<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 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)
<TABLE>
<S> <C>
Delaware 94-3019135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5918 Stoneridge Mall Road
Pleasanton, California 94588
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (925) 467-3000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which
registered
------------------- ------------------------------
<S> <C>
Common Stock, $0.01 par value per share New York Stock Exchange
9.30% Senior Secured Debentures due 2007 New York Stock Exchange
10% Senior Notes due 2002 New York Stock Exchange
9.35% Senior Subordinated Notes due 1999 New York Stock Exchange
10% Senior Subordinated Notes due 2001 New York Stock Exchange
9.65% Senior Subordinated Debentures due 2004 New York Stock Exchange
9.875% Senior Subordinated Debentures due 2007 New York Stock Exchange
6.85% Senior Notes due 2004 New York Stock Exchange
7.00% Senior Notes due 2007 New York Stock Exchange
7.45% Senior Debentures due 2027 New York Stock Exchange
5.75% Notes due 2000 New York Stock Exchange
5.875% Notes due 2001 New York Stock Exchange
6.05% Notes due 2003 New York Stock Exchange
6.50% Notes due 2008 New York Stock Exchange
</TABLE>
(Cover continued on following page)
<PAGE> 2
(Cover continued from previous page)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the voting stock held by non-affiliates of Registrant
as of March 16, 1999, was $25.0 billion.
As of March 16, 1999, there were issued and outstanding 495.6 million shares of
the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the extent
specified herein:
<TABLE>
<CAPTION>
Document Description 10-K Part
-------------------- ---------
<S> <C>
1998 Annual Report to Stockholders I, II, III, IV
1999 Proxy Statement dated March 24, 1999 III
</TABLE>
<PAGE> 3
SAFEWAY INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
GENERAL:
Information appearing on pages 4 through 14 of the Company's 1998 Annual Report
to Stockholders is incorporated herein by this reference.
CAPITAL EXPENDITURES:
Information appearing under the caption "Capital Expenditure Program" on page 14
of the Company's 1998 Annual Report to Stockholders is incorporated herein by
this reference.
Safeway's new stores, remodels, and closures during the last five years were as
follows:
<TABLE>
<CAPTION>
Total
Five
Years 1998 1997 1996 1995 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
New stores:
New locations 73 28 15 14 10 6
Replacements 92 18 22 16 22 14
----- ----- ----- ----- ----- -----
165 46 37 30 32 20
===== ===== ===== ===== ===== =====
Remodels: (Note A)
Expansions 111 28 34 29 13 7
"Four-Wall" remodels 624 206 147 112 95 64
----- ----- ----- ----- ----- -----
735 234 181 141 108 71
===== ===== ===== ===== ===== =====
Dominick's stores acquired 113 113 -- -- -- --
Vons stores acquired 316 -- 316 -- -- --
Closures 175 30 37 37 35 36
Stores at year-end 1,497 1,368 1,052 1,059 1,062
</TABLE>
Note A. Defined as store projects (other than maintenance) generally
requiring expenditures in excess of $200,000.
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
Note L to the consolidated financial statements, included on page 36 of the
Company's 1998 Annual Report to Stockholders, is incorporated herein by this
reference.
TRADEMARKS:
Safeway Inc. ("Safeway" or the "Company") has invested significantly in the
development and protection of the "Safeway" name. The right to use the "Safeway"
name is considered to be an important asset. Safeway also owns approximately 100
other trademarks registered or pending in the United States Patent and Trademark
Office, including its product line names such as Safeway, Safeway SELECT,
Lucerne and Mrs. Wright's, and the marks Vons, Pavilions and Dominick's. Each
trademark registration is for an initial period of 10 or 20 years and is
renewable for as long as the use of the trademark continues. Safeway considers
certain of its trademarks to be of material importance to its business and
actively defends and enforces such trademarks. Safeway has also registered
certain of its trademarks in Canada.
WORKING CAPITAL:
At year-end 1998, working capital deficit was composed of $2.3 billion of
current assets and $2.9 billion of current liabilities. Normal operating
fluctuations in these substantial balances can result in changes to cash flow
from operations presented in the Consolidated Statements of Cash Flows that are
not necessarily indicative of long-term operating trends. There are no unusual
industry practices or requirements relating to working capital items.
COMPETITION:
Food retailing is intensely competitive. The number of competitors and the
amount of competition experienced by Safeway's stores vary by market area. The
principal competitive factors that affect the Company's business are location,
quality, service, price and consumer loyalty to other brands and stores.
Local, regional, and national food chains as well as independent food stores and
markets comprise the Company's principal competition, although Safeway also
faces substantial competition from convenience stores, liquor retailers,
membership warehouse clubs, specialty retailers, supercenters, and large-scale
drug and pharmaceutical chains. Safeway and its competitors engage in price
competition which, from time to time, has adversely affected operating margins
in many of the Company's markets.
RAW MATERIALS:
Various agricultural commodities constitute the principal raw materials used by
the Company in the manufacture of its food products. Management believes that
raw materials for its products are not in short supply, and all are readily
available from a wide variety of independent suppliers.
COMPLIANCE WITH ENVIRONMENTAL LAWS:
The Company's compliance with the federal, state, and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment or otherwise relate to the protection of the environment has not had
and is not expected to have a material adverse effect upon the financial
position or results of operations of the Company.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
EMPLOYEES:
At year-end 1998, Safeway had approximately 170,000 full and part-time
employees. Approximately 90% of Safeway's employees in the United States and
Canada are covered by collective bargaining agreements negotiated with local
unions affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three-year terms, with some
agreements having terms of up to five years. Accordingly, Safeway renegotiates a
significant number of these agreements every year.
In the last three years there have been three significant work stoppages. During
the second quarter of 1997, Safeway was engaged in a 75-day labor dispute
affecting 74 stores in the Alberta, Canada operating area. The Company continued
to operate the affected stores with a combination of replacement workers,
management, and employees who returned to work. During the second and third
quarters of 1996, Safeway was engaged in a labor dispute in British Columbia
which lasted 40 days and affected 86 stores. Under Provincial law in British
Columbia, replacement workers could not be hired, and therefore all the affected
stores were closed throughout the strike-lockout. Separately, the Company was
engaged in a strike-lockout in the Denver operating area which lasted 44 days
also during the second and third quarters of 1996. All of the Denver stores
operated during the strike-lockout, largely with replacement workers. These work
stoppages were resolved in a manner that management considered generally
satisfactory. Safeway estimates that the Alberta strike reduced 1997 net income
by approximately $0.04 per share and that the combined impact of the disputes in
Denver and British Columbia reduced 1996 earnings by approximately $0.07 per
share.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES:
Note L to the consolidated financial statements, included on page 36 of the
Company's 1998 Annual Report to Stockholders and incorporated herein by this
reference, contains financial information by geographic area.
ITEM 3. LEGAL PROCEEDINGS
Information about legal proceedings appearing under the caption "Legal Matters"
as reported in Note K to the consolidated financial statements on pages 35 and
36 of the Company's 1998 Annual Report to Stockholders is incorporated herein by
this reference.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of the current executive officers of the Company and their
positions as of March 16, 1999, are set forth below. Unless otherwise indicated,
each of the executive officers served in various managerial capacities with the
Company over the past five years. None of the executive officers named below is
related to any other executive officer or director by blood, marriage or
adoption. Officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Year First Elected
------------------
Name and all Positions with the Company Present
Held at March 16, 1999 Age Officer Office
- --------------------------------------- --- ------- -------
<S> <C> <C> <C>
Steven A. Burd 49 1992 1993
Chairman, President and Chief Executive Officer
Kenneth W. Oder 51 1993 1993
Executive Vice President
Labor Relations, Human Resources, Law, Public Affairs
and Information Technology
David G. Weed 47 1992 1998
Executive Vice President and
Chief Financial Officer
David F. Bond (1) 45 1997 1997
Senior Vice President
Finance and Control
David T. Ching (2) 46 1994 1994
Senior Vice President and
Chief Information Officer
Dick W. Gonzales (3) 52 1998 1998
Senior Vice President
Human Resources
Lyman C. Gordon 52 1993 1998
Senior Vice President
Strategic Development
Lawrence V. Jackson (4) 45 1997 1997
Senior Vice President
Supply Operations
Melissa C. Plaisance 39 1993 1995
Senior Vice President
Finance and Public Affairs
</TABLE>
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
<TABLE>
<CAPTION>
Year First Elected
------------------
Name and all Positions with the Company Present
Held at March 16, 1999 Age Officer Office
- --------------------------------------- --- ------- -------
<S> <C> <C> <C>
Larree M. Renda 40 1991 1994
Senior Vice President
Corporate Retail Operations
Michael C. Ross 51 1993 1993
Senior Vice President
Secretary and General Counsel
Gary D. Smith 56 1988 1995
Senior Vice President and
Director of Marketing
Richard A. Wilson 65 1988 1988
Vice President
Tax
Donald P. Wright 46 1991 1991
Senior Vice President
Real Estate and Engineering
</TABLE>
- ----------
(1) Mr. Bond was previously a partner at the accounting firm of Deloitte &
Touche LLP.
(2) During 1994, Mr. Ching was the General Manager - North America for the
British American Consulting Group. From 1979 to 1994, he was employed by
Lucky Stores, Inc., where he was the Senior Vice President of
Information Systems beginning in 1989.
(3) Mr. Gonzales held the positions of Group Vice President -- Human
Resources, and Senior Vice President --Human Resources at The Vons
Companies, Inc. from 1993 to 1998.
(4) Mr. Jackson was previously the Senior Vice President, Worldwide
Operations of PepsiCo Food Systems, a division of PepsiCo, Inc., from
1995-97, and Vice President and General manager of Pepsi-Cola Company, a
unit of PepsiCo, Inc., from 1992-95.
Section 16(a) Beneficial Ownership. Information appearing under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1999
Proxy Statement is incorporated herein by this reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is listed on the New York Stock
Exchange. Information as to quarterly sales prices for the Company's common
stock appears in Note N to the consolidated financial statements on page 38 of
the Company's 1998 Annual Report to Stockholders and is incorporated herein by
this reference. There were 9,979 stockholders of record as of March 16, 1999;
however, approximately 88% of the Company's outstanding stock is held in "street
name" by depositories or nominees on behalf of beneficial holders. The price per
share of common stock, as reported on the New York Stock Exchange Composite
Tape, was $55 13/16 at the close of business on March 16, 1999.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(CONTINUED)
Holders of common stock are entitled to receive dividends if, as, and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued. The Company has not paid dividends on common stock through 1998 and
has no current plans for dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
The "Five-Year Summary Financial Information" included on page 15 of the
Company's 1998 Annual Report to Stockholders is incorporated herein by this
reference. The Five-Year Summary should be read in conjunction with the
Company's consolidated financial statements and accompanying notes incorporated
by reference in Item 8, Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information appearing under the caption "Financial Review" on pages 16 through
18 and under the captions "Capital Expenditure Program" and "Market Risk from
Financial Instruments" on page 14 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by this reference.
Information regarding the terms of outstanding indebtedness appearing in Note C
to the consolidated financial statements on pages 28 and 29 of the Company's
1998 Annual Report to Stockholders is incorporated herein by this reference.
Information appearing under the caption "Year 2000 Compliance" on page 18 of the
Company's 1998 Annual Report to Stockholders is incorporated herein by this
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Market Risk from Financial Instruments"
on page 14 of the Company's 1998 Annual Report to Stockholders is incorporated
herein by this reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Pages 19 through 39 of the Company's 1998 Annual Report to Stockholders, which
include the consolidated financial statements and the Independent Auditors'
Report as listed in Item 14(a)1, are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors of the Company. Information on the nominees for election as Directors
and the continuing Directors of the Company, which appears under the caption
"Election of Directors" in the Company's 1999 Proxy Statement, is incorporated
herein by this reference.
Executive Officers of the Company. See PART I under the caption "Executive
Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Executive Compensation" and "Pension
Plans" in the Company's 1999 Proxy Statement is incorporated herein by this
reference. Information appearing under the captions "Report of the Compensation
and Stock Option Committee; Report of the Section 162(m) Committee" and "Stock
Performance Graph" in the Company's 1999 Proxy Statement is not incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Beneficial Ownership of Securities" in
the Company's 1999 Proxy Statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note J to the consolidated financial statements, included on page 34 of the
Company's 1998 Annual Report to Stockholders, and the captions "Certain
Relationships and Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Company's 1999 Proxy Statement contain information
about certain relationships and related transactions and are incorporated herein
by this reference.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Consolidated Financial Statements of the Company are incorporated by
reference in PART II, Item 8:
Consolidated Statements of Income for fiscal 1998, 1997, and 1996.
Consolidated Balance Sheets as of the end of fiscal 1998 and 1997.
Consolidated Statements of Cash Flows for fiscal 1998, 1997, and 1996.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for fiscal 1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Consolidated Financial Statement Schedules:
None required
3. The following exhibits are filed as part of this report:
Exhibit 2.1 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) of the Schedule 14D-1 of Safeway Inc., dated
October 19, 1998).
Exhibit 2.2 Stockholders Agreement, dated as of October 13, 1998, by and
among Safeway Inc., Windy City Acquisition Corp. and each of the
stockholders of Dominick's Supermarkets, Inc. (incorporated by
reference to Exhibit (c)(2) of the Schedule 14D-1 of Safeway
Inc., dated October 19, 1998).
Exhibit 2.3 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 of the
Registrant's Form 10-Q for the quarterly period ended September
12, 1998).
Exhibit 2.4 Amended and Restated Stock Purchase Agreement, dated as of
January 8, 1997 by and between Safeway Inc. and SSI Associates,
L.P. (incorporated by reference to Exhibit 2.1 to Registrant's
Current Report on Form 8-K dated January 8, 1997).
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).
10
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SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
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 4(i).1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4(i).2 to Registration Statement No. 33-33388).
Exhibit 4(i).2 Registration Rights Agreement dated November 25, 1986 between the
Company and certain limited partnerships (incorporated by
reference to Exhibit 4(i).4 to Registration Statement No.
33-33388).
Exhibit 4(i).3 Indenture dated as of November 20, 1991 between the Company and
The Bank of New York, as Trustee, relating to the Company's
Senior Subordinated Debt Securities (incorporated by reference to
Exhibit 4.1 of Registrant's Form 8-K dated November 13, 1991), as
supplemented by the Supplemental Indenture dated as of September
4, 1997 (incorporated by reference to Exhibit 4(i).3 to
Registrant's Form 10-K for the year ended January 3, 1998).
Exhibit 4(i).4 Form of Officers' Certificate establishing the terms of the 10%
Senior Subordinated Notes due December 1, 2001, including the
form of Note (incorporated by reference to Exhibit 4.4 of
Registrant's Form 8-K dated November 13, 1991).
Exhibit 4(i).5 Form of Officers' Certificate establishing the terms of the 9.65%
Senior Subordinated Debentures due January 15, 2004, including
the form of Debenture (incorporated by reference to Exhibit 4.1
of Registrant's Form 8-K dated January 15, 1992).
Exhibit 4(i).6 Indenture dated as of February 1, 1992 between the Company and
The First National Bank of Chicago, as Trustee, relating to the
Company's 9.30% Senior Secured Debentures due 2007, including the
form of Debenture and the forms of Deed of Trust and
Environmental Indemnity Agreement attached as exhibits thereto
(incorporated by reference to Exhibit 4(i).14 of Registrant's
Form 10-K for the year ended December 28, 1991), as supplemented
by the Supplemental Indenture dated as of September 4, 1997
(incorporated by reference to Exhibit 4(i).6 to Registrant's Form
10-K for the year ended January 3, 1998).
Exhibit 4(i).7 Indenture dated as of March 15, 1992 between the Company and
Harris Trust and Savings Bank, as Trustee, relating to the
Company's Senior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated March 17,
1992), as supplemented by the Supplemental Indenture dated as of
September 4, 1997 (incorporated by reference to Exhibit 4(i).7 to
Registrant's Form 10-K for the year ended January 3, 1998).
