<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended September 9, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the transition period from to
------ -----
Commission file number 1-41
----
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3019135
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
Fourth and Jackson Streets
Oakland, California 94660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 891-3000
</TABLE>
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
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 .
--- ---
As of October 13, 1995, there were issued and outstanding 106,592,974 shares of
the registrant's common stock.
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) Page
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 9, 1995 and 3
December 31, 1994
Condensed Consolidated Statements of Income for the 12 and 36 weeks 5
ended September 9, 1995 and September 10, 1994
Condensed Consolidated Statements of Cash Flows for the
36 weeks ended September 9, 1995 and September 10, 1994 6
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 11
OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
September 9, December 31,
1995 1994
------------ ------------
ASSETS
- ----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 48.7 $ 60.7
Receivables 169.4 147.9
Merchandise inventories 1,107.0 1,136.0
Prepaid expenses and other current assets 104.7 93.0
---------- ----------
Total current assets 1,429.8 1,437.6
---------- ----------
Property 4,575.8 4,375.3
Less accumulated depreciation
and amortization 2,042.8 1,868.9
---------- ----------
Property, net 2,533.0 2,506.4
Goodwill, net of amortization of $103.3
and $95.0, respectively 327.8 331.1
Prepaid pension costs 321.3 319.6
Investments in unconsolidated affiliates 326.2 329.3
Other assets 94.6 98.1
---------- ----------
Total assets $ 5,032.7 $ 5,022.1
========== ==========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 9, December 31,
1995 1994
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of notes
and debentures $ 145.9 $ 152.5
Current obligations under capital leases 19.4 19.3
Accounts payable 922.2 1,012.1
Accrued salaries and wages 214.7 223.6
Other accrued liabilities 497.4 416.1
---------- ----------
Total current liabilities 1,799.6 1,823.6
---------- ----------
liabilities
Long-term debt:
Notes and debentures 1,767.6 1,849.5
Obligations under capital leases 172.7 174.8
---------- ----------
Total long-term debt 1,940.3 2,024.3
Deferred income taxes 125.5 128.3
Accrued claims and other liabilities 408.9 402.1
---------- ----------
Total liabilities 4,274.3 4,378.3
---------- ----------
Stockholders' equity:
Common stock: par value $0.01 per share;
300 shares authorized; 106.3 and 104.8
shares outstanding, respectively 1.1 1.0
Additional paid-in capital 676.0 655.6
Unexercised warrants purchased: 4.4 shares (113.2) --
Retained earnings (accumulated deficit) 172.5 (41.9)
Cumulative translation adjustments 22.0 29.1
---------- ----------
Total stockholders' equity 758.4 643.8
---------- ----------
Total liabilities and stockholders' equity $ 5,032.7 $ 5,022.1
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
--------------------------- -----------------------------
Sept. 9, Sept. 10, Sept. 9, Sept. 10,
1995 1994 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 3,845.5 $ 3,631.8 $ 11,231.2 $ 10,736.3
Cost of goods sold (2,796.4) (2,640.7) (8,179.1) (7,821.5)
----------- ----------- ------------ ------------
Gross profit 1,049.1 991.1 3,052.1 2,914.8
Operating and administrative expenses (872.7) (842.6) (2,556.6) (2,502.2)
----------- ----------- ------------ ------------
Operating profit 176.4 148.5 495.5 412.6
Interest expense (44.6) (48.1) (141.3) (156.6)
Equity in earnings of unconsolidated affiliates 9.4 4.4 17.2 22.8
Other income, net 0.4 2.0 1.5 4.9
----------- ----------- ------------ ------------
Income before income taxes and extraordinary loss 141.6 106.8 372.9 283.7
Income taxes (57.9) (43.1) (158.5) (119.2)
----------- ----------- ------------ ------------
Income before extraordinary loss 83.7 63.7 214.4 164.5
Extraordinary loss related to early
retirement of debt, net of income tax
