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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GbnE6j6mV4YGo3O1vcda8025SK4Iyc4MRoHdQUFMXk0kyarF2JRmAZxHQzs53g34 JFfXvi3IfZvQ4oelvxwWew== 0000950149-03-000698.txt : 20030327 0000950149-03-000698.hdr.sgml : 20030327 20030326202158 ACCESSION NUMBER: 0000950149-03-000698 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEWAY INC CENTRAL INDEX KEY: 0000086144 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 943019135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00041 FILM NUMBER: 03619275 BUSINESS ADDRESS: STREET 1: 5918 STONERIDGE MALL RD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 9254673000 MAIL ADDRESS: STREET 1: 5918 STONERIDGE MALL ROAD CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: SAFEWAY STORES INC DATE OF NAME CHANGE: 19900226 10-K 1 f87908e10vk.htm FORM 10-K e10vk

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 December 28, 2002

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 incorporation or organization)		(I.R.S. Employer Identification No.)

5918 Stoneridge Mall Road Pleasanton, California		94588

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:		(925) 467-3000

Securities registered pursuant to Section 12(b) of the Act:


	Title of each class	Name of each exchange on which registered

	Common Stock, $0.01 par value per share	New York Stock Exchange
9.30%	Senior Secured Debentures due 2007	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

(Cover continued on following page)

(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 [ ] .

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ].

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked for price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter. Aggregate market value of the voting stock held by non-affiliates of Registrant as of June 15, 2002 was approximately $8.3 billion.

As of March 14, 2003, there were issued and outstanding 441.3 million shares of the Registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference to the extent specified herein:


Document Description		10-K Part

2002 Annual Report to Stockholders		I, II, III, IV

Proxy Statement for Annual Meeting of Stockholders to be held May 15, 2003, to be filed within 120 days after the end of the fiscal year ended December 28, 2002		III

TABLE OF CONTENTS


PART I
	Item 1. Business and Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Consolidated Financial Statements
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures.
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
CERTIFICATIONS
Exhibit Index
Form 10-K
Exhibit 10(iii).24
Exhibit 12.1
Exhibit 13.1
Exhibit 21.1
Exhibit 23.1

SAFEWAY INC. AND SUBSIDIARIES

PART I

Item 1. Business and Item 2. Properties

General:

Information appearing on pages 13 through 15 of the 2002 Annual Report to Stockholders of Safeway Inc. (“Safeway” or the “Company”) is incorporated herein by this reference.

Safeway was incorporated in the state of Delaware in July 1986 as SSI Holdings Corporation and, thereafter, its name was changed to Safeway Stores, Incorporated. In February 1990, the Company changed its name to Safeway Inc.

In November 2002, Safeway announced its decision to sell the Company’s Dominick’s division, which consists of 113 stores, and to exit the Chicago market. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Dominick’s operations are considered components of an entity which requires the Company to present the planned disposition as a discontinued operation. Accordingly, Dominick’s results are reflected separately in the Company’s consolidated financial statements, and Dominick’s information is excluded from the accompanying notes to the consolidated financial statements and the rest of the statistical and financial information included or incorporated by reference herein, unless otherwise noted.

Safeway’s corporate website is located at www.safeway.com. You may access our SEC filings free of charge at our corporate website promptly after such material is electronically filed with, or furnished to, the SEC. We do not intend for information found on the Company’s website to be part of this document.

SAFEWAY INC. AND SUBSIDIARIES

Item 1. Business and Item 2. Properties (continued)

Capital Expenditures:

Information appearing under the caption “Capital Expenditure Program” on pages 14 and 15 of the Company’s 2002 Annual Report to Stockholders is incorporated herein by this reference.

Safeway stores opened, remodels completed, acquired stores and stores closed or sold during the last five years were as follows:


		Total
		Five
		Years		2002		2001		2000		1999		1998

Stores opened:
	New locations		197		49		55		40		26		27
	Replacements		138		22		36		30		32		18

			335		71		91		70		58		45

Remodels completed: (Note A)
	Expansions		153		33		31		28		33		28
	“Four-Wall” remodels		979		158		200		208		207		206

			1,132		191		231		236		240		234

Genuardi’s stores acquired			39		—		39		—		—		—
Randall’s stores acquired			117		—		—		—		117		—
Carrs stores acquired			32		—		—		—		32		—
Stores closed or sold			196		32		44		45		45		30
Total stores at year-end					1,695		1,656		1,570		1,545		1,383

Note A. Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000.

Financial Information About Industry Segments:

Note O to the consolidated financial statements, included on page 47 of the Company’s 2002 Annual Report to Stockholders, is incorporated herein by this reference.

Trademarks:

Safeway 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 400 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 Pak n’ Save Foods, Vons, Pavilions, Carrs, Randalls, Tom Thumb and Genuardi’s Family Markets. 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. Canada Safeway has also registered certain of its trademarks in Canada.

SAFEWAY INC. AND SUBSIDIARIES

Working Capital:

At year-end 2002, working capital was composed of $4.3 billion of current assets and $3.9 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. 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.

Employees:

At year-end 2002, Safeway had more than 172,000 full and part-time employees. Approximately 76% 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.

During 2003, collective bargaining agreements covering employees in the Company’s stores in Arizona, Washington, Oregon, Southern California and British Columbia come up for renewal.

SAFEWAY INC. AND SUBSIDIARIES

Other Labor Matters:

Employees of companies that operate certain of the Company’s distribution centers in northern California, Maryland and Vancouver, British Columbia are covered by collective bargaining agreements. During the fourth quarter of 2000, Summit Logistics, a company that operates the Company’s northern California distribution center, was engaged in a 47-day strike which had an adverse effect on sales, product costs and distribution expenses at 246 Safeway stores in northern California, Nevada and Hawaii. In 2002, Safeway settled a dispute with Summit over certain of these distribution expenses without a material impact to the Company’s consolidated financial statements. Safeway estimates that the overall cost of the strike reduced 2000 net income by approximately $113.8 million ($0.13 per share). Additional information concerning the strike is set forth under the caption “Financial Review” on page 19 of the Company’s 2002 Annual Report to Stockholders and is incorporated herein by reference.

During the last three years, there have been no other significant work stoppages affecting the employees of the Company or the operators of the Company’s distribution centers.

Financial Information About Foreign and Domestic Operations and Export Sales:

Note O to the consolidated financial statements, included on page 47 of the Company’s 2002 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 captions “Legal Matters” and “Furr’s and Homeland Charge” as reported in Note M to the consolidated financial statements on pages 45 and 46 of the Company’s 2002 Annual Report to Stockholders is incorporated herein by this reference.

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 2002.

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 Q to the consolidated financial statements on page 49 of the Company’s 2002 Annual Report to Stockholders and is incorporated herein by this reference. There were 21,206 stockholders of record as of March 14, 2003; however, approximately 97% 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 $18.20 at the close of business on March 14, 2003.

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 2002 and has no current plans for dividend payments.

SAFEWAY INC. AND SUBSIDIARIES

During the 2002 fiscal year, 402,039 shares of Safeway common stock were sold to participants under the Safeway 401(k) Savings Plan (formerly named “The Vons Companies, Inc. 401(k) Savings Plan”) for an aggregate price of $12.6 million. These shares were purchased by the Plan’s trustee on the open market. Such shares, and interests in the Plan, were not registered under the Securities Act. The Plan covers only those employees of The Vons Companies, Inc. who were eligible to participate as of July 1, 1998.

Item 6. Selected Financial Data

The “Five-Year Summary Financial Information” included on pages 16 and 17 of the Company’s 2002 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 18 through 24 and under the captions “Capital Expenditure Program” and “Market Risk from Financial Instruments” on pages 14 and 15 of the Company’s 2002 Annual Report to Stockholders is incorporated herein by this reference.

Information regarding the terms of outstanding indebtedness appearing in Note E to the consolidated financial statements on pages 37 through 38 of the Company’s 2002 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 15 of the Company’s 2002 Annual Report to Stockholders is incorporated herein by this reference.

Item 8. Consolidated Financial Statements

Pages 25 through 51 of the Company’s 2002 Annual Report to Stockholders, which include the consolidated financial statements and the Independent Auditors’ Report as listed in Item 14(a)1 below, are incorporated herein by this reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the Company. Information on the nominees for election as Directors and the continuing Directors of the Company is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year.

SAFEWAY INC. AND SUBSIDIARIES

Executive Officers of the Company. The names and ages of the current executive officers of the Company and their positions as of March 14, 2003, 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.


			Year First Elected
Name and all Positions with the Company
Held at March 14, 2003	Age		Officer		Present Office

Steven A. Burd Chairman, President and Chief Executive Officer		53		1992		1993

Bruce L. Everette (1) Executive Vice President		51		1991		2001

Vasant M. Prabhu (2) Executive Vice President and Chief Financial Officer		43		2000		2000

Larree M. Renda Executive Vice President Retail Operations, Human Resources, Public Affairs, Labor and Government Relations, Reengineering and Communications		44		1991		1999

David F. Bond (3) Senior Vice President Finance and Control		49		1997		1997

David T. Ching Senior Vice President and Chief Information Officer		50		1994		1994

Dick W. Gonzales (4) Senior Vice President Human Resources		56		1998		1998

Robert A. Gordon (5) Senior Vice President and General Counsel		51		2000		2000

Rojon D. Hasker (6) Senior Vice President Marketing and Merchandising		46		2000		2002

Lawrence V. Jackson (7) Senior Vice President Supply Operations		49		1997		1997

Melissa C. Plaisance Senior Vice President Finance and Investor Relations		43		1993		1995

Kenneth M. Shachmut Senior Vice President Corporate Reengineering and Market Analysis		54		1994		1999

SAFEWAY INC. AND SUBSIDIARIES

Executive Officers of the Company (continued)


			Year First Elected
Name and all Positions with the Company
Held at March 14, 2003	Age		Officer		Present Office

David R. Stern (8) Senior Vice President Financial Planning and Business Development		48		1994		2002

Donald P. Wright Senior Vice President Real Estate and Engineering		50		1991		1991

(1)		Mr. Everette held the positions of President, Northern California Division, and Division Manager, Northern California Division, at Safeway Inc. from 1998 to 2001, and President, Phoenix Division, from 1995 to 1998.

(2)		Mr. Prabhu was previously the President of the Information and Media Group at the McGraw-Hill Companies, Inc., from 1998 to 2000, Chief Financial Officer of Pepsi-Cola International, a division of PepsiCo, Inc. from 1997 to 1998 and Senior Vice President, Finance and Chief Financial Officer of PepsiCo Restaurants International, a division of PepsiCo, Inc. from 1996 to 1997.

(3)		Mr. Bond was previously a partner at the accounting firm of Deloitte & Touche LLP.

(4)		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.

(5)		Mr. Gordon was previously a partner in the law firm of Pillsbury Winthrop LLP.

(6)		Ms. Hasker held the position of Retail Operations Manager in the Phoenix Division of Safeway Inc. from 1997 to 2000. She was named Vice President and Marketing Operations Manager of the Phoenix Division in January 2000 and later that year, she was promoted to Phoenix Division President.

(7)		Mr. Jackson was previously the Senior Vice President, Worldwide Operations of PepsiCo Food Systems, a division of PepsiCo, Inc., from 1995 to 1997.

(8)		Mr. Stern held the position of Vice President, Financial Planning and Analysis, at Safeway Inc. from December 19, 1994 until his election as Senior Vice President in April 2002.

Audit Committee Financial Expert. This information is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year.

Section 16(a) Beneficial Ownership. The information called for is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year.

Item 11. Executive Compensation

The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year. Information appearing under the captions “Report of the Compensation Committee; Report of the Section 162(m) Committee”; “Report of the Audit Committee” and “Stock Performance Graph” to be included in the Company’s 2003 Proxy Statement is not incorporated herein by this reference.

SAFEWAY INC. AND SUBSIDIARIES

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year.

Item 13. Certain Relationships and Related Transactions

Note L to the consolidated financial statements, included on page 45 of the Company’s 2002 Annual Report to Stockholders, is incorporated herein by this reference. The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2002 fiscal year.

Item 14. Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company also has investments in certain unconsolidated entities, including Casa Ley. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

SAFEWAY INC. AND SUBSIDIARIES

PART IV

Item 15. 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 Operations for fiscal 2002, 2001, and 2000.
Consolidated Balance Sheets as of the end of fiscal 2002 and 2001.
Consolidated Statements of Cash Flows for fiscal 2002, 2001, and 2000.
Consolidated Statements of Stockholders’ Equity for fiscal 2002, 2001, and 2000.
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 July 22, 1999, among Safeway Inc., SI Merger Sub, Inc. and Randall’s Food Markets Inc. (incorporated by reference to Exhibit 2 to the Registrant’s Form 8-K dated August 3, 1999).

Exhibit 2.2		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 2.3		Agreement and Plan of Merger dated as of October 13, 1998, by and among Safeway Inc., Windy City Acquisition Corp. and Dominick’s Supermarkets, Inc. (incorporated by reference to Exhibit (c)(1) to Registrant’s Schedule 14D-1 dated October 19, 1998), and Stockholders Agreement dated as of October 12, 1998 between Safeway Inc., Windy City Acquisition Corp., and each of the stockholders of Dominick’s Supermarkets, Inc. named on the signature pages thereto (incorporated by reference to Exhibit (c)(2) to Registrant’s Schedule 14D-1 dated October 19, 1998).

Exhibit 3.1		Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of 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 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 20, 1998).

Exhibit 3.2		Form of By-laws of the Company as amended and restated (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 9, 2000).

Exhibit 4(i).1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).2 to Registration Statement No. 33-33388).

SAFEWAY INC. AND SUBSIDIARIES


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) and Amendment to the Registration Rights Agreement dated as of July 22, 1999 by and between the Company, certain limited partnerships and RFM Acquisition LLC (incorporated by reference to Exhibit 4.5 to Registration Statement No. 333-84749).

Exhibit 4(i).3		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).4		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).5		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).6		Common Stock Purchase Warrants to purchase 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).7		Credit Agreement dated as of May 24, 2001 among Safeway Inc. and Canada Safeway Limited as Borrowers; Deutsche Bank Alex. Brown Inc. and J.P. Morgan Securities Inc. as Co-Arrangers; The Bank of Nova Scotia as Administrative Agent; Deutsche Bank AG New York Branch, The Chase Manhattan Bank, Bank of America, NA and Citicorp USA, Inc. as Co-Syndication Agents, US Bank National Association as Documentation Agent; 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 June 16, 2001).

Exhibit 4(i).8		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).9		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).10		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).

SAFEWAY INC. AND SUBSIDIARIES


Exhibit 4(i).11		Form of Officers’ Certificate establishing terms of the Registrant’s 7.00% Notes due 2002, 7.25% Notes due 2004, and 7.5% Notes due 2004, 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 14, 1999).

Exhibit 4(i).12		Form of Officers’ Certificate establishing terms of the Registrant’s 7.25% Debentures due 2031, 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 January 31, 2001).

Exhibit 4(i).13		Form of Officers’ Certificate establishing terms of the Registrant’s 6.15% Notes due 2006 and 6.50% Notes due 2011, 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 March 5, 2001).

