, wine and liquor. The majority of stores also offer service departments such as hot bakeries, service floral, delicatessens, service meat departments and banking facilities. Selected Pavilions stores offer an expanded greeting card department, a health and beauty care department including cosmetics, a sausage and smoke shop, bagel shop, sushi bar and high quality prepared Chinese food. Approximately one-third of the Company's stores offer full-service pharmacies.
New Store Openings and Store Remodel Projects
The Company expects to continue to augment sales growth through the continuation of its new store opening program and ongoing chainwide remodel program. The Company currently plans to open 13 new stores, including 5 replacement stores, in 1997, subject to changes by Safeway following the proposed Merger. In 1996, the Company maintained its goal of having 80% of its stores either newly opened or remodeled within the preceding five years.
Store remodel projects enable Vons to present a store appearance consistent with Vons evolving store formats and to continuously update the store base through the introduction, where possible, of service departments and new merchandising modules, which are intended to generate higher gross margins and build store traffic. Vons remodeling program includes remerchandising to reflect a contemporary design and decor package including selected fixture replacements. The Company completed 68, 37 and 14 store remodeling projects in fiscal 1996, 1995 and 1994, respectively.
Vons capital expenditures for store projects were $185.4 million and $130.5 million in fiscal 1996 and 1995, respectively. It is anticipated that 1997 capital expenditures for Vons store projects will be funded out of cash provided by operations, revolving debt and/or through operating leases. The capital expenditure program has substantial flexibility and is subject to revision based on various factors, including but not limited to business conditions, changing time constraints, cash flow requirements and competitive factors.
The following table shows, by store format, the number of Vons stores in operation at the end of each of the years indicated and the number of stores opened, closed or converted during each year:
The Company closes stores based on replacement strategies or lease renewals. Following completion of the Merger, Vons management expects to continue these types of store closures in the future.
Marketing and Competition
Southern California is one of the largest and most competitive markets for retail grocery sales in the United States. Vons store network ranges from Fresno on the north to the Mexican border on the south and from the Pacific Ocean on the west to Clark County, Nevada on the east. This market area includes Fresno, Imperial, Inyo, Kern, Los Angeles, Madera, Mono, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, Tulare and Ventura counties in California as well as Clark County, Nevada.
Vons faces a number of major as well as smaller competitors in its market. The Company believes that in recent years the increase in the number of competitors' stores and the addition of convenience stores, drug stores, mass merchandisers, specialty stores, warehouse stores, membership stores as well as discount stores and fast food and other restaurants which compete for the same customers has resulted in intensified competition. This trend is expected to continue.
Both of the Company's store formats utilize promotional buying opportunities to pass along special values to their customers. Also, stores offer customers additional savings through the use of double coupons, advertised weekly specials and a free membership loyalty club known as VonsClub. This club offers customers special values and programs and enables the Company and its vendors to target specific customer segments and better understand household buying behavior. Vons is the only operator in its market area with an established free membership loyalty club offered to its customers. Vons marketing and communication strategy is based on a combination of direct mail, newspaper, television and radio.
The principal competitive factors in the retail supermarket business include price, fast, friendly service, quality of products, breadth of product assortment, store condition and store location. Vons believes that customers are placing greater emphasis on price and overall value. The Company's marketing campaign has incorporated the slogan "Vons Is Value" since 1994. These campaigns emphasize the Vons Value formula which combines competitive prices with customer service and high quality products. Low prices, advertised weekly specials, free membership club savings and double coupons are integral parts of the Vons offering. Another important component of the Vons Value offering is the amount of labor allocated for customer service and check-out which the Company believes has increased customer satisfaction. Vons believes that its strength is its ability to deliver a high value shopping experience through a blend of high quality products, superior customer service and product assortments at competitive prices combined with VonsClub, double coupons and advertised weekly specials.
Merchandising and Store Operations
An average store offers approximately 30,000 to 40,000 merchandise items. Vons carries a full assortment of brand-name grocery products and emphasizes quality and freshness in its produce, meat and seafood selections. Brand name items are complimented by an extensive line of private brand products in all categories. In addition to its proprietary Jerseymaid line of dairy products, the Company carries the private brand "SELECT." This upscale private brand was first introduced in 1994. The Company intends to increase its private brand penetration as a percent of sales by marketing its branded items and introducing additional private brand items, including those under the "SELECT" label. In 1996, private brand sales accounted for approximately 19% of sales.
Vons is committed to being the low cost operator in the market areas it serves. Vons strategy is to continue to decrease its operating costs through aggressive buying, introduction and maintenance of various merchandising and technological innovations and stringent cost controls.