benefit of $1.7 and $6.5, respectively -- (2.7) -- (10.1)
----------- ----------- ------------ ------------
Net income $ 83.7 $ 61.0 $ 214.4 $ 154.4
=========== =========== ============ ============
Earnings per common share and common
share equivalent:
Primary
Income before extraordinary loss $ 0.69 $ 0.52 $ 1.78 $ 1.35
Extraordinary loss -- (0.02) -- (0.08)
----------- ----------- ------------ ------------
Net income $ 0.69 $ 0.50 $ 1.78 $ 1.27
=========== =========== ============ ============
Fully diluted
Income before extraordinary loss $ 0.69 $ 0.52 $ 1.77 $ 1.34
Extraordinary loss -- (0.02) -- (0.08)
----------- ----------- ------------ ------------
Net income $ 0.69 $ 0.50 $ 1.77 $ 1.26
=========== =========== ============ ============
Weighted average common shares and common
share equivalents:
Primary 120.5 122.1 120.5 121.5
=========== =========== ============ ============
Fully diluted 120.8 122.5 121.2 122.5
=========== =========== ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
36 Weeks Ended
---------------------------
September 9, September 10,
1995 1994
------------ -------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS:
Net income $ 214.4 $ 154.4
Reconciliation to net cash flow from operations:
Extraordinary loss related to early retirement of debt,
before income tax benefit -- 16.6
Depreciation and amortization 227.7 225.5
LIFO expense 6.9 6.9
Equity in undistributed earnings of unconsolidated affiliates (17.2) (22.8)
Other 40.6 40.3
Changes in working capital items:
Receivables and prepaids (31.9) (7.1)
Inventories at FIFO cost 34.1 50.1
Payables and accruals (17.5) 84.3
-------- --------
Net cash flow from operations 457.1 548.2
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for property additions (253.2) (181.6)
Proceeds from sale of property 25.2 27.6
Other (19.8) (27.0)
-------- --------
Net cash flow used by investing activities (247.8) (181.0)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Additions to short-term borrowings 98.2 93.9
Payments on short-term borrowings (112.3) (43.6)
Additions to long-term borrowings 558.9 345.4
Payments on long-term borrowings (660.5) (821.8)
Premiums paid on early retirement of debt -- (12.7)
Net proceeds from exercise of warrants and stock options 8.2 10.5
Purchase of unexercised warrants (113.2) --
Other (0.6) 1.1
-------- --------
Net cash flow used by financing activities (221.3) (427.2)
-------- --------
Decrease in cash and equivalents (12.0) (60.0)
CASH AND EQUIVALENTS:
Beginning of period 60.7 118.4
-------- --------
End of period $ 48.7 $ 58.4
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Safeway Inc. and
subsidiaries ("Safeway" or the "Company") for the 12 and 36 weeks ended
September 9, 1995 and September 10, 1994 are unaudited and, in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1994 Annual Report to Stockholders. The results of
operations for the 12 and 36 weeks ended September 9, 1995 are not necessarily
indicative of the results expected for the full year.
NOTE B - INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
LIFO expense was $2.3 million in the third quarters of both 1995 and 1994 and
was $6.9 million for the first 36 weeks of both 1995 and 1994. Actual LIFO
Indices are calculated during the fourth quarter of the year based upon a
statistical sampling of inventories.
NOTE C - INVESTMENTS IN AFFILIATES
Investments in affiliates consist of a 35% interest in The Vons Companies, Inc.
("Vons") which operates 326 supermarkets located mostly in southern California,
and a 49% interest in Casa Ley, S.A. de C.V. which operates 71 stores in western
Mexico. Safeway records income from its equity investments on a one-quarter
delay basis.
Since the December 1994 devaluation of the peso, Mexico has experienced economic
difficulties, including very high interest rates. Interest rates and inflation
have moderated in recent months, and Safeway's share of Casa Ley's earnings for
the third quarter of 1995 increased to $4.6 million from $3.1 million in the
comparable period of 1994. For the 36 weeks ended September 9, 1995, Safeway's
share of Casa Ley's earnings fell to $5.0 million from $12.4 million in 1994.
