-----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, KzB3S5QnI+uZd0R+qsebCWg2BOGTzNF7lBwwPilGj6GsPOH9OiQPczsxhChKHQFj qj/A9QGVaMTZFUv7Lr5kfg== 0000950149-97-002187.txt : 19971211 0000950149-97-002187.hdr.sgml : 19971211 ACCESSION NUMBER: 0000950149-97-002187 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19971210 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEWAY INC CENTRAL INDEX KEY: 0000086144 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 943019135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-40807 FILM NUMBER: 97735649 BUSINESS ADDRESS: STREET 1: 5918 STONERIDGE MALL RD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104673000 MAIL ADDRESS: STREET 1: 5918 STONERIDGE MALL ROAD CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: SAFEWAY STORES INC DATE OF NAME CHANGE: 19900226 S-3/A 1 PRE-EFFECTIVE AMENDMENT #1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997 REGISTRATION NO. 333-40807 ================================================================================ 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 94-3019135 (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER) ORGANIZATION)
5918 STONERIDGE MALL ROAD PLEASANTON, CALIFORNIA 94588 (510) 467-3000 (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MICHAEL C. ROSS SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL SAFEWAY INC. 5918 STONERIDGE MALL ROAD PLEASANTON, CALIFORNIA 94588 (510) 467-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: TRACY K. EDMONSON PAUL C. PRINGLE LAURA L. GABRIEL BROWN & WOOD LLP LATHAM & WATKINS 555 CALIFORNIA STREET 505 MONTGOMERY STREET, SUITE 1900 SAN FRANCISCO, CA 94104 SAN FRANCISCO, CALIFORNIA 94111-2562 (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. [ ] 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 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. SUBJECT TO COMPLETION, DATED DECEMBER 10, 1997 25,000,000 SHARES SAFEWAY INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------------ Of the 25,000,000 shares of Common Stock offered, 22,500,000 shares are being offered hereby in the United States and 2,500,000 shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share are identical for both offerings. See "Underwriting". All the shares of Common Stock offered are being sold by the Selling Stockholders and include 22,134,636 presently outstanding shares and 2,865,364 shares to be issued concurrently with the consummation of these offerings upon the exercise of outstanding warrants. See "Principal and Selling Stockholders". The Company will not receive any of the proceeds from the sale of the shares other than $2,865,364 (assuming no exercise of the Underwriters' over-allotment options) representing the exercise price of the warrants. The last reported sale price of the Common Stock, which is listed under the symbol "SWY", on the New York Stock Exchange on December 9, 1997 was $60 1/2. See "Price Range of Common Stock". ------------------------ 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. ------------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING OFFERING PRICE DISCOUNT(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 $2,865,364 to be paid to the Company representing the exercise price of warrants for 2,865,364 shares at $1.00 per share. Expenses of the offerings, estimated at $950,000, will be paid by the Company. (3) The Selling Stockholders have granted the U.S. Underwriters an option for 30 days to purchase up to an additional 3,375,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Selling Stockholders have granted the International Underwriters a similar option with respect to an additional 375,000 shares as part of the concurrent international offering. If such options are exercised in full, the total initial public offering price, underwriting discount 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 will be $3,295,169. See "Underwriting". ------------------------ The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about December , 1997, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS SBC WARBURG DILLON READ INC. SALOMON SMITH BARNEY ------------------------ The date of this Prospectus is December , 1997. LOGO 3 LOGO CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 2 4 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. ------------------------ AVAILABLE INFORMATION Safeway Inc. ("Safeway" or the "Company") has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") 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, part of which has been omitted in accordance with the rules and regulations of the Commission. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof and otherwise incorporated therein. Statements made in this Prospectus as to the contents of any agreement or other document referred to herein are qualified by reference to the copy of such agreement or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files periodic reports, proxy statements and other information with the Commission. The Registration Statement, including the exhibits thereto, as well as such reports and other information filed by the Company with the Commission, can be inspected, without charge, and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C., 20549; 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a site on the World Wide Web at http://www.sec.gov., which contains reports, proxy statements and other information regarding registrants that file electronically with the Commission and certain of the Company's filings are available at such web site. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other information concerning the Company can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements of the Company, the notes thereto and the other financial data contained elsewhere in this Prospectus or incorporated by reference herein. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment options will not be exercised. This Prospectus, and the documents incorporated herein, contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements relate to, among other things, capital expenditures, cost reduction, cash flow and operating improvements and are indicated by words or phrases such as "anticipate," "estimate," "plans," "projects," "management believes," "the Company believes," "the Company intends" and similar words or phrases. Such statements are subject to inherent uncertainties and risks, including among others: general business and economic conditions in the Company's operating regions; pricing pressures and other competitive factors; results of the Company's efforts to reduce costs; the ability to integrate The Vons Companies, Inc. ("Vons") and achieve operating improvements at Vons; relations with union bargaining units; and the availability and terms of financing. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. THE COMPANY Safeway is the second largest food and drug chain in North America (based on sales), with 1,367 stores (including 315 Vons stores) at September 6, 1997. The Company's U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona and the Mid-Atlantic region. The Company also has Canadian retail operations which are located primarily in British Columbia, Alberta and Manitoba/Saskatchewan. For each of its ten retail operating areas, the Company believes that it holds the number one or number two market share position for the total area served. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities. On April 8, 1997, the Company completed the merger with Vons pursuant to which the Company issued 41.6 million shares of the Company's Common Stock for all of the shares of Vons common stock that it did not already own (the "Merger"). The Company also holds a 49% interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which, as of September 6, 1997, operated 71 food and general merchandise stores in western Mexico. Sales and net income for 1996 were $17.3 billion and $460.6 million, respectively. 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 $1.2 billion in 1996. In addition, income per share (before extraordinary items and the cumulative effect of accounting changes) increased from $0.41 in 1992 to $1.93 in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations". OPERATING STRATEGY Since late 1992, Safeway has focused on three priorities for improving its operating results: (1) controlling costs, (2) increasing sales and (3) improving capital management. Safeway has made substantial progress in these areas and is applying these priorities to Vons' operations, but there can be no assurance as to the future results Safeway will be able to achieve. Controlling Costs Safeway has focused on controlling and reducing elements of its cost of sales through better buying practices, lower advertising expenses, distribution efficiencies, manufacturing plant closures and consolidations, and its category management process. Safeway's efforts to control or reduce operating and administrative expenses have included overhead reduction in its administrative support functions, negotiation of competitive labor agreements, store level work simplification, consolidation of the Company's information technology operations, elimination of certain corporate perquisites and the general encouragement of a "culture of thrift" among employees. Safeway's operating and administrative expense as a percentage of sales has declined 199 basis points from 24.47% in 1992 to 22.48% in 1996. This percentage has increased following the Merger due to Vons' historically higher operating and administrative expense to sales ratio and as a result of increased goodwill amortization. Safeway has begun to realize economies of scale and to implement certain programs that have been successful at Safeway which are expected to generate operating improvements and cost savings for Vons. In addition, on a pro forma basis, the Company continued to reduce operating and administrative expenses as a percentage of sales in the second and third quarters of 1997. See 4 6 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations". Increasing Sales Safeway has increased sales by maintaining competitive pricing, improving store standards, enhancing customer service and offering high quality products. 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. As a result, same-store sales growth since year end 1992 through 1996 and in the first three quarters of 1997 have been among the highest in the industry. Safeway has over 800 premium corporate brand products under the "Safeway SELECT" banner. Since the Merger, Safeway has been applying certain sales strategies that have been employed successfully by each of Safeway and Vons. For example, Safeway recently introduced the Safeway Club Card in its northern California division (a customer loyalty program designed to reward frequent shoppers), which was inspired by a similar program at Vons. Improving Capital Management Safeway's capital management has improved in two key areas: capital expenditures and working capital. In the capital expenditure area, Safeway has expanded its use of standardized layouts and centralized purchasing agreements for building materials, fixtures and equipment for its new stores and remodels. As a result, Safeway's new store prototype is less expensive to build and more efficient to operate than the stores Safeway and Vons previously built and operated. These lower project costs, coupled with Safeway's improved operations, have allowed Safeway to improve its returns on capital investment. Safeway has increased its capital expenditures to $620 million in 1996 from $503 million in 1995 and $352 million in 1994. Combined capital expenditures for Safeway and Vons in fiscal 1997 are expected to exceed $800 million and will be used primarily to open 35 to 40 new stores and complete approximately 180 remodels. Working capital invested in the business has declined substantially since year-end 1992 primarily through lower warehouse inventory levels and improved payables management. THE MERGER In connection with the Merger, the Company repurchased 32.0 million shares of the Company's Common Stock from a partnership affiliated with Kohlberg Kravis Roberts & Co. ("KKR") at $43 per share, for an aggregate purchase price of $1.376 billion (the "Repurchase"). This reduction of 32.0 million shares partially offset the increase of 41.6 million shares issued pursuant to the Merger. To finance the Repurchase, the Company borrowed funds under its new $3.0 billion bank credit agreement (the "Bank Credit Agreement") and has since refinanced these borrowings with proceeds from the sale of commercial paper. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Merger with Vons". Unless the context otherwise requires or as otherwise expressly stated, references herein to "Safeway" or the "Company" include Safeway Inc. and its subsidiaries. The principal executive offices of the Company are located at 5918 Stoneridge Mall Road, Pleasanton, California 94588, and the telephone number is (510) 467-3000. 5 7 RECENT DEVELOPMENTS REFINANCING OUTSTANDING INDEBTEDNESS In 1997 Safeway refinanced a substantial portion of its long-term indebtedness in an effort to reduce interest expense, extend the maturities of its long-term indebtedness and enhance its operating and financial flexibility. Pursuant to tender offers and consent solicitations that were completed in September 1997, Safeway repurchased $589.0 million of its outstanding public indebtedness and eliminated certain restrictive covenants in the indentures governing that indebtedness. In addition, Safeway redeemed $285.5 million of Vons' outstanding public indebtedness and repurchased $40.0 million of Safeway's outstanding medium-term notes. Safeway financed the retirement of this long-term indebtedness with proceeds from a public offering in September 1997 of $600 million principal amount of senior debt securities and proceeds from the issuance of commercial paper. Based on current interest rates, net interest savings from the repurchases and redemption are expected to be approximately $14 million per annum. Depending on various factors, including market conditions, Safeway may, from time to time, continue to purchase and retire portions of its long-term debt. LABOR CONTRACTS Safeway recently concluded early negotiations and signed new labor contracts that would have been due to expire in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Spokane, Washington. In addition, union leadership has recommended an agreement to its membership in British Columbia. The membership is expected to ratify the agreement by the end of the year. Management considers the terms of these new contracts to be satisfactory. As a result of these early negotiations, the only significant remaining labor contracts due to expire in 1998 are in the Seattle and Winnipeg operating areas covering approximately 110 stores. Only one significant labor contract (involving approximately 50 stores) remains to be finalized in 1997, in Phoenix, Arizona. That contract was due to expire in late October 1997, but has been extended while negotiations continue. The third-party distribution operator for Safeway's northern California division, Summit Logistics Inc., recently concluded negotiations with labor, resulting in a new three-year agreement that is considered satisfactory. 6 8 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 following table sets forth the high and low sale prices for the Company's Common Stock for the fiscal quarters indicated as reported by the New York Stock Exchange Composite Tape. Prices prior to January 30, 1996 have been adjusted to give effect to a two-for-one stock split effected on that date.
HIGH LOW ---- ---- 1995 First quarter..................................................... $18 $15 5/16 Second quarter.................................................... 19 1/4 15 9/16 Third quarter..................................................... 20 5/16 17 5/16 Fourth quarter.................................................... 25 3/4 19 5/16 1996 First quarter..................................................... $30 1/8 $22 5/16 Second quarter.................................................... 35 5/8 27 5/8 Third quarter..................................................... 38 1/4 31 3/4 Fourth quarter.................................................... 45 3/8 37 1/4 1997 First quarter..................................................... $52 $41 1/8 Second quarter.................................................... 49 5/8 42 1/4 Third quarter..................................................... 55 1/2 46 1/8 Fourth quarter (through December 9, 1997)......................... 63 7/16 50 1/16
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 it was acquired by a corporation formed by KKR in 1986, 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 "Description of Capital Stock -- Dividends". 7 9 CAPITALIZATION The following table sets forth the short-term debt and the capitalization of Safeway at September 6, 1997 (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 $2,865,364 representing the exercise price of certain outstanding warrants. Short-term borrowings(1)............................................. $ 217.1 ========= Long-term debt and capital lease obligations......................... $ 3,136.1 Stockholders' equity: Common Stock, par value $0.01 per share; 750 shares authorized; 265.2 shares outstanding(2)(3).................................. 2.7 Additional paid-in capital......................................... 2,459.0 Unexercised warrants purchased: 15.1 shares(3)..................... (322.7) Retained earnings.................................................. 1,100.0 Cumulative translation adjustments................................. 9.6 Less: Treasury stock at cost; 30.9 shares.......................... (1,327.1) --------- Total stockholders' equity...................................... 1,921.5 --------- Total capitalization....................................... $ 5,057.6 =========
- --------------- (1) Consists of current portion of long-term debt and capital lease obligations. (2) Excludes 20.8 million shares of Common Stock underlying stock options and 23.4 million shares of Common Stock issuable upon exercise of warrants (the "SSI Warrants") held by SSI Equity Associates, L.P. ("SSI Equity Associates"). In connection with the offerings, it is anticipated that SSI Warrants to purchase 2,865,364 shares of Common Stock will be exercised for an aggregate exercise price of $2,865,364, and SSI Warrants to purchase 5,204,039 shares of Common Stock will be canceled. See "Principal and Selling Stockholders". (3) SSI Equity Associates is a partnership whose sole assets consist of the SSI Warrants. At December 9, 1997, 64.5% of the shares issuable upon exercise of the SSI Warrants were attributable to limited partnership interests in SSI Equity Associates owned by Safeway. Following the offerings, approximately 23.2% of the outstanding Common Stock will be held by two limited partnerships (the "Common Stock Partnerships"). See "Principal and Selling Stockholders". SSI Associates, L.P. ("SSI Associates"), one of the Common Stock Partnerships, made its investment in Safeway in 1986. The limited partnership agreement pursuant to which SSI Associates was organized will, by its terms, expire on December 31, 1998 unless amended by all of the limited partners to extend the term beyond such date. There can be no assurance that KKR Associates, L.P. ("KKR Associates"), the general partner of SSI Associates, will seek such amendments, or, if sought, that such amendments will be approved by the limited partners. If such partnership agreement expires, the limited partnership will dissolve. In the event of the dissolution and winding up of SSI Associates, KKR Associates will have sole discretion regarding the timing (which may be one or more years after the expiration of the partnership agreement) and manner of the disposition of any Common Stock held by such partnership, including public or private sales of such Common Stock, the distribution of such Common Stock to the limited partners of SSI Associates, or a combination of the foregoing. 8 10 SELECTED FINANCIAL DATA SAFEWAY INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) The financial data below are derived from the audited Consolidated Financial Statements of the Company, except for the financial data for the 36-week periods ended September 6, 1997 and September 7, 1996, which are derived from unaudited financial statements. The selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and accompanying notes, which are included herein. In the opinion of management, the results of operations for the 36 weeks ended September 6, 1997 and September 7, 1996 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 6, 1997 are not necessarily indicative of the results expected for the full year.
