-----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, WyMmpUVbNA2V+lfAVIuT5TCfW+LPEJGOMBkfCE45V8Ga11Vq+kda3/VSi3PrWtXj K3ASnMbEz0LYR/sBOUPRyQ== 0000950149-98-001281.txt : 19980714 0000950149-98-001281.hdr.sgml : 19980714 ACCESSION NUMBER: 0000950149-98-001281 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980710 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: 333-58597 FILM NUMBER: 98663994 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 AMENDMENT #1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998 REGISTRATION NO. 333-58597 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
5918 STONERIDGE MALL ROAD PLEASANTON, CALIFORNIA 94588 (925) 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 (925) 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 TAITT SATO 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 EXPLANATORY NOTE This Registration Statement contains two separate prospectuses, one to be used in connection with an offering of Common Stock in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent offering of Common Stock outside the United States and Canada (the "International Prospectus"). The U.S. Prospectus and the International Prospectus will be identical in all respects except for the front cover page. The form of the U.S. Prospectus is included herein and the form of the front cover page of the International Prospectus follows the back cover page of the U.S. Prospectus. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued July 7, 1998 25,000,000 Shares Safeway Inc. COMMON STOCK LOGO ------------------------ Of the 25,000,000 Shares of Common Stock offered, 20,000,000 Shares are being offered initially in the United States and Canada by the U.S. Underwriters and 5,000,000 Shares are being offered initially outside the United States and Canada by the International Underwriters. See "Underwriters." All of the Shares of Common Stock offered are being sold by the Selling Stockholders as described herein under "Principal and Selling Stockholders" and include 21,701,424 presently outstanding Shares and 3,298,576 Shares to be issued concurrently with the consummation of these offerings upon the exercise of outstanding warrants. None of the proceeds from the sale of the Shares will be received by the Company other than $1,649,288 (assuming no exercise of the U.S. Underwriters' over-allotment option) representing the exercise price of the warrants. The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SWY." On July 6, 1998, the reported last sale price of the Common Stock on the New York Stock Exchange Composite Tape was $42 3/4. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) STOCKHOLDERS(2) -------- -------------- ------------------- Per Share........................ $ $ $ Total(3)......................... $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriters." (2) Includes $1,649,288 to be paid to the Company representing the exercise price of warrants for 3,298,576 Shares at $0.50 per share. Expenses of the offerings, estimated at $ , will be paid by the Company. (3) The Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 3,750,000 additional Shares at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively, and the total amount to be paid to the Company representing the exercise price of warrants will be $ . See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein, and subject to approval of certain legal matters by Brown & Wood LLP, counsel for the Underwriters. It is expected that the delivery of the Shares will be made on or about July , 1998, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE Securities Corporation ING BARING FURMAN SELZ LLC LEHMAN BROTHERS J.P. MORGAN & CO. SALOMON SMITH BARNEY WARBURG DILLON READ LLC July , 1998 4 LOGO CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERINGS AND MAY BID FOR, AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 2 5 NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERINGS MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 3 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
PAGE ---- Business.............................. 15 Principal and Selling Stockholders.... 20 Description of Capital Stock.......... 23 Certain United States Tax Consequences to Non-United States Holders........ 24 Underwriters.......................... 27 Legal Matters......................... 29 Experts............................... 30 Information Incorporated by Reference........................... 30
------------------------ 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 6 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 (i) assumes that the U.S. Underwriters' over-allotment option will not be exercised and (ii) has been adjusted to give effect to a stock distribution whereby each holder of the Company's Common Stock received on February 25, 1998 one additional share of Common Stock for each share owned as of February 10, 1998. 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. The following factors are among the principal factors that could cause actual results to differ materially from the forward-looking statements: general business and economic conditions in the Company's operating regions, including the rate of inflation, population, employment and job growth in the Company's markets; pricing pressures and other competitive factors, which could include pricing strategies, store openings and remodels; results of the Company's efforts to reduce costs; the ability to integrate The Vons Companies, Inc. ("Vons") and achieve operating improvements at Vons; increases in labor costs and deterioration in relations with the union bargaining units representing the Company's employees; issues arising from addressing year 2000 information technology issues; opportunities or acquisitions that the Company may pursue; 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 1,370 stores (including 315 Vons stores) at March 28, 1998. The Company's U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona, the Mid-Atlantic region and western Canada. The Company's Canadian retail operations 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 83.2 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 March 28, 1998, operated 74 food and general merchandise stores in western Mexico. Sales and net income for 1997 were $22.5 billion and $557.4 million, respectively. Operating cash flow (FIFO earnings before interest, taxes, depreciation, amortization, equity in earnings from unconsolidated affiliates and extraordinary losses) increased from $777.0 million in 1993 to $1.7 billion in 1997. In addition, diluted income per share (before extraordinary items) increased from $0.25 in 1993 to $1.25 in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." OPERATING STRATEGY During the past five years, Safeway's management team has demonstrated proficiency at turning around underperforming assets. Central to its success is a simple but powerful formula that focuses on three key priorities: (1) control costs, (2) increase sales and (3) improve capital management. Management's focus on these three priorities has produced significant progress in the following key measures of financial performance: - Identical-store sales growth - Expense ratio reduction - Working capital management - Operating cash flow margin - Earnings per share growth 4 7 Safeway continues to be focused on these same three priorities, but there can be no assurance as to the future results the Company will be able to achieve. Control 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, improved category management and increased private label mix. The Company's gross profit margin has improved 143 basis points from 27.10% in 1993 to 28.53% in 1997. 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 136 basis points from 24.20% in 1993 to 22.84% in 1997. Vons historically had a higher operating and administrative expense to sales ratio, and the Merger increased goodwill amortization, which caused this ratio to increase from 22.48% in 1996. Safeway has begun to implement certain programs that have been successful at Safeway which are generating operating improvements and cost savings for Vons. On a pro forma basis, operating and administrative expenses as a percentage of sales declined 35 basis points to 22.95% in 1997 from 23.30% in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." Increase Sales Safeway has increased sales by achieving and maintaining competitive pricing, improving store standards, enhancing customer service and offering high quality products. Safeway's efforts to upgrade store standards have focused on improving store appearance, in-stock condition, employee friendliness and speed of checkout. Despite labor disputes in certain of the Company's operating areas and, during 1997, the absence of food price inflation in many of Safeway's operating areas, comparable-store sales rose 2.2% for the year and identical-store sales rose 1.3% for the year and 6.4% over a two-year period. Safeway has over 850 premium corporate brand products under the "Safeway SELECT" banner and recently added "Great Meal Combos," a line of prepared entrees and side dishes, to its deli offerings. Since the Merger, Safeway has been applying certain sales strategies that have been employed successfully by each of Safeway and Vons. For example, Safeway has introduced the Safeway Club Card in many of its operating areas (a customer loyalty program designed to reward frequent shoppers), which was inspired by a similar program at Vons. Improve 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 $829 million in 1997 from $620 million in 1996 and $503 million in 1995. Combined capital expenditures for Safeway and Vons in fiscal 1998 are expected to increase to approximately $950 million and will be used primarily to open 40 to 45 new stores, complete more than 200 remodels and finish construction of a distribution center in Maryland. Working capital invested in the business has declined substantially since year-end 1993 primarily through lower warehouse inventory levels and improved payables management. STOCK REPURCHASE In connection with the Merger, the Company repurchased 64.0 million shares of the Company's Common Stock from a partnership affiliated with Kohlberg Kravis Roberts & Co. ("KKR") at $21.50 per share, for an aggregate purchase price of $1.376 billion (the "Repurchase"). See "Principal and Selling Stockholders." This reduction of 64.0 million shares partially offset the increase of 83.2 million shares issued pursuant to the Merger. To finance the Repurchase, the Company borrowed funds under a new $3.0 billion bank credit agreement (the "Bank Credit 5 8 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." RECENT DEVELOPMENTS SECOND-QUARTER 1998 EARNINGS On July 9, 1998, Safeway reported net income of $193.2 million ($0.38 per share) for the second quarter ended June 20, 1998, compared to $129.9 million ($0.26 per share) for the second quarter of 1997. Net income for the second quarter of 1997 included an extraordinary loss of $4.2 million ($0.01 per share) for the early retirement of debt. In addition, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta retail operating area which reduced second quarter 1997 net income by approximately $0.04 per share. Second quarter sales increased 6.4% to $5.6 billion in 1998 from $5.2 billion in 1997, primarily because of strong store operations and the effect of the 1997 strike in Alberta. Comparable-store sales increased 8.0%, while identical-store sales increased 7.4%. The combined impact of the Alberta strike and the timing of the Easter holiday increased store sale comparisons by approximately 3.4 percentage points. Gross profit increased 37 basis points to 29.05% of sales in the second quarter of 1998 from 28.68% in the second quarter of 1997 due primarily to continuing improvements in buying practices and product mix. This improvement was partially offset by promotional spending, including the introduction of the Safeway Club Card in many of its operating areas. LIFO expense was $2.3 million in the second quarter of 1998. Operating and administrative expense declined 77 basis points to 22.23% of sales in the second quarter of 1998 compared to 23.00% in 1997, reflecting increased sales and ongoing efforts to reduce or control expenses. Interest expense declined to $51.5 million in the second quarter of 1998 from $62.7 million for the second quarter of 1997, due primarily to the debt refinancing in the third quarter of 1997. The combination of lower interest expense and strong operating results pushed the interest coverage ratio (operating cash flow divided by interest expense) to an all-time high of 9.74 times. Operating cash flow as a percentage of sales also reached an all-time high of 8.98% for the quarter and 8.14% for the last four quarters. Equity in earnings of Casa Ley increased to $4.6 million for the quarter from $4.3 million in 1997. Due to the Merger, Safeway's income statement for the first 24 weeks of 1998 includes Vons' operating results for the entire period, while the income statement for the first 24 weeks of 1997 includes Vons' operating results for the second quarter plus the effect of Safeway's 34.4% equity interest in Vons in the first quarter. The following discussion compares results for the first 24 weeks of 1998 with pro forma results for the same period in 1997, as if Safeway and Vons had merged at the beginning of 1997. For the first 24 weeks of 1998, sales were $11.0 billion compared to pro forma sales of $10.6 billion in the first 24 weeks of 1997. The gross profit margin improved 39 basis points to 29.04% in 1998 from a pro forma gross margin of 28.65% in 1997. Operating and administrative expense improved 52 basis points to 22.55% of sales in 1998 from pro forma expense of 23.07% in 1997. During the first two quarters of 1998, Safeway invested $333.5 million in capital expenditures while opening 13 new stores and closing three stores. The Company expects to spend approximately $950 million in 1998, open about 40 new stores, complete more than 200 remodels and finish construction of the Maryland distribution center. 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 (925) 467-3000. 6 9 SAFEWAY INC. AND SUBSIDIARIES OPERATING RESULTS (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED ---------------------- ---------------------- JUNE 20, JUNE 14, JUNE 20, JUNE 14, 1998 1997 1998 1997 --------- --------- --------- --------- Sales............................................. $ 5,583.3 $ 5,249.2 $10,972.6 $ 9,327.0 ========= ========= ========= ========= Gross profit...................................... $ 1,622.2 $ 1,505.3 $ 3,186.3 $ 2,650.8 Operating and administrative expense.............. (1,241.3) (1,207.3) (2,474.2) (2,128.0) --------- --------- --------- --------- Operating profit.................................. 380.9 298.0 712.1 522.8 Interest expense.................................. (51.5) (62.7) (104.4) (101.4) Equity in earnings of unconsolidated affiliates... 4.6 4.3 10.4 21.5 Other income, net................................. 0.4 0.6 1.7 1.4 --------- --------- --------- --------- Income before income taxes and extraordinary loss............................................ 334.4 240.2 619.8 444.3 Income taxes...................................... (141.2) (106.1) (261.8) (187.7) --------- --------- --------- --------- Income before extraordinary loss.................. 193.2 134.1 358.0 256.6 Extraordinary loss related to early retirement of debt, net of income tax benefit................. -- (4.2) -- (4.2) --------- --------- --------- --------- Net income........................................ $ 193.2 $ 129.9 $ 358.0 $ 252.4 ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary loss................ $ 0.38 $ 0.27 $ 0.71 $ 0.52 Extraordinary loss.............................. -- (0.01) -- (0.01) --------- --------- --------- --------- Net income...................................... $ 0.38 $ 0.26 $ 0.71 $ 0.51 ========= ========= ========= ========= Weighted average shares outstanding -- diluted (in millions)................................... 508.2 500.6 507.4 490.4 ========= ========= ========= ========= Operating cash flow: Income before extraordinary loss.................. $ 193.2 $ 134.1 $ 358.0 $ 256.6 Add (subtract): Income taxes.................................... 141.2 106.1 261.8 187.7 Interest expense................................ 51.5 62.7 104.4 101.4 Depreciation.................................... 106.3 100.3 211.4 178.6 Goodwill amortization........................... 11.7 11.9 23.5 14.3 LIFO expense.................................... 2.3 -- 2.3 2.3 Equity in earnings of unconsolidated affiliates................................... (4.6) (4.3) (10.4) (21.5) --------- --------- --------- --------- Total operating cash flow............... $ 501.6 $ 410.8 $ 951.0 $ 719.4 ========= ========= ========= ========= As a percent of sales........................... 8.98% 7.83% 8.67% 7.71% As a multiple of interest expense............... 9.74x 6.55 9.11x 7.09x
7 10 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 sales prices for the Company's Common Stock for the fiscal quarters indicated as reported by the New York Stock Exchange Composite Tape. Prices have been adjusted to give effect to two-for-one stock splits effected on January 30, 1996 and February 25, 1998.
