<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 20, 1998
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5918 Stoneridge Mall Rd.
Pleasanton, California 94588-3229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 467-3000
--------------
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 24, 1998 there were issued and outstanding 481.6 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> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 20, 1998 and January 3, 3
1998
Condensed Consolidated Statements of Income for the 12 and 24 weeks ended 5
June 20, 1998 and June 14, 1997
Condensed Consolidated Statements of Cash Flows for the 24 weeks ended 6
June 20, 1998 and June 14, 1997
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 11
OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 20, January 3,
1998 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 55.8 $ 77.2
Receivables 164.2 180.8
Merchandise inventories 1,600.9 1,613.2
Prepaid expenses and other current assets 196.7 158.5
---------- ----------
Total current assets 2,017.6 2,029.7
---------- ----------
Property 6,865.4 6,681.7
Less accumulated depreciation and amortization (2,669.4) (2,566.4)
---------- ----------
Property, net 4,196.0 4,115.3
Goodwill, net of accumulated amortization
of $179.4 and $157.0 1,832.9 1,824.7
Prepaid pension costs 350.2 341.4
Investment in unconsolidated affiliates 109.1 97.7
Other assets 81.2 85.1
---------- ----------
Total assets $ 8,587.0 $ 8,493.9
========== ==========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 20, January 3,
1998 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 324.5 $ 277.4
Current obligations under capital leases 21.9 22.0
Accounts payable 1,303.7 1,391.8
Accrued salaries and wages 265.3 310.5
Other accrued liabilities 510.0 536.9
---------- ----------
Total current liabilities 2,425.4 2,538.6
---------- ----------
Long-term debt:
Notes and debentures 2,642.3 2,817.8
Obligations under capital leases 218.8 223.1
---------- ----------
Total long-term debt 2,861.1 3,040.9
Deferred income taxes 268.4 297.0
Accrued claims and other liabilities 472.7 468.4
---------- ----------
Total liabilities 6,027.6 6,344.9
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 541.9 and 537.4
shares issued 5.4 5.3
Additional paid-in capital 2,521.6 2,467.4
Cumulative translation adjustments (8.8) 0.6
Retained earnings 1,672.9 1,315.0
---------- ----------
4,191.1 3,788.3
Less: Treasury stock at cost; 60.9 and 61.2 shares (1,309.0) (1,316.6)
Unexercised warrants purchased (322.7) (322.7)
---------- ----------
Total stockholders' equity 2,559.4 2,149.0
---------- ----------
Total liabilities and stockholders' equity $ 8,587.0 $ 8,493.9
========== ==========
</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 20, June 14, June 20, June 14,
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 5,583.3 $ 5,249.2 $ 10,972.6 $ 9,327.0
Cost of goods sold (3,961.1) (3,743.9) (7,786.3) (6,676.2)
----------- ----------- ------------ -----------
Gross profit 1,622.2 1,505.3 3,186.3 2,650.8
Operating and administrative expense (1,241.3) (1,207.3) (2,474.2) (2,128.0)
----------- ----------- ------------ -----------
Operating profit 380.9 298.0 712.1 522.8
Interest expense (51.5) (62.7) (104.4) (101.4)
Equity in earnings of unconsolidated affiliates 4.6 4.3 10.4 21.5
Other income, net 0.4 0.6 1.7 1.4
----------- ----------- ------------ -----------
Income before income taxes
and extraordinary loss 334.4 240.2 619.8 444.3
Income taxes (141.2) (106.1) (261.8) (187.7)
----------- ----------- ------------ -----------
Income before extraordinary loss 193.2 134.1 358.0 256.6
Extraordinary loss related to early retirement of
debt, net of income tax benefit -- (4.2) -- (4.2)
----------- ----------- ------------ -----------
Net income $ 193.2 $ 129.9 $ 358.0 $ 252.4
----------- ----------- ------------ -----------
Basic earnings per share:
Income before extraordinary loss $ 0.40 $ 0.29 $ 0.75 $ 0.57
Extraordinary loss -- (0.01) -- (0.01)
----------- ----------- ------------ -----------
Net income $ 0.40 $ 0.28 $ 0.75 $ 0.56
=========== ============ ============= ===========
Diluted earnings per share:
Income before extraordinary loss $ 0.38 $ 0.27 $ 0.71 $ 0.52