36 WEEKS ENDED --------------------- 52 52 52 52 52 SEPT. 6, SEPT. 7, WEEKS WEEKS WEEKS WEEKS WEEKS 1997(1) 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS: Sales...................................... $14,698.4 $11,782.1 $17,269.0 $16,397.5 $15,626.6 $15,214.5 $15,151.9 --------- --------- --------- --------- --------- --------- --------- Gross profit............................... 4,203.4 3,281.2 4,774.2 4,492.4 4,287.3 4,123.3 4,149.9 Operating and administrative expense....... (3,363.3) (2,673.2) (3,882.5) (3,765.0) (3,675.2) (3,681.8) (3,708.3) --------- --------- --------- --------- --------- --------- --------- Operating profit........................... 840.1 608.0 891.7 727.4 612.1 441.5 441.6 Interest expense........................... (163.7) (126.3) (178.5) (199.8) (221.7) (265.5) (290.4) Equity in earnings of unconsolidated affiliates............................... 25.6 34.3 50.0 26.9 27.3 33.5 39.1 Other income, net.......................... 2.1 3.4 4.4 2.0 6.4 6.8 7.1 --------- --------- --------- --------- --------- --------- --------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes.................................. 704.1 519.4 767.6 556.5 424.1 216.3 197.4 Income taxes............................... (297.5) (210.4) (307.0) (228.2) (173.9) (93.0) (99.0) --------- --------- --------- --------- --------- --------- --------- Income before extraordinary loss and cumulative effect of accounting changes.................................. 406.6 309.0 460.6 328.3 250.2 123.3 98.4 Extraordinary loss, net of tax benefit of $41.1, $1.3, $6.7 and $17.1.............. (64.1) -- -- (2.0) (10.5) -- (27.8) Cumulative effect of accounting changes, net of tax benefit of $12.0.............. -- -- -- -- -- -- (27.1) --------- --------- --------- --------- --------- --------- --------- Net income................................. $ 342.5 $ 309.0 $ 460.6 $ 326.3 $ 239.7 $ 123.3 $ 43.5 ========= ========= ========= ========= ========= ========= ========= Earnings per common share and common share equivalent (fully diluted): Income before extraordinary loss and cumulative effect of accounting changes................................ $ 1.64 $ 1.29 $ 1.93 $ 1.35 $ 1.01 $ 0.50 $ 0.41 Extraordinary loss....................... (0.26) -- -- (0.01) (0.04) -- (0.12) Cumulative effect of accounting changes................................ -- -- -- -- -- -- (0.11) --------- --------- --------- --------- --------- --------- --------- Net income............................... $ 1.38 $ 1.29 $ 1.93 $ 1.34 $ 0.97 $ 0.50 $ 0.18 ========= ========= ========= ========= ========= ========= ========= FINANCIAL STATISTICS: Same-store sales(2)........................ 0.9% 5.3% 5.1% 4.6% 4.4% 2.1% (1.6)% Gross profit margin........................ 28.60% 27.85% 27.65% 27.40% 27.44% 27.10% 27.39% Operating and administrative expense as a percent of sales......................... 22.88% 22.69% 22.48% 22.96% 23.52% 24.20% 24.47% Operating profit margin.................... 5.7% 5.2% 5.2% 4.4% 3.9% 2.9% 2.9% Capital expenditures(3).................... $ 379.6 $ 323.7 $ 620.3 $ 503.2 $ 352.2 $ 290.2 $ 553.4 Depreciation and amortization.............. 304.4 233.5 338.5 329.7 326.4 330.2 320.3 Total assets............................... 8,176.2 5,272.3 5,545.2 5,194.3 5,022.1 5,074.7 5,225.8 Total debt................................. 3,353.2 1,828.8 1,984.2 2,190.2 2,196.1 2,689.2 3,048.6 Stockholders' equity....................... 1,921.5 1,136.3 1,186.8 795.5 643.8 382.9 243.1 Weighted average common shares and common share equivalents (fully diluted) (in millions)................................ 247.5 240.1 238.4 243.5 247.1 246.9 238.0 OTHER STATISTICS: Total stores at period-end................. 1,367 1,050 1,052 1,059 1,062 1,078 1,103 Remodels completed during the period (4)... 72 65 141 108 71 45 63 Total retail square footage at period-end (in millions)............................ 52.0 39.9 40.7 40.1 39.5 39.4 39.7
- --------------- (1) Safeway completed the acquisition of Vons on April 8, 1997. The results of operations of Vons are included in the Company's results of operations as of the beginning of the second quarter of 1997. (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. The 1997 and 1996 same-store sales figures exclude British Columbia stores, which were closed during a labor dispute during the second and third quarters of 1996. Excluding the effect of the Alberta strike, same-store sales increased 2.2% for the 36-week period ended September 6, 1997. The same-store sales calculation for the 36-week period ended September 6, 1997 includes Vons stores for the entire period. (3) Defined under "Business -- Capital Expenditure Program". (4) Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000. 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MERGER WITH VONS On April 8, 1997, Safeway completed the Merger with Vons. Pursuant to the Merger, Safeway issued 1.425 shares of Safeway Common Stock for each share of Vons stock that Safeway did not already own, or a total of 41.6 million shares of Safeway Common Stock. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial position and results of operations. In connection with the Merger, Safeway repurchased 32.0 million shares of Safeway Common Stock from a partnership affiliated with KKR at $43 per share, for an aggregate purchase price of $1.376 billion. To finance the Repurchase, Safeway entered into the Bank Credit Agreement, which provides for, among other things, increased borrowing capacity, extended maturities and the opportunity to pay lower interest rates based on interest coverage ratios or public debt ratings. During the third quarter of 1997, Safeway entered the commercial paper market and used the proceeds to repay borrowings under the Bank Credit Agreement. The Bank Credit Agreement is used primarily as a backup facility to the commercial paper program. As a result of the Repurchase, Safeway increased its debt and interest expense, but also reduced the number of shares of Common Stock outstanding that otherwise would have been used to calculate earnings per share. This reduction of 32.0 million shares partially offset the increase of 41.6 million shares issued pursuant to the Merger. RESULTS OF OPERATIONS 12 WEEKS AND 36 WEEKS ENDED SEPTEMBER 6, 1997 COMPARED TO 12 WEEKS AND 36 WEEKS ENDED SEPTEMBER 7, 1996 Safeway's income before extraordinary loss was $150.0 million ($0.60 per share) for the third quarter of 1997. This compares to $105.9 million ($0.44 per share) for the third quarter of 1996, which includes an estimated $0.07 per share reduction due to labor disputes in the British Columbia and Denver operating areas. In the third quarter of 1997, the Company incurred an extraordinary loss of $59.9 million ($0.24 per share) for the early retirement of debt, which reduced net income to $90.1 million ($0.36 per share). Safeway believes that the effects of the second quarter labor dispute in Alberta reduced third quarter 1997 net income by approximately $0.01 per share. For the first 36 weeks of the year, Safeway's income before extraordinary loss was $406.6 million ($1.64 per share), compared to $309.0 million ($1.29 per share) in 1996. Safeway's 1997 income statements include Vons' operating results since the second quarter, while the 1996 income statements reflect Safeway's 35% equity interest in Vons. In order to facilitate an understanding of the Company's operations, the pro forma information described below is based on the 1996 combined historical financial statements of the two companies as if the acquisition had been effective as of the beginning of the period discussed. Due primarily to the Merger during the second quarter of 1997, total sales for the third quarter increased 36% on a historical basis from $3.95 billion in 1996 to $5.37 billion in 1997. Combined sales for the third quarter increased 3.2% from 1996 pro forma sales of $5.21 billion. Identical-store sales (stores operating the entire measurement period in both years excluding replacement stores) increased 0.5% while comparable-store sales, which includes replacement stores, increased 1.5%. The lingering effects of the second-quarter strike in Alberta have weakened 1997 identical and comparable-store sales comparisons. Lack of inflation has also softened third quarter 1997 sales. Excluded from identical and comparable store sales comparisons are 86 stores in British Columbia that were closed during a strike-lockout for a portion of the second and third quarters of last year. For the first 36 weeks of the year, total sales increased 25% on a historical basis to $14.7 billion in 1997 from $11.8 billion in 1996, primarily as a result of the Merger. Gross profit increased to 28.90% of sales in the third quarter of 1997 compared to 28.11% in 1996 on a pro forma basis (27.48% on a historical basis), primarily due to improvements in buying practices and product 10 12 mix. In addition, the Company did not record LIFO expense in the second or third quarters of 1997, reflecting management's expectation of little or no inflation for the full year. For the first 36 weeks of the year, gross profit on a historical basis was 28.60% of sales in 1997 compared to 27.85% in 1996. Operating and administrative expense was 23.00% of sales for the third quarter of 1997, down 27 basis points from pro forma operating and administrative expense of 23.27% for the same quarter in 1996, reflecting increased sales and efforts to reduce or control expenses. On a historical basis, operating and administrative expense was 22.33% of sales in the third quarter of 1996. For the first 36 weeks of the year, operating and administrative expense on a historical basis was 22.88% compared to 22.69% of sales in 1996. Safeway's operating and administrative expense-to-sales ratio has increased compared to historical results because Vons' operating and administrative expense ratio, when conformed to Safeway's presentation, has historically been higher than Safeway's. In addition, as a result of the Merger, goodwill amortization on an annualized basis has increased by approximately $25 million. Safeway is applying its cost reduction, sales growth and capital management strategies to Vons' operations to offset these negative effects, although there can be no assurance as to the results Safeway will be able to achieve in this regard. Interest expense was $62.3 million for the third quarter of 1997, compared to $39.8 million for the same period last year. For the first 36 weeks of the year, interest expense rose to $163.7 million in 1997 from $126.3 million in 1996. The increase in 1997 is the result of debt incurred during the second quarter of 1997 to repurchase stock in conjunction with the Merger. During the third quarter of this year, Safeway recorded an extraordinary loss of $59.9 million ($0.24 per share) for the redemption of $589.0 million of Safeway's public debt, $135.5 million of Vons' public debt, and $40 million of medium-term notes. Safeway financed this redemption with $600 million of new senior debt securities and the balance with commercial paper. The refinancing extends Safeway's overall long-term debt maturities, increases financial flexibility and, based on current interest rates, is expected to reduce annual interest expense. During the second quarter of 1997, Safeway recorded an extraordinary loss of $4.2 million ($0.02 per share) for the early redemption of $150.0 million of Vons' public debt. In the second quarter of 1997, Safeway purchased interest rate caps with a notional principal amount of $850 million at 7% for two years. On October 3, 1997, Safeway purchased an interest rate swap with a notional principal amount of $100 million at 6.2075% for ten years. These cap and swap agreements are intended to limit the exposure of its floating interest rate debt to changes in market interest rates. At the end of the third quarter of 1997, Safeway's investment in unconsolidated affiliates consisted of a 49% interest in Casa Ley, which, as of September 6, 1997, operated 71 food and general merchandise stores in western Mexico. Income from Safeway's equity investment in Casa Ley was $4.1 million in the third quarter of 1997 compared to $4.4 million in 1996. For the first 36 weeks of the year, Safeway's share of Casa Ley's earnings rose to $13.4 million in 1997 from $12.5 million in 1996. Safeway's share of Vons' earnings was $12.2 million for the first quarter of 1997, $7.2 million in the first quarter of 1996, and $21.8 million in the first 36 weeks of 1996. 1996 COMPARED TO 1995 AND 1994 Safeway's net income was $460.6 million ($1.93 per share) in 1996, $326.3 million ($1.34 per share) in 1995, and $239.7 million ($0.97 per share) in 1994. In 1995 and 1994, income before extraordinary items was $328.3 million ($1.35 per share) and $250.2 million ($1.01 per share). During the second and third quarters of 1996, Safeway was engaged in a labor dispute in British Columbia which lasted 40 days and affected 86 stores. Under Provincial law in British Columbia, replacement workers could not be hired, and therefore all the affected stores were closed throughout the strike-lockout. Separately, the Company was engaged in a strike-lockout in the Denver operating area which lasted 44 days also during the second and third quarters of 1996. All of the Denver stores operated during the strike-lockout, largely with replacement workers. Safeway estimates that the combined impact of both disputes reduced 1996 earnings by approximately $0.14 per share. 11 13 A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. The Company estimates that the dispute reduced 1995 earnings by an estimated $0.025 per share. Sales Sales were $17.3 billion in 1996, $16.4 billion in 1995 and $15.6 billion in 1994. Annual same-store sales (sales of stores operating the entire measurement period in both 1996 and 1995, including stores that remained open during strikes or lockouts) increased 5.1% in 1996 and 4.6% in 1995. British Columbia stores were closed during the strike-lockout, and therefore are excluded from 1996 annual same-store sales. 1996 marked the third consecutive year that same-store sales exceeded 4%. Through year-end 1996, Safeway had achieved 14 consecutive quarters of same-store sales increases in excess of 3%. Safeway has reinvested cost savings into more competitive pricing, improved store standards and enhanced 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 success of the Safeway SELECT line of premium quality private label products also contributed to sales growth since its introduction in 1993. Gross Profit Gross profit represents the portion of sales revenue remaining after deducting the costs of inventory sold during the period, including purchase and distribution costs. Beginning with the first quarter of 1996, Safeway classified all in-store bakery production labor costs as operating and administrative expense. Previously, a portion of this labor cost was classified as a component of cost of goods sold. All prior periods have been reclassified to conform to the new presentation. Gross profit of 27.65% of sales in 1996 was up from 27.40% in 1995 and 27.44% in 1994. During 1996, Safeway continued to make progress in lowering its cost of sales through better buying practices, improved product mix, lower advertising expenses, distribution efficiencies, and manufacturing plant closures and consolidations. These improvements were offset during the second and third quarters of 1996 by the impact of the labor disputes in Denver and British Columbia, and by efforts to rebuild sales in those areas during the fourth quarter of the year. In addition, Safeway continued to selectively reinvest cost savings throughout 1996 to maintain its competitive position. Operating and Administrative Expenses At year-end 1996, operating and administrative expense as a percentage of sales had declined each year since 1992 due to both sales increases and efforts to control costs. Efforts to control costs 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 expense fell to 22.48% of sales in 1996 from 22.96% in 1995 and 23.52% in 1994. Interest Expense Interest expense fell to $178.5 million in 1996, from $199.8 million in 1995, and $221.7 million in 1994. Interest expense declined in 1996 due to a combination of lower interest rates and reduced debt levels. In 1995, interest expense declined primarily due to lower average debt outstanding resulting from Safeway's strong cash flow from operations. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates, recorded on a one-quarter delay basis, rose to $50.0 million in 1996 compared to $26.9 million in 1995 and $27.3 million in 1994. At year-end 1996, Safeway held a 34.4% interest in Vons, which operated 320 grocery stores located primarily in southern California, and a 49% interest in Casa Ley, which operates food and general merchandise stores in western Mexico. 12 14 Safeway's share of Vons' earnings was $31.2 million in 1996, compared to $18.3 million in 1995 and $11.6 million in 1994. In 1994, Vons reported a restructuring charge which decreased Safeway's share of Vons' earnings by $3.9 million. According to Vons, this restructuring charge included anticipated expenses associated with a program to close underperforming stores and reduce workforce. Income from Safeway's equity investment in Casa Ley increased to $18.8 million in 1996 from $8.6 million in 1995 and $15.7 million in 1994. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. During 1996, interest rates and inflation in Mexico moderated and Casa Ley's financial results have gradually improved. Extraordinary Loss In 1995 and 1994, Safeway's net income was reduced by extraordinary losses of $2.0 million ($0.01 per share) and $10.5 million ($0.04 per share) 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. Depending on market conditions, Safeway may continue to purchase and retire long-term debt. Warrants SSI Equity Associates, a related party, is a limited partnership whose sole assets consist of warrants to purchase 23.4 million shares of Safeway Common Stock at $1.00 per share. In 1995, the Company acquired 50.7% of the partnership interests in SSI Equity Associates for $196.2 million with proceeds from bank borrowings. During 1996, Safeway acquired an additional 13.8% of the partnership interests in SSI Equity Associates for $126.5 million, again with proceeds from bank borrowings. In calculating earnings per share, Safeway considers the warrants to be Common Stock equivalents. LIQUIDITY AND FINANCIAL RESOURCES Net cash flow from operations for the first 36 weeks of the year was $728.4 million in 1997, compared to $546.9 million in 1996. Cash flow used by investing activities for the first 36 weeks of the year was $257.7 million in 1997, compared to $246.1 million in 1996. The change in cash flow used by investing activities is primarily the result of the acquisition of Vons' cash, offset by increased capital expenditures to open 16 stores, to continue construction of a manufacturing plant in California and to begin work on a new distribution center in Maryland. Cash flow used by financing activities for the first 36 weeks of the year increased to $518.3 million in 1997, from $350.1 million in 1996, primarily due to the early retirement of long-term debt. Net cash flow from operations as presented on the Condensed Consolidated Statements of Cash Flows is an important measure of cash generated by the Company's operating activities. Operating cash flow, as defined below, is similar to net cash flow from operations because it excludes certain noncash items. However, operating cash flow also excludes interest expense, income taxes and changes in working capital. Management believes that operating cash flow is relevant because it assists investors in evaluating Safeway's ability to service its debt by providing a commonly used measure of cash available to pay interest, and it facilitates comparisons of Safeway's results of operations with those companies having different capital structures. However, other companies may define operating cash flow differently, and as a result, such measures may not 13 15 be comparable to Safeway's operating cash flow. Safeway's computation of operating cash flow is as follows (dollars in millions):
12 WEEKS ENDED 36 WEEKS ENDED --------------------- --------------------- SEPT. 6, SEPT. 7, SEPT. 6, SEPT. 7, 52 WEEKS 52 WEEKS 52 WEEKS 1997 1996 1997 1996 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- Income before income taxes and extraordinary loss..................... $259.8 $178.1 $ 704.1 $519.4 $ 767.6 $ 556.5 $424.1 LIFO expense............................. -- 2.3 2.3 6.9 4.9 9.5 2.7 Interest expense......................... 62.3 39.8 163.7 126.3 178.5 199.8 221.7 Depreciation and amortization............ 111.5 79.7 304.4 233.5 338.5 329.7 326.4 Equity in earnings of unconsolidated affiliates............................. (4.1) (13.1) (25.6) (34.3) (50.0) (26.9) (27.3) ------ ------ -------- ------ -------- -------- ------ Operating cash flow...................... $429.5 $286.8 $1,148.9 $851.8 $1,239.5 $1,068.6 $947.6 ====== ====== ======== ====== ======== ======== ====== As a percent of sales.................. 8.00% 7.25% 7.82% 7.23% 7.18% 6.52% 6.06% As a multiple of interest expense...... 6.89x 7.21x 7.02x 6.74x 6.94 x 5.35 x 4.27x
Based upon the current level of operations, Safeway believes that operating cash flow and other sources of liquidity, including borrowings under Safeway's commercial paper program and the Bank Credit Agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels. The Bank Credit Agreement is used primarily as a backup facility to the commercial paper program. CAPITAL EXPENDITURE PROGRAM A component of the Company's long-term strategy is its capital expenditure program. During the first three quarters of 1997, Safeway and Vons together invested $380 million in capital expenditures (including Vons' first quarter 1997 capital spending of $7 million) to, among other things, open 16 new stores, continue the construction of a manufacturing plant in California and begin work on a new distribution center in Maryland. Combined capital expenditures for Safeway and Vons in fiscal 1997 are expected to exceed $800 million to open 35 to 40 new stores, complete approximately 180 remodels and continue construction of the new plant and distribution center. In 1998, the Company expects to spend in excess of $950 million to open 40 to 45 new stores, complete more than 200 remodels and finish the construction of the distribution center. YEAR 2000 COMPLIANCE The Company utilizes a significant number of computer software programs and operating systems across its entire organization, including applications used in manufacturing, product development, financial business systems and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification, or replacement of such applications will be necessary. The Company has completed its identification of applications that are not "Year 2000" compliant and has commenced modification or replacement of such applications, as necessary. Given information known at this time about the Company's systems that are non-compliant, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, management does not expect Year 2000 compliance costs to have any material adverse impact on the Company's liquidity or ongoing results of operations. No assurance can be given, however, that all of the Company's systems will be Year 2000 compliant or that compliance costs or the impact of the Company's failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's future liquidity or results of operations. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). The Company is required to adopt SFAS No. 128 in the fourth quarter of 1997 and at that time will restate earnings per share ("EPS") data for prior periods to conform with SFAS No. 128. Earlier application is not permitted. 14 16 SFAS No. 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common shares were exercised or converted to common shares. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which requires that a Company report, by major components and as a single total, the change in its net assets during the period from nonowner sources, and No. 131 (Disclosures about Segments of an Enterprise and Related Information), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 15 17 BUSINESS Safeway is the second largest food and drug chain in North America (based on sales), with 1,367 stores (including 315 Vons stores) at September 6, 1997. The Company's U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona and the Mid-Atlantic region. The Company also has Canadian retail operations which are located primarily in British Columbia, Alberta and Manitoba/Saskatchewan. For each of its ten retail operating areas, the Company believes that it holds the number one or number two market share position for the total area served. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities. On April 8, 1997, the Company completed the Merger pursuant to which the Company issued 41.6 million shares of the Company's Common Stock for all of the shares of Vons common stock that it did not already own. The Company also holds a 49% interest in Casa Ley, which, as of September 6, 1997, operated 71 food and general merchandise stores in western Mexico. Sales and net income for 1996 were $17.3 billion and $460.6 million, respectively. 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 $1.2 billion in 1996. In addition, income per share (before extraordinary items and the cumulative effect of accounting changes) increased from $0.41 in 1992 to $1.93 in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations". OPERATING STRATEGY Since late 1992, Safeway has focused on three priorities for improving its operating results: (1) controlling costs, (2) increasing sales and (3) improving capital management. Safeway has made substantial progress in these areas and is applying these priorities to Vons' operations, but there can be no assurance as to the future results Safeway will be able to achieve. Controlling Costs Safeway has focused on controlling and reducing elements of its cost of sales through better buying practices, lower advertising expenses, distribution efficiencies, manufacturing plant closures and consolidations, and its category management process. Safeway's efforts to control or reduce operating and administrative expenses have included overhead reduction in its administrative support functions, negotiation of competitive labor agreements, store level work simplification, consolidation of the Company's information technology operations, elimination of certain corporate perquisites and the general encouragement of a "culture of thrift" among employees. Safeway's operating and administrative expense as a percentage of sales has declined 199 basis points from 24.47% in 1992 to 22.48% in 1996. This percentage has increased following the Merger due to Vons' historically higher operating and administrative expense to sales ratio and as a result of increased goodwill amortization. Safeway has begun to realize economies of scale and to implement certain programs that have been successful at Safeway which are expected to generate operating improvements and cost savings for Vons. In addition, on a pro forma basis, the Company continued to reduce operating and administrative expenses as a percentage of sales in the second and third quarters of 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations". Increasing Sales Safeway has increased sales by maintaining competitive pricing, improving store standards, enhancing customer service and offering high quality products. 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. As a result, same-store sales growth since year end 1992 through 1996 and in the first three quarters of 1997 have been among the highest in the industry. Safeway has over 800 premium corporate brand products under the "Safeway SELECT" banner. Since the Merger, Safeway has been applying certain 16 18 sales strategies that have been employed successfully by each of Safeway and Vons. For example, Safeway recently introduced the Safeway Club Card in its northern California division (a customer loyalty program designed to reward frequent shoppers), which was inspired by a similar program at Vons. Improving Capital Management Safeway's capital management has improved in two key areas: capital expenditures and working capital. In the capital expenditure area, Safeway has expanded its use of standardized layouts and centralized purchasing agreements for building materials, fixtures and equipment for its new stores and remodels. As a result, Safeway's new store prototype is less expensive to build and more efficient to operate than the stores Safeway and Vons previously built and operated. These lower project costs, coupled with Safeway's improved operations, have allowed Safeway to improve its returns on capital investment. Safeway has increased its capital expenditures to $620 million in 1996 from $503 million in 1995 and $352 million in 1994. Combined capital expenditures for Safeway and Vons in fiscal 1997 are expected to exceed $800 million and will be used primarily to open 35 to 40 new stores and complete approximately 180 remodels. Working capital invested in the business has declined substantially since year-end 1992 primarily through lower warehouse inventory levels and improved payables management. RETAIL OPERATIONS Stores Safeway operates stores ranging in size from approximately 5,900 square feet to over 89,000 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 return on capital invested. Most Safeway stores offer a wide selection of both food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral and pharmacy. In most of 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 achieve 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. The following table summarizes the stores operated by Safeway by size at September 6, 1997:
NUMBER OF PERCENT OF STORES TOTAL --------- ---------- Less than 30,000 square feet............................... 382 28.0% 30,000 to 50,000........................................... 725 53.0 More than 50,000........................................... 260 19.0 ----- ----- Total stores..................................... 1,367 100.0% ===== =====
Store Ownership At September 6, 1997, Safeway owned more than one-third of the stores it operates. Safeway leases the remaining stores. In recent years, the Company has opted for ownership of new developments where possible because it provides control and flexibility with respect to financing terms, remodeling, expansions and closures. Merchandising Safeway's operating strategy is to provide superior value to its customers by maintaining high store standards and a wide selection of high quality products at competitive prices. The Company emphasizes high 17 19 quality perishables, such as produce and meat, and specialty departments, including in-store bakery, produce, delicatessen, floral and pharmacy, designed to provide one-stop shopping for today's busy shoppers. Safeway has introduced a line of over 800 premium corporate brand products since 1993 under the "Safeway SELECT" banner. These products include soft drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt, pet food and laundry detergent. The line also includes Safeway SELECT "Healthy Advantage" items such as low-fat ice cream and low-fat cereal bars, Safeway SELECT "Gourmet Club" frozen entrees and hors d'oeuvres. The Safeway SELECT line is designed to offer premium quality products that are equal or superior in quality to comparable best-selling nationally advertised brands, are offered at more competitive prices, or are not available from national brand manufacturers. Safeway also offers a wide selection of private label products under well-known and respected brand names such as Safeway, Vons, Lucerne, Jerseymaid and Mrs. Wright's, which Safeway believes are equivalent in quality to comparable nationally advertised brands. The Company continually refines its merchandising strategies, which are designed to identify and accommodate changing demographics, lifestyles and product preferences of its customers. Safeway has intensified its efforts to improve in-stock conditions and enhance merchandise presentation and selection. MANUFACTURING AND WHOLESALE OPERATIONS The principal function of manufacturing operations is to purchase, manufacture and process private label merchandise sold in stores operated by the Company. As measured by sales dollars, over one-half of Safeway's private label merchandise is manufactured in company-owned plants, and the remainder is purchased from third parties. During 1993, Safeway began a review to identify manufacturing operations that were not providing acceptable returns. This review resulted in the sale or closure of 18 plants from 1993 through September 6, 1997 and a reorganization of the manufacturing division administrative office during 1994. By year end 1997, Safeway expects to open a new food processing plant in California and close another facility operating in Texas. The ongoing review of all remaining manufacturing operations 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. Safeway operated the following manufacturing and processing facilities at September 6, 1997:
U.S. CANADA ---- ------ Milk plants........................................................ 7 3 Bread baking plants................................................ 6 2 Ice cream plants................................................... 5 2 Cheese and meat packaging plants................................... 2 1 Soft drink bottling plants......................................... 4 -- Fruit and vegetable processing plants.............................. 1 3 Other food processing plants....................................... 3 2 Pet food plants.................................................... 1 -- --- --- Total.................................................... 29 13 === ===
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 ten retail operating areas is served by a regional distribution center consisting of one or more facilities. Safeway has 13 distribution/warehousing centers (ten in the United States and three in Canada), which collectively provide the majority of all products to stores operated by the Company. Safeway's 18 20 distribution centers in northern California and British Columbia are operated by a third party. Management regularly reviews distribution operations focusing on whether these operations support their operating areas in a cost-effective manner. As a result of such reviews, Safeway has begun construction of a replacement distribution center in Maryland. CAPITAL EXPENDITURE PROGRAM A component of the Company's long-term strategy is its capital expenditure program. The Company's capital expenditure program funds new stores, remodels, advances in information technology, and other facilities, including plant and distribution facilities and corporate headquarters. In the last several years, Safeway management has significantly strengthened its program to select and approve new capital investments, resulting in improved returns on investment. The table below reconciles cash paid for property additions reflected in the Company's Consolidated Statements of Cash Flows to Safeway's broader definition of capital expenditures, excluding Vons (dollars in millions), and also details changes in the Company's store base during such period:
1996 1995 1994 ------ ------ ------ Cash paid for property additions........................................ $541.8 $450.9 $339.9 Less: Purchases of previously leased properties......................... (13.2) (9.9) (54.5) Plus: Present value of all lease obligations incurred................... 91.7 62.2 55.5 Mortgage notes assumed in property acquisitions................... -- -- 11.3 ------ ------ ------ Total capital expenditures.............................................. $620.3 $503.2 $352.2 ====== ====== ====== Capital expenditures as a percent of sales.............................. 3.6% 3.1% 2.3% New stores opened....................................................... 30 32 20 Stores closed or sold................................................... 37 35 36 Remodels................................................................ 141 108 71 Total retail square footage at year-end (in millions)................... 40.7 40.1 39.5
Improved operations and lower project costs have raised the return on capital projects, allowing Safeway to increase capital expenditures to $620 million in 1996 from $503 million in 1995 and $352 million in 1994. During the first three quarters of 1997, Safeway and Vons together invested $380 million in capital expenditures to, among other things, open 16 new stores, continue the construction of a manufacturing plant in California and begin work on a new distribution center in Maryland. Combined capital expenditures for Safeway and Vons in fiscal 1997 are expected to exceed $800 million and will be used primarily to open 35 to 40 new stores and complete approximately 180 remodels in 1997. ACQUISITIONS Management believes that the supermarket industry is fragmented and that there may be opportunities to make acquisitions that would enhance Safeway's long-term growth. Safeway's criteria for considering aquisition targets include, but are not limited to, strong market share and the potential for improving EBITDA margin. These criteria are subject to review and modification from time to time. There can be no assurance that Safeway will complete any such acquisition or that, if completed, the business acquired will make any contribution to Safeway's long-term growth. EMPLOYEES At September 6, 1997, Safeway had approximately 147,000 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-to-five-year terms. Accordingly, Safeway renegotiates a significant number of these agreements every year. 19 21 In the last four fiscal years, there have been five significant work stoppages (in Portland, northern California, Denver, British Columbia and Alberta). These work stoppages were resolved in a manner that management considered generally satisfactory. Safeway recently concluded early negotiations and signed new labor contracts that would have been due to expire in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Spokane, Washington. In addition, union leadership has recommended an agreement to its membership in British Columbia. The membership is expected to ratify the agreement by the end of the year. Management considers the terms of these new contracts to be satisfactory. As a result of these early negotiations, the only significant remaining labor contracts due to expire in 1998 are in the Seattle and Winnipeg operating areas covering approximately 110 stores. Only one significant labor contract (involving approximately 50 stores) remains to be finalized in 1997, in Phoenix, Arizona. That contract was due to expire in late October 1997, but has been extended while negotiations continue. The third-party distribution operator for Safeway's northern California division, Summit Logistics Inc., recently concluded negotiations with labor, resulting in a new three-year agreement that is considered satisfactory. 20 22 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 October 31, 1997, and as adjusted to give effect to the offerings, for (i) each of Safeway's directors, (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 1996, (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, 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, L.P.(2)........ 77,232,263 32.9% 22,134,636 55,097,627 23.2% James H. Greene, Jr.(3)...... 35,000 * 35,000 * Henry R. Kravis(4)........... -- -- Robert I. MacDonnell(5)...... -- -- George R. Roberts(6)......... -- -- Michael T. Tokarz............ 10,000 * 10,000 * SSI Equity Associates, L.P.(7)...................... 23,405,953 9.1 2,865,364 15,336,550 6.1 Sam Ginn(8).................... 102,084 * 102,084 * Paul Hazen(8).................. 102,084 * 102,084 * Peter A. Magowan(9)............ 2,076,800 * 2,076,800 * Steven A. Burd(9).............. 1,535,744 * 1,535,744 * Kenneth W. Oder(9)(10)......... 981,072 * 981,072 * Julian C. Day(9)............... 231,557 * 231,557 * Michael C. Ross(9)............. 312,035 * 312,035 * David T. Ching(9).............. 38,544 * 38,544 * FMR Corp.(11).................. 12,946,400 5.5 12,946,400 5.4 All executive officers and directors as a group (16 persons, excluding Messrs. Greene, Kravis, Roberts, MacDonnell and Tokarz)(9).... 6,097,844 2.5 6,097,844 2.5
- --------------- * 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 shares are owned of record by 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, 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 any such beneficial ownership. Messrs. Greene, Kravis, MacDonnell, Roberts and Tokarz are members of Safeway's Board of Directors. See "Capitalization." 21 23 (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 23,405,953 shares shown as beneficially owned before the offerings represent shares of Common Stock issuable upon exercise of SSI Warrants. In connection with the offerings, SSI Equity Associates will sell to the Underwriters SSI Warrants to purchase 2,865,364 shares of Common Stock which will be exercised and sold in the offerings. SSI Equity Associates also will transfer to Safeway for cancellation SSI Warrants to purchase 5,204,039 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 Safeway. See "Capitalization". Following the offerings, SSI Equity Associates will hold SSI Warrants to purchase 15,336,550 shares of Common Stock (of which 9,890,694 shares will be attributable to limited partnership interests held by Safeway). (8) Includes 81,250 shares issuable upon exercise of stock options. (9) Includes shares issuable upon exercise of stock options as follows: Mr. Magowan, 745,000; Mr. Burd, 1,391,131; Mr. Oder, 925,000; Mr. Day, 195,000; Mr. Ross, 285,000; Mr. Ching, 36,000; and all executive officers and directors as a group, 4,401,201. Does not include shares issuable upon exercise of stock options which are not vested. (10) Does not include 2,568 shares held by Mr. Oder as trustee of irrevocable trusts created by Mr. Burd for the benefit of his children. As trustee, Mr. Oder has the authority to vote and dispose of the shares, but has no economic interest in such shares. (11) All information regarding FMR Corp. and its affiliates is based on information disclosed in the Schedule 13G filed by FMR Corp., Edward C. Johnson 3d and Abigail Johnson on February 13, 1997 (the "Schedule 13G"). According to the Schedule 13G, (i) Fidelity Management & Research Company, a wholly owned subsidiary of FMR Corp., is the beneficial owner of 11,894,100 of such shares as a result of acting as investment adviser to various investment companies, (ii) Fidelity Management Trust Company, a wholly owned subsidiary of FMR Corp., is the beneficial owner of 689,800 of such shares as a result of its serving as investment manager of institutional account(s), (iii) Fidelity International Limited is the beneficial owner of 362,500 of such shares as a result of its providing investment advisory and management services to a number of non-U.S. investment companies and certain institutional investors, (iv) FMR Corp., Edward C. Johnson 3d and Abigail Johnson each has sole dispositive power over all such shares and (v) FMR has sole voting power over 607,600 of such shares. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. 22 24 Following the offerings, the Common Stock Partnerships will hold 55,097,627 shares of Common Stock, which will represent approximately 23.2% of the outstanding Common Stock and 20.9% on a fully diluted basis. 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. In connection with the offerings, SSI Equity Associates will sell to the Underwriters SSI Warrants to purchase 2,865,364 shares of Common Stock which will be exercised and sold in the offerings. SSI Equity Associates also will transfer to Safeway for cancellation SSI Warrants to purchase 5,204,039 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 Safeway. See "Capitalization". Following the offerings, SSI Equity Associates will hold SSI Warrants to purchase 15,336,550 shares of Common Stock (of which 9,890,694 shares will be attributable to limited partnership interests held by Safeway). The Company and the Selling Stockholders have agreed, with certain exceptions, not to (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) with respect to the Company only, 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, except for (i) the shares to be sold in the offerings and the SSI Warrants to be canceled, (ii) any shares of Common Stock issued by the Company pursuant to stock option plans in effect on the date of this Prospectus, (iii) option grants under stock option plans in effect on the date of this Prospectus, (iv) 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, (v) capital stock issuable upon the exercise of warrants outstanding on the date of this Prospectus or (vi) the cancellation of warrants for a period of at least 90 days from the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. 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 the 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. 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 25 DESCRIPTION OF CAPITAL STOCK GENERAL Pursuant to Safeway's Restated Certificate of Incorporation, as amended (the "Restated Certificate"), the authorized capital stock of Safeway consists of 750,000,000 shares of Common Stock, par value $0.01 per share, and 25,000,000 shares of preferred stock, par value $0.01 per share. At October 31, 1997, Safeway had outstanding 234,969,152 shares of Common Stock and no outstanding shares of preferred stock. All shares of Common Stock are fully paid and nonassessable. As of October 31, 1997, there were approximately 8,926 holders of record of Common Stock. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share owned of record on all matters voted upon by stockholders, and a majority vote is required for all action to be taken by stockholders. In the event of a liquidation, dissolution or winding-up of Safeway, the holders of Common Stock are entitled to share equally and ratably in 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. The transfer agent and registrar for the Common Stock is First Chicago Trust Company of New York. 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 certain limitations in the Bank Credit Agreement. See "Dividend Policy". 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"). As used in this discussion, the term "Non-U.S. Holder" means any person or entity that 24 26 is, for United States federal income tax purposes, a foreign corporation, a non-resident alien individual, a non-resident fiduciary of a foreign estate or trust, or a foreign partnership. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to United States federal tax as if they were United States citizens and residents. This discussion does not address all aspects of United States federal income and estate taxes or consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and local consequences that may be relevant to Non-U.S. Holders. Furthermore, this discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (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 dividends are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, if a tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder, the dividends will be subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates and will be exempt from the 30% withholding tax described above (assuming the necessary certification and disclosure requirements are met). Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above (unless the payor has knowledge to the contrary), and, under currently applicable United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under recently promulgated United States Treasury regulations generally effective with respect to payments made after December 31, 1998, however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) will be required to satisfy specified certification and other requirements, which will include filing a Form W-8 containing the Non-U.S. Holder's name, address and a certification that such Holder is eligible for the benefits of the treaty under its Limitations in Benefits Article. In addition, certain certification and disclosure requirements must be met to be exempt from withholding under the effectively connected income exemption discussed above. A Non-U.S. Holder of Common Stock who is eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate, timely claim for refund with the United States Internal Revenue Service (the "Service"). 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 25 27 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, is 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 source capital losses (notwithstanding the fact that he or she is not considered a resident of the United States). If a Non-U.S. Holder that is a foreign corporation falls under 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, 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 of FIRPTA tax at a rate of 10% of the amount realized on a sale or other disposition of Common Stock and could be further subject to FIRPTA tax in excess of the amounts withheld. Any amount withheld pursuant to such withholding tax would be creditable against such Non-U.S. Holder's United States federal income tax liability. Non-U.S. Holders are urged to consult their tax advisors concerning the potential applicability of these provisions. FEDERAL ESTATE TAXES An individual Non-U.S. Holder who (i) is not a citizen or resident of the United States (as specifically defined for United States estate tax purposes) at the time of his or her death and (ii) owns, or is treated as owning Common Stock at the time of his or her death, or has made certain lifetime transfers of an interest in Common Stock, will be required to include the value of such Common Stock in his or her gross estate for federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX 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 26 28 such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty or other agreement with the tax authorities in that country. United States backup withholding tax (which, in general, is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) generally will not apply to (a) the payment of dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States (unless the payor has knowledge that the payee is a United States person) or (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. The Treasury Department recently promulgated final regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not significantly alter the substantive withholding and information reporting requirements but rather unify current certification procedures and forms and clarify reliance standards. In addition, the final regulations permit the shifting of primary responsibility for withholding to certain financial intermediaries acting on behalf of beneficial owners. The final regulations are generally effective for payments made after December 31, 1998, subject to certain transition rules. Non-U.S. Holders should consult their own tax advisors with respect to the impact, if any, of the final regulations. 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 and Michael C. Ross, General Counsel of Safeway, and for the Underwriters by Brown & Wood LLP, San Francisco, California. Certain partners of Latham & Watkins, members of their families, related persons and others, have an indirect interest, through limited partnerships, in less than 1% of the Company's Common Stock. Such persons do not have the power to vote or dispose of such shares of Common Stock. Michael C. Ross holds Common Stock and options to purchase Common Stock which in the aggregate constitute less than 1% of the Company's Common Stock. EXPERTS The consolidated financial statements of the Company as of December 28, 1996 and December 30, 1995 and for each of the three fiscal years in the period ended December 28, 1996, included herein have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is included herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Vons as of December 29, 1996 and December 31, 1995 and for each of the years in the three-year period ended December 29, 1996, appearing in the Company's Amendment 27 29 to Current Report on Form 8-K/A filed with the Commission on May 1, 1997, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. INFORMATION INCORPORATED BY REFERENCE The following documents filed with the Commission pursuant to the Exchange Act are incorporated by reference in this Prospectus: (1) the Company's Annual Report on Form 10-K for the year ended December 28, 1996 (the "Form 10-K"); (2) the portions of the Company's 1996 Annual Report to Stockholders that have been incorporated by reference into the Form 10-K; (3) the portions of the Company's Proxy Statement on Schedule 14A dated March 24, 1997 that have been incorporated by reference into the Form 10-K; (4) the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 22, 1997, June 14, 1997 and September 6, 1997; (5) the Company's Amendment to Quarterly Report on Form 10-Q/A for the quarterly period ended June 14, 1997; (6) the Company's Current Reports on Form 8-K filed with the Commission on January 10, 1997, March 14, 1997, April 7, 1997, April 23, 1997, June 4, 1997, June 12, 1997, August 5, 1997, September 3, 1997 and September 10, 1997; (7) the Company's Amendment to Current Report on Form 8-K/A filed with the Commission on May 1, 1997; and (8) Description of the Company's Common Stock contained in the Company'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. (9) all other documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and before the termination of the offering of all securities to which this Prospectus relates shall be deemed to be a part hereof from the date of filing of such 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 incorporated or 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 this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon request, a copy of any documents incorporated into this Prospectus by reference (other than exhibits incorporated by reference into such document). Requests for documents should be submitted to Investor Relations, Safeway Inc., 5918 Stoneridge Mall Road, Pleasanton, California 94588 (telephone 510/467-3790). The information relating to the Company contained in this Prospectus does not purport to be comprehensive and should be read together with the information contained in the documents incorporated or deemed to be incorporated by reference herein. 28 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Condensed Consolidated Balance Sheets as of September 6, 1997 and December 28, 1996....... F-2 Condensed Consolidated Statements of Income for the 12 and 36 weeks ended September 6, 1997 and September 7, 1996.............................................................. F-3 Condensed Consolidated Statements of Cash Flows for the 36 weeks ended September 6, 1997 and September 7, 1996................................................................... F-4 Notes to the Condensed Consolidated Financial Statements.................................. F-5 Independent Auditors' Report.............................................................. F-10 Consolidated Statements of Income for fiscal years 1996, 1995, and 1994................... F-11 Consolidated Balance Sheets as of year-end 1996 and 1995.................................. F-12 Consolidated Statements of Cash Flows for fiscal years 1996, 1995, and 1994............... F-13 Consolidated Statements of Stockholders' Equity for fiscal 1996, 1995, and 1994........... F-14 Notes to Consolidated Financial Statements................................................ F-15
F-1 31 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) (UNAUDITED) ASSETS
SEPTEMBER 6, DECEMBER 28, 1997 1996 ------------- ------------- Current assets: Cash and equivalents............................................... $ 32.1 $ 79.7 Receivables........................................................ 187.0 160.9 Merchandise inventories............................................ 1,523.6 1,283.3 Prepaid expenses and other current assets.......................... 156.5 130.5 -------- -------- Total current assets....................................... 1,899.2 1,654.4 -------- -------- Property............................................................. 6,367.1 5,069.6 Less accumulated depreciation and amortization..................... (2,502.7) (2,313.2) -------- -------- Property, net...................................................... 3,864.4 2,756.4 Goodwill, net of accumulated amortization of $142.2 and $116.4....... 1,886.0 312.5 Prepaid pension costs................................................ 337.2 328.7 Investments in unconsolidated affiliates............................. 89.5 362.4 Other assets......................................................... 99.9 130.8 -------- -------- Total assets......................................................... $ 8,176.2 $ 5,545.2 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of notes and debentures......................... $ 194.9 $ 237.3 Current obligations under capital leases........................... 22.2 18.4 Accounts payable................................................... 1,385.0 1,153.1 Accrued salaries and wages......................................... 260.3 231.2 Other accrued liabilities.......................................... 536.7 390.0 -------- -------- Total current liabilities.................................. 2,399.1 2,030.0 -------- -------- Long-term debt: Notes and debentures............................................... 2,908.9 1,568.1 Obligations under capital leases................................... 227.2 160.4 -------- -------- Total long-term debt....................................... 3,136.1 1,728.5 Deferred income taxes................................................ 238.5 223.8 Accrued claims and other liabilities................................. 481.0 376.1 -------- -------- Total liabilities.......................................... 6,254.7 4,358.4 -------- -------- Contingencies Stockholders' equity: Common stock: par value $0.01 per share; 750 shares authorized; 265.2 and 221.4 shares outstanding.............................. 2.7 2.2 Additional paid-in capital......................................... 2,459.0 750.3 Unexercised warrants purchased..................................... (322.7) (322.7) Cumulative translation adjustments................................. 9.6 12.0 Retained earnings.................................................. 1,100.0 745.0 -------- -------- 3,248.6 1,186.8 Less: treasury stock at cost; 30.9 shares in 1997............... (1,327.1) -- -------- -------- Total stockholders' equity................................. 1,921.5 1,186.8 -------- -------- Total liabilities and stockholders' equity................. $ 8,176.2 $ 5,545.2 ======== ========
See accompanying notes to condensed consolidated financial statements. F-2 32 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