HIGH LOW ------ ----- 1995 First quarter............................................. $ 9 $ 7 21/32 Second quarter............................................ 9 5/8 7 25/32 Third quarter............................................. 10 5/32 8 31/32 Fourth quarter............................................ 12 7/8 9 31/32 1996 First quarter............................................. $15 1/16 $11 7/32 Second quarter............................................ 17 13/16 13 3/16 Third quarter............................................. 19 1/8 15 7/8 Fourth quarter............................................ 22 11/16 18 5/8 1997 First quarter............................................. $26 $20 9/16 Second quarter............................................ 24 13/16 21 1/8 Third quarter............................................. 27 3/4 23 1/16 Fourth quarter............................................ 31 23/32 25 11/32 1998 First quarter............................................. $37 1/4 $30 1/2 Second quarter............................................ 40 7/16 34 Third quarter (through July 2, 1998)...................... 42 15/16 40 1/16
The reported last sale price of the Common Stock on the New York Stock Exchange Composite Tape on July 6, 1998 was 42 3/4. 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." 8 11 CAPITALIZATION The following table sets forth the short-term debt and the capitalization of Safeway at March 28, 1998 (in millions). None of the proceeds from the sale of the shares of Common Stock offered hereby will be received by the Company other than an aggregate of $1,649,288 representing the exercise price of certain outstanding warrants.
MARCH 28, 1998 --------- Short-term borrowings(1).................................... $ 317.5 ======== Long-term debt and capital lease obligations................ $3,098.0 Stockholders' equity: Common Stock, par value $0.01 per share; 1,500 shares authorized; 540.2 shares outstanding(2)(3)............. 5.4 Additional paid-in capital................................ 2,492.2 Retained earnings......................................... 1,479.8 Cumulative translation adjustments........................ 1.0 Less: Treasury stock at cost; 61.1 shares................. (1,314.2) Unexercised warrants purchased: 18.2 shares(3)............ (322.7) -------- Total stockholders' equity........................ 2,341.5 -------- Total capitalization.............................. $5,439.5 ========
- --------------- (1) Consists of the current portion of long-term debt and capital lease obligations. (2) Excludes 39.9 million shares of Common Stock underlying stock options and 28.3 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 3,298,576 shares of Common Stock will be exercised for an aggregate exercise price of $1,649,288 and SSI Warrants to purchase 5,990,831 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 March 28, 1998, 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. 9 12 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 12-week periods ended March 28, 1998 and March 22, 1997, 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 incorporated by reference herein. In the opinion of management, the results of operations for the 12 weeks ended March 28, 1998 and March 22, 1997 contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The results for the 12 weeks ended March 28, 1998 are not necessarily indicative of the results expected for the full year.
12 WEEKS ENDED --------------------- 53 52 52 52 52 MARCH 28, MARCH 22, WEEKS WEEKS WEEKS WEEKS WEEKS 1998 1997(1) 1997(1) 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS: Sales......................................... $5,389.3 $4,077.8 $22,483.8 $17,269.0 $16,397.5 $15,626.6 $15,214.5 --------- -------- --------- --------- --------- --------- --------- Gross profit.................................. 1,564.1 1,145.5 6,414.7 4,774.2 4,492.4 4,287.3 4,123.3 Operating and administrative expense.......... (1,232.9) (920.7) (5,135.0) (3,882.5) (3,765.0) (3,675.2) (3,681.8) --------- -------- --------- --------- --------- --------- --------- Operating profit.............................. 331.2 224.8 1,279.7 891.7 727.4 612.1 441.5 Interest expense.............................. (52.9) (38.7) (241.2) (178.5) (199.8) (221.7) (265.5) Equity in earnings of unconsolidated affiliates.................................. 5.8 17.2 34.9 50.0 26.9 27.3 33.5 Other income, net............................. 1.3 0.8 2.9 4.4 2.0 6.4 6.8 --------- -------- --------- --------- --------- --------- --------- Income before income taxes and extraordinary loss........................................ 285.4 204.1 1,076.3 767.6 556.5 424.1 216.3 Income taxes.................................. (120.6) (81.6) (454.8) (307.0) (228.2) (173.9) (93.0) --------- -------- --------- --------- --------- --------- --------- Income before extraordinary loss.............. 164.8 122.5 621.5 460.6 328.3 250.2 123.3 Extraordinary loss, net of tax benefit of $41.1, $1.3 and $6.7........................ -- -- (64.1) -- (2.0) (10.5) -- --------- -------- --------- --------- --------- --------- --------- Net income.................................... $ 164.8 $ 122.5 $ 557.4 $ 460.6 $ 326.3 $ 239.7 $ 123.3 ========= ======== ========= ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary loss............ $ 0.33 $ 0.26 $ 1.25 $ 0.97 $ 0.68 $ 0.51 $ 0.25 Extraordinary loss.......................... -- -- (0.13) -- -- (0.02) -- --------- -------- --------- --------- --------- --------- --------- Net income.................................. $ 0.33 $ 0.26 $ 1.12 $ 0.97 $ 0.68 $ 0.49 $ 0.25 ========= ======== ========= ========= ========= ========= ========= FINANCIAL STATISTICS: Identical-store sales(2)...................... 1.2% 3.6% 1.3% 5.1% 4.6% 4.4% 2.1% Comparable-store sales........................ 1.8 4.4 2.2 6.1 5.5 5.0 3.5 Gross profit margin........................... 29.02 28.09 28.53 27.65 27.40 27.44 27.10 Operating and administrative expense as a percent of sales............................ 22.88 22.58 22.84 22.48 22.96 23.52 24.20 Operating profit margin....................... 6.1 5.5 5.7 5.2 4.4 3.9 2.9 Operating cash flow(3)........................ $ 449.4 $ 308.6 $ 1,732.3 $ 1,239.5 $ 1,068.6 $ 947.6 $ 777.0 Operating cash flow margin.................... 8.34% 7.57% 7.70% 7.18% 6.52% 6.06% 5.11% Capital expenditures(4)....................... $ 105.5 $ 70.0 $ 829.4 $ 620.3 $ 503.2 $ 352.2 $ 290.2 Depreciation and amortization................. 116.9 80.7 455.8 338.5 329.7 326.4 330.2 Total assets.................................. 8,537.2 5,468.3 8,493.9 5,545.2 5,194.3 5,022.1 5,074.7 Total debt.................................... 3,415.5 1,931.3 3,340.3 1,984.2 2,190.2 2,196.1 2,689.2 Stockholders' equity.......................... 2,341.5 1,322.8 2,149.0 1,186.8 795.5 643.8 382.9 Weighted average shares outstanding -- diluted (in millions)............................... 506.7 477.7 497.7 475.7 481.2 494.2 493.8 OTHER STATISTICS: Vons stores acquired during the period........ -- -- 316 -- -- -- -- Total stores at period-end.................... 1,370 1,053 1,368 1,052 1,059 1,062 1,078 Remodels completed during the period(5)....... N/A N/A 181 141 108 71 45 Total retail square footage at period-end (in millions)................................... 53.3 40.7 53.2 40.7 40.1 39.5 39.4
- --------------- (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 for stores (excluding replacement stores but including Vons stores for the final 41 weeks of 1997 and 1998) operating the entire measurement period in both the current and prior periods. The 1997 and 1996 annual identical-store sales exclude British Columbia stores, which were closed during a labor dispute in 1996. (3) Defined on page 12. (4) Defined under "Business -- Capital Expenditure Program." (5) Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000. 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MERGER WITH VONS On April 8, 1997, Safeway completed the Merger. Pursuant to the Merger, Safeway issued 83.2 million shares of Safeway Common Stock for all of the Vons stock that Safeway did not already own. The Merger was accounted for using the purchase method and resulted in additional goodwill which is being amortized over 40 years. 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 results. In connection with the Merger, Safeway repurchased 64.0 million shares of Common Stock from a partnership affiliated with KKR at $21.50 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 improved 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 64.0 million shares partially offset the increase of 83.2 million shares issued pursuant to the Merger. RESULTS OF OPERATIONS TWELVE WEEKS ENDED MARCH 28, 1998 COMPARED TO 12 WEEKS ENDED MARCH 22, 1997 Safeway's net income was $164.8 ($0.33 per share) for the first quarter ended March 28, 1998, compared to $122.5 million ($0.26 per share) for the first quarter of 1997. First-quarter sales increased 32% to $5.4 billion in 1998 from $4.1 billion in 1997 due primarily to the Merger in the second quarter of 1997. Identical-store sales (which exclude replacement stores) increased 1.2% while comparable-store sales increased 1.8%. These same-store sales comparisons were adversely affected by the timing of the Easter holiday. Gross profit represents the portion of sales revenue remaining after deducting the costs of inventory sold during the period, including purchase and distribution costs. Gross profit increased 39 basis points to 29.02% of sales in the first quarter of 1998 from combined pro forma gross profit of 28.63% in 1997, primarily due to improvements in buying practices and product mix. Safeway did not record LIFO expense in the first quarter of 1998 reflecting management's expectation of little or no inflation for the full year. Operating and administrative expense was 22.88% of sales in 1998, down 26 basis points from combined pro forma operating and administrative expense of 23.14% in 1997, reflecting increased sales and ongoing efforts to reduce or control expenses. Pro forma information is based on the 1997 combined historical financial statements of Safeway and Vons as if the Merger had occurred at the beginning of the first quarter of 1997. Interest expense for the first quarter was $52.9 million in 1998 compared to $38.7 million last year. Interest expense increased because of debt incurred to repurchase stock in conjunction with the Merger. Despite the large increase in interest expense, the quarterly interest coverage ratio (operating cash flow divided by interest expense) improved to an all-time high of 8.50 times in 1998. Operating cash flow, as defined on page 13, also reached an all-time high of 8.34% of sales in the first quarter of 1998. This compares to 7.97% in the first quarter of 1997. Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was $5.8 million in 1998, up from $5.0 million in 1997. First-quarter 1997 equity in earnings of unconsolidated affiliates also included $12.2 million for Safeway's 35% share of Vons' earnings. Safeway's and Vons' operating results were consolidated beginning with Safeway's second quarter of 1997. 11 14 1997 COMPARED TO 1996 AND 1995 Safeway's net income was $557.4 million ($1.12 per share) in 1997, $460.6 million ($0.97 per share) in 1996, and $326.3 million ($0.68 per share) in 1995. In 1997 and 1995, income before extraordinary items related to debt refinancings was $621.5 million ($1.25 per share) and $328.3 million ($0.68 per share), respectively. Safeway's 1997 income statement includes Vons' operating results since the second quarter plus the effect of Safeway's 34.4% equity interest in Vons in the first quarter, while the 1996 income statement reflects Safeway's equity interest in Vons for the full year. In order to facilitate an understanding of the Company's operations, this financial review presents certain pro forma information based on the 1997 and 1996 combined historical financial statements of the two companies as if the Merger had been effective as of the beginning of each of the years discussed. See Note B to the Company's 1997 Consolidated Financial Statements. During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. The Company estimates that the Alberta strike reduced 1997 net income by approximately $0.04 per share, and labor disputes in the British Columbia and Denver operating areas reduced 1996 net income by an estimated $0.07 per share. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. The Company estimates that this dispute reduced 1995 earnings by approximately $0.01 per share. Sales. Sales for the 53 weeks of 1997 were $22.5 billion compared to $17.3 billion for the 52 weeks of 1996. The increase was due primarily to the Merger and the additional week in 1997. Identical-store sales (stores operating the entire year in both 1997 and 1996, excluding replacement stores but including Vons stores for 41 weeks in both years) increased 1.3% while comparable-store sales, which includes replacement stores, increased 2.2%. The effects of the second-quarter strike in Alberta weakened 1997 identical and comparable-store sales comparisons. Lack of inflation also softened 1997 sales comparisons. 