RANDALLS FOOD MARKETS INC, 10-K405, 1999-09-10

RANDALLS FOOD MARKETS INC
10-K405, 1999-09-10
GROCERY STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 26, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 333-35457

RANDALL'S FOOD MARKETS, INC.
(Exact Name of Registrant as Specified in Its Charter)

<S> <C> <C>
TEXAS 5411 74-213-4840
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

3663 BRIARPARK
HOUSTON, TEXAS 77042
(713) 268-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE
ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE
ACT: NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
-------- ------

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10K OR ANY
AMENDMENT TO THIS FORM 10K [X].

THERE WERE 29,983,426 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.25 PER SHARE, OUTSTANDING AS OF THE CLOSE OF BUSINESS ON JULY 13, 1999.

DOCUMENTS INCORPORATED BY REFERENCE - NONE

==============================================================================
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PART I

ITEM 1. BUSINESS

COMPANY HISTORY

Randall's Food Markets, Inc. (the "Company") was founded by Robert
R. Onstead, R. C. Barclay, and Norman N. Frewin in Houston, Texas on July 4,
1966 with the purchase of two existing grocery stores. The Company continued
to expand in the Houston area, operating 39 stores by 1989. In August 1992,
having accumulated a portfolio of 45 stores in the Houston market, the
Company acquired 100% of the stock of Cullum Companies, Inc. ("Cullum"), a
food and drug retailer that operated 62 stores in Dallas and Austin under the
TOM THUMB banner (the "Cullum Acquisition"). Cullum had operated in Dallas
since 1948 and in Austin since 1972. In January 1994, the Company acquired 12
stores in Austin (three of which were closed immediately after the
acquisition) and three stores in Houston from AppleTree Markets, Inc.

In June 1997, the Company completed certain financings and related
transactions whereby RFM Acquisition LLC ("RFM Acquisition"), a Delaware
limited liability company formed at the direction of Kohlberg Kravis Roberts
& Co., L.P. ("KKR"), invested $225.0 million in the Company as consideration
for the Company's issuance to RFM Acquisition of 18,579,686 shares of common
stock and a 25-year option to purchase 3,606,881 shares of common stock at
$12.11 per share, subject to adjustments, including the related financings
and related transactions (the "Recapitalization").

PROPOSED MERGER

On July 22, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Safeway Inc. ("Safeway") and SI Merger
Sub, Inc., a wholly-owned subsidiary of Safeway ("Merger Sub"), pursuant to
which the Company will become a wholly owned subsidiary of Safeway (the
"Merger") and each outstanding share of the Company's common stock ("Common
Stock"), other than shares held by any dissenting shareholders, will be
converted into the right to receive $25.05 per share in cash and a fraction
of a share of common stock of Safeway equal to 0.3204, as adjusted pursuant
to the Merger Agreement. Safeway has indicated that they intend to redeem the
Company's 9-3/8% Series B Senior Subordinated Notes due 2007 (the "Notes").
The consummation of the transactions contemplated by the Merger Agreement is
subject to certain conditions, including approval of the Company's
stockholders and receipt of opinions of tax counsel. Financing is not a
condition to complete the transaction.

Pursuant to separate Voting Agreements, an affiliate of KKR, which
owns approximately 62% of the outstanding common stock of the Company, and
members of the Onstead family, who own approximately 21% of the outstanding
common stock of the Company, have agreed, among other things, to vote in
favor of the approval of the Merger Agreement.

The Merger Agreement provides for payment to Safeway of a
termination fee under certain circumstances, including if the Company's Board
of Directors, in the exercise of its fiduciary responsibilities, withdraws or
modifies in any adverse manner its recommendation to the stockholders of the
Merger Agreement.

GENERAL

The Company is the second largest supermarket operator in its
principal markets, with 115 stores located in major Texas metropolitan areas
including Houston (46 stores), Dallas/Fort Worth (57 stores), and Austin (12
stores) as of June 26, 1999. With over 30 years of operations in Houston and
50 years of operations in Dallas/Fort Worth, the Company has developed a
loyal customer base and a portfolio of large, attractive stores in prime
locations. The Company offers customers an expanded selection of high quality
products, exceptional customer service and a variety of specialty
departments. These strengths have enabled it to maintain a number two market
share in Houston and Dallas and a number three market share in Austin. For
the year ended June 26, 1999 ("Fiscal Year 1999"), the year ended June 27,
1998 ("Fiscal Year 1998") and

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the year ended June 28, 1997 ("Fiscal Year 1997"), the Company generated net
sales of approximately $2.6 billion, $2.4 billion and $2.3 billion,
respectively and EBITDA (earnings before net interest expense, taxes,
depreciation, amortization, LIFO provision and extraordinary items) of $172.2
million, $124.2 million and $33.2 million, respectively. Net income for
Fiscal Year 1999 and Fiscal Year 1998 was $42.2 million and $20.7,
respectively. Net loss for Fiscal Year 1997 was $50.5 million. Total assets
as of June 26, 1999, June 27, 1998 and June 28, 1997 were $1.0 billion,
$883.7 million and $862.4 million, respectively.

The Company operates combination food and pharmacy stores which
appeal to a broad customer base by offering shoppers an extensive variety of
products and services, including large produce and perishables departments,
in-store bakeries, delicatessens, full-service meat and seafood departments,
salad bars, banks, pharmacies, full-service floral departments, expanded
cosmetic departments, video rental departments and film processing counters.
The Company operates 67 traditional combination food and pharmacy stores
under the RANDALLS banner in Houston and Austin and the TOM THUMB banner in
Dallas/Fort Worth averaging approximately 49,300 square feet.

The Company's NEW GENERATION and FLAGSHIP STORES are each variations
of the Company's traditional combination food and pharmacy stores, offering
an even wider selection of premium products and services:

NEW GENERATION STORES emphasize expanded perishable food
departments and open product preparation in order to create a
farmer's market atmosphere and highlight product freshness to
customers. The Company's 28 New Generation Stores operate under the
RANDALLS banner in Houston and Austin and the TOM THUMB banner in
Dallas, and average approximately 63,800 square feet.

FLAGSHIP STORES target customers seeking an expanded array
of premium services and a wider variety of top quality gourmet and
specialty selections. Flagship Stores feature many higher margin
specialty products and services, including in-store gourmet coffee
bars and eating areas, expanded bakery departments, a wide range of
freshly prepared foods (including made-to-order pizza, pastas and
barbecued meats), home delivery and catering. The Company operates
12 Flagship Stores under the RANDALLS FLAGSHIP banner in Houston and
Austin averaging approximately 54,600 square feet and two stores
averaging approximately 42,200 square feet under the SIMON DAVID
banner in Dallas.

The Company also operates six conventional stores which offer a
similar variety of food products and specialty departments as its traditional
combination food and pharmacy stores, but do not include pharmacies.
Conventional stores average approximately 23,200 square feet.

STORE DEVELOPMENT

The Company believes that it will be able to capitalize on the
continued growth in its markets by continuing its accelerated new store
development and remodeling programs. The Recapitalization has provided the
Company with increased financial flexibility, enabling it to undertake
significant remodeling in the Houston area, new store construction and
remodeling in Dallas/Fort Worth and selected store expansion and remodeling
in the Austin market. In Fiscal Year 1999, the Company opened two stores
(both of which were replacement stores) in Houston and six stores in Dallas
(including two replacement stores), while closing six stores in Houston (two
of which were replaced) and two stores in Dallas (both of which were
replaced). In addition, the Company has closed 17 stores as part of a
strategic review of its operations initiated in Fiscal Year 1997 and an
additional three stores based on such a review during Fiscal Year 1999. The
Company's

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plans to remodel existing stores and construct new stores are reviewed
continually and are subject to change. The Company has been selective in
acquiring store locations and attempts to take advantage of market research
and its knowledge of Texas markets in evaluating opportunities. The Company's
ability to expand and remodel existing stores and to open new stores is
subject to many factors, including successful negotiation of new leases or
amendments to existing leases, successful site acquisition and the
availability of financing on acceptable terms, and may be limited by zoning,
environmental and other governmental regulations.

The following table sets forth additional information concerning the
Company's stores for the indicated period:

FISCAL YEAR ENDED
-----------------
JUNE 26, JUNE 27, JUNE 28, JUNE 29, JUNE 24,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period ......... 115 121 120 120 121
Newly constructed ........ 8 4 8 4 3
Acquired ................. 0 0 2 0 0
Closed ................... (8) (10) (9) (4) (4)
--- --- --- --- ---
End of period ............... 115 115 121 120 120
=== === === === ===
MAJOR REMODELS(a) .............. 16 11 0 5 5
=== === === === ===
</TABLE>

(a) Includes the completion of major remodels involving expenditures of at
least $1.0 million per store.

MERCHANDISING

The Company's merchandising strategy is designed to create a
differentiated "one-stop" shopping experience that blends concerns for value
and quick service with variety, quality and convenience. Management believes
that its merchandising strengths have fostered a loyal customer base by
establishing a distinctive reputation for providing high quality products and
a variety of specialty departments.

EXPANDED SELECTIONS OF QUALITY MEAT, SEAFOOD, PRODUCE AND OTHER PERISHABLES.
The Company's stores are well-known for their broad selection of quality
meats, seafood, produce and other perishables. The Company believes that its
reputation for carrying select cuts of beef, natural poultry and pork, fresh
seafood and local produce differentiates its stores from those of its
competitors. The Company's full-service meat departments generally
incorporate an open design which fosters interaction among butchers and
customers. All meat offerings are skillfully trimmed and appealingly
displayed. A wide range of home replacement meals, such as shish kebabs,
chicken kiev and stuffed game hens, are featured in each store's meat
department, and many stores' meat departments include full-service
smokehouses. Fresh fish and seafood from nearby Gulf waters are delivered
daily to each store. The Company's produce departments are designed to
portray an open market feel with carefully selected and appealingly displayed
produce and offerings of fresh herbs and organically grown fruits and
vegetables. An extensive variety of produce from local growers is given
special emphasis in store merchandising.

HIGH QUALITY CONVENIENCE-ORIENTED SPECIALTY DEPARTMENTS AND SERVICES. Based
on market and demographic data, management believes that supermarkets
offering a broad array of products and time-saving services are perceived by
customers as part of a solution to today's lifestyle demands. Accordingly, a
principal component of the Company's merchandising strategy is to design
stores which offer a "one-stop" shopping experience. In-store services such
as bank branches, ATMs, dry-cleaning services and video rental departments
are strategically placed near the front of the stores. Gourmet coffee bars,
in-store bakeries and prepared foods sections are conveniently located near
seating areas. Most stores are open 24 hours, with well-lit parking lots.

INCREASED EMPHASIS ON PREPARED FOODS AND HOME MEAL REPLACEMENT ITEMS. Many
stores offer daily selections of pastas and dinner entrees, as well as
made-to-order pizzas, rotisserie chickens, quiches, hot and cold sandwiches
and salads. In Flagship and New Generation Stores, food is prepared in open
areas to increase

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shoppers' confidence in product freshness. In Flagship Stores, selections
extend to entrees prepared on the premises by the culinary staff and a sushi
bar staffed by trained sushi chefs. In many stores, baked goods are made
daily from scratch, including bagels, hot rolls, scones, brioche and
specialty breads; and most Flagship Stores are staffed with a French pastry
chef. The majority of the stores contain a full-service florist shop offering
flowers and plants delivered daily, and most stores are staffed by master
florists or designers. The majority of the stores also offer an extensive
selection of wines and champagnes, including wines from well-known California
and French vineyards as well as local vineyards.

Most stores include a bank branch and/or ATM machines, one-hour
photo processing, as well as a full-service pharmacy. Customer service
centers in each store provide a wide array of services, including the
purchase of lottery tickets, check cashing, payment of utility bills and car
licenses.

PRIVATE LABEL PROGRAM

The Company supplements its branded grocery offerings with a
selection of private label goods, including grocery, general merchandise,
floral, health and beauty products, dairy, meat, produce and delicatessen
products. In comparison to national brands, private label goods provide
comparable or better quality at lower prices to customers and higher gross
margins to the Company. The Company uses private label products as
negotiating leverage with branded suppliers to enhance margins on branded
products as well. The Company currently offers a three-tiered private label
program including PRESIDENT'S CHOICE premium private label products, its own
REMARKABLE brand private label products and VALUE TIME private label products
catering to value-conscious consumers. The Company procures Remarkable and
Value Time products through Topco Associates, Inc., a national food buying
cooperative owned by over 30 retail, wholesale and food service operators and
offering over 7,000 private label branded goods. In addition, Daymon
Associates, a leading sales and marketing company for private label brands,
helps manage the Company's private label program. The Company is currently
expanding its private label offerings across all tiers, with particular
emphasis on increasing REMARKABLE label offerings.

Based on the Company's merchandising strategy of providing a
one-stop shopping destination for its customers, the Company opened its first
self-service fueling station during Fiscal Year 1999. At June 26, 1999, the
Company had ten fueling stations in operation, including seven in Houston and
three in Dallas. The fueling stations provide competitive retail prices with
an additional discount provided by using the frequent shopper card discussed
in ADVERTISING AND MARKETING below.

ADVERTISING AND MARKETING

The Company advertises through television, radio, newspapers and
newspaper inserts, with an emphasis placed on its reputation for providing
high quality products and exceptional service. The Company distributes a
large number of its circulars to target markets each week. The Company
regularly promotes new products and services through in-store demonstrations
and samplings, and "point of sale" coupons. In addition, in order to enhance
its name recognition and quality-oriented image, the Company sponsors a
number of local and nationally recognized charitable organizations and
professional sports franchises.

The Company's frequent shopper program has become the cornerstone of
its marketing efforts since its inception in the fall of 1996. Currently,
frequent shopper card-holders account for a majority of the Company's total
sales and a significant percentage of the Company's total transactions. Data
generated from frequent shopper card purchases enables the Company to track
changing sales and demographic patterns and customer preferences. The Company
uses such data to allocate advertising resources and shelf space accordingly
and focus on targeted marketing activities (i.e., direct mailings) that are
tailored to the needs of the consumer.

Frequent shopper card-holders currently receive check-cashing
privileges, debit card capability, electronic discounts on groceries,
discounts on gasoline purchases and direct mailings from the Company. In
addition, in conjunction with the Company's "Good Neighbor" program, frequent
shopper card holders can select from one of over 7,600 participating
not-for-profit organizations, and the Company will donate a fixed percentage
of the holder's frequent shopper card purchases to that organization.

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PURCHASING AND DISTRIBUTION

During Fiscal Year 1999, approximately 45.2% of the Company's
purchases were supplied through its own distribution network, approximately
32.3% were supplied directly from vendors and approximately 22.5% were
supplied by a third party supplier, Fleming Companies, Inc. ("Fleming").
Fleming has been a long-term supplier of the Company and had a contract with
the Company which was to expire in June 2001. However, the Company initiated
an arbitration proceeding against Fleming on July 30, 1997 for breach of the
supply agreement. On July 7, 1998, the arbitration panel found that Fleming
did materially breach the supply agreement and the contract was terminated as
of July 7, 1998. See the discussion under LEGAL PROCEEDINGS "FLEMING DISPUTE"
for further information related to the Fleming arbitration.

With the termination of the 1993 supply agreement with Fleming, the
Company began moving towards its strategic objective of self-distribution
through an enhancement of its distribution network. The Company currently
operates two distribution centers (the Telge Road facility in Houston, Texas
and the Alliance facility in Roanoke, Texas, near Dallas) which in the
aggregate total approximately 1,622,000 square feet. During Fiscal Year 1999,
the Company completed an approximately $35.0 million expansion of the Telge
Road facility, increasing the square footage from approximately 150,000
square feet to approximately 646,000 square feet. Such expansion enabled the
Company to complete the consolidation of its Rogerdale facility in Houston
into the Telge Road facility and sell the Rogerdale facility. The Telge Road
facility houses refrigerated perishable goods, frozen foods and dry grocery.
It is located on 70 acres of Company-owned land, approximately 50 of which
have been developed. The Company has transitioned the receipt and shipment of
dry grocery inventory from the Fleming distribution center in Houston, Texas
to the Telge Road facility.

Additionally, as part of its move to self-distribution during Fiscal
year 1999, the Company leased the Alliance facility and moved the operations
of the Company's Inwood facility in Dallas into the Alliance Facility. The
Company currently leases the Inwood Facility, which it owns, to a third
party. The Alliance facility has approximately 1.2 million square feet,
976,000 of which the Company leases. The Alliance facility is a full-line
distribution center with dry, perishable and frozen facilities. During Fiscal
Year 1999, the Company spent approximately $13.0 million on fixtures and
equipment for the Alliance facility. The Company has completed the transition
to the Alliance Facility, including the receipt and shipment of dry grocery
inventory previously purchased from the Fleming distribution center in
Dallas, Texas. See the discussion under PROPERTIES "DISTRIBUTION FACILITIES"
for additional information regarding these properties.

The Company has also expanded the size of its fleet to maintain the
distribution facilities' level of service to the stores in connection with
its move to self-distribution.

Each store submits orders to the distribution facilities through a
centralized processing system, and merchandise is normally received by the
store the next day. Merchandise is delivered from the distribution facilities
through a leased fleet of 51 tractors, 72 refrigerated trailers and 57 dry
trailers and another 6 refrigerated trailers and 2 dry trailers which the
Company owns. The majority of the Company's stores in Houston and Dallas are
located within a 70-mile radius of the distribution facilities.

The transition to self-distribution is expected to increase the
operational and purchasing efficiencies of the Company's distribution network
and lower the Company's overall cost of sales, although no assurance can be
given in this regard. To date, the Company has not experienced any disruption
to its supply of product as a result of such transition. While the Company
has distributed products to its stores for many years, the expansion and the
move to self-distribution present multiple risks that could potentially have
an adverse impact on the Company's financial results for a particular quarter
or annual reporting period. Such risks include, but are not limited to,
increased borrowings due to the build-up of excess inventory levels and lower
sales, gross margin and net income due to the potential disruptions of
product delivery and sourcing to the stores. Although there can be no
assurance, management believes that the success of the transition to date and
management's prior experience in distribution reduce such risks.

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COMPETITION

The supermarket industry is highly competitive and characterized by
narrow profit margins. The Company's competitors include national and
regional supermarket chains, independent and specialty grocers, drug and
convenience stores, and the newer "alternative format" food stores, including
warehouse club stores, deep discount drug stores and supercenters.
Supermarket chains generally compete on the basis of location, quality of
products, service, price, variety and store condition. The Company regularly
monitors its competitors' prices and adjusts its prices and marketing
strategy as management deems appropriate in light of existing conditions. The
Company faces increased competitive pressure in all of its markets from
existing competitors which have opened, and appear to have plans to continue
to open, a significant number of new stores in the Company's markets. Some of
the Company's competitors have greater financial resources than the Company
and could use these resources to take measures which could adversely affect
the Company's competitive position.

The Company's principal competitors in Houston are The Kroger Co.
("Kroger"), Fiesta Mart Inc. and H.E. Butt Grocery Company ("H.E.B."), with
market shares of approximately 28%, 11% and 10%, respectively. The Company's
market share in Houston is approximately 20%. The Company's principal
competitors in Dallas are Albertsons Inc. ("Albertsons"), Kroger and Minyard
Food Stores ("Minyard"), with market shares of approximately 23%, 15% and
15%, respectively. The Company's market share in Dallas is approximately 20%.
The Company's principal competitors in Fort Worth are Albertsons, Winn-Dixie
Stores, Kroger and Minyard, with market shares of approximately 24%, 19%, 15%
and 11%, respectively. The Company's market share in Fort Worth is
approximately 11%. The Company's principal competitors in the Austin
metropolitan area are H.E.B. and Albertsons, with market shares of
approximately 56% and 15%, respectively. The Company's market share in Austin
is approximately 14%.

WORKING CAPITAL

At June 26, 1999, working capital was composed of $311.5 million of
current assets and $313.3 million of current liabilities. Normal operating
fluctuations in these balances can result in changes to cash flow from
operations presented in the Consolidated Statements of Cash Flows that are
not necessarily indicative of long-term operating trends. There are no
unusual industry practices or requirements relating to working capital items.

EMPLOYEES AND LABOR RELATIONS

The Company is one of the largest private employers in Texas. As of
June 26, 1999, the Company employed 17,650 persons, of whom approximately 44%
were full-time and approximately 56% were part-time employees. Of this
number, 16,464 were employed in supermarkets, 692 were employed in the
warehouse operations and 494 were employed in the Company's corporate
offices. The Company currently employs an average of 141 employees in each
store.

EMPLOYEE TYPE: TOTAL

<S> <C>
Salaried ................................................. 2,138
Hourly:
Full-time ............................................. 5,653
Part-time ............................................. 9,859
------
Total..................................................... 17,650
======
</TABLE>

The Company's employees are not members of unions or parties to
collective bargaining agreements.

TRADENAMES AND TRADEMARKS

The Company uses a variety of tradenames and trademarks. Except for
RANDALLS, TOM THUMB and REMARKABLE, the Company does not believe any of such
tradenames or trademarks are material to its business. The Company has
granted the right to certain retail shopping centers to use the RANDALLS, TOM
THUMB and

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SIMON DAVID tradenames as part of the tradenames of such shopping centers, so
long as the Company's stores are operating in such shopping centers.

ENVIRONMENTAL MATTERS

The Company is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes and (ii)
impose liability for the costs of cleaning up, and certain damages resulting
from, sites of past spills, disposal or other releases of hazardous
materials. Under various environmental laws and regulations, a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances or petroleum product releases at such
property and may be held liable to a governmental entity or to third parties
for damages and for investigation and clean-up costs incurred by such parties
in connection with the contamination. The Company believes that it currently
conducts its operations, and in the past has operated its business, in
substantial compliance with applicable environmental laws and regulations.
There can be no assurance that (i) future laws, ordinances or regulations
will not impose any material environmental liability or (ii) the current
environmental condition of the Company's properties will not be affected by
tenants, by the condition of land or operations in the vicinity of such
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company. From time to time, operations of the
Company have resulted or may result in noncompliance with or liability for
cleanup pursuant to environmental laws and regulations. The Company has
determined that, among other things, underground storage tanks at truck
fueling sites in Texas and Nebraska may have leaked fuel and other materials
and resulted in soil contamination. At the Abilene, Texas site, based on soil
and groundwater analysis to date and currently known facts, the Company
estimates a range of future expenditures between $300,000 and $700,000,
substantially all of which has been reserved. With respect to a second site,
located in Dallas, Texas, the Company has paid remediation costs of
approximately $300,000, and state regulatory authorities have advised the
Company that no further corrective action is necessary. One other site,
located in Garland, Texas, was sold to a party who accepted responsibility
for corrective action pertaining to leaking underground storage tank site
remediation. Under applicable environmental laws, the Company may remain
liable for remediation of the Garland site. Remediation of the Nebraska site
had been initiated but was suspended due to shortfalls in the Nebraska Fund
dedicated to remediation of leaking underground storage tanks. Future
remedial work at the Nebraska site (if any) may be borne by either the
Company or the aforementioned fund. The Company believes that the remediation
efforts described above, which represent the Company's material environmental
matters, will not have a material adverse effect on its financial condition,
results of operations or cash flow.

