<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 30, 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)
Delaware 94-3019135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or 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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $0.01 par value per share New York and Pacific Stock Exchanges
Warrants to purchase Common Stock New York Stock Exchange
9.30% Senior Secured Debentures due 2007 New York Stock Exchange
10% Senior Notes due 2002 New York Stock Exchange
9.35% Senior Subordinated Notes due 1999 New York Stock Exchange
10% Senior Subordinated Notes due 2001 New York Stock Exchange
9.65 Senior Subordinated Debentures due 2004 New York Stock Exchange
9.875% Senior Subordinated Debentures due 2007 New York Stock Exchange
</TABLE>
(Cover continued on following page)
<PAGE> 2
(Cover continued from previous page)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
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 10-K or any amendment to this
Form 10-K X .
---
Aggregate market value of the voting stock held by non-affiliates of Registrant
as of March 19, 1996, was $2.9 billion.
As of March 19, 1996, there were issued and outstanding 217.0 million shares of
the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the extent specified
herein:
Document Description 10-K Part
-------------------- ---------
1995 Annual Report to Stockholders I, II, III, IV
1996 Proxy Statement dated March 19, 1996 III
<PAGE> 3
SAFEWAY INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
GENERAL:
Information appearing under the caption "Company in Review" beginning on page 12
of the Company's 1995 Annual Report to Stockholders is incorporated herein by
this reference.
RETAIL OPERATIONS:
Information appearing under the captions "Retail Operations" and "Distribution"
on pages 12 and 13 of the Company's 1995 Annual Report to Stockholders is
incorporated herein by this reference.
MANUFACTURING AND WHOLESALE OPERATIONS:
Information appearing under the caption "Manufacturing and Wholesale Operations"
on page 13 of the Company's 1995 Annual Report to Stockholders is incorporated
herein by this reference.
Various agricultural commodities constitute the principal raw materials used by
the Company in the manufacture of its food products. Management believes that
raw materials for its products are not in short supply, and all are readily
available from a wide variety of independent suppliers.
CAPITAL EXPENDITURES:
Information appearing under the caption "Capital Expenditure Program" on page 14
of the Company's 1995 Annual Report to Stockholders is incorporated herein by
this reference.
Safeway's new stores, remodels, and closures during the last five years were as
follows:
<TABLE>
<CAPTION>
Total
Five
Years 1995 1994 1993 1992 1991
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
New stores:
New locations 45 10 6 8 12 9
Replacements 89 22 14 6 23 24
--- --- -- -- -- --
134 32 20 14 35 33
=== === == == == ==
Remodels:
Expansions 92 13 7 27 23 22
"Four-Wall" remodels 272 95 64 18 40 55
--- --- -- -- -- --
364 108 71 45 63 77
=== === == == == ==
Closures 196 35 36 39 49 37
Stores at year-end 1,059 1,062 1,078 1,103 1,117
</TABLE>
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
This information is omitted because the Company has no significant lines of
business or industry segments except the principal business of operating retail
supermarkets.
TRADEMARKS:
The Company has invested significantly in the development and protection of the
"Safeway" name. The right to use the "Safeway" name is considered to be an
important asset. Safeway also owns approximately 75 other trademarks registered
or pending in the United States Patent and Trademark Office, including its
product line names such as Safeway, Safeway SELECT, Lucerne, and Mrs. Wright's.
Each trademark registration is for an initial period of 10 or 20 years and is
renewable for as long as the use of the trademark continues. Safeway considers
certain of its trademarks to be of material importance to its business and
actively defends and enforces such trademarks. Safeway has also registered
certain of its trademarks in Canada.
WORKING CAPITAL:
At year-end 1995, working capital deficit was composed of $1.5 billion of
current assets and $1.9 billion of current liabilities. Normal operating
fluctuations in these substantial 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.
COMPETITION:
Food retailing is intensely competitive. The number of competitors and the
amount of competition experienced by Safeway's stores vary by market area. The
principal competitive factors that affect the Company's business are location,
quality, service, price and consumer loyalty to other brands and stores.
Local, regional, and national food chains as well as independent food stores and
markets comprise the principal competition, although Safeway also faces
substantial competition from convenience stores, liquor retailers, membership
warehouse clubs, specialty retailers, and large-scale drug and pharmaceutical
chains. Safeway and its competitors engage in price competition which, from
time to time, has adversely affected operating margins in many of its markets.
COMPLIANCE WITH ENVIRONMENTAL LAWS:
The Company's compliance with the federal, state, and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment or otherwise relate to the protection of the environment has not had
and is not expected to have a material adverse effect upon the financial
position or results of operations of the Company.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
EMPLOYEES:
At year-end 1995, Safeway had approximately 114,000 full and part-time
employees. Approximately 90% of Safeway's employees in the United States and
Canada are covered by collective bargaining agreements negotiated with local
unions affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three-year terms, with some
agreements having terms up to five years. Accordingly, Safeway renegotiates a
significant number of the these agreements every year. In the last three years,
despite the large number of negotiations, there have only been two significant
work stoppages, which were in Portland, Oregon and northern California. These
work stoppages were resolved in a manner that management considered generally
satisfactory, and did not individually or in the aggregate have a material
adverse effect on the Company. Both work stoppages involved all of the major
food retailers in those markets. The strike in northern California lasted nine
days during the second quarter of 1995, affected 18,000 employees at 208 stores
and adversely impacted sales and earnings during that quarter.
Of Safeway's approximately 100,000 unionized employees, approximately 37,000 in
four operating areas are covered by labor contracts which are scheduled to
expire in 1996. While Safeway believes that its relationship with its employees
is good, there can be no assurance that contracts covering such 37,000
employees, or that labor contracts which come up for renewal after 1996, will be
renewed. Failure to renew contracts covering a significant number of employees
leading to work stoppages could have an adverse effect on Safeway's results of
operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES:
Note K to the consolidated financial statements, included on page 36 of the
Company's 1995 Annual Report to Stockholders and incorporated herein by this
reference, contains financial information by geographic area. At year-end 1995,
the Company's foreign operations were composed of retail grocery and wholesale
operations in Canada and a 49% equity investment in Casa Ley, S.A. de C.V.
("Casa Ley"), a Mexican company. 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 have gradually improved. Worsening of the economic
situation in Mexico could have an effect on Casa Ley. However, any such effect
is not expected to be material to Safeway's operating results. Other than the
competitive nature of the retail food business and the economic situation in
Mexico, the Company is not aware of any significant risks of operating in these
foreign countries.
The Company's policy for translating Casa Ley's financial statements into U.S.
dollars is described under the caption "Translation of Foreign Currencies" on
page 25 of the Company's 1995 Annual Report. Casa Ley had total assets of
$276.9 million and $448.4 million as of September 30, 1995 and 1994, based on
financial information provided by Casa Ley. Sales and net income for Casa Ley
were as follows (in millions):
<TABLE>
<CAPTION>
12 months ended September 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Sales $861.4 $1,052.4 $925.8
====== ======== ======
Net income $ 17.9 $ 32.0 $ 39.5
====== ======== ======
</TABLE>
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
ITEM 3. LEGAL PROCEEDINGS
Information about legal proceedings appearing under the caption "Legal Matters"
as reported in Note J to the consolidated financial statements on pages 35 and
36 of the Company's 1995 Annual Report to Stockholders is incorporated herein by
this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of 1995.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of the current executive officers of the Company and their
positions as of March 19, 1996, are set forth below. Unless otherwise
indicated, each of the executive officers served in various managerial
capacities with the Company over the past five years. None of the executive
officers named below is related to any other executive officer or director by
blood, marriage or adoption. Officers serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
Year First Elected
Name and all Positions with the Company ------------------
Held at March 19, 1996 Age Officer Present Office
- ---------------------- --- ------- --------------
<S> <C> <C> <C>
Steven A. Burd (1) 46 1992 1992
President and Chief Executive Officer
David T. Ching (2) 43 1994 1994
Senior Vice President and
Chief Information Officer
Frithjof J. Dale 51 1982 1991
Group Vice President
Finance
Julian C. Day (3) 43 1993 1993
Executive Vice President and
Chief Financial Officer
E. Richard Jones 51 1983 1988
Executive Vice President
Supply Operations
George D. Marshall 56 1979 1979
Vice President
Labor Relations
Kenneth W. Oder (4) 48 1993 1993
Executive Vice President
Labor Relations, Human Resources, Law and Public Affairs
Diane Peck 47 1990 1995
Senior Vice President
Human Resources
</TABLE>
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
<TABLE>
<CAPTION>
Year First Elected
Name and all Positions with the Company ------------------
Held at March 19, 1996 Age Officer Present Office
- ---------------------- --- ------- --------------
<S> <C> <C> <C>
Melissa C. Plaisance 36 1993 1995
Senior Vice President
Finance and Public Affairs
Larree M. Renda 37 1991 1994
Senior Vice President
Corporate Retail Operations
Michael C. Ross (4) 48 1993 1993
Senior Vice President
Secretary and General Counsel
Gary D. Smith 52 1988 1995
Senior Vice President and
Director of Marketing
Richard A. Wilson 62 1988 1988
Vice President
Tax
Donald P. Wright 43 1991 1991
Senior Vice President
Real Estate and Engineering
</TABLE>
- ----------------
(1) Previously the owner of Burd & Associates, a management consulting firm.
(2) During 1994, Mr. Ching was the General Manager - North America for the
British American Consulting Group. From 1979 to 1994, he was employed by
Lucky Stores, Inc., where he was the Senior Vice President of Information
Systems beginning in 1989.
(3) Previously self-employed as an independent consultant.
(4) Previously a partner at the law firm of Latham & Watkins.
Compliance with Section 16(a) of the Exchange Act. Information appearing under
the caption "Compliance with Section 16(a) of the Exchange Act" in the Company's
1996 Proxy Statement is incorporated herein by this reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is listed on the New York Stock
Exchange and the Pacific Stock Exchange. Information as to quarterly sales
prices for the Company's common stock appears in Note L to the consolidated
financial statements on page 37 of the Company's 1995 Annual Report to
Stockholders and is incorporated herein by this reference. There were 5,144
stockholders of record as of March 19, 1996; however, approximately 47% of the
Company's outstanding stock is held in "street name" by depositories or nominees
on behalf of beneficial holders. The price per share of common stock was $27.5
as of the close of business on March 19, 1996.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
Holders of common stock are entitled to receive dividends if, as, and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and subject to the dividend restrictions in the Credit Agreement and
the indentures relating to the Notes and Debentures. Information as to dividend
restrictions is included in the first paragraph under the caption "Restrictive
Covenants" in Note B to the consolidated financial statements on page 28 of the
Company's 1995 Annual Report to Stockholders and is incorporated herein by this
reference. The Company has not paid dividends on common stock through 1995 and
has no current plans for dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
The "Five-Year Summary Financial Information" included on page 15 of the
Company's 1995 Annual Report to Stockholders is incorporated herein by this
reference. The Five-Year Summary should be read in conjunction with the
Company's consolidated financial statements and accompanying notes included
under Item 8, Consolidated Financial Statements and Supplementary Data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information appearing under the caption "Financial Review" on pages 16 through
18 and under the caption "Capital Expenditure Program" on page 14 of the
Company's 1995 Annual Report to Stockholders is incorporated herein by this
reference.
Information appearing under the caption "New Accounting Standards" on page 27 of
the Company's 1995 Annual Report to Stockholders is incorporated herein by this
reference.
Information regarding the terms of outstanding indebtedness appearing in Note B
to the consolidated financial statements on pages 27 through 29 of the Company's
1995 Annual Report to Stockholders is incorporated herein by this reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 19 through 39 of the Company's 1995 Annual Report to Stockholders, which
include the consolidated financial statements, Computation of Earnings Per
Common Share and Common Share Equivalent listed as Exhibit 11.1 to Item 14(a)3,
and the Independent Auditors' Report as listed in Item 14(a)1, are incorporated
herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Directors of the Company. Information on the nominees for election as Directors
and the continuing Directors of the Company, which appears under the caption
"Election of Directors" in the Company's 1996 Proxy Statement, is incorporated
herein by this reference.
Executive Officers of the Company. See PART I under the caption "Executive
Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Executive Compensation" and "Pension
Plans" in the Company's 1996 Proxy Statement is incorporated herein by this
reference. Information appearing under the captions "Report of the Compensation
and Stock Option Committee" and "Stock Performance Graph" in the Company's 1996
Proxy Statement is not incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Beneficial Ownership of Securities" in
the Company's 1996 Proxy Statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note I to the consolidated financial statements, included on page 35 of the
Company's 1995 Annual Report to Stockholders, and the captions "Certain
Relationships and Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Company's 1996 Proxy Statement contain information
about certain relationships and related transactions and are incorporated herein
by this reference.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Consolidated Financial Statements of the Company are incorporated by
reference in PART II, Item 8:
Consolidated Statements of Income for fiscal 1995, 1994, and 1993.
Consolidated Balance Sheets as of the end of fiscal 1995 and 1994.
Consolidated Statements of Cash Flows for fiscal 1995, 1994, and 1993.
Consolidated Statements of Stockholders' Equity for fiscal 1995, 1994, and
1993.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Consolidated Financial Statement Schedules:
None required
3. The following exhibits are filed as part of this report:
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 4(i).1 Form of Warrant Agreement between the Company and The First
National Bank of Boston as Warrant Agent relating to Warrants
to purchase shares of common stock of the Company
(incorporated by reference to Exhibit 4.5 to Registration
Statement No. 33-9913) and Amendment to the Warrant Agreement
between the Company and The First National Bank of Boston as
Warrant Agent relating to Warrants to purchase shares of
common stock of the Company (incorporated by reference to
Exhibit 4(i).6 to Registrant's Form 10-K for the year ended
December 30, 1989).