Extraordinary loss -- (0.01) -- (0.01)
----------- ----------- ------------ -----------
Net income $ 0.38 $ 0.26 $ 0.71 $ 0.51
=========== ============ ============= ===========
Weighted average shares outstanding - basic 480.2 464.7 479.2 453.9
=========== ============ ============= ===========
Weighted average shares outstanding - diluted 508.2 500.6 507.4 490.4
=========== ============ ============= ===========
</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 20, June 14,
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 358.0 $ 252.4
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 234.9 192.9
LIFO expense 2.3 2.3
Equity in undistributed earnings of unconsolidated affiliates (10.4) (21.5)
Other (13.4) 37.3
Change in working capital items:
Receivables and prepaid expenses (21.7) 27.0
Inventories at FIFO cost 1.8 144.0
Payables and accruals (144.5) (294.2)
-------- ----------
Net cash flow from operations 407.0 347.2
-------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (300.7) (181.7)
Proceeds from sale of property 8.1 13.2
Net cash acquired in acquisition of The Vons Companies, Inc. -- 57.6
Other (6.6) 17.1
-------- ----------
Net cash flow used by investing activities (299.2) (93.8)
-------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings 90.0 257.5
Payments on short-term borrowings (120.0) (75.6)
Additions to long-term borrowings 295.0 1,621.5
Payments on long-term borrowings (407.9) (734.8)
Purchase of treasury stock -- (1,376.0)
Net proceeds from exercise of stock options and warrants 16.4 18.7
Premium paid on early retirement of debt -- (5.4)
Other (2.7) (2.3)
-------- ----------
Net cash flow used by financing activities (129.2) (296.4)
-------- ----------
Decrease in cash and equivalents (21.4) (43.0)
CASH AND EQUIVALENTS
Beginning of period 77.2 79.7
-------- ----------
End of period $ 55.8 $ 36.7
======== ==========
</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 20,
1998 and June 14, 1997 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 1997 Annual Report to Stockholders. The results of operations for the
12 and 24 weeks ended June 20, 1998 are not necessarily indicative of the
results expected for the full year.
STOCK SPLIT
In January 1998, Safeway's Board of Directors authorized a two-for-one split of
the Company's common stock. The stock split was effected by a distribution on
February 25, 1998 of one additional share for each share owned by stockholders
of record on February 10, 1998. Share and per-share amounts presented in the
condensed consolidated financial statements and related notes have been restated
to reflect the stock split.
MERGER WITH VONS
On April 8, 1997, Safeway acquired The Vons Companies, Inc. ("Vons") pursuant to
which the Company issued 83.2 million shares of Safeway common stock for all 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 results.
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway recorded LIFO expense of $2.3 million during the first 24 weeks of both
1998 and 1997, reflecting management's expectation of low inflation for the full
year. Actual LIFO Indices are calculated during the fourth quarter of the year
based upon a statistical sampling of inventories.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - NEW ACCOUNTING STANDARDS
As required in the first quarter of 1998, Safeway adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement 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. For
Safeway, other comprehensive income includes only foreign currency translation
adjustments. Safeway's total comprehensive income was as follows (in millions):
<TABLE>
<CAPTION>
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 20, 1998 June 14, 1997 June 20, 1998 June 14, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $193.2 $129.9 $358.0 $252.4
Foreign currency translation adjustments (9.8) (1.5) (9.4) (3.4)
------ ------ ------ ------
Total comprehensive income $183.4 $128.4 $348.6 $249.0
====== ====== ====== ======
</TABLE>
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 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 this statement 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. This
statement is effective for Safeway's fiscal year ending January 2, 1999.
