-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6LlzulaG5zIRFFBWLfX59noY6w8x4Q3YA1qdvJGeJ54MojWxV2b0qGpo+hJJlOh oxgNLiEoho53pwAVVTtQWg== 0000950149-96-000057.txt : 19960202 0000950149-96-000057.hdr.sgml : 19960202 ACCESSION NUMBER: 0000950149-96-000057 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19960201 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEWAY INC CENTRAL INDEX KEY: 0000086144 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 943019135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-00037 FILM NUMBER: 96510088 BUSINESS ADDRESS: STREET 1: FOURTH & JACKSON ST CITY: OAKLAND STATE: CA ZIP: 94660 BUSINESS PHONE: 5108913000 MAIL ADDRESS: STREET 1: FOURTH & JACKSON ST CITY: OAKLAND STATE: CA ZIP: 94660 FORMER COMPANY: FORMER CONFORMED NAME: SAFEWAY STORES INC DATE OF NAME CHANGE: 19900226 S-3/A 1 PRE-EFFECTIVE AMENDMENT NO. 1, 2/1/96 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 1996 REGISTRATION NO. 333-00037 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) DELAWARE SAFEWAY INC. 94-3019135 (STATE OR OTHER JURISDICTION FOURTH AND JACKSON STREETS (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) OAKLAND, CALIFORNIA 94660 IDENTIFICATION NUMBER) (510) 891-3000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JULIAN C. DAY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SAFEWAY INC. FOURTH AND JACKSON STREETS OAKLAND, CALIFORNIA 94660 (510) 891-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: SCOTT R. HABER, ESQ. PAUL C. PRINGLE, ESQ. TRACY K. EDMONSON, ESQ. BROWN & WOOD LATHAM & WATKINS 555 CALIFORNIA STREET 505 MONTGOMERY STREET, SUITE 1900 SAN FRANCISCO, CALIFORNIA 94104 SAN FRANCISCO, CALIFORNIA 94111 (415) 772-1200 (415) 391-0600
------------------------ 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, please check the following box and list the Securities Act 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, 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. / / ------------------------ CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED(1) PER UNIT PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- Common Stock ($0.01 par value)......... 20,661,700 $25.125 $519,125,213 $103,825(3) 230,000 $24.50(2) $5,635,000(2) $1,943 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Includes 2,725,004 shares of Common Stock which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of registration fee, based on the average of the high and low prices for the Common Stock as reported on the New York Stock Exchange on January 26, 1996, in accordance with Rule 457(c) promulgated under the Securities Act of 1933. (3) Pursuant to Rule 457, this portion of the filing fee was previously calculated and paid. ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with the public offering of the Common Stock initially in the United States and Canada (the "U.S. Prospectus") and one to be used in connection with the concurrent public offering of the Common Stock initially outside the United States and Canada (the "International Prospectus"). The two forms of prospectus are identical except that they contain a different front cover page. The form of U.S. Prospectus is included herein and is followed by the page (marked "Alternate Page for International Prospectus") to be used in the International Prospectus. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued February 1, 1996 18,166,696 Shares Safeway Inc. (LOGO) COMMON STOCK ------------------------ OF THE 18,166,696 SHARES OF COMMON STOCK OFFERED, 14,533,357 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 3,633,339 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK OFFERED ARE BEING SOLD BY THE SELLING STOCKHOLDERS AS DESCRIBED HEREIN UNDER "PRINCIPAL AND SELLING STOCKHOLDERS" AND INCLUDE 16,250,000 PRESENTLY OUTSTANDING SHARES AND 1,716,696 AND 200,000 SHARES TO BE ISSUED CONCURRENTLY WITH THE CONSUMMATION OF THESE OFFERINGS UPON THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS, RESPECTIVELY. NONE OF THE PROCEEDS FROM THE SALE OF THE SHARES WILL BE RECEIVED BY THE COMPANY OTHER THAN $1,916,696 (ASSUMING NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION) REPRESENTING THE EXERCISE PRICE OF THE WARRANTS AND OPTIONS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A STOCK DISTRIBUTION WHEREBY EACH HOLDER OF THE COMPANY'S COMMON STOCK RECEIVED ON JANUARY 30, 1996 ONE ADDITIONAL SHARE OF COMMON STOCK FOR EACH SHARE OWNED AS OF JANUARY 16, 1996. THE COMPANY'S COMMON STOCK IS LISTED ON THE NEW YORK AND PACIFIC STOCK EXCHANGES. ON JANUARY 31, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE WAS $25 1/2. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) STOCKHOLDERS(2) --------------------------------------------------------------- Per Share.............................. $ $ $ Total(3)............................... $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Includes an aggregate of $1,916,696 to be paid to the Company representing the exercise price of warrants for 1,716,696 Shares at $1.00 per share and the exercise price of options for 200,000 Shares at $1.00 per share. Expenses of the offerings, estimated at $550,000, will be paid by the Company. (3) The Selling Stockholders have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 2,725,004 additional Shares at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively, and the total amount to be paid to the Company representing the exercise price of warrants and options will be $2,204,200. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters, and subject to approval of certain legal matters by Brown & Wood, counsel for the Underwriters. It is expected that the delivery of the Shares will be made on or about , 1996, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in New York funds. ------------------------ MORGAN STANLEY & CO. Incorporated DILLON, READ & CO. INC. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. SALOMON BROTHERS INC SMITH BARNEY INC. , 1996 4 (LOGO) SAFEWAY OPERATING AREAS [Map] ------------------------ IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AND THE MERGER WARRANTS TO PURCHASE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, ON THE PACIFIC STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERINGS MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................................................................. 3 Company Overview...................................................................... 4 Recent Developments................................................................... 6 Price Range of Common Stock........................................................... 9 Dividend Policy....................................................................... 9 Capitalization........................................................................ 10 Selected Financial Data............................................................... 11 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 12 Business.............................................................................. 17 Principal and Selling Stockholders.................................................... 21 Description of Capital Stock.......................................................... 24 Certain United States Tax Consequences to Non-United States Holders................... 25 Underwriters.......................................................................... 28 Legal Matters......................................................................... 30 Experts............................................................................... 30 Incorporation of Certain Documents by Reference....................................... 31 Financial Statements.................................................................. F-1
------------------------ AVAILABLE INFORMATION Safeway Inc. ("Safeway" or the "Company") has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus is a part) under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in the Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules which may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the fees prescribed by the Commission. Safeway is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The Registration Statement, the exhibits and schedules forming a part thereof and the reports, proxy statements and other information filed by Safeway with the Commission in accordance with the Exchange Act can be inspected and copied at the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, Safeway Common Stock is listed on the New York Stock Exchange, 20 Broad Street, New York, New York 10005 and the Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104, and such material may also be inspected at the offices of the New York Stock Exchange and the offices of the Pacific Stock Exchange. 3 6 COMPANY OVERVIEW Except as otherwise indicated, the information contained in this Prospectus has been adjusted to give effect to a stock distribution whereby each holder of the Company's Common Stock received on January 30, 1996 one additional share of Common Stock for each share owned as of January 16, 1996. See "Selected Financial Data," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Capital Stock." Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Safeway is one of the world's largest food retailers, operating 1,059 stores at the end of 1995 in the United States and Canada. U.S. retail operations are located principally in northern California, Oregon, Washington and the Rocky Mountain, Southwest and Mid-Atlantic regions. Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. For each of its nine retail operating areas, Safeway believes that it holds the number one or number two market share position for the total area served. In support of its retail operations, Safeway has an extensive network of distribution, manufacturing and food processing facilities. In addition to stores operated under the Safeway name, the Company has ownership interests in two other retailers. Safeway holds a 35% interest in The Vons Companies, Inc. ("Vons"), which operates 329 grocery stores located mostly in southern California, and a 49% interest in a privately-held company, Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 71 food and general merchandise stores in western Mexico. In early 1992, Safeway undertook a strategic review of its business and concluded that its cost structure was one of the highest in the food retailing industry and that there existed significant opportunities for improvement. In late 1992, Steve Burd was appointed President of Safeway and established three priorities for improving Safeway's operating results: (1) controlling costs, (2) increasing sales and (3) improving capital management. These priorities are reinforced by performance-based compensation plans that cover more than 7,000 of the Company's management employees, from store department managers to executive officers. CONTROLLING COSTS Operating and administrative expenses as a percentage of sales have declined primarily through sales increases and by reducing or controlling costs. Efforts to reduce or control costs have included overhead reduction in the Company's administrative support functions, negotiation of competitive labor agreements, store level work simplification, consolidation of the Company's information technology operations, elimination of corporate perquisites and the general encouragement of a "culture of thrift" among employees. As a result, operating and administrative expenses as a percentage of sales declined 146 basis points from 24.19% in 1992 to 22.73% in 1995. LOGO The Company also has controlled its cost of sales primarily through better buying practices, lower advertising expenses, distribution efficiencies and manufacturing plant closures and consolidations. 4 7 INCREASING SALES The Company has reinvested cost savings into more competitive pricing and improving store standards and customer service, which Safeway believes has resulted in increased sales. Safeway's efforts to upgrade store standards and customer service have focused on improving store appearance, in-stock condition, employee friendliness and speed of checkout. In addition, management believes that the successful introduction of the "Safeway SELECT" line of premium quality private label products in early 1993 has contributed to sales growth. LOGO IMPROVING CAPITAL MANAGEMENT Safeway's capital management has improved in two key areas: capital expenditures and working capital. During 1994, improved operations and lower project costs improved the returns on capital projects, and Safeway increased capital expenditures (including new operating lease obligations) from $290 million in 1993 to $352 million in 1994. In 1995, the Company's $503 million in capital expenditures financed, among other things, the opening of 32 new stores and the completion of 108 remodels. The Company is making greater use of standardized layouts and central purchasing agreements for building materials, fixtures and equipment for its new stores and remodels. As a result, the new store prototype is less expensive to build and more efficient to operate. Capital expenditures for 1996 are expected to increase to approximately $550 million to open 30 to 35 new stores and complete more than 100 remodels. LOGO Working capital invested in the business has declined substantially since year-end 1992 primarily through lower warehouse inventory levels and improved payables management. Stronger operating results, combined with improved working capital management and lower capital expenditures, have allowed the Company to reduce its debt level from $3.0 billion at the end of 1992 to $2.2 billion at the end of 1995. Same-store sales growth has exceeded 3.0% in each of the last 10 quarters. Annual same-store sales have improved from a 1.6% decrease in 1992 to an increase of 4.6% in 1995. Safeway's same-store sales increases since year-end 1992 through 1995 have been among the highest in the industry. 8 Operating cash flow (FIFO earnings before interest, taxes, depreciation, amortization, income from unconsolidated affiliates, extraordinary losses and cumulative effect of accounting changes) increased from $768.6 million in 1992 to $1,068.6 million in 1995. In addition, income per share (before extraordinary items and the cumulative effect of accounting changes) increased from $0.41 in 1992 to $1.35 in 1995. See "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management intends to continue to focus on controlling costs, increasing sales and improving capital management in 1996. There can be no assurance that the Company will be successful in its efforts in these areas or that past results in these areas are indicative of results that may be achieved in the future. * * * * Safeway was founded in 1926 and became one of the world's largest food retailers. In 1986, Safeway, which was then a publicly-held corporation, was acquired (the "Acquisition") by a corporation formed by Kohlberg Kravis Roberts & Co. ("KKR"). Safeway was incorporated in the State of Delaware in July 1986 as SSI Holdings Corporation, and thereafter its name was changed to Safeway Stores, Incorporated. In February 1990, the Company changed its name to Safeway Inc. Unless the context otherwise requires, references herein to "Safeway" or the "Company" include Safeway Inc. and its subsidiaries and also include Safeway Stores, Incorporated, a Maryland corporation, and its subsidiaries, the predecessor to Safeway prior to the Acquisition. The executive offices of Safeway are located at Fourth and Jackson Streets, Oakland, California 94660 and its telephone number is (510) 891-3000. RECENT DEVELOPMENTS 1995 RESULTS On January 25, 1996, Safeway reported income (before extraordinary loss) of $113.9 million ($0.47 per share) for the fourth quarter of 1995, compared to $85.7 million ($0.35 per share) in 1994. The Company incurred fourth quarter extraordinary losses of $2.0 million in 1995 and $0.4 million in 1994 for the early retirement of debt, which reduced net income for those periods to $111.9 million ($0.46 per share) and $85.3 million ($0.35 per share). Total sales for the quarter increased 5.6% from a year earlier to $5.2 billion. On a same-store basis, sales were up 4.7%. Same-store sales gains have now exceeded 3% in each of the past ten quarters. Gross profit was 27.1% of sales in the quarter compared to 27.3% last year. While Safeway continued to make progress in lowering its cost of sales, it invested in pricing throughout the quarter to maintain its competitive position. At the same time, operating and administrative expense declined 58 basis points to 22.64% of sales. Operating and administrative expense as a percentage of sales has now improved for eleven consecutive quarters. Interest expense also fell in the fourth quarter, to $58.5 million from $65.1 million, primarily due to lower average debt outstanding during the quarter. Year end total debt of $2.19 billion remained essentially flat compared to 1994 despite an increase of $151 million in capital expenditures and the previously announced acquisition of limited partnership interests in SSI Equity Associates, L.P. ("SSI Equity Associates") for $196 million. SSI Equity Associates is a limited partnership whose sole assets are warrants to purchase 27.9 million shares of Common Stock at $1.00 per share. Equity in earnings of unconsolidated affiliates, recorded on a one-quarter delay basis, increased to $9.7 million in the fourth quarter of 1995 from $4.5 million a year earlier. Safeway's share of Vons' earnings 6 9 was $6.1 million in the fourth quarter of 1995, compared with $1.2 million in 1994 (which reflects a reduction of $3.9 million in 1994 for Vons' restructuring charges). Fourth quarter earnings from Casa Ley also improved slightly, to $3.6 million from $3.3 million a year ago. Since the December 1994 devaluation of the peso, Mexico has experienced economic difficulties, including very high interest rates. Interest rates and inflation have moderated in recent months, and Casa Ley's financial results have gradually improved. Worsening of the economic situation in Mexico could have an effect on Casa Ley. However, any such effect is not expected to be material to Safeway's operating results. Operating cash flow for the fourth quarter rose to 6.52% of sales, compared to 6.09% in 1994. The interest coverage ratio -- operating cash flow divided by interest expense -- improved to 5.76 times from 4.57 times in the same period a year ago. For the full year, which included the effect of a nine-day strike in 208 northern California stores, results were in line with those described above. Income before extraordinary items was $328.3 million ($1.35 per share) in 1995 compared to $250.2 million ($1.01 per share) in 1994. Total sales were up 4.9% to $16.4 billion, with annual same-store sales growth of 4.6%. Gross profit remained flat at 27.2% of sales, while operating and administrative expenses fell 55 basis points to 22.73%. Interest expense also decreased by $21.9 million to $199.8 million. Safeway's equity in earnings of Vons and Casa Ley fell slightly in 1995 to $26.9 million from $27.3 million a year earlier. Earnings from Casa Ley fell to $8.6 million, down from $15.7 million the previous year, while earnings from Vons increased by $6.7 million to $18.3 million. The income tax rate was 41.0% for the year, down from an estimated rate of 42.5% as of the end of the third quarter. The decrease is primarily due to the Canadian tax treaty with the U.S. which was ratified in the fourth quarter of 1995. Safeway now estimates that its 1996 tax rate will also be approximately 41.0%. Operating cash flow for the year rose to 6.52% of sales in 1995 compared to 6.06% in 1994. The interest coverage ratio was 5.35 times in 1995 compared to 4.27 times last year. Improved operations and lower project costs have raised the return on capital projects, allowing Safeway to increase capital expenditures to $503 million in 1995 from $352 million in 1994. In 1995, Safeway opened 32 new stores and completed 108 remodels. In 1996, the Company expects to spend approximately $550 million for capital expenditures to open 30 to 35 new stores and complete more than 100 remodels. 7 10 SAFEWAY INC. AND SUBSIDIARIES OPERATING RESULTS (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
FOURTH QUARTER YEAR --------------------- --------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Sales............................................. $ 5,166.3 $ 4,890.3 $16,397.5 $15,626.6 -------- -------- --------- --------- Gross profit...................................... $ 1,401.7 $ 1,335.2 $ 4,453.8 $ 4,250.0 Operating and administrative expense.............. (1,169.8) (1,135.7) (3,726.4) (3,637.9) -------- -------- --------- --------- Operating profit.................................. 231.9 199.5 727.4 612.1 Interest expense.................................. (58.5) (65.1) (199.8) (221.7) Equity in earnings of unconsolidated affiliates... 9.7 4.5 26.9 27.3 Other income, net................................. 0.5 1.5 2.0 6.4 -------- -------- --------- --------- Income before income taxes and extraordinary loss............................................ 183.6 140.4 556.5 424.1 Income taxes...................................... (69.7) (54.7) (228.2) (173.9) -------- -------- --------- --------- Income before extraordinary loss.................. 113.9 85.7 328.3 250.2 Extraordinary loss related to early retirement of debt, net of income tax benefit................. (2.0) (0.4) (2.0) (10.5) -------- -------- --------- --------- Net income.............................. $ 111.9 $ 85.3 $ 326.3 $ 239.7 ======== ======== ========= ========= Fully diluted earnings per common share and common share equivalent: Income before extraordinary loss.................. $ 0.47 $ 0.35 $ 1.35 $ 1.01 Extraordinary loss.............................. (0.01) -- (0.01) (0.04) -------- -------- --------- --------- Net income...................................... $ 0.46 $ 0.35 $ 1.34 $ 0.97 ======== ======== ========= ========= Weighted average common shares and common share equivalents (fully diluted) (in millions)....... 240.2 247.2 243.5 247.1 ======== ======== ========= ========= Operating cash flow: Net income........................................ $ 111.9 $ 85.3 $ 326.3 $ 239.7 Add (subtract): Income taxes.................................... 69.7 54.7 228.2 173.9 Interest expense................................ 58.5 65.1 199.8 221.7 Depreciation.................................... 98.8 97.7 319.3 316.0 Goodwill amortization........................... 3.2 3.2 10.4 10.4 LIFO expense (income)........................... 2.6 (4.2) 9.5 2.7 Equity in earnings of unconsolidated affiliates................................... (9.7) (4.5) (26.9) (27.3) Extraordinary loss.............................. 2.0 0.4 2.0 10.5 -------- -------- --------- --------- Total operating cash flow......................... $ 337.0 $ 297.7 $ 1,068.6 $ 947.6 ======== ======== ========= ========= As a percent of sales........................... 6.52% 6.09% 6.52% 6.06% As a multiple of interest expense............... 5.76x 4.57x 5.35x 4.27x Other statistics during the period: Stores opened................................... 16 9 32 20 Stores closed................................... 14 15 35 36 Other statistics at year end: Total stores.................................... 1,059 1,062 Total retail square footage (in millions)....... 40.1 39.5 Square footage increase......................... 1.5% 0.3%
8 11 PRICE RANGE OF COMMON STOCK The Company's Common Stock has been listed on the New York Stock Exchange under the symbol SWY since its initial public offering in May 1990. The Company's Common Stock also is listed on the Pacific Stock Exchange. The following table sets forth the high and low closing sale prices for the Company's Common Stock for the fiscal quarters indicated as reported by the New York Stock Exchange Composite Tape, adjusted to give effect to a stock distribution whereby each holder of the Company's Common Stock received on January 30, 1996 one additional share of Common Stock for each share owned as of January 16, 1996.
HIGH LOW --------- --------- 1994 First quarter................................................. $13 7/16 $ 9 3/4 Second quarter................................................ 13 1/8 10 15/16 Third quarter................................................. 13 15/16 11 11/16 Fourth quarter................................................ 15 15/16 13 5/16 1995 First quarter................................................. 17 15/16 15 3/8 Second quarter................................................ 19 1/4 15 13/16 Third quarter................................................. 20 3/16 18 1/16 Fourth quarter................................................ 25 3/4 20 1996 First quarter (through January 31, 1996)...................... 25 1/2 22 13/16
The reported last sale price of the Common Stock on the New York Stock Exchange Composite Tape as of a recent date is set forth on the cover page of this Prospectus. DIVIDEND POLICY Safeway has not declared or paid any cash dividends on its Common Stock since the Acquisition and does not currently intend to declare or pay any cash dividends. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon Safeway's results of operations, financial condition, capital expenditures, working capital requirements, any contractual restrictions and other factors deemed relevant by the Board of Directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Financial Resources" and "Description of Capital Stock -- Dividends" for a description of certain limitations on the Company's ability to pay dividends. 9 12 CAPITALIZATION The following table sets forth the short-term debt and the capitalization of Safeway at September 9, 1995 (in millions). None of the proceeds from the sale of the shares of Common Stock offered hereby will be received by the Company other than an aggregate of $1,916,696 representing the exercise price of certain outstanding warrants and options. Short-term borrowings(1)................................................... $ 165.3 ======== Long-term debt and capital lease obligations............................... $1,940.3 Stockholders' equity: Common stock, par value $0.01 per share; 300.0 shares authorized; 212.7 shares outstanding(2)(3).............................................. 2.1 Additional paid-in capital............................................... 675.0 Unexercised warrants purchased: 8.9 shares(3)(4)......................... (113.2) Retained earnings........................................................ 172.5 Cumulative translation adjustments....................................... 22.0 -------- Total stockholders' equity............................................ 758.4 -------- Total capitalization............................................. $2,698.7 ========
- --------------- (1) Consists of current portion of long-term debt and capital lease obligations. (2) Excludes 23.2 million shares of Common Stock underlying stock options, 1.8 million shares of Common Stock issuable upon exercise of warrants issued in connection with the Acquisition (the "Merger Warrants") and 27,856,000 shares of Common Stock issuable upon exercise of warrants (the "SSI Warrants") held by SSI Equity Associates. In connection with the offerings, it is anticipated that options to purchase 200,000 shares of Common Stock will be exercised for an aggregate exercise price of $200,000, SSI Warrants to purchase 1,716,696 shares of Common Stock will be exercised for an aggregate exercise price of $1,716,696, and SSI Warrants to purchase 1,765,304 shares of Common Stock will be cancelled. See "Principal and Selling Stockholders." (3) SSI Equity Associates is a partnership whose sole assets consist of the SSI Warrants. At September 9, 1995, 8.9 million of such shares were attributable to limited partnership interests in SSI Equity Associates acquired by a subsidiary of Safeway for $113.1 million in January 1995. (4) In October 1995, a subsidiary of Safeway acquired additional limited partnership interests in SSI Equity Associates for $83 million using proceeds from bank borrowings. Approximately 5.3 million of the 27,856,000 shares of Common Stock issuable upon exercise of the SSI Warrants are attributable to the limited partnership interests purchased in October. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10 13 SELECTED FINANCIAL DATA SAFEWAY INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AND WEEKLY SALES AMOUNTS) The financial data below are derived from the audited Consolidated Financial Statements of Safeway, except for the financial data for the 36 week periods ended September 9, 1995 and September 10, 1994, which are unaudited. The selected financial data should be read in conjunction with Safeway's Consolidated Financial Statements and accompanying Notes which are included herein. The results of operations for the 36 weeks ended September 9, 1995 and September 10, 1994 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 9, 1995 are not necessarily indicative of the results expected for the full year. See "Recent Developments."
