-----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, TFmlRXfUkKiU+pMHZvldP7WdGG6ArXRdFFERqTPpNr69mkBAVOD1ZVXK5bPiP0Y6 G7FElN3JPaDWQfxzzaJ/Ig== 0000950149-97-001406.txt : 19970730 0000950149-97-001406.hdr.sgml : 19970730 ACCESSION NUMBER: 0000950149-97-001406 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970614 FILED AS OF DATE: 19970729 SROS: NYSE SROS: PSE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00041 FILM NUMBER: 97647010 BUSINESS ADDRESS: STREET 1: 5918 STONERIDGE MALL ROAD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104673000 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-Q 1 FORM 10-Q FOR THE PERIOD ENDED 6/14/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended June 14, 1997 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-41 SAFEWAY INC. (Exact name of registrant as specified in its charter) Delaware 94-3019135 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5918 Stoneridge Mall Rd. Pleasanton, California 94588-3229 (Address of principal executive (Zip Code) offices) Registrant's telephone number, (510) 467-3000 including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- As of July 18, 1997 there were issued and outstanding 233.5 million shares of the registrant's common stock. 2 SAFEWAY INC. AND SUBSIDIARIES INDEX
PART I FINANCIAL INFORMATION (UNAUDITED) Page - ------ --------------------------------- ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 3 14, 1997 and December 28, 1996 Condensed Consolidated Statements of Income for 5 the 12 and 24 weeks ended June 14, 1997 and June 15, 1996 Condensed Consolidated Statements of Cash Flows 6 for the 24 weeks ended June 14, 1997 and June 15, 1996 Notes to the Condensed Consolidated Financial 7 Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12 CONDITION AND RESULTS OF OPERATIONS PART II OTHER INFORMATION - ------- ----------------- ITEM 1. LEGAL PROCEEDINGS 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17 HOLDERS ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K 18
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) (UNAUDITED)
June 14, December 28, 1997 1996 ---------- ------------ ASSETS Current assets: Cash and equivalents $ 36.7 $ 79.7 Receivables 184.5 160.9 Merchandise inventories 1,494.4 1,283.3 Prepaid expenses and other current assets 162.0 130.5 ---------- ---------- Total current assets 1,877.6 1,654.4 ---------- ---------- Property 6,194.0 5,069.6 Less accumulated depreciation and amortization (2,407.9) (2,313.2) ---------- ---------- Property, net 3,786.1 2,756.4 Goodwill, net of accumulated amortization of $130.3 and $116.4 1,905.0 312.5 Prepaid pension costs 338.0 328.7 Investments in unconsolidated affiliates 85.4 362.4 Other assets 127.3 130.8 ---------- ---------- Total assets $ 8,119.4 $ 5,545.2 ========== ==========
(Continued) 3 4 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
June 14, December 28, 1997 1996 ---------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of notes and debentures $ 424.6 $ 237.3 Current obligations under capital leases 22.5 18.4 Accounts payable 1,227.9 1,153.1 Accrued salaries and wages 256.2 231.2 Other accrued liabilities 504.4 390.0 ---------- ---------- Total current liabilities 2,435.6 2,030.0 ---------- ---------- Long-term debt: Notes and debentures 2,900.1 1,568.1 Obligations under capital leases 232.1 160.4 ---------- ---------- Total long-term debt 3,132.2 1,728.5 Deferred income taxes 270.4 223.8 Accrued claims and other liabilities 480.4 376.1 ---------- ---------- Total liabilities 6,318.6 4,358.4 ---------- ---------- Contingencies Stockholders' equity: Common stock: par value $0.01 per share; 750 shares authorized; 233.4 and 221.4 shares outstanding 2.6 2.2 Additional paid-in capital 2,454.1 750.3 Unexercised warrants purchased (322.7) (322.7) Cumulative translation adjustments 8.6 12.0 Retained earnings 1,009.8 745.0 ---------- ---------- 3,152.4 1,186.8 Less: treasury stock at cost; 31.4 shares in 1997 (1,351.6) - ---------- ---------- Total stockholders' equity 1,800.8 1,186.8 ---------- ---------- Total liabilities and stockholders' equity $ 8,119.4 $ 5,545.2 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
12 Weeks Ended 24 Weeks Ended --------------------------- --------------------------- June 14, June 15, June 14, June 15, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Sales $ 5,249.2 $ 3,945.4 $ 9,327.0 $ 7,828.1 Cost of goods sold (3,743.9) (2,843.3) (6,676.2) (5,633.5) ----------- ----------- ----------- ----------- Gross profit 1,505.3 1,102.1 2,650.8 2,194.6 Operating and administrative expense (1,207.3) (892.0) (2,128.0) (1,790.4) ----------- ----------- ----------- ----------- Operating profit 298.0 210.1 522.8 404.2 Interest expense (62.7) (42.2) (101.4) (86.5) Equity in earnings of unconsolidated affiliates 4.3 10.0 21.5 21.2 Other income, net 0.6 1.3 1.4 2.4 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary loss 240.2 179.2 444.3 341.3 Income taxes (106.1) (72.5) (187.7) (138.2) ----------- ----------- ----------- ----------- Income before extraordinary loss 134.1 106.7 256.6 203.1 Extraordinary loss related to early retirement of debt, net of income tax benefit (4.2) - (4.2) - ----------- ----------- ----------- ----------- Net income $ 129.9 $ 106.7 $ 252.4 $ 203.1 =========== =========== =========== =========== Primary and fully diluted income per common share and common share equivalent: Income before extraordinary loss $ 0.54 $ 0.44 $ 1.05 $ 0.85 Extraordinary loss (0.02) - (0.02) - ----------- ----------- ----------- ----------- Net income $ 0.52 $ 0.44 $ 1.03 $ 0.85 =========== =========== =========== =========== Weighted average common shares and common share equivalents: Primary 250.2 239.8 245.2 239.1 =========== =========== =========== =========== Fully diluted 250.5 239.9 245.3 239.5 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 5 6 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