12 WEEKS ENDED 36 WEEKS ENDED ---------------------------- ---------------------------- SEPTEMBER 6, SEPTEMBER 7, SEPTEMBER 6, SEPTEMBER 7, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Sales....................................... $ 5,371.4 $ 3,954.0 $ 14,698.4 $ 11,782.1 Cost of goods sold.......................... (3,818.8) (2,867.4) (10,495.0) (8,500.9) --------- --------- ---------- --------- Gross profit.............................. 1,552.6 1,086.6 4,203.4 3,281.2 Operating and administrative expense........ (1,235.3) (882.8) (3,363.3) (2,673.2) --------- --------- ---------- --------- Operating profit.......................... 317.3 203.8 840.1 608.0 Interest expense............................ (62.3) (39.8) (163.7) (126.3) Equity in earnings of unconsolidated affiliates................................ 4.1 13.1 25.6 34.3 Other income, net........................... 0.7 1.0 2.1 3.4 --------- --------- ---------- --------- Income before income taxes and extraordinary loss..................... 259.8 178.1 704.1 519.4 Income taxes................................ (109.8) (72.2) (297.5) (210.4) --------- --------- ---------- --------- Income before extraordinary loss.......... 150.0 105.9 406.6 309.0 Extraordinary loss related to early retirement of debt, net of income tax benefit of $38.3 and $41.1................ (59.9) -- (64.1) -- --------- --------- ---------- --------- Net income.................................. $ 90.1 $ 105.9 $ 342.5 $ 309.0 Primary and fully diluted income per common share and common share equivalent: Income before extraordinary loss.......... $ 0.60 $ 0.44 $ 1.64 $ 1.29 Extraordinary loss........................ (0.24) -- (0.26) -- --------- --------- ---------- --------- Net income................................ $ 0.36 $ 0.44 $ 1.38 $ 1.29 --------- --------- ---------- --------- Weighted average common shares and common share equivalents: Primary................................... 251.4 240.3 247.3 239.5 --------- --------- ---------- --------- Fully diluted............................. 251.4 240.5 247.5 240.1 --------- --------- ---------- ---------
See accompanying notes to condensed consolidated financial statements. F-3 33 SAFEWAY INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
36 WEEKS ENDED ------------------------------ SEPTEMBER 6, SEPTEMBER 7, 1997 1996 ------------ ------------ CASH FLOW FROM OPERATIONS Net income........................................................... $ 342.5 $ 309.0 Reconciliation to net cash flow from operations: Extraordinary loss related to the early retirement of debt, before income tax benefit.............................................. 105.2 -- Depreciation and amortization...................................... 304.4 233.5 LIFO expense....................................................... 2.3 6.9 Equity in undistributed earnings of unconsolidated affiliates...... (25.6) (34.3) Other.............................................................. 4.0 (5.5) Change in working capital items: Receivables and prepaid expenses................................ 28.9 (79.5) Inventories at FIFO cost........................................ 115.7 9.2 Payables and accruals........................................... (149.0) 107.6 --------- ------- Net cash flow from operations.............................. 728.4 546.9 --------- ------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for property additions..................................... (355.2) (286.9) Proceeds from sale of property....................................... 49.4 46.1 Net cash acquired in acquisition of The Vons Companies, Inc. ........ 57.2 -- Other................................................................ (9.1) (5.3) --------- ------- Net cash flow used by investing activities................. (257.7) (246.1) --------- ------- CASH FLOW FROM FINANCING ACTIVITIES Additions to short-term borrowings................................... 277.5 121.7 Payments on short-term borrowings.................................... (245.5) (205.5) Additions to long-term borrowings.................................... 3,188.2 148.4 Payments on long-term borrowings..................................... (2,378.2) (432.7) Purchase of treasury stock........................................... (1,376.0) -- Net proceeds from exercise of stock options and warrants............. 31.7 14.0 Premium paid on early retirement of debt............................. (10.2) -- Other................................................................ (5.8) 4.0 --------- ------- Net cash flow used by financing activities................. (518.3) (350.1) --------- ------- Decrease in cash and equivalents..................................... (47.6) (49.3) CASH AND EQUIVALENTS Beginning of period................................................ 79.7 74.8 --------- ------- End of period...................................................... $ 32.1 $ 25.5 ========= =======
See accompanying notes to condensed consolidated financial statements. F-4 34 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Safeway Inc. and subsidiaries ("Safeway" or the "Company") for the 12 and 36 weeks ended September 6, 1997 and September 7, 1996 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 1996 Annual Report to Stockholders. The results of operations for the 12 and 36 weeks ended September 6, 1997 are not necessarily indicative of the results expected for the full year. Acquisition of the Vons Companies, Inc. As discussed in Note C, Safeway completed the acquisition of The Vons Companies, Inc. ("Vons") on April 8, 1997. The accompanying financial statements include Vons' results of operations as of the beginning of the second quarter of 1997. Summarized pro forma results of operations for 1996 and 1997 appear in Note D. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128"). The Company is required to adopt SFAS No. 128 in the fourth quarter of 1997 and at that time will restate earnings per share ("EPS") data for prior periods to conform with SFAS No. 128. Earlier application is not permitted. SFAS No. 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted to common stock. Pro forma amounts for basic and diluted EPS assuming SFAS No. 128 had been in effect for the 12 and 36 weeks ended September 6, 1997 and September 7, 1996 are as follows:
12 WEEKS ENDED 36 WEEKS ENDED ----------------------------- ----------------------------- SEPTEMBER 6, SEPTEMBER 7, SEPTEMBER 6, SEPTEMBER 7, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Basic EPS: Income before extraordinary loss........ $ 0.64 $ 0.49 $ 1.77 $ 1.42 Extraordinary loss...................... (0.26) -- (0.28) -- ------ ----- ------ ----- Net income.............................. $ 0.38 $ 0.49 $ 1.49 $ 1.42 ====== ===== ====== ===== Diluted EPS: Income before extraordinary loss........ $ 0.60 $ 0.44 $ 1.64 $ 1.29 Extraordinary loss...................... (0.24) -- (0.26) -- ------ ----- ------ ----- Net income.............................. $ 0.36 $ 0.44 $ 1.38 $ 1.29 ====== ===== ====== =====
Inventory Net income reflects the application of the LIFO method of valuing certain domestic inventories, based upon estimated annual inflation ("LIFO Indices"). Safeway did not record LIFO expense in the second and third quarters of 1997, reflecting management's expectation of little or no inflation for the full F-5 35 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) year. LIFO expense was $2.3 million in the third quarter of 1996. For the first 36 weeks of the year, LIFO expense was $2.3 million in 1997 and $6.9 million in 1996. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories. Off-Balance Sheet Financial Instruments As discussed in Note E to the Company's consolidated financial statements on page 26 of the 1996 Annual Report to Stockholders, Safeway has entered into interest rate swap agreements to limit the exposure of its floating interest rate debt to changes in market interest rates. In the second quarter of 1997, Safeway purchased interest rate cap agreements with a notional principal amount of $850 million at 7% for two years. On October 3, 1997, Safeway purchased an interest rate swap with a notional principal amount of $100 million at 6.2075% for ten years. Interest rate cap agreements lock in a maximum rate if rates rise, but enable the Company to otherwise pay lower market rates. The initial cost of interest rate caps is amortized to interest expense over the life of the agreement. Any payments received under the agreement reduce interest expense. NOTE B -- FINANCING Notes and debentures were composed of the following at September 6, 1997 and December 28, 1996 (in millions):
SEPTEMBER 6, 1997 DECEMBER 28, 1996 ---------------------- ---------------------- LONG-TERM CURRENT LONG-TERM CURRENT ---------- ------- ---------- ------- Commercial paper, unsecured........................... $1,407.0 10% Senior Subordinated Notes due 2001, unsecured..... 241.4 $ 241.4 9.65% Senior Subordinated Debentures due 2004, unsecured........................................... 228.2 228.2 9.35% Senior Subordinated Notes due 1999, unsecured... 161.5 161.5 9.875% Senior Subordinated Debentures due 2007, unsecured........................................... 110.0 110.0 8.375% Senior Subordinated Debentures due 1999, unsecured........................................... 100.0 -- 9.30% Senior Secured Debentures due 2007.............. 70.7 70.7 10% Senior Notes due 2002, unsecured.................. 59.1 59.1 6.625% Senior Subordinated Debentures due 1998, unsecured........................................... -- $ 36.0 -- Bank Credit Agreement, unsecured...................... 270.9 -- -- Credit Agreement, unsecured........................... -- -- 360.6 Mortgage notes payable, secured....................... 123.3 39.4 156.5 $ 149.9 Other notes payable, unsecured........................ 111.3 4.5 114.6 4.4 Medium-term notes, unsecured.......................... 25.5 -- 65.5 -- Short-term bank borrowings, unsecured................. -- 115.0 -- 83.0 -------- ------ -------- ------ $2,908.9 $ 194.9 $1,568.1 $ 237.3 ======== ====== ======== ======
During the second quarter of 1997, the Company entered into a new $3.0 billion bank credit agreement (the "Bank Credit Agreement" or "BCA") that provides for, among other things, increased borrowing capacity, extended maturities and the opportunity to pay lower interest rates based on interest F-6 36 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) coverage ratios or public debt ratings. The restrictive covenants of the Bank Credit Agreement continue to limit payments by the Company, for, among other things: (i) paying cash dividends on its capital stock; (ii) repurchasing shares of its capital stock; and (iii) acquiring any outstanding warrants, options or other rights to acquire shares of any class of Safeway stock. These covenants also limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Safeway also is required to meet certain financial tests under the Bank Credit Agreement. During the third quarter of 1997, Safeway entered the commercial paper market. The proceeds were used to pay down borrowings under the BCA. Commercial paper outstanding at September 6, 1997 is classified as long-term because the Company intends to refinance these borrowings on a long-term basis through either continued commercial paper borrowings or utilization of the BCA. During the first three quarters of 1997, the Company recorded an extraordinary loss of $64.1 million, net of the related tax benefit, for the retirement of $589.0 of Safeway's public debt, $285.5 million of Vons' public debt, and $40 million of medium-term notes. Safeway financed the redemption with $600 million of new senior debt securities issued on September 10, 1997 (the "Senior Debt") and the balance with commercial paper. The Senior Debt consists of 6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007 and 7.45% Senior Debentures due 2027. The refinancing extends Safeway's overall long-term debt maturities, increases financial flexibility and, based on current interest rates, is expected to reduce interest expense. The indentures related to the Senior Debt contain certain restrictive covenants which place limitations on liens, sale and lease-back transactions, and merger transactions. In connection with the redemption, the Company obtained consents from the holders of the 9.30% Senior Secured Debentures and the Senior Subordinated Debentures to amend the related indentures to eliminate the principal restrictive covenants and amend certain other provisions contained therein. NOTE C -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES On April 8, 1997, Safeway completed the acquisition of Vons pursuant to which the Company issued 41.6 million shares of Safeway common stock for all of the shares of Vons stock that it did not already own. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial position and results of operations. In connection with the acquisition, Safeway repurchased 32.0 million shares of Safeway common stock from a partnership affiliated with Kohlberg Kravis Roberts & Co. at $43 per share, for an aggregate purchase price of $1.376 billion. To finance the repurchase, Safeway entered into the Bank Credit Agreement described in Note B above. At the end of the third quarter of 1997, Safeway's investment in unconsolidated affiliates consisted of a 49% interest in Casa Ley, which operates 71 food and general merchandise stores in western Mexico. Income from Safeway's equity investment in Casa Ley decreased to $4.1 million in the second quarter of 1997 from $4.4 million in 1996. For the first 36 weeks of the year, Safeway's share of Casa Ley's earnings rose to $13.4 million in 1997 from $12.5 million in 1996. Safeway's share of Vons' earnings was $12.2 million for the first quarter of 1997, $7.2 million in the first quarter of 1996, and $21.8 million in the first 36 weeks of 1996. NOTE D -- UNAUDITED PRO FORMA SUMMARY FINANCIAL INFORMATION The following unaudited pro forma summary financial information combines the consolidated results of operations of Safeway and Vons as if the acquisition had occurred as of the beginning of each of the years presented. The following pro forma financial information is presented for informational purposes F-7 37 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) only and may not be indicative of what the actual consolidated results of operations would have been if the acquisition had been effective earlier (in millions, except per-share amounts):
12 WEEKS ENDED 36 WEEKS ENDED ------------------------------------- ------------------------------------- (ACTUAL) (PRO FORMA) (PRO FORMA) (PRO FORMA) SEPTEMBER 6, 1997 SEPTEMBER 7, 1996 SEPTEMBER 6, 1997 SEPTEMBER 7, 1996 ----------------- ----------------- ----------------- ----------------- Sales............................ $5,371.4 $5,205.8 $ 15,949.9 $ 15,476.8 Income before extraordinary loss........................... $ 150.0 $ 90.1 $ 417.4 $ 314.3 Net income....................... $ 90.1 $ 90.1 $ 353.3 $ 314.3 Fully diluted income per common share and common share equivalent: Income before extraordinary loss........................ $ 0.60 $ 0.36 $ 1.66 $ 1.25 Net income..................... $ 0.36 $ 0.36 $ 1.41 $ 1.25
Net cash acquired from the acquisition was as follows (in millions): Fair value of assets acquired................................. $ 3,170.2 Fair value of liabilities assumed............................. (1,223.2) Stock issued.................................................. (1,693.0) Safeway's equity investment in Vons........................... (311.2) --------- Net cash acquired............................................. $ (57.2) =========
NOTE E -- CONTINGENCIES Legal Matters Note K to the Company's consolidated financial statements, under the caption "Legal Matters" on page 35 of the 1996 Annual Report to Stockholders, provides information on certain claims and litigation in which the Company is involved. In March 1996, a purported class action was filed in the Superior Court for Alameda County, California, alleging that the Company fraudulently (i) obtained settlements of certain claims arising out of the 1988 Richmond warehouse fire and (ii) made statements that induced claimants not to file actions within the time period under the statute of limitations. On April 21, 1997, the Court sustained Safeway's demurrer to the second amended complaint without leave to amend. In May 1997, the Court dismissed the case, and plaintiffs filed an appeal. Vons has been named in a number of lawsuits in state and federal courts in Washington, Nevada, Idaho and California arising from claims of food-borne illness that allegedly was contracted from the consumption of hamburgers at certain Jack In The Box restaurants in early 1993 (the "Outbreak"). Only a few of these cases are pending; they are filed in state courts and a federal court in the State of Washington. The restaurants involved either were directly operated by Foodmaker, Inc. ("Foodmaker"), of which Jack In The Box is a division, or were operated by franchisees. The suits seek an unspecified amount of monetary damages. The plaintiffs in those actions allege, among other things, that the hamburger patties in question were processed by Vons before being cooked and served by a Jack In The Box outlet. The Company, in consultation with its attorneys and insurance carriers, does not anticipate that the total liability that it might face as a result of these claims will exceed the insurance coverage it has available. Vons also has been named as a defendant in two actions that have been coordinated by the California Judicial Council. Claims have been asserted against Vons in both actions by Foodmaker. In addition, Vons has asserted claims in each action against Foodmaker for damages Vons suffered as a F-8 38 SAFEWAY INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) result of the Outbreak and Foodmaker's post-Outbreak statements. Other parties to these actions include a meat supplier and three Jack In The Box franchisees that operated outlets from which claims of illness arose. These lawsuits presently are set for trial in Los Angeles, Superior Court on November 24, 1997, but the parties have agreed, at the Court's direction, that the trial date will be continued to a date in January 1998. Foodmaker seeks damages of approximately $550 million; Vons seeks to recover damages of approximately $250 million and also seeks indemnity from other parties of any amounts it might be held liable to pay to Foodmaker. The Company believes that Vons has meritorious defenses to Foodmaker's claims. On September 13, 1996, a class action lawsuit entitled McCampbell. et al. v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego County, California against Vons and two other grocery store chains operating in Southern California. In the complaint it is alleged, among other things, that Vons and the other defendants conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants violated provisions of the California Cartwright Act and engaged in unfair competition. Plaintiffs seek damages they allege the class has sustained; the amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. In addition, plaintiffs seek an injunction against future acts that would be in restraint of trade or that would constitute unfair competition. An answer has been filed to the complaint that denies plaintiffs' allegations and sets forth several defenses. On October 3, 1997, the Court issued an order certifying a class of retail purchasers of white chicken eggs by the dozen from defendants' stores within the Counties of Los Angeles, Riverside, San Bernadino, San Diego, Imperial and Orange during the period from September 13, 1993 to the present. The Company believes that Vons has meritorious defenses to plaintiffs' claims. On August 28, 1997, the Bankruptcy Court for the Western District of Missouri entered judgment denying all relief sought by Food Barn in its lawsuit against the Company and others arising out of the February 1988 sale of Safeway's Kansas City Division to a company formed by Morgan, Lewis, Githen & Ahn Fund I and financed principally by the Prudential Insurance Company of America and its affiliate, Pru Co. Insurance Company. The complaint alleged that the 1988 transaction was a fraudulent conveyance and that the Company fraudulently induced Food Barn to enter into the 1988 transaction. In September 1997, Food Barn filed a notice of appeal. F-9 39 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 28, 1996 and December 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 28, 1996. 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 as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Francisco, California February 18, 1997 F-10 40 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994 ---------- ---------- ---------- (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) Sales.................................................... $ 17,269.0 $ 16,397.5 $ 15,626.6 Cost of goods sold....................................... (12,494.8) (11,905.1) (11,339.3) ---------- ---------- ---------- Gross profit........................................... 4,774.2 4,492.4 4,287.3 Operating and administrative expense..................... (3,882.5) (3,765.0) (3,675.2) ---------- ---------- ---------- Operating profit....................................... 891.7 727.4 612.1 Interest expense......................................... (178.5) (199.8) (221.7) Equity in earnings of unconsolidated affiliates.......... 50.0 26.9 27.3 Other income, net........................................ 4.4 2.0 6.4 ---------- ---------- ---------- Income before income taxes and extraordinary loss...... 767.6 556.5 424.1 Income taxes............................................. (307.0) (228.2) (173.9) ---------- ---------- ---------- Income before extraordinary loss....................... 460.6 328.3 250.2 Extraordinary loss related to early retirement of debt, net of income tax benefit of $1.3 and $6.7............. -- (2.0) (10.5) ---------- ---------- ---------- Net income..................................... $ 460.6 $ 326.3 $ 239.7 ========== ========== ========== Earnings per common share and common share equivalent: Primary Income before extraordinary loss.................... $ 1.94 $ 1.36 $ 1.02 Extraordinary loss.................................. -- (0.01) (0.04) ---------- ---------- ---------- Net income..................................... $ 1.94 $ 1.35 $ 0.98 ========== ========== ========== Fully diluted Income before extraordinary loss.................... $ 1.93 $ 1.35 $ 1.01 Extraordinary loss.................................. -- (0.01) (0.04) ---------- ---------- ---------- Net income..................................... $ 1.93 $ 1.34 $ 0.97 ========== ========== ========== Weighted average common shares and common share equivalents: Primary................................................ 237.8 240.6 244.1 Fully diluted.......................................... 238.4 243.5 247.1
See accompanying notes to consolidated financial statements. F-11 41 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
YEAR-END YEAR-END 1996 1995 -------- -------- (IN MILLIONS, EXCEPT PER- SHARE AMOUNTS) Current assets: Cash and equivalents.................................................... $ 79.7 $ 74.8 Receivables............................................................. 160.9 152.7 Merchandise inventories, net of LIFO reserve of $79.2 and $74.3......... 1,283.3 1,191.8 Prepaid expenses and other current assets............................... 130.5 95.5 -------- -------- Total current assets............................................ 1,654.4 1,514.8 -------- -------- Property: Land.................................................................... 438.3 419.4 Buildings............................................................... 1,286.9 1,213.2 Leasehold improvements.................................................. 957.2 858.5 Fixtures and equipment.................................................. 2,108.5 1,912.7 Property under capital leases........................................... 278.7 283.4 -------- -------- 5,069.6 4,687.2 Less accumulated depreciation and amortization.......................... 2,313.2 2,094.3 -------- -------- Total property, net............................................. 2,756.4 2,592.9 Goodwill, net of accumulated amortization of $116.4 and $106.3............ 312.5 323.8 Prepaid pension costs..................................................... 328.7 322.4 Investments in unconsolidated affiliates.................................. 362.4 336.0 Other assets.............................................................. 130.8 104.4 -------- -------- Total assets.................................................... $5,545.2 $5,194.3 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of notes and debentures.............................. $ 237.3 $ 221.4 Current obligations under capital leases................................ 18.4 19.0 Accounts payable........................................................ 1,153.1.. 1,040.0 Accrued salaries and wages.............................................. 231.2 234.6 Other accrued liabilities............................................... 390.0 424.0 -------- -------- Total current liabilities....................................... 2,030.0 1,939.0 -------- -------- Long-term debt: Notes and debentures.................................................... 1,568.1 1,783.6 Obligations under capital leases........................................ 160.4 166.2 -------- -------- Total long-term debt............................................ 1,728.5 1,949.8 Deferred income taxes..................................................... 223.8 108.5 Accrued claims and other liabilities...................................... 376.1 401.5 -------- -------- Total liabilities......................................................... 4,358.4 4,398.8 -------- -------- Commitments and contingencies Stockholders' equity: Common stock: par value $0.01 per share; 750 shares authorized; 221.4 and 213.7 shares outstanding......................................... 2.2 2.1 Additional paid-in capital.............................................. 750.3 684.9 Unexercised warrants purchased.......................................... (322.7) (196.2) Cumulative translation adjustments...................................... 12.0 20.3 Retained earnings....................................................... 745.0 284.4 -------- -------- Total stockholders' equity...................................... 1,186.8 795.5 -------- -------- Total liabilities and stockholders' equity................................ $5,545.2 $5,194.3 ======== ========
See accompanying notes to consolidated financial statements. F-12 42 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994 ------- ------- ------- (IN MILLIONS) CASH FLOW FROM OPERATIONS Net income....................................................... $ 460.6 $ 326.3 $ 239.7 Reconciliation to net cash flow from operations: Extraordinary loss related to early retirement of debt, before income tax benefit.......................................... -- 3.3 17.2 Depreciation and amortization.................................. 338.5 329.7 326.4 Amortization of deferred finance costs......................... 1.8 4.0 3.0 Deferred income taxes.......................................... 113.9 (15.8) (12.9) LIFO expense................................................... 4.9 9.5 2.7 Equity in earnings of unconsolidated affiliates................ (50.0) (26.9) (27.3) Net pension expense (income)................................... 4.2 7.6 (1.4) Contributions to Canadian pension plan......................... (10.6) (10.3) (11.5) Increase (decrease) in accrued claims and other liabilities.... (17.6) 19.0 (5.7) Loss (gain) on property retirements............................ (12.6) 20.4 56.3 Changes in working capital items: Receivables................................................. (8.5) (3.8) (24.5) Inventories at FIFO cost.................................... (99.3) (55.4) (31.8) Prepaid expenses and other current assets................... (35.1) (2.9) 3.6 Payables and accruals....................................... 135.0 53.0 219.5 ------ ------ ------ Net cash flow from operations.......................... 825.2 657.7 753.3 ------ ------ ------ CASH FLOW FROM INVESTING ACTIVITIES Cash paid for property additions................................. (541.8) (450.9) (339.9) Proceeds from sale of property and operations.................... 60.8 54.8 36.3 Other............................................................ (1.3) (29.6) (28.0) ------ ------ ------ Net cash flow used by investing activities..................... (482.3) (425.7) (331.6) ------ ------ ------ CASH FLOW FROM FINANCING ACTIVITIES Additions to short-term borrowings............................... $ 227.2 $ 183.7 $ 157.9 Payments on short-term borrowings................................ (280.4) (131.5) (108.0) Additions to long-term borrowings................................ 387.1 708.1 455.7 Payments on long-term borrowings................................. (552.0) (787.6) (986.2) Proceeds from exercise of warrants and stock options............. 12.6 12.8 14.6 Premiums paid on early retirement of debt........................ -- (3.3) (13.2) Purchase of unexercised warrants................................. (126.5) (196.2) -- Other............................................................ (5.5) (4.4) 0.7 ------ ------ ------ Net cash flow used by financing activities..................... (337.5) (218.4) (478.5) ------ ------ ------ Effect of changes in exchange rates on cash...................... (0.5) 0.5 (0.9) ------ ------ ------ Increase (decrease) in cash and equivalents...................... 4.9 14.1 (57.7) CASH AND EQUIVALENTS Beginning of year................................................ 74.8 60.7 118.4 ------ ------ ------ End of year...................................................... $ 79.7 $ 74.8 $ 60.7 ====== ====== ====== OTHER CASH FLOW INFORMATION Cash payments during the year for: Interest....................................................... $ 181.8 $ 203.0 $ 230.1 Income taxes, net of refunds................................... 156.7 213.0 126.0 NONCASH INVESTING AND FINANCING ACTIVITIES Tax benefit from stock options exercised......................... 51.9 16.6 15.6 Mortgage notes assumed in property acquisitions.................. -- -- 11.3 Capital lease obligations entered into........................... 15.5 13.7 4.5
