<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 March 27, 1999
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 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 April 30, 1999, there were issued and outstanding 496.6 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>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 27, 1999 3
and January 2, 1999
Condensed Consolidated Statements of Income for the 12 5
weeks ended March 27, 1999 and March 28, 1998
Condensed Consolidated Statements of Cash Flows for the 12 6
weeks ended March 27, 1999 and March 28, 1998
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 10
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
</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>
March 27, January 2,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 44.9 $ 45.7
Receivables 191.1 200.1
Merchandise inventories 1,860.6 1,856.0
Prepaid expenses and other current assets 208.2 218.1
--------- ---------
Total current assets 2,304.8 2,319.9
--------- ---------
Property 8,118.7 8,024.1
Less accumulated depreciation and amortization (2,917.7) (2,841.5)
--------- ---------
Property, net 5,201.0 5,182.6
Goodwill, net of accumulated amortization
of $231.3 and $211.0 3,301.2 3,348.0
Prepaid pension costs 374.0 369.6
Investment in unconsolidated affiliate 123.2 115.2
Other assets 27.4 54.3
--------- ---------
Total assets $11,331.6 $11,389.6
========= =========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 27, January 2,
1999 1999
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 130.3 $ 279.8
Current obligations under capital leases 42.3 41.7
Accounts payable 1,416.9 1,595.9
Accrued salaries and wages 284.0 348.9
Other accrued liabilities 683.3 627.3
--------- ---------
Total current liabilities 2,556.8 2,893.6
--------- ---------
Long-term debt:
Notes and debentures 4,349.6 4,242.6
Obligations under capital leases 394.3 408.0
--------- ---------
Total long-term debt 4,743.9 4,650.6
Deferred income taxes 236.1 216.9
Accrued claims and other liabilities 461.2 546.4
--------- ---------
Total liabilities 7,998.0 8,307.5
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 495.7 and 490.3 shares
issued, after deducting 60.5 and 60.6 treasury shares 5.6 5.5
Additional paid-in capital 1,340.4 1,297.3
Retained earnings 2,004.8 1,799.0
Accumulated other comprehensive loss (17.2) (19.7)
--------- ---------
Total stockholders' equity 3,333.6 3,082.1
========= =========
Total liabilities and stockholders' equity $11,331.6 $11,389.6
========= =========
</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
----------------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
Sales $ 6,113.2 $ 5,389.3
Cost of goods sold (4,291.6) (3,825.2)
--------- ---------
Gross profit 1,821.6 1,564.1
Operating and administrative expense (1,396.4) (1,232.9)
--------- ---------
Operating profit 425.2 331.2
Interest expense (73.3) (52.9)
Equity in earnings of unconsolidated affiliate 8.0 5.8
Other income, net 1.2 1.3
--------- ---------
Income before income taxes 361.1 285.4
Income taxes (155.3) (120.6)
--------- ---------
Net income $ 205.8 $ 164.8
========= =========
Basic earnings per share $ 0.42 $ 0.34
========= =========
Diluted earnings per share $ 0.40 $ 0.33
========= =========
Weighted average shares outstanding - basic 492.6 478.1
========= =========
Weighted average shares outstanding - diluted 512.8 506.7
========= =========
</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>
12 Weeks Ended
--------------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 205.8 $ 164.8
Reconciliation to net cash flow from operations:
Depreciation and amortization 144.0 116.9
LIFO expense 2.3 --
Equity in undistributed earnings of unconsolidated affiliate (8.0) (5.8)
Other (24.2) (25.5)
Change in working capital items:
Receivables and prepaid expenses 18.3 (23.4)
Inventories at FIFO cost (6.3) (32.8)
Payables and accruals (162.3) (204.9)
--------- ---------
Net cash flow from (used by) operations 169.6 (10.7)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (130.1) (101.8)
Proceeds from sale of property 8.2 1.2
Other (4.9) (4.6)
--------- ---------
Net cash flow used by investing activities (126.8) (105.2)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings 9.5 50.0
Payments on short-term borrowings (86.5) (111.0)
Additions to long-term borrowings 236.5 208.1
Payments on long-term borrowings (212.7) (79.8)
Net proceeds from exercise of stock options and warrants 11.6 7.2
Other (2.0) (1.1)
--------- ---------
Net cash flow from (used by) financing activities (43.6) 73.4
--------- ---------
Decrease in cash and equivalents (0.8) (42.5)
CASH AND EQUIVALENTS