24 Weeks Ended --------------------- June 14, June 15, 1997 1996 -------- -------- CASH FLOW FROM OPERATIONS Net income $252.4 $203.1 Reconciliation to net cash flow from operations: Extraordinary loss related to the early retirement of debt, before income tax benefit 7.0 - Depreciation and amortization 192.9 153.8 LIFO expense 2.3 4.6 Equity in undistributed earnings of unconsolidated affiliates (21.5) (21.2) Other 37.3 4.6 Change in working capital items: Receivables and prepaid expenses 27.0 (95.8) Inventories at FIFO cost 144.0 89.4 Payables and accruals (294.2) (15.9) ------ ------ Net cash flow from operations 347.2 322.6 ------ ------ CASH FLOW FROM INVESTING ACTIVITIES Cash paid for property additions (181.7) (164.9) Proceeds from sale of property 13.2 17.9 Net cash acquired in acquisition of The Vons Companies, Inc. 57.6 - Other 17.1 (1.9) ------ ------ Net cash flow used by investing activities (93.8) (148.9) ------ ------ CASH FLOW FROM FINANCING ACTIVITIES Additions to short-term borrowings 257.5 92.0 Payments on short-term borrowings (75.6) (142.7) Additions to long-term borrowings 1,621.5 129.6 Payments on long-term borrowings (734.8) (313.2) Purchase of treasury stock (1,376.0) - Net proceeds from exercise of stock options and warrants 18.7 7.8 Premium paid on early retirement of debt (5.4) - Other (2.3) (3.3) ------ ------ Net cash flow used by financing activities (296.4) (229.8) ------ ------ Decrease in cash and equivalents (43.0) (56.1) CASH AND EQUIVALENTS Beginning of period 79.7 74.8 ------ ------ End of period $ 36.7 $ 18.7 ====== ======
See accompanying notes to condensed consolidated financial statements. 6 7 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries ("Safeway" or the "Company") for the 12 and 24 weeks ended June 14, 1997 and June 15, 1996 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 1996 Annual Report to Stockholders. The results of operations for the 12 and 24 weeks ended June 14, 1997 are not necessarily indicative of the results expected for the full year. ACQUISITION OF THE VONS COMPANIES, INC. As discussed in Note D, Safeway completed the acquisition of The Vons Companies, Inc. ("Vons") on April 8, 1997. The accompanying financial statements include Vons' results of operations as of the beginning of the second quarter of 1997. Pro forma results of operations for 1996 and 1995 have been included in Safeway's Form 8-K/A filed on May 1, 1997. Summarized pro forma results of operations for the first 12 weeks of 1997 and the first 12 and 24 weeks of 1996 appear in Note D below. NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128"). The Company is required to adopt SFAS No. 128 in the fourth quarter of 1997 and at that time will restate earnings per share ("EPS") data for prior periods to conform with SFAS No. 128. Earlier application is not permitted. SFAS No. 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted to common stock. Pro forma amounts for basic and diluted EPS assuming SFAS No. 128 had been in effect for the 12 and 24 weeks ended June 14, 1997 and June 15, 1996 are as follows:
12 Weeks Ended 24 Weeks Ended -------------------- -------------------- June 14, June 15, June 14, June 15, 1997 1996 1997 1996 -------- -------- -------- -------- Basic EPS: Income before extraordinary loss $ 0.58 $ 0.49 $ 1.13 $ 0.94 Extraordinary loss (0.02) - (0.02) - -------- -------- -------- -------- Net income $ 0.56 $ 0.49 $ 1.11 $ 0.94 ======== ======== ======== ======== Diluted EPS: Income before extraordinary loss $ 0.54 $ 0.44 $ 1.05 $ 0.85 Extraordinary loss (0.02) - (0.02) - -------- -------- -------- -------- Net income $ 0.52 $ 0.44 $ 1.03 $ 0.85 ======== ======== ======== ========
7 8 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INVENTORY Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation ("LIFO Indices"). Safeway did not record LIFO expense in the second quarter of 1997 due to management's expectation of little or no inflation for the full year. LIFO expense was $2.3 million in the second quarter of 1996. For the first 24 weeks of the year, LIFO expense was $2.3 million in 1997 and $4.6 million in 1996. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS As discussed in Note E to the Company's consolidated financial statements on page 26 of the 1996 Annual Report to Stockholders, Safeway has entered into interest rate swap agreements to limit the exposure of its floating interest rate debt to changes in market interest rates. These 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 are major financial institutions. NOTE B - FINANCING Notes and debentures were composed of the following at June 14, 1997 and December 28, 1996 (in millions):
June 15, 1997 December 28, 1996 Long-term Current Long-term Current Bank Credit Agreement, unsecured $1,605.2 Credit Agreement, unsecured - $ 360.6 9.30% Senior Secured Debentures due 70.7 70.7 2007 Mortgage notes payable, secured 147.1 $119.6 156.5 $149.9 10% Senior Notes due 2002, unsecured 59.1 - 59.1 - Medium-term notes, unsecured 65.5 - 65.5 - Other notes payable, unsecured 111.4 4.5 114.6 4.4 Short-term bank borrowings, unsecured - 265.0 - 83.0 9.35% Senior Subordinated Notes due 1999, unsecured 161.5 - 161.5 - 10% Senior Subordinated Notes due 241.4 - 241.4 - 2001, unsecured 9.65% Senior Subordinated Debentures due 2004, unsecured 228.2 - 228.2 - 9.875% Senior Subordinated Debentures due 2007, unsecured 110.0 - 110.0 - 8.375% Senior Subordinated Debentures due 1999, unsecured 100.0 - - - 6.625% Senior Subordinated Debentures due 1998, unsecured - 35.5 - - -------- ------ -------- ------ $2,900.1 $424.6 $1,568.1 $237.3 ======== ====== ======== ======