Exhibit 4(i).14		Form of Officers’ Certificate establishing terms of the Registrant’s 3.625% Notes due 2003, including the forms of Notes (incorporated by reference to Exhibits 4.2 and 4.3 to Registrant’s Form 8-K dated November 5, 2001).

Exhibit 4(i).15		Form of Officers’ Certificate establishing terms of the Registrant’s 4.80% Notes due 2007, 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 July 16, 2002).

Exhibit 4(i).16		Form of Officers’ Certificate establishing terms of the Registrant’s 3.80% Notes due 2005 and 5.80% Notes due 2012 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 August 13, 2002).

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*		1999 Amended and Restated Equity Participation Plan of Safeway Inc. (incorporated by reference to Exhibit 10(iii).1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ending June 19, 1999).

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*		Amended and Restated 1997 Stock Purchase and Option Plan for Key Employees for Randall’s Food Markets, Inc. and Subsidiaries (incorporated by reference to Exhibit 4.3 to Randall’s Food Markets, Inc.’s Registration Statement on Form S-8 dated January 19, 1999).

Exhibit 10(iii).5*		Randall’s Food Markets, Inc. Stock Option Plan and Restricted Stock Plan (incorporated by reference to Exhibit 4.2 of Registration Statement 333-84749).

Exhibit 10(iii).6*		Amendment dated September 11, 1999 to the Randall’s Food Markets, Inc. Stock Option and Restricted Stock and the Amended and Restated 1997 Stock Purchase and Option Plan for Randall’s Food Markets, Inc. and Subsidiaries (incorporated by reference to Exhibit 4.3 of Registration Statement 333-84749).

SAFEWAY INC. AND SUBSIDIARIES


Exhibit 10(iii).7*		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 for the year ended November 1, 1996).

Exhibit 10(iii).8*		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 for the year ended November 1, 1996).

Exhibit 10(iii).9*		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 10(iii).10*		The 2001 Amended and Restated Operating Performance Bonus Plan for Executive Officers of Safeway Inc. (incorporated by reference to Exhibit 10(iii).10 of Registrant’s Form 10-K for the year ended December 30, 2000).

Exhibit 10(iii).11*		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).12*		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).13*		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).14*		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).15*		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).16*		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).17*		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).18*		Safeway Executive Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).18 to the Registrant’s Form 10-K for the year ended January 1, 2000).

Exhibit 10(iii).19*		Canada Safeway Limited Executive Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).19 to the Registrant’s Form 10-K for the year ended January 1, 2000).

Exhibit 10(iii).20*		Safeway Inc. Stock Option Gain Deferred Compensation Plan and Deferral Election Form (incorporated by reference to Exhibit 10(iii).20 to the Registrant’s Form 10-K for the year ended January 1, 2000).

SAFEWAY INC. AND SUBSIDIARIES


Exhibit 10(iii).21*		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).22*		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 10(iii).23*		Employment Agreement made and entered into as of August 14, 2000 by and between Safeway Inc. and Vasant Prabhu. (incorporated by reference to Exhibit 10(iii).23 of Registrant’s Form 10-K for the year ended December 30, 2000).

Exhibit 10(iii).24*		Separation Agreement between Safeway Inc. and Richard W. Dreiling, effective January 5, 2003.

Exhibit 10(iii).25*		The 2002 Equity Incentive Plan of Safeway Inc. (incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement No. 333-98103 on Form S-8 dated August 14, 2002).

Exhibit 11.1		Computation of Earnings per Share (incorporated by reference to page 40 of the Company’s 2002 Annual Report to Stockholders).

Exhibit 12.1		Computation of Ratio of Earnings to Fixed Charges.

Exhibit 13.1		Registrant’s 2002 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 7A, Item 8 and Item 13 above).

Exhibit 21.1		Schedule of Subsidiaries.

Exhibit 23.1		Independent Auditors’ Consent.

* Management contract, or compensatory plan or arrangement.

(b) Reports on Form 8-K:

On November 4, 2002, the Company filed a current report on Form 8-K under “Item 5. Other Events.”

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.


SAFEWAY INC.

By:	/s/Steven A. Burd	Date: March 26, 2003

	Steven A. Burd Chairman, 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/Vasant M. Prabhu		/s/David F. Bond

Vasant M. Prabhu Executive Vice President and CFO Date: March 26, 2003		David F. Bond Senior Vice President, Finance and Control Date: March 26, 2003


Director		Date

/s/Steven A. Burd Steven A. Burd		March 26, 2003

/s/James H. Greene, Jr. James H. Greene, Jr.		March 26, 2003

/s/Paul Hazen Paul Hazen		March 26, 2003

/s/Hector Ley Lopez Hector Ley Lopez		March 26, 2003

Robert I. MacDonnell		March , 2003

/s/Peter A. Magowan Peter A. Magowan		March 26 , 2003

George R. Roberts		March , 2003

/s/Rebecca A. Stirn Rebecca A. Stirn		March 26, 2003

William Y. Tauscher		March , 2003

SAFEWAY INC. AND SUBSIDIARIES

CERTIFICATIONS

I, Steven A. Burd, Chairman, President and Chief Executive Officer of Safeway Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Safeway Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: March 26, 2003	By:	/s/ Steven A. Burd

		Steven A. Burd Chairman, President and Chief Executive Officer

SAFEWAY INC. AND SUBSIDIARIES

CERTIFICATIONS

I, Vasant M. Prabhu, Chief Financial Officer of Safeway Inc., certify that:


Date: March 26, 2003	By:	/s/ Vasant M. Prabhu

		Vasant M. Prabhu Executive Vice President and Chief Financial Officer

SAFEWAY INC. AND SUBSIDIARIES

Exhibit Index

LIST OF EXHIBITS FILED WITH FORM 10-K
FOR THE PERIOD ENDED December 28, 2002


Exhibit 10(iii).24		Separation Agreement between Safeway Inc. and Richard W. Dreiling, effective January 5, 2003.

Exhibit 12.1		Computation of Ratio of Earnings to Fixed Charges.

Exhibit 13.1		Registrant’s 2002 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 7A, Item 8 and Item 13 above).

Exhibit 21.1		Schedule of Subsidiaries.

Exhibit 23.1		Independent Auditors’ Consent.

EX-10.24 4 f87908exv10w24.txt EXHIBIT 10(III).24 EXHIBIT 10(iii).24 SEPARATION AGREEMENT DREILING, as used herein, refers to Richard W. Dreiling, and his marital community, heirs, executors, administrators and assigns. SAFEWAY, as used herein, refers to Safeway Inc., and its successors and assigns, subsidiaries, divisions, directors, officers, managers, agents and employees, and each of them. WHEREAS Dreiling and Safeway desire to terminate their employment relationship on mutually agreeable terms, as set forth in this Separation Agreement ("Agreement"); and WHEREAS Safeway desires to acknowledge Dreiling's contributions to the company during the course of his employment; and WHEREAS Dreiling desires to compromise, settle and fully release any and all claims which he may have against Safeway related in any way to his employment with Safeway, any term or condition of that employment, or the termination of that employment; NOW THEREFORE, Dreiling and Safeway freely and voluntarily enter into and execute this Agreement in consideration of the following terms and conditions: A. Leave of Absence. Except as provided in Paragraph F, below, Dreiling will be on leave of absence from January 5, 2003 through and including May 30, 2006. During the period from January 5, 2003 through January 2, 2004, Safeway will pay to Dreiling, in weekly installments payable in accordance with normal Company payroll cycles, severance in the gross amount of $10,350 per week (equivalent to $538,200 per year, Dreiling's current base salary), less tax withholdings and authorized deductions. In consideration of Dreiling's work in connection with Safeway's plan for 2003, Safeway will pay to Dreiling the greater of (a) 75%, or (b) such other amount determined by Safeway in the ordinary course, of his maximum bonus for the year 2003, such amount to be paid in 52 weekly installments from January 2, 2004 through December 31, 2004. Dreiling may elect to have such weekly payments mailed to his home address or direct-deposited to his bank. For services rendered in 2002, Dreiling shall be eligible for a bonus equal to the maximum percentage bonus payment, if any, which Safeway may hereafter elect to make under the bonus plan applicable to Dreiling as an Executive Vice President; said bonus, if any, to be paid in March of 2003. Dreiling shall not be paid a bonus for work performed in any year thereafter except as set forth in this Paragraph. B. Vacation. On or about January 5, 2003, Dreiling shall be paid for all accrued vacation benefits earned, but unused, up to that time and shall thereafter cease to accrue any vacation benefits. 1 EXHIBIT 10(iii).24 C. Benefits. During the leave of absence period provided for in Paragraph A, above, Dreiling's retirement, 401(k), group health (i.e. medical, dental, orthodontia and vision) and stock option coverages will remain in effect, on the same terms and conditions on which such coverages are made available to salaried Safeway employees, including Dreiling's payment of any premiums, deductibles or co-payments allocable to him as a benefit plan participant. After December 31, 2004, Dreiling shall make direct payments to Safeway for his employee benefit contributions. Dreiling's right to continued group health plan coverage after the effective date of his resignation of employment in accordance with Paragraph 1, below, shall be governed by COBRA. Releasor will no longer be eligible for active participation in the life insurance or Long-Term Disability plans as of January 31, 2003. D. Outplacement. At Safeway's expense, Dreiling will be eligible for a 12-month, executive level outplacement assistance program through the Lee Hecht Harrison firm. E. New Employment. Dreiling's leave of absence shall end immediately upon Dreiling's commencement of employment with an employer other than Safeway. Upon such commencement of employment, (1) Dreiling shall cease employment with Safeway; (2) Safeway shall pay to Dreiling in a lump sum any remaining amounts payable to Dreiling under Paragraph A, above (unless Dreiling's new employment is as described in Paragraph F, below); (3) Dreiling's coverage under all Safeway benefit plans or programs shall cease, subject to COBRA, including any further retirement plan accruals; and (4) Dreiling's stock option participation and vesting shall cease, triggering Dreiling's obligation to exercise any vested stock options within 90 days. Dreiling agrees promptly (within 5 days or less) to notify Safeway if he commences any new employment or undertakes any activity that would result in the termination of his leave of absence in accordance with this Paragraph. F. Termination of Payments. Dreiling's entitlement to any weekly payment under Paragraph A, and/or any lump sum payment under Paragraph E, of this Agreement shall end, and Safeway shall have no further obligations to Dreiling, immediately upon Dreiling's commencement of employment with, or undertaking to provide any paid or unpaid consulting services to, any person or entity, other than Safeway, that is engaged in or is preparing to engage in the food and/or drug retailing business, and that competes directly or indirectly with Safeway in any geographical location regardless of whether that is the geographical location in which Dreiling is assigned to work. G. Relocation Benefits. In the event that Dreiling commences new employment (unless Dreiling's new employment is as described in Paragraph F, above) prior to the termination of his leave of absence, Safeway shall provide Dreiling with the benefits of Safeway Relocation Policy Level 1 - Movement of Household Goods, provided that such benefits are not provided by Dreiling's new employer. In consideration of the foregoing, Dreiling agrees as follows: 2 EXHIBIT 10(iii).24 1. Resignation. Dreiling agrees to, and hereby does, resign his position as an officer of Safeway effective January 5, 2003. Dreiling further agrees to, and hereby does, resign his Safeway employment effective the earlier of: (a) the date on which Dreiling's leave of absence ends in accordance with Paragraph E of this Agreement; or (b) May 30, 2006. 2. Release of Claims. Dreiling hereby releases and forever discharges Safeway of and from any and all claims, demands, actions, causes of action, damages and liabilities (all hereinafter referred to as "claims"), whether or not now known, suspected or claimed, which Releasor ever had, now has, or may hereafter claim to have had against Safeway, relating in any way to his employment with Safeway, or any status, term or condition of such employment or the termination of that employment. This release of claims is expressly intended to, and does, extend to and include, but is not limited to, claims under: Title VII of the Civil Rights Act of 1964, as amended; the Equal Pay Act, as amended; the Fair Labor Standards Act, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Americans With Disabilities Act, as amended; the Employee Retirement Income Security Act, as amended; the Older Workers Benefit Protection Act, as amended; the California Fair Employment and Housing Act, as amended; the California Labor Code; and any other federal, state or local statutes, ordinances or regulations prohibiting any form or forms of discrimination in employment and/or relating to the payment of wages and benefits. This release also extends to and includes, but is not limited to, any claims by Dreiling for: breach of any express or implied written or oral contract; intentional or negligent infliction of emotional distress; impairment or interference with economic activities or opportunities; unlawful interference with employment rights; defamation; wrongful termination; wrongful discharge in violation of public policy; breach of any express or implied covenant of good faith and fair dealing; and any and all other common law contract and/or tort claims. 3. Covenant Not to Sue. Dreiling covenants and agrees never, individually or with any other person or in any way, voluntarily to commence, aid in any way, prosecute or cause or permit to be commenced or prosecuted against Safeway any action or other proceeding based upon any claim which is covered by this Agreement. 4. Sole Right to Claims. Dreiling represents and warrants that no other person had or has any interest in the claims referred to in this Agreement; that he has the sole right and exclusive authority to execute this Agreement; and that he has not sold, assigned, transferred, conveyed or otherwise disposed of any claim or demand relating to any matter covered by this Agreement. 5. No Admission of Liability. Dreiling acknowledges and understands that the consideration referred to herein is provided without admission or concession by Safeway of any violation of any law or liability to Dreiling; that said consideration satisfies and fully extinguishes any obligations owed to him by Safeway under any prior contract or agreement, and 3 EXHIBIT 10(iii).24 that said consideration provides him with valuable benefits in addition to any to which he already is entitled under Safeway's employee benefit plans or otherwise. 6. Release of Unknown Claims. Dreiling expressly waives any right or benefit available in any capacity under the provisions of Section 1542 of the California Civil Code, which section provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 7. No Other Consideration. Dreiling acknowledges and agrees that no consideration other than as provided for in this Agreement has been or will be paid or furnished by Safeway; that he will make no claim and hereby waives any right he may now have or may hereafter have, based upon any alleged oral alteration, amendment, modification or any other alleged change in this Agreement; and that Dreiling understands and has freely and voluntarily entered into and executed this Agreement. 8. Dreiling's Rights. Releasor understands and agrees that: a. he has a period of twenty-one (21) days to consider this Agreement and determine whether he wishes to execute the same; b. any rights or claims that may arise after the date of this Agreement are not waived by his execution of the Agreement; c. he is advised carefully to consider the terms of this Agreement and to consult with an attorney of his choice before signing this Agreement; d. he has a period of seven (7) days after his execution of the Agreement within which he may revoke the Agreement and that the Agreement shall not become effective or enforceable until the seven-day revocation period has expired; and e. in the event that Dreiling fails timely to execute this Agreement and return the executed original thereof to Safeway, or if Dreiling timely exercises the right of revocation provided for in Paragraph 8(d), above, then Safeway shall be relieved of any and all obligations to Dreiling under this Agreement. 9. Confidential Information. Dreiling covenants and agrees that, without the express written consent of an executive officer of Safeway, he will not at any time reveal any confidential 4 EXHIBIT 10(iii).24 or proprietary information about Safeway obtained during the course of his employment with Safeway. 10. Cooperation in Lawsuits. Dreiling covenants and agrees that he will cooperate fully when and as reasonably required by Safeway in the defense or prosecution of any claims, charges, complaints or lawsuits that have been or may hereafter be filed by or against Safeway, in which event Safeway will indemnify Dreiling in the same manner and to the same extent as he if were still employed by Safeway. Such cooperation will include, but is not limited to, meeting with Safeway's counsel and being available for deposition and/or trial testimony upon reasonable notice. Safeway agrees to reimburse Dreiling for reasonable expenses incurred by him in furnishing such cooperation. 11. Injunctive Relief. Dreiling understands and agrees that a breach of any of the covenants set forth in paragraphs 3, 9 and 10, above, shall be a material breach of the Agreement, for which Safeway may, at its sole option: i) immediately cease providing to Dreiling any of the benefits provided for in this Agreement; and/or ii) seek injunctive relief, damages, attorneys' fees and costs. Dated: January 6, 2003 /s/ Richard W. Dreiling ----------------------- Richard W. Dreiling Dated: January 6, 2003 Safeway Inc. /s/ Robert A. Gordon -------------------- By: Robert A. Gordon Its: Senior Vice President & General Counsel 5 EX-12.1 5 f87908exv12w1.txt EXHIBIT 12.1 Exhibit 12.1 SAFEWAY INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)