The Company's recorded investment in Vons at September 9, 1995 was $249.1
million, including unamortized goodwill of $46.0 million that is being amortized
over a 40 year life. Income from Safeway's equity investment in Vons was $4.8
million for the third quarter of 1995 compared to $1.3 million in the third
quarter of 1994. For the 36 weeks ended September 9, 1995 Safeway's share of
Vons earnings was $12.2 compared to $10.4 in 1994.
Based on the September 8, 1995 closing price for Vons common stock as quoted on
the New York Stock Exchange, the Company's 15.1 million shares of Vons common
stock had an aggregate market value of $353.6 million.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - INVESTMENTS IN AFFILIATES (CONTINUED)
Summarized financial information derived from Vons' financial reports to the
Securities and Exchange Commission is as follows (in millions):
<TABLE>
<CAPTION>
June 18, January 1,
FINANCIAL POSITION 1995 1995
- ------------------ ---------- -----------
<S> <C> <C>
Current assets $ 413.0 $ 467.8
Property and equipment, net 1,194.7 1,203.0
Other assets 548.4 551.2
---------- ----------
Total assets $ 2,156.1 $ 2,222.0
========== ==========
Current liabilities $ 519.5 $ 563.9
Long-term obligations 1,053.8 1,105.7
Shareholders' equity 582.8 552.4
---------- ----------
Total liabilities and shareholders' equity $ 2,156.1 $ 2,222.0
========== ==========
</TABLE>
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
June 18, June 19, June 18, June 19,
RESULTS OF OPERATIONS 1995 1994 1995 1994
- --------------------- --------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales $ 1,139.5 $ 1,160.2 $ 3,458.2 $ 3,474.7
Cost of sales and other expenses (1,125.0) (1,155.7) (3,420.6) (3,442.3)
--------- --------- --------- ---------
Net income $ 14.5 $ 4.5 $ 37.6 $ 32.4
========= ========= ========= =========
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - FINANCING
Notes and debentures were composed of the following at September 9, 1995 and
December 31, 1994 (in millions):
<TABLE>
<CAPTION>
September 9, 1995 December 31, 1994
----------------- -----------------
Long-term Current Long-term Current
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Credit Agreement, unsecured $ 295.4
Bank Credit Agreement, secured - $ 135.0
Working Capital Credit Agreement,
secured - 196.8
9.30% Senior Secured Debentures
due 2007 70.7 70.7
10% Senior Notes due 2002,
unsecured 59.1 59.1
10% Senior Subordinated Notes due 2001,
unsecured 241.4 241.4
9.875% Senior Subordinated Debentures
due 2007, unsecured 110.0 110.0
9.65% Senior Subordinated Debentures
due 2004, unsecured 228.2 228.2
9.35% Senior Subordinated Notes due
1999, unsecured 172.5 172.5
Mortgage notes payable, secured 399.2 $ 49.3 426.7 $ 51.3
Other notes payable, unsecured 191.1 26.7 209.1 13.3
Other bank borrowings, unsecured - 69.9 - 87.9
-------- ------- -------- -------
$1,767.6 $ 145.9 $1,849.5 $ 152.5
======== ======= ======== =======
</TABLE>
Note B to the Company's consolidated financial statements on pages 25 through 27
of the 1994 Annual Report to Stockholders and the information appearing under
the caption "Terms of Outstanding Indebtedness" in Item 1 of the Company's 1994
Form 10-K describe all of the material restrictive covenants of the Company's
senior subordinated notes and debentures.
CREDIT AGREEMENT
On May 24, 1995, Safeway entered into a new unsecured bank credit agreement (the
"Credit Agreement") that is less restrictive than Safeway's previous bank
agreement, extends the maturity date and provides lower borrowing costs. The
Credit Agreement matures in 2000 and has two one-year extension options. Safeway
may borrow up to $1.15 billion under the Credit Agreement, including up to $400
million in Canada. In connection with obtaining the new Credit Agreement, all
collateral securing the Company's senior subordinated notes and debentures was
released.