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 1996. Gross Profit. Gross profit was 28.53% of sales in 1997 compared to 27.65% in 1996 and 27.40% in 1995. On a pro forma basis, gross profit increased to 28.63% of sales in 1997 from 28.20% in 1996, primarily due to improvements in buying practices and product mix. In addition, the Company recorded LIFO income of $6.1 million in 1997 compared to LIFO expense of $4.9 million in 1996 reflecting slight deflation in 1997. Operating and Administrative Expense. Operating and administrative expense was 22.84% of sales in 1997 compared to 22.48% in 1996 and 22.96% in 1995. Safeway's operating and administrative expense-to-sales ratio has increased compared to 1996 because Vons' operating and administrative expense ratio has historically been higher than Safeway's (partially due to the high cost of real estate and labor in southern California). In addition, goodwill amortization has increased by approximately $30 million as a result of the Merger. On a pro forma basis, operating and administrative expense declined 35 basis points to 22.95% of sales in 1997, from 23.30% in 1996. Interest Expense. Interest expense increased to $241.2 million in 1997 from $178.5 million in 1996 because of the debt incurred during the second quarter of 1997 to repurchase stock in conjunction with the Merger. During 1997, Safeway recorded an extraordinary loss of $64.1 million ($0.13 per share) for the repurchase of $588.5 million of Safeway's public debt, $285.5 million of Vons' public debt, and $40.0 million of medium-term notes. The extraordinary loss represents the payment of premiums on retired debt and the write-off of deferred finance costs, net of the related tax benefit. Safeway financed this repurchase with a public offering of $600 million of senior debt securities and the balance with commercial paper. The refinancing extended Safeway's overall long-term debt maturities and increased its financial flexibility. In May 1997, Safeway entered into interest rate cap agreements which expire in 1999 and entitle the Company to receive from counterparties the amounts, if any, by which interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized cost to purchase the cap agreements was $2.5 million at year-end 1997. As of year-end 1997, the Company had effectively converted $135.1 million of its floating rate debt to fixed interest rate debt through the use of interest rate swap agreements. Interest rate swap and cap agreements increased 12 15 interest expense by $3.3 million in 1997, $3.0 million in 1996 and $0.3 million in 1995. The significant terms of swap and cap agreements outstanding at year-end 1997 are described in Note E to the Company's 1997 Consolidated Financial Statements which are incorporated herein by reference. Equity in Earnings of Unconsolidated Affiliates. Safeway records its equity in earnings of unconsolidated affiliates on a one-quarter delay basis. Income from Safeway's equity investment in Casa Ley increased to $22.7 million in 1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa Ley's financial results have gradually improved. Equity in earnings of unconsolidated affiliates included Safeway's share of Vons' earnings of $12.2 million in the first quarter of 1997, $31.2 million in 1996, and $18.3 million in 1995. LIQUIDITY AND FINANCIAL RESOURCES Net cash flow from operations declined in the first quarter of 1998 compared to the same quarter in 1997 because of changes in working capital. The largest change was due to a decrease in accounts payable related to capital expenditures. Cash flow used by investing activities for the first 12 weeks of the year was $105.2 million in 1998, compared to $55.3 million in 1997, which was primarily the result of increased capital expenditures to open three new stores and to continue construction of a new distribution center in Maryland. Financing activities provided cash flow of $73.4 million in the first quarter of 1998 which was used primarily to fund increased capital expenditures. Financing activities used cash of $63.3 million in the first quarter of 1997. 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 and income taxes. 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 be comparable to Safeway's operating cash flow. Safeway's computation of operating cash flow is as follows:
12 WEEKS ENDED ---------------------- MARCH 28, MARCH 22, 52 WEEKS 52 WEEKS 52 WEEKS 1998 1997 1997 1996 1995 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Income before income taxes and extraordinary loss.................... $ 285.4 $ 204.1 $ 1,076.3 $ 767.6 $ 556.5 LIFO expense(income).................... -- 2.3 (6.1) 4.9 9.5 Interest expense........................ 52.9 38.7 241.2 178.5 199.8 Depreciation and amortization........... 116.9 80.7 455.8 338.5 329.7 Equity in earnings of unconsolidated affiliates............................ (5.8) (17.2) (34.9) (50.0) (26.9) ------- ------- --------- --------- --------- Operating cash flow..................... $ 449.4 $ 308.6 $ 1,732.3 $ 1,239.5 $ 1,068.6 ======= ======= ========= ========= ========= As a percent of sales................. 8.34% 7.57% 7.70% 7.18% 6.52% As a multiple of interest expense..... 8.50x 7.97x 7.18x 6.94x 5.35x
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 13 16 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. WARRANTS SSI Equity Associates, a related party, is a limited partnership whose sole assets consist of warrants to purchase 28.3 million shares of Common Stock at $0.50 per share. The SSI Warrants are exercisable through November 15, 2001. During 1996 and 1995, the Company acquired 64.5% of the partnership interests in SSI Equity Associates for $322.7 million, which was accounted for as a reduction to stockholders' equity. STOCK OFFERINGS In December 1997 and January 1998, the Company completed the public offering of an aggregate of 56.5 million shares of Common Stock owned by affiliates of KKR, including 6.5 million shares issued upon the exercise of SSI Warrants. In connection with the offering, SSI Warrants to purchase 11.9 million shares attributable to the limited partnership interest owned by Safeway were canceled. The Company received proceeds totaling $3.3 million for the exercise of the warrants. Affiliates of KKR received the balance of proceeds from the stock offering. In February 1996, the Company completed the public offering of 45.9 million shares of Common Stock owned by affiliates of KKR, including 4.4 million shares issued upon the exercise of SSI Warrants and 0.4 million shares issued upon the exercise of employee stock options. Also in 1996, SSI Warrants to purchase 4.6 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. CAPITAL EXPENDITURE PROGRAM A component of the Company's long-term strategy is its capital expenditure program. During 1997, Safeway and Vons together invested $829.4 million in capital expenditures to, among other things, open 37 new stores and begin work on a new distribution center in Maryland. Combined capital expenditures for Safeway and Vons in fiscal 1998 are expected to increase to approximately $950 million to open 40 to 45 new stores, complete more than 200 remodels and finish construction of the Maryland distribution center. YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary to avoid system failures and the temporary inability to process transactions or engage in other normal business activities. The Company utilizes a significant number of computer software programs and operating systems across its entire organization, including applications used in stores, manufacturing, product development, financial business systems and various administrative functions. 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. In addition, the Company is communicating with major vendors to determine the extent to which the Company is vulnerable to third-party year 2000 compliance issues. Based upon the 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 and vendors' systems will be year 2000 compliant or that compliance costs or the impact of any failure to achieve substantial year 2000 compliance will not have a material adverse effect on the Company's future liquidity or results of operations. 14 17 NEW ACCOUNTING STANDARDS 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. In March 1998, the American Institute of Certified Public Accountants finalized SOP 98-1 (Accounting for the Costs of Computer Software Developed or Obtained for Internal Use), which defines the types of costs that are capitalizable for computer software projects and requires all other costs to be expensed in the period incurred. The new SOP requires that in order for costs to be capitalizable they must be intended to create a new system or add identifiable functionality to an existing system. This SOP is effective for fiscal years beginning after December 15, 1998. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (Accounting for Derivative Instruments and Hedging Activities), which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedge accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial statements. 15 18 BUSINESS Safeway is the second largest food and drug chain in North America (based on sales), with 1,370 stores (including 315 Vons stores) at March 28, 1998. The Company's U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona, the Mid-Atlantic region and western Canada. The Company's Canadian retail operations 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 83.2 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 March 28, 1998, operated 74 food and general merchandise stores in western Mexico. Sales and net income for 1997 were $22.5 billion and $557.4 million, respectively. Operating cash flow (FIFO earnings before interest, taxes, depreciation, amortization, equity in earnings from unconsolidated affiliates and extraordinary losses) increased from $777.0 million in 1993 to $1.7 billion in 1997. In addition, diluted income per share (before extraordinary items) increased from $0.25 in 1993 to $1.25 in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." OPERATING STRATEGY During the past five years, Safeway's management team has demonstrated proficiency at turning around underperforming assets. Central to its success is a simple but powerful formula that focuses on three key priorities: (1) control costs, (2) increase sales and (3) improve capital management. Management's focus on these three priorities has produced significant progress in the following key measures of financial performance: - Identical-store sales growth - Expense ratio reduction - Working capital management - Operating cash flow margin - Earnings per share growth Safeway continues to be focused on these same three priorities, but there can be no assurance as to the future results the Company will be able to achieve. Control 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, improved category management and increased private label mix. The Company's gross profit margin has improved 143 basis points from 27.10% in 1993 to 28.53% in 1997. 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 136 basis points from 24.20% in 1993 to 22.84% in 1997. Vons historically had a higher operating and administrative expense to sales ratio, and the Merger increased goodwill amortization, which caused this ratio to increase from 22.48% in 1996. Safeway has begun to implement certain programs that have been successful at Safeway which are generating operating improvements and cost savings for Vons. On a pro forma basis, operating and administrative expenses as a percentage of sales declined 35 basis points to 22.95% in 1997 from 23.30% in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." 16 19 Increase Sales Safeway has increased sales by achieving and maintaining competitive pricing, improving store standards, enhancing customer service and offering high quality products. Safeway's efforts to upgrade store standards have focused on improving store appearance, in-stock condition, employee friendliness and speed of checkout. Despite labor disputes in certain of the Company's operating areas and, during 1997, the absence of food price inflation in many of Safeway's operating areas, comparable-store sales rose 2.2% for the year and identical-store sales rose 1.3% for the year and 6.4% over a two-year period. Safeway has over 850 premium corporate brand products under the "Safeway SELECT" banner and recently added "Great Meal Combos," a line of prepared entrees and side dishes, to its deli offerings. Since the Merger, Safeway has been applying certain sales strategies that have been employed successfully by each of Safeway and Vons. For example, Safeway has introduced the Safeway Club Card in many of its operating areas (a customer loyalty program designed to reward frequent shoppers), which was inspired by a similar program at Vons. Improve 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 $829 million in 1997 from $620 million in 1996 and $503 million in 1995. Combined capital expenditures for Safeway and Vons in fiscal 1998 are expected to increase to approximately $950 million and will be used primarily to open 40 to 45 new stores, complete more than 200 remodels and finish construction of the Maryland distribution center. Working capital invested in the business has declined substantially since year-end 1993 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 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 March 28, 1998:
NUMBER OF PERCENT OF STORES TOTAL --------- ---------- Less than 30,000 square feet................................ 368 26.9% 30,000 to 50,000............................................ 728 53.1 More than 50,000............................................ 274 20.0 ----- ----- Total stores...................................... 1,370 100.0% ===== =====
17 20 Store Ownership At March 28, 1998, Safeway owned more than one-third of its stores. Safeway leased the remaining stores. In recent years, the Company has opted for ownership of new developments where possible because it provides greater control and flexibility with respect to financing terms, remodeling, expansions and closures. Merchandising Safeway's operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high quality products at competitive prices. The Company emphasizes high quality perishables, such as produce and meat, and specialty departments, including in-store bakery, delicatessen, floral and pharmacy, designed to provide one-stop shopping for today's busy shoppers. Safeway has developed a line of over 850 premium corporate brand products under the "Safeway SELECT" banner. These products include, among others, soft drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt, pet food and laundry detergent. The line also includes Safeway SELECT "Healthy Advantage" items such as low-fat ice cream and low-fat cereal bars, 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 19 plants from 1993 through March 28, 1998 and a reorganization of the manufacturing division administrative office during 1994. In 1998, Safeway expects to have fully operational a new food processing plant in California which will replace one that was closed in 1997 and another that is expected to close in 1998. 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. 18 21 Safeway operated the following manufacturing and processing facilities at March 28, 1998:
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 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 is constructing a replacement distribution center in Maryland and expects to complete it by the end of 1998. 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, and also details changes in the Company's store base during such period:
1997 1996 1995 ------ ------ ------ (DOLLARS IN MILLIONS) Cash paid for property additions...................... $758.2 $541.8 $450.9 Less: Purchases of previously leased properties....... (28.2) (13.2) (9.9) Plus: Present value of all lease obligations incurred........................................ 91.3 91.7 62.2 Mortgage notes assumed in property acquisitions.................................... 0.9 -- -- Vons first quarter expenditures....................... 7.2 -- -- ------ ------ ------ Total capital expenditures............................ $829.4 $620.3 $503.2 ====== ====== ====== Capital expenditures as a percent of sales............ 3.7% 3.6% 3.1% Vons stores acquired.................................. 316 -- -- New stores opened..................................... 37 30 32 Stores closed or sold................................. 37 37 35 Remodels.............................................. 181 141 108 Total retail square footage at year-end (in millions)........................................... 53.2 40.7 40.1
19 22 Improved operations and lower project costs have raised the return on capital projects, allowing Safeway to increase capital expenditures to $829 million in 1997 from $620 million in 1996 and $503 million in 1995. During the first quarter of 1998, Safeway invested $105.5 million in capital expenditures to, among other things, open three new stores and continue the construction of a new distribution center in Maryland. Combined capital expenditures for Safeway and Vons in fiscal 1998 are expected to increase to approximately $950 million and will be used primarily to open 40 to 45 new stores, complete more than 200 remodels and finish construction of the Maryland distribution center. 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 acquisition 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 March 28, 1998, Safeway had approximately 146,000 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. Safeway has concluded early negotiations and signed new labor contracts covering employees whose collective bargaining agreements had 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 Seattle and Spokane, Washington. In addition, union members in British Columbia ratified a new labor contract. Management considers the terms of these new contracts to be satisfactory. As a result of these early negotiations, the only significant remaining labor contracts to be negotiated in 1998 are in the Winnipeg operating area covering approximately 40 stores and the Vons distribution centers in southern California. In the last three years there have been four significant work stoppages. During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. The Company continued to operate the affected stores with a combination of replacement workers, management and employees who returned to work. During the second and third quarters of 1996, 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. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. These work stoppages were resolved in a manner that management considered generally satisfactory. Safeway estimates that the Alberta strike reduced 1997 net income by approximately $0.04 per share, that the combined impact of the disputes in Denver and British Columbia reduced 1996 earnings by approximately $0.07 per share, and that the dispute in northern California reduced 1995 earnings by an estimated $0.01 per share. The Company has performance-based compensation plans that cover approximately 7,750 management employees. Performance-based compensation plans set overall bonus levels based upon both operating results and working capital management. Individual bonuses are based on job performance. Certain employees are covered by capital investment bonus plans which measure the performance of capital projects based on operating performance over several years. 20 23 PRINCIPAL AND SELLING STOCKHOLDERS All of the shares of Common Stock being offered hereby are being sold by certain stockholders of the Company included in the following table (the "Selling Stockholders"). The following table also sets forth information regarding the beneficial ownership of Safeway's outstanding Common Stock as of March 28, 1998, 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 and (v) 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, L.P., 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)............... 104,529,450 21.8 21,701,424 82,828,026 17.2 James H. Greene, Jr.(3)............. 144,402 * 144,402 * Henry R. Kravis(4).................. -- -- Robert I. MacDonnell(5)............. 85,504 * 85,504 * George R. Roberts(6)................ -- -- SSI Equity Associates, L.P.(7)........ 28,297,940 5.6 3,298,576 19,008,533 3.8 Paul Hazen(8)......................... 204,168 * 204,168 * Peter A. Magowan(8)................... 3,397,600 * 3,397,600 * William Y. Tauscher................... 4,467 * 4,467 * Steven A. Burd(9)..................... 3,536,822 * 3,536,822 * Kenneth W. Oder(9)(10)................ 1,912,144 * 1,912,144 * David G. Weed(9)...................... 178,443 * 178,443 * Michael C. Ross(9).................... 774,275 * 774,275 * Gary D. Smith(9)...................... 188,370 * 188,370 * FMR Corp.(11)......................... 42,115,364 8.8 42,115,364 8.7 American Express Company and American Express Financial Corporation(12)... 29,279,798 6.1 29,279,798 6.1
- --------------- * Less than 1% (1) For purposes of this table, a person or a group of persons is deemed to have "beneficial ownership" as of a given date of any shares which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any shares which such person or persons has the right to acquire within 60 days after such date are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) The shares are owned of record by two limited partnerships (the "Common Stock Partnerships"), the sole general partner of each of which is KKR Associates, L.P. ("KKR Associates"). KKR Associates, in its capacity as general partner, may be deemed to beneficially own such shares. Messrs. Greene, Kravis, MacDonnell, Roberts, Michael T. Tokarz, Edward A. Gilhuly, 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, and Roberts are members of Safeway's Board of Directors. See "Capitalization." (3) Represents shares owned jointly by Mr. Greene and his wife. Does not include 20,000 shares owned by Mrs. Greene, as to which Mr. Greene disclaims any beneficial ownership. Does not include 12,000 shares held 21 24 in trust by Mrs. Greene for the benefit of their children, as to which Mr. Greene disclaims any beneficial ownership. (4) Does not include 800,000 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 120,000 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 120,000 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 800,000 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, L.P. 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 28,297,940 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 3,298,576 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 5,990,831 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 19,008,533 shares of Common Stock (of which 12,258,791 shares will be attributable to limited partnership interests held by Safeway). (8) Includes shares issuable upon exercise of stock options as follows: Mr. Hazen, 162,500 and Mr. Magowan, 700,000. (9) Includes shares issuable upon exercise of stock options as follows: Mr. Burd, 3,082,262; Mr. Oder, 1,800,000; Mr. Weed, 160,000; Mr. Ross, 720,000 and Mr. Smith, 152,400. Does not include shares issuable upon exercise of stock options which are not vested. (10) Does not include 7,152 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 14, 1998 (the "FMR Schedule 13G"). According to the FMR Schedule 13G, (i) Fidelity Management & Research Company, a wholly owned subsidiary of FMR Corp., is the beneficial owner of 37,842,974 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 3,182,390 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 1,090,000 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 of such shares and (v) FMR has sole voting power over 2,765,990 of such shares. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. (12) All information regarding American Express Company and American Express Financial Corporation is based on information disclosed in a Schedule 13G filed by American Express Company and American Express Financial Corporation on January 30, 1998 (the "AMEX Schedule 13G"). According to the AMEX Schedule 13G, American Express Company disclaims beneficial ownership of the securities referred to in the 22 25 AMEX Schedule 13G. The address of American Express Company is American Express Tower, 200 Vesey Street, New York, New York 10285, and the address of American Express Financial Corporation is IDS Tower 10, Minneapolis, Minnesota 55440. Following the offerings, the Common Stock Partnerships will hold 82,828,026 shares of Common Stock, which will represent approximately 17.2% of the outstanding Common Stock and 15.7% 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. 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, 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. KKR Associates will own directly approximately 43 million of the 82.8 million shares owned by the Common Stock Partnerships, following the offerings. Such partnership is not subject to the termination provisions applicable to SSI Associates. In connection with the offerings, SSI Equity Associates will sell to the Underwriters SSI Warrants to purchase 3,298,576 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 5,990,831 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 19,008,533 shares of Common Stock (of which 12,258,791 shares will be attributable to limited partnership interests held by Safeway). The Company and the Selling Stockholders have agreed 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 arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, 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 Morgan Stanley & Co. Incorporated on behalf of the Underwriters. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. 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 23 26 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. 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 1,500,000,000 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 March 28, 1998, Safeway had outstanding 479,038,274 shares of Common Stock and no outstanding shares of preferred stock. All shares of Common Stock are fully paid and nonassessable. As of March 28, 1998, there were approximately 9,237 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." 