Exhibit 4(i).2 Specimen Warrant (incorporated by reference to Exhibit 4(i).5
to Registration Statement No. 33-33388).
Exhibit 4(i).3 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4(i).2 to Registration Statement No. 33-33388).
Exhibit 4(i).4 Registration Rights Agreement dated November 25, 1986 between
the Company and certain limited partnerships (incorporated by
reference to Exhibit 4(i).4 to Registration Statement No.
33-33388).
Exhibit 4(i).5 Indenture dated as of November 20, 1991 among the Company and
The Bank of New York, as Trustee, relating to the Company's
Senior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated
November 13, 1991).
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i).6 Form of Officers' Certificate establishing the terms of the 10%
Senior Subordinated Notes due December 1, 2001, including the
form of Note (incorporated by reference to Exhibit 4.4 of
Registrant's Form 8-K dated November 13, 1991).
Exhibit 4(i).7 Form of Officers' Certificate establishing the terms of the
9.65% Senior Subordinated Debentures due January 15, 2004,
including the form of Debenture (incorporated by reference to
Exhibit 4.1 of Registrant's Form 8-K dated January 15, 1992).
Exhibit 4(i).8 Indenture dated as of February 1, 1992 between the Company and
The First National Bank of Chicago, as Trustee, relating to the
Company's 9.30% Senior Secured Debentures due 2007, including
the form of Debenture and the forms of Deed of Trust and
Environmental Indemnity Agreement attached as exhibits thereto
(incorporated by reference to Exhibit 4(i).14 of Registrant's
Form 10-K for the year ended December 28, 1991).
Exhibit 4(i).9 Indenture dated as of March 15, 1992 between the Company and
Harris Trust and Savings Bank, as Trustee, relating to the
Company's Senior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated March
17, 1992).
Exhibit 4(i).10 Form of Officers' Certificate establishing the terms of the
9.35% Senior Subordinated Notes due March 15, 1999 and the
9.875% Senior Subordinated Debentures due March 15, 2007,
including the form of Note and form of Debenture (incorporated
by reference to Exhibit 4.2 of Registrant's Form 8-K dated
March 17, 1992).
Exhibit 4(i).11 Indenture dated as of September 1, 1992 between the Company and
The Chase Manhattan Bank (National Association), as Trustee,
relating to the Company's Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated
September 16, 1992).
Exhibit 4(i).12 Form of Officers' Certificate relating to the Company's Fixed
Rate Medium-Term Notes and the Company's Floating Rate
Medium-Term Notes, form of Fixed Rate Note and form of Floating
Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and
4.4 of Registrant's Form 8-K dated September 16, 1992).
Exhibit 4(i).13 Form of Officers' Certificate establishing the terms of a
separate series of Safeway Inc.'s Medium-Term Notes entitled
10% Senior Notes due November 1, 2002, including the form of
Note (incorporated by reference to Exhibits 4.1 and 4.2 of
Registrant's Form 8-K dated November 5, 1992).
Exhibit 4(i).14 Form of Officers' Certificate establishing the terms of a
separate series of Safeway Inc.'s Medium-Term Notes entitled
Medium-Term Notes due June 1, 2003 (Series OPR-1), including
the form of Note (incorporated by reference to Exhibits 4.1 and
4.2 of Registrant's Form 8-K dated June 1, 1993).
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i).15 Form of Common Stock Purchase Warrants dated November 25,
1986 to purchase 13,928,000 shares of Safeway Common Stock
(incorporated by reference to Exhibit 4.7 to Registration
Statement No. 33-9254).
Exhibit 4(i).16 Credit Agreement dated as of May 24, 1995 among Safeway
Inc., Canada Safeway Limited, and Lucerne Foods Ltd., as
Borrowers, Bankers Trust Company, as Administrative Agent,
The Bank of Nova Scotia, as Documentation Agent, The Chase
Manhattan Bank, N.A., Chemical Bank, and Citicorp USA, Inc.,
as Co-Agents, the Lead Managers listed therein, as Lead
Managers, and the lenders listed therein, as Lenders
(incorporated by reference to Exhibit 4(i).16 of the
Registrant's Form 10-Q for the quarterly period ended June
17, 1995).
Exhibit 4(iii) Registrant agrees to provide the Securities and Exchange
Commission, upon request, with copies of instruments
defining the rights of holders of long-term debt of
Registrant and all of its subsidiaries for which
consolidated financial statements are required to be filed
with the Securities and Exchange Commission.
Exhibit 10(iii).1* Safeway Inc. Outside Director Equity Purchase Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 33-36753), and First Amendment to the Safeway
Inc. Outside Director Equity Purchase Plan dated as of July
5, 1994 (incorporated by reference to Exhibit 10(iii).1 to
Registrant's Form 10-Q for the quarterly period ended
September 10, 1994).
Exhibit 10(iii).2* Share Appreciation Rights Plan of Canada Safeway Limited
(incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 28,
1991).
Exhibit 10(iii).3* Share Appreciation Rights Plan of Lucerne Foods Ltd.
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 28,
1991).
Exhibit 10(iii).4* Letter Agreement dated March 24, 1993 between the Company
and Peter A. Magowan (incorporated by reference to Exhibit
10(iii).6 to Registrant's Form 10-Q for the quarterly period
ending June 19, 1993).
Exhibit 10(iii).5* Stock Option Plan for Consultants of Safeway Inc.
(incorporated by reference to Exhibit 10(iii).7 to
Registrant's Form 10-Q for the quarterly period ending June
19, 1993).
Exhibit 10(iii).6* First Amendment to the Stock Option Plan for Consultants of
Safeway Inc. (incorporated by reference to Exhibit 10(iii).7
to Registrant's Form 10-K for the year ended January 1,
1994).
* Management contract, or compensatory plan or arrangement.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 10(iii).7* 1994 Amended and Restated Stock Option and Incentive Plan
for Key Employees of Safeway Inc. (incorporated by
reference to Exhibit 10(iii).8 to Registrant's Form 10-K
for the year ended January 1, 1994) and First Amendment
thereto dated March 1, 1995 (incorporated by reference to
Exhibit 10(iii).7 of Registrant's Form 10-K/A for the year
ended December 31, 1994).
Exhibit 10(iii).8* Operating Performance Bonus Plan for Executive Officers of
Safeway Inc. (incorporated by reference to Exhibit
10(iii).9 to Registrant's Form 10-K for the year ended
January 1, 1994).
Exhibit 10(iii).9* Capital Performance Bonus Plan (incorporated by reference
to Exhibit 10(iii).10 to Registrant's Form 10-K for the
year ended January 1, 1994).
Exhibit 10(iii).10* Retirement Restoration Plan of Safeway Inc. (incorporated
by reference to Exhibit 10(iii).11 to Registrant's Form
10-K for the year ended January 1, 1994).
Exhibit 10(iii).11* Deferred Compensation Plan for Safeway Directors
(incorporated by reference to Exhibit 10(iii).11 of
Registrant's Form 10-K for the year ended December 31,
1994).
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent (incorporated by reference to page 38 of the
Company's 1995 Annual Report to Stockholders).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1 Registrant's 1995 Annual Report to Stockholders (considered
filed to the extent specified in Item 1, Item 2, Item 3,
Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1
above).
Exhibit 22.1 Subsidiaries of Registrant.
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only).
- ------------------
* Management contract, or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K:
None.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
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.
By: /s/ Steven A. Burd Date:
--------------------
SAFEWAY INC. March 20, 1996
Steven A. Burd
President and Chief Executive Officer
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 Registrant and
in the capacities and on the dates indicated:
/s/ Julian C. Day /s/ F. J. Dale
- ----------------- --------------
Julian C. Day F. J. Dale
Executive Vice President and Group Vice President
Chief Financial Officer Finance
Date: March 20, 1996 Date: March 20, 1996
Director Date
-------- ----
/s/Steven A. Burd March 20, 1996
- ------------------------
Steven A. Burd
/s/ Sam Ginn March 20, 1996
- ------------------------
Sam Ginn
/s/ James H. Greene, Jr. March 20, 1996
- ------------------------
James H. Greene, Jr.
/s/ Paul Hazen March 20, 1996
- ------------------------
Paul Hazen
/s/ Henry R. Kravis March 20, 1996
- ------------------------
Henry R. Kravis
/s/ Robert I. MacDonnell March 20, 1996
- ------------------------
Robert I. MacDonnell
/s/ Peter A. Magowan March 20, 1996
- ------------------------
Peter A. Magowan
/s/ George R. Roberts March 20, 1996
- ------------------------
George R. Roberts
/s/ Michael T. Tokarz March 20, 1996
- ------------------------
Michael T. Tokarz
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-K FOR THE PERIOD
ENDED DECEMBER 30, 1995
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent (incorporated by reference to page 38 of the
Company's 1995 Annual Report to Stockholders).
Exhibit 13.1 Registrant's 1995 Annual Report to Stockholders (considered
filed to the extent specified in Item 1, Item 2, Item 3, Item 5,
Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1 above).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 22.1 Subsidiaries of Registrant.
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only)
<PAGE> 1
SAFEWAY INC. Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary loss and cumulative
effect of accounting changes $556.5 $ 424.1 $216.3 $197.4 $166.2
Add interest expense 199.8 221.7 265.5 290.4 355.4
Add interest on rental expense (a) 87.5 86.6 88.0 88.0 83.0
Less equity in earnings of unconsolidated
affiliates (26.9) (27.3) (33.5) (39.1) (45.8)
Less gain on common stock offering by
unconsolidated affiliate -- -- -- -- (27.4)
Add minority interest in subsidiary 3.9 3.0 3.5 1.7 1.3
------ ------- ------ ------ ------
Earnings $820.8 $ 708.1 $539.8 $538.4 $532.7
====== ======= ====== ====== ======
Interest expense $199.8 $ 221.7 $265.5 $290.4 $355.4
Add capitalized interest 4.6 2.9 4.2 8.0 10.6
Add interest on rental expense (a) 87.5 86.6 88.0 88.0 83.0
------ ------- ------ ------ ------
Fixed charges $291.9 $ 311.2 $357.7 $386.4 $449.0
====== ======= ====== ====== ======
Ratio of earnings to fixed charges 2.81 2.28 1.51 (b) 1.39 1.19 (c)
====== ======= ====== ====== ======
</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 expense
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
<PAGE> 1
Exhibit 13.1
COMPANY IN REVIEW
Safeway Inc. ("Safeway" or the "Company") is one of the world's largest food
retailers, operating 1,059 stores in the United States and Canada. U.S. retail
operations are located principally in northern California, Oregon, Washington
and the Rocky Mountain, Southwest, and Mid-Atlantic regions. Canadian retail
operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, Safeway has an
extensive network of distribution, manufacturing and food processing facilities.
In addition to stores operated under the Safeway name, the Company has
ownership interests in two other retailers. Safeway holds a 35% interest in The
Vons Companies, Inc. ("Vons"), which operates 329 grocery stores located mostly
in southern California, and a 49% interest in Casa Ley, S.A. de C.V. ("Casa
Ley"), which operates 71 food and general merchandise stores in western Mexico.
Retail Operations
STORES
Safeway operates stores ranging in size from approximately 7,200 square
feet to over 60,000 square feet. Safeway determines the size of a new store
based on a number of considerations, including the needs of the community the
store serves, the location and site plan, and the estimated return on capital
invested. Most stores offer a wide selection of both food and general
merchandise and feature a variety of specialty departments which historically
have enhanced operating margins. In most of Safeway's larger stores, specialty
departments are showcased in each corner and along the perimeter walls of the
store to create a pleasant shopping atmosphere. Safeway's primary new store
prototype is 55,000 square feet and is designed to accommodate changing consumer
needs and to achieve certain operating efficiencies.
Safeway continues to operate a number of smaller stores which offer an
extensive selection of food and general merchandise, and generally include one
or more specialty departments. These stores remain an important part of the
Company's store network in smaller communities and certain other locations where
larger stores may not be feasible because of space limitations and/or community
needs or restrictions.
Stores opened in 1995 averaged 51,200 square feet. The following table
summarizes Safeway's stores by size at year-end 1995:
<TABLE>
<CAPTION>
Number of Percent of
Stores Total
-------------------------
<S> <C> <C>
Less than 30,000 square feet 307 29%
30,000 to 50,000 581 55
More than 50,000 .......................... 171 16
----- ---
Total stores .............................. 1,059 100%
----- ---
</TABLE>
STORE OWNERSHIP
At year-end 1995, Safeway owned one-third and leased two-thirds of its
stores. In recent years, the Company has preferred ownership because it provides
control and flexibility with respect to financing terms, remodeling, expansions
and closures.
MERCHANDISING
Safeway's merchandising strategy is to provide maximum value to its
customers by maintaining high store standards and offering high quality products
at competitive prices.
The Company has intensified its efforts to elevate store standards and
provide friendly, helpful customer service. Safeway has worked to improve
in-stock conditions, enhance the presentation of perishable merchandise, and
provide faster, more efficient checkout by installing debit/credit card and
check authorization systems. Specialty departments and special services
available in many stores, including video tape rentals, photo processing
counters, in-store automatic teller machines and bank branches, are designed to
provide one-stop shopping for today's busy shopper.
Since 1993, Safeway has introduced a line of over 400 premium private
label products under the banner "Safeway SELECT." These products include soft
drinks, pastas and pasta sauces, salsa, whole bean coffee, cookies, ice cream,
yogurt, pet foods and laundry detergent. The line also includes Safeway SELECT
"Enlighten" items such as no-fat salad dressings and low sodium quick lunches.