8 9 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note C to the Company's consolidated financial statements on pages 27 through 28 of the 1996 Annual Report to Stockholders describes all of the material restrictive covenants of the 9.30% Senior Secured Debentures, the Credit Agreement and the Subordinated Securities (except for the 8.375% Senior Subordinated Debentures and the 6.625% Senior Subordinated Debentures which are described in Note 7 of Vons' 1996 Annual Report on Form 10-K). On April 8, 1997, the Company entered into a new $3.0 billion bank credit agreement (the "Bank Credit Agreement") that provides for, among other things, increased borrowing capacity, extended maturities and the opportunity to pay lower interest rates based on interest coverage ratios or public debt ratings. The restrictive covenants of the Bank Credit Agreement continue to limit payments by the Company, for, among other things: (i) paying cash dividends on its capital stock; (ii) repurchasing shares of its capital stock; and (iii) acquiring any outstanding warrants, options or other rights to acquire shares of any class of Safeway stock. These covenants also 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 also is required to meet certain financial tests under the Bank Credit Agreement. Subsequent to quarter-end, Safeway entered the commercial paper market. On July 17, 1997, the Company had $1.5 billion of commercial paper outstanding, the proceeds were used to pay down borrowings under the Bank Credit Agreement. NOTE C - INVESTMENTS IN UNCONSOLIDATED AFFILIATES On April 8, 1997, Safeway completed the acquisition of Vons pursuant to which Safeway issued 41.6 million shares of Safeway common stock for all of the shares of Vons stock that it did not already own. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial position and results of operations. In connection with the acquisition, Safeway repurchased 32 million shares of Safeway common stock from a partnership affiliated with Kohlberg Kravis Roberts & Co. at $43 per share, for an aggregate purchase price of $1.376 billion. To finance the repurchase, Safeway entered into the Bank Credit Agreement described in Note B above. At the end of the second quarter of 1997, Safeway's investment in unconsolidated affiliates consisted of a 49% interest in Casa Ley, which operated 71 food and general merchandise stores in western Mexico. Income from Safeway's equity investment in Casa Ley increased slightly to $4.3 million in the second quarter of 1997 from $4.1 million in 1996. For the first 24 weeks of the year, Safeway's share of Casa Ley's earnings rose to $9.3 million in 1997 from $8.1 million in 1996. Safeway's share of Vons' earnings, recorded on a one-quarter delay basis, was $12.2 million for the first quarter of 1997, $7.2 million in the first quarter of 1996, and $13.1 million in the first 24 weeks of 1996. 9 10 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION The following unaudited pro forma summary financial information combines the consolidated results of operations of Safeway and Vons for the first 12 weeks of 1997 and the first 12 and 24 weeks of 1996 as if the acquisition had occurred as of the beginning of 1996. 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 at the beginning of fiscal 1996 (in millions, except per-share amounts):
12 Weeks Ended 24 Weeks Ended June 14, June 15, June 14, June 15, 1997 1996 1997 1996 -------- --------- --------- --------- (Actual) (Pro Forma) (Pro Forma) (Pro Forma) Sales $5,249.2 $5,206.4 $10,578.5 $10,271.0 Income before extraordinary loss $134.1 $114.5 $267.4 $219.5 Net income $129.9 $114.5 $263.2 $219.5 Fully diluted income per common share and common share equivalent: Income before $0.54 $0.46 $1.07 $0.88 extraordinary loss Net income $0.52 $0.46 $1.05 $0.88
Net cash acquired from the acquisition was as follows (in millions): Fair value of assets acquired $ 3,129.7 Fair value of liabilities assumed (1,183.1) Stock issued (1,693.0) Safeway's equity investment in Vons (311.2) --------- Net cash acquired $ (57.6) ========= NOTE E - CONTINGENCIES LEGAL MATTERS Note K to the Company's consolidated financial statements, under the caption "Legal Matters" on page 35 of the 1996 Annual Report to Stockholders, provides information on certain claims and litigation in which the Company is involved. In March 1996, a purported class action was filed in the Superior Court for Alameda County, California, alleging that the Company fraudulently (i) obtained settlements of certain claims arising out of the 1988 Richmond warehouse fire and (ii) made statements that induced claimants not to file actions within the time period under the statute of limitations. On April 21, 1997, the Court sustained Safeway's demurrer to the second amended complaint without leave to amend. In May 1997, the Court dismissed the case, and plaintiffs filed a notice of appeal. Vons has been named in a number of lawsuits in state and federal courts in Washington, Nevada, Idaho and California arising from claims of food-borne illness that allegedly was contracted from the consumption of hamburgers at certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few of these cases are pending; they are filed in state courts and a federal court in the State of Washington. The restaurants involved either were directly operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a division, or were operated through franchisees. The suits seek an unspecified amount of monetary damages. The plaintiffs in those actions allege, among other things, that the hamburger patties in question were processed by Vons before being cooked and served by a Jack In The Box outlet. The Company, in consultation with its attorneys and insurance carriers, does not anticipate that the total liability that it might face as a result of these claims will exceed the insurance coverage it has available. 