SAFEWAY INC, 424B4, 1997-12-15

SAFEWAY INC
424B4, 1997-12-15
GROCERY STORES

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<PAGE> 1

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION STATEMENT NO. 333-40807
LOGO

25,000,000 SHARES

SAFEWAY INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------

Of the 25,000,000 shares of Common Stock offered, 22,500,000 shares are
being offered hereby in the United States and 2,500,000 shares are being offered
in a concurrent international offering outside the United States. The initial
public offering price and the aggregate underwriting discount per share are
identical for both offerings. See "Underwriting".

All the shares of Common Stock offered are being sold by the Selling
Stockholders and include 22,134,636 presently outstanding shares and 2,865,364
shares to be issued concurrently with the consummation of these offerings upon
the exercise of outstanding warrants. See "Principal and Selling Stockholders".
The Company will not receive any of the proceeds from the sale of the shares
other than $2,865,364 (assuming no exercise of the Underwriters' over-allotment
options) representing the exercise price of the warrants.

The last reported sale price of the Common Stock, which is listed under the
symbol "SWY", on the New York Stock Exchange on December 11, 1997 was $59 13/16.
See "Price Range of Common Stock".
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDERS(2)
-------------- ------------ -------------------
<S> <C> <C> <C>
Per Share...................................... $59.75 $1.50 $58.25
Total(3)....................................... $1,493,750,000 $37,500,000 $1,456,250,000
</TABLE>

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

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.

(2) Includes an aggregate of $2,865,364 to be paid to the Company representing
the exercise price of warrants for 2,865,364 shares at $1.00 per share.
Expenses of the offerings, estimated at $950,000, will be paid by the
Company.

(3) The Selling Stockholders have granted the U.S. Underwriters an option for 30
days to purchase up to an additional 3,375,000 shares at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Selling Stockholders have granted the
International Underwriters a similar option with respect to an additional
375,000 shares as part of the concurrent international offering. If such
options are exercised in full, the total initial public offering price,
underwriting discount and proceeds to Selling Stockholders will be
$1,717,812,500, $43,125,000 and $1,674,687,500, respectively, and the total
amount to be paid to the Company representing the exercise price of warrants
will be $3,295,169. See "Underwriting".
------------------------

The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York, on or about December
17, 1997, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
SBC WARBURG DILLON READ INC.
SALOMON SMITH BARNEY
------------------------

The date of this Prospectus is December 11, 1997.

<PAGE> 2

[Graphic]
Map depicting territories in the United States and Canada in which Safeway Inc.
operates.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

2
<PAGE> 3

NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERINGS MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY BY
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------

AVAILABLE INFORMATION

Safeway Inc. ("Safeway" or the "Company") has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, part of which
has been omitted in accordance with the rules and regulations of the Commission.
For further information about the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed as
a part thereof and otherwise incorporated therein. Statements made in this
Prospectus as to the contents of any agreement or other document referred to
herein are qualified by reference to the copy of such agreement or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. The Registration Statement, including the exhibits thereto, as
well as such reports and other information filed by the Company with the
Commission, can be inspected, without charge, and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C., 20549; 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission also maintains a site on the World Wide Web at http://www.sec.gov.,
which contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission and certain of the
Company's filings are available at such web site. Copies of such materials can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.

3
<PAGE> 4

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements of the Company, the notes thereto and the
other financial data contained elsewhere in this Prospectus or incorporated by
reference herein. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment options will not be exercised.
This Prospectus, and the documents incorporated herein, contain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such statements relate to, among other things, capital
expenditures, cost reduction, cash flow and operating improvements and are
indicated by words or phrases such as "anticipate," "estimate," "plans,"
"projects," "management believes," "the Company believes," "the Company intends"
and similar words or phrases. Such statements are subject to inherent
uncertainties and risks, including among others: general business and economic
conditions in the Company's operating regions; pricing pressures and other
competitive factors; results of the Company's efforts to reduce costs; the
ability to integrate The Vons Companies, Inc. ("Vons") and achieve operating
improvements at Vons; relations with union bargaining units; and the
availability and terms of financing. Consequently, actual events and results may
vary significantly from those included in or contemplated or implied by such
statements.

THE COMPANY

Safeway is the second largest food and drug chain in North America (based
on sales), with 1,367 stores (including 315 Vons stores) at September 6, 1997.
The Company's U.S. retail operations are located principally in northern
California, southern California, Oregon, Washington, Colorado, Arizona and the
Mid-Atlantic region. The Company also has Canadian retail operations which are
located primarily in British Columbia, Alberta and Manitoba/Saskatchewan. For
each of its ten retail operating areas, the Company believes that it holds the
number one or number two market share position for the total area served. In
support of its retail operations, the Company has an extensive network of
distribution, manufacturing and food processing facilities.

On April 8, 1997, the Company completed the merger with Vons pursuant to
which the Company issued 41.6 million shares of the Company's Common Stock for
all of the shares of Vons common stock that it did not already own (the
"Merger"). The Company also holds a 49% interest in Casa Ley, S.A. de C.V.
("Casa Ley"), which, as of September 6, 1997, operated 71 food and general
merchandise stores in western Mexico.

Sales and net income for 1996 were $17.3 billion and $460.6 million,
respectively. Operating cash flow (FIFO earnings before interest, taxes,
depreciation, amortization, income from unconsolidated affiliates, extraordinary
losses and cumulative effect of accounting changes) increased from $768.6
million in 1992 to $1.2 billion in 1996. In addition, income per share (before
extraordinary items and the cumulative effect of accounting changes) increased
from $0.41 in 1992 to $1.93 in 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations".

OPERATING STRATEGY

Since late 1992, Safeway has focused on three priorities for improving its
operating results: (1) controlling costs, (2) increasing sales and (3) improving
capital management. Safeway has made substantial progress in these areas and is
applying these priorities to Vons' operations, but there can be no assurance as
to the future results Safeway will be able to achieve.

Controlling Costs

4
<PAGE> 5

has declined 199 basis points from 24.47% in 1992 to 22.48% in 1996. This
percentage has increased following the Merger due to Vons' historically higher
operating and administrative expense to sales ratio and as a result of increased
goodwill amortization. Safeway has begun to realize economies of scale and to
implement certain programs that have been successful at Safeway which are
expected to generate operating improvements and cost savings for Vons. In
addition, on a pro forma basis, the Company continued to reduce operating and
administrative expenses as a percentage of sales in the second and third
quarters of 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations".

Increasing Sales

Safeway has increased sales by maintaining competitive pricing, improving
store standards, enhancing customer service and offering high quality products.
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. As a result, same-store sales growth since year end 1992
through 1996 and in the first three quarters of 1997 have been among the highest
in the industry. Safeway has over 800 premium corporate brand products under the
"Safeway SELECT" banner. Since the Merger, Safeway has been applying certain
sales strategies that have been employed successfully by each of Safeway and
Vons. For example, Safeway recently introduced the Safeway Club Card in its
northern California division (a customer loyalty program designed to reward
frequent shoppers), which was inspired by a similar program at Vons.

Improving Capital Management

Safeway's capital management has improved in two key areas: capital
expenditures and working capital. In the capital expenditure area, Safeway has
expanded its use of standardized layouts and centralized purchasing agreements
for building materials, fixtures and equipment for its new stores and remodels.
As a result, Safeway's new store prototype is less expensive to build and more
efficient to operate than the stores Safeway and Vons previously built and
operated. These lower project costs, coupled with Safeway's improved operations,
have allowed Safeway to improve its returns on capital investment. Safeway has
increased its capital expenditures to $620 million in 1996 from $503 million in
1995 and $352 million in 1994. Combined capital expenditures for Safeway and
Vons in fiscal 1997 are expected to exceed $800 million and will be used
primarily to open 35 to 40 new stores and complete approximately 180 remodels.
Working capital invested in the business has declined substantially since
year-end 1992 primarily through lower warehouse inventory levels and improved
payables management.

THE MERGER

In connection with the Merger, the Company repurchased 32.0 million shares
of the Company's Common Stock from a partnership affiliated with Kohlberg Kravis
Roberts & Co. ("KKR") at $43 per share, for an aggregate purchase price of
$1.376 billion (the "Repurchase"). This reduction of 32.0 million shares
partially offset the increase of 41.6 million shares issued pursuant to the
Merger. To finance the Repurchase, the Company borrowed funds under its new $3.0
billion bank credit agreement (the "Bank Credit Agreement") and has since
refinanced these borrowings with proceeds from the sale of commercial paper. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Merger with Vons".

Unless the context otherwise requires or as otherwise expressly stated,
references herein to "Safeway" or the "Company" include Safeway Inc. and its
subsidiaries. The principal executive offices of the Company are located at 5918
Stoneridge Mall Road, Pleasanton, California 94588, and the telephone number is
(510) 467-3000.

5
<PAGE> 6

RECENT DEVELOPMENTS

REFINANCING OUTSTANDING INDEBTEDNESS

In 1997 Safeway refinanced a substantial portion of its long-term
indebtedness in an effort to reduce interest expense, extend the maturities of
its long-term indebtedness and enhance its operating and financial flexibility.
Pursuant to tender offers and consent solicitations that were completed in
September 1997, Safeway repurchased $589.0 million of its outstanding public
indebtedness and eliminated certain restrictive covenants in the indentures
governing that indebtedness. In addition, Safeway redeemed $285.5 million of
Vons' outstanding public indebtedness and repurchased $40.0 million of Safeway's
outstanding medium-term notes. Safeway financed the retirement of this long-term
indebtedness with proceeds from a public offering in September 1997 of $600
million principal amount of senior debt securities and proceeds from the
issuance of commercial paper. Based on current interest rates, net interest
savings from the repurchases and redemption are expected to be approximately $14
million per annum. Depending on various factors, including market conditions,
Safeway may, from time to time, continue to purchase and retire portions of its
long-term debt.

LABOR CONTRACTS

Safeway recently concluded early negotiations and signed new labor
contracts that would have been due to expire in 1998. Certain of these contracts
were with employees represented by the United Food and Commercial Workers Union
in northern California and Spokane, Washington. In addition, union members in
British Columbia have ratified a new labor contract. As a result of these early
negotiations, the only significant remaining labor contracts due to expire in
1998 are in the Seattle and Winnipeg operating areas covering approximately 110
stores. The last significant labor contract (involving approximately 50 stores)
expiring in 1997, in Phoenix, Arizona was finalized in December 1997. Management
considers the terms of these new contracts to be satisfactory.

The third-party distribution operator for Safeway's northern California
division, Summit Logistics Inc., recently concluded negotiations with labor,
resulting in a new three-year agreement that is considered satisfactory.

6
<PAGE> 7

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been listed on the New York Stock Exchange
under the symbol SWY since its initial public offering in May 1990.

The following table sets forth the high and low sale prices for the
Company's Common Stock for the fiscal quarters indicated as reported by the New
York Stock Exchange Composite Tape. Prices prior to January 30, 1996 have been
adjusted to give effect to a two-for-one stock split effected on that date.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1995
First quarter..................................................... $18 $15 5/16
Second quarter.................................................... 19 1/4 15 9/16
Third quarter..................................................... 20 5/16 17 5/16
Fourth quarter.................................................... 25 3/4 19 5/16
1996
First quarter..................................................... $30 1/8 $22 5/16
Second quarter.................................................... 35 5/8 27 5/8
Third quarter..................................................... 38 1/4 31 3/4
Fourth quarter.................................................... 45 3/8 37 1/4
1997
First quarter..................................................... $52 $41 1/8
Second quarter.................................................... 49 5/8 42 1/4
Third quarter..................................................... 55 1/2 46 1/8
Fourth quarter (through December 11, 1997)........................ 63 7/16 50 1/16
</TABLE>

The reported last sale price of the Common Stock on the New York Stock
Exchange Composite Tape as of a recent date is set forth on the cover page of
this Prospectus.

DIVIDEND POLICY

Safeway has not declared or paid any cash dividends on its Common Stock
since it was acquired by a corporation formed by KKR in 1986, and does not
currently intend to declare or pay any cash dividends. Any determination to pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon Safeway's results of operations, financial
condition, capital expenditures, working capital requirements, any contractual
restrictions and other factors deemed relevant by the Board of Directors. See
"Description of Capital Stock -- Dividends".

7
<PAGE> 8

CAPITALIZATION

The following table sets forth the short-term debt and the capitalization
of Safeway at September 6, 1997 (in millions). None of the proceeds from the
sale of the shares of Common Stock offered hereby will be received by the
Company other than an aggregate of $2,865,364 representing the exercise price of
certain outstanding warrants.

<TABLE>
<S> <C>
Short-term borrowings(1)............................................. $ 217.1
=========
Long-term debt and capital lease obligations......................... $ 3,136.1
Stockholders' equity:
Common Stock, par value $0.01 per share; 750 shares authorized;
265.2 shares outstanding(2)(3).................................. 2.7
Additional paid-in capital......................................... 2,459.0
Unexercised warrants purchased: 15.1 shares(3)..................... (322.7)
Retained earnings.................................................. 1,100.0
Cumulative translation adjustments................................. 9.6
Less: Treasury stock at cost; 30.9 shares.......................... (1,327.1)
---------
Total stockholders' equity...................................... 1,921.5
---------
Total capitalization....................................... $ 5,057.6
=========
</TABLE>

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

(1) Consists of current portion of long-term debt and capital lease obligations.

(2) Excludes 20.8 million shares of Common Stock underlying stock options and
23.4 million shares of Common Stock issuable upon exercise of warrants (the
"SSI Warrants") held by SSI Equity Associates, L.P. ("SSI Equity
Associates"). In connection with the offerings, it is anticipated that SSI
Warrants to purchase 2,865,364 shares of Common Stock will be exercised for
an aggregate exercise price of $2,865,364, and SSI Warrants to purchase
5,204,039 shares of Common Stock will be canceled. See "Principal and
Selling Stockholders".

(3) SSI Equity Associates is a partnership whose sole assets consist of the SSI
Warrants. At December 11, 1997, 64.5% of the shares issuable upon exercise
of the SSI Warrants were attributable to limited partnership interests in
SSI Equity Associates owned by Safeway.

Following the offerings, approximately 23.2% of the outstanding Common
Stock will be held by two limited partnerships (the "Common Stock
Partnerships"). See "Principal and Selling Stockholders". SSI Associates, L.P.
("SSI Associates"), one of the Common Stock Partnerships, made its investment in
Safeway in 1986. The limited partnership agreement pursuant to which SSI
Associates was organized will, by its terms, expire on December 31, 1998 unless
amended by all of the limited partners to extend the term beyond such date.
There can be no assurance that KKR Associates, L.P. ("KKR Associates"), the
general partner of SSI Associates, will seek such amendments, or, if sought,
that such amendments will be approved by the limited partners. If such
partnership agreement expires, the limited partnership will dissolve. In the
event of the dissolution and winding up of SSI Associates, KKR Associates will
have sole discretion regarding the timing (which may be one or more years after
the expiration of the partnership agreement) and manner of the disposition of
any Common Stock held by such partnership, including public or private sales of
such Common Stock, the distribution of such Common Stock to the limited partners
of SSI Associates, or a combination of the foregoing.

8
<PAGE> 9

SELECTED FINANCIAL DATA

SAFEWAY INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)

The financial data below are derived from the audited Consolidated
Financial Statements of the Company, except for the financial data for the
36-week periods ended September 6, 1997 and September 7, 1996, which are derived
from unaudited financial statements. The selected financial data should be read
in conjunction with the Company's Consolidated Financial Statements and
accompanying notes, which are included herein. In the opinion of management, the
results of operations for the 36 weeks ended September 6, 1997 and September 7,
1996 contain all adjustments that are of a normal and recurring nature necessary
to present fairly the financial position and results of operations for such
periods. The results for the 36 weeks ended September 6, 1997 are not
necessarily indicative of the results expected for the full year.

