Table of Contents

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 March 22, 2003

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 Rd.
Pleasanton, California
  94588-3229

 
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code:   (925) 467-3000

Not Applicable


(Former name, former address and former fiscal year, if changed since last report.)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]  No  [  ].
 
    Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  [X]  No  [  ].

 


Table of Contents

    As of April 25, 2003 there were issued and outstanding 441.4 million shares of the registrant’s common stock.

 


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 6(a).   Exhibits
Item 6(b). Reports on Form 8-K
10-Q
Exhibit 11.1
Exhibit 12.1


Table of Contents

SAFEWAY INC. AND SUBSIDIARIES

INDEX

                   
              Page
             
PART I    
FINANCIAL INFORMATION (Unaudited)
       
Item 1.    
Financial Statements
       
         
Condensed Consolidated Balance Sheets as of March 22, 2003 and December 28, 2002
    3  
         
Condensed Consolidated Statements of Operations for the 12 weeks ended March 22, 2003 and March 23, 2002
    5  
         
Condensed Consolidated Statements of Cash Flows for the 12 weeks ended March 22, 2003 and March 23, 2002
    6  
         
Notes to the Condensed Consolidated Financial Statements
    7  
Item 2.    
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    12  
Item 3.    
Quantitative and Qualitative Disclosures About Market Risk
    16  
Item 4.    
Controls and Procedures
    16  
PART II    
OTHER INFORMATION
       
Item 1.    
Legal Proceedings
    17  
Item 6.    
Exhibits and Reports on Form 8-K
    18  

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

                   
      March 22,   December 28,
      2003   2002
     
 
ASSETS
               
Current assets:
               
 
Cash and equivalents
  $ 85.3     $ 73.7  
 
Receivables
    409.4       413.1  
 
Merchandise inventories
    2,442.5       2,493.0  
 
Prepaid expenses and other current assets
    178.8       226.0  
 
Income taxes receivable
    156.1        
 
Assets held for sale
    734.7       1,053.3  
 
 
   
     
 
 
Total current assets
    4,006.8       4,259.1  
 
 
   
     
 
Property
    12,572.4       12,398.7  
 
Less accumulated depreciation and amortization
    (4,611.5 )     (4,388.5 )
 
 
   
     
 
 
Property, net
    7,960.9       8,010.2  
Goodwill
    2,849.4       2,846.2  
Prepaid pension costs
    510.6       535.2  
Investment in unconsolidated affiliates
    207.2       208.3  
Other assets
    188.4       188.3  
 
 
   
     
 
Total assets
  $ 15,723.3     $ 16,047.3  
 
 
   
     
 

(Continued)

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions, except per-share amounts)
(Unaudited)

                   
      March 22,   December 28,
      2003   2002
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Current maturities of notes and debentures
  $ 859.3     $ 780.3  
 
Current obligations under capital leases
    27.9       25.2  
 
Accounts payable
    1,497.2       1,715.4  
 
Accrued salaries and wages
    334.1       374.9  
 
Other accrued liabilities
    507.3       687.2  
 
Liabilities of operations held for sale
    344.7       353.3  
 
 
   
     
 
 
Total current liabilities
    3,570.5       3,936.3  
 
 
   
     
 
Long-term debt:
               
 
Notes and debentures
    6,824.0       7,009.2  
 
Obligations under capital leases
    510.9       512.3  
 
 
   
     
 
 
Total long-term debt
    7,334.9       7,521.5  
Deferred income taxes
    578.1       577.9  
Accrued claims and other liabilities
    396.5       384.1  
 
 
   
     
 
Total liabilities
    11,880.0       12,419.8  
 
 
   
     
 
Commitments and contingencies
               
Stockholders’ equity:
               
 
Common stock: par value $0.01 per share; 1,500 shares authorized; 573.2 and 573.0 shares outstanding
    5.7       5.7  
 
Additional paid-in capital
    3,309.1       3,307.2  
 
Accumulated other comprehensive loss
    (20.1 )     (68.3 )
 
Retained earnings
    4,450.2       4,287.6  
 
 
   