Beginning of period 45.7 77.2
--------- ---------
End of period $ 44.9 $ 34.7
========= =========
</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 weeks ended March 27, 1999
and March 28, 1998 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 1998 Annual Report to Stockholders. The results of operations for the
12 weeks ended March 27, 1999 are not necessarily indicative of the results
expected for the full year.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S)
In November 1998, Safeway acquired Dominick's by purchasing all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion (the "Dominick's Acquisition"). The Dominick's
Acquisition was accounted for as a purchase, and Dominick's operating results
have been consolidated with Safeway's since approximately midway through the
fourth quarter of 1998. See Note D.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway acquired Carrs by purchasing all of the outstanding
shares of Carrs for $12.50 cash per share, or a total of approximately $110
million (the "Carrs Acquisition"). Carrs is Alaska's largest food and drug
retailer. Carrs also runs Alaska's largest food warehouse and distribution
operation. On the acquisition date, Carrs operated 49 stores. The Carrs
Acquisition will be accounted for as a purchase. Safeway funded the Carrs
Acquisition, including the subsequent repayment of $238.7 million of Carr's
debt, with the issuance of commercial paper.
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 $2.3 million during the first 12 weeks of 1999. No
LIFO expense was recorded during the first 12 weeks of 1998. Actual LIFO Indices
are calculated during the fourth quarter of the year based upon a statistical
sampling of inventories.
COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments. Total comprehensive income approximates net income.
NOTE B - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 Safeway beginning in
the first quarter of 2000. 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.
During the first quarter of 1999, the Company adopted SOP 98-5, "Reporting on
the Costs of Start-Up Activities," which requires that costs incurred for
start-up activities, such as store openings, be expensed as incurred. This SOP
did not have a material impact on Safeway's financial statements.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - FINANCING
Notes and debentures were composed of the following at March 27, 1999 and
January 2, 1999 (in millions):
<TABLE>
<CAPTION>
March 27, 1999 January 2, 1999
--------------------- --------------------
Long-term Current Long-term Current
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper $1,763.0 $1,745.0
Bank credit agreement, unsecured 185.1 89.1
9.30% Senior Secured Debentures due 2007 24.3 24.3
6.85% Senior Notes due 2004, unsecured 200.0 200.0
7.00% Senior Notes due 2007, unsecured 250.0 250.0
7.45% Senior Debentures due 2027, unsecured 150.0 150.0
5.75% Notes due 2000, unsecured 400.0 400.0
5.875% Notes due 2001, unsecured 400.0 400.0
6.05% Notes due 2003, unsecured 350.0 350.0
6.50% Notes due 2008, unsecured 250.0 250.0
9.35% Senior Subordinated Notes due 1999,
unsecured - - $ 66.7
10% Senior Subordinated Notes due 2001, 79.9 79.9 -
unsecured
9.65% Senior Subordinated Debentures due
2004, unsecured 81.2 81.2 -
9.875% Senior Subordinated Debentures due
2007, unsecured 24.2 24.2 -
10% Senior Notes due 2002, unsecured 6.1 6.1 -
Mortgage notes payable, secured 64.0 $ 40.4 69.6 46.3
Other notes payable, unsecured 96.3 5.1 97.7 5.0
Medium-term notes, unsecured 25.5 - 25.5 -
Short-term bank borrowings, unsecured - 84.8 - 161.8
-------- ------ -------- ------
$4,349.6 $130.3 $4,242.6 $279.8
======== ====== ======== ======
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of the operations of Safeway and
Dominick's, as if the Dominick's Acquisition had occurred as of the beginning of
the 12-week period ended March 28, 1998. 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 as of the period being presented.
Under purchase accounting, the purchase price is allocated to acquired assets
and liabilities based on their estimated fair values at the date of acquisition,
and any excess is allocated to goodwill. For Dominick's, such allocations are
subject to adjustment when additional analysis concerning asset and liability
balances is finalized. The preliminary allocation of the purchase price to the
assets and liabilities acquired was based in part upon an independent valuation
which, in turn, was based upon certain estimates and cash flow information
provided by management. Management does not expect the final allocations to
differ materially from the amounts presented herein.