In March 1998, the American Institute of Certified Public Accountants finalized
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which defines the types of
costs that are capitalizable for computer software projects and requires all
other costs to be expensed in the period incurred. The new SOP requires that in
order for costs to be capitalizable they must be intended to create a new system
or add identifiable functionality to an existing system. This SOP is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. Although the Company has not fully assessed the implications of this
new statement, the Company does not believe adoption of this statement will have
a material impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which defines derivatives, requires that
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Although the Company has not
fully assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on its financial
statements.
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - FINANCING
Notes and debentures were composed of the following at June 20, 1998 and January
3, 1998 (in millions):
<TABLE>
<CAPTION>
June 20, 1998 January 3, 1998
------------- ---------------
Long-term Current Long-term Current
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Bank Credit Agreement, unsecured $ 110.3 $ 238.2
Commercial paper 1,520.2 1,473.5
9.30% Senior Secured Debentures due 2007 24.3 24.3
10% Senior Subordinated Notes due 2001, unsecured 79.9 79.9
9.875% Senior Subordinated Debentures due 2007,
unsecured 24.2 24.2
9.65% Senior Subordinated Debentures due 2004,
unsecured 81.2 81.2
9.35% Senior Subordinated Notes due 1999,
unsecured -- $ 66.7 66.7
7.45% Senior Debentures due 2027, unsecured 150.0 -- 150.0
7.00% Senior Notes due 2007, unsecured 250.0 -- 250.0
6.85% Senior Notes due 2004, unsecured 200.0 -- 200.0
10% Senior Notes due 2002, unsecured 6.1 -- 6.1
Mortgage notes payable, secured 73.9 72.9 88.0 $ 62.8
Other notes payable, unsecured 96.7 4.9 110.2 4.6
Medium-term notes, unsecured 25.5 -- 25.5 --
Short-term bank borrowings, unsecured -- 180.0 -- 210.0
-------- -------- -------- --------
$2,642.3 $ 324.5 $2,817.8 $ 277.4
======== ======== ======== ========
</TABLE>
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 for the 24 week
period ended June 14, 1997 combines the consolidated results of operations of
Safeway and Vons as if the acquisition had occurred as of the beginning of 1997.
The following 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 earlier (in
millions, except per-share amounts):
<TABLE>
<CAPTION>
24 Weeks Ended
--------------
(Actual) (Pro Forma)
June 20, 1998 June 14, 1997
------------- -------------
<S> <C> <C>
Sales $ 10,972.6 $ 10,578.5
Income before extraordinary loss $ 358.0 $ 267.4
Net income $ 358.0 $ 263.2
Diluted earnings per share:
Income before extraordinary loss $ 0.71 $ 0.53
Net income $ 0.71 $ 0.52
</TABLE>
NOTE E - CONTINGENCIES
LEGAL MATTERS
Safeway Inc. (the "Company") previously reported in Note K to its consolidated
financial statements, under the caption "Legal Matters" on page 35 of the 1997
Annual Report to Stockholders, information concerning the 1996 purported class
action 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 May 19, 1998, the California Court of
Appeal affirmed the Superior Court's May 1997 dismissal of the case. Plaintiffs'
request for rehearing by the Court of Appeal was denied on June 12, 1998. On
June 26, 1998, plaintiffs filed a petition for review by the California Supreme
Court.
On July 10, 1998, Safeway was served with a new case filed in the Superior Court
for Alameda County, California by the same attorney that handled the purported
class action described in the preceding paragraph. The new complaint asserts
allegations that are generally similar to those in the case described above, and
seeks damages of $5,000 per plaintiff, plus interest, and punitive damages. It
purports to be filed on behalf of approximately 23,000 individual plaintiffs.
