<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 9, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___ to ___
Commission file number 1-41
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3019135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5918 Stoneridge Mall Rd.
Pleasanton, California 94588-3229
------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 467-3000
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of October 13, 2000 there were issued and outstanding 501.1 million
shares of the registrant's common stock.
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 9, 3
2000 and January 1, 2000
Condensed Consolidated Statements of Income for the 12 and 5
36 weeks ended September 9, 2000 and September 11, 1999
Condensed Consolidated Statements of Cash Flows for the 36 6
weeks ended September 9, 2000 and September 11, 1999
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 10
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
September 9, January 1,
2000 2000
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 110.2 $ 106.2
Receivables 347.1 292.9
Merchandise inventories 2,310.5 2,444.9
Prepaid expenses and other current assets 267.2 208.1
--------- ---------
Total current assets 3,035.0 3,052.1
--------- ---------
Property 10,089.4 9,726.6
Less accumulated depreciation and amortization (3,466.2) (3,281.9)
--------- ---------
Property, net 6,623.2 6,444.7
Goodwill, net of accumulated amortization
of $400.9 and $314.4 4,745.7 4,786.6
Prepaid pension costs 469.8 405.6
Investment in unconsolidated affiliate 149.6 131.6
Other assets 114.0 79.7
--------- ---------
Total assets $15,137.3 $14,900.3
========= =========
</TABLE>
(Continued)
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 9, January 1,
2000 2000
------------ ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes
and debentures $ 528.1 $ 557.1
Current obligations under capital leases 45.2 41.8
Accounts payable 1,778.4 1,878.4
Accrued salaries and wages 357.3 387.7
Income taxes payable 448.6 117.2
Other accrued liabilities 698.7 600.4
--------- ---------
Total current liabilities 3,856.3 3,582.6
--------- ---------
Long-term debt:
Notes and debentures 5,187.7 5,922.0
Obligations under capital leases 407.5 435.4
--------- ---------
Total long-term debt 5,595.2 6,357.4
Deferred income taxes 330.3 379.1
Accrued claims and other liabilities 394.1 495.4
--------- ---------
Total liabilities 10,175.9 10,814.5
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
1,500 shares authorized; 498.4 and 493.6 shares
issued, after deducting 64.8 and 65.4 treasury shares 5.6 5.6
Additional paid-in capital 1,413.3 1,321.8
Retained earnings 3,562.7 2,769.9
Accumulated other comprehensive loss (20.2) (11.5)
--------- ---------
Total stockholders' equity 4,961.4 4,085.8
--------- ---------
Total liabilities and stockholders' equity $15,137.3 $14,900.3
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------------------------- ------------------------------
September 9, September 11, September 9, September 11,
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sales $ 7,457.2 $ 6,475.0 $ 21,961.5 $ 18,925.2
Cost of goods sold (5,220.5) (4,556.2) (15,413.4) (13,289.8)
---------- ---------- ---------- ----------
Gross profit 2,236.7 1,918.8 6,548.1 5,635.4
Operating and administrative expense (1,652.7) (1,444.0) (4,808.0) (4,224.8)
Goodwill amortization (29.1) (21.5) (87.4) (62.6)
---------- ---------- ---------- ----------
Operating profit 554.9 453.3 1,652.7 1,348.0
Interest expense (104.1) (73.4) (322.2) (221.0)
Equity in earnings of unconsolidated affiliate 7.5 6.4 18.0 19.6
Other income (expense), net 3.3 (1.1) 6.7 1.1
---------- ---------- ---------- ----------
Income before income taxes 461.6 385.2 1,355.2 1,147.7
Income taxes (191.6) (161.8) (562.4) (482.0)
---------- ---------- ---------- ----------
Net income $ 270.0 $ 223.4 $ 792.8 $ 665.7
========== ========== ========== ==========
Basic earnings per share: $ 0.54 $ 0.45 $ 1.60 $ 1.34
========== ========== ========== ==========
Diluted earnings per share: $ 0.53 $ 0.44 $ 1.55 $ 1.30
========== ========== ========== ==========
Weighted average shares outstanding - basic 497.9 497.6 496.1 495.6
========== ========== ========== ==========
Weighted average shares outstanding - diluted 511.7 513.4 510.0 513.1