As part of its effort to improve efficiency and reduce operating costs, the Company is actively pursuing an industry-wide effort known as Efficient Consumer Response ("ECR"). This effort includes a review of the Company's products by category to achieve an efficient assortment which reduces the number of products offered without compromising customer satisfaction. A neighborhood-specific product assortment with efficient space management improves in-stock conditions and reduces inventory. The Company has also implemented systems to allow for more efficient replenishment of inventory such as continuous replenishment systems and electronic ordering and invoicing.
In addition, the Company is committed to neighborhood marketing and merchandising to serve the diverse needs of its customer base. Over the past few years, Vons has developed systems to give store managers more control over store merchandising needs. The Company improves the consistency of store operations through its policy to develop store managers internally. All store managers participate in a bonus program which is based primarily upon their individual store sales and profit and are included in the Company's stock option program.
Through technological innovation, Vons has experienced improved operational efficiency. All Vons stores are equipped with an electronic receiving system for products delivered directly to stores by vendors, electronic time and attendance reporting and computerized labor scheduling. Vons central buying office monitors warehouse inventory levels and product movement daily for buyer analysis and action. Vons utilizes a category management system which combines the buying and merchandising functions. The Company has upgraded these systems to enable category managers to more effectively analyze data.
Support and Other Services
The Company operates a fluid milk processing facility, an ice cream plant and a central bakery.
Vons operates two distribution facilities in Southern California. The Company utilizes computerized inventory and labor management systems throughout its distribution network. As of December 29, 1996, Vons operated a fleet of 414 tractors and 1,162 trailers, of which 105 and 322, respectively, were leased and the remainder were owned. The Company's transportation department utilizes on-board electronic trip recorders to monitor travel times and a sophisticated computerized routing system. Approximately 75% of store sales in 1996 represented inventories supplied by these distribution facilities, and the balance was delivered directly to the stores by vendors.
Governmental Regulation
Vons is subject to regulation by a variety of governmental agencies, including the California Department of Alcoholic Beverage Control, the California State Board of Pharmacy, the California Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments and weights and measures agencies.
In connection with the 1988 Safeway Acquisition, Vons, Safeway and certain other parties entered into a consent order (the "Consent Order") with the Federal Trade Commission (the "FTC") whereby Vons divested three retail grocery stores and Safeway divested nine retail grocery stores to competitors in Southern California. The Consent Order, among other things, also limits for ten years the acquisition by Vons of existing supermarkets from any other party in certain trade areas where both Vons and Safeway operated stores prior to the Safeway Acquisition, allowing a specified number of such acquisitions within any 12-month period in some areas and prohibiting acquisitions in others.
In 1992, in connection with the Williams Bros. acquisition, the Company entered into a consent order with the FTC whereby the Company divested one of the Williams Bros. store locations and among other things, agreed to seek FTC approval before acquiring any supermarket, or any interest in any company owning a supermarket, in San Luis Obispo County for ten years.
Employees
At December 29, 1996, Vons employed approximately 11,100 full-time and 19,300 part-time employees as follows:
In the fall of 1994, the Company negotiated a four-year contract with the International Brotherhood of Teamsters' Union which will expire on September 13, 1998.
In the fall of 1995, the Company negotiated a four-year contract with the United Food and Commercial Workers' International Unions which will expire on October 3, 1999.
Like its major competitors, pursuant to its various collective bargaining agreements, Vons contributes to Taft- Hartley multi-employer, joint pension plans. Under pertinent law, a participating employer which totally or partially withdraws from such a pension plan could be liable for unfunded vested benefits, which could be substantial.
Insurance
Vons carries insurance which it believes to be customary in the supermarket industry to protect the Company against catastrophic loss, including earthquake insurance. The Company is approved in both California and Nevada to self-insure workers' compensation and general liability exposures and maintains third-party insurance for loss exposures in excess of self-insured retentions and deductibles.
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of the Company as of March 27, 1997:
Officers are elected annually and are subject to removal at any time, with or without cause, by the Company's Board of Directors, subject to all rights under employment contracts, if any.
Mr. Del Santo was appointed Chairman of the Board in May 1995. He served as Director and Vice Chairman of the Board from April 1994 to May 1995. Mr. Del Santo continues to serve as Chief Executive Officer of the Company, a position he has held since April 1994. Prior to joining the Company, Mr. Del Santo was Senior Executive Vice President and Chief Operating Officer - Food of American Stores Company from March 1993 to April 1994. From April 1989 to March 1993, Mr. Del Santo was Chairman of Lucky Stores, Inc.
Mr. Goodspeed was elected a Director of the Company in February 1996. Mr. Goodspeed also continues in the position of President and Chief Operating Officer of the Company, to which he was appointed in April 1994. Prior to joining the Company, Mr. Goodspeed was Executive Vice President - Food of American Stores Company and President and Chief Operating Officer of Lucky Stores, Inc. a position he held since September 1988.