24 27 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS GENERAL The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a holder who is not a United States person or entity (a "Non-U.S. Holder"). As used in this discussion, the term "Non-U.S. Holder" means any person or entity that is, for United States federal income tax purposes, a foreign corporation, a non-resident alien individual, a non-resident fiduciary of a foreign estate or trust, or a foreign partnership. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to United States federal tax as if they were United States citizens and residents. This discussion does not address all aspects of United States federal income and estate taxes or consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and local consequences that may be relevant to Non-U.S. Holders. Furthermore, this discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (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, 1999, however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) will be required to satisfy specified certification and other requirements, which will include filing a Form W-8 containing the Non-U.S. Holder's name, address and a certification that such Holder is eligible for the benefits of the treaty under its Limitations in Benefits Article. In addition, certain certification and disclosure requirements must be met to be exempt from withholding under the effectively connected income exemption discussed above. A Non-U.S. Holder of Common Stock who is eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate, timely claim for refund with the United States Internal Revenue Service (the "Service"). 25 28 GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to United States federal income tax on any gain recognized on a disposition of a share of Common Stock unless (i) subject to the exception discussed below, the Company is or has been a "United States real property holding corporation" (a "USRPHC") within the meaning of section 897(c)(2) of the Code at any time within the shorter of the five-year period preceding such disposition or such Non-U.S. Holder's holding period (the "Required Holding Period"), (ii) the gain is effectively connected with the conduct of a trade or business within the United States of the Non-U.S. Holder and, if a tax treaty applies, 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. 26 29 UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX The Company must report annually to the Service and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply regardless of whether withholding is required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty or other agreement with the tax authorities in that country. 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 under current regulations, or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business. The payment of the proceeds of a sale of shares of Common Stock to or through a United States office of a broker is subject to information reporting and possible backup withholding unless the owner certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holder's United States federal income tax liability, provided that the required information is furnished to the 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, 1999, 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. 27 30 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters named below have severally agreed to purchase, directly or through the exercise of SSI Warrants, and the Selling Stockholders have severally agreed to sell to them, and the International Underwriters named below have severally agreed to purchase, directly or through the exercise of SSI Warrants, and the Selling Stockholders have severally agreed to sell to them, the respective number of shares of the Company's Common Stock set forth opposite the names of such Underwriters below:
NUMBER NAME OF SHARES ---- --------- U.S. Underwriters Morgan Stanley & Co. Incorporated......................... Goldman, Sachs & Co. ..................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated........ Donaldson, Lufkin & Jenrette Securities Corporation....... ING Baring Furman Selz LLC................................ Lehman Brothers Inc. ..................................... J.P. Morgan Securities Inc................................ Smith Barney Inc. ........................................ Warburg Dillon Read LLC................................... --------- Subtotal.......................................... --------- International Underwriters Morgan Stanley & Co. International Limited................ Goldman Sachs International............................... Merrill Lynch International............................... Donaldson, Lufkin & Jenrette International................ ING Baring Furman Selz LLC................................ Lehman Brothers International (Europe).................... J.P. Morgan Securities Ltd. .............................. Smith Barney Inc. ........................................ UBS AG, acting through its division Warburg Dillon Read... --------- Subtotal.......................................... --------- Total............................................. =========
The U.S. Underwriters and the International Underwriters are collectively referred to as the "Underwriters." The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock (directly or through the purchase and exercise of SSI Warrants) offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. With respect to shares of Common Stock obtained upon the purchase and exercise of SSI Warrants, the Underwriters will remit the exercise price of the SSI Warrants to the Company. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions, (i) it is not purchasing any Shares for the account of anyone other than a United States or Canadian Person (as defined below) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions, (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus 28 31 relating to the Shares within the United States or Canada or to any United States or Canadian Person. With respect to ING Baring Furman Selz LLC and Smith Barney Inc., the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter shall apply only to shares of Common Stock purchased by it in its capacity as a U.S. Underwriter, (ii) made by it in its capacity as an International Underwriter shall apply only to shares of Common Stock purchased by it in its capacity as an International Underwriter and (iii) shall not restrict its ability to distribute any prospectus relating to the shares of Common Stock to any person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the Underwriters are referred to herein as the "Shares." Pursuant to the Agreement between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and the International Underwriters of any number of Shares as may be mutually agreed. The per share price and currency of any Shares so sold shall be the public offering price set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any Shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities law thereof and has represented that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirements to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that: (i) it has not offered or sold and, prior to the date six months after the closing date for the sale of the Shares to the International Underwriters, will not offer or sell any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the U.K. Regulations with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise lawfully be issued or passed on. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offerings of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. 29 32 The Selling Stockholders have granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 3,750,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock set forth next to the names of all U.S. Underwriters in the preceding table. In order to facilitate the offerings of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offerings, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Stock in the offerings, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The SSI Warrants being purchased by the several Underwriters from SSI Equity Associates will be purchased at a price per underlying share equal to the Price to Public less the exercise price of each such SSI Warrant and the underwriting discount per underlying share. The Underwriters will immediately exercise such SSI Warrants by paying the Company the aggregate exercise price of the SSI Warrants, and will include in the offering the 3,298,576 shares of Common Stock issuable as a result of such exercise. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company and the Selling Stockholders have agreed 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 arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, 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 Morgan Stanley & Co. Incorporated, on behalf of the Underwriters. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. 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. 30 33 EXPERTS The consolidated financial statements of the Company as of January 3, 1998 and December 28, 1996 and for each of the three fiscal years in the period ended January 3, 1998, included herein have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated by reference herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. INFORMATION INCORPORATED BY REFERENCE The 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 January 3, 1998, as amended by a Form 10-K/A filed April 10, 1998 (the "Form 10-K"); (2) the portions of the Company's 1997 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 27, 1998 that have been incorporated by reference into the Form 10-K; (4) the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 28, 1998; (5) the Company's Current Report on Form 8-K filed with the Commission on February 25, 1998; (6) 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; and (7) 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 925/467-3790). 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. 31 34 LOGO 35 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued July 7, 1998 25,000,000 Shares Safeway Inc. COMMON STOCK LOGO ------------------------ Of the 25,000,000 Shares of Common Stock offered, 5,000,000 Shares are being offered initially outside the United States and Canada by the International Underwriters and 20,000,000 Shares are being offered initially in the United States and Canada by the U.S. Underwriters. See "Underwriters." All of the Shares of Common Stock offered are being sold by the Selling Stockholders as described herein under "Principal and Selling Stockholders" and include 21,701,424 presently outstanding Shares and 3,298,576 Shares to be issued concurrently with the consummation of these offerings upon the exercise of outstanding warrants. None of the proceeds from the sale of the Shares will be received by the Company other than $1,649,288 (assuming no exercise of the U.S. Underwriters' over-allotment option) representing the exercise price of the warrants. The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SWY." On July 6, 1998, the reported last sale price of the Common Stock on the New York Stock Exchange Composite Tape was $42 3/4. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) STOCKHOLDERS(2) -------- -------------- ------------------- Per Share........................ $ $ $ Total(3)......................... $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriters." (2) Includes $1,649,288 to be paid to the Company representing the exercise price of warrants for 3,298,576 Shares at $0.50 per share. Expenses of the offerings, estimated at $ , will be paid by the Company. (3) The Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 3,750,000 additional Shares at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively, and the total amount to be paid to the Company representing the exercise price of warrants will be $ . See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein, and subject to approval of certain legal matters by Brown & Wood LLP, counsel for the Underwriters. It is expected that the delivery of the Shares will be made on or about July , 1998, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE International ING BARINGS LEHMAN BROTHERS J.P. MORGAN SECURITIES LTD. SALOMON SMITH BARNEY INTERNATIONAL WARBURG DILLON READ July , 1998 36 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...................... $349,597 *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.............................................. 75,403 -------- *Total............................................ $800,000 ========
- --------------- * 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, 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 II-1 37 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. 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.