U.S. borrowings under the Credit Agreement carry interest at one of the
following rates selected by the Company: (i) the prime rate; (ii) the rate at
which Eurodollar deposits are offered to first-class banks by the lenders in the
Credit Agreement plus a pricing margin based on the Company's debt rating or
interest coverage ratio (the "Pricing Margin"); or (iii) rates quoted at the
discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry
interest at one of the following rates selected by the Company: (i) the Canadian
base rate; or (ii) the Canadian Eurodollar rate plus the Pricing Margin.
Canadian borrowings denominated in Canadian dollars carry interest at the
Canadian prime rate.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Credit Agreement sets certain restrictions on payments by the Company (i) of
dividends on any class of stock; (ii) to acquire shares of any class of stock of
the Company; or (iii) to acquire certain outstanding warrants or any options or
other rights to acquire shares of any class of stock of the Company, other than
those held by certain Company officers and employees.
Other provisions of the Credit Agreement limit certain acts of the Company and
require the Company to meet certain financial tests which pertain to its ability
to generate adequate cash to meet required payments.
NOTE E - CONTINGENCIES
LEGAL MATTERS
Note H to the Company's consolidated financial statements, under the caption
"Legal Matters" on page 32 of the 1994 Annual Report to Stockholders, provides
information on certain claims and litigation in which the Company is involved.
In February 1988, the Company sold its Kansas City Division to a company formed
by Morgan, Lewis, Githen & Ahn Fund I ("Morgan Lewis") and financed principally
by the Prudential Insurance Company of America ("Prudential") and its affiliate,
PruCo Insurance Company ("PruCo"). In January 1993, the buyer (Food Barn Stores,
Inc.) filed a voluntary petition under Chapter 11 of the U. S. Bankruptcy Code,
and the plan of reorganization was confirmed in July 1994. In January 1995, Food
Barn filed suit against the Company and others in the U. S. Bankruptcy Court for
the Western District of Missouri. In its complaint, Food Barn alleges that (i)
the 1988 transaction was a fraudulent conveyance under New York law, and (ii)
the Company defrauded Food Barn and fraudulently induced it to enter into the
February 1988 transaction. Food Barn seeks compensatory damages estimated to
approximate $293 million plus interest, and $100 million in punitive damages. In
April 1995, the Company filed motions to dismiss, and for summary judgment on,
Food Barn's claims, and in August 1995 the Bankruptcy Court denied the motions.
In September 1995, the Company filed its answer and counterclaims, denying the
operative allegations of the complaint, asserting numerous defenses, and
alleging that any losses sustained by Food Barn were the result of actions and
omissions of Morgan Lewis and its principals, Prudential and PruCo. Safeway
believes that it has numerous meritorious defenses, and intends to defend itself
vigorously, in this case.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Safeway's net income for the third quarter ended September 9, 1995 was $83.7
million ($0.69 per share) compared to income before extraordinary loss of $63.7
million ($0.52 per share) for the third quarter of 1994. In the third quarter of
1994, the Company incurred an extraordinary loss of $2.7 million ($0.02 per
share) for the early retirement of debt which reduced net income for that period
to $61.0 million ($0.50 per share). Net income for the first 36 weeks of 1995
was $214.4 million ($1.77 per share) compared to income before extraordinary
loss of $164.5 million ($1.34 per share) for the same period of 1994. A nine-day
strike during the second quarter of 1995 affected 208 stores in Northern
California and reduced earnings per share for the first 36 weeks of 1995 by an
estimated $0.05 per share. Net income for the 36 weeks ended September 10, 1994,
which included an extraordinary loss of $10.1 million ($0.08 per share) for the
early retirement of debt, was $154.4 million ($1.26 per share).
Sales were $3.8 billion for the third quarter of 1995 compared to $3.6 billion
for the third quarter of 1994. Same-store sales increased 5.3% in the third
quarter of 1995, continuing an eleven-quarter trend of same-store sales
increases. For the first 36 weeks of 1995, sales were $11.2 billion compared to
$10.7 billion for the same period of 1994. Same-store sales for the first 36
weeks of 1995 increased 4.6%. Safeway's commitment to reinvest the cost savings
achieved throughout the Company has resulted in sales growth despite very low
food price inflation.