In 1995, Safeway introduced the Safeway SELECT "Gourmet Club," a line of frozen
entrees which includes items such as lasagna,
12
<PAGE> 2
gourmet macaroni and cheese, pre-seasoned ground beef patties, and barbecued
spare ribs. Safeway SELECT products are designed to offer value-conscious
consumers premium quality products at prices lower than comparable national
brands. The Company plans to continue introducing more Safeway SELECT items over
the next few years. Safeway also offers a wide selection of private label
products under well-known and respected brand names such as Safeway, Lucerne and
Mrs. Wright's.
Safeway offers high quality perishables in the produce, meat, dairy,
seafood, bakery and delicatessen departments. The Company continually refines
its merchandising strategies to identify and accommodate changing demographics,
lifestyles and product preferences of its customers.
The Company offers competitive prices for today's value-conscious
consumers, and features a line of Valu Pack merchandise which includes more than
100 of the large-size products most frequently purchased at membership club
stores.
Manufacturing and Wholesale Operations
The principal function of manufacturing operations is to purchase,
manufacture and process private label merchandise sold in Safeway stores under
brand names such as Safeway, Lucerne, Mrs. Wright's and Safeway SELECT. As
measured by sales, approximately two-thirds of Safeway SELECT merchandise and
approximately half of other private label merchandise is manufactured in
company-owned plants. The remainder of such private label merchandise is
purchased from third parties.
During 1994, Safeway began a review to identify manufacturing operations
in the U.S. that do not provide acceptable returns. This review resulted in the
closure of six plants and a reorganization of the manufacturing division
administrative office during 1994, and the closure of five plants during 1995.
The ongoing review of all remaining manufacturing operations, including Canadian
facilities, may result in additional plant closures.
Safeway's Canadian subsidiary has a wholesale operation that distributes
both national brands and private label products to independent grocery stores
and institutional customers.
Safeway operated the following manufacturing and processing facilities
at year-end 1995:
<TABLE>
<CAPTION>
U.S. Canada
----------------
<S> <C> <C>
Milk plants 6 3
Bread baking plants 5 2
Ice cream plants 4 3
Cheese packaging plants 1 1
Soft drink bottling plants 4 -
Fruit and vegetable processing plants 2 4
Other food processing plants 3 4
Pet food plant............................................... 1 -
-- --
Total........................................................ 26 17
-- --
</TABLE>
In addition, the Company operates laboratory facilities for quality
assurance and research and development in certain of its plants and at its U.S.
manufacturing headquarters in Walnut Creek, California.
Distribution
Each of Safeway's retail operating areas is served by a regional
distribution center consisting of one or more facilities. Safeway owns 11
distribution/warehousing centers (seven in the United States and four in
Canada), which collectively provide the majority of all products to Safeway
stores. Safeway's northern California distribution center is operated by a third
party. Management regularly reviews distribution operations to ensure that
these operations support their operating areas in a cost-effective manner.
13
<PAGE> 3
Capital Expenditure Program
A key component of the Company's long-term strategy is its capital
expenditure program. The Company's capital expenditure program funds new stores,
remodels, advances in information technology, and other facilities, including
plant and distribution facilities and corporate headquarters. In the last
several years, Safeway management has significantly strengthened its program to
select and approve new capital investments.
The table below reconciles cash paid for property additions reflected in
the Consolidated Statements of Cash Flows to a broader definition of capital
expenditures (dollars in millions):
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Cash paid for
property additions $450.9 $339.9 $245.3
Less: Purchases of
previously leased
properties (9.9) (54.5) (21.4)
Plus: Present value of all
lease obligations
incurred 62.2 55.5 58.8
Mortgage notes
assumed in property
acquisitions.................. - 11.3 7.5
------ ------ ------
Total capital expenditures............ $503.2 $352.2 $290.2
------ ------ ------
Capital expenditures as
a percent of sales 3.1% 2.3% 1.9%
New stores opened 32 20 14
Stores closed or sold* 35 36 39
Remodels 108 71 45
Total retail square footage
(in millions) 40.1 39.5 39.4
</TABLE>
* 1993 includes 15 stores sold to Farm Fresh, Inc.
Improved operations and lower project costs have raised the return on
capital projects, allowing Safeway to increase capital expenditures to $503
million in 1995 from $352 million in 1994 and $290 million in 1993. In 1996,
Safeway expects to spend approximately $550 million for capital expenditures to
open 30 to 35 new stores and complete more than 100 remodels.
Management regularly reviews the performance of individual stores and
other facilities on the basis of a variety of economic factors. Upon the
decision to close a store or other facility, the Company accrues estimated
future losses, if any, which may include lease payments or other costs of
holding the facility, net of estimated future income. As of year-end 1995,
Safeway had an accrued liability of $30.8 million for the anticipated future
closure of 48 stores and $18.6 million for the anticipated future closure of
other facilities.
Performance-Based Compensation
The Company has performance-based compensation plans that cover
approximately 7,000 management employees. Performance-based compensation plans
set overall bonus levels based upon both operating results and working capital
management. Individual bonuses are based on job performance. Certain employees
are covered by capital investment bonus plans which measure the performance of
capital projects based on operating performance over several years.
14
<PAGE> 4
FIVE-YEAR SUMMARY FINANCIAL INFORMATION
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks 53 Weeks 52 Weeks
(Dollars in millions, except per-share amounts) 1995 1994 1993 1992 1991
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Sales................................................. $16,397.5 $15,626.6 $15,214.5 $15,151.9 $15,119.2
--------- --------- --------- --------- ---------
Gross profit 4,453.8 4,250.0 4,083.4 4,106.4 4,059.1
Operating and administrative expense (3,726.4) (3,637.9) (3,641.9) (3,664.8) (3,510.8)
AppleTree charge ..................................... - - - - (115.0)
--------- --------- --------- --------- ---------
Operating profit 727.4 612.1 441.5 441.6 433.3
Interest expense (199.8) (221.7) (265.5) (290.4) (355.4)
Equity in earnings of unconsolidated affiliates 26.9 27.3 33.5 39.1 45.8
Gain on common stock offering by
unconsolidated affiliate - - - - 27.4
Other income, net..................................... 2.0 6.4 6.8 7.1 15.1
--------- --------- --------- --------- ---------
Income before income taxes,
extraordinary loss and cumulative effect
of accounting changes 556.5 424.1 216.3 197.4 166.2
Income taxes.......................................... (228.2) (173.9) (93.0) (99.0) (87.2)
--------- --------- --------- --------- ---------
Income before extraordinary loss and
cumulative effect of accounting changes 328.3 250.2 123.3 98.4 79.0
Extraordinary loss, net of tax benefit of
$1.3, $6.7, $17.1 and $14.9 (2.0) (10.5) - (27.8) (24.1)
Cumulative effect of accounting changes,
net of tax benefit of $12.0........................ - - - (27.1) -
--------- --------- --------- --------- ---------
Net income ........................................... $ 326.3 $ 239.7 $ 123.3 $ 43.5 $ 54.9
--------- --------- --------- --------- ---------
Earnings per common share and common
share equivalent (fully diluted) (Note 1):
Income before extraordinary loss and
cumulative effect of accounting changes $ 1.35 $ 1.01 $ 0.50 $ 0.41 $ 0.34
Extraordinary loss (0.01) (0.04) - (0.12) (0.10)
Cumulative effect of accounting changes ......... - - - (0.11) -
--------- --------- --------- --------- ---------
Net income ...................................... $ 1.34 $ 0.97 $ 0.50 $ 0.18 $ 0.24
--------- --------- --------- --------- ---------
FINANCIAL STATISTICS
Same-store sales (Note 2) 4.6% 4.4% 2.1% (1.6%) (0.3%)
Gross profit margin 27.2% 27.2% 26.8% 27.1% 26.8%
Operating and administrative expense
as a percent of sales 22.73% 23.28% 23.94% 24.19% 23.22%
Operating profit margin 4.4% 3.9% 2.9% 2.9% 2.9%
Capital expenditures $ 503.2 $ 352.2 $ 290.2 $ 553.4 $ 635.0
Depreciation and amortization 329.7 326.4 330.2 320.3 295.9
Total assets 5,194.3 5,022.1 5,074.7 5,225.8 5,170.7
Total debt 2,190.2 2,196.1 2,689.2 3,048.6 3,066.0
Stockholders' equity 795.5 643.8 382.9 243.1 214.4
Weighted average common shares and common
share equivalents (fully diluted)
(in millions) (Note 1) 243.5 247.1 246.9 238.0 230.4
OTHER STATISTICS
Stores opened during the year 32 20 14 35 33
Stores closed or sold during the year 35 36 39 49 37
Total stores at year-end 1,059 1,062 1,078 1,103 1,117
Remodels completed during the year (Note 3) 108 71 45 63 77
Total retail square footage at year-end (in millions) 40.1 39.5 39.4 39.7 38.9
</TABLE>
Note 1. Amounts have been restated to reflect the two-for-one stock split
effected January 30, 1996.
Note 2. Reflects sales increases (decreases) for stores operating the entire
measurement period in both the current and prior periods and does not
include replacement stores.
Note 3. Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
15
<PAGE> 5
FINANCIAL REVIEW
Results of Operations
Safeway's net income was $326.3 million ($1.34 per share) in 1995,
$239.7 million ($0.97 per share) in 1994, and $123.3 million ($0.50 per share)
in 1993. In 1995 and 1994, income before extraordinary items was $328.3 million
($1.35 per share) and $250.2 million ($1.01 per share). A nine-day strike during
the second quarter of 1995 affected 208 stores in northern California and
reduced 1995 earnings per share by an estimated $0.025 per share. In 1993,
severance paid for a voluntary employee buyout in Alberta, Canada reduced net
income by $30.2 million ($0.12 per share). Per-share amounts have been restated
to reflect a two-for-one common stock split which was effected in January 1996.
[BAR CHART]
NET INCOME
(In Millions)
1993 $123.3
1994 239.7
1995 326.3
SALES
Sales were $16.4 billion in 1995, $15.6 billion in 1994, and $15.2
billion in 1993. Annual same-store sales increased 4.6% in 1995 and 4.4% in
1994. Through year-end 1995, Safeway had achieved ten consecutive quarters of
same-store sales increases in excess of 3%. Safeway has reinvested cost savings
into more competitive pricing and improved store standards and customer service,
which Safeway believes has resulted in increased sales. Safeway's efforts to
upgrade store standards and customer service have focused on improving store
appearance, in-stock condition, employee friendliness, and speed of checkout. In
addition, management believes that the successful introduction of the Safeway
SELECT line of premium quality private label products in early 1993 has also
contributed to sales growth.
[PIE CHART]
1995 PORTIONS OF THE SALES DOLLAR
Cost of Goods Sold 72.9%
Operating & Administrative Expense 22.7
Operating profit 4.4
GROSS PROFIT
Gross profit represents the portion of sales revenue remaining after
deducting the costs of inventory sold during the period, including purchase and
distribution costs. Gross profit in 1995 of 27.2% was flat compared to 1994, and
up from 26.8% in 1993. In 1995, Safeway continued to make progress in lowering
its cost of sales, but invested the savings in pricing to maintain its
competitive position. The Company has controlled its cost of sales primarily
through better buying practices, lower advertising expenses, distribution
efficiencies, and manufacturing plant closures and consolidations. The
improvement in 1994 also reflects the price recovery in Alberta following a 1993
price war, the disposal of stores with low gross margins in Richmond, Virginia,
and company-wide improvements to bakery operations.
OPERATING AND ADMINISTRATIVE EXPENSE
Operating and administrative expense as a percentage of sales has
declined each year since 1992 due to both sales increases and cost control.
Efforts to reduce or control costs have included overhead reduction in the
Company's administrative support functions, negotiation of competitive labor
agreements, store level work simplification, consolidation of the Company's
information technology operations, elimination of corporate perquisites, and the
general encouragement of a "culture of thrift" among employees. As a result,
operating and administrative expense fell to 22.73% of sales in 1995, from
23.28% in 1994 and 23.94% in 1993 (23.58% excluding the Alberta buyout).
During 1993, Safeway recorded a charge for the Alberta buyout, reducing
operating profit by $54.9 million and net income by $30.2 million ($0.12 per
share). The new labor contract in Alberta significantly reduced a competitive
wage disparity in that area. Savings from the contract were offset during 1993
by increased costs associated with training new employees. Productivity returned
to normal levels in 1994.
16
<PAGE> 6
The Company is currently considering ways to reduce the high costs
associated with the physical condition and layout of the distribution center in
Landover, Maryland, which serves the Company's stores in the Mid-Atlantic
region. The Company is evaluating the feasibility of replacing the current
distribution center with a new facility or contracting with a third party to
provide distribution services. Management does not expect to be able to
determine the impact of these alternatives on the Company's operations until it
has completed its review. However, management expects that there would be
potentially significant one-time expenses associated with either alternative.
INTEREST EXPENSE
Interest expense fell to $199.8 million in 1995 from $221.7 million in 1994 and
$265.5 million in 1993. In 1995 and 1994, interest expense declined primarily
due to lower average debt outstanding resulting from Safeway's strong cash flow
from operations, and the replacement of high interest rate long-term debt with
short-term floating rate debt.
[BAR CHART]
INTEREST EXPENSE
(In Millions)
1993 $265.5
1994 221.7
1995 199.8
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
Equity in earnings of unconsolidated affiliates, recorded on a
one-quarter delay basis, fell slightly to $26.9 million in 1995, from $27.3
million in 1994 and $33.5 million in 1993. Safeway holds a 35% interest in Vons,
which operates 329 grocery stores located mostly in southern California, and a
49% interest in Casa Ley, which operates 71 food and general merchandise stores
in western Mexico.