36 WEEKS ENDED ----------------------- SEPT. 9, SEPT. 10, 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 1995 1994 1994 1993 1992 1991 1990 ---------- ---------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS: Sales................................. $ 11,231.2 $ 10,736.3 $15,626.6 $15,214.5 $15,151.9 $15,119.2 $14,873.6 ========= ========= ========= ========= ========= ========= ========= Gross profit.......................... $ 3,052.1 $ 2,914.8 $ 4,250.0 $ 4,083.4 $ 4,106.4 $ 4,059.1 $ 3,903.0 Operating and administrative expenses............................ (2,556.6) (2,502.2) (3,637.9) (3,641.9) (3,664.8) (3,510.8) (3,367.7) AppleTree charge...................... -- -- -- -- -- (115.0) -- --------- --------- --------- --------- --------- --------- --------- Operating profit...................... 495.5 412.6 612.1 441.5 441.6 433.3 535.3 Interest expense...................... (141.3) (156.6) (221.7) (265.5) (290.4) (355.4) (384.1) Equity in earnings of unconsolidated affiliates.......................... 17.2 22.8 27.3 33.5 39.1 45.8 25.5 Gain on common stock offering by unconsolidated affiliate............ -- -- -- -- -- 27.4 -- Other income, net..................... 1.5 4.9 6.4 6.8 7.1 15.1 18.0 --------- --------- --------- --------- --------- --------- --------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes........ 372.9 283.7 424.1 216.3 197.4 166.2 194.7 Income taxes.......................... (158.5) (119.2) (173.9) (93.0) (99.0) (87.2) (107.6) --------- --------- --------- --------- --------- --------- --------- Income before extraordinary loss and cumulative effect of accounting changes............................. 214.4 164.5 250.2 123.3 98.4 79.0 87.1 Extraordinary loss, net of tax benefit of $6.5, $6.7, $17.1 and $14.9...... -- (10.1) (10.5) -- (27.8) (24.1) -- Cumulative effect of accounting changes, net of tax benefit of $12.0............................... -- -- -- -- (27.1) -- -- --------- --------- --------- --------- --------- --------- --------- Net income............................ $ 214.4 $ 154.4 $ 239.7 $ 123.3 $ 43.5 $ 54.9 $ 87.1 ========= ========= ========= ========= ========= ========= ========= Earnings per common share and common share equivalent (fully diluted): Income before extraordinary loss and cumulative effect of accounting changes........................... $ 0.88 $ 0.67 $ 1.01 $ 0.50 $ 0.41 $ 0.34 $ 0.45 Extraordinary loss.................. -- (0.04) (0.04) -- (0.12) (0.10) -- Cumulative effect of accounting changes........................... -- -- -- -- (0.11) -- -- --------- --------- --------- --------- --------- --------- --------- Net income.......................... $ 0.88 $ 0.63 $ 0.97 $ 0.50 $ 0.18 $ 0.24 $ 0.45 ========= ========= ========= ========= ========= ========= ========= FINANCIAL STATISTICS: Same-store sales*..................... 4.6% 4.0% 4.4% 2.1% (1.6)% (0.3)% 2.5% Average weekly sales per store per week (in thousands)...................... $ 285 $ 267 $ 270 $ 256 $ 247 $ 250 $ 246 Average weekly sales per square foot................................ 7.64 7.29 7.36 7.07 7.01 7.21 7.25 Gross profit margin................... 27.2% 27.1% 27.2% 26.8% 27.1% 26.8% 26.2% Operating and administrative expenses as a percent of sales............... 22.76% 23.31% 23.28% 23.94% 24.19% 23.22% 22.64% Operating profit margin............... 4.4% 3.8% 3.9% 2.9% 2.9% 2.9% 3.6% Capital expenditures.................. $ 279.3 $ 185.6 $ 352.2 $ 290.2 $ 553.4 $ 635.0 $ 489.6 Depreciation and amortization......... 227.7 225.5 326.4 330.2 320.3 295.9 276.2 Total assets.......................... 5,032.7 4,887.3 5,022.1 5,074.7 5,225.8 5,170.7 4,739.1 Total debt............................ 2,105.6 2,247.8 2,196.1 2,689.2 3,048.6 3,066.0 3,083.6 Stockholders' equity (deficit)........ 758.4 549.7 643.8 382.9 243.1 214.4 (183.4) Weighted average common shares and common share equivalents (fully diluted) (in millions).............. 242.4 245.0 247.1 246.9 238.0 230.4 192.0 OTHER STATISTICS: Stores opened during the period....... 16 11 20 14 35 33 30 Stores closed or sold during the period.............................. 21 21 36 39 49 37 26 Total stores at period-end............ 1,057 1,068 1,062 1,078 1,103 1,117 1,121 Remodels**............................ n/a n/a 71 45 63 77 90 Total retail square footage (in millions)........................... 39.7 39.3 39.5 39.4 39.7 38.9 38.2
- --------------- * Reflects sales increases (decreases) for stores operating the entire measurement period in both the current and prior periods and does not include replacement stores. ** Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000. 11 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 36 WEEKS ENDED SEPTEMBER 9, 1995 COMPARED TO 36 WEEKS ENDED SEPTEMBER 10, 1994 Net income for the first 36 weeks of 1995 was $214.4 million ($0.88 per share) compared to income before extraordinary loss of $164.5 million ($0.67 per share) for the same period of 1994. A nine-day strike during the second quarter of 1995 affected 208 stores in Northern California and reduced earnings per share for the first 36 weeks of 1995 by an estimated $0.025 per share. Net income for the 36 weeks ended September 10, 1994, which included an extraordinary loss of $10.1 million ($0.04 per share) for the early retirement of debt, was $154.4 million ($0.63 per share). For the first 36 weeks of 1995, sales were $11.2 billion compared to $10.7 billion for the same period of 1994. Same-store sales for the first 36 weeks of 1995 increased 4.6%. Safeway's commitment to reinvest the cost savings achieved throughout the Company has resulted in sales growth despite very low food price inflation. For the first 36 weeks of 1995, gross profit was 27.2% of sales compared to 27.1% in 1994. Gross profit represents the portion of sales revenue remaining after deducting the costs of inventory sold during the period, including purchase, advertising and distribution costs. LIFO expense was $6.9 million for the first 36 weeks of both 1995 and 1994, reflecting the Company's expectation of low inflation for the year. For the first three quarters of 1995, operating and administrative expense decreased as a percent of sales to 22.76% from 23.31% for the same period of 1994. Higher overall Company sales and ongoing efforts to reduce or control expenses contributed to the lower operating and administrative expense ratio. For the first 36 weeks of 1995, interest expense fell to $141.3 million compared to $156.6 million for the same period of 1994. Interest expense decreased in 1995 primarily due to reduced debt levels. For the first three quarters of 1995, equity in earnings of unconsolidated affiliates, recorded on a one-quarter delay basis, fell to $17.2 million compared to $22.8 million in 1994. For the first 36 weeks of 1995, Safeway's share of Vons' earnings increased to $12.2 million from $10.4 million in 1994. For the first 36 weeks of 1995, Safeway's share of Casa Ley's earnings was $5.0 million compared to $12.4 million in 1994. Since the December 1994 devaluation of the peso, Mexico has experienced economic difficulties, including very high interest rates. Interest rates and inflation have moderated in recent months, and Casa Ley's financial results have gradually improved. While the economic situation in Mexico will continue to affect Casa Ley's financial results, the impact is not expected to be material to the consolidated operating results of Safeway. 1994 COMPARED TO 1993 AND 1992 Safeway's net income was $239.7 million ($0.97 per share) in 1994, $123.3 million ($0.50 per share) in 1993, and $43.5 million ($0.18 per share) in 1992. In 1994 and 1992, income before extraordinary items and the cumulative effect of accounting changes was $250.2 million ($1.01 per share) and $98.4 million ($0.41 per share). In 1993, severance paid for a voluntary employee buyout in Alberta, Canada reduced 1993 operating profit by $54.9 million and net income by $30.2 million ($0.12 per share). SALES Sales were $15.6 billion in 1994 (a 52-week year), and $15.2 billion in both 1993 (a 52-week year) and 1992 (a 53-week year). Safeway's same-store sales increased 4.4% in 1994 and 2.1% in 1993. In spite of low food price inflation, Safeway achieved sales growth in 1994 and 1993. The Company simplified work methods in the stores, streamlined backstage operations, improved inventory management and achieved labor cost parity through a competitive labor contract signed in Alberta. Safeway reinvested these fundamental cost savings into more competitive pricing and improved store standards and customer service. 12 15 GROSS PROFIT In 1994, Safeway began classifying advertising expenses as part of cost of goods sold. Previously, advertising expenses were included in operating and administrative expenses. All prior periods have been reclassified to conform to the 1994 presentation. After reclassifying advertising expenses, gross profit was 27.2% of sales in 1994, compared to 26.8% in 1993 and 27.1% in 1992. The improvement in 1994 was primarily due to decreased advertising expense, the price recovery in Alberta following a 1993 price war, the disposal of stores with low gross margins in Richmond, Virginia, and company-wide improvements to bakery operations. The decline in 1993 primarily reflects the effect of the price war in Alberta. OPERATING AND ADMINISTRATIVE EXPENSES After reclassifying advertising expenses, operating and administrative expenses were 23.28% of sales in 1994, compared to 23.94% in 1993 (23.58% excluding the Alberta buyout) and 24.19% in 1992 (24.04% excluding a restructuring charge). Operating and administrative expenses as a percentage of sales declined since 1992 as a result of increased sales and efforts to reduce or control expenses. The principal efforts included reorganizing the administrative support functions, centralizing information technology operations, improving labor costs in Alberta, Canada, and simplifying work methods in stores. During the first half of 1993, Safeway recorded a charge for the Alberta buyout, reducing operating profit by $54.9 million and net income by $30.2 million ($0.12 per share). The new contract approved by retail employees in Alberta reduced wages, established a gain-sharing plan, and provided for a voluntary buyout program, while significantly reducing a competitive wage disparity in that area. Safeway began realizing savings from the new contract during the second quarter of 1993, which were offset through the third quarter of 1993 by the increased training costs and reduced productivity associated with new employees. Productivity improved during the fourth quarter of 1993 and returned to normal levels in 1994. In 1992, the Company recorded a restructuring charge for the anticipated costs associated with downsizing its corporate administrative staff and closing its distribution center in Sacramento, California. The Sacramento facility, which was leased following the 1988 fire that destroyed the Richmond, California distribution center, was consolidated into the Company's distribution center in Tracy, California. The charge reduced 1992 operating profit by $22.3 million and net income by $13.8 million ($0.06 per share). Approximately one-half of this charge was for severance payments. All employee terminations associated with this restructuring were completed in 1993. Annual savings from these restructurings have been between $15 million and $20 million. INTEREST EXPENSE Interest expense fell to $221.7 million in 1994 from $265.5 million in 1993 and $290.4 million in 1992. The decrease in 1994 was primarily due to overall debt reductions resulting from Safeway's strong cash flow from operations, and the replacement of high interest rate long-term debt with short-term floating rate debt. The decrease in 1993 reflects reduced borrowings, lower short-term interest rates, and the refinancing of high interest rate debt during 1992. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES Equity in earnings of unconsolidated affiliates, recorded on a one-quarter delay basis, fell to $27.3 million in 1994, compared to $33.5 million in 1993 and $39.1 million in 1992. Safeway holds a 35% interest in Vons and a 49% interest in Casa Ley. Income from Safeway's equity investment in Vons was $11.6 million in 1994, compared to $12.9 million in 1993 and $18.6 million in 1992. According to Vons' financial reports to the Commission, Vons' same store sales declined 1.6% and 3.2% for the 16 and 40 weeks ended October 9, 1994. In addition to lower operating income, Vons reported restructuring charges which decreased Safeway's equity in Vons' earnings by 13 16 $3.9 million in 1994 and $11.7 million in 1993. According to Vons, these restructuring charges included anticipated expenses associated with a program to close under-performing stores and reduce its work force. In 1992, Vons adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Safeway's share of Vons' accounting charges is included in the 1992 cumulative effect of accounting changes in the Company's Consolidated Statements of Income. Income from Safeway's equity investment in Casa Ley fell to $15.7 million in 1994 from $20.6 million in 1993 and $20.5 million in 1992 due to changes in the competitive environment in Mexico. INCOME TAXES Income taxes declined to 41.0% of pre-tax income in 1994 from 43.0% in 1993 and 50.2% in 1992. In August 1993, the maximum statutory federal income tax rate increased from 34% to 35%. Despite the increased federal income tax rate, Safeway's effective rate declined in 1993 primarily due to the tax benefit of a loss in Canada, where the statutory rate is higher than in the United States. The loss in Canada resulted principally from the employee buyout charge and the price war in Alberta. The tax effect of permanently investing certain foreign earnings which were previously not permanently invested also contributed to the tax rate decline in 1993. EXTRAORDINARY LOSS Safeway's net income was reduced by extraordinary losses of $10.5 million ($0.04 per share) in 1994 and $27.8 million ($0.12 per share) in 1992 for the early retirement of debt. The extraordinary losses represent the payment of premiums on retired debt and the write-off of deferred finance costs, net of the related tax benefits. ACCOUNTING CHANGES In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual of the expected cost of such benefits during employee service periods, and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of the expected cost of benefits provided to former or inactive employees after employment but before retirement. Prior to 1992, the Company recognized the cost of providing these benefits as claims were paid. In addition, during 1992 Vons adopted SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 106. The cumulative effect of accounting changes recognized on Safeway's Consolidated Statement of Income in 1992 was as follows (in millions): Postretirement benefits, net of tax benefit of $6.4.................. $10.5 Postemployment benefits, net of tax benefit of $1.1.................. 1.8 Vons' income taxes, net of tax benefit of $3.2....................... 10.6 Vons' postretirement benefits, net of tax benefit of $1.3............ 4.2 ----- $27.1 =====
Except for the cumulative effect of adoption, the impact of these accounting changes on Safeway's 1992 net income was not material. LIQUIDITY AND FINANCIAL RESOURCES Operating cash flow, as presented below, provides a measure of the Company's ability to generate cash to pay interest and fixed charges, and facilitates the comparison of Safeway's results of operations with those of 14 17 companies having different capital structures. Safeway's computation of operating cash flow is as follows (dollars in millions):
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 1995 1994 1993 1992 -------- -------- -------- -------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes......... $ 556.5 $424.1 $216.3 $197.4 LIFO expense (income)............................. 9.5 2.7 (1.5) (0.4) Interest expense.................................. 199.8 221.7 265.5 290.4 Depreciation and amortization..................... 329.7 326.4 330.2 320.3 Equity in earnings of unconsolidated affiliates... (26.9) (27.3) (33.5) (39.1) ------ ------ ------ ------ Operating cash flow............................... $1,068.6 $947.6 $777.0 $768.6 ====== ====== ====== ====== As a percent of sales............................. 6.52% 6.06% 5.11% 5.07% As a multiple of interest expense................. 5.35x 4.27x 2.93x 2.65x
Management expects operating cash flow, supplemented by credit available under the Credit Agreement (as defined below), to be Safeway's primary sources of long-term liquidity. Management believes that these sources will be adequate to meet the Company's requirements. At year end 1995, the Company had available unused borrowing capacity of $675.2 million under the Credit Agreement. During 1994, Safeway retired $44.2 million of senior debt and $247.9 million of senior subordinated debt which resulted in annual interest expense savings of approximately $8.0 million. During 1995, Safeway retired $53.5 million of mortgage debt. Safeway purchased the long-term debt in 1994 and 1995 primarily with proceeds from floating rate bank borrowings. Depending on market conditions, Safeway may continue to purchase and retire long-term debt. CAPITAL EXPENDITURE PROGRAM The Company's capital expenditure program funds new stores, remodels, expenditures for information technology and the Company's other facilities, including its plant and distribution facilities and its corporate headquarters. In 1995, the Company's $503 million of capital expenditures financed, among other things, the opening of 32 new stores and the completion of 108 remodels. Capital expenditures for 1996 are expected to increase to approximately $550 million to open 30 to 35 new stores and complete more than 100 remodels. ACQUISITION OF INTEREST IN WARRANTS TO PURCHASE SAFEWAY STOCK In January 1995, a subsidiary of the Company acquired 31.8% of the partnership interests in SSI Equity Associates for $113 million with proceeds from bank borrowings. SSI Equity Associates is a limited partnership whose sole assets consist of SSI Warrants to purchase 27,856,000 shares of Common Stock. See "Principal and Selling Stockholders." In October 1995, a subsidiary of the Company acquired an additional 18.9% of the partnership interests of SSI Equity Associates for $83 million using proceeds from bank borrowings. Safeway estimates that, as of December 30, 1995, the combined effect of these transactions would reduce common stock equivalents by about 13.6 million shares. The favorable effect on earnings per share from reducing common stock equivalents is being partially offset by interest expense on the bank borrowings. In connection with the offerings, SSI Equity Associates will sell to the Underwriters SSI Warrants to purchase 1,716,696 shares of Common Stock which will be exercised and sold in the offerings. SSI Equity Associates will also transfer to Safeway for cancellation SSI Warrants to purchase 1,765,304 shares of Common Stock, such SSI Warrants representing the pro rata portion of the SSI Warrants that are attributable to the limited partnership interests held by a subsidiary of Safeway. Following the offerings, SSI Equity Associates will hold SSI Warrants to purchase 24,374,000 shares of Common Stock (of which 12,357,130 shares will be attributable to limited partnership interests held by a subsidiary of Safeway). 15 18 NEW CREDIT AGREEMENT AND INDENTURES On May 24, 1995, Safeway entered into a new unsecured bank credit agreement (the "Credit Agreement") that is less restrictive than Safeway's previous bank agreement, extends the maturity date and provides lower borrowing costs. The Credit Agreement matures in 2000 and has two one-year extension options. Safeway may borrow up to $1.15 billion under the Credit Agreement, including up to $400 million in Canada. In connection with obtaining the new Credit Agreement, all collateral securing the Company's senior subordinated notes and debentures was released. U.S. borrowings under the Credit Agreement carry interest at one of the following rates selected by the Company: (i) the prime rate; (ii) the rate at which Eurodollar deposits are offered to first-class banks by the lenders in the Credit Agreement plus a pricing margin based on the Company's debt rating or interest coverage ratio (the "Pricing Margin"); or (iii) rates quoted at the discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry interest at one of the following rates selected by the Company: (x) the Canadian base rate; or (y) the Canadian Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in Canadian dollars carry interest at the Canadian prime rate. The Credit Agreement and the indentures related to Safeway's 9.30% Senior Secured Debentures due 2007, certain of its medium-term notes and its 10% Senior Subordinated Notes due 2001, 9.875% Senior Subordinated Debentures due 2007, 9.65% Senior Subordinated Debentures due 2004 and 9.35% Senior Subordinated Notes due 1999 contain certain covenants which limit Safeway with respect to, among other things: (i) paying cash dividends on its capital stock; (ii) incurring additional indebtedness; (iii) creating liens upon its assets; (iv) repurchasing shares of its capital stock or certain indebtedness; (v) acquiring any outstanding warrants, options or other rights to acquire shares of any class of stock of Safeway; and (vi) disposing of material amounts of assets other than in the ordinary course of business. Other provisions of the Credit Agreement limit certain acts of the Company and require the Company to meet certain financial tests which pertain to its ability to generate adequate cash to meet required payments. 16 19 BUSINESS Safeway was founded in 1926 and is one of the world's largest food retailers, operating 1,059 stores at the end of 1995 in the United States and Canada. U.S. retail operations are located principally in northern California, Oregon, Washington and the Rocky Mountain, Southwest, and Mid-Atlantic regions. Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. For each of its nine retail operating areas, Safeway believes that it holds the number one or number two market share position for the total area served. In support of its retail operations, Safeway has an extensive network of distribution, manufacturing and food processing facilities. In addition to stores operated under the Safeway name, the Company has ownership interests in two other retailers. Safeway holds a 35% interest in Vons, which operates 329 grocery stores located mostly in southern California, and a 49% interest in Casa Ley, which operates 71 food and general merchandise stores in western Mexico. RETAIL OPERATIONS STORES Safeway operates stores ranging in size from approximately 7,200 square feet to over 60,000 square feet. Safeway determines the size of a new store based on a number of considerations, including the needs of the community the store serves, the location and site plan, and the estimated returns on capital invested. Most Safeway stores offer a wide selection of both food and general merchandise and feature a variety of specialty departments which historically have enhanced operating margins. In most of Safeway's larger stores, specialty departments are showcased in each corner and along the perimeter walls of the store to create a pleasant shopping atmosphere. Safeway's primary new store prototype is 55,000 square feet and is designed to accommodate changing consumer needs and to obtain certain operating efficiencies. Safeway continues to operate a number of smaller stores which offer an extensive selection of food and general merchandise, and generally include one or more specialty departments. These stores remain an important part of the Company's store network in smaller communities and certain other locations where larger stores may not be feasible because of space limitations and/or community needs or restrictions. Stores opened in 1995 averaged 51,200 square feet. The following table summarizes Safeway's stores by size at December 30, 1995:
NUMBER OF PERCENT OF STORES TOTAL --------- ---------- Less than 30,000 square feet........................... 307 29% 30,000 to 50,000....................................... 581 55 More than 50,000....................................... 171 16 ----- --- Total stores................................. 1,059 100% ===== ===
STORE OWNERSHIP At December 30, 1995, Safeway owned one-third and leased two-thirds of its stores. In recent years, the Company has preferred ownership because it provides control and flexibility with respect to financing terms, remodeling, expansions and closures. 17 20 MERCHANDISING Safeway's merchandising strategy is to provide maximum value to its customers by maintaining high store standards and offering high quality products at competitive prices. - The Company has intensified its efforts to elevate store standards and provide friendly, helpful customer service. Safeway has reallocated time and resources to improve in-stock conditions, enhance the presentation of perishable merchandise, and provide faster, more efficient checkout. Debit/credit card and check authorization systems have been installed for customer convenience and to speed up checkout. Specialty departments and special services provided in many stores, including video tape rentals, photo processing counters, in-store automatic teller machines and bank branches, are designed to provide one-stop shopping for today's busy shopper. - Since 1993, Safeway has introduced a line of over 400 premium private label products under the banner "Safeway SELECT." These products include soft drinks, pastas and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt, pet foods and laundry detergent. In addition, the line includes Safeway SELECT "Enlighten" items such as no-fat salad dressings and low sodium, single-serving, quick lunches. Safeway SELECT products are designed to offer value-conscious consumers premium quality products at prices lower than comparable national brands. The Company plans to continue introducing more Safeway SELECT items over the next few years. Safeway also offers a wide selection of private label products under well-known and respected brand names such as Safeway, Lucerne and Mrs. Wright's. - Safeway offers high quality perishables in the produce, meat, dairy, seafood, bakery and delicatessen departments. The Company continually refines its merchandising strategies to identify and accommodate changing demographics, lifestyles, and product preferences of its customers. Percentage of Stores with Specialty Departments
