Safeway 1998 Annual Report Download - page 21

Total debt, including capital leases, increased to $4.97 bil-
lion at year-end 1998 from $3.34 billion at year-end 1997 and
$1.98 billion at year-end 1996, primarily due to the Dominick’s
Acquisition and Vons Merger. Annual debt maturities over the
next five years are set forth in Note C of the Company’s 1998
consolidated financial statements.
Based upon the current level of operations, Safeway believes
that operating cash flow and other sources of liquidity, including
b o r rowings under Safeway’s commercial paper program and
bank credit agreement, will be adequate to meet anticipated
re q u i rements for working capital, capital expenditures, intere s t
payments and scheduled principal payments for the fore s e e a b l e
f u t u re. There can be no assurance, however, that the Company’s
business will continue to generate cash flow at or above curre n t
levels. The bank credit agreement is used primarily as a backup
facility to the commercial paper pro g r a m .
Year 2000 Compliance
The year 2000 issue is the result of computer programs that
were written using two digits rather than four to define the
applicable year. For example, computer programs that have
time-sensitive software may recognize a date using “00” as
the year 1900 rather than the year 2000. To the extent that
the Company’s software applications contain source code that
is unable to interpret appropriately the upcoming calendar
year 2000 and beyond, some level of modification or replace-
ment of such applications will be necessary to avoid system
failures and the temporary inability to process transactions
or engage in other normal business activities.
In 1997, the Company established a year 2000 project gro u p ,
headed by Safeway’s Chief Information Off i c e r, to coord i n a t e
the Company’s year 2000 compliance eff o r ts. The project
group is staffed primarily with representatives of Safeway’s
Information Technology department and also uses outside con-
sultants on an as-needed basis. The Chief Information Officer
re p o rts regularly on the status of the year 2000 project to a
steering committee headed by the Chief Executive Officer
and to the Company’s Board of Directors.
The year 2000 project group has identified all computer-
based systems and applications (including embedded systems)
the Company uses in its operations that might not be year 2000
compliant, and has categorized these systems and applications
into three priority levels based on how critical the system or
application is to the Company’s operations. The year 2000 pro-
ject group is determining what modifications or replacements
will be necessary to achieve compliance; implementing the
modifications and replacements; conducting tests necessary
to verify that the modified systems are operational; and trans i-
tioning the compliant systems into the Company’s re g u l a r
operations. The systems and applications in the highest priori-
ty level are being assessed and modified or replaced first.
Management estimates that these actions with respect to all
priority levels are approximately 80% complete at year-end
1998. The Company estimates that all critical systems and
applications will be year 2000 compliant by June 30, 1999.
Safeway completed its acquisition of Dominick’s in
November 1998 and is in the process of identifying which sys-
tems and applications of Dominick’s might not be year 2000
compliant, and integrating those systems and applications into
its year 2000 project. The Company estimates that all critical
systems and applications of Dominick’s will be year 2000 com-
pliant by September 30, 1999.
The year 2000 project group is also examining Safeway’s
relationships with certain key outside vendors and others with
whom the Company has significant business relationships to
determine, to the extent practical, the degree of such outside
p a rties’ year 2000 compliance. The project group has begun test-
ing procedures with certain vendors identified as having poten-
tial year 2000 compliance issues. Management does not believe
that the Company’s relationship with any third party is materi-
al to Safeway’s operations and, therefore, does not believe that
the failure of any particular third party to be year 2000 compli-
ant would have a material adverse effect on the Company.
The year 2000 project group is in the process of establishing
and implementing a contingency plan to provide for viable
a l t e rnatives to ensure that the Company’s core business opera-
tions are able to continue in the event of a year 2000-related
systems failure. Management expects to have a compre h e n s i v e
contingency plan established by March 31, 1999.
Through January 31, 1999, Safeway spent approximately
$20.5 million to address year 2000 compliance issues. The
Company estimates that it will incur an additional $12.5 million,
for a total of $33.0 million, (including $8 million for
D o m i n i c k ’s) to address year 2000 compliance issues for
Safeway and Dominick‘s, which includes the estimated costs of
all modifications, testing and consultants’ fees.
Management believes that, should Safeway or any t h i rd
p a rty with whom the Company has a significant business re l a-
tionship have a year 2000-related systems failure, the most sig-
nificant impact would likely be the inability, with respect to
a group of stores, to conduct operations due to a power failure,
to deliver inventory in a timely fashion, to receive cert a i n
products from vendors or to process electronically customer
sales at store level. The Company does not anticipate that any
such impact would be material to Safeway’s liquidity or re s u l t s
of operations.
Forward-Looking Statements
This Annual Report contains certain forw a rd-looking state-
ments relating to, among other things, capital expenditure s ,
cost reduction, operating improvements and year 2000 compli-
ance. Such statements are subject to inherent uncertainties and
risks, including among others: business and economic conditions
generally in the Company’s operating regions; pricing pre s s u re s
and other competitive factors; results of the Company’s pro-
grams to reduce costs; the ability to integrate Vons and
D o m i n i c k ’s and continue to achieve operating impro v e m e n t s ;
relations with union bargaining units; and the availability and
t e rms of financing. Consequently, actual events and results may
vary significantly from those included in or contemplated or
implied by such statements.