See accompanying notes to consolidated financial statements. F-13 43 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED COMMON STOCK ADDITIONAL UNEXERCISED CUMULATIVE EARNINGS TOTAL -------------- PAID-IN WARRANTS TRANSLATION (ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL PURCHASED ADJUSTMENTS DEFICIT) EQUITY ------ ------ ---------- ----------- ----------- ------------ ------------- (IN MILLIONS) Balance, year-end 1993............ 203.0 $2.0 $623.5 $39.0 $ (281.6) $ 382.9 Options and warrants exercised, including tax benefit........... 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 Options and warrants exercised, including tax benefit........... 4.0 -- 29.4 -- -- 29.4 Stock bonuses..................... 0.1 -- 1.0 -- -- 1.0 Unexercised warrants purchased.... -- -- -- $(196.2) -- -- (196.2) Net income........................ -- -- -- -- -- 326.3 326.3 Translation adjustments........... -- -- -- -- (8.8) -- (8.8) ----- ---- ------ ------- ----- ------ ------- Balance, year-end 1995............ 213.7 2.1 684.9 (196.2) 20.3 284.4 795.5 Options and warrants exercised, including tax benefit........... 7.7 0.1 64.4 -- -- -- 64.5 Stock bonuses..................... -- -- 1.0 -- -- -- 1.0 Unexercised warrants purchased.... -- -- -- (126.5) -- -- (126.5) Net income........................ -- -- -- -- -- 460.6 460.6 Translation adjustments........... -- -- -- -- (8.3) -- (8.3) ----- ---- ------ ------- ----- ------ ------- Balance, year-end 1996............ 221.4 $2.2 $750.3 $(322.7) $12.0 $ 745.0 $ 1,186.8 ===== ==== ====== ======= ===== ====== =======
See accompanying notes to consolidated financial statements. F-14 44 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES The Company At December 28, 1996, Safeway Inc. ("Safeway" or the "Company") operated 1,052 stores in the United States and Canada. U.S. retail operations are located principally in northern California, Oregon, Washington, Colorado, Arizona and the Mid-Atlantic region. Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. 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. At year-end 1996, Safeway held a 49% interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operated 71 food and general merchandise stores in western Mexico, and a 34.4% interest in The Vons Companies, Inc. ("Vons"), which operated 320 grocery stores located primarily in southern California. In December 1996, Safeway and Vons entered into an agreement for a business combination of the two companies pursuant to which Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock it does not currently own in a transaction that will be accounted for as a purchase (the "Merger"). As a result of the Merger, Vons will become a wholly-owned subsidiary of Safeway. The transaction is subject to approval by Vons' shareholders. The companies expect to complete the transaction in early April of 1997. Basis of Consolidation The consolidated financial statements include Safeway Inc., a Delaware corporation, and all majority-owned subsidiaries. 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 periods ended December 28, 1996, December 30, 1995 and December 31, 1994. Reclassifications Certain amounts for prior years have been reclassified to conform to the 1996 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. Adjustments resulting from translating financial statements into U.S. dollars are reported as cumulative translation adjustments and are shown net of applicable income taxes as a separate component of stockholders' equity. F-15 45 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Merchandise Inventories Merchandise inventory of $756 million at year-end 1996 and $693 million at year-end 1995 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 $835 million at year-end 1996 and $767 million at year-end 1995. 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 increases in cost of goods sold of $4.9 million in 1996, $9.5 million in 1995 and $2.7 million in 1994. 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 1996, 1995 and 1994. Self-Insurance The Company is primarily self-insured for workers' compensation, automobile and general liability costs. The self-insurance 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 a discount rate of 5.5% in both 1996 and 1995. The current portion of the self-insurance liability ($65.1 million at year-end 1996 and $70.6 million at year-end 1995) is included in other accrued liabilities in the consolidated balance sheets. The long-term portion of $168.7 million at year-end 1996 and $188.7 million at year-end 1995 is included in accrued claims and other liabilities. Claims payments were $66.7 million in 1996, $71.4 million in 1995 and $75.3 million in 1994. The total undiscounted liability was $266 million at year-end 1996 and $297 million at year-end 1995. 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. F-16 46 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Statements 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 As discussed in Note E, 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. Revenue Recognition Sales are recorded when payment is tendered at check-out. 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 at 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. 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 1996, the estimated fair value of debt was $1.9 billion compared to a carrying value of $1.8 billion. At year-end 1995, the estimated fair value of debt was $2.1 billion compared to a carrying value of $2.0 billion. 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 1996 and 1995, net unrealized losses on interest rate swap agreements were $2.0 million and $2.4 million. Since the F-17 47 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company intends to hold these agreements as hedges for the terms of the agreements, the market risk associated with changes in interest rates should not be significant. Impairment of Long-Lived Assets In 1996, Safeway adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 establishes recognition and measurement criteria for impairment losses when the Company no longer expects to recover the carrying value of a long-lived asset. Safeway's existing accounting policy for long-lived assets complied with SFAS No. 121. Therefore, the adoption of SFAS No. 121 did not have a material effect on the Company's Consolidated Financial Statements. Upon the decision to close a store or other 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 year-end 1996, Safeway had an accrued liability of $27.6 million for the anticipated future closure of 35 stores and $19.8 million for the anticipated future closure of other facilities. Stock-Based Compensation Safeway accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Safeway elected to adopt the disclosure requirements of SFAS No. 123,"Accounting for Stock-Based Compensation," in 1996. NOTE B -- MERGER WITH THE VONS COMPANIES, INC. Safeway currently owns approximately 34% of the outstanding common stock of Vons. In December 1996, Safeway and Vons entered into an agreement for the Merger pursuant to which Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock it does not currently own in a transaction that will be accounted for as a purchase. As a result of the Merger, Vons will become a wholly-owned subsidiary of Safeway. The transaction is subject to approval by Vons' shareholders. The companies expect to complete the transaction in early April of 1997. Safeway currently recognizes its proportionate share of Vons' net income (based on Safeway's ownership interest in Vons) as equity in the earnings of an unconsolidated affiliate on a one-quarter delay basis. As of the acquisition date, Safeway will consolidate 100% of Vons' activity in its financial statements. Based on preliminary estimates, the cost to acquire the Vons stock not currently owned by Safeway will be approximately $1.7 billion, of which an estimated $1.5 billion will be allocated to goodwill with an estimated useful life of 40 years. Annual goodwill amortization of the combined company is expected to increase by approximately $29 million. In connection with the Merger, Safeway will repurchase (the "Repurchase") 32 million shares of Safeway common stock held by one or more partnerships controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR") at $43 per share, or $1.376 billion in the aggregate. To finance the Repurchase, Safeway currently expects to enter into a new credit agreement to provide for, among other things, increased borrowing capacity to $3 billion and an extended maturity on the new commitments. F-18 48 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C -- FINANCING Notes and debentures were composed of the following at year-end (in millions):
1996 1995 -------- -------- Credit Agreement, unsecured........................................... $ 360.6 $ 395.0 9.30% Senior Secured Debentures due 2007.............................. 70.7 70.7 Mortgage notes payable, secured....................................... 306.4 389.3 10% Senior Notes due 2002, unsecured.................................. 59.1 59.1 Medium-term notes, unsecured.......................................... 65.5 80.0 Other notes payable, unsecured........................................ 119.0 122.7 Short-term bank borrowings, unsecured................................. 83.0 136.1 9.35% Senior Subordinated Notes due 1999, unsecured................... 161.5 172.5 10% Senior Subordinated Notes due 2001, unsecured..................... 241.4 241.4 9.65% Senior Subordinated Debentures due 2004, unsecured.............. 228.2 228.2 9.875% Senior Subordinated Debentures due 2007, unsecured............. 110.0 110.0 -------- -------- 1,805.4 2,005.0 Less current maturities............................................... 237.3 221.4 -------- -------- Long-term portion..................................................... $1,568.1 $1,783.6 ======== ========
Credit Agreement Safeway's existing unsecured bank credit agreement (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. At year-end 1996, the Company had total unused borrowing capacity under the Credit Agreement of $722.7 million. U.S. borrowings under the Credit Agreement carry interest at one of the following rates selected by the Company: (i) the prime rate; (ii) a rate based on rates 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: (a) the Canadian base rate; or (b) the Canadian Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in Canadian dollars carry interest at one of the following rates selected by the Company: (i) the Canadian prime rate; or (ii) the rate for Canadian bankers acceptances plus the Pricing Margin. The weighted average interest rate on borrowings under the Credit Agreement was 5.3% during 1996. At year-end 1996, the weighted average interest rate on borrowings under the Credit Agreement was 5.0%. 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. Mortgage Notes Payable Mortgage notes payable at year-end 1996 have remaining terms ranging from one to 13 years, have a weighted average interest rate of 9.3% and are secured by properties with a net book value of approximately $425 million. F-19 49 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 the shelf registration, the Company issued $80 million of notes in 1992, including $74 million of 10% Senior Notes due 2002, and $80 million of medium-term notes in 1993. The Company used the proceeds from these notes to finance capital expenditures. Other Notes Payable Other notes payable at year-end 1996 have remaining terms ranging from one to 15 years and a weighted average interest rate of 7.6%. Senior Subordinated Indebtedness The 9.35% Senior Subordinated Notes due 1999, 10% Senior Subordinated Notes due 2001, 9.65% Senior Subordinated Debentures due 2004, and 9.875% Senior Subordinated Debentures due 2007 (collectively the "Subordinated Securities") are subordinated in right of payment to, among other things, the Company's borrowings under the Credit Agreement, the 9.30% Senior Secured Debentures, the senior unsecured indebtedness and mortgage notes payable. Redemptions During 1995, Safeway retired $53.5 million of mortgage debt with proceeds from floating rate bank borrowings. During 1994, Safeway retired $44.2 million of senior debt and $247.9 million of Subordinated Securities primarily with proceeds from floating rate bank borrowings. These redemptions resulted in extraordinary losses of $2.0 million ($0.01 per share) in 1995 and $10.5 million ($0.04 per share) in 1994. 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 Credit Agreement and the indentures related to Safeway's 9.30% Senior Secured Debentures due 2007 and the Subordinated Securities (the "Indentures") contain certain restrictions on payments by the Company for, among other things: (i) paying cash dividends on its capital stock; (ii) repurchasing shares of its capital stock or certain indebtedness; and (iii) acquiring any outstanding warrants, options or other rights to acquire shares of any class of stock of Safeway. At year-end 1996, the limitation on such restricted payments was $540 million. Other provisions of the Credit Agreement, Indentures and the indentures related to the senior unsecured indebtedness limit Safeway with respect to, among other things, (a) incurring additional indebtedness; (b) creating liens upon its assets; and (c) 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. The restrictions under the Indentures will not affect the Company's ability to consummate the Merger and the Repurchase described in Note B above. F-20 50 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Annual Debt Maturities As of year-end 1996, annual debt maturities were as follows (in millions): 1997...................................................... $ 237.3 1998...................................................... 70.8 1999...................................................... 195.6 2000...................................................... 386.0 2001...................................................... 306.3 Thereafter................................................ 609.4 -------- $1,805.4 ========
Letters of Credit The Company had letters of credit of $153.5 million outstanding at year-end 1996 of which $66.7 million were issued under the Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company pays annual commitment fees ranging from 0.25% to 0.75% on the outstanding portion of the letters of credit. NOTE D -- LEASE OBLIGATIONS Approximately two-thirds of the premises that the Company occupies are leased. The Company had approximately 1,020 leases at year-end 1996, including approximately 170 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 1996, 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 ------- --------- 1997............................................. $ 39.4 $ 144.4 1998............................................. 36.5 142.6 1999............................................. 32.9 138.4 2000............................................. 28.1 131.8 2001............................................. 25.8 118.7 Thereafter....................................... 196.1 968.3 ------ -------- Total minimum lease payments..................... 358.8 $ 1,644.2 ======== Less amounts representing interest............... (180.0) ------ Present value of net minimum lease payments...... 178.8 Less current obligations......................... (18.4) ------ Long-term obligations............................ $ 160.4 ======
Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income of $146.1 million. Amortization expense for property under capital leases was $17.9 million in 1996, $18.9 million in 1995 and $20.6 million in 1994. Accumulated amortization of property under capital leases was $156.1 million at year-end 1996 and $151.6 million at year-end 1995. F-21 51 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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.
1996 1995 1994 ------ ------ ------ Property leases: Minimum rentals...................... $138.2 $132.7 $126.4 Contingent rentals................... 9.9 9.1 9.8 Less rentals from subleases.......... (11.1) (11.1) (13.7) ------ ------ ------ 137.0 130.7 122.5 Equipment leases....................... 21.0 20.8 20.9 ------ ------ ------ $158.0 $151.5 $143.4 ====== ====== ======
NOTE E -- INTEREST EXPENSE Interest expense consisted of the following (in millions):
1996 1995 1994 ------ ------ ------ Credit Agreement............................................... $ 16.4 $ 13.5 Bank Credit Agreement and Working Capital Credit Agreement..... -- 11.7 $ 20.5 9.30% Senior Secured Debentures................................ 6.6 6.6 8.0 Mortgage notes payable......................................... 33.0 43.3 50.2 10% Senior Notes............................................... 5.9 5.9 6.5 Medium-term notes.............................................. 6.0 7.1 7.5 Other notes payable............................................ 11.9 11.3 16.5 Short-term bank borrowings..................................... 5.1 6.6 3.0 9.35% Senior Subordinated Notes................................ 15.3 16.1 19.6 10% Senior Subordinated Notes.................................. 24.1 24.1 26.6 9.65% Senior Subordinated Debentures........................... 22.0 22.0 24.5 9.875% Senior Subordinated Debentures.......................... 10.9 10.9 12.1 Obligations under capital leases............................... 20.8 21.0 22.2 Amortization of deferred finance costs......................... 1.8 4.0 3.0 Interest rate swap agreements.................................. 3.0 0.3 4.4 Capitalized interest........................................... (4.3) (4.6) (2.9) ------ ------ ------ $178.5 $199.8 $221.7 ====== ====== ======
As of year-end 1996, the Company had effectively converted $83.0 million of its $494.3 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 1996 were as follows (dollars in millions):
VARIABLE CANADA INTEREST U.S. FIXED FIXED RATES NOTIONAL INTEREST INTEREST TO BE ORIGINATION EXPIRATION PRINCIPAL RATES PAID RATES PAID RECEIVED DATE DATE - --------- ---------- ---------- -------- ----------- ---------- $10.0 5.8% 5.5% 1992 1997 18.3 8.7% 2.9 1992 1997 18.2 8.7 4.4 1992 1997 36.5 6.0 4.0 1993 1998 ----- $83.0 =====
F-22 52 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The variable interest rate received on the U.S. swap is 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 1996 and 1995, net unrealized losses on the interest rate swap agreements were $2.0 million and $2.4 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. NOTE F -- CAPITAL STOCK Shares Authorized and Issued Authorized preferred stock consists of 25 million shares of which none was outstanding during 1996, 1995 or 1994. Authorized common stock consists of 750 million shares at $0.01 par value. Common stock outstanding at year-end 1996 and 1995 was 221.4 million and 213.7 million shares. 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. Under Safeway's stock option plans, the Company may grant incentive and non-qualified options to purchase up to 49.0 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. Options generally vest over seven years. 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. F-23 53 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Activity in the Company's stock option plans for the three-year period ended December 28, 1996 was as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- ------------------ Outstanding, year-end 1993................................... 27,087,240 $ 4.73 1994 Activity: Granted................................................. 3,709,250 13.13 Canceled................................................ (1,154,168) 7.25 Exercised............................................... (4,329,298) 2.83 ---------- Outstanding, year-end 1994................................... 25,313,024 6.18 1995 Activity: Granted................................................. 1,018,180 18.13 Canceled................................................ (779,324) 7.44 Exercised............................................... (3,386,558) 3.86 ---------- Outstanding, year-end 1995................................... 22,165,322 7.04 1996 Activity: Granted................................................. 1,995,992 33.30 Canceled................................................ (362,227) 10.14 Exercised............................................... (4,412,509) 4.09 ---------- Outstanding, year-end 1996................................... 19,386,578 10.14 ========== Exercisable, year-end 1995................................... 12,022,760 4.69 ========== Exercisable, year-end 1996................................... 11,517,320 8.50 ==========
Weighted average fair value of options granted during the year: 1995 $ 8.69 1996 $15.28
The following table summarizes stock option information at year-end 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------------------ ----------------------------------- RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OF OPTIONS REMAINING CONTRACTUAL LIFE EXERCISE PRICE OF OPTIONS EXERCISE PRICE - ----------------- ------------ ----------------------------- ------------------ ------------ ------------------ $ 1.00 to $ 1.00 2,087,000 1.70 years $ 1.00 2,087,000 $ 1.00 4.80 to 6.00 3,445,520 10.69 5.47 2,031,285 5.48 6.19 to 6.44 3,210,026 8.67 6.43 2,686,820 6.43 6.50 to 9.50 4,313,040 10.40 7.78 2,648,072 7.82 9.56 to 13.13 2,625,205 7.96 12.58 823,961 12.49 13.19 to 43.00 3,705,787 9.98 24.85 1,240,182 29.38 ---------- ---------- ------ ---------- ------ $ 1.00 to $43.00 19,386,578 8.81 $10.33 11,517,320 $ 8.50 ========== ========== ====== ========== ======
Options to purchase 7.4 million shares were available for grant at year-end 1996. Additional Stock Plan Information As discussed in Note A, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. F-24 54 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" requires the disclosure of proforma net income and earnings per share as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: seven to nine years expected life to vesting; stock volatility of 30% in 1996 and 29% in 1995; risk-free interest rates of 6.29% in 1996 and 6.50% in 1995; and no dividends during the expected term. The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. However, the impact of outstanding unvested stock options granted prior to 1995 has been excluded from the proforma calculation; accordingly, the 1995 and 1996 proforma adjustments are not indicative of future period proforma adjustments. Had compensation cost for the Safeway's stock option plans been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the proforma amounts indicated below:
1996 1995 ------ ------ Net income (in millions): As reported.................................... $460.6 $326.3 Proforma....................................... 459.0 325.8 Primary earnings per share: As reported.................................... $ 1.94 $ 1.35 Proforma....................................... 1.93 1.35 Fully diluted earnings per share: As reported.................................... $ 1.93 $ 1.34 Proforma....................................... 1.92 1.34
Public Stock Offering In February 1996, the Company completed the public offering of 23.0 million shares of common stock owned by affiliates of KKR, including 2.2 million shares issued upon the exercise of SSI Warrants (as defined below) and 0.2 million shares issued upon the exercise of employee stock options. Also in 1996, SSI Warrants to purchase 2.3 million shares attributable to the limited partnership interests owned by Safeway were canceled. The Company received proceeds of $2.4 million for the exercise price of the options and warrants. Affiliates of KKR and the option holder received the balance of proceeds from the stock offering. After the offering, two limited partnerships affiliated with KKR own 109.2 million shares of Safeway common stock, and SSI Equity Associates, L.P. holds SSI Warrants to purchase 23.4 million shares of Safeway common stock. Repurchases of Common Stock and Warrants to Purchase Common Stock At year-end 1996, warrants (the "SSI Warrants") to purchase 23.4 million shares of the Company's common stock at $1.00 per share were held by SSI Equity Associates, L.P. ("SSI"), a limited partnership whose sole assets consist 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 SSI. During 1996 and 1995, the F-25 55 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company acquired 64.5% of the partnership interests in SSI for $322.7 million with proceeds from bank borrowings, which was accounted for as a reduction to stockholders' equity. Outstanding common stock and the effect of options and warrants at year-end 1996 are summarized as follows (in millions):
POTENTIAL- PROCEEDS SHARES FROM EXERCISE ------ ------------- Common stock outstanding...................... 221.4 Options to purchase common stock.............. 18.5 $ 169.9 SSI Warrants.................................. 8.3 8.3 ----- ------ Total............................... 248.2 $ 178.2 ===== ======
Immediately following the Merger described in Note B above, the Company will consummate the Repurchase of 32.0 million shares of Safeway common stock held by one or more partnerships controlled by affiliates of KKR at $43 per share, or $1.376 billion in the aggregate. Immediately after the Repurchase, it is expected that the two limited partnerships affiliated with KKR will own approximately 33% of Safeway's outstanding common stock. NOTE G -- TAXES ON INCOME The components of income tax expense are as follows (in millions):
1996 1995 1994 ------ ------ ------ Current: Federal $162.9 $157.9 $112.6 State 30.7 29.9 23.1 Foreign (0.5) 56.2 51.4 ------ ------ ------ 193.1 244.0 187.1 ------ ------ ------ Deferred: Federal 49.3 8.2 (0.6) State 12.6 (0.8) 1.9 Foreign 52.0 (23.2) (14.5) ------ ------ ------ 113.9 (15.8) (13.2) ------ ------ ------ $307.0 $228.2 $173.9 ====== ====== ======
Extraordinary losses are presented net of related tax benefits. Therefore, 1995 and 1994 income tax expense excludes tax benefits of $1.3 million and $6.7 million on extraordinary losses. Tax benefits from the exercise of employee stock options of $51.9 million in 1996, $16.6 million in 1995 and $15.6 million in 1994 were credited directly to paid-in capital and, therefore, are excluded from income tax expense. F-26 56 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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):
1996 1995 1994 ------ ------ ------ Statutory rate......................................... 35% 35% 35% Income tax expense using federal statutory rate........ $268.7 $194.8 $148.4 State rates on income less federal benefit............. 28.1 18.9 16.3 Taxes provided on equity in earnings of unconsolidated affiliates at rates below the statutory rate......... (10.5) (5.3) (6.9) Taxes on foreign earnings not permanently reinvested... 7.3 6.2 6.6 Withholding tax on Canadian earnings not permanently reinvested........................................... -- (5.8) 4.4 Nondeductible expenses and amortization................ 3.2 4.2 2.9 Difference between statutory rate and foreign effective rate................................................. 11.1 1.0 2.2 Other accruals......................................... (0.9) 14.2 -- ------ ------ ------ $307.0 $228.2 $173.9 ====== ====== ======
Significant components of the Company's net deferred tax liability at year-end were as follows (in millions):
1996 1995 ------- ------- Deferred tax assets: Workers' compensation and other claims........................ $ 91.7 $ 102.9 Accruals not currently deductible............................. 48.7 59.5 Accrued claims and other liabilities.......................... 47.4 48.3 Employee benefits............................................. 9.7 34.0 Canadian operating loss carryforward.......................... 2.7 54.7 Other assets.................................................. 6.0 14.5 ------- ------- 206.2 313.9 ------- ------- Deferred tax liabilities: Property...................................................... (110.5) (124.3) Prepaid pension costs......................................... (149.9) (142.7) LIFO inventory reserves....................................... (66.8) (53.7) Investments in unconsolidated affiliates...................... (48.1) (40.0) Cumulative translation adjustments............................ (23.0) (24.6) Other liabilities............................................. (31.7) (37.1) ------- ------- (430.0) (422.4) ------- ------- Net deferred tax liability...................................... $(223.8) $(108.5) ======= =======
