<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 14, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-41
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3019135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5918 Stoneridge Mall Rd.
Pleasanton, California 94588-3229
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, (510) 467-3000
including area code
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of July 18, 1997 there were issued and outstanding 233.5
million shares of the registrant's common stock.
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) Page
- ------ --------------------------------- ----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 3
14, 1997 and December 28, 1996
Condensed Consolidated Statements of Income for 5
the 12 and 24 weeks ended June 14, 1997 and
June 15, 1996
Condensed Consolidated Statements of Cash Flows 6
for the 24 weeks ended June 14, 1997 and
June 15, 1996
Notes to the Condensed Consolidated Financial 7
Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17
HOLDERS
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 14, December 28,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 36.7 $ 79.7
Receivables 184.5 160.9
Merchandise inventories 1,494.4 1,283.3
Prepaid expenses and other current assets 162.0 130.5
---------- ----------
Total current assets 1,877.6 1,654.4
---------- ----------
Property 6,194.0 5,069.6
Less accumulated depreciation and amortization (2,407.9) (2,313.2)
---------- ----------
Property, net 3,786.1 2,756.4
Goodwill, net of accumulated amortization
of $130.3 and $116.4 1,905.0 312.5
Prepaid pension costs 338.0 328.7
Investments in unconsolidated affiliates 85.4 362.4
Other assets 127.3 130.8
---------- ----------
Total assets $ 8,119.4 $ 5,545.2
========== ==========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 14, December 28,
1997 1996
---------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 424.6 $ 237.3
Current obligations under capital leases 22.5 18.4
Accounts payable 1,227.9 1,153.1
Accrued salaries and wages 256.2 231.2
Other accrued liabilities 504.4 390.0
---------- ----------
Total current liabilities 2,435.6 2,030.0
---------- ----------
Long-term debt:
Notes and debentures 2,900.1 1,568.1
Obligations under capital leases 232.1 160.4
---------- ----------
Total long-term debt 3,132.2 1,728.5
Deferred income taxes 270.4 223.8
Accrued claims and other liabilities 480.4 376.1
---------- ----------
Total liabilities 6,318.6 4,358.4
---------- ----------
Contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
750 shares authorized; 233.4 and 221.4
shares outstanding 2.6 2.2
Additional paid-in capital 2,454.1 750.3
Unexercised warrants purchased (322.7) (322.7)
Cumulative translation adjustments 8.6 12.0
Retained earnings 1,009.8 745.0
---------- ----------
3,152.4 1,186.8
Less: treasury stock at cost; 31.4
shares in 1997 (1,351.6) -
---------- ----------
Total stockholders' equity 1,800.8 1,186.8
---------- ----------
Total liabilities and stockholders' equity $ 8,119.4 $ 5,545.2
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
--------------------------- ---------------------------
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 5,249.2 $ 3,945.4 $ 9,327.0 $ 7,828.1
Cost of goods sold (3,743.9) (2,843.3) (6,676.2) (5,633.5)
----------- ----------- ----------- -----------
Gross profit 1,505.3 1,102.1 2,650.8 2,194.6
Operating and administrative expense (1,207.3) (892.0) (2,128.0) (1,790.4)
----------- ----------- ----------- -----------
Operating profit 298.0 210.1 522.8 404.2
Interest expense (62.7) (42.2) (101.4) (86.5)
Equity in earnings of unconsolidated affiliates 4.3 10.0 21.5 21.2
Other income, net 0.6 1.3 1.4 2.4
----------- ----------- ----------- -----------
Income before income taxes
and extraordinary loss 240.2 179.2 444.3 341.3
Income taxes (106.1) (72.5) (187.7) (138.2)
----------- ----------- ----------- -----------
Income before extraordinary loss 134.1 106.7 256.6 203.1
Extraordinary loss related to early retirement of
debt, net of income tax benefit (4.2) - (4.2) -
----------- ----------- ----------- -----------
