<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 September 11, 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 October 21, 1999,
there were issued and outstanding 508.8 million shares of the registrant's
common stock.
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
- ------ --------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 11, 3
1999 and January 2, 1999
Condensed Consolidated Statements of Income for the 12 5
weeks and 36 weeks ended September 11, 1999 and
September 12, 1998
Condensed Consolidated Statements of Cash Flows for the 36 6
weeks ended September 11, 1999 and September 12, 1998
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 11, January 2,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 83.3 $ 45.7
Receivables 276.9 200.1
Merchandise inventories 2,213.8 1,856.0
Prepaid expenses and other current assets 180.9 218.1
------------ ------------
Total current assets 2,754.9 2,319.9
------------ ------------
Property 9,184.4 8,024.1
Less accumulated depreciation and amortization (3,076.5) (2,841.5)
------------ ------------
Property, net 6,107.9 5,182.6
Goodwill, net of accumulated amortization
of $274.3 and $211.0 4,776.9 3,348.0
Prepaid pension costs 389.9 369.6
Investment in unconsolidated affiliate 130.4 115.2
Other assets 83.9 54.3
------------ ------------
Total assets $ 14,243.9 $ 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>
September 11, January 2,
1999 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 99.8 $ 279.8
Current obligations under capital leases 52.1 41.7
Accounts payable 1,686.9 1,595.9
Accrued salaries and wages 327.1 348.9
Other accrued liabilities 1,043.3 627.3
------------ ------------
Total current liabilities 3,209.2 2,893.6
------------ ------------
Long-term debt:
Notes and debentures 5,514.8 4,242.6
Obligations under capital leases 435.3 408.0
------------ ------------
Total long-term debt 5,950.1 4,650.6
Deferred income taxes 185.2 216.9
Accrued claims and other liabilities 493.2 546.4
------------ ------------
Total liabilities 9,837.7 8,307.5
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 510.8 and 486.0 shares
issued, after deducting 47.6 and 60.8 treasury shares 5.6 5.5
Additional paid-in capital 1,818.2 1,297.3
Retained earnings 2,590.6 1,799.0
Accumulated other comprehensive loss (8.2) (19.7)
------------ ------------
Total stockholders' equity 4,406.2 3,082.1
------------ ------------
Total liabilities and stockholders' equity $ 14,243.9 $ 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 36 Weeks Ended
-------------------------------------------------------------------------
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 6,475.0 $ 5,589.0 $ 18,925.2 $ 16,561.6
Cost of goods sold (4,556.2) (3,938.9) (13,289.8) (11,725.2)
------------ ------------ ------------ ------------
Gross profit 1,918.8 1,650.1 5,635.4 4,836.4
Operating and administrative expense (1,465.5) (1,272.3) (4,287.4) (3,746.5)
------------ ------------ ------------ ------------
Operating profit 453.3 377.8 1,348.0 1,089.9
Interest expense (73.4) (48.8) (221.0) (153.2)
Equity in earnings of unconsolidated affiliate 6.4 6.3 19.6 16.7
Other income (expense), net (1.1) 0.2 1.1 1.9
------------ ------------ ------------ ------------
Income before income taxes 385.2 335.5 1,147.7 955.3
Income taxes (161.8) (141.8) (482.0) (403.6)
------------ ------------ ------------ ------------
Net income $ 223.4 $ 193.7 $ 665.7 $ 551.7
------------ ------------ ------------ ------------
Basic earnings per share $ 0.45 $ 0.40 $ 1.34 $ 1.15
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.44 $ 0.38 $ 1.30 $ 1.09
------------ ------------ ------------ ------------
Weighted average shares outstanding - basic 497.6 483.6 495.6 480.6
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 513.4 509.4 513.1 508.1
============ ============ ============ ============
</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>
36 Weeks Ended
-------------------------------
September 11, September 12,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 665.7 $ 551.7
Reconciliation to net cash flow from operations:
Depreciation and amortization 447.4 354.7
LIFO expense 6.9 4.6
Equity in undistributed earnings of unconsolidated affiliate (19.6) (16.7)
Other (42.7) (16.5)
Change in working capital items:
Receivables and prepaid expenses 30.3 (19.7)
Inventories at FIFO cost (49.8) 16.6
Payables and accruals 42.1 45.8
------------ ------------
Net cash flow from operations 1,080.3 920.5
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (716.0) (498.9)