Safeway's share of Vons' earnings was $18.3 million in 1995, compared to
$11.6 million in 1994, and $12.9 million in 1993. According to Vons' financial
reports to the Securities and Exchange Commission, same-store sales increased
5.3% and 3.1% for the 16 and 40 weeks ended October 8, 1995. In 1994 and 1993,
Vons reported restructuring charges which decreased Safeway's share of Vons'
earnings by $3.9 million and $11.7 million. According to Vons, these
restructuring charges included anticipated expenses associated with a program to
close underperforming stores and reduce work force.
Income from Safeway's equity investment in Casa Ley fell to $8.6 million
in 1995 from $15.7 million in 1994 and $20.6 million in 1993. 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 have gradually improved.
Worsening of the economic situation in Mexico could have an effect on Casa Ley.
However, any such effect is not expected to be material to the consolidated
operating results of Safeway.
EXTRAORDINARY LOSS
Safeway's net income was reduced by extraordinary losses of $2.0 million
($0.01 per share) in 1995 and $10.5 million ($0.04 per share) in 1994 for the
early retirement of debt. The extraordinary losses represent the payment of
premiums on retired debt and the write-off of deferred finance costs, net of the
related tax benefits.
ACQUISITION OF INTEREST IN WARRANTS TO PURCHASE SAFEWAY STOCK
SSI Equity Associates, L.P., a related party, is a limited partnership
whose sole assets during 1995 consisted of warrants to purchase 27.9 million
shares of Safeway common stock at $1.00 per share. In 1995, the Company acquired
50.7% of the partnership interests in SSI Equity Associates, L.P. for $196.2
million with proceeds from bank borrowings. In calculating earnings per share,
Safeway considers the warrants to be common stock equivalents. Safeway estimated
that, as of year-end 1995, these acquisitions would reduce common stock
equivalents by about 13.6 million shares. The favorable effect on earnings per
share from reducing common stock equivalents is partially offset by interest
expense on the bank borrowings.
In February 1996, SSI Equity Associates, L.P. sold or canceled warrants
to purchase an aggregate of 4.5 million shares of Safeway common stock. As a
result, SSI Equity Associates, L.P. currently holds warrants to purchase 23.4
million shares.
17
<PAGE> 7
Liquidity and Financial Resources
Operating cash flow 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>
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Income before income taxes
and extraordinary loss $ 556.5 $424.1 $216.3
LIFO expense (income) 9.5 2.7 (1.5)
Interest expense 199.8 221.7 265.5
Depreciation and
amortization 329.7 326.4 330.2
Equity in earnings
of unconsolidated
affiliates........................... (26.9) (27.3) (33.5)
-------- ------ ------
Operating cash flow..................... $1,068.6 $947.6 $777.0
-------- ------ ------
As a percent of sales .................. 6.52% 6.06% 5.11%
-------- ------ ------
As a multiple of
interest expense .................... 5.35x 4.27x 2.93x
-------- ------ ------
</TABLE>
In May 1995, Safeway entered into a new unsecured bank credit agreement
(the "Credit Agreement") that is less restrictive than the Company's previous
bank agreements, 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.
Management expects operating cash flow, supplemented by credit available
under the Credit Agreement, to be Safeway's primary sources of long-term
liquidity. Management believes that these sources will be adequate to meet the
Company's requirements. At year-end 1995, the Company had total unused borrowing
capacity under the Credit Agreement of $675.2 million.
During 1995, Safeway retired $53.5 million of mortgage debt. During
1994, Safeway retired $44.2 million of senior debt and $247.9 million of senior
subordinated debt primarily using proceeds from floating rate bank borrowings.
Depending on market conditions, Safeway may continue to purchase and retire
long-term debt.
Annual debt maturities over the next five years are set forth in Note B
of the Company's 1995 consolidated financial statements.
As of year-end 1995, the Company had effectively converted $120.6
million of its $584.8 million of floating rate debt to fixed interest rate debt
through the use of interest rate swap agreements. The significant terms of such
agreements outstanding at year-end 1995 are described in Note D to the Company's
1995 consolidated financial statements.
Interest rate swap agreements increased interest expense by $0.3 million
in 1995, $4.4 million in 1994, and $8.3 million in 1993.
Total debt of $2.19 billion at year-end 1995 remained essentially flat
compared to year-end 1994, despite increased capital expenditures and the
acquisition of limited partnership interests in SSI Equity Associates, L.P. for
$196.2 million.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In millions, except per-share amounts) 1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Sales $ 16,397.5 $ 15,626.6 $ 15,214.5
Cost of goods sold........................................................ (11,943.7) (11,376.6) (11,131.1)
---------- ---------- ----------
Gross profit 4,453.8 4,250.0 4,083.4
Operating and administrative expense...................................... (3,726.4) (3,637.9) (3,641.9)
---------- ---------- ----------
Operating profit 727.4 612.1 441.5
Interest expense (199.8) (221.7) (265.5)
Equity in earnings of unconsolidated affiliates 26.9 27.3 33.5
Other income, net......................................................... 2.0 6.4 6.8
---------- ---------- ----------
Income before income taxes and extraordinary loss 556.5 424.1 216.3
Income taxes.............................................................. (228.2) (173.9) (93.0)
---------- ---------- ----------
Income before extraordinary loss 328.3 250.2 123.3
Extraordinary loss related to early retirement of debt, net of
income tax benefit of $1.3 and $6.7.................................... (2.0) (10.5) -
---------- ---------- ----------
Net income........................................................... $ 326.3 $ 239.7 $ 123.3
---------- ---------- ----------
Earnings per common share and common share equivalent:
Primary
Income before extraordinary loss $ 1.36 $ 1.02 $ 0.51
Extraordinary loss................................................... (0.01) (0.04) -
---------- ---------- ----------
Net income......................................................... $ 1.35 $ 0.98 $ 0.51
---------- ---------- ----------
Fully diluted
Income before extraordinary loss $ 1.35 $ 1.01 $ 0.50
Extraordinary loss................................................... (0.01) (0.04) -
---------- ---------- ----------
Net income......................................................... $ 1.34 $ 0.97 $ 0.50
---------- ---------- ----------
Weighted average common shares and common share equivalents:
Primary 240.6 244.1 242.1
Fully diluted 243.5 247.1 246.9
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year-end Year-end
(In millions, except per-share amounts) 1995 1994
---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 74.8 $ 60.7
Receivables 152.7 147.9
Merchandise inventories, net of LIFO
reserve of $74.3 and $64.8 1,191.8 1,136.0
Prepaid expenses and other current assets...................... 95.5 93.0
-------- --------
Total current assets........................................... 1,514.8 1,437.6
-------- --------
Property:
Land 419.4 408.9
Buildings 1,213.2 1,095.0
Leasehold improvements 858.5 814.5
Fixtures and equipment 1,912.7 1,765.2
Property under capital leases.................................. 283.4 291.7
-------- --------
4,687.2 4,375.3
Less accumulated depreciation and amortization................. 2,094.3 1,868.9
-------- --------
Total property, net 2,592.9 2,506.4
Goodwill, net of accumulated amortization of $106.3 and $95.0 323.8 331.1
Prepaid pension costs 322.4 319.6
Investments in unconsolidated affiliates 336.0 329.3
Other assets...................................................... 104.4 98.1
-------- --------
Total assets...................................................... $5,194.3 $5,022.1
======== ========
</TABLE>
20
<PAGE> 10
<TABLE>
<CAPTION>
Year-end Year-end
1995 1994
---------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures $ 221.4 $ 152.5
Current obligations under capital leases 19.0 19.3
Accounts payable 1,040.0 1,012.1
Accrued salaries and wages 234.6 223.6
Other accrued liabilities................................. 424.0 416.1
-------- --------
Total current liabilities................................. 1,939.0 1,823.6
-------- --------
Long-term debt:
Notes and debentures 1,783.6 1,849.5
Obligations under capital leases.......................... 166.2 174.8
-------- --------
Total long-term debt 1,949.8 2,024.3
Deferred income taxes 108.5 128.3
Accrued claims and other liabilities......................... 401.5 402.1
-------- --------
Total liabilities............................................ 4,398.8 4,378.3
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
300 shares authorized; 213.7 and 209.6 shares
outstanding 2.1 2.1
Additional paid-in capital 684.9 654.5
Unexercised warrants purchased (196.2) -
Cumulative translation adjustments 20.3 29.1
Retained earnings (accumulated deficit)................... 284.4 (41.9)
-------- --------
Total stockholders' equity................................ 795.5 643.8
-------- --------
Total liabilities and stockholders' equity................... $5,194.3 $5,022.1
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
---------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 326.3 $ 239.7 $ 123.3
Reconciliation to net cash flow from operations:
Extraordinary loss related to early retirement of debt,
before income tax benefit 3.3 17.2 -
Depreciation and amortization 329.7 326.4 330.2
Amortization of deferred finance costs 4.0 3.0 3.8
Deferred income taxes (15.8) (12.9) (35.8)
LIFO expense (income) 9.5 2.7 (1.5)
Equity in earnings of unconsolidated affiliates (26.9) (27.3) (33.5)
Net pension (income) expense 7.6 (1.4) 0.4
Contributions to Canadian pension plan (10.3) (11.5) (1.2)
Increase (decrease) in accrued claims and other liabilities 19.0 (5.7) 29.3
Loss (gain) on property retirements 20.4 56.3 (2.9)
Changes in working capital items:
Receivables (3.8) (24.5) 15.4
Inventories at FIFO cost (55.4) (31.8) 61.6
Prepaid expenses and other current assets (2.9) 3.6 (9.4)
Payables and accruals......................................... 53.0 219.5 119.7
------- ------- -------
Net cash flow from operations............................... 657.7 753.3 599.4
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (450.9) (339.9) (245.3)
Proceeds from sale of property and operations 54.8 36.3 66.7
Other.............................................................. (29.6) (28.0) (49.3)
------- ------- -------
Net cash flow used by investing activities...................... (425.7) (331.6) (227.9)
------- ------- -------
</TABLE>
22
<PAGE> 12
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings $ 183.7 $ 157.9 $ 60.0
Payments on short-term borrowings (131.5) (108.0) (44.9)
Additions to long-term borrowings 708.1 455.7 352.1
Payments on long-term borrowings (787.6) (986.2) (732.7)
Net proceeds from exercise of warrants and stock options 12.8 14.6 10.4
Premiums paid on early retirement of debt (3.3) (13.2) -
Purchase of unexercised warrants (196.2) - -
Other............................................................ (4.4) 0.7 1.2
------- ------- -------
Net cash flow used by financing activities.................... (218.4) (478.5) (353.9)
------- ------- -------
Effect of changes in exchange rates on cash...................... 0.5 (0.9) 4.2
------- ------- -------
Increase (decrease) in cash and equivalents 14.1 (57.7) 21.8
CASH AND EQUIVALENTS
Beginning of year................................................ 60.7 118.4 96.6
------- ------- -------
End of year...................................................... $ 74.8 $ 60.7 $ 118.4
------- ------- -------
OTHER CASH FLOW INFORMATION
Cash payments during the year for:
Interest $ 203.0 $ 230.1 $ 270.2
Income taxes, net of refunds 213.0 126.0 100.6
NONCASH INVESTING AND FINANCING ACTIVITIES
Tax benefit from stock options exercised 16.6 15.6 9.6
Mortgage notes assumed in property
acquisitions - 11.3 7.5
Capital lease obligations entered into 13.7 4.5 20.3
Capital lease assets retired,
net of accumulated amortization 5.4 2.5 3.1
Capital lease obligations retired 4.3 0.8 2.5
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
Retained
Additional Unexercised Cumulative Earnings Total
Common Stock Paid-in Warrants Translation (Accumulated Stockholders'
(In millions) Shares Amount Capital Purchased Adjustments Deficit) Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, year-end 1992 197.7 $2.0 $603.5 $42.5 $(404.9) $ 243.1
Options and warrants exercised 5.3 - 19.3 - - 19.3
Cash received on subscriptions
receivable - - 0.7 - - 0.7
Net income - - - - 123.3 123.3
Translation adjustments ........... - - - (3.5) - (3.5)
----- ---- ------ ------- ----- ------- -------
Balance, year-end 1993 203.0 2.0 623.5 39.0 (281.6) 382.9
Options and warrants exercised 6.6 0.1 30.1 - - 30.2
Stock bonuses - - 0.9 - - 0.9
Net income - - - - 239.7 239.7
Translation adjustments ........... - - - (9.9) - (9.9)
----- ---- ------ ------- ----- ------- -------
Balance, year-end 1994 209.6 2.1 654.5 29.1 (41.9) 643.8
Options and warrants exercised 4.0 - 29.4 - - 29.4
Stock bonuses 0.1 - 1.0 - - 1.0
Purchase of unexercised warrants - - - $(196.2) - - (196.2)
Net income - - - - - 326.3 326.3
Translation adjustments ........... - - - - (8.8) - (8.8)
----- ---- ------ ------- ----- ------- -------
Balance, year-end 1995 ............ 213.7 $2.1 $684.9 $(196.2) $20.3 $ 284.4 $ 795.5
----- ---- ------ ------- ----- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: The Company and Significant Accounting Policies
THE COMPANY
Safeway Inc. ("Safeway" or the "Company") is one of the world's largest
food retailers, operating 1,059 stores in the United States and Canada. U.S.
retail operations are located principally in northern California, Oregon,
Washington and the Rocky Mountain, Southwest, and Mid-Atlantic regions. Canadian
retail operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, Safeway has an
extensive network of distribution, manufacturing and food processing facilities.
In addition to stores operated under the Safeway name, the Company has
ownership interests in two other retailers. Safeway holds a 35% interest in The
Vons Companies, Inc. ("Vons") which operates 329 grocery stores located mostly
in southern California, and a 49% interest in a privately-held company, Casa
Ley, S.A. de C.V. ("Casa Ley") which operates 71 food and general merchandise
stores in western Mexico.
