<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 1999
REGISTRATION NO. 333-71231
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SAFEWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE SAFEWAY INC. 94-3019135
(STATE OR OTHER JURISDICTION 5918 STONERIDGE MALL ROAD (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) PLEASANTON, CALIFORNIA 94588 IDENTIFICATION NUMBER)
(925) 467-3000
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL C. ROSS, ESQ.
SENIOR VICE PRESIDENT, SECRETARY
AND GENERAL COUNSEL
SAFEWAY INC.
5918 STONERIDGE MALL ROAD
PLEASANTON, CALIFORNIA 94588
(925) 467-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
SCOTT R. HABER, ESQ. PAUL C. PRINGLE, ESQ.
SCOTT K. MILSTEN, ESQ. BROWN & WOOD LLP
LATHAM & WATKINS 555 CALIFORNIA STREET
505 MONTGOMERY STREET, SUITE 1900 SAN FRANCISCO, CALIFORNIA 94104
SAN FRANCISCO, CALIFORNIA 94111 (415) 772-1200
(415) 391-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 1, 1999
SAFEWAY LOGO
19,750,000 Shares
Safeway Inc.
COMMON STOCK
------------------------
THE SELLING STOCKHOLDERS ARE OFFERING ALL OF THE SHARES, WHICH INCLUDE
19,650,304 PRESENTLY OUTSTANDING SHARES AND 99,696 SHARES WHICH
WILL BE ISSUED UPON THE EXERCISE OF OUTSTANDING WARRANTS.
------------------------
SAFEWAY INC.'S COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE
SYMBOL "SWY." ON JANUARY 29, 1999, THE REPORTED LAST SALE PRICE
OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $56 1/8 PER SHARE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS
-------- ------------- ------------
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total.................................................. $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
None of the proceeds from the sale of the shares will be received by Safeway
other than $49,848 representing the exercise price of the warrants.
One of the selling stockholders has granted the underwriters the right to
purchase up to an additional 2,000,000 shares to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
February , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
ING BARING FURMAN SELZ LLC
LEHMAN BROTHERS
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
February , 1999
<PAGE> 3
[Map of Safeway Operating Territories]
2
<PAGE> 4
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell
shares of common stock and seeking offers to buy shares of common stock, only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the common stock. In
this prospectus, "we," "us" and "our" refer to Safeway Inc. and its
subsidiaries, unless the context otherwise requires.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Where You Can Find More Information......................... 7
Disclosure Regarding Forward-Looking Statements............. 7
Price Range of Common Stock................................. 8
Dividend Policy............................................. 8
Selected Financial Data..................................... 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Business.................................................... 16
The Selling Stockholders.................................... 21
Description of Capital Stock and Warrants................... 23
Certain United States Tax Consequences to Non-United States
Holders................................................... 24
Underwriters................................................ 27
Legal Matters............................................... 28
Experts..................................................... 29
Information Incorporated by Reference....................... 29
</TABLE>
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and our financial statements, the notes thereto and the other
financial data contained elsewhere in this prospectus or incorporated by
reference herein. Unless we indicate otherwise, the information in this
prospectus assumes that the underwriters will not exercise their over-allotment
option.
THE COMPANY
We are one of the largest food and drug retailers in North America based on
sales, with 1,497 stores as of January 2, 1999. Our U.S. retail operations are
located principally in northern California, southern California, Oregon,
Washington, Colorado, Arizona, Illinois and the Mid-Atlantic region. Our
Canadian retail operations are located principally in British Columbia, Alberta
and Manitoba/Saskatchewan. In support of our retail operations, we have an
extensive network of distribution, manufacturing and food processing facilities.
In April 1997, we completed a merger with The Vons Companies, Inc. pursuant
to which we issued 83.2 million shares of our common stock for all of the shares
of Vons common stock that we did not already own. In connection with the merger,
we repurchased 64.0 million shares of our common stock for an aggregate purchase
price of $1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V.
which, as of January 2, 1999, operated 77 food and general merchandise stores in
western Mexico.
Dominick's Acquisition. In November 1998, we completed our acquisition of
all of the outstanding shares of Dominick's Supermarkets Inc. for $49 cash per
share, or a total of approximately $1.2 billion. We funded the acquisition of
Dominick's, including the repayment of approximately $560 million of debt and
lease obligations, with a combination of bank borrowings and the issuance of
commercial paper. Dominick's is now our wholly owned subsidiary through which we
operate 114 stores in the greater Chicago metropolitan area, two distribution
facilities and a dairy processing plant. Dominick's had sales of $2.6 billion in
fiscal 1997 and sales of $1.8 billion through its third quarter of 1998.
Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive
agreement to acquire all of the outstanding shares of Carr-Gottstein Foods Co.
for $12.50 per share, or a total of approximately $110 million, in a cash merger
transaction. Carr-Gottstein had approximately $220 million of debt outstanding
on September 27, 1998. Carr-Gottstein is the leading food and drug retailer in
Alaska, with 49 stores primarily located in Anchorage, as well as Fairbanks,
Juneau, Kenai and other Alaska communities. Carr-Gottstein had sales of $589
million in fiscal 1997 and sales of $440 million through its third quarter of
1998.
The acquisition of Carr-Gottstein is subject to a number of conditions,
including the approval of the holders of a majority of Carr-Gottstein's
outstanding shares, receipt of certain regulatory approvals and other customary
closing conditions. Although we cannot assure you that all of these conditions
to the merger will be satisfied or waived, we believe we will complete the
transaction early in the second quarter of 1999. See "Business -- Carr-Gottstein
Acquisition."
OPERATING STRATEGY
During the past five years, our management team has demonstrated
proficiency at turning around underperforming assets. Central to our success is
a simple but effective formula that focuses on three key priorities to enhance
the performance of our operations, including the operations of companies we
acquire: (1) controlling costs, (2) increasing sales and (3) improving capital
management. Management's focus on these three priorities has produced
significant progress in the following key measures of financial performance:
- Identical-store sales growth
- Expense ratio reduction
- Working capital management
- Operating cash flow margin
- Earnings per share growth
4
<PAGE> 6
RECENT DEVELOPMENTS
FOURTH QUARTER 1998 EARNINGS
On January 28, 1999, we reported net income of $255.0 million ($0.50 per
share) for the 16-week fourth quarter of 1998 compared to net income of $214.9
million ($0.43 per share) for the 17-week fourth quarter of 1997. This
represents a 19% increase in earnings despite the additional week in the fourth
quarter of 1997.
Strong store operations helped increase fourth quarter identical-store
sales (which exclude replacement stores) 2.4% and comparable-store sales 3.0%.
Total sales were $7.9 billion in the 16-week fourth quarter of 1998 compared to
$7.8 billion in the 17-week fourth quarter of 1997.
The Dominick's acquisition was accounted for as a purchase and Dominick's
operating results have been consolidated with ours since approximately midway
through the fourth quarter of 1998. The pro forma amounts presented below for
1997 were computed as if we had owned Dominick's for the corresponding period of
the prior year.
Our continuing improvement in buying practices and product mix helped to
increase gross profit 51 basis points to 28.88% of sales in the fourth quarter
of 1998 from pro forma 28.37% in the fourth quarter of 1997. LIFO expense was
$2.5 million in the fourth quarter of 1998 compared to LIFO income of $8.4
million in 1997. Operating and administrative expense declined 42 basis points
to 22.42% of sales in the fourth quarter of 1998 from pro forma operating and
administrative expense of 22.84% in 1997, reflecting increased sales and ongoing
efforts to reduce or control expenses. This represents the 23rd consecutive
quarter of improvement in operating and administrative expense, after pro forma
adjustments for acquisitions of Vons and Dominick's.
Interest expense increased to $81.8 million in the fourth quarter of 1998
from $77.5 million for the fourth quarter of 1997, due to borrowings incurred in
connection with the Dominick's acquisition. In spite of higher interest expense,
strong operating results pushed the interest coverage ratio (operating cash flow
divided by interest expense) to 8.44 times in 1998 from 7.53 times in 1997.
Operating cash flow as a percentage of sales was 8.72% for the quarter and 8.75%
for the year.
Equity in earnings of Casa Ley, our unconsolidated affiliate, was $11.8
million for the quarter compared to $9.3 million in 1997.
For the year, net income was $806.7 million in 1998 compared to $621.5
million of income before extraordinary loss in 1997. Sales for the year were
$24.5 billion in 1998 compared to $22.5 billion in 1997. The gross profit margin
improved 57 basis points to 29.10% in 1998 from 28.53% in 1997. Operating and
administrative expense improved 28 basis points to 22.56% of sales in 1998
compared to 22.84% in 1997.
At fiscal year end 1998, our outstanding debt was approximately $5.0
billion and our stockholders' equity was approximately $3.1 billion.
5
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
OPERATING RESULTS
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED*
------------------------ ------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(16 WEEKS) (17 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C>
Sales......................................... $ 7,922.6 $ 7,785.4 $24,484.2 $22,483.8
========= ========= ========= =========
Gross profit.................................. $ 2,228.1 $ 2,211.3 $ 7,124.5 $ 6,414.7
Operating and administrative expense.......... (1,776.3) (1,771.7) (5,522.8) (5,135.0)
--------- --------- --------- ---------
Operating profit.............................. 511.8 439.6 1,601.7 1,279.7
Interest expense.............................. (81.8) (77.5) (235.0) (241.2)
Equity in earnings of unconsolidated
affiliates.................................. 11.8 9.3 28.5 34.9
Other income (expense), net................... (0.2) 0.8 1.7 2.9
--------- --------- --------- ---------
Income before income taxes and extraordinary
loss........................................ 441.6 372.2 1,396.9 1,076.3
Income taxes.................................. (186.6) (157.3) (590.2) (454.8)
--------- --------- --------- ---------
Income before extraordinary loss.............. 255.0 214.9 806.7 621.5
Extraordinary loss related to early retirement
of debt, net of income tax benefit of
$41.1....................................... -- -- -- (64.1)
--------- --------- --------- ---------
Net income.................................... $ 255.0 $ 214.9 $ 806.7 $ 557.4
========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary loss............ $ 0.50 $ 0.43 $ 1.59 $ 1.25
Extraordinary loss.......................... -- -- -- (0.13)
--------- --------- --------- ---------
Net income.................................. $ 0.50 $ 0.43 $ 1.59 $ 1.12
========= ========= ========= =========
Weighted average shares outstanding:
Diluted..................................... 511.3 504.4 508.8 497.7
========= ========= ========= =========
OPERATING CASH FLOW:
Income before extraordinary loss.............. $ 255.0 $ 214.9 $ 806.7 $ 621.5
Add (subtract):
Income taxes................................ 186.6 157.3 590.2 454.8
Interest expense............................ 81.8 77.5 235.0 241.2
Depreciation................................ 155.6 135.6 475.1 414.0
Goodwill amortization....................... 21.1 15.8 56.3 41.8
LIFO expense (income)....................... 2.5 (8.4) 7.1 (6.1)
Equity in earnings of unconsolidated
affiliates............................... (11.8) (9.3) (28.5) (34.9)
--------- --------- --------- ---------
Total operating cash flow..................... $ 690.8 $ 583.4 $ 2,141.9 $ 1,732.3
========= ========= ========= =========
As a percent of sales....................... 8.72% 7.49% 8.75% 7.70%
As a multiple of interest expense........... 8.44x 7.53x 9.11x 7.18x
</TABLE>
- ---------------
* The annual income statements include Vons' operating results since the
companies merged at the beginning of the second quarter of 1997. Before the
merger, our operating results include our 34.4% equity interest in Vons.
Our principal executive offices are located at 5918 Stoneridge Mall Road,
Pleasanton, California 94588, and our telephone number is (925) 467-3000.
6
<PAGE> 8
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy these reports, proxy statements and other information at the public
reference facilities of the Commission, in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago, Illinois
60661-2511. You can also obtain copies of these materials from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with it
(http://www.sec.gov). You can inspect reports and other information we file at
the office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
We have filed a registration statement and related exhibits with the
Commission under the Securities Act of 1933, as amended. The registration
statement contains additional information about us and our common stock. You may
inspect the registration statement and exhibits without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may
obtain copies from the Commission at prescribed rates.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the documents that we incorporate by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements relate to, among other things, capital expenditures,
cost reduction, cash flow and operating improvements and are indicated by words
or phrases such as "anticipate," "estimate," "plans," "projects," "continuing,"
"ongoing," "expects," "management believes," "the Company believes," "the
Company intends," "we believe," "we intend" and similar words or phrases. The
following factors are among the principal factors that could cause actual
results to differ materially from the forward-looking statements:
- general business and economic conditions in our operating regions,
including the rate of inflation/deflation, population, employment and
job growth in our markets;
- pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels;
- results of our programs to reduce costs;
- the ability to integrate any companies we acquire and achieve
operating improvements at those companies;
- relations with union bargaining units;
- issues arising from addressing year 2000 information technology
issues, including for companies we acquire;
- opportunities or acquisitions that we pursue;
- conditions to the acquisition of Carr-Gottstein, including regulatory
approval, which could affect the timing of or our ability to complete
the acquisition; 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.
7
<PAGE> 9
PRICE RANGE OF COMMON STOCK
Our common stock has been listed on the New York Stock Exchange under the
symbol "SWY" since our initial public offering in May 1990.
The following table sets forth the high and low sales prices for our common
stock for the fiscal quarters indicated as reported by the New York Stock
Exchange Composite Tape. Prices have been adjusted to give effect to two-for-one
stock splits effected on January 30, 1996 and February 25, 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First quarter............................................. $26 $20 9/16
Second quarter............................................ 24 13/16 21 1/8
Third quarter............................................. 27 3/4 23 1/16
Fourth quarter............................................ 31 23/32 25 11/32
1998
First quarter............................................. $37 1/4 $30 1/2
Second quarter............................................ 40 7/16 34
Third quarter............................................. 46 7/16 37 1/4
Fourth quarter............................................ 61 3/8 37 5/8
1999
First quarter (through January 29, 1999).................. $62 7/16 $53 9/16
</TABLE>
The reported last sale price of the common stock on the New York Stock
Exchange Composite Tape on January 29, 1999 was $56 1/8.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since
we were acquired by a corporation formed by Kohlberg Kravis Roberts & Co. in
1986, and we do not currently intend to declare or pay any cash dividends. Any
determination to pay dividends in the future will be at the discretion of our
Board of Directors and will depend on our results of operations, financial
condition, capital expenditures, working capital requirements, any contractual
restrictions and other factors deemed relevant by our Board of Directors. See
"Description of Capital Stock and Warrants -- Dividends."