     
 
 
    7,744.9       7,532.2  
 
Less: Treasury stock at cost; 131.9 and 132.0 shares
    (3,901.6 )     (3,904.7 )
 
 
   
     
 
 
Total stockholders’ equity
    3,843.3       3,627.5  
 
 
   
     
 
Total liabilities and stockholders’ equity
  $ 15,723.3     $ 16,047.3  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)

                 
    12 Weeks Ended
   
    March 22,   March 23,
    2003   2002
   
 
Sales
  $ 7,542.9     $ 7,366.9  
Cost of goods sold
    (5,296.4 )     (5,052.8 )
 
   
     
 
Gross profit
    2,246.5       2,314.1  
Operating and administrative expense
    (1,840.6 )     (1,727.9 )
 
   
     
 
Operating profit
    405.9       586.2  
Interest expense
    (90.4 )     (80.1 )
Other income, net
    2.5       9.0  
 
   
     
 
Income from continuing operations before income taxes and cumulative effect of accounting change
    318.0       515.1  
Income taxes
    (121.8 )     (190.1 )
 
   
     
 
Income from continuing operations before cumulative effect of accounting change
    196.2       325.0  
Discontinued operations:
               
(Loss) income from operations of Dominick’s (including loss on disposal adjustment of $302.7 million in 2003)
    (307.1 )     10.8  
Income tax benefit (expense), net
    273.5       (3.7 )
 
   
     
 
(Loss) income from discontinued operations
    (33.6 )     7.1  
Income before cumulative effect of accounting change
    162.6       332.1  
Cumulative effect of accounting change
          (700.0 )
 
   
     
 
Net income (loss)
  $ 162.6     $ (367.9 )
 
   
     
 
Basic earnings (loss) per share:
               
Income from continuing operations before cumulative effect of accounting change
  $ 0.44     $ 0.67  
(Loss) income from discontinued operations (including loss on disposal)
    (0.07 )     0.01  
Cumulative effect of accounting change
          (1.44 )
 
   
     
 
Net income (loss)
  $ 0.37     $ (0.76 )
 
   
     
 
Diluted earnings (loss) per share:
               
Income from continuing operations before cumulative effect of accounting change
  $ 0.44     $ 0.66  
(Loss) income from discontinued operations (including loss on disposal)
    (0.08 )     0.01  
Cumulative effect of accounting change
          (1.41 )
 
   
     
 
Net income (loss)
  $ 0.36     $ (0.74 )
 
   
     
 
Weighted average shares outstanding - basic
    441.2       486.7  
 
   
     
 
Weighted average shares outstanding - diluted
    446.0       495.0  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

                       
          12 Weeks Ended
         
          March 22,   March 23,
          2003   2002
         
 
OPERATING ACTIVITIES
               
Net income (loss)
  $ 162.6     $ (367.9 )
 
Loss (income) from discontinued operations, net of tax
    33.6       (7.1 )
 
Cumulative effect of accounting change
          700.0  
 
   
     
 
Income from continuing operations
    196.2       325.0  
Reconciliation to net cash flow from operating activities:
               
 
Depreciation expense
    197.7       181.2  
 
LIFO expense
    2.3       2.3  
 
Equity in losses (earnings) of unconsolidated affiliates, net
    1.1       (6.0 )
 
Net pension expense
    29.4       7.2  
 
Gain on property retirements
    (5.2 )     (0.7 )
 
Other
    14.2       (5.9 )
 
Change in working capital items:
               
   
Receivables and prepaid expenses
    53.5       1.1  
   
Inventories at FIFO cost
    66.9       68.4  
   
Payables and accruals
    (336.1 )     (302.4 )
 
   
     
 
     
Net cash flow from operating activities
    220.0       270.2  
 
   
     
 
INVESTING ACTIVITIES
               
Cash paid for property additions
    (133.6 )     (172.6 )
Proceeds from sale of property
    43.9       20.7  
Other
    (9.9 )     (8.3 )
 
   
     
 
     