Gross profit was 27.3% of sales in the third quarter of both 1995 and 1994. For
the first 36 weeks of 1995, gross profit was 27.2% of sales compared to 27.1% in
1994. LIFO expense was $6.9 million for the first 36 weeks of both 1995 and
1994, reflecting the Company's expectation of low inflation for the year.
Operating and administrative expense improved to 22.69% of sales in the third
quarter of 1995 from 23.20% in the third quarter of 1994. For the first three
quarters of 1995, operating and administrative expense decreased to 22.76% from
23.31% for the same period of 1994. Higher overall Company sales and ongoing
efforts to reduce or control expenses contributed to the lower operating and
administrative expenses.
Interest expense was $44.6 million in the third quarter of 1995 compared to
$48.1 million in the same quarter of 1994. For the first 36 weeks of 1995,
interest expense fell to $141.3 million compared to $156.6 million for the same
period of 1994. Interest expense decreased in 1995 primarily due to reduced debt
levels.
Equity in earnings of unconsolidated affiliates, recorded on a one-quarter delay
basis, was $9.4 million for the third quarter of 1995 compared to $4.4 million
for the same period of 1994. For the first three quarters of 1995, equity in
earnings of unconsolidated affiliates fell to $17.2 million compared to $22.8
million in 1994. Safeway's share of Vons' earnings increased to $4.8 million in
the third quarter of 1995 from $1.3 million in 1994. For the first 36 weeks of
1995, Safeway's share of Vons' earnings increased to $12.2 million from $10.4
million in 1994. Earnings from Casa Ley increased to $4.6 million in the third
quarter of 1995 from $3.1 million in 1994. For the first 36 weeks of 1995,
Safeway's share of Casa Ley's earnings was $5.0 million compared to $12.4
million in 1994. Since the December 1994 devaluation of the peso, Mexico has
experienced economic difficulties, including very high interest rates. Interest
rates and inflation have moderated in recent months, and Casa Ley's financial
results are gradually improving. While the economic situation in Mexico will
continue to affect Casa Ley's financial results, the impact is not expected to
be material to the consolidated operating results of Safeway.
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In January 1995, the Company acquired 31.8% of the partnership interests in SSI
Equity Associates, L.P. for $113 million with proceeds from bank borrowings. SSI
Equity Associates, L.P., a related party, is a limited partnership whose sole
asset consists of warrants to purchase 13.9 million shares of Safeway common
stock at $2.00 per share. At the date of acquisition, Safeway estimated that
this transaction would reduce common stock equivalents by about 4.16 million
shares, which began having a favorable effect on earnings per share in the first
quarter of 1995. On October 20, 1995, the Company acquired an additional 18.9%
of the partnership interests of SSI Equity Associates for $83 million using
proceeds from bank borrowings. Safeway estimates that this transaction will
reduce common stock equivalents by about 2.51 million shares, and begin having a
favorable effect on earnings per share in the fourth quarter of 1995. The
favorable effect on earnings per share from reducing common stock equivalents
is being partially offset by interest expense on the bank borrowings.
LIQUIDITY AND FINANCIAL RESOURCES
On May 24, 1995, Safeway entered into a new unsecured bank credit agreement (the
"Credit Agreement") that is less restrictive than the Company's previous bank
agreement, extends the maturity date and provides lower borrowing costs. The
Credit Agreement matures in 2000 and has two one-year extension options. Safeway
may borrow up to $1.15 billion under the Credit Agreement, including up to $400
million in Canada. In connection with obtaining the new Credit Agreement, all
collateral securing the Company's senior subordinated notes and debentures was
released.