========== ========== ========== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
36 Weeks Ended
----------------------------
September 9, September 11,
2000 1999
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 792.8 $ 665.7
Reconciliation to net cash flow from operations:
Depreciation and amortization 566.6 447.4
LIFO expense 3.6 6.9
Equity in undistributed earnings of unconsolidated affiliate (18.0) (19.6)
Net pension income (55.8) (19.6)
Gain on pension settlement (15.0) --
Decrease in accrued claims and other liabilities (47.8) (4.7)
Other (62.9) (18.4)
Change in working capital items:
Receivables and prepaid expenses (115.4) 30.3
Inventories at FIFO cost 100.2 (49.8)
Payables and accruals 343.4 42.1
-------- --------
Net cash flow from operating activities 1,491.7 1,080.3
-------- --------
INVESTING ACTIVITIES
Cash paid for property additions (782.8) (716.0)
Proceeds from sale of property 125.9 89.1
Net cash paid for Carr-Gottstein Foods Co. -- (94.4)
Net cash paid for Randall's Food Markets, Inc. -- (729.8)
Other (41.9) (21.8)
-------- --------
Net cash flow used by investing activities (698.8) (1,472.9)
-------- --------
FINANCING ACTIVITIES
Additions to short-term borrowings 80.1 68.5
Payments on short-term borrowings (150.6) (160.7)
Additions to long-term borrowings 149.5 2,369.8
Payments on long-term borrowings (896.0) (1,843.6)
Net proceeds from exercise of stock options and warrants 29.7 19.3
Other (1.6) (23.1)
-------- --------
Net cash flow (used by) from financing activities (788.9) 430.2
-------- --------
Increase in cash and equivalents 4.0 37.6
CASH AND EQUIVALENTS
Beginning of period 106.2 45.7
-------- --------
End of period $ 110.2 $ 83.3
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Safeway Inc. and
subsidiaries ("Safeway" or the "Company") for the 12 and 36 weeks ended
September 9, 2000 and September 11, 1999 are unaudited and, in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1999 Annual Report to Stockholders. The results of
operations for the 12 and 36 weeks ended September 9, 2000 are not necessarily
indicative of the results expected for the full year.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway completed its acquisition of Carrs by purchasing all of
the outstanding shares of Carrs for approximately $106 million in cash (the
"Carrs Acquisition"). The Carrs Acquisition was accounted for as a purchase and
Carrs operating results have been consolidated with Safeway's since the
beginning of the second quarter of 1999. See Note D.
ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
In September 1999, Safeway acquired Randall's by purchasing all of the
outstanding shares of Randall's for $1.3 billion consisting of $754 million in
cash and 12.7 million shares of Safeway stock (the "Randall's Acquisition"). The
Randall's Acquisition was accounted for as a purchase and Randall's operating
results have been consolidated with Safeway's since the beginning of the fourth
quarter of 1999. See Note D.
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway recorded estimated LIFO expense of $3.6 million during the first 36
weeks of 2000 and $6.9 million during the first 36 weeks of 1999. Actual LIFO
Indices are calculated during the fourth quarter of the year based upon a
statistical sampling of inventories.
COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments. Total comprehensive income approximates net income.
NOTE B - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. Safeway will adopt SFAS No. 133 as required by SFAS
137, "Deferral of the Effective Date of the FASB Statement No. 133," beginning
in the first quarter of 2001. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on its financial statements.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
provides the SEC staff's views on selected revenue recognition issues. The
guidance in SAB 101 must be adopted during the Company's quarter ended December
30, 2000 and the effects, if any, are required to be recorded through a
retroactive, cumulative-effect adjustment as of the beginning of the fiscal
year, with a restatement of all prior interim quarters in the year. Although the
Company has not fully assessed the implications of SAB 101, the Company does not
believe adoption of this statement will have a material impact on its financial
statements.