Net cash flow used by investing activities
    (99.6 )     (160.2 )
 
   
     
 
FINANCING ACTIVITIES
               
Additions to short-term borrowings
          2.7  
Additions to long-term borrowings
    81.2       202.4  
Payments on long-term borrowings
    (196.4 )     (144.9 )
Purchase of treasury stock
          (183.7 )
Net proceeds from exercise of stock options
    3.5       12.3  
Other
    0.2        
 
   
     
 
     
Net cash flow used by financing activities
    (111.5 )     (111.2 )
 
   
     
 
DISCONTINUED OPERATIONS
               
     
Net cash from (used by) discontinued operations
    2.7       (1.7 )
 
   
     
 
Increase (decrease) in cash and equivalents
    11.6       (2.9 )
CASH AND EQUIVALENTS
               
   
Beginning of period
    73.7       65.7  
 
   
     
 
   
End of period
  $ 85.3     $ 62.8  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries (“Safeway” or the “Company”) for the 12 weeks ended March 22, 2003 and March 23, 2002 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 2002 Annual Report to Stockholders. The results of operations for the 12 weeks ended March 22, 2003 are not necessarily indicative of the results expected for the full year.

Inventory

Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation (“LIFO Indices”). Safeway recorded estimated LIFO expense of $2.3 million during the first 12 weeks of 2003 and 2002. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories.

Comprehensive Income (Loss)

Comprehensive income (loss) consists primarily of net income (loss) and foreign currency translation adjustments. Total comprehensive income was $210.8 million for the first 12 weeks of 2003 compared to total comprehensive loss of $362.3 million for the first 12 weeks of 2002.

NOTE B - NEW ACCOUNTING STANDARDS

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 effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 became effective for the Company in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

Emerging Issues Task Force Issue (“EITF”) 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 in 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 became effective for the Company in the first quarter of 2003. The Company applied the provisions of EITF No. 02-16 prospectively which resulted in deferring recognition of $10.3 million of allowances from the first quarter to the second quarter of 2003.

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 initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements became effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45 and adoption of FIN No. 45 did not have a material effect on the Company’s financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. This interpretation requires a company to consider variable interest entities (“VIE”) if the entity is a primary beneficiary (holds a majority of the variable interest) of the VIE and the VIE possesses specific characteristics. It also requires additional disclosure for parties involved with VIEs. The provisions of this interpretation became effective for the Company in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

NOTE C - STOCK-BASED EMPLOYEE COMPENSATION

The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of the grant. The following table illustrates the effect on net income and earnings per share for the first 12 weeks of 2003 and 2002 if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in millions, except per-share amounts):

                     
        12 Weeks Ended
March 22, 2003
  12 Weeks Ended
March 23, 2002
       
 
Net income (loss) – as reported
  $ 162.6     $ (367.9 )
Less:
               
  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects     (11.9 )     (11.2 )
 
   
     
 
Net income (loss) – pro forma
  $ 150.7     $ (379.1 )
 
   
     
 
Basic earnings (loss) per share:
               
   
As reported
  $ 0.37     $ (0.76 )
   
Pro forma
    0.34       (0.78 )
Diluted earnings (loss) per share:
               
   
As reported
  $ 0.36     $ (0.74 )
   
Pro forma
    0.34       (0.77 )

NOTE D - GOODWILL

A summary of changes in Safeway’s goodwill during the first 12 weeks of 2003 and 2002 by reportable operating segment is as follows (in millions):

                                                 
    2003   2002
   
 
    U.S.   Canada   Total   U.S.   Canada   Total
   
 
 
 
 
 
Balance – beginning of quarter
  $ 2,783.4     $ 62.8     $ 2,846.2     $ 3,553.9     $ 62.1     $ 3,616.0  
Genuardi’s Acquisition
                      23.4             23.4  
Cumulative effect of accounting change
                      (111.0 )           (111.0 )
Other adjustments
    (0.7 )     3.9 (1)     3.2       (1.3 )     0.5 (1)     (0.8 )
 
   
     
     
     
     
     