Income tax returns for years subsequent to 1985 and 1991 are subject to examination by U.S. and Canadian taxing authorities, respectively. NOTE H -- EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS U.S. and Canadian Retirement Plans The Company maintains defined benefit, non-contributory pension plans (the "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 compensation during the last years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy F-27 57 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the statutory funding standards. Through year-end 1996, 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 1996, 1995 and 1994, the Company contributed $10.6 million, $10.3 million and $11.5 million to the Canadian Plan. 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:
1996 1995 1994 ---- ---- ---- Discount rate used to determine the projected benefit obligations: U.S. Plan..................................................... 7.5 % 7.0 % 8.0 % Canadian Plan................................................. 7.0 8.0 8.0 Combined weighted average rate................................ 7.4 7.2 8.0 Long-term rate of return on Plan assets: U.S. Plan..................................................... 9.0 9.0 9.0 Canadian Plan................................................. 8.0 8.0 8.0 Rate of compensation increase................................... 5.5 5.5 5.5
Net pension plan income (expense) consisted of the following (in millions):
1996 1995 1994 ------ ------ ------ Return on Plan assets: Actual return, gain (loss)............................ $162.4 $241.2 $(26.9) Deferred loss (gain).................................. (14.2) (152.9) 123.6 ------ ------ ------ Actuarial assumed return................................ 148.2 88.3 96.7 Service cost............................................ (41.3) (36.7) (41.2) Interest cost on projected benefit obligations.......... (51.7) (48.3) (44.9) Net amortization........................................ (56.0) (10.9) (9.2) ------ ------ ------ Net pension plan income (expense) recognized in consolidated statements of income..................... $ (0.8) $ (7.6) $ 1.4 ====== ====== ======
Under the provisions of SFAS No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS No. 88"), Safeway recognized a $3.4 million special termination expense in 1996 in connection with a workforce reduction, which is excluded from 1996 pension expense in the table above. F-28 58 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The funded status of the Plans at year-end was as follows (in millions):
1996 1995 -------- -------- Fair value of assets at year-end.............................. $1,392.0 $1,245.9 -------- -------- Actuarially determined present value of: Vested benefit obligations.................................. 758.9 657.4 Nonvested benefit obligations............................... 9.3 9.3 -------- -------- Accumulated benefit obligations............................. 768.2 666.7 Additional amounts related to projected compensation increases................................................ 98.9 102.7 -------- -------- Projected benefit obligations............................... 867.1 769.4 -------- -------- Fair value of assets in excess of projected benefit obligations................................................. 524.9 476.5 Adjustment for difference in book and tax basis of assets..... (165.1) (165.1) Unamortized prior service costs resulting from improved Plan benefits.................................................... 83.3 68.7 Net gain from actuarial experience which has not been recognized in the consolidated financial statements......... (114.4) (57.7) -------- -------- Prepaid pension costs......................................... $ 328.7 $ 322.4 ======== ========
Retirement Restoration Plan The Retirement Restoration Plan provides death benefits and supplemental income payments for senior executives after retirement. The Company recognized expense of $4.4 million in 1996, $3.4 million in 1995 and $1.7 million in 1994. The aggregate projected benefit obligation of the Retirement Restoration Plan was approximately $44.9 million at year-end 1996 and $45.5 million at year-end 1995. Postretirement Benefits Other Than Pensions In addition to pension and the Retirement Restoration Plan benefits, the Company sponsors plans that provide postretirement 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 1996, the postretirement medical plan was amended to restrict the types of coverage available, to change the participant contributions and to exclude future retirees from participating in the plan. The exclusion of future retirees in the plan is considered a curtailment under the provisions of SFAS No. 88 which resulted in recognition of a curtailment gain of $14.5 million in 1996. At year-end 1996 and 1995, the Company's accumulated postretirement benefit obligation ("APBO") was $15.9 million and $23.3 million. The APBO represents the actuarial present value of benefits expected to be paid after retirement. Postretirement benefit expense was $1.7 million in 1996, $2.5 million in 1995 and $2.9 million in 1994. The significant assumptions used to determine the periodic postretirement benefit expense and the APBO were as follows:
1996 1995 1994 ---- ---- ---- Discount rate.................................................. 7.0 % 7.0 % 8.0 % Rate of compensation increase.................................. 5.5 5.5 5.5
For 1997, an 8.0% annual rate of increase in the per capita cost of postretirement medical benefits provided under the Company's group health plan was assumed. The rate was assumed to decrease gradually to 5.5% for 2002 and remain at that level thereafter. A 5.5% annual rate of increase was F-29 59 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assumed for 1997 and thereafter in the per capita cost of postretirement benefits provided under HMO plans. If the health care cost trend rate assumptions were increased by 1% in each year, the APBO as of year-end 1996 would increase $0.1 million, and the net periodic postretirement benefit expense for 1996 would remain unchanged. 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. 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 $112 million in 1996, $105 million in 1995 and $70 million in 1994 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 the 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. Collective Bargaining Agreements At year-end 1996, Safeway had approximately 119,000 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 agreements having terms up to five years. Accordingly, Safeway negotiates a significant number of these agreements every year. Of Safeway's approximately 107,000 unionized employees, approximately 7,000 in four operating areas are covered by labor contracts which are scheduled to expire in 1997. In addition, there are contracts in one operating area covering 10,000 employees that expired in 1996 and that have not yet been renewed. While Safeway believes that its relationship with its employees is good, there can be no assurance that contracts covering such 17,000 employees, or that labor contracts which come up for renewal after 1997, will be renewed. Failure to renew significant contracts can lead to work stoppages that could have an adverse effect on Safeway's results of operations. NOTE I -- INVESTMENTS IN AFFILIATES At year-end 1996, investments in affiliates consisted of a 49% interest in Casa Ley, which operated 71 food and general merchandise stores in western Mexico, and a 34.4% interest in Vons, which operated 320 grocery stores located mostly in southern California. F-30 60 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In December 1996, Safeway and Vons entered into an agreement for the Merger pursuant to which Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock it does not currently own in a transaction that will be accounted for as a purchase. The transaction is subject to approval by Vons' shareholders. The companies expect to complete the transaction in early April of 1997. See Note B to the Consolidated Financial Statements. At year-end 1996, the Company owned 15.1 million shares of Vons outstanding common stock. The Company's recorded investment in Vons was $286.4 million (including goodwill of $44.3 million) at year-end 1996 and $255.2 million (including goodwill of $45.6 million) at year-end 1995. Goodwill is being amortized over 40 years. At year-end 1996, the aggregate market value of Safeway's shares of Vons stock as quoted on the New York Stock Exchange was $871.6 million. Safeway's share of Vons' earnings, recorded on a one-quarter delay basis, was $31.2 million in 1996, compared to $18.3 million in 1995 and $11.6 million in 1994. According to Vons' financial reports filed with the Securities and Exchange Commission, same-store sales increased 5.2% and 5.5% for the 16 and 40 weeks ended October 6, 1996. In 1994, Vons reported a restructuring charge which decreased Safeway's share of Vons' earnings by $3.9 million. According to Vons, these restructuring charges included anticipated expenses associated with a program to close underperforming stores and reduce workforce. Summarized financial information derived from Vons' financial reports filed with the Securities and Exchange Commission was as follows (in millions):
OCTOBER 6, OCTOBER 8, 1996 1995 ---------- ---------- Financial Position: Current assets................................................ $ 440.7 $ 436.3 Property and equipment, net................................... 1,182.9 1,189.3 Other assets.................................................. 529.3 545.3 -------- -------- Total assets.................................................. $2,152.9 $2,170.9 -------- -------- Current liabilities........................................... $ 706.0 $ 573.6 Long-term obligations......................................... 744.9 995.8 Shareholders' equity.......................................... 702.0 601.5 -------- -------- Total liabilities and shareholders' equity.................... $2,152.9 $2,170.9 ======== ========
52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED OCTOBER 6, OCTOBER 8, OCTOBER 9, 1996 1995 1994 ---------- ---------- ---------- Results of Operations: Sales.............................................. $ 5,366.6 $ 5,023.5 $ 4,990.9 Cost of sales and other expenses................... (5,275.9) (4,967.4) (4,954.5) --------- --------- --------- Net income......................................... $ 90.7 $ 56.1 $ 36.4 ========= ========= =========
Income from Safeway's equity investment in Casa Ley, recorded on a one-quarter delay basis, increased to $18.8 million in 1996 from $8.6 million in 1995 and $15.7 million in 1994. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. During 1996, interest rates and inflation in Mexico have moderated and Casa Ley's financial results have gradually improved. F-31 61 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Casa Ley had total assets of $263.1 million and $276.9 million as of September 30, 1996 and 1995 based on financial information provided by Casa Ley. Sales and net income for Casa Ley were as follows (in millions):
12 MONTHS ENDED SEPTEMBER 30, ------------------------------ 1996 1995 1994 ------ ------ -------- Sales........................ $810.1 $861.4 $1,052.4 ====== ====== ======== Net income................... $ 33.8 $ 17.9 $ 32.0 ====== ====== ========
NOTE 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 $1,364,000 in 1996, $1,355,000 in 1995 and $980,000 in 1994. 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 minority interest of $25.1 million and $23.2 million at year-end 1996 and 1995 is included in accrued claims and other liabilities in the accompanying consolidated balance sheets. During 1996, the Company contributed to PDA 16 properties no longer used in its retail grocery business which had an aggregate net book value of $8.4 million. The minority partner contributed cash in an amount sufficient to maintain its 20% ownership. No gains or losses were recognized on these transactions. In 1995, no properties were contributed. Safeway paid PDA $1.6 million in 1996, $1.5 million in 1995 and $1.1 million in 1994 for reimbursement of expenses related to management and real estate services provided by PDA. Safeway sells products to Vons for resale under Vons' private label. Sales and cost of sales to Vons were as follows (in millions):
1996 1995 1994 ----- ----- ----- Sales.............................. $51.4 $28.4 $19.5 ===== ===== ===== Cost of Sales...................... $49.3 $27.9 $18.5 ===== ===== =====
NOTE K -- 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 9, 1997 in excess of 125,000 claims for personal injury and property damage arising from the fire have been settled for an aggregate amount of approximately $121 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 9, 1997, there were still pending approximately 3,000 claims against the Company for personal injury (including punitive damages) and approximately 460 separate claims 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. 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. F-32 62 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On March 8, 1996, a purported class action was filed on behalf of persons allegedly injured as a result of the smoke, ash and embers generated by the fire. The complaint, which was amended after the Court sustained the Company's demurrer with leave to amend, generally alleges that the Company fraudulently (i) obtained settlements of certain claims arising out of the fire and (ii) made statements that induced claimants not to file actions within the time period under the statute of limitations. The amended complaint seeks compensatory and punitive damages. Safeway has demurred to the amended complaint, and the court has taken the demurrer under submission. The Company has received notice from its insurance carrier denying coverage for claims asserted in this case. Safeway strongly disagrees with the insurance carrier's denial of coverage. Safeway believes that coverage under its insurance 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 ("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 damages of $78 million (the alleged difference between the value of the division and the purchase price), and consequential damages of approximately $696 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. A trial was held in December 1996 and January 1997, and the case is under submission in the Bankruptcy Court. Safeway believes that its defenses are meritorious. 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 but without regard to potential recovery under the Company's insurance policies where coverage is contested, will not have a material adverse effect on the Company's financial statements taken as a whole. 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 $39.6 million at year-end 1996. F-33 63 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE L -- FINANCIAL INFORMATION BY GEOGRAPHIC AREA
UNITED STATES CANADA TOTAL ------------- -------- --------- (IN MILLIONS) 1996 Sales.................................................. $13,797.5 $3,471.5 $17,269.0 Gross Profit........................................... 3,901.3 872.9 4,774.2 Operating Profit....................................... 752.8 138.9 891.7 Income before income taxes............................. 652.2 115.4 767.6 Net working capital (deficit).......................... (442.7) 67.1 (375.6) Total assets........................................... 4,625.4 919.8 5,545.2 Net assets............................................. 792.4 394.4 1,186.8 1995 Sales.................................................. $12,902.4 $3,495.1 $16,397.5 Gross profit........................................... 3,584.5 907.9 4,492.4 Operating profit....................................... 590.1 137.3 727.4 Income before income taxes and extraordinary loss...... 448.9 107.6 556.5 Net working capital (deficit).......................... (490.1) 65.9 (424.2) Total assets........................................... 4,261.5 932.8 5,194.3 Net assets............................................. 462.6 332.9 795.5 1994 Sales.................................................. $12,240.1 $3,386.5 $15,626.6 Gross profit........................................... 3,409.7 877.6 4,287.3 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
F-34 64 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE M -- 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.
LAST THIRD SECOND FIRST YEAR 16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS --------- --------- --------- --------- --------- (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) ----------------------------------------------------------------- 1996 Sales........................ $17,269.0 $ 5,486.9 $ 3,954.0 $ 3,945.4 $ 3,882.7 Gross profit................. 4,774.2 1,493.0 1,086.6 1,102.1 1,092.5 Operating profit............. 891.7 283.7 203.8 210.1 194.1 Income before income taxes... 767.6 248.2 178.1 179.2 162.1 Net income................... 460.6 151.6 105.9 106.7 96.4 Income per common share and common share equivalent: Primary...................... $ 1.94 $ 0.63 $ 0.44 $ 0.44 $ 0.40 Fully diluted................ 1.93 0.63 0.44 0.44 0.40 Price range, New York Stock Exchange................... $ 45 3/8 $ 45 3/8 $ 38 1/4 $ 35 5/8 $ 30 1/8 to to 22 7/16 to 37 1/4 to 31 3/4 to 27 5/8 22 7/16
LAST THIRD SECOND FIRST YEAR 16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS --------- --------- --------- --------- --------- 1995 Sales........................ $16,397.5 $ 5,166.3 $ 3,845.5 $ 3,753.4 $ 3,632.3 Gross profit................. 4,492.4 1,413.8 1,058.4 1,016.8 1,003.4 Operating profit............. 727.4 231.9 176.4 165.1 154.0 Income before income taxes and extraordinary loss..... 556.5 183.6 141.6 121.5 109.8 Extraordinary loss related to early retirement of debt... (2.0) (2.0) -- -- -- Net income................... 326.3 111.9 83.7 68.7 62.0 Income per common share and common share equivalent: Primary Income before extraordinary loss.................... $ 1.36 $ 0.48 $ 0.35 $ 0.29 $ 0.26 Extraordinary loss......... (0.01) (0.01) -- -- -- --------- -------- -------- -------- -------- Net income................... $ 1.35 $ 0.47 $ 0.35 $ 0.29 $ 0.26 ========= ======== ======== ======== ======== Fully diluted Income before extraordinary loss....................... $ 1.35 $ 0.47 0.35 $ 0.29 $ 0.26 Extraordinary loss........... (0.01) (0.01) -- -- -- --------- -------- -------- -------- -------- Net income................... $ 1.34 $ 0.46 $ 0.35 $ 0.29 $ 0.26 ========= ======== ======== ======== ======== Price range, New York Stock Exchange................... $ 25 3/4 $ 25 3/4 $ 20 5/16 $ 19 1/4 $ 18 to to to to to 15 5/16 19 15/16 17 15/16 15 9/16 15 5/16
F-35 65 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Selling Stockholders have agreed to sell to each of the U.S. Underwriters named below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., SBC Warburg Dillon Read Inc. and Smith Barney Inc. are acting as representatives, has severally agreed to purchase from the Selling Stockholders, directly or through the exercise of SSI Warrants, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK -------------------------------------------------------------- ------------ Goldman, Sachs & Co........................................... Morgan Stanley & Co. Incorporated............................. Merrill Lynch, Pierce, Fenner & Smith Incorporated............ Donaldson, Lufkin & Jenrette Securities Corporation........... Lehman Brothers Inc........................................... SBC Warburg Dillon Read Inc................................... Smith Barney Inc.............................................. ----------- Total............................................... 22,500,000 ===========
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares (directly or through the purchase and exercise of SSI Warrants) offered hereby, if any are taken. With respect to shares of Common Stock obtained upon the purchase and exercise of SSI Warrants, the U.S. Underwriters will remit the exercise price of the SSI Warrants to the Company. The U.S. Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company and the Selling Stockholders have entered into an underwriting agreement (the "International Underwriting Agreement") with the underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of 2,500,000 shares of Common Stock in an international offering outside the United States. The initial public offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the international offering, and vice versa. The representatives of the International Underwriters are Goldman Sachs International, Morgan Stanley & Co. International Limited, Merrill Lynch International, Donaldson, Lufkin & Jenrette International, Lehman Brothers International (Europe), Swiss Bank Corporation, acting through its division SBC Warburg Dillon Read and Smith Barney Inc. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver the shares of Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as a part of the distribution of the shares offered as a part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the U-1 66 United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Selling Stockholders have granted the U.S. Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 3,375,000 additional shares of Common Stock solely to cover over-allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 22,500,000 shares of Common Stock offered. The Selling Stockholders have granted the International Underwriters a similar option to purchase up to an aggregate of 375,000 additional shares of Common Stock. The Company and the Selling Stockholders have agreed, with certain exceptions, not to (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) with respect to the Company only, 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, except for (i) the shares to be sold in the offerings and the SSI Warrants to be cancelled, (ii) any shares of Common Stock issued by the Company pursuant to stock option plans in effect on the date of this Prospectus, (iii) option grants under stock option plans in effect on the date of this Prospectus, (iv) 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, (v) capital stock issuable upon the exercise of warrants outstanding on the date of this Prospectus or (vi) the cancellation of warrants, for a period of at least 90 days from the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. In connection with the offerings, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the offerings. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock; and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Selling Stockholders in the offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the offerings for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise. The SSI Warrants being purchased by the several U.S. Underwriters from SSI Equity Associates will be purchased at a price per underlying share equal to the initial public offering price less the exercise price of each such SSI Warrant and the underwriting discount per underlying share. The U.S. 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 2,578,828 shares of Common Stock issuable as a result of such U-2 67 exercise. The International Underwriters will similarly purchase and exercise SSI Warrants, and will include in the international offering 286,536 shares of Common Stock issuable as a result of such exercise. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. This Prospectus may be used by underwriters and dealers in connection with offers and sales of the Common Stock, including shares initially sold in the international offering, to persons located in the United States. U-3 68 ========================================================== No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell or the 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 such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information..................... 3 Summary................................... 4 Price Range of Common Stock............... 7 Dividend Policy........................... 7 Capitalization............................ 8 Selected Financial Data................... 9 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 10 Business.................................. 16 Principal and Selling Stockholders........ 21 Description of Capital Stock.............. 24 Certain United States Tax Consequences to Non-United States Holders............... 24 Legal Matters............................. 27 Experts................................... 27 Information Incorporated by Reference..... 28 Index to Consolidated Financial Statements.............................. F-1 Underwriting.............................. U-1
========================================================== ========================================================== 25,000,000 SHARES SAFEWAY INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------------ LOGO ------------------------ GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS SBC WARBURG DILLON READ INC. SALOMON SMITH BARNEY REPRESENTATIVES OF THE UNDERWRITERS ========================================================== 69 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be paid by the Company in connection with the distribution of the securities being registered are as set forth in the following table: Securities and Exchange Commission Fee......................... $540,936 *Legal Fees and Expenses (other than Blue Sky)................. 250,000 *Accounting Fees and Expenses.................................. 50,000 *Printing Expenses............................................. 50,000 *Blue Sky Fees................................................. 15,000 *Transfer Agent and Registrar Fees and Expenses................ 10,000 *Miscellaneous................................................. 34,064 -------- * Total................................................ $950,000 ========
- --------------- * Estimated. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Delaware General Corporation Law, the Company's Restated Certificate of Incorporation provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for breach of the duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (governing distributions to stockholders), or (iv) for any transaction for which a director derives an improper personal benefit. In addition, Section 145 of the Delaware General Corporation law and Article III, Section 13 of the Company's 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 attorney's fees, fines, settlements or judgments, which were actually and reasonably incurred, in connection with a legal proceeding, other than one brought by or on behalf of the Company, to which he was a party as a result of such relationship, if he acted in good faith, and in the manner he believed to be in or not opposed to the Company's best interest and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If the action is brought by or on behalf of the Company, the person to be indemnified must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the Company's best interest, but no indemnification will be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of Delaware, or the court in which such action was brought, determines upon application that, despite adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expense which such Court of Chancery or such other court shall deem proper. Any indemnification under the previous paragraphs (unless ordered by a court) will be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper under the circumstances because he has met the applicable standard of conduct set forth above. Such determination will be made (i) by the Company's board of directors by a majority vote of a quorum of disinterested directors who were not parties to such actions, (ii) if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, II-1 70 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 attorney's fees) actually and reasonably incurred by him in connection therewith. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Company as authorized by the Company's By-Laws. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Company's board of directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, Section 13 of the Company's 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 Company's 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 Company's board of directors may authorize, by a vote of a majority of a quorum of the Company's board of directors, the Company to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of Section 13 of the Company's By-Laws. The Company's board of directors may authorize the Company to enter into a contract with any person who is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise providing for indemnification rights equivalent to or, if the Company's board of directors so determines, greater than those provided for in Section 13 of the Company's By-Laws. The Company has also purchased insurance for its directors and officers for certain losses arising from claims or charges made against them in their capacities as directors and officers of the Company. II-2 71 ITEM 16. EXHIBITS 1 Form of Underwriting Agreement. 4.1 Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 15, 1996). 4.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the Fiscal year ended January 2, 1993). 4.3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388). 4.4 Registration Rights Agreement dated as of November 25, 1986 by and between Safeway Stores Holdings Corporation (predecessor to the Company) and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388). *5 Opinion of Latham & Watkins. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of KPMG Peat Marwick LLP. *23.3 Consent of Latham & Watkins (included in Exhibit 5). *24 Power of Attorney (contained on page II-5).