10 11 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Vons also has been named as a defendant in two actions that have been coordinated by the California Judicial Council. Claims have been asserted against Vons in both actions by Foodmaker. In addition, Vons has asserted claims in each action against Foodmaker for damages Vons suffered as a result of the Outbreak and Foodmaker's post-Outbreak statements. Other parties to these actions include two meat suppliers and three Jack In The Box franchisees that operated outlets from which claims of illness arose. These lawsuits presently are set for trial on September 22, 1997, in Los Angeles, Superior Court. Foodmaker seeks damages of approximately $550 million; Vons seeks to recover damages of approximately $250 million and also seeks indemnity from other parties of any amounts it might be held liable to pay to Foodmaker. The Company believes that Vons has meritorious defenses to Foodmaker's claims. On September 13, 1996, a class action lawsuit entitled McCampbell. et al. v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego County, California against Vons and two other grocery store chains operating in Southern California. In the complaint it is alleged, among other things, that Vons and the other defendants conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants violated provisions of the California Cartwright Act and engaged in unfair competition. Plaintiffs seek damages they allege the class has sustained; the amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. In addition, plaintiffs seek an injunction against future acts that would be in restraint of trade or that would constitute unfair competition. An answer has been filed to the complaint that denies plaintiffs' allegations and sets forth several defenses. The Company believes that Vons has meritorious defenses to plaintiffs' claims. 11 12 SAFEWAY INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MERGER WITH THE VONS COMPANIES, INC. ("VONS") On April 8, 1997 Safeway completed the acquisition of Vons (the "Merger"). Pursuant to the Merger, Safeway issued 1.425 shares of Safeway common stock for each share of Vons stock that Safeway did not already own, or a total of 41.6 million shares of Safeway common stock. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial position and results of operations. In connection with the Merger, Safeway repurchased 32.0 million shares of Safeway common stock from a partnership affiliated with Kohlberg Kravis Roberts & Co. ("KKR") at $43 per share, for an aggregate purchase price of $1.376 billion. To finance the repurchase, Safeway entered into a new $3.0 billion bank credit agreement (the "Bank Credit Agreement") that provides for, among other things, increased borrowing capacity, extended maturities and the opportunity to pay lower interest rates based on interest coverage ratios or public debt ratings. As a result of the repurchase, Safeway increased its debt and interest expense, but also reduced the number of common shares outstanding used to calculate earnings per share. This reduction of 32.0 million shares partially offsets the increase of 41.6 million shares issued pursuant to the Merger. RESULTS OF OPERATIONS Safeway's income before extraordinary loss was $134.1 million ($0.54 per share) for the second quarter of 1997, compared to $106.7 million ($0.44 per share) in 1996. The Company incurred an extraordinary loss of $4.2 million ($0.02 per share) in the second quarter of 1997 for the early retirement of debt, which reduced net income to $129.9 million ($0.52 per share). As described below, quarterly results in both years were affected by labor disputes, and the current quarter was affected by the acquisition of Vons. For the first 24 weeks of the year, Safeway's income before extraordinary loss was $256.6 million ($1.05 per share), compared to $203.1 million ($0.85 per share) in 1996. During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. The Company estimates that the strike reduced second-quarter 1997 net income by approximately $0.07 per share. Labor disputes in the British Columbia and Denver operating areas reduced second-quarter 1996 net income by an estimated $0.05 per share. Safeway's second-quarter 1997 income statement consolidates Safeway's and Vons' operating results for the full quarter, while the second quarter 1996 income statement includes only Safeway's operating results and reflects its 35% equity interest in Vons. In order to facilitate an understanding of the Company's operations, the following discussions of sales, gross profit and operating and administrative expenses include comparisons with second-quarter 1996 pro forma combined financial information. This pro forma information is based on the 1996 second-quarter historical financial statements of the two companies as if the acquisition had occurred at the beginning of that quarter, and has been adjusted to conform Vons' accounting policies to Safeway's. Due to the acquisition of Vons this quarter, total sales increased 33% on a historical basis from $3.95 billion in 1996 to $5.25 billion in 1997. Pro forma combined sales for the second quarter last year were $5.21 billion, representing an increase of 0.8%. Excluding Alberta, identical-store sales (stores operating the entire measurement period in both years excluding replacement stores), increased 2.0%, or 3.0% on a comparable-store basis (which includes replacement stores). Including Alberta, identical-stores sales decreased 1.0%, or a 0.1% decrease on a comparable-store basis. Same-store sales have softened compared to recent quarterly results, largely because of the effect of deflation and the timing of the Easter holiday. For the first 24 weeks of the year, total sales increased 19% on a historical basis to $9.33 billion in 1997 from $7.83 billion in 1996, primarily as a result of the Vons acquisition. 