NOTE C - FINANCING
Notes and debentures were composed of the following at September 9, 2000 and
January 1, 2000 (in millions):
<TABLE>
<CAPTION>
September 9, 2000 January 1, 2000
--------------------- ---------------------
Long-term Current Long-term Current
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper $1,664.7 $2,358.1
Bank credit agreement, unsecured 90.6 75.7
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% Senior Notes due 2000, unsecured -- $400.0 -- $400.0
5.875% Senior Notes due 2001, unsecured 400.0 400.0
6.05% Senior Notes due 2003, unsecured 350.0 350.0
6.50% Senior Notes due 2008, unsecured 250.0 250.0
7.00% Senior Notes due 2002, unsecured 600.0 600.0
7.25% Senior Notes due 2004, unsecured 400.0 400.0
7.50% Senior Notes due 2009, unsecured 500.0 500.0
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 64.2 17.3 63.5 12.1
Other notes payable, unsecured 36.0 51.6 92.5 6.3
Medium-term notes, unsecured 16.5 -- 16.5 9.0
Short-term bank borrowings, unsecured -- 59.2 -- 129.7
-------- ------ -------- ------
$5,187.7 $528.1 $5,922.0 $557.1
======== ====== ======== ======
</TABLE>
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of the operations of Safeway,
Randall's and Carrs, as if the Randall's and Carrs Acquisitions had occurred as
of the beginning of the 36-week period ended September 11, 1999. This pro forma
financial information is presented for informational purposes only and may not
be indicative of what the actual consolidated results of operations would have
been if the acquisitions had been effective as of the period being presented.
Under purchase accounting, the purchase price is allocated to acquired assets
and liabilities based on their estimated fair values at the date of acquisition,
and any excess is allocated to goodwill.
<TABLE>
<CAPTION>
(in millions, except per-share amounts)
36 Weeks Ended
----------------------------------------
(Actual) (Pro Forma)
September 9, 2000 September 11, 1999
----------------- ------------------
<S> <C> <C>
Sales $21,961.5 $20,867.1
Net income $792.8 $651.5
Diluted earnings per share $1.55 $1.24
</TABLE>
NOTE E - CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the caption
"Legal Matters" on pages 37 and 38 of the 1999 Annual Report to Stockholders,
provides information on certain litigation in which the Company is involved.
There have been no material developments to these matters, except as noted in
subsequent quarterly filings and except as described below.
On August 23, 2000, a lawsuit entitled Baker, et al. v. Jewel Food Stores, Inc.,
et al. was filed in the Circuit Court of Cook County, Illinois, against the
Company's subsidiary Dominick's and Jewel Food Stores, a subsidiary of
Albertson's, Inc. The complaint alleges, among other things, that Dominick's and
Jewel conspired to fix the retail price of milk in nine Illinois counties in the
Chicago area, in violation of the Illinois Antitrust Act. The plaintiffs purport
to bring the lawsuit as a class action on behalf of all persons residing in the
nine-county area who purchased milk from the defendants' retail stores in these
counties. The complaint seeks unspecified damages, and an injunction enjoining
the defendants from acts in restraint of trade. If damages were to be awarded,
they may be trebled under the applicable statute. The Company believes that the
allegations in the complaint are without merit, and plans to defend this action
vigorously.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Safeway's net income was $270.0 million ($0.53 per share) for the third quarter
ended September 9, 2000, compared to $223.4 million ($0.44 per share) for the
third quarter of 1999.
Third-quarter sales increased 15% to $7.5 billion in 2000 from $6.5 billion in
1999, primarily because of strong store operations and the Randall's
Acquisition. Comparable-store sales increased 4.9%, while identical-store sales
(which exclude replacement stores) increased 4.2%.
In September 1999, Safeway acquired Randall's Food Markets, Inc. (the "Randall's
Acquisition"). In April 1999, Safeway acquired Carr-Gottstein Foods Co. (the
"Carrs Acquisition"). In order to facilitate an understanding of the Company's
operations, the following discussions of gross profit and operating and
administrative expense include certain pro forma information based on the 1999
combined historical financial statements as if the Randall's and Carrs
Acquisitions had been effective as of the beginning of 1999.
Safeway's continued improvement in buying practices and product mix helped
increase gross profit to 29.99% of sales in the third quarter of 2000 from
29.63% on a historical basis and 29.37% on a pro forma basis in the third
quarter of 1999.
Operating and administrative expense, including goodwill amortization, declined
to 22.55% of sales in the third quarter of 2000 from 22.63% in 1999 on a
historical basis and 22.73% on a pro forma basis, reflecting increased sales and
ongoing efforts to reduce or control expenses.