Net income $ 129.9 $ 106.7 $ 252.4 $ 203.1
=========== =========== =========== ===========
Primary and fully diluted income per common
share and common share equivalent:
Income before extraordinary loss $ 0.54 $ 0.44 $ 1.05 $ 0.85
Extraordinary loss (0.02) - (0.02) -
----------- ----------- ----------- -----------
Net income $ 0.52 $ 0.44 $ 1.03 $ 0.85
=========== =========== =========== ===========
Weighted average common shares and common share equivalents:
Primary 250.2 239.8 245.2 239.1
=========== =========== =========== ===========
Fully diluted 250.5 239.9 245.3 239.5
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks Ended
---------------------
June 14, June 15,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $252.4 $203.1
Reconciliation to net cash flow from operations:
Extraordinary loss related to the early retirement of debt,
before income tax benefit 7.0 -
Depreciation and amortization 192.9 153.8
LIFO expense 2.3 4.6
Equity in undistributed earnings of unconsolidated affiliates (21.5) (21.2)
Other 37.3 4.6
Change in working capital items:
Receivables and prepaid expenses 27.0 (95.8)
Inventories at FIFO cost 144.0 89.4
Payables and accruals (294.2) (15.9)
------ ------
Net cash flow from operations 347.2 322.6
------ ------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (181.7) (164.9)
Proceeds from sale of property 13.2 17.9
Net cash acquired in acquisition of The Vons Companies, Inc. 57.6 -
Other 17.1 (1.9)
------ ------
Net cash flow used by investing activities (93.8) (148.9)
------ ------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings 257.5 92.0
Payments on short-term borrowings (75.6) (142.7)
Additions to long-term borrowings 1,621.5 129.6
Payments on long-term borrowings (734.8) (313.2)
Purchase of treasury stock (1,376.0) -
Net proceeds from exercise of stock options and warrants 18.7 7.8
Premium paid on early retirement of debt (5.4) -
Other (2.3) (3.3)
------ ------
Net cash flow used by financing activities (296.4) (229.8)
------ ------
Decrease in cash and equivalents (43.0) (56.1)
CASH AND EQUIVALENTS
Beginning of period 79.7 74.8
------ ------
End of period $ 36.7 $ 18.7
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - 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 24 weeks ended June 14,
1997 and June 15, 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 24 weeks ended June 14, 1997 are not necessarily indicative of the
results expected for the full year.
ACQUISITION OF THE VONS COMPANIES, INC.
As discussed in Note D, 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.
Pro forma results of operations for 1996 and 1995 have been included in
Safeway's Form 8-K/A filed on May 1, 1997. Summarized pro forma results of
operations for the first 12 weeks of 1997 and the first 12 and 24 weeks of 1996
appear in Note D below.
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.
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 stock were exercised or converted to common stock.
Pro forma amounts for basic and diluted EPS assuming SFAS No. 128 had been in
effect for the 12 and 24 weeks ended June 14, 1997 and June 15, 1996 are as
follows:
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
-------------------- --------------------
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS:
Income before
extraordinary loss $ 0.58 $ 0.49 $ 1.13 $ 0.94
Extraordinary loss (0.02) - (0.02) -
-------- -------- -------- --------
Net income $ 0.56 $ 0.49 $ 1.11 $ 0.94
======== ======== ======== ========
Diluted EPS:
Income before
extraordinary loss $ 0.54 $ 0.44 $ 1.05 $ 0.85
Extraordinary loss (0.02) - (0.02) -
-------- -------- -------- --------
Net income $ 0.52 $ 0.44 $ 1.03 $ 0.85
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 quarter of 1997 due to
management's expectation of little or no inflation for the full year. LIFO
expense was $2.3 million in the second quarter of 1996. For the first 24 weeks
of the year, LIFO expense was $2.3 million in 1997 and $4.6 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. 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.