U.S. borrowings under the Credit Agreement carry interest at one of the
following rates selected by the Company: (i) the prime rate; (ii) the rate at
which Eurodollar deposits are offered to first-class banks by the lenders in the
Credit Agreement plus a pricing margin based on the Company's debt rating or
interest coverage ratio (the "Pricing Margin"); or (iii) rates quoted at the
discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry
interest at one of the following rates selected by the Company: (i) the Canadian
base rate; or (ii) the Canadian Eurodollar rate plus the Pricing Margin.
Canadian borrowings denominated in Canadian dollars carry interest at the
Canadian prime rate.
The Credit Agreement sets certain restrictions on payments by the Company (i) of
dividends on any class of stock; (ii) to acquire shares of any class of stock of
the Company; or (iii) to acquire certain outstanding warrants or any options or
other rights to acquire shares of any class of stock of the Company, other than
those held by certain Company officers and employees.
Other provisions of the Credit Agreement limit certain acts of the Company and
require the Company to meet certain financial tests which pertain to its ability
to generate adequate cash to meet required payments.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating cash flow, as presented below, provides a measure of the Company's
ability to generate cash to pay interest and fixed charges, and facilitates the
comparison of Safeway's results of operations with those of companies having
different capital structures. Safeway's computation of operating cash flow is as
follows (dollars in millions):
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
-------------- --------------
Sept. 9, Sept. 10, Sept. 9, Sept. 10,
1995 1994 1995 1994
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $141.6 $106.8 $372.9 $283.7
LIFO expense 2.3 2.3 6.9 6.9
Interest expense 44.6 48.1 141.3 156.6
Depreciation and amortization 76.8 75.4 227.7 225.5
Equity in earnings of unconsolidated
affiliates (9.4) (4.4) (17.2) (22.8)
------- ------- ------- -------
Operating cash flow $255.9 $228.2 $731.6 $649.9
======= ======= ======= =======
As a percent of sales 6.65% 6.28% 6.51% 6.05%
======= ======= ======= =======
As a multiple of interest expense 5.74x 4.74x 5.18x 4.15x
======= ======= ======= =======
</TABLE>
Cash flow from operations supplemented by credit available under the Credit
Agreement are the Company's primary sources of short-term liquidity. At
September 9, 1995, the Company had available unused borrowing capacity of $763.5
million under the Credit Agreement. Management believes that this amount is
adequate to meet the Company's requirements.
CAPITAL EXPENDITURE PROGRAM
A key component of the Company's long-term strategy is its capital expenditure
program. During the first 36 weeks of 1995, Safeway invested $279 million in
capital expenditures and opened 16 new stores. The Company plans to invest
approximately $475 million for capital expenditures in 1995 to open 30 new
stores and complete more than 100 remodels. Capital expenditures for 1996 are
expected to increase to approximately $550 million.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Note H to the Company's consolidated financial statements, under the caption
"Legal Matters" on page 32 of the 1994 Annual Report to Stockholders, provides
information on certain claims and litigation in which the Company is involved.
In February 1988, the Company sold its Kansas City Division to a company formed
by Morgan, Lewis, Githen & Ahn Fund I ("Morgan Lewis") and financed principally
by the Prudential Insurance Company of America ("Prudential") and its affiliate,
PruCo Insurance Company ("PruCo"). In January 1993, the buyer (Food Barn Stores,
Inc.) filed a voluntary petition under Chapter 11 of the U. S. Bankruptcy Code,
and the plan of reorganization was confirmed in July 1994. In January 1995, Food
Barn filed suit against the Company and others in the U. S. Bankruptcy Court for
the Western District of Missouri. In its complaint, Food Barn alleges that (i)
the 1988 transaction was a fraudulent conveyance under New York law, and (ii)
the Company defrauded Food Barn and fraudulently induced it to enter into the
February 1988 transaction. Food Barn seeks compensatory damages estimated to
approximate $293 million plus interest, and $100 million in punitive damages. In
April 1995, the Company filed motions to dismiss, and for summary judgment on,
Food Barn's claims, and in August 1995 the Bankruptcy Court denied the motions.