Exhibit 4(i).8 Form of Officers' Certificate establishing the terms of the 9.35%
Senior Subordinated Notes due March 15, 1999 and the 9.875%
Senior Subordinated Debentures due March 15, 2007, including the
form of Note and form of Debenture (incorporated by reference to
Exhibit 4.2 of Registrant's Form 8-K dated March 17, 1992).
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i).9 Indenture dated as of September 1, 1992 between the Company and
The Chase Manhattan Bank (National Association), as Trustee,
relating to the Company's Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated
September 16, 1992), as supplemented by the Supplemental
Indenture dated as of September 4, 1997 (incorporated by
reference to Exhibit 4(i).9 to Registrant's Form 10-K for the
year ended January 3, 1998).
Exhibit 4(i).10 Form of Officers' Certificate relating to the Company's Fixed
Rate Medium-Term Notes and the Company's Floating Rate
Medium-Term Notes, form of Fixed Rate Note and form of Floating
Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and
4.4 of Registrant's Form 8-K dated September 16, 1992).
Exhibit 4(i).11 Form of Officers' Certificate establishing the terms of a
separate series of Safeway Inc.'s Medium-Term Notes entitled
10% Senior Notes due November 1, 2002, including the form of
Note (incorporated by reference to Exhibits 4.1 and 4.2 of
Registrant's Form 8-K dated November 5, 1992).
Exhibit 4(i).12 Form of Officers' Certificate establishing the terms of a
separate series of Safeway Inc.'s Medium-Term Notes entitled
Medium-Term Notes due June 1, 2003 (Series OPR-1), including
the form of Note (incorporated by reference to Exhibits 4.1 and
4.2 of Registrant's Form 8-K dated June 1, 1993).
Exhibit 4(i).13 Common Stock Purchase Warrants to purchase 14,148,969 shares of
Safeway Inc. common stock (incorporated by reference to Exhibit
4(i).13 to Registrant's Form 10-K for the year ended January 3,
1998) and Amendment to Safeway Inc. Common Stock Purchase
Warrant dated as of January 29, 1999 (incorporated by reference
to Exhibit A to Registrant's Form 8-K dated February 11, 1999).
Exhibit 4(i).14 Credit Agreement dated as of April 8, 1997 among Safeway Inc.,
The Vons Companies, Inc. and Canada Safeway Limited as
Borrowers; Bankers Trust Company as Administrative Agent; The
Chase Manhattan Bank as Syndication Agent; The Bank of Nova
Scotia and Bank of America National Trust and Savings
Association as Documentation Agents; the agents listed therein
as Agents; and the lenders listed therein as Lenders.
(incorporated by reference to Exhibit 4(i).1 of the
Registrant's Form 10-Q for the quarterly period ended March 22,
1997).
Exhibit 4(i).15 Indenture, dated as of September 10, 1997, between Safeway Inc.
and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.1 to Registrant's Form 8-K dated September 10,
1997).
Exhibit 4(i).16 Form of Officers' Certificate establishing the terms of the
Registrant's 6.85% Senior Notes due 2004, the Registrant's
7.00% Senior Notes due 2007 and the Company's 7.45% Senior
Debentures due 2027, including the forms of Notes (incorporated
by reference to Exhibits 4.2, 4.3, 4.4, 4.5 and 4.6 to
Registrant's Form 8-K dated September 10, 1997).
Exhibit 4(i).17 Form of Officers' Certificate establishing the terms of the
Registrant's 5.75% Notes due 2000, 5.875% Notes due 2001, 6.05%
Notes due 2003, and 6.50% Notes due 2008, including forms of
Notes (incorporated by reference to Exhibits 4.2, 4.3, 4.4, 4.5
and 4.6 to Registrant's Form 8-K dated November 9, 1998).
Exhibit 4(i).18 The 1996 Equity Participation Plan of Dominick's Supermarkets,
Inc. (incorporated by reference to Exhibit 10.13 to Dominick's
Supermarkets, Inc.'s Form 10-K, Number 1-12353).
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i).19 The 1995 Amended and Restated Stock Option Plan of
Dominick's Supermarkets, Inc. (incorporated by reference to
Exhibit 10.12 to Dominick's Supermarkets, Inc.'s Form 10-K,
Number 1-12353).
Exhibit 4(i).20 Form of Amendment to Stock Option Agreements under The 1996
Equity Participation Plan of Dominick's Supermarkets, Inc.,
and the 1995 Amended and Restated Stock Option Plan of
Dominick's Supermarkets, Inc. (incorporated by reference to
Exhibit 4.5 to Registrant's Registration on Form S-8 No.
333-67575 dated November 19, 1998).
Exhibit 4(iii) Registrant agrees to provide the Securities and Exchange
Commission, upon request, with copies of instruments
defining the rights of holders of long-term debt of the
Registrant and all of its subsidiaries for which
consolidated financial statements are required to be filed
with the Securities and Exchange Commission.
Exhibit 10(iii).1* Safeway Inc. Outside Director Equity Purchase Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 33-36753), and First Amendment to the Safeway
Inc. Outside Director Equity Purchase Plan dated as of July
5, 1994 (incorporated by reference to Exhibit 10(iii).1 to
Registrant's Form 10-Q for the quarterly period ended
September 10, 1994).
Exhibit 10(iii).2* Share Appreciation Rights Plan of Canada Safeway Limited
(incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 28,
1991).
Exhibit 10(iii).3* Share Appreciation Rights Plan of Lucerne Foods Ltd.
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 28,
1991).
Exhibit 10(iii).4* Stock Option Plan for Consultants of Safeway Inc.
(incorporated by reference to Exhibit 10(iii).7 to
Registrant's Form 10-Q for the quarterly period ending June
19, 1993).
Exhibit 10(iii).5* First Amendment to the Stock Option Plan for Consultants of
Safeway Inc. (incorporated by reference to Exhibit 10(iii).7
to Registrant's Form 10-K for the year ended January 1,
1994).
Exhibit 10(iii).6* 1994 Amended and Restated Stock Option and Incentive Plan
for Key Employees of Safeway Inc. (incorporated by reference
to Exhibit 10(iii).8 to Registrant's Form 10-K for the year
ended January 1, 1994) and First Amendment thereto dated
March 1, 1995 (incorporated by reference to Exhibit
10(iii).7 of Registrant's Form 10-K/A for the year ended
December 31, 1994).
Exhibit 10(iii).7* Operating Performance Bonus Plan for Executive Officers of
Safeway Inc. (incorporated by reference to Exhibit 10(iii).9
to Registrant's Form 10-K for the year ended January 1,
1994); First Amendment thereto dated January 1, 1997.
(incorporated by reference to Exhibit 10(iii).12 of
Registrant's Form 10-K for the year ended December 28,
1996); Second Amendment thereto dated October 7, 1997; and
Third Amendment thereto dated March 10, 1998 (incorporated
by reference to Exhibit 10(iii).7 of Registrant's Form 10-K
for the year ended January 2, 1998). -------------- *
Management contract, or compensatory plan or arrangement.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 10(iii).8* Capital Performance Bonus Plan for Executive Officers of
Safeway Inc. (incorporated by reference to Exhibit 10(iii).8
of Registrant's Form 10-K for the year ended January 2,
1998).
Exhibit 10(iii).9* Retirement Restoration Plan of Safeway Inc. (incorporated by
reference to Exhibit 10(iii).11 to Registrant's Form 10-K
for the year ended January 1, 1994).
Exhibit 10(iii).10* Deferred Compensation Plan for Safeway Directors
(incorporated by reference to Exhibit 10(iii).11 of
Registrant's Form 10-K for the year ended December 31,
1994).
Exhibit 10(iii).11* Form of stock option agreement for former directors of The
Vons Companies, Inc. (incorporated by reference to Exhibit
10(iii).12 of Registrant's Form 10-K for the year ended
December 28, 1996).
Exhibit 10(iii).12* The Vons Companies, Inc. Management Stock Option Plan
(incorporated by reference to Exhibit 10.3 to The Vons
Companies, Inc. Annual Report on Form 10-K for the
twenty-seven weeks ended January 3, 1988).
Exhibit 10(iii).13* The Vons Companies, Inc. 1990 Stock Option and Restricted
Stock Plan (incorporated by reference to Appendix A to The
Vons Companies, Inc. Proxy Statement for its May 17, 1990
Annual Meeting of Shareholders).
Exhibit 10(iii).14* Amendment, dated February 17, 1993, to The Vons Companies,
Inc. 1990 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.13.1 to The Vons
Companies, Inc. Form 10-Q for the quarterly period ended
March 28, 1993).
Exhibit 10(iii).15* Amendment, effective as of December 13, 1996, to The Vons
Companies, Inc. 1990 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.7.2 to The Vons
Companies, Inc. Form 10-K for the fiscal year ended December
29, 1996).
Exhibit 10(iii).16* Form of Amendments, dated April 8, 1997, to The Vons
Companies, Inc. Management Stock Option Plan and The Vons
Companies, Inc. 1990 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 4.5 to Registrant's
Form S-4 filed on March 5, 1997). Exhibit 11.1 Computation
of Earnings per Share (incorporated by reference to page 37
of the Company's 1998 Annual Report to Stockholders).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1 Registrant's 1998 Annual Report to Stockholders (considered
filed to the extent specified in Item 1, Item 2, Item 3,
Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1
above).
Exhibit 22.1 Schedule of Subsidiaries
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only).
- --------------
* Management contract, or compensatory plan or arrangement.
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
(b) REPORTS ON FORM 8-K:
On October 19, 1998 the Company filed a Current Report on Form 8-K stating under
"Item 5. Other Events" that on that date it had entered into an agreement and
plan of merger with Dominick's Supermarkets, Inc. pursuant to which it would
acquire all of the outstanding shares of Dominick's common stock at $49 per
share, or a total of approximately $1.2 billion.
On November 9, 1998, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that on that date it had completed an underwritten
offering of $400 million aggregate principal amount of its 5.75% Notes due 2000,
$400 million aggregate principal amount of its 5.875% Notes due 2001, $350
million aggregate principal amount of its 6.05% Notes due 2003, and $250 million
aggregate principal amount of its 6.50% Senior Debentures due 2008 under its
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on October 20, 1998 (File no. 333-65903).
On November 24, 1998, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that it had completed the previously announced
acquisition of Dominick's Supermarkets, Inc.
15
<PAGE> 16
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Steven A. Burd Date: March 24, 1999
------------------
SAFEWAY INC.
Steven A. Burd
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ David G. Weed /s/ David F. Bond
- ---------------------------------- ---------------------
David G. Weed David F. Bond
Executive Vice President and Senior Vice President
Chief Financial Officer Finance and Control
Date: March 24, 1999 Date: March 24, 1999
<TABLE>
<CAPTION>
Director Date
-------- ----
<S> <C>
/s/Steven A. Burd March 24, 1999
- -----------------------------------
Steven A. Burd
/s/ James H. Greene, Jr. March 24, 1999
- -----------------------------------
James H. Greene, Jr.
/s/ Paul Hazen March 24, 1999
- -----------------------------------
Paul Hazen
/s/ Henry R. Kravis March 24, 1999
- -----------------------------------
Henry R. Kravis
/s/ Robert I. MacDonnell March 24, 1999
- -----------------------------------
Robert I. MacDonnell
/s/ Peter A. Magowan March 24, 1999
- -----------------------------------
Peter A. Magowan
/s/ George R. Roberts March 24, 1999
- -----------------------------------
George R. Roberts
/s/ William Y. Tauscher March 24, 1999
- -----------------------------------
William Y. Tauscher
</TABLE>
16
<PAGE> 17
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-K FOR THE PERIOD
ENDED JANUARY 2, 1999
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 13.1 Registrant's 1998 Annual Report to Stockholders
(considered filed to the extent specified in Item 1, Item 2,
Item 3, Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit
11.1 above).
Exhibit 22.1 Schedule of Subsidiaries.
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only).
<PAGE> 1
Exhibit 12.1
SAFEWAY INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $1,396.9 $1,076.3 $767.6 $556.5 $424.1
Add interest expense 235.0 241.2 178.5 199.8 221.7
Add interest on rental expense(a) 108.2 88.5 90.0 87.5 86.6
Less equity in earnings of unconsolidated
affiliates (28.5) (34.9) (50.0) (26.9) (27.3)
Add minority interest in subsidiary 5.1 4.4 3.4 3.9 3.0
-------- -------- ------ ------ ------
Earnings $1,716.7 $1,375.5 $989.5 $820.8 $708.1
======== ======== ====== ====== ======
Interest expense $ 235.0 $ 241.2 $178.5 $199.8 $221.7
Add capitalized interest 8.5 5.7 4.4 4.6 2.9
Add interest on rental expense(a) 108.2 88.5 90.0 87.5 86.6
-------- -------- ------ ------ ------
Fixed charges $ 351.7 $ 335.4 $272.9 $291.9 $311.2
======== ======== ====== ====== ======
Ratio of earnings to fixed charges 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.
<PAGE> 1
Safeway Post-IPO Timeline
[LINE GRAPH]
Year-end Safeway Stock Price (adjusted for splits)
1990 $3 3/32 1995 $12 7/8
1991 4 1/2 1996 20 5/8
1992 3 1/4 1997 31 7/16
1993 5 5/16 1998 60 15/16
1994 7 31/32
1990
Completed initial public offering (IPO) of Safeway common stock.
Adopted new company name: Safeway Inc.
Announced five-year $3.2 billion capital expenditure program.
Honored by the President's Citation Program for Private Sector Initiatives, for
an unprecedented sixth consecutive year.
Identical-store sales gain slowed to 2.5% from 4.6% a year earlier.
Operating cash flow improved to 5.68% of sales.
Capital expenditures rose 30.3% to $490 million.
[PHOTOGRAPH OF ASSORTED STOCK CERTIFICATES]
[PHOTOGRAPH OF SAFEWAY STORE CONSTRUCTION SITE]
1991
Began construction of new 1.8 million sq. ft. distribution center in northern
California.
Sold an additional 70 million shares of common stock.
Retired $565 million of 14.5% LBO-related debt.
Total sales surpassed $15 billion mark.
Identical-store sales essentially flat compared to 1990.
Operating and administrative (O&A) expense-to-sales margin rose to 23.51%.
Operating cash flow as percentage of sales increased to 5.74%.
Capital expenditures increased to $635 million.
1992
Identical-store sales declined 1.6%.
O&A expense increased to 24.47% of sales.
Operating cash flow declined to 5.07% of sales from 5.74% in 1991 as
recession-weary consumers "traded down" to less profitable product mix.
Opened new distribution center in northern California.
Steve Burd, long-time consultant to Safeway, named president.
In fourth quarter, implemented strategy to reduce costs, increase sales and
improve returns on capital.
Completed refinancing of $1 billion of subordinated debt.
[PHOTOGRAPH OF SAFEWAY TRUCKS AT DISTRIBUTION CENTER]
<PAGE> 2
[PHOTOGRAPH OF SAFEWAY SELECT COLA]
1993
Introduced Safeway SELECT line of premium quality private-label products.
Steve Burd elected CEO.
Raised $6.7 million for the National Easter Seal Society, Safeway's designated
corporate charity.
Identical-store sales increased, reversing three-year decline.
O&A expense margin decreased for first time since 1989.
Operating cash flow improved to 5.11% of sales.
Reduced working capital by $275 million.
Reduced debt by $359 million.
[PHOTOGRAPH OF CEO STEVEN A. BURD]
1994
Identical-store sales rose 4.4%.
Reduced O&A expense margin for second straight year, to 23.52% of sales.
Working capital declined another $176 million.
Operating cash flow improved to 6.06% of sales.
Capital spending increased to $352 million.
Closed six manufacturing plants, resulting in significant savings and higher
productivity in remaining plants.
Retired $292 million of senior debt.
Northern California Division donated more than $3 million worth of computer
equipment to local schools.
[PHOTOGRAPH OF OPEN CASH REGISTER DRAWER]
1995
Identical-store sales up 4.6%.
O&A expense as percentage of sales declined for third consecutive year, to
22.96%.