- --------------- * Previously filed. ITEM 17. UNDERTAKINGS (a) 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 section 15(d) of the Securities Exchange Act of 1934 and (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions 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 Securities Act of 1933 and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the 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, the registrant will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby also undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or II-3 72 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 73 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, California on December 9, 1997. SAFEWAY INC. By /s/ MICHAEL C. ROSS ------------------------------------ Michael C. Ross Senior Vice President, Secretary and General Counsel Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by each of the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------ ------------------ *STEVEN A. BURD President, Chief December 9, 1997 - ----------------------------------------------- Executive Officer and Steven A. Burd Director (Principal Executive Officer) *JULIAN C. DAY Executive Vice December 9, 1997 - ----------------------------------------------- President, Chief Julian C. Day Financial Officer (Principal Financial Officer and Principal Accounting Officer) *PETER A. MAGOWAN Director December 9, 1997 - ----------------------------------------------- Peter A. Magowan *SAM GINN Director December 9, 1997 - ----------------------------------------------- Sam Ginn *JAMES H. GREENE. JR. Director December 9, 1997 - ----------------------------------------------- James H. Greene, Jr. *PAUL HAZEN Director December 9, 1997 - ----------------------------------------------- Paul Hazen
II-5 74
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------ ------------------ *HENRY R. KRAVIS Director December 9, 1997 - ----------------------------------------------- Henry R. Kravis *ROBERT I. MACDONNELL Director December 9, 1997 - ----------------------------------------------- Robert I. MacDonnell *GEORGE R. ROBERTS Director December 9, 1997 - ----------------------------------------------- George R. Roberts *MICHAEL T. TOKARZ Director December 9, 1997 - ----------------------------------------------- Michael T. Tokarz */s/ MICHAEL C. ROSS December 9, 1997 - ----------------------------------------------- Michael C. Ross as attorney-in-fact
II-6 75 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------- ------------ 1 Form of Underwriting Agreement......................................... 4.1 Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 15, 1996)...... 4.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the Fiscal year ended January 2, 1993)................................................. 4.3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388)......................... 4.4 Registration Rights Agreement dated as of November 25, 1986 by and between Safeway Stores Holdings Corporation (predecessor to the Company) and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388)................. *5 Opinion of Latham & Watkins............................................ 23.1 Consent of Deloitte & Touche LLP....................................... 23.2 Consent of KPMG Peat Marwick LLP....................................... *23.3 Consent of Latham & Watkins (included in Exhibit 5).................... *24 Power of Attorney (contained on page II-5).............................
- --------------- * Previously filed. EX-1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1 SAFEWAY INC. COMMON STOCK (PAR VALUE $0.01 PER SHARE) Underwriting Agreement (U.S. Version) December __, 1997 Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Lehman Brothers Inc. SBC Warburg Dillon Read Inc. Smith Barney Inc. As Representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co., 85 Broad Street New York, NY 10004 Ladies and Gentlemen: The stockholders and warrantholders named in Schedule II hereto (the "Selling Stockholders") of Safeway Inc., a Delaware corporation (the "Company"), propose, subject to the terms and conditions stated herein, to sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 19,921,172 shares (the "Firm Shares") and warrants (the "Firm Warrants") for the purchase of an aggregate of 2,578,828 shares (the "Firm Warrant Shares") and, at the election of the Underwriters, up to 2,988,176 additional shares (the "Optional Shares") and warrants (the "Optional Warrants") for the purchase of up to 386,824 additional shares (the "Optional Warrant Shares") of Common Stock, par value $0.01 per share ("Stock"), of the Company. The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares". The Firm Warrants and the Optional Warrants that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Warrants". The Firm Warrant Shares and the Optional Warrant Shares are herein collectively called the "Warrant Shares". The Shares and the Warrant Shares are herein collectively called the "Securities". It is understood and agreed to by all parties that the Company and the Selling Stockholders are concurrently entering into an agreement (the "International Underwriting Agreement") 2 providing for the sale by the Selling Stockholders of (i) up to a total of 2,545,483 shares of Stock (the "International Shares"), including the overallotment option thereunder, and (ii) warrants (the "International Warrants"), including the overallotment option thereunder, for the purchase of up to an aggregate of 329,517 shares of Stock (the "International Warrant Shares"), through arrangements with certain underwriters outside the United States (the "International Underwriters"), for whom Goldman Sachs International, Morgan Stanley International Ltd., Merrill Lynch International, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers International (Europe), Swiss Bank Corporation, acting through its division SBC Warburg Dillon Read and Smith Barney Inc. are acting as lead managers. The International Shares and the International Warrant Shares are herein collectively called the "International Securities". Anything herein or therein to the contrary notwithstanding, the respective closings under this Agreement and the International Underwriting Agreement are hereby expressly made conditional on one another. The Underwriters hereunder and the International Underwriters are simultaneously entering into an Agreement between U.S. and International Underwriting Syndicates (the "Agreement between Syndicates") which provides, among other things, for the transfer of shares of Stock between the two syndicates. Two forms of prospectus are to be used in connection with the offering and sale of shares of Stock contemplated by the foregoing, one relating to the Securities hereunder and the other relating to the International Securities. The latter form of prospectus will be identical to the former except for certain substitute pages. Except as used in Sections 2, 3, 4, 9 and 10 herein, and except as the context may otherwise require, references hereinafter to the "Shares" shall include all the Shares and the International Shares which may be sold pursuant to either this Agreement or the International Underwriting Agreement, references hereinafter to the "Warrants" shall include all the Warrants and International Warrants which may be sold pursuant to either this Agreement or the International Underwriting Agreement, references hereinafter to the "Warrant Shares" shall include all the Warrant Shares and International Warrant Shares which may be sold pursuant to either this Agreement or the International Underwriting Agreement, references hereinafter to the "Securities" shall include all the Securities and International Securities which may be sold pursuant to either this Agreement or the International Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include both the U.S. and the international versions thereof. 1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) A registration statement on Form S-3 (File No. 333-40807), as amended through the date hereof (the "Initial Registration Statement"), in respect of the Securities has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto but including all documents incorporated by reference in the prospectus contained therein, delivered to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with 2 3 the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act, is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective and (ii) the documents incorporated by reference in the prospectus contained in the registration statement at the time such part of the registration statement became effective, each as amended at the time such part of the registration statement became effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; and any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in such Preliminary Prospectus or Prospectus, as the case may be; and any reference to any amendment to the Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date of the Registration Statement that is incorporated by reference in the Registration Statement; (ii) The financial statements included in the Registration Statement and the Prospectus, together with the related notes, 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 ("GAAP") applied on a consistent basis throughout the periods involved. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement; (iii) The Company has been duly incorporated and is validly existing as a corporation 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 3 4 Prospectus, and is duly qualified as a foreign corporation for the transaction of business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries considered as a whole; and each Significant Subsidiary (as used herein, the term "Significant Subsidiary" shall have the meaning assigned to "significant subsidiary" in Rule 405 under the Act) 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; (iv) This Agreement and the International Underwriting Agreement have been duly authorized, executed and delivered by the Company; (v) The Warrant Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement and the International Underwriting 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; (vi) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (vii) The shares of Stock (including the Shares to be sold by the Selling Stockholders hereunder and under the International Underwriting Agreement) 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 or the International Underwriters, as the case may be, will be subject to any preemptive rights; the Shares and Warrant Shares conform as to legal matters to the description of the Stock contained in the Prospectus and the Warrants conform as to legal matters to the description thereof contained in the Prospectus; (viii) 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; (ix) The execution and delivery by the Company of, and the performance by the Company of its respective obligations under, this Agreement and the International Underwriting Agreement (including, without limitation, the purchase and exercise by the Underwriters and the International Underwriters of the Warrants) will not result in any violation of the Restated Certificate of Incorporation or 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 of its subsidiaries; and no consent, approval, authorization or order of, or qualification with, any governmental body or agency having 4 5 jurisdiction over the Company is required for the performance by the Company of its obligations under this Agreement or the International Underwriting Agreement except such as may be required under the Act and the rules and regulations thereunder, the Exchange Act and the rules and regulations thereunder, and the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities; (x) Upon the Underwriters' and the International 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 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 Stock in respect thereof. (xi) 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; (xii) Other than as set forth in the Prospectus, there are no other 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; (xiii) The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xiv) 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 Act, complied when so filed in all material respects with the Act and the rules and regulations of the Commission thereunder (except to the extent that any Preliminary Prospectus did not so comply in a manner corrected in the Prospectus); and (xv) (i) Each document, if any, filed or to be filed pursuant to the Exchange Act and incorporated by reference in the Prospectus complied or will comply when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder, (ii) the Registration Statement, when it became effective, did not contain and such Registration Statement, as amended or supplemented, if applicable, will not contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and the applicable rules and regulations of the Commission thereunder and (iv) the Prospectus 5 6 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 (xv) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information concerning any Underwriter furnished to the Company in writing by such Underwriter expressly for use therein. (b) Each of the Selling Stockholders severally represents and warrants to, and agrees with, each of the Underwriters and the Company that: (i) This Agreement and the International Underwriting Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Stockholder; (ii) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement and the International Underwriting 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 or the International Underwriting Agreement, except the registration under the 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; (iii) Such Selling Stockholder has, and on each Time of Delivery (as defined in Section 4 hereof) will have, valid title to all of the Shares or Warrants which may be sold by such Selling Stockholder under this Agreement and the International Underwriting 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 the International Underwriting Agreement and to sell, transfer and deliver the Shares or Warrants to be sold by such Selling Stockholder; (iv) Upon delivery of the Shares or Warrants to be sold by such Selling Stockholder and payment therefor pursuant to this Agreement and the International Underwriting Agreement, the Underwriters and the International Underwriters, as the case may be, 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 any security interests, claims, liens, equities and other encumbrances assuming that such Underwriters have purchased such Shares, Warrants and Warrant Shares in good faith and without notice of any security interest, claims, liens, equities, encumbrances or any other adverse claims within the meaning of the Uniform Commercial Code; and (v) The information (other than the percent of shares owned, as to which such Selling Stockholder makes no representation) pertaining to such Selling Stockholder under 6 7 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 1997 Proxy Statement fairly presents the information required to be set forth therein and contains no material misstatement or omission. 2. Subject to the terms and conditions herein set forth, (a) each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from each of the Selling Stockholders, (i) at a purchase price per share of $__ (the "Share Purchase Price"), the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares to be sold by each of the Selling Stockholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from all of the Selling Stockholders hereunder and (ii) at a purchase price per Warrant of $__ (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 Warrants (to be adjusted by you so as to eliminate fractional warrants) determined by multiplying the aggregate number of Firm Warrants to be sold by each of the Selling Stockholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Warrants to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Warrants to be purchased by all of the Underwriters from all of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares or Optional Warrants as provided below, each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from each of the Selling Stockholders at the Share Purchase Price and Warrant Purchase Price that portion of the number of Optional Shares or Optional Warrants as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares and warrants) determined by multiplying such number of Optional Shares or Optional Warrants by a fraction the numerator of which is the maximum number of Optional Shares or Optional Warrants which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares or Optional Warrants that all of the Underwriters are entitled to purchase hereunder. The Selling Stockholders, as and to the extent indicated in Schedule II hereto, hereby grant, severally and not jointly, to the Underwriters the right to purchase at their election (i) up to 2,988,176 Optional Shares, at the Share Purchase Price, and (ii) up to 386,824 Optional Warrants, at the Warrant Purchase Price, for the sole purpose of covering overallotments in the sale of the Firm Shares and Firm Warrant Shares. Any such election to purchase Optional Shares or Optional Warrants shall be made in proportion to the number of Firm Shares and Firm Warrants, respectively, to be sold by each Selling Stockholder. Any such election to purchase 7 8 Optional Shares or Optional Warrants may be exercised by written notice from you to the Selling Stockholders, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares and Optional Warrants to be purchased and the date on which such Optional Shares and Optional Warrants are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Selling Stockholders otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. At any Time of Delivery, simultaneous with (i) the purchase by the Underwriters of the Firm Warrants or the Optional Warrants and (ii) the payment to the Company of the Warrant Exercise Price, the Underwriters will be deemed to have exercised such Firm Warrants or Optional Warrants and the Company will immediately issue to the Underwriters at such Time of Delivery, the related Firm Warrant Shares and Optional Warrant Shares, as the case may be. 3. Upon the authorization by you of the release of the Firm Shares and the Firm Warrant Shares, the several Underwriters propose to offer the Firm Shares and the Firm Warrant Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Securities to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Selling Stockholders shall be delivered by or on behalf of the Selling Stockholders to Goldman, Sachs & Co., through the facilities of The Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of immediately available funds to an account designated by the Selling Stockholders. Payment of the Warrant Exercise Price for the Firm Warrant Shares and the Optional Warrant Shares shall be made by wire transfer of immediately available funds to an account designated by the Company. The Company will cause the certificates representing the Securities to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares and the Firm Warrant Shares, 10:00 a.m., New York City time, on December __, 1997, or such other time and date as Goldman, Sachs & Co. and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares and the Optional Warrant Shares, 10:00 a.m., New York City time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares and the Optional Warrant Shares, or such other time and date as Goldman, Sachs & Co. and the Selling Stockholders may agree upon in writing. Such time and date for delivery of the Firm Shares and the Firm Warrant Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares and the Optional Warrant Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Securities, 8 9 will be delivered at the offices of Latham & Watkins, 505 Montgomery Street, San Francisco, California (the "Closing Location"), and the Securities will be delivered at the Designated Office, all at each Time of Delivery. A meeting will be held at the Closing Location at 4:00 p.m., New York City time, on the New York Business Day next preceding each Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To furnish to you, without charge, a signed copy of the Registration Statement (including exhibits and all amendments thereto) and for delivery to each other Underwriter a copy of the Registration Statement (without exhibits thereto); (b) Before amending or supplementing the Registration Statement or the Prospectus, whether by the filing of documents pursuant to the Exchange Act, the Act or otherwise, 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 or counsel for the Underwriters reasonably objects; (c) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus prior to the last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Securities; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus relating to the Securities, of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; 9 10 (d) Promptly from time to time to take such action as you may reasonably request to qualify the Securities for offering and sale under the securities laws of such jurisdictions as you may reasonably request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Securities, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (e) To furnish the Underwriters with copies of the Prospectus in such quantities as you may from time to time reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Securities and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act or the Exchange Act, to notify you and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Securities at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (f) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (g) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to (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 Stock or any securities convertible into or exercisable or exchangeable for 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 Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise, except for (i) the Shares, (ii) any shares of Common Stock issued by the Company pursuant to stock option plans in effect 10 11 on the date of the Prospectus, (iii) option grants under stock option plans in effect on the date of the Prospectus, (iv) 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, (v) capital stock issuable upon the exercise of warrants outstanding on the date of the Prospectus or (vi) the cancellation of warrants, without the prior written consent of Goldman, Sachs & Co.; (h) Upon payment of the Warrant 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. (i) Simultaneous with the purchase from the Selling Stockholders of, and payment for, the Firm Warrants and any Optional 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 Optional Warrant Shares, respectively, all as contemplated by this Agreement. (j) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company covenants and agrees with the several Underwriters, 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 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 5(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky memorandum, (iii) the cost of printing certificates representing the Securities, (iv) the costs and charges of any transfer agent, registrar or depositary, (v) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expense of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered by the Company in connection 11 12 with the road show, (vi) all other costs and expenses of the Company in connection with the performance of its obligations hereunder for which provision is not otherwise made in this Section, and (vii) any other costs and expenses of others in connection with the performance of the Company's obligations hereunder which have been previously approved by the Company. Goldman, Sachs & Co. 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 Goldman, Sachs & Co. 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, and Sections 8 and 10 hereof, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Securities by them, the costs and expenses of the Underwriters relating to investor presentations on any "road shows" undertaken in connection with the marketing of the Securities and any advertising expenses connected with any offers they may make. 7. The several obligations of the Underwriters hereunder are subject to the following conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to each Time of Delivery: (i) 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, considered as a whole, from that set forth in the Prospectus, that, in your reasonable judgment, is material and adverse and that makes it, in your reasonable judgment, impracticable to proceed with the public offering or the delivery of the Securities to be delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (ii) You shall have received at such Time of Delivery a certificate, dated such Time of Delivery and signed by an executive officer of the Company, to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of such Time of Delivery and that the Company has complied in all material respects with all of the agreements and satisfied in all material respects all of its obligations to be performed or satisfied on or before such Time of Delivery (the officer signing and delivering such certificate may rely upon his or her knowledge as to proceedings threatened); and (iii) You shall have received at such Time of Delivery a certificate, dated such Time of Delivery and signed on behalf of each of the Selling Stockholders, to the effect that the representations and warranties of such Selling Stockholders contained in this Agreement are true and correct as of such Time of Delivery and that such Selling Stockholders have complied in all material respects with all of the agreements and satisfied in all material respects all of their obligations to be performed or satisfied on or before such Time of Delivery. 12 13 (b) Latham & Watkins, counsel for the Company, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (ii) The Company has authorized capital stock as set forth in the Prospectus, and the Stock and Warrants conform to the descriptions thereof contained in the Prospectus; (iii) This Agreement and the International Underwriting Agreement have been duly authorized, executed and delivered by the Company; (iv) The Shares to be sold by the Selling Stockholders pursuant to this Agreement and the International Underwriting Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the Warrant Shares to be issued and sold by the Company pursuant to the terms of the Warrants have been duly authorized, and when issued to and paid for by you and the other Underwriters and International Underwriters in accordance with the terms of the Warrants will be validly issued, fully paid and non-assessable. (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 such Time of Delivery by the Company and the compliance by the Company with the provisions of this Agreement and the International Underwriting Agreement will not result in the violation by the Company of its Restated Certificate of Incorporation or By-laws or any federal, New York or California statute, rule or regulation known to such counsel to be applicable to the Company (other than federal securities laws, which are specifically addressed elsewhere in such counsel's opinion, or state securities laws, as to which such counsel need not express an opinion) or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any of the indentures relating to the 9.30% Senior Secured Debentures due 2007, 10% Senior Notes due 2002, 10% Senior Subordinated Notes due 2001, 9.875% Senior Subordinated Debentures due 2007, 9.65% Senior Subordinated Debentures due 2004, 9.35% Senior Subordinated Notes due 1999, 6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007 or 7.45% Senior Debentures due 2027, or the bank credit agreement between the Company and a consortium of banks led by Bankers Trust Company; 13 14 (vii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Act and no proceedings therefor have been initiated by the Commission; and the Prospectus has been filed in accordance with Rule 424(b) and 430A under the Act; (viii) The Registration Statement and the Prospectus, in each case excluding the documents referred to in (xi) below, comply as to form in all material respects with the requirements for registration statements on Form S-3 under the Act and the applicable rules and regulations of the Commission thereunder; it being understood however, that such counsel need express no opinion with respect to the financial statements, schedules and other financial data included or incorporated in the Registration Statement or Prospectus. 