The claims made in the new case are substantially the same as those considered
and rejected by the Court of Appeal in its ruling in Safeway's favor in the case
described above. Because of the substantial similarity of the claims in this
suit and the case that has been dismissed, and the basis for the affirmance by
the Court of Appeal, the Company believes that the claims are without merit and
intends to defend itself vigorously.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Safeway's net income was $193.2 million ($0.38 per share) for the second quarter
ended June 20, 1998, compared to $129.9 million ($0.26 per share) in 1997. In
the second quarter of 1997, Safeway incurred an extraordinary loss of $4.2
million ($0.01 per share) for the early retirement of debt. In addition, Safeway
was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada
operating area which reduced second-quarter 1997 net income by approximately
$0.04 per share.
Second-quarter sales increased 6.4% to $5.6 billion in 1998 from $5.2 billion in
1997, primarily because of strong store operations and the effect of the 1997
strike in Alberta. Identical-store sales (which exclude replacement stores)
increased 7.4%, while comparable-store sales increased 8.0%. The Company
believes that the combined impact of the Alberta strike and the timing of the
Easter holiday increased same-store sale comparisons by approximately 3.4
percentage points.
Gross profit increased 37 basis points to 29.05% of sales in the second quarter
of 1998 from 28.68% in 1997, due primarily to continuing improvements in buying
practices and product mix. This improvement was partially offset by promotional
spending, including the introduction of the Safeway Club Card in a number of
operating areas. LIFO expense was $2.3 million in the second quarter of 1998. No
LIFO expense was recorded in the second quarter of 1997.
Operating and administrative expense declined 77 basis points to 22.23% of sales
in the second quarter of 1998 compared to 23.00% in 1997, reflecting increased
sales, ongoing efforts to reduce or control expenses and the impact of the 1997
Alberta strike.
Interest expense declined to $51.5 million in the second quarter of 1998 from
$62.7 million last year, primarily due to the debt refinancing in the third
quarter of 1997. The combination of lower interest expense and strong operating
results increased the interest coverage ratio (operating cash flow divided by
interest expense) to an all-time high of 9.74 times in the second quarter of
1998. For the first 24 weeks of the year, interest expense was $104.4 million
compared to $101.4 million in 1997.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was $4.6
million in the second quarter of 1998 compared to $4.3 million in the second
quarter of 1997. For the first two quarters of 1998, equity in earnings of Casa
Ley was $10.4 million. In the first two quarters of 1997 the Company recorded
equity in earnings of unconsolidated affiliates of $21.5 million, which included
$12.2 million recognized in the first quarter of 1997 for Safeway's share of
Vons' earnings.
Safeway and Vons merged at the beginning of the second quarter of 1997.
Consequently, Safeway's income statement for the first 24 weeks of 1998 includes
Vons' operating results for the entire period, while the income statement for
the first 24 weeks of 1997 includes Vons' operating results for the second
quarter plus the effect of Safeway's 34.4% equity interest in Vons for the first
quarter. The following discussion compares results for the first 24 weeks of
1998 with pro forma results for the same period in 1997, as if Safeway and Vons
had merged at the beginning of 1997. For the first 24 weeks of the year, sales
increased to $11.0 billion in 1998 from pro forma sales of $10.6 billion in
1997. The gross profit margin improved 39 basis points to 29.04% in 1998 from a
pro forma gross profit margin of 28.65% in 1997. Operating and administrative
expense improved 52 basis points to 22.55% of sales in 1998 from pro forma
expense of 23.07% in 1997.
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $407.0 million in the first 24 weeks of 1998
compared to $347.2 million in 1997. This increase is due to higher results from
operations, which was partially offset by a greater usage of cash for working
capital purposes in 1998 over 1997. Working capital (excluding cash and debt) at
quarter-end in 1998 was a deficit of $117.2 million compared to a $147.6 million
deficit at the 1997 quarter end.
Cash flow used for investing activities for the first 24 weeks of the year was
$299.2 million in 1998, compared to $93.8 million in 1997, which is primarily
the result of increased capital expenditures to open 13 new stores and to
continue construction of a new distribution center in Maryland.
Cash flow used by financing activities was $129.2 million in the first two
quarters of the year, primarily due to paydowns of long-term debt. In the first
24 weeks of 1997, financing activities used cash flow of $296.4 million,
primarily to purchase treasury stock, which was partially offset by long-term
borrowings.