Operating cash flow rose to 6.52% of sales.
Capital spending increased to $503 million.
Senior unsecured debt given investment grade status by Standard & Poor's.
Began converting hundreds of private label items previously marketed under 10
other brand names to Safeway brand name.
Denver Division received Martin Luther King, Jr. Community Service Award.
[PHOTOGRAPH OF ASSORTED SAFEWAY BRAND PRODUCTS]
<PAGE> 3
[PHOTOGRAPH OF VONS LOGO]
1996
Stock split two-for-one in January.
Signed definitive agreement to purchase shares of The Vons Companies, Inc. that
Safeway did not already own.
Recycled more than 300 million pounds of corrugated cardboard, in addition to
large amounts of plastic, glass, aluminum, batteries and tires.
Identical-store sales increased 5.1%.
O&A expense margin declined for fourth consecutive year, to 22.48% of sales.
Operating cash flow increased to 7.18% of sales, marking first time it exceeded
7% on an annual basis in Safeway's 70-year history.
Capital expenditures rose to $620 million.
1997
Completed Vons acquisition.
Began construction of new 762,000 sq. ft. distribution center in Maryland.
Cumulative fundraising total for Easter Seals, since becoming a corporate
sponsor in 1985, exceeded $50 million.
Contributed approximately $40 million worth of food and non-food products to
food banks in the U.S. and Canada.
Recorded positive identical-store sales for fifth year in a row.
O&A expense as percentage of sales declined 35 basis points on a pro forma basis
(to reflect acquisition of Vons), continuing a five-year trend.
Operating cash flow margin improved to 7.70% of sales.
Capital spending increased to $829 million.
[PHOTOGRAPH OF DOMINICK'S GROCERY BAG FILLED WITH PURCHASES]
[PHOTOGRAPH OF PRESS CLIPPING ON SAFEWAY'S ADDITION TO S&P 500]
1998
Stock split two-for-one in February.
Opened new distribution center in Maryland.
Signed definitive agreement to acquire Carr-Gottstein Foods Co.
[CARRS LOGO]
Acquired Dominick's Supermarkets, Inc.
Added to S&P 500 Index.
Identical-store sales increased 3.7%.
O&A expense margin declined 28 basis points to 22.56% of sales.
Operating cash flow as percentage of sales increased to 8.75%.
Capital expenditures exceeded $1 billion.
<PAGE> 4
Safeway has undergone significant change since reemerging as a publicly traded
company in mid-1990. Three years after the initial public stock offering,
following a prolonged period of disappointing operating and financial results, a
new management team set out to transform the company from an industry laggard
into the preeminent food and drug retailer in North America.
[SAFEWAY STOCK SYMBOL]
<PAGE> 5
Continued Strong Performance
During 1998, Safeway continued to be among the industry leaders in the following
key measures of financial performance:*
o Identical-store sales growth
o Expense ratio reduction
o Working capital management
o Operating cash flow margin
o Earnings per share growth
The value of Safeway common stock on the New York Stock Exchange at the close of
trading in 1998 rose to $60.94 per share, a gain of 92.7% from year-end 1997. We
have achieved these results by focusing on the three priorities detailed on the
following pages.
* Based on latest available information
<PAGE> 6
Controlling Expenses
[PHOTOGRAPH OF DOMINICK'S STORE EXTERIOR]
Operating and administrative expense as a percentage of sales declined for the
sixth consecutive year in 1998. This trend reflects ongoing efforts throughout
the company to streamline support functions, simplify work practices and
maintain labor cost parity. These efforts are focused on areas invisible to our
customers - procurement, distribution, manufacturing and administration.
We continuously seek ways to operate our business at lower cost.
[BAR GRAPH]
Improvement in Annual Operating and Administrative Expense Margin
(in basis points)
1994 68
1995 56
1996 48
1997* 35
1998 28
Our O&A expense-to-sales margin declined another 28 basis points in 1998,
continuing a six-year trend.
* Pro forma as defined on page 16.
WE BEGAN CONSOLIDATING CORPORATE ADMINISTRATIVE FUNCTIONS AT DOMINICK'S INTO
SAFEWAY'S OPERATIONS.
WE NEGOTIATED COMPETITIVE LABOR AGREEMENTS IN SEVERAL KEY MARKETS.
WE CONTINUED TO CONTROL THE FREQUENCY AND COST OF WORKERS' COMPENSATION CLAIMS
IN 1998.
ONGOING IMPROVEMENTS IN PROCUREMENT AND CATEGORY MANAGEMENT HAVE REDUCED OUR
COST OF GOODS SOLD AS A PERCENTAGE OF SALES.
<PAGE> 7
Increasing Sales
[BAR GRAPH]
Annual Identical-store Sales Growth
1994 4.4%
1995 4.6%
1996 5.1%
1997 1.3%
1998 3.1%
Our identical-store sales gains have been among the industry's highest in each
of the past five years.
By reinvesting savings from our cost-reduction efforts into the business, we
continued to drive top-line growth in 1998. Identical-store sales increased for
the sixth straight year, despite the persistence of very low food price
inflation in many of our operating areas. With the recently completed
acquisition of Dominick's and pending acquisition of Carr-Gottstein, we
anticipate significant opportunities to enhance Safeway's long-term sales
growth.
[PHOTOGRAPH OF CUSTOMER LOYALTY CARDS FROM SAFEWAY, VONS AND DOMINICK'S]
WITH THE DOMINICK'S ACQUISITION, COMPLETED IN JUST SIX WEEKS, WE INCREASED OUR
STORE COUNT AND ENTERED A NEW GEOGRAPHIC MARKET.
THE EXCHANGE OF BEST PRACTICES AMONG VONS, DOMINICK'S AND CORE SAFEWAY DIVISIONS
HAS RESULTED IN SIGNIFICANT IMPROVEMENTS IN ALL OPERATIONS.
SIX MORE DIVISIONS INTRODUCED THE SAFEWAY CLUB CARD IN 1998. ALL DIVISIONS NOW
HAVE A CARD PROGRAM TO ATTRACT AND REWARD LOYAL CUSTOMERS.
WE ADDED ANOTHER 139 NEW ITEMS TO OUR SAFEWAY SELECT LINE OF PREMIUM QUALITY
PRODUCTS, BRINGING THE TOTAL COUNT TO ALMOST 900 ITEMS.
<PAGE> 8
Managing Capital
[PHOTOGRAPH OF INTERIOR OF GROCERY WAREHOUSE]
Continued strong operating results enabled us to increase capital expenditures
again, to $1.2 billion in 1998 from $829 million the year before. Over the past
five years, we have invested $3.5 billion to modernize our stores, support
facilities, warehouse and trucking equipment, and information systems. Despite
the additional debt incurred to finance the Dominick's acquisition, our interest
coverage ratio rose to 9.11 times in 1998 from 7.18 times in 1997.
[BAR GRAPH]
Capital Expenditures* (in millions)
1994 $ 352.2
1995 503.2
1996 620.3
1997 829.4
1998 1,189.7
Capital spending has increased steadily each year since 1993, reflecting strong
operating results.
* Defined on page 14.
SAFEWAY, VONS AND DOMINICK'S OPENED 46 NEW STORES AND REMODELED 234 EXISTING
STORES.
WE OPENED A NEW 762,000 SQUARE FOOT DISTRIBUTION CENTER IN MARYLAND TO BETTER
SERVE OUR 123-STORE EASTERN DIVISION.
WE MAINTAINED NEGATIVE WORKING CAPITAL FOR THE FIFTH STRAIGHT YEAR BY MANAGING
INVENTORIES AND PAYABLES EFFECTIVELY.
WE REPLACED $560 MILLION OF HIGHER RATE LONG-TERM DEBT AT DOMINICK'S WITH LOWER
RATE BORROWINGS.
<PAGE> 9
- --------------------------------------------------------------------------------
COMPANY IN REVIEW
- --------------------------------------------------------------------------------
Safeway Inc. ("Safeway" or the "Company") is one of the largest food and drug
chains in North America, with 1,497 stores at year-end 1998.
The Company's U.S. retail operations are located principally in northern
California, southern California, Oregon, Washington, Colorado, Arizona, the
Chicago metropolitan area, and the Mid-Atlantic region. The Company's Canadian
retail operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, the Company has an
extensive network of distribution, manufacturing and food processing facilities.
In addition, Safeway has a 49% ownership interest in Casa Ley, S.A. de C.V.
("Casa Ley") which operates 77 food and general merchandise stores in western
Mexico.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S") In November 1998,
Safeway completed its acquisition of 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"). Dominick's is the second largest supermarket operator
in the Chicago metropolitan area with 114 stores, two distribution facilities
and a dairy processing plant. The Dominick's Acquisition is accounted for as a
purchase. Safeway funded the Dominick's Acquisition, including the repayment of
approximately $560 million of debt and lease obligations, with a combination of
bank borrowings and commercial paper. Dominick's sales for calendar year 1998
were $2.4 billion.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS") In August 1998, Safeway and
Carrs signed a definitive merger agreement in which Safeway will acquire all of
the outstanding shares of Carrs for $12.50 cash per share, or a total of
approximately $110 million. In addition, Carrs has approximately $220 million of
debt. The acquisition will be accounted for as a purchase and will be funded
initially through the issuance of commercial paper.
Carrs is Alaska's largest food and drug retailer, operating 49 stores as well as
the state's largest food warehouse and distribution operation, and largest
freight company. Carrs' sales for calendar year 1998 were $602 million.
The acquisition of Carrs is subject to a number of conditions, including the
approval of the holders of a majority of Carrs' outstanding shares, court
approval of a consent decree with the state of Alaska requiring the sale of six
Safeway stores and one Carrs store, and other customary closing conditions.
Carrs expects to schedule a shareholder meeting to vote on the transaction in
April 1999. Assuming satisfaction of all conditions, Safeway and Carrs expect to
close the transaction shortly after receiving shareholder approval and final
court approval of the consent decree.
STORES Safeway operates stores ranging in size from approximately 5,900 square
feet to over 90,000 square feet. The Company determines the size of a new store
based on a number of considerations, including the needs of the community the
store serves, the location and site plan, and the estimated return on capital
invested. Safeway's primary new store prototype is 55,000 square feet and is
designed to accommodate changing consumer needs and to achieve certain operating
efficiencies. Most stores offer a wide selection of both food and general
merchandise and feature a variety of specialty departments such as bakery,
delicatessen, floral and pharmacy. In most of Safeway's larger stores, specialty
departments are showcased in each corner and along the perimeter walls of the
store to create a pleasant shopping atmosphere.
Safeway continues to operate a number of smaller stores which also offer an
extensive selection of food and general merchandise, and generally include one
or more specialty departments. These stores remain an important part of the
Company's store network in smaller communities and certain other locations where
larger stores may not be feasible because of space limitations and/or community
needs or restrictions.
<PAGE> 10
The following table summarizes Safeway's stores by size at year-end 1998:
<TABLE>
<CAPTION>
Number Percent
of Stores of Total
--------- --------
<S> <C> <C>
Less than 30,000 square feet 348 23%
30,000 to 50,000 770 52
More than 50,000 379 25
----- ----
Total stores 1,497 100%
===== ====
</TABLE>
STORE OWNERSHIP At year-end 1998, Safeway owned approximately one-third of its
stores and leased its remaining stores. In recent years, the Company has
preferred ownership because it provides control and flexibility with respect to
financing terms, remodeling, expansions and closures.
MERCHANDISING Safeway's operating strategy is to provide value to its customers
by maintaining high store standards and a wide selection of high quality
products at competitive prices. To provide one-stop shopping for today's busy
shoppers, the Company emphasizes high quality produce and meat, as well as
specialty departments including in-store bakery, delicatessen, floral and
pharmacy.
Safeway has developed a line of approximately 900 premium corporate brand
products since 1993 under the "Safeway SELECT" banner. The award-winning Safeway
SELECT line is designed to offer premium quality products that the Company
believes are equal or superior in quality to comparable best-selling nationally
advertised brands, or that are unique to the category and not available from
national brand manufacturers. The Safeway SELECT line is being introduced in
Dominick's stores during the first quarter of 1999.
The Safeway SELECT line of products includes carbonated soft drinks; unique
salsas; the Indulgence line of cookies and other sweets; the Verdi line of fresh
and frozen pastas, pasta sauces and olive oils; Artisan fresh-baked breads;
Twice-the-Fruit yogurt; NutraBalance Pet Food; Ultra laundry detergents and dish
soaps; and Softly paper products. The Safeway SELECT line also includes an
extensive array of ice cream, frozen yogurt and sorbets; Healthy Advantage items
such as low-fat ice cream and low-fat cereal bars; and Gourmet Club frozen
entrees and hors d'oeuvres.
In addition, Safeway has repackaged over 2,500 corporate brand products
primarily under the Safeway, Lucerne and Mrs. Wright's labels.
MANUFACTURING AND WHOLESALE The principal function of manufacturing operations
is to purchase, manufacture and process private label merchandise sold in stores
operated by the Company. As measured by sales dollars, approximately one-
half of Safeway's private label merchandise is manufactured in Company-owned
plants, and the remainder is purchased from third parties.
During 1993, Safeway began a review to identify manufacturing facilities
that were not providing acceptable returns. This review resulted in the sale or
closure of 20 plants from 1993 through 1998 and the reorganization of an
administrative office during 1994. In 1998, Safeway opened a new manufacturing
facility in California to replace one that was closed in 1997. The ongoing
review of all remaining manufacturing facilities may result in additional plant
closures.
Safeway's Canadian subsidiary has a wholesale operation that distributes
both national brands and private label products to independent grocery stores
and institutional customers.
Safeway operated the following manufacturing and processing facilities at
year-end 1998:
<TABLE>
<CAPTION>
U.S. Canada
---- ------
<S> <C> <C>
Milk plants 8 3
Bread baking plants 6 2
Ice cream plants 5 2
Cheese and meat packaging plants 1 2
Soft drink bottling plants 4 --
Fruit and vegetable processing plants 2 3
Other food processing plants 3 1
Pet food plant 1 --
-- --
Total 30 13
== ==
</TABLE>
In addition, the Company operates laboratory facilities for quality
assurance and research and development in certain of its plants and at its U.S.
manufacturing headquarters in Walnut Creek, California.
DISTRIBUTION Each of Safeway's 11 retail operating areas is served by a regional
distribution center consisting of one or more facilities. Safeway has 15
distribution/warehousing centers (12 in the United States and three in Canada),
which collectively provide the majority of all products to Safeway stores.
Safeway's distribution centers in northern California and British Columbia are
operated by third parties. During 1998, Safeway completed construction of a
replacement distribution center in Maryland.
<PAGE> 11
CAPITAL EXPENDITURE PROGRAM
A component of Safeway's long-term strategy is its capital expenditure program.
The Company's capital expenditure program funds, among other things, new stores,
remodels, manufacturing plants, distribution facilities, and information
technology advances. In the last several years, Safeway management has
significantly strengthened its program to select and approve new capital
investments, resulting in improved returns on investment.
The table below reconciles cash paid for property additions reflected in
the Consolidated Statements of Cash Flows to Safeway's broader definition of
capital expenditures, and also details changes in the Company's store base
during such period:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for property
additions $1,075.2 $ 758.2 $ 541.8
Less: Purchases of
previously leased
properties (35.7) (28.2) (13.2)
Plus: Present value of all lease
obligations incurred 117.4 91.3 91.7
Mortgage notes assumed
in property acquisitions 32.8 0.9 -
Vons first-quarter
expenditures - 7.2 -
-------- -------- --------
Total capital expenditures $1,189.7 $ 829.4 $ 620.3
======== ======== ========
Capital expenditures as
a percent of sales 4.9% 3.7% 3.6%
Dominick's stores acquired 113 - -
Vons stores acquired - 316 -
Stores opened 46 37 30
Stores closed or sold 30 37 37
Remodels (Note 1) 234 181 141
Total retail square footage
at year-end (in millions) 61.6 53.2 40.7
- ----------------------------------------------- --------------------------------
Note 1: Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
- --------------------------------------------------------------------------------
</TABLE>
Improved operations and lower project costs have raised the return on
capital projects, allowing Safeway to increase capital expenditures to $1.2
billion in 1998 and open 46 stores, remodel 234 stores and complete construction
of the new distribution center in Maryland. In 1999, Safeway expects to spend
approximately $1.2 billion and open 55 to 60 new stores and complete
approximately 250 remodels.