AT DECEMBER 30, 1995 -------------------- Bakery............................................ 76% Deli.............................................. 91 Pharmacy.......................................... 55 Seafood........................................... 44 Floral............................................ 93
- The Company offers competitive prices for today's value-conscious consumers, and features a line of Valu Pack merchandise which includes more than 100 of the large-size products most frequently purchased at membership club stores. MANUFACTURING AND WHOLESALE OPERATIONS The principal function of manufacturing operations is to manufacture and process private label merchandise sold in Safeway stores under brand names such as Safeway, Lucerne, Mrs. Wright's and Safeway SELECT. As measured by sales, approximately two-thirds of Safeway SELECT merchandise, and approximately half of its other private label merchandise, is manufactured in company-owned plants. The remainder of such private label merchandise is procured from third parties. During 1994, Safeway began a review to identify manufacturing operations in the U.S. that do not provide acceptable returns. This review resulted in the closure of six plants and a reorganization of the manufacturing division administrative office during 1994 and the closure of five plants during 1995. The ongoing review of all remaining manufacturing operations, including Canadian facilities, may result in additional plant closures. Safeway's Canadian subsidiary has a wholesale operation that distributes both national brands and private label products to independent grocery stores and institutional customers. 18 21 Safeway operated the following manufacturing and processing facilities at December 30, 1995:
U.S. CANADA ---- ------ Milk plants.................................................. 6 3 Bread baking plants.......................................... 5 2 Ice cream plants............................................. 4 3 Cheese packaging plants...................................... 1 1 Soft drink bottling plants................................... 4 0 Fruit and vegetable processing plants........................ 2 4 Other food processing plants................................. 3 4 Pet food plant............................................... 1 0 -- -- Total plants....................................... 26 17 == ==
In addition, the Company operates laboratory facilities for quality assurance and research and development in certain of its plants and at its U.S. manufacturing headquarters in Walnut Creek, California. DISTRIBUTION Each of Safeway's retail operating areas is served by a regional distribution center consisting of one or more facilities. Safeway owns 11 distribution/warehousing centers (seven in the United States and four in Canada), which collectively provide the majority of all products to Safeway stores. Safeway's northern California distribution center is operated by a third party. Management regularly reviews distribution operations to ensure that these operations support their respective operating areas in a cost-effective manner. The Company is currently exploring ways to reduce the high costs associated with the physical condition and layout of the distribution center in Landover, Maryland, which serves the Company's stores in the Mid-Atlantic region. The Company is exploring the feasibility of replacing the current distribution center with a new facility or contracting with a third party to provide distribution services. Management does not expect to be able to determine the impact on the Company's operations of these alternatives until it has completed its review. However, management expects that there would be potentially significant one-time expenses associated with either alternative. CAPITAL EXPENDITURE PROGRAM A key component of the Company's long-term strategy is its capital expenditure program. The Company's capital expenditure program funds new stores, remodels, expenditures for information technology and the Company's other facilities, including its plant and distribution facilities and its corporate headquarters. In the last several years, Safeway management has significantly strengthened its program to select and approve new capital investments. 19 22 The table below reconciles cash paid for property additions reflected in the Consolidated Statements of Cash Flows to a broader definition of capital expenditures (dollars in millions):
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 1995 1994 1993 1992 -------- -------- -------- -------- Cash paid for property additions................... $450.9 $339.9 $245.3 $483.6 Less: Purchase of previously leased properties..... (9.9) (54.5) (21.4) (9.9) Plus: Present value of all lease obligations incurred......................................... 62.2 55.5 58.8 79.3 Mortgage notes assumed in property acquisitions.................................. -- 11.3 7.5 0.4 ------ ------ ------ ------ Total capital expenditures............... $503.2 $352.2 $290.2 $553.4 ====== ====== ====== ====== Capital expenditures as a percent of sales......... 3.1% 2.3% 1.9% 3.7% New stores opened.................................. 32 20 14 35 Stores closed or sold.............................. 35 36 39 49 Remodels........................................... 108 71 45 63 Total retail square footage (in millions).......... 40.1 39.5 39.4 39.7
During 1994, improved operations and lower project costs improved the return on capital projects, and Safeway increased capital expenditures (including new operating lease obligations) to $352 million from $290 million in 1993. During 1994, Safeway opened 20 new stores and completed 71 remodels. In 1995, the Company's capital expenditures financed, among other things, the opening of 32 new stores and the completion of 108 remodels. Capital expenditures for 1996 are expected to increase to approximately $550 million to open 30 to 35 new stores and complete more than 100 remodels. Management regularly reviews the performance of individual stores and other facilities on the basis of a variety of economic factors. Upon the decision to close a store or a facility, the Company accrues estimated future losses, if any, which may include lease payments or other costs of holding the facility, net of estimated future income. As of December 30, 1995, Safeway had an accrued liability of $30.8 million for the anticipated future closure of 48 stores and $18.6 million for the anticipated future closure of other facilities. EMPLOYEES At year-end 1995, Safeway had approximately 113,000 full and part-time employees. Approximately 90% of Safeway's employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three-year terms, with some contracts having terms up to five years. Accordingly, Safeway renegotiates a significant number of the these agreements every year. In the last three years, despite the large number of negotiations, there have only been two significant work stoppages, which were in Portland, Oregon and northern California. These work stoppages were resolved in a manner that management considered generally satisfactory, and did not individually or in the aggregate have a material adverse effect on the Company. Both work stoppages involved all of the major food retailers in those markets. The strike in northern California lasted nine days during the second quarter of 1995, affected 18,000 employees at 208 stores and adversely impacted sales and earnings during that quarter. Of Safeway's approximately 100,000 unionized employees, approximately 37,000 are covered by labor contracts in four operating areas which are scheduled to expire at various times in 1996. While Safeway believes that its relationship with its employees is good, there can be no assurance that contracts covering such 37,000 employees, or that labor contracts which come up for renewal after 1996, will be renewed. Failure to renew contracts covering a significant number of employees leading to work stoppages could have an adverse effect on Safeway's results of operations. The Company has performance-based compensation plans which cover approximately 7,000 management employees. Performance-based compensation plans set overall bonus levels based upon both operating results and working capital management. Individual bonuses are based on job performance. Certain employees are covered by capital investment bonus plans which measure the performance of capital projects based on operating performance over several years. 20 23 PRINCIPAL AND SELLING STOCKHOLDERS All of the shares of Common Stock being offered hereby are being sold by certain stockholders of the Company described in the following table (the "Selling Stockholders"). The following table sets forth information regarding the beneficial ownership of Safeway's outstanding Common Stock as of December 15, 1995, assuming the exercise of all options exercisable on, or within 60 days of, such date, and as adjusted to give effect to the offerings, for (i) each of Safeway's directors who is a stockholder, (ii) each of the Selling Stockholders, (iii) the Company's Chief Executive Officer, (iv) each of the Company's four other most highly compensated executive officers who were serving as executive officers at the end of fiscal 1994, (v) all executive officers and directors of Safeway as a group and (vi) each person believed by Safeway to own beneficially more than 5% of its outstanding shares of Common Stock. 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 KKR Associates, a New York limited partnership ("KKR Associates"), SSI Equity Associates and SSI Partners, L.P. is 9 West 57th Street, New York, New York 10019.
BEFORE OFFERINGS AFTER OFFERINGS --------------------------- --------------------------- NUMBER OF NUMBER OF NUMBER OF SHARES(1) PERCENTAGE(1) SHARES OFFERED SHARES(1) PERCENTAGE(1) ----------- ------------- -------------- ----------- ------------- KKR Associates(2)............... 130,000,000 61.0% 16,250,000 113,750,000 53.3% James H. Greene, Jr.(3)....... 24,000 * 24,000 * Henry R. Kravis(4)............ -- -- Robert I. MacDonnell(5)....... -- -- George R. Roberts(6).......... -- -- Michael T. Tokarz............. 10,000 * 10,000 * SSI Equity Associates(7)........ 27,856,000 11.6 1,716,696 24,374,000 10.3 Sam Ginn(8)..................... 68,748 * 68,748 * Paul Hazen(8)................... 68,748 * 68,748 * Peter A. Magowan(9)............. 2,731,940 1.3 200,000 2,531,940 1.2 Steven A. Burd(9)............... 927,610 * 927,610 * Kenneth W. Oder(9).............. 605,560 * 605,560 * E. Richard Jones(9)(10)......... 1,050,372 * 1,050,372 * Julian C. Day(9)................ 177,732 * 177,732 * Frithjof J. Dale(9)............. 473,444 * 473,444 * All executive officers and directors as a group (17 persons, excluding Messrs. Greene, Kravis, Roberts, MacDonnell and Tokarz)(9)..... 7,010,922 3.2 200,000 6,810,922 3.1
- --------------- * Less than 1% (1) For purposes of this table, a person or a group of persons is deemed to have "beneficial ownership" as of a given date of any shares which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any shares which such person or persons has the right to acquire within 60 days after such date are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) The 130,000,000 shares are owned of record by two limited partnerships (the "Common Stock Partnerships"), the sole general partner of each of which is KKR Associates. KKR Associates, in its capacity as general partner, may be deemed to beneficially own such shares. Messrs. Greene, Kravis, MacDonnell, Roberts, Tokarz, Saul A. Fox, Edward A. Gihuly, Perry Golkin, Michael W. Michelson, Paul E. Raether, Clifton S. Robbins and Scott Stuart, as general partners of KKR Associates, may be deemed to share beneficial ownership of any shares beneficially owned by KKR Associates, but disclaim 21 24 any such beneficial ownership. Messrs. Greene, Kravis, MacDonnell, Roberts and Tokarz are members of Safeway's Board of Directors. (3) Represents shares owned jointly by Mr. Greene and his wife. Does not include 10,000 shares owned by Mrs. Greene, as to which Mr. Greene disclaims any beneficial ownership. Does not include 6,000 shares held in trust by Mrs. Greene for the benefit of their children, as to which Mr. Greene disclaims any beneficial ownership. (4) Does not include 400,000 shares held by Mr. Kravis as a trustee of an irrevocable trust created by Mr. Roberts for the benefit of his children (the "Roberts Trust"). As co-trustee, Mr. Kravis shares the authority to vote and dispose of the shares, but has no economic interest in such shares. (5) Does not include 60,000 shares held in an irrevocable trust created by Mr. MacDonnell for the benefit of his children (the "MacDonnell Trust") with respect to which Mr. MacDonnell disclaims any beneficial ownership. (6) Does not include 60,000 shares held by Mr. Roberts as a trustee of the MacDonnell Trust. As co-trustee, Mr. Roberts shares the authority to vote and to dispose of the shares, but has no economic interest in such shares. Does not include 400,000 shares held in the Roberts Trust with respect to which Mr. Roberts disclaims any beneficial ownership. (7) SSI Equity Associates is a Delaware limited partnership, the sole general partner of which is SSI Partners, L.P., a Delaware limited partnership. SSI Partners, L.P., in its capacity as general partner, may be deemed to own any shares beneficially owned by SSI Equity Associates. Messrs. Kravis, MacDonnell, Raether and Roberts, as general partners of SSI Partners, L.P., may be deemed to share beneficial ownership of any shares beneficially owned by SSI Partners, L.P., but disclaim any such beneficial ownership. Messrs. Kravis, MacDonnell and Roberts are members of Safeway's Board of Directors. All 27,856,000 shares shown as beneficially owned before the offerings represent shares of Common Stock issuable upon exercise of SSI Warrants. In connection with the offerings, the Underwriters will acquire 1,716,696 shares of Common Stock upon the purchase of a portion of the SSI Warrants and exercise thereof. SSI Equity Associates also will transfer to Safeway for cancellation SSI Warrants to purchase 1,765,304 shares of Common Stock, such SSI Warrants representing the pro rata portion of the SSI Warrants that are attributable to the limited partnership interests held by a subsidiary of Safeway. These 3,482,000 shares to be sold or cancelled in connection with the offerings represent 12.5% of the shares issuable upon exercise of the SSI Warrants. (8) Includes 47,914 shares issuable upon exercise of stock options. (9) Includes shares issuable upon exercise of stock options as follows: Mr. Magowan, 1,346,156; Mr. Burd, 790,000; Mr. Oder, 555,000; Mr. Jones, 650,000; Mr. Day, 145,000; Mr. Dale, 294,800; and all executive officers and directors as a group, 4,571,904. Does not include shares issuable upon exercise of warrants as follows: Mr. Dale, 30; Mr. Jones, 188; and all executive officers and directors as a group, 776. In connection with the offerings, Mr. Magowan will sell to the Underwriters 200,000 shares issuable upon exercise of a portion of his stock options. (10) Does not include 12,000 shares owned by Mr. Jones' children to which Mr. Jones disclaims any beneficial ownership. Shares sold by the Common Stock Partnerships in the offerings, including shares sold pursuant to any exercise of the over-allotment option, will be sold by each of the Common Stock Partnerships in proportion to the amount of Common Stock owned by them. Following the offerings, the Common Stock Partnerships will hold 113,750,000 shares of Common Stock, which will represent approximately 53.3% of the outstanding Common Stock and 43.1% on a fully diluted basis. As a result of the Common Stock Partnerships' stock ownership of the Company, the Common Stock Partnerships, KKR Associates, and their general partners will continue to be able to exercise effective control over the Company, through their representation on the Board of Directors and by reason of their substantial voting power with respect to the election of directors and actions requiring stockholder approval. In connection with the offerings, SSI Equity Associates will sell to the Underwriters SSI Warrants to purchase 1,716,696 shares of Common Stock which will be exercised and sold in the offerings. SSI Equity 22 25 Associates also will transfer to Safeway for cancellation SSI Warrants to purchase 1,765,304 shares of Common Stock, such SSI Warrants representing the pro rata portion of the SSI Warrants that are attributable to the limited partnership interests held by a subsidiary of Safeway. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Financial Resources." Following the offerings, SSI Equity Associates will hold SSI Warrants to purchase 24,374,000 shares of Common Stock (of which 12,357,130 shares will be attributable to limited partnership interests held by a subsidiary of Safeway). The Company, the Selling Stockholders and certain directors and executive officers of the Company have agreed, with certain exceptions, not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any shares of capital stock of the Company, or any securities convertible into or exercisable or exchangeable for capital stock of the Company, except for the shares to be sold in the offerings and the SSI Warrants to be cancelled, for a period of at least 90 days from the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. The Company, the Common Stock Partnerships, SSI Equity Associates and certain other parties entered into an agreement dated as of November 25, 1986 (the "Registration Agreement"), a copy of which is incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part, pursuant to which the Company agreed to register the offer and sale of shares of Common Stock held by such parties, including the shares of Common Stock offered hereby, under the Securities Act, and such parties and the Company agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act in connection with the sale of the shares pursuant to the Registration Agreement. Pursuant to the Registration Agreement, the Common Stock Partnerships and SSI Equity Associates are required to pay the underwriting discounts and commissions and transfer taxes, if any, associated with the offerings, and the Company is required to pay substantially all expenses directly associated with the offerings, including, without limitation, the cost of registering the shares offered hereby, including applicable registration and filing fees, printing expenses, certain underwriting expenses and applicable expenses for legal counsel and accountants incurred by the Company or the Common Stock Partnerships and SSI Equity Associates. In addition, from December 1986 through December 1989, certain other investors, consisting primarily of members of management, purchased and/or acquired options to purchase an aggregate of 19,272,000 shares of Common Stock. Such investors paid, and stock options held by such investors are exercisable primarily at, $1.00 per share. Each such investor entered into a subscription agreement with Safeway, pursuant to which all shares of Common Stock held by such investor are subject to certain restrictions on transfer and certain repurchase rights and obligations under certain circumstances, primarily relating to such investor's termination of employment. The investors have registration rights with respect to shares of Common Stock owned by such investors. Mr. Magowan has exercised his registration rights with respect to 200,000 shares (plus an additional 30,000 shares to be sold in the over-allotment option, if any) of Common Stock issuable upon exercise of stock options. Such shares will be offered on the same terms and conditions applicable to the other Selling Stockholders under the Registration Agreement, including provisions for the payment of fees and expenses associated with the offerings. No predictions can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sales, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. 23 26 DESCRIPTION OF CAPITAL STOCK GENERAL Pursuant to Safeway's Restated Certificate of Incorporation (the "Restated Certificate"), the authorized capital stock of Safeway consists of 300,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. At October 13, 1995, Safeway had outstanding 213,185,948 shares of Common Stock and no outstanding shares of preferred stock. All shares of Common Stock are fully paid and nonassessable. As of October 13, 1995, there were approximately 4,700 holders of record of Common Stock. At the Company's next annual stockholders meeting, the Company intends to submit a proposal to its stockholders to increase its authorized Common Stock to 750,000,000 shares. COMMON STOCK On January 30, 1996, the Company effected a distribution of its Common Stock whereby each holder thereof received one additional share of Common Stock for each share owned as of January 16, 1996. 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 the assets of Safeway, if any, remaining after the payment of all debts and liabilities of Safeway 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. The Restated Certificate 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. Safeway's By-laws provide for additional notice requirements for stockholder nominations and proposals at annual or special meetings of Safeway. At annual meetings, stockholders may submit nominations for directors or other proposals only upon written notice to Safeway at least 50 days prior to the annual meeting. The Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. The transfer agent and registrar for the Common Stock is The First National Bank of Boston. PREFERRED STOCK The Board of Directors of Safeway 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 the dividend restrictions in the Credit Agreement and the indentures relating to the Company's senior and senior subordinated debt securities. See "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Financial Resources." 24 27 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS GENERAL 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"). For purposes of this discussion, a "Non-U.S. Holder" is any person or entity that is, as to the United States, 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 (the "Code"), 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. DIVIDENDS The Company does 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 dividend is effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States, the dividend 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. Under current United States Treasury regulations, 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 the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under proposed United States Treasury regulations not currently in effect, however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate would be required to file certain forms and meet other certification requirements. 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 United States Internal Revenue Service (the "Service"). 25 28 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 (i) subject to the exception discussed below, the Company is or has been a "United States real property holding corporation" (a "USRPHC") within the meaning of section 897(c)(2) of the 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"), (ii) 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, attributable to a permanent establishment maintained by the Non-U.S. Holder, (iii) 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 (iv) the Non-U.S. Holder is subject to tax pursuant to the Code provisions applicable to certain United States expatriates. If an individual Non-U.S. Holder falls under clause (ii) or (iv) 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 clause (iii) 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 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 clause (ii) 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 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. The Company believes that it is not currently a USRPHC; however, even if the Company met the test for a USRPHC, 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 the Company's 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. The Company believes that the Common Stock will be treated as regularly traded. If the Company is or has 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 the Company is or has 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 to FIRPTA tax at a rate of 10% of the amount realized on a sale or other disposition of Common Stock in USRPHCs and would 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. FEDERAL ESTATE TAXES Common Stock owned, or treated as owned, by an individual Non-U.S. Holder at the time of his or her death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. 26 29 UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX The Company must report annually to the Service 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. Backup withholding of United States federal income 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 (a) the payment of dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States or (b) 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, 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 Service. These information reporting and backup withholding rules are under review by the United States Treasury, and their application to the Common Stock could be changed prospectively by future regulations. 27 30 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof, the U.S. Underwriters named below have severally agreed to purchase, directly or through the exercise of SSI Warrants, and the Selling Stockholders have severally agreed to sell to them, and the International Underwriters named below have severally agreed to purchase, directly or through the exercise of SSI Warrants, and the Selling Stockholders have severally agreed to sell to them, the respective number of shares of the Company's Common Stock set forth opposite the names of such Underwriters below:
NUMBER NAME OF SHARES ------------------------------------------------------------------------- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated...................................... Dillon, Read & Co. Inc. ............................................... Goldman, Sachs & Co. .................................................. Merrill Lynch, Pierce, Fenner & Smith Incorporated..................... Salomon Brothers Inc .................................................. Smith Barney Inc. ..................................................... --------- Subtotal....................................................... 14,533,357 --------- International Underwriters: Morgan Stanley & Co. International Limited............................. Dillon, Read & Co. Inc. ............................................... Goldman Sachs International............................................ Merrill Lynch International Limited.................................... Salomon Brothers International Limited................................. Smith Barney Inc. ..................................................... --------- Subtotal....................................................... 3,633,339 --------- Total.......................................................... 18,166,696 =========
The U.S. Underwriters and the International Underwriters are collectively referred to as the "Underwriters." 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 SSI Warrants) offered hereby (other than those covered by the 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 SSI Warrants, the Underwriters will remit the exercise price of the SSI Warrants to the Company. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions, (i) it is not purchasing any U.S. Shares (as defined below) for the account of anyone other than a United States or Canadian Person (as defined below) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions, (i) it is not purchasing any International Shares (as defined below) for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any International Shares or distribute any prospectus relating to the International Shares within the United States or Canada or to any United States or Canadian Person. With respect to Dillon, Read & Co. Inc. and Smith Barney Inc., the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter shall apply only to shares of Common Stock purchased by it in its capacity as a U.S. Underwriter, (ii) made by it in its capacity as an International Underwriter shall apply only to shares of Common Stock purchased by it in its 28 31 capacity as an International Underwriter and (iii) shall not restrict its ability to distribute any prospectus relating to the shares of Common Stock to any person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person) and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters are referred to herein as the U.S. Shares and the International Shares, respectively. Pursuant to the Agreement Between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and the International Underwriters of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price and currency of any shares sold shall be the Price to Public set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock, directly or indirectly, in any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any shares of Common Stock a notice stating in substance that, by purchasing such Common Stock, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Common Stock in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made, and that such dealer will deliver to any other dealer to whom it sells any of such Common Stock a notice to the foregoing effect. Each International Underwriter has agreed that: (i) it has not offered or sold and will not offer or sell any shares of Common Stock to persons in the United Kingdom (the "U.K.") except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the U.K. within the meaning of the Public Offers of Securities Regulation 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the U.K.; and (iii) it has only issued or passed on, and will only issue or pass on, in the U.K. any document received by it in connection with the issue of the Common Stock, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on. The Underwriters propose to offer part of the Common Stock directly to the public at the Price to Public set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. Pursuant to the Underwriting Agreement, the Selling Stockholders have granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 2,725,004 additional shares of Common Stock at the Price to Public set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option to purchase 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 U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth 29 32 next to such U.S. Underwriter's name in the preceding table bears to the total number of U.S. Shares offered hereby. The SSI Warrants 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 SSI Warrant and the underwriting discount per underlying share. The Underwriters will immediately exercise such SSI Warrants by paying the Company the aggregate exercise price of the SSI Warrants, and will include in the offering the 1,716,696 shares of Common Stock issuable as a result of such exercise. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company, the Selling Stockholders and certain directors and executive officers of the Company have agreed in the Underwriting Agreement, with certain exceptions, not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for any capital stock of the Company, except for the shares to be sold in the offerings and the SSI Warrants to be cancelled, 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 several Underwriters. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. LEGAL MATTERS Certain legal matters in connection with the sale of the shares of Common Stock offered hereby will be passed upon for Safeway and the Selling Stockholders by Latham & Watkins, San Francisco, California. Certain partners of Latham & Watkins, members of their families, related persons and others own, or through limited partnerships have an indirect interest in, less than 1% of the Common Stock. Such persons do not have the power to vote or dispose of shares which are indirectly held, some of which shares will be sold in the offerings. Certain legal matters in connection with the offerings will be passed upon for the U.S. Underwriters and the International Underwriters by Brown & Wood, San Francisco, California. EXPERTS Safeway's consolidated financial statements as of December 31, 1994 and January 1, 1994 and for each of the three fiscal years in the period ended December 31, 1994 included herein have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report included herein (which report expresses an unqualified opinion and includes an explanatory paragraph relating to changes in Safeway's methods of accounting during the fiscal year ended January 2, 1993), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 30 33 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents which have been filed with the Commission by the Company are hereby incorporated by reference in this Prospectus: (1) Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) Quarterly Report on Form 10-Q for the fiscal quarter ended March 25, 1995. (3) Quarterly Report on Form 10-Q for the fiscal quarter ended June 17, 1995. (4) Quarterly Report on Form 10-Q for the fiscal quarter ended September 9, 1995. (5) 1995 Proxy Statement. (6) Current Reports on Form 8-K dated March 29, 1995, May 22, 1995 and January 25, 1996. (7) Description of Safeway's Common Stock contained in Safeway's Registration Statement on Form 8-A filed with the Commission on February 20, 1990, including the amendment on Form 8 dated March 26, 1990. All documents filed by Safeway pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior to the termination of the offerings made hereby, shall be deemed incorporated by reference herein and to be a part hereof from the date of filing such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such information, unless such exhibits are specifically incorporated by reference in such information) will be provided without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon written or oral request. Copies of this Prospectus, as amended or supplemented from time to time, and any other documents (or parts of documents) that constitute part of the Prospectus under Section 10(a) of the Securities Act will also be provided without charge to each such person, upon written or oral request. Requests should be directed to Safeway Inc., Attention: Investor Relations Department, Safeway Inc., Fourth and Jackson Streets, Oakland, California 94660, telephone number (510) 891-3790. 31 34 INDEX
PAGE ---- Condensed Consolidated Balance Sheets as of September 9, 1995 and December 31, 1994 F-2 Condensed Consolidated Statements of Income for the 12 and 36 weeks ended September 9, 1995 and September 10, 1994 F-4 Condensed Consolidated Statements of Cash Flows for the 36 weeks ended September 9, 1995 and September 10, 1994 F-5 Notes to the Condensed Consolidated Financial Statements F-6 Independent Auditors' Report F-10 Consolidated Statements of Income for fiscal years 1994 and 1993 F-11 Consolidated Balance Sheets as of year-end 1994 and 1993 F-12 Consolidated Statements of Cash Flows for fiscal years 1994, 1993 and 1992 F-14 Consolidated Statements of Stockholders' Equity for fiscal years 1994, 1993 and 1992 F-16 Notes to the Consolidated Financial Statements F-17
F-1 35 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) (Unaudited)
September 9, December 31, 1995 1994 ------------ ------------ ASSETS Current assets: Cash and equivalents $ 48.7 $ 60.7 Receivables 169.4 147.9 Merchandise inventories 1,107.0 1,136.0 Prepaid expenses and other current assets 104.7 93.0 ---------- ---------- Total current assets 1,429.8 1,437.6 ---------- ---------- Property 4,575.8 4,375.3 Less accumulated depreciation and amortization 2,042.8 1,868.9 ---------- ---------- Property, net 2,533.0 2,506.4 Goodwill, net of amortization of $103.3 and $95.0, respectively 327.8 331.1 Prepaid pension costs 321.3 319.6 Investments in unconsolidated affiliates 326.2 329.3 Other assets 94.6 98.1 ---------- ---------- Total assets $ 5,032.7 $ 5,022.1 ========== ==========
(Continued) F-2 36 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (In millions, except per-share amounts) (Unaudited)
September 9, December 31, 1995 1994 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of notes and debentures $ 145.9 $ 152.5 Current obligations under capital leases 19.4 19.3 Accounts payable 922.2 1,012.1 Accrued salaries and wages 214.7 223.6 Other accrued liabilities 497.4 416.1 ---------- ---------- Total current liabilities 1,799.6 1,823.6 ---------- ---------- Long-term debt: Notes and debentures 1,767.6 1,849.5 Obligations under capital leases 172.7 174.8 ---------- ---------- Total long-term debt 1,940.3 2,024.3 Deferred income taxes 125.5 128.3 Accrued claims and other liabilities 408.9 402.1 ---------- ---------- Total liabilities 4,274.3 4,378.3 ---------- ---------- Stockholders' equity: Common stock: par value $0.01 per share; 300 shares authorized; 212.7 and 209.6 shares outstanding, respectively 2.1 2.1 Additional paid-in capital 675.0 654.5 Unexercised warrants purchased: 8.9 shares (113.2) -- Retained earnings (accumulated deficit) 172.5 (41.9) Cumulative translation adjustments 22.0 29.1 ---------- ---------- Total stockholders' equity 758.4 643.8 ---------- ---------- Total liabilities and stockholders' equity $ 5,032.7 $ 5,022.1 ========== ==========
See accompanying notes to condensed consolidated financial statements. F-3 37 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In millions, except per-share amounts) (Unaudited)
12 Weeks Ended 36 Weeks Ended ------------------------- ---------------------------- Sept. 9, Sept. 10, Sept. 9, Sept. 10, 1995 1994 1995 1994 ---------- ---------- ------------ ------------ Sales $ 3,845.5 $ 3,631.8 $ 11,231.2 $ 10,736.3 Cost of goods sold (2,796.4) (2,640.7) (8,179.1) (7,821.5) ---------- ---------- ------------ ------------ Gross profit 1,049.1 991.1 3,052.1 2,914.8 Operating and administrative expenses (872.7) (842.6) (2,556.6) (2,502.2) ---------- ---------- ------------ ------------ Operating profit 176.4 148.5 495.5 412.6 Interest expense (44.6) (48.1) (141.3) (156.6) Equity in earnings of unconsolidated affiliates 9.4 4.4 17.2 22.8 Other income, net 0.4 2.0 1.5 4.9 ---------- ---------- ------------ ------------ Income before income taxes and extraordinary loss 141.6 106.8 372.9 283.7 Income taxes (57.9) (43.1) (158.5) (119.2) ---------- ---------- ------------ ------------ Income before extraordinary loss 83.7 63.7 214.4 164.5 Extraordinary loss related to early retirement of debt, net of income tax benefit of $1.7 and $6.5, respectively -- (2.7) -- (10.1) ---------- ---------- ------------ ------------ Net income $ 83.7 $ 61.0 $ 214.4 $ 154.4 ========== ========== ============ ============ Earnings per common share and common share equivalent: Primary Income before extraordinary loss $ 0.35 $ 0.26 $ 0.89 $ 0.68 Extraordinary loss -- (0.01) -- (0.04) ========== ========== ============ ============ Net income $ 0.35 $ 0.25 $ 0.89 $ 0.64 ========== ========== ============ ============ Fully diluted Income before extraordinary loss $ 0.35 $ 0.26 $ 0.88 $ 0.67 Extraordinary loss -- (0.01) -- (0.04) ========== ========== ============ ============ Net income $ 0.35 $ 0.25 $ 0.88 $ 0.63 ========== ========== ============ ============ Weighted average common shares and common share equivalents: Primary 241.0 244.2 241.1 243.1 ========== ========== ============ ============ Fully diluted 241.6 245.0 242.4 245.0 ========== ========== ============ ============
See accompanying notes to the condensed consolidated financial statements. F-4 38 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
36 Weeks Ended ---------------------------- September 9, September 10, 1995 1994 ------------ ------------- CASH FLOW FROM OPERATIONS: Net income $ 214.4 $ 154.4 Reconciliation to net cash flow from operations: Extraordinary loss related to early retirement of debt, before income tax benefit -- 16.6 Depreciation and amortization 227.7 225.5 LIFO expense 6.9 6.9 Equity in undistributed earnings of unconsolidated affiliates (17.2) (22.8) Other 40.6 40.3 Changes in working capital items: Receivables and prepaids (31.9) (7.1) Inventories at FIFO cost 34.1 50.1 Payables and accruals (17.5) 84.3 -------- -------- Net cash flow from operations 457.1 548.2 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Cash paid for property additions (253.2) (181.6) Proceeds from sale of property 25.2 27.6 Other (19.8) (27.0) -------- -------- Net cash flow used by investing activities (247.8) (181.0) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Additions to short-term borrowings 98.2 93.9 Payments on short-term borrowings (112.3) (43.6) Additions to long-term borrowings 558.9 345.4 Payments on long-term borrowings (660.5) (821.8) Premiums paid on early retirement of debt -- (12.7) Net proceeds from exercise of warrants and stock options 8.2 10.5 Purchase of unexercised warrants (113.2) -- Other (0.6) 1.1 -------- -------- Net cash flow used by financing activities (221.3) (427.2) -------- -------- Decrease in cash and equivalents (12.0) (60.0) CASH AND EQUIVALENTS: Beginning of period 60.7 118.4 -------- -------- End of period $ 48.7 $ 58.4 ======== ========
See accompanying notes to condensed consolidated financial statements. F-5 39 NOTE A - BASIS OF PRESENTATION Stock Split. On January 3, 1996, Safeway's Board of Directors authorized a two-for-one split of the Company's common stock. The stock split was effected by a distribution on January 30, 1996, of one additional share for each share owned by stockholders of record on January 16, 1996. Share and per-share amounts presented in the condensed consolidated financial statements and related notes have been restated to reflect the stock split. The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries ("Safeway" or the "Company") for the 12 and 36 weeks ended September 9, 1995 and September 10, 1994 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in this Prospectus. The results of operations for the 12 and 36 weeks ended September 9, 1995 are not necessarily indicative of the results expected for the full year. NOTE B - INVENTORY Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation ("LIFO Indices"). LIFO expense was $2.3 million in the third quarters of both 1995 and 1994 and was $6.9 million for the first 36 weeks of both 1995 and 1994. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories. NOTE C - INVESTMENTS IN AFFILIATES Investments in affiliates consist of a 35% interest in The Vons Companies, Inc. ("Vons") which operates 326 supermarkets located mostly in southern California, and a 49% interest in Casa Ley, S.A. de C.V. which operates 71 food and general merchandise stores in western Mexico. Safeway records income from its equity investments on a one-quarter delay basis. Since the December 1994 devaluation of the peso, Mexico has experienced economic difficulties, including very high interest rates. Interest rates and inflation have moderated in recent months, and Safeway's share of Casa Ley's earnings for the third quarter of 1995 increased to $4.6 million from $3.1 million in the comparable period of 1994. For the 36 weeks ended September 9, 1995, Safeway's share of Casa Ley's earnings fell to $5.0 million from $12.4 million in 1994. The Company's recorded investment in Vons at September 9, 1995 was $249.1 million, including unamortized goodwill of $46.0 million that is being amortized over a 40 year life. Income from Safeway's equity investment in Vons was $4.8 million for the third quarter of 1995 compared to $1.3 million in the third quarter of 1994. For the 36 weeks ended September 9, 1995 Safeway's share of Vons earnings was $12.2 compared to $10.4 in 1994. Based on the September 8, 1995 closing price for Vons common stock as quoted on the New York Stock Exchange, the Company's 15.1 million shares of Vons common stock had an aggregate market value of $353.6 million. F-6 40 NOTE C - INVESTMENTS IN AFFILIATES (CONTINUED) Summarized financial information derived from Vons' financial reports to the Securities and Exchange Commission is as follows (in millions):
June 18, January 1, FINANCIAL POSITION 1995 1995 - ------------------ ---- ---- Current assets $ 413.0 $ 467.8 Property and equipment, net 1,194.7 1,203.0 Other assets 548.4 551.2 -------- -------- Total assets $2,156.1 $2,222.0 ======== ======== Current liabilities $ 519.5 $ 563.9 Long-term obligations 1,053.8 1,105.7 Shareholders' equity 582.8 552.4 -------- -------- Total liabilities and shareholders' equity $2,156.1 $2,222.0 ======== ========
12 Weeks Ended 36 Weeks Ended --------------------------- -------------------------- June 18, June 19, June 18, June 19, RESULTS OF OPERATIONS 1995 1994 1995 1994 - --------------------- ---- ---- ---- ---- Sales $ 1,139.5 $ 1,160.2 $ 3,458.2 $ 3,474.7 Cost of sales and other expenses (1,125.0) (1,155.7) (3,420.6) (3,442.3) --------- --------- --------- --------- Net income $ 14.5 $ 4.5 $ 37.6 $ 32.4 ========= ========= ========= =========
F-7 41 NOTE D - FINANCING Notes and debentures were composed of the following at September 9, 1995 and December 31, 1994 (in millions):
September 9, 1995 December 31, 1994 ----------------------- ------------------------ Long-term Current Long-term Current --------- ------- --------- ------- Credit Agreement, unsecured $ 295.4 Bank Credit Agreement, secured - $ 135.0 Working Capital Credit Agreement, secured - 196.8 9.30% Senior Secured Debentures due 2007 70.7 70.7 10% Senior Notes due 2002, unsecured 59.1 59.1 10% Senior Subordinated Notes due 2001, unsecured 241.4 241.4 9.875% Senior Subordinated Debentures due 2007, unsecured 110.0 110.0 9.65% Senior Subordinated Debentures due 2004, unsecured 228.2 228.2 9.35% Senior Subordinated Notes due 1999, unsecured 172.5 172.5 Mortgage notes payable, secured 399.2 $ 49.3 426.7 $ 51.3 Other notes payable, unsecured 191.1 26.7 209.1 13.3 Other bank borrowings, unsecured - 69.9 - 87.9 -------- ------- --------- ------- $1,767.6 $ 145.9 $ 1,849.5 $ 152.5 ======== ======= ========= =======
Note B to the Company's consolidated financial statements on pages F-11 through F-29 and the information appearing under the caption "Terms of Outstanding Indebtedness" in Item 1 of the Company's 1994 Form 10-K describe all of the material restrictive covenants of the Company's senior subordinated notes and debentures. CREDIT AGREEMENT On May 24, 1995, Safeway entered into a new unsecured bank credit agreement (the "Credit Agreement") that is less restrictive than Safeway's previous bank agreement, extends the maturity date and provides lower borrowing costs. The Credit Agreement matures in 2000 and has two one-year extension options. Safeway may borrow up to $1.15 billion under the Credit Agreement, including up to $400 million in Canada. In connection with obtaining the new Credit Agreement, all collateral securing the Company's senior subordinated notes and debentures was released. U.S. borrowings under the Credit Agreement carry interest at one of the following rates selected by the Company: (i) the prime rate; (ii) the rate at which Eurodollar deposits are offered to first-class banks by the lenders in the Credit Agreement plus a pricing margin based on the Company's debt rating or interest coverage ratio (the "Pricing Margin"); or (iii) rates quoted at the discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry interest at one of the following rates selected by the Company: (i) the Canadian base rate; or (ii) the Canadian Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in Canadian dollars carry interest at the Canadian prime rate. F-8 42 The Credit Agreement sets certain restrictions on payments by the Company (i) of dividends on any class of stock; (ii) to acquire shares of any class of stock of the Company; or (iii) to acquire certain outstanding warrants or any options or other rights to acquire shares of any class of stock of the Company, other than those held by certain Company officers and employees. Other provisions of the Credit Agreement limit certain acts of the Company and require the Company to meet certain financial tests which pertain to its ability to generate adequate cash to meet required payments. NOTE E - CONTINGENCIES LEGAL MATTERS Note H to the Company's consolidated financial statements, under the caption "Legal Matters" on F-26, provides information on certain claims and litigation in which the Company is involved. In February 1988, the Company sold its Kansas City Division to a company formed by Morgan, Lewis, Githen & Ahn Fund I ("Morgan Lewis") and financed principally by the Prudential Insurance Company of America ("Prudential") and its affiliate, PruCo Insurance Company ("PruCo"). In January 1993, the buyer (Food Barn Stores, Inc.) filed a voluntary petition under Chapter 11 of the U. S. Bankruptcy Code, and the plan of reorganization was confirmed in July 1994. In January 1995, Food Barn filed suit against the Company and others in the U. S. Bankruptcy Court for the Western District of Missouri. In its complaint, Food Barn alleges that (i) the 1988 transaction was a fraudulent conveyance under New York law, and (ii) the Company defrauded Food Barn and fraudulently induced it to enter into the February 1988 transaction. Food Barn seeks compensatory damages estimated to approximate $293 million plus interest, and $100 million in punitive damages. In April 1995, the Company filed motions to dismiss, and for summary judgment on, Food Barn's claims, and in August 1995 the Bankruptcy Court denied the motions. In September 1995, the Company filed its answer and counterclaims, denying the operative allegations of the complaint, asserting numerous defenses, and alleging that any losses sustained by Food Barn were the result of actions and omissions of Morgan Lewis and its principals, Prudential and PruCo. Safeway believes that it has numerous meritorious defenses, and intends to defend itself vigorously, in this case. F-9 43 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Safeway Inc.: We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries as of December 31, 1994 and January 1, 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Safeway Inc. and subsidiaries at December 31, 1994 and January 1, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, during the fiscal year ended January 2, 1993, the Company changed its methods of accounting for postretirement and postemployment benefits, and an unconsolidated equity method affiliate of the Company changed its methods of accounting for postretirement benefits and income taxes. DELOITTE & TOUCHE LLP Oakland, California February 20, 1995 (January 30, 1996 as to the effects of the stock split described in Note A) F-10 44 Consolidated STATEMENTS OF INCOME SAFEWAY INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS (In millions, except per-share amounts) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Sales $ 15,626.6 $ 15,214.5 $ 15,151.9 Cost of goods sold ............................................... (11,376.6) (11,131.1) (11,045.5) ---------------------------------------------- Gross profit 4,250.0 4,083.4 4,106.4 Operating and administrative expenses ............................ (3,637.9) (3,641.9) (3,664.8) ---------------------------------------------- Operating profit 612.1 441.5 441.6 Interest expense (221.7) (265.5) (290.4) Equity in earnings of unconsolidated affiliates 27.3 33.5 39.1 Other income, net ................................................ 6.4 6.8 7.1 ---------------------------------------------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes 424.1 216.3 197.4 Income taxes ..................................................... (173.9) (93.0) (99.0) ---------------------------------------------- Income before extraordinary loss and cumulative effect of accounting changes 250.2 123.3 98.4 Extraordinary loss related to early retirement of debt, net of income tax benefit of $6.7 and $17.1 (10.5) -- (27.8) Cumulative effect of accounting changes, net of income tax benefit of $12.0 ................................... -- -- (27.1) ---------------------------------------------- Net income .................................................. $ 239.7 $ 123.3 $ 43.5 ============================================== Earnings per common share and common share equivalent: Primary Income before extraordinary loss and cumulative effect of accounting changes $ 1.02 $ 0.51 $ 0.41 Extraordinary loss (0.04) -- (0.12) Cumulative effect of accounting changes ..................... -- -- (0.11) ---------------------------------------------- Net income ................................................ $ 0.98 $ 0.51 $ 0.18 ============================================== Fully diluted Income before extraordinary loss and cumulative effect of accounting changes $ 1.01 $ 0.50 $ 0.41 Extraordinary loss (0.04) -- (0.12) Cumulative effect of accounting changes ..................... -- -- (0.11) ---------------------------------------------- Net income ................................................ $ 0.97 $ 0.50 $ 0.18 ============================================== Weighted average common shares and common share equivalents: Primary 244.1 242.1 237.9 Fully diluted 247.1 246.9 238.0