The Company has not incurred material capital expenditures for
environmental controls during the previous three fiscal years, nor does the
Company anticipate incurring any such material expenditures to comply with
environmental regulations during the fiscal year ending June 24, 2000.

GOVERNMENT REGULATION

The Company is subject to regulation by a variety of governmental
agencies, including, but not limited to, the U.S. Food and Drug
Administration, the U.S. Department of Agriculture, and other federal, state
and local agencies. The Company's stores are also subject to local laws
regarding the sale of alcoholic beverages.

ITEM 2. PROPERTIES

The Company operates a total of 115 supermarkets, with 46 located in
the Houston area, 57 in the Dallas/Fort Worth area and 12 in the Austin area.
Three of the Company's stores are owned and 112 are leased (one of which is
held through a joint venture interest).

As a result of acquisitions, new store construction and remodelings,
total square footage in the Company's stores has increased approximately 4%
since 1994 from approximately 5,745,000 square feet to approximately
5,971,000 square feet in 1999 and average store size has increased from
approximately 47,500 square feet to approximately 51,900 square feet over the
same period. While most of its newer stores are larger and while the Company
expects the average size of its stores to grow as stores are remodeled and
new

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stores are opened, the Company intends to remain flexible as to the size of
new, acquired and remodeled stores. Eighty-two of the Company's stores are
larger than 50,000 square feet.

The Company's real estate holdings consist of 139 leasehold
interests (the "Leased Properties") and 34 owned properties (the "Fee
Properties"). The Company also owns interests in four properties through
joint ventures (the "Joint Venture Properties"). The Company's ownership
interests in the Joint Venture Properties range from 50.0% to 83.3%. As of
June 26, 1999, the book value of the Company's investments in the four Joint
Venture Properties is $3.1 million. As of June 26, 1999, the Joint Venture
Properties had approximately $2.8 million of indebtedness, all of which is
nonrecourse to the Company. The Company shares in the profits and losses on
the Joint Venture Properties on a pro rata basis with the other joint venture
owners. See Note 6 to the Consolidated Financial Statements.

LEASED PROPERTIES

The Company leases 139 properties under standard commercial leases
which generally obligate the Company to pay its proportionate share of real
estate taxes, common area maintenance charges and insurance costs. In
addition, such leases generally provide for a percentage of sales rent when
sales from the store exceed a certain dollar amount. Generally these leases
have 20-year terms, with four five-year renewal options. The Company owns a
majority of the fixtures and equipment in each leased location and has made
various leasehold improvements to the store sites. Company stores are located
on 112 of the 139 Leased Properties and, of the remaining 27 leases, eight
leases are for closed stores, two leases are for warehouse space, and 17 have
been assigned or subleased to unaffiliated third parties, generally in
connection with store closings.

FEE PROPERTIES

The Company owns the 34 Fee Properties through Randall's Properties,
Inc., a wholly-owned subsidiary. The Fee Properties consist of the Company's
headquarters in Houston (comprised of two sites), the Telge Road facility
(see "Distribution Facilities"), the Inwood facility which the Company leases
to a third party, one shopping center which is not occupied by a Company
store, three free-standing supermarkets, one store leased to an unaffiliated
party, one closed store, 20 undeveloped properties and four properties
currently under construction.

JOINT VENTURE PROPERTIES

The four Joint Venture Properties are comprised of one shopping
center which contains a Company store and three parcels of undeveloped land.
The joint ventures relating to the Joint Venture Properties were originally
formed in order to acquire land, develop shopping centers and lease the land.
The Company currently does not intend to enter into any additional joint
venture or similar arrangements in the future.

DISTRIBUTION FACILITIES

The Company currently operates one distribution facility in Houston
and one in Dallas, which in the aggregate total approximately 1,622,000
square feet. The Telge Road facility in Houston consists of 398,000 square
feet of dry grocery space, 109,640 square feet of refrigerated space to store
perishable goods, 92,800 square feet of freezer space to store frozen foods,
25,200 square feet of garage and salvage space and 20,000 square feet of
office space, and is located on approximately 70 acres of Company-owned land,
50 of which have been developed. The Alliance facility has approximately 1.2
million square feet, 976,000 of which the Company leases. The Alliance
facility is a full-line distribution center with dry, perishable and frozen
facilities. It consists of 678,624 square feet of non food and dry grocery
space, 117,504 square feet of freezer space to store frozen foods, 116,101
square feet of refrigerated space to store perishable goods, 51,443 square
feet of garage and salvage space and 12,800 square feet of office space.
During Fiscal Year 1999, the Company spent approximately $13.0 million on
fixtures and equipment for the Alliance facility. See ITEM 1.
BUSINESS--PURCHASING AND DISTRIBUTION for a more complete discussion related
to the expansion of the distribution facilities.

9
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

MSP LITIGATION

Following the Company's acquisition of Cullum Companies, Inc. in
August 1992, the Company terminated the Cullum's Management Security Plan for
Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years
of service. Thirty-five of the former MSP participants have instituted a
claim against the Company on behalf of all persons who were participants in
the MSP on its date of termination (which is alleged by plaintiffs to be
approximately 250 persons). On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan" (a plan which is unfunded and maintained by an employer
primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees). The Court defined the
class as all persons who, on the date of the termination of the MSP, were
participants in the MSP and were employed by Randall's Food Markets, Inc. The
trial of the limited class action issue was conducted before the Court,
sitting without a jury, on October 26, 1998. On February 18, 1999, the Court
ruled on the limited class action issue finding that the MSP was not an
exempt top hat plan. On April 8, 1999, the plaintiffs filed a new Motion for
Class Certification, seeking class action treatment on all remaining issues.
In addition, the plaintiffs have provided to the Company schedules indicating
that they may claim damages on behalf of the class ranging from $65.1 million
to $67.7 million, prejudgement interest ranging from $28.1 million to $29.3
million and attorneys' fees. In addition, they have calculated that if their
damages in these amounts had been invested to earn a rate of return achieved
by the Standards & Poors 500 Index since December 31, 1992, they would be
entitled to an additional amount of approximately $100 million. On July 13,
1999, the Court announced its decision to certify the same class for the
purpose of trying all remaining issues in the case, principally damages. The
Court ordered that no class member would be permitted to opt out and directed
plaintiffs' counsel to mail written notice of the pendency of the case to all
class members within 30 days. On July 14, 1999, the Court issued a scheduling
order setting the case for trial on November 22, 1999. Based upon current
facts, the Company is unable to estimate any meaningful range of possible
loss that could result from an unfavorable outcome of the MSP litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of the MSP litigation.

FLEMING DISPUTE

On July 30, 1997, the Company initiated an arbitration proceeding
before the American Arbitration Association against Fleming Companies, Inc.
("Fleming"), one of its long-time suppliers, alleging, among other things,
that Fleming violated the terms of a supply agreement signed in 1993. On July
7, 1998, the arbitration panel unanimously found that Fleming materially
breached the supply agreement and the contract was terminated as of July 7,
1998 without payment of any termination fee. The Company and Fleming entered
into a transition agreement, effective September 25, 1998, which provides for
a continued supply of products from Fleming while the Company moves to
self-distribution.

JOHN PAUL MITCHELL LAWSUIT

On August 26, 1998, a jury in the 126th District Court, Travis
County, Texas, returned a verdict against the Company and a co-defendant,
Jade Drug Company, Inc. ("Jade"), finding both parties intentionally
conspired with each other to interfere with contracts between John Paul
Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession,
selling or offering for sale Mitchell products that it knew, or that a
reasonable person in the position of the Company would know, had serial
numbers or other permanent identification markings removed, altered or
obliterated. The jury found that the company unfairly competed with Mitchell
by purchasing and distributing the products and infringed on Mitchell's
trademark. The jury also found that the harm caused Mitchell resulted from
malice.

10
<PAGE>

The jury awarded Mitchell and its co-plaintiff, Ultimate Salon
Services Inc., (together, the "Plaintiffs") $3.25 million in joint and
several damages from the Company and Jade, $4.5 million in exemplary damages
from the Company and $3.0 million in actual damages and $4.5 million in
exemplary damages from Jade.

The Company and Jade filed motions with the trial court judge to
disregard the jury's verdict. On November 19, 1998, the trial court judge
overturned the jury's verdict, entered judgement in favor of the Company and
Jade, ordered that the plaintiffs recover nothing and ordered that the
plaintiffs pay the Company and Jade all of their court costs. On December 18,
1998, the plaintiffs filed a motion for a new trial. On February 2, 1999, the
trial court judge denied such motion by operation of law. On February 16,
1999, the plaintiffs filed their notice of appeal with the court. The
plaintiffs filed their brief with the Court of Appeals on July 5, 1999. The
Company's brief is due at least ten days prior to oral argument, which is not
expected to occur before October 1999. Although the outcome of this matter
cannot be predicted with certainty, management believes an unfavorable
outcome will not have a material adverse effect on the Company, its
operations, its financial condition or its cash flows.

Other than the foregoing matters, the Company believes it is not a
party to any pending legal proceedings, including ordinary litigation
incidental to the conduct of its business and the ownership of its property,
the adverse determination of which would have a material adverse effect on
the Company, its operations, its financial condition, or its cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 26, 1999.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

None.

11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated
condensed financial and other data for the Company. The historical
consolidated financial statements of the Company for 52 weeks ended June 26,
1999 ("Fiscal Year 1999"), 52 weeks ended June 27, 1998 ("Fiscal Year 1998")
and 52 weeks ended June 28, 1997 ("Fiscal Year 1997") have been audited by
Deloitte & Touche LLP and the historical consolidated financial statements
for 53 weeks ended June 29, 1996 ("Fiscal Year 1996") and 52 weeks ended June
24, 1995 ("Fiscal Year 1995") have been audited by Arthur Andersen LLP. The
historical consolidated financial data as of June 26, 1999 and June 27, 1998
and for the Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997 have been
derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company and notes thereto included
elsewhere in this Form 10-K.

SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA

FISCAL YEAR ENDED
-----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) JUNE 26, 1999 JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- ------------- -------------
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)

<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales ................................... $ 2,585,089 $ 2,419,023 $ 2,344,983 $ 2,368,645 $ 2,328,247
Cost of sales (1) ........................... 1,861,810 1,755,203 1,711,832 1,739,832 1,728,698
------------- ------------- ------------- ------------- -------------

Gross profit ............................. 723,279 663,820 633,151 628,813 599,549
Selling, general and administrative
expenses ................................. 553,593 541,497 559,578 506,049 501,634
Depreciation and amortization ............... 61,734 50,908 48,875 45,814 47,447
Interest expense, net(2) .................... 34,446 32,949 36,828 38,981 43,411
Litigation charge(3) ........................ --- --- 9,500 1,000 ---
Severance/benefits charge(4) ................ --- --- 4,512 --- ---
Estimated store closing costs(1) ............ --- --- 29,790 1,215 ---
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item .................... 73,506 38,466 (55,932) 35,754 7,057
(Provision) benefit for income taxes ........ (31,266) (17,730) 15,215 (16,316) (7,020)
------------- ------------- ------------- ------------- -------------

Income (loss) before extraordinary
item .................................. 42,240 20,736 (40,717) 19,438 37
Loss on early extinguishment of debt(5) ..... --- --- (9,798) --- ---
------------- ------------- ------------- ------------- -------------

Net income (loss) ........................ $ 42,240 $ 20,736 $ (50,515) $ 19,438 $ 37
============= ============= ============= ============= =============
Ratio of earnings to fixed charges(6) ....... 2.38x 1.77x --- 1.67x 1.13x

OTHER DATA:
EBITDA(7)(8) ................................ $ 172,226 $ 124,224 $ 33,205 $ 122,641 $ 98,982
Stores open at end of year(9) ............... 115 115 121 120 120

BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficit) ................... $ (1,818) $ (12,315) $ 11,429 $ 29,895 $ 30,186
Total assets ................................ 1,012,631 883,747 862,374 823,265 816,790
Total long-term debt and capital lease
obligations .............................. 389,657 342,506 362,148 437,982 463,944
Redeemable preferred stock .................. --- --- --- 12,438 7,728
Redeemable common stock ..................... 6,988 5,155 5,002 18,607 11,021
Stockholders' equity ........................ 271,184 231,290 213,361 136,650 134,753

CASH FLOW DATA:
Cash flows from operating activities ........ $ 87,768 $ 110,600 $ 28,698 $ 63,846 $ 53,508
Cash flows from investing activities ........ (148,501) (87,194) (50,006) (33,782) (108)
Cash flows from financing activities ........ 52,101 (10,278) 12,737 (31,229) (54,331)
</TABLE>

See Notes to Selected Historical Consolidated Condensed Financial
and Other Data

12
<PAGE>

NOTES TO SELECTED HISTORICAL CONSOLIDATED CONDENSED FINANCIAL AND OTHER DATA

(1) Cost of sales for Fiscal Year 1997 includes inventory losses of
approximately $3.0 million recorded in connection with the Company's
plan to close, replace or sell certain stores, two of which were
closed during Fiscal Year 1997 and 15 of which were closed during
Fiscal Year 1998 and Fiscal Year 1999. Estimated store closing costs
in Fiscal Year 1997 represents an additional charge recorded in
connection with such planned closures.

(2) Represents interest expense net of interest income.

(3) During Fiscal Year 1997, the Company increased its litigation
reserve by $9.5 million to fully reserve for the settlement of a
lawsuit in which two individuals alleged on behalf of the Company
Employee Stock Ownership Plan ("ESOP") and certain participants and
former participants in and beneficiaries of the ESOP alleged that
the Company, certain employees thereof and certain entities which
engaged in a variety of services relating to the ESOP had violated
various federal and state laws in connection with the operation of
the ESOP. The Company concluded it was desirable to settle the
litigation in order to avoid further expense, inconvenience and
distractions, as well as the uncertainty and risks inherent in
litigation.

(4) Represents a charge recorded in connection with departure of certain
executives and other employees of the Company, as well as certain
charges relating to benefits granted under certain employment
agreements.

(5) Represents an extraordinary item of $9.8 million, net of taxes of
$6.0 million, resulting from the early extinguishment of debt.

(6) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed
charges (net of capitalized interest). Fixed charges consist of
interest expense on all indebtedness and capitalized interest,
amortization of deferred financing cost, and one-third of rental
expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest. For
Fiscal Year 1997, the deficiency in earnings to cover fixed charges
was $55.9 million.

(7) "EBITDA" represents earnings before net interest expense, income
taxes, depreciation, amortization, extraordinary items and LIFO
provisions. The LIFO provision for Fiscal Year 1999, Fiscal Year
1998, Fiscal Year 1997, Fiscal Year 1996 and Fiscal Year 1995 was
approximately $2.5 million, $1.9 million, $3.4 million, $2.1 million
and $1.1 million, respectively. EBITDA is not intended to represent
cash flows from operations as defined by generally accepted
accounting principles and should not be considered as an alternative
to net income, as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA is
included in this report as it is a basis upon which the Company
assesses its financial performance, and certain covenants in the
Company's borrowing arrangements are tied to similar measures.
EBITDA should not be used as a measure of performance between
companies as computations differ among companies.

(8) Included in EBITDA for Fiscal Year 1997 are approximately $63.4
million of charges to record an inventory charge, a year-end closed
store accrual (see note (1)), the settlement of the ESOP litigation
(see note (3)), costs associated with implementation of the
Company's frequent shopper program, a severance accrual (see note
(4)), compensation expense related to the issuance of shares of
restricted common stock to certain employees, accruals for
transaction costs related to the Recapitalization, sales taxes,
payroll taxes, legal expenses, rent and other payables. See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

13
<PAGE>

(9) The following sets forth additional information concerning changes in
the Company's store base:

FISCAL YEAR ENDED
-----------------
JUNE 26, JUNE 27, JUNE 28, JUNE 29, JUNE 24,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of year ...... 115 121 120 120 121
Newly constructed ... 8 4 8 4 3
Acquired............. 0 0 2 0 0
Closed............... (8) (10) (9) (4) (4)
--- --- --- --- ---
End of year ............ 115 115 121 120 120
=== === === === ===
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company operates on a 52 or 53 week fiscal year ending on the
last Saturday of each June. Same-store sales is defined as net sales for
stores in full operation in each of the current fiscal periods and the
comparable periods of the prior fiscal year. Replacement stores are included
in the same-store sales calculation. A replacement store is defined as a
store that is opened to replace a store that is closed nearby.
Identical-store sales is defined as net sales for stores in full operation in
each of the current fiscal periods and the comparable periods of the prior
fiscal year, excluding expansion and replacement stores.

On July 22, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Safeway Inc. ("Safeway") and SI Merger
Sub, Inc., a wholly-owned subsidiary of Safeway ("Merger Sub"), pursuant to
which the Company will become a wholly owned subsidiary of Safeway (the
"Merger") and each outstanding share of the Company's common stock ("Common
Stock"), other than shares held by any dissenting shareholders, will be
converted into the right to receive $25.05 per share in cash and a fraction
of a share of common stock of Safeway equal to 0.3204, as adjusted pursuant
to the Merger Agreement. Safeway has indicated that they intend to redeem the
Notes. The consummation of the transactions contemplated by the Merger
Agreement is subject to certain conditions, including approval of the
Company's stockholders and receipt of opinions of tax counsel. Financing is
not a condition to complete the transaction.

The Merger Agreement provides for payment to Safeway of a termination
fee under certain circumstances, including if the Company's Board of
Directors, in the exercise of its fiduciary responsibilities, withdraws or
modifies in any adverse manner its recommendation to the stockholders of the
Merger Agreement.

The following discussion and analysis of the results of operations of
the Company covers certain periods before completion of the Recapitalization
and the related transactions. Accordingly, the discussion and analysis of
such periods do not reflect the significant impact that the Recapitalization
and the related transactions have had and will continue to have on the
Company. However, since the Recapitalization occurred prior to the close of
Fiscal Year 1997, the balance sheet of the Company as of June 28, 1997, and
hence the discussion of liquidity and capital resources, reflects the impact
of the Recapitalization. See the discussion below under LIQUIDITY AND CAPITAL
RESOURCES for further discussion relating to the impact that the
Recapitalization had and may in the future have on the Company.

During Fiscal Year 1997, the Company recorded a charge of
approximately $32.8 million which includes $3.7 million relating to stores
that were closed or sold in Fiscal Year 1997 and $29.1 million related to 20
stores the Company planned to close, replace or sell. Approximately $29.8
million of such Fiscal Year 1997 charge is reflected as estimated store
closing costs, and approximately $3.0 million is included in cost of sales.
To date, the Company closed or sold 18 such stores. During Fiscal Year 1999,
the Company decided

14
<PAGE>

not to close the two remaining stores and accordingly, reversed the portion
of the reserve related to these two stores. See the "SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES" discussion in the COMPARISON OF FISCAL YEAR 1999 AND
FISCAL YEAR 1998 section below. The Company continually reviews its portfolio
of stores and may decide to close, replace or sell additional stores in the
future.

Presented below is a table showing the percentage of net sales
represented by certain items in the Company's condensed consolidated
statements of income (dollars in thousands):

FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 26, 1999 JUNE 27, 1998 JUNE 28, 1997
---------------------- -------------------- ---------------------

<S> <C> <C> <C> <C> <C> <C>
Net sales ............................................. $ 2,585,089 100.0% $ 2,419,023 100.0% $ 2,344,983 100.0%
Cost of sales ......................................... 1,861,810 72.0 1,755,203 72.6 1,711,832 73.0
----------- ------ ----------- ------ ----------- ------

Gross profit ....................................... 723,279 28.0 663,820 27.4 633,151 27.0
Selling, general and administrative expenses .......... 553,593 21.4 541,497 22.4 559,578 23.9
Depreciation and amortization ......................... 61,734 2.4 50,908 2.1 48,875 2.1
Interest expense, net ................................. 34,446 1.3 32,949 1.4 36,828 1.6
Litigation charge ..................................... -- 0.0 -- 0.0 9,500 0.4
Severance/benefits charge ............................. -- 0.0 -- 0.0 4,512 0.2
Estimated store closing costs ......................... -- 0.0 -- 0.0 29,790 1.3
----------- ------ ----------- ------ ----------- ------
Income (loss) before income taxes and extraordinary
item ............................................... 73,506 2.8 38,466 1.6 (55,932) (2.4)
(Provision) benefit for income taxes .................. (31,266) 1.2 (17,730) (0.7) 15,215 0.6
Loss on early extinguishment of debt .................. -- 0.0 -- 0.0 (9,798) 0.4
----------- ------ ----------- ------ ----------- ------
Net income (loss) ..................................... $ 42,240 1.6% $ 20,736 0.9% $ (50,515) (2.2)%
=========== ====== =========== ====== =========== ======
EBITDA ................................................ $ 172,226 6.7% $ 124,224 5.1% $ 33,205 1.4%
=========== ====== =========== ====== =========== ======
</TABLE>

COMPARISON OF FISCAL YEAR 1999 AND FISCAL YEAR 1998

NET SALES

Net sales for Fiscal Year 1999 increased by approximately $166.1
million (6.9%) compared to Fiscal Year 1998. Such increase is partially
attributable to additional sales of approximately $70.2 million generated
from the opening of four new stores (excluding four replacement stores)
during Fiscal Year 1999 and the operation during such period of two stores
(excluding two replacement stores) opened during the Fiscal Year 1998 which
were not in operation during the entire Fiscal Year 1998. In addition, the
Company experienced an increase in same-store sales of approximately $153.6
million in Fiscal Year 1999 as compared to Fiscal Year 1998. These increases
were offset by a decline of approximately $57.7 million primarily resulting
from the closure of four stores (excluding four replacement stores) during
Fiscal Year 1999, eight stores (excluding two replacement stores) in Fiscal
Year 1998 which were operating during part of Fiscal Year 1998 and three
temporarily closed stores in Fiscal Year 1999. Same-store sales during Fiscal
Year 1999 increased approximately 6.6% compared to an increase of
approximately 3.9% during Fiscal Year 1998. Such improvements are due
primarily to the store remodeling and expansion program, the contribution of
replacement stores, the success of merchandising, marketing and customer
service initiatives and favorable economic conditions. Identical-store sales
increased approximately 3.8% during Fiscal Year 1999 compared to an increase
of approximately 3.0% during Fiscal Year 1998. The Company anticipates that
the rate of improvement in same-store sales and identical-store sales will
decline in future periods as such sales are compared to stronger sales of the
previous year.