8
<PAGE> 10
SELECTED FINANCIAL DATA
SAFEWAY INC. AND SUBSIDIARIES
The financial data below are derived from our audited consolidated
financial statements, except for the financial data for the 36-week periods
ended September 12, 1998 and September 6, 1997, which are derived from unaudited
consolidated financial statements. You should read the selected financial data
in conjunction with our consolidated financial statements and accompanying
notes, which we have incorporated by reference herein. In the opinion of our
management, the results of operations for the 36 weeks ended September 12, 1998
and September 6, 1997 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 results for the 36 weeks ended September 12,
1998 are not necessarily indicative of the results expected for the full year.
<TABLE>
<CAPTION>
36 WEEKS ENDED
---------------------- 53 52 52 52 52
SEPT. 12, SEPT. 6, WEEKS WEEKS WEEKS WEEKS WEEKS
1998 1997(1) 1997(1) 1996 1995 1994 1993
---------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales.............................. $ 16,561.6 $14,698.4 $22,483.8 $17,269.0 $16,397.5 $15,626.6 $15,214.5
---------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 4,836.4 4,203.4 6,414.7 4,774.2 4,492.4 4,287.3 4,123.3
Operating and administrative
expense.......................... (3,746.5) (3,363.3) (5,135.0) (3,882.5) (3,765.0) (3,675.2) (3,681.8)
---------- --------- --------- --------- --------- --------- ---------
Operating profit................... 1,089.9 840.1 1,279.7 891.7 727.4 612.1 441.5
Interest expense................... (153.2) (163.7) (241.2) (178.5) (199.8) (221.7) (265.5)
Equity in earnings of
unconsolidated affiliates........ 16.7 25.6 34.9 50.0 26.9 27.3 33.5
Other income, net.................. 1.9 2.1 2.9 4.4 2.0 6.4 6.8
---------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary loss............... 955.3 704.1 1,076.3 767.6 556.5 424.1 216.3
Income taxes....................... (403.6) (297.5) (454.8) (307.0) (228.2) (173.9) (93.0)
---------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss... 551.7 406.6 621.5 460.6 328.3 250.2 123.3
Extraordinary loss, net of tax
benefit
of $41.1, $41.1, $1.3 and
$6.7............................. -- (64.1) (64.1) -- (2.0) (10.5) --
---------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 551.7 $ 342.5 $ 557.4 $ 460.6 $ 326.3 $ 239.7 $ 123.3
========== ========= ========= ========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary
loss........................... $ 1.09 $ 0.82 $ 1.25 $ 0.97 $ 0.68 $ 0.51 $ 0.25
Extraordinary loss............... -- (0.13) (0.13) -- -- (0.02) --
---------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 1.09 $ 0.69 $ 1.12 $ 0.97 $ 0.68 $ 0.49 $ 0.25
========== ========= ========= ========= ========= ========= =========
FINANCIAL STATISTICS:
Identical-store sales(2)(3)........ 4.2% 0.8% 1.3% 5.1% 4.6% 4.4% 2.1%
Comparable-store sales(2).......... 4.8 2.5 2.2 6.1 5.5 5.0 3.5
Gross profit margin................ 29.20 28.60 28.53 27.65 27.40 27.44 27.10
Operating and administrative
expense
as a percent of sales............ 22.62 22.88 22.84 22.48 22.96 23.52 24.20
Operating profit margin............ 6.6 5.7 5.7 5.2 4.4 3.9 2.9
Operating cash flow(4)............. $ 1,451.1 $ 1,148.9 $ 1,732.3 $ 1,239.5 $ 1,068.6 $ 947.6 $ 777.0
Operating cash flow margin......... 8.76% 7.82% 7.70% 7.18% 6.52% 6.06% 5.11%
Capital expenditures(5)............ $ 538.1 $ 379.6 $ 829.4 $ 620.3 $ 503.2 $ 352.2 $ 290.2
Depreciation and amortization...... 354.7 304.4 455.8 338.5 329.7 326.4 330.2
Total assets....................... 8,603.4 8,176.2 8,493.9 5,545.2 5,194.3 5,022.1 5,074.7
Total debt......................... 2,854.1 3,353.2 3,340.3 1,984.2 2,190.2 2,196.1 2,689.2
Stockholders' equity............... 2,778.0 1,921.5 2,149.0 1,186.8 795.5 643.8 382.9
Weighted average shares
outstanding -- diluted (in
millions)........................ 508.1 494.6 497.7 475.7 481.2 494.2 493.8
OTHER STATISTICS:
Vons stores acquired in 1997....... -- 316 316 -- -- -- --
Total stores at period-end......... 1,381 1,367 1,368 1,052 1,059 1,062 1,078
Remodels completed during the
period(6)........................ N/A N/A 181 141 108 71 45
Total retail square footage at
period-end (in millions)......... 53.8 52.0 53.2 40.7 40.1 39.5 39.4
</TABLE>
9
<PAGE> 11
- ---------------
(1) We completed the merger with Vons in April 1997. The results of operations
of Vons are included in our results of operations as of the beginning of the
second quarter of 1997.
(2) Reflects sales increases for stores (including Vons stores for the final 41
weeks of 1997 and for 1998) operating the entire measurement period in both
the current and prior periods. The 1997 and 1996 annual identical-store
sales and comparable-store sales exclude British Columbia stores, which were
closed during a labor dispute in 1996.
(3) Excludes replacement stores.
(4) Defined as FIFO income before income taxes, interest, depreciation,
amortization, equity in earnings from unconsolidated affiliates and
extraordinary losses. Operating cash flow is similar to net cash flow from
operations presented in our consolidated statements of cash flows because it
excludes certain noncash items. However, operating cash flow also excludes
interest expense and income taxes. Management believes that operating cash
flow is relevant because it assists investors in evaluating our ability to
service our debt by providing a commonly used measure of cash available to
pay interest, and it facilitates comparisons of our results of operations
with those of companies having different capital structures. Other companies
may define operating cash flow differently, and, as a result, those measures
may not be comparable to our operating cash flow.
(5) Defined under "Business -- Capital Expenditure Program."
(6) Defined as store projects, other than maintenance, generally requiring
expenditures in excess of $200,000.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
PERIOD ENDED SEPTEMBER 12, 1998 COMPARED TO PERIOD ENDED SEPTEMBER 6, 1997
Our net income was $193.7 million ($0.38 per share) for the third quarter
ended September 12, 1998, compared to income before extraordinary loss of $150.0
million ($0.30 per share) for the third quarter of 1997. In the third quarter of
1997, we incurred an extraordinary loss of $59.9 million ($0.12 per share)
related to the early retirement of debt which reduced net income to $90.1
million ($0.18 per share).
Our third-quarter sales increased 4.1% to $5.6 billion in 1998 from $5.4
billion in 1997, primarily because of strong store operations. Identical-store
sales (which exclude replacement stores) increased 4.2%, while comparable-store
sales increased 4.8%.
Continuing improvement in buying practices and product mix helped increase
gross profit 62 basis points to 29.52% of sales in the third quarter of 1998
from 28.90% in the third quarter of 1997. LIFO expense was $2.3 million in the
third quarter of 1998. No LIFO expense was recorded in the third quarter of
1997. Operating and administrative expense declined 24 basis points to 22.76% of
sales in the third quarter of 1998 compared to 23.00% in 1997, reflecting
increased sales and ongoing efforts to reduce or control expenses.
Interest expense declined to $48.8 million in the third quarter of 1998
from $62.3 million last year, due to reduced borrowings and lower interest rates
achieved through the refinancing of certain debt in the third quarter of 1997.
For the first 36 weeks of the year, interest expense was $153.2 million compared
to $163.7 million in 1997.
The combination of lower interest expense and strong operating results
increased the interest coverage ratio (operating cash flow divided by interest
expense) to an all-time high of 10.25 times in the third quarter of 1998.
Operating cash flow (as defined under "-- Liquidity and Financial Resources") as
a percentage of sales was 8.95% for the quarter and 8.36% for the last four
quarters.
Equity in earnings of Casa Ley, our unconsolidated affiliate, was $6.3
million in the third quarter of 1998 compared to $4.1 million in the third
quarter of 1997. For the first three quarters of 1998, equity in earnings of
Casa Ley was $16.7 million. In the first three quarters of 1997, we recorded
equity in earnings of unconsolidated affiliates of $25.6 million, which included
$12.2 million recognized in the first quarter of 1997 for the effect of our
34.4% equity interest in Vons.
We merged with Vons at the beginning of the second quarter of 1997.
Consequently, our income statement for the first 36 weeks of 1998 includes Vons'
operating results for the entire period, while the income statement for the
first 36 weeks of 1997 includes Vons' operating results for the second and third
quarters plus the effect of our 34.4% equity interest in Vons for the first
quarter. The following paragraph compares actual results for the first 36 weeks
of 1998 with pro forma results for the same period in 1997, as if we merged with
Vons at the beginning of 1997.
Sales for the first 36 weeks of 1998 were $16.6 billion compared to pro
forma sales of $15.9 billion in 1997. The gross profit margin for the first 36
weeks of 1998 improved 46 basis points to 29.20% from pro forma gross profit
margin of 28.74% in 1997. Operating and administrative expense improved 42 basis
points to 22.62% of sales in 1998 from pro forma expense of 23.04% in 1997.
1997 COMPARED TO 1996 AND 1995
Our net income was $557.4 million ($1.12 per share) in 1997, $460.6 million
($0.97 per share) in 1996, and $326.3 million ($0.68 per share) in 1995. In 1997
and 1995, income before extraordinary items related to debt refinancings was
$621.5 million ($1.25 per share) and $328.3 million ($0.68 per share),
respectively.
Our 1997 income statement includes Vons' operating results since the second
quarter plus the effect of our 34.4% equity interest in Vons in the first
quarter, while the 1996 and 1995 income statements reflect our
11
<PAGE> 13
equity interest in Vons for the full year. In order to facilitate an
understanding of our operations, this financial review presents certain pro
forma information based on the 1997 and 1996 combined historical financial
statements of the two companies as if the merger with Vons had been effective as
of the beginning of each of the years discussed. See Note B to our 1997
Consolidated Financial Statements which are incorporated herein by reference.
During the second quarter of 1997, we were engaged in a 75-day labor
dispute affecting 74 stores in the Alberta, Canada operating area. We estimate
that the Alberta strike reduced 1997 net income by approximately $0.04 per
share, and labor disputes in the British Columbia and Denver operating areas
reduced 1996 net income by an estimated $0.07 per share.
A nine-day strike during the second quarter of 1995 affected 208 stores in
northern California. We estimate that this dispute reduced 1995 earnings by
approximately $0.01 per share.
Sales. Sales for the 53 weeks of 1997 were $22.5 billion compared to $17.3
billion for the 52 weeks of 1996 and $16.4 billion for the 52 weeks of 1995. The
increase was due primarily to our merger with Vons and the additional week in
1997. Identical-store sales (stores operating the entire year in both 1997 and
1996, excluding replacement stores but including Vons stores for 41 weeks in
both years) increased 1.3% while comparable-store sales, which includes
replacement stores, increased 2.2%. The effects of the second-quarter strike in
Alberta weakened 1997 identical-store and comparable-store sales comparisons.
Lack of inflation also softened 1997 sales comparisons. Excluded from
identical-store and comparable-store sales comparisons are 86 stores in British
Columbia that were closed during a strike-lockout for a portion of the second
and third quarters of 1996.
Gross Profit. Gross profit was 28.53% of sales in 1997 compared to 27.65%
in 1996 and 27.40% in 1995. On a pro forma basis, gross profit increased to
28.63% of sales in 1997 from 28.20% in 1996, primarily due to improvements in
buying practices and product mix. In addition, we recorded LIFO income of $6.1
million in 1997 compared to LIFO expense of $4.9 million in 1996 reflecting
slight deflation in 1997.
Operating and Administrative Expense. Operating and administrative expense
was 22.84% of sales in 1997 compared to 22.48% in 1996 and 22.96% in 1995. Our
operating and administrative expense-to-sales ratio increased compared to 1996
because Vons' operating and administrative expense ratio was higher than ours
(partially due to the high cost of real estate and labor in southern
California). In addition, goodwill amortization increased by approximately $30
million as a result of the merger with Vons. On a pro forma basis, operating and
administrative expense declined 35 basis points to 22.95% of sales in 1997, from
23.30% in 1996.
Interest Expense. Interest expense increased to $241.2 million in 1997 from
$178.5 million in 1996 because of the debt incurred during the second quarter of
1997 to repurchase stock in conjunction with the merger with Vons.
During 1997, we recorded an extraordinary loss of $64.1 million ($0.13 per
share) for the repurchase of $588.5 million of our public debt, $285.5 million
of Vons' public debt, and $40.0 million of medium-term notes. The extraordinary
loss represented the payment of premiums on retired debt and the write-off of
deferred finance costs, net of the related tax benefit. We financed this
repurchase with a public offering of $600 million of senior debt securities and
the balance with commercial paper. The refinancing extended our overall
long-term debt maturities and increased our financial flexibility.
In May 1997, we entered into interest rate cap agreements which expire in
1999 and entitle us to receive from counterparties the amounts, if any, by which
interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized
cost to purchase the cap agreements was $2.5 million at year-end 1997.
As of year-end 1997, we had effectively converted $135.1 million of our
floating rate debt to fixed interest rate debt through the use of interest rate
swap agreements. Interest rate swap and cap agreements increased interest
expense by $3.3 million in 1997, $3.0 million in 1996 and $0.3 million in 1995.
The significant terms of swap and cap agreements outstanding at year-end 1997
are described in Note E to our 1997 Consolidated Financial Statements which are
incorporated herein by reference.