II-2 38 23.1 Consent of Deloitte & Touche LLP. *23.2 Consent of Latham & Watkins (included in Exhibit 5). *24 Power of Attorney.
- --------------- * 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 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-3 39 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 July 8, 1998. 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 Executive Officer July 8, 1998 - ----------------------------------------------------- and Director (Principal Executive Steven A. Burd Officer) *DAVID WEED Executive Vice President, Chief July 8, 1998 - ----------------------------------------------------- Financial Officer (Principal David Weed Financial Officer and Principal Accounting Officer) *PETER A. MAGOWAN Director July 8, 1998 - ----------------------------------------------------- Peter A. Magowan *WILLIAM Y. TAUSCHER Director July 8, 1998 - ----------------------------------------------------- William Y. Tauscher *JAMES H. GREENE. JR Director July 8, 1998 - ----------------------------------------------------- James H. Greene, Jr. *PAUL HAZEN Director July 8, 1998 - ----------------------------------------------------- Paul Hazen
II-4 40
SIGNATURE TITLE DATE --------- ----- ---- *HENRY R. KRAVIS Director July 8, 1998 - ----------------------------------------------------- Henry R. Kravis *ROBERT I. MACDONNELL Director July 8, 1998 - ----------------------------------------------------- Robert I. MacDonnell *GEORGE R. ROBERTS Director July 8, 1998 - ----------------------------------------------------- George R. Roberts *By: /s/ MICHAEL C. ROSS July 8, 1998 ------------------------------------------------ Michael C. Ross as attorney-in-fact
II-5 41 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 Latham & Watkins (included in Exhibit 5)......... *24 Power of Attorney...........................................
- --------------- * Previously filed. EX-1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1 25,000,000 Shares SAFEWAY INC. Common Stock, Par Value $0.01 Per Share UNDERWRITING AGREEMENT July -, 1998 2 July -, 1998 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation ING Baring Furman Selz LLC Lehman Brothers Inc. J.P. Morgan Securities Inc. Smith Barney Inc. Warburg Dillon Read LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Merrill Lynch International Donaldson, Lufkin & Jenrette International ING Baring Furman Selz LLC Lehman Brothers International (Europe) J.P. Morgan Securities Ltd. Smith Barney Inc. UBS AG, acting through its division Warburg Dillon Read c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: Certain stockholders and warrantholders of Safeway Inc., a Delaware corporation (the "Company"), named in Schedule I hereto (the "Selling Stockholders") severally propose to sell to the several Underwriters (as defined below) 21,701,424 shares of the Common Stock, par value $0.01 per share, of the Company (the "Firm Shares") and warrants (the "Firm Warrants") for the purchase of an aggregate of 3,298,576 shares of Common Stock, par value $0.01 per share, of the Company (the "Firm Warrant Shares"). It is understood and agreed to by all parties that, subject to the conditions hereinafter stated, 3 17,361,139 Firm Shares (the "U.S. Firm Shares") and Firm Warrants (the "U.S. Firm Warrants") to purchase 2,638,861 Firm Warrant Shares (the "U.S. Firm Warrant Shares") will be sold to the several U.S. Underwriters named in Schedule II hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Shares and U.S. Firm Warrant Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and 4,340,285 Firm Shares (the "International Shares") and Firm Warrants (the "International Warrants") to purchase 659,715 Firm Warrant Shares (the "International Warrant Shares") will be sold to the several International Underwriters named in Schedule III hereto (the "International Underwriters") in connection with the offering and sale of such International Shares and International Warrant Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, ING Baring Furman Selz LLC, Lehman Brothers Inc., J.P. Morgan Securities Inc., Smith Barney Inc. and Warburg Dillon Read LLC shall act as representatives (the "U.S. Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited, Goldman Sachs International, Merrill Lynch International, Donaldson, Lufkin & Jenrette International, ING Baring Furman Selz LLC, Lehman Brothers International (Europe), J.P. Morgan Securities Ltd., Smith Barney Inc. and UBS AG, acting through its division Warburg Dillon Read, shall act as representatives (the "International Representatives") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter referred to as the Underwriters. The Selling Stockholders also severally propose to sell to the several U.S. Underwriters an aggregate of not more than an additional 3,255,214 shares of Common Stock, par value $0.01 per share, of the Company (the "Additional Shares") and warrants (the "Additional Warrants") for the purchase of an aggregate of not more than an additional 494,786 shares of Common Stock, par value $0.01 per share, of the Company (the "Additional Warrant Shares"), each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in Schedule I hereto, if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such Additional Shares and such Additional Warrants granted to the U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares, the Firm Warrants and the Additional Warrants are hereinafter collectively referred to as the Warrants and the Firm Warrant Shares and the Additional Warrant Shares are hereinafter collectively referred to as the Warrant Shares. The Shares and the Warrant Shares are hereinafter collectively referred to as the Securities. The shares of Common Stock, par value $0.01 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Securities. The registration statement contains two forms of prospectuses to be used in connection with the offering and sale of the Securities: the U.S. prospectus, to be used in connection with the offering and sale of Securities in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Securities outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Registration Statement." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462 2 4 Registration Statement"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. The U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of the Securities are hereinafter collectively referred to as the Prospectus. All references herein to the Registration Statement and the Prospectus include the documents incorporated therein by reference. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) Each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 1(b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and applicable rules and regulations of the Commission thereunder; and no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission. (d) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (e) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to 3 5 own its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (f) Each subsidiary, if any, of the Company which is a "significant subsidiary" as defined in Rule 405 of Regulation C of the Securities Act has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (g) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement (including, without limitation, the purchase and exercise by the Underwriters of the Warrants) will not result in any violation of the Restated Certificate of Incorporation or the By-Laws of the Company or any agreement or other instrument (including, without limitation, the Warrant Purchase Agreement dated as of November 28, 1986 between the Company and SSI Equity Associates, L.P. (the "Warrant Purchase Agreement")) binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any statute or any order, rule or regulation of any governmental body, agency or court having jurisdiction over the Company or any subsidiaries, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency having jurisdiction over the Company is required for the performance by the Company of its obligations under this Agreement, except such as may be required under the Act and the rules and regulations thereunder, and the Exchange Act and the rules and regulations thereunder, and the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities. (h) The accountants who have audited certain financial statements included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the rules and regulations thereunder. (i) The financial statements (together with the related notes thereto) included in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of and at the dates indicated and the results of their operations for the periods specified, except as otherwise disclosed therein; and except as otherwise stated therein or in the Registration Statement and the Prospectus, said financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis. (j) This Agreement has been duly authorized, executed and delivered by the Company. (k) The Warrant Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement and the Warrants, will be validly issued, fully paid and non-assessable, and the issuance of such shares will not be subject to any preemptive rights. 4 6 (l) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (m) The shares of Common Stock (including the Shares to be sold by the Selling Stockholders hereunder) and the Warrants have been duly authorized and validly issued and are fully paid and non-assessable; none of such Shares or Warrants, when delivered to the Underwriters, will be subject to any preemptive rights; the Shares, and Warrant Shares conform as 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. (n) 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. (o) Upon the Underwriters' purchase of the Warrants and payment to the Company of the Warrant Exercise Price (as defined herein), all of the requirements (whether under the Warrant Purchase Agreement or otherwise) with respect to the Underwriters' exercise of the Warrants for Warrant Shares will be satisfied, and the Company will be unconditionally obligated to immediately issue duly and validly authorized and issued, fully paid and nonassessable shares of Common Stock in respect thereof. (p) The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (q) 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. (r) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending or, to the Company's knowledge, threatened, to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly, represents and warrants to and agrees with each of the Underwriters and the Company that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder. (b) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement will not result in any violation of any material agreement or other instrument binding upon such Selling Stockholder or any statute or any order, rule or regulation of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, 5 7 any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement, except the registration under the Securities Act of the Securities, and except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities. (c) Such Selling Stockholder has, and on the Closing Date and any Option Closing Date (as defined in Section 5) will have, valid title to all of the Shares or Warrants which may be sold by such Selling Stockholder under this Agreement and the legal right and power, and all authorization and approval required by law or other instruments binding upon such Selling Stockholder, to enter into this Agreement and to sell, transfer and deliver the Shares or Warrants to be sold by such Selling Stockholder. (d) Upon delivery of the Shares or Warrants to be sold by such Selling Stockholder and payment therefor pursuant to this Agreement, the Underwriters will hold such Shares or Warrants (including Warrant Shares issued upon exercise of the Warrants after payment of the exercise price therefor) free and clear of any security interests, claims, liens, equities and other encumbrances assuming that such Underwriters have purchased such Shares, Warrants and Warrant Shares in good faith and without notice of any security interest, claims, liens, equities, encumbrances or any other adverse claims within the meaning of the Uniform Commercial Code. (e) The information (other than the percent of shares owned, as to which such Selling Stockholder makes no representation) pertaining to such Selling Stockholder under the caption "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 1998 Proxy Statement fairly presents the information required to be set forth therein and contains no material misstatement or omission. Any certificate signed by any officer of the Company or by or on behalf of any Selling Stockholder and delivered to the U.S. Representatives, the International Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or such Selling Stockholder, as the case may be, to each Underwriter as to the matters covered thereby. 3. AGREEMENTS TO SELL AND PURCHASE. Each Selling Stockholder, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Selling Stockholder (i) at $- a Share (the "Share Purchase Price") and (ii) at $- a Warrant (the "Warrant Purchase Price") (such Warrant Purchase Price representing the Share Purchase Price less the exercise price of $.50 per Warrant (the "Warrant Exercise Price") for each Warrant Share), the number of Firm Shares or Firm Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as you may determine), that bears the same proportion to the number of Firm Shares or Firm Warrants, as the case may be, to be sold by such Selling Stockholder as the number of Firm Shares and Firm Warrants, respectively, set forth in Schedules II or III hereto opposite the name of such Underwriter bears to the total number of Firm Shares and Firm Warrants, respectively. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Selling Stockholders agree to sell to the U.S. Underwriters the Additional Shares and the Additional Warrants, as the case may be, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to 3,255,214 Additional Shares at the Share Purchase Price and up to 6 8 494,786 Additional Warrants at the Warrant Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Selling Stockholders in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares and Additional Warrants to be purchased by the U.S. Underwriters and the date on which such Additional Shares and Additional Warrants are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares and Additional Warrants may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares and Firm Warrant Shares. If any Additional Shares and Additional Warrants are to be purchased, each Selling Stockholder agrees, severally and not jointly, to sell the number of Additional Shares or Additional Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares or Additional Warrants to be sold as the number of Additional Shares or Additional Warrants set forth in Schedule I opposite the names of such Selling Stockholders bears to the total number of Additional Shares and Additional Warrants, and each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares or Additional Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares and Additional Warrants, as the case may be, to be purchased as the number of U.S. Firm Shares and U.S. Firm Warrants, respectively, set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of U.S. Firm Shares and U.S. Firm Warrants, respectively. At the Closing Date and the Option Closing Date, simultaneous with (i) the purchase by the Underwriters of Firm Warrants or the purchase by the U.S. Underwriters of Additional Warrants and (ii) the payment to the Company of the Warrant Exercise Price, the Underwriters and U.S. Underwriters, respectively, will be deemed to have exercised such Firm Warrants or Additional Warrants and the Company will immediately issue to the Underwriters and U.S. Underwriters, respectively, at the Closing Date and Option Closing Date, the related Firm Warrant Shares and Additional Warrant Shares, as the case may be. Each of the Company and the Selling Stockholders of the Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during a period of 90 days after the date of the Prospectus, (i) offer, [PLEDGE,] 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[, LEND,] 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 arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities or Warrants to be sold hereunder, (B) any shares of Common Stock issued by the Company pursuant to stock option plans in effect on the date of the Prospectus, (C) option grants under stock option plans in effect on the date of the Prospectus, (D) any agreement of the Company in connection with an acquisition of assets or properties or any capital stock issuable pursuant to the terms of such an agreement, (E) capital stock issuable upon the exercise of warrants outstanding on the date of the Prospectus, or (F) the cancellation of warrants. In addition, each Selling Stockholder agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. 7 9 4. TERMS OF PUBLIC OFFERING. The Company and the Selling Stockholders are advised by you that the Underwriters propose to make a public offering of their respective portions of the Securities as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company and the Selling Stockholders are further advised by you that the Securities are to be offered to the public initially at $- a share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of $- a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $- a share, to any Underwriter or to certain other dealers. 5. PAYMENT AND DELIVERY. Payment for the Firm Shares and Firm Warrants to be sold by each Selling Stockholder shall be made in Federal or other immediately available funds to an account designated by the Selling Stockholders against delivery of such Firm Shares and Firm Warrants for the respective accounts of the several Underwriters at 7 a.m., California time on July -, 1998, or at such other time on the same or such other date, not later than -, 1998, as shall be designated in writing by you. Payment of the Warrant Exercise Price for Firm Warrant Shares shall be made in Federal or other immediately available funds to an account designated by the Company on the same such date. The time and date of such payment are hereinafter referred to as the "Closing Date." Payment for any Additional Shares and Additional Warrants to be sold by each Selling Stockholder shall be made in Federal or other immediately available funds to an account designated by the Selling Stockholders against delivery of such Additional Shares and Additional Warrants for the respective accounts of the several Underwriters at 7 a.m., California time on the date specified in the notice described in Section 3 or on such other date, in any event not later than - -, 1998, as shall be designated in writing by you. Payment of the Warrant Exercise Price for Additional Warrant Shares shall be made in Federal or other immediately available funds to an account designated by the Company on the same such date. The time and date of such payment are hereinafter referred to as the "Option Closing Date." Certificates for the Firm Shares, Firm Warrant Shares, Additional Shares and Additional Warrant Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares, Firm Warrant Shares, Additional Shares and Additional Warrant Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Warrants and Securities to the Underwriters duly paid (subject to the provisions of Section 7 hereof), against payment of the Purchase Price, Warrant Purchase Price and Warrant Exercise Price therefor. 6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The several obligations of the Selling Stockholders to sell the Shares and Warrants to the Underwriters and the several obligations of the Underwriters, to purchase and pay for the Shares and Warrants on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: 8 10 (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in clause (a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date (the officer signing and delivering such certificate may rely upon his or her knowledge as to proceedings threatened). (c) Latham & Watkins, counsel for the Company, shall have furnished to you their written opinion dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) the Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; (ii) the Company has authorized capital stock as set forth in the Prospectus, and the Common Stock and Warrants conform to the description thereof contained in the Prospectus; (iii) the Shares to be sold by the Selling Stockholders pursuant to the Underwriting Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the Warrant Shares to be issued and sold by the Company pursuant to the terms of the Warrants have been duly authorized, and when issued to and paid for by you and the other Underwriters in accordance with the terms of the Warrants will be validly issued, fully paid and non-assessable; (iv) this Agreement has been duly authorized, executed and delivered by the Company; (v) the Warrants have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their terms; (vi) the issue and sale of the Warrant Shares being delivered at the Closing Date by the Company and the conformance by the Company with the provisions of this 9 11 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; (vii) no consent, approval, authorization or order of, or filing with, any federal, New York or California court or governmental agency or body is required for the issue of the Warrant Shares or the sale of the Securities except such as have been obtained under the Securities Act and such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters as to which such counsel need not express an opinion; (viii) each document incorporated by reference in the Prospectus [or any further amendment or supplement thereto made by the Company prior to the Closing Date] (other than the financial statements, schedules and other financial data included or incorporated by reference therein, as to which such counsel need express no opinion), when it became effective or was filed with the Commission, as the case may be, appeared on its face to comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. In passing upon the compliance as to form of each of such documents, such counsel may assume that the statements made and incorporated by reference therein are correct and complete; (ix) the statements in the Prospectus under the captions "Certain United States Tax Consequences to Non-United States Holders" and "Description of Capital Stock," in each case insofar as such statements constitute summaries of legal matters, are accurate in all material respects; (x) the Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xi) the Registration Statement and Prospectus (except for financial statements, schedules and other financial data included or incorporated by reference therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements for registration statements on Form S-3 under the Securities Act and the applicable rules and regulations of the Commission thereunder. In passing upon the compliance as to form of the Registration Statement and the Prospectus, such counsel may assume that the statements made and incorporated by reference therein are correct and complete; and (xii) The Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the 10 12 Registration Statement has been issued under the Securities Act and no proceedings therefor have been initiated by the Commission; and the Prospectus has been filed in accordance with Rule 424(b) and 430A under the Securities Act. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and your representatives, at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus and such counsel has not made any independent check or verification thereof (except as set forth in paragraph (ix) above), during the course of such participation (relying, in connection with such counsel's determination as to materiality, to a large extent upon statements as to matters of fact of officers and other representatives of the Company), no facts came to such 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 the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no belief with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus or incorporated by reference therein. In rendering such opinion, such counsel may state that they express an opinion only as to federal securities laws, New York and California law and the General Corporation Law of Delaware. (d) Michael C. Ross, Senior Vice President, General Counsel and Secretary of the Company, shall have furnished to you his written opinion, dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which its ownership or lease of substantial properties or the conduct of its business require such qualification, and in which the failure to be so qualified and in good standing would have a material adverse effect upon the Company and its subsidiaries considered as a single enterprise; (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 11 13 properties or the conduct of its business require such qualification, and in which failure to be so qualified and in good standing would have a material adverse effect upon the Company and its subsidiaries considered as a single enterprise; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued and is fully paid and nonassessable, and the capital stock owned by the Company in such subsidiary is owned by the Company free and clear of any mortgage, pledge, lien, encumbrance, claim or equity; (iii) to the best of such counsel's knowledge there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject, required to be described in the Prospectus, which are not described as required; (iv) the issue and sale of the Warrant Shares being delivered at the Closing Date by the Company and the performance by the Company of all its obligations under this Agreement will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument relating to indebtedness in excess of $25 million to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; and (v) the issued and outstanding shares of capital stock of the Company and warrants to purchase capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. (e) Latham & Watkins, counsel for the Selling Stockholders, shall have furnished to you their written opinion, dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders; (ii) each Selling Stockholder has full right, power and authority to enter into the Underwriting Agreement; the sale of the Shares or the Warrants, as applicable, by each Selling Stockholder will not result in the violation by such Selling Stockholder of its partnership agreement or any federal or New York statute, rule or regulation known to such counsel to be applicable to such Selling Stockholder (other than federal securities laws which are specifically addressed elsewhere in such counsel's opinion, or state securities laws, as to which such counsel need not express an opinion); no consent, approval, authorization or order of, or filing with, any federal or New York governmental body or agency is required for the sale of the Shares or the Warrants, as applicable, except such as have been obtained under the Securities Act and except such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters, as to which such counsel need not express an opinion; and (iii) upon delivery of the Shares and Warrants and payment therefor pursuant hereto, the Underwriters will acquire such Shares and Warrants (including the Warrant Shares issued upon exercise of the Warrants after payment of the exercise price therefor) 12 14 free and clear of 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 this agreement without notice of any such adverse claim within the meaning of the Uniform Commercial Code as in effect in the State of New York. (f) The Underwriters shall have received on the Closing Date an opinion of Brown & Wood LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in the first clause of subparagraph (i), the second clause of subparagraph (iii), subparagraph (iv) and subparagraph (xi) of paragraph (c) above and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. With respect to subparagraph (xi) of paragraph (c) above, Brown & Wood may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto (other than the documents incorporated by reference) and review and discussion of the contents thereof, but are without independent check or verification, except as specified. With respect to paragraph (e) above, Latham & Watkins may rely upon an opinion or opinions of counsel for any Selling Stockholder and, to the extent such counsel deems appropriate, upon the representations of each Selling Stockholder contained herein and in other documents and instruments, provided that (A) each such counsel for the Selling Stockholders is satisfactory to your counsel, (B) a copy of each opinion so relied upon is delivered to you and is in form and substance satisfactory to your counsel, (C) copies of such other documents and instruments, if any, shall be delivered to you and shall be in form and substance satisfactory to your counsel and (D) Latham & Watkins shall state in their opinion that they are justified in relying on each such other opinion. The opinions of Latham & Watkins described in paragraphs (c) and (e) above shall be rendered to the Underwriters at the request of the Company or the Selling Stockholders, as the case may be, and shall so state therein. (g) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed on behalf of each of the Selling Stockholders, to the effect that the representations and warranties of such Selling Stockholders contained herein are true and correct on and as of the Closing Date and that such Selling Stockholders have complied with all of the agreements and satisfied all of the conditions on their part to be performed or satisfied hereunder on or before the Closing Date. (h) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (i) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. 