See accompanying notes to consolidated financial statements. F-11 45 CONSOLIDATED BALANCE SHEETS SAFEWAY INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------ YEAR-END YEAR-END (In millions, except per-share amounts) 1994 1993 - ------------------------------------------------------------------------------------------ Assets Current assets: Cash and equivalents $ 60.7 $ 118.4 Receivables 147.9 119.5 Merchandise inventories, net of LIFO reserve of $64.8 and $62.1 1,136.0 1,128.1 Prepaid expenses and other current assets ................... 93.0 98.0 ----------------------- Total current assets ........................................ 1,437.6 1,464.0 ----------------------- Property: Land 408.9 384.7 Buildings 1,095.0 1,009.6 Leasehold improvements 814.5 791.5 Fixtures and equipment 1,765.2 1,711.1 Property under capital leases ............................... 291.7 310.4 ----------------------- 4,375.3 4,207.3 Less accumulated depreciation and amortization .............. 1,868.9 1,647.2 ----------------------- Total property, net 2,506.4 2,560.1 Goodwill, net of accumulated amortization of $95.0 and $86.2 331.1 347.6 Prepaid pension costs 319.6 307.1 Investments in unconsolidated affiliates 329.3 303.4 Other assets ................................................... 98.1 92.5 ----------------------- Total assets ................................................... $5,022.1 $5,074.7 =======================
F-12 46
- --------------------------------------------------------------------------------- YEAR-END YEAR-END 1994 1993 - --------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current maturities of notes and debentures $ 152.5 $ 188.6 Current obligations under capital leases 19.3 19.3 Accounts payable 1,012.1 880.5 Accrued salaries and wages 223.6 216.3 Other accrued liabilities ......................... 416.1 369.1 ------------------------ Total current liabilities ......................... 1,823.6 1,673.8 ------------------------ Long-term debt: Notes and debentures 1,849.5 2,287.7 Obligations under capital leases .................. 174.8 193.6 ------------------------ Total long-term debt 2,024.3 2,481.3 Deferred income taxes 128.3 145.5 Accrued claims and other liabilities ................. 402.1 391.2 ------------------------ Total liabilities .................................... 4,378.3 4,691.8 ------------------------ Commitments and contingencies Stockholders' equity: Common stock: par value $.01 per share; 300 shares authorized; 209.6 and 203.0 shares outstanding 2.1 2.0 Additional paid-in capital 654.5 623.5 Cumulative translation adjustments 29.1 39.0 Accumulated deficit ............................... (41.9) (281.6) ------------------------ Total stockholders' equity ........................ 643.8 382.9 ------------------------ Total liabilities and stockholders' equity ........... $5,022.1 $5,074.7 ========================
See accompanying notes to consolidated financial statements. F-13 47 CONSOLIDATED STATEMENTS OF CASH FLOWS SAFEWAY INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS (In millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------- Cash Flow From Operations Net income $239.7 $123.3 $ 43.5 Reconciliation to net cash flow from operations: Extraordinary loss related to early retirement of debt, before income tax benefit 17.2 -- 44.9 Cumulative effect of accounting changes, before income tax benefit -- -- 39.1 Depreciation and amortization 326.4 330.2 320.3 Amortization of deferred finance costs 3.0 3.8 4.0 Deferred income taxes (12.9) (35.8) 17.5 LIFO expense (income) 2.7 (1.5) (0.4) Equity in earnings of unconsolidated affiliates (27.3) (33.5) (39.1) Net pension (income) expense (1.4) 0.4 (4.6) Pension contributions (11.5) (1.2) -- Increase (decrease) in accrued claims and other liabilities (5.7) 29.3 8.2 Loss (gain) on property retirements 56.3 (2.9) 48.9 Changes in working capital items: Receivables (24.5) 15.4 9.3 Inventories at FIFO cost (31.8) 61.6 10.2 Prepaid expenses and other current assets 3.6 (9.4) (12.5) Payables and accruals 165.2 95.6 21.0 Income taxes ....................................................... 54.3 24.1 (1.8) ---------------------------------- Net cash flow from operations .................................... 753.3 599.4 508.5 ---------------------------------- Cash Flow From Investing Activities Cash paid for property additions (339.9) (245.3) (483.6) Proceeds from sale of property 36.3 66.7 26.3 Other ................................................................... (28.0) (49.3) (26.9) ---------------------------------- Net cash flow used by investing activities ........................... (331.6) (227.9) (484.2) ----------------------------------
F-14 48
- -------------------------------------------------------------------------------------------------------- 52 WEEKS 52 WEEKS 53 WEEKS 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cash Flow From Financing Activities Additions to short-term borrowings $ 157.9 $ 60.0 $ 237.4 Payments on short-term borrowings (108.0) (44.9) (280.5) Additions to long-term borrowings 455.7 352.1 1,888.4 Payments on long-term borrowings (986.2) (732.7) (1,774.1) Net proceeds from exercise of warrants and stock options 14.6 10.4 3.5 Premiums paid on early retirement of debt (13.2) -- (35.1) Other .......................................................... 0.7 1.2 (13.9) ------------------------------------ Net cash flow from (used by) financing activities ........... (478.5) (353.9) 25.7 ------------------------------------ Effect of changes in exchange rates on cash .................... (0.9) 4.2 (7.6) ------------------------------------ Increase (decrease) in cash and equivalents (57.7) 21.8 42.4 Cash and Equivalents Beginning of year .............................................. 118.4 96.6 54.2 ------------------------------------ End of year .................................................... $ 60.7 $ 118.4 $ 96.6 ==================================== Other Cash Flow Information Cash payments during the year for: Interest $ 230.1 $ 270.2 $ 293.5 Income taxes, net of refunds 126.0 100.6 56.4 Noncash Investing And Financing Activities Tax benefit from stock options exercised $ 15.6 $ 9.6 Mortgage notes assumed in property acquisitions 11.3 7.5 $ 0.4 Capital lease obligations entered into 4.5 20.3 5.7 Capital lease assets retired, net of accumulated amortization 2.5 3.1 1.7 Capital lease obligations retired 0.8 2.5 0.6
See accompanying notes to consolidated financial statements. F-15 49 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SAFEWAY INC. AND SUBSIDIARIES
Common Stock Additional Cumulative Total (In millions) --------------------- Paid-in Translation Accumulated Stockholders' Shares Amount Capital Adjustments Deficit Equity - --------------------------------------------------------------------------------------------------------------------------------- Balance, year-end 1991 195.5 $ 2.0 $600.0 $ 60.8 $(448.4) $214.4 Options and warrants exercised 2.2 -- 3.4 -- -- 3.4 Cash received on subscriptions receivable -- -- 0.1 -- -- 0.1 Net income -- -- -- -- 43.5 43.5 Translation adjustments -- -- -- (18.3) -- (18.3) ------------------------------------------------------------------------------------ Balance, year-end 1992 197.7 2.0 603.5 42.5 (404.9) 243.1 Options and warrants exercised 5.3 -- 19.3 -- -- 19.3 Cash received on subscriptions receivable -- -- 0.7 -- -- 0.7 Net income -- -- -- -- 123.3 123.3 Translation adjustments -- -- -- (3.5) -- (3.5) ------------------------------------------------------------------------------------ Balance, year-end 1993 203.0 2.0 623.5 39.0 (281.6) 382.9 Options and warrants exercised 6.6 0.1 30.1 -- -- 30.2 Stock bonuses -- -- 0.9 -- -- 0.9 Net income -- -- -- -- 239.7 239.7 Translation adjustments -- -- -- (9.9) -- (9.9) ------------------------------------------------------------------------------------ Balance, year-end 1994 209.6 $ 2.1 $654.5 $ 29.1 $(41.9) $643.8 ====================================================================================
See accompanying notes to consolidated financial statements. F-16 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A SIGNIFICANT ACCOUNTING POLICIES Stock Split On January 3, 1996, Safeway's Board of Directors authorized a two-for-one split of the Company's common stock. The stock split was effected by a distribution on January 30, 1996, of one additional share for each share owned by stockholders of record on January 16, 1996. Share and per-share amounts presented in the consolidated financial statements and related notes have been restated to reflect the stock split. Basis of Consolidation The consolidated financial statements include Safeway Inc., a Delaware corporation, and all majority owned subsidiaries ("Safeway" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. Investments in affiliates which are not majority owned are reported using the equity method. Fiscal Year The Company's fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 52-week period ended December 31, 1994, the 52-week period ended January 1, 1994, and the 53-week period ended January 2, 1993. Translation of Foreign Currencies Assets and liabilities of the Company's Canadian subsidiaries and Mexican unconsolidated affiliate are translated into U.S. dollars at year-end rates of exchange, and income and expenses are translated at average rates during the year. Cumulative translation adjustments reflecting the effect of the movement in exchange rates during the year are shown net of applicable income taxes as a separate component of stockholders' equity. Merchandise Inventories At year-end 1994 and 1993, merchandise inventory of $660 million and $634 million is valued at the lower of cost on a last-in, first-out ("LIFO") basis or market value. Such LIFO inventory had a replacement or current cost of $724 million and $696 million at year-end 1994 and 1993. The remaining inventory is valued at the lower of cost on a first-in, first-out ("FIFO") basis or market value. FIFO cost of inventory approximates replacement or current cost. Inventory on a FIFO basis includes meat and produce in the United States, inventory of U.S. manufacturing operations, and all inventories of the Canadian subsidiaries. Application of the LIFO method resulted in a $2.7 million increase in cost of goods sold in 1994, compared to decreases of $1.5 million in 1993 and $0.4 million in 1992. Liquidations of LIFO layers during the three years reported did not have a significant effect on the results of operations. Property and Depreciation Property is stated at cost. Depreciation expense on buildings and equipment is computed on the straight-line method using the following lives: Stores and other buildings 10 - 30 years Fixtures and equipment 3 - 15 years Property under capital leases is amortized on a straight-line basis over the remaining terms of the leases. Leasehold improvements include buildings constructed on leased land and improvements to leased buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the lease or the estimated useful lives of the assets. Goodwill Goodwill is amortized on a straight-line basis over 40 years. Goodwill amortization was $10.4 million in 1994, $10.6 million in 1993, and $12.7 million in 1992. Closed Store Expense Upon the decision to close a store, the Company accrues estimated future losses, if any, which may include lease payments or other costs of holding the facility, net of estimated future income. Self-insurance The Company is primarily self-insured for workers' compensation, automobile, and general liability costs. The self-insurance claim liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The present value of such claims was accrued using discount rates of 6.5% in 1994 and 5% in 1993. The current portion of the self-insurance claim liability ($77 million and $78 million at year-end 1994 and 1993) is included in other accrued liabilities in the consolidated balance sheets. The noncurrent portion of $186 million and $176 million at year-end 1994 and 1993 is included in accrued claims and other liabilities. Claims payments were $75.3 million in 1994, $83.0 million in 1993 and $85.7 million in 1992. The total undiscounted liability was $304 million and $289 million at year-end 1994 and 1993. F-17 51 Income Taxes The Company provides a deferred tax expense or benefit equal to the change in the deferred tax liability during the year in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes represent tax credit carryforwards and future net tax effects resulting from temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Earnings per Common Share and Common Share Equivalent Earnings per common share and common share equivalent is calculated by dividing net income by the weighted average number of common shares outstanding during the period plus the dilutive effect of stock options and warrants, as determined by the treasury stock method. Statement of Cash Flows Short-term investments with original maturities of less than three months are considered to be cash equivalents. Borrowings with original maturities of less than three months are presented net of related repayments. Off-Balance Sheet Financial Instruments The Company has entered into interest rate swap agreements to limit the exposure of its floating interest rate debt to changes in market interest rates. These agreements involve the exchange with a counterparty of fixed and floating rate interest payments periodically over the life of the agreements without exchange of the underlying notional principal amounts. The differential to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. The Company's counterparties are major financial institutions. Fair Value of Financial Instruments Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Safeway estimated the fair values presented below using appropriate valuation methodologies and market information available as of year-end. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, these fair values were estimated as of year-end, and current estimates of fair value may differ significantly from the amounts presented. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and equivalents, accounts receivable, accounts payable and short-term debt -- The carrying amount of these items approximates fair value. value. Long-term debt -- Market values quoted on the New York Stock Exchange are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted on an exchange, the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities. At year-end 1994 and 1993, the carrying value of long-term debt approximated fair value. Interest rate swap agreements -- The fair value of interest rate swap agreements is the amount at which they could be settled based on estimates obtained from dealers. At year-end 1994, net unrealized gains on interest rate swap agreements were $5.4 million. Since the Company intends to hold these agreements as hedges for the term of the agreements, the market risk associated with changes in interest rates should not be significant. Reclassifications Certain amounts for prior years have been reclassified to conform to the 1994 presentation. Accounting Changes In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual of the expected cost of such benefits during employee service periods, and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of the expected cost of benefits provided to former or inactive employees after employment but before retirement. Prior to 1992, the Company recognized the cost of providing these benefits as claims were paid. In addition, in 1992 The Vons Companies, Inc. ("Vons"), an unconsolidated affiliate of Safeway, adopted SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 106. The cumulative effect of accounting changes recognized in Safeway's F-18 52 consolidated statements of income as of the beginning of fiscal 1992 was as follows (in millions): Postretirement benefits, net of tax benefit of $6.4 $10.5 Postemployment benefits, net of tax benefit of $1.1 1.8 Vons' income taxes, net of tax benefit of $3.2 10.6 Vons' postretirement benefits, net of tax benefit of $1.3 4.2 ----- $27.1 =====
Except for the cumulative effect of adoption, the impact of these accounting changes on Safeway's 1992 net income was not material. B FINANCING Notes and debentures were composed of the following at year-end (in millions):
1994 1993 ------ ------ Bank Credit Agreement, secured $135.0 $35.0 Working Capital Credit Agreement, secured 196.8 340.3 9.30% Senior Secured Debentures due 2007 70.7 100.0 10% Senior Notes due 2002, unsecured 59.1 74.0 10% Senior Subordinated Notes due 2001, secured 241.4 300.0 9.875% Senior Subordinated Debentures due 2007, secured 110.0 150.0 9.65% Senior Subordinated Debentures due 2004, secured 228.2 300.0 9.35% Senior Subordinated Notes due 1999, secured 172.5 250.0 Mortgage notes payable, secured 478.0 567.3 Other notes payable, unsecured 222.4 313.9 Other bank borrowings, unsecured 87.9 45.8 -------- -------- 2,002.0 2,476.3 Less current maturities 152.5 188.6 -------- -------- Long-term portion $1,849.5 $2,287.7 ======== ========
Bank Credit Agreement and Working Capital Credit Agreement In 1994, the Bank Credit Agreement and the Working Capital Credit Agreement (together the "Bank Agreements") were amended to (i) permit the purchase of up to $500 million of senior subordinated debt over the life of the Bank Agreements, (ii) extend bank borrowing maturities one year to 1998, (iii) voluntarily reduce bank borrowing capacity by $250 million, and (iv) reduce commitment fees and borrowing costs on bank borrowings. At year-end 1994, the Company had total borrowing capacity under the Bank Agreements of $1.15 billion, of which $694.2 million was unused. At year-end 1994, domestic borrowings under the Bank Agreements carried interest at one of the following rates selected by the Company: (i) the prime rate, (ii) a rate based on certificates of deposit rates plus 1%, (iii) the rate at which Eurodollar deposits are offered to first-class banks in the Eurodollar market by the Banks plus 0.50%, or (iv) rates quoted at the discretion of the Banks. Canadian borrowings denominated in U.S. dollars under the Working Capital Credit Agreement carried interest at one of the following rates selected by the Company: (i) the Canadian base rate or (ii) the Canadian Eurodollar rate plus 0.50%. Canadian borrowings denominated in Canadian dollars carried interest at (i) the Canadian Bankers' Acceptance rate plus 0.50% or (ii) the Canadian prime rate. The Company paid an annual commitment fee of 0.20% on the unused portion of borrowings available under the Bank Agreements. The weighted average interest rate on borrowings under the Bank Credit Agreement was 5.0% during 1994, 4.7% during 1993, and 5.3% during 1992. At year-end 1994, the weighted average interest rate on borrowings under the Bank Credit Agreement was 6.6%. The weighted average interest rate on borrowings under the Working Capital Credit Agreement was 6.0% during 1994, 5.6% during 1993, and 7.4% during 1992. At year-end 1994, the weighted average interest rate on borrowings under the Working Capital Credit Agreement was 6.8%. Amounts due under the Working Capital Credit Agreement consist of Canadian borrowings. Indebtedness under the Bank Agreements is secured by the pledge of certain assets of the Company and certain assets and stock of certain subsidiaries, and is also guaranteed by certain subsidiaries. Such subsidiaries own approximately 30% of the Company's stores and approximately 70% of the Company's manufacturing facilities. Senior Secured Indebtedness The 9.30% Senior Secured Debentures due 2007 are secured by a Deed of Trust which created a lien on the land, buildings, and equipment owned by Safeway at its distribution center in Tracy, California. F-19 53 Senior Unsecured Indebtedness In 1992, the Company filed with the Securities and Exchange Commission a shelf registration statement relating to public offerings of up to $240 million of debt securities. Pursuant to this shelf registration, the Company issued $160 million of medium-term notes during 1993 and 1992. The Company used the proceeds from these notes to finance capital expenditures. Subordinated Indebtedness The 10% Senior Subordinated Notes due 2001, 9.875% Senior Subordinated Debentures due 2007, 9.65% Senior Subordinated Debentures due 2004, and 9.35% Senior Subordinated Notes due 1999 (collectively the "Subordinated Securities") are subordinated in right of payment to, among other things, the Company's borrowings under the Bank Agreements, the 9.30% Senior Secured Debentures, the Company's senior unsecured debt, the Company's other secured debt, and mortgage notes payable. The Subordinated Securities are secured by the pledge of certain assets of the Company and stock of certain subsidiaries. Redemptions During 1994, Safeway retired $44.2 million of senior debt and $247.9 million of senior subordinated debt. Safeway purchased the long-term debt primarily with proceeds from floating rate bank borrowings. These redemptions will result in estimated annual interest expense savings of approximately $8 million, subject to fluctuations in short-term interest rates. During 1992, the Company redeemed $700 million of high interest rate debt using cash from operations and proceeds from issuing the Subordinated Securities. These redemptions resulted in extraordinary losses of $10.5 million ($0.04 per share) in 1994 and $27.8 million ($0.12 per share) in 1992. The extraordinary losses represent the payment of redemption premiums and the write-off of deferred finance costs, net of the related tax benefits. Depending on market conditions, Safeway may continue to purchase and retire long-term debt. Restrictive Covenants The Bank Agreements prohibit payments by the Company of dividends on any class of stock (other than dividends paid through issuance of additional shares of that class of stock) and restrict, among other things, payments by the Company (i) to acquire shares of any class of stock of the Company, (ii) to retire or repurchase any debt which is subordinate to the Bank Agreements, and (iii) to acquire certain outstanding warrants or any options or other rights to acquire shares of any class of stock of the Company, other than those held by certain Company officers. Other provisions of the Bank Agreements limit certain acts of the Company, including the creation of liens, incurring obligations under leases in excess of specified levels, incurring capital expenditures in excess of specified amounts, and entering into certain business activities, investments and guarantees. The Bank Agreements also limit the amount of indebtedness that the Company can incur. The Company is also required to meet certain financial tests which pertain to its ratio of debt to equity and its ability to generate adequate cash to meet required payments. The Indentures pursuant to which the 9.30% Senior Secured Debentures, the 10% Senior Notes and the Subordinated Securities were issued restrict, among other things, payments by the Company (i) of dividends on any capital stock (other than dividends paid through issuance of additional shares of that capital stock) and (ii) to acquire shares of any capital stock of the Company (including outstanding warrants, options or other rights to acquire shares of any capital stock of the Company), other than those held by certain Company officers. The Indentures also contain provisions which limit the amount of additional debt that the Company may incur. Mortgage Notes Payable Mortgage notes payable at year-end 1994 are secured by properties with a net book value of approximately $550 million, have remaining terms ranging from one to 15 years, and have a weighted average interest rate of 10.0%. Other Notes Payable Other notes payable at year-end 1994 have remaining terms ranging from one to 17 years and a weighted average interest rate of 7.9%. Annual Debt Maturities As of year-end 1994, annual debt maturities were as follows (in millions): 1995 $ 152.5 1996 87.0 1997 159.0 1998 398.9 1999 218.0 Thereafter 986.6 -------- $2,002.0 ======== F-20 54 Letters of Credit The Company had letters of credit of $335.2 million outstanding at year-end 1994 of which $124.0 million were issued under the Bank Credit Agreement. The letters of credit are maintained primarily to back the Company's self-insurance program and to support performance, payment, deposit, or surety obligations of the Company. The Company pays commitment fees ranging from 0.625% to 0.875% on the outstanding portion of the letters of credit. C LEASE OBLIGATIONS A majority of the premises that the Company occupies are leased. The Company had approximately 1,080 leases at year-end 1994, including approximately 210 which are capitalized for financial reporting purposes. Most leases have renewal options, some with terms and conditions similar to the original lease, others with reduced rental rates during the option periods. Certain of these leases contain options to purchase the property at amounts that approximate fair market value. As of year-end 1994, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of one year were as follows (in millions):
Capital Operating Leases Leases --------- ----------- 1995 $ 40.9 $ 130.1 1996 39.0 127.3 1997 35.4 123.6 1998 32.1 119.8 1999 28.6 114.3 Thereafter 188.5 943.9 ------- -------- Total minimum lease payments 364.5 $1,559.0 ======== Less amounts representing interest 170.4 ------- Present value of net minimum lease payments 194.1 Less current obligations 19.3 ------- Long-term obligations $174.8 =======
Future minimum lease payments under non- cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income of $139.3 million. Amortization expense for property under capital leases was $20.6 million in 1994, $22.3 million in 1993 and $23.2 million in 1992. Accumulated amortization of property under capital leases was $150.1 million and $148.1 million at year-end 1994 and 1993. The following schedule shows the composition of total rental expense for all operating leases (in millions). In general, contingent rentals are based on individual store sales.