Ms. Klug was appointed Senior Vice President, Marketing of the Company in October 1994. Prior to joining the Company, Ms. Klug had been with Catalina Marketing in various positions since 1989, rising to the position of Vice President of Western United States.
Ms. Knous was appointed Treasurer of the Company in December 1995 and continues in the position of Executive Vice President and Chief Financial Officer of the Company, which she has held since May 1995. Ms. Knous served as Senior Vice President and Chief Financial Officer from July 1994 to May 1995. Ms. Knous was Group Vice President, Finance of the Company from November 1993 to July 1994. From April 1991 to November 1993, Ms. Knous was Vice President, Finance of the Company.
Mr. Peets was appointed Executive Vice President of the Company in September 1995. Prior to joining the Company, Mr. Peets had been with Ralphs Grocery Company in various positions since 1977, rising to the position of Executive Vice President.
Mr. Rudnick was appointed Senior Vice President, Retail Purchasing of the Company in May 1995. Mr. Rudnick served as Senior Vice President, Procurement of the Company from April 1994 to May 1995. Mr. Rudnick was Group Vice President, National Accounts of the Company from June 1992 to April 1994. From October 1985 to June 1992, Mr. Rudnick was Vice President, Grocery/Frozen Food Service of the Company.
Mr. Wallock was appointed Executive Vice President and General Counsel of the Company in November 1993 and continues in the position of Secretary of the Company which he has held since March 1991. Mr. Wallock was Senior Vice President, Chief Legal and Security Officer of the Company from August 1991 to November 1993.
ITEM 2:
ITEM 2: PROPERTIES
As of December 29, 1996, the Company leased 228 of its stores and owned 92 of its stores. At December 29, 1996, 195 of the Company's leases provided for contingent rental payments based on a percentage of such rental property's sales over specified amounts, which typically range from 1.0% to 1.5% of total gross sales, less amounts expended for common area maintenance, real estate taxes and insurance; the balance had no percentage rent clauses. Store leases have various expiration dates through 2021. Renewal options range up to 40 years. The following table lists the number of such store leases for open stores that are due to expire (assuming exercise of all renewal options) in each of the specified periods:
The Company has a $110.8 million mortgage loan on 51 properties requiring monthly principal and interest payments of approximately $1.0 million with a one-time principal and interest payment of $110.7 million in July 1997. The Company has other real estate notes and mortgages covering seven properties totaling $23.8 million due in varying monthly installments with maturity dates from 1997 to 2009.
The Company's stores are usually located in active shopping centers and generally have several co-tenants, which typically include a drugstore; although the newer stores, which are usually food and drug combination stores, tend to be in shopping centers without drugstores.
The Company owns distribution and manufacturing facilities in El Monte, California, which are located on approximately 63 acres of land. The El Monte facilities include two warehouses with an aggregate of 764,000 square feet and a meat cooking facility, including a warehouse with an aggregate of 256,000 square feet.
The Company leases a distribution facility located in Santa Fe Springs, California. This distribution facility includes several warehouses and a maintenance operation. The facility covers approximately 1,040,000 square feet located on approximately 78 acres of land. The lease for such facility expires in 2000 with two five-year and one one-year options to extend.
The Company operates a 450,000-square-foot forward buy warehouse located in the City of Industry, California under a lease which expires in 1999, with one three-year option to extend. The Company also leases a 95,000-square-foot frozen food distribution facility in Ontario, California under a lease which expires in March 1998. The Company closed its owned distribution facility in San Diego, California in third quarter 1995. The Company is in the process of disposing of this property. See Note 15 to the Consolidated Financial Statements included elsewhere herein.
The Company owns a 244,000-square-foot building in Arcadia, California, used for its corporate administrative offices.
The manufacturing operations consist of a fluid milk processing facility, an ice cream plant and a bakery, all leased and located in the City of Commerce, California. The leases for the fluid milk processing facility and ice cream plant expire in 2001, with one five-year option to extend. The lease for the bakery expires in 1997 with three five-year options to extend.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
In addition to routine litigation incidental to the conduct of its business, the Company has been named in a number of lawsuits in state and Federal courts in Washington, Nevada, Idaho and California arising from claims of food-borne illness that allegedly was contracted from the consumption of hamburgers at certain Jack-In-The-Box restaurants in early 1993. The restaurants involved were either directly operated by Jack-In-The-Box, a division of Foodmaker, Inc. ("Foodmaker"), or through franchisees. The suits allege that the hamburger patties in question were processed by the Company before being cooked and served by a Jack-In-The-Box outlet. The plaintiffs in these actions seek unspecified damages for illnesses ranging from minor diarrhea to serious kidney and intestinal infection. Several deaths are alleged to have resulted from the incidents and, in those cases, the plaintiffs seek damages for wrongful death. The Company is insured against various losses, including those for bodily injury.