<TABLE>
<CAPTION>
36 WEEKS ENDED
--------------------- 52 52 52 52 52
SEPT. 6, SEPT. 7, WEEKS WEEKS WEEKS WEEKS WEEKS
1997(1) 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales...................................... $14,698.4 $11,782.1 $17,269.0 $16,397.5 $15,626.6 $15,214.5 $15,151.9
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................... 4,203.4 3,281.2 4,774.2 4,492.4 4,287.3 4,123.3 4,149.9
Operating and administrative expense....... (3,363.3) (2,673.2) (3,882.5) (3,765.0) (3,675.2) (3,681.8) (3,708.3)
--------- --------- --------- --------- --------- --------- ---------
Operating profit........................... 840.1 608.0 891.7 727.4 612.1 441.5 441.6
Interest expense........................... (163.7) (126.3) (178.5) (199.8) (221.7) (265.5) (290.4)
Equity in earnings of unconsolidated
affiliates............................... 25.6 34.3 50.0 26.9 27.3 33.5 39.1
Other income, net.......................... 2.1 3.4 4.4 2.0 6.4 6.8 7.1
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes, extraordinary
loss and cumulative effect of accounting
changes.................................. 704.1 519.4 767.6 556.5 424.1 216.3 197.4
Income taxes............................... (297.5) (210.4) (307.0) (228.2) (173.9) (93.0) (99.0)
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss and
cumulative effect of accounting
changes.................................. 406.6 309.0 460.6 328.3 250.2 123.3 98.4
Extraordinary loss, net of tax benefit of
$41.1, $1.3, $6.7 and $17.1.............. (64.1) -- -- (2.0) (10.5) -- (27.8)
Cumulative effect of accounting changes,
net of tax benefit of $12.0.............. -- -- -- -- -- -- (27.1)
--------- --------- --------- --------- --------- --------- ---------
Net income................................. $ 342.5 $ 309.0 $ 460.6 $ 326.3 $ 239.7 $ 123.3 $ 43.5
========= ========= ========= ========= ========= ========= =========
Earnings per common share and common share
equivalent (fully diluted):
Income before extraordinary loss and
cumulative effect of accounting
changes................................ $ 1.64 $ 1.29 $ 1.93 $ 1.35 $ 1.01 $ 0.50 $ 0.41
Extraordinary loss....................... (0.26) -- -- (0.01) (0.04) -- (0.12)
Cumulative effect of accounting
changes................................ -- -- -- -- -- -- (0.11)
--------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 1.38 $ 1.29 $ 1.93 $ 1.34 $ 0.97 $ 0.50 $ 0.18
========= ========= ========= ========= ========= ========= =========
FINANCIAL STATISTICS:
Same-store sales(2)........................ 0.9% 5.3% 5.1% 4.6% 4.4% 2.1% (1.6)%
Gross profit margin........................ 28.60% 27.85% 27.65% 27.40% 27.44% 27.10% 27.39%
Operating and administrative expense as a
percent of sales......................... 22.88% 22.69% 22.48% 22.96% 23.52% 24.20% 24.47%
Operating profit margin.................... 5.7% 5.2% 5.2% 4.4% 3.9% 2.9% 2.9%
Capital expenditures(3).................... $ 379.6 $ 323.7 $ 620.3 $ 503.2 $ 352.2 $ 290.2 $ 553.4
Depreciation and amortization.............. 304.4 233.5 338.5 329.7 326.4 330.2 320.3
Total assets............................... 8,176.2 5,272.3 5,545.2 5,194.3 5,022.1 5,074.7 5,225.8
Total debt................................. 3,353.2 1,828.8 1,984.2 2,190.2 2,196.1 2,689.2 3,048.6
Stockholders' equity....................... 1,921.5 1,136.3 1,186.8 795.5 643.8 382.9 243.1
Weighted average common shares and common
share equivalents (fully diluted) (in
millions)................................ 247.5 240.1 238.4 243.5 247.1 246.9 238.0
OTHER STATISTICS:
Total stores at period-end................. 1,367 1,050 1,052 1,059 1,062 1,078 1,103
Remodels completed during the period (4)... 72 65 141 108 71 45 63
Total retail square footage at period-end
(in millions)............................ 52.0 39.9 40.7 40.1 39.5 39.4 39.7
</TABLE>

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

(1) Safeway completed the acquisition of Vons on April 8, 1997. The results of
operations of Vons are included in the Company's results of operations as of
the beginning of the second quarter of 1997.

(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. The 1997 and 1996 same-store sales figures
exclude British Columbia stores, which were closed during a labor dispute
during the second and third quarters of 1996. Excluding the effect of the
Alberta strike, same-store sales increased 2.2% for the 36-week period ended
September 6, 1997. The same-store sales calculation for the 36-week period
ended September 6, 1997 includes Vons stores for the entire period.

(3) Defined under "Business -- Capital Expenditure Program".

(4) Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.

9
<PAGE> 10

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MERGER WITH VONS

On April 8, 1997, Safeway completed the Merger with Vons. Pursuant to the
Merger, Safeway issued 1.425 shares of Safeway Common Stock for each share of
Vons stock that Safeway did not already own, or a total of 41.6 million shares
of Safeway Common Stock. Vons is now a wholly-owned subsidiary of Safeway, and
as of the beginning of the second quarter of 1997, Safeway's consolidated
financial statements include Vons' financial position and results of operations.

In connection with the Merger, Safeway repurchased 32.0 million shares of
Safeway Common Stock from a partnership affiliated with KKR at $43 per share,
for an aggregate purchase price of $1.376 billion. To finance the Repurchase,
Safeway entered into the Bank Credit Agreement, which provides for, among other
things, increased borrowing capacity, extended maturities and the opportunity to
pay lower interest rates based on interest coverage ratios or public debt
ratings. During the third quarter of 1997, Safeway entered the commercial paper
market and used the proceeds to repay borrowings under the Bank Credit
Agreement. The Bank Credit Agreement is used primarily as a backup facility to
the commercial paper program. As a result of the Repurchase, Safeway increased
its debt and interest expense, but also reduced the number of shares of Common
Stock outstanding that otherwise would have been used to calculate earnings per
share. This reduction of 32.0 million shares partially offset the increase of
41.6 million shares issued pursuant to the Merger.

RESULTS OF OPERATIONS

12 WEEKS AND 36 WEEKS ENDED SEPTEMBER 6, 1997 COMPARED TO 12 WEEKS AND 36
WEEKS ENDED SEPTEMBER 7, 1996

Safeway's income before extraordinary loss was $150.0 million ($0.60 per
share) for the third quarter of 1997. This compares to $105.9 million ($0.44 per
share) for the third quarter of 1996, which includes an estimated $0.07 per
share reduction due to labor disputes in the British Columbia and Denver
operating areas. In the third quarter of 1997, the Company incurred an
extraordinary loss of $59.9 million ($0.24 per share) for the early retirement
of debt, which reduced net income to $90.1 million ($0.36 per share). Safeway
believes that the effects of the second quarter labor dispute in Alberta reduced
third quarter 1997 net income by approximately $0.01 per share. For the first 36
weeks of the year, Safeway's income before extraordinary loss was $406.6 million
($1.64 per share), compared to $309.0 million ($1.29 per share) in 1996.

Safeway's 1997 income statements include Vons' operating results since the
second quarter, while the 1996 income statements reflect Safeway's 35% equity
interest in Vons. In order to facilitate an understanding of the Company's
operations, the pro forma information described below is based on the 1996
combined historical financial statements of the two companies as if the
acquisition had been effective as of the beginning of the period discussed.

Due primarily to the Merger during the second quarter of 1997, total sales
for the third quarter increased 36% on a historical basis from $3.95 billion in
1996 to $5.37 billion in 1997. Combined sales for the third quarter increased
3.2% from 1996 pro forma sales of $5.21 billion. Identical-store sales (stores
operating the entire measurement period in both years excluding replacement
stores) increased 0.5% while comparable-store sales, which includes replacement
stores, increased 1.5%. The lingering effects of the second-quarter strike in
Alberta have weakened 1997 identical and comparable-store sales comparisons.
Lack of inflation has also softened third quarter 1997 sales. Excluded from
identical and comparable store sales comparisons are 86 stores in British
Columbia that were closed during a strike-lockout for a portion of the second
and third quarters of last year. For the first 36 weeks of the year, total sales
increased 25% on a historical basis to $14.7 billion in 1997 from $11.8 billion
in 1996, primarily as a result of the Merger.

Gross profit increased to 28.90% of sales in the third quarter of 1997
compared to 28.11% in 1996 on a pro forma basis (27.48% on a historical basis),
primarily due to improvements in buying practices and product

10
<PAGE> 11

mix. In addition, the Company did not record LIFO expense in the second or third
quarters of 1997, reflecting management's expectation of little or no inflation
for the full year. For the first 36 weeks of the year, gross profit on a
historical basis was 28.60% of sales in 1997 compared to 27.85% in 1996.

Operating and administrative expense was 23.00% of sales for the third
quarter of 1997, down 27 basis points from pro forma operating and
administrative expense of 23.27% for the same quarter in 1996, reflecting
increased sales and efforts to reduce or control expenses. On a historical
basis, operating and administrative expense was 22.33% of sales in the third
quarter of 1996. For the first 36 weeks of the year, operating and
administrative expense on a historical basis was 22.88% compared to 22.69% of
sales in 1996. Safeway's operating and administrative expense-to-sales ratio has
increased compared to historical results because Vons' operating and
administrative expense ratio, when conformed to Safeway's presentation, has
historically been higher than Safeway's. In addition, as a result of the Merger,
goodwill amortization on an annualized basis has increased by approximately $25
million. Safeway is applying its cost reduction, sales growth and capital
management strategies to Vons' operations to offset these negative effects,
although there can be no assurance as to the results Safeway will be able to
achieve in this regard.

Interest expense was $62.3 million for the third quarter of 1997, compared
to $39.8 million for the same period last year. For the first 36 weeks of the
year, interest expense rose to $163.7 million in 1997 from $126.3 million in
1996. The increase in 1997 is the result of debt incurred during the second
quarter of 1997 to repurchase stock in conjunction with the Merger. During the
third quarter of this year, Safeway recorded an extraordinary loss of $59.9
million ($0.24 per share) for the redemption of $589.0 million of Safeway's
public debt, $135.5 million of Vons' public debt, and $40 million of medium-term
notes. Safeway financed this redemption with $600 million of new senior debt
securities and the balance with commercial paper. The refinancing extends
Safeway's overall long-term debt maturities, increases financial flexibility
and, based on current interest rates, is expected to reduce annual interest
expense.

During the second quarter of 1997, Safeway recorded an extraordinary loss
of $4.2 million ($0.02 per share) for the early redemption of $150.0 million of
Vons' public debt.

In the second quarter of 1997, Safeway purchased interest rate caps with a
notional principal amount of $850 million at 7% for two years. On October 3,
1997, Safeway purchased an interest rate swap with a notional principal amount
of $100 million at 6.2075% for ten years. These cap and swap agreements are
intended to limit the exposure of its floating interest rate debt to changes in
market interest rates.

At the end of the third quarter of 1997, Safeway's investment in
unconsolidated affiliates consisted of a 49% interest in Casa Ley, which, as of
September 6, 1997, operated 71 food and general merchandise stores in western
Mexico. Income from Safeway's equity investment in Casa Ley was $4.1 million in
the third quarter of 1997 compared to $4.4 million in 1996. For the first 36
weeks of the year, Safeway's share of Casa Ley's earnings rose to $13.4 million
in 1997 from $12.5 million in 1996. Safeway's share of Vons' earnings was $12.2
million for the first quarter of 1997, $7.2 million in the first quarter of
1996, and $21.8 million in the first 36 weeks of 1996.

1996 COMPARED TO 1995 AND 1994

Safeway's net income was $460.6 million ($1.93 per share) in 1996, $326.3
million ($1.34 per share) in 1995, and $239.7 million ($0.97 per share) in 1994.
In 1995 and 1994, income before extraordinary items was $328.3 million ($1.35
per share) and $250.2 million ($1.01 per share).

During the second and third quarters of 1996, Safeway was engaged in a
labor dispute in British Columbia which lasted 40 days and affected 86 stores.
Under Provincial law in British Columbia, replacement workers could not be
hired, and therefore all the affected stores were closed throughout the
strike-lockout. Separately, the Company was engaged in a strike-lockout in the
Denver operating area which lasted 44 days also during the second and third
quarters of 1996. All of the Denver stores operated during the strike-lockout,
largely with replacement workers. Safeway estimates that the combined impact of
both disputes reduced 1996 earnings by approximately $0.14 per share.

11
<PAGE> 12

A nine-day strike during the second quarter of 1995 affected 208 stores in
northern California. The Company estimates that the dispute reduced 1995
earnings by an estimated $0.025 per share.

Sales

Sales were $17.3 billion in 1996, $16.4 billion in 1995 and $15.6 billion
in 1994. Annual same-store sales (sales of stores operating the entire
measurement period in both 1996 and 1995, including stores that remained open
during strikes or lockouts) increased 5.1% in 1996 and 4.6% in 1995. British
Columbia stores were closed during the strike-lockout, and therefore are
excluded from 1996 annual same-store sales. 1996 marked the third consecutive
year that same-store sales exceeded 4%. Through year-end 1996, Safeway had
achieved 14 consecutive quarters of same-store sales increases in excess of 3%.
Safeway has reinvested cost savings into more competitive pricing, improved
store standards and enhanced 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 success of the Safeway SELECT line of premium quality private label
products also contributed to sales growth since its introduction in 1993.

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. Beginning with the first quarter of 1996, Safeway classified
all in-store bakery production labor costs as operating and administrative
expense. Previously, a portion of this labor cost was classified as a component
of cost of goods sold. All prior periods have been reclassified to conform to
the new presentation. Gross profit of 27.65% of sales in 1996 was up from 27.40%
in 1995 and 27.44% in 1994. During 1996, Safeway continued to make progress in
lowering its cost of sales through better buying practices, improved product
mix, lower advertising expenses, distribution efficiencies, and manufacturing
plant closures and consolidations. These improvements were offset during the
second and third quarters of 1996 by the impact of the labor disputes in Denver
and British Columbia, and by efforts to rebuild sales in those areas during the
fourth quarter of the year. In addition, Safeway continued to selectively
reinvest cost savings throughout 1996 to maintain its competitive position.

Operating and Administrative Expenses

At year-end 1996, operating and administrative expense as a percentage of
sales had declined each year since 1992 due to both sales increases and efforts
to control costs. Efforts to control costs 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 22.48% of sales in 1996 from 22.96%
in 1995 and 23.52% in 1994.

Interest Expense

Interest expense fell to $178.5 million in 1996, from $199.8 million in
1995, and $221.7 million in 1994. Interest expense declined in 1996 due to a
combination of lower interest rates and reduced debt levels. In 1995, interest
expense declined primarily due to lower average debt outstanding resulting from
Safeway's strong cash flow from operations.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates, recorded on a one-quarter
delay basis, rose to $50.0 million in 1996 compared to $26.9 million in 1995 and
$27.3 million in 1994. At year-end 1996, Safeway held a 34.4% interest in Vons,
which operated 320 grocery stores located primarily in southern California, and
a 49% interest in Casa Ley, which operates food and general merchandise stores
in western Mexico.

12
<PAGE> 13

Safeway's share of Vons' earnings was $31.2 million in 1996, compared to
$18.3 million in 1995 and $11.6 million in 1994. In 1994, Vons reported a
restructuring charge which decreased Safeway's share of Vons' earnings by $3.9
million. According to Vons, this restructuring charge included anticipated
expenses associated with a program to close underperforming stores and reduce
workforce.

Income from Safeway's equity investment in Casa Ley increased to $18.8
million in 1996 from $8.6 million in 1995 and $15.7 million in 1994. For much of
1995, Mexico suffered from high interest rates and inflation which adversely
affected Casa Ley. During 1996, interest rates and inflation in Mexico moderated
and Casa Ley's financial results have gradually improved.

Extraordinary Loss

In 1995 and 1994, Safeway's net income was reduced by extraordinary losses
of $2.0 million ($0.01 per share) and $10.5 million ($0.04 per share) 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. Depending on market conditions, Safeway may continue to
purchase and retire long-term debt.

Warrants

SSI Equity Associates, a related party, is a limited partnership whose sole
assets consist of warrants to purchase 23.4 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 for $196.2 million with proceeds from bank
borrowings. During 1996, Safeway acquired an additional 13.8% of the partnership
interests in SSI Equity Associates for $126.5 million, again with proceeds from
bank borrowings. In calculating earnings per share, Safeway considers the
warrants to be Common Stock equivalents.

LIQUIDITY AND FINANCIAL RESOURCES

Net cash flow from operations for the first 36 weeks of the year was $728.4
million in 1997, compared to $546.9 million in 1996.

Cash flow used by investing activities for the first 36 weeks of the year
was $257.7 million in 1997, compared to $246.1 million in 1996. The change in
cash flow used by investing activities is primarily the result of the
acquisition of Vons' cash, offset by increased capital expenditures to open 16
stores, to continue construction of a manufacturing plant in California and to
begin work on a new distribution center in Maryland.

Cash flow used by financing activities for the first 36 weeks of the year
increased to $518.3 million in 1997, from $350.1 million in 1996, primarily due
to the early retirement of long-term debt.