Proceeds from sale of property 89.1 24.5
Net cash paid for acquisition of Carr-Gottstein Foods Co. (94.4) -
Net cash paid for acquisition of Randall's Food Markets, Inc. (729.8) -
Other (21.8) 1.9
------------ ------------
Net cash flow used by investing activities (1,472.9) (472.5)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings 68.5 140.0
Payments on short-term borrowings (160.7) (185.0)
Additions to long-term borrowings 2,369.8 342.2
Payments on long-term borrowings (1,843.6) (790.6)
Net proceeds from exercise of stock options and warrants 19.3 25.2
Other (23.1) (5.2)
------------ ------------
Net cash flow provided (used) by financing activities 430.2 (473.4)
------------ ------------
Increase (decrease) in cash and equivalents 37.6 (25.4)
CASH AND EQUIVALENTS
Beginning of period 45.7 77.2
------------ ------------
End of period $ 83.3 $ 51.8
============ ============
</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 and 36 weeks ended
September 11, 1999 and September 12, 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 and 36 weeks ended September 11, 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 Dominicks' 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 $106
million (the "Carrs Acquisition"). On the acquisition date, Carrs operated 49
stores. The Carrs Acquisition was accounted for as a purchase and resulted in
goodwill of $204 million which is being amortized over 40 years. Safeway funded
the Carrs Acquisition, and the subsequent repayment of $238.7 million of Carrs'
debt, with the issuance of commercial paper. Safeway's income statement includes
24 weeks of Carrs' results for the third quarter of 1999. See Note D.
ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On September 11, 1999, Safeway acquired all of the outstanding shares of
Randall's for $1.3 billion consisting of $754 million of cash and 12.7 million
shares of Safeway stock (the "Randall's Acquisition"). Randall's is a 117-store
supermarket chain based in Texas. Safeway's September 11, 1999 balance sheet
reflects the acquisition of Randall's. Safeway's income statement will reflect
Randall's operating results beginning in the fourth quarter of 1999.
The Randall's Acquisition was accounted for as a purchase and resulted in
goodwill of approximately $1.3 billion which will be amortized over 40 years.
Safeway used proceeds from the issuance of senior notes (see Note C) to fund the
Randall's Acquisition.
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 $6.9 million during the first 36 weeks of 1999
and $4.6 million in the first 36 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.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 2001. 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.
NOTE C - FINANCING
Notes and debentures were composed of the following at September 11, 1999 and
January 2, 1999 (in millions):
<TABLE>
<CAPTION>
September 11, 1999 January 2, 1999
---------------------------- ----------------------------
Long-term Current Long-term Current
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper $ 957.7 $ 1,745.0
Bank credit agreement, unsecured 481.0 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
7.0% Notes due 2002, unsecured 600.0
7.25% Notes due 2004, unsecured 400.0
7.50% Notes due 2009, unsecured 500.0
Randall's 9.375% Series B Senior Subordinated
Notes, due 2007 166.6
9.35% Senior Subordinated Notes due 1999,
unsecured - - -
10% Senior Subordinated Notes due 2001,
unsecured 79.9 79.9 $ 66.7
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 67.5 $ 14.4 69.6 46.3
Other notes payable, unsecured 109.8 6.8 97.7 5.0
Medium-term notes, unsecured 16.5 9.0 25.5 -
Short-term bank borrowings, unsecured - 69.6 - 161.8
---------- ---------- ---------- ----------
$ 5,514.8 $ 99.8 $ 4,242.6 $ 279.8
========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 11, 1999, Safeway issued senior unsecured debt securities
consisting of $600 million of 7.00% Notes due 2002, $400 million of 7.25% Notes
due 2004 and $500 million of 7.50% Notes due 2009. Proceeds from the notes were
used to help finance the Randall's Acquisition, including the October 1999
redemption of the Randall's 9.375% Series B Senior Subordinated Notes due 2007,
and for working capital purposes. Under the provisions of APB 16, the carrying
value of Randall's Series B Subordinated Notes was adjusted to its fair value as
part of the Randall's Acquisition. Consequently, Safeway did not recognize any
gain or loss on the redemption of the notes.