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<PAGE> 14
Equity in Earnings of Unconsolidated Affiliates. We record our equity in
earnings of unconsolidated affiliates on a one-quarter delay basis.
Income from our equity investment in Casa Ley increased to $22.7 million in
1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995,
Mexico suffered from high interest rates and inflation which adversely affected
Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa
Ley's financial results have gradually improved.
Equity in earnings of unconsolidated affiliates included our share of Vons'
earnings of $12.2 million in the first quarter of 1997, $31.2 million in 1996
and $18.3 million in 1995.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $920.5 million in the first 36 weeks of 1998
compared to $728.4 million in 1997, primarily due to improved results from
operations. Working capital (excluding cash and debt) at September 12, 1998 was
a deficit of $302.2 million compared to a $314.9 million deficit at September 6,
1997.
Cash flow used by investing activities for the first 36 weeks of the year
was $472.5 million in 1998, compared to $257.7 million in 1997. During the first
36 weeks of 1998 we increased capital expenditures to open 18 new stores and to
continue construction of a new distribution center in Maryland. In 1997 we
acquired $57.2 million in cash from the merger with Vons.
Cash flow used by financing activities was $473.4 million in the first
three quarters of 1998, primarily due to repayment of long-term debt. In the
first 36 weeks of 1997, financing activities used cash flow of $518.3 million,
primarily to purchase treasury stock related to the merger with Vons, which was
partially offset by long-term borrowings.
Net cash flow from operations as presented in the consolidated statements
of cash flows is an important measure of cash generated by our operating
activities. Operating cash flow, as defined below, is similar to net cash flow
from operations because it excludes certain noncash items. However, operating
cash flow also excludes interest expense and income taxes. Our management
believes that operating cash flow is relevant because it assists investors in
evaluating our ability to service our debt by providing a commonly used measure
of cash available to pay interest, and it facilitates comparisons of our results
of operations with those of companies having different capital structures. Other
companies may define operating cash flow differently, and as a result, such
measures may not be comparable to our operating cash flow. Our computation of
operating cash flow is as follows:
<TABLE>
<CAPTION>
36 WEEKS ENDED
-----------------------------
SEPTEMBER 12, SEPTEMBER 6, 53 WEEKS 52 WEEKS 52 WEEKS
1998 1997 1997 1996 1995
------------- ------------ -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss.............. $ 955.3 $ 704.1 $1,076.3 $ 767.6 $ 556.5
LIFO expense (income)............. 4.6 2.3 (6.1) 4.9 9.5
Interest expense.................. 153.2 163.7 241.2 178.5 199.8
Depreciation and amortization..... 354.7 304.4 455.8 338.5 329.7
Equity in earnings of
unconsolidated affiliates....... (16.7) (25.6) (34.9) (50.0) (26.9)
-------- -------- -------- -------- --------
Operating cash flow............... $1,451.1 $1,148.9 $1,732.3 $1,239.5 $1,068.6
======== ======== ======== ======== ========
As a percent of sales............. 8.76% 7.82% 7.70% 7.18% 6.52%
As a multiple of interest
expense......................... 9.47x 7.02x 7.18x 6.94x 5.35x
</TABLE>
Based upon the current level of operations, we believe that operating cash
flow and other sources of liquidity, including borrowings under our commercial
paper program and our 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 that our business will continue to generate cash flow at or
above current levels. The bank credit agreement is used primarily as a
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<PAGE> 15
backup facility to the commercial paper program. We funded the acquisition of
Dominick's, including the repayment of approximately $560 million of debt and
lease obligations, with a combination of bank borrowings and the issuance of
commercial paper. On November 9, 1998, we closed the public offering of $1.4
billion of senior debt securities. We used most of the proceeds of that offering
to repay outstanding indebtedness under our commercial paper program and the
bank credit agreement. We expect to fund the acquisition of Carr-Gottstein
through the issuance of commercial paper.
CAPITAL EXPENDITURE PROGRAM
During 1998, we invested $1.2 billion in capital expenditures while opening
46 new stores, remodeling 234 stores and completing construction of the new
Maryland distribution center. During 1999, we expect to spend approximately $1.2
billion to add 55 to 60 stores and complete approximately 250 remodels. The
acquisition of Carr-Gottstein could result in additional capital spending in
1999.
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 our software
applications contain source code that is unable to interpret appropriately the
upcoming calendar year 2000 and beyond, some level of modification or
replacement 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 we established a year 2000 project group, headed by our Chief
Information Officer, to coordinate our year 2000 compliance efforts. The project
group is staffed primarily with representatives of our Information Technology
department and also uses outside consultants on an as-needed basis. The Chief
Information Officer reports regularly on the status of the year 2000 project to
a steering committee headed by the Chief Executive Officer, and to our Board of
Directors.
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) we use in our 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
our operations. The year 2000 project 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 transitioning the compliant systems into
our regular operations. The systems and applications in the highest priority
level are being assessed and modified or replaced first. Management estimates
that these actions with respect to all priority levels are approximately eighty
percent complete. We estimate that all critical systems and applications will be
year 2000 compliant by June 30, 1999.
We completed our acquisition of Dominick's in November 1998 and are in the
process of identifying which systems and applications of Dominick's might not be
year 2000 compliant and integrating those systems and applications into our year
2000 project. We estimate that all critical systems and applications of
Dominick's will be year 2000 compliant by September 30, 1999. We are not yet
able to estimate the incremental costs associated with achieving compliance, but
we do not expect that these costs will have any material adverse effect on the
benefits we expect from the acquisition of Dominick's.
The year 2000 project group is also examining our relationships with
certain key outside vendors and others with whom we have significant business
relationships to determine, to the extent practical, the degree of such outside
parties' year 2000 compliance. The project group has begun testing procedures
with certain vendors identified as having potential year 2000 compliance issues.
Management does not believe that our relationship with any third party is
material to our operations and, therefore, does not believe that the failure of
any particular third party to be year 2000 compliant would have a material
adverse effect on Safeway.
The year 2000 project group is in the process of establishing and
implementing a contingency plan to provide for viable alternatives to ensure
that our core business operations are able to continue in the event of a
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<PAGE> 16
year 2000-related systems failure. Management expects to have a comprehensive
contingency plan established by March 31, 1999.
Through December 31, 1998, we expended approximately $17 million to address
year 2000 compliance issues. We estimate that we will incur an additional $8
million, for a total of approximately $25 million (excluding Dominick's), to
address year 2000 compliance issues, which includes the estimated costs of all
modifications, testing and consultants' fees.
Management believes that, should we or any third party with whom we have a
significant business relationship have a year 2000-related systems failure, the
most significant 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 certain products from vendors or to process
electronically customer sales at store level. We do not anticipate that any such
impact would be material to our liquidity or results of operations.
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<PAGE> 17
BUSINESS
We are one of the largest food and drug retailers in North America based on
sales, with 1,497 stores as of January 2, 1999. Our U.S. retail operations are
located principally in northern California, southern California, Oregon,
Washington, Colorado, Arizona, Illinois and the Mid-Atlantic region. Our
Canadian retail operations are located principally in British Columbia, Alberta
and Manitoba/Saskatchewan. In support of our retail operations, we have an
extensive network of distribution, manufacturing and food processing facilities.
In April 1997, we completed a merger with Vons pursuant to which we issued
83.2 million shares of our common stock for all of the shares of Vons common
stock that we did not already own. In connection with the merger, we repurchased
64.0 billion shares of our common stock for an aggregate purchase price of
$1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V. which, as
of January 2, 1999, operated 77 food and general merchandise stores in western
Mexico.
Dominick's Acquisition. In November 1998, we completed our acquisition of
all of the outstanding shares of Dominick's for $49 cash per share, or a total
of approximately $1.2 billion. We funded the acquisition of Dominick's,
including the repayment of approximately $560 million of debt and lease
obligations, with a combination of bank borrowings and the issuance of
commercial paper. Dominick's is now our wholly owned subsidiary through which we
operate 114 stores. Dominick's is the second largest supermarket operator in the
greater Chicago metropolitan area based on sales. Dominick's also operates two
distribution facilities and a dairy processing plant. The Dominick's stores
average approximately 61,000 square feet in size. Dominick's had sales of $2.6
billion in fiscal 1997 and sales of $1.8 billion through its third quarter of
1998.
Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive
agreement to acquire all of the outstanding shares of Carr-Gottstein for $12.50
per share, or a total of approximately $110 million, in a cash merger
transaction. Carr-Gottstein had approximately $220 million of debt outstanding
as of September 27, 1998. Carr-Gottstein had sales of $589 million in fiscal
1997 and sales of $440 million through its third quarter of 1998.
Carr-Gottstein is the leading food and drug retailer in Alaska, with 49
stores, including liquor and tobacco stores described below, primarily located
in Anchorage, as well as Fairbanks, Juneau, Kenai and other Alaska communities.
Carr-Gottstein is Alaska's highest-volume alcoholic beverage retailer through
its chain of 17 wine and liquor stores operated under the name Oaken Keg Spirit
Shops. Carr-Gottstein also operates seven specialty tobacco stores under the
name The Great Alaska Tobacco Company. In addition, Carr-Gottstein's vertically
integrated organization includes freight transportation operations and a
full-line food warehouse and distribution center.
The definitive agreement requires Carr-Gottstein to call a special meeting
of its stockholders where they will be asked to approve the merger of one of our
wholly owned subsidiaries with Carr-Gottstein, with Carr-Gottstein surviving as
our wholly owned subsidiary. An affiliate of Leonard Green & Associates owns
approximately 35% of the outstanding shares and has agreed to vote its shares in
favor of the transaction.
The acquisition of Carr-Gottstein is subject to a number of conditions,
including the approval of the holders of a majority of Carr-Gottstein's
outstanding shares, receipt of certain regulatory approvals and other customary
closing conditions. Safeway and Carr-Gottstein have received a request for
additional information from the Federal Trade Commission, and we and
Carr-Gottstein are in the process of compiling information in response to this
request. In late October 1998, an Alaska consumer group and five individuals
filed a purported class-action lawsuit in Alaska state court seeking an
injunction to prevent our merger with Carr-Gottstein. The consumer group has
dismissed its claims. The individual plaintiffs are seeking to amend the
complaint to add an additional individual plaintiff. We and Carr-Gottstein
believe the lawsuit is without merit and intend to defend the lawsuit
vigorously. Although we cannot assure you that all of these conditions to the
merger will be satisfied or waived, or that this lawsuit will be resolved to our
satisfaction, we believe we will complete the transaction early in the second
quarter of 1999.
There is a risk that we may not be able to implement programs to enhance
the performance of operations at Dominick's in a timely manner, if at all. The
same risk exists with respect to Carr-Gottstein. In addition, we may not be able
to complete the acquisition of Carr-Gottstein because one or more of the
conditions to the transaction may not be satisfied. If we do achieve success in
any one area, that success may be diluted by our
16
<PAGE> 18
inability to produce results in another. These acquisitions also present certain
risks with regard to the integration of Dominick's and Carr-Gottstein with
Safeway, including risks relating to coordinating different operations and
integrating personnel and corporate cultures. If we are not successful in
integrating these operations, our financial results could be adversely affected.
OPERATING STRATEGY
During the past five years, our management team has demonstrated
proficiency at turning around underperforming assets. Central to our success is
a simple but effective formula that focuses on three key priorities: (1)
controlling costs, (2) increasing sales and (3) improving capital management.
Management's focus on these three priorities has produced significant progress
in the following key measures of financial performance:
- Identical-store sales growth
- Expense ratio reduction
- Working capital management
- Operating cash flow margin
- Earnings per share growth
We continue to be focused on these same three priorities and expect
continued improvement, but we cannot assure you as to the future results we will
be able to achieve.
Controlling Costs
We have focused on controlling and reducing elements of our cost of sales
through better buying practices, lower advertising expenses, distribution
efficiencies, manufacturing plant closures and consolidations, improved category
management and increased private label mix.
Our efforts to control or reduce operating and administrative expenses have
included overhead reduction in our administrative support functions, negotiation
of competitive labor agreements, store level work simplification, consolidation
of our information technology operations, elimination of certain corporate
perquisites and the general encouragement of a "culture of thrift" among
employees.
Increasing Sales
We have increased sales by achieving and maintaining competitive pricing,
improving store standards, enhancing customer service and offering high quality
products. Our efforts to upgrade store standards have focused on improving store
appearance, in-stock condition, employee friendliness and speed of checkout. We
have over 850 premium corporate brand products under the "Safeway SELECT" banner
and have repackaged over 3,000 corporate brand products primarily under the
"Safeway," "Lucerne" and "Mrs. Wright's" labels. Since our merger with Vons, we
have been applying certain sales strategies that we and Vons have each employed
successfully. By October 1998, we had introduced in all of our operating areas
the Safeway Club Card (a customer loyalty program designed to reward frequent
shoppers) which was inspired by a similar program at Vons.
Improving Capital Management
Our capital management has improved in two key areas: capital expenditures
and working capital. In the capital expenditure area, we have expanded our use
of standardized layouts and centralized purchasing agreements for building
materials, fixtures and equipment for our new stores and remodels. As a result,
our new store prototype is less expensive to build and more efficient to operate
than the stores we and Vons previously built and operated. These lower project
costs, coupled with our improved operations, have allowed us to improve our
returns on capital investment. Working capital invested in the business has
declined
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<PAGE> 19
substantially since year-end 1993, primarily through lower warehouse inventory
levels and improved payables management.
RETAIL OPERATIONS
Stores
We operate stores ranging in size from approximately 5,900 square feet to
over 89,000 square feet. We determine the size of a new store based on a number
of considerations, including the needs of the community the store serves, the
location and site plan, and the estimated return on capital invested. Our
primary new store prototype is 55,000 square feet and is designed to accommodate
changing consumer needs and to achieve certain operating efficiencies. Most
stores offer a wide selection of both food and general merchandise and feature a
variety of specialty departments such as bakery, delicatessen, floral and
pharmacy. In most of our larger stores, specialty departments are showcased in
each corner and along the perimeter walls of the store to create a pleasant
shopping atmosphere.
Merchandising
Our operating strategy is to provide value to our customers by maintaining
high store standards and a wide selection of high quality products at
competitive prices. We emphasize high quality perishables, such as produce and
meat, and specialty departments, including in-store bakery, delicatessen, floral
and pharmacy, designed to provide one-stop shopping for today's busy shoppers.