Net cash flow from operations as presented on the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense, income taxes
and changes in working capital. Management believes that operating cash flow is
relevant because it assists investors in evaluating Safeway's ability to service
its debt by providing a commonly used measure of cash available to pay interest,
and it facilitates comparisons of Safeway's results of operations with those
companies having different capital structures. However, other companies may
define operating cash flow differently, and as a result, such measures may not

13
<PAGE> 14

be comparable to Safeway's operating cash flow. Safeway's computation of
operating cash flow is as follows (dollars in millions):

<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
--------------------- ---------------------
SEPT. 6, SEPT. 7, SEPT. 6, SEPT. 7, 52 WEEKS 52 WEEKS 52 WEEKS
1997 1996 1997 1996 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss..................... $259.8 $178.1 $ 704.1 $519.4 $ 767.6 $ 556.5 $424.1
LIFO expense............................. -- 2.3 2.3 6.9 4.9 9.5 2.7
Interest expense......................... 62.3 39.8 163.7 126.3 178.5 199.8 221.7
Depreciation and amortization............ 111.5 79.7 304.4 233.5 338.5 329.7 326.4
Equity in earnings of unconsolidated
affiliates............................. (4.1) (13.1) (25.6) (34.3) (50.0) (26.9) (27.3)
------ ------ -------- ------ -------- -------- ------
Operating cash flow...................... $429.5 $286.8 $1,148.9 $851.8 $1,239.5 $1,068.6 $947.6
====== ====== ======== ====== ======== ======== ======
As a percent of sales.................. 8.00% 7.25% 7.82% 7.23% 7.18% 6.52% 6.06%
As a multiple of interest expense...... 6.89x 7.21x 7.02x 6.74x 6.94 x 5.35 x 4.27x
</TABLE>

Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the Bank Credit Agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. The Bank Credit Agreement is used
primarily as a backup facility to the commercial paper program.

CAPITAL EXPENDITURE PROGRAM

A component of the Company's long-term strategy is its capital expenditure
program. During the first three quarters of 1997, Safeway and Vons together
invested $380 million in capital expenditures (including Vons' first quarter
1997 capital spending of $7 million) to, among other things, open 16 new stores,
continue the construction of a manufacturing plant in California and begin work
on a new distribution center in Maryland. Combined capital expenditures for
Safeway and Vons in fiscal 1997 are expected to exceed $800 million to open 35
to 40 new stores, complete approximately 180 remodels and continue construction
of the new plant and distribution center. In 1998, the Company expects to spend
in excess of $950 million to open 40 to 45 new stores, complete more than 200
remodels and finish the construction of the distribution center.

YEAR 2000 COMPLIANCE

The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
manufacturing, product development, financial business systems and various
administrative functions. To the extent that the Company's software applications
contain source code that is unable to appropriately interpret the upcoming
calendar year "2000" and beyond, some level of modification, or replacement of
such applications will be necessary. The Company has completed its
identification of applications that are not "Year 2000" compliant and has
commenced modification or replacement of such applications, as necessary. Given
information known at this time about the Company's systems that are
non-compliant, coupled with the Company's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, management does
not expect Year 2000 compliance costs to have any material adverse impact on the
Company's liquidity or ongoing results of operations. No assurance can be given,
however, that all of the Company's systems will be Year 2000 compliant or that
compliance costs or the impact of the Company's failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
future liquidity or results of operations.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). The Company is required to adopt SFAS No. 128 in the fourth quarter of
1997 and at that time will restate earnings per share ("EPS") data for prior
periods to conform with SFAS No. 128. Earlier application is not permitted.

14
<PAGE> 15

SFAS No. 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
contracts to issue common shares were exercised or converted to common shares.

In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that a Company report, by major components and as a single total, the
change in its net assets during the period from nonowner sources, and No. 131
(Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.

15
<PAGE> 16

BUSINESS

On April 8, 1997, the Company completed the Merger pursuant to which the
Company issued 41.6 million shares of the Company's Common Stock for all of the
shares of Vons common stock that it did not already own. The Company also holds
a 49% interest in Casa Ley, which, as of September 6, 1997, operated 71 food and
general merchandise stores in western Mexico.

OPERATING STRATEGY

Controlling Costs

Safeway has focused on controlling and reducing elements of its cost of
sales through better buying practices, lower advertising expenses, distribution
efficiencies, manufacturing plant closures and consolidations, and its category
management process. Safeway's efforts to control or reduce operating and
administrative expenses have included overhead reduction in its administrative
support functions, negotiation of competitive labor agreements, store level work
simplification, consolidation of the Company's information technology
operations, elimination of certain corporate perquisites and the general
encouragement of a "culture of thrift" among employees. Safeway's operating and
administrative expense as a percentage of sales has declined 199 basis points
from 24.47% in 1992 to 22.48% in 1996. This percentage has increased following
the Merger due to Vons' historically higher operating and administrative expense
to sales ratio and as a result of increased goodwill amortization. Safeway has
begun to realize economies of scale and to implement certain programs that have
been successful at Safeway which are expected to generate operating improvements
and cost savings for Vons. In addition, on a pro forma basis, the Company
continued to reduce operating and administrative expenses as a percentage of
sales in the second and third quarters of 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations".

Increasing Sales

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<PAGE> 17

sales strategies that have been employed successfully by each of Safeway and
Vons. For example, Safeway recently introduced the Safeway Club Card in its
northern California division (a customer loyalty program designed to reward
frequent shoppers), which was inspired by a similar program at Vons.

Improving Capital Management

RETAIL OPERATIONS

Stores

Safeway operates stores ranging in size from approximately 5,900 square
feet to over 89,000 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 Safeway stores offer a wide selection of both food and general
merchandise and feature a variety of specialty departments such as bakery,
delicatessen, floral and pharmacy. 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.

The following table summarizes the stores operated by Safeway by size at
September 6, 1997:

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STORES TOTAL
--------- ----------
<S> <C> <C>
Less than 30,000 square feet............................... 382 28.0%
30,000 to 50,000........................................... 725 53.0
More than 50,000........................................... 260 19.0
----- -----
Total stores..................................... 1,367 100.0%
===== =====
</TABLE>

Store Ownership

At September 6, 1997, Safeway owned more than one-third of the stores it
operates. Safeway leases the remaining stores. In recent years, the Company has
opted for ownership of new developments where possible because it provides
control and flexibility with respect to financing terms, remodeling, expansions
and closures.

Merchandising

Safeway's operating strategy is to provide superior value to its customers
by maintaining high store standards and a wide selection of high quality
products at competitive prices. The Company emphasizes high

17
<PAGE> 18

quality perishables, such as produce and meat, and specialty departments,
including in-store bakery, produce, delicatessen, floral and pharmacy, designed
to provide one-stop shopping for today's busy shoppers.

Safeway has introduced a line of over 800 premium corporate brand products
since 1993 under the "Safeway SELECT" banner. These products include soft
drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream,
yogurt, pet food and laundry detergent. The line also includes Safeway SELECT
"Healthy Advantage" items such as low-fat ice cream and low-fat cereal bars,
Safeway SELECT "Gourmet Club" frozen entrees and hors d'oeuvres.

The Safeway SELECT line is designed to offer premium quality products that
are equal or superior in quality to comparable best-selling nationally
advertised brands, are offered at more competitive prices, or are not available
from national brand manufacturers. Safeway also offers a wide selection of
private label products under well-known and respected brand names such as
Safeway, Vons, Lucerne, Jerseymaid and Mrs. Wright's, which Safeway believes are
equivalent in quality to comparable nationally advertised brands.

The Company continually refines its merchandising strategies, which are
designed to identify and accommodate changing demographics, lifestyles and
product preferences of its customers. Safeway has intensified its efforts to
improve in-stock conditions and enhance merchandise presentation and selection.

MANUFACTURING AND WHOLESALE OPERATIONS

The principal function of manufacturing operations is to purchase,
manufacture and process private label merchandise sold in stores operated by the
Company. As measured by sales dollars, over one-half of Safeway's private label
merchandise is manufactured in company-owned plants, and the remainder is
purchased from third parties.

During 1993, Safeway began a review to identify manufacturing operations
that were not providing acceptable returns. This review resulted in the sale or
closure of 18 plants from 1993 through September 6, 1997 and a reorganization of
the manufacturing division administrative office during 1994. By year end 1997,
Safeway expects to open a new food processing plant in California and close
another facility operating in Texas. The ongoing review of all remaining
manufacturing operations 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
September 6, 1997:

<TABLE>
<CAPTION>
U.S. CANADA
---- ------
<S> <C> <C>
Milk plants........................................................ 7 3
Bread baking plants................................................ 6 2
Ice cream plants................................................... 5 2
Cheese and meat packaging plants................................... 2 1
Soft drink bottling plants......................................... 4 --
Fruit and vegetable processing plants.............................. 1 3
Other food processing plants....................................... 3 2
Pet food plants.................................................... 1 --
--- ---
Total.................................................... 29 13
=== ===
</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 ten retail operating areas is served by a regional
distribution center consisting of one or more facilities. Safeway has 13
distribution/warehousing centers (ten in the United States and three in Canada),
which collectively provide the majority of all products to stores operated by
the Company. Safeway's

18
<PAGE> 19

distribution centers in northern California and British Columbia are operated by
a third party. Management regularly reviews distribution operations focusing on
whether these operations support their operating areas in a cost-effective
manner. As a result of such reviews, Safeway has begun construction of a
replacement distribution center in Maryland.

CAPITAL EXPENDITURE PROGRAM

A 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, resulting in improved returns on investment.

The table below reconciles cash paid for property additions reflected in
the Company's Consolidated Statements of Cash Flows to Safeway's broader
definition of capital expenditures, excluding Vons (dollars in millions), and
also details changes in the Company's store base during such period:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash paid for property additions........................................ $541.8 $450.9 $339.9
Less: Purchases of previously leased properties......................... (13.2) (9.9) (54.5)
Plus: Present value of all lease obligations incurred................... 91.7 62.2 55.5
Mortgage notes assumed in property acquisitions................... -- -- 11.3
------ ------ ------
Total capital expenditures.............................................. $620.3 $503.2 $352.2
====== ====== ======
Capital expenditures as a percent of sales.............................. 3.6% 3.1% 2.3%
New stores opened....................................................... 30 32 20
Stores closed or sold................................................... 37 35 36
Remodels................................................................ 141 108 71
Total retail square footage at year-end (in millions)................... 40.7 40.1 39.5
</TABLE>

Improved operations and lower project costs have raised the return on
capital projects, allowing Safeway to increase capital expenditures to $620
million in 1996 from $503 million in 1995 and $352 million in 1994. During the
first three quarters of 1997, Safeway and Vons together invested $380 million in
capital expenditures to, among other things, open 16 new stores, continue the
construction of a manufacturing plant in California and begin work on a new
distribution center in Maryland. Combined capital expenditures for Safeway and
Vons in fiscal 1997 are expected to exceed $800 million and will be used
primarily to open 35 to 40 new stores and complete approximately 180 remodels in
1997.

ACQUISITIONS

Management believes that the supermarket industry is fragmented and that
there may be opportunities to make acquisitions that would enhance Safeway's
long-term growth. Safeway's criteria for considering aquisition targets include,
but are not limited to, strong market share and the potential for improving
EBITDA margin. These criteria are subject to review and modification from time
to time. There can be no assurance that Safeway will complete any such
acquisition or that, if completed, the business acquired will make any
contribution to Safeway's long-term growth.

EMPLOYEES

At September 6, 1997, Safeway had approximately 147,000 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-to-five-year terms.
Accordingly, Safeway renegotiates a significant number of these agreements every
year.

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<PAGE> 20

In the last four fiscal years, there have been five significant work
stoppages (in Portland, northern California, Denver, British Columbia and
Alberta). These work stoppages were resolved in a manner that management
considered generally satisfactory.

20
<PAGE> 21

PRINCIPAL AND SELLING STOCKHOLDERS

All of the shares of Common Stock being offered hereby are being sold by
certain stockholders of the Company described in the following table (the
"Selling Stockholders").

The following table sets forth information regarding the beneficial
ownership of Safeway's outstanding Common Stock as of October 31, 1997, and as
adjusted to give effect to the offerings, for (i) each of Safeway's directors,
(ii) each of the Selling Stockholders, (iii) the Company's Chief Executive
Officer, (iv) each of the Company's four other most highly compensated executive
officers who were serving as executive officers at the end of fiscal 1996, (v)
all executive officers and directors of Safeway as a group and (vi) each person
believed by Safeway to own beneficially more than 5% of its outstanding shares
of Common Stock. Except as indicated by the notes to the following table, the
holders listed below have sole voting power and investment power over the shares
beneficially held by them. The address of KKR Associates, SSI Equity Associates
and SSI Partners, L.P. is 9 West 57th Street, New York, New York 10019.

<TABLE>
<CAPTION>
BEFORE OFFERINGS AFTER OFFERINGS
--------------------------- ---------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES(1) PERCENTAGE (1) SHARES OFFERED SHARES(1) PERCENTAGE (1)
---------- -------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
KKR Associates, L.P.(2)........ 77,232,263 32.9% 22,134,636 55,097,627 23.2%
James H. Greene, Jr.(3)...... 35,000 * 35,000 *
Henry R. Kravis(4)........... -- --
Robert I. MacDonnell(5)...... -- --
George R. Roberts(6)......... -- --
Michael T. Tokarz............ 10,000 * 10,000 *
SSI Equity Associates,
L.P.(7)...................... 23,405,953 9.1 2,865,364 15,336,550 6.1
Sam Ginn(8).................... 102,084 * 102,084 *
Paul Hazen(8).................. 102,084 * 102,084 *
Peter A. Magowan(9)............ 2,076,800 * 2,076,800 *
Steven A. Burd(9).............. 1,535,744 * 1,535,744 *
Kenneth W. Oder(9)(10)......... 981,072 * 981,072 *
Julian C. Day(9)............... 231,557 * 231,557 *
Michael C. Ross(9)............. 312,035 * 312,035 *
David T. Ching(9).............. 38,544 * 38,544 *
FMR Corp.(11).................. 12,946,400 5.5 12,946,400 5.4
All executive officers and
directors as a group (16
persons, excluding Messrs.
Greene, Kravis, Roberts,
MacDonnell and Tokarz)(9).... 6,097,844 2.5 6,097,844 2.5
</TABLE>

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

* Less than 1%

(1) For purposes of this table, a person or a group of persons is deemed to
have "beneficial ownership" as of a given date of any shares which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any shares which
such person or persons has the right to acquire within 60 days after such
date are deemed to be outstanding, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.

(2) The shares are owned of record by the Common Stock Partnerships, the sole
general partner of each of which is KKR Associates. KKR Associates, in its
capacity as general partner, may be deemed to beneficially own such shares.
Messrs. Greene, Kravis, MacDonnell, Roberts, Tokarz, Edward A. Gihuly,
Perry Golkin, Michael W. Michelson, Paul E. Raether, Clifton S. Robbins and
Scott Stuart, as general partners of KKR Associates, may be deemed to share
beneficial ownership of any shares beneficially owned by KKR Associates,
but disclaim any such beneficial ownership. Messrs. Greene, Kravis,
MacDonnell, Roberts and Tokarz are members of Safeway's Board of Directors.
See "Capitalization".

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<PAGE> 22

(3) Represents shares owned jointly by Mr. Greene and his wife. Does not
include 10,000 shares owned by Mrs. Greene, as to which Mr. Greene
disclaims any beneficial ownership. Does not include 6,000 shares held in
trust by Mrs. Greene for the benefit of their children, as to which Mr.
Greene disclaims any beneficial ownership.

(4) Does not include 400,000 shares held by Mr. Kravis as a trustee of an
irrevocable trust created by Mr. Roberts for the benefit of his children
(the "Roberts Trust"). As co-trustee, Mr. Kravis shares the authority to
vote and dispose of the shares, but has no economic interest in such
shares.

(5) Does not include 60,000 shares held in an irrevocable trust created by Mr.
MacDonnell for the benefit of his children (the "MacDonnell Trust") with
respect to which Mr. MacDonnell disclaims any beneficial ownership.

(6) Does not include 60,000 shares held by Mr. Roberts as a trustee of the
MacDonnell Trust. As co-trustee, Mr. Roberts shares the authority to vote
and to dispose of the shares, but has no economic interest in such shares.
Does not include 400,000 shares held in the Roberts Trust with respect to
which Mr. Roberts disclaims any beneficial ownership.