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,
Dominick's, Carrs, and Randall's as if these acquisitions had occurred as of the
beginning of the 36-week periods ended September 11, 1999 and September 12,
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 acquisitions 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. Such allocations are subject to
adjustment when additional analysis concerning asset and liability balances is
finalized. Management does not expect the final allocations to differ materially
from the amounts presented herein.
<TABLE>
<CAPTION>
36 Weeks Ended
--------------------------------
(Pro Forma) (Pro Forma)
(in millions, except per-share amounts) Sept. 11, 1999 Sept. 12, 1998
-------------- --------------
<S> <C> <C>
Sales $20,867.0 $20,276.1
Net income $670.6 $497.4
Diluted earnings per share $1.27 $0.95
</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 and material changes thereto have been described in subsequent Forms
10-Q. The material changes to that information are described below.
On September 2, 1999, after a six-week trial, the jury returned a verdict in
favor of Vons and two other grocery store chains in the class action lawsuit,
McCampbell et al. v. Ralphs Grocery Company et al., in the Superior Court for
San Diego County. Plantiffs claimed that the grocery store chains agreed to fix
or raise the price of eggs in Southern California. They had asked the jury to
award damages against Vons (before trebling) in the amount of $36.8 million. On
October 15, 1999, the court denied plantiffs' motion for judgment
notwithstanding the verdict or a new trial, and also denied their motion for
judgment on a second cause of action under California's unfair competition law.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net income was $223.4 million ($0.44 per share) for the third quarter ended
September 11, 1999, compared to $193.7 million ($0.38 per share) for the third
quarter of 1998.
Third quarter sales increased 15.9% to $6.5 billion in 1999 from $5.6 billion in
1998, primarily because of the Dominick's and Carrs acquisitions.
Comparable-store sales increased 1.0%, while identical-store sales (which
exclude replacement stores) increased 0.5%.
Safeway acquired Dominick's in November 1998. Consequently, Safeway's income
statement for the first 36 weeks of 1999 includes Dominick's operating results
while the income statement for the first 36 weeks of 1998 does not. Also, in
April 1999 Safeway acquired Carrs. Consequently, Safeway's income statement for
the first 36 weeks of 1999 includes 24 weeks of Carrs' operating results. In
order to facilitate an understanding of Safeway's operations, the pro forma
amounts presented below were computed as if Safeway had owned Dominick's for the
first 36 weeks of 1998 and Carrs for the comparable 24 weeks of 1998.
Safeway's continuing improvements in buying practices and product mix helped
increase gross profit to 29.63% of sales in the third quarter of 1999 from
29.52% in the third quarter of 1998 on a historical basis and 29.45% on a pro
forma basis. LIFO expense was $2.3 million in both the third quarter of 1999 and
the third quarter of 1998.
Operating and administrative expense declined to 22.63% of sales in the third
quarter of 1999 from 22.76% in 1998 on a historical basis and 23.03% on a pro
forma basis, reflecting increased sales and ongoing efforts to reduce or control
expenses.
Interest expense increased to $73.4 million in the third quarter of 1999 from
$48.8 million for the third quarter of 1998 primarily due to debt incurred to
finance the Dominick's and Carrs acquisitions described below. However the
interest coverage ratio (operating cash flow divided by interest expense)
remains very strong at 8.24 over the last four quarters. Operating cash flow
(defined on page 11) as a percentage of sales reached 9.29% for the last four
quarters compared to 8.36% one year ago.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was $6.4
million for the quarter compared to $6.3 million in 1998. Casa Ley operates 86
food and general merchandise stores in western Mexico.