(a) Based on a 10% discount factor on the estimated present value of future operating lease payments. EX-13.1 6 f87908exv13w1.txt EXHIBIT 13.1 EXHIBIT 13.1 COMPANY IN REVIEW SAFEWAY INC. AND SUBSIDIARIES Safeway Inc. ("Safeway" or the "Company") is one of the largest food and drug retailers in North America, with 1,695 continuing stores and 113 Dominick's stores which are held for sale at year-end 2002. See Planned Disposition of Dominick's. The Company's continuing U.S. retail operations are located principally in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas 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. Safeway also has a 49% interest in Casa Ley, S.A. de C.V. ("Casa Ley") which operates 102 food and general merchandise stores in Western Mexico. In addition, the Company has a strategic alliance with and a 52.5% ownership interest in Grocery Works Holdings, Inc., an Internet grocer. PLANNED DISPOSITION OF DOMINICK'S In November 2002, Safeway announced its decision to sell Dominick's, which consists of 113 stores, and to exit the Chicago market. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," Dominick's operations are presented as a discontinued operation. Accordingly, Dominick's results are reflected separately in the Company's consolidated financial statements and Dominick's information is excluded from the accompanying notes to the consolidated financial statements and the rest of the financial information included herein, unless otherwise noted. Sales at Dominick's were $2.4 billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000. In accordance with SFAS No. 144, Dominick's net assets and liabilities have been written down to estimated fair market value. The fair value of Dominick's was determined by an independent third-party appraiser which primarily used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is known. STORES Safeway's average store size is approximately 44,000 square feet. Safeway's primary new store prototype is 55,000 square feet and is designed both to accommodate changing consumer needs and to achieve certain operating efficiencies. 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. Most stores offer a wide selection of food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral, pharmacy, Starbucks coffee shops and adjacent fuel centers. Safeway continues to operate a number of smaller stores that 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. The following table summarizes Safeway's stores by size at year-end 2002:

STORE OWNERSHIP At year-end 2002, 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, and offers many specialty items through its various specialty departments. SAFEWAY INC. 2002 ANNUAL REPORT 13 Safeway has developed a line of some 1,265 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 are unique to the category and not available from national brand manufacturers. The Safeway SELECT line of products includes carbonated soft drinks; unique salsas; bagged salads; whole bean coffees; the Indulgence line of cookies and other sweets; the Verdi line of frozen pizzas, fresh and frozen pastas, pasta sauces and olive oils; the Primo Taglio line of meats, cheeses and sandwiches; Artisan fresh-baked breads; NutraBalance pet food; Ultra laundry detergents and dish soaps; and Softly paper products. The Safeway SELECT line also includes an extensive array of ice creams, frozen yogurts and sorbets; Healthy Advantage items such as low-fat ice creams and low-fat cereal bars; and Gourmet Club frozen entrees and hors d'oeuvres. 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 28% of Safeway's private label merchandise is manufactured in Company-owned plants, and the remainder is purchased from third parties. 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 2002:

In addition, the Company operates laboratory facilities for quality assurance and research and development in certain of its plants and at its corporate offices. 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. The Company's distribution centers in northern California, Maryland and British Columbia are operated by third parties. CAPITAL EXPENDITURE PROGRAM A component of the Company'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. Over the last several years, Safeway management has continued to strengthen its program to select and approve new capital investments. The table below presents the Company's cash capital expenditures and details changes in the Company's store base over the last three years:

Note 1. Excludes acquisitions. Includes 11 former ABCO stores purchased in 2001. Note 2. Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $200,000. 14 SAFEWAY INC. 2002 ANNUAL REPORT Safeway invested $1.4 billion in cash capital expenditures in 2002 and opened 71 stores and remodeled 191 stores. In 2003, Safeway expects to spend between $1.1 billion and $1.3 billion in cash capital expenditures and open 50 to 55 new stores and complete between 100 and 125 remodels. PERFORMANCE-BASED COMPENSATION The Company has performance-based compensation plans that cover more than 21,000 management and professional employees. Performance-based compensation plans set overall bonus levels based upon operating results and working capital management. Individual bonuses are based on job performance. Certain employees are covered by capital investment bonus plans that measure the performance of capital projects based on operating performance over several years, and other employees are covered by supply division results. MARKET RISK FROM FINANCIAL INSTRUMENTS Safeway manages interest rate risk through the strategic use of fixed and variable interest rate debt and, from time to time, interest rate swaps. As of year-end 2002, the Company did not have any outstanding interest rate swap agreements. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. The Company does not consider the potential losses in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material. The table below presents principal amounts and related weighted average rates by year of maturity for the Company's debt obligations at year-end 2002 (dollars in millions):

(1) Primarily fixed-rate debt SAFEWAY INC. 2002 ANNUAL REPORT 15 FIVE-YEAR SUMMARY FINANCIAL INFORMATION SAFEWAY INC. AND SUBSIDIARIES

16 SAFEWAY INC. 2002 ANNUAL REPORT FIVE-YEAR SUMMARY FINANCIAL INFORMATION SAFEWAY INC. AND SUBSIDIARIES

Note 1. Defined as stores operating the entire year in both the current year and the previous year. Comparable stores include replacement stores while identical stores do not. 2001 and 2000 sales increases reflect actual results and have not been adjusted to eliminate the estimated 50-basis-point impact of the 2000 northern California distribution center strike. Note 2. Excludes goodwill amortization. Management believes this ratio is relevant because it assists investors in evaluating Safeway's ability to control costs. Note 3. Defined as store remodel projects (other than maintenance) generally requiring expenditures in excess of $200,000. SAFEWAY INC. 2002 ANNUAL REPORT 17 FINANCIAL REVIEW SAFEWAY INC. AND SUBSIDIARIES PLANNED DISPOSITION OF DOMINICK'S In November 2002, Safeway announced its decision to sell Dominick's, which consists of 113 stores, and to exit the Chicago market. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," Dominick's operations are presented as a discontinued operation. Accordingly, Dominick's results are reflected separately in the Company's consolidated financial statements and Dominick's information is excluded from the accompanying notes to the consolidated financial statements and the rest of the financial information included herein, unless otherwise noted. Sales at Dominick's were $2.4 billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000. In accordance with SFAS No. 144, Dominick's net assets and liabilities have been written down to estimated fair market value. The fair value of Dominick's was determined by an independent third party appraiser which primarily used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is known. STOCK REPURCHASE In July 2002, Safeway announced that its Board of Directors had increased the authorized level of the Company's stock repurchase program to $3.5 billion from the previously announced level of $2.5 billion. During 2002, Safeway repurchased 50.1 million shares of common stock at a cost of $1.5 billion. From initiation of the program in 1999 through the end of 2002, Safeway had repurchased 87.0 million shares of common stock at a cost of $2.9 billion, leaving $0.6 billion available for repurchases. ACQUISITION OF GENUARDI'S FAMILY MARKETS, INC. ("GENUARDI'S") In February 2001, Safeway acquired all of the assets of Genuardi's for approximately $530 million in cash (the "Genuardi's Acquisition"). On the acquisition date, Genuardi's operated 39 stores in the greater Philadelphia, Pennsylvania area, including New Jersey and Delaware. The Genuardi's Acquisition was accounted for as a purchase and was funded through the issuance of commercial paper and debentures. RESULTS OF OPERATIONS CONTINUING OPERATIONS Safeway's income from continuing operations before cumulative effect of accounting change was $568.5 million ($1.20 per share) in 2002, $1,286.7 million ($2.51 per share) in 2001 and $1,154.2 million ($2.26 per share) in 2000. Safeway adopted SFAS No. 142, "Goodwill and Other Intangible Assets," during the first quarter of 2002 and recorded an aggregate impairment charge of $700 million for the cumulative effect of adopting this statement. The charge for Dominick's of $589 million and Randall's of $111 million reduced the carrying value of goodwill to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. During the fourth quarter of 2002, Safeway performed its annual impairment review for goodwill under SFAS No. 142. As a result of this review Safeway recorded a charge of $704.2 million for Randall's, which is recorded as a component of continuing operations, and $583.8 million for Dominick's, which is recorded as a component of discontinued operations. These charges reflect declining multiples in the retail grocery industry and the operating performance of these divisions. Net loss after the cumulative effect of this accounting change, discontinued operations and the fourth-quarter goodwill impairment was $828.1 million ($1.75 per share). In 1987, Safeway assigned a number of leases to Furr's Inc. ("Furr's") and Homeland Stores, Inc. ("Homeland") as part of the sale of the Company's former El Paso, Texas and Oklahoma City, Oklahoma divisions. Furr's filed for Chapter 11 bankruptcy on February 8, 2001. Homeland filed for Chapter 11 bankruptcy on August 1, 2001. Safeway is contingently liable if Furr's and Homeland are unable to continue making rental payments on these leases. In 2001, Safeway recorded a pretax charge to operating and administrative expense of $42.7 million ($0.05 per share) to recognize the estimated lease liabilities associated with these bankruptcies and for a single lease from Safeway's former Florida division. During 2002, the accrual was reduced by $12.0 million as cash was paid out. In addition, Furr's began the liquidation process and Homeland emerged from bankruptcy in 2002 and, based on the resolution of various leases, Safeway reversed $12.1 million of the accrual, leaving a balance of $18.6 million at year-end 2002. Safeway is unable to determine its maximum potential obligation with respect to other divested operations, should there be any similar defaults, because information about the total number of leases from these divestitures that are still outstanding is not available. Based on an internal assess- [BAR CHART]

18 SAFEWAY INC. 2002 ANNUAL REPORT ment by the Company, performed by taking the original inventory of assigned leases at the time of the divestitures and accounting for the passage of time, Safeway expects that any potential losses beyond those recorded, should there be any similar defaults, would not be material to Safeway's net operating results, cash flow or financial position. Safeway also recorded a pre-tax charge of $30.1 million ($0.04 per share) in other loss in 2001 to reduce the carrying amount of the Company's investment in GroceryWorks Holdings, Inc. ("GroceryWorks") to its estimated fair value. Future Beef Operations Holdings, LLC ("FBO"), a meat processing company based in Denver, Colorado, was placed in bankruptcy in March 2002. Safeway was a 15% equity investor in FBO, had a supply contract for the purchase of beef from FBO, and had a common board member with FBO. Safeway had a first-loss deficiency agreement with FBO's principal lender which provided that, under certain circumstances and in the event of a liquidation of FBO being initiated, Safeway would pay the lender up to $40 million if proceeds from the sale of collateral did not fully repay the amount owed by FBO to the lender. Safeway accrued a pre- tax charge of $51.0 million ($0.06 per share) in other income (loss) related to the bankruptcy in 2001. The charge was primarily for payments under contractual obligations and the firstloss deficiency agreement in the event FBO was liquidated. FBO is currently in the process of being liquidated and Safeway paid the lender $40 million in January 2003. During the fourth quarter of 2000, Summit Logistics, a company that operates Safeway's northern California distribution center, was engaged in a 47-day strike (the "Summit strike") which had an adverse effect on sales, product costs and distribution expenses at 246 Safeway stores in northern California, Nevada and Hawaii. In 2002, Safeway settled a dispute with Summit over certain of these distribution expenses without a material impact to the Company's consolidated financial statements. Safeway estimates that the overall cost of the strike reduced 2000 net income by approximately $113.8 million ($0.13 per share). Safeway estimated the impact of the strike by comparing internal forecasts immediately before the strike with actual results during the strike. SALES Identical-store sales (stores operating the entire year in both 2002 and 2001, excluding replacement stores) decreased 1.2% in 2002 while comparable-store sales, which include replacement stores, decreased 0.6%. Sales were impacted by continued softness in the economy, an increase in competitive activity, an overly aggressive shrink-reduction effort and disruptions associated with the centralization of buying and merchandising. Identical-store sales increased 2.0% in 2001, while comparable-store sales rose 2.7%. Safeway estimates that the Summit strike in 2000 had a positive impact on 2001 comparablestore and identical-store sales of approximately 50 basis points. [PIE CHART]