We have developed a line of over 850 premium corporate brand products under
the "Safeway SELECT" banner. These products include, among others, soft drinks,
pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt,
pet food and laundry detergent. The line also includes Safeway SELECT "Healthy
Advantage" items such as low-fat ice cream and low-fat cereal bars, and Safeway
SELECT "Gourmet Club" frozen entrees and hors d'oeuvres. We have repackaged over
3,000 corporate brand products primarily under the "Safeway," "Lucerne" and
"Mrs. Wright's" labels.
DISTRIBUTION
Each of our 11 retail operating areas is served by a regional distribution
center consisting of one or more facilities. With the acquisition of Dominick's,
we have 15 distribution/warehousing centers (12 in the United States and three
in Canada), which collectively provide the majority of all products to our
stores. Our distribution centers in northern California and British Columbia are
operated by a third party. Management regularly reviews distribution operations
focusing on whether these operations support their operating areas in a
cost-effective manner. We completed construction of a replacement distribution
center in Maryland in December 1998.
CAPITAL EXPENDITURE PROGRAM
A component of our long-term strategy is our capital expenditure program.
Our capital expenditure program funds new stores, remodels, information
technology advances, and other facilities, including plant and distribution
facilities and corporate headquarters. In the last several years, our management
has significantly strengthened our program to select and approve new capital
investments, resulting in improved returns on investment.
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<PAGE> 20
The table below reconciles for the last three fiscal years cash paid for
property additions reflected in our consolidated statements of cash flows to our
broader definition of capital expenditures, excluding Vons, and also details
changes in our store base during such period:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash paid for property additions............................... $758.2 $541.8 $450.9
Less: Purchases of previously leased properties............... (28.2) (13.2) (9.9)
Plus: Present value of all lease obligations incurred......... 91.3 91.7 62.2
Mortgage notes assumed in property acquisitions......... 0.9 -- --
Vons first quarter expenditures......................... 7.2 -- --
------ ------ ------
Total capital expenditures.............................. $829.4 $620.3 $503.2
====== ====== ======
Capital expenditures as a percent of sales..................... 3.7% 3.6% 3.1%
Vons stores acquired........................................... 316 -- --
New stores opened.............................................. 37 30 32
Stores closed or sold.......................................... 37 37 35
Remodels....................................................... 181 141 108
Total retail square footage at year-end (in millions).......... 53.2 40.7 40.1
</TABLE>
Improved operations and lower project costs have raised the return on
capital projects, allowing us to increase capital expenditures.
ACQUISITIONS
Our management believes that the supermarket industry in North America is
fragmented and that there may be opportunities to make other acquisitions that
would enhance our long-term growth. Our criteria for considering acquisition
targets include, but are not limited to, strong market share and the potential
for improving operating cash flow margin. These criteria are subject to review
and modification from time to time. We cannot assure you that we will complete
any such acquisition or that, if completed, the business acquired will make any
contribution to our long-term growth.
EMPLOYEES
As of January 2, 1999, we had approximately 170,000 full and part-time
employees. Approximately 90% of our employees in the United States and Canada
are covered by collective bargaining agreements negotiated with local unions
affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three to five-year terms.
Accordingly, we renegotiate a significant number of these agreements every year.
In the last three years there have been four significant work stoppages.
During the second quarter of 1997, we were engaged in a 75-day labor dispute
affecting 74 stores in the Alberta, Canada operating area. We continued to
operate the affected stores with a combination of replacement workers,
management and employees who returned to work. During the second and third
quarters of 1996, we were engaged in a labor dispute in British Columbia which
lasted 40 days and affected 86 stores. Under Provincial law in British Columbia,
replacement workers could not be hired, and therefore all the affected stores
were closed throughout the strike-lockout. Separately, we were engaged in a
strike-lockout in the Denver operating area which lasted 44 days also during the
second and third quarters of 1996. All of the Denver stores operated during the
strike-lockout, largely with replacement workers. A nine-day strike during the
second quarter of 1995 affected 208 stores in northern California. These work
stoppages were resolved in a manner that management considered generally
satisfactory. We estimate that the Alberta strike reduced 1997 net income by
approximately $0.04 per share, that the combined impact of the disputes in
Denver and British Columbia reduced 1996 earnings by approximately $0.07 per
share, and that the dispute in northern California reduced 1995 earnings by an
estimated $0.01 per share.
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<PAGE> 21
We concluded early negotiations and signed new labor contracts covering
employees whose collective bargaining agreements expired in 1998. Certain of
these contracts were with employees represented by the United Food and
Commercial Workers Union in northern California and Seattle and Spokane,
Washington and by the International Brotherhood of Teamsters in southern
California. In addition, union members in British Columbia ratified a new labor
contract. Our management considers the terms of these new contracts to be
satisfactory. During 1999, collective bargaining agreements covering employees
in our stores in Denver, southern California (Vons) and northern Illinois
(Dominick's) come up for renewal.
Dominick's Litigation. We acquired Dominick's in November 1998. At that
time, there was pending against Dominick's a class action lawsuit filed in March
1995 alleging gender discrimination and seeking compensatory and punitive
damages in an unspecified amount. The lawsuit also alleges national origin
discrimination, but the court has denied plaintiffs' class certification motion
as to those claims. We plan to vigorously defend this lawsuit. It is our
management's opinion that although the amount of liability with respect to this
lawsuit cannot be ascertained at this time, any resulting liability, including
any punitive damages, is not likely to have a material adverse effect on our
financial statements taken as a whole.
20
<PAGE> 22
THE SELLING STOCKHOLDERS
All of the shares of common stock are being sold by the selling
stockholders identified in the following table and the footnotes. The table and
the footnotes also set forth information regarding the beneficial ownership of
our outstanding common stock as of January 25, 1999 for each of the selling
stockholders. Except as indicated by the notes to the following table, the
holders listed below have sole voting power and investment power over the shares
beneficially held by them. The address of SSI Associates, L.P., KKR Partners II,
L.P., KKR Associates, L.P., SSI Equity Associates, L.P. and SSI Partners, L.P.
is 9 West 57th Street, New York, New York 10019.
<TABLE>
<CAPTION>
AFTER OFFERING AND
BEFORE OFFERING AFTER DISTRIBUTIONS(4)
-------------------------- --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENTAGE(3) SHARES OFFERED SHARES PERCENTAGE(5)
---------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
KKR Associates, L.P.(1)....... 64,337,639 13.1% 19,650,304 44,091,592 8.9%
SSI Equity Associates,
L.P.(2)..................... 9,969,660 2.0% 99,696 6,429,533 1.3%
</TABLE>
- ---------------
(1) The shares are beneficially owned by KKR Associates, L.P. and two limited
partnerships, SSI Associates, L.P. and KKR Partners II, L.P. KKR Associates
is the general partner of each of SSI Associates and KKR Partners II. KKR
Associates, in its capacity as general partner, may be deemed to
beneficially own shares that are owned of record by SSI Associates and KKR
Partners II. James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell,
George R. Roberts, Edward A. Gilhuly, Perry Golkin, Michael W. Michelson,
Paul E. Raether, Clifton S. Robbins, Scott Stuart and Michael T. Tokarz are
the general partners of KKR Associates. In their capacity as general
partners, they may be deemed to share beneficial ownership of any shares
beneficially owned by KKR Associates, but disclaim any such beneficial
ownership. Messrs. Greene, Kravis, MacDonnell and Roberts are members of our
Board of Directors.
Shares owned before the offering include 48,352,750 shares held by KKR
Associates, of which 4,261,158 are being offered by this prospectus,
14,862,296 shares held by SSI Associates, all of which are being offered by
this prospectus, and 1,122,593 shares held by KKR Partners II, of which
526,850 are being offered by this prospectus. On or prior to the completion
of the offering, KKR Partners II will distribute the remaining 595,743
shares to its limited partners. After the offering and the distribution,
neither SSI Associates nor KKR Partners II will own any of our common
stock. To the extent that the over-allotment option is exercised, all of
the shares to be sold pursuant to the option will be sold by KKR
Associates. If the underwriters exercise the entire over-allotment option,
then following the offering and the distribution, KKR Associates will own
approximately 42.1 million shares (representing approximately 8.5% of the
outstanding shares).
(2) The shares are beneficially owned by SSI Equity Associates, L.P. SSI
Partners, L.P. is the sole general partner of SSI Equity Associates. SSI
Partners, in its capacity as general partner, may be deemed to beneficially
own shares that are beneficially owned by SSI Equity Associates. Messrs.
Kravis, MacDonnell, Raether and Roberts are the general partners of SSI
Partners. In their capacity as general partners, they may be deemed to share
beneficial ownership of any shares beneficially owned by SSI Partners, but
disclaim any such beneficial ownership. Messrs. Kravis, MacDonnell and
Roberts are members of our Board of Directors. We are a limited partner of
SSI Equity Associates and own 64.5% of the partnership.
All 9,969,660 shares shown as beneficially owned by SSI Equity Associates
prior to the offering represent shares of common stock issuable upon
exercise of warrants to purchase common stock. Of those shares, 3,540,127
shares issuable upon exercise of warrants are attributable to limited
partners other than Safeway and 6,429,533 shares issuable upon exercise of
warrants are attributable to our limited partner interest in SSI Equity
Associates. Of the 3,540,127 shares, SSI Equity Associates will sell
warrants to purchase 99,696 shares of common stock pursuant to this
prospectus. On or prior to the completion of the offering, the remaining
warrants to purchase 3,440,431 shares will be exercised and the shares
issued upon exercise will be distributed to limited partners other than
Safeway. In connection with the exercise, warrants to purchase
approximately 30,000 shares will be canceled as payment of the exercise
price. After
21
<PAGE> 23
the offering and the distribution, SSI Equity Associates will hold warrants
to purchase 6,429,533 shares of common stock (representing approximately
1.3% of the outstanding shares) and we will be the sole limited partner of
SSI Equity Associates. SSI Partners will no longer serve as the general
partner of SSI Equity Associates. We intend for the partnership to hold
such warrants until November 15, 2001 when they expire and to not exercise
such warrants.
(3) Based on 490.3 million shares outstanding at January 2, 1999. For purposes
of calculating the percentage of shares owned by SSI Equity Associates, we
have assumed that SSI Equity Associates has exercised all of its warrants.
(4) Gives effect to the offering and distributions by KKR Partners II and SSI
Equity Associates described in notes (1) and (2) above.
(5) Based on 493.8 million shares outstanding after the offering and
distribution. For purposes of calculating the percentage of shares owned by
SSI Equity Associates, we have assumed that SSI Equity Associates has
exercised all of its warrants.
SSI Associates made its investment in Safeway in 1986. The limited
partnership agreement pursuant to which SSI Associates was organized, by its
terms, expired on December 31, 1998. As a result of the expiration, the general
partner is in the process of dissolving and winding up SSI Associates. Following
the offering, SSI Associates will not own any of our common stock.
KKR Associates, SSI Associates, KKR Partners II, SSI Equity Associates and
we entered into a Registration Rights Agreement dated as of November 25, 1986. A
copy of the Registration Rights Agreement is incorporated by reference as an
exhibit to the registration statement. Pursuant to that agreement, we agreed to
register the offer and sale of shares of common stock offered hereby. We and the
other parties to the agreement agreed to indemnify each other against certain
liabilities under the Securities Act in connection with the sale of the shares
offered hereby. Pursuant to the Registration Rights Agreement, the selling
stockholders are required to pay the underwriting discounts and commissions and
transfer taxes associated with the offering, and we are required to pay
substantially all expenses directly associated with the offering, including the
registration and filing fees, printing expenses, underwriting expenses and
expenses for counsel and accountants incurred by us or the selling stockholders.
Sales of substantial amounts of common stock, including shares issued upon
the exercise of stock options, or the perception that such sales could occur,
could adversely affect prevailing market prices of the common stock. As a
condition to receiving shares from KKR Partners II and SSI Equity Associates in
the distributions described above, the limited partners who will receive shares
will agree not to sell these shares for 120 days following the distributions.
KKR Associates and SSI Partners have agreed with the underwriters not to waive
this sale restriction for a period of 90 days from the date of this prospectus.
22
<PAGE> 24
DESCRIPTION OF CAPITAL STOCK AND WARRANTS
GENERAL
Pursuant to our Restated Certificate of Incorporation, as amended, our
authorized capital stock consists of 1.5 billion shares of common stock, par
value $0.01 per share, and 25 million shares of preferred stock, par value $0.01
per share. At January 2, 1999, we had outstanding 490.3 million shares of common
stock and no outstanding shares of preferred stock. All shares of common stock
are fully paid and nonassessable.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all action to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of Safeway, the holders of common stock
are entitled to share equally and ratably in our assets, if any, remaining after
the payment of all of our debts and liabilities and the liquidation preference
of any outstanding preferred stock. The common stock has no preemptive rights,
no cumulative voting rights and no redemption, sinking fund or conversion
provisions.
Our Restated Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes as nearly equal in size as practicable.
Each class will hold office until the third annual meeting for election of
directors following the election of such class.
Our bylaws provide for additional notice requirements for stockholder
nominations and proposals at our annual or special meetings. At annual meetings,
stockholders may submit nominations for directors or other proposals only upon
written notice to us at least 50 days prior to the annual meeting.
The common stock is listed on the New York Stock Exchange. The transfer
agent and registrar for the common stock is First Chicago Trust Company of New
York.
PREFERRED STOCK
Our Board of Directors is authorized without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and to
fix and determine the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this prospectus, the Board of Directors has not
authorized any series of preferred stock and there are no plans, agreements or
understandings for the issuance of any shares of preferred stock.
DIVIDENDS
Holders of common stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and subject to certain limitations in our bank credit agreement.
WARRANTS
Each warrant is exercisable to purchase one share of common stock at an
exercise price of $.50 per share. The warrants were issued in 1986 to SSI Equity
Associates. There are currently outstanding warrants to purchase an aggregate of
9,969,660 shares of common stock, all of which are held by SSI Equity
Associates. The warrants are exercisable until they expire on November 15, 2001.