1994 1993 1992 ------- ------- ------- Property leases: Minimum rentals $ 126.4 $ 129.6 $ 130.9 Contingent rentals 9.8 10.3 10.3 Less rentals from subleases (13.7) (15.1) (11.1) ------- ------- ------- 122.5 124.8 130.1 Equipment leases 20.9 24.0 26.7 ------- ------- ------- $ 143.4 $ 148.8 $ 156.8 ======= ======= =======
D INTEREST EXPENSE Interest expense consisted of the following (in millions):
1994 1993 1992 ------- ------- ------- Bank Agreements $ 20.5 $ 31.9 $ 51.5 9.30% Senior Secured Debentures 8.0 9.3 8.2 10% Senior Notes 6.5 7.4 1.2 10% Senior Subordinated Notes 26.6 30.0 30.0 9.875% Senior Subordinated Debentures 12.1 14.8 11.4 9.65% Senior Subordinated Debentures 24.5 29.0 27.3 9.35% Senior Subordinated Notes 19.6 23.4 18.1 11.75% Senior Subordinated Notes -- -- 9.7 12% Subordinated Debentures -- -- 9.1 Mortgage notes payable 50.2 58.6 63.9 Other notes payable 24.0 28.4 29.7 Other bank borrowings 3.0 0.9 1.6 Obligations under capital leases 22.2 23.9 25.0 Amortization of deferred finance costs 3.0 3.8 4.0 Interest rate swap and collar agreements 4.4 8.3 7.7 Capitalized interest (2.9) (4.2) (8.0) ------- ------- ------- $ 221.7 $ 265.5 $ 290.4 ======= ======= =======
F-21 55 As of year-end 1994, the Company had effectively converted $208.3 million of its $475.9 million of floating rate debt to fixed interest rate debt through the use of interest rate swap agreements. The significant terms of such agreements outstanding at year-end 1994 were as follows (dollars in millions):
U.S Fixed Canada Fixed Variable Interest Interest Interest Rates National Rates Rates to be Origination Expiration Principal Paid Paid Received Date Date - --------- ----- ----- --------- ------------ -------------- $ 50.0 5.1% 6.3% 1991 1995 10.0 5.8 6.4 1992 1997 6.0 5.4 6.9 1992 1995 35.6 8.7% 6.1 1991 1996 35.6 8.7 5.8 1992 1997 35.6 6.0 7.0 1993 1998 35.5 9.0 5.4 1993 1995 - -------- $ 208.3 ========
Variable interest rates received on U.S. swaps are based on LIBOR rates. Variable interest rates received on Canadian swaps are based on the average of Bankers' Acceptance rates quoted by Canadian banks. The notional principal amounts do not represent cash flows and therefore are not subject to credit risk. The Company is subject to risk from nonperformance of the counterparties to the agreements in the amount of any interest differential to be received. Because the Company monitors the credit ratings of its counterparties, which are limited to major financial institutions, Safeway does not anticipate nonperformance by the counterparties. At year-end 1994, net unrealized gains on the interest rate swap agreements were $5.4 million. Since the Company intends to hold these agreements as hedges for the term of the agreements, the market risk associated with changes in interest rates should not be significant. E CAPITAL STOCK Shares Authorized and Issued Authorized preferred stock consists of 10 million shares of which none was outstanding during 1994, 1993, or 1992. Authorized common stock consists of 300 million shares of $0.01 par value. Common stock outstanding at year-end 1994 and 1993 was 209.6 million and 203.0 million shares. Two limited partnerships formed by Kohlberg Kravis Roberts & Co. ("KKR") own 130 million shares of Safeway's common stock. Common stock issued to certain Company officers is restricted as to transferability. Generally, this restriction gives the Company the option to purchase, at market price, any such stock offered for sale. Options and Warrants to Purchase Common Stock Under Safeway's stock option plans, the Company may grant incentive and non-qualified options to purchase up to 39 million shares of common stock at an exercise price equal to or greater than the fair market value at the date of grant, as determined by the Compensation and Stock Option Committee of the Board of Directors. Vested options are exercisable in part or in full at any time prior to the expiration date of 10 to 15 years from the date of the grant. The stock option plans prohibit the transfer of options. Activity in the stock option plans for the three-year period ended December 31, 1994 was as follows:
Option Options Price ------- -------------- Outstanding, year-end 1991 $25,874,376 $1.000 - 9.563 1992 Activity: Granted 3,905,584 5.000 - 9.250 Canceled (652,594) 5.000 - 9.563 Exercised (1,017,844) 1.000 - 6.938 ----------- Outstanding, year-end 1992 28,109,522 1.000 - 9.563 1993 Activity: Granted 3,158,050 5.750 -10.500 Canceled (1,100,572) 5.000 - 9.563 Exercised (3,079,760) 1.000 - 9.250 ----------- Outstanding, year-end 1993 27,087,240 1.000 -10.500 1994 Activity: Granted 3,709,250 10.250 -15.250 Canceled (1,154,168) 5.000 -12.875 Exercised (4,329,298) 1.000 - 9.563 ----------- Outstanding, year-end 1994 $25,313,024 1.000 -15.250 =========== Exercisable, year-end 1993 $14,825,680 1.000 - 9.563 =========== Exercisable, year-end 1994 $12,886,098 1.000 -10.500 ===========
F-22 56 Of the options exercisable at year-end 1994, 6,641,856 were exercisable at $1.00 per share. There were 3,960,386 options available for grant at year-end 1994. At year-end 1994, there were 4.1 million warrants to purchase common stock outstanding, which represented 2.3 million shares of common stock. Each warrant represents the right to purchase 0.558 shares of the Company's common stock for approximately $1.052 per warrant. In order to purchase a whole share of common stock, a holder must exercise 1.792 warrants and pay an aggregate exercise price of $1.8846. During 1994, 4.1 million warrants representing 2.3 million shares of common stock were exercised. During 1993, 3.8 million warrants representing 2.1 million shares of common stock were exercised. The warrants expire on November 24, 1996. Warrants (the "SSI Warrants") to purchase 27.9 million shares of the Company's common stock at $1.00 per share are held by SSI Equity Associates, L.P., a limited partnership (the "SSI Partnership"), whose sole asset consists of the SSI Warrants. The SSI Warrants are exercisable through November 15, 2001. SSI Partners, L.P., an affiliate of KKR, is the general partner of the SSI Partnership. In January 1995, the Company acquired 31.8% of the limited partnership interests in the SSI Partnership for $113 million with proceeds from bank borrowings. Outstanding common stock and the effect of options and warrants at year-end 1994, after giving effect to the January 1995 acquisition of the interests in the SSI Partnership, are summarized as follows (in millions):
Potential Proceeds Shares from Exercise ------ ------------------- Common stock outstanding 209.6 Options to purchase common stock 25.3 $154.2 Warrants 2.3 4.3 SSI Warrants 19.0 19.0 ----- ------ 256.2 $177.5 ===== ======
F TAXES ON INCOME The components of income tax expense were as follows (in millions):
1994 1993 1992 ------- ------- ------- Current: Federal $ 112.6 $ 80.2 $ 34.2 State 23.1 10.7 7.6 Foreign 51.4 37.9 39.7 --------- --------- --------- 187.1 128.8 81.5 --------- --------- --------- Deferred: Federal (0.6) 20.3 23.9 State 1.9 6.2 3.0 Foreign (14.5) (62.3) (9.4) --------- --------- --------- (13.2) (35.8) 17.5 --------- --------- --------- Total $ 173.9 $ 93.0 $ 99.0 ========= ========= =========
Extraordinary losses and the cumulative effect of accounting changes are presented net of related tax benefits. Therefore, 1994 income tax expense excludes a tax benefit of $6.7 million on an extraordinary loss. The 1992 tax provision excludes tax benefits of $17.1 million on an extraordinary loss, and $12.0 million on the cumulative effect of accounting changes. In 1994 and 1993, tax benefits from the exercise of employee stock options of $15.6 million and $9.6 million were credited directly to paid-in capital and, therefore, are excluded from income tax expense. The reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Company's income taxes is as follows (dollars in millions):
1994 1993 1992 ------- ------- ------- Statutory rate 35% 35% 34% Income tax expense using federal statutory rate $ 148.4 $ 75.7 $ 67.1 State taxes on income less federal benefit 16.3 11.0 7.0 Taxes provided on equity earnings of affiliates at rates below the statutory rate (6.9) (8.3) (3.2) Taxes on foreign earnings not permanently reinvested 6.6 8.3 10.0 Withholding tax on Canadian earnings not permanently reinvested 4.4 (2.1) 4.1 Nondeductible amortization 3.3 3.9 3.3 Difference between statutory rate and foreign effective rate 2.2 (9.7) 5.8 Deferred tax adjustment due to 1993 federal rate increase -- 3.4 -- Other accruals -- 9.2 3.9 Other (0.4) 1.6 1.0 --------- --------- --------- Income taxes $ 173.9 $ 93.0 $ 99.0 ========= ========= =========
F-23 57 Significant components of the Company's net deferred tax liability at year-end were as follows (in millions):
- ------------------------------------------------------------------- 1994 1995 - ------------------------------------------------------------------- Deferred tax assets: Workers' compensation and other claims $ 104.9 $ 100.4 Reserves not currently deductible 65.2 50.0 Accrued claims and other liabilities 40.4 54.9 Employee benefits 35.3 25.3 Canadian operating loss carryforward 51.5 42.8 Foreign tax credit carryforwards -- 118.8 Valuation allowance -- (118.8) Other assets 3.2 22.3 ----------------- 300.5 295.7 ----------------- Deferred tax liabilities: Property (138.0) (163.9) Prepaid pension costs (139.2) (135.0) LIFO inventory reserves (51.2) (49.7) Investments in unconsolidated affiliates (34.6) (30.7) Cumulative translation adjustments (20.3) (27.0) Other liabilities (45.5) (34.9) ----------------- (428.8) (441.2) ----------------- Net deferred tax liability $(128.3) $(145.5) =================
G - ------------------------------------------------------------------------------- EMPLOYEE PENSION AND BENEFIT PLANS - ------------------------------------------------------------------------------- U.S. and Canadian Retirement Plans (the "Plans") The Company maintains defined benefit, non-contributory pension plans for substantially all of its U.S. and Canadian employees not participating in multi-employer pension plans. Benefits are generally based upon years of service, age at retirement date, and employee compensation during the last years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the statutory funding standards. Through year-end 1994, the assets of the U.S. Plan have exceeded its actuarially determined liabilities by such amounts that the U.S. Plan was considered fully funded for purposes of contribution requirements. Accordingly, no Company contributions were made to the U.S. Plan during the last three years. In 1994 and 1993, the Company contributed $11.5 million and $1.2 million to the Canadian Plan. No contributions were made to the Canadian Plan in 1992. Assets of the Plans are primarily composed of equity and interest-bearing securities. Actuarial assumptions used to determine year-end plan status were as follows:
- ---------------------------------------------------------------------------------- 1994 1993 1992 - ---------------------------------------------------------------------------------- Weighted average assumed discount rate used to determine the projected benefit obligation: U.S. Plan 8.0% 7.0% 8.5% Canadian Plan 8.0 7.5 8.5 Combined weighted average rate 8.0 7.1 8.5 Long-term rate of return on plan assets: U.S. Plan 9.0 9.0 9.0 Canadian Plan 8.0 9.0 9.0 Assumed rate of compensation increase 5.5 5.5 6.0 Net pension plan income (expense) consisted of the following (in millions): - ---------------------------------------------------------------------------------- 1994 1993 1992 - ---------------------------------------------------------------------------------- Return on plan assets: Actual return, (loss) gain $(26.9) $ 198.9 $ 41.2 Deferred loss (gain) 123.6 (114.4) 44.0 ------------------------------------ Actuarial assumed return 96.7 84.5 85.2 Service cost (41.2) (36.8) (32.6) Interest cost on projected benefit obligations (44.9) (45.9) (44.7) Net amortization (9.2) (2.2) (3.3) ------------------------------------ Net pension plan income (expense) recognized in consolidated statements of income $ 1.4 $ (0.4) $ 4.6 ====================================
F-24 58 The funded status of the Plans at year-end was as follows (in millions):
- --------------------------------------------------------------------------------- 1994 1993 - --------------------------------------------------------------------------------- Fair value of assets at year-end $ 1,040.3 $ 1,139.4 ------------------------- Actuarially determined present value of: Vested benefit obligations 545.1 612.4 Nonvested benefit obligations 7.8 9.0 ------------------------- Accumulated benefit obligations 552.9 621.4 Additional amounts related to projected compensation increases 84.3 100.0 ------------------------- Projected benefit obligations 637.2 721.4 ------------------------- Fair value of assets in excess of projected benefit obligations 403.1 418.0 Adjustment for difference in book and tax basis of assets (165.1) (167.1) Unamortized prior service costs resulting from improved Plan benefits 71.0 61.8 Net loss (gain) from actuarial experience which has not been recognized in the consolidated financial statements 10.6 (5.6) ------------------------- Prepaid pension costs $ 319.6 $ 307.1 =========================
Multi-Employer Pension Plans Safeway participates in various multi-employer pension plans, covering virtually all Company employees not covered under the Company's non-contributory pension plans, pursuant to agreements between the Company and employee bargaining units which are members of such plans. These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer-contributors. Contributions of $70 million in both 1994 and 1993, and $100 million in 1992 were made and charged to income. Under U.S. legislation regarding such pension plans, a company is required to continue funding its proportionate share of a plan's unfunded vested benefits in the event of withdrawal (as defined by the legislation) from a plan or plan termination. Safeway participates in a number of these pension plans, and the potential obligation as a participant in these plans may be significant. The information required to determine the total amount of this contingent obligation, as well as the total amount of accumulated benefits and net assets of such plans, is not readily available. During 1988 and 1987, the Company sold certain operations. In most cases the party acquiring an operation agreed to continue making contributions to the plans. Safeway is relieved of the obligations related to these sold operations to the extent the acquiring parties continue to make contributions. Whether such sales could result in withdrawal under ERISA and, if so, whether such withdrawals could result in liability to the Company, is not determinable at this time. In 1993, Safeway settled a claim by the Central States, Southeast and Southwest Pension Fund in connection with an alleged withdrawal related to sold operations. This settlement did not have a significant impact on the consolidated financial statements. Retirement Restoration Plan The Retirement Restoration Plan (the successor to the Senior Executive Supplemental Benefit Plan) provides death benefits and supplemental income payments after retirement for senior executives. The Company recognized expense of $1.7 million in 1994, $7.8 million in 1993, and $6.4 million in 1992. The aggregate projected benefit obligation of the Retirement Restoration Plan was approximately $38.4 million at year-end 1994 and $45.4 million at year-end 1993. Postretirement Benefits Other Than Pensions In addition to pension and the Retirement Restoration Plan benefits, the Company sponsors postretirement plans that provide medical and life insurance benefits to certain salaried employees. Retirees share a portion of the cost of the postretirement medical plans. Safeway pays all of the cost of the life insurance plans. The plans are not funded. In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual of the expected cost of such postretirement benefits during employee service periods. The cumulative effect of adoption was $10.5 million ($0.04 per share). At year-end 1994 and 1993, the Company's accumulated postretirement benefit obligation ("APBO") was $25.5 million and $26.9 million. The APBO represents the actuarial present value of benefits expected to be paid after retirement. Postretirement expense was $2.9 million in 1994 and $2.8 million in both 1993 and 1992. F-25 59 The significant assumptions used to determine the periodic postretirement benefit expense and the APBO were as follows:
- ---------------------------------------------------------------------------------- 1994 1993 - ---------------------------------------------------------------------------------- Discount rate 8.0% 7.0% Rate of salary increase 5.5 5.5
A 13% annual rate of increase in the per capita cost of postretirement medical benefits was assumed for 1994. The rate was assumed to decrease gradually to 6% for 2006 and remain at that level thereafter. If the health care cost trend rate assumptions were increased by 1% in each year, the APBO as of year-end 1994 would increase $1.0 million, and the net periodic postretirement benefit expense for 1994 would increase $0.2 million. Retiree contributions have historically been adjusted when plan costs increase. The APBO for the medical plans anticipates future cost-sharing changes to the written plan that are consistent with the Company's past practice. H - ------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------- Legal Matters In July 1988, there was a major fire at the Company's dry grocery warehouse in Richmond, California. Through January 27, 1995, approximately 125,000 claims for personal injury and property damage arising from the fire had been settled for an aggregate amount of approximately $119 million. The Company's loss as a result of the fire damage to its property and settlement of the above claims was substantially covered by insurance. As of January 27, 1995, there were still pending approximately 2,600 claims against the Company for personal injury (including punitive damages) and approximately 2,500 separate claims against the Company for property damage arising from the smoke, ash and embers generated by the fire. A substantial percentage of these claims have been asserted in lawsuits against the Company filed in the Superior Court for Alameda County, California. Although no persons died or were injured in the fire itself, the claims include wrongful death actions based on the grounds that pre-existing health conditions were aggravated by smoke, ash or embers from the fire. There can be no assurance that the pending claims will be settled or otherwise disposed of for amounts and on terms comparable to those settled to date. The Company's excess insurance carrier asserted that its liability policy does not cover third-party claims against the Company arising from the fire because of the policy's pollution exclusion and notice provisions in the exclusion. In 1994, a panel of arbitrators in London rendered a decision in Safeway's favor, ruling that Safeway is entitled to be indemnified by the carrier under the policy. Safeway believes that coverage under the policy will be sufficient and available for resolution of all remaining third-party claims arising out of the fire. In February 1988, the Company sold its Kansas City Division to a company formed by Morgan, Lewis, Githen & Ahn Fund I and financed principally by the Prudential Insurance Company of America. In January 1993, the buyer (Food Barn Stores, Inc.) filed a voluntary petition under Chapter 11 of the U. S. Bankruptcy Code, and the plan of reorganization was confirmed in July 1994. In January 1995, Food Barn filed suit against the Company and others in the U. S. Bankruptcy Court for the Western District of Missouri. In its complaint, Food Barn alleges that (i) the 1988 transaction was a fraudulent conveyance under New York law and (ii) the Company defrauded Food Barn and fraudulently induced it to enter into the February 1988 transaction. Food Barn seeks compensatory damages estimated to approximate $216 million plus interest, and $100 million in punitive damages. Safeway believes that it has numerous meritorious defenses, and intends to defend itself vigorously, in this case. There are also pending against the Company various claims and lawsuits arising in the normal course of business, some of which seek damages and other relief which, if granted, would require very large expenditures. It is management's opinion that although the amount of liability with respect to all of the above matters cannot be ascertained at this time, any resulting liability, including any punitive damages, will not have a material adverse effect on the Company's consolidated financial position. Commitments The Company has commitments under contracts for the purchase of property and equipment and for the construction of buildings. Portions of such contracts not completed at year-end are not reflected in the consolidated financial statements. These unrecorded commitments were $25 million at year-end 1994. F-26 60 I - ------------------------------------------------------------------------------- INVESTMENTS IN AFFILIATES - ------------------------------------------------------------------------------- Investments in affiliates consists of a 35% interest in Vons, which operates 336 grocery stores located mostly in southern California, and a 49% interest in Casa Ley, which operates 70 stores in western Mexico. At year-end 1994, the Company owned 15.1 million common shares, or 35% of total Vons shares outstanding. The Company's recorded investment in Vons was $236.9 million (including goodwill of $46.9 million) at year-end 1994 and $225.3 million (including goodwill of $48.3 million) at year-end 1993. Goodwill is being amortized over 40 years. At year-end 1994, the aggregate market value quoted on the New York Stock Exchange of Safeway's shares of Vons stock was $272.3 million. Summarized financial information derived from Vons' financial reports to the Securities and Exchange Commission was as follows (in millions):
- ---------------------------------------------------------- OCTOBER 9, OCTOBER 10, 1994 1993 - ---------------------------------------------------------- Current assets $ 445.5 $ 477.6 Property and equipment, net 1,224.1 1,149.1 Other assets 557.8 561.3 -------------------- Total assets $2,227.4 $2,188.0 -------------------- Current liabilities $ 535.3 $ 496.6 Long-term obligations 1,148.7 1,185.4 Shareholders' equity 543.4 506.0 -------------------- Total liabilities and shareholders' equity $2,227.4 $2,188.0 ====================
- --------------------------------------------------------------------------------- 52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED Results of Operations OCTOBER 9, OCTOBER 10, OCTOBER 4, 1994 1993 1992 - --------------------------------------------------------------------------------- Sales $ 4,990.9 $ 5,263.6 $ 5,475.5 Cost of sales and other expenses (4,954.5) (5,221.9) (5,402.4) --------------------------------------------- Income before extraordinary item and effect of accounting changes 36.4 41.7 73.1 Extraordinary item - (1.5) (16.1) --------------------------------------------- Income before effect of accounting changes $ 36.4 $ 40.2 $ 57.0 =============================================
Safeway's equity in Vons' income before the effect of accounting changes was $11.6 million in 1994, $12.9 million in 1993, and $18.6 million in 1992. The Company records its equity in Vons' net income on a one-quarter delay basis. In addition to lower operating income, Vons reported restructuring charges which decreased Safeway's equity in Vons' earnings by $3.9 million in 1994 and $11.7 million in 1993. According to Vons, these restructuring charges included anticipated expenses associated with a program to close under-performing stores and reduce work force. In 1992, Vons adopted SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The $55.1 million effect of these accounting changes is not reflected in the summarized financial information presented above. Safeway's share of Vons' accounting changes is included in the cumulative effect of accounting changes in the Company's Consolidated Statements of Income (Note A). Income from Safeway's equity investment in Casa Ley fell to $15.7 million in 1994 from $20.6 million in 1993 and $20.5 million in 1992 due to changes in the competitive environment in Mexico. Casa Ley had total assets of $448.4 million and $365.5 million as of September 30, 1994 and 1993 based on financial information provided by Casa Ley. Sales were $1,052.4 million and net income was $32.0 million for the 12 months ended September 30, 1994. Sales were $925.8 million and net income was $39.5 million for the 12 months ended September 30, 1993. Sales were $752.7 million and net income was $33.8 million for the 12 months ended September 30, 1992. J - -------------------------------------------------------------------------------- RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- KKR provides management, consulting and financial services to the Company for an annual fee. Such services include, but are not necessarily limited to, advice and assistance concerning any and all aspects of the operation, planning and financing of the Company. Payments for management fees, special services and reimbursement of expenses were $980,000 in 1994, $907,000 in 1993 and $826,000 in 1992. F-27 61 The Company holds an 80% interest in Property Development Associates ("PDA"), a partnership formed in 1987 with a company controlled by an affiliate of KKR, to purchase, manage and dispose of certain Safeway facilities which are no longer used in the retail grocery business. The financial statements of PDA are consolidated with those of the Company, and a minority interest of $23.0 million and $19.3 million at year-end 1994 and 1993 is included in accrued claims and other liabilities in the accompanying consolidated balance sheet. During 1994, the Company contributed to PDA nine properties no longer used in its retail grocery business which had an aggregate net book value of $9.7 million. In 1993, the Company contributed seven such properties having a net book value of $2.5 million to PDA. No gains or losses were recognized on these transactions. The minority partner contributed cash in an amount sufficient to maintain its 20% ownership. Safeway paid PDA $1.1 million in 1994, $2.0 million in 1993 and $1.5 million in 1992 for reimbursement of expenses related to management and real estate services provided by PDA. During 1994, Safeway began selling products to Vons for resale under their private label. Sales to Vons in 1994 were $19.5 million, and cost of sales was $18.5 million. K - -------------------------------------------------------------------------------- FINANCIAL INFORMATION BY GEOGRAPHIC AREA - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- (In millions) United States Canada Total - --------------------------------------------------------------------------------------------------------------------- 1994: Sales $12,240.1 $3,386.5 $15,626.6 Gross profit 3,409.7 840.3 4,250.0 Operating profit 490.9 121.2 612.1 Income before income taxes and extraordinary loss 337.7 86.4 424.1 Net working capital (deficit) (372.5) (13.5) (386.0) Total assets 4,171.3 850.8 5,022.1 Net assets 386.6 257.2 643.8 1993: Sales $11,756.0 $3,458.5 $15,214.5 Gross profit 3,269.0 814.4 4,083.4 Operating profit 436.3 5.2 441.5 Income (loss) before income taxes 252.3 (36.0) 216.3 Net working capital (deficit) (276.3) 66.5 (209.8) Total assets 4,084.0 990.7 5,074.7 Net assets 169.1 213.8 382.9 1992: Sales $11,547.1 $3,604.8 $15,151.9 Gross profit 3,164.6 941.8 4,106.4 Operating profit 330.1 111.5 441.6 Income before income taxes, extraordinary loss and cumulative effect of accounting changes 137.3 60.1 197.4 Net working capital (deficit) (67.2) 126.9 59.7 Total assets 4,177.5 1,048.3 5,225.8 Net assets 12.8 230.3 243.1
F-28 62 L - -------------------------------------------------------------------------------- QUARTERLY INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The summarized quarterly financial data presented below reflect all adjustments which, in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented. In 1994, Safeway began classifying advertising expenses as cost of goods sold. Advertising expenses were previously included in operating and administrative expenses. All prior periods have been reclassified to conform to the 1994 presentation.