Total sales for 2002 were $32.4 billion, compared to $31.8 billion for 2001 and $29.4 billion for 2000. Sales increased in 2002 primarily due to new store openings. 2001 sales increases were attributable to the Genuardi's Acquisition, new store openings and increased sales at continuing stores as well as the effect of the Summit strike in 2000. GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the costs of inventory sold during the period, including purchase and distribution costs. In addition, advertising and promotional expenses, net of vendor allowances, are a component of cost of goods sold. Vendor allowances that relate to the Company's buying and merchandising activities consist primarily of promotional allowances, advertising allowances and, to a lesser extent, slotting allowances and are included as a component of cost of sales. Vendor allowances totaled $2.1 billion in 2002 and 2001 and $1.9 billion in 2000. Safeway includes all store occupancy costs in operating and administrative expense. Gross profit increased to $10,096.4 million, or 31.16% of sales, in 2002, from $9,849.6 million, or 30.98% of sales, in 2001 and $8,789.5 million, or 29.85% of sales, in 2000. The 2002 increase in the gross profit margin was primarily due to shrink control and continued improvements in buying practices. The increase in the gross profit margin in 2002 was less than in 2001 because much of the Company's cost savings were reinvested in pricing and promotion. Safeway estimates that approximately 26 basis points of the 2001 increase in the gross profit margin was attributable to the Summit strike in 2000. The remaining 87-basis-point improvement was due primarily to continuing improvements in shrink control, buying practices and private-label growth. SAFEWAY INC. 2002 ANNUAL REPORT 19 OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense was $7,718.9 million, or 23.82% of sales, in 2002 compared to $7,212.9 million, or 22.68% of sales, in 2001 and $6,437.8 million, or 21.87% of sales, in 2000. Operating and administrative expense as a percentage of sales increased 114 basis points in 2002 due primarily to higher employee benefit costs, higher real estate occupancy costs, higher pension expense and soft sales. These increases were partially offset by a decrease of approximately 10 basis points due to income received from Canadian Imperial Bank of Commerce for the termination of an in-store banking agreement with Safeway. Approximately 13 basis points of the 2001 increase was attributable to the charge related to the Furr's and Homeland bankruptcies. Another 14 basis points was attributable to the Genuardi's Acquisition. The remaining 54- basis point increase was due primarily to unfavorable comparisons in pension income and property gains, higher real estate occupancy costs, utility cost increases and higher workers' compensation expense. These increases were partially offset by a decrease of approximately eight basis points attributable to the Summit strike. Annual goodwill amortization was $101.0 million in 2001 and $87.2 million in 2000. Beginning in 2002, goodwill no longer is being amortized. Goodwill was tested for impairment upon adoption of SFAS No.142, and is being tested annually for impairment. INTEREST EXPENSE Interest expense from continuing operations was $368.6 million in 2002, $366.1 million in 2001 and $363.6 million in 2000. In accordance with EITF Issue No. 87-24, interest expense was allocated to discontinued operations based on the ratio of Dominick's net assets to total Safeway net assets. Interest expense of $62.2 million in 2002, $80.8 million in 2001 and $93.6 million in 2000 was allocated to, and is included in, loss on discontinued operations. Allocated interest decreased in 2002 and 2001 primarily because Dominick's net assets have decreased relative to total Safeway net assets. Interest expense from continuing operations increased in both 2002 and 2001 primarily due to less interest allocated to discontinued operations and higher average borrowings primarily from debt incurred to finance the repurchase of Safeway stock and the Genuardi's Acquisition in 2001, partially offset by lower interest rates. OTHER INCOME (LOSS) Other income (loss) consists primarily of net equity in earnings or losses from Safeway's unconsolidated affiliates, which was a loss of $0.2 million in 2002, and income of $20.2 million in 2001 and $31.2 million in 2000. Equity in losses, net, in 2002 includes approximately $15.8 million in charges related to the resolution of physical inventory count discrepancies at Casa Ley. Other income (loss) also includes interest income of $8.5 million in 2002, $13.5 million in 2001 and $12.0 million in 2000. Other loss in 2001 includes a $30.1 million impairment charge to reduce the carrying amount of the Company's investment in GroceryWorks to its estimated fair value. Safeway also recorded a $51.0 million charge related to the FBO bankruptcy in 2001. DISCONTINUED OPERATIONS In November 2002, Safeway announced its decision to sell Dominick's, which consists of 113 stores, and to exit the Chicago market. In accordance with SFAS No. 144, Dominick's operations are presented as a discontinued operation. As a result of the planned exit of the Chicago market, the Company recorded a pre-tax loss from discontinued operations of $787.9 million ($1.47 per share) in 2002, consisting of $583.8 million in Dominick's goodwill impairment, $201.3 in estimated loss on disposal of Dominick's and $2.8 million in loss from store operations. Pre-tax loss from discontinued operations was $27.7 million ($0.07 per share) in 2001 and $76.4 million ($0.13 per share) in 2000. Loss from discontinued operations includes all direct charges to operations at Dominick's as well as allocated interest expense of $62.2 million in 2002, $80.8 million in 2001 and $93.6 million in 2000. Loss from discontinued operations also included goodwill amortization of $39.4 million in 2001 and $39.0 million in 2000. Corporate overhead is not included in discontinued store operations. Sales at discontinued operations were $2.4 billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000. In accordance with SFAS No. 144, Dominick's net assets and liabilities have been written down to estimated fair market value. The fair value of Dominick's was determined by an independent third party appraiser which primarily used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is known. RELATED PARTY TRANSACTIONS See Note L of the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those accounting policies that management believes are important to the portrayal of Safeway's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 20 SAFEWAY INC. 2002 ANNUAL REPORT WORKERS' COMPENSATION The Company is primarily self-insured for workers' compensation, automobile and general liability costs. It is the Company's policy to record its estimated self-insurance liability, as determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, discounted at a riskfree interest rate. Any actuarial projection of losses concerning workers' compensation and general liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. An example of how change in discount rates can affect Safeway's reserve occurred in 2002 when a 100-basis-point reduction in the Company's discount rate, based on changes in market rates, increased its liability by approximately $9.0 million. The majority of the Company's workers' compensation liability is from claims occurring in California. California workers' compensation has received a significant amount of attention from the state's politicians, insurers, employers and providers, as well as the public in general. Recent years have seen an escalation in the number of legislative reforms, judicial rulings and social phenomena affecting workers' compensation in California. Some of the factors that may affect the Company's reserve estimates include changes in benefit levels and medical fee schedules. In 2002, the State of California passed AB-749 which increases the maximum weekly temporary-disability rate beginning in 2003. Weekly benefits are calculated as a function of the hourly pay rate and the average number of hours worked. The law also has several cost containing measures, such as the establishment of some medical fee schedules and abolishment of the treating physician presumption. The impact of the increase in benefits on Safeway is mitigated by the high ratio of part-time workers, who typically qualify for benefit amounts below the weekly maximum. The Company's workers' compensation future funding estimates anticipate no change in the benefit structure. Statutory changes could have a significant impact on future claim costs. The California Legislature is currently discussing additional benefit reforms. At this point it is unknown what, if any, changes will result. STORE CLOSURES It is the Company's policy to recognize losses relating to the impairment of long-lived assets when expected net future cash flows are less than the assets' carrying value. For stores closed that are under long-term leases, the Company records a liability for the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries. In both cases, fair value is determined by estimating net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the closed store is located and, when necessary, utilizes local real estate brokers. However, these estimates project cash flow several years into the future and are affected by variable factors such as inflation, the strength of the real estate markets and economic conditions. EMPLOYEE BENEFIT PLANS The determination of Safeway's obligation and expense for pension and other post-retirement benefits is dependent, in part, on the Company's selection of certain assumptions used by its actuaries in calculating these amounts. These assumptions are disclosed in Note J to the consolidated financial statements and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. In accordance with generally accepted accounting principles, actual results that differ from the Company's assumptions are accumulated and amortized over future periods and, therefore, affect its recognized expense and recorded obligation in such future periods. While Safeway believes that its assumptions are appropriate, significant differences in Safeway's actual experience or significant changes in the Company's assumptions may materially affect Safeway pension and other post- retirement obligations and its future expense. An example of how changes in these assumptions can affect Safeway's financial statements occurred in 2002. Based on the Company's review of market interest rates, actual return on plan assets and other factors, Safeway lowered its discount rate for U.S. plans to 6.50% at year-end 2002 from 7.50% at year-end 2001. The Company also lowered its expected return on plan assets for U.S. plans to 8.50% at year-end 2002 from 9.00% at year-end 2001. These rates are applied to the calculated value of plan assets and liabilities which results in an amount that is included in pension expense or income in the following years. When not considering other changes in assumptions or actual return on plan assets, the 100-basis-point change in the discount rate alone will negatively impact 2003 U.S. pension expense by approximately $19.8 million and the 50-basis-point change in expected return on plan assets alone will negatively impact 2003 U.S. pension expense by $6.5 million. While changes in assumptions may materially affect the Company's future expense, the most significant factor in determining this amount is the fair value of plan assets at year end. Not considering any changes in assumptions, a $100 million change in plan assets in 2002 would impact 2003 U.S. pension expense by approximately $8.5 million. The fair value of plan assets can vary significantly from year to year. SAFEWAY INC. 2002 ANNUAL REPORT 21 GOODWILL SFAS No. 142 became effective for Safeway in the first quarter of 2002. Adoption of this standard changed our method of accounting for goodwill. Goodwill is no longer amortized and instead is reviewed for impairment on an annual basis. Safeway recorded a $700 million charge for the cumulative effect of adoption of SFAS No. 142 in the first quarter of 2002 and another $1,288 million goodwill impairment charge after completing its annual impairment test in the fourth quarter of 2002. See Note C to the consolidated financial statements. Safeway reviewed goodwill for impairment at the operating division level. All of the Company's 2002 goodwill impairment related to Dominick's, which the Company is currently planning to sell, and Randall's, which had a remaining goodwill balance of $452.6 million at year-end 2002. Fair value was determined by an independent third party appraiser which primarily used the discounted cash flow method and the guideline company method. The annual impairment review required by SFAS No. 142 requires extensive use of accounting judgments and estimates of future operating results. Changes in estimates or application of alternative assumptions and definitions could produce significantly different results. The factors that most significantly affect the fair value calculation are market multiples and estimates of future cash flows. LIQUIDITY AND FINANCIAL RESOURCES Net cash flow from operating activities was $1,938.1 million in 2002, $2,150.0 million in 2001 and $1,909.5 million in 2000. Net cash flow from operating activities decreased in 2002 primarily due to changes in working capital. Net cash flow from operating activities increased in 2001 largely due to increased net income, partially offset by changes in working capital. Cash flow used by investing activities was $1,313.1 million in 2002, $2,131.6 million in 2001 and $1,337.0 million in 2000. Cash flow used by investing activities decreased in 2002 primarily because of cash used to acquire Genuardi's in 2001, as well as lower capital expenditures. Cash flow used by investing activities increased in 2001 over 2000 primarily because of cash used to acquire Genuardi's, as well as increased capital expenditures. Safeway opened 71 new stores and remodeled 191 stores in 2002. In 2001, Safeway opened 91 new stores and remodeled 231 stores. Cash flow used by financing activities was $597.7 million in 2002 primarily due to cash flow from operations being used to pay down debt. Cash flow from financing activities was $12.1 million in 2001 primarily due to additional borrowings related to the Genuardi's Acquisition, almost entirely offset by cash flow from operations being used to pay down debt. Based upon the current level of operations, Safeway believes that cash flow from operating activities and other sources of liquidity, including borrowing under the Company'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 Safeway's business will continue to generate cash flow at or above current levels or that the Company will be able to maintain its ability to borrow under the commercial paper program and bank credit agreement. If the Company's credit rating were to decline below its current level of Baa2/BBB, the ability to borrow under the commercial paper program would be adversely affected. Safeway's ability to borrow under the bank credit agreement is unaffected by Safeway's credit rating. However, if Safeway's 2002 Adjusted EBITDA (as defined in Safeway's bank credit agreement) to interest ratio of 7.68 to 1 were to decline to 2.0 to 1, or if Safeway's year-end 2002 debt to Adjusted EBITDA ratio of 2.55 to 1 were to grow to 3.5 to 1, Safeway's ability to borrow under the bank credit agreement would be impaired. The table below presents significant contractual obligations of the Company at year-end 2002:

(1) Minimum lease payments, less amounts representing interest. 22 SAFEWAY INC. 2002 ANNUAL REPORT NEW ACCOUNTING STANDARDS SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. The Company adopted SFAS No. 142 on December 30, 2001. Under the transitional provisions of SFAS No. 142, the Company's goodwill was tested for impairment as of December 30, 2001. Each of the Company's reporting units was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily considered the discounted cash flow, guideline company and similar transaction methods. As a result of the Company's impairment test, the Company recorded an impairment loss for Dominick's of $589 million and Randall's of $111 million to reduce the carrying value of goodwill to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of accounting change in the Company's statement of operations. As required by SFAS No. 142, Safeway tested goodwill for impairment again in the fourth quarter of 2002, which represents the annual impairment testing date selected by Safeway. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily used the discounted cash flow method and guideline company method. As a result of this annual review, Safeway recorded an impairment charge for Dominick's goodwill of $583.8 million, which is recorded as a component of discontinued operations, and for Randall's goodwill of $704.2 million, which is recorded as a component of operating income. These additional charges reflect declining multiples in the retail grocery industry and operating performance. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business," became effective for Safeway on December 30, 2001. In accordance with SFAS No. 144, the Company evaluates the carrying value of the assets in relation to its expected future cash flows whenever management commits to close or relocate a store or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable. If the carrying value is greater than the future cash flows, a provision is made for the impairment of the assets to write the assets down to fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of interest. These provisions are recorded as a component of operating and administrative expense and are disclosed in Note D. Adoption of this provision of SFAS No. 144 did not have a material effect on the Company's financial statements. In the fourth quarter of 2002, Safeway decided to sell Dominick's and to exit the Chicago market. In accordance with SFAS No. 144, Dominick's net assets as of year-end 2002 were written down to their estimated fair market value and presented as a discontinued operation. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar economic effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 becomes effective for the Company in the first quarter of 2003. The Company is currently analyzing the effect that SFAS No. 145 will have on its financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs, including store closures. SFAS No. 146 replaces previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of the company's commitment to an exit plan. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. In accordance with SFAS No. 146, store lease exit costs are accrued when a store is closed. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 may affect the timing of recognizing future store closures and restructuring costs, if any, as well as the amounts recognized. The Company adopted the provisions of SFAS No. 146 during the third quarter of 2002 for any leased store-closure activities initiated after June 15, 2002. Adoption of this standard did not have a material effect on the Company's financial statements. SAFEWAY INC. 2002 ANNUAL REPORT 23 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123 and SFAS No. 148. EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor," provides that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or it is a reimbursement of costs incurred to sell the vendor's products, in which case the cash consideration should be characterized as a reduction of that cost. EITF No. 02-16 becomes effective for the Company in the first quarter of 2003. The Company is currently analyzing the effect that adoption of EITF No. 02-16 will have on its financial statements. In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," was issued. This interpretation requires the initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements are effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45 and is currently assessing the impact that adoption of FIN No. 45 will have on the Company's financial statements. In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities," was issued. This interpretation requires a company to consolidate variable interest entities ("VIE") if the enterprise is a primary beneficiary (holds a majority of the variable interest) of the VIE and the VIE possess specific characteristics. It also requires additional disclosure for parties involved with VIEs. The provisions of this interpretation are effective in 2003. Adoption of this interpretation will not have a material effect on the Company's financial statements. FORWARD-LOOKING STATEMENTS This Annual Report contains certain 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, the valuation of Safeway's investments, operating improvements and costs, tax rate and gross profit improvement, and are indicated by words or phrases such as "continuing," "ongoing," "expects," and similar words or phrases. The following are among the principal factors that could cause actual results to differ materially from the forward-looking statements: general business and economic conditions in our operating regions, including the rate of inflation, consumer spending levels, population, employment and job growth in our markets; pricing pressures and competitive factors, which could include pricing strategies, store openings and remodels by our competitors; results of our programs to control or reduce costs, improve buying practices and control shrink; results of our programs to increase sales, including private-label sales, and our promotional programs; results of our programs to improve capital management; the ability to integrate any companies we acquire and achieve operating improvements at those companies; changes in financial performance of or our equity investments; increases in labor costs and relations with union bargaining units representing our employees or employees of third-party operators of our distribution centers; changes in state or federal legislation or regulation; the cost and stability of power sources; opportunities, acquisitions or dispositions that we pursue; the rate of return on our pension assets; 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. The Company under- takes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so. 24 SAFEWAY INC. 2002 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS SAFEWAY INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements. SAFEWAY INC. 2002 ANNUAL REPORT 25 CONSOLIDATED BALANCE SHEETS SAFEWAY INC. AND SUBSIDIARIES