The exercise price of the warrants is subject to adjustment in the event we
effect a stock dividend, subdivision of stock and certain other distributions
described in the warrant. A copy of the warrant is filed as an exhibit to the
registration statement and is incorporated herein by reference. The
determination of when or whether to exercise the warrants is within the sole
discretion of the general partner of SSI Equity Associates, except under certain
limited circumstances following the sale of common stock by SSI Associates and
KKR Partners II. After the offering and the distribution, there will be
outstanding warrants to purchase 6,429,533 shares of common stock, all of which
will be held by SSI Equity Associates. We will be the sole limited partner of
SSI Equity Associates and intend for the partnership to hold the warrants until
they expire. See "The Selling Stockholders."
23
<PAGE> 25
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a holder who is not a United States person or entity (a "Non-U.S.
Holder"). The term "Non-U.S. Holder" means any person or entity that is, for
United States federal income tax purposes, a foreign corporation, a non-resident
alien individual, a non-resident fiduciary of a foreign estate or trust, or a
foreign partnership. An individual may, subject to certain exceptions, be deemed
to be a resident alien (as opposed to a non-resident alien) by virtue of being
present in the United States on at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to United States federal tax as if they were United States citizens and
residents.
This discussion does not address all aspects of United States federal
income and estate taxes or consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and
local consequences that may be relevant to Non-U.S. Holders. Furthermore, this
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, existing and proposed regulations promulgated thereunder and public
administrative and judicial interpretations thereof, all of which are subject to
changes which could be applied retroactively. EACH PROSPECTIVE PURCHASER OF
COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND
POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON
STOCK.
We do not currently intend to pay cash dividends on shares of common stock.
See "Dividend Policy." In the event that such dividends are paid on shares of
common stock, except as described below, dividends paid to a Non-U.S. Holder of
common stock will be subject to withholding of United States federal income tax
at a 30% rate or such lower rate as may be specified by an applicable income tax
treaty, unless the dividends are effectively connected with the conduct of a
trade or business by the Non-U.S. Holder within the United States. If the
dividends are effectively connected with the conduct of a trade or business by
the Non-U.S. Holder within the United States and, if a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S. Holder,
the dividends will be subject to United States federal income tax on a net
income basis at applicable graduated individual or corporate rates and will be
exempt from the 30% withholding tax described above (assuming the necessary
certification and disclosure requirements are met). Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above (unless the payor has knowledge to the contrary), and, under currently
applicable United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under recently promulgated United States
Treasury regulations generally effective with respect to payments made after
December 31, 1999, however, a Non-U.S. Holder of common stock who wishes to
claim the benefit of an applicable treaty rate (and avoid backup withholding as
discussed below) will be required to satisfy specified certification and other
requirements, which will include filing a Form W-8 containing the Non-U.S.
Holder's name, address and a certification that such Holder is eligible for the
benefits of the treaty under its Limitations in Benefits Article. In addition,
certain certification and disclosure requirements must be met to be exempt from
withholding under the effectively connected income exemption discussed above.
A Non-U.S. Holder of common stock who is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate, timely claim for
refund with the IRS.
24
<PAGE> 26
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on a disposition of a share of common stock
unless:
- subject to the exception discussed below, we are or have been a
"United States real property holding corporation" (a "USRPHC") within
the meaning of section 897(c)(2) of the Internal Revenue Code at any
time within the shorter of the five-year period preceding such
disposition or such Non-U.S. Holder's holding period (the "Required
Holding Period");
- the gain is effectively connected with the conduct of a trade or
business within the United States of the Non-U.S. Holder and, if a tax
treaty applies, is attributable to a permanent establishment
maintained by the Non-U.S. Holder;
- the Non-U.S. Holder is an individual who holds the share of common
stock as a capital asset and is present in the United States for 183
days or more in the taxable year of the disposition and either (a)
such individual has a "tax home" (as defined for United States federal
income tax purposes) in the United States or (b) the gain is
attributable to an office or other fixed place of business maintained
in the United States by such individual; or
- the Non-U.S. Holder is subject to tax pursuant to the Internal Revenue
Code provisions applicable to certain United States expatriates.
If an individual Non-U.S. Holder falls under the second or fourth clause
above, he or she will be taxed on his or her net gain derived from the sale
under regular United States federal income tax rates. If the individual Non-U.S.
Holder falls under the third clause above, he or she will be subject to a flat
30% tax on the gain derived from the sale which may be offset by United States
source capital losses (notwithstanding the fact that he or she is not considered
a resident of the United States). If a Non-U.S. Holder that is a foreign
corporation falls under the second clause above, it will be taxed on its gain
under regular graduated United States federal income tax rates and, in addition,
will under certain circumstances be subject to the branch profits tax equal to
30% of its "effectively connected earnings and profits" within the meaning of
the Internal Revenue Code for the taxable year, as adjusted for certain items,
unless it qualifies for a lower rate under an applicable income tax treaty.
A corporation is generally a USRPHC if the fair market value of its United
States real property interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its other assets used
or held for use in a trade or business. We believe that we are not currently a
USRPHC. However, a Non-U.S. Holder would generally not be subject to tax, or
withholding in respect of such tax, on gain from a sale or other disposition of
common stock by reason of our USRPHC status if the common stock is regularly
traded on an established securities market ("regularly traded") during the
calendar year in which such sale or disposition occurs, provided that such
holder does not own, actually or constructively, common stock with a fair market
value in excess of 5% of the fair market value of all common stock outstanding
at any time during the Required Holding Period. We believe that the common stock
will be treated as regularly traded.
If we are or have been a USRPHC within the Required Holding Period, and if
a Non-U.S. Holder owns in excess of 5% of the fair market value of common stock
(as described in the preceding paragraph), such Non-U.S. Holder of common stock
will be subject to United States federal income tax at regular graduated rates
under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such common stock. In addition, if we are or have been a USRPHC
within the Required Holding Period and if the common stock were not treated as
regularly traded, a Non-U.S. Holder (without regard to its ownership percentage)
would be subject to withholding in respect of FIRPTA tax at a rate of 10% of the
amount realized on a sale or other disposition of common stock and could be
further subject to FIRPTA tax in excess of the amounts withheld. Any amount
withheld pursuant to such withholding tax would be creditable against such
Non-U.S. Holder's United States federal income tax liability. Non-U.S. Holders
are urged to consult their tax advisors concerning the potential applicability
of these provisions.
25
<PAGE> 27
FEDERAL ESTATE TAXES
An individual Non-U.S. Holder who (i) is not a citizen or resident of the
United States (as specifically defined for United States estate tax purposes) at
the time of his or her death and (ii) owns, or is treated as owning common stock
at the time of his or her death, or has made certain lifetime transfers of an
interest in common stock, will be required to include the value of such common
stock in his or her gross estate for federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the IRS and to each Non-U.S. Holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends. These information reporting requirements apply regardless of whether
withholding is required. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty or other agreement with the tax authorities in that
country.
United States backup withholding tax (which, in general, is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) generally will not apply to:
- the payment of dividends paid on common stock to a Non-U.S. Holder at
an address outside the United States (unless the payor has knowledge
that the payee is a United States person); or
- the payment of the proceeds of the sale of common stock to or through
the foreign office of a broker.
In the case of the payment of proceeds from such a sale of common stock
through a foreign office of a broker that is a United States person or a "U.S.
related person," however, information reporting (but not backup withholding) is
required with respect to the payment unless the broker has documentary evidence
in its files that the owner is a Non-U.S. Holder (and has no actual knowledge to
the contrary) and certain other requirements are met or the holder otherwise
establishes an exemption. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes
under current regulations, or (ii) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business. The payment of
the proceeds of a sale of shares of common stock to or through a United States
office of a broker is subject to information reporting and possible backup
withholding unless the owner certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules from a payment to a Non-U.S. Holder will be
allowed as a refund or a credit against such Non-U.S. Holder's United States
federal income tax liability, provided that the required information is
furnished to the IRS.
On October 6, 1997, the United States Treasury Department promulgated new
regulations regarding the withholding and information reporting rules discussed
above, effective for payments made after December 31, 1999. In general, these
new regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The new regulations also
alter the procedures for claiming benefits of an income tax treaty and permit
the shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners under some circumstances.
On January 15, 1999, the IRS issued Notice 99-8 proposing certain changes to
these new withholding regulations for non-resident aliens and foreign
corporations and providing a model "qualified intermediary" withholding
agreement to be entered into with the IRS to allow certain institutions to
certify on behalf of their non-U.S. customers or account holders who invest in
U.S. securities. Non-U.S. Holders should consult their own tax advisors with
respect to the impact of the new regulations.
26
<PAGE> 28
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, ING Baring Furman Selz LLC, Lehman Brothers Inc., J.P.
Morgan Securities Inc., Salomon Smith Barney Inc. and Warburg Dillon Read LLC
are acting as representatives, have severally agreed to purchase, directly or
through the exercise of warrants held by SSI Equity Associates, and the selling
stockholders have agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
ING Baring Furman Selz LLC..................................
Lehman Brothers Inc. .......................................
J.P. Morgan Securities Inc. ................................
Salomon Smith Barney Inc. ..................................
Warburg Dillon Read LLC.....................................
----------
Total............................................. 19,750,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock (directly or through the purchase
and exercise of warrants held by SSI Equity Associates) offered hereby (other
than those covered by the underwriters' over-allotment option described below)
if any such shares are taken. With respect to shares of common stock obtained
upon the purchase and exercise of warrants held by SSI Equity Associates, the
underwriters will remit the exercise price of the warrants to Safeway.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $. a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $. a
share to other underwriters or to certain dealers. After the initial offering of
the shares of common stock, the offering price and other selling terms may from
time to time be varied by the representatives.
KKR Associates, one of the selling stockholders, has granted to the
underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 2,000,000 additional shares of
common stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table. If the underwriters' option is exercised in full, the total price to the
public would be $ , the total underwriters' discounts and commissions
would be $ and total proceeds to the selling stockholders would be
$ .
27
<PAGE> 29
Safeway and the selling stockholders have agreed not to (1) offer, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock,
provided that the foregoing shall not apply to distributions of common stock by
either of KKR Partners II or SSI Equity Associates to any of their respective
limited partners or (2) with respect to Safeway only, enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
common stock or such other securities, in cash or otherwise, except for (a) the
shares to be sold and the warrants to be cancelled in connection with the
offering, (b) any shares of common stock issued by Safeway pursuant to stock
option plans for our employees and directors or existing stock option plans for
consultants, (c) option grants under stock option plans for our employees and
directors or existing stock option plans for consultants, (d) any agreement of
Safeway in connection with an acquisition of assets or properties or any capital
stock issuable pursuant to the terms of such an agreement, (e) capital stock
issuable upon the exercise of warrants outstanding on the date of this
prospectus or (f) the cancellation of warrants for a period of at least 90 days
from the date of this prospectus without the prior written consent of Morgan
Stanley & Co. Incorporated, on behalf of the underwriters. If any such consent
is given it would not necessarily be preceded or followed by a public
announcement thereof. As a condition to receiving shares from KKR Partners II
and SSI Equity Associates, the limited partners who will receive shares will
agree not to sell those shares for 120 days following the distributions. KKR
Associates and SSI Partners have agreed with the underwriters not to waive this
sale restriction for a period of 90 days from the date of this prospectus.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The warrants held by SSI Equity Associates being purchased by the several
underwriters from SSI Equity Associates will be purchased at a price per
underlying share equal to the price to public less the exercise price of each
such warrant and the underwriting discount per underlying share. The
underwriters will immediately exercise such warrants held by SSI Equity
Associates by paying Safeway the aggregate exercise price of the warrants, and
will include in the offering the 99,696 shares of common stock issuable as a
result of such exercise.
Safeway, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
Latham & Watkins of San Francisco, California, and Michael C. Ross, our
General Counsel, will issue an opinion about certain legal matters with respect
to the common stock and warrants for Safeway and the selling stockholders.
Certain partners of Latham & Watkins, members of their families, related persons
and others, have an indirect interest, through limited partnerships, in less
than 1% of our common stock. These persons do not have the power to vote or
dispose of such shares of common stock. Michael C. Ross holds common stock and
options to purchase common stock which in the aggregate constitute less than 1%
of our common stock. Brown & Wood LLP of San Francisco will act as counsel for
the underwriters. Paul C. Pringle is a partner of Brown & Wood LLP and owns
1,000 shares of Safeway common stock.
28
<PAGE> 30
EXPERTS
Our consolidated financial statements as of January 3, 1998 and December
28, 1996 and for each of the three fiscal years in the period ended January 3,
1998, which are incorporated by reference herein from our Annual Report on Form
10-K for the year ended January 3, 1998, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is also incorporated
by reference herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
INFORMATION INCORPORATED BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
Commission will automatically update and supersede this information. We
incorporate by reference the following documents we filed with the Commission
pursuant to Section 13 of the Exchange Act (Commission file number 1-00041):
- Annual Report on Form 10-K for the year ended January 3, 1998
(including information specifically incorporated by reference into our
Form 10-K from our 1997 Annual Report to Stockholders and Proxy
Statement for our 1998 Annual Meeting of Stockholders) and Form 10-K/A
filed March 10, 1998;
- Quarterly Reports on Form 10-Q for the quarters ended March 28, 1998,
June 6, 1998 and September 12, 1998;
- Current Reports on Form 8-K filed on July 15, 1998, October 19, 1998,
November 9, 1998 and November 24, 1998;
- Description of our common stock contained in our registration
statement on Form 8-A filed with the Commission on February 20, 1990,
including the amendment on Form 8 dated March 26, 1990; and
- All documents filed by us with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and before the offering the common stock thereby is
completed (other than those portions of such documents described in
paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated
by the Commission).
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Investor Relations
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, California 94588
(925) 467-3790
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information.