STOCK SPLIT
On January 3, 1996, Safeway's Board of Directors authorized a
two-for-one split of the Company's common stock. The stock split was effected by
a distribution on January 30, 1996, of one additional share for each share owned
by stockholders of record on January 16, 1996. Share and per-share amounts
presented in the consolidated financial statements and related notes have been
restated to reflect the stock split.
BASIS OF CONSOLIDATION
The consolidated financial statements include Safeway Inc., a Delaware
corporation, and all majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
affiliates which are not majority owned are reported using the equity method.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest December 31. The
last three fiscal years consist of the 52-week periods ended December 30, 1995,
December 31, 1994, and January 1, 1994.
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 those estimates.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of the Company's Canadian subsidiaries and
Mexican unconsolidated affiliate are translated into U.S. dollars at year-end
rates of exchange, and income and expenses are translated at average rates
during the year. Adjustments resulting from translating financial statements
into U.S. dollars are reported as cumulative translation adjustments and are
shown net of applicable income taxes as a separate component of stockholders'
equity.
MERCHANDISE INVENTORIES
At year-end 1995 and 1994, merchandise inventory of $693 million and
$660 million is valued at the lower of cost on a last-in, first-out ("LIFO")
basis or market value. Such LIFO inventory had a replacement or current cost of
$767 million and $724 million at year-end 1995 and 1994. The remaining inventory
is valued at the lower of cost on a first-in, first-out ("FIFO") basis or market
value. FIFO cost of inventory approximates replacement or current cost.
Inventory on a FIFO basis includes meat and produce in the United States,
inventory of U.S. manufacturing operations, and all inventories of the Canadian
subsidiaries.
Application of the LIFO method resulted in increases in cost of goods
sold of $9.5 million in 1995 and $2.7 million in 1994, compared to a decrease of
$1.5 million in 1993. Liquidations of LIFO layers during the three years
reported did not have a significant effect on the results of operations.
25
<PAGE> 15
PROPERTY AND DEPRECIATION
Property is stated at cost. Depreciation expense on buildings and
equipment is computed on the straight-line method using the following lives:
<TABLE>
<S> <C>
Stores and other buildings 10 - 30 years
Fixtures and equipment 3 - 15 years
</TABLE>
Property under capital leases is amortized on a straight-line basis over
the remaining terms of the leases. Leasehold improvements include buildings
constructed on leased land and improvements to leased buildings. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
remaining terms of the lease or the estimated useful lives of the assets.
GOODWILL
Goodwill is amortized on a straight-line basis over 40 years. Goodwill
amortization was $10.4 million in both 1995 and 1994, and $10.6 million in 1993.
CLOSED FACILITY EXPENSE
Upon the decision to close a store or other facility, the Company
accrues estimated future losses, if any, which may include lease payments or
other costs of holding the facility, net of estimated future income.
SELF-INSURANCE
The Company is primarily self-insured for workers' compensation,
automobile, and general liability costs. The self-insurance liability is
determined actuarially, based on claims filed and an estimate of claims incurred
but not yet reported. The present value of such claims was accrued using
discount rates of 5.5% in 1995 and 6.5% in 1994. The current portion of the
self-insurance liability ($70.6 million and $77.1 million at year-end 1995 and
1994) is included in other accrued liabilities in the consolidated balance
sheets. The noncurrent portion of $188.7 million and $185.6 million at year-end
1995 and 1994 is included in accrued claims and other liabilities. Claims
payments were $71.4 million in 1995, $75.3 million in 1994 and $83.0 million in
1993. The total undiscounted liability was $297 million and $304 million at
year-end 1995 and 1994.
INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the
change in the deferred tax liability during the year in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred income taxes represent tax credit carryforwards and
future net tax effects resulting from temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Earnings per common share and common share equivalent is calculated by
dividing net income by the weighted average number of common shares outstanding
during the period plus the dilutive effect of stock options and warrants, as
determined by the treasury stock method.
STATEMENT OF CASH FLOWS
Short-term investments with original maturities of less than three
months are considered to be cash equivalents. Borrowings with original
maturities of less than three months are presented net of related repayments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note D, the Company has entered into interest rate swap
agreements to limit the exposure of its floating interest rate debt to changes
in market interest rates. These agreements involve the exchange with a
counterparty of fixed and floating rate interest payments periodically over the
life of the agreements without exchange of the underlying notional principal
amounts. The differential to be paid or received is recognized over the life of
the agreements as an adjustment to interest expense. The Company's
counterparties are major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require the disclosure of the
fair value of certain financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate fair value. Safeway
estimated the fair values presented below using appropriate valuation
methodologies and market information available as of year-end. Considerable
judgment is required to develop estimates of fair value, and the estimates
presented are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions or
estimation methodologies could have a material effect on the estimated fair
values. Additionally, these fair values were estimated at year-end, and current
estimates of fair value may differ significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable and short-term
debt: The carrying amount of these items approximates fair
value.
26
<PAGE> 16
Long-term debt: Market values quoted on the New York Stock
Exchange are used to estimate the fair value of publicly traded debt. To
estimate the fair value of debt issues that are not quoted on an exchange,
the Company uses those interest rates that are currently available to it for
issuance of debt with similar terms and remaining maturities. At year-end
1995, the estimated fair value of debt was $2.1 billion compared to a
carrying value of $2.0 billion.
Interest rate swap agreements: The fair value of interest rate
swap agreements is the amount at which they could be settled based on
estimates obtained from dealers. At year-end 1995, net unrealized losses on
interest rate swap agreements were $2.4 million. Since the Company intends to
hold these agreements as hedges for the term of the agreements, the market
risk associated with changes in interest rates should not be significant.
NEW ACCOUNTING STANDARDS
In 1996, Safeway will be subject to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 establishes recognition and measurement criteria
for impairment losses when the Company no longer expects to recover the carrying
value of a long-lived asset. The effect of adopting SFAS No. 121, while not yet
determined, is not expected to be material.
In 1995, the Financial Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires adoption of its disclosure
provisions in 1996. The new standard defines a fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.
The new standard encourages, but does not require, adoption of the fair
value method of accounting for employee stock-based transactions. SFAS No. 123
permits companies to continue to account for such transactions under Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," but requires a disclosure of pro forma net income and earnings per
share as if a company had applied the new method of accounting. Safeway has
elected to continue to account for stock-based compensation under APBO No. 25
and will adopt the disclosure requirements of SFAS No. 123 in 1996.
NOTE B: Financing
Notes and debentures were composed of the following at year-end (in
millions):
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Credit Agreement, unsecured $ 395.0
Bank Credit Agreement, secured - $ 135.0
Working Capital Credit
Agreement, secured - 196.8
9.30% Senior Secured
Debentures due 2007 70.7 70.7
Mortgage notes payable, secured 389.3 478.0
10% Senior Notes due
2002, unsecured 59.1 59.1
Medium-term notes, unsecured 80.0 86.0
Other notes payable, unsecured 122.7 136.4
Short-term bank borrowings,
unsecured 136.1 87.9
9.35% Senior Subordinated
Notes due 1999, unsecured 172.5 172.5
10% Senior Subordinated
Notes due 2001, unsecured 241.4 241.4
9.65% Senior Subordinated
Debentures due 2004, unsecured 228.2 228.2
9.875% Senior Subordinated
Debentures due 2007, unsecured.................. 110.0 110.0
-------- --------
2,005.0 2,002.0
Less current maturities............................ 221.4 152.5
-------- --------
Long-term portion.................................. $1,783.6 $1,849.5
-------- --------
</TABLE>
CREDIT AGREEMENT
In May 1995, Safeway entered into a new unsecured bank credit agreement
(the "Credit Agreement"). 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. At year-end 1995, the Company
had total unused borrowing capacity under the Credit Agreement of $675.2
million.
U.S. borrowings under the Credit Agreement carry interest at one of the
following rates selected by the Company: (i) the prime rate; (ii) a rate based
on rates 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
27
<PAGE> 17
interest at one of the following rates selected by the Company: (x) the Canadian
base rate; or (y) the Canadian Eurodollar rate plus the Pricing Margin. Canadian
borrowings denominated in Canadian dollars carry interest at one of the
following rates selected by the Company: (i) the Canadian prime rate or (ii) the
rate for Canadian bankers acceptances plus the Pricing Margin.
The weighted average interest rate on borrowings under the Credit
Agreement was 6.7% during 1995. At year-end 1995, the weighted average interest
rate on borrowings under the Credit Agreement was 6.1%.
SENIOR SECURED INDEBTEDNESS
The 9.30% Senior Secured Debentures due 2007 are secured by a Deed of
Trust which created a lien on the land, buildings, and equipment owned by
Safeway at its distribution center in Tracy, California.
MORTGAGE NOTES PAYABLE
Mortgage notes payable at year-end 1995 have remaining terms ranging
from one to 14 years, have a weighted average interest rate of 9.6% and are
secured by properties with a net book value of approximately $500 million.
SENIOR UNSECURED INDEBTEDNESS
In 1992, the Company filed with the Securities and Exchange Commission a
shelf registration statement relating to public offerings of up to $240 million
of debt securities. The Company has issued $160 million of debt securities under
the shelf registration. In 1992, the Company issued $6 million of floating rate
notes due in 1995 and $74 million of 10% Senior Notes due 2002. In 1993, the
Company issued $80 million of medium-term notes. The Company used the proceeds
from these notes to finance capital expenditures.
OTHER NOTES PAYABLE
Other notes payable at year-end 1995 have remaining terms ranging from
one to 16 years and a weighted average interest rate of 7.6%.
SENIOR SUBORDINATED INDEBTEDNESS
The 9.35% Senior Subordinated Notes due 1999, 10% Senior Subordinated
Notes due 2001, 9.65% Senior Subordinated Debentures due 2004, and 9.875% Senior
Subordinated Debentures due 2007 (collectively the "Subordinated Securities")
are subordinated in right of payment to, among other things, the Company's
borrowings under the Credit Agreement, the 9.30% Senior Secured Debentures, the
senior unsecured indebtedness, and mortgage notes payable.
REDEMPTIONS
During 1995, Safeway retired $53.5 million of mortgage debt with
proceeds from floating rate bank borrowings. During 1994, Safeway retired $44.2
million of senior debt and $247.9 million of Subordinated Securities primarily
with proceeds from floating rate bank borrowings. These redemptions resulted in
extraordinary losses of $2.0 million ($0.01 per share) in 1995 and $10.5 million
($0.04 per share) in 1994. The extraordinary losses represent the payment of
redemption premiums and the write-off of deferred finance costs, net of the
related tax benefits. Depending on market conditions, Safeway may continue to
purchase and retire long-term debt.
RESTRICTIVE COVENANTS
The Credit Agreement and the indentures related to Safeway's 9.30%
Senior Secured Debentures due 2007 and the Subordinated Securities (the
"Indentures") contain certain restrictions on payments by the Company for, among
other things: (i) paying cash dividends on its capital stock; (ii) repurchasing
shares of its capital stock or certain indebtedness; and (iii) acquiring any
outstanding warrants, options or other rights to acquire shares of any class of
stock of Safeway. At year-end 1995, the limitation on such restricted payments
was $436 million, which will increase by 50% of Safeway's future consolidated
net income. Other provisions of the Credit Agreement, Indentures, and the
indentures related to the senior unsecured indebtedness limit Safeway with
respect to, among other things, (x) incurring additional indebtedness; (y)
creating liens upon its assets; and (z) disposing of material amounts of assets
other than in the ordinary course of business.
Other provisions of the Credit Agreement limit certain acts of the
Company and require the Company to meet certain financial tests.
ANNUAL DEBT MATURITIES
As of year-end 1995, annual debt maturities were as follows (in
millions):
<TABLE>
<S> <C>
1996 $ 221.4
1997 157.4
1998 61.0
1999 210.9
2000 425.3
Thereafter........................................................... 929.0
--------
$2,005.0
========
</TABLE>
28
<PAGE> 18
LETTERS OF CREDIT
The Company had letters of credit of $233.1 million outstanding at
year-end 1995 of which $79.8 million were issued under the Credit Agreement. The
letters of credit are maintained primarily to back the Company's self-insurance
program and to support performance, payment, deposit, or surety obligations of
the Company. The Company pays commitment fees ranging from 0.50% to 0.75% on the
outstanding portion of the letters of credit.
NOTE C: Lease Obligations
A majority of the premises that the Company occupies are leased. The
Company had approximately 1,050 leases at year-end 1995, including approximately
190 which are capitalized for financial reporting purposes. Most leases have
renewal options, some with terms and conditions similar to the original lease,
others with reduced rental rates during the option periods. Certain of these
leases contain options to purchase the property at amounts that approximate fair
market value.
As of year-end 1995, future minimum rental payments applicable to
non-cancelable capital and operating leases with remaining terms in excess of
one year were as follows (in millions):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------------------
<S> <C> <C>
1996 $ 40.5 $ 137.6
1997 37.0 135.6
1998 33.9 132.3
1999 30.4 127.4
2000 26.1 120.4
Thereafter.......................................... 198.3 950.6
------- --------
Total minimum lease payments........................ 366.2 $1,603.9
========
Less amounts representing
interest......................................... (181.0)
--------
Present value of net minimum
lease payments 185.2
Less current obligations............................ (19.0)
-------
Long-term obligations............................... $ 166.2
=======
</TABLE>
Future minimum lease payments under non-cancelable capital and operating
lease agreements have not been reduced by minimum sublease rental income of
$149.7 million.
Amortization expense for property under capital leases was $18.9 million
in 1995, $20.6 million in 1994 and $22.3 million in 1993. Accumulated
amortization of property under capital leases was $151.6 million and $150.1
million at year-end 1995 and 1994.