26 SAFEWAY INC. 2002 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS SAFEWAY INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements. SAFEWAY INC. 2002 ANNUAL REPORT 27 CONSOLIDATED STATEMENTS OF CASH FLOWS SAFEWAY INC. AND SUBSIDIARIES

28 SAFEWAY INC. 2002 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS SAFEWAY INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements. SAFEWAY INC. 2002 ANNUAL REPORT 29 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SAFEWAY INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements. 30 SAFEWAY INC. 2002 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SAFEWAY INC. AND SUBSIDIARIES NOTE A: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Safeway Inc. ("Safeway" or the "Company") is one of the largest food and drug retailers in North America, with 1,695 continuing stores and 113 Dominick's stores which are held for sale at year-end 2002. See Note N. Safeway's U.S. retail operations are located principally in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas 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 February 2001, Safeway acquired all of the assets of Genuardi's for approximately $530 million in cash (the "Genuardi's Acquisition"). The Genuardi's Acquisition was accounted for as a purchase and resulted in goodwill of approximately $521 million. Safeway funded the acquisition through the issuance of commercial paper and debentures. Safeway's 2001 statement of operations includes 47 weeks of Genuardi's operating results. The Company also has a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 102 food and general merchandise stores in western Mexico. In addition, Safeway has a strategic alliance with and a 52.5% ownership interest in GroceryWorks Holdings, Inc., an Internet grocer. 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 and is recorded on a one-month delay basis because financial information for the latest month is not available from Casa Ley in time to be included in Safeway's consolidated earnings until the following reporting period. FISCAL YEAR The Company's fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 52-week periods ended December 28, 2002, December 29, 2001 and December 30, 2000. REVENUE RECOGNITION Revenue is recognized at the point of sale for retail sales. Discounts provided to customers in connection with loyalty cards are accounted for as a reduction of sales. COST OF GOODS SOLD Cost of goods sold includes cost of inventory sold during the period, including purchase and distribution costs. Advertising and promotional expenses are also included as a component of cost of goods sold. Such costs are expensed in the period the advertisement occurs. Advertising and promotional expenses totaled $350.4 million in 2002, $384.1 million in 2001 and $377.0 million in 2000. Vendor allowances that relate to the Company's buying and merchandising activities consist primarily of promotional allowances and advertising allowances and, to a lesser extent, slotting allowances. Promotional and advertising allowances are recognized as a reduction in cost of goods sold when the related expense is incurred or the related performance is completed. Safeway recognizes slotting allowances as a reduction in cost of goods sold when the product is first stocked, which is generally when all the related expenses have been incurred. Lump-sum payments received for multi-year contracts are amortized over the life of the contracts. Vendor allowances totaled $2.1 billion in 2002 and 2001 and $1.9 billion in 2000. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. 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 consolidated statements of stockholders' equity. CASH AND CASH EQUIVALENTS Short-term investments with original maturities of less than three months are considered to be cash equivalents. SAFEWAY INC. 2002 ANNUAL REPORT 31 MERCHANDISE INVENTORIES Merchandise inventory of $1,802.8 million at year-end 2002 and $1,690.4 million at year-end 2001 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 $1,867.9 million at year-end 2002 and $1,773.0 million at year-end 2001. Liquidations of LIFO layers resulted in income of $5.3 million in 2002, $1.8 million in 2001 and $2.2 million in 2000. 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 7 to 40 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. 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, and is discounted using a risk-free rate of interest. The present value of such claims was calculated using a discount rate of 4.0% in 2002 and 5.0% in 2001. The current portion of the self-insurance liability of $105.3 million at year-end 2002 and $85.6 million at year-end 2001 is included in other accrued liabilities in the consolidated balance sheets. The long-term portion of $194.6 million at year-end 2002 and $181.2 million at year-end 2001 is included in accrued claims and other liabilities. The Company recorded expense of $165.2 million in 2002, $121.5 million in 2001 and $55.0 million in 2000. Claims payments were $132.1 million in 2002, $120.1 million in 2001 and $108.2 million in 2000. The self-insurance liability increased by $12.0 million in 2001 because of the Genuardi's Acquisition. The total undiscounted liability was $341.5 million at year-end 2002 and $307.7 million at year-end 2001. 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. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS As discussed in Note G, the Company has, from time to time, entered into interest rate swap agreements to limit the exposure of certain of its floating-rate debt 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. The Company's counterparties have been 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 32 SAFEWAY INC. 2002 ANNUAL REPORT issuance of debt with similar terms and remaining maturities. At year-end 2002, the estimated fair value of debt was $8.3 billion compared to a carrying value of $7.8 billion. At year-end 2001, the estimated fair value of debt was $7.1 billion compared to carrying value of $6.9 billion. Off-Balance Sheet Instruments. The fair value of interest rate swap agreements are the amounts at which they could be settled based on estimates obtained from dealers. At year-end 2002 and 2001, no such agreements were outstanding. STORE CLOSING AND IMPAIRMENT CHARGES Safeway continually reviews its stores' operating performance and assesses its plans for certain store and plant closures. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," losses related to the impairment of long-lived assets are recognized when expected future cash flows are less than the asset's carrying value. At the time a store is closed or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable, the Company evaluates the carrying value of the asset in relation to its expected future cash flows. If the carrying value is greater than the future cash flows, a provision is made for the impairment of the assets to write the assets down to estimated fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of return. The Company calculates its liability for impairment on a store-by-store basis. These provisions are recorded as a component of operating and administrative expense and are disclosed in Note D. For stores to be closed that are under long-term leases, the Company records a liability for the future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations, discounted using a risk-adjusted rate of interest. This liability is recorded at the time the store is closed. Activity included in the reserve for store lease exit costs is disclosed in Note D. 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 following table illustrates the effect on net (loss) income and (loss) earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123:
(in millions, except per-share amounts) 2002 2001 2000 - ------------------------------------------------------------------------------- Net (loss) income - as reported $(828.1) $1,253.9 $ 1,091.9 Less: Total stock-based employee compensation expense determined under fair value- based method for all awards, net of related tax effects (49.6) (45.0) (30.4) - ------------------------------------------------------------------------------- Net (loss) income - pro forma $(877.7) $1,208.9 $ 1,061.5 =============================================================================== Basic (loss) earnings per share: As reported $ (1.77) $ 2.49 $ 2.19 Pro forma $ (1.88) $ 2.40 $ 2.13 Diluted (loss) earnings per share: As reported $ (1.75) $ 2.44 $ 2.13 Pro forma $ (1.85) $ 2.36 $ 2.07
NEW ACCOUNTING STANDARDS SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. The Company adopted SFAS No. 142 on December 30, 2001. Under the transitional provisions of SFAS No. 142, the Company's goodwill was tested for impairment as of December 30, 2001. Each of the Company's reporting units was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily considered the discounted cash flow, guideline company and similar transaction methods. As a result of the Company's impairment test, the Company recorded an impairment loss at Dominick's of $589 million and Randall's of $111 million to reduce the carrying value of goodwill to its implied fair value. Impairment in both cases was due to a combination of factors including acquisition price, post-acquisition capital expenditures and operating performance. In accordance with SFAS No. 142, the impairment charge was reflected as SAFEWAY INC. 2002 ANNUAL REPORT 33 a cumulative effect of accounting change in the Company's statement of operations. As required by SFAS No. 142, Safeway tested goodwill for impairment again in the fourth quarter of 2002, which represents the annual impairment testing date selected by Safeway. Fair value was determined based on a valuation study performed by an independent third party appraiser which primarily used the discounted cash flow method and guideline company method. As a result of this annual review, Safeway recorded an impairment charge for Dominick's goodwill of $583.8 million, which is recorded as a component of discontinued operations, and for Randall's goodwill of $704.2 million, which is recorded as a component of operating income. These additional charges reflect declining multiples in the retail grocery industry and operating performance. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business," became effective for Safeway on December 30, 2001. In accordance with SFAS No. 144, the Company evaluates the carrying value of the assets in relation to its expected future cash flows whenever management commits to close or relocate a store or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable. If the carrying value is greater than the future cash flows, a provision is made for the impairment of the assets to write the assets down to fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of interest. These provisions are recorded as a component of operating and administrative expense and are disclosed in Note D. Adoption of this provision of SFAS No. 144 did not have a material effect on the Company's financial statements. In the fourth quarter of 2002, Safeway decided to sell Dominick's and to exit the Chicago market. In accordance with SFAS No. 144, Dominick's net assets as of year-end 2002 were written down to their estimated fair market value and presented as a discontinued operation. See Note N. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt, eliminates inconsistencies in the accounting required for sale-leaseback transactions and certain lease modifications with similar economic effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 becomes effective for the Company in the first quarter of 2003. The Company is currently analyzing the effect that SFAS No. 145 will have on its financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs, including store closures. SFAS No. 146 replaces previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of the company's commitment to an exit plan. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. In accordance with SFAS No. 146, store lease exit costs are accrued when a store is closed. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 may affect the timing of recognizing future store closures and restructuring costs, if any, as well as the amounts recognized. The Company adopted the provisions of SFAS No. 146 during the third quarter of 2002 for any leased store-closure activities initiated after June 15, 2002. Adoption of this standard did not have a material effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123 and SFAS No. 148. See Notes A and H. EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor," provides that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or 34 SAFEWAY INC. 2002 ANNUAL REPORT services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or it is a reimbursement of costs incurred to sell the vendor's products, in which case the cash consideration should be characterized as a reduction of that cost. EITF No. 02-16 becomes effective for the Company in the first quarter of 2003. The Company is currently analyzing the effect that adoption of EITF No. 02-16 will have on its financial statements. In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," was issued. This interpretation requires the initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements are effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45 and is currently assessing the impact that adoption of FIN No. 45 will have on the Company's financial statements. In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities," was issued. This interpretation requires a company to consolidate variable interest entities ("VIE") if the enterprise is a primary beneficiary (holds a majority of the variable interest) of the VIE and the VIE posses specific characteristics. It also requires additional disclosure for parties involved with VIEs. The provisions of this interpretation are effective in 2003. Adoption of this interpretation will not have a material effect on the Company's financial statements. NOTE B: ACQUISITION The following unaudited pro forma combined summary financial information is based on the historical consolidated results of operations of Safeway and Genuardi's as if the Genuardi's Acquisition had occurred as of the beginning of 2000. This pro forma financial information is presented for informational purposes only and may not be indicative of what the actual consolidated results of operations would have been if the acquisition had been effective as of the beginning of 2000. Pro forma adjustments were applied to the historical financial statements to account for the acquisition as a purchase. 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.
Pro Forma (Unaudited) ----------- (in millions, except per-share amounts) 2000 - ---------------------------------------------------- ~~Sales $30,368.7 Net income $ 1,100.9 Diluted earnings per share $ 2.15~~
NOTE C: GOODWILL A summary of changes in Safeway's goodwill during 2002 and 2001 by reportable operating segment is as follows :
2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- (In millions, except per-share amounts) U.S Canada Total U.S Canada Total --------------------------------------------------------------------------------------- Balance - beginning of year $3,553.9 $62.1 $3,616.0 $3,145.4 $68.8 $3,214.2 Genuardi's acquisition 23.4 - 23.4 497.5 - 497.5 Amortization - - - (98.5) (2.5) (101.0) Impairment charge (704.2) - (704.2) - - - Cumulative effect of accounting change (111.0) - (111.0) - - - Adjustments 21.3(1) 0.7(2) 22.0 9.5(1) (4.2)(2) 5.3 - ---------------------------------------------------------------------------------------------------------------------------------- $2,783.4 $62.8 $2,846.2 $3,553.9 $62.1 $3,616.0 ==================================================================================================================================
(1) Primarily represents reclassifications in connection with the consolidation of certain affiliates due to increases in Safeway's ownership. (2) Represents foreign currency translation adjustments. SAFEWAY INC. 2002 ANNUAL REPORT 35 Safeway's adoption of SFAS No. 142 eliminated the amortization of goodwill beginning in the first quarter of 2002. The following table adjusts net (loss) income and net earnings per share for the adoption of SFAS No. 142 (in millions):
2002 2001 2000 - ------------------------------------------------------------------------ Reported net (loss) income $ (828.1) $1,253.9 $1,091.9 Add back: Goodwill amortization(1) - 140.4 126.2 - ------------------------------------------------------------------------ Adjusted net (loss) income $ (828.1) $1,394.3 $1,218.1 ======================================================================== Basic earnings per share: Reported net (loss) income $ (1.77) $ 2.49 $ 2.19 Add back: Goodwill amortization(1) - 0.28 0.26 - ------------------------------------------------------------------------ Adjusted net (loss) income $ (1.77) $ 2.77 $ 2.45 ======================================================================== Diluted earnings per share: Reported net (loss) income $ (1.75) $ 2.44 $ 2.13 Add back: Goodwill amortization(1) - 0.28 0.25 - ------------------------------------------------------------------------ Adjusted net (loss) income $ (1.75) $ 2.72 $ 2.38 ========================================================================
(1) Includes goodwill amortization from continuing operations and Dominick's discontinued operations. NOTE D: STORE CLOSING AND IMPAIRMENT CHARGES IMPAIRMENT WRITE-DOWNS Safeway recognized impairment charges on the write-down of long-lived store assets to be closed of $8.4 million in 2002, $5.3 million in 2001 and $8.6 million in 2000. STORE LEASE EXIT COSTS The reserve for store lease exit costs includes the following activity for 2002, 2001 and 2000 (in millions):
2002 2001 2000 - --------------------------------------------------------------------------- Beginning balance $ 92.9 $ 103.7 $ 119.0 Provision for estimated net future cash flows(1) of additional closed stores 22.2 6.7 7.2 Estimated net future cash flows(1) of stores assumed through acquisitions that are closed or designated to be closed - 2.1 10.8 Net cash flows, interest accretion, changes in estimates of net future cash flows (25.8) (19.6) (30.3) Reversals of reserves for stores that management has determined will remain open - - (3.0) - --------------------------------------------------------------------------- Ending balance $ 89.3 $ 92.9 $ 103.7 ===========================================================================
(1) Estimated net future cash flows represents future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. Store lease exit costs related to the Furr's and Homeland bankruptcies are not included above but are discussed in Note M. 36 SAFEWAY INC. 2002 ANNUAL REPORT NOTE E: FINANCING Notes and debentures were composed of the following at year-end (in millions):
- ---------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------- Commercial paper $1,744.1 $1,723.8 Bank credit agreement, unsecured 25.3 - 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 3.80% Senior Notes due 2005, unsecured 225.0 - 4.80% Senior Notes due 2007, unsecured 480.0 - 5.80% Senior Notes due 2012, unsecured 800.0 - 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 7.25% Senior Notes due 2004, unsecured 400.0 400.0 7.50% Senior Notes due 2009, unsecured 500.0 500.0 6.15% Senior Notes due 2006, unsecured 700.0 700.0 6.50% Senior Notes due 2011, unsecured 500.0 500.0 7.25% Senior Debentures due 2031, unsecured 600.0 600.0 3.625% Senior Notes due 2003, unsecured 400.0 400.0 9.65% Senior Subordinated Debentures due 2004, unsecured 81.2 81.2 9.875% Senior Subordinated Debentures due 2007, unsecured 24.2 24.2 10.00% Senior Notes due 2002, unsecured - 6.1 Mortgage notes payable, secured 39.7 60.5 Other notes payable, unsecured 21.6 31.7 Medium-term notes, unsecured 16.5 16.5 Short-term bank borrowings, unsecured 7.6 7.6 - ---------------------------------------------------------------------- 7,789.5 6,875.9 Less current maturities (780.3) (639.1) - ---------------------------------------------------------------------- Long-term portion $7,009.2 $6,236.8 ======================================================================
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 2006. The weighted average interest rate on commercial paper borrowings was 1.98% during 2002 and 1.62% at year-end 2002. BANK CREDIT AGREEMENT Safeway's total borrowing capacity under the bank credit agreement is $2.5 billion. Of the $2.5 billion credit line, $1.25 billion matures in 2006 and has a one-year extension option requiring lender consent. Another $1.25 billion is renewable annually through 2006 and can be extended by the Company for an additional year through a term-loan conversion feature at the Company's option or through a one-year extension option requiring lender consent. 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 maintain a minimum adjusted EBITDA (as defined in Safeway's bank credit agreement) to interest ratio of 2.0 to 1 and a maximum debt to adjusted EBITDA ratio of 3.5 to 1. At year-end 2002, the Company had total unused borrowing capacity under the bank credit agreement of $720.1 million. 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 2.91% during 2002 and at year-end 2002. SENIOR SECURED INDEBTEDNESS The 9.30% Senior Secured Debentures due 2007 are secured by a deed of trust that created a lien on the land, buildings and equipment owned by Safeway at its distribution center in Tracy, California. SENIOR UNSECURED INDEBTEDNESS In August 2002, Safeway issued senior unsecured debt facilities consisting of 3.80% Notes due 2005 and 5.80% Notes due 2012. In July 2002, Safeway issued senior unsecured debt facilities consisting of 4.80% Notes due 2007. In November 2001, Safeway issued senior unsecured debt facilities consisting of 3.625% Notes due 2003. In March 2001, Safeway issued senior unsecured debt facilities consisting of 6.15% Notes due 2006 and 6.50% Notes due 2011. SAFEWAY INC. 2002 ANNUAL REPORT 37 In January 2001, Safeway issued senior unsecured debt facilities consisting of 7.25% debentures due 2031. In September 1999, Safeway issued senior unsecured debt facilities consisting of 7.00% Notes due 2002, 7.25% Notes due 2004 and 7.5% Notes due 2009. On September 15, 2002, the 7.00% Notes, due 2002, were paid. In 1998 Safeway issued senior unsecured debt facilities consisting of 5.75% Notes due 2000, 5.875% Notes due 2001, 6.05% Notes due 2003 and 6.50% Notes due 2008. On November 15, 2001, the 5.875% Notes were paid and on November 15, 2000, the 5.75% Notes, due 2002, were paid. In 1997 Safeway issued senior unsecured debt facilities 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 9.65% 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 and mortgage notes payable. MORTGAGE NOTES PAYABLE Mortgage notes payable at year-end 2002 have remaining terms ranging from one to 21 years, have a weighted average interest rate of 8.94% and are secured by properties with a net book value of approximately $131 million. OTHER NOTES PAYABLE Other notes payable at year-end 2002 have remaining terms ranging from one to seven years and a weighted average interest rate of 4.75%. ANNUAL DEBT MATURITIES As of year-end 2002, annual debt maturities were as follows (in millions): - -------------------------------------------- 2003 $ 780.3 2004 699.6 2005 232.5 2006 2,479.7 2007 785.0 Thereafter 2,812.4 - -------------------------------------------- $ 7,789.5 ============================================