PERFORMANCE-BASED COMPENSATION
The Company has performance-based compensation plans that cover
approximately 12,000 management and professional employees. Performance-based
compensation plans set overall bonus levels based upon both operating results
and working capital management. Individual bonuses are based on job performance.
Certain employees are covered by capital investment bonus plans which measure
the performance of capital projects based on operating performance over several
years.
MARKET RISK FROM FINANCIAL INSTRUMENTS
Safeway manages interest rate risk through the strategic use of fixed and
variable interest rate debt and, to a limited extent, interest rate derivatives.
At year-end 1998, Safeway's derivative instruments consisted of interest rate
cap agreements and an interest rate swap agreement. The cap agreements expire in
May 1999, and entitle Safeway to receive the excess of LIBOR over 7% on an $850
million notional amount. Under the swap agreement, which expires in the year
2007, Safeway pays interest of 6.2% on a $100 million notional amount and
receives a variable interest rate based on Federal Reserve rates quoted for
commercial paper. No derivatives are held for trading purposes.
The following table provides information by year of maturity about the
Company's other financial instruments that are sensitive to interest rate
changes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in millions) 1999 2000 2001 2002 2003 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper:
Principal _ _ _ $1,745.1 _ _
Weighted average
interest rate _ _ _ 5.99% _ _
Bank borrowings:
Principal $ 161.8 _ _ $ 89.1 _ _
Weighted average
interest rate 5.80% _ _ 5.57% _ _
Long-term debt:*
Principal $ 118.0 $ 427.5 $549.6 $ 37.8 $377.6 $1,015.9
Weighted average
interest rate 8.97% 5.93% 6.88% 8.95% 6.28% 7.22%
- --------------------------------------------------------------------------------
*Primarily fixed rate debt
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
- --------------------------------------------------------------------------------
FIVE-YEAR FINANCIAL SUMMARY INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS 53 Weeks 52 Weeks 52 Weeks 52 Weeks
(Dollars in millions, except per-share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Sales $ 24,484.2 $ 22,483.8 $ 17,269.0 $ 16,397.5 $ 15,626.6
========== ========== ========== ========== ==========
Gross profit 7,124.5 6,414.7 4,774.2 4,492.4 4,287.3
Operating and administrative expense (5,522.8) (5,135.0) (3,882.5) (3,765.0) (3,675.2)
---------- ---------- ---------- ---------- ----------
Operating profit 1,601.7 1,279.7 891.7 727.4 612.1
Interest expense (235.0) (241.2) (178.5) (199.8) (221.7)
Equity in earnings of unconsolidated
affiliates (Note 1) 28.5 34.9 50.0 26.9 27.3
Other income, net 1.7 2.9 4.4 2.0 6.4
---------- ---------- ---------- ---------- ----------
Income before income taxes
and extraordinary loss 1,396.9 1,076.3 767.6 556.5 424.1
Income taxes (590.2) (454.8) (307.0) (228.2) (173.9)
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss 806.7 621.5 460.6 328.3 250.2
Extraordinary loss, net of tax benefit
of $41.1, $1.3 and $6.7 -- (64.1) -- (2.0) (10.5)
---------- ---------- ---------- ---------- ----------
Net income $ 806.7 $ 557.4 $ 460.6 $ 326.3 $ 239.7
========== ========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss $ 1.59 $ 1.25 $ 0.97 $ 0.68 $ 0.51
Extraordinary loss -- (0.13) -- -- (0.02)
---------- ---------- ---------- ---------- ----------
Net income $ 1.59 $ 1.12 $ 0.97 $ 0.68 $ 0.49
========== ========== ========== ========== ==========
FINANCIAL STATISTICS
Identical-store sales increases (Note 2) 3.7% 1.3% 5.1% 4.6% 4.4%
Gross profit margin 29.10% 28.53% 27.65% 27.40% 27.44%
Operating and administrative expense margin 22.56% 22.84% 22.48% 22.96% 23.52%
Operating profit margin 6.5% 5.7% 5.2% 4.4% 3.9%
Capital expenditures (Note 3) $ 1,189.7 $ 829.4 $ 620.3 $ 503.2 $ 352.2
Depreciation and amortization 531.4 455.8 338.5 329.7 326.4
Total assets 11,389.6 8,493.9 5,545.2 5,194.3 5,022.1
Total debt 4,972.1 3,340.3 1,984.2 2,190.2 2,196.1
Stockholders' equity 3,082.1 2,149.0 1,186.8 795.5 643.8
Weighted average shares outstanding -
Diluted (in millions) 508.8 497.7 475.7 481.2 494.2
OTHER STATISTICS
Dominick's stores acquired during the year 113 -- -- -- --
Vons stores acquired during the year -- 316 -- -- --
Stores opened during the year 46 37 30 32 20
Stores closed or sold during the year 30 37 37 35 36
Total stores at year-end 1,497 1,368 1,052 1,059 1,062
Remodels completed during the year (Note 4) 234 181 141 108 71
Total retail square footage
at year-end (in millions) 61.6 53.2 40.7 40.1 39.5
</TABLE>
Note 1. Includes equity in Vons' earnings through the first quarter of 1997.
Note 2. Reflects sales increases for stores operating the entire management
period in both the current and prior periods. 1997 and 1996 identical
store sales exclude British Columbia stores, which were closed during
a labor dispute in 1996.
Note 3. Defined in the table on page 14 under "Capital Expenditure Program."
Note 4. Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
<PAGE> 13
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S")
In November 1998, Safeway completed its acquisition of 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"). Dominick's is the second largest
supermarket operator in the Chicago metropolitan area with 114 stores, two
distribution facilities and a dairy processing plant. Safeway funded the
Dominick's Acquisition, including the repayment of approximately $560 million of
debt and lease obligations, with a combination of bank borrowings and commercial
paper. Sales for fiscal 1998 were $2.4 billion.
INCOME BEFORE EXTRAORDINARY LOSS
(IN MILLIONS)
[LINE GRAPH]
1996 1997 1998
------ ------ ------
Income before extraordinary loss $460.6 $621.5 $806.7
MERGER WITH THE VONS COMPANIES, INC. ("VONS")
In April 1997, Safeway completed a merger with Vons pursuant to which the
Company issued 83.2 million shares of Safeway common stock for all of the shares
of Vons common stock that it did not already own (the "Vons Merger").
In connection with the Vons Merger, Safeway repurchased 64.0 million shares
of its common stock from a partnership affiliated with KKR & Co., L.L.C. at
$21.50 per share, for an aggregate purchase price of $1.376 billion. Safeway
funded the repurchase with bank borrowings.
PORTIONS OF 1998 SALES DOLLAR
[PIE CHART]
Operating profit 6.5%
Operating and administrative expense 22.6%
Cost of goods sold 70.9%
RESULTS OF OPERATIONS
Safeway's net income was $806.7 million ($1.59 per share) in 1998, $557.4
million ($1.12 per share) in 1997 and $460.6 million ($0.97 per share) in 1996.
In 1997, income before an extraordinary item related to debt refinancing was
$621.5 million ($1.25 per share).
Safeway's 1998 income statement includes Vons' operating results for the
full year and Dominick's operating results since approximately midway through
Safeway's fourth quarter. Safeway's 1997 income statement includes Vons'
operating results since the second quarter plus the effect of Safeway's 34.4%
equity interest in Vons in the first quarter of 1997. The 1996 income statement
reflects Safeway's 34.4% equity interest in Vons for the full year. In order to
facilitate an understanding of the Company's operations, this financial review
presents certain pro forma information based on the 1997 and 1996 combined
historical financial statements as if the Vons Merger had been effective as of
the beginning of 1997 and 1996. See Note B to the Company's 1998 consolidated
financial statements.
During the second quarter of 1997, Safeway was engaged in a 75-day labor
dispute affecting 74 stores in the Alberta, Canada operating area. The Company
estimates that the strike reduced 1997 net income by approximately $0.04 per
share. Labor disputes in the British Columbia and Denver operating areas reduced
1996 net income by an estimated $0.07 per share.
SALES Strong store operations helped to increase identical-store sales (stores
operating the entire year in both 1998 and 1997, excluding replacement stores)
3.7% in 1998, while comparable-store sales, which includes replacement stores,
increased 4.1%. In 1997, identical-store sales increased 1.3% while
comparable-store sales increased 2.2%. Total sales for the 52 weeks of 1998 were
$24.5 billion, compared to $22.5 billion for the 53 weeks of 1997 and $17.3
billion for the 52 weeks of 1996. Total sales increases are attributed to
comparable-store sales increases, the Vons Merger in 1997, and the Dominick's
Acquisition in 1998.
GROSS PROFIT Safeway's continuing improvement in buying practices and product
mix helped to increase gross profit to 29.10% of sales in 1998, from 28.53% in
1997 and 27.65% in 1996. On a pro forma basis, gross profit increased to 28.63%
in 1997 from 28.20% in 1996. Application of the LIFO method resulted in an
increase in cost of goods sold of $7.1 million in 1998, a decrease of $6.1
million in 1997, and an increase of $4.9 million in 1996.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense was
22.56% of sales in 1998 compared to 22.84% in 1997 and 22.48% in 1996. Safeway's
operating and administrative expense-to-sales ratio increased in 1997 because
Vons'
<PAGE> 14
operating and administrative expense ratio had historically been higher than
Safeway's. Increased sales and ongoing efforts to reduce or control expenses
improved this expense ratio in 1998. Goodwill amortization has increased to
$56.3 million in 1998 from $41.8 million in 1997 and $10.4 million in 1996
primarily as a result of the Vons Merger. On a pro forma basis, operating and
administrative expense declined 35 basis points to 22.95% in 1997 from 23.30% in
1996.
INTEREST EXPENSE Interest expense was $235.0 million in 1998, compared to $241.2
million in 1997 and $178.5 million in 1996. Interest expense increased in 1997
because of the debt incurred during the second quarter to repurchase stock in
connection with the Vons Merger. Interest expense in 1998 included debt incurred
in connection with the Dominick's Acquisition, which was partially offset by the
paydown of certain other indebtedness.
During 1997, Safeway recorded an extraordinary loss of $64.1 million ($0.13
per share) for the redemption of $589.0 million of Safeway's public debt, $285.5
million of Vons' public debt, and $40.0 million of medium-term notes. These
redemptions were financed with $600 million of new public senior debt securities
and the balance with commercial paper.
In 1997, Safeway entered into interest rate cap agreements which expire in
1999 and entitle the Company to receive from counterparties the amounts, if any,
by which interest at LIBOR on an $850 million notional amount exceeds 7%. The
unamortized cost to purchase the cap agreements was $0.6 million at year-end
1998.
As of year-end 1998, the Company had effectively converted $100.0 million
of its floating rate debt to fixed interest rate debt through an interest rate
swap agreement which expires in 2007. Under the swap agreement, Safeway pays
interest of 6.2% on the $100.0 million notional amount and receives a variable
interest rate based on Federal Reserve rates quoted for commercial paper.
Interest rate swap and cap agreements increased interest expense by $2.8 million
in 1998, $3.3 million in 1997 and $3.0 million in 1996.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES Safeway's investment in
affiliates consists of a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa
Ley"), which at year-end 1998 operated 77 food and general merchandise stores in
western Mexico. Through the first quarter of 1997, Safeway also held a 34.4%
interest in Vons. Safeway records its equity in earnings of unconsolidated
affiliates on a one-quarter delay basis.
Income from Safeway's equity investment in Casa Ley increased to $28.5
million in 1998, from $22.7 million in 1997 and $18.8 million in 1996. Casa
Ley's financial results have been improving since 1995, when Mexico suffered
from the adverse effects of high interest rates and inflation.
Equity in earnings of unconsolidated affiliates included Safeway's share of
Vons' earnings of $12.2 million in the first quarter of 1997 and $31.2 million
for the year in 1996.
LIQUIDITY AND FINANCIAL RESOURCES
Net cash flow from operations was $1,252.7 million in 1998, $1,221.6 million in
1997 and $825.2 million in 1996. Net cash flow from operations increased in 1997
largely due to increased net income and changes in working capital.
Cash flow used by investing activities was $2,186.4 million in 1998, $607.7
million in 1997 and $482.3 million in 1996. The increases in cash used by
investing activities is primarily due to the Dominick's Acquisition in 1998, as
well as increased capital expenditures in both 1998 and 1997. Safeway opened 46
new stores and remodeled 234 stores in 1998. In 1997, Safeway opened 37 new
stores and remodeled 181 stores. The Company built a new distribution center in
Maryland during 1997 and 1998, and opened a new manufacturing plant in
California in 1998.
Cash flow from financing activities was $903.4 million in 1998 primarily
due to increased borrowing related to the Dominick's Acquisition. Cash flow used
by financing activities was $614.6 million in 1997 and $337.5 million in 1996,
reflecting Safeway's reduction of total debt in 1996, followed by increased
borrowing related to the Vons Merger in 1997.
Net cash flow from operations as presented on the 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 non-cash 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. Operating cash flow also facilitates comparisons
of Safeway's results of operations with 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) 1998 1997 1996
------------------------------------------------------------------
Income before income taxes
and extraordinary loss $1,396.9 $1,076.3 $ 767.6
LIFO expense (income) 7.1 (6.1) 4.9
Interest expense 235.0 241.2 178.5
Depreciation and amortization 531.4 455.8 338.5
Equity in earnings of
unconsolidated affiliates (28.5) (34.9) (50.0)
-------- -------- --------
Operating cash flow $2,141.9 $1,732.3 $1,239.5
======== ======== ========
As a percent of sales 8.75% 7.70% 7.18%
======== ======== ========
As a multiple of interest
expense (interest
coverage ratio) 9.11x 7.18x 6.94x
======== ======== ========
<PAGE> 15
Total debt, including capital leases, increased to $4.97 billion at
year-end 1998 from $3.34 billion at year-end 1997 and $1.98 billion at year-end
1996, primarily due to the Dominick's Acquisition and Vons Merger. Annual debt
maturities over the next five years are set forth in Note C of the Company's
1998 consolidated financial statements.
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 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 will be 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
Safeway's Chief Information Officer, to coordinate the Company's year 2000
compliance efforts. The project group is staffed primarily with representatives
of Safeway'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 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 Company's regular operations. 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 80% complete at year-end 1998. The Company
estimates that all critical 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 identifying which systems and applications of Dominick's might
not be year 2000 compliant, and integrating those systems and applications into
its year 2000 project. The Company estimates that all critical systems and
applications of Dominick's will be year 2000 compliant by September 30, 1999.
The year 2000 project group is also examining Safeway'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 has begun 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 Safeway'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 is in the process of establishing and
implementing 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. Management expects to have a comprehensive
contingency plan established by March 31, 1999.
Through January 31, 1999, Safeway spent approximately $20.5 million to
address year 2000 compliance issues. The Company estimates that it will incur an
additional $12.5 million, for a total of $33.0 million, (including $8 million
for Dominick's) to address year 2000 compliance issues for Safeway and
Dominick's, which includes the estimated costs of all modifications, testing and
consultants' fees.
Management believes that, should Safeway 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 store level. The Company does not
anticipate that any such impact would be material to Safeway's liquidity or
results of operations.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements relating to,
among other things, capital expenditures, cost reduction, operating improvements
and year 2000 compliance. Such statements are subject to inherent uncertainties
and risks, including among others: business and economic conditions generally in
the Company's operating regions; pricing pressures and other competitive
factors; results of the Company's programs to reduce costs; the ability to
integrate Vons and Dominick's and continue to achieve operating improvements;
relations with union bargaining units; and the availability and terms of
financing. Consequently, actual events and results may vary significantly from
those included in or contemplated or implied by such statements.