(7) SSI Equity Associates is a Delaware limited partnership, the sole general
partner of which is SSI Partners, L.P., a Delaware limited partnership. SSI
Partners, L.P., in its capacity as general partner, may be deemed to own
any shares beneficially owned by SSI Equity Associates. Messrs. Kravis,
MacDonnell, Raether and Roberts, as general partners of SSI Partners, L.P.,
may be deemed to share beneficial ownership of any shares beneficially
owned by SSI Partners, L.P., but disclaim any such beneficial ownership.
Messrs. Kravis, MacDonnell and Roberts are members of Safeway's Board of
Directors. All 23,405,953 shares shown as beneficially owned before the
offerings represent shares of Common Stock issuable upon exercise of SSI
Warrants. In connection with the offerings, SSI Equity Associates will sell
to the Underwriters SSI Warrants to purchase 2,865,364 shares of Common
Stock which will be exercised and sold in the offerings. SSI Equity
Associates also will transfer to Safeway for cancellation SSI Warrants to
purchase 5,204,039 shares of Common Stock, such SSI Warrants representing
the pro rata portion of the SSI Warrants that are attributable to the
limited partnership interests held by Safeway. See "Capitalization".
Following the offerings, SSI Equity Associates will hold SSI Warrants to
purchase 15,336,550 shares of Common Stock (of which 9,890,694 shares will
be attributable to limited partnership interests held by Safeway).

(8) Includes 81,250 shares issuable upon exercise of stock options.

(9) Includes shares issuable upon exercise of stock options as follows: Mr.
Magowan, 745,000; Mr. Burd, 1,391,131; Mr. Oder, 925,000; Mr. Day, 195,000;
Mr. Ross, 285,000; Mr. Ching, 36,000; and all executive officers and
directors as a group, 4,401,201. Does not include shares issuable upon
exercise of stock options which are not vested.

(10) Does not include 2,568 shares held by Mr. Oder as trustee of irrevocable
trusts created by Mr. Burd for the benefit of his children. As trustee, Mr.
Oder has the authority to vote and dispose of the shares, but has no
economic interest in such shares.

(11) All information regarding FMR Corp. and its affiliates is based on
information disclosed in the Schedule 13G filed by FMR Corp., Edward C.
Johnson 3d and Abigail Johnson on February 13, 1997 (the "Schedule 13G").
According to the Schedule 13G, (i) Fidelity Management & Research Company,
a wholly owned subsidiary of FMR Corp., is the beneficial owner of
11,894,100 of such shares as a result of acting as investment adviser to
various investment companies, (ii) Fidelity Management Trust Company, a
wholly owned subsidiary of FMR Corp., is the beneficial owner of 689,800 of
such shares as a result of its serving as investment manager of
institutional account(s), (iii) Fidelity International Limited is the
beneficial owner of 362,500 of such shares as a result of its providing
investment advisory and management services to a number of non-U.S.
investment companies and certain institutional investors, (iv) FMR Corp.,
Edward C. Johnson 3d and Abigail Johnson each has sole dispositive power
over all such shares and (v) FMR has sole voting power over 607,600 of such
shares. The address of FMR Corp. is 82 Devonshire Street, Boston,
Massachusetts 02109.

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<PAGE> 23

Following the offerings, the Common Stock Partnerships will hold 55,097,627
shares of Common Stock, which will represent approximately 23.2% of the
outstanding Common Stock and 20.9% on a fully diluted basis. The Common Stock
Partnerships, KKR Associates, and their general partners will continue to be
able to exercise effective control over the Company through their representation
on the Board of Directors.

In connection with the offerings, SSI Equity Associates will sell to the
Underwriters SSI Warrants to purchase 2,865,364 shares of Common Stock which
will be exercised and sold in the offerings. SSI Equity Associates also will
transfer to Safeway for cancellation SSI Warrants to purchase 5,204,039 shares
of Common Stock, such SSI Warrants representing the pro rata portion of the SSI
Warrants that are attributable to the limited partnership interests held by
Safeway. See "Capitalization". Following the offerings, SSI Equity Associates
will hold SSI Warrants to purchase 15,336,550 shares of Common Stock (of which
9,890,694 shares will be attributable to limited partnership interests held by
Safeway).

The Company and the Selling Stockholders have agreed, with certain
exceptions, not to (i) offer, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) with respect to the Company
only, enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, except
for (i) the shares to be sold in the offerings and the SSI Warrants to be
canceled, (ii) any shares of Common Stock issued by the Company pursuant to
stock option plans in effect on the date of this Prospectus, (iii) option grants
under stock option plans in effect on the date of this Prospectus, (iv) any
agreement of the Company in connection with an acquisition of assets or
properties or any capital stock issuable pursuant to the terms of such an
agreement, (v) capital stock issuable upon the exercise of warrants outstanding
on the date of this Prospectus or (vi) the cancellation of warrants for a period
of at least 90 days from the date of this Prospectus without the prior written
consent of Goldman, Sachs & Co. If any such consent is given it would not
necessarily be preceded or followed by a public announcement thereof.

The Company, the Common Stock Partnerships, SSI Equity Associates and
certain other parties entered into an agreement dated as of November 25, 1986
(the "Registration Agreement"), a copy of which is incorporated by reference as
an exhibit to the Registration Statement of which this Prospectus is a part,
pursuant to which the Company agreed to register the offer and sale of shares of
Common Stock held by such parties, including the shares of Common Stock offered
hereby, under the Securities Act, and such parties and the Company agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act in connection with the sale of the shares pursuant to the
Registration Agreement. Pursuant to the Registration Agreement, the Common Stock
Partnerships and SSI Equity Associates are required to pay the underwriting
discounts and commissions and transfer taxes, if any, associated with the
offerings, and the Company is required to pay substantially all expenses
directly associated with the offerings, including, without limitation, the cost
of registering the shares offered hereby, including the applicable registration
and filing fees, printing expenses, certain underwriting expenses and applicable
expenses for legal counsel and accountants incurred by the Company or the Common
Stock Partnerships and SSI Equity Associates.

No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issued upon the exercise of stock
options or warrants), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.

23
<PAGE> 24

DESCRIPTION OF CAPITAL STOCK

GENERAL

Pursuant to Safeway's Restated Certificate of Incorporation, as amended
(the "Restated Certificate"), the authorized capital stock of Safeway consists
of 750,000,000 shares of Common Stock, par value $0.01 per share, and 25,000,000
shares of preferred stock, par value $0.01 per share. At October 31, 1997,
Safeway had outstanding 234,969,152 shares of Common Stock and no outstanding
shares of preferred stock. All shares of Common Stock are fully paid and
nonassessable. As of October 31, 1997, there were approximately 8,926 holders of
record of Common Stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all action to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of Safeway, the holders of Common Stock
are entitled to share equally and ratably in the assets of Safeway, if any,
remaining after the payment of all debts and liabilities of Safeway and the
liquidation preference of any outstanding preferred stock. The Common Stock has
no preemptive rights, no cumulative voting rights and no redemption, sinking
fund or conversion provisions.

The Restated Certificate provides for a classified Board of Directors
consisting of three classes as nearly equal in size as practicable. Each class
will hold office until the third annual meeting for election of directors
following the election of such class.

Safeway's By-laws provide for additional notice requirements for
stockholder nominations and proposals at annual or special meetings of Safeway.
At annual meetings, stockholders may submit nominations for directors or other
proposals only upon written notice to Safeway at least 50 days prior to the
annual meeting.

The Common Stock is listed on the New York Stock Exchange. The transfer
agent and registrar for the Common Stock is First Chicago Trust Company of New
York.

PREFERRED STOCK

The Board of Directors of Safeway is authorized without further stockholder
action, to divide any or all shares of the authorized preferred stock into
series and to fix and determine the designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this Prospectus, the Board of Directors has not
authorized any series of preferred stock and there are no plans, agreements or
understandings for the issuance of any shares of preferred stock.

DIVIDENDS

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 certain limitations in the Bank Credit Agreement. See
"Dividend Policy".

CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

GENERAL

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person or entity (a "Non-U.S.
Holder"). As used in this discussion, the term "Non-U.S. Holder" means any
person or entity that

24
<PAGE> 25

is, for United States federal income tax purposes, a foreign corporation, a
non-resident alien individual, a non-resident fiduciary of a foreign estate or
trust, or a foreign partnership. An individual may, subject to certain
exceptions, be deemed to be a resident alien (as opposed to a non-resident
alien) by virtue of being present in the United States on at least 31 days in
the calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year (counting for such purposes all of
the days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year). Resident aliens are subject to United States federal tax as if
they were United States citizens and residents.

This discussion does not address all aspects of United States federal
income and estate taxes or consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and
local consequences that may be relevant to Non-U.S. Holders. Furthermore, this
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed regulations promulgated
thereunder and public administrative and judicial interpretations thereof, all
of which are subject to changes which could be applied retroactively. EACH
PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH
RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING
AND DISPOSING OF COMMON STOCK.

DIVIDENDS

The Company does not currently intend to pay cash dividends on shares of
Common Stock. See "Dividend Policy". In the event that such dividends are paid
on shares of Common Stock, except as described below, dividends paid to a
Non-U.S. Holder of Common Stock will be subject to withholding of United States
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are effectively connected
with the conduct of a trade or business by the Non-U.S. Holder within the United
States. If the dividends are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States and, if a tax treaty
applies, are attributable to a United States permanent establishment of the
Non-U.S. Holder, the dividends will be subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate rates
and will be exempt from the 30% withholding tax described above (assuming the
necessary certification and disclosure requirements are met). Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.

Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above (unless the payor has knowledge to the contrary), and, under currently
applicable United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under recently promulgated United States
Treasury regulations generally effective with respect to payments made after
December 31, 1998, however, a Non-U.S. Holder of Common Stock who wishes to
claim the benefit of an applicable treaty rate (and avoid backup withholding as
discussed below) will be required to satisfy specified certification and other
requirements, which will include filing a Form W-8 containing the Non-U.S.
Holder's name, address and a certification that such Holder is eligible for the
benefits of the treaty under its Limitations in Benefits Article. In addition,
certain certification and disclosure requirements must be met to be exempt from
withholding under the effectively connected income exemption discussed above.

A Non-U.S. Holder of Common Stock who is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate, timely claim for
refund with the United States Internal Revenue Service (the "Service").

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on a disposition of a share of Common Stock
unless (i) subject to the exception discussed below, the Company is or has been
a "United States real property holding corporation" (a "USRPHC") within the

25
<PAGE> 26

meaning of section 897(c)(2) of the Code at any time within the shorter of the
five-year period preceding such disposition or such Non-U.S. Holder's holding
period (the "Required Holding Period"), (ii) the gain is effectively connected
with the conduct of a trade or business within the United States of the Non-U.S.
Holder and, if a tax treaty applies, is attributable to a permanent
establishment maintained by the Non-U.S. Holder, (iii) the Non-U.S. Holder is an
individual who holds the share of Common Stock as a capital asset and is present
in the United States for 183 days or more in the taxable year of the disposition
and either (a) such individual has a "tax home" (as defined for United States
federal income tax purposes) in the United States or (b) the gain is
attributable to an office or other fixed place of business maintained in the
United States by such individual, or (iv) the Non-U.S. Holder is subject to tax
pursuant to the Code provisions applicable to certain United States expatriates.
If an individual Non-U.S. Holder falls under clause (ii) or (iv) above, he or
she will be taxed on his or her net gain derived from the sale under regular
United States federal income tax rates. If the individual Non-U.S. Holder falls
under clause (iii) above, he or she will be subject to a flat 30% tax on the
gain derived from the sale which may be offset by United States source capital
losses (notwithstanding the fact that he or she is not considered a resident of
the United States). If a Non-U.S. Holder that is a foreign corporation falls
under clause (ii) above, it will be taxed on its gain under regular graduated
United States federal income tax rates and, in addition, will under certain
circumstances be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits" within the meaning of the Code for
the taxable year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable income tax treaty.

A corporation is generally a USRPHC if the fair market value of its United
States real property interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its other assets used
or held for use in a trade or business. The Company believes that it is not
currently a USRPHC. However, a Non-U.S. Holder would generally not be subject to
tax or withholding in respect of such tax, on gain from a sale or other
disposition of Common Stock by reason of the Company's USRPHC status if the
Common Stock is regularly traded on an established securities market ("regularly
traded") during the calendar year in which such sale or disposition occurs,
provided that such holder does not own, actually or constructively, Common Stock
with a fair market value in excess of 5% of the fair market value of all Common
Stock outstanding at any time during the Required Holding Period. The Company
believes that the Common Stock will be treated as regularly traded.

If the Company is or has been a USRPHC within the Required Holding Period,
and if a Non-U.S. Holder owns in excess of 5% of the fair market value of Common
Stock (as described in the preceding paragraph), such Non-U.S. Holder of Common
Stock will be subject to United States federal income tax at regular graduated
rates under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such Common Stock. In addition, if the Company is or has been a
USRPHC within the Required Holding Period and if the Common Stock were not
treated as regularly traded, a Non-U.S. Holder (without regard to its ownership
percentage) would be subject to withholding in respect of FIRPTA tax at a rate
of 10% of the amount realized on a sale or other disposition of Common Stock and
could be further subject to FIRPTA tax in excess of the amounts withheld. Any
amount withheld pursuant to such withholding tax would be creditable against
such Non-U.S. Holder's United States federal income tax liability. Non-U.S.
Holders are urged to consult their tax advisors concerning the potential
applicability of these provisions.

FEDERAL ESTATE TAXES

An individual Non-U.S. Holder who (i) is not a citizen or resident of the
United States (as specifically defined for United States estate tax purposes) at
the time of his or her death and (ii) owns, or is treated as owning Common Stock
at the time of his or her death, or has made certain lifetime transfers of an
interest in Common Stock, will be required to include the value of such Common
Stock in his or her gross estate for federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply regardless of
whether withholding is required. Copies of the information returns reporting

26
<PAGE> 27

such dividends and withholding may also be made available to the tax authorities
in the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty or other agreement with the tax authorities in that
country.

United States backup withholding tax (which, in general, is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) generally will not apply to (a) the payment of dividends paid on
Common Stock to a Non-U.S. Holder at an address outside the United States
(unless the payor has knowledge that the payee is a United States person) or (b)
the payment of the proceeds of the sale of Common Stock to or through the
foreign office of a broker. In the case of the payment of proceeds from such a
sale of Common Stock through a foreign office of a broker that is a United
States person or a "U.S. related person", however, information reporting (but
not backup withholding) is required with respect to the payment unless the
broker has documentary evidence in its files that the owner is a Non-U.S. Holder
(and has no actual knowledge to the contrary) and certain other requirements are
met or the holder otherwise establishes an exemption. For this purpose, a "U.S.
related person" is (i) a "controlled foreign corporation" for United States
federal income tax purposes, or (ii) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business. The payment of
the proceeds of a sale of shares of Common Stock to or through a United States
office of a broker is subject to information reporting and possible backup
withholding unless the owner certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules from a payment to a Non-U.S. Holder will be
allowed as a refund or a credit against such Non-U.S. Holder's United States
federal income tax liability, provided that the required information is
furnished to the Service.

The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the final
regulations permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules. Non-U.S. Holders should consult their
own tax advisors with respect to the impact, if any, of the final regulations.

LEGAL MATTERS

Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for Safeway and the Selling
Stockholders by Latham & Watkins, San Francisco, California and Michael C. Ross,
General Counsel of Safeway, and for the Underwriters by Brown & Wood LLP, San
Francisco, California. Certain partners of Latham & Watkins, members of their
families, related persons and others, have an indirect interest, through limited
partnerships, in less than 1% of the Company's Common Stock. Such persons do not
have the power to vote or dispose of such shares of Common Stock. Michael C.
Ross holds Common Stock and options to purchase Common Stock which in the
aggregate constitute less than 1% of the Company's Common Stock.

EXPERTS

The consolidated financial statements of the Company as of December 28,
1996 and December 30, 1995 and for each of the three fiscal years in the period
ended December 28, 1996, included herein have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.

The consolidated financial statements of Vons as of December 29, 1996 and
December 31, 1995 and for each of the years in the three-year period ended
December 29, 1996, appearing in the Company's Amendment

27
<PAGE> 28

to Current Report on Form 8-K/A filed with the Commission on May 1, 1997, have
been incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.

INFORMATION INCORPORATED BY REFERENCE

The following documents filed with the Commission pursuant to the Exchange
Act are incorporated by reference in this Prospectus:

(1) the Company's Annual Report on Form 10-K for the year ended
December 28, 1996 (the "Form 10-K");

(2) the portions of the Company's 1996 Annual Report to Stockholders
that have been incorporated by reference into the Form 10-K;

(3) the portions of the Company's Proxy Statement on Schedule 14A
dated March 24, 1997 that have been incorporated by reference into the Form
10-K;

(4) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 22, 1997, June 14, 1997 and September 6, 1997;

(5) the Company's Amendment to Quarterly Report on Form 10-Q/A for the
quarterly period ended June 14, 1997;

(6) the Company's Current Reports on Form 8-K filed with the
Commission on January 10, 1997, March 14, 1997, April 7, 1997, April 23,
1997, June 4, 1997, June 12, 1997, August 5, 1997, September 3, 1997 and
September 10, 1997;

(7) the Company's Amendment to Current Report on Form 8-K/A filed with
the Commission on May 1, 1997;

(8) description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed with the Commission on
February 20, 1990, including the amendment on Form 8 dated March 26, 1990;
and

(9) all other documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Prospectus and before the termination of the offering of all
securities to which this Prospectus relates shall be deemed to be a part
hereof from the date of filing of such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon request, a copy of
any documents incorporated into this Prospectus by reference (other than
exhibits incorporated by reference into such document). Requests for documents
should be submitted to Investor Relations, Safeway Inc., 5918 Stoneridge Mall
Road, Pleasanton, California 94588 (telephone 510/467-3790). The information
relating to the Company contained in this Prospectus does not purport to be
comprehensive and should be read together with the information contained in the
documents incorporated or deemed to be incorporated by reference herein.