LETTERS OF CREDIT The Company had letters of credit of $148.0 million outstanding at year-end 2002, of which $35.9 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 0.15% to 1.00% on the outstanding letters of credit. NOTE F: LEASE OBLIGATIONS Approximately two-thirds of the premises that the Company occupies are leased. The Company had approximately 1,500 leases at year-end 2002, including approximately 180 that 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 2002, 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):
Capital Operating Leases Leases - ---------------------------------------------------------------------- 2003 $ 79.7 $ 341.7 2004 79.1 332.7 2005 77.8 317.1 2006 75.6 299.4 2007 72.6 279.5 Thereafter 749.2 2,542.7 - ---------------------------------------------------------------------- Total minimum lease payments 1,134.0 $4,113.1 ======== Less amounts representing interest (596.5) - -------------------------------------------------------- Present value of net minimum lease payments 537.5 Less current obligations (25.2) - -------------------------------------------------------- Long-term obligations $ 512.3 ========================================================
Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income of $206.8 million. Amortization expense for property under capital leases was $23.7 million in 2002, $16.7 million in 2001 and $20.1 million in 2000. Accumulated amortization of property under capital leases was $62.4 million at year-end 2002 and $49.6 million at year-end 2001. 38 SAFEWAY INC. 2002 ANNUAL REPORT 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.
- -------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Property leases: Minimum rentals $343.1 $324.8 $282.3 Contingent rentals 16.9 16.5 16.8 Less rentals from subleases (29.0) (31.7) (25.6) - ------------------------------------------------------------------------------- 331.0 309.6 273.5 Equipment leases 25.0 30.1 30.1 - ------------------------------------------------------------------------------- $356.0 $339.7 $303.6 ===============================================================================
NOTE G: INTEREST EXPENSE Interest expense consisted of the following (in millions):
- -------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Commercial paper $ 32.0 $ 61.3 $138.8 Bank credit agreement 3.1 6.8 7.7 9.30% Senior Secured Debentures 2.3 2.3 2.3 6.85% Senior Notes 13.7 13.7 13.7 7.00% Senior Notes 17.5 17.5 17.5 7.45% Senior Debentures 11.2 11.2 11.2 3.80% Senior Notes 3.3 - - 4.80% Senior Notes 10.5 - - 5.80% Senior Notes 17.7 - - 5.75% Senior Notes - - 19.9 5.875% Senior Notes - 20.3 23.5 6.05% Senior Notes 21.2 21.2 21.2 6.50% Senior Notes 16.3 16.3 16.3 7.00% Senior Notes 29.4 42.0 42.0 7.25% Senior Notes 29.0 29.0 29.0 7.50% Senior Notes 37.5 37.5 37.5 6.15% Senior Notes 43.1 35.5 - 6.50% Senior Notes 32.5 26.8 - 7.25% Senior Debentures 43.5 39.8 - 3.625% Senior Notes 14.5 2.2 - 10.00% Senior Subordinated Notes - 7.2 8.0 9.65% Senior Subordinated Debentures 7.8 7.8 7.8 9.875% Senior Subordinated Debentures 2.4 2.4 2.4 10.00% Senior Notes 0.5 0.6 0.6 Mortgage notes payable 4.2 6.0 6.7 Other notes payable 1.7 3.0 7.1 Medium-term notes 1.4 1.4 1.6 Short-term bank borrowings - 0.9 3.9 Obligations under capital leases 57.0 50.1 48.3 Amortization of deferred finance costs 7.8 8.0 7.0 Interest rate swap and cap agreements 0.7 1.8 0.2 Capitalized interest (31.0) (25.7) (17.0) - ------------------------------------------------------------------------------- $430.8 $446.9 $457.2 Less amount allocated to, and included in, discontinued operations (62.2) (80.8) (93.6) - ------------------------------------------------------------------------------- $368.6 $366.1 $363.6 ===============================================================================
Interest expense of $62.2 million in 2002, $80.8 million in 2001 and $93.6 million in 2000 was allocated to, and is included in, loss on discontinued operations. Interest expense was allocated based on the ratio of Dominick's net assets to total Safeway net assets. NOTE H: CAPITAL STOCK SHARES AUTHORIZED AND ISSUED Authorized preferred stock consists of 25 million shares of which none were outstanding during 2002, 2001 or 2000. Authorized common stock consists of 1.5 billion shares at $0.01 par value. Common stock outstanding at year-end 2002 was 441.0 million shares (net of 132.0 million shares of treasury stock) and 488.1 million shares at year-end 2001 (net of 82.7 million shares of treasury stock). STOCK OPTION PLANS Under Safeway's 1999 Equity Participation Plan (the "1999 Plan"), 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, as well as other stock-based awards. Options generally vest over five or 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. Options to purchase approximately 5.0 million shares were available for grant under the 1999 Plan at year-end 2002. On July 31, 2002, the Board of Directors adopted the 2002 Equity Incentive Plan of Safeway Inc. (the "2002 Plan"), under which awards of non-qualified stock options and stock-based awards may be made. There are 2.0 million shares of common stock authorized for issuance pursuant to grants under the 2002 Plan. At year-end 2002, no awards had been made. SAFEWAY INC. 2002 ANNUAL REPORT 39 In 2000, the Company granted an option to purchase 100,000 shares of common stock to a member of the Company's Board of Directors as compensation for services to Safeway as a consultant regarding the Company's equity investment in Future Beef Operations Holdings, LLC ("FBO"). The option has an exercise price of $41.00 per share and vests ratably over five years. The Company estimates the fair value of the option granted using the Black-Scholes option pricing model with assumptions similar to those used by the Company to value employee stock options. The Company reversed $0.2 million from compensation expense in 2002 and charged $0.4 million in 2001 and $0.2 million in 2000 to compensation expense for this option. RESTRICTED STOCK Safeway includes restricted stock awards in its basic earnings per share computation when vested and diluted earnings per share computation when granted, provided that continued employment is the only condition for vesting. A restricted stock award of 41,344 shares with a fair value of $48.38 per share was granted to an executive officer of the Company in 2000. No restricted stock awards were made in 2002 or 2001. Under the terms of the restricted shares issued, continued employment is the only condition for vesting. The Company charged $1.0 million to compensation expense in both 2001 and 2000 for this award. The restricted shares were fully vested as of January 1, 2002 and 14,641 shares have been returned to Safeway to satisfy the executive officer's tax withholding obligation. Activity in the Company's stock option plans for the three-year period ended December 28, 2002 was as follows:
- ------------------------------------------------------------------------------- Weighted Average Options Exercise Price - ------------------------------------------------------------------------------- Outstanding, year-end 1999 40,506,313 $ 17.44 2000 Activity: Granted 8,617,500 43.93 Canceled (1,502,400) 33.81 Exercised (10,441,672) 7.40 ----------- Outstanding, year-end 2000 37,179,741 25.66 2001 Activity: Granted 5,463,474 50.06 Canceled (1,073,248) 40.99 Exercised (2,923,086) 12.85 ----------- Outstanding, year-end 2001 38,646,881 29.61 2002 Activity: Granted 5,044,297 39.57 Canceled (2,727,671) 39.08 Exercised (3,019,997) 10.64 ----------- Outstanding, year-end 2002 37,943,510 31.70 =========== Exercisable, year-end 2000 17,239,036 11.52 =========== Exercisable, year-end 2001 18,758,616 16.20 =========== Exercisable, year-end 2002 19,960,460 21.79 ===========
Weighted average fair value of options granted during the year: ~~2000 $ 21.31 2001 22.99 2002 18.46~~

40 SAFEWAY INC. 2002 ANNUAL REPORT The following table summarizes stock option information at year-end 2002:
------------------------------------------------------------ ------------------------------ 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 - ---------------- ------------------------------------------------------------ ------------------------------ $ 1.57 to $ 4.50 4,321,815 4.20 years $ 3.06 4,321,815 $ 3.06 4.56 to 7.34 4,424,963 1.80 6.30 4,424,963 6.30 7.50 to 26.41 4,359,606 4.09 17.18 3,558,905 16.39 26.72 to 35.63 4,041,737 7.29 30.75 1,235,149 31.85 35.75 to 40.94 4,102,147 6.81 37.58 1,543,506 37.81 41.00 to 42.94 4,201,174 7.17 42.20 1,384,961 41.91 43.19 to 48.38 4,187,179 8.40 45.86 798,305 46.05 48.44 to 52.20 4,066,353 7.85 50.10 1,131,850 50.06 52.56 to 62.50 4,238,536 7.46 55.58 1,561,006 55.30 ---------- ---------- 1.57 to 62.50 37,943,510 6.07 31.70 19,960,460 21.79 ========== ==========
ADDITIONAL STOCK 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," as amended by SFAS No. 148, 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 No. 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; stock volatility of 36% in 2002 and 34% in 2001 and 2000; risk-free interest rates of 4.35% in 2002, 4.86% in 2001 and 6.16% in 2000; 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. Had compensation cost for Safeway's stock option plans been determined based on the fair value at the grant date for awards from 1996 through 2002, 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 disclosed in Note A. NOTE I: TAXES ON INCOME The components of income tax expense from continuing operations are as follows (in millions):
- ------------------------------------------------- 2002 2001 2000 - ------------------------------------------------- Current: Federal $ 486.1 $ 608.3 $ 480.4 State 68.1 98.8 84.2 Foreign 61.9 77.8 80.9 - ------------------------------------------------- 616.1 784.9 645.5 - ------------------------------------------------- Deferred: Federal 127.5 35.3 114.3 State 9.7 9.5 23.8 Foreign (1.6) 6.3 5.1 - ------------------------------------------------- 135.6 51.1 143.2 - ------------------------------------------------- $ 751.7 $ 836.0 $ 788.7 =================================================
SAFEWAY INC. 2002 ANNUAL REPORT 41 The reconciliation of the provision for income taxes from continuing operations at the U.S. federal statutory income tax rate to the Company's income taxes is as follows (dollars in millions):
- -------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Statutory rate 35% 35% 35% Income tax expense using federal statutory rate $462.1 $743.0 $680.0 State taxes on income net of federal benefit 50.6 70.4 70.2 Nondeductible goodwill 246.5 31.2 29.7 Difference between statutory rate and foreign effective rate 4.7 15.6 20.9 Other (12.2) (24.2) (12.1) - ------------------------------------------------------------------------------- $751.7 $836.0 $788.7 ===============================================================================
Significant components of the Company's net deferred tax liability at year-end were as follows (in millions):
- ------------------------------------------------------------------- 2002 2001 - ------------------------------------------------------------------- Deferred tax assets: Workers' compensation and other claims $ 133.9 $ 134.9 Reserves not currently deductible 74.9 83.7 Accrued claims and other liabilities 41.3 38.8 Employee benefits 43.6 28.6 Operating loss carryforwards 60.1 - Other assets 137.3 152.8 - ------------------------------------------------------------------ 491.1 438.8 - ------------------------------------------------------------------ Less valuation allowance (60.1) - - ------------------------------------------------------------------ 431.0 438.8 Deferred tax liabilities: Property (487.3) (471.6) Prepaid pension costs (215.0) (217.5) Inventory (197.9) (176.1) Investments in foreign operations (97.2) (89.7) - ------------------------------------------------------------------ (997.4) (954.9) - ------------------------------------------------------------------ Net deferred tax liability $(566.4) $(516.1) Less current asset (liability) 11.5 (42.4) - ------------------------------------------------------------------ Long-term portion $(577.9) $(473.7) ==================================================================
At December 28, 2002, certain undistributed earnings of the Company's foreign operations totaling $901.2 million were considered to be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings to the United States since it is the Company's intention to utilize those earnings in the foreign operations for an indefinite period of time, or to repatriate such earnings only when tax efficient to do so. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, unrecognized foreign tax credit carryovers may be available to reduce some portion of the U.S. income tax liability. As of December 28, 2002, GroceryWorks' net operating loss ("NOL") carryforwards were approximately $171.6 million. These carryforwards expire at various dates from 2019 to 2022. Until sufficient evidence exists that GroceryWorks will have future taxable income to absorb the NOL carry forwards, Safeway will provide a valuation allowance for the entire deferred tax asset relating to these carryforwards. In the case of any subsequent reversal of this valuation allowance, approximately $24.2 million of the tax benefit realized will result in a reduction to GroceryWorks' goodwill or other noncurrent intangible assets. NOTE J: 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 Genuardi's Acquisition in 2001, the Randall's acquisition in 1999 and the Vons merger in 1997, the Company assumed the sponsorship and obligations of Genuardi's, Randall's and Vons' retirement plans. The actuarial assumptions for the existing Genuardi's, Randall's and Vons retirement plans are comparable to those for the Safeway retirement plan. Genuardi's, Randall's and Vons' retirement plans have been combined with Safeway's for financial statement presentation. 42 SAFEWAY INC. 2002 ANNUAL REPORT 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 December 28, 2002 and a statement of the funded status as of year-end 2002 and 2001 (in millions):
- -------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------- Change in benefit obligation: Beginning balance $1,286.9 $1,181.9 Service cost 74.6 58.2 Interest cost 82.9 76.4 Plan amendments 19.4 19.0 Actuarial loss 138.9 51.3 Acquisition of Genuardi's - 22.7 Benefit payments (86.0) (85.3) Transfer of plan liabilities - (21.5) Currency translation adjustment 2.5 (15.8) - ------------------------------------------------------------------- Ending balance $1,519.2 $1,286.9 ===================================================================