<TABLE>
<CAPTION>
12 Weeks Ended
--------------
(Actual) (Pro Forma)
March 27, 1999 March 28, 1998
-------------- --------------
(in millions, except per-share amounts)
<S> <C> <C>
Sales $6,113.2 $5,920.7
Net income $ 205.8 $ 150.9
Diluted earnings per share $ 0.40 $ 0.30
</TABLE>
NOTE E - CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the caption
"Legal Matters" on pages 35 and 36 of the 1998 Annual Report to Stockholders,
provides information on significant claims and litigation in which the Company
is involved. There have been no material changes in the information relating to
those matters.
In April 1999, a lawsuit entitled Sanders, et al. v. Lucky Stores, Inc. et al.
was filed in the California Superior Court, San Francisco County, against the
Company and five other retail grocery store operations. The complaint alleges,
among other things, that the Company conspired with the other defendants to fix
the retail price of milk in six San Francisco Bay Area counties in violation of
the California Cartwright Act and the California Unfair Competition Act. The
plaintiffs purport to bring the lawsuit as a class action on behalf of all
persons who reside, and who purchased milk from the defendants, in the Bay Area
counties from April 1995 to the present. The complaint seeks unspecified
damages, an injunction enjoining the defendants from fixing the price of milk
and restitution of profits earned through the allegedly unlawful practices. If
damages were to be awarded, they may be trebled under the applicable statute.
The Company believes that it has meritorious defenses to plaintiffs' claims and
plans to defend this lawsuit vigorously.
9
<PAGE> 10
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 $205.8 million ($0.40 per share) for the first quarter
ended March 27, 1999, compared to $164.8 million ($0.33 per share) for the first
quarter of 1998.
In November 1998, Safeway acquired Dominick's Supermarkets, Inc. (the
"Dominick's Acquisition"), which is the second largest supermarket operator in
the Chicago metropolitan area. In order to facilitate an understanding of the
Company's operations, the following discussions of gross profit and operating
and administrative expenses include certain pro forma information based on the
1998 combined historical financial statements as if the Dominick's Acquisition
had been effective as of the beginning of 1998.
Due primarily to the Dominick's Acquisition, total first-quarter sales increased
13.4% to $6.1 billion in 1999 from $5.4 billion in 1998. Identical-store sales
(which exclude replacement stores) increased 2.2%, while comparable-store sales
increased 2.8%.
Safeway's continuing improvement in buying practices and product mix, together
with reduced advertising costs, helped increase gross profit to 29.80% of sales
in the first quarter of 1999, from 29.02% in 1998 on a historical basis and
28.98% on a pro forma basis. The Company recorded LIFO expense of $2.3 million
in the first quarter of 1999. No LIFO expense was recorded in the first quarter
of 1998. Increased sales and ongoing efforts to reduce or control expenses
helped to improve Safeway's operating and administrative expense to 22.84% of
sales in the first quarter of 1999, from 22.88% in 1998 on a historical basis
and 23.16% on a pro forma basis.
Interest expense increased to $73.3 million in the first quarter of 1999 from
$52.9 million last year, due to borrowings incurred in connection with the
Dominick's Acquisition. Despite higher interest expense, Safeway's interest
coverage (defined in the table on page 11) was 7.81 times, due to strong
operating results. Operating cash flow (defined in the table on page 11) as a
percentage of sales was 9.37% for the first quarter of 1999 and 8.99% for the
last four quarters.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was $8.0
million for the first quarter of 1999, compared to $5.8 million in 1998. Casa
Ley operates 80 food and general merchandise stores in western Mexico.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
On April 16, 1999, Safeway acquired all of the outstanding shares of Carrs for
$12.50 cash per share, or a total of approximately $110 million (the "Carrs
Acquisition"). Carrs is Alaska's largest food and drug retailer. Carrs also runs
Alaska's largest food warehouse and distribution operation. On the acquisition
date, Carrs operated 49 stores. A consent decree entered into with the state of
Alaska requires the sale of six Safeway stores and one Carrs store following the
Carrs Acquisition. Safeway funded the Carrs Acquisition, including the
subsequent repayment of $238.7 million of Carrs' debt, with the issuance of
commercial paper.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $169.6 million in the first quarter of 1999
compared to cash flow used by operations of $10.7 million in the first quarter
of 1998. This change is primarily due to improved results of operations and
changes in working capital. Working capital (excluding cash and debt) at March
27, 1999 was a deficit of $112.2 million compared to a deficit of $16.8 million
at March 28, 1998.