12 13 SAFEWAY INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross profit was 28.68% of sales in the second quarter of 1997 compared to 27.93% in 1996 on a historical basis and 28.42% on a pro forma basis. Improvements in buying practices and product mix were partially offset by investments to drive sales in various regions. In addition, the Company did not record LIFO expense this quarter, reflecting management's expectation of little or no inflation for the full year. For the first 24 weeks of the year, on a historical basis gross profit was 28.42% of sales in 1997 compared to 28.03% in 1996. Operating and administrative expense was 23.00% of sales in 1997 compared to 22.61% in 1996 due to the effect in 1997 of Vons' higher operating and administrative expense margin. On a pro forma combined basis, operating and administrative expense for the second quarter of 1997 was down 34 basis points from 23.34% last year. Efforts to reduce or control expenses combined with increased sales have continued to result in lower operating and administrative expenses as a percentage of sales on a pro forma basis. For the first 24 weeks of the year, operating and administrative expense on a historical basis fell slightly to 22.82% in 1997 from 22.87% of sales in 1996. It is expected that Safeway's operating and administrative expense-to-sales ratio will increase compared to historical results because Vons' operating and administrative expense ratio, when conformed to Safeway's presentation, has historically been higher than Safeway's. In addition, annual goodwill amortization will increase by approximately $25 million. Safeway plans to apply its cost reduction, sales growth and capital management strategies to Vons' operations in an effort to offset these negative effects, although there can be no assurance as to the results Safeway will be able to achieve in this regard. As a result of the interest on the debt incurred on April 8, 1997 to repurchase the KKR stock, interest expense rose to $62.7 million for the second quarter of 1997 compared to $42.2 million last year, and to $101.4 million for the first 24 weeks of 1997 compared to $86.5 million last year. On April 30, 1997, Safeway purchased interest rate caps with a notional principal amount of $850 million at 7% for two years. These caps are intended to provide partial protection from the exposure to higher floating interest rates over the life of the cap. At the end of the second quarter of 1997, Safeway's investment in unconsolidated affiliates consisted of a 49% interest in Casa Ley, which operated 71 food and general merchandise stores in western Mexico. Income from Safeway's equity investment in Casa Ley increased slightly to $4.3 million in the second quarter of 1997 from $4.1 million in 1996. For the first 24 weeks of the year, Safeway's share of Casa Ley's earnings rose to $9.3 million in 1997 from $8.1 million in 1996. Safeway's share of Vons' earnings, recorded on a one-quarter delay basis, was $12.2 million for the first quarter of 1997, $7.2 million in the first quarter of 1996, and $13.1 million in the first 24 weeks of 1996. The income tax rate increased to 42.25% for the first 24 weeks of 1997 from 39.98% in the first quarter of the year due to the increase in nondeductible goodwill amortization resulting from the acquisition of Vons. LIQUIDITY AND FINANCIAL RESOURCES Net cash flow from operations for the first 24 weeks of the year was $347.2 million in 1997 compared to $322.6 million in 1996. Cash flow used by investing activities for the first 24 weeks of the year was $93.8 million in 1997 compared to $148.9 million in 1996. The change in cash flow used by investing activities is primarily the result of the acquisition of Vons' cash, offset by increased capital expenditures to open four new stores, continue construction of a manufacturing plant in California and begin work on a new distribution center in Maryland. [THESE NUMBERS ARE STILL PRELIMINARY]. Cash flow used by financing activities for the first 24 weeks of the year was $296.4 million in 1997, compared to $229.8 million in 1996, reflecting Safeway's repurchase of KKR stock and the early retirement of $150 million of long-term debt, parially offset by the debt incurred to repurchase the KKR stock. 13 14 SAFEWAY INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash flow from operations as presented on the Condensed Consolidated Statements of Cash Flows is an important measure of cash generated by the Company's operating activities. Operating cash flow, as defined below, is similar to net cash flow from operations because it excludes certain noncash items. However, operating cash flow also excludes interest expense, income taxes and changes in working capital. Management believes that operating cash flow is relevant because it assists investors in evaluating Safeway's ability to service its debt by providing a commonly used measure of cash available to pay interest, and it facilitates comparisons of Safeway's results of operations with those companies having different capital structures. Safeway's computation of operating cash flow is as follows (dollars in millions):