29
<PAGE> 31
SAFEWAY LOGO
<PAGE> 32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by us in connection with the distribution of the
securities being registered are as set forth in the following table:
<TABLE>
<S> <C>
Securities Act Registration Fee........................... $ 327,660
* Legal Fees and Expenses (other than Blue Sky)............. 400,000
* Accounting Fees and Expenses.............................. 75,000
* Printing Expenses......................................... 150,000
* Blue Sky Fees and Expenses................................ 30,000
* Miscellaneous............................................. 17,340
----------
Total..................................................... $1,000,000
==========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Company's
Restated Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except for liability (i)
for breach of the duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law (governing distributions to stockholders), or (iv) for any
transaction for which a director derives an improper personal benefit. In
addition, Section 145 of the Delaware General Corporation law and Article III,
Section 13 of the Company's bylaws, under certain circumstances, provide for the
indemnification of the Company's officers, directors, employees and agents
against liabilities which they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is contained herein,
but that description is qualified in its entirety by reference to Article III,
Section 13 of the Company's bylaws.
In general, any officer, director, employee or agent will be indemnified
against expenses, including attorney's fees, fines, settlements or judgments,
which were actually and reasonably incurred, in connection with a legal
proceeding, other than one brought by or on behalf of the Company, to which he
was a party as a result of such relationship, if he acted in good faith, and in
the manner he believed to be in or not opposed to the Company's best interest
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. If the action is brought by or on behalf of
the Company, the person to be indemnified must have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the Company's best
interest, but no indemnification will be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Company unless and only to the extent that the Court of Chancery of Delaware, or
the court in which such action was brought, determines upon application that,
despite adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expense which such Court of Chancery or such other court shall deem proper.
Any indemnification under the previous paragraphs (unless ordered by a
court) will be made by the Company only as authorized in the specific case upon
a determination that indemnification of the director, officer, employee or agent
is proper under the circumstances because he has met the applicable standard of
conduct set forth above. Such determination will be made (i) by the Company's
board of directors by a majority vote of a quorum of disinterested directors who
were not parties to such actions, (ii) if such quorum is not obtainable or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders. To the extent
that a director, officer, employee or
II-1
<PAGE> 33
agent of the Company is successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the previous paragraph, he will be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it is ultimately determined that he is not entitled to be indemnified by the
Company as authorized by the Company's bylaws. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Company's board of directors deems appropriate.
The indemnification and advancement of expenses provided by, or granted
pursuant to, Section 13 of the Company's bylaws is not deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office. If a claim for
indemnification or payment of expenses under Section 13 of the Company's bylaws
is not paid in full within ninety (90) days after a written claim therefor has
been received by the Company, the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, shall be entitled
to be paid the expense of prosecuting such claim. In any such action, the
Company has the burden of proving that the claimant was not entitled to the
requested indemnification or payment of expenses under applicable law.
The Company's board of directors may authorize, by a vote of a majority of
a quorum of the Company's board of directors, the Company to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power to indemnify
him against such liability under the provisions of Section 13 of the Company's
bylaws. The Company's board of directors may authorize the Company to enter into
a contract with any person who is or was a director, officer, employee or agent
of the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise providing for indemnification rights equivalent to or,
if the Company's board of directors so determines, greater than those provided
for in Section 13 of the Company's bylaws.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
II-2
<PAGE> 34
ITEM 16. EXHIBITS
The following documents are filed as part of this registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
4.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 15, 1996 and Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 20, 1998)
4.2 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
the Company's Form 10-K for the Fiscal year ended January 2,
1993)
4.3 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4(i).1 to Registration Statement No. 33-33388)
4.4 Registration Rights Agreement dated as of November 25, 1986
by and between Safeway Stores Holdings Corporation
(predecessor to the Company) and certain limited
partnerships (incorporated by reference to Exhibit 4(i).4 to
Registration Statement No. 33-33388)
4.5 Common Stock Purchase Warrants to purchase shares of Safeway
Inc. common stock (incorporated by reference to Exhibit
4(i).13 to Annual Report on Form 10-K for the year ended
January 3, 1998)
*5.1 Opinion of Latham & Watkins
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Latham & Watkins (included in Exhibit 5.1)
*24.1 Powers of Attorney (contained on page II-5)
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) We hereby undertake that, for purposes of determining any liability
under the Securities Act of 1933, each filing of our annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Safeway pursuant to the provisions described in this registration statement
above, or otherwise, we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of us in
the successful defense of any action, suit or proceeding) is asserted against us
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-3
<PAGE> 35
(c) The undersigned registrant hereby also undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pleasanton, California, on January 29,
1999.
SAFEWAY INC.
By: /s/ MICHAEL C. ROSS
-------------------------------------
Michael C. Ross
Senior Vice President, Secretary and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by each of the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*STEVEN A. BURD Chairman, President and January 29, 1999
- ----------------------------------------------------- Chief Executive Officer
Steven A. Burd (Principal Executive
Officer)
*DAVID G. WEED Executive Vice President, January 29, 1999
- ----------------------------------------------------- Chief Financial Officer
David G. Weed (Principal Financial
Officer and Principal
Accounting Officer)
*PETER A. MAGOWAN Director January 29, 1999
- -----------------------------------------------------
Peter A. Magowan
*WILLIAM Y. TAUSCHER Director January 29, 1999
- -----------------------------------------------------
William Y. Tauscher
*JAMES H. GREENE, JR. Director January 29, 1999
- -----------------------------------------------------
James H. Greene, Jr.
*PAUL HAZEN Director January 29, 1999
- -----------------------------------------------------
Paul Hazen
*HENRY R. KRAVIS Director January 29, 1999
- -----------------------------------------------------
Henry R. Kravis
*ROBERT I. MACDONNELL Director January 29, 1999
- -----------------------------------------------------
Robert I. MacDonnell
*GEORGE R. ROBERTS Director January 29, 1999
- -----------------------------------------------------
George R. Roberts
*By: /s/ MICHAEL C. ROSS January 29, 1999
- -----------------------------------------------------
Michael C. Ross
as attorney-in-fact
</TABLE>
II-5
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
4.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended and Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 20, 1998)
4.2 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
the Company's Form 10-K for the Fiscal year ended January 2,
1993)
4.3 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4(i).1 to Registration Statement No. 33-33388)
4.4 Registration Rights Agreement dated as of November 25, 1986
by and between Safeway Stores Holdings Corporation
(predecessor to the Company) and certain limited
partnerships (incorporated by reference to Exhibit 4(i).4 to
Registration Statement No. 33-33388)
4.5 Common Stock Purchase Warrants to purchase shares of Safeway
Inc. common stock (incorporated by reference to Exhibit
4(i).13 to Annual Report on Form 10-K for the year ended
January 3, 1998)
*5.1 Opinion of Latham & Watkins
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Latham & Watkins (included in Exhibit 5.1)
*24.1 Powers of Attorney (contained on page II-5)
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
19,750,000 Shares
SAFEWAY INC.
Common Stock, Par Value $0.01 Per Share
UNDERWRITING AGREEMENT
February [*], 1999
<PAGE> 2
February [*], 1999
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
ING Baring Furman Selz LLC
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
Salomon Smith Barney Inc.
Warburg Dillon Read LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Certain stockholders and warrantholders of Safeway Inc., a Delaware
corporation (the "Company"), named in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several underwriters named in
Schedule II hereto (the "Underwriters"), for whom Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, ING Baring
Furman Selz LLC, Lehman Brothers Inc., J.P. Morgan Securities Inc., Salomon
Smith Barney Inc. and Warburg Dillon Read LLC are acting as representatives (the
"Representatives"), 19,650,304 shares of the Common Stock, par value $0.01 per
share, of the Company (the "Firm Shares") and warrants (the "Warrants") for the
purchase of an aggregate of 99,696 shares of Common Stock, par value $0.01 per
share, of the Company (the "Warrant Shares").
KKR Associates, L.P. ("KKR Associates"), one of the Selling
Stockholders, also proposes to sell to the several Underwriters an aggregate of
not more than an additional 2,000,000 shares of Common Stock, par value $0.01
per share, of the Company (the "Additional Shares"), if and to the extent that
the Representatives shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such Additional Shares granted to the
Underwriters in Section 3 hereof.
The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the Shares and the Shares and the Warrant Shares are hereinafter
collectively referred to as the Securities. The shares of Common Stock, par
value $0.01 per share, of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the Common Stock.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (Registration No. 333-71231), including a
prospectus, relating to the Securities.
1
<PAGE> 3
The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement." If the Company has filed an
abbreviated registration statement to register additional shares of Common Stock
pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462 Registration Statement. All references
herein to the Registration Statement and the Prospectus include the documents
incorporated or deemed to be incorporated by reference therein. The terms
"supplement," "amendment" and "amend" as used herein shall include all documents
deemed to be incorporated by reference in the Prospectus that are filed
subsequent to the date hereof by the Company with the Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement (other than a Rule 462
Registration Statement) has become effective; no stop order suspending
the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became
effective, did not contain and such Registration Statement, as amended
or supplemented, if applicable, will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations
and warranties set forth in this paragraph 1(b) do not apply to
statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter expressly for use therein.
(c) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and applicable rules and regulations of the Commission thereunder
(except to the extent that any preliminary prospectus did not so comply
in a manner corrected in the Prospectus); and no order preventing or
suspending the use of any preliminary prospectus has been issued by the
Commission.
(d) The documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission thereunder;
and any further documents so filed and incorporated by reference in the
Prospectus or any further amendment or supplement thereto, when such
documents become effective or are filed with the Commission, as the case
may be, will conform in all material respects to the requirements of the
Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder.
2
<PAGE> 4
(e) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its properties
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in the State of
California and in each other jurisdiction in which such qualification is
required, except to the extent that the failure to be so qualified or be
in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(f) Each subsidiary (each a "Significant Subsidiary"), if
any, of the Company which is a "significant subsidiary" as defined in
Rule 405 of Regulation C of the Securities Act has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation.
(g) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
(including, without limitation, the purchase and exercise by the
Underwriters of the Warrants) will not result in any violation of the
Restated Certificate of Incorporation or the By-Laws of the Company or
any agreement or other instrument (including, without limitation, the
Warrant Purchase Agreement dated as of November 28, 1986 between the
Company and SSI Equity Associates, L.P. (the "Warrant Purchase
Agreement")) binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
statute or any order, rule or regulation of any governmental body,
agency or court having jurisdiction over the Company or any
subsidiaries, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency having jurisdiction
over the Company is required for the performance by the Company of its
obligations under this Agreement, except such as may be required under
the Act and the rules and regulations thereunder, and the Exchange Act
and the rules and regulations thereunder, and the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Securities.
(h) The financial statements (together with the related
notes thereto) incorporated by reference in the Registration Statement
and the Prospectus present fairly the financial position of the Company
and its consolidated subsidiaries as of and at the dates indicated and
the results of their operations for the periods specified, except as
otherwise disclosed therein; and except as otherwise stated therein or
in the Registration Statement and the Prospectus, said financial
statements have been prepared in conformity with generally accepted
accounting principles in the United States applied on a consistent
basis.
(i) This Agreement has been duly authorized, executed and
delivered by the Company.
(j) The Warrant Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this Agreement and
the Warrants, will be validly issued, fully paid and non-assessable, and
the issuance of such shares will not be subject to any preemptive
rights.
(k) The authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the Prospectus.
(l) The shares of Common Stock (including the Shares to be
sold by the Selling Stockholders hereunder) and the Warrants have been
duly authorized and validly issued and are fully paid and
non-assessable; none of such Shares or Warrants, when delivered to the
Underwriters, will be subject to any preemptive rights; the Shares and
Warrant Shares conform as
3
<PAGE> 5
to legal matters to the description of the Common Stock contained in the
Prospectus and the Warrants conform as to legal matters to the
description thereof contained in the Prospectus.
(m) The Warrants have been duly authorized, executed and
delivered by the Company and constitute valid and binding obligations of
the Company enforceable in accordance with their terms.
(n) Upon the Underwriters' purchase of the Warrants and
payment to the Company of the Warrant Exercise Price (as defined
herein), all of the requirements (whether under the Warrant Purchase
Agreement or otherwise) with respect to the Underwriters' exercise of
the Warrants for Warrant Shares will be satisfied, and the Company will
be unconditionally obligated to immediately issue duly and validly
authorized and issued, fully paid and nonassessable shares of Common
Stock in respect thereof.
(o) The Company is not an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended.
(p) There has not occurred any material adverse change, or
any development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus.
(q) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending or, to the Company's
knowledge, threatened, to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of
its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not described
or filed as required.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
of the Selling Stockholders, severally and not jointly, represents and warrants
to and agrees with each of the Underwriters and the Company that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations
under, this Agreement will not result in any violation of any material
agreement or other instrument binding upon such Selling Stockholder or
any statute or any order, rule or regulation of any governmental body,
agency or court having jurisdiction over such Selling Stockholder, and
no consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by such
Selling Stockholder of its obligations under this Agreement, except the
registration under the Securities Act of the Securities, and except such
as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Securities.
(c) Such Selling Stockholder has, and on the Closing Date
and any Option Closing Date (each, as defined in Section 5) will have,
valid title to all of the Shares or Warrants which may be sold by such
Selling Stockholder under this Agreement and the legal right and power,
and all authorization and approval required by law or other instruments
binding upon such Selling
4
<PAGE> 6
Stockholder, to enter into this Agreement and to sell, transfer and
deliver the Shares or Warrants to be sold by such Selling Stockholder.
(d) Upon delivery of the Shares or Warrants to be sold by
such Selling Stockholder and payment therefor pursuant to this
Agreement, the Underwriters will hold such Shares or Warrants (including
Warrant Shares issued upon exercise of the Warrants after payment of the
exercise price therefor) free and clear of any security interests,
claims, liens, equities and other encumbrances assuming that such
Underwriters have purchased such Shares, Warrants and Warrant Shares in
good faith and without notice of any security interest, claims, liens,
equities, encumbrances or any other adverse claims within the meaning of
the Uniform Commercial Code.
(e) The information (other than the percent of shares owned,
as to which such Selling Stockholder makes no representation) pertaining
to such Selling Stockholder under the caption "The Selling Stockholders"
in the Prospectus is complete and accurate in all material respects, and
any information pertaining to such Selling Stockholder or its affiliates
under the caption "Certain Relationships and Transactions" incorporated
by reference into the Prospectus from the Company's 1998 Proxy Statement
fairly presents the information required to be set forth therein and
contains no material misstatement or omission.