Cash flow used for investing activities for the first quarter of the year was
$126.8 million in 1999 compared to $105.2 million in 1998, primarily due to
increased capital expenditures in 1999.
Cash flow used for financing activities was $43.6 million in the first quarter
of 1999, primarily due to the repayment of debt. In the first quarter of 1998,
financing activities provided cash flow of $73.4 million which was used
primarily to fund capital expenditures.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
<TABLE>
<CAPTION>
12 Weeks Ended
--------------------------------
March 27, 1999 March 28, 1998
-------------- --------------
(Dollars in millions)
<S> <C> <C>
Income before income taxes $ 361.1 $ 285.4
Interest expense 73.3 52.9
Depreciation and amortization 144.0 116.9
LIFO expense 2.3 --
Equity in earnings of unconsolidated affiliate (8.0) (5.8)
------- -------
Operating cash flow $ 572.7 $ 449.4
======= =======
As a percent of sales 9.73% 8.34%
As a multiple of interest expense 7.81x 8.50x
</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. During the
second quarter of 1999, the acquisition of Carrs, including the subsequent
repayment of $238.7 million of Carr's debt, was funded with the issuance of
commercial paper.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. To the extent that the Company's
software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications is necessary to avoid system
failures and the temporary inability to process transactions or engage in other
normal business activities.
In 1997 the Company established a year 2000 project group, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
compliance efforts. The project group is staffed primarily with representatives
of the Company's Information Technology department and also uses outside
consultants on an as-needed basis. The Chief Information Officer reports
regularly on the status of the year 2000 project to a steering committee headed
by the Chief Executive Officer and to the Company's board of directors.
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant, and has categorized these systems and
applications into three priority levels based on how critical the system or
application is to the Company's operations. The year 2000 project group is
determining what modifications or replacements will be necessary to achieve
compliance; implementing the modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the regular operations of the Company. The systems
and applications in the highest priority level are being assessed and modified
or replaced first. Management estimates that these actions with respect to all
priority levels are approximately 90% complete as of March 31, 1999. The Company
estimates that all critical Safeway systems and applications will be year 2000
compliant by June 30, 1999.
Safeway completed its acquisition of Dominick's in November 1998, and is in the
process of replacing or modifying systems that are not year 2000 compliant.
Safeway estimates that all critical systems and applications of Dominick's will
be year 2000 compliant by September 30, 1999.
Safeway also completed its acquisition of Carrs on April 16, 1999. The majority
of Carrs systems which are not year 2000 compliant will be replaced with the
core Safeway systems. Other Carrs systems will be modified as necessary. Safeway
estimates that all critical systems and applications of Carrs will be year 2000
compliant by September 30, 1999.
The year 2000 project group is also examining the Company's relationships with
certain key outside vendors and others with whom the Company has significant
business relationships to determine, to the extent practical, the degree of such
outside parties' year 2000 compliance. The project group is testing procedures
with certain vendors identified as having potential year 2000 compliance issues.
Management does not believe that the Company's relationship with any third party
is material to the Company's operations and, therefore, does not believe that
the failure of any particular third party to be year 2000 compliant would have a
material adverse effect on the Company.
The year 2000 project group has established a preliminary contingency plan to
provide for viable alternatives to ensure that the Company's core business
operations are able to continue in the event of a year 2000-related systems
failure. The plan provides for several alternative responses to various possible
failure scenarios in each of the Company's primary functional areas. The plan is
being and will continue to be evaluated and refined by management for each
functional area. Limited testing of the plan will take place during the third
quarter of 1999, and the Company expects that the plan will be finalized in all
material respects by September 30, 1999.
Through the first quarter of 1999 the Company has spent approximately $21.4
million to address year 2000 compliance issues. The Company estimates that it
will incur an additional $8.6 million, for a total of approximately $30.0
million (including $5.0 million for Dominick's and Carrs) to address year 2000
compliance issues, which includes the estimated costs of all modifications,
testing and consultants' fees.