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; (ix) The statements set forth in the Prospectus under the caption "Certain United States Tax Consequences to Non- United States Holders" and "Description of Capital Stock", insofar as such statements constitute summaries of legal matters, are accurate in all material respects; (x) No consent, approval, authorization or order of, or filing with any federal, New York or California court or governmental agency or body is required for the issue of the Warrant Shares or the sale of the Securities except such as have been obtained under the 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 such counsel need not express an opinion; and (xi) Each document incorporated by reference in the Prospectus (other than the financial statements, schedules and other financial data included or incorporated by reference therein, as to which such counsel need express no opinion), when it became effective or was filed with the Commission, as the case may be, appeared on its face to comply as to form in all material respects with the requirements of the Exchange Act and the applicable rules and regulations of the Commission thereunder. In passing upon the compliance as to form of each of such documents, such counsel may assume that the statements made and incorporated by reference therein are correct and complete. 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 representatives of the Underwriters, 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 14 15 as set forth in paragraph (ix) above), during the course of such participation (relying as to materiality to the extent such counsel deems appropriate upon statements of officers and other representatives of the Company), no facts have come to such counsel's attention that have caused such counsel to believe that the Registration Statement (including the documents incorporated by reference therein), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (including the documents incorporated by reference therein), as of its date or as of such Time of Delivery, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no belief with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus or incorporated by reference therein. In rendering such opinion, such counsel may state that they express an opinion only as to federal securities laws, New York and California law and the General Corporation Law of the State of Delaware. Such opinion may also be subject to customary assumptions and limitations. (c) Michael C. Ross, Senior Vice President, General Counsel and Secretary of the Company, shall have furnished to you his written opinion, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which its ownership or lease of substantial properties or the conduct of its business requires such qualification, and in which failure to be so qualified and in good standing would have a material adverse effect upon the Company and its subsidiaries considered as a whole; (ii) Based solely on certificates from public officials, each Significant Subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; to the best of his knowledge has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which its ownership or lease of substantial properties or the conduct of its business 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 whole; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued and is fully paid and nonassessable, and the capital stock owned by the Company in such subsidiary is owned by the Company free and clear of any mortgage, pledge, lien, encumbrance, claim or equity; 15 16 (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; and (iv) The issue and sale of the Warrant Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the International Underwriting Agreement will not conflict with or result in a material breach or violation 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. (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. (d) Latham & Watkins, counsel for the Selling Stockholders, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) This Agreement and the International Underwriting Agreement have 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 this Agreement and the International Underwriting Agreement; the sale of the Shares or the Warrants, as applicable, by each Selling Stockholder will not result in the violation by such Selling Stockholder of its partnership agreement, or any federal or New York statute, rule or regulation known to such counsel to be applicable to such Selling Stockholder (other than federal securities laws which are specifically addressed elsewhere in such counsel's opinion, or state securities laws, as to which such counsel need not express an opinion); no consent, approval, authorization or order of, or filing with, any federal or New York governmental body or agency is required for the sale of the Shares or the Warrants, as applicable, except such as have been obtained under the Act and except such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters, as to which such counsel need not express an opinion; and (iii) Upon delivery of the Shares and Warrants and payment therefor pursuant to this Agreement and the International Underwriting Agreement, the Underwriters and the International Underwriters will acquire such Shares and 16 17 Warrants (including the Warrant Shares issued upon exercise of the Warrants after payment of the exercise price therefor) free and clear of all adverse claims within the meaning of the Uniform Commercial Code as in effect in the State of New York, assuming that such Underwriters have purchased such Shares, Warrants and Warrant Shares pursuant to the Underwriting Agreements without notice of any such adverse claim within the meaning of the Uniform Commercial Code as in effect in the State of New York. (e) Brown & Wood LLP, counsel for the Underwriters, shall have furnished to you their written opinion (a draft of such opinion is attached as Exhibit F hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (iii), the second clause of (iv), (vii), (viii) and (ix) of subsection (b) above, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. (f) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders of the Company relating to sales and certain other dispositions of shares of Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on each Time of Delivery. (g) You shall have received on the date of this Agreement and each Time of Delivery a letter, dated such date, in form and substance satisfactory to you, to the effect set forth in Exhibit B hereto, from the Company's independent auditors. (h) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange; (ii) a general moratorium on commercial banking activities in New York or California declared by either Federal or New York or California State authorities; or (iii) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in clause (i), (ii) or (iii) above in your reasonable judgment makes it impracticable to proceed with the public offering or the delivery of the Securities being delivered on such Time of Delivery on the terms and in the manner contemplated in the Prospectus. (i) On or after the date this Agreement (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities. (j) Simultaneous with the purchase from the Selling Stockholders of, and payment for, the Firm Warrants and any Optional Warrants pursuant to this Agreement or the International Underwriting Agreement, and the payment to the Company of the 17 18 Warrant Exercise Price by the Underwriters and the International Underwriters, as the case may be, the Company will issue the Warrant Shares. (k) If the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 p.m., Washington, D.C. time, on the date of this Agreement. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein; and provided, however, that the Company shall not be liable under the indemnity agreement in this subsection (a) with respect to any Preliminary Prospectus or Prospectus to the extent that such loss, claim, damage or liability of such Underwriter results from the fact such Underwriter sold Securities (1) to a person to whom there was not sent or given, at or prior to the time of written confirmation of such sale, a copy of the Prospectus or of the Prospectus, as amended or supplemented, or (2) in any case where such delivery is required by the Act if the Company has previously furnished copies thereof to such Underwriter and the loss, claim, damage or liability of such Underwriter results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus or Prospectus which was corrected in the Prospectus or the Prospectus as amended or supplemented at such time of written confirmation. 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"). (b) Each of the Selling Stockholders, severally and not jointly, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged 18 19 untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that such Selling Stockholder shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein, and provided, however, that the Selling Shareholders shall not be liable under the indemnity agreement in this subsection (b) with respect to any Preliminary Prospectus or Prospectus to the extent that such loss, claim, damage or liability of such Underwriter results from the fact such Underwriter sold Securities (1) to a person to whom there was not sent or given, at or prior to the time of written confirmation of such sale, a copy of the Prospectus or of the Prospectus, as amended or supplemented, or (2) in any case where such delivery is required by the Act if the Company has previously furnished copies thereof to such Underwriter and the loss, claim, damage or liability of such Underwriter results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus or Prospectus which was corrected in the Prospectus or the Prospectus as amended or supplemented at such time of written confirmation. The Selling Stockholders reaffirm their indemnification of the Company pursuant to the Registration Rights Agreement. (c) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder to the same extent as the foregoing indemnity in paragraph 8(a) above from the Company to each Underwriter, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company and each Selling Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action (including any governmental investigation), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (which shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, 19 20 after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. 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. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), 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 in connection with the offering of the Securities shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities purchased under this Agreement (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Securities purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault 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 or the Selling Stockholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) 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 which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include 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 subsection (e), 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 which 20 21 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 Warrants 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 ommission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint, and the Selling Stockholders' obligations in this subsection (e) to contribute are several in proportion to the amount of Shares and Warrants that they have sold to the Underwriters, and not joint. (f) The obligations of the Company and the Selling Stockholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act. (g) The respective indemnities, agreements, representations and warranties of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them in certificates of officers, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or any controlling person of any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company or any officer or director or controlling person of the Company, and shall survive delivery of and payment for any of the Securities. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares or Warrants which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares and Warrants on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares and Warrants, then the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares and Warrants on such terms. In the event that, within the respective prescribed periods, you notify the Selling Stockholders that you have so arranged for the purchase of such Shares and Warrants, or the Selling Stockholders notify you that they have so arranged for the purchase of such Shares and Warrants, you or the Selling Stockholders shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes, if any, may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which may thereby be made necessary. The term "Underwriter" as used in this Agreement shall 21 22 include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares and Warrants. (b) If, after giving effect to any arrangements for the purchase of the Shares or Warrants of a defaulting Underwriter or Underwriters by you and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares and Warrants which remains unpurchased does not exceed one-eleventh of the aggregate number of all of the Shares and Warrants to be purchased at such Time of Delivery, then the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares and Warrants which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares and Warrants which such Underwriter agreed to purchase hereunder) of the Shares and Warrants of such defaulting Underwriter or Underwriters for which such arrangements have not been made, or in such other proportions as you may specify; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares or Warrants of a defaulting Underwriter or Underwriters by you and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares and Warrants which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares and Warrants to be purchased at such Time of Delivery, or if the Selling Stockholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares and Warrants of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Selling Stockholders to sell the Optional Shares and Optional Warrants) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholders, except for the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. If this Agreement shall be terminated pursuant to Section 9 hereof, or as a result of the failure of any of the conditions set forth in Section 7(h) hereof, neither the Company nor the Selling Stockholders shall then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares or Warrant Shares are not delivered by or on behalf of the Selling Stockholders as provided herein, each of the Selling Stockholders pro rata (based on the number of Shares and Warrants to be sold by such Selling Stockholder hereunder) will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including reasonable fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the filing of the Registration Statement and the purchase, sale and delivery pursuant to this Agreement of the Shares and Warrant Shares not so delivered, but the Company and the Selling Stockholders shall then be under no further liability to any Underwriter in respect of the Shares or Warrants not so delivered except as provided in Sections 6 and 8 hereof. 11. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you 22 23 as the representatives in care of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration Department; if to any Selling Stockholder shall be delivered or sent by mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company or the Selling Stockholders by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 12. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and the Selling Stockholders and, to the extent provided in Section 8 hereof, the officers and directors of the Company and each person who controls the Company, any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Securities from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 13. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 15. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 23 24 If the foregoing is in accordance with your understanding, please sign and return to us 12 counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Stockholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters (U.S. Version), the form of which shall be submitted to the Company and the Selling Stockholders for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, SAFEWAY INC. By: -------------------------------- Melissa C. Plaisance Senior Vice President - Finance and Public Affairs SELLING STOCKHOLDERS KKR Partners II, L.P. By KKR Associates, the General Partner By: -------------------------------- Name: James H. Greene, Jr. Title: General Partner SSI Associates, L.P. By KKR Associates, the General Partner By: -------------------------------- Name: James H. Greene, Jr. Title: General Partner 24 25 SSI Equity Associates, L.P. By SSI Partners, L.P., the General Partner By: -------------------------------- Name: George R. Roberts Title: General Partner Accepted as of the date hereof: Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Lehman Brothers Inc. SBC Warburg Dillon Read Inc. Smith Barney Inc. By: ---------------------------------- (Goldman, Sachs & Co.) On behalf of each of the Underwriters 25 26 SCHEDULE I
NUMBER OF OPTIONAL TOTAL NUMBER OF NUMBER OF WARRANTS TO BE FIRM WARRANTS OPTIONAL PURCHASED TOTAL NUMBER TO BE PURCHASED SHARES TO BE (EXPRESSED AS OF FIRM (EXPRESSED AS PURCHASED IF OPTIONAL WARRANT SHARES TO BE FIRM WARRANT MAXIMUM OPTION SHARES) IF MAXIMUM UNDERWRITER PURCHASED SHARES) EXERCISED OPTION EXERCISED ----------- --------- ------- --------- ---------------- Goldman, Sachs & Co. . . . . . . Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . Donaldson, Lufkin & Jenrette Securities Corporation . . . . Lehman Brothers Inc. . . . . . . SBC Warburg Dillon Read Inc. . . Smith Barney Inc. . . . . . . . . ------------- ------------ ------------ ---------- Total . . . . . . . . . . . 19,921,172 2,578,828 2,988,176 386,824 ========== ========= ========= =======
26 27 SCHEDULE II
TOTAL NUMBER OF NUMBER OF NUMBER OF OPTIONAL TOTAL FIRM WARRANTS TO OPTIONAL WARRANTS TO BE SOLD NUMBER OF BE SOLD SHARES TO BE (EXPRESSED AS FIRM (EXPRESSED AS SOLD IF OPTIONAL WARRANT SHARES TO FIRM WARRANT MAXIMUM OPTION SHARES) IF MAXIMUM BE SOLD SHARES) EXERCISED OPTION EXERCISED ------- ------- --------- ---------------- The Selling Stockholders: KKR Partners II, L.P. . . . . SSI Associates, L.P. . . . . . SSI Equity Associates, L.P. . 2,578,828 386,824 ---------- --------- --------- ------- Total . . . . . . . . . . . . 19,921,172 2,578,828 2,988,176 386,824 ========== ========= ========= =======
The Selling Stockholders are represented by Latham & Watkins, 505 Montgomery Street, Suite 1900, San Francisco, CA 94111. 27 28 Exhibit A [FORM OF LOCK-UP CONTRACT] December __, 1997 Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation Lehman Brothers Inc. SBC Warburg Dillon Read Inc. Smith Barney Inc. c/o Goldman, Sachs & Co. 555 California Street San Francisco, California 94104 Goldman Sachs International Morgan Stanley & Co. International Ltd. Merrill Lynch International Donaldson, Lufkin & Jenrette Securities Corporation Lehman Brothers International (Europe) Swiss Bank Corporation, acting through its division SBC Warburg Dillon Read Smith Barney Inc. c/o Goldman Sachs International Peterborough Court 133 Fleet Street London EC4A 2BB England Dear Ladies and Gentlemen: The undersigned understands that Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., SBC Warburg Dillon Read Inc. and Smith Barney Inc., as representatives of the several Underwriters, propose to enter into an Underwriting Agreement (U.S. Version) with Safeway Inc., a Delaware corporation (the "Company") and KKR Partners II, L.P., SSI Associates, L.P. and SSI Equity Associates, L.P. (the "Selling 29 Stockholders"), and that Goldman Sachs International, Morgan Stanley & Co. International Ltd., Merrill Lynch International, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers International (Europe), Swiss Bank Corporation, acting through its division SBC Warburg Dillon Read, and Smith Barney Inc., as representatives of the several International Underwriters (the International Underwriters, together with the Underwriters, the "Underwriters") propose to enter into an Underwriting Agreement (International Version) with the Company and the Selling Stockholders, providing for the public offering (the "Public Offering") by the Underwriters of 25,000,000 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 Goldman, Sachs & Co., it will not, during a period of 90 days after the date of the prospectus first used to confirm sales of Shares (the "Prospectus"), 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, whether any such transaction is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Shares to be sold pursuant to the Public Offering and the SSI Warrants to be canceled, as described in the Prospectus. In addition, the undersigned agrees that, without the prior written consent of Goldman, Sachs & Co., 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) A-2 30 Exhibit B Pursuant to Section 7(g) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder. (ii) In their opinion, the consolidated financial statements audited by them and included or incorporated by reference in the Registration Statement or the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related published rules and regulations thereunder. (iii) The selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus agrees with the corresponding amounts in the audited consolidated financial statements for such five fiscal years which were included or incorporated by reference in the Company's Annual Report on Form 10-K for such fiscal year. (iv) On the basis of limited procedures, not constituting an audit in accordance with generally accepted auditing standards, consisting of a reading of the latest available interim consolidated financial statements of the Company and its subsidiaries, inspection of the minute books of the Company since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the interim consolidated financial statements of the Company included or incorporated by reference in the Registration Statement or Prospectus did not comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related published rules and regulations thereunder; (B) as of the date of the latest available interim consolidated financial statements of the Company subsequent to the date of the latest consolidated financial statements included or incorporated by reference in the Prospectus, there has been any change in the consolidated capital stock (other than issuances of capital stock upon exercise of options and warrants, in each case which were outstanding on the date of the latest financial statements included or incorporated by reference in the Prospectus), any increase greater than $50 million in the B-1 31 consolidated long-term debt of the Company and its subsidiaries, or any decrease in consolidated stockholders' equity, and for the period from the date of the latest consolidated financial statements included or incorporated by reference in the Prospectus to the date of the latest available interim consolidated financial statements, there has been any decrease in consolidated net sales, operating profit, net income or net income per share as compared with the comparable period of the preceding year; (C) as of a specified date not more than five days prior to the date of such letter, there has been any change in the consolidated capital stock (other than issuances of capital stock upon exercise of options and warrants, in each case which were outstanding on the date of the latest audited financial statements included or incorporated by reference in the Prospectus) or any increase greater than $50 million in the consolidated long-term debt of the Company and its subsidiaries, or decrease in stockholders' equity as compared with amounts shown in the latest interim consolidated balance sheet included or incorporated by reference in the Prospectus; and (D) for the period from the date of the latest interim consolidated financial statements included or incorporated by reference in the Prospectus to the specified date referred to in Clause (C) there was any decrease in consolidated net sales or, to the extent that information as to decreases in net income (before extraordinary items) is available, net income (before extraordinary items) or net income (before extraordinary items) per share, in each case as compared with the comparable period of the preceding year. (v) They have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information derived from the accounting records of the Company and its subsidiaries, which appear in the Prospectus (excluding documents incorporated by reference), or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the representatives, or in documents incorporated by reference in the Prospectus specified by the representatives, which procedures consist principally of comparing such amounts, percentages and financial information with the corresponding amounts, percentages and financial information included in or derived from the accounting records of the Company and its subsidiaries and have found such amounts, percentages and financial information to be in agreement. (vi) They have-- (A) read the unaudited pro forma condensed consolidated balance sheet as of December 28, 1996, and the unaudited pro forma condensed consolidated statements of income for the year ended December 28, 1996 incorporated by reference in the Registration Statement; (B) inquired of certain officials of the Company who have responsibility for financial and accounting matters about-- B-2 32 (1) the basis for their determination of the pro forma adjustments; and (2) whether the unaudited pro forma condensed consolidated financial statements referred to in (vi)(A) comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S- X; and (C) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the unaudited pro forma condensed consolidated financial statements. The foregoing procedures are substantially less in scope than an examination, the objective of which is the expression of an opinion on management's assumptions, the pro forma adjustments, and the application of those adjustments to historical financial information. Accordingly, such accountants do not express such an opinion. The foregoing procedures would not necessarily reveal matters of significance with respect to the comments in the following paragraph. Accordingly, such accountants make no representation about the sufficiency of such procedures for the purposes of the representatives. (vii) Nothing came to such accountants' attention as a result of the procedures specified in paragraph (vi), however, that caused such accountants to believe that the unaudited pro forma condensed consolidated financial statements referred to in (vi)(A) incorporated by reference in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements. Had such accountants performed additional procedures or had such accountants made an examination of the pro forma condensed consolidated financial statements, other matters might have come to such accountants' attention that would have been reported to you. B-3 EX-23.1 3 CONSENT 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. 333-40807 of Safeway Inc. of our report dated February 18, 1997 on the consolidated financial statements of Safeway Inc. as of December 28, 1996 and December 30, 1995 and for each of the three fiscal years in the period ended December 28, 1996, and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ DELOITTE & TOUCHE LLP San Francisco, California December 8, 1997 EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.2 The Board of Directors Safeway Inc. We consent to the incorporation by reference in this Amendment No. 1 to the registration statement on Form S-3 (No. 333-40807) filed on December 10, 1997 by Safeway Inc., of our report dated January 17, 1997, except for the penultimate sentence in paragraph five of note 7 which is as of March 27, 1997, with respect to the consolidated balance sheets of The Vons Companies, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the fifty-two week periods ended December 29, 1996, December 31, 1995 and January 1, 1995, which report appears in the Form 8-K/A of Safeway Inc. filed May 1, 1997. We also consent to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Los Angeles, California December 8, 1997 -----END PRIVACY-ENHANCED MESSAGE-----