28
<PAGE> 29

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets as of September 6, 1997 and December 28, 1996....... F-2
Condensed Consolidated Statements of Income for the 12 and 36 weeks ended September 6,
1997 and September 7, 1996.............................................................. F-3
Condensed Consolidated Statements of Cash Flows for the 36 weeks ended September 6, 1997
and September 7, 1996................................................................... F-4
Notes to the Condensed Consolidated Financial Statements.................................. F-5
Independent Auditors' Report.............................................................. F-10
Consolidated Statements of Income for fiscal years 1996, 1995, and 1994................... F-11
Consolidated Balance Sheets as of year-end 1996 and 1995.................................. F-12
Consolidated Statements of Cash Flows for fiscal years 1996, 1995, and 1994............... F-13
Consolidated Statements of Stockholders' Equity for fiscal 1996, 1995, and 1994........... F-14
Notes to Consolidated Financial Statements................................................ F-15
</TABLE>

F-1
<PAGE> 30

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 6, DECEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and equivalents............................................... $ 32.1 $ 79.7
Receivables........................................................ 187.0 160.9
Merchandise inventories............................................ 1,523.6 1,283.3
Prepaid expenses and other current assets.......................... 156.5 130.5
-------- --------
Total current assets....................................... 1,899.2 1,654.4
-------- --------
Property............................................................. 6,367.1 5,069.6
Less accumulated depreciation and amortization..................... (2,502.7) (2,313.2)
-------- --------
Property, net...................................................... 3,864.4 2,756.4
Goodwill, net of accumulated amortization of $142.2 and $116.4....... 1,886.0 312.5
Prepaid pension costs................................................ 337.2 328.7
Investments in unconsolidated affiliates............................. 89.5 362.4
Other assets......................................................... 99.9 130.8
-------- --------
Total assets......................................................... $ 8,176.2 $ 5,545.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures......................... $ 194.9 $ 237.3
Current obligations under capital leases........................... 22.2 18.4
Accounts payable................................................... 1,385.0 1,153.1
Accrued salaries and wages......................................... 260.3 231.2
Other accrued liabilities.......................................... 536.7 390.0
-------- --------
Total current liabilities.................................. 2,399.1 2,030.0
-------- --------
Long-term debt:
Notes and debentures............................................... 2,908.9 1,568.1
Obligations under capital leases................................... 227.2 160.4
-------- --------
Total long-term debt....................................... 3,136.1 1,728.5
Deferred income taxes................................................ 238.5 223.8
Accrued claims and other liabilities................................. 481.0 376.1
-------- --------
Total liabilities.......................................... 6,254.7 4,358.4
-------- --------
Contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 750 shares authorized;
265.2 and 221.4 shares outstanding.............................. 2.7 2.2
Additional paid-in capital......................................... 2,459.0 750.3
Unexercised warrants purchased..................................... (322.7) (322.7)
Cumulative translation adjustments................................. 9.6 12.0
Retained earnings.................................................. 1,100.0 745.0
-------- --------
3,248.6 1,186.8
Less: treasury stock at cost; 30.9 shares in 1997............... (1,327.1) --
-------- --------
Total stockholders' equity................................. 1,921.5 1,186.8
-------- --------
Total liabilities and stockholders' equity................. $ 8,176.2 $ 5,545.2
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-2
<PAGE> 31

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
---------------------------- ----------------------------
SEPTEMBER 6, SEPTEMBER 7, SEPTEMBER 6, SEPTEMBER 7,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales....................................... $ 5,371.4 $ 3,954.0 $ 14,698.4 $ 11,782.1
Cost of goods sold.......................... (3,818.8) (2,867.4) (10,495.0) (8,500.9)
--------- --------- ---------- ---------
Gross profit.............................. 1,552.6 1,086.6 4,203.4 3,281.2
Operating and administrative expense........ (1,235.3) (882.8) (3,363.3) (2,673.2)
--------- --------- ---------- ---------
Operating profit.......................... 317.3 203.8 840.1 608.0
Interest expense............................ (62.3) (39.8) (163.7) (126.3)
Equity in earnings of unconsolidated
affiliates................................ 4.1 13.1 25.6 34.3
Other income, net........................... 0.7 1.0 2.1 3.4
--------- --------- ---------- ---------
Income before income taxes and
extraordinary loss..................... 259.8 178.1 704.1 519.4
Income taxes................................ (109.8) (72.2) (297.5) (210.4)
--------- --------- ---------- ---------
Income before extraordinary loss.......... 150.0 105.9 406.6 309.0
Extraordinary loss related to early
retirement of debt, net of income tax
benefit of $38.3 and $41.1................ (59.9) -- (64.1) --
--------- --------- ---------- ---------
Net income.................................. $ 90.1 $ 105.9 $ 342.5 $ 309.0
Primary and fully diluted income per common
share and common share equivalent:
Income before extraordinary loss.......... $ 0.60 $ 0.44 $ 1.64 $ 1.29
Extraordinary loss........................ (0.24) -- (0.26) --
--------- --------- ---------- ---------
Net income................................ $ 0.36 $ 0.44 $ 1.38 $ 1.29
--------- --------- ---------- ---------
Weighted average common shares and common
share equivalents:
Primary................................... 251.4 240.3 247.3 239.5
--------- --------- ---------- ---------
Fully diluted............................. 251.4 240.5 247.5 240.1
--------- --------- ---------- ---------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-3
<PAGE> 32

SAFEWAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
36 WEEKS ENDED
------------------------------
SEPTEMBER 6, SEPTEMBER 7,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income........................................................... $ 342.5 $ 309.0
Reconciliation to net cash flow from operations:
Extraordinary loss related to the early retirement of debt, before
income tax benefit.............................................. 105.2 --
Depreciation and amortization...................................... 304.4 233.5
LIFO expense....................................................... 2.3 6.9
Equity in undistributed earnings of unconsolidated affiliates...... (25.6) (34.3)
Other.............................................................. 4.0 (5.5)
Change in working capital items:
Receivables and prepaid expenses................................ 28.9 (79.5)
Inventories at FIFO cost........................................ 115.7 9.2
Payables and accruals........................................... (149.0) 107.6
--------- -------
Net cash flow from operations.............................. 728.4 546.9
--------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions..................................... (355.2) (286.9)
Proceeds from sale of property....................................... 49.4 46.1
Net cash acquired in acquisition of The Vons Companies, Inc. ........ 57.2 --
Other................................................................ (9.1) (5.3)
--------- -------
Net cash flow used by investing activities................. (257.7) (246.1)
--------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings................................... 277.5 121.7
Payments on short-term borrowings.................................... (245.5) (205.5)
Additions to long-term borrowings.................................... 3,188.2 148.4
Payments on long-term borrowings..................................... (2,378.2) (432.7)
Purchase of treasury stock........................................... (1,376.0) --
Net proceeds from exercise of stock options and warrants............. 31.7 14.0
Premium paid on early retirement of debt............................. (10.2) --
Other................................................................ (5.8) 4.0
--------- -------
Net cash flow used by financing activities................. (518.3) (350.1)
--------- -------
Decrease in cash and equivalents..................................... (47.6) (49.3)
CASH AND EQUIVALENTS
Beginning of period................................................ 79.7 74.8
--------- -------
End of period...................................................... $ 32.1 $ 25.5
========= =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-4
<PAGE> 33

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Safeway
Inc. and subsidiaries ("Safeway" or the "Company") for the 12 and 36 weeks ended
September 6, 1997 and September 7, 1996 are unaudited and, in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1996 Annual Report to Stockholders. The results of
operations for the 12 and 36 weeks ended September 6, 1997 are not necessarily
indicative of the results expected for the full year.

Acquisition of the Vons Companies, Inc.

As discussed in Note C, Safeway completed the acquisition of The Vons Companies,
Inc. ("Vons") on April 8, 1997. The accompanying financial statements include
Vons' results of operations as of the beginning of the second quarter of 1997.
Summarized pro forma results of operations for 1996 and 1997 appear in Note D.

New Accounting Standard

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No.
128"). The Company is required to adopt SFAS No. 128 in the fourth quarter of
1997 and at that time will restate earnings per share ("EPS") data for prior
periods to conform with SFAS No. 128. Earlier application is not permitted.

Pro forma amounts for basic and diluted EPS assuming SFAS No. 128 had been
in effect for the 12 and 36 weeks ended September 6, 1997 and September 7, 1996
are as follows:

<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
----------------------------- -----------------------------
SEPTEMBER 6, SEPTEMBER 7, SEPTEMBER 6, SEPTEMBER 7,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS:
Income before extraordinary loss........ $ 0.64 $ 0.49 $ 1.77 $ 1.42
Extraordinary loss...................... (0.26) -- (0.28) --
------ ----- ------ -----
Net income.............................. $ 0.38 $ 0.49 $ 1.49 $ 1.42
====== ===== ====== =====
Diluted EPS:
Income before extraordinary loss........ $ 0.60 $ 0.44 $ 1.64 $ 1.29
Extraordinary loss...................... (0.24) -- (0.26) --
------ ----- ------ -----
Net income.............................. $ 0.36 $ 0.44 $ 1.38 $ 1.29
====== ===== ====== =====
</TABLE>

Inventory

Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway did not record LIFO expense in the second and third quarters of 1997,
reflecting management's expectation of little or no inflation for the full

F-5
<PAGE> 34

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

year. LIFO expense was $2.3 million in the third quarter of 1996. For the first
36 weeks of the year, LIFO expense was $2.3 million in 1997 and $6.9 million in
1996. Actual LIFO Indices are calculated during the fourth quarter of the year
based upon a statistical sampling of inventories.

Off-Balance Sheet Financial Instruments

As discussed in Note E to the Company's consolidated financial statements
on page 26 of the 1996 Annual Report to Stockholders, Safeway has entered into
interest rate swap agreements to limit the exposure of its floating interest
rate debt to changes in market interest rates. In the second quarter of 1997,
Safeway purchased interest rate cap agreements with a notional principal amount
of $850 million at 7% for two years. On October 3, 1997, Safeway purchased an
interest rate swap with a notional principal amount of $100 million at 6.2075%
for ten years.

Interest rate cap agreements lock in a maximum rate if rates rise, but
enable the Company to otherwise pay lower market rates. The initial cost of
interest rate caps is amortized to interest expense over the life of the
agreement. Any payments received under the agreement reduce interest expense.

NOTE B -- FINANCING

Notes and debentures were composed of the following at September 6, 1997
and December 28, 1996 (in millions):

<TABLE>
<CAPTION>
SEPTEMBER 6, 1997 DECEMBER 28, 1996
---------------------- ----------------------
LONG-TERM CURRENT LONG-TERM CURRENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Commercial paper, unsecured........................... $1,407.0
10% Senior Subordinated Notes due 2001, unsecured..... 241.4 $ 241.4
9.65% Senior Subordinated Debentures due 2004,
unsecured........................................... 228.2 228.2
9.35% Senior Subordinated Notes due 1999, unsecured... 161.5 161.5
9.875% Senior Subordinated Debentures due 2007,
unsecured........................................... 110.0 110.0
8.375% Senior Subordinated Debentures due 1999,
unsecured........................................... 100.0 --
9.30% Senior Secured Debentures due 2007.............. 70.7 70.7
10% Senior Notes due 2002, unsecured.................. 59.1 59.1
6.625% Senior Subordinated Debentures due 1998,
unsecured........................................... -- $ 36.0 --
Bank Credit Agreement, unsecured...................... 270.9 -- --
Credit Agreement, unsecured........................... -- -- 360.6
Mortgage notes payable, secured....................... 123.3 39.4 156.5 $ 149.9
Other notes payable, unsecured........................ 111.3 4.5 114.6 4.4
Medium-term notes, unsecured.......................... 25.5 -- 65.5 --
Short-term bank borrowings, unsecured................. -- 115.0 -- 83.0
-------- ------ -------- ------
$2,908.9 $ 194.9 $1,568.1 $ 237.3
======== ====== ======== ======
</TABLE>

During the second quarter of 1997, the Company entered into a new $3.0
billion bank credit agreement (the "Bank Credit Agreement" or "BCA") that
provides for, among other things, increased borrowing capacity, extended
maturities and the opportunity to pay lower interest rates based on interest

F-6
<PAGE> 35

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

coverage ratios or public debt ratings. The restrictive covenants of the Bank
Credit Agreement continue to limit payments by the Company, for, among other
things: (i) paying cash dividends on its capital stock; (ii) repurchasing shares
of its capital stock; and (iii) acquiring any outstanding warrants, options or
other rights to acquire shares of any class of Safeway stock. These covenants
also limit Safeway with respect to, among other things, creating liens upon its
assets and disposing of material amounts of assets other than in the ordinary
course of business. Safeway also is required to meet certain financial tests
under the Bank Credit Agreement.

During the third quarter of 1997, Safeway entered the commercial paper
market. The proceeds were used to pay down borrowings under the BCA. Commercial
paper outstanding at September 6, 1997 is classified as long-term because the
Company intends to refinance these borrowings on a long-term basis through
either continued commercial paper borrowings or utilization of the BCA.

During the first three quarters of 1997, the Company recorded an
extraordinary loss of $64.1 million, net of the related tax benefit, for the
retirement of $589.0 of Safeway's public debt, $285.5 million of Vons' public
debt, and $40 million of medium-term notes. Safeway financed the redemption with
$600 million of new senior debt securities issued on September 10, 1997 (the
"Senior Debt") and the balance with commercial paper. The Senior Debt consists
of 6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007 and 7.45% Senior
Debentures due 2027. The refinancing extends Safeway's overall long-term debt
maturities, increases financial flexibility and, based on current interest
rates, is expected to reduce interest expense. The indentures related to the
Senior Debt contain certain restrictive covenants which place limitations on
liens, sale and lease-back transactions, and merger transactions. In connection
with the redemption, the Company obtained consents from the holders of the 9.30%
Senior Secured Debentures and the Senior Subordinated Debentures to amend the
related indentures to eliminate the principal restrictive covenants and amend
certain other provisions contained therein.

NOTE C -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES

On April 8, 1997, Safeway completed the acquisition of Vons pursuant to
which the Company issued 41.6 million shares of Safeway common stock for all of
the shares of Vons stock that it did not already own. Vons is now a wholly-owned
subsidiary of Safeway, and as of the beginning of the second quarter of 1997,
Safeway's consolidated financial statements include Vons' financial position and
results of operations. In connection with the acquisition, Safeway repurchased
32.0 million shares of Safeway common stock from a partnership affiliated with
Kohlberg Kravis Roberts & Co. at $43 per share, for an aggregate purchase price
of $1.376 billion. To finance the repurchase, Safeway entered into the Bank
Credit Agreement described in Note B above.

At the end of the third quarter of 1997, Safeway's investment in
unconsolidated affiliates consisted of a 49% interest in Casa Ley, which
operates 71 food and general merchandise stores in western Mexico. Income from
Safeway's equity investment in Casa Ley decreased to $4.1 million in the second
quarter of 1997 from $4.4 million in 1996. For the first 36 weeks of the year,
Safeway's share of Casa Ley's earnings rose to $13.4 million in 1997 from $12.5
million in 1996. Safeway's share of Vons' earnings was $12.2 million for the
first quarter of 1997, $7.2 million in the first quarter of 1996, and $21.8
million in the first 36 weeks of 1996.