The Company also has been named as a defendant in a suit filed on July 2, 1993, in the Superior Court of the State of California for the County of San Diego, by franchisees of Foodmaker who operate Jack-In-The-Box outlets in various states. Also named as defendants were Foodmaker and a number of meat suppliers and slaughterhouses. The complaint seeks an estimated $100 million for lost profits and compensation for an alleged reduction in the value of the franchisees' businesses, as well as unspecified damages for alleged emotional distress. On July 19, 1993, Foodmaker filed a cross-complaint against the Company and subsequently voluntarily dismissed a separate action which it had previously brought. The cross-complaint asserts various tort and contract theories and seeks, among other things, indemnity as well as lost profits and compensation for a reduction in Foodmaker's stock price. Foodmaker's cross-complaint seeks unspecified damages, although the Company has been advised that Foodmaker may potentially claim damages of approximately $400 million, including the aforesaid claims of the franchisees.
The Company is vigorously contesting the lawsuits against it and has filed its own cross-complaint against Foodmaker and certain of its franchisees seeking damages in an amount substantially higher than the amount of damages claimed by Foodmaker. Trial is currently scheduled to commence in July of 1997.
On September 13, 1996, a class action lawsuit titled McCampbell, et al. v. Ralphs Grocery Company, et al. was - ---------------------------------------------------- filed in the Superior Court of the State of California, County of San Diego, against the Company and two other grocery store chains operating in the Southern California area. The complaint alleges, among other things, that the Company and others conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants' actions violate provisions of the California Cartwright Act and constitute unfair competition. Plaintiffs seek damages they purport to have sustained as a result of the defendants' alleged actions, which damages may be trebled under the applicable statute, and an injunction from future acts in restraint of trade and unfair competition. Because the case was recently filed, discovery has just commenced. Management of the Company intends to defend this action vigorously and the Company has filed an answer to the complaint denying the plaintiffs' allegations and setting forth several defenses.
The Company believes that the above-described lawsuits are unlikely to result in liability which would be material to the consolidated financial position of the Company.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders of the Company for a vote during the quarter ended December 29, 1996.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Vons common stock is listed on the New York Stock Exchange, Inc. ("NYSE") (Symbol-VON). The shares have been listed on the NYSE since March 20, 1986. As of February 20, 1997, there were approximately 6,311 shareholders of record. The table below sets forth the high and low sales prices for Vons common stock as reported on the NYSE Composite Tape during the fiscal periods specified:
The Company paid no dividends on its common stock in fiscal years 1996, 1995, and 1994. Certain Company debt agreements restrict the Company from paying cash dividends or making other distributions on stock under certain circumstances. Under its most restrictive debt agreement, the Company had $119.0 million available for dividends and distributions at December 29, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 7 to the Consolidated Financial Statements contained in the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996 included elsewhere herein.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Five-Year Selected Financial Data
The following five-year selected financial data should be read in conjunction with the Consolidated Financial Statements.
The operations acquired from Williams Bros. are included in operating results from January 28, 1992. During 1992, the Company implemented the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 3, 1993.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
THE VONS COMPANIES, INC. AND SUBSIDIARIES - -----------------------------------------
Notes to the Consolidated Financial Statements
Note 1. Basis of Presentation
At December 29, 1996, the Company operated 320 supermarkets and food and drug combination retail stores under the names Vons and Pavilions. The Company's marketing territory includes Southern and Central California and Clark County, Nevada. The Company also operates a fluid milk processing facility, an ice cream plant, a bakery, and distribution facilities for meat, grocery, produce and general merchandise to support the store network.
The Company's fiscal year is based on a 52-53 week fiscal year ending on the Sunday closest to December 31. Fiscal years 1996, 1995 and 1994 included 52 weeks which ended on December 29, 1996, December 31, 1995 and January 1, 1995, respectively.
Note 2. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of December 29, 1996 and the reported amounts of income and expenses for the fiscal year ended December 29, 1996. Actual results could differ from those estimates.
Basis of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition. Sales are recorded when payment is tendered at check-out.
Inventories. Inventories are stated at the lower of cost or market. The cost of substantially all inventories is determined using the last-in, first-out (LIFO) method.
Property and Depreciation. Property and equipment, including assets under capital leases, are recorded at cost and depreciated or amortized over forty years for buildings, up to ten years for fixtures and equipment and generally between fifteen and twenty-five years, but not to exceed the lease term, for leasehold improvements using principally the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Major renewals and improvements are capitalized. Maintenance and repairs which do not improve or extend the life of the respective assets are charged to expense.
Amortization of Intangible Assets. The excess of cost over net assets acquired is amortized on a straight-line basis over forty years. The Company assesses the recoverability of the excess of cost over net assets acquired based on forecasted operating income. Other noncurrent assets include an agreement not to compete acquired in connection with the 1992 acquisition of the Williams Bros. Markets, Inc. supermarket business. The agreement not to compete is amortized on a straight-line basis over five years.