NOTE B - FINANCING
Notes and debentures were composed of the following at June 14, 1997 and
December 28, 1996 (in millions):
<TABLE>
<CAPTION>
June 15, 1997 December 28, 1996
Long-term Current Long-term Current
<S> <C> <C> <C> <C>
Bank Credit Agreement, unsecured $1,605.2
Credit Agreement, unsecured - $ 360.6
9.30% Senior Secured Debentures due 70.7 70.7
2007
Mortgage notes payable, secured 147.1 $119.6 156.5 $149.9
10% Senior Notes due 2002, unsecured 59.1 - 59.1 -
Medium-term notes, unsecured 65.5 - 65.5 -
Other notes payable, unsecured 111.4 4.5 114.6 4.4
Short-term bank borrowings, unsecured - 265.0 - 83.0
9.35% Senior Subordinated Notes due
1999, unsecured 161.5 - 161.5 -
10% Senior Subordinated Notes due 241.4 - 241.4 -
2001, unsecured
9.65% Senior Subordinated Debentures
due 2004, unsecured 228.2 - 228.2 -
9.875% Senior Subordinated Debentures
due 2007, unsecured 110.0 - 110.0 -
8.375% Senior Subordinated Debentures
due 1999, unsecured 100.0 - - -
6.625% Senior Subordinated Debentures
due 1998, unsecured - 35.5 - -
-------- ------ -------- ------
$2,900.1 $424.6 $1,568.1 $237.3
======== ====== ======== ======
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note C to the Company's consolidated financial statements on pages 27 through 28
of the 1996 Annual Report to Stockholders describes all of the material
restrictive covenants of the 9.30% Senior Secured Debentures, the Credit
Agreement and the Subordinated Securities (except for the 8.375% Senior
Subordinated Debentures and the 6.625% Senior Subordinated Debentures which are
described in Note 7 of Vons' 1996 Annual Report on Form 10-K). On April 8, 1997,
the Company entered into a new $3.0 billion bank credit agreement (the "Bank
Credit Agreement") that 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. 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.
Subsequent to quarter-end, Safeway entered the commercial paper market. On July
17, 1997, the Company had $1.5 billion of commercial paper outstanding, the
proceeds were used to pay down borrowings under the Bank Credit Agreement.
NOTE C - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On April 8, 1997, Safeway completed the acquisition of Vons pursuant to which
Safeway 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
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 second quarter of 1997, Safeway's investment in unconsolidated
affiliates consisted of a 49% interest in Casa Ley, which operated 71 food and
general merchandise stores in western Mexico. Income from Safeway's equity
investment in Casa Ley increased slightly to $4.3 million in the second quarter
of 1997 from $4.1 million in 1996. For the first 24 weeks of the year, Safeway's
share of Casa Ley's earnings rose to $9.3 million in 1997 from $8.1 million in
1996. Safeway's share of Vons' earnings, recorded on a one-quarter delay basis,
was $12.2 million for the first quarter of 1997, $7.2 million in the first
quarter of 1996, and $13.1 million in the first 24 weeks of 1996.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 for the first 12 weeks of
1997 and the first 12 and 24 weeks of 1996 as if the acquisition had occurred as
of the beginning of 1996. This pro forma financial information is presented for
informational purposes only and may not be indicative of what the actual
consolidated results of operations would have been if the acquisition had been
effective at the beginning of fiscal 1996 (in millions, except per-share
amounts):
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
-------- --------- --------- ---------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Sales $5,249.2 $5,206.4 $10,578.5 $10,271.0
Income before
extraordinary loss $134.1 $114.5 $267.4 $219.5
Net income $129.9 $114.5 $263.2 $219.5
Fully diluted income per
common share and
common share equivalent:
Income before $0.54 $0.46 $1.07 $0.88
extraordinary loss
Net income $0.52 $0.46 $1.05 $0.88
</TABLE>
Net cash acquired from the acquisition was as follows (in millions):
Fair value of assets acquired $ 3,129.7
Fair value of liabilities assumed (1,183.1)
Stock issued (1,693.0)
Safeway's equity investment in Vons (311.2)
---------
Net cash acquired $ (57.6)
=========
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 a notice
of 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 through 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.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 result of the
Outbreak and Foodmaker's post-Outbreak statements. Other parties to these
actions include two meat suppliers and three Jack In The Box franchisees that
operated outlets from which claims of illness arose. These lawsuits presently
are set for trial on September 22, 1997, in Los Angeles, Superior Court.