The following schedule shows the composition of total rental expense for
all operating leases (in millions). In general, contingent rentals are based on
individual store sales.
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Property leases:
Minimum rentals $132.7 $126.4 $129.6
Contingent rentals 9.1 9.8 10.3
Less rentals from
subleases........................ (11.1) (13.7) (15.1)
------ ------ ------
130.7 122.5 124.8
Equipment leases...................... 20.8 20.9 24.0
------ ------ ------
$151.5 $143.4 $148.8
====== ====== ======
</TABLE>
NOTE D: Interest Expense
Interest expense consisted of the following (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Credit Agreement $ 13.5
Bank Credit Agreement and
Working Capital Credit
Agreement 11.7 $ 20.5 $ 31.9
9.30% Senior Secured
Debentures 6.6 8.0 9.3
Mortgage notes payable 43.3 50.2 58.6
10% Senior Notes 5.9 6.5 7.4
Medium-term notes 7.1 7.5 4.0
Other notes payable 11.3 16.5 24.4
Short-term bank borrowings 6.6 3.0 0.9
9.35% Senior Subordinated
Notes 16.1 19.6 23.4
10% Senior Subordinated
Notes 24.1 26.6 30.0
9.65% Senior Subordinated
Debentures 22.0 24.5 29.0
9.875% Senior Subordinated
Debentures 10.9 12.1 14.8
Obligations under capital
leases 21.0 22.2 23.9
Amortization of deferred
finance costs 4.0 3.0 3.8
Interest rate swap
agreements 0.3 4.4 8.3
Capitalized interest................... (4.6) (2.9) (4.2)
------ ------ ------
$199.8 $221.7 $265.5
====== ====== ======
</TABLE>
29
<PAGE> 19
As of year-end 1995, the Company had effectively converted $120.6
million of its $584.8 million of floating rate debt to fixed interest rate debt
through the use of interest rate swap agreements. The significant terms of such
agreements outstanding at year-end 1995 were as follows (dollars in millions):
<TABLE>
<CAPTION>
U.S. Fixed Canada Fixed Variable
Interest Interest Interest
Notional Rates Rates Rates to be Origination Expiration
Principal Paid Paid Received Date Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10.0 5.8% 5.8% 1992 1997
36.9 8.7% 5.9 1991 1996
36.9 8.7 5.8 1992 1997
36.8 6.0 5.7 1993 1998
- ------
$120.6
======
</TABLE>
The variable interest rate received on the U.S. swap is based on LIBOR
rates. Variable interest rates received on Canadian swaps are based on the
average of bankers acceptance rates quoted by Canadian banks.
The notional principal amounts do not represent cash flows and therefore
are not subject to credit risk. The Company is subject to risk from
nonperformance of the counterparties to the agreements in the amount of any
interest differential to be received. Because the Company monitors the credit
ratings of its counterparties, which are limited to major financial
institutions, Safeway does not anticipate nonperformance by the counterparties.
At year-end 1995, net unrealized losses on the interest rate swap
agreements were $2.4 million. Since the Company intends to hold these agreements
as hedges for the term of the agreements, the market risk associated with
changes in interest rates should not be significant.
NOTE E: Capital Stock
SHARES AUTHORIZED AND ISSUED
Authorized preferred stock consists of 10 million shares of which none
was outstanding during 1995, 1994 or 1993. Authorized common stock consists of
300 million shares at $0.01 par value. Common stock outstanding at year-end 1995
and 1994 was 213.7 million and 209.6 million shares. Safeway's stockholders will
vote at the 1996 Annual Meeting of Stockholders on a proposal to increase the
authorized shares of preferred stock to 25 million shares and the authorized
shares of common stock to 750 million shares.
Common stock issued to certain Company officers is restricted as to
transferability. Generally, this restriction gives the Company the option to
purchase, at market price, any such stock offered for sale.
OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK
Under Safeway's stock option plans, the Company may grant incentive and
non-qualified options to purchase up to 49.0 million shares of common stock at
an exercise price equal to or greater than the fair market value at the date of
grant, as determined by the Compensation and Stock Option Committee of the Board
of Directors. Options generally vest over seven years. Vested options are
exercisable in part or in full at any time prior to the expiration date of 10 to
15 years from the date of the grant. The stock option plans prohibit the
transfer of options.
Activity in the stock option plans for the three-year period ended
December 30, 1995 was as follows:
<TABLE>
<CAPTION>
Options Option Price
----------------------------------------
<S> <C> <C>
Outstanding, year-end 1992 28,109,522 $ 1 to $ 9 9/16
1993 Activity:
Granted 3,158,050 5 3/4 to 10 1/2
Canceled (1,100,572) 5 to 9 9/16
Exercised.................... (3,079,760) 1 to 9 1/4
----------
Outstanding, year-end 1993 27,087,240 1 to 10 1/2
1994 Activity:
Granted 3,709,250 10 1/4 to 15 1/4
Canceled (1,154,168) 5 to 12 7/8
Exercised.................... (4,329,298) 1 to 9 9/16
----------
Outstanding, year-end 1994 25,313,024 1 to 15 1/4
1995 Activity:
Granted 1,018,180 15 13/16 to 20 3/16
Canceled (779,324) 5 to 20 3/16
Exercised.................... (3,386,558) 1 to 13 13/16
----------
Outstanding, year-end 1995........ 22,165,322 1 to 20 3/16
----------
Exercisable, year-end 1994........ 12,886,098 1 to 10 1/2
----------
Exercisable, year-end 1995........ 12,022,760 1 to 15 1/4
----------
</TABLE>
Of the options exercisable at year-end 1995, options to purchase 4.9
million shares were exercisable at $1.00 per share. Options to purchase 13.7
million shares were available for grant at year-end 1995.
At year-end 1995, there were outstanding 3.1 million warrants to
purchase 1.7 million shares of common stock. Each warrant represents the right
to purchase 0.558 shares of the Company's common stock for approximately $1.052
per warrant. In order to purchase a whole share of common stock, a holder must
exercise 1.792 warrants and pay an aggregate exercise price of $1.8846. The
warrants expire on November 24, 1996.
30
<PAGE> 20
At year-end 1995, warrants (the "SSI Warrants") to purchase 27.9 million
shares of the Company's common stock at $1.00 per share were held by SSI Equity
Associates, L.P., a limited partnership whose sole assets consist of the SSI
Warrants. The SSI Warrants are exercisable through November 15, 2001. SSI
Partners, L.P., an affiliate of Kohlberg Kravis Roberts & Co. ("KKR"), is the
general partner of SSI Equity Associates, L.P. During 1995, the Company acquired
50.7% of the partnership interests in SSI Equity Associates, L.P. for $196.2
million with proceeds from bank borrowings, which was accounted for as a
reduction to stockholders' equity.
PUBLIC STOCK OFFERING
In February 1996, the Company completed the public offering of 23.2
million shares of common stock primarily owned by affiliates of KKR. Included in
the 23.2 million shares sold were 2.2 million shares issued upon the exercise of
SSI Warrants and 0.2 million shares issued upon the exercise of employee stock
options. Also in connection with the sale, SSI Warrants to purchase 2.3 million
shares attributable to the limited partnership interests owned by Safeway were
canceled. The Company received proceeds of $2.4 million for the exercise price
of the options and warrants. Affiliates of KKR received the balance of proceeds
from the stock offering. After the offering, two limited partnerships formed by
KKR own 109.2 million shares of Safeway common stock, and SSI Equity Associates,
L.P. holds SSI Warrants to purchase 23.4 million shares of Safeway common stock.
Outstanding common stock and the effect of options and warrants at
year-end 1995, adjusted for i) the Company's interests in SSI Equity Associates,
L.P., and ii) the effect of the February 1996 public stock offering, are
summarized as follows (in millions):
<TABLE>
<CAPTION>
Potential Proceeds
Shares from Exercise
-------------------------------
<S> <C> <C>
Common stock outstanding 216.1
Options to purchase common stock 21.9 $154.0
Warrants 1.7 3.2
SSI Warrants.................................. 11.5 11.5
----- ------
251.2 $168.7
===== ======
</TABLE>
NOTE F: Taxes on Income
The components of income tax expense were as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Current:
Federal $157.9 $112.6 $ 80.2
State 29.9 23.1 10.7
Foreign........................... 56.2 51.4 37.9
------ ------ ------
244.0 187.1 128.8
------ ------ ------
Deferred: -
Federal 8.2 (0.6) 20.3
State (0.8) 1.9 6.2
Foreign........................... (23.2) (14.5) (62.3)
------ ------ ------
(15.8) (13.2) (35.8)
------ ------ ------
$228.2 $173.9 $ 93.0
====== ====== ======
</TABLE>
Extraordinary losses are presented net of related tax benefits.
Therefore, 1995 and 1994 income tax expense excludes tax benefits of $1.3
million and $6.7 million on extraordinary losses. In 1995, 1994 and 1993, tax
benefits from the exercise of employee stock options of $16.6 million, $15.6
million and $9.6 million were credited directly to paid-in capital and,
therefore, are excluded from income tax expense.
The reconciliation of the provision for income taxes at the U.S. federal
statutory income tax rate to the Company's income taxes is as follows (dollars
in millions):
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Income tax expense using
federal statutory rate $194.8 $148.4 $75.7
State taxes on income less
federal benefit 18.9 16.3 11.0
Taxes provided on equity in
earnings of unconsolidated
affiliates at rates below the
statutory rate (5.3) (6.9) (8.3)
Taxes on foreign earnings not
permanently reinvested 6.2 6.6 8.3
Withholding tax on Canadian
earnings not permanently
reinvested (5.8) 4.4 (2.1)
Nondeductible amortization 3.4 3.3 3.9
Difference between
statutory rate and foreign
effective rate 1.0 2.2 (9.7)
Deferred tax adjustment
due to 1993 federal rate
increase - - 3.4
Other accruals 14.2 - 9.2
Other........................................ 0.8 (0.4) 1.6
------ ------ -----
$228.2 $173.9 $93.0
====== ====== =====
</TABLE>
31
<PAGE> 21
Significant components of the Company's net deferred tax liability at
year-end were as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Deferred tax assets:
Workers' compensation
and other claims $ 102.9 $ 104.9
Reserves not currently
deductible 59.5 65.2
Accrued claims and
other liabilities 48.3 40.4
Employee benefits 34.0 35.3
Canadian operating loss
carryforward 54.7 51.5
Other assets................................... 14.5 3.2
------- -------
313.9 300.5
------- -------
Deferred tax liabilities:
Property (124.3) (138.0)
Prepaid pension costs (142.7) (139.2)
LIFO inventory reserves (53.7) (51.2)
Investments in
unconsolidated affiliates (40.0) (34.6)
Cumulative translation
adjustments (24.6) (20.3)
Other liabilities.............................. (37.1) (45.5)
------- -------
(422.4) (428.8)
------- -------
Net deferred tax liability........................ $(108.5) $(128.3)
======= =======
</TABLE>
NOTE G: Employee Benefit Plans and Collective Bargaining Agreements
U.S. AND CANADIAN RETIREMENT PLANS
The Company maintains defined benefit, non-contributory pension plans
(the "Plans") for substantially all of its U.S. and Canadian employees not
participating in multi-employer pension plans. Benefits are generally based upon
years of service, age at retirement date and compensation during the last years
of employment. The Company's funding policy is to contribute annually the amount
necessary to satisfy the statutory funding standards. Through year-end 1995, the
assets of the U.S. Plan have exceeded its actuarially determined liabilities by
such amounts that the U.S. Plan was considered fully funded for purposes of
contribution requirements. Accordingly, no Company contributions were made to
the U.S. Plan during the last three years. In 1995, 1994 and 1993, the Company
contributed $10.3 million, $11.5 million and $1.2 million to the Canadian Plan.
Assets of the Plans are primarily composed of equity and interest-bearing
securities.
Actuarial assumptions used to determine year-end Plan status were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Weighted average assumed
discount rate used to
determine the projected
benefit obligation:
U.S. Plan 7.0% 8.0% 7.0%
Canadian Plan 8.0 8.0 7.5
Combined weighted
average rate 7.2 8.0 7.1
Long-term rate of return on
plan assets:
U. S Plan 9.0 9.0 9.0
Canadian Plan 8.0 8.0 9.0
Assumed rate of compensation
increase 5.5 5.5 5.5
</TABLE>
Net pension plan income (expense) consisted of the following (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Return on Plan assets:
Actual return, gain (loss) $ 241.2 $ (26.9) $ 198.9
Deferred loss (gain) .................. (152.9) 123.6 (114.4)
------- ------- -------
Actuarial assumed return 88.3 96.7 84.5
Service cost (36.7) (41.2) (36.8)
Interest cost on projected
benefit obligations (48.3) (44.9) (45.9)
Net amortization.......................... (10.9) (9.2) (2.2)
------- ------- -------
Net pension plan
income (expense)
recognized in consolidated
statements of income .................. $ (7.6) $ 1.4 $ (0.4)
------- ------- -------
</TABLE>
Income tax returns for years subsequent to 1985 and 1990 are subject to
examination by U.S. and Canadian taxing authorities, respectively.
32
<PAGE> 22
The funded status of the Plans at year-end was as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Fair value of assets at year-end..................... $1,245.9 $1,040.3
-------- --------
Actuarially determined present value of:
Vested benefit obligations 657.4 545.1
Nonvested benefit
obligations.................................... 9.3 7.8
-------- --------
Accumulated benefit
obligations 666.7 552.9
Additional amounts
related to projected
compensation increases......................... 102.7 84.3
-------- --------
Projected benefit
obligations.................................... 769.4 637.2
-------- --------
Fair value of assets in excess of
projected benefit obligations 476.5 403.1
Adjustment for difference in book and
tax basis of assets (165.1) (165.1)
Unamortized prior service costs resulting
from improved Plan benefits 68.7 71.0
Net loss (gain) from actuarial experience
which has not been recognized in the
consolidated financial statements................. (57.7) 10.6
-------- --------
Prepaid pension costs................................ $ 322.4 $ 319.6
======== ========
</TABLE>
RETIREMENT RESTORATION PLAN
The Retirement Restoration Plan provides death benefits and supplemental
income payments after retirement for senior executives. The Company recognized
expense of $3.4 million in 1995, $1.7 million in 1994 and $7.8 million in 1993.