GROSS PROFIT

Gross profit for Fiscal Year 1999 increased by approximately $59.5
million (9.0%) compared to Fiscal Year 1998. The dollar increase in gross
profit is primarily attributable to the increased sales volume and more
effective promotional efforts during the Fiscal Year 1999. Gross profit as a
percentage of net sales increased to approximately 28.0% for Fiscal Year 1999
from approximately 27.4% for Fiscal Year 1998. Such increase is primarily due
to more effective promotional efforts and higher gross margins at new and
replacement stores. Such higher gross margins at new and replacement stores
are due primarily to the more expansive specialty departments and the broader
range of products and services offered by such stores.

15
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased approximately
$12.1 million (2.2%) during Fiscal Year 1999 compared to Fiscal Year 1998.
Selling, general and administrative expenses as a percentage of net sales
decreased to approximately 21.4% for Fiscal Year 1999 from approximately
22.4% for Fiscal Year 1998. Such decrease, as a percentage of net sales, was
due primarily to the Company's focus on expense management and the increase
in net sales. Selling, general and administrative expenses for Fiscal Year
1999 were also reduced by approximately $4.3 million due to the reversal of a
portion of a reserve that was recorded in Fiscal Year 1997 for planned store
closures. This reversal relates to two stores that the Company decided not to
close which were part of the Fiscal Year 1997 reserve. These decreases in
selling, general and administrative expenses were offset to some degree by a
charge of approximately $3.0 million relating to three stores, not included
in the Fiscal Year 1997 reserve, that the Company decided to close or replace
during Fiscal Year 1999. Two of these three stores were closed as of June 26,
1999 and the remaining store was closed and replaced shortly thereafter. The
aggregate revenue and operating loss for Fiscal Year 1999 from two of these
three stores that the Company does not plan to replace were approximately
$20.5 million and $2.6 million, respectively. At June 26, 1999, the aggregate
carrying value, net of the closed store reserve, of the fixed assets of these
three stores was approximately $3.8 million, or less than 0.4% of the
Company's total assets.

EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, INCOME TAXES, DEPRECIATION,
AMORTIZATION, LIFO PROVISION AND EXTRAORDINARY ITEMS) AND OPERATING INCOME

EBITDA for Fiscal Year 1999 increased by approximately $48.0 million
(38.6%) compared to Fiscal Year 1998. EBITDA as a percentage of net sales
increased to approximately 6.7% for Fiscal Year 1999 from approximately 5.1%
for Fiscal Year 1998. EBITDA for Fiscal Year 1999 and Fiscal Year 1998 is
defined to exclude LIFO provisions of approximately $2.5 million and $1.9
million, respectively. Operating income for Fiscal Year 1999 increased by
approximately $36.5 million (51.2%) compared to Fiscal Year 1998. Such
increases are primarily attributable to the growth in sales, increases in
gross profit and reduction in the rate of selling, general and administrative
expenses described above.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for Fiscal Year 1999 increased
by approximately $10.8 million (21.3%). Such increase is primarily due to new
store openings, the remodeling of certain existing stores and the expansion
of the Company's distribution network in connection with the Company's
capital expenditure program that began in Fiscal Year 1998. This trend is
expected to continue as the Company continues its capital expenditure
program. See LIQUIDITY AND CAPITAL RESOURCES.

INTEREST EXPENSE, NET

Net interest expense for Fiscal Year 1999 increased by approximately
$1.5 million (4.5%) compared to Fiscal Year 1998, due primarily to the
utilization of the Company's revolving credit facility under its bank credit
agreement. See LIQUIDITY AND CAPITAL RESOURCES.

(PROVISION) BENEFIT FOR INCOME TAXES

The provision for income taxes for Fiscal Year 1999 was
approximately $31.3 million compared to approximately $17.7 million for
Fiscal Year 1998. Such increase is primarily due to the Company's increased
pre-tax income.

NET INCOME

Net income for Fiscal Year 1999 increased approximately $21.5
million (103.7%) compared to Fiscal Year 1998 due primarily to the combined
impact of the factors discussed above.

16
<PAGE>

COMPARISON OF FISCAL YEAR 1998 AND FISCAL YEAR 1997

NET SALES

Net sales for Fiscal Year 1998 increased by approximately $74.1
million (3.2%) compared to Fiscal Year 1997. Such increase is partially
attributable to additional sales of approximately $81.4 million generated
from the opening of two new stores (excluding two replacement stores) during
Fiscal Year 1998 and the operation during such period of six stores
(excluding four replacement stores) opened during the Fiscal Year 1997 which
were not in operation during the entire Fiscal Year 1997. In addition, the
Company experienced an increase in same-store sales of approximately $87.5
million in Fiscal Year 1998 as compared to Fiscal Year 1997. These increases
were offset by a decline of approximately $95.4 million primarily resulting
from the closure of eight stores (excluding two replacement stores) during
Fiscal Year 1998 and five stores (excluding four replacement stores) in
Fiscal Year 1997 which were operating during part of Fiscal Year 1997.
Same-store sales during Fiscal Year 1998 increased approximately 3.9%
compared to a decrease of approximately 1.3% during Fiscal Year 1997. Such
improvement has resulted primarily from increased sales at newly remodeled
stores, the contribution of four replacement stores, the success of other
merchandising, marketing and promotional initiatives and favorable economic
conditions.

GROSS PROFIT

Gross profit for Fiscal Year 1998 increased by approximately $30.7
million (4.8%) compared to Fiscal Year 1997. The dollar increase in gross
profit is primarily attributable to the increased sales volume and more
effective promotional efforts during the Fiscal Year 1998. Gross profit as a
percentage of net sales increased to approximately 27.4% for Fiscal Year 1998
from approximately 27.0% for Fiscal Year 1997. Such increases are primarily
due to more effective promotional efforts and higher gross margins at new and
replacement stores. Such higher gross margins at new and replacement stores
are due primarily to the more expansive specialty departments and the broader
range of products and services offered by such stores.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased approximately
$18.1 million (3.2%) during Fiscal Year 1998 compared to Fiscal Year 1997.
Selling, general and administrative expenses as a percentage of net sales
decreased to approximately 22.4% for Fiscal Year 1998 from approximately
23.9% for Fiscal Year 1997. Such decrease is due primarily to the Company's
expense management efforts and approximately $19.3 million of other charges
incurred in Fiscal Year 1997, including recognition of compensation expense
in connection with the issuance of restricted common stock to certain of its
employees, charges to record accruals for sales taxes, payroll taxes, legal
expenses, rent and other payables, an inventory charge, costs associated with
the implementation of the frequent shopper program and transaction costs
related to the Recapitalization.

EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, TAXES, DEPRECIATION, AMORTIZATION,
LIFO PROVISION AND EXTRAORDINARY ITEMS) AND OPERATING INCOME (LOSS)

EBITDA for Fiscal Year 1998 increased by approximately $91.0 million
(274.1%) compared to Fiscal Year 1997. EBITDA as a percentage of net sales
increased to approximately 5.1% for Fiscal Year 1998 from approximately 1.4%
for Fiscal Year 1997. EBITDA for Fiscal Year 1998 and Fiscal Year 1997 is
defined to exclude LIFO provisions of approximately $1.9 million and $3.4
million, respectively, and $9.8 million of loss on early extinguishment of
debt in Fiscal Year 1997. Operating income for Fiscal Year 1998 increased by
approximately $90.5 million (473.8%) compared to Fiscal Year 1997. Such
increases are primarily attributable to the increases in gross profit,
approximately $19.3 million of selling, general and administrative expenses
described above incurred in Fiscal Year 1997 which did not recur in Fiscal
Year 1998, and approximately $44.1 million of additional other charges
incurred in Fiscal Year 1997 which did not recur in Fiscal Year 1998. Such
additional other charges included a year end closed store charge of
approximately $30.1 million (of which, approximately $29.1 million related to
stores the Company planned to close subsequent to Fiscal Year 1997 and
approximately $1.0 million related to stores closed previously), settlement
of litigation for approximately $9.5 million and a severance charge of
approximately $4.5 million.

17
<PAGE>

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for Fiscal Year 1998 increased by
approximately $2.0 million (4.2%). Such increase is primarily due to new
store openings and the remodeling of certain existing stores in Fiscal Year
1997 and 1998.

INTEREST EXPENSE, NET

Net interest expense for Fiscal Year 1998 declined by approximately
$3.9 million (10.5%) compared to Fiscal Year 1997, due primarily to a net
reduction of debt. See LIQUIDITY AND CAPITAL RESOURCES.

(PROVISION) BENEFIT FOR INCOME TAXES

The provision for income taxes for Fiscal Year 1998 was
approximately $17.7 million compared to a benefit of approximately $15.2
million for Fiscal Year 1997. Such increase is primarily due to the Company's
increased pre-tax income.

NET INCOME (LOSS)

Net income for Fiscal Year 1998 increased approximately $71.3
million (141.0%) compared to Fiscal Year 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company is a holding company, and as a result, its operating
cash flow and its ability to service its indebtedness, including the
Company's $150.0 million aggregate principal amount outstanding of the Notes,
are dependent upon the operating cash flow of its subsidiaries and the
payment of funds by such subsidiaries to the Company in the form of loans,
dividends or otherwise.

The Company's principal sources of liquidity are expected to be cash
flow from operations, borrowings under the $225.0 million revolving credit
facility ("Revolver") available under the Company's current bank credit
agreement and proceeds from lease financing arrangements. As of June 26,
1999, the Company had approximately $167.7 million available (net of
approximately $0.3 million of outstanding letters of credit) to be borrowed
under the Revolver. Subject to the completion of the Merger, management
anticipates that the Company's principal uses of liquidity will be to provide
working capital, meet debt service requirements and finance the Company's
expansion and remodeling plans. Subject to the completion of the Merger,
management believes that cash flows generated from operations, borrowings
under the Revolver and lease financing will adequately provide for its
working capital and debt service needs and will be sufficient to fund the
Company's expected capital expenditures.

On the date the Merger becomes effective ("Merger Effective Date"),
certain covenants in the Notes indenture and the bank credit agreement
prohibiting mergers and similar transactions may be violated and, upon the
passage of thirty days after notice of such violation is received, the Notes
and obligations under the bank credit agreement would be in default;
although, the Company has been advised by Safeway that it is the intention of
Safeway to call the Notes for redemption and to immediately refinance the
obligations under the bank credit agreement with other pre-existing credit
arrangements on the Merger Effective Date.

During Fiscal Year 1999, Fiscal Year 1998, and Fiscal Year 1997,
operating activities generated cash of $87.8 million, $110.6 million and
$28.7 million, respectively. Net cash provided by operations during Fiscal
Year 1999 resulted primarily from net income during the period (adjusted for
the non-cash impact of depreciation and amortization) and increases in
accounts payable and accrued expenses, offset to some extent by increases in
merchandise inventories and accounts receivable. Net cash provided by
operations during Fiscal Year 1998 resulted primarily from net income
(adjusted for the non-cash impact of depreciation and amortization), the
collection of a $10.0 million federal income tax receivable, and increases in
accounts payable and accrued expenses, offset to some extent by increases in
accounts receivable and merchandise inventories. During Fiscal Year 1999,
Fiscal Year 1998 and Fiscal Year 1997, net cash provided by (used in)
financing activities were $52.1 million, ($10.3 million) and $12.7 million,
respectively. During Fiscal Year 1999, the net cash provided by financing
activities resulted primarily from borrowings under the revolver of
approximately $280.0 million offset to some extent by repayments of debt of
approximately $224.3 million, a

18
<PAGE>

reduction in capital lease obligations of approximately $3.7 million and the
redemption of the Company's common stock of approximately $2.1 million.
During Fiscal Year 1998, the use of cash in financing activities reflects the
redemption of the Company's common stock of approximately $4.1 million, a
reduction in capital lease obligations of approximately $3.8 million and
repayments of debt of approximately $3.3 million. Net (repayments) borrowings
of revolving loans under the Company's credit facilities were ($3.0) million
and $17.0 million during Fiscal Year 1998 and Fiscal Year 1997, respectively.

Net cash used in investing activities during Fiscal Year 1999 was
$148.5 million, consisting primarily of capital expenditures of approximately
$226.5 million, which were partially offset by proceeds from the sale of
assets in the amount of approximately $77.7 million. Capital expenditures
primarily include expenditures related to construction of new stores,
purchase of real estate, remodeling of existing stores, ongoing store
expenditures for equipment and capitalized maintenance, as well as
expenditures relating to warehousing and distribution equipment, software
development and computer equipment. To finance store development, the Company
has traditionally purchased real estate and constructed stores from operating
cash flows and from the proceeds of its revolving credit facility and then
entered into sale and leaseback transactions, the proceeds of which were
applied to reduce debt incurred to construct the stores. During Fiscal Year
1998 and Fiscal Year 1997, capital expenditures were approximately $113.0
million and $106.0 million, respectively. Proceeds from asset sales were
approximately $25.2 million during Fiscal Year 1998 compared to $55.4 million
during Fiscal Year 1997.

During Fiscal Year 1998, the Company embarked upon a program to
accelerate its store development and remodeling and to optimize its
distribution system. This program has resulted in a level of capital
expenditures significantly in excess of historical levels prior to the
Recapitalization. Subject to completion of the Merger, the Company currently
estimates that its capital expenditures for Fiscal Year 2000 will be
approximately $192.0 million, including approximately $51.0 million for store
remodeling, approximately $103.0 million for land purchases and construction
of new stores, approximately $10.0 million for construction of fueling
stations, approximately $16.0 million for computer hardware and software
related expenditures and approximately $12.0 million for maintenance related
capital expenditures. Subject to completion of the Merger, the Company
anticipates funding its future capital expenditures and expansion program
with cash flow from operations, borrowings under the Revolver and proceeds
from lease financing arrangements, including a five-year, $50.0 million
synthetic lease arrangement that the Company entered into on September 10,
1998.

During Fiscal Year 1998, the Company commenced expansion of its
distribution network in a strategic shift toward self-distribution. The
transition to self-distribution is expected to increase the operational and
purchasing efficiencies of the Company's distribution network and lower the
Company's overall cost of sales, although no assurance can be given in this
regard. The Company has completed the transition to its Alliance facility
including the receipt and shipment of dry grocery inventory previously
purchased from The Fleming Companies, Inc. ("Fleming") distribution center in
Dallas, Texas. The Company has also completed the expansion of the Telge Road
facility in Houston, Texas and has transitioned the receipt and shipment of
dry grocery inventory from the Fleming distribution center in Houston, Texas
to the Telge Road facility. To date, the Company has not experienced any
disruption to its supply of product as a result of such transition. While the
Company has distributed products to its stores for many years, the expansion
and move to self-distribution present multiple risks that could potentially
have an adverse impact on the Company's financial results for a particular
quarter or annual reporting period. Such risks include, but are not limited
to, increased borrowings due to the build-up of excess inventory levels and
lower sales, gross margin and net income due to the potential disruptions of
product delivery and sourcing to the stores. Although there can be no
assurance, management believes that its extensive planning process, success
of the transition to date and management's experience in distribution reduce
such risks.

NEW ACCOUNTING STANDARDS

REPORTING ON THE COSTS OF START-UP ACTIVITIES

In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "REPORTING ON THE COSTS OF
START-UP ACTIVITIES", ("SOP 98-5") which requires that costs incurred for
start-up activities should be charged to operations as incurred. Although the
Company has not fully assessed the

19
<PAGE>

impact of adopting SOP 98-5, the Company does not believe that such adoption
will have a material impact on its financial statements. The Company is
required to adopt SOP 98-5 in its fiscal year ending June 24, 2000. Initial
application of SOP 98-5 will be reported as a cumulative effect of an
accounting change.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at its fair value. Depending on the intended use of the
derivative, changes in its fair value will be reported in the period of
change as either a component of earnings or a component of other
comprehensive income. The Company has not quantified the impact of adoption
on its financial statements. The Company is required to adopt SFAS No. 133 in
its fiscal year ending June 30, 2001. Retroactive application to periods
prior to adoption is not allowed.

EFFECTS OF INFLATION

The Company's primary costs, inventory and labor, are affected by a
number of factors that are beyond its control, including inflation,
availability and price of merchandise, the competitive climate and general
and regional economic conditions. As is typical of the supermarket industry,
the Company has generally been able to maintain gross profit margins by
adjusting retail prices, but competitive conditions may from time to time
render the Company unable to do so while maintaining its market share.

YEAR 2000 COMPLIANCE

The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year, as well as
hardware designed with similar constraints. Some of the Company's computer
programs and hardware that have date-sensitive functions may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions in operations
including, among other things, a temporary inability to process transactions,
receive invoices, make payments or engage in similar normal business
activities.

In February 1997, the Company began a project, under the direction
of the Company's Chief Information Officer, to address the year 2000 issue.
The Company is utilizing both internal and external resources to identify,
upgrade and test the Company's hardware, software, systems and processes ("IT
systems") for year 2000 compliance. In July 1997, the Company completed the
identification phase of its project with a comprehensive inventory and impact
assessment of its IT systems. Such phase identified various IT systems
requiring upgrades in order to be year 2000 compliant. To complete the
upgrade and testing phases, the Company developed the Y2K Migration Plan (the
"Y2K Plan"). Year 2000 upgrades have been prioritized to complete all
critical systems in the early phases of the Y2K Plan. Presently,
approximately 95% of the Company's IT systems that were determined to be
non-compliant have been upgraded and tested, and are now believed to be year
2000 compliant. The Company expects the Y2K Plan to be completed by the end
of calendar year 1999.

During Fiscal Year 1999, the Company expensed approximately $2.0
million for the cost of upgrading its IT systems under the Y2K Plan. In
addition, the Company currently expects to expense approximately $0.6 million
in Fiscal Year 2000 to complete its Y2K Plan. The Company invested
approximately $22.3 million during Fiscal Year 1999 for hardware and software
programs to replace systems that are inefficient and in need of replacement
regardless of their year 2000 compliance status. The Company currently
anticipates to invest approximately $16.0 million in Fiscal Year 2000 for
such hardware and software. The Company expects to fund the Y2K Plan and
hardware and software purchases with cash flows generated from operations and
borrowings under the Revolver.

The Company is also currently assessing the year 2000 readiness of
its non-information technology systems and equipment, such as refrigeration
units, ovens, scales, safes and other equipment ("non-IT systems") which may
include imbedded technology such as microcontrollers that are not year 2000
compliant. Imbedded chips in store security, refrigeration and environmental
systems were inventoried and, where

20
<PAGE>

possible, tested. Where systems could not be tested, manufacturer
certification as to Y2K compliance was obtained. The cost of achieving such
compliance is not currently expected to have a material impact on the
Company's financial position, results of operations or cash flows.

The Company has suppliers and other third parties, such as utility
companies, that it relies on for business operations and currently expects
those suppliers and other third parties are taking the appropriate action for
year 2000 compliance. The Company cannot provide assurance that the failure
of such suppliers and other third parties to address the year 2000 issue will
not have an adverse impact on the Company. While the Company has limited
ability to test and control its suppliers' and other third parties' year 2000
readiness, the Company has contacted major suppliers and critical other third
parties in order to assessing whether they will be year 2000 compliant.
Responses for major suppliers indicate that they all have year 2000 plans in
place and none expect to have any year 2000 problems. Although there can be
no assurance that multiple business disruptions caused by technology failures
can be adequately anticipated, the Company will develop contingency plans to
reduce the impact of non-compliant major suppliers and other critical parties
and is identifying second and third sources of supply for major suppliers to
minimize the risk of business interruptions.

The Company intends for its year 2000 date conversion project for
both its IT systems and non-IT systems to be completed on a timely basis so
as to not significantly impact business operations. However, if the Company
or any critical third parties do not complete necessary upgrades as planned,
the year 2000 issue may have a material impact on the Company, including,
among other things, a temporary inability to procure and distribute products,
process transactions, receive invoices, make payments, refrigerate perishable
products or engage in similar normal business activities. The Company is
currently assessing the potential impact of such year 2000-related issues and
is developing contingency plans to mitigate the risk of any scenario that may
have a material impact on the Company. The Company intends to formalize such
contingency plans by the fourth quarter of calendar year 1999.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. The factors discussed
below, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report, including,
without limitation, in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, in the Company's related press release
and in oral statements made by authorized officers of the Company. When used
in this report, any press release or oral statements, the words "looking
forward", "estimate," "project," "anticipate," "expect," "intend," "believe"
and similar expressions are intended to identify forward-looking statements.
All of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not be
placed upon such estimates and statements. No assurance can be given that any
of such statements or estimates will be realized and actual results will
differ from those contemplated by such forward-looking statements.
Accordingly, the Company hereby identifies the following important factors
which could cause the Company's financial results to differ materially from
any such results which might be projected, forecast, estimated or budgeted by
the Company in forward-looking statements: heightened competition, including
specifically the intensification of price competition and the expansion,
renovation and opening of new stores by competitors; failure to obtain new
customers or retain existing customers; inability to carry out strategies to
accelerate new store development and remodeling programs, reduce operating
costs, differentiate products and services, leverage frequent shopper program
and increase private label sales; insufficiency of financial resources to
renovate and expand store base; increase in leverage and interest expense due
to the expansion and remodeling program; outcome of the MSP Litigation and
the John Paul Mitchell Litigation; issues arising in connection with the Y2K
Plan; prolonged dispute with labor; economic downturn in the State of Texas;
loss or retirement of key executives; transition to self distribution; higher
selling, general and administrative expenses occasioned by the need for
additional advertising, marketing, administrative, or management information
systems expenditures; adverse publicity and news coverage and the proposed
Merger involving Safeway.

21
<PAGE>

ITEM 7 (a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

During Fiscal Year 1999, the Company entered into two interest rate
swap agreements to hedge interest rate costs and risks associated with
variable interest rates. Such agreements effectively convert variable-rate
debt, to the extent of the notional amount, to fixed-rate debt with effective
per annum interest rates of 5.493% and 5.295%, with respect to the London
Interbank Offered Rate portion of such borrowings. The aggregate notional
principal amount of such agreements is $100.0 million, $50.0 million of which
became effective August 25, 1998 and matures August 25, 2001, and $50.0
million of which became effective September 2, 1998 and matures September 2,
2001. The counterparty to such agreements can terminate either agreement
after two years, at its sole discretion. The counterparty to such agreements
is a major financial institution, and therefore, credit losses from
counterparty nonperformance are not anticipated.