- ----------------------------------------------------------------------------------------------------------------------- (In millions, except per-share amounts) Last Third Second First Year 16 Weeks 12 Weeks 12 Weeks 12 Weeks - ----------------------------------------------------------------------------------------------------------------------- 1994 SALES $ 15,626.6 $ 4,890.3 $ 3,631.8 $ 3,612.7 $ 3,491.8 GROSS PROFIT 4,250.0 1,335.2(1) 991.1 983.2 940.5 OPERATING PROFIT 612.1 199.5 148.5 146.7 117.4 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 424.1 140.4 106.8 103.4 73.5 EXTRAORDINARY LOSS RELATED TO EARLY RETIREMENT OF DEBT (10.5) (0.4) (2.7) (7.4) -- NET INCOME 239.7 85.3 61.0 51.5 41.9 INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT: PRIMARY INCOME BEFORE EXTRAORDINARY LOSS $ 1.02 $ 0.35 $ 0.26 $ 0.24 $ 0.17 EXTRAORDINARY LOSS (0.04) -- (0.01) (0.03) -- ------------------------------------------------------------------------- NET INCOME $ 0.98 $ 0.35 $ 0.25 $ 0.21 $ 0.17 ========================================================================= FULLY DILUTED INCOME BEFORE EXTRAORDINARY LOSS $ 1.01 $ 0.35 $ 0.26 $ 0.24 $ 0.17 EXTRAORDINARY LOSS (0.04) -- (0.01) (0.03) -- ------------------------------------------------------------------------- NET INCOME $ 0.97 $ 0.35 $ 0.25 $ 0.21 $ 0.17 ========================================================================= PRICE RANGE, NEW YORK STOCK EXCHANGE $ 9 3/4 $ 13 5/16 $ 11 11/16 $ 10 15/16 $ 9 3/4 to 15 15/16 to 15 15/16 to 13 15/16 to 13 1/8 to 13 7/16
- ----------------------------------------------------------------------------------------------------------------------- (In millions, except per-share amounts) Last Third Second First Year 16 Weeks 12 Weeks 12 Weeks 12 Weeks - ----------------------------------------------------------------------------------------------------------------------- 1993 Sales $ 15,214.5 $ 4,701.6 $ 3,558.9 $ 3,549.4 $ 3,404.6 Gross profit 4,083.4 1,263.2(1) 957.0 949.6 913.6 Operating profit 441.5 161.3 121.1 116.8(2) 42.3(2) Income (loss) before income taxes 216.3 82.2 74.0 63.2 (3.1) Net income (loss) 123.3 46.9(3) 42.1 36.0(2) (1.7)(2) Income (loss) per common share and common share equivalent: Primary $ 0.51 $ 0.19 $ 0.18 $ 0.15 $ (0.01) Fully diluted 0.50 0.19 0.17 0.15 (0.01) Price range, New York Stock Exchange $ 5 11/16 $ 9 1/16 $ 7 7/16 $ 6 3/4 $ 5 11/16 to 11 1/4 to 11 1/4 to 9 9/16 to 8 3/16 to 7 1/16
Note 1. The LIFO charge to cost of goods sold for the first 36 weeks of each year is based upon estimated annual inflation ("LIFO Indices"). Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories. Accordingly, fourth quarter pre-tax earnings were increased by $4.2 million in 1994 and $9.2 million in 1993. Note 2. Severance paid for a voluntary employee buyout in Alberta, Canada reduced operating profit and net income by $50.0 million and $27.5 million for the first quarter of 1993 and by $4.9 million and $2.7 million for the second quarter of 1993. Note 3. Restructuring charges recorded by Vons reduced Safeway's net income in the fourth quarter of 1993 by $8.7 million. F-29 63 (This Page Intentionally Left Blank) 64 (LOGO) 65 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued February 1, 1996 18,166,696 Shares Safeway Inc. (LOGO) COMMON STOCK ------------------------ OF THE 18,166,696 SHARES OF COMMON STOCK OFFERED, 3,633,339 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 14,533,357 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK OFFERED ARE BEING SOLD BY THE SELLING STOCKHOLDERS AS DESCRIBED HEREIN UNDER "PRINCIPAL AND SELLING STOCKHOLDERS" AND INCLUDE 16,250,000 PRESENTLY OUTSTANDING SHARES AND 1,716,696 AND 200,000 SHARES TO BE ISSUED CONCURRENTLY WITH THE CONSUMMATION OF THESE OFFERINGS UPON THE EXERCISE OF OUTSTANDING WARRANTS AND OPTIONS, RESPECTIVELY. NONE OF THE PROCEEDS FROM THE SALE OF THE SHARES WILL BE RECEIVED BY THE COMPANY OTHER THAN $1,916,696 (ASSUMING NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION) REPRESENTING THE EXERCISE PRICE OF THE WARRANTS AND OPTIONS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A STOCK DISTRIBUTION WHEREBY EACH HOLDER OF THE COMPANY'S COMMON STOCK RECEIVED ON JANUARY 30, 1996 ONE ADDITIONAL SHARE OF COMMON STOCK FOR EACH SHARE OWNED AS OF JANUARY 16, 1996. THE COMPANY'S COMMON STOCK IS LISTED ON THE NEW YORK AND PACIFIC STOCK EXCHANGES. ON JANUARY 31, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE WAS $25 1/2. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) STOCKHOLDERS(2) --------------------------------------------------------------- Per Share.............................. $ $ $ Total(3)............................... $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Includes an aggregate of $1,916,696 to be paid to the Company representing the exercise price of warrants for 1,716,696 Shares at $1.00 per share and the exercise price of options for 200,000 Shares at $1.00 per share. Expenses of the offerings, estimated at $550,000, will be paid by the Company. (3) The Selling Stockholders have granted to the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 2,725,004 additional Shares at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively, and the total amount to be paid to the Company representing the exercise price of the warrants and options will be $2,204,200. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters, and subject to approval of certain legal matters by Brown & Wood, counsel for the Underwriters. It is expected that the delivery of the Shares will be made on or about , 1996, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in New York funds. ------------------------ MORGAN STANLEY & CO. International DILLON, READ & CO. INC. GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED SMITH BARNEY INC. , 1996 66 APPENDIX A CHART DESCRIPTIONS PAGE 4 A bar graph entitled "Operating and Administrative Expenses as a Percent of Sales" which shows operating and administrative expenses as a percentage of sales as follows: 1992............................................ 24.19% 1993............................................ 23.94% 1994............................................ 23.28% 1995............................................ 22.73%
The graph has an initial value of 20%. PAGE 5 A line graph entitled "Annual Same-Store Sales Trends" which shows same-store sales trends as follows: 1990............................................ 2.5% 1991............................................ -0.3% 1992............................................ -1.6% 1993............................................ 2.1% 1994............................................ 4.4% 1995............................................ 4.6%
The graph has an initial value of -4%. PAGE 5 A bar graph entitled "Capital Expenditures" which shows capital expenditures as follows: 1992........................................... $553.4 1993........................................... $290.2 1994........................................... $352.2 1995........................................... $503.2 1996*.......................................... $ 550
- --------------- * Forecasted. The graph has an initial value of $0. 67 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID -------- SEC Registration Fee...................................................... $105,768 NASD Filing Fee........................................................... 37,500 Printing Costs............................................................ 50,000 Legal Fees and Expenses (other than Blue Sky)............................. 250,000 Accounting Fees and Expenses.............................................. 50,000 Blue Sky Fees and Expenses................................................ 20,000 Transfer Agent and Registrar Fees and Expenses............................ 10,000 Miscellaneous............................................................. 26,732 -------- TOTAL........................................................... $550,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by 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 the 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 By-laws, 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 By-laws. In general, any officer, director, employee or agent will be indemnified against expenses including attorneys' 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 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 expenses 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 II-1 68 conduct set forth above. Such determination will be made (i) by the Board of Directors by a majority vote of a quorum of disinterested directors who were not parties to such action, (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 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 attorneys' 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 By-laws. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, Section 13 of the By-laws 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 By-laws 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 Board of Directors may authorize, by a vote of a majority of a quorum of the 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 By-laws. The 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 Board of Directors so determines, greater than those provided for in Section 13 of the By-laws. Safeway 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 Safeway. ITEM 16. EXHIBITS. The following documents are filed as part of this Registration Statement:
EXHIBIT DESCRIPTION - ------- ----------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 4(i).1 Restated Certificate of Incorporation of the Company as filed with the Secretary of State of Delaware on February 23, 1990 (incorporated by reference to Exhibit 3.1 to the Registration Statement No. 33-33388 filed on February 12, 1990). 4(i).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(i).3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388).
II-2 69
EXHIBIT DESCRIPTION - ------- ----------------------------------------------------------------------------------- 4(i).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(i).5 Subscription Agreement dated as of December 15, 1986 by and between Safeway Stores, Incorporated (predecessor to the Company) and certain purchasers (incorporated by reference to Exhibit 10(ii)(a).1 to the Company's Annual Report on Form 10-K for the year ended January 3, 1987). 4(i).6 Form of Common Stock Purchase Warrants (incorporated by reference to Exhibit 4.7 to Amendment No. 1 to Registration Statement No. 33-9047). 5.1 Opinion of Latham & Watkins. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Latham & Watkins (included in its opinion filed as Exhibit 5.1). 24.1 Power of Attorney (included on Page II-4 of this Registration Statement). 27.1 Financial Data Schedules.
ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1993 may be permitted to directors, officers and controlling persons of Registrant pursuant to the provisions described in Item 15, or otherwise, the Registrant has 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 Registrant of expenses incurred or paid by a director, officer, or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, Registrant will, unless in the opinion of its counsel the matter has been settled by controlled precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1993, 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 of 1933, 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. (c) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 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. II-3 70 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF OAKLAND, STATE OF CALIFORNIA, ON THIS 1ST DAY OF FEBRUARY, 1996. SAFEWAY INC. By /s/ STEVEN A. BURD ------------------------------------ Steven A. Burd President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY EACH OF THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON FEBRUARY 1, 1996.
SIGNATURE TITLE - ------------------------------------------ ---------------------------------------------- /s/ STEVEN A. BURD President, Chief Executive Officer and - ------------------------------------------ Director (Principal Executive Officer) Steven A. Burd JULIAN C. DAY* Executive Vice President and Chief Financial - ------------------------------------------ Officer (Principal Financial Officer) Julian C. Day PETER A. MAGOWAN* Chairman of the Board - ------------------------------------------ Peter A. Magowan SAM GINN* Director - ------------------------------------------ Sam Ginn JAMES H. GREENE, JR.* Director - ------------------------------------------ James H. Greene, Jr. PAUL HAZEN* Director - ------------------------------------------ Paul Hazen HENRY R. KRAVIS* Director - ------------------------------------------ Henry R. Kravis ROBERT I. MACDONNELL* Director - ------------------------------------------ Robert I. MacDonnell GEORGE R. ROBERTS* Director - ------------------------------------------ George R. Roberts MICHAEL T. TOKARZ* Director - ------------------------------------------ Michael T. Tokarz *By: /s/ MICHAEL C. ROSS - ------------------------------------------ (Michael C. Ross, Attorney-in-fact)
II-4 71 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-00037 of Safeway Inc. of our report dated February 20, 1995 (January 30, 1996 as to the effects of the stock split discussed in Note A) (which expresses an unqualified opinion and includes an explanatory paragraph relating to changes in Safeway Inc.'s methods of accounting during the fiscal year ended January 2, 1993) appearing in the Prospectuses, which are part of such Registration Statement, and to the reference to us under the heading "Experts" in the Prospectuses. Deloitte & Touche LLP Oakland, California January 30, 1996 72 INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE - ------- ------------------------------------------------------------------------------ ---- 1.1 Form of Underwriting Agreement. 4(i).1 Restated Certificate of Incorporation of the Company as filed with the Secretary of State of Delaware on February 23, 1990 (incorporated by reference to Exhibit 3.1 to the Registration Statement No. 33-33388 filed on February 12, 1990). 4(i).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 year ended January 2, 1993). 4(i).3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388). 4(i).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(i).5 Subscription Agreement dated as of December 15, 1986 by and between Safeway Stores, Incorporated (predecessor to the Company) and certain purchasers (incorporated by reference to Exhibit 10(ii)(a).1 to the Company's Annual Report on Form 10-K for the year ended January 3, 1987). 4(i).6 Form of Common Stock Purchase Warrants (incorporated by reference to Exhibit 4.7 to Amendment No. 1 to Registration Statement No. 33-9047). 5.1 Opinion of Latham & Watkins. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Latham & Watkins (included in its opinion filed as Exhibit 5.1). 24.1 Power of Attorney (included on Page II-4 of this Registration Statement). 27.1 Financial Data Schedules.