The aggregate projected benefit obligation of the Retirement Restoration Plan
was approximately $45.5 million at year-end 1995 and $38.4 million at year-end
1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to pension and the Retirement Restoration Plan benefits, the
Company sponsors plans that provide postretirement medical and life insurance
benefits to certain salaried employees. Retirees share a portion of the cost of
the postretirement medical plans. Safeway pays all of the cost of the life
insurance plans. The plans are not funded.
At year-end 1995 and 1994, the Company's accumulated postretirement
benefit obligation ("APBO") was $23.3 million and $25.5 million. The APBO
represents the actuarial present value of benefits expected to be paid after
retirement. Postretirement benefit expense was $2.5 million in 1995, $2.9
million in 1994 and $2.8 million in 1993.
The significant assumptions used to determine the periodic
postretirement benefit expense and the APBO were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 8.0% 7.0%
Rate of salary increase 5.5 5.5 5.5
</TABLE>
For 1996, an 8.0% annual rate of increase in the per capita cost of
postretirement medical benefits provided under the Company's group health plan
was assumed. The rate was assumed to decrease gradually to 5.5% for 2001 and
remain at that level thereafter. A 5.5% annual rate of increase was assumed for
1996 and thereafter in the per capita cost of postretirement benefits provided
under HMO plans. If the health care cost trend rate assumptions were increased
by 1% in each year, the APBO as of year-end 1995 would increase $0.7 million,
and the net periodic postretirement benefit expense for 1995 would increase $0.1
million. Retiree contributions have historically been adjusted when plan costs
increase. The APBO for the medical plans anticipates future cost-sharing changes
to the written plan that are consistent with the Company's past practice.
MULTI-EMPLOYER PENSION PLANS
Safeway participates in various multi-employer pension plans, covering
virtually all Company employees not covered under the Company's non-contributory
pension plans, pursuant to agreements between the Company and employee
bargaining units which are members of such plans. These plans are generally
defined benefit plans; however, in many cases, specific benefit levels are not
negotiated with or known by the employer-contributors. Contributions of $105
million in 1995 and $70 million in both 1994 and 1993 were made and charged to
income.
Under U.S. legislation regarding such pension plans, a company is
required to continue funding its proportionate share of a plan's unfunded vested
benefits in the event of withdrawal (as defined by the legislation) from a plan
or plan termination. Safeway participates in a number of these pension plans,
and the potential obligation as a participant in these plans
33
<PAGE> 23
may be significant. The information required to determine the total amount of
this contingent obligation, as well as the total amount of accumulated benefits
and net assets of such plans, is not readily available. During 1988 and 1987,
the Company sold certain operations. In most cases the party acquiring the
operation agreed to continue making contributions to the plans. Safeway is
relieved of the obligations related to these sold operations to the extent the
acquiring parties continue to make contributions. Whether such sales could
result in withdrawal under ERISA and, if so, whether such withdrawals could
result in liability to the Company, is not determinable at this time.
COLLECTIVE BARGAINING AGREEMENTS
At year-end 1995, Safeway had approximately 114,000 full and part-time
employees. Approximately 90% of Safeway's employees in the United States and
Canada are covered by collective bargaining agreements negotiated with local
unions affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three-year terms, with some
agreements having terms up to five years. Accordingly, Safeway renegotiates a
significant number of these agreements every year.
Of Safeway's approximately 100,000 unionized employees, approximately
37,000 in four operating areas are covered by labor contracts which are
scheduled to expire in 1996. While Safeway believes that its relationship with
its employees is good, there can be no assurance that contracts covering such
37,000 employees, or that labor contracts which come up for renewal after 1996,
will be renewed. Failure to renew significant contracts could lead to work
stoppages that could have an adverse effect on Safeway's results of operations.
NOTE H: Investments in Affiliates
Investments in affiliates consists of a 35% interest in Vons, which
operates 329 grocery stores located mostly in southern California, and a 49%
interest in Casa Ley, which operates 71 food and general merchandise stores in
western Mexico.
At year-end 1995, the Company owned 15.1 million common shares, or 35%
of total Vons shares outstanding. The Company's recorded investment in Vons was
$255.2 million (including goodwill of $45.6 million) at year-end 1995 and $236.9
million (including goodwill of $46.9 million) at year-end 1994. Goodwill is
being amortized over 40 years. At year-end 1995, the aggregate market value
quoted on the New York Stock Exchange of Safeway's shares of Vons stock was
$427.3 million.
Safeway's equity in Vons' net income, recorded on a one-quarter delay
basis, was $18.3 million in 1995, $11.6 million in 1994 and $12.9 million in
1993. Vons reported restructuring charges which decreased Safeway's equity in
Vons' earnings by $3.9 million in 1994 and $11.7 million in 1993. According to
Vons, these restructuring charges included anticipated expenses associated with
a program to close underperforming stores and reduce its work force.
Summarized financial information derived from Vons' financial reports to
the Securities and Exchange Commission was as follows (in millions):
<TABLE>
<CAPTION>
October 8, October 9,
1995 1994
---------------------------
<S> <C> <C>
Financial Position:
Current assets $ 436.3 $ 445.5
Property and equipment, net 1,189.3 1,224.1
Other assets...................................... 545.3 557.8
-------- --------
Total assets...................................... $2,170.9 $2,227.4
-------- --------
Current liabilities $ 573.6 $ 535.3
Long-term obligations 995.8 1,148.7
Shareholders' equity.............................. 601.5 543.4
-------- --------
Total liabilities and
shareholders' equity........................... $2,170.9 $2,227.4
======== ========
</TABLE>
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
October 8, October 9, October 10,
1995 1994 1993
-------------------------------------------
<S> <C> <C> <C>
Results of Operations:
Sales $ 5,023.5 $ 4,990.9 $ 5,263.6
Cost of sales and other
expenses......... (4,967.4) (4,954.5) (5,221.9)
--------- --------- ---------
Income before
extraordinary item 56.1 36.4 41.7
Extraordinary item.. - - (1.5)
--------- --------- ---------
Net income.......... $ 56.1 $ 36.4 $ 40.2
========= ========= =========
</TABLE>
34
<PAGE> 24
In 1995, Safeway's share of Casa Ley's earnings was $8.6 million
compared to $15.7 million in 1994 and $20.6 million in 1993. 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 have gradually improved.
Worsening of the economic situation in Mexico could have an effect on Casa Ley.
However, any such effect is not expected to be material to Safeway's operating
results.
Casa Ley had total assets of $276.9 million and $448.4 million as of
September 30, 1995 and 1994 based on financial information provided by Casa Ley.
Sales and net income for Casa Ley were as follows (in millions):
<TABLE>
<CAPTION>
12 months ended September 30,
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Sales...................................... $861.4 $1,052.4 $925.8
====== ======== ======
Net income................................. $ 17.9 $ 32.0 $ 39.5
====== ======== ======
</TABLE>
NOTE I: Related Party Transactions
KKR provides management, consulting and financial services to the
Company for an annual fee. Such services include, but are not necessarily
limited to, advice and assistance concerning any and all aspects of the
operation, planning and financing of the Company. Payments for management fees,
special services and reimbursement of expenses were $1,355,000 in 1995, $980,000
in 1994 and $907,000 in 1993.
The Company holds an 80% interest in Property Development Associates
("PDA"), a partnership formed in 1987 with a company controlled by an affiliate
of KKR, to purchase, manage and dispose of certain Safeway facilities which are
no longer used in the retail grocery business. The financial statements of PDA
are consolidated with those of the Company and a minority interest of $23.2
million and $23.0 million at year-end 1995 and 1994 is included in accrued
claims and other liabilities in the accompanying consolidated balance sheets.
During 1994, the Company contributed to PDA nine properties no longer used in
its retail grocery business which had an aggregate net book value of $9.7
million. The minority partner contributed cash in an amount sufficient to
maintain their 20% ownership. No gains or losses were recognized on these
transactions. In 1995, no properties were contributed. Safeway paid PDA $1.5
million in 1995, $1.1 million in 1994 and $2.0 million in 1993 for reimbursement
of expenses related to management and real estate services provided by PDA.
Safeway sells products to Vons for resale under Vons' private label. In
1995 and 1994, sales to Vons were $28.4 million and $19.5 million, and cost of
sales was $27.9 million and $18.5 million.
NOTE J: Commitments and Contingencies
LEGAL MATTERS
In July 1988, there was a major fire at the Company's dry grocery
warehouse in Richmond, California. Through January 4, 1996, in excess of 125,000
claims for personal injury and property damage arising from the fire had been
settled for an aggregate amount of approximately $121 million. The Company's
loss as a result of the fire damage to its property and settlement of the above
claims was substantially covered by insurance.
As of January 4, 1996, there were still pending approximately 2,100
claims against the Company for personal injury (including punitive damages) and
approximately 500 separate claims against the Company for property damage
arising from the smoke, ash and embers generated by the fire. On March 8, 1996,
a purported class action was filed on behalf of persons allegedly injured as a
result of the fire. The complaint generally alleges that the Company
fraudulently (i) obtained settlements of certain claims arising out of the fire
and (ii) made statements that induced claimants not to file actions within the
time period allowed under the statute of limitations. The complaint seeks
compensatory and punitive damages. A substantial percentage of these claims
have been asserted in lawsuits against the Company filed in the Superior Court
for Alameda County, California. There can be no assurance that the pending
claims will be settled or otherwise disposed of for amounts and on terms
comparable to those settled to date. Safeway believes that coverage under its
insurance policy will be sufficient and available for resolution of all
remaining third-party claims arising out of the fire.
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,
35
<PAGE> 25
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.
There are also pending against the Company various claims and lawsuits
arising in the normal course of business, some of which seek damages and other
relief which, if granted, would require very large expenditures.
It is management's opinion that although the amount of liability with
respect to all of the above matters cannot be ascertained at this time, any
resulting liability, including any punitive damages, will not have a material
adverse effect on the Company's consolidated financial position.
COMMITMENTS
The Company has commitments under contracts for the purchase of property
and equipment and for the construction of buildings. Portions of such contracts
not completed at year-end are not reflected in the consolidated financial
statements. These unrecorded commitments were $21.2 million at year-end 1995.
NOTE K: Financial Information by Geographic Area
<TABLE>
<CAPTION>
(In millions) United States Canada Total
--------------------------------------
<S> <C> <C> <C>
1995
SALES $12,902.4 $3,495.1 $16,397.5
GROSS PROFIT 3,584.5 869.3 4,453.8
OPERATING PROFIT 590.1 137.3 727.4
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 448.9 107.6 556.5
NET WORKING CAPITAL (DEFICIT) (490.1) 65.9 (424.2)
TOTAL ASSETS 4,261.5 932.8 5,194.3
NET ASSETS 462.6 332.9 795.5
1994
Sales $12,240.1 $3,386.5 $15,626.6
Gross profit 3,409.7 840.3 4,250.0
Operating profit 490.9 121.2 612.1
Income before income taxes and extraordinary loss 337.7 86.4 424.1
Net working capital (deficit) (372.5) (13.5) (386.0)
Total assets 4,171.3 850.8 5,022.1
Net assets 386.6 257.2 643.8
1993
Sales $11,756.0 $3,458.5 $15,214.5
Gross profit 3,269.0 814.4 4,083.4
Operating profit 436.3 5.2 441.5
Income (loss) before income taxes 252.3 (36.0) 216.3
Net working capital (deficit) (276.3) 66.5 (209.8)
Total assets 4,084.0 990.7 5,074.7
Net assets 169.1 213.8 382.9
</TABLE>
36
<PAGE> 26
NOTE L: Quarterly Information (unaudited)
The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
<TABLE>
<CAPTION>
Last Third Second First
(In millions, except per-share amounts) Year 16 Weeks 12 Weeks 12 Weeks 12 Weeks
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
SALES $ 16,397.5 $ 5,166.3 $ 3,845.5 $ 3,753.4 $ 3,632.3
GROSS PROFIT 4,453.8 1,401.7 1,049.1 1,007.8 995.2
OPERATING PROFIT 727.4 231.9 176.4 165.1 154.0
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 556.5 183.6 141.6 121.5 109.8
EXTRAORDINARY LOSS RELATED TO EARLY RETIREMENT OF DEBT
NET AFTER BENEFIT (2.0) (2.0) - - -
NET INCOME 326.3 111.9 83.7 68.7 62.0
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT (NOTE 1):
PRIMARY
INCOME BEFORE EXTRAORDINARY LOSS $ 1.36 $ 0.48 $ 0.35 $ 0.29 $ 0.26
EXTRAORDINARY LOSS .................................. (0.01) (0.01) - - -
---------- ---------- ----------- ---------- ------------
NET INCOME ........................................ $ 1.35 $ 0.47 $ 0.35 $ 0.29 $ 0.26
========== ========== =========== ========== ============
FULLY DILUTED
INCOME BEFORE EXTRAORDINARY LOSS $ 1.35 $ 0.47 $ 0.35 $ 0.29 $ 0.26
EXTRAORDINARY LOSS .................................. (0.01) (0.01) - - -
---------- ---------- ----------- ---------- ------------
NET INCOME ........................................ $ 1.34 $ 0.46 $ 0.35 $ 0.29 $ 0.26
========== ========== =========== ========== ============
PRICE RANGE, NEW YORK STOCK EXCHANGE (NOTE 1) $ 15 3/8 $ 20 $ 18 1/16 $ 15 13/16 $ 15 3/8
to 25 3/4 to 25 3/4 to 20 3/16 to 19 1/4 to 17 15/16
</TABLE>
<TABLE>
<CAPTION>
Last Third Second First
(In millions, except per-share amounts) Year 16 Weeks 12 Weeks 12 Weeks 12 Weeks
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Sales $ 15,626.6 $ 4,890.3 $ 3,631.8 $ 3,612.7 $ 3,491.8
Gross profit 4,250.0 1,335.2 991.1 983.2 940.5
Operating profit 612.1 199.5 148.5 146.7 117.4
Income before income taxes and extraordinary loss 424.1 140.4 106.8 103.4 73.5
Extraordinary loss related to early retirement of debt (10.5) (0.4) (2.7) (7.4) -
Net income 239.7 85.3 61.0 51.5 41.9
Earnings per common share and common
share equivalent (Note 1):
Primary
Income before extraordinary loss $ 1.02 $ 0.35 $ 0.26 $ 0.24 $ 0.17
Extraordinary loss ................................ (0.04) - (0.01) (0.03) -
------------ ------------ ------------ ---------- -----------
Net income ...................................... $ 0.98 $ 0.35 $ 0.25 $ 0.21 $ 0.17
============ ============ ============ ========== ===========
Fully diluted
Income before extraordinary loss $ 1.01 $ 0.35 $ 0.26 $ 0.24 $ 0.17
Extraordinary loss ................................ (0.04) - (0.01) (0.03) -
------------ ------------ ------------ ---------- -----------
Net income ...................................... $ 0.97 $ 0.35 $ 0.25 $ 0.21 $ 0.17
============ ============ ============ ========== ===========
Price range, New York Stock Exchange (Note 1) $ 9 3/4 $ 13 5/16 $ 11 11/16 $ 10 15/16 $ 9 3/4
to 15 15/16 to 15 15/16 to 13 15/16 to 13 1/8 to 13 7/16
</TABLE>
Note 1. Amounts have been adjusted for a two-for-one stock split effected
January 30, 1996.