<PAGE> 16
Safeway Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS 53 Weeks 52 Weeks
(In millions, except per-share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 24,484.2 $ 22,483.8 $ 17,269.0
Cost of goods sold (17,359.7) (16,069.1) (12,494.8)
---------- ---------- ----------
Gross profit 7,124.5 6,414.7 4,774.2
Operating and administrative expense (5,522.8) (5,135.0) (3,882.5)
---------- ---------- ----------
Operating profit 1,601.7 1,279.7 891.7
Interest expense (235.0) (241.2) (178.5)
Equity in earnings of unconsolidated affiliates 28.5 34.9 50.0
Other income, net 1.7 2.9 4.4
---------- ---------- ----------
Income before income taxes and extraordinary loss 1,396.9 1,076.3 767.6
Income taxes (590.2) (454.8) (307.0)
---------- ---------- ----------
Income before extraordinary loss 806.7 621.5 460.6
Extraordinary loss related to early retirement of debt,
net of income tax benefit of $41.1 -- (64.1) --
---------- ---------- ----------
Net income $ 806.7 $ 557.4 $ 460.6
========== ========== ==========
Basic earnings per share:
Income before extraordinary loss $ 1.67 $ 1.35 $ 1.06
Extraordinary loss -- (0.14) --
---------- ---------- ----------
Net income $ 1.67 $ 1.21 $ 1.06
========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss $ 1.59 $ 1.25 $ 0.97
Extraordinary loss -- (0.13) --
---------- ---------- ----------
Net income $ 1.59 $ 1.12 $ 0.97
========== ========== ==========
Weighted average shares outstanding - basic 482.8 462.3 436.0
Weighted average shares outstanding - diluted 508.8 497.7 475.7
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
Safeway Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR-END Year-End
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 45.7 $ 77.2
Receivables 200.1 180.8
Merchandise inventories, net of LIFO
reserve of $80.2 and $73.1 1,856.0 1,613.2
Prepaid expenses and other current assets 218.1 158.5
--------- ---------
Total current assets 2,319.9 2,029.7
--------- ---------
Property:
Land 794.1 722.2
Buildings 2,069.9 1,719.9
Leasehold improvements 1,498.3 1,247.3
Fixtures and equipment 3,282.6 2,663.1
Property under capital leases 379.2 329.2
--------- ---------
8,024.1 6,681.7
Less accumulated depreciation and amortization (2,841.5) (2,566.4)
--------- ---------
Total property, net 5,182.6 4,115.3
Goodwill, net of accumulated amortization of $211.0 and $157.0 3,348.0 1,824.7
Prepaid pension costs 369.6 341.4
Investment in unconsolidated affiliate 115.2 97.7
Other assets 54.3 85.1
--------- ---------
Total assets $11,389.6 $ 8,493.9
========= =========
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
YEAR-END Year-End
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures $ 279.8 $ 277.4
Current obligations under capital leases 41.7 22.0
Accounts payable 1,595.9 1,391.8
Accrued salaries and wages 348.9 310.5
Other accrued liabilities 627.3 536.9
--------- ---------
Total current liabilities 2,893.6 2,538.6
--------- ---------
Long-term debt:
Notes and debentures 4,242.6 2,817.8
Obligations under capital leases 408.0 223.1
--------- ---------
Total long-term debt 4,650.6 3,040.9
Deferred income taxes 216.9 297.0
Accrued claims and other liabilities 546.4 468.4
--------- ---------
Total liabilities 8,307.5 6,344.9
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 550.9 and 537.4 shares outstanding 5.5 5.3
Additional paid-in capital 2,599.9 2,467.4
Accumulated other comprehensive (loss) income (19.7) 0.6
Retained earnings 1,925.0 1,315.0
--------- ---------
4,510.7 3,788.3
Less: Treasury stock at cost; 60.6 and 61.2 shares (1,302.6) (1,316.6)
Unexercised warrants purchased (126.0) (322.7)
--------- ---------
Total stockholders' equity 3,082.1 2,149.0
--------- ---------
Total liabilities and stockholders' equity $11,389.6 $ 8,493.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 19
Safeway Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS 53 Weeks 52 Weeks
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 806.7 $ 557.4 $ 460.6
Reconciliation to net cash flow from operations:
Extraordinary loss related to early retirement of debt,
before income tax benefit -- 105.2 --
Depreciation and amortization 531.4 455.8 338.5
Amortization of deferred finance costs 1.6 1.7 1.8
Deferred income taxes 59.4 55.9 113.9
LIFO expense (income) 7.1 (6.1) 4.9
Equity in earnings of unconsolidated affiliates (28.5) (34.9) (50.0)
Net pension (income) expense (18.3) (4.1) 4.2
Contributions to Canadian pension plans (6.8) (10.0) (10.6)
Decrease in accrued claims and other liabilities (17.5) (13.9) (17.6)
Other 13.3 (12.4) (12.6)
Changes in working capital items:
Receivables (5.5) 25.8 (8.5)
Inventories at FIFO cost (48.0) 37.5 (99.3)
Prepaid expenses and other current assets (36.9) 2.7 (35.1)
Payables and accruals (5.3) 61.0 135.0
-------- -------- --------
Net cash flow from operations 1,252.7 1,221.6 825.2
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for property additions (1,075.2) (758.2) (541.8)
Proceeds from sale of property 47.6 75.6 60.8
Net cash used to acquire Dominick's (1,144.9) -- --
Net cash acquired in merger with Vons -- 55.3 --
Other (13.9) 19.6 (1.3)
-------- -------- --------
Net cash flow used by investing activities (2,186.4) (607.7) (482.3)
-------- -------- --------
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
52 WEEKS 53 Weeks 52 Weeks
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Additions to short-term borrowings $ 251.7 $ 414.5 $ 227.2
Payments on short-term borrowings (299.9) (287.5) (280.4)
Additions to long-term borrowings 2,722.3 4,254.3 387.1
Payments on long-term borrowings (1,789.9) (3,553.5) (552.0)
Purchase of treasury stock -- (1,376.0) --
Purchase of unexercised warrants -- -- (126.5)
Net proceeds from exercise of warrants and stock options 34.5 43.9 12.6
Premiums paid on early retirement of debt -- (97.7) --
Other (15.3) (12.6) (5.5)
-------- -------- --------
Net cash flow from (used by) financing activities 903.4 (614.6) (337.5)
-------- -------- --------
Effect of changes in exchange rates on cash (1.2) (1.8) (0.5)
-------- -------- --------
Increase (decrease) in cash and equivalents (31.5) (2.5) 4.9
CASH AND EQUIVALENTS
Beginning of year 77.2 79.7 74.8
-------- -------- --------
End of year $ 45.7 $ 77.2 $ 79.7
======== ======== ========
OTHER CASH FLOW INFORMATION
Cash payments during the year for:
Interest $ 241.0 $ 263.6 $ 181.8
Income taxes, net of refunds 468.7 214.6 156.7
NONCASH INVESTING AND FINANCING ACTIVITIES
Stock issued for acquisition of Vons -- 1,693.0 --
Tax benefit from stock options exercised 85.2 42.4 51.9
Capital lease obligations entered into 34.2 37.3 15.5
Mortgage notes assumed in property additions 32.8 0.9 --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
Safeway Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Unexercised
Common Stock Paid-In Treasury Stock Warrants
(In millions) Shares Amount Capital Shares Cost Purchased
------- -------- ---------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, year-end 1995 427.4 $ 4.2 $ 682.8 $ (196.2)
Net income -- -- -- --
Translation adjustments -- -- -- --
Options and warrants
exercised 15.4 0.2 64.3 --
Stock bonuses -- -- 1.0 --
Unexercised warrants
purchased -- -- -- (126.5)
------- -------- -------- --------
Balance, year-end 1996 442.8 4.4 748.1 (322.7)
Net income -- -- -- --
Translation adjustments -- -- -- --
Equity in Vons' premerger
earnings due to timing
of recording earnings -- -- -- --
Shares issued for
acquisition of Vons 83.2 0.8 1,692.2 --
Treasury stock purchased -- -- -- (64.0) $(1,376.0) --
Options and warrants
exercised 11.4 0.1 26.8 2.8 59.4 --
Stock bonuses -- -- 0.3 -- -- --
------- -------- -------- ------- ---------- --------
Balance, year-end 1997 537.4 5.3 2,467.4 (61.2) (1,316.6) (322.7)
Net income -- -- -- -- -- --
Translation adjustments -- -- -- -- -- --
Dominick's options converted -- -- 27.0 -- -- --
Options and warrants
exercised 13.5 0.2 105.5 0.6 14.0 --
Warrants canceled -- -- -- -- -- 196.7
------- -------- -------- ------- ---------- --------
Balance, year-end 1998 550.9 $ 5.5 $2,599.9 (60.6) $(1,302.6) $ (126.0)
======= ======== ======== ======= ========== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Total Total
Retained Income Stockholders' Comprehensive
(In millions) Earnings (Loss) Equity Income
-------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, year-end 1995 $ 284.4 $ 20.3 $ 795.5
Net income 460.6 -- 460.6 $ 460.6
Translation adjustments -- (8.3) (8.3) (8.3)
Options and warrants
exercised -- -- 64.5 --
Stock bonuses -- -- 1.0 --
Unexercised warrants
purchased -- -- (126.5) --
-------- -------- -------- --------
Balance, year-end 1996 745.0 12.0 1,186.8 $ 452.3
========
Net income 557.4 557.4 $ 557.4
Translation adjustments -- (11.4) (11.4) (11.4)
Equity in Vons' premerger
earnings due to timing
of recording earnings 12.6 -- 12.6 --
Shares issued for
acquisition of Vons -- -- 1,693.0 --
Treasury stock purchased -- -- (1,376.0) --
Options and warrants
exercised -- -- 86.3 --
Stock bonuses -- -- 0.3 --
-------- -------- -------- --------
Balance, year-end 1997 1,315.0 0.6 2,149.0 $ 546.0
========
Net income 806.7 -- 806.7 $ 806.7
Translation adjustments -- (20.3) (20.3) (20.3)
Dominick's options converted -- -- 27.0 --
Options and warrants
exercised -- -- 119.7 --
Warrants canceled (196.7) -- -- --
-------- -------- -------- --------
Balance, year-end 1998 $1,925.0 $ (19.7) $3,082.1 $ 786.4
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 22
Safeway Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY Safeway Inc. ("Safeway" or the "Company") is one of the largest food
and drug chains in North America, with 1,497 stores as of year-end 1998.
Safeway's U.S. retail operations are located principally in northern California,
southern California, Oregon, Washington, Colorado, Arizona, the Chicago
metropolitan area and the Mid-Atlantic region . The Company's Canadian retail
operations are located principally in British Columbia, Alberta and
Manitoba/Saskatchewan. In support of its retail operations, the Company has an
extensive network of distribution, manufacturing and food processing facilities.
As discussed in Note B, in November 1998 the Company acquired Dominick's
Supermarkets, Inc. ("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 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.
Also discussed in Note B, in August 1998 Safeway and Carr-Gottstein Foods
Co. ("Carrs") signed a definitive merger agreement in which Safeway will acquire
all of the outstanding shares of Carrs for $12.50 cash per share, or a total of
approximately $110 million (the "Carrs Acquisition").
In April 1997, Safeway completed a merger with The Vons Companies, Inc.
("Vons") pursuant to which the Company issued 83.2 million shares of Safeway
common stock for all of the shares of Vons common stock that it did not already
own (the "Vons Merger"). Beginning in the second quarter of 1997, Safeway's
consolidated financial statements include Vons' financial results.
In addition to these operations, the Company has a 49% ownership interest
in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 77 food and general
merchandise stores in western Mexico.
BASIS OF CONSOLIDATION The consolidated financial statements include Safeway
Inc., a Delaware corporation, and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. The Company's investment in Casa Ley is reported using the equity
method. Prior to the Vons Merger in the second quarter of 1997, the Company's
investment in Vons was reported using the equity method.
FISCAL YEAR The Company's fiscal year ends on the Saturday nearest December 31.
The last three fiscal years consist of the 52-week period ended January 2, 1999,
the 53-week period ended January 3, 1998 and 52-week period ended December 28,
1996.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of the Company's
Canadian subsidiaries and Casa Ley are translated into U.S. dollars at year-end
rates of exchange, and income and expenses are translated at average rates
during the year. Adjustments resulting from translating financial statements
into U.S. dollars are reported, net of applicable income taxes, as a separate
component of comprehensive income in the Statements of Stockholders' Equity and
Comprehensive Income.
MERCHANDISE INVENTORIES Merchandise inventory of $1,110 million at year-end 1998
and $1,118 million at year-end 1997 is valued at the lower of cost on a last-in,
first-out ("LIFO") basis or market value. Such LIFO inventory had a replacement
or current cost of $1,190 million at year-end 1998 and $1,191 million at
year-end 1997. Liquidations of LIFO layers during the three years reported did
not have a significant effect on the results of operations. All remaining
inventory is valued at the lower of cost on a first-in, first-out ("FIFO") basis
or market value. The FIFO cost of inventory approximates replacement or current
cost.
PROPERTY AND DEPRECIATION Property is stated at cost. Depreciation expense on
buildings and equipment is computed on the straight-line method using the
following lives:
Stores and other buildings 10 to 30 years
Fixtures and equipment 3 to 15 years
Property under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the remaining terms of the lease or the
estimated useful lives of the assets.
<PAGE> 23
SELF-INSURANCE The Company is primarily self-insured for workers' compensation,
automobile and general liability costs. The self-insurance liability is
determined actuarially, based on claims filed and an estimate of claims incurred
but not yet reported. The present value of such claims was accrued using a
discount rate of 5.5% in 1998 and 1997. The current portion of the
self-insurance liability of $107.3 million at year-end 1998 and $96.3 million at
year-end 1997 is included in other accrued liabilities in the consolidated
balance sheets. The long-term portion of $265.5 million at year-end 1998 and
$230.7 million at year-end 1997 is included in accrued claims and other
liabilities. Claims payments were $98.2 million in 1998, $100.0 million in 1997
and $66.7 million in 1996. The total undiscounted liability was $413.1 million
at year-end 1998 and $365.5 million at year-end 1997.
INCOME TAXES The Company provides a deferred tax expense or benefit equal to the
change in the deferred tax liability during the year in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred income taxes represent tax credit carryforwards and
future net tax effects resulting from temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
STATEMENT OF CASH FLOWS Short-term investments with original maturities of less
than three months are considered to be cash equivalents. Borrowings with
original maturities of less than three months are presented net of related
repayments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS As discussed in Note E, the Company has
entered into interest rate swap and cap agreements to limit the Company's
exposure to changes in market interest rates. Interest rate swap agreements
involve the exchange with a counterparty of fixed and floating-rate interest
payments periodically over the life of the agreements without exchange of the
underlying notional principal amounts. The differential to be paid or received
is recognized over the life of the agreements as an adjustment to interest
expense. Interest rate cap agreements lock in a maximum interest rate on a
notional principal amount by paying a fee to a counterparty in exchange for the
counterparty's promise to pay to Safeway the difference between a fixed rate and
a floating rate of interest. The fee paid to the counterparty is deferred and
amortized as an adjustment to interest expense over the life of the agreement.
The Company's counterparties are major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles
require the disclosure of the fair value of certain financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Safeway estimated the fair values presented below using
appropriate valuation methodologies and market information available as of
year-end. Considerable judgment is required to develop estimates of fair value,
and the estimates presented are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies could have a material effect on
the estimated fair values. Additionally, these fair values were estimated at
year-end, and current estimates of fair value may differ significantly from the
amounts presented. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable and short-term debt.
The carrying amount of these items approximates fair value.
Long-term debt. Market values quoted on the New York Stock Exchange are used to
estimate the fair value of publicly traded debt. To estimate the fair value of
debt issues that are not quoted on an exchange, the Company uses those interest
rates that are currently available to it for issuance of debt with similar terms
and remaining maturities. At year-end 1998, the estimated fair value of debt was
$4.6 billion compared to a carrying value of $4.5 billion. At year-end 1997, the
estimated fair value of debt was $3.2 billion compared to a carrying value of
$3.1 billion.