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. The Company believes
that Vons has meritorious defenses to plaintiffs' claims.
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MERGER WITH THE VONS COMPANIES, INC. ("VONS")
On April 8, 1997 Safeway completed the acquisition of Vons (the "Merger").
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 Kohlberg Kravis Roberts
& Co. ("KKR") at $43 per share, for an aggregate purchase price of $1.376
billion. To finance the repurchase, Safeway entered into a new $3.0 billion bank
credit agreement (the "Bank Credit Agreement") that 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. As a result of the repurchase, Safeway increased its debt and interest
expense, but also reduced the number of common shares outstanding used to
calculate earnings per share. This reduction of 32.0 million shares partially
offsets the increase of 41.6 million shares issued pursuant to the Merger.
RESULTS OF OPERATIONS
Safeway's income before extraordinary loss was $134.1 million ($0.54 per share)
for the second quarter of 1997, compared to $106.7 million ($0.44 per share) in
1996. The Company incurred an extraordinary loss of $4.2 million ($0.02 per
share) in the second quarter of 1997 for the early retirement of debt, which
reduced net income to $129.9 million ($0.52 per share). As described below,
quarterly results in both years were affected by labor disputes, and the current
quarter was affected by the acquisition of Vons. For the first 24 weeks of the
year, Safeway's income before extraordinary loss was $256.6 million ($1.05 per
share), compared to $203.1 million ($0.85 per share) in 1996.
During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute
affecting 74 stores in the Alberta, Canada operating area. The Company estimates
that the strike reduced second-quarter 1997 net income by approximately $0.07
per share. Labor disputes in the British Columbia and Denver operating areas
reduced second-quarter 1996 net income by an estimated $0.05 per share.
Safeway's second-quarter 1997 income statement consolidates Safeway's and Vons'
operating results for the full quarter, while the second quarter 1996 income
statement includes only Safeway's operating results and reflects its 35% equity
interest in Vons. In order to facilitate an understanding of the Company's
operations, the following discussions of sales, gross profit and operating and
administrative expenses include comparisons with second-quarter 1996 pro forma
combined financial information. This pro forma information is based on the 1996
second-quarter historical financial statements of the two companies as if the
acquisition had occurred at the beginning of that quarter, and has been adjusted
to conform Vons' accounting policies to Safeway's.
Due to the acquisition of Vons this quarter, total sales increased 33% on a
historical basis from $3.95 billion in 1996 to $5.25 billion in 1997. Pro forma
combined sales for the second quarter last year were $5.21 billion, representing
an increase of 0.8%. Excluding Alberta, identical-store sales (stores operating
the entire measurement period in both years excluding replacement stores),
increased 2.0%, or 3.0% on a comparable-store basis (which includes replacement
stores). Including Alberta, identical-stores sales decreased 1.0%, or a 0.1%
decrease on a comparable-store basis. Same-store sales have softened compared to
recent quarterly results, largely because of the effect of deflation and the
timing of the Easter holiday. For the first 24 weeks of the year, total sales
increased 19% on a historical basis to $9.33 billion in 1997 from $7.83 billion
in 1996, primarily as a result of the Vons acquisition.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross profit was 28.68% of sales in the second quarter of 1997 compared to
27.93% in 1996 on a historical basis and 28.42% on a pro forma basis.
Improvements in buying practices and product mix were partially offset by
investments to drive sales in various regions. In addition, the Company did not
record LIFO expense this quarter, reflecting management's expectation of little
or no inflation for the full year. For the first 24 weeks of the year, on a
historical basis gross profit was 28.42% of sales in 1997 compared to 28.03% in
1996.
Operating and administrative expense was 23.00% of sales in 1997 compared to
22.61% in 1996 due to the effect in 1997 of Vons' higher operating and
administrative expense margin. On a pro forma combined basis, operating and
administrative expense for the second quarter of 1997 was down 34 basis points
from 23.34% last year. Efforts to reduce or control expenses combined with
increased sales have continued to result in lower operating and administrative
expenses as a percentage of sales on a pro forma basis. For the first 24 weeks
of the year, operating and administrative expense on a historical basis fell
slightly to 22.82% in 1997 from 22.87% of sales in 1996. It is expected that
Safeway's operating and administrative expense-to-sales ratio will increase
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, annual goodwill amortization will increase
by approximately $25 million. Safeway plans to apply its cost reduction, sales
growth and capital management strategies to Vons' operations in an effort to
offset these negative effects, although there can be no assurance as to the
results Safeway will be able to achieve in this regard.