NOTE D -- UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION

The following unaudited pro forma summary financial information combines
the consolidated results of operations of Safeway and Vons as if the acquisition
had occurred as of the beginning of each of the years presented. The following
pro forma financial information is presented for informational purposes

F-7
<PAGE> 36

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

only and may not be indicative of what the actual consolidated results of
operations would have been if the acquisition had been effective earlier (in
millions, except per-share amounts):

<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
------------------------------------- -------------------------------------
(ACTUAL) (PRO FORMA) (PRO FORMA) (PRO FORMA)
SEPTEMBER 6, 1997 SEPTEMBER 7, 1996 SEPTEMBER 6, 1997 SEPTEMBER 7, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales............................ $5,371.4 $5,205.8 $ 15,949.9 $ 15,476.8
Income before extraordinary
loss........................... $ 150.0 $ 90.1 $ 417.4 $ 314.3
Net income....................... $ 90.1 $ 90.1 $ 353.3 $ 314.3
Fully diluted income per common
share and common share
equivalent:
Income before extraordinary
loss........................ $ 0.60 $ 0.36 $ 1.66 $ 1.25
Net income..................... $ 0.36 $ 0.36 $ 1.41 $ 1.25
</TABLE>

Net cash acquired from the acquisition was as follows (in millions):

<TABLE>
<S> <C>
Fair value of assets acquired................................. $ 3,170.2
Fair value of liabilities assumed............................. (1,223.2)
Stock issued.................................................. (1,693.0)
Safeway's equity investment in Vons........................... (311.2)
---------
Net cash acquired............................................. $ (57.2)
=========
</TABLE>

NOTE E -- CONTINGENCIES

Legal Matters

Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on page 35 of the 1996 Annual Report to Stockholders,
provides information on certain claims and litigation in which the Company is
involved.

In March 1996, a purported class action was filed in the Superior Court for
Alameda County, California, alleging that the Company fraudulently (i) obtained
settlements of certain claims arising out of the 1988 Richmond warehouse fire
and (ii) made statements that induced claimants not to file actions within the
time period under the statute of limitations. On April 21, 1997, the Court
sustained Safeway's demurrer to the second amended complaint without leave to
amend. In May 1997, the Court dismissed the case, and plaintiffs filed an
appeal.

Vons has been named in a number of lawsuits in state and federal courts in
Washington, Nevada, Idaho and California arising from claims of food-borne
illness that allegedly was contracted from the consumption of hamburgers at
certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few
of these cases are pending; they are filed in state courts and a federal court
in the State of Washington. The restaurants involved either were directly
operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a
division, or were operated by franchisees. The suits seek an unspecified amount
of monetary damages. The plaintiffs in those actions allege, among other things,
that the hamburger patties in question were processed by Vons before being
cooked and served by a Jack In The Box outlet. The Company, in consultation with
its attorneys and insurance carriers, does not anticipate that the total
liability that it might face as a result of these claims will exceed the
insurance coverage it has available.

Vons also has been named as a defendant in two actions that have been
coordinated by the California Judicial Council. Claims have been asserted
against Vons in both actions by Foodmaker. In addition, Vons has asserted claims
in each action against Foodmaker for damages Vons suffered as a

F-8
<PAGE> 37

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

result of the Outbreak and Foodmaker's post-Outbreak statements. Other parties
to these actions include a meat supplier and three Jack In The Box franchisees
that operated outlets from which claims of illness arose. These lawsuits
presently are set for trial in Los Angeles, Superior Court on November 24, 1997,
but the parties have agreed, at the Court's direction, that the trial date will
be continued to a date in January 1998. Foodmaker seeks damages of approximately
$550 million; Vons seeks to recover damages of approximately $250 million and
also seeks indemnity from other parties of any amounts it might be held liable
to pay to Foodmaker. The Company believes that Vons has meritorious defenses to
Foodmaker's claims.

On September 13, 1996, a class action lawsuit entitled McCampbell. et al.
v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego
County, California against Vons and two other grocery store chains operating in
Southern California. In the complaint it is alleged, among other things, that
Vons and the other defendants conspired to fix the retail price of eggs in
Southern California. The plaintiffs claim that the defendants violated
provisions of the California Cartwright Act and engaged in unfair competition.
Plaintiffs seek damages they allege the class has sustained; the amount of
damages sought is not specified. If any damages were to be awarded, they may be
trebled under the applicable statute. In addition, plaintiffs seek an injunction
against future acts that would be in restraint of trade or that would constitute
unfair competition. An answer has been filed to the complaint that denies
plaintiffs' allegations and sets forth several defenses. On October 3, 1997, the
Court issued an order certifying a class of retail purchasers of white chicken
eggs by the dozen from defendants' stores within the Counties of Los Angeles,
Riverside, San Bernadino, San Diego, Imperial and Orange during the period from
September 13, 1993 to the present. The Company believes that Vons has
meritorious defenses to plaintiffs' claims.

On August 28, 1997, the Bankruptcy Court for the Western District of
Missouri entered judgment denying all relief sought by Food Barn in its lawsuit
against the Company and others arising out of the February 1988 sale of
Safeway's Kansas City Division to a company formed by Morgan, Lewis, Githen &
Ahn Fund I and financed principally by the Prudential Insurance Company of
America and its affiliate, Pru Co. Insurance Company. The complaint alleged that
the 1988 transaction was a fraudulent conveyance and that the Company
fraudulently induced Food Barn to enter into the 1988 transaction. In September
1997, Food Barn filed a notice of appeal.

F-9
<PAGE> 38

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 28, 1996 and December 30, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three fiscal years in the period ended December 28, 1996. 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
as of December 28, 1996 and December 30, 1995, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended December 28, 1996 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

San Francisco, California
February 18, 1997

F-10
<PAGE> 39

SAFEWAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
Sales.................................................... $ 17,269.0 $ 16,397.5 $ 15,626.6
Cost of goods sold....................................... (12,494.8) (11,905.1) (11,339.3)
---------- ---------- ----------
Gross profit........................................... 4,774.2 4,492.4 4,287.3
Operating and administrative expense..................... (3,882.5) (3,765.0) (3,675.2)
---------- ---------- ----------
Operating profit....................................... 891.7 727.4 612.1
Interest expense......................................... (178.5) (199.8) (221.7)
Equity in earnings of unconsolidated affiliates.......... 50.0 26.9 27.3
Other income, net........................................ 4.4 2.0 6.4
---------- ---------- ----------
Income before income taxes and extraordinary loss...... 767.6 556.5 424.1
Income taxes............................................. (307.0) (228.2) (173.9)
---------- ---------- ----------
Income before extraordinary loss....................... 460.6 328.3 250.2
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..................................... $ 460.6 $ 326.3 $ 239.7
========== ========== ==========
Earnings per common share and common share equivalent:
Primary
Income before extraordinary loss.................... $ 1.94 $ 1.36 $ 1.02
Extraordinary loss.................................. -- (0.01) (0.04)
---------- ---------- ----------
Net income..................................... $ 1.94 $ 1.35 $ 0.98
========== ========== ==========
Fully diluted
Income before extraordinary loss.................... $ 1.93 $ 1.35 $ 1.01
Extraordinary loss.................................. -- (0.01) (0.04)
---------- ---------- ----------
Net income..................................... $ 1.93 $ 1.34 $ 0.97
========== ========== ==========
Weighted average common shares and common share
equivalents:
Primary................................................ 237.8 240.6 244.1
Fully diluted.......................................... 238.4 243.5 247.1
</TABLE>

See accompanying notes to consolidated financial statements.

F-11
<PAGE> 40

SAFEWAY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
YEAR-END YEAR-END
1996 1995
-------- --------
(IN MILLIONS, EXCEPT
PER- SHARE AMOUNTS)
<S> <C> <C>
Current assets:
Cash and equivalents.................................................... $ 79.7 $ 74.8
Receivables............................................................. 160.9 152.7
Merchandise inventories, net of LIFO reserve of $79.2 and $74.3......... 1,283.3 1,191.8
Prepaid expenses and other current assets............................... 130.5 95.5
-------- --------
Total current assets............................................ 1,654.4 1,514.8
-------- --------
Property:
Land.................................................................... 438.3 419.4
Buildings............................................................... 1,286.9 1,213.2
Leasehold improvements.................................................. 957.2 858.5
Fixtures and equipment.................................................. 2,108.5 1,912.7
Property under capital leases........................................... 278.7 283.4
-------- --------
5,069.6 4,687.2
Less accumulated depreciation and amortization.......................... 2,313.2 2,094.3
-------- --------
Total property, net............................................. 2,756.4 2,592.9
Goodwill, net of accumulated amortization of $116.4 and $106.3............ 312.5 323.8
Prepaid pension costs..................................................... 328.7 322.4
Investments in unconsolidated affiliates.................................. 362.4 336.0
Other assets.............................................................. 130.8 104.4
-------- --------
Total assets.................................................... $5,545.2 $5,194.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures.............................. $ 237.3 $ 221.4
Current obligations under capital leases................................ 18.4 19.0
Accounts payable........................................................ 1,153.1.. 1,040.0
Accrued salaries and wages.............................................. 231.2 234.6
Other accrued liabilities............................................... 390.0 424.0
-------- --------
Total current liabilities....................................... 2,030.0 1,939.0
-------- --------
Long-term debt:
Notes and debentures.................................................... 1,568.1 1,783.6
Obligations under capital leases........................................ 160.4 166.2
-------- --------
Total long-term debt............................................ 1,728.5 1,949.8
Deferred income taxes..................................................... 223.8 108.5
Accrued claims and other liabilities...................................... 376.1 401.5
-------- --------
Total liabilities......................................................... 4,358.4 4,398.8
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 750 shares authorized; 221.4
and 213.7 shares outstanding......................................... 2.2 2.1
Additional paid-in capital.............................................. 750.3 684.9
Unexercised warrants purchased.......................................... (322.7) (196.2)
Cumulative translation adjustments...................................... 12.0 20.3
Retained earnings....................................................... 745.0 284.4
-------- --------
Total stockholders' equity...................................... 1,186.8 795.5
-------- --------
Total liabilities and stockholders' equity................................ $5,545.2 $5,194.3
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-12
<PAGE> 41

SAFEWAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income....................................................... $ 460.6 $ 326.3 $ 239.7
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.................................. 338.5 329.7 326.4
Amortization of deferred finance costs......................... 1.8 4.0 3.0
Deferred income taxes.......................................... 113.9 (15.8) (12.9)
LIFO expense................................................... 4.9 9.5 2.7
Equity in earnings of unconsolidated affiliates................ (50.0) (26.9) (27.3)
Net pension expense (income)................................... 4.2 7.6 (1.4)
Contributions to Canadian pension plan......................... (10.6) (10.3) (11.5)
Increase (decrease) in accrued claims and other liabilities.... (17.6) 19.0 (5.7)
Loss (gain) on property retirements............................ (12.6) 20.4 56.3
Changes in working capital items:
Receivables................................................. (8.5) (3.8) (24.5)
Inventories at FIFO cost.................................... (99.3) (55.4) (31.8)
Prepaid expenses and other current assets................... (35.1) (2.9) 3.6
Payables and accruals....................................... 135.0 53.0 219.5
------ ------ ------
Net cash flow from operations.......................... 825.2 657.7 753.3
------ ------ ------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions................................. (541.8) (450.9) (339.9)
Proceeds from sale of property and operations.................... 60.8 54.8 36.3
Other............................................................ (1.3) (29.6) (28.0)
------ ------ ------
Net cash flow used by investing activities..................... (482.3) (425.7) (331.6)
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings............................... $ 227.2 $ 183.7 $ 157.9
Payments on short-term borrowings................................ (280.4) (131.5) (108.0)
Additions to long-term borrowings................................ 387.1 708.1 455.7
Payments on long-term borrowings................................. (552.0) (787.6) (986.2)
Proceeds from exercise of warrants and stock options............. 12.6 12.8 14.6
Premiums paid on early retirement of debt........................ -- (3.3) (13.2)
Purchase of unexercised warrants................................. (126.5) (196.2) --
Other............................................................ (5.5) (4.4) 0.7
------ ------ ------
Net cash flow used by financing activities..................... (337.5) (218.4) (478.5)
------ ------ ------
Effect of changes in exchange rates on cash...................... (0.5) 0.5 (0.9)
------ ------ ------
Increase (decrease) in cash and equivalents...................... 4.9 14.1 (57.7)
CASH AND EQUIVALENTS
Beginning of year................................................ 74.8 60.7 118.4
------ ------ ------
End of year...................................................... $ 79.7 $ 74.8 $ 60.7
====== ====== ======
OTHER CASH FLOW INFORMATION
Cash payments during the year for:
Interest....................................................... $ 181.8 $ 203.0 $ 230.1
Income taxes, net of refunds................................... 156.7 213.0 126.0
NONCASH INVESTING AND FINANCING ACTIVITIES
Tax benefit from stock options exercised......................... 51.9 16.6 15.6
Mortgage notes assumed in property acquisitions.................. -- -- 11.3
Capital lease obligations entered into........................... 15.5 13.7 4.5
</TABLE>

See accompanying notes to consolidated financial statements.

F-13
<PAGE> 42

SAFEWAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL UNEXERCISED CUMULATIVE EARNINGS TOTAL
-------------- PAID-IN WARRANTS TRANSLATION (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL PURCHASED ADJUSTMENTS DEFICIT) EQUITY
------ ------ ---------- ----------- ----------- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, year-end 1993............ 203.0 $2.0 $623.5 $39.0 $ (281.6) $ 382.9
Options and warrants exercised,
including tax benefit........... 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,
including tax benefit........... 4.0 -- 29.4 -- -- 29.4
Stock bonuses..................... 0.1 -- 1.0 -- -- 1.0
Unexercised warrants purchased.... -- -- -- $(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
Options and warrants exercised,
including tax benefit........... 7.7 0.1 64.4 -- -- -- 64.5
Stock bonuses..................... -- -- 1.0 -- -- -- 1.0
Unexercised warrants purchased.... -- -- -- (126.5) -- -- (126.5)
Net income........................ -- -- -- -- -- 460.6 460.6
Translation adjustments........... -- -- -- -- (8.3) -- (8.3)
----- ---- ------ ------- ----- ------ -------
Balance, year-end 1996............ 221.4 $2.2 $750.3 $(322.7) $12.0 $ 745.0 $ 1,186.8
===== ==== ====== ======= ===== ====== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-14
<PAGE> 43

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company

At December 28, 1996, Safeway Inc. ("Safeway" or the "Company") operated
1,052 stores in the United States and Canada. U.S. retail operations are located
principally in northern California, Oregon, Washington, Colorado, Arizona and
the Mid-Atlantic region. 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. At year-end 1996, Safeway held a 49%
interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operated 71 food and
general merchandise stores in western Mexico, and a 34.4% interest in The Vons
Companies, Inc. ("Vons"), which operated 320 grocery stores located primarily in
southern California.

In December 1996, Safeway and Vons entered into an agreement for a business
combination of the two companies pursuant to which Safeway will issue 1.425
shares of Safeway common stock for each share of Vons common stock it does not
currently own in a transaction that will be accounted for as a purchase (the
"Merger"). As a result of the Merger, Vons will become a wholly-owned subsidiary
of Safeway. The transaction is subject to approval by Vons' shareholders. The
companies expect to complete the transaction in early April of 1997.

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 28, 1996,
December 30, 1995 and December 31, 1994.

Reclassifications

Certain amounts for prior years have been reclassified to conform to the
1996 presentation.

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.

F-15
<PAGE> 44

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Merchandise Inventories

Merchandise inventory of $756 million at year-end 1996 and $693 million at
year-end 1995 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
$835 million at year-end 1996 and $767 million at year-end 1995. 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 $4.9 million in 1996, $9.5 million in 1995 and $2.7 million in 1994.
Liquidations of LIFO layers during the three years reported did not have a
significant effect on the results of operations.

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 1996, 1995 and 1994.

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 a discount rate
of 5.5% in both 1996 and 1995. The current portion of the self-insurance
liability ($65.1 million at year-end 1996 and $70.6 million at year-end 1995) is
included in other accrued liabilities in the consolidated balance sheets. The
long-term portion of $168.7 million at year-end 1996 and $188.7 million at
year-end 1995 is included in accrued claims and other liabilities. Claims
payments were $66.7 million in 1996, $71.4 million in 1995 and $75.3 million in
1994. The total undiscounted liability was $266 million at year-end 1996 and
$297 million at year-end 1995.

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.

F-16
<PAGE> 45

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Statements 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 E, 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.

Revenue Recognition

Sales are recorded when payment is tendered at check-out.

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.

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 1996, the estimated fair
value of debt was $1.9 billion compared to a carrying value of $1.8 billion. 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 1996 and 1995, net unrealized losses on
interest rate swap agreements were $2.0 million and $2.4 million. Since the

F-17
<PAGE> 46

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company intends to hold these agreements as hedges for the terms of the
agreements, the market risk associated with changes in interest rates should not
be significant.

Impairment of Long-Lived Assets

In 1996, Safeway adopted 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. Safeway's existing accounting policy for long-lived
assets complied with SFAS No. 121. Therefore, the adoption of SFAS No. 121 did
not have a material effect on the Company's Consolidated Financial Statements.
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 1996,
Safeway had an accrued liability of $27.6 million for the anticipated future
closure of 35 stores and $19.8 million for the anticipated future closure of
other facilities.

Stock-Based Compensation

Safeway accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Safeway elected to adopt the
disclosure requirements of SFAS No. 123,"Accounting for Stock-Based
Compensation," in 1996.