22
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To Randall's Food Markets, Inc.:

We have audited the accompanying consolidated balance sheets of
Randall's Food Markets, Inc. and subsidiaries (the "Company") as of June 26,
1999 and June 27, 1998, and the related consolidated statements of
operations, redeemable common stock and stockholders' equity, and cash flows
for the fiscal years ended June 26, 1999, June 27, 1998 and June 28, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Randall's Food
Markets, Inc. and subsidiaries as of June 26, 1999 and June 27, 1998, and the
results of their operations and their cash flows for the fiscal years ended
June 26, 1999, June 27, 1998 and June 28, 1997, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP
Houston, Texas
August 13, 1999

23
<PAGE>

RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 26, 1999 AND JUNE 27, 1998
(In Thousands, Except Share and Per Share Amounts)

JUNE 26, 1999 JUNE 27, 1998
------------- -------------
ASSETS

<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 27,611 $ 36,243
Receivables, net ................................................................... 53,810 44,187
Merchandise inventories ............................................................ 223,362 166,332
Deferred tax asset ................................................................. 510 11,792
Prepaid expenses and other ......................................................... 6,210 5,986
------------- -------------
Total current assets .................................................. 311,503 264,540
PROPERTY AND EQUIPMENT, net ........................................................... 453,826 365,853
GOODWILL, net ......................................................................... 211,586 217,968
OTHER ASSETS, net ..................................................................... 35,716 35,386
------------- -------------
TOTAL ................................................................................. $ 1,012,631 $ 883,747
============= =============

LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt ............................................... $ 798 $ 789
Current maturities of obligations under capital leases ............................. 3,856 3,755
Accounts payable ................................................................... 176,119 135,834
Accrued expenses and other ......................................................... 132,548 136,477
------------- -------------
Total current liabilities .................................................. 313,321 276,855
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities .......................................... 332,157 276,447
Obligations under capital leases, net of current maturities ........................ 57,500 61,515
Deferred income tax liability ...................................................... 7,596 8,711
Other liabilities .................................................................. 23,885 23,774
------------- -------------
Total liabilities .......................................................... 734,459 647,302

COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
REDEEMABLE COMMON STOCK, $18.03 and $13.30 redemption value per share, 387,651
shares issued and outstanding at June 26, 1999 and June 27, 1998 ................... 6,988 5,155

STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value, 75,000,000 shares authorized, 29,619,833
shares issued and outstanding at June 26, 1999, 29,697,979 shares issued
and 29,679,597 shares outstanding at June 27, 1998 .............................. 7,405 7,425
Additional paid-in capital ......................................................... 173,386 174,337
Stockholders' notes receivable ..................................................... (6,402) (6,213)
Retained earnings .................................................................. 96,913 56,506
Restricted common stock ............................................................ (118) (547)
Treasury stock, 18,382 shares at June 27, 1998, at cost ............................ --- (218)
------------- -------------
Total stockholders' equity ................................................. 271,184 231,290
------------- -------------
TOTAL ................................................................................. $ 1,012,631 $ 883,747
============= =============
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

24
<PAGE>

RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 26, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(In Thousands)

JUNE 26, 1999 JUNE 27, 1998 JUNE 28, 1997
------------- ------------- -------------

<S> <C> <C> <C>
NET SALES ....................................................... $ 2,585,089 $ 2,419,023 $ 2,344,983
COST OF SALES ................................................... 1,861,810 1,755,203 1,711,832
------------- ------------- -------------
Gross profit ......................................... 723,279 663,820 633,151
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative expenses .............. 553,593 541,497 559,578
Depreciation and amortization ............................. 61,734 50,908 48,875
Litigation and severance/benefits ......................... - - 14,012
Estimated store closing costs ............................. - - 29,790
------------- ------------- -------------
Total operating expenses ............................. 615,327 592,405 652,255
------------- ------------- -------------
OPERATING INCOME (LOSS) ......................................... 107,952 71,415 (19,104)
INTEREST EXPENSE, net ........................................... 34,446 32,949 36,828
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ........ 73,506 38,466 (55,932)
(PROVISION) BENEFIT FOR INCOME TAXES ............................ (31,266) (17,730) 15,215
------------- ------------- -------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......................... 42,240 20,736 (40,717)
EXTRAORDINARY ITEM - Loss on early extinguishment of debt
(Net of taxes of $6,006) ..................................... - - (9,798)
------------- ------------- -------------
NET INCOME (LOSS) ............................................... $ 42,240 $ 20,736 $ (50,515)
============= ============= =============
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

25
<PAGE>

RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 27, 1998 AND JUNE 26, 1999
(In Thousands)

<TABLE>
<CAPTION>
REDEEMABLE STOCK
------------------------------------ STOCKHOLDERS' EQUITY
8% ----------------------
CLASS A CONVERTIBLE ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
---------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 29, 1996 ................................ $ 825 $ 11,613 $ 18,607 $ 3,996 $ 37,629
Preferred stock dividends ........................... -0- -0- -0- -0- -0-
Issuance of restricted stock ........................ -0- -0- -0- 34 2,405
Issuance of common stock ............................ -0- -0- -0- 4,645 220,355
Accretion to redemption value ....................... -0- (3,865) (5,404) -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- -0- -0- -0- 29
Purchase of treasury stock .......................... -0- -0- -0- -0- -0-
Retirement of treasury stock ........................ -0- -0- (158) (10) (906)
Purchase and retirement of ESOP and Non-ESOP shares . -0- -0- -0- (1,346) (84,810)
Redemption of common stock .......................... -0- -0- -0- (93) (4,407)
Redemption of putable common stock .................. -0- -0- (2,426) -0- -0-
Redemption of preferred stock ....................... (825) (7,748) -0- -0- -0-
Cancellation of putable rights ...................... -0- -0- (5,617) 100 -0-
Impairment of loan to ESOP .......................... -0- -0- -0- -0- (472)
Net loss ............................................ -0- -0- -0- -0- -0-
--------- --------- --------- --------- ---------
BALANCE, JUNE 28, 1997 ................................ -- -- 5,002 7,326 169,823
Issuance of restricted stock ........................ -0- -0- -0- 21 882
Issuance of common stock ............................ -0- -0- -0- 154 7,294
Purchase and retirement of common stock ............. -0- -0- -0- (81) (4,184)
Accretion to redemption value ....................... -0- -0- 442 -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- -0- -0- -0- -0-
Cancellation of restricted common stock ............ -0- -0- -0- (1) (31)
Purchase of treasury stock .......................... -0- -0- -0- -0- -0-
Sale of treasury stock .............................. -0- -0- -0- -0- -0-
Cancellation of redemption rights ................... -0- -0- (280) 6 274
Purchase of redeemable common shares ................ -0- -0- (9) -0- -0-
Impairment of loan to ESOP .......................... -0- -0- -0- -0- (263)
Repayment of loan to ESOP ........................... -0- -0- -0- -0- 542
Net income .......................................... -0- -0- -0- -0- -0-
--------- --------- --------- --------- ---------
BALANCE, JUNE 27, 1998 ................................ -- -- 5,155 7,425 174,337
--------- --------- --------- --------- ---------
Issuance of common stock ............................ -0- -0- -0- 36 1,852
Purchase and retirement of common stock ............. -0- -0- -0- (50) (2,773)
Accretion to redemption value ....................... -0- -0- 1,833 -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- -0- -0- -0- -0-
Cancellation of restricted common stock ............. -0- -0- -0- (1) (13)
Retirement of treasury stock ........................ -0- -0- -0- (5) (213)
Repayment of stockholders' notes receivable ......... -0- -0- -0- -0- -0-
Repayment of loan to ESOP ........................... -0- -0- -0- -0- 196
Net income .......................................... -0- -0- -0- -0- -0-
--------- --------- --------- --------- ---------
BALANCE, JUNE 26, 1999 ................................. $ -- $ -- $ 6,988 $ 7,405 $ 173,386
========= ========= ========= ========= =========

STOCKHOLDERS' EQUITY
-------------------------------------------------------
RESTRICTED STOCKHOLDERS'
RETAINED COMMON TREASURY NOTES
EARNINGS STOCK STOCK RECEIVABLE
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 29, 1996 ................................ $ 95,025 $ -- $ -- $ --
Preferred stock dividends ........................... (2,407) -0- -0- -0-
Issuance of restricted stock ........................ -0- (2,439) -0- -0-
Issuance of common stock ............................ -0- -0- -0- -0-
Accretion to redemption value ....................... 9,269 -0- -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- 2,439 -0- -0-
Purchase of treasury stock .......................... -0- -0- (919) -0-
Retirement of treasury stock ........................ 155 -0- 919 -0-
Purchase and retirement of ESOP and Non-ESOP shares . -0- -0- -0- -0-
Redemption of common stock .......................... -0- -0- -0- -0-
Redemption of putable common stock .................. (780) -0- -0- -0-
Redemption of preferred stock ....................... (20,052) -0- -0- -0-
Cancellation of putable rights ...................... 5,517 -0- -0- -0-
Impairment of loan to ESOP .......................... -0- -0- -0- -0-
Net loss ............................................ (50,515) -0- -0- -0-
--------- --------- -------- ---------
BALANCE, JUNE 28, 1997 ................................ 36,212 -- -- --
Issuance of restricted stock ........................ -0- (903) -0- -0-
Issuance of common stock ............................ -0- -0- -0- (6,503)
Purchase and retirement of common stock ............. -0- -0- -0- 180
Accretion to redemption value ....................... (442) -0- -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- 324 -0- -0-
Cancellation of restricted common stock ............ -0- 32 -0- -0-
Purchase of treasury stock .......................... -0- -0- (348) 200
Sale of treasury stock .............................. -0- -0- 130 (90)
Cancellation of redemption rights ................... -0- -0- -0- -0-
Purchase of redeemable common shares ................ -0- -0- -0- -0-
Impairment of loan to ESOP .......................... -0- -0- -0- -0-
Repayment of loan to ESOP ........................... -0- -0- -0- -0-
Net income .......................................... 20,736 -0- -0- -0-
--------- --------- -------- ---------
BALANCE, JUNE 27, 1998 ................................ 56,506 (547) (218) (6,213)
--------- --------- -------- ---------
Issuance of common stock ............................ -0- -0- -0- (1,129)
Purchase and retirement of common stock ............. -0- -0- -0- 724
Accretion to redemption value ....................... (1,833) -0- -0- -0-
Earned portion of restricted common stock
compensation ..................................... -0- 415 -0- -0-
Cancellation of restricted common stock ............. -0- 14 -0- -0-
Retirement of treasury stock ........................ -0- -0- 218 -0-
Repayment of stockholders' notes receivable ......... -0- -0- -0- 216
Repayment of loan to ESOP ........................... -0- -0- -0- -0-
Net income .......................................... 42,240 -0- -0- -0-
--------- --------- -------- ---------
BALANCE, JUNE 26, 1999 ................................. $ 96,913 $ (118) $ -- $ (6,402)
========= ========= ======== =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

26
<PAGE>

RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 26, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(In Thousands)

<TABLE>
<CAPTION>
JUNE 26, 1999 JUNE 27, 1998 JUNE 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 42,240 $ 20,736 $ (50,515)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ...................................... 61,734 50,908 48,874
Amortization of debt issuance costs ................................ 1,927 2,053 662
LIFO reserve ....................................................... 2,540 1,901 3,434
Loss on early extinguishment of debt ............................... -- -- 15,804
Settlement of ESOP litigation ...................................... -- -- 10,500
Severance benefits ................................................. -- -- 3,594
Loss (gain) from sale of assets ................................... 897 (1,241) (905)
Store closing costs ................................................ -- -- 32,790
Earned portion of restricted common stock compensation ............. 415 324 2,468
Equity in earnings of unconsolidated joint venture ................. (29) (127) (137)
Deferred tax provision (benefit) ................................... 10,167 6,961 (13,735)
Increase in receivables ............................................ (6,740) (12,879) (2,291)
(Increase) decrease in merchandise inventories ..................... (59,570) (4,059) 184
(Increase) decrease in prepaid expenses and other .................. (1,212) 1,746 (1,216)
Decrease (increase) in note receivable from ESOP ................... -- 2,250 (2,250)
(Increase) decrease in federal income tax receivable ............... (2,883) 13,356 (16,409)
(Increase) decrease in other assets ................................ (2,425) 3,217 (15,963)
Increase in accounts payable ....................................... 40,285 23,808 33,614
Increase (decrease) in accrued expenses and other .................. 5,152 7,485 (18,994)
Decrease in accrued income taxes .................................. -- (2,634) (3,366)
(Decrease) increase in other long-term liabilities ................. (4,730) (3,205) 2,555
--------- --------- ---------
Net cash provided by operating activities ........................ 87,768 110,600 28,698
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (226,460) (112,957) (105,993)
Proceeds from sale of assets .......................................... 77,748 25,167 55,434
Contributions to joint ventures ....................................... -- (163) (138)
Proceeds from sale of joint ventures .................................. 211 496 167
Distributions from joint ventures ..................................... -- 263 524
--------- --------- ---------
Net cash used in investing activities ............................ (148,501) (87,194) (50,006)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt ..................................................... (224,298) (3,267) (399,524)
Cost of early extinguishment of debt .................................. -- -- (15,804)
Proceeds from issuance of debt ........................................ -- -- 178,000
Proceeds from issuance of senior subordinated notes ................... -- -- 149,755
Proceeds from borrowings under Credit Agreement ....................... 280,000 -- --
Reductions of obligations under capital leases ........................ (3,661) (3,754) (3,378)
Proceeds from issuance of common stock ................................ 759 945 225,000
Redemption of common stock ............................................ (2,099) (4,094) (89,363)
Redemption of preferred stock ......................................... -- -- (28,645)
Purchase of treasury stock ............................................ -- (148) (919)
Proceeds from sale of treasury stock .................................. -- 40 --
Collection of ESOP note ............................................... 1,184 -- --
Collection on Management Equity Plan note ............................ 216 -- --
Preferred dividends paid .............................................. -- -- (2,385)
--------- --------- ---------
Net cash provided by (used in) financing activities .............. 52,101 (10,278) 12,737
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................... (8,632) 13,128 (8,571)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 36,243 23,115 31,686
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 27,611 $ 36,243 $ 23,115
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

27
<PAGE>

RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Randall's
Food Markets, Inc., a Texas corporation, and its wholly owned subsidiaries,
Randall's Food and Drugs, Inc. (d.b.a. Randalls Food and Pharmacy or Randalls
and Tom Thumb Food and Pharmacy or Tom Thumb), Randall's Properties, Inc.,
Randall's Management Company, Inc. and Randall's Beverage Company, Inc.
(collectively referred to as the Company). All significant intercompany accounts
and transactions have been eliminated in consolidation.

2. MERGER AGREEMENT

On July 22, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Safeway Inc. ("Safeway") and SI Merger Sub,
Inc., a wholly-owned subsidiary of Safeway ("Merger Sub"), pursuant to which the
Company will become a wholly owned subsidiary of Safeway (the "Merger") and each
outstanding share of the Company's common stock ("Common Stock"), other than
shares held by any dissenting shareholders, will be converted into the right to
receive $25.05 per share in cash and a fraction of a share of common stock of
Safeway equal to 0.3204, as adjusted pursuant to the Merger Agreement. Safeway
has indicated that they intend to redeem the Company's 9-3/8% Series B Senior
Subordinated Notes due 2007 (the "Notes"). The consummation of the transactions
contemplated by the Merger Agreement is subject to certain conditions, including
approval of the Company's stockholders and receipt of opinions of tax counsel.
Financing is not a condition to complete the transaction.

Pursuant to separate Voting Agreements, an affiliate of KKR, which owns
approximately 62% of the outstanding common stock of the Company, and members of
the Onstead family, who own approximately 21% of the outstanding common stock of
the Company, have agreed, among other things, to vote in favor of the approval
of the Merger Agreement.

The Merger Agreement provides for payment to Safeway of a termination
fee under certain circumstances, including if the Company's Board of Directors,
in the exercise of its fiduciary responsibilities, withdraws or modifies in any
adverse manner its recommendation to the stockholders of the Merger Agreement.

3. EQUITY INVESTMENT

The Company and its majority stockholder entered into a subscription
agreement dated April 1, 1997 (the "Subscription Agreement"), with RFM
Acquisition LLC ("RFM Acquisition"). RFM Acquisition is a Delaware limited
liability company formed at the direction of KKR. Following approval of the
stockholders of the Company at a special meeting held in June 1997, RFM
Acquisition paid a total of approximately $225.0 million to the Company (the
Equity Investment), including approximately $210.0 million as consideration for
the Company's issuance to RFM Acquisition of 18,579,686 shares of common stock
and approximately $15.0 million as consideration for a 25-year option to
purchase 3,606,881 shares of common stock at $12.11 per share, subject to
adjustments in the event of stock dividends, subdivisions and combinations,
distributions to common stockholders of securities such as debt or preferred
stock, sales of common stock of the Company below fair market value and the
issuance of convertible securities with an exercise price below fair market
value.

On the Merger Effective Date, RFM Acquisition's options are expected
to be purchased by Safeway for a payment in cash and stock equal to the product
of (a) the number of shares underlying the options multiplied by (b) $41.75 less
the exercise price.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONCENTRATION OF RISK - The Company operates in a highly competitive
marketplace with its retail grocery stores concentrated in north, central and
southeast Texas. The Company is also subject to certain litigation and
administrative matters (See Note 12).

28
<PAGE>

USE OF ESTIMATES - 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

STATEMENTS OF CASH FLOWS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's most significant
financial instruments are long-term debt obligations which are reflected in the
accompanying financial statements at approximately $333.0 million and $277.2
million at June 26, 1999 and June 27, 1998, respectively, which management
believes approximates fair value at those dates. The fair value of debt was
estimated by discounting the future cash flows using rates currently available
for debt of similar terms and maturity. Management believes the fair values of
all other financial instruments are not materially different from their carrying
values.

FISCAL YEAR - The Company's fiscal year ends on the last Saturday in
June of each calendar year, resulting in either a 52- or 53-week fiscal year.
There were 52 weeks in the fiscal years ended June 26, 1999 ("Fiscal Year
1999"), June 27, 1998 ("Fiscal Year 1998") and June 28, 1997 ("Fiscal Year
1997").

RECEIVABLES - Receivables consist of federal income tax receivable and
amounts due from charge customers, vendor promotions, manufacturer coupons and
returned checks and are net of an allowance for uncollectible accounts totaling
$5.9 million, $5.8 million and $3.1 million at June 26, 1999, June 27, 1998 and
June 28, 1997, respectively. The activity in the allowance for uncollectible
accounts for Fiscal Years 1999, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year........ $ 5,805 $ 3,053 $ 1,002
Additions........................... 5,311 4,301 4,714
Deductions.......................... (5,262) (1,549) (2,663)
------- ------- -------
Balance at end of year.............. $ 5,854 $ 5,805 $ 3,053
======= ======= =======
</TABLE>

MERCHANDISE INVENTORIES - The Company uses the last-in first-out
("LIFO") method of costing for its inventories. If the first-in first-out
("FIFO") method had been used for costing inventories, the valuation assigned
to inventories would have been approximately $23.4 million and $20.9 million
higher as of June 26, 1999 and June 27, 1998, respectively.

DEPRECIATION AND AMORTIZATION - Property and equipment are stated at
cost. The Company uses the straight-line method to provide for depreciation over
the estimated useful lives of buildings and improvements (20 years) and
fixtures, leaseholds and equipment (3 to 10 years). Properties held under
capital leases are amortized over the shorter of the useful life or lease term.
Maintenance, repairs and minor replacements are charged to expense as incurred;
major replacements and betterments, including store remodelings, are
capitalized. The net book value of assets sold, retired or otherwise disposed of
is removed from the accounts at the time of disposition or when indicators of
impairment to long-lived assets used in operations are present, and any
resulting gain or loss is reflected in operations for that period.

Goodwill in the amount of $256 million resulted from the acquisition of
Cullum Companies, Inc. ("Cullum") in August 1992 (the "Cullum Acquisition").
Such goodwill is being amortized on a straight-line basis over 40 years. The
accumulated amortization was $44.6 million and $38.2 million at June 26, 1999
and June 27, 1998, respectively. The Company utilizes undiscounted estimated
cash flows to evaluate any possible impairment of goodwill.

29
<PAGE>

ACCRUED EXPENSES AND OTHER - Accrued expenses and other as of June, 26,
1999 and June 27, 1998, consisted of the following (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Payroll and related benefits ............. $ 47,560 $ 42,162
Rent ..................................... 10,699 7,666
Property taxes ........................... 6,880 5,585
Insurance and related costs .............. 22,141 21,712
Deferred income, current ................. 6,811 6,109
Legal and other contingencies ............ 2,445 7,280
Accrual for planned store closings ....... 12,739 27,519
Accrued transaction costs ................ -- 435
Accrued interest ......................... 8,456 7,921
Other .................................... 14,817 10,088
-------- --------
$132,548 $136,477
======== ========
</TABLE>

COST OF SALES - Cost of sales includes cost of merchandise sold and
warehouse salaries, benefits and operating costs.

STORE OPENING AND CLOSING COSTS - During Fiscal Year 1997, the Company
recorded a charge of approximately $32.8 million in connection with the planned
closure, replacement or sale of certain of its stores. Such charge included $3.7
million relating to stores that were closed or sold prior to the fourth quarter
of Fiscal Year 1997 and $29.1 million relating to 20 stores that the Company
planned to close, replace or sell at various dates from June 1997 to June 1999.
The $32.8 million charge included estimated inventory losses of approximately
$3.0 million (included in cost of sales during Fiscal Year 1997), estimated
lease termination costs of approximately $11.7 million and asset write-offs of
approximately $18.1 million (both of which were included in operating expenses
during Fiscal Year 1997).

As of June 26, 1999, 17 out of the 20 stores included in the Fiscal
Year 1997 reserve had been closed, replaced or sold and one was closed and
replaced shortly thereafter. At June 26, 1999, approximately $8.3 million
remained accrued, primarily for future lease obligations and fixed assets to be
disposed of, in connection with such closed stores. During Fiscal Year 1999, the
Company charged against the reserve $0.8 million for inventory write-offs, $5.3
million for lease termination costs and $7.6 million for asset write-offs, or a
total of $13.7 million related to the 17 stores closed, replaced or sold as of
June 26, 1999. The Company does not anticipate a material impact on its future
revenues and operating results as a result of activities from the closing of
such stores. At June 26, 1999, the aggregate carrying value, net of the closed
store reserve, of the fixed assets of stores closed and remaining to be closed
under the plan was $1.8 million, or less than 0.2% of the Company's total
assets.

During Fiscal Year 1999, the Company decided not to close the two
remaining stores included in the Fiscal Year 1997 reserve. The related reserve
for such stores amounted to $4.3 million representing $0.6 million in inventory
write-offs, $0.4 million in lease termination costs and $3.3 million in asset
write-offs. The reserve was adjusted for such amounts resulting in a reduction
in selling, general and administrative expenses.