As a result of the interest on the debt incurred on April 8, 1997 to repurchase
the KKR stock, interest expense rose to $62.7 million for the second quarter of
1997 compared to $42.2 million last year, and to $101.4 million for the first 24
weeks of 1997 compared to $86.5 million last year. On April 30, 1997, Safeway
purchased interest rate caps with a notional principal amount of $850 million at
7% for two years. These caps are intended to provide partial protection from the
exposure to higher floating interest rates over the life of the cap.
At the end of the second quarter of 1997, Safeway's investment in unconsolidated
affiliates consisted of a 49% interest in Casa Ley, which operated 71 food and
general merchandise stores in western Mexico. Income from Safeway's equity
investment in Casa Ley increased slightly to $4.3 million in the second quarter
of 1997 from $4.1 million in 1996. For the first 24 weeks of the year, Safeway's
share of Casa Ley's earnings rose to $9.3 million in 1997 from $8.1 million in
1996. Safeway's share of Vons' earnings, recorded on a one-quarter delay basis,
was $12.2 million for the first quarter of 1997, $7.2 million in the first
quarter of 1996, and $13.1 million in the first 24 weeks of 1996.
The income tax rate increased to 42.25% for the first 24 weeks of 1997 from
39.98% in the first quarter of the year due to the increase in nondeductible
goodwill amortization resulting from the acquisition of Vons.
LIQUIDITY AND FINANCIAL RESOURCES
Net cash flow from operations for the first 24 weeks of the year was $347.2
million in 1997 compared to $322.6 million in 1996.
Cash flow used by investing activities for the first 24 weeks of the year was
$93.8 million in 1997 compared to $148.9 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 four new stores,
continue construction of a manufacturing plant in California and begin work on a
new distribution center in Maryland. [THESE NUMBERS ARE STILL PRELIMINARY].
Cash flow used by financing activities for the first 24 weeks of the year was
$296.4 million in 1997, compared to $229.8 million in 1996, reflecting Safeway's
repurchase of KKR stock and the early retirement of $150 million of long-term
debt, parially offset by the debt incurred to repurchase the KKR stock.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Safeway's computation of
operating cash flow is as follows (dollars in millions):
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
------------------- -------------------
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income before income taxes
and extraordinary loss $240.2 $179.2 $444.3 $341.3
LIFO expense - 2.3 2.3 4.6
Interest expense 62.7 42.2 101.4 86.5
Depreciation and
amortization 112.2 78.2 192.9 153.8
Equity in earnings of
unconsolidated affiliates (4.3) (10.0) (21.5) (21.2)
------ ------ ------ ------
Operating cash flow $410.8 $291.9 $719.4 $565.0
====== ====== ====== ======
As a percent of sales 7.83% 7.40% 7.71% 7.22%
====== ====== ====== ======
As a multiple of interest
expense 6.55x 6.92x 7.09x 6.53x
====== ====== ====== ======
</TABLE>
Based upon the current level of operations of Safeway and Vons, and anticipated
operating improvements and cost savings resulting in part from the Merger,
Safeway believes that operating cash flow of the combined company 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. There can be no assurance, however, that the
combined company's business will continue to generate cash flow at or above
current levels or that anticipated operating improvements or cost savings can be
achieved. Through July 17, 1997, the Company borrowed $1.5 billion of commercial
paper, the proceeds of which were used to pay down borrowings under the Bank
Credit Agreement. The Bank Credit Agreement will be 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 two quarters of 1997, Safeway and Vons together
invested $204 million in capital expenditures, including Vons' first quarter
1997 capital spending of $7 million, to, among other things, open 10 new stores
and continue the construction of a manufacturing plant in California and a new
distribution center in Maryland. Combined capital expenditures for Safeway and
Vons in fiscal 1997 are expected to exceed $800 million. The combined company
expects to open 40 to 45 new stores and complete more than 180 remodels in 1997.