Net cash flow from operations as presented in 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 and income
taxes. 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 of
companies having different capital structures. Other companies may define
operating cash flow differently, and as a result, such measures may not 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 24 Weeks Ended
-------------- --------------
June 20, 1998 June 14, 1997 June 20, 1998 June 14, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 334.4 $ 240.2 $ 619.8 $ 444.3
LIFO expense 2.3 -- 2.3 2.3
Interest expense 51.5 62.7 104.4 101.4
Depreciation and amortization 118.0 112.2 234.9 192.9
Equity in earnings of unconsolidated
affiliates (4.6) (4.3) (10.4) (21.5)
------- ------- ------- -------
Operating cash flow $ 501.6 $ 410.8 $ 951.0 $ 719.4
======= ======= ======= =======
As a percent of sales 8.98% 7.83% 8.67% 7.71%
======= ======= ======= =======
As a multiple of interest expense 9.74x 6.55x 9.11x 7.09x
======= ======= ======= =======
</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
During the first two quarters of 1998, Safeway invested $333.5 million in
capital expenditures and opened 13 new stores. The Company expects to spend
approximately $950 million in 1998, open about 40 new stores, complete more than
200 remodels and finish construction of the Maryland distribution center.
12
<PAGE> 13
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 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. The following are among the principal factors that could cause actual
results to differ materially from the forward-looking statements: general
business and economic conditions in the Company's operating regions, including
the rate of inflation, population, employment and job growth in the Company's
markets; pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels; results of the Company's
efforts to reduce costs; the ability to integrate and achieve operating
improvements at Vons; increases in labor costs and deterioration in relations
with the union bargaining units representing the Company's employees; issues
arising from addressing year 2000 information technology issues; opportunities
or acquisitions that the Company may pursue; 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.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Safeway Inc. (the "Company") previously reported in Note K to its consolidated
financial statements, under the caption "Legal Matters" on page 35 of the 1997
Annual Report to Stockholders, information concerning the 1996 purported class
action 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 May 19, 1998, the California Court of
Appeal affirmed the Superior Court's May 1997 dismissal of the case. Plaintiffs'
request for rehearing by the Court of Appeal was denied on June 12, 1998. On
June 26, 1998, plaintiffs filed a petition for review by the California Supreme
Court.
On July 10, 1998, Safeway was served with a new case filed in the Superior Court
for Alameda County, California by the same attorney that handled the purported
class action described in the preceding paragraph. The new complaint asserts
allegations that are generally similar to those in the case described above, and
seeks damages of $5,000 per plaintiff, plus interest, and punitive damages. It
purports to be filed on behalf of approximately 23,000 individual plaintiffs.
The claims made in the new case are substantially the same as those considered
and rejected by the Court of Appeal in its ruling in Safeway's favor in the case
described above. Because of the substantial similarity of the claims in this
suit and the case that has been dismissed, and the basis for the affirmance by
the Court of Appeal, the Company believes that the claims are without merit and
intends to defend itself vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 12, 1998 at which the
stockholders voted on proposals as follows:
<TABLE>
<CAPTION>
Votes Against Votes
Votes For or Withheld Abstained Broker Non-Votes
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Election of Directors:
Steven A. Burd 416,965,728 2,780,245 N/A N/A
Robert I. MacDonnell 416,896,070 2,849,903 N/A N/A
William Y. Tausher 417,034,175 2,711,998 N/A N/A
Amend the Company's Restated Certificate
of Incorporation to increase the total number
of shares of the Company's Common Stock from 750
million shares to 1.5 billion shares 399,448,260 19,577,824 719,889 -0-
Adopt two amendments to the Operating
Performance Bonus Plan for Executive Officers
of Safeway 409,894,345 8,807,962 1,043,666 -0-
Adopt the Capital Performance Bonus Plan for
Executive Officers of Safeway Inc. 396,371,018 22,219,406 1,155,549 -0-
Adoption of stockholder proposal requesting
the Board of Directors to take the necessary
steps to provide for cumulative voting 147,778,196 233,686,155 1,442,918 36,838,704
Ratification of appointment of Deloitte &
Touche LLP as independent auditors for fiscal
year 1998 399,775,300 10,874,331 9,096,362 -0-
</TABLE>
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
ITEM 6(a). EXHIBITS
<TABLE>
<S> <C>
Exhibit 3.1 Certificate of Amendment of Restated Certificate of Incorporation of Safeway Inc.