The number of stores closed, replaced or sold in connection with the
plan during each fiscal period since the plan's inception is as follows:

<TABLE>
<CAPTION>
<S> <C>
Stores to be closed per original plan 20

Closures during the fourth quarter of Fiscal Year 1997 (2)

Closures during Fiscal Year 1998 (10)

Closures during Fiscal Year 1999 (5)

Stores not closing (2)
----
Stores remaining to be closed at June 26, 1999 1
====
</TABLE>

30
<PAGE>

Activity in the reserve since June 28, 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
LEASE ASSET
INVENTORY TERMINATION WRITE OFFS TOTAL
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Reserve/expense recorded in FY 1997 $ 3,000 $ 11,745 $ 18,047 $ 32,792

Charges to the reserve during FY 1998 (1,407) (1,600) (3,483) (6,490)
-------- -------- -------- --------
Remaining reserve at June 27, 1998 1,593 10,145 14,564 26,302

Charges to the reserve during FY 1999 (816) (5,318) (7,580) (13,714)

Reversal of unused reserves (556) (401) (3,295) (4,252)
-------- -------- -------- --------
Remaining reserve at June 26, 1999 $ 221 $ 4,426 $ 3,689 $ 8,336
======== ======== ======== ========
</TABLE>

During Fiscal Year 1999, the Company decided to close or replace three
stores not included in the Fiscal Year 1997 reserve. Accordingly, the Company
recorded a charge of approximately $3.7 million relating to such three stores
including approximately $0.7 million charged to cost of sales for estimated
inventory losses and $3.0 million charged to selling, general and administrative
expenses, including estimated lease termination costs of approximately $0.6
million, asset impairment of approximately $1.9 million and other expenses
associated with store closings of approximately $0.5 million.

During Fiscal Year 1999, the Company charged against the reserve $0.5
million for inventory write-offs, $0.5 million for asset write-offs and $0.1
million for lease termination costs, or a total of $1.1 million related to the
two stores closed, replaced or sold as of June 26, 1999.

Two of these three stores were closed as of June 26, 1999 and the
remaining store was closed and replaced shortly thereafter. The aggregate
revenue and operating loss for the Fiscal Year 1999 from the two stores that the
Company does not plan to replace were $20.5 million and $2.6 million,
respectively. At June 26, 1999, the aggregate carrying value, net of the closed
store reserve, of the fixed assets of these three stores was $3.8 million, or
less than 0.4% of the Company's total assets.

ACCOUNTING FOR JOINT VENTURES - The Company accounts for its investment
in joint ventures under the equity method.

STOCK OPTIONS - The Company has adopted only the disclosure
requirements of Statement of Financial Accounting Standard ("SFAS") No.123
"Accounting for Stock Based Compensation." The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its stock options and have not
recognized compensation for options granted.

RECLASSIFICATIONS - Certain reclassifications have been made to the
prior years' financial statements to conform to the current year presentation.

NEW ACCOUNTING STANDARDS - In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, "REPORTING ON
THE COSTS OF START-UP ACTIVITIES", ("SOP 98-5") which requires that costs
incurred for start-up activities should be charged to operations as incurred.
Although the Company has not fully assessed the impact of adopting SOP 98-5, the
Company does not believe that such adoption will have a material impact on its
financial statements. The Company is required to adopt SOP 98-5 in its fiscal
year ending June 24, 2000. Initial application of SOP 98-5 will be reported as a
cumulative effect of an accounting change.

In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. The Company has not
quantified the impact of adoption on its financial statements. The Company is
required to adopt SFAS No. 133 in its fiscal year ending June 30, 2001.
Retroactive application to periods prior to adoption is not allowed.

31
<PAGE>

5. PROPERTY AND EQUIPMENT

Property and equipment at June 26, 1999 and June 27, 1998 consisted of
the following (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land ....................................... $ 44,330 $ 55,232
Buildings and improvements ................. 44,037 39,904
Fixtures, leaseholds and equipment ......... 576,001 445,457
Property held under capital leases ......... 74,863 78,484
Construction-in-progress ................... 23,622 21,867
-------- --------
762,853 640,944
Accumulated depreciation and amortization:
Property and equipment .................. 280,855 250,004
Capital leases .......................... 28,172 25,087
-------- --------
Property and equipment, net ................ $453,826 $365,853
======== ========
</TABLE>

6. JOINT VENTURES

The Company participates as a general partner in various joint ventures
for the purpose of developing shopping centers in which store facilities are
located. The Company's ownership interests range from 50 percent to 83.3
percent. Joint ventures that are greater than 50 percent owned are consolidated
in the accompanying consolidated financial statements from the date that the
majority interest was acquired. The following represents the activity in
investments in unconsolidated joint ventures for Fiscal Years 1999, 1998 and
1997 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period ............................... $(1,543) $(3,624) $(3,208)
Equity in earnings of unconsolidated joint ventures ........ 29 127 137
Contributions made ......................................... - 163 138
Distributions received ..................................... - (263) (524)
Sales of certain joint ventures ............................ 1,180 2,054 (167)
------- ------- -------
Balance at end of period ..................................... $ (334) $(1,543) $(3,624)
======= ======= =======
</TABLE>

The balance for investments in unconsolidated joint ventures is
included in other assets. The unconsolidated joint ventures have debt
outstanding at June 26, 1999 and June 27, 1998 of approximately $2.8 million and
$8.9 million, respectively, that is nonrecourse. The debt outstanding at June
26, 1999 and June 27, 1998 represents 100 percent of the joint ventures debt.

As of June 26, 1999, the Company had one unconsolidated joint venture.
The Company sold its interest in one of its unconsolidated joint ventures in
Fiscal Year 1999 and two in Fiscal Year 1998. These sales are accounted for as
sale leaseback transactions because the Company continues to operate stores at
each of these locations. The gains from these transactions amounting to
approximately $1.4 million and $2.6 million for Fiscal Year 1999 and Fiscal Year
1998, respectively, were deferred and are being recognized over the remaining
lease term.

The Company paid the joint ventures approximately $0.6 million, $1.1
million and $3.4 million in Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year
1997, respectively, in rent, common area maintenance and other lease-related
costs for shopping centers owned by the joint ventures.

32
<PAGE>

7. LONG-TERM DEBT

At June 26, 1999 and June 27, 1998, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Senior subordinated notes:
9.375% Series B Senior Subordinated Notes,
due 2007 ........................................................................ $ 150,000 $ 150,000
Discount on senior subordinated notes .............................................. (212) (229)
--------- ---------
Total Senior Subordinated Notes ............................................. 149,788 149,771
--------- ---------
Notes payable to banks:
Principal due in annual installments beginning June 29, 1998 and interest due
in quarterly or monthly installments, final installment due June 27, 2006,
interest at the London Interbank Offered Rate ("LIBOR") plus an
adjustable margin rate (1.5%), interest at 6.6% at June 26, 1999 ................ 124,000 125,000
Borrowings under revolver facility, interest due in quarterly or monthly
installments, interest at LIBOR plus an adjustable margin rate (0.75%),
interest at 5.8% at June 26, 1999 ............................................... 45,000 --
Borrowings under swingline facility, interest due in quarterly or monthly
installments, interest at an Adjusted Base Rate equal to the greater of
the Federal Funds Effective Rate, the bank's base certificate of deposit
rate or the prime rate, interest at prime (7.75%) at June 26, 1999 .............. 12,000 --
--------- ---------
Total notes payable to banks .................................................. 181,000 125,000
--------- ---------
Note payable to insurance company:
Principal and interest due in monthly installments, final installment due in
2005, interest from 8.3% to 9.0%, interest at 9.0% at June 26, 1999 ............. 2,167 2,465
--------- ---------
Total long-term debt .................................................................. 332,955 277,236
Less current maturities of long-term debt ............................................. 798 789
--------- ---------
Long-term debt, net of current maturities ............................................. $ 332,157 $ 276,447
========= =========
</TABLE>
Aggregate principal payments applicable to existing long-term debt
outstanding as of June 26, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING
<S> <C>
2000........................................ $ 798
2001........................................ 798
2002........................................ 798
2003........................................ 798
2004........................................ 798
Thereafter............................... 328,965
--------
Total....................................... $332,955
========
</TABLE>
The senior subordinated notes (the "Notes") are redeemable, in whole or
in part, at specified redemption prices together with accrued and unpaid
interest, if any, to the date of redemption. In addition, at any time on or
prior to July 1, 2000, the Company may redeem up to $60 million of the original
aggregate principal amount of the Notes at a redemption price equal to 109.375%
of the aggregate principal amount to be redeemed, together with accrued and
unpaid interest, if any, to the date of redemption, provided that at least $90
million of the original aggregate principal amount of the Notes remains
outstanding immediately after each such redemption.

Upon the occurrence of a change of control or certain transfer events,
such as the Merger, the Company will have the option, at any time prior to July
1, 2002, to redeem the Notes, in whole but not in part, at a redemption price
equal to 100% of the aggregate principal amount thereof plus a premium, together
with accrued and unpaid interest, if any, to the date of redemption.

33
<PAGE>

The Notes are unsecured and are subordinated in right of payment to all
existing and future senior indebtedness of the Company.

The indenture under which the Notes were sold contains covenants that
limit the ability of the Company to (i) pay dividends or make certain other
restricted payments; (ii) incur additional indebtedness and issue disqualified
stock and preferred stock; (iii) create liens on assets; (iv) merge, consolidate
or sell all or substantially all assets; (v) enter into certain transactions
with affiliates; (vi) restrict dividends or other payments by subsidiaries to
the Company or its subsidiaries; (vii) permit guarantees of indebtedness by
subsidiaries of the Company; and (viii) incur other senior subordinated
indebtedness. At June 26, 1999 and June 27, 1998, the Company was in compliance
with all such covenants. On the Merger Effective Date, the covenant prohibiting
mergers and similar transactions may be violated and, upon the passage of thirty
days after notice of such violation is received, the Notes would be in default;
although, the Company has been advised by Safeway that it is the intention of
Safeway to call the Notes for redemption on the Merger Effective Date, with a
redemption date thirty days after the Merger Effective Date.

In November 1993 the Company entered into a credit agreement with
various banks and a note purchase agreement with certain insurance companies.
The banks provided a term loan commitment for approximately $225.0 million, and
the insurance companies provided three series of private placement debt
aggregating approximately $135.5 million. In conjunction with the Equity
Investment described in Note 3, the Company paid in full the notes payable to
the insurance companies and the term loan to the banks. In connection with this
early extinguishment of debt, the Company recorded an extraordinary charge of
$9.8 million in Fiscal Year 1997, consisting primarily of a make whole premium
in the amount of approximately $14.9 million including interest payable to the
insurance companies, net of an income tax benefit of $6.0 million.

As part of the credit agreement dated June 27, 1997, a revolving credit
commitment for $225.0 million, a swingline credit commitment for $25.0 million
and a letter of credit limit of $25.0 million were established, with the
outstanding revolving credit loans, swingline borrowings and the letters of
credit loans not to exceed $225.0 million. As of June 26, 1999, the Company had
approximately $45.0 million of borrowings under the revolver, approximately
$12.0 million of borrowings under the swingline and approximately $0.3 million
of letters of credit outstanding. As of June 27, 1998, the Company had no
borrowings under the revolver or under the swingline and had approximately $1.0
million of letters of credit outstanding. There are no scheduled reductions to
the amounts available to the Company under the credit agreement prior to
June 27, 2004. There is an annual credit commitment fee of 0.25 percent charged
on the unused portion of the revolver.

The obligations under the bank credit agreement are secured by the
common stock of the Company's principal operating subsidiaries, Randall's Food &
Drugs, Inc. and Randall's Properties, Inc.

The bank debt agreements contain covenants, the more significant of
which require the Company to maintain certain debt ratios which are calculated
based on EBITDA (earnings before interest, taxes, depreciation and
amortization). The Company is also restricted as to maximum lease expense and
the capital expenditures it can make. At June 26, 1999 and June 27, 1998 the
Company was in compliance with all such covenants. The bank agreements also
contain a restrictive covenant which does not permit the Company to enter into a
merger or similar extraordinary transaction. At June 26, 1999, the Company was
in compliance with this covenant, and will continue to be in compliance until
the Merger with Safeway is consummated. However, at the Merger Effective Date,
the covenant may be violated, and, upon the passage of thirty days after notice
of such violation is received, the long-term debt amounting to $181.0 million
would be considered to be in default; although, the Company has been advised by
Safeway that it is the intention of Safeway to immediately refinance this
obligation with other pre-existing credit arrangements on the Merger Effective
Date. The accompanying financial statements do not reflect these obligations as
current liabilities; the obligation is classified as a long-term liability in
accordance with the original stated maturities.

The note payable to insurance company is secured by a first lien on the
related property. The note payable to bank due June 27, 2006 is secured by
pledges for all capital stock of the Company's Subsidiaries and all evidence of
indebtedness in excess of $5.0 million received by the Company in connection
with any disposition of assets.

Interest capitalized associated with construction was $1,504,000,
$794,000 and $556,000 in Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year
1997, respectively.

<PAGE>

8. INCOME TAXES

The Company files a consolidated federal income tax return. Deferred
income taxes are provided to recognize temporary differences between financial
and tax reporting.

The provision for income taxes for Fiscal Year 1999, Fiscal Year 1998
and Fiscal Year 1997 is summarized below (in thousands):

Current provision (benefit) ......................................... $ 21,099 $ 10,769 $ (7,486)
Deferred provision (benefit) ........................................ 10,167 6,961 (13,735)
-------- -------- --------
Total tax provision (benefit) ....................................... 31,266 17,730 (21,221)
Less: tax on extraordinary item ..................................... -- -- 6,006
-------- -------- --------
Total tax provision (benefit), net of extraordinary item ...... $ 31,266 $ 17,730 $(15,215)
======== ======== ========

</TABLE>

Deferred tax assets and liabilities result from differences in the
bases of assets and liabilities for income tax and financial reporting purposes.
The cumulative tax effect of such items at June 26, 1999 and June 27, 1998, are
as follows (in thousands):

1999 1998
-------- --------
<S> <C> <C>
Assets:
Deferred income ........................................ $(10,955) $ (9,884)
Employee benefits ...................................... (11,006) (11,105)
Insurance .............................................. (8,746) (8,576)
Closed store accruals .................................. (3,435) (8,875)
Other .................................................. 3,927 (997)
-------- --------
Total gross deferred tax assets ................ (30,215) (39,437)
-------- --------
Liabilities:
Property and equipment ................................. 15,781 12,217
Tax benefit lease ...................................... 3,246 4,429
LIFO ................................................... 14,637 13,206
Other .................................................. 3,637 6,504
-------- --------
Total gross deferred tax liabilities ........... 37,301 36,356
-------- --------
Net deferred income tax (asset) liability .............. 7,086 (3,081)
Current deferred income tax asset ...................... (510) (11,792)
-------- --------
Long-term deferred income tax liability ................ $ 7,596 $ 8,711
======== ========

</TABLE>

The actual provision (benefit) for income taxes differs from that
calculated using the statutory federal income tax rate as follows (in
thousands):

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>

Taxes at federal statutory tax rate ....................... $ 25,727 $ 13,463 $(25,108)
Increase (decrease) in income taxes resulting from:
Goodwill ............................................... 2,233 2,233 2,233
State taxes based on income ............................ 3,607 2,018 (2,152)
Nondeductible transaction costs ........................ -- -- 2,800
Previously overprovided taxes and other, net ........... (301) 16 1,006
Tax on extraordinary item .............................. -- -- 6,006
-------- -------- --------
Total tax provision (benefit) .......................... $ 31,266 $ 17,730 $(15,215)
======== ======== ========

</TABLE>

<PAGE>

Income taxes paid were approximately $22.2 million during Fiscal Year
1999. As of June 27, 1998, the Company had a tax credit of approximately $4.1
million from an overpayment of estimated taxes paid in a prior year.

The Company's 1994, 1995 and 1996 tax years are currently under audit
by the Internal Revenue Service.

9. BENEFIT PLANS

DEFINED BENEFIT PENSION PLAN - The Company has a noncontributory,
defined benefit pension plan for all hourly employees who are at least 21 years
of age and have completed one year of continuous employment consisting of at
least 1,000 hours of service as of year end. The Company makes annual
contributions to the plan equal to the amounts actuarially required to fund
current pension costs.

The following table sets forth the plan's funded status and the amount
recognized in the Company's consolidated balance sheets at June 26, 1999 and
June 27, 1998 (in thousands):

1999 1998
-------- --------
<S> <C> <C>

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ............... $ 27,039 $ 18,814
Service cost .......................................... 2,329 1,850
Interest cost ......................................... 2,044 1,642
Actuarial gains ....................................... (965) (546)
Benefits paid ......................................... (733) (434)
Assumption changes .................................... -- 5,713
-------- --------
Benefit obligation at end of year ..................... 29,714 27,039
-------- --------

CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year ............. 24,498 17,491
Actual return on assets ............................... 3,774 5,711
Contributions ......................................... -- 1,730
Benefits paid ......................................... (733) (434)
-------- --------
Fair value of assets at end of year ................... 27,539 24,498
-------- --------
Funded status ......................................... (2,175) (2,541)
Unrecognized prior service cost ....................... 155 232
Unrecognized net actuarial losses (gains) ............. (1,827) 722
-------- --------
Accrued pension (liability) asset recognized in
the accompanying consolidated balance sheets ....... $ (3,847) $ (1,587)
======== ========

</TABLE>

Net periodic benefit costs for Fiscal Year 1999, Fiscal Year 1998 and
Fiscal Year 1997 include the following components (in thousands):

1999 1998 1997
------- ------- -------
<S> <C> <C> <C>

Service cost/benefits earned during the year ..................... $ 2,330 $ 1,849 $ 1,796
Interest cost on projected benefit obligation .................... 2,044 1,642 1,353
Actual return on assets .......................................... (2,190) (1,568) (1,406)
Amortization of unrecognized net transition asset and net
losses ........................................................ 76 76 108
------- ------- -------
Net periodic pension expense ..................................... $ 2,260 $ 1,999 $ 1,851
======= ======= =======

</TABLE>

Assumptions used in determining the actuarial present value of plan
benefits reflect a weighted average discount rate of 7.0 percent, 7.0 percent
and 8.0 percent for Fiscal Years 1999, 1998 and 1997, respectively, and a
weighted average investment rate of return of 9.0 percent for Fiscal Years 1999,
1998 and 1997. The assumed weighted average rate of salary increase was 5.4
percent, 5.0 percent and 5.0 percent for Fiscal Years 1999, 1998 and 1997,
respectively.

<PAGE>

EMPLOYEE STOCK OWNERSHIP PLAN - On April 1, 1997 the Employee Stock
Ownership Plan ("ESOP") was amended and restated to become Randall's ESOP/401k
Savings Plan. The ESOP/401k Savings Plan is for all employees who are at least
21 years of age and have completed one year of continuous service. Participants
in the ESOP/401k may elect to contribute up to 5 percent of their compensation,
which will be matched 100 percent by the Company. Participants in the ESOP/401k
may make voluntary contributions up to an additional 10 percent of their
compensation, unmatched by the Company. The Company's cash contributions to the
ESOP/401k for Fiscal Years 1999, 1998 and 1997 totaled approximately $4.1
million, $3.9 million and $3.3 million, respectively.

During Fiscal Year 1997 and Fiscal Year 1996, the Company loaned the
ESOP $2.3 million and $1.5 million, respectively (together, the "ESOP Notes").
Such ESOP Notes were non-interest bearing and secured by 244,482 shares of the
Company's common stock. During Fiscal Year 1998 and Fiscal Year 1997, the
Company recorded impairment reserves related to the ESOP Notes in the amount of
$262,722 and $472,000, respectively, because the value of the Company's stock
securing the ESOP Notes was not adequate to secure the fair value of such notes.
During Fiscal Year 1998, the ESOP sold 275,174 shares of the Company's common
stock to the Company for $3.7 million and used the proceeds from such sale to
repay the $2.3 million note in full. During Fiscal Year 1999, the ESOP paid the
remaining note, including the impairment reserve, in full. At June 27, 1998, the
outstanding balance of the remaining ESOP Note was $988,126 and the related
impairment reserve, which is recorded as a reduction of equity, was $192,460.
The remaining ESOP Note was included in Prepaid expenses and other in the
accompanying consolidated balance sheet at June 27, 1998.

During Fiscal Year 1999, the ESOP purchased 4,194 shares of the
Company's common stock. The ESOP did not purchase shares of the Company's common
stock in Fiscal Year 1998 and Fiscal Year 1997.

The Company was a defendant in a lawsuit related to the ESOP. As
further discussed in Note 12, a settlement was reached that provides for cash
payments and changes in the operation of the ESOP, including the addition of a
401(k) feature offering a variety of professionally managed mutual fund
investments and the cessation of additional investments by the ESOP in the
Company's common stock. Court approval of the settlement was granted in June
1997.

CULLUM RETIREMENT PLANS-Following the Cullum Acquisition, the Company
terminated Cullum's Management Security Plan ("MSP") and the Senior Corporate
Officer Plan effective December 31, 1992. The present value (based on a discount
rate of 8.56 percent) of the remaining obligation to participants in such plans
who retired prior to the termination of the plans was approximately $4.0
million, net of the current portion of $1.3 million, at June 26, 1999 and
approximately $5.4 million, net of the current portion of $0.6 million, at
June 27, 1998. As discussed further in Note 12, certain MSP participants who
received payments in connection with the termination of the MSP have instituted
a claim against the Company.

10. REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY

PREFERRED STOCK-The Class A Redeemable preferred stock, which was
redeemed in June 1997, had a par value of $10 per share, and 8,250 shares
authorized, issued and outstanding in 1996. This class of stock was nonvoting
and dividends accrued at $10.50 per year per share. These dividends were payable
quarterly and before dividends were declared or paid on the common stock. The
liquidation value was $100 per share plus all accrued and unpaid dividends.

The 8 percent convertible preferred stock, which was redeemed in June
1997, had a par value of $10 per share, with 5,000,000 shares authorized and
292,043 shares issued at June 28, 1997. In connection with the equity investment
described in Note 2, the Class A preferred stock and the 8 percent convertible
preferred stock were redeemed at liquidation value for a total of $28.7 million.

COMMON STOCK - In connection with the Cullum Acquisition, certain
shares of common stock are subject to an agreement between the Company and
certain stockholders, whereby the stockholders have the right to sell such
shares to the Company at the most recently appraised fair value beginning
October 15, 1997 and each October 15 up to and including October 15, 2001. At
June 26, 1999 and June 27, 1998, there were approximately 60,000 shares of
common stock subject to this agreement and outstanding.