Income Tax Provision. The income tax provision includes amounts related to current taxable income and deferred income taxes. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversals of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. The deferred income tax provision is measured by the change in the net deferred income tax asset or liability during the year. The Company accounts for general business tax credits using the flow-through method.
Income per Common and Common Equivalent Share. Income per common and common equivalent share is based on the weighted average number of common shares outstanding during each year and common equivalent shares arising from stock options when the effect is dilutive.
Disclosure About Fair Value of Financial Instruments. The fair value of the Company's financial instruments is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for financial instruments of the same remaining maturities.
Derivatives. Premiums paid for purchased interest rate cap contracts are amortized to interest expense over the terms of the contracts. Unamortized premiums are included in other assets in the accompanying consolidated balance sheets. Amounts earned under the interest rate cap contracts are reflected as a reduction of interest expense.
Note 3. Proposed Merger
On December 15, 1996, Vons entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement"), with Safeway for a business combination in which, among other things, Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock that Safeway does not currently own and Vons will be merged with and into a wholly owned subsidiary of Safeway (the "Merger"). The transaction, which was unanimously approved by a special committee of the Vons Board of Directors, comprised of directors who are not affiliated with Safeway, is subject to approval by a majority of the outstanding Vons common shares not held by Safeway and its affiliates, and certain other conditions. The combined company will be the second largest grocery chain in North America, with 1,377 stores and sales in excess of $22 billion. The proposed merger is expected to close early in the second quarter of 1997.
Note 4. Inventories
The excess of estimated current cost over LIFO carrying value of inventories was $37.1 million and $32.3 million at December 29, 1996 and December 31, 1995, respectively. Application of the LIFO method resulted in a charge to cost of sales, buying and occupancy of $4.8 million, $4.9 million and $2.3 million for 1996, 1995 and 1994, respectively.
Note 5. Property and Equipment
The components of property and equipment at December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
Note 6. Accrued Current Liabilities
The components of accrued current liabilities at December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
Note 7. Senior and Subordinated Debt
Senior and subordinated debt as of December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
On February 17, 1995, the Company entered into an agreement with a group of banks for a $625 million Revolving Loan Agreement (the "Revolving Loan"). The Revolving Loan expires on February 17, 2000; however, it provides that the Company may request that the banks extend the maturity date by one year beginning in September 1997 and each year thereafter. Interest for the revolving debt is at prime or Eurodollar rate plus designated amounts. At the Company's option, the revolving debt may be used to support commercial paper borrowings, other unsecured bank borrowings and standby letters of credit outside the revolving debt. At December 29, 1996, borrowings under the Revolving Loan were $6.0 million and available unused credit under the Revolving Loan was $616.8 million. Weighted average interest costs for 1996, for the Revolving Loan were 7.0% excluding commitment fees on unused borrowings. At December 29, 1996, the corresponding bank prime rate was 8.25%. Commitment fees under the Revolving Loan and Revolving Credit and Term Loan Facilities were $.8 million, $1.2 million and $1.5 million for 1996, 1995 and 1994, respectively.
The Company's involvement with derivative financial instruments has been limited to interest rate cap contracts to reduce the impact of increases in interest rates on revolving debt. The contracts were purchased in 1992 to hedge principal amounts of $250 million for 1994, $200 million for 1995, and $100 million for 1996 and 1997 of interest rate exposure in excess of an approximate 8.225% effective borrowing rate under the revolving debt. The Company records interest expense or interest income related to interest rate cap contracts on a monthly basis.
The Company's $110.8 million mortgage loan requires monthly principal and interest payments of approximately $1 million with a one-time principal and interest payment of $110.7 million in July 1997.
The indenture related to the 6-5/8% Senior Subordinated Debentures (the "6-5/8% Debt") provides for mandatory redemptions. As of December 29, 1996, $25.0 million and $37.5 million are due on May 15, 1997, and May 15, 1998, respectively. Interest on the 6-5/8% Debt is payable semiannually on May 15 and November 15. The 6-5/8% Debt may be redeemed at any time at 100% of the principal amount plus accrued interest. The 6-5/8% Debt was issued at a discount which is being amortized over the related term of the indebtedness.
The indenture related to the 9-5/8% Senior Subordinated Notes (the "9-5/8% Debt") due April 1, 2002, provides for principal repayment at maturity. Interest on the 9-5/8% Debt is payable semiannually on April 1 and October 1. The 9-5/8% Debt may be redeemed at the Company's option any time on or after April 1, 1997, at varying percentages above par of the principal amount plus accrued interest. On March 24, 1997, the Company requested the redemption of all outstanding 9-5/8% Debt effective April 28, 1997. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 9-5/8% Debt prior to maturity.