12 Weeks Ended 24 Weeks Ended ------------------- ------------------- June 14, June 15, June 14, June 15, 1997 1996 1997 1996 ------ ------ ------ ------ Income before income taxes and extraordinary loss $240.2 $179.2 $444.3 $341.3 LIFO expense - 2.3 2.3 4.6 Interest expense 62.7 42.2 101.4 86.5 Depreciation and amortization 112.2 78.2 192.9 153.8 Equity in earnings of unconsolidated affiliates (4.3) (10.0) (21.5) (21.2) ------ ------ ------ ------ Operating cash flow $410.8 $291.9 $719.4 $565.0 ====== ====== ====== ====== As a percent of sales 7.83% 7.40% 7.71% 7.22% ====== ====== ====== ====== As a multiple of interest expense 6.55x 6.92x 7.09x 6.53x ====== ====== ====== ======
Based upon the current level of operations of Safeway and Vons, and anticipated operating improvements and cost savings resulting in part from the Merger, Safeway believes that operating cash flow of the combined company and other sources of liquidity, including borrowings under Safeway's commercial paper program and the Bank Credit Agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments. There can be no assurance, however, that the combined company's business will continue to generate cash flow at or above current levels or that anticipated operating improvements or cost savings can be achieved. Through July 17, 1997, the Company borrowed $1.5 billion of commercial paper, the proceeds of which were used to pay down borrowings under the Bank Credit Agreement. The Bank Credit Agreement will be used primarily as a backup facility to the commercial paper program. CAPITAL EXPENDITURE PROGRAM A component of the Company's long-term strategy is its capital expenditure program. During the first two quarters of 1997, Safeway and Vons together invested $204 million in capital expenditures, including Vons' first quarter 1997 capital spending of $7 million, to, among other things, open 10 new stores and continue the construction of a manufacturing plant in California and a new distribution center in Maryland. Combined capital expenditures for Safeway and Vons in fiscal 1997 are expected to exceed $800 million. The combined company expects to open 40 to 45 new stores and complete more than 180 remodels in 1997. 14 15 SAFEWAY INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements relating to, among other things, capital expenditures, cost reduction, cash flow and operating improvements. Such statements are subject to inherent uncertainties and risks, including among others: general business and economic conditions in the Company's operating regions; pricing pressures and other competitive factors; results of the Company's programs to reduce costs; the ability to integrate Vons and achieve operating improvements at Vons; relations with union bargaining units; and the availability and terms of financing. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. 15 16 SAFEWAY INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note K to the Company's consolidated financial statements, under the caption "Legal Matters" on page 35 of the 1996 Annual Report to Stockholders, provides information on certain claims and litigation in which the Company is involved. In March 1996, a purported class action was filed in the Superior Court for Alameda County, California, alleging that the Company fraudulently (i) obtained settlements of certain claims arising out of the 1988 Richmond warehouse fire and (ii) made statements that induced claimants not to file actions within the time period under the statute of limitations. On April 21, 1997, the Court sustained Safeway's demurrer to the second amended complaint without leave to amend. In May 1997, the Court dismissed the case, and plaintiffs filed a notice of appeal. Vons has been named in a number of lawsuits in state and federal courts in Washington, Nevada, Idaho and California arising from claims of food-borne illness that allegedly was contracted from the consumption of hamburgers at certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few of these cases are pending; they are filed in state courts and a federal court in the State of Washington. The restaurants involved either were directly operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a division, or were operated through franchisees. The suits seek an unspecified amount of monetary damages. The plaintiffs in those actions allege, among other things, that the hamburger patties in question were processed by Vons before being cooked and served by a Jack In The Box outlet. The Company, in consultation with its attorneys and insurance carriers, does not anticipate that the total liability that it might face as a result of these claims will exceed the insurance coverage it has available. Vons also has been named as a defendant in two actions that have been coordinated by the California Judicial Council. Claims have been asserted against Vons in both actions by Foodmaker. In addition, Vons has asserted claims in each action against Foodmaker for damages Vons suffered as a result of the Outbreak and Foodmaker's post-Outbreak statements. Other parties to these actions include two meat suppliers and three Jack In The Box franchisees that operated outlets from which claims of illness arose. These lawsuits presently are set for trial on September 22, 1997, in Los Angeles, Superior Court. Foodmaker seeks damages of approximately $550 million; Vons seeks to recover damages of approximately $250 million and also seeks indemnity from other parties of any amounts it might be held liable to pay to