 
Balance - end of quarter
  $ 2,782.7     $ 66.7     $ 2,849.4     $ 3,465.0     $ 62.6     $ 3,527.6  
 
   
     
     
     
     
     
 

1)   Primarily represents foreign currency translation adjustments.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

NOTE E - FINANCING

Notes and debentures were composed of the following at March 22, 2003 and December 28, 2002 (in millions):

                                 
    March 22, 2003   December 28, 2002
   
 
    Long-term   Current   Long-term   Current
   
 
 
 
Commercial paper
  $ 1,665.1             $ 1,744.1          
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               225.0          
4.80% Senior Notes due 2007, unsecured
    480.0               480.0          
5.80% Senior Notes due 2012, unsecured
    800.0               800.0          
6.05% Senior Notes due 2003, unsecured
        $ 350.0           $ 350.0  
6.50% Senior Notes due 2008, unsecured
    250.0               250.0          
7.25% 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          
Mortgage notes payable, secured
    33.8       4.8       33.5       6.2  
Other notes payable, unsecured
    16.0       4.0       16.1       5.5  
Medium-term notes, unsecured
          16.5             16.5  
Short-term bank borrowings, unsecured
    5.6       2.8       5.5       2.1  
 
   
     
     
     
 
 
  $ 6,824.0     $ 859.3     $ 7,009.2     $ 780.3  
 
   
     
     
     
 

NOTE F - FURR’S AND HOMELAND CHARGE

In 2001, Safeway recorded a pre-tax charge to earnings of $42.7 million to recognize estimated lease liabilities associated with the bankruptcies of Furr’s Inc. (“Furr’s”) and Homeland Stores, Inc. (“Homeland”). At December 28, 2002, there was $18.6 million remaining in this accrual. During the first 12 weeks of 2003 Safeway adjusted the accrual by $0.4 million due to the favorable resolution of a lease and by $1.6 million as cash was paid out, leaving a balance of $16.6 million at March 22, 2003 which will be paid over the next 25 years.

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 allowing 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.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G - CONTINGENCIES

Legal Matters

Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on pages 45 and 46 of the 2002 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no material developments to these matters, except as noted below.

On February 25, 2003, Dominick’s Finer Foods, LLC, a subsidiary of Safeway Inc., obtained a dismissal of the action in Baker, et al. v. Jewel Food Stores, et al. , a consumer class action in Chicago alleging that Dominick’s and Jewel Food Stores, a subsidiary of Albertsons Inc., conspired to fix the price of milk in their stores in the nine-county Chicago metropolitan area from 1996-2000, in violation of the Illinois Antitrust Act. The case was filed in August 2000 in the Circuit Court of Cook County, Illinois, and was certified as a class action in July 2002. Trial began in late January 2003. The judge, after hearing three weeks of testimony, dismissed the action at the end of plaintiffs’ case, without requiring Dominick’s and Jewel to present the defense case. On March 27, 2003, plaintiffs filed a notice of appeal in the Illinois Appellate Court, which is currently pending.

NOTE H – DISCONTINUED OPERATIONS

As previously announced, during the fourth quarter of 2002 management decided to sell Dominick’s and 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 financial statements and the rest of the statistical and financial information included herein, unless otherwise noted.

Loss from discontinued operations was $33.6 million ($0.08 per share) in the first quarter of 2003, consisting of $4.4 million loss from operations, $302.7 million adjustment to the estimated loss on disposal and $273.5 million income tax benefit. The adjustment to the estimated loss on disposal was based on indications of the value of Dominick’s obtained during the sale process. As a result of the adjustment of Dominick’s net assets to a lower estimated fair value, Safeway has recorded a net current tax benefit of $273.5 million, consisting of a gross tax benefit of $508.0 million less a reserve of $234.5 million. The estimates of fair value and of the tax benefits are based on management’s judgment with respect to a number of factors, including current indications of interest, the ability to sell Dominick’s, the terms and the timing of the sale and the likelihood of realizing the tax benefit. Changes in estimates or application of alternative assumptions could produce significantly different results. The final determination as to the fair value of Dominick’s and amount of tax benefit will be made when more information is known and is dependent on a number of factors, including the Company’s ability to complete the sale of Dominick’s, the timing and terms of any such disposition, examination by taxing authorities which could result in the elimination of some or all of the tax benefit, and possible changes in tax laws.