The indenture related to the 8-3/8% Senior Subordinated Notes (the "8-3/8% Debt") due October 1, 1999, provides for principal repayment at maturity. Interest on the 8-3/8% Debt is payable semiannually on April 1 and October 1. The 8-3/8% Debt may be redeemed at the Company's option any time on or after October 1, 1997, at 100% of the principal amount plus accrued interest. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 8-3/8% Debt prior to maturity.
At December 29, 1996, and December 31, 1995, the carrying value of all financial instruments approximated fair value.
The Company's debt agreements contain various restrictions on the incurrence of additional indebtedness, payment or prepayment of senior subordinated and subordinated debt, investments, acquisitions, capital expenditures, dividends, common stock redemptions and purchases and dispositions of assets. The covenants also require the Company to meet certain shareholders' equity levels, debt leverage levels and fixed charge coverage ratios which can vary each fiscal year. The Company is in compliance with these covenants as of December 29, 1996. Under its most restrictive debt agreement, the Company had $119.0 million available for dividends and distributions at December 29, 1996.
Principal payments required in future years are as follows (in millions of dollars):
Standby letters of credit, primarily for self-insurance purposes, not reflected in the accompanying consolidated financial statements, were approximately $72.2 million and $73.3 million at December 29, 1996 and December 31, 1995 respectively.
Note 8. Leases
The Company currently leases certain of its stores, distribution facilities, vehicles and equipment for periods up to 50 years with various renewal options. The majority of such leases are noncancellable operating leases. Certain operating and capital leases require contingent rentals based upon a percentage of sales over a specified amount. Rental expense under operating leases was as follows (in millions of dollars):
Capital lease obligations, relating primarily to buildings, vary in amounts with interest rates ranging from 7.5% to 12.5%. Contingent rentals associated with capital leases were $1.6 million, $1.5 million and $1.4 million for 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating and capital leases, together with the present value of the net minimum lease payments, at December 29, 1996 were as follows (in millions of dollars):
Minimum sublease rentals to be received in the future under noncancellable operating and capital leases totaled $76.6 million at December 29, 1996.
Effective September 1993, the Company became a partner of a California general partnership. This partnership has obligations for 16 retail leases for periods up to 21 years with various renewal options. It is the partnership's intent to assign or sublease its leasehold interest in all of these sites. Future minimum lease payments of the partnership under noncancellable operating leases at December 29, 1996 were as follows (in millions of dollars):
Minimum sublease rentals to be received by the partnership under noncancellable operating leases totaled $25.2 million at December 29, 1996.
Note 9. Employee Benefit Plans
The Company sponsors a defined benefit pension plan for all nonunion employees. An employee's benefit is based on years of credited service and the employee's final average pay calculated on the highest five years of compensation during the last ten years of employment. The Company's funding policy is to contribute at least the minimum annual contribution required by Internal Revenue Service regulations.
The following table sets forth the defined benefit pension plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 29, 1996 and December 31, 1995 (in millions of dollars):
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% at December 29, 1996 and December 31, 1995. The expected long-term rate of return on assets and rate of increase in compensation levels were 9.0% and 4.5%, respectively, at December 29, 1996 and December 31, 1995. Net pension cost under the defined benefit pension plan for 1996, 1995 and 1994 included the following components (in millions of dollars):
The Company's supplemental executive retirement plan provides supplemental income payments for certain officers during retirement. Total pension expense for all plans was $4.3 million, $3.4 million and $5.1 million for 1996, 1995 and 1994, respectively.
The Company's contributory profit sharing plan for nonunion employees qualifies under Section 401(k) of the Internal Revenue Code. In 1996, the Company's contribution was five percent of each eligible employee's pay plus a one percent matching contribution for each eligible employee who elected to contribute at least one percent of their pay. For 1996, 1995, and 1994 total expense related to the Company's profit sharing plan was $6.3 million, $7.6 million and $5.3 million, respectively.
The Company sponsors a retiree medical plan covering substantially all nonunion employees who retire under certain age and service requirements. The retiree medical plan provides outpatient, inpatient and various other covered services. Participants in the retiree medical plan who retire after June 30, 1990 receive a benefit based upon years of service and a benefit value determined by the Company at the time of retirement. Effective December 31, 1995, the Company adopted modifications in its retiree medical plan which reduced the net retiree medical plan cost. Unused benefits may be indexed each year to the social security cost of living, up to a maximum of 4.0%. Such benefits are funded from the Company's general assets. The Company has the right to modify or terminate the plan.