Foodmaker. The Company believes that Vons has meritorious defenses to Foodmaker's claims. On September 13, 1996, a class action lawsuit entitled McCampbell. et al. v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego County, California against Vons and two other grocery store chains operating in Southern California. In the complaint it is alleged, among other things, that Vons and the other defendants conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants violated provisions of the California Cartwright Act and engaged in unfair competition. Plaintiffs seek damages they allege the class has sustained; the amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. In addition, plaintiffs seek an injunction against future acts that would be in restraint of trade or that would constitute unfair competition. An answer has been filed to the complaint that denies plaintiffs' allegations and sets forth several defenses. The Company believes that Vons has meritorious defenses to plaintiffs' claims. 16 17 SAFEWAY INC. AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 14, 1997 at which the stockholders voted on proposals as follows:
Votes Votes Abstained Against or and Broker Votes For Withheld Non-votes --------- ---------- --------------- Election of Directors: James H. Greene, Jr. 200,016,878 1,347,174 Not applicable Paul Hazen 200,168,402 1,195,650 Not applicable Henry R. Kravis 199,949,406 1,414,646 Not applicable Adoption of stockholder proposal requesting the Board of Directors to take the necessary steps to provide for cumulative voting 35,534,552 155,006,384 10,823,116 Ratification of appointment of Deloitte & Touche LLP as independent auditors for 200,856,762 350,296 156,994 fiscal year 1997
17 18 SAFEWAY INC. AND SUBSIDIARIES ITEM 6(A). EXHIBITS Exhibit 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-33388). Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended January 2, 1993). Exhibit 10(iii).1 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).2 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).3 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. Quarterly Report on Form 10-Q for the quarterly period ended March 28, 1993). Exhibit 10(iii).4 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. Annual Report on Form 10-K for the fiscal year ended December 29, 1996). Exhibit 10(iii).5 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 Safeway Inc.'s Form S-4 filed on March 5, 1997). Exhibit 10(iii).6 Form of stock option agreement for former directors of The Vons Companies, Inc. (Incorporated by reference to Exhibit 10(iii).12 to Safeway Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1996). Exhibit 11.1 Computation of Earnings Per Common Share and Common Share Equivalent. Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges. Exhibit 27.1 Financial Data Schedule (electronic filing only). ITEM 6(B). REPORTS ON FORM 8-K On April 7, 1997, the Company filed a Current Report on Form 8-K stating under "Item 5. Other Events" that on April 2, 1997 employees represented by the Retail Clerks, Bakers and Meatcutters unions in Canada Safeway's Alberta operating area voted on the Company's Final Offer to settle a strike in that operating area which had commenced at 12:01 a.m. on March 26, 1997. The Company reported that the voting resulted in a rejection of the Company's Final Offer in all but Lethbridge, where Retail Clerks voted to accept the Final Offer. On April 23, 1997, the Company filed a Current Report on Form 8-K stating under "Item 2. Acquisition or Disposition of Assets" that the Company consummated its previously announced merger with The Vons Companies, Inc. ("Vons") pursuant to which each share of Vons common stock outstanding but not owned by Safeway immediately prior to the merger was converted into the right to receive 1.425 shares of common stock of the Company. 18 19 SAFEWAY INC. AND SUBSIDIARIES On May 1, 1997, the Company filed on Form 8-K/A an amendment to the Current Report on Form 8-K filed on April 23, 1997, and included the information required under "Item 7. Financial Statements, Pro Forma Financial Information and Exhibits". On June 4, 1997, the Company filed a Current Report on Form 8-K stating under "Item 5. Other Events" that on May 28, 1997, the Company and the unions representing employees involved in a labor dispute in Canada Safeway's Alberta operating area requested a mediator to assist in bringing the parties together in an attempt to resolve the dispute. The Company reported that on June 3, 1997, the mediator recommended a basis for settlement which would be voted on by three of the four unions involved. On June 12, 1997, the Company filed a Current Report on Form 8-K stating under "Item 5. Other Events" that unions involved in a labor dispute in Canada Safeway's Alberta operating area voted to accept a mediator's recommended settlement which ended the labor dispute. 19 20 SAFEWAY INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 28, 1997 \s\ Steven A. Burd ------------------ ------------------------------------- Steven A. Burd President and Chief Executive Officer Date: July 28, 1997 \s\ Julian C. Day ------------------ ------------------------------------- Julian C. Day Executive Vice President and Chief Financial Officer 20 21 SAFEWAY INC. AND SUBSIDIARIES EXHIBIT INDEX LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD ENDED JUNE 14, 1997 Exhibit 11.1 Computation of Earnings Per Common Share and Common Share Equivalent Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges Exhibit 27.1 Financial Data Schedule (electronic filing only) 21 EX-11.1 2 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11.1 SAFEWAY INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