Loss from discontinued store 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. Income from continuing operations was $7.1 million in the first quarter of 2002. Sales at discontinued operations were $500.4 million in the first quarter of 2003 and $565.4 million in the first quarter of 2002.

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SAFEWAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents Dominick’s major classes of assets and liabilities as of March 22, 2003 and December 28, 2002 (in millions):

                 
    March 22, 2003   December 28, 2002
   
 
Current assets
  $ 249.5     $ 252.9  
Property, net
    484.8       520.5  
Other long-term assets
    0.4       279.9  
Current debt, including obligations under capital leases
    (18.7 )     (17.4 )
Other current liabilities
    (188.6 )     (192.2 )
Long-term debt, including obligations under capital leases
    (85.7 )     (91.1 )
Other long-term liabilities
    (51.7 )     (52.6 )

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net income for the first quarter of 2003, including discontinued operations, was $162.6 million ($0.36 per share). Net loss for the first quarter of 2002, including discontinued operations and a $700.0 million ($1.41 per share) charge for the cumulative effect of adopting SFAS No. 142, was $367.9 million ($0.74 per share).

Income from continuing operations was $196.2 million ($0.44 per share) for the first quarter ended March 22, 2003. These results include the effect of adopting EITF 02-16, on accounting for vendor allowances, which reduced first-quarter 2003 earnings by $10.3 million pre-tax ($0.014 per share). Income from continuing operations for the first quarter of 2002 was $325.0 million ($0.66 per share).

Total sales increased to $7.5 billion from $7.4 billion in the first quarter of 2002, primarily due to new store openings. Sales were impacted by continued softness in the economy. First-quarter 2003 comparable store sales were flat while identical store sales (which exclude replacement stores) fell 0.5%. Excluding the effect of fuel sales, comparable store sales fell 1.8% and identical store sales fell 2.3%. Fuel sales are becoming an increasingly larger part of the Company’s sales mix. Below are the Company’s identical-store sales (decreases) increases at continuing stores over the four quarters of 2002 including and excluding fuel sales :

                                 
    Last 16 weeks   Third 12 weeks   Second 12 weeks   First 12 weeks
   
 
 
 
Including fuel
    (1.9 )%     (1.0 )%     (0.8 )%     0.3 %
Excluding fuel
    (2.9 )%     (1.8 )%     (1.2 )%     0.2 %

Gross profit decreased 163 basis points to 29.78% of sales in the first quarter of 2003 from gross profit of 31.41% in the first quarter of 2002, primarily due to higher fuel sales (which have a lower gross margin), transitional issues related to centralizing the Company’s marketing and procurement functions and higher shrink.

Operating and administrative expense increased 95 basis points to 24.40% of sales in the first quarter of 2003 compared to operating and administrative expense of 23.45% of sales in the first quarter of 2002 primarily due to increases in health and pension expense, as well as soft sales.

Interest expense increased to $90.4 million in the first quarter of 2003 compared to $80.1 million in the first quarter of 2002 as lower interest rates were offset by higher average borrowings resulting from the repurchase of Safeway stock in 2002.

The Company’s tax rate for the quarter was 38.3% and is expected to be approximately 38.1% for full-year 2003.

Discontinued Operations

As previously announced, during the fourth quarter of 2002 management decided to sell Dominick’s and 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 financial statements and the rest of the statistical and financial information included herein, unless otherwise noted.