13 15 (j) At the date of this Agreement, the Company and the Selling Stockholders shall have furnished for review by the U.S. Representatives and the International Representatives copies of such further information, certificates and documents as they may reasonably request. (k) Simultaneous with the purchase of the Firm Warrants and any Additional Warrants and the payment of the Warrant Exercise Price by the Underwriters, the Company will issue Warrant Shares. (l) If the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 p.m., Washington, D.C. time, on the date of this Agreement. The several obligations of the U.S. Underwriters to purchase Additional Shares and Additional Warrants hereunder are subject to the delivery to the U.S. Underwriters on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and Additional Warrant Shares and other matters related thereto. 7. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, seven signed copies of the Registration Statement (including exhibits thereto and documents incorporated by reference) and to each Underwriter a copy of the Registration Statement (without exhibits thereto but including documents incorporated by reference) and to furnish to you in New York City without charge prior to 5:00 p.m. local time on the business day next succeeding the date of this Agreement, and during the period mentioned in paragraph (c) below, as many copies of the Prospectus, any documents incorporated therein by reference, and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. The terms "supplement" and "amendment" or "amend" as used in this Agreement shall include all documents subsequently filed by the Company with the Commission pursuant to the Exchange Act that are deemed to be incorporated be reference in the Prospectus. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Securities as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names 14 16 and addresses you will furnish to the Company) to which Securities may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earnings statement covering the twelve-month period ending September -, 1999 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Securities under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) the cost of printing or producing any Blue Sky memorandum in connection with the offer and sale of the Securities under state securities laws and all expenses in connection with the qualification of the Securities for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky memorandum, (iii) all filing fees and reasonable disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering by the National Association of Securities Dealers, Inc., (iv) the cost of printing certificates representing the Securities, (v) the costs and charges of any transfer agent, registrar or depositary, (vi) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expense of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered by the Company in connection with the road show, (vii) all other costs and expenses of the Company in connection with the performance of its obligations hereunder for which provision is not otherwise made in this Section, and (viii) any other costs and expenses of others in connection with the performance of the Company's obligations hereunder which have been previously approved by the Company. Morgan Stanley & Co. Incorporated agrees to pay New York State stock transfer taxes incurred in connection with the sale of the Securities pursuant hereto, if any, and the Selling Stockholders agree to reimburse Morgan Stanley & Co. Incorporated for any associated carrying costs if such tax payment is not rebated on the day of payment and for any portion of such tax payment not rebated. It is understood, however, that except as provided in this Section, Section 8 entitled "Indemnity and Contribution", and the last paragraph of Section 10 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Securities by them, the costs 15 17 and expenses of the Underwriters relating to investor presentations on any "road shows" undertaken in connection with the marketing of the Shares and any advertising expenses connected with any offers they may make. (g) Upon payment of the purchase price for any or all of the Warrants to the Selling Stockholders, to deem any and all requirements for the transfer of such Warrants to be satisfied. (h) Simultaneous with the purchase from the Selling Stockholders of, and payment for, the Firm Warrants and any Additional Warrants and the payment to the Company of the Warrant Exercise Price by the Underwriters, the Company will issue the Firm Warrant Shares and any Additional Warrant Shares, respectively, all as contemplated by this Agreement. 8. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Underwriter or any such controlling person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. The Company reaffirms its indemnification of the Selling Stockholders pursuant to that certain Registration Rights Agreement entered into by the Company, KKR Associates, SSI Equity Associates and certain other parties named therein, dated as of November 25, 1986 (the "Registration Rights Agreement"). (b) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto; provided, however, that the foregoing indemnity agreement with respect to any preliminary 16 18 prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as to amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. The Selling Stockholders reaffirm their indemnification of the Company pursuant to the Registration Rights Agreement and the Subscription Agreement. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity from the Company to such Underwriter in paragraph 8(a) above, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to paragraph (a), (b) or (c) of this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Stockholders and all persons, if any, who control any Selling Stockholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Stockholders and such controlling persons of Selling Stockholders, such firm shall be designated in writing by the Selling Stockholders. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from 17 19 and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) To the extent the indemnification provided for in paragraph (a) , (b) or (c) of this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Securities received by the Selling Stockholders and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table (including the footnotes thereto) on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Shares and Warrants they have purchased hereunder, and not joint. (f) The Company, the Selling Stockholders and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) of this Section 8. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue 18 20 or alleged untrue statement or omission or alleged omission and no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the proceeds received by such Selling Stockholder from the Shares or Warrant Shares sold by it pursuant to this Agreement exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Securities. 9. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company and the Selling Stockholders, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York or California shall have been declared by either Federal or New York State or California authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares or Warrants that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares and Warrants which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares and Warrants to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the aggregate number of Firm Shares and Firm Warrants set forth opposite their respective names in Schedule II or III, as the case may be, bears to the aggregate number of Firm Shares and Firm Warrants set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares and Warrants which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the aggregate number of Shares and Warrants that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of one-ninth of such aggregate number of Shares and Warrants without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares or Firm 19 21 Warrants and the aggregate number of Firm Shares and Firm Warrants with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares and Firm Warrants to be purchased, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares and Firm Warrants are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. In any such case either you or the Company or the Selling Stockholders shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any U.S. Underwriter or Underwriters shall fail or refuse to purchase Additional Shares or Additional Warrants and the aggregate number of Additional Shares and Additional Warrants with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares and Additional Warrants to be purchased, the non-defaulting U.S. Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares and Additional Warrants or (ii) purchase not less than the number of Additional Shares and Additional Warrants that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company or any Selling Stockholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or any Selling Stockholder shall be unable to perform its obligations under this Agreement, the Company and the Selling Stockholders will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder; provided, however, that no such reimbursement shall be required with respect to a termination of this Agreement by the Underwriters pursuant to Section 9 or Section 10. 11. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 12. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 20 22 13. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, SAFEWAY INC. By:_____________________________________ Name: Title: 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 SSI Equity Associates, L.P. By SSI Partners, L.P., the General Partner By:_____________________________________ Name: George R. Roberts Title: General Partner 21 23 Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ING BARING FURMAN SELZ LLC LEHMAN BROTHERS INC. J.P. MORGAN SECURITIES INC. SMITH BARNEY INC. WARBURG DILLON READ LLC Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. Incorporated By:_____________________________________ Name: Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE INTERNATIONAL ING BARING FURMAN SELZ LLC LEHMAN BROTHERS INTERNATIONAL (EUROPE) J.P. MORGAN SECURITIES LTD. SMITH BARNEY INC. UBS AG, ACTING THROUGH ITS DIVISION WARBURG DILLON READ Acting severally on behalf of themselves and the several International Underwriters named in Schedule III hereto. By: Morgan Stanley & Co. International Limited By:_____________________________________ Name: Title: 22 24 SCHEDULE I
TOTAL NUMBER OF ADDITIONAL WARRANTS TOTAL NUMBER OF TOTAL NUMBER OF (EXPRESSED AS FIRM WARRANTS ADDITIONAL ADDITIONAL TO BE SOLD SHARES TO BE WARRANT SHARES) TOTAL NUMBER OF (EXPRESSED AS SOLD IF TO BE SOLD IF FIRM SHARES TO FIRM WARRANT MAXIMUM MAXIMUM SELLING STOCKHOLDERS BE SOLD SHARES) OPTION EXERCISED OPTION EXERCISED - -------------------- ------- ------- ---------------- ---------------- KKR Partners II, L.P. SSI Associates, L.P. SSI Equity Associates, L.P. 3,298,576 494,786 ============ ========= =========== ======= TOTAL 21,701,424 3,298,576 3,255,214 494,786
23 25 SCHEDULE II
TOTAL NUMBER OF ADDITIONAL WARRANTS TO TOTAL BE PURCHASED TOTAL NUMBER OF EXPRESSED AS NUMBER OF ADDITIONAL ADDITIONAL TOTAL ADDITIONAL SHARES TO WARRANT NUMBER OF WARRANTS TO BE PURCHASED SHARES) IF U.S. FIRM U.S. FIRM IF MAXIMUM MAXIMUM SHARES TO BE WARRANT OPTION OPTION U.S. UNDERWRITERS PURCHASED SHARES) EXERCISED EXERCISED - ----------------- --------- ------- --------- --------- MORGAN STANLEY & CO. INCORPORATED GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ING BARING FURMAN SELZ LLC LEHMAN BROTHERS INC. J.P. MORGAN SECURITIES INC. SMITH BARNEY INC. WARBURG DILLON READ LLC ========== ========= ========= ======= TOTAL 17,361,139 2,638,861 3,255,214 494,786
24 26 SCHEDULE III
TOTAL NUMBER OF INTERNATIONAL WARRANTS TO BE PURCHASED TOTAL NUMBER OF (EXPRESSED AS INTERNATIONAL SHARES INTERNATIONAL INTERNATIONAL UNDERWRITERS TO BE PURCHASED WARRANT SHARES) - -------------------------- --------------- --------------- MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS & INTERNATIONAL MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE INTERNATIONAL ING BARING FURMAN SELZ LLC LEHMAN BROTHERS INTERNATIONAL (EUROPE) J.P. MORGAN SECURITIES LTD. SMITH BARNEY INC. UBS AG, ACTING THROUGH ITS DIVISION WARBURG DILLON READ ========= ======= TOTAL 4,340,285 659,715
25 27 EXHIBIT A [FORM OF LOCK-UP CONTRACT] July -, 1998 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation ING Baring Furman Selz LLC Lehman Brothers Inc. J.P. Morgan Securities Inc. Smith Barney Inc. Warburg Dillon Read LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Merrill Lynch International Donaldson, Lufkin & Jenrette International ING Baring Furman Selz LLC Lehman Brothers International (Europe) J.P. Morgan Securities Ltd. Smith Barney Inc. UBS AG, acting through its division Warburg Dillon Read c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs: The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement with Safeway Inc., a Delaware corporation (the "Company") and Selling Stockholders named in Schedule I thereto providing for the public offering (the "Public Offering") by the several Underwriters, including Morgan Stanley (the "Underwriters"), of 28 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 Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during a period of 90 days after the date of the prospectus first used to confirm sales of Shares (the "Prospectus"), offer, [pledge,] 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[, lend] 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 or the SSI Warrants to be canceled, as described in the Prospectus. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, ________________________________________ (Name) ________________________________________ (Address) 2 EX-23.1 3 CONSENT OF DELOITTE & TOUCHE 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 1 to Registration Statement No. 333-58597 of Safeway Inc. of our report dated February 27, 1998 incorporated by reference in the Annual Report on Form 10-K of Safeway Inc. for the year ended January 3, 1998, and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. DELOITTE & TOUCHE LLP San Francisco, California July 8, 1998 -----END PRIVACY-ENHANCED MESSAGE-----