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
</TABLE>
ITEM 6(b). REPORTS ON FORM 8-K
The Company filed no Current Reports on Form 8-K during the second quarter of
1998.
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: July 30, 1998 /s/ Steven A. Burd
--------------------- -----------------------------------
Steven A. Burd
Chairman, President
and Chief Executive Officer
Date: July 30, 1998 /s/ David F. Bond
--------------------- -----------------------------------
David F. Bond
Senior Vice President
Finance and Control
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED JUNE 20, 1998
<TABLE>
<S> <C>
Exhibit 3.1 Certificate of Amendment of Restated Certificate of Incorporation of Safeway Inc.
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule (electronic filing only)
</TABLE>
17
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SAFEWAY INC.
SAFEWAY INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That, by written consent of the Board of Directors of said
corporation as of March 10, 1998, a resolution was duly adopted setting forth a
proposed amendment to the Restated Certificate of Incorporation of said
corporation, declaring said amendment to be advisable and directing its officers
to submit said amendment to the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that Article IV of the Corporation's Restated Certificate of
Incorporation be amended to read as follows, subject to the required
consent of the stockholders of the Corporation:
ARTICLE IV
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Billion Five Hundred
Twenty Five Million (1,525,000,000), consisting of One Billion Five
Hundred Million (1,500,000,000) shares of common stock, par value
$.01 per share (the "Common Stock"), and Twenty Five Million
(25,000,000) shares of preferred stock, par value $.01 per share (the
"Preferred Stock"). The designation, powers, preferences and
relative, participating, optional or other special rights, including
voting rights, and qualifications, limitations or restrictions of the
Preferred Stock shall be established by resolution of the Board of
Directors pursuant to Section 151 of the General Corporation Law of
the State of Delaware.
<PAGE> 2
SECOND: That, thereafter, at the Annual Meeting of the stockholders of
said corporation, the necessary number of shares required by statute were voted
in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, SAFEWAY INC. has caused this certificate to be
signed by Steven A. Burd, its President, and attested by Michael C. Ross, its
Secretary, this 12th day of May, 1998.
SAFEWAY INC.
By: /s/ STEVEN A. BURD
-------------------------------
Steven A. Burd
President
ATTEST:
/s/ MICHAEL C. ROSS
- -------------------------------
Michael C. Ross
Secretary
<PAGE> 1
EXHIBIT 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended
------------------------------------------------------
June 20, 1998 June 14, 1997
------------------------ ------------------------
Diluted Basic Diluted Basic
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 193.2 $ 193.2 $ 134.1 $ 134.1
Extraordinary loss -- -- (4.2) (4.2)
--------- --------- --------- ---------
Net income $ 193.2 $ 193.2 $ 129.9 $ 129.9
========= ========= ========= =========
Weighted average common shares outstanding 480.2 480.2 464.7 464.7
========= =========
Common share equivalents 28.0 35.9
--------- ---------
Weighted average shares outstanding 508.2 500.6
========= =========
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 0.38 $ 0.40 $ 0.27 $ 0.29
Extraordinary loss -- -- (0.01) (0.01)
--------- --------- --------- ---------
Net income $ 0.38 $ 0.40 $ 0.26 $ 0.28
========= ========= ========= =========
Calculation of common share equivalents:
Options and warrants to purchase common shares 49.0 60.2
Common shares assumed purchased with potential