For the first 36 weeks of 1999, sales were $18.9 billion compared to sales of
$16.6 billion in 1998. The gross profit margin improved to 29.78% from 29.20% in
1998 on a historical basis and 29.15% on a pro forma basis. Operating and
administrative expense increased to 22.65% of sales in 1999 from 22.62% in 1998
primarily because of increased goodwill amortization from the Dominick's and
Carrs acquisitions. On a pro forma basis, operating and administrative expense
improved from 22.95% in the first 36 weeks of 1998.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO.
In April 1999, Safeway acquired all of the outstanding shares of Carrs for
$12.50 cash per share, or a total of approximately $106 million (the "Carrs
Acquisition"). On the acquisition date, Carrs operated 49 stores. In accordance
with a consent decree entered into with the state of Alaska Safeway has disposed
of six Safeway stores and one Carrs store following the Carrs Acquisition.
Safeway funded the Carrs Acquisition, and the subsequent repayment of $238.7
million of Carrs' debt, with the issuance of commercial paper.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On September 11, 1999, Safeway acquired all of the outstanding shares of
Randall's for $1.3 billion consisting of $754 million of cash and 12.7 million
shares of Safeway stock (the "Randall's Acquisition"). Randall's is a 117-store
supermarket chain based in Texas. Safeway's September 11, 1999 balance sheet
reflects the acquisition of Randall's. Safeway's income statement will reflect
Randall's operating results beginning in the fourth quarter of 1999.
The Randall's Acquisition is accounted for as a purchase and resulted in
goodwill of approximately $1.3 billion which will be amortized over 40 years.
Safeway used proceeds from the issuance of subordinated debt (see Note C) to
fund the acquisition.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $1,080.3 million in the first 36 weeks of 1999
compared to cash flow from operations of $920.5 million in the first 36 weeks of
1998. This change is primarily due to improved operations offset by changes in
working capital. Working capital (excluding cash and debt) at September 11, 1999
was a deficit of $454.3 million compared to a deficit of $302.2 million at
September 12, 1998.
Cash flow used for investing activities for the first 36 weeks of the year was
$1,472.9 million in 1999 compared to $472.5 million in 1998. The increase is
primarily due to the acquisition of Randall's and Carrs as well as increased
capital expenditures in 1999.
Cash flow provided by financing activities was $430.2 million in the first 36
weeks of 1999 compared to cash flow used by financing activities of $473.4 in
1998, primarily due to the issuance of the senior notes to help finance the
acquisition of Randall's.
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 36 Weeks Ended
------------------------------ -------------------------------
Sept. 11, Sept. 12, Sept. 12, Sept. 12
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating cash flow:
Income before income taxes $ 385.2 $ 335.5 $ 1,147.7 $ 955.3
Interest expense 73.4 48.8 221.0 153.2
Depreciation and amortization 155.0 119.8 447.4 354.7
LIFO expense 2.3 2.3 6.9 4.6
Equity in earnings of unconsolidated affiliate (6.4) (6.3) (19.6) (16.7)
---------- ---------- ---------- ----------
Operating cash flow $ 609.5 $ 500.1 $ 1,803.4 $ 1,451.1
========== ========== ========== ==========
As a percent of sales 9.41% 8.95% 9.53% 8.76%
As a multiple of interest expense 8.30x 10.25x 8.16x 9.47
</TABLE>
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 5, 1999 Safeway announced that its Board of Directors authorized a
stock repurchase program under which Safeway may acquire up to $1.0 billion of
its common stock. The purchases will be made from time to time at prevailing
prices in open market or in privately negotiated transactions and will be funded
with a combination of cash flow from operations, commercial paper and bank
borrowings. The purpose of this program is, in part, to replace treasury stock
issued in connection with the Randall's Acquisition. Safeway presently
anticipates that shares repurchased in the near future will be made in block
purchases in privately negotiated transactions.
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.
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.
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 has
determined what modifications or replacements will be necessary to achieve
compliance; is 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. Management
believes that all critical Safeway systems and applications are now year 2000
compliant. The year 2000 project group will continue to evaluate and test any
additional year 2000-related upgrades or changes which may be provided by
software vendors relating to software packages supporting Company systems and
applications.
Safeway completed its acquisition of Dominick's in November 1998. All critical
Dominick's systems and applications that were not year 2000 compliant have been
replaced with compliant systems and applications or have been modified to
achieve year 2000 compliance.