- --------------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------------- Change in fair value of plan assets: Beginning balance $ 1,782.8 $ 1,956.7 Actual loss on plan assets (158.5) (56.1) Acquisition of Genuardi's - 24.4 Employer contributions 31.8 5.9 Benefit payments (86.0) (85.3) Transfer of plan assets - (46.9) Currency translation adjustment 2.3 (15.9) - -------------------------------------------------------------------- Ending balance $ 1,572.4 $ 1,782.8 ====================================================================

- --------------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------------- Funded status: Fair value of plan assets $ 1,572.4 $ 1,782.8 Projected benefit obligation (1,519.2) (1,286.9) - -------------------------------------------------------------------- Funded status 53.2 495.9 Adjustment for difference in book and tax basis of assets (165.1) (165.1) Unamortized prior service cost 104.0 99.0 Unrecognized loss 543.1 101.5 - -------------------------------------------------------------------- Prepaid pension cost $ 535.2 $ 531.3 ====================================================================
The following table provides the components of 2002, 2001 and 2000 net pension (expense) income for the retirement plans (in millions):
- ------------------------------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------------- Estimated return on assets $ 143.7 $ 158.9 $ 182.3 Service cost (74.6) (58.2) (47.7) Interest cost (82.9) (76.4) (84.7) Amortization of prior service cost (14.7) (14.0) (14.8) Amortization of unrecognized (losses) gains (1.8) 17.0 42.2 - ------------------------------------------------------------------------------ Net pension (expense) income $ (30.3) $ 27.3 $ 77.3 ==============================================================================
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 and the fair value of plan assets. In May 2000, Safeway entered into an agreement to have a third party operate the Company's Maryland distribution center. Pursuant to the agreement, Safeway and the third party jointly established a new multiple-employer defined benefit pension plan to provide benefits for the employees that were transferred as a result of this agreement. The Company recorded settlement gains of $9.3 million in 2001 and $15.0 million in 2000 as a result of transfers of accrued benefits and assets from the Safeway retirement plan to the multiple employer plan. The actuarial assumptions used to determine year-end plan status were as follows:
- -------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------- Discount rate used to determine the projected benefit obligation: United States plans 6.5% 7.5% 7.8% Canadian plans 6.5 7.0 7.0 Combined weighted average rate 6.5 7.4 7.6 Expected return on plan assets: United States plans 8.5% 9.0% 9.0% Canadian plans 7.5 8.0 8.0 Rate of compensation increase: United States plans 5.0% 5.0% 5.0% Canadian plans 3.5 5.0 5.0
SAFEWAY INC. 2002 ANNUAL REPORT 43 RETIREMENT RESTORATION PLAN The Retirement Restoration Plan provides death benefits and supplemental income payments for senior executives after retirement. The Company recognized expense of $5.7 million in 2002, $5.5 million in 2001 and $4.7 million in 2000. The aggregate projected benefit obligation of the Retirement Restoration Plan was approximately $64.2 million at year-end 2002 and $55.8 million at year-end 2001. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to the Company's retirement plans and the Retirement Restoration Plan benefits, the Company sponsors plans that provide postretirement medical and life insurance benefits to certain salaried employees. Retirees share a portion of the cost of the postretirement medical plans. Safeway pays all the costs of the life insurance plans. The plans are not funded. The Company's APBO was $63.9 million at year-end 2002 and $58.5 million at year-end 2001. The APBO represents the actuarial present value of the benefits expected to be paid after retirement. Postretirement benefit expense was $8.0 million in 2002, $2.6 million in 2001 and $2.1 million in 2000. MULTI-EMPLOYER RETIREMENT PLANS Safeway participates in various multi-employer retirement plans, covering substantially all Company employees not covered under the Company's non-contributory retirement plans, pursuant to agreements between the Company and various unions. 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 $138.8 million in 2002, $144.9 million in 2001 and $140.8 million in 2000 were made and charged to expense. Under U.S. law applicable to 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 law) from a plan or plan termination. Safeway participates in a number of these pension plans, and the potential liability as a participant in these plans may be significant. The information required to determine the total amount of this contingent liability, 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 that 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 2002, Safeway had more than 172,000 full and part-time employees. Approximately 76% 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 negotiates a significant number of these agreements every year. NOTE K: INVESTMENT IN UNCONSOLIDATED AFFILIATES At year-end 2002, 2001 and 2000, Safeway's investment in unconsolidated affiliates includes a 49% ownership interest in Casa Ley, which operates 102 food and general merchandise stores in western Mexico. At year-end 2001, Safeway's investment in unconsolidated affiliates also included a 50% interest in GroceryWorks, an Internet grocer, and a 15% interest in FBO, a beef processing operation. During the second and third quarters of 2002 Safeway invested $11.9 million in GroceryWorks, bringing Safeway's ownership interest to 52.5%. Therefore, Safeway changed its method of accounting for its investment in GroceryWorks from the equity method to consolidation beginning in the third quarter of 2002. Equity in (losses) earnings, net, from Safeway's unconsolidated affiliates, which is included in other income (loss), was a loss of $0.2 million in 2002, and income of $20.2 million in 2001 and $31.2 million in 2000. Equity in losses, net, in 2002 includes approximately $15.8 million in charges related to the resolution of physical inventory count discrepancies at Casa Ley. Additionally, Safeway recorded a $30.1 million impairment charge in other income (loss) in 2001 to reduce the carrying amount of the Company's investment in GroceryWorks to its estimated fair value. 44 SAFEWAY INC. 2002 ANNUAL REPORT Future Beef Operations Holdings, LLC ("FBO"), a meat processing company based in Denver, Colorado, was placed in bankruptcy in March 2002. Safeway was a 15% equity investor in FBO, had a supply contract for the purchase of beef from FBO, and had a common board member with FBO. Safeway had a first-loss deficiency agreement with FBO's principal lender which provided that, under certain circumstances and in the event of a liquidation of FBO being initiated, Safeway would pay the lender up to $40 million if proceeds from the sale of collateral did not fully repay the amount owed by FBO to the lender. Safeway accrued a pre-tax charge of $51 million in other (loss) income related to the bankruptcy in 2001. The charge was primarily for payments under contractual obligations and the first-loss deficiency agreement in the event FBO was liquidated. FBO is currently in the process of being liquidated and Safeway paid the lender $40 million in January 2003. NOTE L: RELATED PARTY TRANSACTIONS Prior to April 2000, the Company held an 80% interest in Property Development Associates ("PDA"), a partnership formed in 1987 with Pacific Resources Associates, L.P. ("PacTrust"), a limited partnership, the sole general partner of which is a corporation owned by approximately 45 individuals, including three of the Company's directors. Through their ownership in the corporate general partner, these three directors' ownership interest in PacTrust is approximately 3.8%. None of these directors is involved in the day-to-day management of PacTrust or in the negotiations related to the purchase of properties. PDA was dissolved in April 2000. During 2002, Safeway sold eight properties to PacTrust with an aggregate carrying value of $0.3 million for $2.6 million cash, resulting in an aggregate gain of $2.3 million. During 2001, Safeway sold 22 properties to PacTrust with an aggregate carrying value of $7.5 million for $13.9 million cash, resulting in an aggregate gain of $6.4 million. During 2000, Safeway sold 48 properties to PacTrust with an aggregate carrying value of $43.5 million for total consideration of $84.4 million, resulting in an aggregate gain of $40.9 million. Of the consideration received, $13.4 million was in the form of a note receivable and the remainder was in cash. The note bore interest at 8.5% and was fully paid in cash before the end of 2000. Safeway paid PDA $1.1 million in 2000 for reimbursement of expenses related to management and real estate services provided by PDA. HBS Limited Partnership ("HBS") is a limited partnership formed in 1996 to own, develop and operate a shopping center in Hawaii. Safeway is sole general partner of HBS. Safeway had a note receivable of $26.5 million at year-end 2002 and $25.0 million at year-end 2001 from HBS for funding the development costs of the shopping center. The loan is secured by a first mortgage lien against the land and a first security interest in all personal property of HBS. Safeway had a supply contract to purchase beef from FBO, which had a common board member with Safeway. In March 2002 FBO was placed in bankruptcy. See Note K. The Company has made loans to certain of its executive officers in connection with their relocations. The promissory notes bear no interest and are secured by personal residences. At year-end 2002, $3.1 million was outstanding on these notes with repayment terms ranging from 2003 to 2007. The Company has conducted various transactions in the normal course of business with each of its equity investees which are not material. NOTE M: COMMITMENTS AND CONTINGENCIES LEGAL MATTERS In July 1988, there was a major fire at the Company's dry grocery warehouse in Richmond, California. Through February 19, 2003, in excess of 126,000 claims for personal injury and property damage arising from the fire had been settled for an aggregate amount of approximately $125 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 February 19, 2003, there were still pending approximately 1,900 claims against the Company for personal injury (including punitive damages), and approximately 290 separate active 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. 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. SAFEWAY INC. 2002 ANNUAL REPORT 45 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 Finer Foods, Inc. (predecessor of Dominick's Finer Foods, LLC), and Jewel Food Stores, a subsidiary of Albertson's, Inc. The complaint alleged, 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 court certified 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 during August 1996 to August 2000. Plaintiffs' expert has calculated damages against both defendants in several ways, ranging from $51 million to $126 million. If damages were to be awarded, they may be trebled under the applicable statute. Plaintiffs also seek an injunction enjoining the defendants from acts in restraint of trade. On February 25, 2003, after three weeks of trial, the trial judge, sitting without a jury, dismissed the action at the end of plaintiffs' case, and entered judgment in favor of defendants. Plaintiffs have until March 27, 2003 to appeal. The Company believes that the plaintiffs have no meritorious grounds for an appeal and, if there is an appeal, expects the judgment to be affirmed. There are also pending against the 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. FURR'S AND HOMELAND CHARGE In 1987, Safeway assigned a number of leases to Furr's Inc. ("Furr's") and Homeland Stores, Inc. ("Homeland") as part of the sale of the Company's former El Paso, Texas and Oklahoma City, Oklahoma divisions. Furr's filed for Chapter 11 bankruptcy on February 8, 2001. Homeland filed for Chapter 11 bankruptcy on August 1, 2001. Safeway is contingently liable if Furr's and Homeland are unable to continue making payments on these leases. In 2001, Safeway recorded a pre-tax charge to operating and administrative expense of $42.7 million ($0.05 per share) to recognize the estimated lease liabilities associated with these bankruptcies and for a single lease from Safeway's former Florida division. During 2002, the accrual was reduced by $12.0 million as cash was paid out. In addition, Furr's began the liquidation process and Homeland emerged from bankruptcy in 2002 and, based on the resolution of various leases, Safeway reversed $12.1 million of the accrual, leaving a balance of $18.6 million at year-end 2002. Safeway is unable to determine its maximum potential obligation with respect to other divested operations, should there be any similar defaults, because information about the total number of leases from these divestitures that are still outstanding is not available. Based on an internal assessment by the Company, performed by taking the original inventory of assigned leases at the time of the divestitures and accounting for the passage of time, Safeway expects that any potential losses beyond those recorded, should there be any similar defaults, would not be material to Safeway's operating results, cash flow or financial position. 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 $129.1 million at year-end 2002. NOTE N: DISCONTINUED OPERATIONS In November 2002, Safeway announced its decision to sell Dominick's, which consists of 113 stores, and to exit the Chicago market. In accordance with SFAS No. 144, Dominick's operations are presented as a discontinued operation. Accordingly, Dominick's results are reflected separately in the Company's consolidated financial statements and Dominick's information is excluded from the accompanying notes to the consolidated financial statements, unless other- wise noted. As a result of the planned exit of the Chicago market, the Company recorded a pre-tax loss from discontinued operations of $787.9 million in 2002, consisting of $583.8 million in Dominick's goodwill impairment, $201.3 million in estimated loss on disposal of Dominick's and $2.8 million in loss from discontinued store operations. Pre-tax loss from discontinued operations was $27.7 million in 2001 and $76.4 million in 2000. Loss from discontinued operations includes all direct charges to operations at Dominick's as well as allocated interest expense. Corporate overhead is not included in discontinued store operations. Sales at discontinued operations were $2.4 billion in 2002, $2.5 billion in 2001 and $2.5 billion in 2000. 46 SAFEWAY INC. 2002 ANNUAL REPORT In accordance with SFAS No. 144, Dominick's net assets and liabilities have been written down to estimated fair value. The fair value of Dominick's was determined by an independent third party appraiser which primarily used the discounted cash flow method and the guideline company method. The final valuation of Dominick's is dependent upon the results of negotiations with the ultimate buyer. Adjustment to the loss on disposition, together with any related tax effects, will be made when additional information is known. The following table presents Dominick's major classes of assets and liabilities as of year-end 2002 and 2001 (in millions):
- ----------------------------------------------------------------- 2002 2001 - ----------------------------------------------------------------- Current assets $ 252.9 $ 254.3 Property, net 520.5 725.0 Other long-term assets 279.9 1,458.0 Current debt, including obligations under capital leases 17.4 11.2 Other current liabilities 192.2 199.3 Long-term debt, including obligations under capital leases 91.1 117.1 Other long-term liabilities 52.6 72.8 - -----------------------------------------------------------------
NOTE O: SEGMENTS Safeway's retail grocery business, which represents more than 98% of consolidated sales and operates in the United States and Canada, is its only reportable segment. The following table presents information about the Company by geographic area (in millions):
- ------------------------------------------------------------------------------------------------- U.S. Canada Total - ------------------------------------------------------------------------------------------------- 2002 Sales $ 28,922.4 $ 3,476.8 $ 32,399.2 Operating Profit 1,498.7 174.6 1,673.3 Income from continuing operations before income taxes and cumulative effect of accounting change 1,151.2 169.0 1,320.2 Long-lived assets 7,356.2 654.0 8,010.2 Total assets 14,948.9 1,098.4 16,047.3 2001 Sales $ 28,362.2 $ 3,434.8 $ 31,797.0 Operating profit 2,330.0 205.7 2,535.7 Income from continuing operations before income taxes 1,927.5 195.2 2,122.7 Long-lived assets 6,774.0 642.7 7,416.7 Total assets 16,417.5 1,045.1 17,462.6 2000 Sales $ 25,998.5 $ 3,443.0 $ 29,441.5 Operating profit 2,064.3 200.2 2,264.5 Income from continuing operations before income taxes 1,752.0 190.9 1,942.9 Long-lived assets 5,833.8 614.5 6,448.3 Total assets 14,931.5 1,033.8 15,965.3
SAFEWAY INC. 2002 ANNUAL REPORT 47 NOTE P: COMPUTATION OF EARNINGS (LOSS) PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (In millions, except per-share amounts) Diluted Basic Diluted Basic Diluted Basic ----------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change $ 568.5 $ 568.5 $ 1,286.7 $ 1,286.7 $ 1,154.2 $ 1,154.2 Loss on discontinued operations (696.6) (696.6) (32.8) (32.8) (62.3) (62.3) Cumulative effect of accounting change (700.0) (700.0) - - - - - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (828.1) $ (828.1) $ 1,253.9 $ 1,253.9 $ 1,091.9 $ 1,091.9 ================================================================================================================================= Weighted average common shares outstanding 467.3 467.3 503.3 503.3 497.9 497.9 ================================================================================================================================= Common share equivalents 6.5 9.9 13.7 - --------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 473.8 513.2 511.6 ================================================================================================================================= Earnings (loss) per common share and common share equivalents: Income from continuing operations before cumulative effect of accounting change $ 1.20 $ 1.22 $ 2.51 $ 2.56 $ 2.26 $ 2.32 Loss on discontinued operations (1.47) (1.49) (0.07) (0.07) (0.13) (0.13) Cumulative effect of accounting change (1.48) (1.50) - - - - - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (1.75) $ (1.77) $ 2.44 $ 2.49 $ 2.13 $ 2.19 ================================================================================================================================= Calculation of common share equivalents: Options to purchase common shares 17.2 29.1 36.8 Common shares assumed purchased with potential proceeds (10.7) (19.2) (23.1) - --------------------------------------------------------------------------------------------------------------------------------- Common share equivalents 6.5 9.9 13.7 ================================================================================================================================= Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options to purchase common shares $ 350.3 $ 918.9 $ 1,077.4 Common stock price used under the treasury stock method $ 32.86 $ 47.85 $ 46.57 Common shares assumed purchased with potential proceeds 10.7 19.2 23.1
Anti-dilutive shares totaling 21.7 million in 2002, 9.0 million in 2001 and 3.2 million in 2000 have been excluded from diluted weighted average shares outstanding. 48 SAFEWAY INC. 2002 ANNUAL REPORT NOTE Q: 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.
- ---------------------------------------------------------------------------------------------------------------- Last 16 Third 12 Second 12 First 12 (in millions, except per-share amounts) 52 Weeks Weeks Weeks Weeks Weeks - ---------------------------------------------------------------------------------------------------------------- 2002(1) SALES $ 32,399.2 $ 10,010.8 $ 7,508.0 $ 7,513.5 $ 7,366.9 GROSS PROFIT 10,096.4 3,097.9 2,309.1 2,375.3 2,314.1 OPERATING PROFIT (LOSS) 1,673.3 (9.1) 530.2 565.9 586.2 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,320.2 (132.3) 448.1 489.2 515.1 INCOME (LOSS) FROM CONTINUING OPERATIONS 568.5 (342.6) 280.9 305.0 325.0 (LOSS) INCOME FROM DISCONTINUED OPERATIONS (696.6) (708.3) 0.4 4.3 7.1 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (700.0) - - - (700.0) NET (LOSS) INCOME (828.1) (1,050.8) 281.3 309.3 (367.9) INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS - BASIC $ 1.22 $ (0.77) $ 0.60 $ 0.63 $ 0.67 INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS - DILUTED 1.20 (0.77) 0.60 0.62 0.66 NET (LOSS) INCOME PER SHARE - BASIC $ (1.77) $ (2.37) $ 0.60 $ 0.64 $ (0.76) NET (LOSS) INCOME PER SHARE - DILUTED (1.75) (2.37) 0.60 0.63 (0.74) PRICE RANGE, NEW YORK STOCK EXCHANGE 46.09 27.80 30.85 45.02 46.09 TO 19.08 TO 19.08 TO 25.35 TO 30.67 TO 38.89