Each of KKR Associates, as the sole general partner of KKR Partners II,
L.P. ("KKR Partners"), and SSI Partners, L.P. ("SSI Partners"), as the sole
general partner of SSI Equity Associates, L.P. ("SSI Equity"), severally and not
jointly, represents and warrants to and agrees with each of the Underwriters and
the Company that with respect to any distributions of Common Stock by KKR
Partners or SSI Equity to any of their respective limited partners, each of them
will receive agreements, executed by such limited partners, which provide that
such limited partners will not sell such distributed shares for a period of 120
days following the date of the distribution.
Any certificate signed by any officer of the Company or by or on behalf
of any Selling Stockholder and delivered to the Underwriters or to counsel for
the Underwriters shall be deemed a representation and warranty by the Company or
such Selling Stockholder, as the case may be, to each Underwriter as to the
matters covered thereby.
3. AGREEMENTS TO SELL AND PURCHASE. Each Selling Stockholder,
severally and not jointly, hereby agrees to sell to the several Underwriters,
and each Underwriter, upon the basis of the representations and warranties
herein contained, but subject to the conditions hereinafter stated, agrees,
severally and not jointly, to purchase from such Selling Stockholder (i) at
$[*] a Share (the "Share Purchase Price") and (ii) at $[*] a Warrant (the
"Warrant Purchase Price") (such Warrant Purchase Price representing the Share
Purchase Price less the exercise price of $.50 per Warrant (the "Warrant
Exercise Price") for each Warrant Share), the number of Firm Shares or Warrants,
as the case may be (subject to such adjustments to eliminate fractional shares
as you may determine), that bears the same proportion to the number of Firm
Shares or Warrants, as the case may be, to be sold by such Selling Stockholder
as the number of Firm Shares and Warrants, respectively, set forth in Schedule
II hereto opposite the name of such Underwriter bears to the total number of
Firm Shares and Warrants, respectively.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, KKR Associates agrees to
sell to the Underwriters the Additional Shares and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 2,000,000
Additional Shares at the Share Purchase Price. If the Representatives, on behalf
of the Underwriters, elect to exercise such option, the Representatives shall so
notify KKR Associates in writing not later than 30 days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such Additional Shares are
to be purchased. Such date may be
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the same as the Closing Date but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 5 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares and
Warrant Shares. If any Additional Shares are to be purchased, KKR Associates
agrees to sell the number of Additional Shares to be sold, and each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Additional Shares to be purchased as the number of Firm Shares and
Warrants, respectively, set forth in Schedule II hereto opposite the name of
such Underwriter bears to the total number of Firm Shares and Warrants,
respectively.
At the Closing Date, simultaneous with (i) the purchase by the
Underwriters of Warrants and (ii) the payment to the Company of the Warrant
Exercise Price, the Underwriters will be deemed to have exercised such Warrants
and the Company will immediately issue to the Underwriters at the Closing Date,
the related Warrant Shares.
Each of the Company and the Selling Stockholders of the Company hereby
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during a period of 90
days after the date of the Prospectus, (i) offer, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, provided that
the foregoing shall not apply to distributions of Common Stock by either KKR
Partners or SSI Equity to any of their respective limited partners or (ii) with
respect to the Company only, enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities or Warrants to be sold hereunder, (B) any shares of Common Stock
issued by the Company pursuant to stock option plans in effect on the date of
the Prospectus, (C) option grants under stock option plans in effect on the date
of the Prospectus, (D) any agreement of the Company in connection with an
acquisition of assets or properties or any capital stock issuable pursuant to
the terms of such an agreement, (E) capital stock issuable upon the exercise of
warrants outstanding on the date of the Prospectus, or (F) the cancellation of
warrants. In addition, each Selling Stockholder agrees that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 90 days after the date of
the Prospectus, make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. With respect to any distributions
of shares by KKR Partners and SSI Equity, the limited partners who will receive
such shares will agree not to sell those shares for a period of 120 days
following the date of the distribution. KKR Associates, as the sole general
partner of KKR Partners, and SSI Partners, as the sole general partner of SSI
Equity, hereby agree with the Underwriters that they will not waive this sale
restriction for a period of 90 days from the date of this Agreement.
4. TERMS OF PUBLIC OFFERING. The Company and the Selling
Stockholders are advised by you that the Underwriters propose to make a public
offering of their respective portions of the Securities as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company and the Selling Stockholders are further
advised by you that the Securities are to be offered to the public initially at
$[*] a share (the "Public Offering Price") and to certain dealers selected by
you at a price that represents a concession not in excess of $.[*] a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of $.[*] a share, to any
Underwriter or to certain other dealers.
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5. PAYMENT AND DELIVERY. Payment for the Firm Shares and Warrants
to be sold by each Selling Stockholder shall be made in Federal or other
immediately available funds to an account designated by the Selling Stockholders
against delivery of such Firm Shares and Warrants for the respective accounts of
the several Underwriters at 7 a.m., California time on February [*], 1999, or
at such other time on the same or such other date, not later than [*], 1999,
as shall be designated in writing by you. Payment of the Warrant Exercise Price
for Warrant Shares shall be made in Federal or other immediately available funds
to an account designated by the Company on the same such date. The time and date
of such payment are hereinafter referred to as the "Closing Date."
Payment for any Additional Shares to be sold by KKR Associates shall be
made in Federal or other immediately available funds to an account designated by
KKR Associates against delivery of such Additional Shares for the respective
accounts of the several Underwriters at 7 a.m., California time on the date
specified in the notice described in Section 3 or on such other date, in any
event not later than March [*], 1999, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "Option
Closing Date."
Certificates for the Firm Shares, Warrant Shares and Additional Shares
shall be in definitive form and registered in such names and in such
denominations as you shall request in writing not later than two full business
days prior to the Closing Date or the Option Closing Date, as the case may be.
The certificates evidencing the Firm Shares, Warrant Shares and Additional
Shares shall be delivered to you on the Closing Date or the Option Closing Date,
as the case may be, for the respective accounts of the several Underwriters,
with any transfer taxes payable in connection with the transfer of the Warrants
and Securities to the Underwriters duly paid (subject to the provisions of
Section 7 hereof), against payment of the Purchase Price, Warrant Purchase Price
and Warrant Exercise Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The several
obligations of the Selling Stockholders to sell the Shares and Warrants to the
Underwriters and the several obligations of the Underwriters, to purchase and
pay for the Shares and Warrants on the Closing Date are subject to the condition
that that the Registration Statement shall have become effective not later than
the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus that, in your
judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date
a certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in clause (a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied in
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<PAGE> 9
all material respects with all of the agreements and satisfied in all
material respects all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date (the officer signing
and delivering such certificate may rely upon his or her knowledge as to
proceedings threatened).
(c) Latham & Watkins, counsel for the Company, shall have
furnished to you their written opinion dated the Closing Date, in form
and substance satisfactory to you, to the effect that:
(i) the Company has been duly incorporated and is
validly existing and in good standing under the laws of the
State of Delaware, with corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Prospectus;
(ii) the Company has authorized capital stock as set
forth in the Prospectus, and the Common Stock and Warrants
conform to the description thereof contained in the Prospectus;
(iii) the Shares to be sold by the Selling
Stockholders pursuant to the Underwriting Agreement have been
duly authorized and validly issued and are fully paid and
non-assessable; the Warrant Shares to be issued and sold by the
Company pursuant to the terms of the Warrants have been duly
authorized, and when issued to and paid for by you and the other
Underwriters in accordance with the terms of the Warrants will
be validly issued, fully paid and non-assessable;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company;
(v) the Warrants have been duly authorized, executed
and delivered by the Company and constitute valid and binding
obligations of the Company enforceable in accordance with their
terms;
(vi) the issue and sale of the Warrant Shares being
delivered at the Closing Date by the Company and the compliance
by the Company with the provisions of this Agreement will not
result in the violation by the Company of its Restated
Certificate of Incorporation or By-laws or any federal, New York
or California statute, rule or regulation known to such counsel
to be applicable to the Company (other than federal securities
laws, which are specifically addressed elsewhere in such
counsel's opinion, or state securities laws, as to which such
counsel need not express an opinion) or result in a material
breach or violation of any of the terms or provisions of, or
constitute a default under, any of the indentures relating to
the 9.30% Senior Secured Debentures due 2007, 10% Senior Notes
due 2002, 10% Senior Subordinated Notes due 2001, 9.875% Senior
Subordinated Debentures due 2007, 9.65% Senior Subordinated
Debentures due 2004, 9.35% Senior Subordinated Notes due 1999,
6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007, 7.45%
Senior Debentures due 2027, 5 3/4% Notes Due 2000, 5 7/8>%
Notes Due 2001, 6.05% Notes Due 2003 or 6 1/2% Notes Due 2008,
or the bank credit agreement between the Company and a
consortium of banks led by Bankers Trust Company;
(vii) no consent, approval, authorization or order of,
or filing with, any federal, New York or California court or
governmental agency or body is required for the issue of the
Warrant Shares except such as have been obtained under the
Securities Act
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<PAGE> 10
and such as may be required under state securities laws in
connection with the purchase and distribution of the Securities
by the Underwriters as to which such counsel need not express an
opinion;
(viii) each document incorporated by reference in the
Prospectus or any further amendment or supplement thereto made
by the Company prior to the Closing Date (other than the
financial statements, schedules and other financial data
included or incorporated by reference therein, as to which such
counsel need express no opinion), when it became effective or
was filed with the Commission, as the case may be, appeared on
its face to comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations
of the Commission thereunder. In passing upon the compliance as
to form of each of such documents, such counsel may assume that
the statements made and incorporated by reference therein are
correct and complete;
(ix) the statements in the Prospectus under the
captions "Certain United States Tax Consequences to Non-United
States Holders" and "Description of Capital Stock," in each case
insofar as such statements constitute summaries of legal
matters, are accurate in all material respects;
(x) the Company is not an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;
(xi) the Registration Statement and the Prospectus
(in each case excluding the documents incorporated by reference
therein, and except for financial statements, schedules and
other financial data included or incorporated by reference
therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements
for registration statements on Form S-3 under the Securities Act
and the applicable rules and regulations of the Commission
thereunder. In passing upon the compliance as to form of the
Registration Statement and the Prospectus, such counsel may
assume that the statements made and incorporated by reference
therein are correct and complete; and
(xii) the Registration Statement has become effective
under the Securities Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued under the Securities Act and no
proceedings therefor have been initiated by the Commission; and
the Prospectus has been filed in accordance with Rule 424(b) and
430A under the Securities Act.
In addition, such counsel shall state that they have
participated in conferences with officers and other
representatives of the Company, representatives of the
independent public accountants for the Company, and your
representatives, at which the contents of the Registration
Statement and the Prospectus and related matters were discussed
and, although such counsel is not passing upon, and does not
assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration
Statement and the Prospectus and such counsel has not made any
independent check or verification thereof (except as set forth
in paragraph (ix) above), during the course of such
participation, no facts came to such counsel's attention that
have caused such counsel to believe that the Registration
Statement (including the documents incorporated by reference
therein), at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, or that the
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Prospectus (including the documents incorporated by reference
therein), as of its date or as of the Closing Date, contained or
contains an untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; it being understood that such counsel need
express no belief with respect to the financial statements,
schedules and other financial data included in the Registration
Statement or the Prospectus or incorporated by reference
therein.
In rendering such opinion, such counsel may state that
they express an opinion only as to federal securities laws, New
York and California law and the General Corporation Law of
Delaware.
(d) Michael C. Ross, Senior Vice President, General Counsel and Secretary
of the Company, shall have furnished to you his written opinion, dated
the Closing Date, in form and substance satisfactory to you, to the
effect that:
(i) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each jurisdiction in which its
ownership or lease of substantial properties or the conduct of
its business requires such qualification, and in which the
failure to be so qualified and in good standing would have a
material adverse effect upon the Company and its subsidiaries
considered as a whole;
(ii) based solely on certificates from public
officials, each Significant Subsidiary of the Company has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation; has corporate power and authority to own, lease
and operate its properties and conduct its business as described
in the Prospectus; to the best of his knowledge has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which its ownership or lease of substantial
properties or the conduct of its business requires such
qualification, and in which failure to be so qualified and in
good standing would have a material adverse effect upon the
Company and its subsidiaries considered as a whole; and all of
the issued and outstanding capital stock of each such
Significant Subsidiary has been duly authorized and validly
issued and is fully paid and nonassessable, and the capital
stock owned by the Company in such subsidiary is owned by the
Company free and clear of any mortgage, pledge, lien,
encumbrance, claim or equity;
(iii) to the best of such counsel's knowledge there
are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is
the subject, required to be described in the Prospectus, which
are not described as required;
(iv) the issue and sale of the Warrant Shares being
delivered at the Closing Date by the Company and the compliance
by the Company with all of the provisions of this Agreement will
not conflict with or result in a material breach or violation of
any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument relating to indebtedness in excess
of $25 million to which the Company or any of its subsidiaries
is a party or by which the
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Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries
is subject; and
(v) the issued and outstanding shares of capital
stock of the Company and warrants to purchase capital stock of
the Company have been duly authorized and validly issued and are
fully paid and non-assessable.