Off-balance sheet instruments. The fair value of interest rate swap and cap
agreements is the amount at which they could be settled based on estimates
obtained from dealers. At year-end 1998 and 1997, net unrealized losses on such
agreements were $7.0 million and $0.4 million.
IMPAIRMENT OF LONG-LIVED ASSETS When Safeway decides to close a store or other
facility, the Company accrues estimated losses, if any, which may include lease
payments or other costs of holding the facility, net of estimated future income
(primarily sublease income) in accordance with the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." Safeway had an accrued liability of $84.6 million at year-end
1998 and $72.0 million at year-end 1997 for the anticipated future closure of
stores and other facilities, which is included in Accrued Claims and Other
Liabilities in the Company's consolidated balance sheets.
<PAGE> 24
GOODWILL Goodwill was $3.3 billion at year-end 1998 and $1.8 billion at year-end
1997, and is being amortized on a straight-line basis over its estimated useful
life. If it became probable that the projected future undiscounted cash flows of
acquired assets were less than the carrying value of the goodwill, Safeway would
recognize an impairment loss in accordance with the provisions of SFAS No. 121.
Goodwill amortization was $56.3 million in 1998, $41.8 million in 1997 and $10.4
million in 1996. Goodwill and related amortization has increased due to the Vons
Merger and Dominick's Acquisition as discussed in Note B.
STOCK-BASED COMPENSATION Safeway accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" are set
forth in Note F.
NEW ACCOUNTING STANDARDS In 1998, Safeway adopted the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 defines the types of computer software project costs
that may be capitalized. All other costs must be expensed in the period
incurred. In order for costs to be capitalized, the computer software project
must be intended to create a new system or add identifiable functionality to an
existing system. Adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board 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 Safeway beginning in the year 2000. Although Safeway has not fully
assessed the implications of this new statement, the Company believes adoption
of this statement will not have a material impact on its consolidated financial
statements.
In April 1998, the AICPA finalized 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, which is
effective in the first quarter of 1999, is not expected to have a material
impact on Safeway's consolidated financial statements.
NOTE B: ACQUISITIONS
In November 1998, Safeway completed its acquisition of 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 was accounted for as a purchase and resulted
in additional goodwill of $1.6 billion which is being amortized over 40 years.
Safeway funded the Dominick's Acquisition, including the repayment of
approximately $560 million of debt and lease obligations, with a combination of
bank borrowings and commercial paper.
In April 1997, Safeway completed the Vons Merger pursuant to which the
Company issued 83.2 million shares of Safeway common stock valued at $1.7
billion for all of the shares of Vons common stock that it did not already own.
The Vons Merger was accounted for as a purchase and resulted in additional
goodwill of $1.5 billion which is being amortized over 40 years. In connection
with the Vons Merger, Safeway repurchased 64.0 million shares of its common
stock from a partnership affiliated with KKR & Co., L.L.C. ("KKR") at $21.50 per
share, for an aggregate purchase price of $1.376 billion. Safeway funded the
repurchase with bank borrowings.
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of operations of Safeway, Vons and
Dominick's, as if the Vons Merger and the Dominick's Acquisition had occurred as
of the beginning of each year presented. 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 beginning of the years presented. Pro forma
adjustments were applied to the respective historical financial statements to
account for the Vons Merger and the Dominick's Acquisition as purchases. 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>
Pro Forma
--------------------------
52 WEEKS 53 WEEKS
(In millions, expect per-share amounts) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Sales $ 26,487.6 $ 26,315.9
Income before extraordinary loss 742.1 510.6
Net income 742.1 423.1
Diluted earnings per share:
Income before extraordinary loss $ 1.46 $ 1.01
Net income 1.46 0.84
</TABLE>
<PAGE> 25
In August 1998, Safeway and Carrs signed a definitive merger agreement in
which Safeway will acquire all of the outstanding shares of Carrs for $12.50
cash per share, or a total of approximately $110 million. In addition, Carrs has
approximately $220 million of debt. The acquisition will be accounted for as a
purchase and will be funded initially through the issuance of commercial paper.
The acquisition of Carrs is subject to a number of conditions, including
the approval of the holders of a majority of Carrs' outstanding shares, court
approval of a consent decree with the state of Alaska requiring the sale of six
Safeway stores and one Carrs store, and other customary closing conditions.
Carrs expects to schedule a shareholder meeting to vote on the transaction in
April 1999. Assuming satisfaction of all conditions, Safeway and Carrs expect to
close the transaction shortly after receiving shareholder approval and final
court approval of the consent decree.
NOTE C: FINANCING
Notes and debentures were composed of the following at year-end (in millions):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Commercial paper $1,745.0 $1,473.5
Bank credit agreement, unsecured 89.1 238.2
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 --
5.875% Notes due 2001, unsecured 400.0 --
6.05% Notes due 2003, unsecured 350.0 --
6.50% Notes due 2008, unsecured 250.0 --
9.35% Senior Subordinated Notes
due 1999, unsecured 66.7 66.7
10% Senior Subordinated Notes
due 2001, unsecured 79.9 79.9
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 115.9 150.8
Other notes payable, unsecured 102.7 114.8
Medium-term notes, unsecured 25.5 25.5
Short-term bank borrowings,
unsecured 161.8 210.0
-------- --------
4,522.4 3,095.2
Less current maturities (279.8) (277.4)
-------- --------
Long-term portion $4,242.6 $2,817.8
======== ========
</TABLE>
COMMERCIAL PAPER The amount of commercial paper borrowings is limited to the
unused borrowing capacity under the bank credit agreement. Commercial paper is
classified as long-term because the Company intends to and has the ability to
refinance these borrowings on a long-term basis through either continued
commercial paper borrowings or utilization of the bank credit agreement, which
matures in 2002. The weighted average interest rate on commercial paper
borrowings was 5.75% during 1998 and 5.99% at year-end 1998.
BANK CREDIT AGREEMENT Safeway's total borrowing capacity under the bank credit
agreement is $2.9 billion. Of the $2.9 billion credit line, $2.0 billion matures
in 2002 and has two one-year extension options, and $0.9 million is renewable
annually through 2004. The restrictive covenants of the bank credit agreement
limit Safeway with respect to, among other things, creating liens upon its
assets and disposing of material amounts of assets other than in the ordinary
course of business. Safeway is also required to meet certain financial tests
under the bank credit agreement. At year-end 1998, the Company had total unused
borrowing capacity under the bank credit agreement of $ 2.7 billion ($1.0
billion excluding that portion of the bank credit agreement reserved to back up
commercial paper borrowings).
U.S. borrowings under the bank credit agreement carry interest at one of
the following rates selected by the Company: (i) the prime rate; (ii) a rate
based on rates at which Eurodollar deposits are offered to first-class banks by
the lenders in the bank credit agreement plus a pricing margin based on the
Company's debt rating or interest coverage ratio (the "Pricing Margin"); or
(iii) rates quoted at the discretion of the lenders. Canadian borrowings
denominated in U.S. dollars carry interest at one of the following rates
selected by the Company: (a) the Canadian base rate; or (b) the Canadian
Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in
Canadian dollars carry interest at one of the following rates selected by the
Company: (i) the Canadian prime rate or (ii) the rate for Canadian bankers
acceptances plus the Pricing Margin.
The weighted average interest rate on borrowings under the bank credit
agreement was 6.69% during 1998 and 5.57% at year-end 1998.
<PAGE> 26
SENIOR SECURED INDEBTEDNESS The 9.30% Senior Secured Debentures due 2007 are
secured by a deed of trust which created a lien on the land, buildings and
equipment owned by Safeway at its distribution center in Tracy, California.
SENIOR UNSECURED INDEBTEDNESS In November 1998, Safeway issued senior unsecured
debt securities consisting of 5.75% Notes due 2000, 5.875% Notes due 2001, 6.05%
Notes due 2003, and 6.50% Notes due 2008. In 1997 Safeway issued senior
unsecured debt securities consisting of 6.85% Senior Notes due 2004, 7.00%
Senior Notes due 2007, and 7.45% Senior Debentures due 2027.
SENIOR SUBORDINATED INDEBTEDNESS The 9.35% Senior Subordinated Notes due 1999,
10% Senior Subordinated Notes due 2001, 9.65% Senior Subordinated Debentures due
2004, and 9.875% Senior Subordinated Debentures due 2007 are subordinated in
right of payment to, among other things, the Company's borrowings under the bank
credit agreement, the 9.30% Senior Secured Debentures, the Senior Unsecured
Indebtedness, and mortgage notes payable.
MORTGAGE NOTES PAYABLE Mortgage notes payable at year-end 1998 have remaining
terms ranging from one to 17 years, have a weighted average interest rate of
9.36% and are secured by properties with a net book value of approximately $225
million.
OTHER NOTES PAYABLE Other notes payable at year-end 1998 have remaining terms
ranging from one to 13 years and a weighted average interest rate of 7.12%.
REDEMPTIONS During 1997, the Company redeemed $588.5 million of the Senior
Subordinated Indebtedness, $285.5 million of Vons' public debt, and $40.0
million of medium-term notes using proceeds from the Senior Unsecured
Indebtedness and commercial paper program. In connection with these redemptions,
Safeway recorded an extraordinary loss of $64.1 million ($0.13 per share). The
extraordinary loss represents the payment of redemption premiums and the
write-off of deferred finance costs, net of the related tax benefits.
ANNUAL DEBT MATURITIES As of year-end 1998, annual debt maturities were as
follows (in millions):
<TABLE>
<S> <C>
1999 $ 279.8
2000 427.5
2001 549.6
2002 1,872.0
2003 377.6
Thereafter 1,015.9
---------
$ 4,522.4
=========
</TABLE>
LETTERS OF CREDIT The Company had letters of credit of $143.9 million
outstanding at year-end 1998 of which $63.2 million were issued under the bank
credit agreement. The letters of credit are maintained primarily to support
performance, payment, deposit or surety obligations of the Company. The Company
pays commitment fees ranging from 0.25% to 1.00% on the outstanding portion of
the letters of credit.
NOTE D: LEASE OBLIGATIONS
Approximately two-thirds of the premises that the Company occupies are leased.
The Company had approximately 1,400 leases at year-end 1998, including
approximately 220 which are capitalized for financial reporting purposes. Most
leases have renewal options, some with terms and conditions similar to the
original lease, others with reduced rental rates during the option periods.
Certain of these leases contain options to purchase the property at amounts that
approximate fair market value. As of year-end 1998, future minimum rental
payments applicable to non-cancelable capital and operating leases with
remaining terms in excess of one year were as follows (in millions):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- ---------------------------------------------------------------
<S> <C> <C>
1999 $ 87.9 $ 236.8
2000 84.5 231.5
2001 87.0 207.3
2002 70.1 210.7
2003 67.4 200.2
Thereafter 404.2 1,821.9
-------- ---------
Total minimum lease payments 801.1 $ 2,908.4
Less amounts representing interest (351.4) =========
Present value of net minimum --------
lease payments 449.7
Less current obligations (41.7)
--------
Long-term obligations $ 408.0
========
</TABLE>
Future minimum lease payments under non-cancelable capital and operating
lease agreements have not been reduced by minimum sublease rental income of
$210.5 million.
Amortization expense for property under capital leases was $22.3 million in
1998, $21.1 million in 1997 and $17.9 million in 1996. Accumulated amortization
of property under capital leases was $136.1 million at year-end 1998 and $153.4
million at year-end 1997.
The following schedule shows the composition of total rental expense for
all operating leases (in millions). In general, contingent rentals are based on
individual store sales.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Property leases:
Minimum rentals $ 208.7 $ 206.0 $ 138.2
Contingent rentals 19.2 12.3 9.9
Less rentals from
subleases (12.0) (13.4) (11.1)
--------- --------- ---------
215.9 204.9 137.0
Equipment leases 22.4 19.3 21.0
--------- --------- ---------
$ 238.3 $ 224.2 $ 158.0
========= ========= =========
</TABLE>
<PAGE> 27
NOTE E: INTEREST EXPENSE
Interest expense consisted of the following (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial paper $ 83.7 $ 43.8
Bank credit agreement 10.8 36.9 $ 16.4
9.30% Senior Secured
Debentures 2.3 5.3 6.6
6.85% Senior Notes 13.7 4.1 --
7.00% Senior Notes 17.5 5.2 --
7.45% Senior Debentures 11.2 3.4 --
5.75% Notes 3.5 -- --
5.875% Notes 3.6 -- --
6.05% Notes 3.2 -- --
6.50% Notes 2.5 -- --
9.35% Senior Subordinated Notes 6.2 12.3 15.3
10% Senior Subordinated Notes 8.0 19.3 24.1
9.65% Senior Subordinated
Debentures 7.8 17.8 22.0
9.875% Senior Subordinated
Debentures 2.4 8.2 10.9
10% Senior Notes 0.6 4.3 5.9
Vons Debentures -- 10.2 --
Mortgage notes payable 12.1 22.0 33.0
Other notes payable 9.5 9.9 11.9
Medium-term notes 2.1 4.4 6.0
Short-term bank borrowings 10.6 8.8 5.1
Obligations under capital leases 27.8 26.0 20.8
Amortization of deferred
finance costs 1.6 1.7 1.8
Interest rate swap and cap
agreements 2.8 3.3 3.0
Capitalized interest (8.5) (5.7) (4.3)
------- ------- -------
$ 235.0 $ 241.2 $ 178.5
======= ======= =======
</TABLE>
In 1997 the Company entered into interest rate cap agreements which entitle
Safeway to receive the excess, if any, of LIBOR over 7% on an $850 million
notional amount. The cap agreements expire in May 1999. The unamortized cost to
purchase the cap agreements was $0.6 million at year-end 1998.
Also in 1997, the Company entered into an interest rate swap agreement with
a notional amount of $100.0 million. Under the swap agreement, Safeway pays
interest of 6.2% on the $100.0 million notional amount and receives a variable
interest rate based on Federal Reserve rates quoted for commercial paper. The
agreement expires in the year 2007. At year-end 1998 and 1997, the net
unrealized loss on the interest rate swap agreement was $7.0 million and $0.4
million.
The Company is not subject to credit risk because the notional amounts do
not represent cash flows. The Company is subject to risk from nonperformance of
the counterparties to the swap and cap agreements in the amount of any interest
differential to be received. Because the Company monitors the credit ratings of
its counterparties, which are limited to major financial institutions, Safeway
does not anticipate nonperformance by the counterparties.
Because the Company intends to hold these agreements as hedges for the term
of the agreements, the market risk associated with changes in interest rates
should not be significant.
NOTE F: CAPITAL STOCK
SHARES AUTHORIZED AND ISSUED Authorized preferred stock consists of 25 million
shares of which none was outstanding during 1998, 1997 or 1996. Authorized
common stock consists of 1.5 billion shares at $0.01 par value. Common stock
outstanding was 490.3 million shares (net of 60.6 million shares of treasury
stock) at year-end 1998 and 476.2 million shares (net of 61.2 million shares of
treasury stock) at year-end 1997.
STOCK OPTION PLANS Under Safeway's stock option plans, the Company may grant
incentive and non-qualified options to purchase common stock at an exercise
price equal to or greater than the fair market value at the grant date, as
determined by the Compensation and Stock Option Committee of the Board of
Directors. Options generally vest over seven years. Vested options are
exercisable in part or in full at any time prior to the expiration date of 10 to
15 years from the date of the grant.