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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loss from discontinued operations was $33.6 million ($0.08 per share) in the first quarter of 2003, consisting of $4.4 million loss from operations, $302.7 million adjustment to the estimated loss on disposal and $273.5 million income tax benefit. The adjustment to the estimated loss on disposal was based on indications of the value of Dominick’s obtained during the sale process. As a result of the adjustment of Dominick’s net assets to a lower estimated fair value, Safeway has recorded a net current tax benefit of $273.5 million, consisting of a gross tax benefit of $508.0 million less a reserve of $234.5 million. The estimates of fair value and of the tax benefits are based on management’s judgment with respect to a number of factors, including current indications of interest, the ability to sell Dominick’s, the terms and the timing of the sale and the likelihood of realizing the tax benefit. Changes in estimates or application of alternative assumptions could produce significantly different results. The final determination as to the fair value of Dominick’s and amount of tax benefit will be made when more information is known and is dependent on a number of factors, including the Company’s ability to complete the sale of Dominick’s, the timing and terms of any such disposition, examination by taxing authorities which could result in the elimination of some or all of the tax benefit, and possible changes in tax laws.

Loss from discontinued store 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. Income from discontinued operations was $7.1 million ($0.01 per share) in the first quarter of 2002. Sales at discontinued operations were $500.4 million in the first quarter of 2003 and $565.4 million in the first quarter of 2002.

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. The Company’s 2002 Annual Report to Stockholders includes a description of certain critical accounting policies, including with respect to goodwill. The information under “Discontinued Operations” above, which, among other things, describes certain estimates and judgments the Company was required to make in connection with the fair value of Dominick’s and related tax benefits and tax reserve, is incorporated herein by reference.

New Accounting Pronouncements

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 effects, and amends other existing authoritative pronouncements to make technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 became effective for the Company in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

Emerging Issues Task Force Issue (“EITF”) 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 in 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 became effective for the Company in the first quarter of 2003. The Company applied the provisions of EITF No. 02-16 prospectively which resulted in deferring recognition of $10.3 million of allowances from the first quarter to the second quarter of 2003.

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 initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements became effective for financial statements ending after December 15, 2002. The Company complies with the disclosure provisions of FIN No. 45 and adoption of FIN No. 45 did not have a material effect on the Company’s financial statements.

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SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. This interpretation requires a company to consider variable interest entities (“VIE”) if the entity is a primary beneficiary (holds a majority of the variable interest) of the VIE and the VIE possesses specific characteristics. It also requires additional disclosure for parties involved with VIEs. The provisions of this interpretation became effective for the Company in the first quarter of 2003 and did not have a material effect on the Company’s financial statements.

Liquidity and Financial Resources

Cash flow from operating activities was $220.0 million in the first quarter of 2003 compared to cash flow from operations of $270.2 million in the first quarter of 2002. This decline is due primarily to lower income from continuing operations in 2003 compared to 2002, partly offset by improvement in cash used by working capital and increased proceeds from the sale of properties.

Cash flow used by investing activities for the first quarter of 2003 declined to $99.6 million in 2003 compared to $160.2 million in 2002 primarily because of lower capital expenditures and increased proceeds from the sale of property.

Cash flow used by financing activities was $111.5 in 2003 reflecting the utilization of cash from operations to pay down debt. Cash flow used by financing activities was $111.2 in 2002 which consisted of $183.7 million for the purchase of treasury stock, partly offset by cash from increased borrowings and proceeds from the exercise of stock options.

The Company did not repurchase any Safeway common stock during the first quarter of 2003. From initiation of the Company’s share repurchase program in 1999 through the end of the first quarter of 2003, Safeway has repurchased 87 million shares of common stock at a total purchase price of $2.9 billion leaving $0.6 billion available for repurchases under the current level authorized by the Company’s board of directors. The timing and volume of future repurchases will depend on market conditions.

Based upon the current level of operations, Safeway believes that cash flow from operating activities and other sources of liquidity, including borrowings under Safeway’s commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that the Company’s business will continue to generate cash flow at or above current levels or that the Company will 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.

Capital Expenditure Program

During the first 12 weeks of 2003, Safeway invested $133.6 million in cash capital expenditures. The Company opened 9 new stores and closed 10 stores. For the year, the Company expects to spend between $1.1 billion and $1.3 billion in cash capital expenditures while opening 50 to 55 new stores and completing between 100 and 125 remodels.