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
relating to, among other things, capital expenditures, cost reduction, cash flow
and operating improvements. 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 programs to reduce costs; the
ability to integrate 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.
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 a notice
of 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 through 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 result of the
Outbreak and Foodmaker's post-Outbreak statements. Other parties to these
actions include two meat suppliers and three Jack In The Box franchisees that
operated outlets from which claims of illness arose. These lawsuits presently
are set for trial on September 22, 1997, in Los Angeles, Superior Court.
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. The Company believes
that Vons has meritorious defenses to plaintiffs' claims.
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 14, 1997 at which the
stockholders voted on proposals as follows:
<TABLE>
<CAPTION>
Votes Votes Abstained
Against or and Broker
Votes For Withheld Non-votes
--------- ---------- ---------------
<S> <C> <C> <C>
Election of Directors:
James H. Greene, Jr. 200,016,878 1,347,174 Not applicable
Paul Hazen 200,168,402 1,195,650 Not applicable
Henry R. Kravis 199,949,406 1,414,646 Not applicable
Adoption of stockholder
proposal requesting the Board
of Directors to take the
necessary steps to provide for
cumulative voting 35,534,552 155,006,384 10,823,116
Ratification of appointment of
Deloitte & Touche LLP as
independent auditors for 200,856,762 350,296 156,994
fiscal year 1997
</TABLE>
17
<PAGE> 18
SAFEWAY INC. AND SUBSIDIARIES
ITEM 6(A). EXHIBITS
Exhibit 3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Registration
Statement No. 33-33388).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated
by reference to Exhibit 3.2 to Registration Statement No.
33-33388), and Amendment to the Company's By-laws
effective March 8, 1993 (incorporated by reference to
Exhibit 3.2 to Registrant's Form 10-K for the year ended
January 2, 1993).
Exhibit 10(iii).1 The Vons Companies, Inc. Management Stock Option
Plan (incorporated by reference to Exhibit 10.3 to The
Vons Companies, Inc. Annual Report on Form 10-K for the
twenty-seven weeks ended January 3, 1988).
Exhibit 10(iii).2 The Vons Companies, Inc. 1990 Stock Option and Restricted
Stock Plan (incorporated by reference to Appendix A to The
Vons Companies, Inc. Proxy Statement for its May 17, 1990
Annual Meeting of Shareholders).
Exhibit 10(iii).3 Amendment, dated February 17, 1993, to The Vons Companies,
Inc. 1990 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.13.1 to The Vons
Companies, Inc. Quarterly Report on Form 10-Q for the
quarterly period ended March 28, 1993).
Exhibit 10(iii).4 Amendment, effective as of December 13, 1996, to The Vons
Companies, Inc. 1990 Stock Option and Restricted Stock
Plan (incorporated by reference to Exhibit 10.7.2 to The
Vons Companies, Inc. Annual Report on Form 10-K for the
fiscal year ended December 29, 1996).
Exhibit 10(iii).5 Form of Amendments, dated April 8, 1997, to The Vons
Companies, Inc. Management Stock Option Plan and The Vons
Companies, Inc. 1990 Stock Option and Restricted Stock
Plan (incorporated by reference to Exhibit 4.5 to Safeway
Inc.'s Form S-4 filed on March 5, 1997).
Exhibit 10(iii).6 Form of stock option agreement for former directors of The
Vons Companies, Inc. (Incorporated by reference to Exhibit
10(iii).12 to Safeway Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 28, 1996).
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
ITEM 6(B). REPORTS ON FORM 8-K
On April 7, 1997, the Company filed a Current Report on Form 8-K stating under
"Item 5. Other Events" that on April 2, 1997 employees represented by the Retail
Clerks, Bakers and Meatcutters unions in Canada Safeway's Alberta operating area
voted on the Company's Final Offer to settle a strike in that operating area
which had commenced at 12:01 a.m. on March 26, 1997. The Company reported that
the voting resulted in a rejection of the Company's Final Offer in all but
Lethbridge, where Retail Clerks voted to accept the Final Offer.