<PAGE> 28
Activity in the Company's stock option plans for the three-year period ended
January 2, 1999 was as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, year-end 1995 44,330,644 $ 3.52
1996 Activity:
Granted 3,991,984 16.65
Canceled (724,454) 5.07
Exercised (8,825,018) 2.04
----------
Outstanding, year-end 1996 38,773,156 5.07
1997 Activity:
Granted 3,981,766 26.25
Converted Vons options 7,578,098 7.34
Canceled (962,522) 10.01
Exercised (8,373,270) 5.06
----------
Outstanding, year-end 1997 40,997,228 7.53
1998 Activity:
Granted 4,987,038 40.28
Converted Dominick's options 922,701 19.70
Canceled (848,482) 14.61
Exercised (6,680,083) 3.90
----------
Outstanding, year-end 1998 39,378,402 12.15
==========
Exercisable, year-end 1996 23,034,640 4.25
==========
Exercisable, year-end 1997 25,887,094 4.75
==========
Exercisable, year-end 1998 24,447,905 5.79
==========
Weighted average fair value of options granted during the year:
1996 $ 7.64
1997 12.43
1998 17.06
</TABLE>
The following table summarizes stock option information at year-end 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------- -------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Prices of Options Remaining Contractual Life Exercise Price of Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.50 to $ 0.50 1,047,000 0.35 years $ 0.50 1,047,000 $ 0.50
1.46 to 9.44 25,297,992 7.06 4.71 20,730,918 4.37
9.67 to 17.63 3,495,840 8.31 13.63 1,756,064 14.78
18.94 to 29.88 4,468,929 8.50 25.59 807,537 24.87
31.44 to 39.00 2,261,808 9.19 35.13 25,496 32.82
40.06 to 48.06 2,806,833 9.56 41.80 80,890 42.56
---------- ----------
0.50 to 48.06 39,378,402 7.46 12.15 24,447,905 5.79
========== ==========
</TABLE>
Options to purchase 18.4 million shares were available for grant at year-end
1998.
ADDITIONAL STOCK OPTION PLAN INFORMATION The Company accounts for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
option awards granted at fair market value.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: seven to nine
years expected life to vesting; stock volatility of 31% in both 1998 and 1997,
and 30% in 1996; risk-free interest rates of 5.26% in 1998 and 6.29% in both
1997 and 1996; and no dividends during the expected term.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. However, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the pro forma results presented
<PAGE> 29
below are not indicative of future period pro forma results. Had compensation
cost for Safeway's stock option plans been determined based on the fair value at
the grant date for awards in 1998, 1997 and 1996, consistent with the provisions
of SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income (in millions):
As reported $ 806.7 $ 557.4 $ 460.6
Pro forma 794.8 553.5 459.0
Basic earnings per share:
As reported $ 1.67 $ 1.21 $ 1.06
Pro forma 1.65 1.20 1.05
Diluted earnings per share:
As reported $ 1.59 $ 1.12 $ 0.97
Pro forma 1.56 1.11 0.96
</TABLE>
NOTE G: TAXES ON INCOME
The components of income tax expense are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 398.8 $ 303.6 $ 162.9
State 80.0 57.5 30.7
Foreign 52.0 37.8 (0.5)
------- ------- -------
530.8 398.9 193.1
------- ------- -------
Deferred:
Federal 44.4 40.4 49.3
State 12.2 8.4 12.6
Foreign 2.8 7.1 52.0
------- ------- -------
59.4 55.9 113.9
------- ------- -------
$ 590.2 $ 454.8 $ 307.0
======= ======= =======
</TABLE>
Extraordinary losses are presented net of related tax benefits. Therefore, 1997
income tax expense excludes the $41.1 million tax benefit on an extraordinary
loss related to the early retirement of debt. Tax benefits from the exercise of
employee stock options of $85.2 million in 1998, $42.4 million in 1997 and $51.9
million in 1996 were credited directly to paid-in capital and, therefore, are
excluded from income tax expense.
The reconciliation of the provision for income taxes at the U.S. federal
statutory income tax rate to the Company's income taxes is as follows (dollars
in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Income tax expense using
federal statutory rate $ 488.9 $ 376.7 $ 268.7
State taxes on income net
of federal benefit 59.9 42.8 28.1
Taxes provided on equity in
earnings of unconsolidated
affiliates at rates below
the statutory rate (10.0) (9.4) (10.5)
Taxes on foreign earnings
not permanently reinvested 7.9 8.9 7.3
Nondeductible expenses and
amortization 17.6 13.6 3.2
Difference between statutory rate
and foreign effective rate 11.1 10.6 11.1
Other accruals 14.8 11.6 (0.9)
------- ------- -------
$ 590.2 $ 454.8 $ 307.0
======= ======= =======
</TABLE>
Significant components of the Company's net deferred tax liability at year-end
were as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Workers' compensation
and other claims $ 158.5 $ 138.8 $ 91.7
Accruals not currently
deductible 106.6 80.3 48.7
Accrued claims and other
liabilities 48.0 48.8 47.4
Employee benefits 34.7 18.4 9.7
U.S. operating loss carry
forward 12.1 -- --
Canadian operating loss
carryforward -- -- 2.7
Other assets 51.5 14.6 6.0
------- ------- -------
411.4 300.9 206.2
------- ------- -------
Deferred tax liabilities:
Property (315.7) (280.8) (110.5)
Prepaid pension costs (166.4) (161.3) (149.9)
LIFO inventory reserves (125.7) (106.0) (66.8)
Investments in unconsolidated
affiliates (16.7) (15.3) (48.1)
Cumulative translation
adjustments (3.8) (16.2) (23.0)
Other liabilities -- (18.3) (31.7)
------- ------- -------
(628.3) (597.9) (430.0)
------- ------- -------
Net deferred tax liability $(216.9) $(297.0) $(223.8)
======= ======= =======
</TABLE>
Deferred tax assets include net operating losses assumed in the Dominick's
acquisition which will expire between 2008 and 2010. Such losses are expected to
be fully utilized.
<PAGE> 30
NOTE H: EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS
RETIREMENT PLANS The Company maintains defined benefit, non-contributory
retirement plans for substantially all of its employees not participating in
multi-employer pension plans.
In connection with the Vons Merger, the Company assumed the obligations of Vons'
retirement plan. The actuarial assumptions for the existing Vons' retirement
plan are comparable to the existing plans of the Company. Vons' retirement plan
has been combined with Safeway's for financial statement presentation.
The following tables provide a reconciliation of the changes in the retirement
plans' benefit obligation and fair value of assets over the two-year period
ended January 2, 1999 and a statement of the funded status as of year-end 1998
and 1997 (in millions):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Beginning balance $ 1,056.8 $ 867.1
Service cost 52.5 42.5
Interest cost 69.7 60.1
Plan amendments 18.2 25.1
Actuarial loss 65.1 45.4
Acquisition of Vons -- 83.9
Benefit payments (79.8) (70.3)
Change in assumptions (0.5) 12.3
Currency translation adjustments (16.3) (9.3)
---------- ----------
Ending balance $ 1,165.7 $ 1,056.8
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Change in fair value of plan assets:
Beginning balance $ 1,662.6 $ 1,392.0
Actual return on plan assets 193.2 263.8
Acquisition of Vons -- 76.5
Employer contributions 6.8 10.0
Benefit payments (79.8) (70.3)
Currency translation adjustments (16.7) (9.4)
---------- ----------
Ending balance $ 1,766.1 $ 1,662.6
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Funded status:
Fair value of plan assets $ 1,766.1 $ 1,662.6
Projected benefit obligation (1,165.7) (1,056.8)
---------- ----------
Funded status 600.4 605.8
Adjustment for difference in book
and tax basis of assets (165.1) (165.1)
Unamortized prior service cost 95.5 93.7
Unrecognized gain (161.2) (193.0)
---------- ----------
Prepaid pension cost $ 369.6 $ 341.4
========== ==========
</TABLE>
The following table provides the components of 1998 and 1997 net pension income
for the retirement plans (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Estimated return on assets $ 141.5 $ 118.3 $ 148.2
Service cost (52.5) (42.5) (41.3)
Interest cost (69.7) (60.1) (51.7)
Amortization of prior
service cost (14.3) (11.6) (56.0)
Amortization of
unrecognized gains 13.3 -- --
------- ------- -------
Net pension income $ 18.3 $ 4.1 $ (0.8)
======= ======= =======
</TABLE>
Prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Actuarial gains and losses are
amortized over the average remaining service life of active participants when
the accumulation of such gains and losses exceeds 10% of the greater of the
projected benefit obligation or the fair value of plan assets.
The actuarial assumptions used to determine year-end plan status were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used to determine
the projected benefit
obligation:
United States Plans 6.5% 7.0% 7.5%
Canadian Plans 6.3 6.3 7.0
Combined weighted
average rate 6.5 6.8 7.4
Expected return on plan assets:
United States Plans 9.0% 9.0% 9.0%
Canadian Plans 8.0 8.0 8.0
Rate of compensation increase:
United States Plans 5.0% 5.0% 5.5%
Canadian Plans 4.5 4.5 5.5
</TABLE>
RETIREMENT RESTORATION PLAN The Retirement Restoration Plan provides death
benefits and supplemental income payments for senior executives after
retirement. The Company recognized expense of $5.0 million in 1998, $4.3 million
in 1997 and $4.4 million in 1996. The aggregate projected benefit obligation of
the Retirement Restoration Plan was approximately $53.8 million at year-end 1998
and $48.4 million at year-end 1997.
<PAGE> 31
MULTI-EMPLOYER PENSION PLANS Safeway participates in various multi-employer
pension plans, covering virtually all Company employees not covered under the
Company's non-contributory pension plans, pursuant to agreements between the
Company and employee bargaining units which are members of such plans. These
plans are generally defined benefit plans; however, in many cases, specific
benefit levels are not negotiated with or known by the employer-contributors.
Contributions of $119 million in 1998, $130 million in 1997 and $112 million in
1996 were made and charged to expense.
Under U.S. legislation regarding such pension plans, a company is required
to continue funding its proportionate share of a plan's unfunded vested benefits
in the event of withdrawal (as defined by the legislation) from a plan or plan
termination. Safeway participates in a number of these pension plans, and the
potential obligation as a participant in these plans may be significant. The
information required to determine the total amount of this contingent
obligation, as well as the total amount of accumulated benefits and net assets
of such plans, is not readily available. During 1988 and 1987, the Company sold
certain operations. In most cases the party acquiring the operation agreed to
continue making contributions to the plans. Safeway is relieved of the
obligations related to these sold operations to the extent the acquiring parties
continue to make contributions. Whether such sales could result in withdrawal
under ERISA and, if so, whether such withdrawals could result in liability to
the Company, is not determinable at this time.
COLLECTIVE BARGAINING AGREEMENTS At year-end 1998, Safeway had approximately
170,000 full and part-time employees. Approximately 90% of Safeway's employees
in the United States and Canada are covered by collective bargaining agreements
negotiated with local unions affiliated with one of 12 different international
unions. There are approximately 400 such agreements, typically having three-year
terms, with some agreements having terms up to five years. Accordingly, Safeway
negotiates a significant number of these agreements every year.
NOTE I: INVESTMENT IN UNCONSOLIDATED AFFILIATE
At year-end 1998 Safeway's investment in unconsolidated affiliate consists of a
49% ownership interest in Casa Ley, which operates 77 food and general
merchandise stores in western Mexico.
Income from Safeway's equity investment in Casa Ley, recorded on a
one-quarter delay basis, was $28.5 million in 1998, $22.7 million in 1997 and
$18.8 million in 1996.
Through April 8, 1997, Safeway also owned 15.1 million common shares, or
34.4% of the total shares outstanding, of Vons. Vons is now a wholly-owned
subsidiary of Safeway, and as of the beginning of the second quarter of 1997,
Safeway's consolidated financial statements include Vons' financial position and
results of operations.
Safeway's share of Vons' earnings was $12.2 million for the first quarter
of 1997 and $31.2 million for the year in 1996.
NOTE J: RELATED-PARTY TRANSACTIONS
KKR provides management, consulting and financial services to the Company for an
annual fee. Such services include, but are not necessarily limited to, advice
and assistance concerning any and all aspects of the operation, planning and
financing of the Company. Annual payments for management fees, special services
and reimbursement of expenses were approximately $1.4 million in 1998, 1997 and
1996.
The Company holds an 80% interest in Property Development Associates
("PDA"), a partnership formed in 1987 with a company controlled by an affiliate
of KKR, to purchase, manage and dispose of certain Safeway facilities which are
no longer used in the retail grocery business. The financial statements of PDA
are consolidated with those of the Company and a minority interest of $23.9
million and $24.0 million at year-end 1998 and 1997 is included in accrued
claims and other liabilities in the accompanying consolidated balance sheets.
During 1997, the Company contributed to PDA six properties no longer used in its
retail grocery business which had an aggregate net book value of $4.9 million.
The minority partner contributed cash in an amount sufficient to maintain its
20% ownership. No gains or losses were recognized on these transactions. In
1998, no properties were contributed to PDA. Safeway paid PDA $1.9 million in
1998, $1.5 million in 1997 and $1.6 million in 1996 for reimbursement of
expenses related to management and real estate services provided by PDA.
<PAGE> 32
NOTE K: COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS In July 1988, there was a major fire at the Company's dry grocery
warehouse in Richmond, California. Through January 2, 1999, in excess of 126,000
claims for personal injury and property damage arising from the fire have been
settled for an aggregate amount of approximately $123.9 million. The Company's
loss as a result of the fire damage to its property and settlement of the above
claims was substantially covered by insurance.
As of January 2, 1999, there were still pending approximately 3,100 claims
against the Company for personal injury (including punitive damages), and
approximately 290 separate claims for property damage, arising from the smoke,
ash and embers generated by the fire. A substantial percentage of these claims
have been asserted in lawsuits against the Company filed in the Superior Court
for Alameda County, California. There can be no assurance that the pending
claims will be settled or otherwise disposed of for amounts and on terms
comparable to those settled to date.
In early 1996, a purported class action was filed in the Superior Court for
Alameda County, California on behalf of persons allegedly injured as a result of
the smoke, ash and embers generated by the fire. The complaint, which was
amended after the Court sustained the Company's demurrer with leave to amend,
generally alleged that the Company fraudulently (i) obtained settlements of
certain claims arising out of the fire and (ii) made statements that induced
claimants not to file actions within the time period under the statute of
limitations. The amended complaint sought compensatory and punitive damages. In
May 1997, the Court dismissed the case, and in May 1998 the California Court of
Appeal affirmed the dismissal. In August 1998, plaintiffs' petition for review
by the California Supreme Court was denied.
On July 10, 1998, Safeway was served with a new case filed in the Superior
Court for Alameda County, California by the same attorney who handled the
purported class action described in the preceding paragraph. Safeway filed a
demurrer, and plaintiffs filed an amended complaint. Safeway filed a demurrer to
the amended complaint. The first complaint asserted allegations that are
generally similar to those in the case described above. The amended complaint
contains factual allegations that materially contradict those contained in the
first complaint and includes a claim for breach of contract. Plaintiffs seek
damages according to proof, plus interest and punitive damages. The case
purports to be filed on behalf of approximately 21,500 individual plaintiffs. On
March 5, 1999, the Court sustained Safeway's demurrer to plaintiffs' fraud claim
and overruled Safeway's demurrer to plaintiffs' contract claim. The Company
believes that the claims in the new case are without merit and intends to defend
this lawsuit vigorously.
The Company has received notice from its insurance carrier denying coverage
for the claims asserted in the two purported class action suits described above.
Safeway strongly disagrees with the insurance carrier's denial of coverage.
Safeway continues to believe that coverage under its insurance policy will be
sufficient and available for resolution of all remaining personal injury and
property damage claims arising out of the fire.
On September 13, 1996, a class action lawsuit entitled McCampbell et al. v.
Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego
County, California against Vons and two other grocery store chains operating in
southern California. In the complaint it is alleged, among other things, that
Vons and the other defendants conspired to fix the retail price of eggs in
southern California. The plaintiffs claim that the defendants violated
provisions of the California Cartwright Act and engaged in unfair competition.