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 B&W Draft 1/31/96 SAFEWAY INC. UNDERWRITING AGREEMENT dated February , 1996 18,166,696 Shares Common Stock, Par Value $0.01 Per Share 2 February , 1996 Morgan Stanley & Co. Incorporated Dillon, Read & Co. Inc. Goldman, Sachs & Co. Merrill Lynch & Co. Salomon Brothers Inc Smith Barney Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Dillon, Read & Co. Inc. Goldman Sachs International Merrill Lynch International Limited Salomon Brothers International Limited Smith Barney Inc. c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England 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 (as defined below) 16,450,000 shares of the Common Stock, par value $0.01 per share, of the Company (the "Firm Shares") and warrants (the "Firm Warrants") for the purchase of an aggregate of 1,716,696 of Common Stock, par value $0.01 per share, of the Company (the "Firm Warrant Shares"). It is understood and agreed to by all parties that, subject to the conditions hereinafter stated, 13,160,000 Firm Shares (the "U.S. Firm Shares") and Firm Warrants (the "U.S. Firm Warrants") to purchase 1,373,357 Firm Warrant Shares (the "U.S. Firm Warrant Shares") will be sold to the several U.S. Underwriters named in Schedule II hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Shares and U.S. Firm Warrant Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and 3,290,000 Firm Shares (the "International Shares") and Firm Warrants (the "International Warrants") to purchase 343,339 Firm Warrant Shares (the "International 3 Warrant Shares") will be sold to the several International Underwriters named in Schedule III hereto (the "International Underwriters") in connection with the offering and sale of such International Shares and International Warrant Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Dillon, Read & Co. Inc., Goldman, Sachs & Co., Merrill Lynch & Co., Salomon Brothers Inc and Smith Barney Inc. shall act as representatives (the "U.S. Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited, Dillon, Read & Co. Inc., Goldman, Sachs International Limited, Merrill Lynch International Limited, Salomon Brothers International Limited and Smith Barney Inc. shall act as representatives (the "International Representatives") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter referred to as the Underwriters. The Selling Stockholders also severally propose to sell to the several U.S. Underwriters an aggregate of not more than an additional 2,467,500 shares of Common Stock, par value $0.01 per share, of the Company (the "Additional Shares") and warrants (the "Additional Warrants") for the purchase of an aggregate of not more than an additional 257,504 shares of Common Stock, par value $0.01 per share, of the Company (the "Additional Warrant Shares"), each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in Schedule I hereto, if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such Additional Shares and such Additional Warrants granted to the U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares, the Firm Warrants and the Additional Warrants are hereinafter collectively referred to as the Warrants and the Firm Warrant Shares and the Additional Warrant Shares are hereinafter collectively referred to as the Warrant Shares. 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. All of the share numbers and other information in this Agreement give effect to a two for one stock split of the Company's Common Stock on January 30, 1996. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Securities. The registration statement contains two forms of prospectuses to be used in connection with the offering and sale of the Securities: the U.S. prospectus, to be used in connection with the offering and sale of Securities in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Securities outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. 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. The U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of the Securities are hereinafter collectively referred to as the Prospectus. All references herein to the Registration Statement and the Prospectus include the documents incorporated therein by reference. 2 4 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 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) Each part of the Registration Statement, when such part became effective, did not contain and each such part, 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 through you 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; 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable, and the rules and regulations of the Commission thereunder, and none of such documents 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; 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 and will not contain an 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. (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. 3 5 (f) Each 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, has the corporate power and authority to own its property and conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, 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. (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 is required for the performance by the Company 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. (h) The accountants who have audited certain financial statements included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the rules and regulations thereunder. (i) The financial statements (together with the related notes thereto) included 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. (j) This Agreement has been duly authorized, executed and delivered by the Company. (k) The shares of Common Stock (the "Merger Warrant Shares") issuable upon exercise of warrants (the "Merger Warrants") issued pursuant to a warrant agreement dated as of November 24, 1986, as amended (the "Warrant Agreement") have been duly authorized and when issued and delivered against payment therefor as provided in the Merger Warrants and the Warrant Agreement, will be validly issued, fully paid and non-assessable and the issuance of such shares will not be subject to any preemptive rights. (l) 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. 4 6 (m) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (n) 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, Warrants and Warrant Shares conform [as to legal matters] to the description thereof contained in the Prospectus. (o) 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. (p) 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. (q) The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (r) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is imminent which is reasonably likely to have a material adverse effect on the Company and its subsidiaries, taken as a whole. (s) 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. (t) 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. (u) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 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: 5 7 (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 (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 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. (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 "Principal and 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 1995 Proxy Statement fairly presents the information required to be set forth therein and contains no material misstatement or omission. Any certificate signed by any officer of the Company or by or on behalf of any Selling Stockholder and delivered to the U.S. Representatives, the International Representatives 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 $1.00 per Warrant (the "Warrant Exercise Price") for each Warrant Share), the number of Firm Shares or Firm 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 Firm Warrants, as the case may be, to be sold by such Selling Stockholder as the number of Firm Shares and Firm Warrants, respectively, set forth in 6 8 Schedules II or III hereto opposite the name of such Underwriter bears to the total number of Firm Shares and Firm Warrants, respectively. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Selling Stockholders agree to sell to the U.S. Underwriters the Additional Shares and the Additional Warrants, as the case may be, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to 2,467,500 Additional Shares at the Share Purchase Price and up to 257,504 Additional Warrants at the Warrant Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Selling Stockholders in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares and Additional Warrants to be purchased by the U.S. Underwriters and the date on which such Additional Shares and Additional Warrants are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares and Additional Warrants 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 Firm Warrant Shares. If any Additional Shares and Additional Warrants are to be purchased, each Selling Stockholder agrees, severally and not jointly, to sell the number of Additional Shares or Additional Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares or Additional Warrants to be sold as the number of Additional Shares or Additional Warrants set forth in Schedule I opposite the names of such Selling Stockholders bears to the total number of Additional Shares and Additional Warrants, and each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares or Additional Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares and Additional Warrants, as the case may be, to be purchased as the number of U.S. Firm Shares and U.S. Firm Warrants, respectively, set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of U.S. Firm Shares and U.S. Firm Warrants, respectively. At the Closing Date and the Option Closing Date, simultaneous with (i) the purchase by the Underwriters of Firm Warrants or the purchase by the U.S. Underwriters of Additional Warrants and (ii) the payment to the Company of the Warrant Exercise Price, the Underwriters and U.S. Underwriters, respectively, will be deemed to have exercised such Firm Warrants or Additional Warrants and the Company will immediately issue to the Underwriters and U.S. Underwriters, respectively, at the Closing Date and Option Closing Date, the related Firm Warrant Shares and Additional Warrant Shares, as the case may be. Each of the Company, the Selling Stockholders and certain directors and executive officers 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 [or (ii) enter into any swap or other agreement that transfers, 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 hereof, (C) option grants under stock option plans in effect on the date hereof, 7 9 (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 hereof 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. 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. 5. PAYMENT AND DELIVERY. Payment for the Firm Shares and Firm Warrants to be sold by each Selling Stockholder shall be made by certified or official bank check or checks payable to the order of the Selling Stockholders in _____________ Clearing House funds or similar next day funds at the office of Latham & Watkins, 505 Montgomery Street, San Francisco, California 94104 at 7:00 A.M., local time, on __________, 1996, or at such other time on the same or such other date, not later than _______, 1996, as shall be designated in writing by you. Payment of the Warrant Exercise Price for Firm Warrant Shares shall be made by certified or official bank check or checks payable to 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 and Additional Warrants to be sold by each Selling Stockholder shall be made by certified or official bank check or checks payable to the order of the Selling Stockholders in _____________ Clearing House funds or similar next day funds at the office of Latham & Watkins, 505 Montgomery Street, San Francisco, California 94104 at 7:00 A.M., local time, on the date specified in the notice described in Section 3 or on such other date, in any event not later than _________, 1996, as shall be designated in writing by you. Payment of the Warrant Exercise Price for Additional Warrant Shares shall be made by certified or official bank check or checks payable to the order of the Company on the same such date. The time and date of such payment are hereinafter referred to as the "Option Closing Date." In the event that Morgan Stanley & Co. Incorporated shall, as an accommodation to the Selling Stockholders, arrange for payment for all or a portion of the Shares or Warrants to be made to the Selling Stockholders by wire transfer of immediately available funds, the Selling Stockholders agree to reimburse Morgan Stanley & Co. Incorporated for their reasonably estimated overnight cost of funds in respect of such payment, such reimbursement to be effected by wire transfer on the Closing Date or the Option Closing Date, as the case may be, of immediately available funds. Certificates for the Firm Shares, Firm Warrant Shares, Additional Shares and Additional Warrant 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, Firm Warrant Shares, Additional Shares and Additional Warrant Shares shall be delivered to you on the Closing Date or the Option Closing 8 10 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, 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, on the other hand, to purchase and pay for the Shares and Warrants on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [_______________] (New York time) on 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 or of any review for a possible change that indicates possible negative implications, 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 with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. (c) The Underwriters shall have received on the Closing Date an opinion of Latham & Watkins, counsel for the Company, dated the Closing Date, 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 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 [and Merger 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 9 11 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 performance by the Company of all its obligations under this Agreement will not result in the violation by the Company of its Restated Certificate of Incorporation or By-laws or any applicable federal or California statute, rule or regulation (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 or 9.35% Senior Subordinated Notes due 1999, 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 or California court or governmental agency or body is required for the issue and sale of the Warrant Shares or the performance by the Company of all its obligations under this Agreement except such as have been obtained under the Securities Act 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 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 and other financial and statistical data and related schedules 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; (ix) the statements (A) 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; and 10 12 (xi) the Registration Statement and Prospectus (except for financial statements, schedules and other financial and statistical data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with 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. 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 (relying, in connection with such counsel's determination as to materiality, to a large extent upon statements as to matters of fact of officers and other representatives of the Company), no facts came to such counsels attention that caused such counsel to believe that the Registration Statement, 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 Prospectus, as of its date or as of the Closing Date, contained an untrue statement of a material fact or omitted 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 and statistical data included in the Registration Statement or the Prospectus or incorporated 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 other jurisdiction in which its ownership or lease of substantial properties or the conduct of its business require 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 single enterprise; (ii) 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 11 13 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 require 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 single enterprise; 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 performance by the Company of all its obligations under this Agreement and the issuance of the Merger Warrant Shares pursuant to the exercise of the Merger Warrants, 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 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) The Underwriters shall have received on the Closing Date an opinion of Latham & Watkins, counsel for the Selling Stockholders, dated the Closing Date, 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 charter documents, if any, 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 securities laws of the various states in connection with the purchase and distribution of the Securities by the Underwriters, as to which such counsel need not express an opinion; 12 14 (iii) upon delivery of the Shares and Warrants and payment therefor pursuant hereto, the Underwriters will hold such Shares and Warrants (including the Warrant Shares issued upon exercise of the Warrants after payment of the exercise price therefor) free and clear of all liens, encumbrances, equities or claims, assuming that such Underwriters have purchased such Shares, Warrants and Warrant Shares in good faith and without notice of any lien, encumbrance, equity or claim or any other adverse claim within the meaning of the Uniform Commercial Code; (f) The Underwriters shall have received on the Closing Date an opinion of Brown & Wood, 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), subparagraph (iv) and subparagraph (xi) of paragraph (c) above. With respect to subparagraph (xii) 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 herein are true and correct on and as of the Closing Date and that such Selling Stockholders have complied with all of the agreements and satisfied 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) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, officers and directors of the Company relating to sales and 13 15 certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (j) At the date of this Agreement, the Company and the Selling Stockholders shall have furnished for review by the U.S. Representatives and the International Representatives copies of such further information, certificates and documents as they may reasonably request. (k) Simultaneous with the purchase of the Firm Warrants and any Additional Warrants and the payment of the Warrant Exercise Price by the Underwriters, the Company will issue Warrant Shares. The several obligations of the U.S. Underwriters to purchase Additional Shares and Additional Warrants hereunder are subject to the delivery to the U.S. Underwriters on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and Additional Warrant 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, seven signed copies 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 be 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 [Company and 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 [Company and 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 14 16 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 covering the twelve-month period ending ______________, 1997 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 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) all filing fees and reasonable disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering by the National Association of Securities Dealers, Inc., (iv) the cost of printing certificates representing the Securities, (v) the costs and charges of any transfer agent, registrar or depositary, (vi) 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, (vii) 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 (viii) 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 15 17 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 Firm Warrants and any Additional Warrants and the payment to the Company of the Warrant Exercise Price by the Underwriters, the Company will issue the Firm Warrant Shares and any Additional Warrant Shares, respectively, 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 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 Associates and certain other parties named therein, dated as of November 25, 1986 (the "Registration Rights Agreement") and that certain Subscription Agreement entered into by the Company and Peter A. Magowan as of December 15, 1986 (the "Subscription 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 16 18 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 and the Subscription 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 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 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 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 17 19 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 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 18 20 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, the New York Stock Exchange, (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, 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 Firm Warrants set forth opposite their respective names in Schedule II or III, as the case may be, bears to the aggregate number of Firm Shares and Firm Warrants set forth opposite the names of all such non-defaulting 19 21 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 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 Firm Warrants and the aggregate number of Firm Shares and Firm Warrants with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares and Firm Warrants to be purchased, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares and Firm 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 U.S. Underwriter or Underwriters shall fail or refuse to purchase Additional Shares or Additional Warrants and the aggregate number of Additional Shares and Additional Warrants with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares and Additional Warrants to be purchased, the non-defaulting U.S. Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares and Additional Warrants or (ii) purchase not less than the number of Additional Shares and Additional Warrants 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. [Carve-out for termination by Underwriters under Section 9 or 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. 12. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 20 22 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: The Selling Stockholders named in Schedule I hereto, acting severally By_______________________________ Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED DILLON, READ & CO. INC. GOLDMAN, SACHS & CO. MERRILL LYNCH PIERCE, FENNER & SMITH INCORPORATED SALOMON BROTHERS INC SMITH BARNEY INC. Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule II hereto. By Morgan Stanley & Co. Incorporated By_______________________________________________ Name: Title: 21 23 MORGAN STANLEY & CO. INTERNATIONAL LIMITED DILLON, READ & CO. INC. GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED SMITH BARNEY INC. Acting severally on behalf of themselves and the several International Underwriters named in Schedule III hereto By Morgan Stanley & Co. International Limited By_______________________________________________ Name: Title: 22 24 SCHEDULE I
TOTAL NUMBER OF ADDITIONAL WARRANTS (EXPRESSED AS TOTAL NUMBER TOTAL NUMBER ADDITIONAL OF FIRM OF ADDITIONAL WARRANT WARRANTS TO SHARES TO BE SHARES) TO BE TOTAL NUMBER BE SOLD SOLD IF SOLD IF OF FIRM (EXPRESSED AS MAXIMUM MAXIMUM SHARES TO BE FIRM WARRANT OPTION OPTION SELLING STOCKHOLDERS SOLD SHARES) EXERCISED EXERCISED ---- ------- --------- --------- KKR Associates 16,250,000 2,437,500 SSI Equity Associates 1,716,696 257,504 Peter A. Magowan 200,000 30,000 ========== ========= ========= ======= TOTAL 16,450,000 1,716,696 2,467,500 257,504 ========== ========= ========= =======
23 25 SCHEDULE II
TOTAL NUMBER OF ADDITIONAL TOTAL WARRANTS TO NUMBER OF BE U.S. FIRM TOTAL PURCHASED WARRANTS TO NUMBER OF (EXPRESSED BE ADDITIONAL AS TOTAL PURCHASED SHARES TO ADDITIONAL NUMBER OF (EXPRESSED BE WARRANT U.S. FIRM AS U.S. PURCHASED SHARES) IF SHARES TO FIRM IF MAXIMUM MAXIMUM BE WARRANT OPTION OPTION U.S. UNDERWRITERS PURCHASED SHARES) EXERCISED Exercised --------- ------- --------- --------- MORGAN STANLEY & CO. INCORPORATED DILLON, READ & CO. INC. GOLDMAN, SACHS & CO. MERRILL LYNCH PIERCE, FENNER & SMITH INCORPORATED SALOMON BROTHERS INC SMITH BARNEY INC. [NAMES OF OTHER UNDERWRITERS] Total 13,160,000 1,373,357 2,467,500 257,504
24 26 SCHEDULE III
INTERNATIONAL UNDERWRITERS TOTAL NUMBER OF INTERNATIONAL WARRANTS TO BE TOTAL NUMBER OF PURCHASED (EXPRESSED INTERNATIONAL SHARES AS INTERNATIONAL TO BE PURCHASED WARRANT SHARES) --------------- --------------- MORGAN STANLEY & CO. INTERNATIONAL LIMITED DILLON, READ & CO. INC. GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED SMITH BARNEY INC. [NAMES OF OTHER INTERNATIONAL UNDERWRITERS] Total 3,290,000 343,339
25 27 Exhibit A [FORM OF LOCK-UP CONTRACT] February , 1996 Morgan Stanley & Co. Incorporated Dillon, Read & Co. Inc. Goldman, Sachs & Co. Merrill Lynch & Co. Salomon Brothers Inc Smith Barney Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Morgan Stanley & Co. International Limited Dillon, Read & Co. Inc. Goldman Sachs International Merrill Lynch International Limited Salomon Brothers International Limited Smith Barney Inc. c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs: The undersigned understands that Morgan Stanley & Co. Incorporated, as Representative of the several U.S. Underwriters named or to be named in Schedule I, hereto (the "U.S. Underwriters") and of the several International Underwriters named or to be named in Schedule II hereto (the "International Underwriters"), propose to enter into an Underwriting Agreement with Safeway Inc., a Delaware corporation (the "Company") providing for the public offering (the "Public Offering") by the U.S. and International Underwriters (together, the "Underwriters"), including yourselves, of _____________ shares (the "Shares") of the Common Stock, par value $0.01 per share, of the Company (the "Common Stock"). In consideration of the Underwriters' agreement to purchase and make the Public Offering of the Shares, and for other good and valuable consideration receipt of which is hereby acknowledged, the undersigned 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 first used to confirm sales of Shares (the "Prospectus"), (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 [or (2) enter into any swap or other agreement that transfers, 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. The foregoing sentence shall not apply to (A) the Shares to be sold pursuant to the Public Offering, (B) any shares of Common Stock issued by the Company pursuant to stock option plans in effect on the date hereof, (C) option grants under stock option plans in effect on the date hereof, (D) any agreement of the Company in connection with an acquisition of assets or properties or any capital stock issuable pursuant to the 28 terms of such an agreement, (E) capital stock issuable upon the exercise of warrants outstanding on the date hereof or (F) the cancellation of warrants. In addition, the undersigned 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. Very truly yours, __________________________________ (Name) __________________________________ (Address) Accepted as of the date first set forth above: MORGAN STANLEY & CO. INCORPORATED By_______________________________________________ 2 EX-5.1 3 OPINION OF LATHAM & WATKINS 1 EXHIBIT 5.1 [LETTERHEAD] February 1, 1996 Safeway Inc. Fourth & Jackson Streets Oakland, California 94660 Re: Safeway Inc.-Registration Statement on Form S-3 Common Stock, $0.01 par value Ladies and Gentlemen: In connection with the filing by Safeway Inc. (the "Company") of its Registration Statement on Form S-3 with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), on January 3, 1996 (File No. 333-00037), as amended by Amendment No. 1 filed with the Commission on February 1, 1996 (collectively, the "Registration Statement"), with respect to the registration of up to 20,891,700 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), and any shares which may be registered pursuant to any subsequent registration statement the Company may hereafter file with the Commission in connection with such transaction pursuant to Rule 462(b) under the Act (collectively, the "Shares"), you have requested our opinion with respect to the matters set forth below. Of the Shares being registered, (i) 18,687,500 shares of Common Stock, including 2,437,500 shares of Common Stock which the underwriters named in the Registration Statement (the "Underwriters") have the option to purchase to cover over-allotments, if any, are presently issued and outstanding shares of Common Stock (the "Outstanding Shares"), (ii) 1,974,200 shares of Common Stock, including 257,504 shares of Common Stock which the Underwriters have the option to purchase to cover over-allotments, if any, are issuable upon the exercise of certain outstanding warrants of the Company (the "Warrant Shares"), and (iii) 230,000 shares of Common Stock, including 30,000 shares of 2 LATHAM & WATKINS Safeway Inc. February 1, 1996 Page 2 Common Stock which the Underwriters have the option to purchase to cover over-allotments, if any, are issuable upon the exercise of certain outstanding options issued by the Company (the "Option Shares"). As used herein, the Outstanding Shares, the Warrant Shares and the Option Shares include any shares which may be registered pursuant to any subsequent registration statement the Company may hereafter file with the Commission in connection with such transaction pursuant to Rule 462(b) under the Act. In our capacity as your counsel in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares, and for the purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and instruments, as we have deemed necessary or appropriate for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the General Corporation Law of the State of Delaware, and we express no opinion with respect to the applicability thereto, or the effect thereon, of any other laws, or as to any matters of municipal law or the laws of any other local agencies within the state. Subject to the foregoing, it is our opinion that: 1. The Outstanding Shares have been duly authorized and validly issued and are fully paid and nonassessable. 2. The Warrant Shares have been duly authorized, and, upon issuance, delivery and payment therefor in the manner contemplated by the Common Stock Purchase Warrants issued by the Company on November 25, 1986, will be validly issued, fully paid and nonassessable. 3. The Option Shares have been duly authorized, and, upon issuance, delivery and payment therefor in the manner contemplated by the stock option agreement dated as of December 30, 1986 relating thereto, will be validly issued, fully paid and nonassessable. 3 LATHAM & WATKINS Safeway Inc. February 1, 1996 Page 3 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, to the reference to our firm under the caption "Legal Matters" in the prospectuses included therein and to the incorporation by reference of this opinion and consent into a registration statement filed with the Commission pursuant to Rule 462(b) under the Act relating to the Shares. Very truly yours, LATHAM & WATKINS EX-23.1 4 OPINION OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-00037 of Safeway Inc. of our report dated February 20, 1995 (January 30, 1996 as to the effects of the stock split discussed in Note A) (which expresses an unqualified opinion and includes an explanatory paragraph relating to changes in Safeway Inc.'s methods of accounting during the fiscal year ended January 2, 1993) appearing in the Prospectuses, which are part of such Registration Statement, and to the reference to us under the heading "Experts" in the Prospectuses. Deloitte & Touche LLP Oakland, California January 30, 1996 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME ON PAGES F-11 THROUGH F-29 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS JAN-01-1994 JAN-02-1993 JAN-01-1994 118400 0 119500 0 1128100 1464000 4270300 1647200 5074700 1673800 2481300 0 0 2000 380900 5074700 15214500 15214500 11131100 11131100 0 0 265500 216300 93000 123300 0 0 0 123300 0.51 0.50
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME IN THE COMPANY'S 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 26, 1994 ADJUSTED FOR A TWO-FOR-ONE STOCK SPLIT EFFECTIVE JANUARY 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1994 JAN-02-1994 MAR-26-1994 36300 0 124900 0 1092800 1347100 4202200 1686200 4935200 1590700 2425500 0 0 2000 420800 4935200 3491800 3491800 2551300 2551300 0 0 55800 73500 31600 41900 0 0 0 41900 0.17 0.17
EX-27.3 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the condensed balance sheets and condensed consolidated statements of income on pages 3 through 5 of the Company's Form 10-Q for the quarterly period ending June 18, 1994 adjusted for a two-for-one stock split effective January 1996 and is qualified in its entirety by reference to such financial statements. 1000 6-MOS DEC-31-1994 JUN-18-1994 49300 0 129300 0 1051400 1327000 4214800 (1739300) 4880500 1673900 2231700 0 0 2000 474000 4880500 7104500 7104500 (5180800) (5180800) 0 0 (108500) 176900 (76100) 100800 0 (7400) 0 93400 0.39 0.38
EX-27.4 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 10, 1994, ADJUSTED FOR A TWO-FOR-ONE STOCK SPLIT EFFECTIVE JANUARY 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 9-MOS DEC-31-1994 JAN-02-1994 SEP-10-1994 58400 0 136500 0 1057100 1343700 4279800 (1798500) 4887300 1750000 2073100 0 0 2000 547700 4887300 10736300 10736300 (7821500) 0 0 0 (156600) 283700 (199200) 164500 0 (10100) 0 154400 0.64 0.63
EX-27.5 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME ON PAGES F-11 THROUGH F-29 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 12-MOS DEC-31-1994 JAN-02-1994 DEC-31-1994 60700 0 147900 0 1136000 1437600 4375300 (1868900) 5022100 1823600 2024300 0 0 2100 641700 5022100 15626600 15626600 (11376600) 0 0 0 (221700) 424100 (173900) 250200 0 (10500) 0 239700 0.98 0.97
EX-27.6 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS DUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 25, 1995 ADJUSTED FOR A TWO-FOR-ONE STOCK SPLIT EFFECTIVE JANUARY 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-30-1995 JAN-01-1995 MAR-25-1995 50500 0 144900 0 1088500 1382200 4421700 1924300 4963200 1717700 2099900 0 0 2100 601300 4963200 3632300 3632300 2637100 2637100 0 0 47500 109800 47800 62000 0 0 0 62000 0.26 0.26
EX-27.7 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 17, 1995, ADJUSTED FOR A TWO-FOR-ONE STOCK SPLIT EFFECTIVE JANUARY 1996, AN D IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-MOS DEC-30-1995 JAN-01-1995 JUN-17-1995 28200 0 159600 0 1087500 1383000 4498200 1980100 4969700 1796300 1962300 0 0 2100 661000 4969700 7385700 7385700 5382700 5382700 0 0 96700 231300 100600 130700 0 0 0 130700 0.54 0.54
EX-27.8 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON PAGE 3 THROUGH 5 OF THE COMPANY FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 9, 1995, ADJUSTED FOR A TWO-FOR-ONE STOCK SPLIT EFFECTIVE JANUARY 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 9-MOS DEC-30-1995 JAN-01-1995 SEP-09-1995 48700 0 169400 0 1107000 1429800 4575800 2042800 5032700 1799600 1940300 0 0 2100 756300 5032700 11231200 11231200 8179100 8179100 0 0 141300 372900 158500 214400 0 0 0 214400 0.89 0.88
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