<PAGE>

The Company also has approximately 328,000 shares of redeemable
common stock, not associated with the Cullum Acquisition, subject to an
agreement between the Company and certain stockholders whereby the
stockholders have the option to sell such shares to the Company at the most
recently appraised fair value if first refused by the other existing
stockholders. During Fiscal Year 1999, no redeemable rights for redeemable
common stock were cancelled. During Fiscal Year 1998, the redeemable rights
on approximately 25,000 shares of such redeemable common stock were cancelled.

During Fiscal Year 1999, the Company purchased 201,833 shares of its
common stock, all of which have been retired. Additionally, the treasury
shares purchased in Fiscal Year 1998 were retired during Fiscal Year 1999.
During Fiscal Year 1998, the Company purchased 29,117 shares of its common
stock. Of such shares, 10,735 shares have been retired and 18,382 shares
recorded as treasury shares at cost. During Fiscal Year 1997, the Company
purchased 53,027 shares of its common stock from certain stockholders for
approximately $919,023. Such shares were recorded as treasury stock at cost
and all such shares were retired during Fiscal Year 1997. Treasury shares
were purchased at the then estimated fair values.

In connection with the equity investment described in Note 3,
5,585,186 shares of Common Stock were redeemed at $16.00 per share for
aggregate consideration of $89.4 million as of June 28, 1997. Additionally,
as discussed in Note 3, RFM Acquisition has a 25-year option to purchase
3,606,881 shares of the Company's common stock at $12.11 per share, subject
to certain adjustments. On the Merger Effective Date, RFM Acquisition's
options are expected to be purchased by Safeway for a payment in cash and
stock equal to the product of (a) the number of shares underlying the options
multiplied by (b) $41.75 less the exercise price.

STOCK PURCHASE AND OPTION PLAN - During Fiscal Year 1999, the
Company adopted the Amended and Restated 1997 Stock Purchase and Option Plan
for key employees of the Company (the "1997 Plan"). The 1997 Plan authorizes
grants of stock and stock options covering 2.75 million shares of the
Company's common stock. Grants or awards under the 1997 Plan may take the
form of purchased stock, restricted stock, non-qualified stock options, or
other types of rights specified in the 1997 Plan and are typically issued at
prices greater than or equal to the fair market value of the Company's common
stock at the time of such grants and awards.

During Fiscal Year 1998, the Company sold approximately 589,000
shares of common stock under the 1997 Plan to key executives and certain
members of management at prices ranging from $12.11 to $12.61 per share.
During Fiscal Year 1999, the Company sold 137,875 shares of common stock
under the 1997 Plan at prices ranging from $12.96 to $13.57 per share. As
consideration, the Company accepted payment of cash or a combination of cash
and notes receivable from the purchasers. The notes receivable bear interest
at rates ranging from 4.5% to 6.1% per annum. At June 26, 1999 and June 27,
1998, the Company held notes receivable from management stockholders in the
aggregate amount of approximately $6.4 million and $6.2 million,
respectively. Such notes receivable are shown as a reduction of stockholders'
equity in the accompanying consolidated balance sheets.

STOCK OPTION AND RESTRICTED STOCK PLAN - The Company has adopted the
Randall's Food Markets, Inc. Stock Option and Restricted Stock Plan which
provides for the issuance of incentive stock options, nonqualified stock
options and restricted stock to the Company's key employees and directors. A
total of 1,500,000 shares of the Company's common stock, subject to an
antidilution adjustment, may be issued under this plan as determined by the
Executive Committee of the Board of Directors. All options granted through
June 28, 1997, were exercisable for a ten-year period. At June 26, 1999,
approximately 722,631 shares of common stock were available for future
issuances of options or restricted stock under this plan.

During December 1994, the Company granted options to purchase the
Company's common stock to certain employees. The number of shares which may
be issued to the employees is based on the estimated fair value of the common
stock at each vesting date. These options vest at $300,000 of total value on
December 31, 1995, 1996 and 1997, and $200,000 of total value on December 31,
1998 and 1999. During Fiscal Year 1999, 9,132 shares vested with an exercise
price of $10.95. During Fiscal Year 1998, 13,334 shares vested with an
exercise price of $15.00. During Fiscal Year 1997, 25,209 shares vested with
an exercise price of $11.90. During Fiscal Year 1996, 31,086 shares vested
with an exercise price of $9.65. During Fiscal Year 1998, 43,697 of such
options were cancelled. The unvested portion of the grant would be issuable
into approximately 19,879 shares of common stock based on the most recent
estimated fair value. The difference between the exercise price and the
estimated fair value at the measurement dates was not significant. During
Fiscal Year 1998, the Company granted 86,000 shares of restricted stock. The
$903,000 estimated aggregate fair value of the restricted stock is being
recognized as compensation expense over two years, the period in which the
restrictions lapse.

38
<PAGE>

During Fiscal Year 1996, the Company granted certain employees
options to purchase 37,500 shares of the Company's common stock at an
exercise price of $10.75 per share, the estimated fair value of the stock at
the grant date. The options were fully vested at the date of grant and were
exercisable at June 29, 1996.

During Fiscal Year 1997, the Company granted certain employees
139,382 shares of restricted stock, of which 5,000 have been forfeited. The
$2.4 million estimated aggregate fair value of the restricted stock was
recognized as compensation expense in the Fiscal Year ended June 28, 1997. In
addition, these employees were granted options to purchase 523,355 shares, of
which 27,545 have been forfeited in Fiscal Year 1997, 55,090 in Fiscal Year
1998 and 11,018 in Fiscal Year 1999, of the Company's common stock. The
exercise price of such options is $18.15, the estimated fair value at the
date of grant. These options become exercisable on September 30, 2000 and
expire on September 30, 2006.

Stock option activity under the Company's plans for the three years
ended June 26, 1999, June 27, 1998 and June 28, 1997 are summarized below:

1999 1998 1997
----------------------------- -------------------------- ---------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
PRICE PRICE PRICE
----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year .......... 1,892,496 $ 13.42 635,044 $ 16.76 137,634 $ 11.16
Change in option value ........ (1,043) (4,794) 19,100
Changes during the year:
Granted (per share):
1999, $12.73 to
$14.50 ................ 811,857 13.20
1998, $10.50 to
$12.61 ................ 1,404,106 12.02
1997, at $18.15 523,355 18.15
Exercised/forfeited
(per share):
1999, at $12.73
to $12.96 ............. (13,178)
1998, at $10.50
to $12.48 ............. (103,355) (38,073)
1997, at $18.15 ......... (11,018) (55,090) (27,545)
1996, at $10.75 ......... (5,000) (17,500)
1995, $9.65 to
$15.00 ................ (43,697)
--------- --------- --------
Stock options
outstanding, end of
year ....................... 2,575,759 13.40 1,892,496 13.42 635,044 16.63
========= ========= =======
Stock options
exercisable, end of
year ....................... 683,688 12.22 309,436 11.99 96,296 11.58
========= ========= =======
Weighted Average fair
value of options
granted during the year .... $ 4.08 $ 5.10 $ 8.88
</TABLE>

The following table summarizes information about stock options
outstanding at June 26, 1999.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
RANGE OF NUMBER WEIGHTED-AVG WEIGHTED-AVG NUMBER WEIGHTED-AVG
EXERCISE PRICES OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
--------------- AT JUNE 26, 1999 CONTRACTUAL LIFE PRICE AT JUNE 26, 1999 PRICE
---------------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
$9.65 to $18.03...... 2,146,057 8.7 years $12.45 707,134 $12.30
$18.04 to $18.15..... 429,702 7.3 years $18.15 -- --
$9.65 to $18.15...... 2,575,759 8.5 years $13.40 707,134 $12.30
</TABLE>

The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for Fiscal Years 1999, 1998 and 1997 respectively: risk-free
interest rates of 5.0, 5.8 and 6.7 percent; dividend yield of 0.0 percent for
all years, expected lives of 10 years for all options; and volatility of 0.0
percent for all years.

39
<PAGE>

Stock-based compensation costs would have reduced net income by
approximately $2.3 million, $1.7 million and $800,000 in Fiscal Year 1999,
Fiscal Year 1998 and Fiscal Year 1997, respectively, if the fair value of the
options granted in those years had been recognized as compensation expense
over the vesting period of the grants.

Certain of the Company's Directors and employees own common stock
and stock options. Immediately prior to the consummation of the Merger
discussed in Note 2, all stock options issued under the 1997 Plan and the
Stock Option and Restricted Stock Plan will become fully exercisable and
generally will be canceled in exchange for a per share payment in cash and
stock equal to $41.75 less the applicable exercise price. The resulting
amount would be paid in cash and Safeway stock in the same proportion as paid
to shareholders in the Merger. In determining the number of shares of Safeway
stock to which each option holder will be entitled, $52 1/8 is used as the
price of Safeway common stock, regardless of the actual market price of
Safeway stock at that time. As part of the Merger, some holders of stock
options will, at the discretion of the Company and Safeway (as the two
companies will mutually agree), have the opportunity to convert their stock
options into options to purchase Safeway common stock as an alternative to
receiving cash and Safeway common stock for their stock options.

In addition to the foregoing, immediately prior to the consummation
of the Merger, the Company will cause all restricted Company stock held by
certain individuals to become fully vested and will cause all restrictions on
transferability imposed thereon by any agreement to lapse immediately. In the
Merger, these shares of Company stock will be treated in the same manner as
all other outstanding shares of Company stock.

11. LEASE COMMITMENTS

LEASES - Minimum rental commitments for future periods are as follows
(in thousands):

OPERATING CAPITAL
FISCAL YEAR ENDING TOTAL LEASES LEASES
------------------ --------- ------- ------

<S> <C> <C> <C>
2000 $ 51,115 $ 41,342 $ 9,773
2001 52,615 42,842 9,773
2002 50,803 42,236 8,567
2003 48,908 41,227 7,681
2004 47,897 40,273 7,624
Thereafter 505,861 429,437 76,424
-------- ------- ------
$757,199 $637,357 119,842
======== ========
Amount representing interest 58,486
------
Present value of net minimum lease payments including
current maturities of $3,856: $ 61,356
========
</TABLE>

The Company leases substantially all of its store facilities and some
equiptment. Included in the above operating lease commitments are future
minimum rentals to the joint ventures discussed in Note 6 aggregating
approximately $2.9 million. The store leases generally cover an initial term
of 20 to 30 years with renewal options for 5 to 15 additional years. Most
leases require the payment of fixed minimum rentals as well as payment of
property taxes and insurance, or a percentage of sales, whichever is greater.

40
<PAGE>

Included in selling, general, and administrative expense for the
Fiscal Years ended June 26, 1999, June 27, 1998 and June 28, 1997 is rent
expense comprised of the following (in thousands):

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Minimum rental ........... $55,845 $50,254 $47,073
Percentage rental ........ 757 744 939
------- ------- -------
$56,602 $50,998 $48,012
======= ======= =======
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

MSP LITIGATION - Following the Company's acquisition of Cullum
Companies, Inc. in August 1992, the Company terminated the Cullum's
Management Security Plan for Cullum Companies, Inc. ("the MSP"). In respect
of such termination, the Company paid MSP participants the greater of (i) the
amount of such participant's deferral or (ii) the net present value of the
participant's accrued benefit, based upon the participant's current salary,
age and years of service. Thirty-five of the former MSP participants have
instituted a claim against the Company on behalf of all persons who were
participants in the MSP on its date of termination (which is alleged by
plaintiffs to be approximately 250 persons). On June 16, 1998, the Court
certified the case as a class action for the limited issue of determining if
the MSP was an exempt "top hat plan" (a plan which is unfunded and maintained
by an employer primarily for the purpose of providing deferred compensation
for a select group of management or highly compensated employees). The Court
defined the class as all persons who, on the date of the termination of the
MSP, were participants in the MSP and were employed by Randall's Food
Markets, Inc. The trial of the limited class action issue was conducted
before the Court, sitting without a jury, on October 26, 1998. On February
18, 1999, the Court ruled on the limited class action issue finding that the
MSP was not an exempt top hat plan. On April 8, 1999, the plaintiffs filed a
new Motion for Class Certification, seeking class action treatment on all
remaining issues. In addition, the plaintiffs have provided to the Company
schedules indicating that they may claim damages on behalf of the class
ranging from $65.1 million to $67.7 million, prejudgement interest ranging
from $28.1 million to $29.3 million and attorneys' fees. In addition, they
have calculated that if their damages in these amounts had been invested to
earn a rate of return achieved by the Standards & Poors 500 Index since
December 31, 1992, they would be entitled to an additional amount of
approximately $100 million. On July 13, 1999, the Court announced its
decision to certify the same class for the purpose of trying all remaining
issues in the case, principally damages. The Court ordered that no class
member would be permitted to opt out and directed plaintiffs' counsel to mail
written notice of the pendency of the case to all class members within 30
days. On July 14, 1999, the Court issued a scheduling order setting the case
for trial on November 22, 1999. Based upon current facts, the Company is
unable to estimate any meaningful range of possible loss that could result
from an unfavorable outcome of the MSP litigation. It is possible that the
Company's results of operations or cash flows in a particular quarterly or
annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of the MSP litigation.

ESOP LITIGATION - On November 28, 1995, two individuals filed a
lawsuit on behalf of the Company's Employee Stock Ownership Plan (the "ESOP")
and certain participants and former participants in and beneficiaries of the
ESOP. The lawsuit alleged that the Company, certain employees thereof and
certain entities which engaged in a variety of services relating to the ESOP
had violated various federal and state laws in connection with the operation
of the ESOP, including transactions by the ESOP involving the Common Stock.
The Company and the other defendants denied all of the allegations. The
plaintiffs' representatives and the Company and the other defendants
subsequently agreed to settle the litigation. Although the defendants
continue to deny all charges of wrongdoing or liability against them, they
have concluded that it was desirable to settle the litigation in order to
avoid further expense, inconvenience, and distraction, noting the uncertainty
and risks inherent in litigation.

The Company and the other defendants elected to settle the suit
pursuant to a settlement agreement (the "Settlement Agreement") for $16.5
million, of which the Company was liable for $11.3 million plus $0.2 million
in expenses. Net of insurance proceeds, the Company has paid $10.5 million in
the aggregate in connection with the settlement. The Company increased its
existing litigation reserves by $9.5 million during Fiscal Year 1997 to fully
reserve for such matters and concurrently with the closing of the Equity
Investment, the Company paid $11.3 million into a trust fund pursuant to the
Settlement Agreement.

41
<PAGE>

In addition, the settlement provides for certain changes in the
operation of the ESOP, including the addition of a 401(k) feature offering a
variety of professionally managed mutual fund investments and the cessation
of additional investments by the ESOP in the Common Stock. Under the
Settlement Agreement, the Company and the other defendants were released from
further liability relating to the litigation by all the members of the
plaintiffs' class.

EEOC LITIGATION - On June 5, 1997, the U.S. District Court for the
Southern District of Texas granted a joint motion by the Company and the
Equal Employment Opportunity Commission (the "EEOC") for entry of a consent
decree (the "Consent Decree") settling a charge by the EEOC Commissioner
filed in 1989 that the Company violated Title VII of the Civil Rights Act of
1964, as amended. The Consent Decree provides that between January 1, 1988
and December 31, 1992 the Company violated Title VII by (i) failing to hire
African American, Hispanic and female applicants for entry-level jobs, (ii)
segregating female and Hispanic employees, (iii) failing to select African
Americans and women for the Grocery Management Training Program and (iv)
failing to maintain required records. Under the terms of the Consent Decree,
the Company is required to pay $2.3 million, representing back pay and
interest, into a fund to be divided among entry-level claimants, and $0.2
million into a fund to be divided among grocery department management trainee
claimants. The Company will bear the costs of administering the settlement,
which the Company estimates to be approximately $0.8 million. At June 28,
1997, the Company reserved $3.3 million for expected expenditures in
connection with the EEOC settlement and as of June 26, 1999, approximately
$41,000 of such accrual remained. Qualified promotion claimants will be
placed on a preferential promotion list from which future promotions will be
made by the Company. The Consent Decree includes certain requirements to
properly notify potential claimants and certain enhanced reporting
requirements. The Consent Decree will be effective for a two-year period,
except that the obligations to distribute back pay, offer employment, retain
information and make reports will extend beyond the two-year term.

During the course of the EEOC investigation evidence was uncovered
that the Company may not have hired certain persons for age and other
reasons. The Company has agreed to settle these charges for an immaterial
amount of money.

FLEMING DISPUTE - On July 30, 1997, the Company initiated an
arbitration proceeding before the American Arbitration Association against
Fleming Companies, Inc. ("Fleming"), one of its long-time suppliers,
alleging, among other things, that Fleming violated the terms of a supply
agreement signed in 1993. On July 7, 1998, the arbitration panel unanimously
found that Fleming materially breached the supply agreement and that the
contract was terminated as of July 7, 1998 without payment of any termination
fee. The Company and Fleming entered into a transition agreement, effective
September 25, 1998, which provides for a continued supply of products from
Fleming while the Company moves to self-distribution.

JOHN PAUL MITCHELL LAWSUIT - On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company
and a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between
John Paul Mitchell Systems ("Mitchell") and one or more of its distributors
and/or salons. The jury found the Company guilty of having in its possession,
selling or offering for sale Mitchell products that it knew, or that a
reasonable person in the position of the Company would know, had serial
numbers or other permanent identification markings removed, altered or
obliterated. The jury found that the Company unfairly competed with Mitchell
by purchasing and distributing the products and infringed on Mitchell's
trademark. The jury also found that the harm caused Mitchell resulted from
malice.

42
<PAGE>

The Company and Jade filed motions with the trial court judge to
disregard the jury's verdict. On November 19, 1998, the trial court judge
overturned the jury's verdict, entered judgement in favor of the Company and
Jade, ordered that the plaintiffs recover nothing and ordered that the
plaintiffs pay the Company and Jade all of their court costs. On December 18,
1998, the plaintiffs filed a motion for a new trial. On February 2, 1999, the
trial court judge denied such motion by operation of law. On February 16, 1999,
the plaintiffs filed their notice of appeal with the court. The plaintiffs filed
their brief with the Court of Appeals on July 5, 1999. The Company's brief is
due at least ten days prior to oral argument, which is not expected to occur
before October 1999. Although the outcome of this matter cannot be predicted
with certainty, management believes an unfavorable outcome will not have a
material adverse effect on the Company, its operations, its financial condition
or its cash flows.

Other than the foregoing matters, the Company believes it is not a
party to any pending legal proceedings, including ordinary litigation incidental
to the conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations, its financial condition, or its cash flows.

INSURANCE - The Company maintains a self-insurance program covering
portions of workers' compensation (employee safety program) a Company sponsored
employee injury and disability program (Randall's Employee Safety Plan),
designed to replace the State's workers compensation program, and general and
automobile liability costs. The amounts in excess of the self-insured levels are
fully insured. Self-insurance accruals are based on claims filed and an estimate
for significant claims incurred but not reported.

COMMITMENTS - The Company has entered into severance and employment
agreements with certain officers and employees. Expected severance payments and
postemployment benefits in the amount of approximately $2.1 million and $1.8
million are accrued in the accompanying consolidated financial statements as of
June 26, 1999 and June 27, 1998, respectively.

In connection with the Company's capital expenditure program, as of
June 26, 1999, the Company had commitments to make $57.8 million in capital
expenditures.

The Company is continually evaluating possible additional site
locations and related financing opportunities.

13. SUPPLEMENTAL CASH FLOW DISCLOSURES

Supplemental cash flow information with respect to payments of interest
and income taxes made for Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year
1997 are as follows (in thousands):

1999 1998 1997
------- ------- -------
<S> <C> <C> <C>

Interest paid............................................ $32,195 $22,310 $37,542
Income taxes paid........................................ 22,250 6,300 17,700

</TABLE>

The Company incurred capital lease obligations of $8.8 million in
Fiscal Year 1997 and no obligations for Fiscal Year 1999 and Fiscal Year 1998.

In connection with the 1997 Plan, the Company sold stock to key
executives and certain members of management during Fiscal Year 1999 for cash or
a combination of cash and notes receivable. At June 26, 1999, the notes
receivable had an aggregate amount of $6.4 million.

<PAGE>

14. UNAUDITED QUARTERLY FINANCIAL INFORMATION

Quarter Ended
--------------------------------------------------------
October 17, January 9, April 3, June 26,
1998 1999 1999 1999
----------- ---------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
YEAR ENDED JUNE 26, 1999:
Net sales $766,741 $627,583 $602,917 $587,848
Gross profit 213,861 174,433 166,413 168,573
Operating income 24,874 27,804 26,995 28,279
Net income 8,186 11,280 10,810 11,965

</TABLE>

Quarter Ended
--------------------------------------------------------
October 17, January 10, April 4, June 27,
1998 1999 1998 1998
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
YEAR ENDED JUNE 27, 1998:
Net sales $719,377 $579,916 $552,524 $567,207
Gross profit 197,140 157,210 153,024 157,149
Operating income 18,044 21,355 16,604 15,411
Net income 3,742 7,845 4,862 4,284

</TABLE>

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None
PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the names, ages and positions with the Company of directors
and executive officers of the Company, together with certain other key
personnel. The Board of Directors will be subject to change from time to time.

Name Age Position
- ---- --- --------
<S> <C> <C>

Robert R. Onstead........................................... 68 Chairman Emeritus
R. Randall Onstead.......................................... 43 Chairman of the Board and Chief Executive Officer
Douglas G. Beckstett........................................ 47 Senior Vice President, Human Resources
Michael M. Calbert.......................................... 36 Senior Vice President and Chief Financial Officer
Frank Lazaran............................................... 42 Senior Vice President, Sales and Merchandising
D. Mark Prestidge........................................... 40 Senior Vice President, Store Operations
J. Russell Robinson......................................... 57 Senior Vice President, Chief Information Officer
Joe R. Rollins.............................................. 43 Senior Vice President, Real Estate and Assistant Secretary
Lee E. Straus............................................... 50 Senior Vice President, Finance, Secretary and Treasurer
Henry R. Kravis............................................. 55 Director
George R. Roberts........................................... 55 Director
Paul E. Raether............................................. 53 Director
James H. Greene, Jr......................................... 48 Director
Nils P. Brous............................................... 35 Director
A. Benton Cocanougher....................................... 61 Director

</TABLE>

ROBERT R. ONSTEAD is a co-founder of the Company and served as its
Chairman from 1966 through July 1998. Mr. Onstead attended the University of
North Texas.

R. RANDALL ONSTEAD was elected President and Chief Executive Officer of
the Company in April 1996 and became Chairman of the Board and Chief Executive
Officer in July 1998. He has been a Director of the Company for 13 years and has
been with the Company for 21 years. From 1986 to April 1996, Mr. Onstead served
as President and Chief Operating Officer. Prior to 1986, Mr. Onstead was
Assistant Grocery Buyer for five years after serving in various management
positions since 1978. He has a B.S. degree in Marketing from Texas Tech
University and has attended Harvard Business School's Management Development
Program.