Safeway also completed its acquisition of Carrs in April 1999. All critical
Carrs systems and applications that were not year 2000 compliant have been
replaced with compliant Safeway core systems and applications or have been
modified to achieve year 2000 compliance.
Safeway completed its acquisition of Randall's on September 11, 1999. Management
believes that all critical Randall's systems and applications are year 2000
compliant.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The year 2000 project group is also examining the Company's relationships with
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 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. A
central task force has been formed to manage and control all year 2000
contingency preparation and activities for the Company. Each division of the
Company has formed its own committee to manage and control contingency
preparation and activities for that division. Communication of the contingency
plan and training to support it are underway and will be completed by October
30, 1999.
Through the third quarter of 1999 the Company has spent approximately $28.5
million to address year 2000 compliance issues. The Company estimates that it
will incur an additional $1.5 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. Randall's spent $2.6 million to address year 2000
compliance issues.
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 36 weeks of 1999, Safeway invested $792 million in capital
expenditures (as defined on page 14 of the Company's 1998 Annual Report to
Stockholders) while opening 32 new stores and closing 29 stores. The Company
expects to spend approximately $1.3 billion in 1999 while opening approximately
65 new stores and completing approximately 250 remodels. In the year 2000
Safeway expects to spend approximately $1.5 billion, open 70 to 75 new stores
and complete 250 remodels.
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.
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 and material changes thereto have been described in subsequent Forms
10-Q. The material changes to that information are described below.
On September 2, 1999, after a six-week trial, the jury returned a verdict in
favor of Vons and two other grocery store chains in the class action lawsuit,
McCampbell et al. v. Ralphs Grocery Company et al., in the Superior Court for
San Diego County. Plantiffs claimed that the grocery store chains agreed to fix
or raise the price of eggs in Southern California. They had asked the jury to
award damages against Vons (before trebling) in the amount of $36.8 million. On
October 15, 1999, the court denied plantiffs' motion for judgment
notwithstanding the verdict or a new trial, and also denied their motion for
judgment on a second cause of action under California's unfair competition law.
ITEM 6(a). EXHIBITS
Exhibit 2.1 Agreement and Plan of Merger dated as of July 22, 1999,
among Safeway Inc., SI Merger Sub, Inc. and Randall's Food
Markets Inc. (incorporated by reference to Exhibit 2 to the
Registrants Form 8-K dated August 3, 1999).
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).
ITEM 6(b). REPORTS ON FORM 8-K
On September 14, 1999 the Company filed a current report on Form 8-K under Item
5. "Other Events" that on September 13 Safeway completed an underwritten
offering of $600 million 7% Notes Due 2002, $400 million 7-1/4% Notes Due 2004
and $500 million 7-1/2% Notes Due 2009.
On August 3, 1999 the Company filed a current report on Form 8-K under Item 5.
"Other Events" that on July 23, 1999 Safeway and Randall's Food Markets, Inc.,
("Randall's") jointly announced that they had entered into an Agreement and Plan
of Merger, dated as of July 22, 1999 pursuant to which Safeway would acquire all
of the outstanding shares of common stock of Randall's.