37
<PAGE> 27
COMPUTATION OF EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT (UNAUDITED)
Safeway Inc. and Subsidiaries
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- -------------------- --------------------
Fully Fully Fully
(In millions, except per-share amounts) Diluted Primary Diluted Primary Diluted Primary
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary loss $328.3 $328.3 $250.2 $250.2 $123.3 $123.3
Extraordinary loss.................................... (2.0) (2.0) (10.5) (10.5) - -
------ ------ ------ ------ ------ ------
Net income............................................ $326.3 $326.3 $239.7 $239.7 $123.3 $123.3
====== ====== ====== ====== ====== ======
Weighted average common shares outstanding 213.7 211.9 209.6 205.9 203.0 199.3
Common share equivalents ............................. 29.8 28.7 37.5 38.2 43.9 42.8
------ ------ ------ ------ ------ ------
Weighted average common shares and
common share equivalents .......................... 243.5 240.6 247.1 244.1 246.9 242.1
------ ------ ------ ------ ------ ------
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 1.35 $ 1.36 $ 1.01 $ 1.02 $ 0.50 $ 0.51
Extraordinary loss............................... (0.01) (0.01) (0.04) (0.04) - -
------ ------ ------ ------ ------ ------
Net income ...................................... $ 1.34 $ 1.35 $ 0.97 $ 0.98 $ 0.50 $ 0.51
------ ------ ------ ------ ------ ------
Calculation of common share equivalents:
Options and warrants to purchase
common shares 43.8 44.1 54.0 56.5 58.7 60.4
Common shares assumed purchased with
potential proceeds ............................ (14.0) (15.4) (16.5) (18.3) (14.8) (17.6)
------ ------ ------ ------ ------ ------
Common share equivalents ........................ 29.8 28.7 37.5 38.2 43.9 42.8
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of
options and warrants to purchase
common shares $359.2 $298.9 $262.9 $237.5 $157.2 $146.5
Common stock price used under the
treasury stock method $25.62 $19.40 $15.94 $12.98 $10.63 $ 8.30
Common shares assumed purchased
with potential proceeds 14.0 15.4 16.5 18.3 14.8 17.6
</TABLE>
38
<PAGE> 28
MANAGEMENT'S REPORT
FINANCIAL STATEMENTS
Safeway Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include amounts that
are based on judgments and estimates made by management. Safeway also prepared
the other information included in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders,
the Board of Directors, and committees of the Board. Safeway believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The report of Deloitte & Touche LLP is presented below.
INTERNAL CONTROL SYSTEM
Safeway maintains a system of internal control over financial
reporting, which is designed to provide reasonable assurance to management and
the Board of Directors regarding the preparation of reliable published
financial statements. The system includes a documented organizational structure
and division of responsibility, established policies and procedures including a
code of conduct to foster a strong ethical climate, which are communicated
throughout Safeway, and the careful selection, training and development of
employees. Internal auditors monitor the operation of the internal control
system and report findings and recommendations to management and the Board, and
corrective actions are taken to address control deficiencies and other
opportunities for improving the system as they are identified. The Board,
operating through its Audit Committee, which is composed entirely of outside
directors, provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation.
Furthermore, the effectiveness of an internal control system can change with
circumstances. As of December 30, 1995, Safeway believes its system of internal
controls over financial reporting was effective for providing reliable
financial statements.
/s/ Steven A. Burd /s/ Julian C. Day
- ----------------------------- ------------------------------
Steven A. Burd Julian C. Day
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway
Inc. and subsidiaries as of December 30, 1995 and December 31, 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three fiscal years in the period ended December 30, 1995. 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Safeway Inc. and
subsidiaries at December 30, 1995 and December 31, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 1995 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------------
Oakland, California
February 19, 1996
<PAGE> 29
APPENDIX TO EXHIBIT 13.1
GRAPHIC PRESENTATION OF MATERIAL
The following three graphs in the Company's 1995 Annual Report to
Stockholders are incorporated by reference in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations:
1. On page 16 under the section "Financial Review" is a bar graph
entitled "Net Income (In Millions)" which shows net income for 1993,
1994 and 1995 as follows:
<TABLE>
<S> <C>
1993 $123.3
1994 $239.7
1995 $326.3
</TABLE>
This graph has an initial value of zero.
2. On page 16 under the section "Financial Review" is a pie graph
entitled "1995 Portions of the Sales Dollar" depicting the following :
<TABLE>
<S> <C>
Cost of Goods Sold 72.9%
Operating and Administrative Expenses 22.7%
Operating Profit 4.4%
</TABLE>
This graph accompanies the subsection entitled "Sales".
3. On page 17 under the section "Financial Review" is a bar graph
entitled "Interest Expense (In Millions)" which shows interest expense
for 1993, 1994 and 1995 as follows:
<TABLE>
<S> <C>
1993 $265.5
1994 $221.7
1995 $199.8
</TABLE>
This graph accompanies the subsection entitled " Interest Expense" and
has an initial value of zero.
<PAGE> 1
Exhibit 22.1
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 30, 1995
Registrant: Safeway Inc.
Subsidiaries of Registrant (Tier I subsidiaries):
Safeway U.S. Holdings, Inc.
Safeway Canada Holdings, Inc.
Safeway Australia Holdings, Inc.
Salvage, Inc.
Oakland Property Brokerage, Inc.
Glencourt, Inc.
Safeway Foreign Sales, Inc.
Milford Insurance Ltd.
Pak 'N Save, Inc.
SUBSIDIARIES OF TIER I SUBSIDIARIES (Tier II subsidiaries):
Subsidiaries of Safeway U.S. Holdings, Inc.:
Safeway Trucking, Inc.
Photo Acquisition I, Inc.
Photo Acquisition II, Inc.
Safeway Southern California, Inc.
Safeway Denver, Inc.
Safeway Richmond, Inc.
Safeway Dallas, Inc.
Safeway Supply, Inc.
Safeway Corporate, Inc.
Safeway Stores 42, Inc.
Safeway Stores 43, Inc.
Safeway Stores 64, Inc.
Safeway Claim Services, Inc.
Safeway Stores, Incorporated
Safeway Warehouse, Inc.
Subsidiaries of Safeway Canada Holdings, Inc.:
Safeway New Canada, Inc.
(Continued)
<PAGE> 2
Exhibit 22.1
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 30, 1995
SUBSIDIARIES OF TIER II SUBSIDIARIES (Tier III subsidiaries):
Subsidiaries of Safeway Southern California, Inc.
Safeway Stores 18, Inc.
Safeway Stores 26, Inc.
Safeway Stores 28, Inc.
Safeway Stores 31, Inc.
Subsidiaries of Safeway Denver, Inc.
Safeway Stores 44, Inc.
Safeway Stores 45, Inc.
Safeway Stores 46, Inc.
Safeway Stores 47, Inc.
Safeway Stores 48, Inc.
Safeway Stores 49, Inc.
Safeway Stores 50, Inc.
Subsidiaries of Safeway Richmond, Inc.
Safeway Stores 58, Inc.
Safeway Stores 59, Inc.
Subsidiaries of Safeway Corporate, Inc.
Safeway Stores 67, Inc.
Safeway Stores 68, Inc.
Safeway Stores 69, Inc.
Safeway Stores 70, Inc.
Subsidiaries of Safeway Supply, Inc.
Safeway Stores 71, Inc.
Safeway Stores 72, Inc.
Safeway Stores 73, Inc.
Safeway Stores 74, Inc.
Safeway Stores 75, Inc.
Safeway Stores 76, Inc.
Safeway Stores 77, Inc.
Consolidated Procurement Services, Inc.
(Continued)
<PAGE> 3
Exhibit 22.1
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 30, 1995
Subsidiaries of Safeway Dallas, Inc.
Safeway Stores 78, Inc.
Safeway Stores 79, Inc.
Safeway Stores 80, Inc.
Safeway Stores 81, Inc.
Safeway Stores 82, Inc.
Safeway Stores 85, Inc.
Safeway Stores 86, Inc.
Safeway Stores 87, Inc.
Safeway Stores 88, Inc.
Safeway Stores 89, Inc.
Safeway Stores 90, Inc.
Safeway Stores 91, Inc.
Safeway Stores 92, Inc.
Safeway Stores 96, Inc.
Safeway Stores 97, Inc.
Safeway Stores 98, Inc.
Subsidiaries of Photo Acquisition I, Inc.
Everett Realty Advisors, Inc.
SUBSIDIARIES OF TIER II SUBSIDIARIES (Non-tier Subsidiaries):
Subsidiary of Safeway New Canada, Inc.:
Canada Safeway Limited and its subsidiaries:
Safeway International Finance Corp. of Canada Ltd.
Lucerne Foods Ltd. (effective 12/31/95, Lucerne Foods was amalgamated with
Canada Safeway Limited)
SUBSIDIARIES OF TIER III SUBSIDIARIES (Tier IV Subsidiaries):
Subsidiary of Safeway Stores 58, Inc.:
Safelease, Inc.
Ten companies are not listed as they are maintained solely for the purpose of
holding licenses.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated March 8, 1996,
incorporated by reference in this Annual Report on Form 10-K of Safeway Inc.
for the fiscal year ended December 30, 1995, in the following Registration
Statements of Safeway Inc.:
- - No. 33-33388 on Form S-3 regarding Warrants to Purchase Common Stock,
- - No. 33-36753 on Form S-8 regarding the Safeway Inc. Outside Director Equity
Purchase Plan,
- - No. 33-37207 on Form S-8 regarding the Profit Sharing Plan of Safeway Inc.
and its United States Subsidiaries,
- - No. 33-42232 on Forms S-3 and S-8 regarding the Amended and Restated Stock
Option and Incentive Plan for Key Employees of Safeway Inc.,
- - No. 33-48884 on Form S-8 regarding the Amended and Restated Stock Option and
Incentive Plan for Key Employees of Safeway Inc.,
- - No. 33-51552 on Form S-3 regarding Debt Securities,
- - No. 33-51119 on Form S-8 regarding the Stock Option Plan for Consultants of
Safeway Inc.,
- - No. 33-54581 on Form S-8 regarding the Employee Stock Purchase Plan of
Safeway Inc., and
- - No. 33-63803 on Form S-8 regarding the 1994 Amended and Restated Stock
Option and Incentive Plan for Key Employees of Safeway Inc.
Deloitte & Touche LLP
Oakland, California
March 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGE
19 THROUGH 21 OF THE COMPANY'S 1995 ANNUAL REPORT TO STOCKHOLDERS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-30-1995
<CASH> 74,800
<SECURITIES> 0
<RECEIVABLES> 152,700
<ALLOWANCES> 0
<INVENTORY> 1,191,800
<CURRENT-ASSETS> 1,514,800
<PP&E> 4,687,200
<DEPRECIATION> 2,094,300
<TOTAL-ASSETS> 5,194,300
<CURRENT-LIABILITIES> 1,939,000
<BONDS> 1,949,800
0
0
<COMMON> 2,100
<OTHER-SE> 793,400
<TOTAL-LIABILITY-AND-EQUITY> 5,194,300
<SALES> 16,397,500
<TOTAL-REVENUES> 16,397,500
<CGS> 11,943,700
<TOTAL-COSTS> 11,943,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,800
<INCOME-PRETAX> 556,500
<INCOME-TAX> 228,200
<INCOME-CONTINUING> 328,300
<DISCONTINUED> 0
<EXTRAORDINARY> (2,000)
<CHANGES> 0
<NET-INCOME> 326,300
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
</TABLE>