Interest expense increased to $104.1 million in the third quarter of 2000 from
$73.4 million in the third quarter of 1999. This increase was primarily due to
debt incurred in the fourth quarter of 1999 to finance the Randall's
Acquisition, debt incurred in the fourth quarter of 1999 to finance the
repurchase of Safeway stock and, to a lesser extent, higher interest rates on
variable rate borrowings. Despite the increase in interest expense, the interest
coverage ratio (operating cash flow divided by interest expense) remains very
strong at 6.74 times over the last four quarters. Operating cash flow (defined
on page 11) as a percentage of sales reached 9.80% over the last four quarters
compared to 9.29% one year ago.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was $7.5
million for the third quarter of 2000, compared to $6.4 million in 1999. Casa
Ley operates 94 food and general merchandise stores in western Mexico.
For the first 36 weeks of 2000, sales were $22.0 billion compared to sales of
$18.9 billion for the first 36 weeks of 1999. The gross profit margin increased
to 29.82% for the first 36 weeks of 2000 from 29.78% on a historical basis, and
29.46% on a pro forma basis, in the first 36 weeks of 1999. Operating and
administrative expense, including goodwill amortization, decreased to 22.29% of
sales in the first 36 weeks of 2000 from 22.65% on a historical basis, and
22.69% on a pro forma basis, in the first 36 weeks of 1999.
On October 18, 2000 Teamsters Local 439 struck Summit Logistics, a company that
operates Safeway's Northern California Distribution Center. Summit has
implemented contingency plans to continue deliveries to the 246 Safeway stores
that it supplies. At this time Safeway cannot specifically estimate the impact
on store operations, but does not expect the dispute to have a significant
impact on its financial position.
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. Safeway will adopt SFAS No. 133 as required by SFAS
137, "Deferral of the Effective Date of the FASB Statement No. 133," beginning
in the first quarter of 2001. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
provides the SEC staffs views on selected revenue recognition issues. The
guidance in SAB 101 must be adopted during the Company's quarter ended December
30, 2000 and the effects, if any, are required to be recorded through a
retroactive, cumulative-effect adjustment as of the beginning of the fiscal
year, with a restatement of all prior interim quarters in the year. Although the
Company has not fully assessed the implications of SAB 101, the Company does not
believe adoption of this statement will have a material impact on its financial
statements.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway completed its acquisition of all of the outstanding
shares of Carrs for approximately $106 million in cash (the "Carrs
Acquisition"). The Carrs Acquisition was accounted for as a purchase. Safeway
funded the acquisition, and subsequent repayment of approximately $239 million
of Carrs' debt, with the issuance of commercial paper.
ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
In September 1999, Safeway acquired all of the outstanding shares of Randall's
in exchange for $1.3 billion consisting of $754 million of cash and 12.7 million
shares of Safeway stock (the "Randall's Acquisition"). The Randall's Acquisition
was accounted for as a purchase. Safeway funded the cash portion of the
acquisition and subsequent repayment of approximately $403 million in Randall's
debt, through the issuance of senior notes.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $1,491.7 million in the first 36 weeks
of 2000 compared to cash flow from operations of $1,080.3 million in the first
36 weeks of 1999. This change is primarily due to improved results of operations
and changes in working capital.
Cash flow used by investing activities for the first 36 weeks of the year was
$698.8 million in 2000 compared to $1,472.9 million in 1999. The decrease is
primarily due to the acquisition of Carrs and Randall's in 1999 offset by
increased capital expenditures in 2000.
Cash flow used by financing activities was $788.9 million in the first 36 weeks
of 2000, primarily due to net repayments on borrowings. Cash flow from financing
activities of $430.2 million in 1999, primarily due to the issuance of senior
notes to help finance the acquisition of Randall's in 1999.