In September 1995, the Company filed its answer and counterclaims, denying the
operative allegations of the complaint, asserting numerous defenses, and
alleging that any losses sustained by Food Barn were the result of actions and
omissions of Morgan Lewis and its principals, Prudential and PruCo. Safeway
believes that it has numerous meritorious defenses, and intends to defend itself
vigorously, in this case.
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
ITEM 6(a). EXHIBITS
<TABLE>
<S> <C>
Exhibit 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to Registration Statement No. 33-33388).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2
to Registration Statement No. 33-33388), and Amendment to the Company's By-laws
effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's
Form 10-K for the year ended January 2, 1993).
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share Equivalent.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule (electronic filing only).
</TABLE>
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: October 20, 1995 /s/ Steven A. Burd
--------------------- ------------------
Steven A. Burd
President and Chief Executive Officer
Date: October 20, 1995 /s/ Julian C. Day
--------------------- -----------------
Julian C. Day
Executive Vice President and Chief
Financial Officer
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 9, 1995
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule (electronic filing only)
17
<PAGE> 1
Exhibit 11.1
SAFEWAY INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
and Common Share Equivalent
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
12 Weeks Ended
----------------------------------------------------
September 9, 1995 September 10, 1994
------------------------ ------------------------
Fully Fully
Diluted Primary Diluted Primary
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 83.7 $ 83.7 $ 63.7 $ 63.7
Extraordinary loss -- -- (2.7) (2.7)
---------- ---------- ---------- ----------
Net income $ 83.7 $ 83.7 $ 61.0 $ 61.0
========== ========== ========== ==========
Weighted average common shares outstanding 106.4 106.2 103.3 103.1
Common share equivalents 14.4 14.3 19.2 19.0
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 120.8 120.5 122.5 122.1
========= ========= ========= =========
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 0.69 $ 0.69 $ 0.52 $ 0.52
Extraordinary loss -- -- (0.02) (0.02)
---------- ---------- ---------- ----------
Net Income $ 0.69 $ 0.69 $ 0.50 $ 0.50
========== ========== ========== ==========
Calculation of common share equivalents:
Options and warrants to purchase common
shares 21.8 22.0 27.8 28.0
Common shares assumed purchased with
potential proceeds (7.4) (7.7) (8.6) (9.0)
---------- ---------- ---------- ----------
Common share equivalents 14.4 14.3 19.2 19.0
========== ========== ========== ==========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 298.2 $ 290.4 $ 238.7 $ 233.6
Common stock price used under the treasury
stock method $ 40.38 $ 37.83 $ 27.62 $ 25.91
Common shares assumed purchased with
potential proceeds 7.4 7.7 8.6 9.0
</TABLE>
(Continued)
18
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES Exhibit 11.1
Computation of Earnings Per Common Share
and Common Share Equivalent (Continued)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
36 Weeks Ended
----------------------------------------------------
September 9, 1995 September 10, 1994
------------------------ ------------------------
Fully Fully
Diluted Primary Diluted Primary
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 214.4 $ 214.4 $ 164.5 $ 164.5
Extraordinary loss -- -- (10.1) (10.1)
---------- ---------- ---------- ----------
Net income $ 214.4 $ 214.4 $ 154.4 $ 154.4
========== ========= ========= ==========
Weighted average common shares outstanding 106.3 105.7 103.3 102.4
Common share equivalents 14.9 14.8 19.2 19.1
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 121.2 120.5 122.5 121.5
========= ========= ========= =========
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 1.77 $ 1.78 $ 1.34 $ 1.35