proceeds (21.0) (24.3)
--------- ---------
Common share equivalents 28.0 35.9
========= =========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 798.1 $ 547.7
Common stock price used under the treasury
stock method $ 37.97 $ 22.52
Common shares assumed purchased with
potential proceeds 21.0 24.3
</TABLE>
<PAGE> 2
EXHIBIT 11.1
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 20, 1998 June 14, 1997
------------------------ -----------------------
Diluted Basic Diluted Basic
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Income before extraordinary loss $ 358.0 358.0 $ 256.6 256.6
Extraordinary loss -- -- (4.2) (4.2)
--------- ----- --------- -----
Net income $ 358.0 358.0 $ 252.4 252.4
========= ===== ========= =====
Weighted average common shares outstanding 479.1 479.1 453.9 453.9
===== =====
Common share equivalents 28.3 36.5
--------- ---------
Weighted average shares outstanding 507.4 490.4
========= =========
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 0.71 0.75 $ 0.52 0.57
Extraordinary loss -- -- (0.01) (0.01)
--------- ----- --------- -----
Net income $ 0.71 0.75 $ 0.51 0.56
========= ===== ========= =====
Calculation of common share equivalents:
Options and warrants to purchase common shares 49.8 61.2
Common shares assumed purchased with potential
proceeds (21.5) (24.7)
--------- ---------
Common share equivalents 28.3 36.5
========= =========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 784.3 $ 569.9
Common stock price used under the treasury
stock method $ 36.45 $ 23.08
Common shares assumed purchased with
potential proceeds 21.5 24.7
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks Fiscal Year
---------------------- ---------------------------------------------------------------
June 20, June 14,
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 619.8 $ 444.3 $ 1,076.3 $ 767.6 $ 556.5 $ 424.1 $ 216.3
Add interest expense 104.4 101.4 241.2 178.5 199.8 221.7 265.5
Add interest on rental expense (a) 50.0 40.8 88.5 90.0 87.5 86.6 88.0
Less equity in earnings of
unconsolidated affiliates (10.4) (21.5) (34.9) (50.0) (26.9) (27.3) (33.5)
Add minority interest in
subsidiary 1.6 1.9 4.4 3.4 3.9 3.0 3.5
--------- --------- ----------- --------- --------- --------- ---------
Earnings $ 765.4 $ 566.9 $ 1,375.5 $ 989.5 $ 820.8 $ 708.1 $ 539.8
========= ========= =========== ========= ========= ========= =========
Interest expense $ 104.4 $ 101.4 $ 241.2 $ 178.5 $ 199.8 $ 221.7 $ 265.5
Add capitalized interest 3.2 2.4 5.7 4.4 4.6 2.9 4.2
Add interest on rental expense (a) 50.0 40.8 88.5 90.0 87.5 86.6 88.0
--------- --------- ----------- --------- --------- --------- ---------
Fixed charges $ 157.6 $ 144.6 $ 335.4 $ 272.9 $ 291.9 $ 311.2 $ 357.7
========= ========= =========== ========= ========= ========= =========
Ratio of earnings to fixed
charges 4.86 3.92 4.10 3.63 2.81 2.28 1.51(b)
========= ========= =========== ========= ========= ========= =========
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME
ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JUNE 20, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUN-20-1998
<CASH> 55,800
<SECURITIES> 0
<RECEIVABLES> 164,200
<ALLOWANCES> 0
<INVENTORY> 1,600,900
<CURRENT-ASSETS> 2,017,600
<PP&E> 6,865,400
<DEPRECIATION> 2,669,400
<TOTAL-ASSETS> 8,587,000
<CURRENT-LIABILITIES> 2,425,400
<BONDS> 2,861,100
0
0
<COMMON> 5,400
<OTHER-SE> 2,554,000
<TOTAL-LIABILITY-AND-EQUITY> 8,587,000
<SALES> 10,972,600
<TOTAL-REVENUES> 10,972,600
<CGS> (7,786,300)
<TOTAL-COSTS> (7,786,300)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (104,400)
<INCOME-PRETAX> 619,800
<INCOME-TAX> (261,800)
<INCOME-CONTINUING> 358,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,000
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.71
</TABLE>