12 Weeks Ended --------------------------------------------------- June 14, 1997 June 15, 1996 ----------------------- ----------------------- Fully Fully Diluted Primary Diluted Primary --------- --------- --------- --------- Income before extraordinary loss $ 134.1 $ 134.1 $ 106.7 $ 106.7 Extraordinary loss (4.2) (4.2) - - --------- --------- --------- --------- Net income $ 129.9 $ 129.9 $ 106.7 $ 106.7 ========= ========= ========= ========= Weighted average common shares outstanding 232.3 232.3 217.4 217.4 Common share equivalents 18.2 17.9 22.5 22.4 --------- --------- --------- --------- Weighted average common shares and common share equivalents 250.5 250.2 239.9 239.8 ========= ========= ========= ========= Earnings per common share and common share equivalent: Income before extraordinary loss $ 0.54 $ 0.54 $ 0.44 $ 0.44 Extraordinary loss (0.02) (0.02) - - - --------- --------- --------- --------- Net income $ 0.52 $ 0.52 $ 0.44 $ 0.44 ========== ========== ========== ========== Calculation of common share equivalents: Options and warrants to purchase common shares 30.1 30.1 34.2 34.2 Common shares assumed purchased with potential proceeds (11.9) (12.2) (11.7) (11.8) --------- --------- --------- --------- Common share equivalents 18.2 17.9 22.5 22.4 ========= ========= ========= ========= Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options and warrants to purchase common shares $ 579.9 $ 547.7 $ 397.0 $ 384.0 Common stock price used under the treasury stock method $ 48.58 $ 45.04 $ 33.87 $ 32.36 Common shares assumed purchased with potential proceeds 11.9 12.2 11.7 11.8
(Continued) 22 2 SAFEWAY INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (CONTINUED) (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
24 Weeks Ended --------------------------------------------------- June 14, 1997 June 15, 1996 ----------------------- ----------------------- Fully Fully Diluted Primary Diluted Primary --------- --------- --------- --------- Income before extraordinary loss $ 256.6 $ 256.6 $ 203.1 $ 203.1 Extraordinary loss (4.2) (4.2) - - --------- --------- --------- --------- Net income $ 252.4 $ 252.4 $ 203.1 $ 203.1 ========= ========= ========= ========= Weighted average common shares outstanding 226.9 226.9 216.4 216.4 Common share equivalents 18.4 18.3 23.1 22.7 --------- --------- --------- --------- Weighted average common shares and common share equivalents 245.3 245.2 239.5 239.1 ========= ========= ========= ========= Earnings per common share and common share equivalent: Income before extraordinary loss $ 1.05 $ 1.05 $ 0.85 $ 0.85 Extraordinary loss (0.02) (0.02) - - --------- --------- --------- --------- Net income $ 1.03 $ 1.03 $ 0.85 $ 0.85 ========= ========= ========= ========= Calculation of common share equivalents: Options and warrants to purchase common shares 30.6 30.6 35.0 35.1 Common shares assumed purchased with potential proceeds (12.2) (12.3) (11.9) (12.4) -------- --------- --------- --------- Common share equivalents 18.4 18.3 23.1 22.7 ======== ========= ========= ========= Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options and warrants to purchase common shares $ 592.4 $ 569.7 $ 403.7 $ 364.6 Common stock price used under the treasury stock method $ 48.56 $ 46.15 $ 33.85 $ 29.29 Common shares assumed purchased with potential proceeds 12.2 12.3 11.9 12.4
23 EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 SAFEWAY INC. AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) (UNAUDITED)
24 Weeks Fiscal Year -------------------- ---------------------------------------------------------------- June 14, June 15, 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes $ 444.3 $ 341.3 $ 767.6 $ 556.5 $ 424.1 $ 216.3 $ 197.4 Add interest expense 101.4 86.5 178.5 199.8 221.7 265.5 290.4 Add interest on rental expense (a) 40.8 41.5 90.0 87.5 86.6 88.0 88.0 Less equity in earnings of unconsolidated affiliates (21.5) (21.2) (50.0) (26.9) (27.3) (33.5) (39.1) Add minority interest in subsidiary 1.9 1.2 3.4 3.9 3.0 3.5 1.7 --------- --------- --------- --------- --------- --------- --------- Earnings $ 566.9 $ 449.3 $ 989.5 $ 820.8 $ 708.1 $ 539.8 $ 538.4 ========= ========= ========= ========= ========= ========= ========= Interest expense $ 101.4 $ 86.5 $ 178.5 $ 199.8 $ 221.7 $ 265.5 $ 290.4 Add capitalized interest 2.4 1.6 4.4 4.6 2.9 4.2 8.0 Add interest on rental expense (a) 40.8 41.5 90.0 87.5 86.6 88.0 88.0 --------- --------- --------- --------- --------- --------- --------- Fixed charges $ 144.6 $ 129.6 $ 272.9 $ 291.9 $ 311.2 $ 357.7 $ 386.4 ========= ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 3.92 3.47 3.63 2.81 2.28 1.51(b) 1.39 ========= ========= ========= ========= ========= ========= =========
(a) Based on a 10% discount factor on the estimated present value of future operating lease payments. (b) Safeway's ratio of earnings to fixed charges during 1993 was adversely affected by a $54.9 million charge to operating and administrative expense for severance payments made to retail employees in the Alberta, Canada division as part of a voluntary employee buyout. Excluding this charge, the ratio of earnings to fixed charges for 1993 would have been 1.66. 24 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 14, 1997. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-03-1998 DEC-29-1996 JUN-14-1997 36,700 0 184,500 0 1,494,400 1,877,600 6,194,000 (2,407,900) 8,119,400 2,435,600 2,900,100 0 0 2,600 1,798,200 8,119,400 9,327,000 9,327,000 6,676,200 6,676,200 0 0 101,400 444,300 187,700 256,600 0 (4,200) 0 252,400 1.03 1.03
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