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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 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, same-store sales, capital expenditures, acquisitions and dispositions, share repurchases, improvements in operations, gross margin and costs, shrink reduction efforts, centralization of operations, restructuring and transition charges, the valuation of goodwill, investments in other companies, debt reductions and inventory adjustments at Casa Ley and are indicated by words or phrases such as “continuing,” “on-going,” “expects,” “comfortable,” “guidance,” “management believes,” the Company believes,” “the Company intends,” “we believe,” “we intend,” and similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties. 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, including our ability to implement our programs to centralize buying and merchandising and realize savings from that program and the potential operating effects of implementing that program; results of our programs to reduce 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; various risks and uncertainties concerning the planned sale of Dominick’s (including whether Safeway is able to dispose of Dominick’s, the timing and manner of sale, the price paid, the terms of the sale, changes in tax law, and review by taxing authorities), changes in financial performance of other companies in which we have investments, and the amount of any inventory adjustments at Casa Ley; 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, regulation or judicial developments, including with respect to taxes; the cost and stability of power sources; opportunities or acquisitions that we pursue; the availability and timely delivery of perishables and other products; market valuation assumptions and internal projections of future operating results which affect the valuation of goodwill; 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 undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes regarding the Company’s market risk position from the information provided under the caption “Market Risk from Financial Instruments” on page 15 of the Company’s 2002 Annual Report to Stockholders.

Item 4.    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 applied 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. Management believes that there are reasonable assurances that the Company’s controls and procedures will achieve 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.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Note M to the Company’s consolidated financial statements, under the caption “Legal Matters” on pages 45 and 46 of the 2002 Annual Report to Stockholders, provides information on certain litigation in which the Company is involved. There have been no material developments to these matters, except as noted below.

On February 25, 2003, Dominick’s Finer Foods, LLC, a subsidiary of Safeway Inc., obtained a dismissal of the action in Baker, et al. v. Jewel Food Stores, et al., a consumer class action in Chicago alleging that Dominick’s and Jewel Food Stores, a subsidiary of Albertsons Inc., conspired to fix the price of milk in their stores in the nine-county Chicago metropolitan area from 1996-2000, in violation of the Illinois Antitrust Act. The case was filed in August 2000 in the Circuit Court of Cook County, Illinois, and was certified as a class action in July 2002. Trial began in late January 2003. The judge, after hearing three weeks of testimony, dismissed the action at the end of plaintiffs’ case, without requiring Dominick’s and Jewel to present the defense case. On March 27, 2003, plaintiffs filed a notice of appeal in the Illinois Appellate Court, which is currently pending.

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Item 6(a).   Exhibits

     
Exhibit 11.1   Computation of Earnings Per Common Share.
     
Exhibit 12.1   Computation of Ratio of Earnings to Fixed Charges.

Item 6(b).    Reports on Form 8-K

On March 6, 2003, the Company filed a current report on Form 8-K under “Item 5. Other Events.”

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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: May 6, 2003   /s/ Steven A. Burd
   
    Steven A. Burd
    Chairman, President
    and Chief Executive Officer
     
Date: May 6, 2003   /s/ Vasant M. Prabhu
   
    Vasant M. Prabhu
    Executive Vice President
    and Chief Financial Officer

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Certifications

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

1.   I have reviewed this quarterly report on Form 10-Q of Safeway Inc.;
 
2.   Based on my knowledge, this quarterly 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 periods covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
c)   presented in this quarterly 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 quarterly 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: May 6, 2003   /s/ Steven A. Burd
   
    Steven A. Burd
    Chairman, President
    and Chief Executive Officer

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Certifications

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

1.   I have reviewed this quarterly report on Form 10-Q of Safeway Inc.;
 
2.   Based on my knowledge, this quarterly 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 periods covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
c)   presented in this quarterly 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 quarterly 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: May 6, 2003   /s/ Vasant M. Prabhu
   