DOUGLAS G. BECKSTETT joined the Company as Senior Vice President of
Human Resources in June 1997. He had 20 years of Human Resources experience
prior to joining the Company, most recently serving as vice president of Human
Resources for APS Inc. He received his bachelor's degree in management science
with a concentration in organizational theory in 1974 from Duke University and
his M.B.A., with honors, in organizational behavior in 1977 from Boston
University.

MICHAEL M. CALBERT joined the Company in September 1994 as Senior Vice
President, Corporate Controller. He was promoted to Senior Vice President
Corporate Planning and Development in 1996 and became Chief Financial Officer in
1998. From 1984 to 1994, he served as a Manager in the audit and consulting
groups of Arthur Andersen LLP. Mr. Calbert is a Certified Public Accountant and
received a B.B.A. degree from Stephen F. Austin State University and his M.B.A.
from the University of Houston.

<PAGE>

FRANK LAZARAN joined the Company as Senior Vice President of Sales and
Merchandising in November 1997. Prior to joining the Company, he served as Group
Vice President, Sales, Advertising and Merchandising for Ralphs Grocery Company
where he worked for 23 years. Mr. Lazaran has a B.S. degree in Business
Administration from California State University at Long Beach.

D. MARK PRESTIDGE was appointed Senior Vice President of all store
operations in November 1998. In March 1996, Mr. Prestidge was named President of
the Tom Thumb Stores Division. From April 1994 to 1996, Mr. Prestidge served as
Division Vice President, Tom Thumb Stores Division after serving for two years
as a Vice President/District Manager of the Division. From 1980 to 1992, he
served in various store management positions at the Company. Mr. Prestidge has
attended Harvard Business School's Management Development Program.

J. RUSSELL ROBINSON joined the Company as Senior Vice President, Chief
Information Officer in June 1997. Prior to joining the Company, he served as
Director of Information Systems for MCI Systemhouse from June 1996 to June 1997.
Prior to June 1996, he served as Vice President, Information Services for Ralphs
Grocery Company where he worked for 12 years. Mr. Robinson has a B.A. degree in
Business Administration from California State University at Long Beach and an
M.B.A. degree from the University of Southern California.

JOE R. ROLLINS was promoted to Senior Vice President, Real Estate in
August 1996, after serving 12 years as Vice President, Real Estate. From 1978 to
1984, he served as Real Estate Manager for Kroger in Houston. Mr. Rollins is
responsible for new store site evaluation and acquisition, leasing arrangements
for stores, warehouses and other facilities and facilities planning. In
addition, he negotiates the purchase and sale of real property. Mr. Rollins has
a B.B.A. degree from Texas Tech University.

LEE E. STRAUS joined the Company in August 1994 as Senior Vice
President-Finance, Secretary and Treasurer after more than 21 years in various
positions at Texas Commerce Bancshares. From 1989 to 1994, Mr. Straus served as
President of Texas Commerce Mortgage Company, and prior to that was Executive
Vice President, Chief Administrative Officer, of Texas Commerce Bancshares. He
has a M.B.A. from Stanford University.

HENRY R. KRAVIS is a managing member of KKR & Co. LLC, the limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds
Collection, Ltd., Evenflo Company Inc., The Gillette Company, IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Corporation, Newsquest plc,
Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway Inc.,
Sotheby's Holdings, Inc. and Spalding Holdings Corporation.

GEORGE R. ROBERTS is a managing member of KKR & Co. LLC, the limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, AutoZone, Inc., Borden,
Inc., The Boyds Collection, Ltd., Evenflo Company Inc., IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Corporation, Owens-Illinois,
Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway Inc. and Spalding Holdings
Corporation.

PAUL E. RAETHER is a member of KKR & Co. LLC, the limited liability
company which serves as the general partner of KKR. He is also a director of
Bruno's, Inc., IDEX Corporation and KSL Recreation Corporation.

JAMES H. GREENE, JR. is a member of KKR & Co. LLC, the limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Bruno's, Inc., Owens-Illinois, Inc., and
Safeway Inc.

NILS P. BROUS has been an executive of KKR since 1992. Prior thereto,
he was an associate at Goldman, Sachs & Co. Mr. Brous is also a director of
KinderCare Learning Centers, Inc. and Nexstar Financial Corporation.

A. BENTON COCANOUGHER is currently Dean of the Lowry Mays College and
Graduate School of Business at Texas A&M University. He is also a director of
Smith Barney Concert Series Mutual Funds, First American Bank-Bryan and First
American State Savings Bank Texas. Mr. Cocanougher has a B.B.A., M.B.A. and
Ph.D. from the University of Texas at Austin.

Messrs. Kravis and Roberts are first cousins. Robert R. Onstead and R.
Randall Onstead are father and son.

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for Fiscal Year 1999 for (i) the Chief Executive Officer of the
Company during such Fiscal Year, (ii) the Chairman of the Board of the Company
during such Fiscal Year and (iii) each of the four other most highly compensated
executive officers of the Company, determined as of June 26, 1999 (collectively,
the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ----------------------------
SECURITIES
FISCAL OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK AWARDS(2) OPTIONS COMPENSATION
- --------------------------- ---- -------- -------- --------------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Randall Onstead ........... 1999 $463,078 $694,617 $ 5,401 - 100,000 -
Chairman of the Board and 1998 425,000 425,000 78,324 - 371,595 -
Chief Executive Officer 1997 375,192 185,589 9,807 $103,480(4) - $169,064(3)

Michael M. Calbert ........... 1999 233,654 350,481 12,358 - 41,476 -
Senior Vice President and 1998 197,115 197,115 18,756 - 77,877 -
Chief Financial Officer 1997 175,000 133,000 11,289 58,382(4) 6,667 -

D. Mark Prestidge ............ 1999 196,443 294,664 27,158 - 30,000 -
Senior Vice President, 1998 174,038 174,038 11,096 - 51,610 -
Store Operations 1997 138,558 25,000 14,618 12,110(4) - -

Frank Lazaran ................ 1999 186,923 280,385 46,089 - 30,000 -
Senior Vice President, 1998 178,077 178,077 109,633 - 51,610 -
Sales and Merchandising 1997 - - - - - -

Lee E. Straus ................ 1999 186,923 280,385 24,290 - 20,000 -
Senior Vice President, 1998 178,077 178,077 3,524 - 51,610 -
Finance, Secretary and 1997 153,846 71,731 3,500 46,708(4) - -
Treasurer
</TABLE>

(1) The amounts shown in this column represent annual payments for
reimbursement of moving expenses, medical expenses and/or country club
dues.

(2) As of June 28, 1997, the aggregate number and value of the Company's
restricted stock for all executive officers was 34,408 shares with a
value of $416,681 based on the purchase price of the Common Stock in
the Recapitalization.

(3) Includes income recognized by such executive upon the purchase of a
whole life insurance policy for the benefit of such executive.

(4) Includes income recognized upon the vesting of restricted Common Stock
as of the closing of the Recapitalization.

47
<PAGE>

STOCK OPTION AND RESTRICTED STOCK PLAN

The Company Stock Option and Restricted Stock Plan (the "Stock Plan")
provides for participation by key executives who are selected by the Company's
Executive Committee. There are 1.5 million shares available for awards under the
Stock Plan. To date, the following options have been granted: options to
purchase 23,952 shares at $9.65 per share; options to purchase 16,806 shares at
$11.90 per share; options to purchase 15,000 shares at $10.75 per share; options
to purchase 13,334 shares at $15.00 per share; options to purchase 9,132 shares
at $10.95 per share; options to purchase 429,702 shares at $18.15 per share;
options to purchase 85,707 shares at $10.50 per share; options to purchase
117,232 shares at $14.50 per share; and options to purchase 6,476 shares at
$15.44 per share. As of June 26, 1999 approximately 76,610 shares subject to
options were exercisable.

During Fiscal Year 1998, the Company adopted the 1997 Stock Purchase
and Option Plan for Key Employees of Randall's Food Markets, Inc. and
Subsidiaries (the "1997 Plan"). Grants made pursuant to the Stock Plan will
become subject to, and be exercisable only in accordance with, the provisions of
the 1997 Plan. See "1997 Stock Purchase and Option Plan".

OPTION GRANTS

On December 31, 1994, the Company granted options to purchase Common
Stock to three employees including each of Messrs. Calbert and Straus (the "1994
Option Grant"). The options granted to Mr. Calbert consisted of five tranches of
formula grants each in the amount of $100,000, the exercise price of which was
determined or is to be determined, as the case may be, on the last business day
of the five consecutive calendar years commencing December 31, 1994. The options
granted to Mr. Straus consisted of three tranches of formula grants each in the
amount of $100,000, the exercise price of which was determined on the last
business day of the three consecutive calendar years commencing December 31,
1994.

The number of options in each tranche of formula grants is determined
by dividing $100,000 by the value of a share of Common Stock at successive
calendar year ends. The exercise prices which have been fixed as of the present
time are $9.65 for options granted on December 31, 1994, $11.90 for options
granted on December 31, 1995 and $15.00 for options granted on December 31, 1996
for each of Messrs. Calbert and Straus; and, $10.95 for options granted on
December 31, 1997 and $15.44 for options granted on December 31, 1998 to Mr.
Calbert.

1997 STOCK PURCHASE AND OPTION PLAN

The 1997 Plan provides for the issuance of 2.75 million shares of
authorized but unissued or reacquired shares of Common Stock, subject to
adjustment to reflect certain events such as stock dividends, stock splits,
recapitalizations, mergers or reorganizations of or by the Company. The 1997
Plan is intended to assist the Company in attracting and retaining employees of
outstanding ability and to promote the identification of their interests with
those of the stockholders of the Company. The 1997 Plan permits the issuance of
Common Stock (the "1997 Plan Purchase Stock") and the grant of Non-Qualified
Stock Options and Incentive Stock Options (the "1997 Plan Options") to purchase
shares of Common Stock and other stock-based awards (the issuance of 1997 Plan
Purchase Stock and the grant of 1997 Plan Options and other stock-based awards
pursuant to the 1997 Plan being a "1997 Plan Grant"). In addition, it is
expected that loans of up to approximately $8.0 million (including $6.4 million
outstanding as of June 26, 1999) in the aggregate will be made to employees to
finance purchases of Common Stock pursuant to the 1997 Plan. These loans will be
secured by pledges to the Company of Common Stock owned by such employees.
Unless sooner terminated by the Company's Board of Directors, the 1997 Plan will
expire ten years after its approval by the Company's stockholders. Such
termination will not affect the validity of any 1997 Plan Grant outstanding on
the date of the termination.

48
<PAGE>

The Compensation Committee of the Board of Directors will administer
the 1997 Plan, including, without limitation, the determination of the employees
to whom 1997 Plan Grants will be made, the number of shares of Common Stock
subject to each 1997 Plan Grant, and the various terms of 1997 Plan Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any 1997 Plan Grant, but, except for adjustments made upon a change in
the Common Stock by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1997 Plan with respect
to the 1997 Plan Purchase Stock and the 1997 Plan Options without such
participant's consent. The Board of Directors will retain the right to amend,
suspend or terminate the 1997 Plan.

During Fiscal Year 1999, the Company sold approximately 137,875 shares
of common stock under the 1997 Plan to the Board of Directors, key executives
and certain members of management at prices ranging from $12.96 to $13.57 per
share. As consideration, the Company accepted payment of cash or a combination
of cash and notes receivable from the purchasers. The notes receivable bear
interest at rates ranging from 4.5% to 6.1% per annum. At June 26, 1999, the
Company held notes receivable from management stockholders in the aggregate
amount of approximately $6.4 million. Such notes receivable are shown as a
reduction of stockholders' equity in the accompanying condensed consolidated
balance sheet.

The following Option Grants Table sets forth, as to the Named Executive
Officers, certain information relating to stock options granted during Fiscal
Year 1999:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (1)
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME SARS GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
R. Randall Onstead.......... 100,000 12.3% $12.96 12/30/2008 $1,065,993 $2,664,626
Michael M. Calbert.......... 35,000 4.3 12.96 12/31/2008 1,004,147 1,563,669
6,476 0.8 15.44 12/31/2004 152,834 197,560
D. Mark Prestidge........... 30,000 3.7 12.96 12/30/2008 860,698 1,340,288
Frank Lazaran............... 30,000 3.7 12.96 12/30/2008 860,698 1,340,288
Lee E. Straus............... 20,000 2.5 12.96 12/30/2008 573,799 893,525
</TABLE>

- -----------

(1) The value of the Common Stock was $18.03 based upon an appraisal of the
Common Stock for purposes of the Company's ESOP/401k Savings Plan as of
April 3, 1999. Based upon the exercise prices, the amounts shown in
these columns are the potential realizable value of options granted at
assumed rates of stock price appreciation (5% and 10%, as set by the
executive compensation disclosure provisions of the rules of the
Securities and Exchange Commission) compounded annually over the option
term and have not been discounted to reflect the present value of such
amounts. The assumed rates of stock price appreciation are not intended
to forecast the future appreciation of the Common Stock.

49
<PAGE>

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND OPTION VALUES AS OF JUNE 26,
1999

The following table sets forth certain information concerning the
number of stock options held by the Named Executive Officers as of June 26,
1999, and the value of in-the-money options outstanding as of such date.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
OPTIONS AS OF MONEY OPTIONS AS
NUMBER OF SHARES JUNE 26, 1999 OF JUNE 26, 1999
ACQUIRED ON (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE) (1)
- ---- ---------------- -------------- --------------- -------------------
<S> <C> <C> <C> <C>
R. Randall Onstead.............. 0 0 181,971/289,624 922,593/1,468,394
Michael M. Calbert.............. 0 0 73,729/72,670 421,766/357,719
D. Mark Prestidge............... 0 0 30,644/50,966 155,365/258,398
Frank Lazaran................... 0 0 30,644/50,966 155,365/258,398
Lee E. Straus................... 0 0 54,357/44,299 310,537/224,596
</TABLE>

- -----------

(1) The value of the Common Stock was $18.03 based upon an appraisal of the
Common Stock for purposes of the Company's ESOP/401k Savings Plan as of
April 3, 1999.

In Fiscal Year 1998, the Company issued certain employees 86,000 shares
of restricted Common Stock, of which 4,000 have been forfeited. During Fiscal
Year 1999, 4,000 restricted Common Stock were forfeited.

Certain of the Company's Directors and employees own common stock and
stock options. Immediately prior to the consummation of the Merger, all stock
options issued under the 1997 Plan and the Stock Option and Restricted Stock
Plan will become fully exercisable and generally will be canceled in exchange
for a per share payment in cash and stock equal to $41.75 less the applicable
exercise price. The resulting amount would be paid in cash and Safeway stock in
the same proportion as paid to shareholders in the Merger. In determining the
number of shares of Safeway stock to which each option holder will be entitled,
$52 1/8 is used as the price of Safeway common stock, regardless of the actual
market price of Safeway stock at that time. As part of the Merger, some holders
of stock options will, at the discretion of the Company and Safeway (as the two
companies will mutually agree), have the opportunity to convert their stock
options into options to purchase Safeway common stock as an alternative to
receiving cash and Safeway common stock for their stock options.

In addition to the foregoing, immediately prior to the consummation of
the Merger, the Company will cause all restricted Company stock held by certain
individuals to become fully vested and will cause all restrictions on
transferability imposed thereon by any agreement to lapse immediately. In the
Merger, these shares of Company stock will be treated in the same manner as all
other outstanding shares of Company stock.

BONUS PLANS

Prior to the Recapitalization, the Company maintained a bonus plan
covering different executive populations at and above the district vice
president level. Bonus payments under these plans were part cash and part stock
and were keyed to relevant performance factors within each group. The maximum
bonuses ranged from 40% of annual base salary for certain vice presidents to
100% of annual base salary for the most senior executives. Performance criteria
are a combination of corporate performance, individual and district or division
goals, as appropriate. The Company adopted a new bonus plan for Fiscal Year 1998
which replaced the old bonus plan. Under the new plan, separate bonus programs
have been established for (i) officer (including Named Executive Officers),
administrative department directors and key managers, (ii) store directors and
department managers, (iii) pharmacists, (iv) merchandisers; (v) in-store service
personnel and (vi) pricing coordinators. The bonus payments will consist solely
of cash payments and will be keyed to different performance measures for each
eligible employee group. For

50
<PAGE>

example, bonus payments to officers (including Named Executive Officers),
administrative department directors and key managers will be based upon
achievement of yearly EBITDA and same-store sales targets. The new bonus
programs are not set forth in any formal documents.

RETIREMENT PLANS

The Company maintains two qualified retirement plans. One, Randall's
Hourly Employees' Retirement Plan, is a defined benefit pension plan. The other
plan is the Randall's Food Markets, Inc. ESOP/401k Savings Plan ("ESOP"), which
currently holds 1,875,946 shares of Common Stock. The ESOP provides for pass
through voting with respect to a potential change in control. During Fiscal Year
1999, the ESOP purchased 4,194 shares of the Company's common stock. Although it
will no longer acquire shares of Common Stock, the Company has combined the ESOP
with a 401(k) plan option with diversified investment alternatives. The Company
also maintained the nonqualified Key Employee Stock Purchase Plan (the "KeySOP")
which provided benefits to key employees and highly compensated employees whose
benefits under the ESOP are limited due to Internal Revenue Code requirements.
The KeySop was terminated effective September 30, 1997.

EMPLOYEE WELFARE BENEFITS AND RETIREE INSURANCE BENEFITS

The Company provides welfare and other benefits only for its full-time
employees. In addition to medical insurance, the Company also provides other
standard benefits such as paid vacation and holidays, life insurance, sick pay
and long-term disability coverage for eligible employees. The Company is
self-insured with respect to health benefits for its employees. The long-term
disability coverage and life insurance for eligible employees is fully insured.
The Company has a stop loss policy in effect with respect to its self-insured
medical plan and is reimbursed by the stop loss carrier for all claims that
exceed the stop loss level, which is $200,000 for calendar 1998. Reimbursement
for stop loss claims is handled by the third party administrator who pays all
medical claims. In the event charges for any eligible employee exceeds $200,000
in one plan year, the third party administrator pays the claim for the plan and
then submits the claim to the carrier for reimbursement. Total medical claims
paid by the Company in calendar 1998, net of claims reimbursed by the stop loss
carrier, were approximately $23.6 million.

The Company does not generally provide retiree medical or retiree life
insurance benefits. However, the Company does have individual arrangements which
provide for health benefits for life with respect to four surviving family
members of the founders.

BOARD COMPENSATION

All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. It is anticipated that
each director who is not an employee of the Company will receive an aggregate
annual fee of $30,000. Directors who are also employees of the Company will
receive no remuneration for serving as directors.

The Company maintains a Directors' Deferred Compensation Plan (the
"Directors' Plan"). The Directors' Plan permits a non-employee member of the
Board of Directors of the Company to elect annually to defer payment of all or
any portion of the director's fees earned during a given year. Such deferred
fees are credited to an account for each director denominated as that number of
shares of Common Stock which would have a value equal to the amount of the
deferred fees. Once established, such account is also credited with additional
units representing that number of shares of Common Stock which would have a
value equal to the cash dividends otherwise payable on the Common Stock credited
to each director's account. Upon a director's retirement or separation from
service with the Board of Directors, such director will receive cash
distribution, either in a lump-sum or in equal installments (as elected by the
director at the time of the election to defer the fees), equal to the value of
the number of share units reflected in his or her account at such time.

EMPLOYMENT CONTRACTS

Effective April 1, 1997 (the "Effective Date"), the Company entered
into employment agreements with Robert R. Onstead and R. Randall Onstead (the
"Employment Agreements") which became effective upon consummation of the
Recapitalization and are subject to the terms and conditions described below.

51
<PAGE>

ROBERT R. ONSTEAD. Pursuant to the Employment Agreement with Robert
R. Onstead, Mr. Onstead became Chairman Emeritus for life as of July 2, 1998
and will serve as a consultant to the Company until such time as 10% of the
Common Stock (or the common stock of a successor to the Company) is tradable
on a national stock exchange (the "Consulting Period"). In addition, Mr.
Onstead will continue to be nominated as a director (and the Company shall
use its best efforts to secure his election as such) until such time as his
stock ownership in the Company falls below 10% of the outstanding Common
Stock.

During the Consulting Period, the Company will pay Mr. Onstead a
monthly fee of $16,667. In addition, Mr. Onstead will receive monthly
retirement payments in the amount of $8,333 until Mr. Onstead owns less than
3% of the outstanding Common Stock (or of the outstanding interest in a
successor). The Company will furnish Mr. Onstead (and his spouse) at no cost
to them with lifetime medical, dental and life insurance benefits. The
Company will also provide Mr. Onstead with certain office amenities for life;
provided that the annual cost thereof may not exceed $100,000.

In the event Mr. Onstead's consulting engagement is terminated (i)
by the Company (A) due to his death or disability, (B) as a result of Mr.
Onstead's gross negligence or willful misconduct in the performance of his
duties and services or his material breach of any material provision of his
Employment Agreement which is not corrected within 30 days of notice thereof
or (C) in connection with the insolvency, liquidation or any other event
which results in the discontinuance of the existence of the Company without a
successor thereto, or (ii) by Mr. Onstead other than as a result of the
Company's material breach of any material provision of his Employment
Agreement which is not corrected within 30 days of notice thereof (a
termination under clause (i) or (ii) being hereinafter referred to as a
"Non-Severance Termination"), the Company will cease to pay Mr. Onstead's
consulting fee (as applicable) upon such termination. In the event of a
change of control of the Company, Mr. Onstead's consulting agreement shall
terminate 30 days after such event and the Company (or its successor) will
cease to pay Mr. Onstead's consulting fee (as applicable) upon such
termination.

In the event Mr. Onstead incurs a termination other than a
Non-Severance Termination during his consulting engagement, the Company is
required to continue to pay Mr. Onstead all amounts due in respect of his
consulting engagement on the same basis as if Mr. Onstead had remained a
consultant through the Consulting Period.

R. RANDALL ONSTEAD. The Employment Agreement with R. Randall Onstead
provides that Mr. Onstead will serve as President and Chief Executive
Officer, for which he will receive a minimum monthly base salary of $35,417.
Pursuant to his Employment Agreement, Mr. Onstead was also granted options to
purchase 371,594 shares of Common Stock at a price of $12.11 per share, with
50% of such shares to vest 20% per year over five years and the remaining 50%
to vest based on the attainment of certain performance goals. In addition to
receiving other benefits and perquisites available to similarly situated
executives of the Company, Mr. Onstead was also extended a $750,000 line of
credit by the Company which will be secured by his Common Stock and be
payable 180 days after termination of his Employment Agreement to the extent
not satisfied out of (i) any compensation due him and payable upon the
termination of his employment and (ii) the proceeds from the disposition of
Common Stock and options by him. This line of credit will bear interest at
the applicable federal rate, which is published in a revenue ruling each
month by the Internal Revenue Service. At June 26, 1999, Mr. Onstead had
advances amounting to $400,000 on this line of credit.