14
<PAGE> 15
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: October 25, 1999 \s\ Steven A. Burd
---------------- ----------------------------------
Steven A. Burd
Chairman, President
and Chief Executive Officer
Date: October 25, 1999 \s\ David G. Weed
---------------- ----------------------------------
David G. Weed
Executive Vice President
and Chief Financial Officer
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 11, 1999
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)
16
<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
----------------------------------------------------------------
September 11, 1999 September 12, 1998
----------------------------- ----------------------------
Diluted Basic Diluted Basic
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 223.4 $ 223.4 $ 193.7 $ 193.7
----------- ----------- ----------- -----------
Weighted average common shares outstanding 497.6 497.6 483.6 483.6
----------- -----------
Common share equivalents 15.8 25.8
----------- -----------
Weighted average shares outstanding and common
share equivalents 513.4 509.4
=========== ===========
Earnings per share $ 0.44 $ 0.45 $ 0.38 $ 0.40
----------- ----------- ----------- -----------
Calculation of common share equivalents:
Options and warrants to purchase common shares 36.1 47.7
Common shares assumed purchased with potential
proceeds (20.3) (21.9)
=========== ===========
Common share equivalents 15.8 25.8
=========== ===========
Calculation of common shares assumed purchased with potential
proceeds:
Potential proceeds from exercise of options and warrants
to purchase common shares $ 1,014.2 $ 923.4
Common stock price used under the treasury
stock method $ 49.94 $ 42.09
Common shares assumed purchased with
potential proceeds 20.3 21.9
</TABLE>
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks Ended
-----------------------------------------------------
September 11, 1999 September 12, 1998
-------------------------- -----------------------
Diluted Basic Diluted Basic
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 665.7 $ 665.7 $ 551.7 $ 551.7
---------- ---------- ---------- ----------
Weighted average common shares outstanding 495.6 495.6 480.6 480.6
---------- ----------
Common share equivalents 17.5 27.5
---------- ----------
Weighted average common shares and common
share equivalents 513.1 508.1
---------- ----------
Earnings per share $ 1.30 $ 1.34 $ 1.09 $ 1.15
---------- ---------- ---------- ----------
Calculation of common share equivalents:
Options and warrants to purchase common shares 37.8 48.6
Common shares assumed purchased with potential
proceeds (20.3) (21.1)
---------- ----------
Common share equivalents 17.5 27.5
========== ==========
Calculation of common shares assumed purchased with potential proceeds:
Potential proceeds from exercise of options and warrants
to purchase common shares $ 1,053.4 $ 808.2
Common stock price used under the treasury
stock method $ 51.87 $ 38.20
Common shares assumed purchased with
potential proceeds 20.3 21.1
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 Weeks Fiscal Year
---------------------------- -----------------------------------------------------------
September 11, September 12,
1999 1998 1998 1997 1996 1995 1994
------------ ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 1,147.7 $ 955.3 $ 1,396.9 $ 1,076.3 $ 767.6 $ 556.5 $ 424.1
Add interest expense 221.0 153.2 235.0 241.2 178.5 199.8 221.7
Add interest on rental expense (a) 96.9 75.0 108.2 88.5 90.0 87.5 86.6
Less equity in earnings of unconsolidated
affiliate (19.6) (16.7) (28.5) (34.9) (50.0) (26.9) (27.3)
Add minority interest in subsidiary 4.4 3.3 5.1 4.4 3.4 3.9 3.0
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 1,450.4 $ 1,170.1 $ 1,716.7 $ 1,375.5 $ 989.5 $ 820.8 $ 708.1
--------- --------- --------- --------- --------- --------- ---------
Interest expense $ 221.0 $ 153.2 $ 235.0 $ 241.2 $ 178.5 $ 199.8 $ 221.7
Add capitalized interest 5.9 5.5 8.5 5.7 4.4 4.6 2.9
Add interest on rental expense (a) 96.9 75.0 108.2 88.5 90.0 87.5 86.6
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 323.8 $ 233.7 $ 351.7 $ 335.4 $ 272.9 $ 291.9 $ 311.2
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 4.48 5.01 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.
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> SEP-11-1999
<CASH> 83,300
<SECURITIES> 0
<RECEIVABLES> 276,900
<ALLOWANCES> 0
<INVENTORY> 2,213,800
<CURRENT-ASSETS> 2,754,900
<PP&E> 9,184,400
<DEPRECIATION> 3,076,500
<TOTAL-ASSETS> 14,243,900
<CURRENT-LIABILITIES> 3,209,200
<BONDS> 5,614,600
0
0
<COMMON> 5,600
<OTHER-SE> 4,400,600
<TOTAL-LIABILITY-AND-EQUITY> 14,243,900
<SALES> 18,925,200
<TOTAL-REVENUES> 18,925,200
<CGS> (13,289,800)
<TOTAL-COSTS> (13,289,800)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (221,000)
<INCOME-PRETAX> 1,147,700
<INCOME-TAX> (482,000)
<INCOME-CONTINUING> 665,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665,700
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.30
</TABLE>