Net cash flow from operations as presented in the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense and income
taxes. Management believes that operating cash flow is relevant because it
assists investors in evaluating Safeway's ability to service its debt by
providing a commonly used measure of cash available to pay interest, and it
facilitates comparisons of Safeway's results of operations with those of
companies having different capital structures. Other companies may define
operating cash flow differently, and as a result, such measures may not be
comparable to Safeway's operating cash flow. Safeway's computation of operating
cash flow is as follows:
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------------------ -------------------------------
(Dollars in millions) Sept. 9, 2000 Sept. 11, 1999 Sept. 9, 2000 Sept. 11, 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Income before income taxes $ 461.6 $ 385.2 $ 1,355.2 $ 1,147.7
LIFO expense 2.3 2.3 3.6 6.9
Interest expense 104.1 73.4 322.2 221.0
Depreciation and amortization 186.8 155.0 566.6 447.4
Equity in earnings of
unconsolidated affiliate (7.5) (6.4) (18.0) (19.6)
---------- ---------- ---------- ----------
Operating cash flow $ 747.3 $ 609.5 $ 2,229.6 $ 1,803.4
========== ========== ========== ==========
As a percent of sales 10.02% 9.41% 10.15% 9.53%
========== ========== ========== ==========
As a multiple of interest expense 7.18x 8.30x 6.92x 8.16x
========== ========== ========== ==========
</TABLE>
Based upon the current level of operations, Safeway believes that operating cash
flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. The bank credit agreement is used
primarily as a backup facility to the commercial paper program.
CAPITAL EXPENDITURE PROGRAM
During the first three quarters of 2000, Safeway invested $887.9 million in
capital expenditures and opened 45 new stores and closed 24 stores. The Company
expects to spend more than $1.7 billion in 2000 while opening 75 to 80 new
stores and completing approximately 275 remodels.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements relate to, among other things,
capital expenditures, acquisitions, operating improvements and cost reductions,
and are indicated by words or phrases such as "continuing," "on-going,"
"expects," and similar words or phrases. The following factors are among the
principal factors that could cause actual results to differ materially from the
forward-looking statements: general business and economic conditions in our
operating regions, including the rate of inflation, population, employment and
job growth in our markets; pricing pressures and other competitive factors,
which could include pricing strategies, store openings and remodels; results of
our initiatives to increase sales; results of our program to reduce costs; the
ability to integrate and achieve operating improvements at companies we acquire;
increases in labor costs and deterioration in relations with the union
bargaining units representing the our employees; opportunities or acquisitions
that the we pursue; and the availability and terms of financing. Consequently,
actual events and results may vary significantly from those included in or
contemplated or implied by such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes regarding the Company's market risk position
from the information provided under the caption "Market Risk from Financial
Instruments" on page 16 of the Company's 1999 Annual Report to Stockholders.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note K to the Company's consolidated financial statements, under the caption
"Legal Matters" on pages 37 and 38 of the 1999 Annual Report to Stockholders,
provides information on certain litigation in which the Company is involved.
There have been no material developments to these matters, except as noted in
subsequent quarterly filings and except as described below.
On August 23, 2000, a lawsuit entitled Baker, et al. v. Jewel Food Stores, Inc.,
et al. was filed in the Circuit Court of Cook County, Illinois, against the
Company's subsidiary Dominick's and Jewel Food Stores, a subsidiary of
Albertson's, Inc. The complaint alleges, among other things, that Dominick's and
Jewel conspired to fix the retail price of milk in nine Illinois counties in the
Chicago area, in violation of the Illinois Antitrust Act. The plaintiffs purport
to bring the lawsuit as a class action on behalf of all persons residing in the
nine-county area who purchased milk from the defendants' retail stores in these
counties. The complaint seeks unspecified damages, and an injunction enjoining
the defendants from acts in restraint of trade. If damages were to be awarded,
they may be trebled under the applicable statute. The Company believes that the
allegations in the complaint are without merit, and plans to defend this action
vigorously.
ITEM 6(a). EXHIBITS
Exhibit 3.2 Form of By-laws of the Company as amended and restated.
Exhibit 11.1 Computation of Earnings Per Common Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
ITEM 6(b). REPORTS ON FORM 8-K
The Company filed no Current Reports on Form 8-K during the third quarter of
2000.
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<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: October 24, 2000 \s\ Steven A. Burd
------------------
Steven A. Burd
Chairman, President
and Chief Executive Officer
Date: October 24, 2000 \s\ Vasant M. Prabhu
--------------------
Vasant M. Prabhu
Executive Vice President
and Chief Financial Officer
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 9, 2000
Exhibit 3.2 Form of By-laws of the Company as amended and restated.
Exhibit 11.1 Computation of Earnings Per Common Share
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule (electronic filing only)
15