On April 23, 1997, the Company filed a Current Report on Form 8-K stating under
"Item 2. Acquisition or Disposition of Assets" that the Company consummated its
previously announced merger with The Vons Companies, Inc. ("Vons") pursuant to
which each share of Vons common stock outstanding but not owned by Safeway
immediately prior to the merger was converted into the right to receive 1.425
shares of common stock of the Company.
18
<PAGE> 19
SAFEWAY INC. AND SUBSIDIARIES
On May 1, 1997, the Company filed on Form 8-K/A an amendment to the Current
Report on Form 8-K filed on April 23, 1997, and included the information
required under "Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits".
On June 4, 1997, the Company filed a Current Report on Form 8-K stating under
"Item 5. Other Events" that on May 28, 1997, the Company and the unions
representing employees involved in a labor dispute in Canada Safeway's Alberta
operating area requested a mediator to assist in bringing the parties together
in an attempt to resolve the dispute. The Company reported that on June 3, 1997,
the mediator recommended a basis for settlement which would be voted on by three
of the four unions involved.
On June 12, 1997, the Company filed a Current Report on Form 8-K stating under
"Item 5. Other Events" that unions involved in a labor dispute in Canada
Safeway's Alberta operating area voted to accept a mediator's recommended
settlement which ended the labor dispute.
19
<PAGE> 20
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: July 28, 1997 \s\ Steven A. Burd
------------------ -------------------------------------
Steven A. Burd
President and Chief Executive Officer
Date: July 28, 1997 \s\ Julian C. Day
------------------ -------------------------------------
Julian C. Day
Executive Vice President and Chief
Financial Officer
20
<PAGE> 21
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED JUNE 14, 1997
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule (electronic filing only)
21
<PAGE> 1
EXHIBIT 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended
---------------------------------------------------
June 14, 1997 June 15, 1996
----------------------- -----------------------
Fully Fully
Diluted Primary Diluted Primary
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 134.1 $ 134.1 $ 106.7 $ 106.7
Extraordinary loss (4.2) (4.2) - -
--------- --------- --------- ---------
Net income $ 129.9 $ 129.9 $ 106.7 $ 106.7
========= ========= ========= =========
Weighted average common shares outstanding 232.3 232.3 217.4 217.4
Common share equivalents 18.2 17.9 22.5 22.4
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 250.5 250.2 239.9 239.8
========= ========= ========= =========
Earnings per common share and common share equivalent:
Income before extraordinary loss $ 0.54 $ 0.54 $ 0.44 $ 0.44
Extraordinary loss (0.02) (0.02) - - -
--------- --------- --------- ---------
Net income $ 0.52 $ 0.52 $ 0.44 $ 0.44
========== ========== ========== ==========
Calculation of common share equivalents:
Options and warrants to purchase common shares 30.1 30.1 34.2 34.2
Common shares assumed purchased with potential
proceeds (11.9) (12.2) (11.7) (11.8)
--------- --------- --------- ---------
Common share equivalents 18.2 17.9 22.5 22.4
========= ========= ========= =========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 579.9 $ 547.7 $ 397.0 $ 384.0
Common stock price used under the treasury
stock method $ 48.58 $ 45.04 $ 33.87 $ 32.36
Common shares assumed purchased with
potential proceeds 11.9 12.2 11.7 11.8
</TABLE>
(Continued)
22
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks Ended
---------------------------------------------------
June 14, 1997 June 15, 1996
----------------------- -----------------------
Fully Fully
Diluted Primary Diluted Primary
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 256.6 $ 256.6 $ 203.1 $ 203.1