Management believes that, should the Company or any third party with whom the
Company has a significant business relationship have a year 2000-related systems
failure, the most significant impact would likely be the inability, with respect
to a group of stores, to conduct operations due to a power failure, to deliver
inventory in a timely fashion, to receive certain products from vendors or to
process electronically customer sales at the store level. The Company does not
anticipate that any such impact would be material to the Company's liquidity or
results of operations.
CAPITAL EXPENDITURE PROGRAM
During the first quarter of 1999, Safeway invested $176.8 million in capital
expenditures (as defined on page 14 of the Company's 1998 Annual Report to
Stockholders) and opened 13 new stores. The Company expects to spend
approximately $1.2 billion in 1999, while opening 55 to 60 new stores and
completing approximately 250 remodels.
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 of 1933 and Section 21E of the
Exchange Act of 1934. Such statements relate to, among other things, capital
expenditures, cost reduction, cash flow, operating improvements and year 2000
disclosures, and are indicated by words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects", "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 companies Safeway acquires; 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 pursues; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change to the information appearing under the
caption "Market Risk from Financial Instruments" on page 14 of the Company's
1998 Annual Report to Stockholders.
13
<PAGE> 14
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 pages 35 and 36 of the 1998 Annual Report to Stockholders,
provides information on significant claims and litigation in which the Company
is involved. There have been no material changes in the information relating to
those matters.
In April 1999, a lawsuit entitled Sanders, et al. v. Lucky Stores, Inc. et al.
was filed in the California Superior Court, San Francisco County, against the
Company and five other retail grocery store operations. The complaint alleges,
among other things, that the Company conspired with the other defendants to fix
the retail price of milk in six San Francisco Bay Area counties in violation of
the California Cartwright Act and the California Unfair Competition Act. The
plaintiffs purport to bring the lawsuit as a class action on behalf of all
persons who reside, and who purchased milk from the defendants, in the Bay Area
counties from April 1995 to the present. The complaint seeks unspecified
damages, an injunction enjoining the defendants from fixing the price of milk
and restitution of profits earned through the allegedly unlawful practices. If
damages were to be awarded, they may be trebled under the applicable statute.
The Company believes that it has meritorious defenses to plaintiffs' claims and
plans to defend this lawsuit vigorously.
<TABLE>
<CAPTION>
ITEM 6(A). EXHIBITS
<S> <C>
Exhibit 2.1 Agreement and Plan of Merger dated as of August 6, 1998,
among Carr-Gottstein Foods Co., Safeway Inc. and ACG
Merger Sub., Inc.; and Stockholder Support Agreement
dated August 6, 1998 entered into by Green Equity
Investors, L.P. for the benefit of Safeway Inc.
(incorporated by reference to Exhibit 2.1 to
Registrant's Form 10-Q for the quarterly period ended
September 12, 1998).
Exhibit 2.2 Agreement and Plan of Merger dated as of October 13,
1998, by and among Safeway Inc., Windy City Acquisition
Corp. and Dominick's Supermarkets, Inc. (incorporated by
reference to Exhibit (c)(1) to Registrant's Schedule
14D-1 dated October 19, 1998), and Stockholders'
Agreement dated as of October 12, 1998 between Safeway
Inc., Windy City Acquisition Corp., and each of the
stockholders of Dominick's Supermarkets, Inc. named on
the signature pages thereto (incorporated by reference
to Exhibit (c)(2) to Registrant's Schedule 14D-1 dated
October 19, 1998).
Exhibit 3.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation by the Company (incorporated by reference
to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 15, 1996)
and Certificate of Amendment of Restated Certificate of
Incorporation of Safeway Inc. (incorporated by reference
to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 20, 1998).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated
by reference to Exhibit 3.2 to Registration Statement
No. 33-33388), and Amendment to the Company's By-laws
effective March 8, 1993 (incorporated by reference to
Exhibit 3.2 to Registrant's Form 10-K for the year ended
January 2, 1993).
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
</TABLE>
14
<PAGE> 15
ITEM 6(B). REPORTS ON FORM 8-K
On February 23, 1999, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that Safeway and Carrs
announced that the companies had settled a purported class action lawsuit
pending in the state court in Anchorage, Alaska, which sought to prevent the
proposed acquisition of Carrs by Safeway.