The accumulated postretirement benefit obligation for the retiree medical plan as of December 29, 1996 and December 31, 1995 was as follows (in millions of dollars):
For measurement purposes, a 6.0% annual increase in the cost of covered retiree medical benefits was assumed. A 1.0% increase in the retiree medical cost trend rate would increase the retiree medical benefit obligation at December 29, 1996 by $.6 million and the 1996 annual expense by $.1 million. The weighted average discount rate used in determining the accumulated retiree medical benefit obligation was 7.25% at December 29, 1996 and December 31, 1995. The net retiree medical plan cost for 1996, 1995 and 1994 included the following components (in millions of dollars):
The Company contributes to multi-employer joint pension plans and health and welfare plans administered by various trustees. Contributions to these plans are based upon negotiated labor contracts. The pension plans may be deemed to be defined benefit plans. Information relating to accumulated benefits and fund assets as they may be allocable to the Company at December 29, 1996 is not available. Total pension expense for the union plans was $42.0 million, $19.8 million and $22.3 million for 1996, 1995 and 1994, respectively. The health and welfare plans provide medical, dental and other benefits to certain employees covered by union contracts. Total health and welfare expense for these plans was $108.7 million, $108.6 million and $125.9 million for 1996, 1995 and 1994, respectively.
Note 10. Income Taxes
The following table summarizes information about stock options outstanding at December 29, 1996:
THE VONS COMPANIES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
The following exhibits are filed as a separate section of this report:
Exhibit No. Description of Exhibit Sequentially Numbered Page - ------- ---------------------- --------------------------
24 Independent Auditors' Consent.
27 Financial Data Schedule.
Management Contracts or Compensatory Plans or Arrangements:
10.7.2 Amendment dated December 13, 1996 to 1990 Stock Option and Restricted Stock Plan dated January 24, 1990.
THE VONS COMPANIES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
The following exhibits are incorporated herein by reference:
Exhibit No. Description of Exhibit Incorporated By Reference From - ------- ---------------------- ------------------------------ 2.1 Agreement and Plan of Merger Exhibit 2.1 to Registrant's dated as of December 15, 1996 Report on Form 8-K dated by and among Safeway, Inc., December 15, 1996. SSCI Merger Sub, Inc. and The Vons Companies, Inc.
2.1.1 Amendment to Agreement and Exhibit 2.1 to Safeway, Inc. Plan of merger dated as of Report on Form 8-K dated December 15, 1996 by and January 8, 1997. among Safeway, Inc., SSCI Merger Sub, Inc. and The Vons Companies, Inc.
3.1 Amended Restated Articles of Exhibit 3.1 to Registrant's Incorporation of the Registrant Annual Report on Form 10-K for as amended on May 13, 1992. fiscal year ended January 3, 1993.
3.2 By-Laws of the Registrant as Exhibit 3.2 to Registrant's amended on November 28, 1990. Annual Report on Form 10-K for fiscal year ended December 30, 1990.
4.1 Indenture by and among the Exhibit 4.2 to Registrant's Registrant and Chemical Bank, Statement No. 33-45430 on Form as Trustee, dated February 15, S-3. 1992.
4.1.1 Officers' Certificate and Note Exhibits 4.1 and 4.2 to regarding the 9-5/8% Senior Registrant's Report on Form Subordinated Notes due April 1, 8-K dated March 17, 1992. 2002.
4.1.2 Officers' Certificate and Note Exhibits 4.1 and 4.3 regarding the 8-3/8% Senior to Registrant's Report on Form Subordinated Notes due 8-K dated September 24, 1992. October 1, 1999.
4.2 Indenture between Registrant Exhibit 2 to Registrant's and National Bank of Detroit, Report on Form 8-K dated as Trustee, dated May 15, 1986, May 15, 1986. including form of 6-5/8% Senior Subordinated Debentures due 1998 attached as Exhibit A thereto.
10.1 Revolving Loan Agreement Exhibit 10.1.6 to Registrant's dated February 17, 1995 Quarterly Report on Form 10-Q by and among the Registrant, for quarter ended March 26, 1995. the banks named therein, and Bank of America NT & SA and The Chase Manhattan Bank, N.A. as managing agents.
10.1.1 Amendment to Revolving Loan Exhibit 10.1.7 to Registrant's Agreement dated February 17, Quarterly Report on Form 10-Q 1995 by and among the for quarter ended October 8, Registrant, the banks named 1995. therein, and Bank of America NT & SA and The Chase Manhattan Bank, N.A. as managing agents.
10.2 Metropolitan Life Insurance Exhibit 10.13 to Registrant's Company loan to the Registrant Annual Report on Form 10-K for represented by Deed of Trust fiscal year ended January 3, and Security Agreement 1988. Assignment of Rents and Fixture Filing dated July 22, 1987 by and among the Registrant, as Trustor, Ticor Title Insurance Company, as Trustee and Metropolitan Life Insurance Company, as Beneficiary.
10.3 Standstill Agreement dated Exhibit 10.20 to Registrant's December 3, 1987 by and among Annual Report on Form 10-K for the Registrant, Safeway fiscal year ended January 3, Southern California, Inc., 1988. Safeway Stores, Incorporated, Kohlberg Kravis Roberts & Co., Safeway U.S. Holdings, Inc., and KKR Associates.