In the event Randall Onstead incurs a Non-Severance Termination, the
Company will cease to pay Mr. Onstead's salary upon such termination. In the
event Mr. Onstead incurs a termination of employment other than a
Non-Severance Termination (which shall include a termination of employment by
Mr. Onstead due to the assignment to him by the Board of duties materially
inconsistent with his position) within two years of the Effective Date, he
shall be entitled to a severance payment in an amount equal to three times
the sum of (i) his base salary on the date of termination and (ii) the
average annual bonus paid or payable with respect to the immediately
preceding three calendar years. He shall also be entitled to three years
continued medical and dental coverage at no cost to him for himself, his
spouse and his dependents. In the event Mr. Onstead incurs a termination of
employment other than a Non-Severance Termination after two years following
the Effective Date, he shall be entitled to a severance payment in an amount
equal to two times the sum of (i) his base salary on the date of termination
and (ii) the average annual bonus paid or payable with respect to the
immediately preceding two calendar years. He shall also be entitled to two
years continued medical and dental coverage at no cost to him for himself,
his spouse and his dependents. Regardless of the timing of any such
termination, if Mr. Onstead's employment is terminated without cause, he
shall be entitled to the Company's investment in certain life insurance
policies.

52
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Paul E. Raether, James H. Greene, Jr., Nils P. Brous and A.
Benton Cocanougher are members of the Company's Compensation Committee.
Messrs. Raether and Greene are members of KKR 1996 GP L.L.C. KKR 1996 GP
L.L.C. beneficially owns approximately 62% of the Company's outstanding
shares of Common Stock which are held by RFM Acquisitions. KKR 1996 GP L.L.C.
is the sole general partner of KKR Associates 1996 L.P., a Delaware limited
partnership. KKR Associates 1996 L.P. is the sole general partner of KKR 1996
Fund L.P., a Delaware limited partnership. KKR 1996 Fund L.P. is the sole
member of RFM Acquisition. Mr. Brous is a limited partner of KKR Associates
1996 L.P. He is an executive of KKR. KKR, an affiliate of RFM Acquisition and
KKR 1996 GP L.L.C., received a fee of $8.0 million in cash for negotiating
the Recapitalization and arranging the financing therefor, plus the
reimbursement of its expenses in connection therewith, and, from time to time
in the future, KKR may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR has agreed to render management,
consulting and financial services to the Company for an annual fee of $1.0
million.

53
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning
beneficial ownership of shares of Common Stock as of June 26, 1999 by: (i)
persons known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each person who is a director of the
Company; (iii) each person who is a Named Executive Officer; and (iv) all
directors and executive officers of the Company as a group.

NAME OF BENEFICIAL OWNER BENEFICIAL PERCENTAGE
- ------------------------ OWNERSHIP OF OF CLASS
COMMON STOCK OUTSTANDING(a)
------------ --------------

<S> <C> <C>
KKR 1996 GP L.L.C.(b) 18,579,686 62.1%(c)
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, NY 10019
Henry R. Kravis(b)(f)............................................................... 5,000 *
George R. Roberts(b)(f)............................................................. 5,000 *
Paul E. Raether(b)(f)............................................................... 5,000 *
James H. Greene(b)(f)............................................................... 5,000 *
Nils P. Brous(b)(f)................................................................. 5,000 *
Robert R. Onstead(d)(e)(f)............................................................. 6,059,165 20.2%
Randall's Food Markets, Inc. Employee Stock Ownership Plan............................. 1,875,946 6.3%
R. Randall Onstead(d).................................................................. 209,224 *
Michael M. Calbert(d).................................................................. 44,025 *
D. Mark Prestidge(d)................................................................... 20,644 *
Lee E. Straus(d)....................................................................... 20,644 *
Frank Lazaran(d)....................................................................... 20,644 *
A. Benton Cocanougher (f).............................................................. 13,258 *
All directors and executive officers as group (16 persons)............................. 25,054,222 83.5%
</TABLE>

- -----------

* Less than one percent.

(a) The amounts and percentage of Common Stock beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities. Under the rules of
the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes
the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to
acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he has no economic interest. The percentage of class outstanding
is based on the 30,007,484 shares of Common Stock outstanding as of
June 26, 1999. In connection with the Recapitalization, the Company has
agreed to certain indemnities for the benefit of RFM Acquisition which
are payable in additional shares of Common Stock, and the percentages
in the table do not reflect any issuances thereunder.

(b) Shares of Common Stock shown as beneficially owned by KKR 1996 GP
L.L.C. are held by RFM Acquisition. KKR 1996 GP L.L.C. is the sole
general partner of KKR Associates 1996 L.P., a Delaware limited
partnership. KKR Associates 1996 L.P. is the sole general partner of
KKR 1996 Fund L.P., a Delaware limited partnership. KKR 1996 Fund L.P.
is the sole member of RFM Acquisition. KKR 1996 GP L.L.C. is a limited
liability company, the managing members of which are Messrs. Henry R.
Kravis and George R. Roberts and the other members of which are Messrs.
Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson, James H.
Greene, Jr., Michael T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott
M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts, Raether and
Greene are

54
<PAGE>

directors of the Company. Each of such individuals may be deemed to
share beneficial ownership of the shares shown as beneficially owned
by KKR 1996 GP L.L.C. Each of such individuals disclaims beneficial
ownership of such shares. Mr. Nils P. Brous is a limited partner of
KKR Associates 1996 L.P. and also is a director of the Company.

(c) KKR 1996 GP L.L.C. will own approximately 61.3% of the Common Stock
on a fully diluted basis assuming exercise of the RFM Option and the
completion of issuances of stock and options to certain members of
management under the 1997 Plan. On the Merger Effective Date, RFM
Acquisition's options are expected to be purchased by Safeway for a
payment in cash and stock equal to the product of (a) the number of
shares underlying the options multiplied by (b) $41.75 less the
exercise price.

(d) Does not include shares of Common Stock held by these individuals
as part of their participation in the ESOP.

(e) Includes shares held by Mr. Onstead's family partnership, his
spouse and the Onstead Foundation.

(f) During Fiscal Year 1999, pursuant to the Company's 1997 Plan,
Messrs. Robert R. Onstead, Henry R. Kravis, George R. Roberts, Paul
E. Raether, James H. Greene, Nils P. Brous and A. Benton Cocanougher
purchased 5,000 shares each of Common Stock and were granted options
to purchase 10,000 each of Common Stock. The purchase price for such
shares and the exercise price for the options were $12.96 per share.
The options shall vest, with respect to 33 1/3% of the options, on
each Vesting Date subject to the attainment of certain earnings
targets by the Company. The purchase of such shares are reflected in
the table. Immediately prior to the consummation of the Merger, all
stock options issued under the 1997 Plan and the Stock Option and
Restricted Stock Plan will become fully exercisable and generally
will be canceled in exchange for a per share payment in cash and
stock equal to $41.75 less the applicable exercise price. The
resulting amount would be paid in cash and Safeway stock in the same
proportion as paid to shareholders in the Merger. In determining the
number of shares of Safeway stock to which each option holder will
be entitled, $52 1/8 is used as the price of Safeway common stock,
regardless of the actual market price of Safeway stock at that time.
As part of the Merger, some holders of stock options will, at the
discretion of the Company and Safeway (as the two companies will
mutually agree), have the opportunity to convert their stock options
into options to purchase Safeway common stock as an alternative to
receiving cash and Safeway common stock for their stock options.

55
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

KKR 1996 GP L.L.C. beneficially owns approximately 62% of the
Company's outstanding shares of Common Stock. The managing members of KKR
1996 GP L.L.C. are Messrs. Henry R. Kravis and George R. Roberts and the
other members of which are Messrs. Robert I. MacDonnell, Paul E. Raether,
Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin,
Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis,
Roberts, Raether and Greene are directors of the Company, as is Mr. Nils P.
Brous, who is a limited partner of KKR Associates 1996 L.P. Each of the
members of KKR 1996 GP L.L.C. is also a member of the limited liability
company which serves as the general partner of KKR and Mr. Brous is an
executive of KKR. KKR, an affiliate of RFM Acquisition and KKR 1996 GP
L.L.C., received a fee of $8.0 million in cash for negotiating the
Recapitalization and arranging the financing therefor, plus the reimbursement
of its expenses in connection therewith, and, from time to time in the
future, KKR may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR has agreed to render management,
consulting and financial services to the Company for an annual fee of $1.0
million.

RFM Acquisition has the right, under certain circumstances and
subject to certain conditions, to require the Company to register under the
Securities Act shares of Common Stock held by it pursuant to a registration
rights agreement entered into at the Closing (the "RFM Registration Rights
Agreement"). Such registration rights will generally be available to RFM
Acquisition until registration under the Securities Act is no longer required
to enable it to resell the Common Stock owned by it. The RFM Registration
Rights Agreement provides, among other things, that the Company will pay all
expenses in connection with the first six demand registrations requested by
RFM Acquisition and in connection with any registration commenced by the
Company as a primary offering in which RFM Acquisition participates through
piggy-back registration rights granted under such agreement. RFM
Acquisition's exercise of its registration rights under the RFM Registration
Rights Agreement will be subject to the RFM Tag Along and the RFM Drag Along
provided for in the Shareholders Agreement.

At June 26, 1999, R. Randall Onstead had advances amounting to
$400,000 of the $750,000 line of credit extended by the Company as discussed
in Item 11 Employment Contracts. Interest on these advances at 4.62% at June
26, 1999 payable semi-annually beginning June 30, 1999.

In connection with the Company's grant of $250,000 worth of
restricted Common Stock (25,907 shares) to Michael Calbert on December 30,
1994, the Company loaned Mr. Calbert $100,000 on January 26, 1995 to pay
related income taxes. So long as Mr. Calbert is in active employment during
the 15 days before and after each payment date, the Company has agreed to
forgive the scheduled repayments. The loan is evidenced by a promissory note,
bears interest at 8% per annum and is payable in annual installments of
$20,000 each, plus interest, beginning December 1, 1995 and ending December
1, 1999. The note is secured by the 25,907 shares, one-fifth of which are
released each year beginning December 1, 1995. At June 26, 1999 the balance
of such loan was $20,000 and 5,181 shares remained as security.

The Company purchases uniforms and other merchandise from Coastal
Athletic Supply ("Coastal"), which is majority owned by Ann and Preston Hill
(Robert R. Onstead's daughter and son-in-law). Purchases from Coastal during
Fiscal Years 1997, 1998 and 1999 were $1,152,483, $1,707,580 and $1,087,416,
respectively. In addition, the Company guarantees the obligation of Coastal
to Uniforms To You ("UTY") for merchandise purchased on the Company's behalf
(the "Uniform Guaranty"). As of June 26, 1999, the obligation subject to the
Uniform Guaranty was $71,878, with the same amount being the highest balances
due with respect to such obligation for Fiscal Year 1999. The obligation
subject to the Uniform Guaranty is not interest bearing.

56
<PAGE>

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A. Certain documents filed as part of Form 10-K

None

B. Reports on Form 8-K

On August 2, 1999, the Company filed a Form 8-K reporting that on
July 22, 1999, the Company entered into an Agreement and Plan of Merger among
the Company, Safeway Inc. ("Safeway"), and SI Merger Sub, Inc., a wholly
owned subsidiary of Safeway ("Merger Sub"), pursuant to which the Company
will become a wholly owned subsidiary of Safeway.

C. Exhibits

Exhibit
Number Description of Document

12 Computation of Ratio of Earnings to Fixed Charges

21 List of Subsidiaries of Randall's Food Markets, Inc.

23.1 Consent of Deloitte & Touche LLP, independent accountants

27 Financial Data Schedule

D. Financial statement schedules

Schedules are omitted for the reason that they are not required
and/or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.

57
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

RANDALL'S FOOD MARKETS, INC.

BY: /s/ R. Randall Onstead, Jr.
-------------------------------------------------
Chairman of the Board and Chief Executive Officer
Date: September 10, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:

<TABLE>

<S> <C> <C>
/s/ Michael M. Calbert Senior Vice President and Chief Financial Officer September 10, 1999
- ------------------------------- (Principal Financial Officer and Principal
Accounting Officer)

</TABLE>

DIRECTORS: DATE
---------- ----

/s/ Nils P. Brous September 10, 1999
- -------------------------------

/s/ A. Benton Cocanougher September 10, 1999
- -------------------------------

/s/ James H. Greene, Jr. September 10, 1999
- -------------------------------

/s/ Henry R. Kravis September 10, 1999
- -------------------------------

/s/ R. Randall Onstead, Jr. September 10, 1999
- -------------------------------

/s/ Robert R. Onstead September 10, 1999
- -------------------------------

/s/ Paul E. Raether September 10, 1999
- -------------------------------

/s/ George R. Roberts September 10, 1999
- -------------------------------

<PAGE>

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT

None.

<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
EXHIBIT INDEX

Exhibit
No. Description of Exhibit
- ------ ----------------------
<S> <C>

2.1 Subscription Agreement dated as of April 1, 1997, among Randall's Food
Markets, Inc. ("Randall's"), Robert R. Onstead and RFM Acquisition LLC
("RFM Acquisition"). (1)
2.2 Letter Agreement dated as of April 1, 1997 between Randall's and RFM
Acquisition relating to certain indemnification obligations of
Randall's. (1)
2.3 Letter Agreement dated as of June 18, 1997 between Randall's and RFM
Acquisition relating to certain indemnification obligations of
Randall's. (1)
3.1 Amended and Restated Articles of Incorporation of Randall's. (1)
3.2 By-Laws of Randall's. (1)
4.1 Indenture dated as of June 27, 1997 between Randall's and Marine
Midland Bank, as Trustee (the `Indenture'). (1)
4.2 Form of 9 3/8% Senior Subordinated Note due 2007 (included in
Exhibit 4.1). (1)
4.3 Form of 9 3/8% Series B Senior Subordinated Note due 2007 (included in
Exhibit 4.1). (1)
4.4 First Supplemental Indenture to the Indenture, dated as of September 8,
1997 between Randall's and Marine Midland Bank, as Trustee. (1)
10.1 Settlement Agreement among Randall's and the other parties named
therein relating to the Randall's Food Markets, Inc. Employee Stock
Ownership Plan. (1)
10.2 Voting, Repurchase and Shareholders Agreement, dated as of April 1,
1997, between RFM Acquisition and the shareholders party thereto. (1)
10.3 Credit Agreement, dated as of June 27, 1997, among Randall's, the
several lenders from time to time parties thereto, and The Chase
Manhattan Bank, as administrative agent. (1)
10.4 Registration Rights Agreement, dated as of June 18, 1997, between RFM
Acquisition and Randall's. (1)
10.5 Employment Agreement of Robert R. Onstead. (1)
10.6 Employment Agreement of R. Randall Onstead, Jr. (1)
10.7 Registration Rights and Repurchase Agreement dated as of August 24,
1992 among Randall's, the Morgan Stanley Leveraged Equity Fund II, L.P.
and certain other shareholders parties thereto. (1)
10.8 Shareholder Agreement dated March 29, 1984 among Randall's and John N.
Frewin, Rosemary Frewin Gambino and certain other shareholders parties
thereto. (1)
10.9 Shareholder Agreement dated April 8, 1985 among Randall's and John N.
Frewin, Rosemary Frewin Gambino and certain other shareholders parties
thereto. (1)
10.10 Randall's Food Markets, Inc. Corporate Incentive Plan. (1)
10.11(a) Randall's Food Markets, Inc. Key Employee Stock Purchase Plan. (1)
10.11(b) First Amendment to Randall's Food Markets, Inc. Key Employee Stock
Purchase Plan. (1)
10.11(c) Second Amendment to Randall's Food Markets, Inc. Key Employee Stock
Purchase Plan. (1)
10.11(d) Third Amendment to Randall's Food Markets, Inc. Key Employee Stock
Purchase Plan. (1)
10.12 Supply Agreement dated as of August 20, 1993 between Fleming Foods of
Texas, Inc. and Randall's. (1)
10.13 Amended and Restated 1997 Stock Purchase and Option Plan for Key
employees of Randall's Food Markets, Inc. and Subsidiaries. (7)
10.14 Form of Management Stockholder's Agreement. (2)
10.15 Form of Non-Qualified Stock Option Agreement. (2)
10.16 Form of Sale Participation Agreement. (2)
10.17 Form of Pledge Agreement to be executed by certain employees of
Randall's in connection with the 1997 Plan. (1)
10.18 Agreement dated December 31, 1980 between Topco Associates, Inc.
(Cooperative) and Randall's. (1)
10.19 Stockholder's Agreement, dated February 3, 1998, among RFM Acquisition
LLC, Randall's Food Markets, Inc., and A. Benton Cocanougher. (3)
10.20 Directors' Deferred Compensation Contract (4)

<PAGE>

<S> <C>
10.21 Ground Lease Agreement, dated as of September 10, 1998 between Brazos
Markets Development, L.P. and Randall's Food & Drugs, Inc. and
Randall's Food Markets, Inc. (5)
10.22 Facilities Lease Agreement, dated as of September 10, 1998 between
Brazos Markets Development, L.P. and Randall's Food & Drugs, Inc. and
Randall's Food Markets, Inc. (5)
10.23 Guarantee as of September 10, 1998 Re: Agreement for Ground Lease,
Ground Lease Agreement, Agreement for Facilities Lease, Facilities
Lease Agreement each between Brazos Markets Development, L.P., a
Delaware Corporation, and Randall's Food & Drugs, Inc., a Delaware
Corporation, and Randall's Food Markets, Inc., a Texas Corporation and
each effective as of September 10, 1998. (5)
10.24 Residual Guarantee as of September 10, 1998 Re: Credit Agreement dated
effective as of September 10, 1998 by and among Brazos Markets
Development, L.P., as the Borrower, the several banks a party thereto
from time to time and the Agent. (5)
10.25 Form of Outside Director's Stockholder Agreement (7)
10.26 Form of Director's Non-Qualified Stock Option Agreement (7)
10.27 Agreement and Plan of Merger, dated as of July 22, 1999, among Safeway,
Inc., SI Merger Sub, Inc. and Randall's Food Markets, Inc. (8)
10.28 Voting Agreement, dated as of July 22, 1999, among Safeway Inc., SI
Merger Sub, Inc. and RFM Acquisition LLC (8)
10.29 Voting Agreement, dated as of July 22, 1999, among Safeway Inc., SI
Merger Sub, Inc. and Onstead Interest, Ltd. (8)
10.30 Voting Agreement, dated as of July 22, 1999, among Safeway Inc., SI
Merger Sub, Inc. and R. Randall Onstead, Jr. (8)
10.31 Press release, dated July 23, 1999. (8)
12 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter in lieu of consent of Deloitte & Touche LLP, independent
accountants (6)
16 Letter regarding change in certifying accountant. (1)
21 List of Subsidiaries of Randall's Food Markets, Inc.
23.1 Consent of Deloitte & Touche LLP, independent certified public
accountants.
24 Powers of Attorney. (1)
27 Financial Data Schedule.

</TABLE>

(1) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Registration Statement on Form S-4 (Registration
No. 333-35457) dated January 9, 1998.

(2) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Registration Statement on Form S-8 dated January 13,
1998.

(3) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Form 10-Q for the Quarter ended April 4, 1998

(4) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Form 10-K for the Fiscal Year ended June 27, 1998

(5) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Form 10-Q for the Quarter ended October 17, 1998

(6) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Form 10-Q for the Quarter ended April 3, 1999

(7) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Registration Statement on Form S-8 dated January 19,
1999.

(8) Incorporated by reference to the Exhibits filed with Randall's Food
Markets, Inc.'s Form 8-K dated August 2, 1999.

<PAGE>

Exhibit 12

RANDALLS FOOD MARKETS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)

<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income (loss) before income taxes and
extraordinary loss $ 73,506 $ 38,466 $(55,932) $ 35,754 $ 7,057
Fixed Charges 53,313 49,948 52,999 53,551 55,791
---------- ---------- -------- -------- --------
Earnings (loss) before income taxes,
extraordinary loss and fixed charges $ 126,819 $ 88,414 $ (2,933) $ 89,305 $ 62,848
========== ========== ======== ======== ========
FIXED CHARGES
Interest expense $ 34,446 $ 32,949 $ 36,828 $ 38,981 $ 43,411
One-third rental expense 18,867 16,999 16,171 14,570 12,380
---------- ---------- -------- -------- --------
Total Fixed Charges $ 53,313 $ 49,948 $ 52,999 $ 53,551 $ 55,791
========== ========== ======== ======== ========
Earnings to fixed charges ratio: 2.38x 1.77x - 1.67x 1.13x
========== ========== ======== ======== ========
Deficiency of earnings to cover fixed charges - - $(55,932) - -
========== ========== ======== ======== ========
</TABLE>

<PAGE>

Exhibit 21

SUBSIDIARIES OF RANDALL'S FOOD MARKETS, INC.

NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION

Randall's Food & Drugs, Inc. Delaware

Randall's Properties, Inc. Delaware

Gooch Packaging Company, Inc. Texas

American Community Stores Texas
Corporation

Food Depot, Inc. Texas

Randall's Beverage Company, Inc. Texas

Randall's Management Company, Inc. Delaware

<PAGE>

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration
Statement No. 333-44157 and 333-70771 of Randall's Food Markets, Inc. each on
Form S-8 of our report dated August 13, 1999, appearing in the Annual Report
on Form 10-K of Randall's Food Markets, Inc. for the year ended June 26, 1999.

DELOITTE & TOUCHE LLP
Houston, Texas
September 10, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS, THE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR RANDALL'S FOOD MARKETS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-26-1999
<CASH> 27,611
<SECURITIES> 0
<RECEIVABLES> 53,810
<ALLOWANCES> 0
<INVENTORY> 223,362
<CURRENT-ASSETS> 311,503
<PP&E> 453,826
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,012,631
<CURRENT-LIABILITIES> 313,321
<BONDS> 389,657
0
0
<COMMON> 14,393
<OTHER-SE> 263,779
<TOTAL-LIABILITY-AND-EQUITY> 1,012,631
<SALES> 2,585,089
<TOTAL-REVENUES> 2,585,089
<CGS> 1,861,810
<TOTAL-COSTS> 615,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,446
<INCOME-PRETAX> 73,506
<INCOME-TAX> 31,266
<INCOME-CONTINUING> 42,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,240
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>