- ---------------------------------------------------------------------------------------------------------------------------- Last 16 Third 12 Second 12 First 12 (in millions, except per-share amounts) 52 Weeks Weeks Weeks Weeks Weeks - ---------------------------------------------------------------------------------------------------------------------------- 2001(2) Sales $ 31,797.0 $ 9,926.7 $ 7,386.4 $ 7,399.9 $ 7,084.0 Gross profit 9,849.6 3,077.2 2,293.3 2,311.8 2,167.3 Operating profit 2,535.7 747.3 595.3 624.7 568.5 Income from continuing operations before income taxes 2,122.7 598.2 521.0 516.1 487.5 Income from continuing operations 1,286.7 362.3 327.3 303.9 293.3 Loss from discontinued operations (32.8) (8.7) (18.1) 3.4 (9.4) Net income 1,253.9 353.6 309.2 307.3 283.9 Income per share from continuing operations - basic $ 2.56 $ 0.73 $ 0.65 $ 0.60 $ 0.58 Income per share from continuing operations - diluted 2.51 0.71 0.64 0.59 0.57 Net income per share - basic $ 2.49 $ $0.71 $ 0.61 $ 0.61 $ 0.56 Net income per share - diluted 2.44 0.70 0.60 0.59 0.55 Price range, New York Stock Exchange 61.38 46.25 49.70 55.99 61.38 to 37.44 to 37.44 to 40.75 to 47.77 to 46.06
(1) Loss from continuing operations for the last 16 weeks of 2002 includes a $704.2 million goodwill impairment charge for Randall's, $32.7 million of pre-tax income from Canadian Imperial Bank of Commerce for the termination of an in-store banking agreement with Safeway and a pre-tax charge of approximately $15.8 million related to the resolution of physical inventory count discrepancies at Casa Ley. Loss from discontinued operations for the last 16 weeks of 2002 includes a $583.8 million impairment charge for Dominick's and a $201.3 million estimated loss on disposal of Dominick's. (2) Income from continuing operations for the last 16 weeks of 2001 includes a $42.7 million pre-tax charge to recognize estimated lease liabilities associated with the Furr's and Homeland bankruptcies and a $51.0 million pre-tax charge for estimated payments under contractual obligations and a first-loss deficiency agreement in connection with the FBO bankruptcy. Income from continuing operations for the second 12 weeks of 2001 includes a $30.1 million pre-tax charge to reduce the carrying amount of Safeway's investment in GroceryWorks. SAFEWAY INC. 2002 ANNUAL REPORT 49 MANAGEMENT'S REPORT SAFEWAY INC. AND SUBSIDIARIES 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 accounting principles generally accepted in the United States of America 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 on the following page. INTERNAL CONTROL SYSTEM Safeway maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to management, the Audit Committee 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 Audit Committee of 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 December 28, 2002 Safeway believes its system of internal controls over financial reporting was effective for providing reliable financial statements. /s/ Steven A. Burd /s/ Vasant M. Prabhu Steven A. Burd Vasant M. Prabhu Chairman, President and Executive Vice President Chief Executive Officer and Chief Financial Officer 50 SAFEWAY INC. 2002 ANNUAL REPORT INDEPENDENT AUDITORS' REPORT SAFEWAY INC. AND SUBSIDIARIES THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SAFEWAY INC: We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries as of December 28, 2002 and December 29, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 28, 2002. 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 auditing standards generally accepted in the United States of America. 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 December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note A to the consolidated financial statements, in fiscal 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP San Francisco, California March 21, 2003 SAFEWAY INC. 2002 ANNUAL REPORT 51 EX-21.1 7 f87908exv21w1.txt EXHIBIT 21.1 Exhibit 21.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of December 28, 2002 Registrant: Safeway Inc. The following is a list of the Company's wholly-owned subsidiaries and includes all subsidiaries deemed significant. 24 companies are not listed because they are maintained solely for the purpose of holding licenses or because they are non-wholly owned. Subsidiaries of Registrant (Tier I subsidiaries): Safeway Canada Holdings, Inc. Safeway Australia Holdings, Inc. Safeway Leasing, Inc. Oakland Property Brokerage, Inc. Omnibrands, Inc. Milford Insurance Ltd. Milford Insurance Brokerage Services, Inc. Pak 'N Save, Inc. ePOS! Marketing Company 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, Incorporated Safeway Stores 42, Inc. Safeway Stores 43, Inc. Safeway Stores 64, Inc. Safeway Claim Services, Inc. Safeway Holdings I, Inc. Safeway Stores 99, Inc. Safeway SELECT Gift Source, Inc. Vons REIT, Inc. Taylor Properties, Inc. SSI - AK Holdings, Inc. GFM Holdings I GFM Holdings II Randall's Holdings, Inc. Cayam Energy, LLC The Safeway Foundation 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. Exhibit 21.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of December 28, 2002 (continued) 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. Exhibit 21.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of December 28, 2002 (Continued) 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. Subsidiary of Photo Acquisition I, Inc.: Everett Realty Advisors, Inc. Subsidiary of SSI - AK Holdings, Inc.: Carr-Gottstein Foods Co. Subsidiary of GFM Holdings I: GFM Holdings LLC Subsidiary of GFM Holdings II: Genuardi's Family Markets LP Subsidiaries of Randall's Holdings, Inc.: Randall's Finance Company, Inc. Randall's Food Markets, Inc. Randall's Investments, Inc. SUBSIDIARIES OF TIER I SUBSIDIARIES (Non-tier Subsidiaries): Subsidiaries of Safeway Canada Holdings, Inc.: Safeway New Canada, Inc. and its subsidiary: Safeway Foreign Sales Ltd. and its subsidiary: Canada Safeway Holdings Limited: Safeway Ontario Finance Corporation Canada Safeway Limited: Cananda Safeway Liquor Stores Limited Safeway International Finance Corp. of Canada The Canada Safeway Foundation Subsidiary of Vons REIT, Inc.: Dominick's Supermarkets, Inc. Subsidiaries of Dominick's Supermarkets, Inc.: Dominick's Finer Foods, LLC Blackhawk Properties, Inc. Exhibit 21.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of December 28, 2002 Blackhawk Developments, Inc. (Continued) Subsidiaries of Dominick's Finer Foods, LLC: Dominick's Finer Foods, Inc. of Illinois The Dominick's/Omni Foundation (non-profit) Dodi Hazelcrest, Inc. Kohl's of Bloomingdale, Inc. Save-It Discount Foods Corporation SUBSIDIARIES OF TIER II SUBSIDIARIES (Tier III Subsidiaries): Subsidiary of Safeway Stores 58, Inc.: Safelease, Inc. Subsidiaries of The Vons Companies, Inc.: Vons Food Services, Inc. The Vons Companies Charitable Foundation, Inc. Subsidiaries of Carr-Gottstein Foods Co.: AOL Express, Inc. APR Forwarders, Inc. Alaska Advertisers, Inc. Seldovia Mart, Inc. Subsidiary of Randall's Investments, Inc.: Randall's Food & Drugs LP Subsidiary of Randall's Food & Drugs LP: Randall's Management Company, Inc. Subsidiary of Randall's Management Company, Inc.: Randall's Beverage Company, Inc. EX-23.1 8 f87908exv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our report dated March 21, 2003 (which report expresses an unqualified opinion and includes an emphasis paragraph relating to the adoption of a new accounting principle), incorporated by reference in this Annual Report on Form 10-K of Safeway Inc. and subsidiaries for the fiscal year ended December 28, 2002, 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. 33-51119 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, The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan and Safeway Inc. Stock Option Plan for former Directors of the Vons Companies, Inc., - - No. 333-55008 on Form S-3 regarding Debt Securities, - - 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., - - No. 333-84749 on Form S-8 regarding Randall's Food Markets, Inc. Stock Option and Restricted Stock Plan and Amended and Restated 1997 Stock Purchase and Option Plan for Key Employees for Randall's Food Markets, Inc. and Subsidiaries, - - No. 333-87289 on Form S-8 regarding the 1999 Amended and Restated Equity Participation Plan, - - No. 333-91975 on Form S-8 regarding Randall's Food Markets, Inc. ESOP/401(k) Savings Plan and Dominick's Finer Foods, Inc. 401(k) Retirement Plan for Union Employees, as Amended, and Dominick's Finer Foods, Inc. 401(k) Retirement Plan for Non-Union Employees, as Amended, - - No. 333-30820 on Form S-8 regarding the Safeway Executive Deferred Compensation Plan and Canada Safeway Limited Executive Deferred Compensation Plan, - - No. 333-45920 on Form S-8 regarding the Safeway 401(k) Plan and Trust, - - No. 333-65792 on Form S-8 regarding Genuardi's Family Markets, L.P. Retirement Savings Plan, - - No. 333?64354 on Form S?8 regarding the 2001 Restatement of the Von's Companies, Inc. Pharmacists' 401(k) Plan and Trust, - - No. 333-85132 on Form S-8 regarding the 2002 Restatement of the Safeway 401(k) Savings Plan and Trust, - - No. 333-92270 on Form S-3 regarding Debt and Equity Securities, - - No. 333-96685 on Form S-3 regarding Debt and Equity Securities, and - - No. 333-98103 on Form S-8 regarding the 2002 Equity Incentive Plan of Safeway Inc. /s/ Deloitte & Touche LLP San Francisco, California March 26, 2003 ~~-----END PRIVACY-ENHANCED MESSAGE-----~~

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1.		Consolidated Financial Statements of the Company are incorporated by reference in PART II, Item 8:

		Consolidated Statements of Operations for fiscal 2002, 2001, and 2000. Consolidated Balance Sheets as of the end of fiscal 2002 and 2001. Consolidated Statements of Cash Flows for fiscal 2002, 2001, and 2000. Consolidated Statements of Stockholders’ Equity for fiscal 2002, 2001, and 2000. 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:

1.		I have reviewed this annual report on Form 10-K of Safeway Inc.;

2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)		presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and