Plaintiffs seek damages they allege the class has sustained; the amount of
damages sought is not specified. Plaintiffs have produced a damages study which
purports to support damages in excess of $90 million attributable to Vons. If
any damages were to be awarded, they may be trebled under the applicable
statute. In addition, plaintiffs seek an injunction against future acts that
would be in restraint of trade or that would constitute unfair competition. An
answer has been filed to the complaint that denies plaintiffs' allegations and
sets forth several defenses. On October 3, 1997, the Court issued an order
certifying a class of retail purchasers of white chicken eggs by the dozen from
defendants' stores within the Counties of Los Angeles, Riverside, San
Bernardino, San Diego, Imperial and Orange during the period from September 13,
1992 to the present. On September 23, 1998 the Court denied defendants' motions
for summary judgment. It is expected that trial will commence in the third
quarter of 1999. The Company believes that Vons
<PAGE> 33
has meritorious defenses to plaintiffs' claims and plans to defend this lawsuit
vigorously.
Safeway acquired Dominick's in November 1998. At that time, there was
pending against Dominick's a class action lawsuit that had been filed in the
U.S. District Court for the Northern District of Illinois in March 1995,
alleging gender discrimination and seeking compensatory and punitive damages in
an unspecified amount. The lawsuit also alleges national origin discrimination,
but the court denied plaintiffs' class certification motion as to those claims.
The Company believes Dominick's has meritorious defenses and plans to defend
this lawsuit vigorously.
There are also pending against Company various claims and lawsuits arising
in the normal course of business, some of which seek damages and other relief,
which, if granted, would require very large expenditures.
It is management's opinion that although the amount of liability with
respect to all of the above matters cannot be ascertained at this time, any
resulting liability, including any punitive damages, will not have a material
adverse effect on the Company's financial statements taken as a whole.
COMMITMENTS The Company has commitments under contracts for the purchase of
property and equipment and for the construction of buildings. Portions of such
contracts not completed at year-end are not reflected in the consolidated
financial statements. These unrecorded commitments were $63.8 million at
year-end 1998.
NOTE L: SEGMENTS
Safeway's retail grocery business, which represents more than 98% of
consolidated sales, is its only reportable segment. The following table presents
information about the Company by geographic area (in millions):
<TABLE>
<CAPTION>
U.S. Canada Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
SALES $ 21,241.7 $ 3,242.5 $ 24,484.2
OPERATING PROFIT 1,467.3 134.4 1,601.7
INCOME BEFORE INCOME TAXES 1,272.3 124.6 1,396.9
TOTAL ASSETS 10,541.9 847.7 11,389.6
1997
Sales $ 19,075.9 $ 3,407.9 $ 22,483.8
Operating profit 1,169.6 110.1 1,279.7
Income before income taxes and extraordinary loss 978.4 97.9 1,076.3
Total assets 7,613.7 880.2 8,493.9
1996
Sales $ 13,797.5 $ 3,471.5 $ 17,269.0
Operating profit 752.8 138.9 891.7
Income before income taxes 652.2 115.4 767.6
Total assets 4,625.4 919.8 5,545.2
</TABLE>
<PAGE> 34
NOTE M: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- ------------------
(In millions, except per-share amounts) DILUTED BASIC Diluted Basic Diluted Basic
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary loss $ 806.7 $ 806.7 $ 621.5 $ 621.5 $ 460.6 $ 460.6
Extraordinary loss -- -- (64.1) (64.1) -- --
------- ------- ------- ------- ------- -------
Net income $ 806.7 $ 806.7 $ 557.4 $ 557.4 $ 460.6 $ 460.6
======= ======= ======= ======= ======= =======
Weighted average common shares outstanding 482.8 482.8 462.3 462.3 436.0 436.0
======= ======= =======
Common share equivalents 26.0 35.4 39.7
------- ------- -------
Weighted average shares outstanding 508.8 497.7 475.7
======= ======= =======
Earnings per common share and common share equivalent:
Income before extraordinary loss $ 1.59 $ 1.67 $ 1.25 $ 1.35 $ 0.97 $ 1.06
Extraordinary loss -- -- (0.13) (0.14) -- --
------- ------- ------- ------- ------- -------
Net income $ 1.59 $ 1.67 $ 1.12 $ 1.21 $ 0.97 $ 1.06
======= ======= ======= ======= ======= =======
Calculation of common share equivalents:
Options and warrants to purchase
common shares 48.0 58.6 62.6
Common shares assumed purchased with
potential proceeds (22.0) (23.2) (22.9)
------- ------- -------
Common share equivalents 26.0 35.4 39.7
======= ======= =======
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options
and warrants to purchase common shares $ 913.9 $ 597.4 $ 394.3
Common stock price used under the
treasury stock method $ 41.60 $ 25.75 $ 17.22
Common shares assumed purchased with
potential proceeds 22.0 23.2 22.9
</TABLE>
<PAGE> 35
NOTE N: QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflect all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Last 16 Third 12 Second 12 First 12
(in millions, except per share amounts) 52 Weeks Weeks Weeks Weeks Weeks
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
SALES $24,484.2 $7,922.6 $5,589.0 $5,583.3 $5,389.3
GROSS PROFIT 7,124.5 2,288.1 1,650.1 1,622.2 1,564.1
OPERATING PROFIT 1,601.7 511.8 377.8 380.9 331.2
INCOME BEFORE INCOME TAXES 1,396.9 441.6 335.5 334.4 285.4
NET INCOME 806.7 255.0 193.7 193.2 164.8
EARNINGS PER SHARE:
BASIC $ 1.67 $ 0.52 $ 0.40 $ 0.40 $ 0.34
DILUTED 1.59 0.50 0.38 0.38 0.33
PRICE RANGE, NEW YORK STOCK EXCHANGE 61 3/8 61 3/8 46 3/4 40 7/16 37 1/4
to 30 1/2 to 37 5/8 to 37 1/4 to 34 to 30 1/2
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Last 17 Third 12 Second 12 First 12
(in millions, except per share amounts) 53 Weeks Weeks Weeks Weeks Weeks
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Sales $22,483.8 $7,785.4 $5,371.4 $5,249.2 $4,077.8
Gross profit 6,414.7 2,211.3 1,552.6 1,505.3 1,145.5
Operating profit 1,279.7 439.6 317.3 298.0 224.8
Income before income taxes and
extraordinary loss 1,076.3 372.2 259.8 240.2 204.1
Extraordinary loss related to early
retirement of debt, net of income
tax benefit (64.1) -- (59.9) (4.2) --
Net income 557.4 214.9 90.1 129.9 122.5
Earnings per share:
Basic
Income before extraordinary loss $ 1.35 $ 0.46 $ 0.32 $ 0.29 $ 0.28
Extraordinary loss (0.14) -- (0.13) (0.01) --
---------- -------- -------- -------- --------
Net income $ 1.21 $ 0.46 $ 0.19 $ 0.28 $ 0.28
========== ======== ======== ======== ========
Diluted
Income before extraordinary loss $ 1.25 $ 0.43 $ 0.30 $ 0.27 $ 0.26
Extraordinary loss (0.13) -- (0.12) (0.01) --
---------- -------- -------- -------- --------
Net income $ 1.21 $ 0.43 $ 0.18 $ 0.26 $ 0.26
========== ======== ======== ======== ========
Price range, New York Stock Exchange $ 31 23/32 $31 23/32 $ 27 3/4 $24 13/16 $ 26
to 20 9/16 to 25 11/32 to 23 1/16 to 21 1/8 to 20 9/16
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 36
- --------------------------------------------------------------------------------
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS Safeway Inc. is responsible for the preparation, integrity
and fair presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include amounts that
are based on judgments and estimates made by management. Safeway also prepared
the other information included in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
Board of Directors, and committees of the Board. Safeway believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The report of Deloitte & Touche LLP is presented below.
INTERNAL CONTROL SYSTEM Safeway maintains a system of internal control over
financial reporting, which is designed to provide reasonable assurance to
management and the Board of Directors regarding the preparation of reliable
published financial statements. The system includes a documented organizational
structure and division of responsibility, established policies and procedures
including a code of conduct to foster a strong ethical climate, which are
communicated throughout Safeway, and the careful selection, training and
development of employees. Internal auditors monitor the operation of the
internal control system and report findings and recommendations to management
and the Board, and corrective actions are taken to address control deficiencies
and other opportunities for improving the system as they are identified. The
Board, operating through its Audit Committee, which is composed entirely of
outside directors, provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation.
Furthermore, the effectiveness of an internal control system can change with
circumstances. As of January 2, 1999, Safeway believes its system of internal
controls over financial reporting was effective for providing reliable financial
statements.
/s/ STEVEN A. BURD /s/ DAVID G. WEED
Steven A. Burd David G. Weed
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway Inc. and
subsidiaries as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and of cash flows for each of the three fiscal years in the period ended January
2, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Safeway Inc. and subsidiaries as of
January 2, 1999 and January 3, 1998, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended January
2, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 5, 1999
<PAGE> 1
Exhibit 22.1
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of January 2, 1999
Registrant: Safeway Inc.
Subsidiaries of Registrant (Tier I subsidiaries):
Safeway Canada Holdings, Inc.
Safeway Australia Holdings, Inc.
Safeway Leasing, Inc.
Oakland Property Brokerage, Inc.
Glencourt, Inc.
Milford Insurance Ltd.
Pak 'N Save, Inc.
Safeway Trucking, Inc.
Photo Acquisition I, Inc.
Photo Acquisition II, Inc.
Safeway Southern California, Inc.
Safeway Denver, Inc.
Safeway Richmond, Inc.
Safeway Dallas, Inc.
Safeway Supply, Inc.
Safeway Corporate, Inc.
Safeway Stores 42, Inc.
Safeway Stores 43, Inc.
Safeway Stores 64, Inc.
Safeway Claim Services, Inc.
Safeway Stores, Incorporated
Safeway Stores 99, Inc.
Safeway SELECT Gift Source, Inc.
Safeway Warehouse, Inc.
Safeway REIT, Inc.
Vons REIT, Inc.
Taylor Properties, Inc.
ACG Merger Sub, Inc.
Subsidiaries of Safeway Canada Holdings, Inc.:
Safeway New Canada, Inc.
(Continued)
<PAGE> 2
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of January 2, 1999
SUBSIDIARIES OF TIER I SUBSIDIARIES (Tier II subsidiaries):
Subsidiaries of Safeway Southern California, Inc.:
Safeway Stores 18, Inc.
Safeway Stores 26, Inc.
Safeway Stores 28, Inc.
Safeway Stores 31, Inc.
The Vons Companies, Inc.
Subsidiaries of Safeway Denver, Inc.
Safeway Stores 44, Inc.
Safeway Stores 45, Inc.
Safeway Stores 46, Inc.
Safeway Stores 47, Inc.
Safeway Stores 48, Inc.
Safeway Stores 49, Inc.
Safeway Stores 50, Inc.
Subsidiaries of Safeway Richmond, Inc.
Safeway Stores 58, Inc.
Safeway Stores 59, Inc.
Subsidiaries of Safeway Corporate, Inc.
Safeway Stores 67, Inc.
Safeway Stores 68, Inc.
Safeway Stores 69, Inc.
Safeway Stores 70, Inc.
Subsidiaries of Safeway Supply, Inc.
Safeway Stores 71, Inc.
Safeway Stores 72, Inc.
Safeway Stores 73, Inc.
Safeway Stores 74, Inc.
Safeway Stores 75, Inc.
Safeway Stores 76, Inc.
Safeway Stores 77, Inc.
Consolidated Procurement Services, Inc.
(Continued)
<PAGE> 3
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of January 2, 1999
Subsidiaries of Safeway Dallas, Inc.:
Safeway Stores 78, Inc.
Safeway Stores 79, Inc.
Safeway Stores 80, Inc.
SMC Rx, Inc.
Safeway Stores 82, Inc.
Safeway Stores 85, Inc.
Safeway Stores 86, Inc.
Safeway Stores 87, Inc.
Safeway Stores 88, Inc.
Safeway Stores 89, Inc.
Safeway Stores 90, Inc.
Safeway Stores 91, Inc.
Safeway Stores 92, Inc.
Safeway Stores 96, Inc.
Safeway Stores 97, Inc.
Safeway Stores 98, Inc.
Subsidiaries of Photo Acquisition I, Inc.:
Everett Realty Advisors, Inc.
SUBSIDIARIES OF TIER I SUBSIDIARIES (Non-tier Subsidiaries):
Subsidiary of Safeway New Canada, Inc.:
Safeway Foreign Sales Ltd. and its subsidiary:
Canada Safeway Limited and its subsidiary:
Safeway International Finance Corp. of Canada Ltd.
Subsidiary of Vons REIT, Inc.:
Dominick's Supermarkets, Inc.
Subsidiaries of Dominick's Supermarkets, Inc.:
Dominick's Finer Foods, Inc.
Blackhawk Properties, Inc.
Blackhawk Development, Inc.
<PAGE> 4
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of January 2, 1999
Subsidiaries of Dominick's Finer Foods, Inc.:
DFF Equipment Leasing Co.
Dominick's Finer Foods of Illinois, Inc.
The Dominick's Foundation (non-profit)
Dodi Hazelcrest, Inc.
Kohl's of Bloomingdale, Inc.
Save-It Discount Foods, Inc.
SUBSIDIARIES OF TIER II SUBSIDIARIES (Tier III Subsidiaries):
Subsidiary of Safeway Stores 58, Inc.:
Safelease, Inc.
Subsidiary of The Vons Companies, Inc.:
Vons Food Services, Inc.
19 companies are not listed as they are maintained solely for the purpose of
holding licenses.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated March 5, 1999,
included and incorporated by reference in the Annual Report on Form 10-K of
Safeway Inc. and subsidiaries for the fiscal year ended January 2, 1999, in the
following Registration Statements of Safeway Inc. and subsidiaries:
No. 33-36753 on Form S-8 regarding the Safeway Inc. Outside Director
Equity Purchase Plan,
No. 33-37207 on Form S-8 regarding the Profit Sharing Plan of Safeway
Inc. and its United States Subsidiaries,
No. 33-42232 on Forms S-3 and S-8 regarding the Amended and Restated
Stock Option and Incentive Plan for Key Employees of Safeway
Inc.,
No. 33-48884 on Form S-8 regarding the Amended and Restated Stock Option
and Incentive Plan for Key Employees of Safeway Inc.,
No. 33-51552 on Form S-3 regarding Debt Securities,
No. 33-51119 on Form S-8 regarding the Stock Option Plan for
Consultants of Safeway Inc.,
No. 33-54581 on Form S-8 regarding the Employee Stock Purchase Plan of
Safeway Inc.,
No. 33-63803 on Form S-8 regarding the 1994 Amended and Restated Stock
Option and Incentive Plan for Key Employees of Safeway Inc.,
No. 333-13677 on Form S-8 regarding the 1987 Plan for Consultants of
Safeway Stores, Inc.,
No. 333-22837 on Form S-8 regarding The Vons Companies, Inc. Management
Stock Option Plan,
No. 333-40807 on Form S-3 regarding Debt Securities,
No. 333-65903 on Form S-3 regarding Debt Securities, and
No. 333-67575 on Form S-8 regarding the 1996 Equity Participation Plan
of Dominick's Supermarkets, Inc. and the 1995 Amended and
Restricted Stock Option Plan of Dominick's Supermarkets, Inc.
DELOITTE & TOUCHE LLP
San Francisco, California
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGES
19 THROUGH 21 OF THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 45,700
<SECURITIES> 0
<RECEIVABLES> 200,100
<ALLOWANCES> 0
<INVENTORY> 1,856,000
<CURRENT-ASSETS> 2,319,900
<PP&E> 8,024,100
<DEPRECIATION> 2,841,500
<TOTAL-ASSETS> 11,389,600
<CURRENT-LIABILITIES> 2,893,600
<BONDS> 4,650,600
0
0
<COMMON> 5,500
<OTHER-SE> 3,076,600
<TOTAL-LIABILITY-AND-EQUITY> 11,389,600
<SALES> 24,484,200
<TOTAL-REVENUES> 24,484,200
<CGS> (17,359,700)
<TOTAL-COSTS> (17,359,700)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (235,000)
<INCOME-PRETAX> 1,396,900
<INCOME-TAX> (590,200)
<INCOME-CONTINUING> 806,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806,700<F1>
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.59
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