    Vasant M. Prabhu
    Executive Vice President
    and Chief Financial Officer

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Exhibit Index

LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED March 22, 2003

     
Exhibit 11.1   Computation of Earnings Per Common Share
     
Exhibit 12.1   Computation of Ratio of Earnings to Fixed Charges

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EXHIBIT 11.1 SAFEWAY INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> 12 Weeks Ended --------------------------------------------------- March 22, March 22, March 23, March 23, 2003 2003 2002 2002 ----------------------- ----------------------- Diluted Basic Diluted Basic ------- ------- ------- ------- <S> <C> <C> <C> <C> Income from continuing operations before cumulative effect of accounting change $ 196.2 $ 196.2 $ 325.0 $ 325.0 (Loss) income from discontinued operations (33.6) (33.6) 7.1 7.1 Cumulative effect of accounting change -- -- (700.0) (700.0) ------- ------- ------- ------- Net income (loss) $ 162.6 $ 162.6 $(367.9) $(367.9) ======= ======= ======= ======= Weighted average common shares outstanding 441.2 441.2 486.7 486.7 ======= ======= Common share equivalents 4.8 8.3 ------- ------- Weighted average shares outstanding 446.0 495.0 ======= ======= Earnings per share: Income from continuing operations before cumulative effect of accounting change $ 0.44 $ 0.44 $ 0.66 $ 0.67 (Loss) income from discontinued operations (0.08) (0.07) 0.01 0.01 Cumulative effect of accounting change -- -- (1.41) (1.44) ------- ------- ------- ------- Net income (loss) $ 0.36 $ 0.37 $ (0.74) $ (0.76) ======= ======= ======= ======= Calculation of common share equivalents: Options to purchase common shares 11.4 24.8 Common shares assumed purchased with potential proceeds (6.6) (16.5) ------- ------- Common share equivalents 4.8 8.3 ======= ======= Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options to purchase common shares $ 142.7 $ 691.1 Common stock price used under the treasury stock method $ 21.73 $ 41.98 Common shares assumed purchased with potential proceeds 6.6 16.5 </TABLE> Anti-dilutive shares totaling 26.9 million in 2003 and 13.9 million in 2002 have been excluded from diluted weighted average shares outstanding.

EXHIBIT 12.1 SAFEWAY INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) (UNAUDITED) <TABLE> <CAPTION> 12 Weeks Fiscal Year --------------------- --------------------------------------------------------- March 22, March 23, 2003 2002 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Income from continuing operations before taxes and cumulative effect of accounting change $ 318.0 $ 515.1 $ 1,320.2 $ 2,122.7 $ 1,942.9 $ 1,670.5 $ 1,394.6 Add interest expense 90.4 80.1 368.6 366.1 363.6 261.1 230.7 Add interest on rental expense (a) 51.2 47.8 221.9 207.1 184.0 153.0 127.1 Add (less) equity in losses (earnings) of unconsolidated affiliates, net 1.1 (6.0) 0.2 (20.2) (31.2) (34.5) (28.5) (Less) add minority interest in subsidiary (2.3) -- (5.5) -- 1.1 5.9 5.1 --------- --------- --------- --------- --------- --------- --------- Earnings $ 458.4 $ 637.0 $ 1,905.4 $ 2,675.7 $ 2,460.4 $ 2,056.0 $ 1,729.0 ========= ========= ========= ========= ========= ========= ========= Interest expense $ 90.4 $ 80.1 $ 368.6 $ 366.1 $ 363.6 $ 261.1 $ 230.7 Add capitalized interest 4.6 6.4 26.5 21.1 13.5 6.7 8.3 Add interest on rental expense (a) 51.2 47.8 221.9 207.1 184.0 153.0 127.1 --------- --------- --------- --------- --------- --------- --------- Fixed charges $ 146.2 $ 134.3 $ 617.0 $ 594.3 $ 561.1 $ 420.8 $ 366.1 ========= ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 3.14 4.74 3.09 4.50 4.38 4.89 4.72 ========= ========= ========= ========= ========= ========= ========= </TABLE> (a) Based on a 10% discount factor on the estimated present value of future operating lease payments.