Extraordinary loss -- -- (0.08) (0.08)
---------- ---------- ---------- ----------
Net income $ 1.77 $ 1.78 $ 1.26 $ 1.27
========== ========= ========= ==========
Calculation of common share equivalents:
Options and warrants to purchase common shares 22.3 22.8 27.8 28.6
Common shares assumed purchased with potential
proceeds (7.4) (8.0) (8.6) (9.5)
---------- ---------- ---------- ----------
Common share equivalents 14.9 14.8 19.2 19.1
========== ========= ========= ==========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 297.2 $ 286.7 $ 237.4 $ 230.7
Common stock price used under the treasury
stock method $ 40.38 $ 35.78 $ 27.62 $ 24.33
Common shares assumed purchased with
potential proceeds 7.4 8.0 8.6 9.5
</TABLE>
19
<PAGE> 1
SAFEWAY INC. Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
36 Weeks Fiscal Year
--------------------- ----------------------------------------------------------------
Sept. 9, Sept. 10,
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary loss and
cumulative effect of accounting
changes $ 372.9 $ 283.7 $ 424.1 $ 216.3 $ 197.4 $ 166.2 $ 194.7
Add interest expense 141.3 156.6 221.7 265.5 290.4 355.4 384.1
Add interest on rental expense (a) 60.0 60.2 86.6 88.0 88.0 83.0 82.0
Less equity in earnings of unconsolidated
affiliates (17.2) (22.8) (27.3) (33.5) (39.1) (45.8) (25.5)
Less gain on common stock offering by
unconsolidated affiliate - - - - - (27.4) -
Add minority interest in subsidiary 2.6 1.9 3.0 3.5 1.7 1.3 1.4
--------- --------- --------- --------- --------- -------- --------
Earnings $ 559.6 $ 479.6 $ 708.1 $ 539.8 $ 538.4 $ 532.7 $ 636.7
======== ======== ======== ======== ========= ======== ========
Interest expense $ 141.3 $ 156.6 $ 221.7 $ 265.5 $ 290.4 $ 355.4 $ 384.1
Add capitalized interest 3.1 2.0 2.9 4.2 8.0 10.6 3.3
Add interest on rental expense (a) 60.0 60.2 86.6 88.0 88.0 83.0 82.0
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 204.4 $ 218.8 $ 311.2 $ 357.7 $ 386.4 $ 449.0 $ 469.4
======== ======== ======== ======== ========= ======== ========
Ratio of earnings to fixed charges 2.74 2.19 2.28 1.51 (b) 1.39 1.19 (c) 1.36
======== ======== ======== ======== ========= ======== ========
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of
future operating lease payments.
(b) Safeway's ratio of earnings to fixed charges during 1993 was
adversely affected by a $54.9 million charge to operating and
administrative expenses for severance payments made to retail
employees in the Alberta, Canada division as part of a voluntary
employee buyout. Excluding this charge, the ratio of earnings to
fixed charges for 1993 would have been 1.66.
(c) Safeway's ratio of earnings to fixed charges for 1991 was adversely
affected by a $115 million charge to operating profit in connection
with the bankruptcy of AppleTree Markets, Inc. ("AppleTree"). The
$115 million charge was an estimate of the eventual net lease and
related cash payments which Safeway expected to make over a period
of up to 16 years in connection with any liability Safeway may have
on the leases assigned to AppleTree as part of the sale of the
Company's former Houston division. Excluding this charge, the ratio
of earnings to fixed charges for 1991 would have been 1.44.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF INCOME ON PAGE 3 THROUGH 5 OF THE COMPANY FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 9, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-09-1995
<CASH> 48,700
<SECURITIES> 0
<RECEIVABLES> 169,400
<ALLOWANCES> 0
<INVENTORY> 1,107,000
<CURRENT-ASSETS> 1,429,800
<PP&E> 4,575,800
<DEPRECIATION> 2,042,800
<TOTAL-ASSETS> 5,032,700
<CURRENT-LIABILITIES> 1,799,600
<BONDS> 1,940,300
<COMMON> 1,100
0
0
<OTHER-SE> 757,300
<TOTAL-LIABILITY-AND-EQUITY> 5,032,700
<SALES> 11,231,200
<TOTAL-REVENUES> 11,231,200
<CGS> 8,179,100
<TOTAL-COSTS> 8,179,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,300
<INCOME-PRETAX> 372,900
<INCOME-TAX> 158,500
<INCOME-CONTINUING> 214,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214,400
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.77
</TABLE>