On February 11, 1999, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that Safeway and Carrs announced the filing of a
consent decree with the Attorney General of the State of Alaska regarding the
proposed acquisition of Carrs by Safeway.
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: May 10, 1999 \s\ Steven A. Burd
---------------- ----------------------------------
Steven A. Burd
Chairman, President
and Chief Executive Officer
Date: May 10, 1999 \s\ David G. Weed
---------------- ----------------------------------
David G. Weed
Executive Vice President
and Chief Financial Officer
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED MARCH 27, 1999
<TABLE>
<S> <C>
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 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended
------------------------------------------------------
March 27, March 27, March 28, March 28,
1999 1999 1998 1998
-------------------------- ------------------------
Diluted Basic Diluted Basic
------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $ 205.8 205.8 $ 164.8 164.8
=========== ===== =========== =====
Weighted average common shares outstanding 492.6 492.6 478.1 478.1
===== -----
Common share equivalents 20.2 28.6
--------- -----------
Weighted average shares outstanding 512.8 506.7
========= ===========
Earnings per share $ 0.40 0.42 $ 0.33 0.34
=========== ===== =========== =====
Calculation of common share equivalents:
Options and warrants to purchase common shares 40.5 50.6
Common shares assumed purchased with potential
proceeds (20.3) (22.0)
----------- -----------
Common share equivalents 20.2 28.6
=========== ===========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 1,134.6 $ 763.2
Common stock price used under the treasury
stock method $ 55.76 $ 34.62
Common shares assumed purchased with
potential proceeds 20.3 22.0
18
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Fiscal Year
-------------------- -----------------------------------------------------------
March 27, March 28,
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 361.1 $ 285.4 $ 1,396.9 $ 1,076.3 $ 767.6 $ 556.5 $ 424.1
Add interest expense 73.3 52.9 235.0 241.2 178.5 199.8 221.7
Add interest on rental expense (a) 32.3 25.0 108.2 88.5 90.0 87.5 86.6
Less equity in earnings of unconsolidated
affiliates (8.0) (5.8) (28.5) (34.9) (50.0) (26.9) (27.3)
Add minority interest in subsidiary 0.6 0.7 5.1 4.4 3.4 3.9 3.0
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 459.3 $ 358.2 $ 1,716.7 $ 1,375.5 $ 989.5 $ 820.8 $ 708.1
========= ========= ========= ========= ========= ========= =========
Interest expense $ 73.3 $ 52.9 $ 235.0 $ 241.2 $ 178.5 $ 199.8 $ 221.7
Add capitalized interest 2.4 1.5 8.5 5.7 4.4 4.6 2.9
Add interest on rental expense (a) 32.3 25.0 108.2 88.5 90.0 87.5 86.6
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 108.0 $ 79.4 $ 351.7 $ 335.4 $ 272.9 $ 291.9 $ 311.2
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 4.25 4.51 4.88 4.10 3.63 2.81 2.28
========= ========= ========= ========= ========= ========= =========
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of future
operating lease payments.
19
<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
MARCH 27, 1999 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-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> MAR-27-1999
<CASH> 44,900
<SECURITIES> 0
<RECEIVABLES> 191,100
<ALLOWANCES> 0
<INVENTORY> 1,860,600
<CURRENT-ASSETS> 2,304,800
<PP&E> 8,118,700
<DEPRECIATION> 2,917,700
<TOTAL-ASSETS> 11,331,600
<CURRENT-LIABILITIES> 2,556,800
<BONDS> 4,743,900
5,600
0
<COMMON> 0
<OTHER-SE> 3,328,000
<TOTAL-LIABILITY-AND-EQUITY> 11,331,600
<SALES> 6,113,200
<TOTAL-REVENUES> 6,113,200
<CGS> (4,291,600)
<TOTAL-COSTS> (4,291,600)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (73,300)
<INCOME-PRETAX> 361,100
<INCOME-TAX> (155,300)
<INCOME-CONTINUING> 205,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,800
<EPS-PRIMARY> 0.42<F1>
<EPS-DILUTED> 0.40
<FN>
<F1>For Purposes of This Exhibit, Primary Means Basic.
</FN>
</TABLE>