NOTE B -- MERGER WITH THE VONS COMPANIES, INC.

Safeway currently owns approximately 34% of the outstanding common stock of
Vons. In December 1996, Safeway and Vons entered into an agreement for the
Merger pursuant to which Safeway will issue 1.425 shares of Safeway common stock
for each share of Vons common stock it does not currently own in a transaction
that will be accounted for as a purchase. As a result of the Merger, Vons will
become a wholly-owned subsidiary of Safeway. The transaction is subject to
approval by Vons' shareholders. The companies expect to complete the transaction
in early April of 1997.

Safeway currently recognizes its proportionate share of Vons' net income
(based on Safeway's ownership interest in Vons) as equity in the earnings of an
unconsolidated affiliate on a one-quarter delay basis. As of the acquisition
date, Safeway will consolidate 100% of Vons' activity in its financial
statements. Based on preliminary estimates, the cost to acquire the Vons stock
not currently owned by Safeway will be approximately $1.7 billion, of which an
estimated $1.5 billion will be allocated to goodwill with an estimated useful
life of 40 years. Annual goodwill amortization of the combined company is
expected to increase by approximately $29 million.

In connection with the Merger, Safeway will repurchase (the "Repurchase")
32 million shares of Safeway common stock held by one or more partnerships
controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR") at $43 per
share, or $1.376 billion in the aggregate. To finance the Repurchase, Safeway
currently expects to enter into a new credit agreement to provide for, among
other things, increased borrowing capacity to $3 billion and an extended
maturity on the new commitments.

F-18
<PAGE> 47

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C -- FINANCING

Notes and debentures were composed of the following at year-end (in
millions):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Credit Agreement, unsecured................................................ $ 360.6 $ 395.0
9.30% Senior Secured Debentures due 2007................................... 70.7 70.7
Mortgage notes payable, secured............................................ 306.4 389.3
10% Senior Notes due 2002, unsecured....................................... 59.1 59.1
Medium-term notes, unsecured............................................... 65.5 80.0
Other notes payable, unsecured............................................. 119.0 122.7
Short-term bank borrowings, unsecured...................................... 83.0 136.1
9.35% Senior Subordinated Notes due 1999, unsecured........................ 161.5 172.5
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
-------- --------
1,805.4 2,005.0
Less current maturities.................................................... 237.3 221.4
-------- --------
Long-term portion.......................................................... $1,568.1 $1,783.6
======== ========
</TABLE>

Credit Agreement

Safeway's existing unsecured bank 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. At year-end 1996, the Company had total unused borrowing capacity under
the Credit Agreement of $722.7 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 interest at one of the following rates selected by the Company:
(a) the Canadian base rate; or (b) 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 5.3% during 1996. At year-end 1996, the weighted average interest rate on
borrowings under the Credit Agreement was 5.0%.

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 1996 have remaining terms ranging from
one to 13 years, have a weighted average interest rate of 9.3% and are secured
by properties with a net book value of approximately $425 million.

F-19
<PAGE> 48

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. Pursuant to the shelf registration, the Company issued $80
million of notes in 1992, including $74 million of 10% Senior Notes due 2002,
and $80 million of medium-term notes in 1993. The Company used the proceeds from
these notes to finance capital expenditures.

Other Notes Payable

Other notes payable at year-end 1996 have remaining terms ranging from one
to 15 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 1996, the limitation on such restricted payments was $540
million. Other provisions of the Credit Agreement, Indentures and the indentures
related to the senior unsecured indebtedness limit Safeway with respect to,
among other things, (a) incurring additional indebtedness; (b) creating liens
upon its assets; and (c) 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.

The restrictions under the Indentures will not affect the Company's ability
to consummate the Merger and the Repurchase described in Note B above.

F-20
<PAGE> 49

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Annual Debt Maturities

As of year-end 1996, annual debt maturities were as follows (in millions):

<TABLE>
<S> <C>
1997........................................................... $ 237.3
1998........................................................... 70.8
1999........................................................... 195.6
2000........................................................... 386.0
2001........................................................... 306.3
Thereafter..................................................... 609.4
--------
$1,805.4
========
</TABLE>

Letters of Credit

The Company had letters of credit of $153.5 million outstanding at year-end
1996 of which $66.7 million were issued under the Credit Agreement. The letters
of credit are maintained primarily to support performance, payment, deposit or
surety obligations of the Company. The Company pays annual commitment fees
ranging from 0.25% to 0.75% on the outstanding portion of the letters of credit.

NOTE D -- LEASE OBLIGATIONS

Approximately two-thirds of the premises that the Company occupies are
leased. The Company had approximately 1,020 leases at year-end 1996, including
approximately 170 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 1996, 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>
1997................................................. $ 39.4 $ 144.4
1998................................................. 36.5 142.6
1999................................................. 32.9 138.4
2000................................................. 28.1 131.8
2001................................................. 25.8 118.7
Thereafter........................................... 196.1 968.3
------ --------
Total minimum lease payments......................... 358.8 $ 1,644.2
========
Less amounts representing interest................... (180.0)
------
Present value of net minimum lease payments.......... 178.8
Less current obligations............................. (18.4)
------
Long-term obligations................................ $ 160.4
======
</TABLE>

Future minimum lease payments under non-cancelable capital and operating
lease agreements have not been reduced by minimum sublease rental income of
$146.1 million.

Amortization expense for property under capital leases was $17.9 million in
1996, $18.9 million in 1995 and $20.6 million in 1994. Accumulated amortization
of property under capital leases was $156.1 million at year-end 1996 and $151.6
million at year-end 1995.

F-21
<PAGE> 50

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Property leases:
Minimum rentals........................... $138.2 $132.7 $126.4
Contingent rentals........................ 9.9 9.1 9.8
Less rentals from subleases............... (11.1) (11.1) (13.7)
------ ------ ------
137.0 130.7 122.5
Equipment leases............................ 21.0 20.8 20.9
------ ------ ------
$158.0 $151.5 $143.4
====== ====== ======
</TABLE>

NOTE E -- INTEREST EXPENSE

Interest expense consisted of the following (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Credit Agreement.................................................... $ 16.4 $ 13.5
Bank Credit Agreement and Working Capital Credit Agreement.......... -- 11.7 $ 20.5
9.30% Senior Secured Debentures..................................... 6.6 6.6 8.0
Mortgage notes payable.............................................. 33.0 43.3 50.2
10% Senior Notes.................................................... 5.9 5.9 6.5
Medium-term notes................................................... 6.0 7.1 7.5
Other notes payable................................................. 11.9 11.3 16.5
Short-term bank borrowings.......................................... 5.1 6.6 3.0
9.35% Senior Subordinated Notes..................................... 15.3 16.1 19.6
10% Senior Subordinated Notes....................................... 24.1 24.1 26.6
9.65% Senior Subordinated Debentures................................ 22.0 22.0 24.5
9.875% Senior Subordinated Debentures............................... 10.9 10.9 12.1
Obligations under capital leases.................................... 20.8 21.0 22.2
Amortization of deferred finance costs.............................. 1.8 4.0 3.0
Interest rate swap agreements....................................... 3.0 0.3 4.4
Capitalized interest................................................ (4.3) (4.6) (2.9)
------ ------ ------
$178.5 $199.8 $221.7
====== ====== ======
</TABLE>

As of year-end 1996, the Company had effectively converted $83.0 million of
its $494.3 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 1996 were as follows (dollars in millions):

<TABLE>
<CAPTION>
VARIABLE
CANADA INTEREST
U.S. FIXED FIXED RATES
NOTIONAL INTEREST INTEREST TO BE ORIGINATION EXPIRATION
PRINCIPAL RATES PAID RATES PAID RECEIVED DATE DATE
- --------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$10.0 5.8% 5.5% 1992 1997
18.3 8.7% 2.9 1992 1997
18.2 8.7 4.4 1992 1997
36.5 6.0 4.0 1993 1998
-----
$83.0
=====
</TABLE>

F-22
<PAGE> 51

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 1996 and 1995, net unrealized losses on the interest rate swap
agreements were $2.0 million and $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 F -- CAPITAL STOCK

Shares Authorized and Issued

Authorized preferred stock consists of 25 million shares of which none was
outstanding during 1996, 1995 or 1994. Authorized common stock consists of 750
million shares at $0.01 par value. Common stock outstanding at year-end 1996 and
1995 was 221.4 million and 213.7 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.

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.

F-23
<PAGE> 52

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Activity in the Company's stock option plans for the three-year period
ended December 28, 1996 was as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ------------------
<S> <C> <C>
Outstanding, year-end 1993....................................... 27,087,240 $ 4.73
1994 Activity:
Granted..................................................... 3,709,250 13.13
Canceled.................................................... (1,154,168) 7.25
Exercised................................................... (4,329,298) 2.83
----------
Outstanding, year-end 1994....................................... 25,313,024 6.18
1995 Activity:
Granted..................................................... 1,018,180 18.13
Canceled.................................................... (779,324) 7.44
Exercised................................................... (3,386,558) 3.86
----------
Outstanding, year-end 1995....................................... 22,165,322 7.04
1996 Activity:
Granted..................................................... 1,995,992 33.30
Canceled.................................................... (362,227) 10.14
Exercised................................................... (4,412,509) 4.09
----------
Outstanding, year-end 1996....................................... 19,386,578 10.14
==========
Exercisable, year-end 1995....................................... 12,022,760 4.69
==========
Exercisable, year-end 1996....................................... 11,517,320 8.50
==========
</TABLE>

Weighted average fair value of options granted during the year:

The following table summarizes stock option information at year-end 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------ -----------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OF OPTIONS REMAINING CONTRACTUAL LIFE EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- ----------------- ------------ ----------------------------- ------------------ ------------ ------------------
<C> <C> <S> <C> <C> <C>
$ 1.00 to $ 1.00 2,087,000 1.70 years $ 1.00 2,087,000 $ 1.00
4.80 to 6.00 3,445,520 10.69 5.47 2,031,285 5.48
6.19 to 6.44 3,210,026 8.67 6.43 2,686,820 6.43
6.50 to 9.50 4,313,040 10.40 7.78 2,648,072 7.82
9.56 to 13.13 2,625,205 7.96 12.58 823,961 12.49
13.19 to 43.00 3,705,787 9.98 24.85 1,240,182 29.38
----------
---------- ------ ---------- ------
$ 1.00 to $43.00 19,386,578 8.81 $10.33 11,517,320 $ 8.50
========== ========== ====== ========== ======
</TABLE>

Options to purchase 7.4 million shares were available for grant at year-end
1996.

Additional Stock Plan Information

As discussed in Note A, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.

F-24
<PAGE> 53

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" requires the disclosure of proforma net income and
earnings per share as if the Company had adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: seven to nine years expected life to
vesting; stock volatility of 30% in 1996 and 29% in 1995; risk-free interest
rates of 6.29% in 1996 and 6.50% in 1995; and no dividends during the expected
term.

The Company's calculations are based on a single-option valuation approach
and forfeitures are recognized as they occur. However, the impact of outstanding
unvested stock options granted prior to 1995 has been excluded from the proforma
calculation; accordingly, the 1995 and 1996 proforma adjustments are not
indicative of future period proforma adjustments. Had compensation cost for the
Safeway's stock option plans been determined based on the fair value at the
grant date for awards in 1995 and 1996 consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share would have been
adjusted to the proforma amounts indicated below:

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net income (in millions):
As reported......................................... $460.6 $326.3
Proforma............................................ 459.0 325.8
Primary earnings per share:
As reported......................................... $ 1.94 $ 1.35
Proforma............................................ 1.93 1.35
Fully diluted earnings per share:
As reported......................................... $ 1.93 $ 1.34
Proforma............................................ 1.92 1.34
</TABLE>

Public Stock Offering

In February 1996, the Company completed the public offering of 23.0 million
shares of common stock owned by affiliates of KKR, including 2.2 million shares
issued upon the exercise of SSI Warrants (as defined below) and 0.2 million
shares issued upon the exercise of employee stock options. Also in 1996, 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
and the option holder received the balance of proceeds from the stock offering.
After the offering, two limited partnerships affiliated with 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.

Repurchases of Common Stock and Warrants to Purchase Common Stock

At year-end 1996, warrants (the "SSI Warrants") to purchase 23.4 million
shares of the Company's common stock at $1.00 per share were held by SSI Equity
Associates, L.P. ("SSI"), 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 KKR, is the general partner of SSI. During 1996
and 1995, the

F-25
<PAGE> 54

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company acquired 64.5% of the partnership interests in SSI for $322.7 million
with proceeds from bank borrowings, which was accounted for as a reduction to
stockholders' equity.

Outstanding common stock and the effect of options and warrants at year-end
1996 are summarized as follows (in millions):

<TABLE>
<CAPTION>
POTENTIAL-
PROCEEDS
SHARES FROM EXERCISE
------ -------------
<S> <C> <C>
Common stock outstanding........................... 221.4
Options to purchase common stock................... 18.5 $ 169.9
SSI Warrants....................................... 8.3 8.3
----- ------
Total.................................... 248.2 $ 178.2
===== ======
</TABLE>

Immediately following the Merger described in Note B above, the Company
will consummate the Repurchase of 32.0 million shares of Safeway common stock
held by one or more partnerships controlled by affiliates of KKR at $43 per
share, or $1.376 billion in the aggregate. Immediately after the Repurchase, it
is expected that the two limited partnerships affiliated with KKR will own
approximately 33% of Safeway's outstanding common stock.

NOTE G -- TAXES ON INCOME

The components of income tax expense are as follows (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $162.9 $157.9 $112.6
State 30.7 29.9 23.1
Foreign (0.5) 56.2 51.4
------ ------ ------
193.1 244.0 187.1
------ ------ ------
Deferred:
Federal 49.3 8.2 (0.6)
State 12.6 (0.8) 1.9
Foreign 52.0 (23.2) (14.5)
------ ------ ------
113.9 (15.8) (13.2)
------ ------ ------
$307.0 $228.2 $173.9
====== ====== ======
</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. Tax benefits from the exercise of employee
stock options of $51.9 million in 1996, $16.6 million in 1995 and $15.6 million
in 1994 were credited directly to paid-in capital and, therefore, are excluded
from income tax expense.

F-26
<PAGE> 55

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory rate.............................................. 35% 35% 35%
Income tax expense using federal statutory rate............. $268.7 $194.8 $148.4
State rates on income less federal benefit.................. 28.1 18.9 16.3
Taxes provided on equity in earnings of unconsolidated
affiliates at rates below the statutory rate.............. (10.5) (5.3) (6.9)
Taxes on foreign earnings not permanently reinvested........ 7.3 6.2 6.6
Withholding tax on Canadian earnings not permanently
reinvested................................................ -- (5.8) 4.4
Nondeductible expenses and amortization..................... 3.2 4.2 2.9
Difference between statutory rate and foreign effective
rate...................................................... 11.1 1.0 2.2
Other accruals.............................................. (0.9) 14.2 --
------ ------ ------
$307.0 $228.2 $173.9
====== ====== ======
</TABLE>

Significant components of the Company's net deferred tax liability at
year-end were as follows (in millions):

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Workers' compensation and other claims............................. $ 91.7 $ 102.9
Accruals not currently deductible.................................. 48.7 59.5
Accrued claims and other liabilities............................... 47.4 48.3
Employee benefits.................................................. 9.7 34.0
Canadian operating loss carryforward............................... 2.7 54.7
Other assets....................................................... 6.0 14.5
------- -------
206.2 313.9
------- -------
Deferred tax liabilities:
Property........................................................... (110.5) (124.3)
Prepaid pension costs.............................................. (149.9) (142.7)
LIFO inventory reserves............................................ (66.8) (53.7)
Investments in unconsolidated affiliates........................... (48.1) (40.0)
Cumulative translation adjustments................................. (23.0) (24.6)
Other liabilities.................................................. (31.7) (37.1)
------- -------
(430.0) (422.4)
------- -------
Net deferred tax liability........................................... $(223.8) $(108.5)
======= =======
</TABLE>

Income tax returns for years subsequent to 1985 and 1991 are subject to
examination by U.S. and Canadian taxing authorities, respectively.