(e) Latham & Watkins, counsel for the Selling Stockholders,
shall have furnished to you their written opinion, dated the Closing
Date, in form and substance satisfactory to you, to the effect that:
(i) this Agreement has been duly authorized,
executed and delivered by or on behalf of each of the Selling
Stockholders;
(ii) each Selling Stockholder has full right, power
and authority to enter into the Underwriting Agreement; the sale
of the Shares or the Warrants, as applicable, by each Selling
Stockholder will not result in the violation by such Selling
Stockholder of its partnership agreement or any federal or New
York statute, rule or regulation known to such counsel to be
applicable to such Selling Stockholder (other than federal
securities laws which are specifically addressed elsewhere in
such counsel's opinion, or state securities laws, as to which
such counsel need not express an opinion); no consent, approval,
authorization or order of, or filing with, any federal or New
York governmental body or agency is required for the sale of the
Shares or the Warrants, as applicable, except such as have been
obtained under the Securities Act and except such as may be
required under state securities laws in connection with the
purchase and distribution of the Securities by the Underwriters,
as to which such counsel need not express an opinion; and
(iii) Upon (i) payment for the Shares and the Warrants
and payment of the exercise price for the Warrant Shares in
accordance with the terms of the Underwriting Agreement, (ii)
(A) physical delivery by KKR Associates, SSI Associates, L.P.
and KKR Partners of the Shares to First Chicago Trust Company of
New York (the "Transfer Agent") and (B) instructions from the
Company to the Transfer Agent to issue the Warrant Shares in
accordance with the terms of the Underwriting Agreement, and
registration of the Securities in the name of The Depository
Trust Company ("DTC") upon registration of transfer by the
Company, (iii) physical delivery of the Securities to DTC, and
registration of the Securities in the name of DTC upon
registration of transfer by the Company, and (iv) registration
by book-entry of the credit to the Underwriters' securities
accounts with DTC of the purchase of Securities in the records
of DTC and any other "securities intermediary" (as defined in
Section 8-102(a)(14) of the New York Uniform Commercial Code
(the "New York UCC")) which acts as a "clearing corporation" (as
defined in Section 8-102(a)(5) of the New York UCC) or maintains
"securities accounts" (as defined in Section 8-501(a) of the New
York UCC) with respect to the transfer of the Securities to the
Underwriters, then the Underwriters will become the "entitlement
holders" (as defined in Section 8-102(a)(7) of the New York UCC)
of the Securities, free of any "adverse claims" (as defined in
Section 8-102(a)(1) of the New York UCC).
(f) The Underwriters shall have received on the Closing Date
an opinion of Brown & Wood LLP, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in the first clause of
subparagraph (i), the second clause of subparagraph (iii),
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<PAGE> 13
subparagraphs (iv), (xi) and (xii) and the penultimate subparagraph of
paragraph (c) above and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters.
With respect to subparagraph (xi) of paragraph (c) above, Brown
& Wood may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto (other than the
documents incorporated by reference) and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified. With respect to paragraph (e) above, Latham &
Watkins may rely upon an opinion or opinions of counsel for any Selling
Stockholder and, to the extent such counsel deems appropriate, upon the
representations of each Selling Stockholder contained herein and in
other documents and instruments, provided that (A) each such counsel for
the Selling Stockholders is satisfactory to your counsel, (B) a copy of
each opinion so relied upon is delivered to you and is in form and
substance satisfactory to your counsel, (C) copies of such other
documents and instruments, if any, shall be delivered to you and shall
be in form and substance satisfactory to your counsel and (D) Latham &
Watkins shall state in their opinion that they are justified in relying
on each such other opinion.
The opinions of Latham & Watkins described in paragraphs (c) and
(e) above shall be rendered to the Underwriters at the request of the
Company or the Selling Stockholders, as the case may be, and shall so
state therein.
(g) The Underwriters shall have received on the Closing Date
a certificate, dated the Closing Date and signed on behalf of each of
the Selling Stockholders, to the effect that the representations and
warranties of such Selling Stockholders contained herein are true and
correct on and as of the Closing Date and that such Selling Stockholders
have complied in all material respects with all of the agreements and
satisfied in all material respects all of the conditions on their part
to be performed or satisfied hereunder on or before the Closing Date.
(h) The Underwriters shall have received, on each of the
date hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Deloitte & Touche LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(i) At the date of this Agreement, the Company and the
Selling Stockholders shall have furnished for review by the Underwriters
copies of such further information, certificates and documents as they
may reasonably request.
(j) Simultaneous with the purchase of the Warrants and the
payment of the Warrant Exercise Price by the Underwriters, the Company
will issue Warrant Shares.
(k) If the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have become effective by 10:00
p.m., Washington, D.C. time, on the date of this Agreement.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the
Underwriters on the Option Closing Date of such documents as they
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<PAGE> 14
may reasonably request with respect to the good standing of the Company,
the due authorization and issuance of the Additional Shares and other
matters related thereto.
7. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, a signed copy of the
Registration Statement (including exhibits thereto and documents
incorporated by reference) and to each Underwriter a copy of the
Registration Statement (without exhibits thereto but including documents
incorporated by reference) and to furnish to you in New York City
without charge prior to 5:00 p.m. local time on the business day next
succeeding the date of this Agreement, and during the period mentioned
in paragraph (c) below, as many copies of the Prospectus, any documents
incorporated therein by reference, and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
The terms "supplement" and "amendment" or "amend" as used in this
Agreement shall include all documents subsequently filed by the Company
with the Commission pursuant to the Exchange Act that are deemed to be
incorporated by reference in the Prospectus.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file with
the Commission within the applicable period specified in Rule 424(b)
under the Securities Act any prospectus required to be filed pursuant to
such Rule.
(c) If, during such period after the first date of the
public offering of the Securities as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall occur
or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Securities may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus
as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Securities for offer and sale
under the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement that
satisfies the provisions of Section 11(a) of the Securities Act and the
rules and regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Securities under
the Securities Act and all other fees or expenses
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<PAGE> 15
in connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments and
supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) the cost of printing or producing any Blue Sky
memorandum in connection with the offer and sale of the Securities under
state securities laws and all expenses in connection with the
qualification of the Securities for offer and sale under state
securities laws as provided in Section 7(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection
with the Blue Sky memorandum, (iii) the cost of printing certificates
representing the Securities, (iv) the costs and charges of any transfer
agent, registrar or depositary, (v) the costs and expenses of the
Company relating to investor presentations on any "road show" undertaken
in connection with the marketing of the offering, including, without
limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged in connection
with the road show presentations with the prior approval of the Company,
travel and lodging expense of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered
by the Company in connection with the road show, (vi) all other costs
and expenses of the Company in connection with the performance of its
obligations hereunder for which provision is not otherwise made in this
Section, and (vii) any other costs and expenses of others in connection
with the performance of the Company's obligations hereunder which have
been previously approved by the Company. Morgan Stanley & Co.
Incorporated agrees to pay New York State stock transfer taxes incurred
in connection with the sale of the Securities pursuant hereto, if any,
and the Selling Stockholders agree to reimburse Morgan Stanley & Co.
Incorporated for any associated carrying costs if such tax payment is
not rebated on the day of payment and for any portion of such tax
payment not rebated. It is understood, however, that except as provided
in this Section, Section 8 entitled "Indemnity and Contribution", and
the last paragraph of Section 10 below, the Underwriters will pay all of
their costs and expenses, including fees and disbursements of their
counsel, stock transfer taxes payable on resale of any of the Securities
by them, the costs and expenses of the Underwriters relating to investor
presentations on any "road shows" undertaken in connection with the
marketing of the Shares and any advertising expenses connected with any
offers they may make.
(g) Upon payment of the purchase price for any or all of the
Warrants to the Selling Stockholders, to deem any and all requirements
for the transfer of such Warrants to be satisfied.
(h) Simultaneous with the purchase from the Selling
Stockholders of, and payment for, the Warrants and the payment to the
Company of the Warrant Exercise Price by the Underwriters, the Company
will issue the Warrant Shares, all as contemplated by this Agreement.
8. INDEMNITY AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages
and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by any Underwriter or any such controlling
person in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused
14
<PAGE> 16
by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Securities, or any person controlling
such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Securities to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities. The Company reaffirms its
indemnification of the Selling Stockholders pursuant to that certain
Registration Rights Agreement entered into by the Company, KKR
Associates, SSI Equity and certain other parties named therein, dated as
of November 25, 1986 (the "Registration Rights Agreement").
(b) Each Selling Stockholder agrees, severally and not
jointly, to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
any amendment thereof, any preliminary prospectus or the Prospectus (as
amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only
with reference to information relating to such Selling Stockholder
furnished in writing by or on behalf of such Selling Stockholder
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto;
provided, however, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Securities, or any person controlling
such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Securities to such person, and if the Prospectus (as to amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities. The Selling Stockholders reaffirm their
indemnification of the Company pursuant to the Registration Rights
Agreement.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company
or any Selling Stockholder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to such Underwriter in
paragraph 8(a) above, but only with reference to information relating to
such Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to paragraph (a), (b) or (c) of
this Section 8, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding
and shall
15
<PAGE> 17
pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (a) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, (b) the fees and expenses of more
than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of
either such Section and (c) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Selling
Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriters and such control persons
of Underwriters, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In the case of any such separate firm for
the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such
controlling persons of Selling Stockholders, such firm shall be
designated in writing by the Selling Stockholders. The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall
be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in
paragraph (a), (b) or (c) of this Section 8 is unavailable to an
indemnified party or insufficient in respect of any losses, claims,
damages or liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party or parties on the other hand from the
offering of the Securities or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the indemnifying party
or parties on the one hand and of the indemnified party or parties on
the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received
by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other hand in connection with the offering of the
Securities shall be deemed to be in the same respective proportions as
16
<PAGE> 18
the net proceeds from the offering of the Securities received by the
Selling Stockholders and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in
the table (including the footnotes thereto) on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Shares.
The relative fault of the Company and the Selling Stockholders on the
one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company and
the Selling Stockholders or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 8 are
several in proportion to the respective number of Shares and Warrants
they have purchased hereunder, and not joint.
(f) The Company, the Selling Stockholders and the
Underwriters agree that it would not be just or equitable if
contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account
of the equitable considerations referred to in paragraph (e) of this
Section 8. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission and no Selling
Stockholder shall be required to contribute any amount in excess of the
amount by which the proceeds received by such Selling Stockholder from
the Shares or Warrant Shares sold by it pursuant to this Agreement
exceeds the amount of any damages that such Selling Stockholder has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 8 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any indemnified
party at law or in equity.
(g) The indemnity and contribution provisions contained in
this Section 8 and the representations, warranties and other statements
of the Company and the Selling Stockholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, any
Selling Stockholder or any person controlling any Selling Stockholder,
or the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Securities.
9. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company and the Selling Stockholders, if (a) after
the execution and delivery of this Agreement and prior to the Closing Date (i)
trading generally shall have been suspended or materially limited on or by, as
the case may be, either of the New York Stock Exchange or the National
Association of Securities Dealers, Inc., (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
or California shall have been declared by either Federal or New York State or
California authorities, or (iv) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crisis that, in your judgment, is material and adverse and (b) in the case of
any of the events specified in clauses (a)(i) through (iv), such event, singly
or together with any other such event,
17
<PAGE> 19
makes it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares or
Warrants that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares and Warrants which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares and Warrants to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that the
aggregate number of Firm Shares and Warrants set forth opposite their respective
names in Schedule II bears to the aggregate number of Firm Shares and Warrants
set forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as you may specify, to purchase the Shares and Warrants which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date; provided that in no event shall the aggregate number of
Shares and Warrants that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such aggregate number of Firm Shares and Warrants without the
written consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares or Warrants and the
aggregate number of Firm Shares and Warrants with respect to which such default
occurs is more than one-tenth of the aggregate number of Firm Shares and
Warrants to be purchased, and arrangements satisfactory to you, the Company and
the Selling Stockholders for the purchase of such Firm Shares and Warrants are
not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Stockholders. In any such case either you or the Company or the
Selling Stockholders shall have the right to postpone the Closing Date, but in
no event for longer than seven days, in order that the required changes, if any,
in the Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company or any
Selling Stockholder to comply with the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company or any Selling Stockholder
shall be unable to perform its obligations under this Agreement, the Company and
the Selling Stockholders will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder; provided, however, that no such
reimbursement shall be required with respect to a termination of this Agreement
by the Underwriters pursuant to Section 9 or Section 10.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
18
<PAGE> 20
12. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
19
<PAGE> 21
13. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
SAFEWAY INC.
By: __________________________________________
Name:
Title:
SELLING STOCKHOLDERS
KKR Associates, L.P.
By: __________________________________________
Name:
Title: General Partner
KKR Partners II, L.P.
By: KKR Associates, L.P.
the General Partner
By: __________________________________________
Name:
Title: General Partner
SSI Associates, L.P.
By: KKR Associates, L.P.
the General Partner
By: __________________________________________
Name:
Title: General Partner
SSI Equity Associates, L.P.
By: SSI Partners, L.P.
the General Partner
By: __________________________________________
Name:
Title: General Partner
20
<PAGE> 22
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
ING BARING FURMAN SELZ LLC
LEHMAN BROTHERS INC.
J.P. MORGAN SECURITIES INC.
SALOMON SMITH BARNEY INC.
WARBURG DILLON READ LLC
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule II hereto
By: Morgan Stanley & Co. Incorporated
By: __________________________________________
Name:
Title:
21
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
TOTAL NUMBER OF
TOTAL NUMBER OF ADDITIONAL SHARES
TOTAL NUMBER OF WARRANTS TO BE TO BE SOLD IF
FIRM SHARES SOLD (EXPRESSED AS MAXIMUM OPTION
SELLING STOCKHOLDERS TO BE SOLD WARRANT SHARES) EXERCISED
- -------------------- --------------- ------------------ -----------------
<S> <C> <C> <C>
KKR Associates, L.P. 4,261,158 2,000,000
SSI Associates, L.P. 14,862,296
KKR Partners II, L.P. 526,850
SSI Equity Associates, L.P. 99,696
========== ====== =========
TOTAL 19,650,304 99,696 2,000,000
</TABLE>
22
<PAGE> 24
SCHEDULE II
<TABLE>
<CAPTION>
TOTAL NUMBER OF
TOTAL NUMBER OF ADDITIONAL
WARRANTS TO BE SHARES TO BE
TOTAL NUMBER OF PURCHASED PURCHASED IF
FIRM SHARES TO BE (EXPRESSED AS MAXIMUM OPTION
UNDERWRITERS PURCHASED WARRANT SHARES) EXERCISED
- ------------ ----------------- --------------- ---------------
<S> <C> <C> <C>
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette Securities
Corporation
ING Baring Furman Selz LLC
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
Salomon Smith Barney Inc.
Warburg Dillon Read LLC
========== ====== =========
TOTAL 19,650,304 99,696 2,000,000
</TABLE>
23
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Safeway Inc. on Form S-3 of our report dated February 27, 1998, incorporated by
reference in the Annual Report on Form 10-K of Safeway Inc. for the year ended
January 3, 1998 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
San Francisco, California
January 28, 1999