Extraordinary loss (4.2) (4.2) - -
--------- --------- --------- ---------
Net income $ 252.4 $ 252.4 $ 203.1 $ 203.1
========= ========= ========= =========
Weighted average common shares outstanding 226.9 226.9 216.4 216.4
Common share equivalents 18.4 18.3 23.1 22.7
--------- --------- --------- ---------
Weighted average common shares and common
share equivalents 245.3 245.2 239.5 239.1
========= ========= ========= =========
Earnings per common share and common share equivalent:
Income before extraordinary loss $ 1.05 $ 1.05 $ 0.85 $ 0.85
Extraordinary loss (0.02) (0.02) - -
--------- --------- --------- ---------
Net income $ 1.03 $ 1.03 $ 0.85 $ 0.85
========= ========= ========= =========
Calculation of common share equivalents:
Options and warrants to purchase common shares 30.6 30.6 35.0 35.1
Common shares assumed purchased with potential
proceeds (12.2) (12.3) (11.9) (12.4)
-------- --------- --------- ---------
Common share equivalents 18.4 18.3 23.1 22.7
======== ========= ========= =========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 592.4 $ 569.7 $ 403.7 $ 364.6
Common stock price used under the treasury
stock method $ 48.56 $ 46.15 $ 33.85 $ 29.29
Common shares assumed purchased with
potential proceeds 12.2 12.3 11.9 12.4
</TABLE>
23
<PAGE> 1
SAFEWAY INC. AND SUBSIDIARIES EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks Fiscal Year
-------------------- ----------------------------------------------------------------
June 14, June 15,
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary loss and cumulative
effect of accounting changes $ 444.3 $ 341.3 $ 767.6 $ 556.5 $ 424.1 $ 216.3 $ 197.4
Add interest expense 101.4 86.5 178.5 199.8 221.7 265.5 290.4
Add interest on rental expense (a) 40.8 41.5 90.0 87.5 86.6 88.0 88.0
Less equity in earnings of unconsolidated
affiliates (21.5) (21.2) (50.0) (26.9) (27.3) (33.5) (39.1)
Add minority interest in subsidiary 1.9 1.2 3.4 3.9 3.0 3.5 1.7
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 566.9 $ 449.3 $ 989.5 $ 820.8 $ 708.1 $ 539.8 $ 538.4
========= ========= ========= ========= ========= ========= =========
Interest expense $ 101.4 $ 86.5 $ 178.5 $ 199.8 $ 221.7 $ 265.5 $ 290.4
Add capitalized interest 2.4 1.6 4.4 4.6 2.9 4.2 8.0
Add interest on rental expense (a) 40.8 41.5 90.0 87.5 86.6 88.0 88.0
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 144.6 $ 129.6 $ 272.9 $ 291.9 $ 311.2 $ 357.7 $ 386.4
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 3.92 3.47 3.63 2.81 2.28 1.51(b) 1.39
========= ========= ========= ========= ========= ========= =========
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of future
operating lease payments.
(b) Safeway's ratio of earnings to fixed charges during 1993 was adversely
affected by a $54.9 million charge to operating and administrative expense
for severance payments made to retail employees in the Alberta, Canada
division as part of a voluntary employee buyout. Excluding this charge, the
ratio of earnings to fixed charges for 1993 would have been 1.66.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF INCOME ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 14, 1997. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-14-1997
<CASH> 36,700
<SECURITIES> 0
<RECEIVABLES> 184,500
<ALLOWANCES> 0
<INVENTORY> 1,494,400
<CURRENT-ASSETS> 1,877,600
<PP&E> 6,194,000
<DEPRECIATION> (2,407,900)
<TOTAL-ASSETS> 8,119,400
<CURRENT-LIABILITIES> 2,435,600
<BONDS> 2,900,100
0
0
<COMMON> 2,600
<OTHER-SE> 1,798,200
<TOTAL-LIABILITY-AND-EQUITY> 8,119,400
<SALES> 9,327,000
<TOTAL-REVENUES> 9,327,000
<CGS> 6,676,200
<TOTAL-COSTS> 6,676,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,400
<INCOME-PRETAX> 444,300
<INCOME-TAX> 187,700
<INCOME-CONTINUING> 256,600
<DISCONTINUED> 0
<EXTRAORDINARY> (4,200)
<CHANGES> 0
<NET-INCOME> 252,400
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