NOTE H -- 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

F-27
<PAGE> 56

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the statutory funding standards. Through year-end 1996, 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 1996, 1995 and 1994, the Company contributed
$10.6 million, $10.3 million and $11.5 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate used to determine the projected benefit obligations:
U.S. Plan.......................................................... 7.5 % 7.0 % 8.0 %
Canadian Plan...................................................... 7.0 8.0 8.0
Combined weighted average rate..................................... 7.4 7.2 8.0
Long-term rate of return on Plan assets:
U.S. Plan.......................................................... 9.0 9.0 9.0
Canadian Plan...................................................... 8.0 8.0 8.0
Rate of compensation increase........................................ 5.5 5.5 5.5
</TABLE>

Net pension plan income (expense) consisted of the following (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Return on Plan assets:
Actual return, gain (loss)................................. $162.4 $241.2 $(26.9)
Deferred loss (gain)....................................... (14.2) (152.9) 123.6
------ ------ ------
Actuarial assumed return..................................... 148.2 88.3 96.7
Service cost................................................. (41.3) (36.7) (41.2)
Interest cost on projected benefit obligations............... (51.7) (48.3) (44.9)
Net amortization............................................. (56.0) (10.9) (9.2)
------ ------ ------
Net pension plan income (expense) recognized in consolidated
statements of income....................................... $ (0.8) $ (7.6) $ 1.4
====== ====== ======
</TABLE>

Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
("SFAS No. 88"), Safeway recognized a $3.4 million special termination expense
in 1996 in connection with a workforce reduction, which is excluded from 1996
pension expense in the table above.

F-28
<PAGE> 57

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The funded status of the Plans at year-end was as follows (in millions):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Fair value of assets at year-end................................... $1,392.0 $1,245.9
-------- --------
Actuarially determined present value of:
Vested benefit obligations....................................... 758.9 657.4
Nonvested benefit obligations.................................... 9.3 9.3
-------- --------
Accumulated benefit obligations.................................. 768.2 666.7
Additional amounts related to projected compensation increases... 98.9 102.7
-------- --------
Projected benefit obligations.................................... 867.1 769.4
-------- --------
Fair value of assets in excess of projected benefit obligations.... 524.9 476.5
Adjustment for difference in book and tax basis of assets.......... (165.1) (165.1)
Unamortized prior service costs resulting from improved Plan
benefits......................................................... 83.3 68.7
Net gain from actuarial experience which has not been recognized in
the consolidated financial statements............................ (114.4) (57.7)
-------- --------
Prepaid pension costs.............................................. $ 328.7 $ 322.4
======== ========
</TABLE>

Retirement Restoration Plan

The Retirement Restoration Plan provides death benefits and supplemental
income payments for senior executives after retirement. The Company recognized
expense of $4.4 million in 1996, $3.4 million in 1995 and $1.7 million in 1994.
The aggregate projected benefit obligation of the Retirement Restoration Plan
was approximately $44.9 million at year-end 1996 and $45.5 million at year-end
1995.

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.

In 1996, the postretirement medical plan was amended to restrict the types
of coverage available, to change the participant contributions and to exclude
future retirees from participating in the plan. The exclusion of future retirees
in the plan is considered a curtailment under the provisions of SFAS No. 88
which resulted in recognition of a curtailment gain of $14.5 million in 1996.

At year-end 1996 and 1995, the Company's accumulated postretirement benefit
obligation ("APBO") was $15.9 million and $23.3 million. The APBO represents the
actuarial present value of benefits expected to be paid after retirement.
Postretirement benefit expense was $1.7 million in 1996, $2.5 million in 1995
and $2.9 million in 1994.

The significant assumptions used to determine the periodic postretirement
benefit expense and the APBO were as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate....................................................... 7.0 % 7.0 % 8.0 %
Rate of compensation increase....................................... 5.5 5.5 5.5
</TABLE>

For 1997, 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 2002 and
remain at that level thereafter. A 5.5% annual rate of increase was

F-29
<PAGE> 58

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assumed for 1997 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 1996
would increase $0.1 million, and the net periodic postretirement benefit expense
for 1996 would remain unchanged. 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 $112 million in 1996,
$105 million in 1995 and $70 million in 1994 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 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 1996, Safeway had approximately 119,000 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 negotiates a
significant number of these agreements every year.

Of Safeway's approximately 107,000 unionized employees, approximately 7,000
in four operating areas are covered by labor contracts which are scheduled to
expire in 1997. In addition, there are contracts in one operating area covering
10,000 employees that expired in 1996 and that have not yet been renewed. While
Safeway believes that its relationship with its employees is good, there can be
no assurance that contracts covering such 17,000 employees, or that labor
contracts which come up for renewal after 1997, will be renewed. Failure to
renew significant contracts can lead to work stoppages that could have an
adverse effect on Safeway's results of operations.

NOTE I -- INVESTMENTS IN AFFILIATES

At year-end 1996, investments in affiliates consisted of a 49% interest in
Casa Ley, which operated 71 food and general merchandise stores in western
Mexico, and a 34.4% interest in Vons, which operated 320 grocery stores located
mostly in southern California.

F-30
<PAGE> 59

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 1996, Safeway and Vons entered into an agreement for the Merger
pursuant to which Safeway will issue 1.425 shares of Safeway common stock for
each share of Vons common stock it does not currently own in a transaction that
will be accounted for as a purchase. The transaction is subject to approval by
Vons' shareholders. The companies expect to complete the transaction in early
April of 1997. See Note B to the Consolidated Financial Statements.

At year-end 1996, the Company owned 15.1 million shares of Vons outstanding
common stock. The Company's recorded investment in Vons was $286.4 million
(including goodwill of $44.3 million) at year-end 1996 and $255.2 million
(including goodwill of $45.6 million) at year-end 1995. Goodwill is being
amortized over 40 years. At year-end 1996, the aggregate market value of
Safeway's shares of Vons stock as quoted on the New York Stock Exchange was
$871.6 million.

Safeway's share of Vons' earnings, recorded on a one-quarter delay basis,
was $31.2 million in 1996, compared to $18.3 million in 1995 and $11.6 million
in 1994. According to Vons' financial reports filed with the Securities and
Exchange Commission, same-store sales increased 5.2% and 5.5% for the 16 and 40
weeks ended October 6, 1996. In 1994, Vons reported a restructuring charge which
decreased Safeway's share of Vons' earnings by $3.9 million. According to Vons,
these restructuring charges included anticipated expenses associated with a
program to close underperforming stores and reduce workforce.

Summarized financial information derived from Vons' financial reports filed
with the Securities and Exchange Commission was as follows (in millions):

<TABLE>
<CAPTION>
OCTOBER 6, OCTOBER 8,
1996 1995
---------- ----------
<S> <C> <C>
Financial Position:
Current assets..................................................... $ 440.7 $ 436.3
Property and equipment, net........................................ 1,182.9 1,189.3
Other assets....................................................... 529.3 545.3
-------- --------
Total assets....................................................... $2,152.9 $2,170.9
-------- --------
Current liabilities................................................ $ 706.0 $ 573.6
Long-term obligations.............................................. 744.9 995.8
Shareholders' equity............................................... 702.0 601.5
-------- --------
Total liabilities and shareholders' equity......................... $2,152.9 $2,170.9
======== ========
</TABLE>

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
OCTOBER 6, OCTOBER 8, OCTOBER 9,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Results of Operations:
Sales................................................... $ 5,366.6 $ 5,023.5 $ 4,990.9
Cost of sales and other expenses........................ (5,275.9) (4,967.4) (4,954.5)
--------- --------- ---------
Net income.............................................. $ 90.7 $ 56.1 $ 36.4
========= ========= =========
</TABLE>

Income from Safeway's equity investment in Casa Ley, recorded on a
one-quarter delay basis, increased to $18.8 million in 1996 from $8.6 million in
1995 and $15.7 million in 1994. For much of 1995, Mexico suffered from high
interest rates and inflation which adversely affected Casa Ley. During 1996,
interest rates and inflation in Mexico have moderated and Casa Ley's financial
results have gradually improved.

F-31
<PAGE> 60

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Casa Ley had total assets of $263.1 million and $276.9 million as of
September 30, 1996 and 1995 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,
------------------------------
1996 1995 1994
------ ------ --------
<S> <C> <C> <C>
Sales............................. $810.1 $861.4 $1,052.4
====== ====== ========
Net income........................ $ 33.8 $ 17.9 $ 32.0
====== ====== ========
</TABLE>

NOTE J -- 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 $1,364,000 in 1996, $1,355,000 in 1995 and
$980,000 in 1994.

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 minority interest of $25.1
million and $23.2 million at year-end 1996 and 1995 is included in accrued
claims and other liabilities in the accompanying consolidated balance sheets.
During 1996, the Company contributed to PDA 16 properties no longer used in its
retail grocery business which had an aggregate net book value of $8.4 million.
The minority partner contributed cash in an amount sufficient to maintain its
20% ownership. No gains or losses were recognized on these transactions. In
1995, no properties were contributed. Safeway paid PDA $1.6 million in 1996,
$1.5 million in 1995 and $1.1 million in 1994 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. Sales
and cost of sales to Vons were as follows (in millions):

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Sales.................................. $51.4 $28.4 $19.5
===== ===== =====
Cost of Sales.......................... $49.3 $27.9 $18.5
===== ===== =====
</TABLE>

NOTE K -- 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 9, 1997 in excess of 125,000 claims for
personal injury and property damage arising from the fire have 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 9, 1997, there were still pending approximately 3,000 claims
against the Company for personal injury (including punitive damages) and
approximately 460 separate claims for property damage arising from the smoke,
ash and embers generated by the fire. 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.

F-32
<PAGE> 61

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On March 8, 1996, a purported class action was filed on behalf of persons
allegedly injured as a result of the smoke, ash and embers generated by the
fire. The complaint, which was amended after the Court sustained the Company's
demurrer with leave to amend, 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
under the statute of limitations. The amended complaint seeks compensatory and
punitive damages. Safeway has demurred to the amended complaint, and the court
has taken the demurrer under submission. The Company has received notice from
its insurance carrier denying coverage for claims asserted in this case. Safeway
strongly disagrees with the insurance carrier's denial of coverage.

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, 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 damages of $78
million (the alleged difference between the value of the division and the
purchase price), and consequential damages of approximately $696 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. A trial was held in December 1996 and
January 1997, and the case is under submission in the Bankruptcy Court. Safeway
believes that its defenses are meritorious.

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 but without regard to
potential recovery under the Company's insurance policies where coverage is
contested, will not have a material adverse effect on the Company's financial
statements taken as a whole.

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 $39.6 million at year-end 1996.

F-33
<PAGE> 62

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L -- FINANCIAL INFORMATION BY GEOGRAPHIC AREA

<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL
------------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
1996
Sales...................................................... $13,797.5 $3,471.5 $17,269.0
Gross Profit............................................... 3,901.3 872.9 4,774.2
Operating Profit........................................... 752.8 138.9 891.7
Income before income taxes................................. 652.2 115.4 767.6
Net working capital (deficit).............................. (442.7) 67.1 (375.6)
Total assets............................................... 4,625.4 919.8 5,545.2
Net assets................................................. 792.4 394.4 1,186.8
1995
Sales...................................................... $12,902.4 $3,495.1 $16,397.5
Gross profit............................................... 3,584.5 907.9 4,492.4
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............................................... 3,409.7 877.6 4,287.3
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
</TABLE>

F-34
<PAGE> 63

SAFEWAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M -- 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
YEAR 16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales............................. $17,269.0 $ 5,486.9 $ 3,954.0 $ 3,945.4 $ 3,882.7
Gross profit...................... 4,774.2 1,493.0 1,086.6 1,102.1 1,092.5
Operating profit.................. 891.7 283.7 203.8 210.1 194.1
Income before income taxes........ 767.6 248.2 178.1 179.2 162.1
Net income........................ 460.6 151.6 105.9 106.7 96.4
Income per common share and common
share equivalent:
Primary........................... $ 1.94 $ 0.63 $ 0.44 $ 0.44 $ 0.40
Fully diluted..................... 1.93 0.63 0.44 0.44 0.40
Price range, New York Stock
Exchange........................ $ 45 3/8 $ 45 3/8 $ 38 1/4 $ 35 5/8 $ 30 1/8
to to
22 7/16 to 37 1/4 to 31 3/4 to 27 5/8 22 7/16
</TABLE>

<TABLE>
<CAPTION>
LAST THIRD SECOND FIRST
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...................... 4,492.4 1,413.8 1,058.4 1,016.8 1,003.4
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........ (2.0) (2.0) -- -- --
Net income........................ 326.3 111.9 83.7 68.7 62.0
Income per common share and common
share equivalent:
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........................ $ 25 3/4 $ 25 3/4 $ 20 5/16 $ 19 1/4 $ 18
to to to to to
15 5/16 19 15/16 17 15/16 15 9/16 15 5/16
</TABLE>

F-35
<PAGE> 64

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Selling Stockholders have agreed to sell to each of the U.S. Underwriters named
below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., SBC
Warburg Dillon Read Inc. and Smith Barney Inc. are acting as representatives,
has severally agreed to purchase from the Selling Stockholders, directly or
through the exercise of SSI Warrants, the respective number of shares of Common
Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co................................................ 5,175,000
Morgan Stanley & Co. Incorporated.................................. 5,175,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 4,050,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 2,025,000
Lehman Brothers Inc................................................ 2,025,000
SBC Warburg Dillon Read Inc........................................ 2,025,000
Smith Barney Inc................................................... 2,025,000
-----------
Total.................................................... 22,500,000
===========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares (directly or
through the purchase and exercise of SSI Warrants) offered hereby, if any are
taken. With respect to shares of Common Stock obtained upon the purchase and
exercise of SSI Warrants, the U.S. Underwriters will remit the exercise price of
the SSI Warrants to the Company.

The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $.90 per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.

The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 2,500,000 shares of Common Stock in an
international offering outside the United States. The initial public offering
price and aggregate underwriting discounts and commissions per share for the two
offerings are identical. The closing of the offering made hereby is a condition
to the closing of the international offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Morgan Stanley & Co. International Limited, Merrill Lynch
International, Donaldson, Lufkin & Jenrette International, Lehman Brothers
International (Europe), Swiss Bank Corporation, acting through its division SBC
Warburg Dillon Read and Smith Barney Inc.

Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the

U-1
<PAGE> 65

United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.

Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.

The Selling Stockholders have granted the U.S. Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 3,375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 22,500,000 shares of Common Stock offered. The Selling
Stockholders have granted the International Underwriters a similar option to
purchase up to an aggregate of 375,000 additional shares of Common Stock.

The Company and the Selling Stockholders have agreed, with certain
exceptions, not to (i) offer, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) with respect to the Company
only, enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, except
for (i) the shares to be sold in the offerings and the SSI Warrants to be
cancelled, (ii) any shares of Common Stock issued by the Company pursuant to
stock option plans in effect on the date of this Prospectus, (iii) option grants
under stock option plans in effect on the date of this Prospectus, (iv) any
agreement of the Company in connection with an acquisition of assets or
properties or any capital stock issuable pursuant to the terms of such an
agreement, (v) capital stock issuable upon the exercise of warrants outstanding
on the date of this Prospectus or (vi) the cancellation of warrants, for a
period of at least 90 days from the date of this Prospectus without the prior
written consent of Goldman, Sachs & Co. If any such consent is given it would
not necessarily be preceded or followed by a public announcement thereof.

In connection with the offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Selling
Stockholders in the offerings. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to syndicate members or other broker-dealers
in respect of the Common Stock sold in the offerings for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the New York Stock Exchange, in
the over-the-counter market or otherwise.

The SSI Warrants being purchased by the several U.S. Underwriters from SSI
Equity Associates will be purchased at a price per underlying share equal to the
initial public offering price less the exercise price of each such SSI Warrant
and the underwriting discount per underlying share. The U.S. Underwriters will
immediately exercise such SSI Warrants by paying the Company the aggregate
exercise price of the SSI Warrants, and will include in the offering the
2,578,828 shares of Common Stock issuable as a result of such

U-2
<PAGE> 66

exercise. The International Underwriters will similarly purchase and exercise
SSI Warrants, and will include in the international offering 286,536 shares of
Common Stock issuable as a result of such exercise.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
international offering, to persons located in the United States.

U-3
<PAGE> 67

==========================================================

No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................... 3
Summary................................... 4
Price Range of Common Stock............... 7
Dividend Policy........................... 7
Capitalization............................ 8
Selected Financial Data................... 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 10
Business.................................. 16
Principal and Selling Stockholders........ 21
Description of Capital Stock.............. 24
Certain United States Tax Consequences to
Non-United States Holders............... 24
Legal Matters............................. 27
Experts................................... 27
Information Incorporated by Reference..... 28
Index to Consolidated Financial
Statements.............................. F-1
Underwriting.............................. U-1
</TABLE>

==========================================================
==========================================================

25,000,000 SHARES

SAFEWAY INC.

COMMON STOCK

(PAR VALUE $.01 PER SHARE)
------------------------

LOGO

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

GOLDMAN, SACHS & CO.

MORGAN STANLEY DEAN WITTER

MERRILL LYNCH & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

LEHMAN BROTHERS

SBC WARBURG DILLON READ INC.

SALOMON SMITH BARNEY

REPRESENTATIVES OF THE UNDERWRITERS
==========================================================