10.3.1 Amendment to Standstill Exhibit 28.7 to Registrant's Agreement dated December 3, Quarterly Report on Form 10-Q 1987 by and among the for quarter ended June 18, Registrant, Safeway Stores, 1989. Incorporated and other parties thereto, dated April 5, 1989.
10.3.2 Amendment to Standstill Exhibit 10.13.2 to Registrant's Agreement dated December 3, Annual Report on Form 10-K for 1987 by and among the fiscal year ended December 30, Registrant, Safeway Inc., 1990. and other parties thereto, dated December 21, 1990.
10.4 Registration Rights Agreement Exhibit 28.8 to Registrant's with Roger Stangeland dated Quarterly Report on Form 10-Q April 7, 1989. for quarter ended March 26, 1989.
10.5 Registration Rights Agreement Exhibit 28.9 to Registrant's with Fritz Duda dated Quarterly Report on Form 10-Q April 7, 1989. for quarter ended March 26, 1989.
Management Contracts or Compensatory Plans or Arrangements:
10.6 Management Stock Option Plan Exhibit 10.3 to Registrant's of the Registrant dated Annual Report on Form 10-K for July 22, 1987. fiscal year ended January 3, 1988.
10.7 1990 Stock Option and Appendix A to Registrant's Restricted Stock Plan dated Proxy Statement for Annual January 24, 1990. Meeting of Shareholders on May 17, 1990.
10.7.1 Amendment dated February 17, Exhibit 10.13.1 to Registrant's 1993 to 1990 Stock Option Quarterly Report on Form 10-Q and Restricted Stock Plan for the quarter ended March 28, dated January 24, 1990. 1993.
10.8 Directors' Stock Option Plan Appendix A to Registrant's dated September 17, 1991. Proxy Statement for Annual Meeting of Shareholders on May 13, 1992.
10.9 Severance Agreement between The Registrant's Proxy the Registrant and Senior Statement for Annual Meeting of Management and Key Employees Shareholders on May 13, 1992, dated February 19, 1992. where it appears under the caption "Compensation through Plans - Severance Agreements."
10.9.1 The Vons Companies, Inc. Exhibit 10.9.1 to Registrant's Amended and Restated Severance Quarterly Report on Form 10-Q Plan for Senior Management and for quarter ended October 6, Key Employees dated July 15, 1996. 1996.
10.10 1992 Supplemental Executive Exhibit 10.19 to Registrant's Retirement Plan by and among Annual Report on Form 10-K for the Registrant and certain fiscal year ended January 3, officers effective April 30, 1993. 1992.
10.11 The Vons Companies, Inc. Exhibit 10.27 to Registrant's 401(k) Wrap-Around Plan Annual Report on Form 10-K effective October 18, 1993. for fiscal year ended January 2, 1994.
10.11.1 Amendment 1994-1 dated Exhibit 10.11.1 to Registrant's December 23, 1994 to The Annual Report on Form 10-K for Vons Companies, Inc. 401(k) fiscal year ended December 31, Wrap-Around Plan effective 1995. October 18, 1993.
10.11.2 Amendment 1996-1 dated Exhibit 10.11.2 to Registrant's February 20, 1996 to The Quarterly Report on Form 10-Q Vons Companies, Inc., 401(k) for quarter ended March 24, 1996. Wrap-Around Plan effective January 1, 1996.
10.12 Employment Agreement between Exhibit 10.28 to Registrant's the Registrant and Lawrence A. Quarterly Report on Form 10-Q Del Santo dated April 26, 1994. for quarter ended June 19, 1994.
10.13 Employment Agreement between Exhibit 10.29 to Registrant's the Registrant and Richard E. Quarterly Report on Form 10-Q Goodspeed dated April 26, 1994. for quarter ended June 19, 1994.
10.14 Retirement Agreement Exhibit 10.31 to Registrant's confirming employment and Quarterly Report on Form 10-Q retirement agreements for quarter ended October 9, between the Registrant and 1994. Roger E. Stangeland, dated July 28, 1994.
10.15 Employment Arrangement Exhibit 10.24 to Registrant's between the Registrant Quarterly Report on Form 10-Q and Terry R. Peets for quarter ended October 8, dated September 6, 1995. 1995.
10.16 Severance Agreement Exhibit 10.25 to Registrant's between the Registrant Quarterly Report on Form 10-Q and Terry R. Peets for quarter ended October 8, dated September 6, 1995. 1995.
10.17 The Vons Companies, Inc. 1996 Exhibit 10.17 to Registrant's Officer and Administrative Annual Report on Form 10-K for Bonus Plan. fiscal year ended December 31, 1995.