-----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, WFK10dzNTTJwKCj/We3WJa5IwBPolPQ/jo0aKJrH2KKef0wXTXZm3tmtc/2TrjFO gf5sx5qvwong4FAxgsL1ww== 0000950149-99-000093.txt : 19990202 0000950149-99-000093.hdr.sgml : 19990202 ACCESSION NUMBER: 0000950149-99-000093 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990201 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: 333-71231 FILM NUMBER: 99518142 BUSINESS ADDRESS: STREET 1: 5918 STONERIDGE MALL RD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104673000 MAIL ADDRESS: STREET 1: 5918 STONERIDGE MALL ROAD CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: SAFEWAY STORES INC DATE OF NAME CHANGE: 19900226 S-3/A 1 PRE-EFFECTIVE AMENDMENT NO.1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 1999 REGISTRATION NO. 333-71231 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SAFEWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE SAFEWAY INC. 94-3019135 (STATE OR OTHER JURISDICTION 5918 STONERIDGE MALL ROAD (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) PLEASANTON, CALIFORNIA 94588 IDENTIFICATION NUMBER) (925) 467-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MICHAEL C. ROSS, ESQ. SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL SAFEWAY INC. 5918 STONERIDGE MALL ROAD PLEASANTON, CALIFORNIA 94588 (925) 467-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: SCOTT R. HABER, ESQ. PAUL C. PRINGLE, ESQ. SCOTT K. MILSTEN, ESQ. BROWN & WOOD LLP LATHAM & WATKINS 555 CALIFORNIA STREET 505 MONTGOMERY STREET, SUITE 1900 SAN FRANCISCO, CALIFORNIA 94104 SAN FRANCISCO, CALIFORNIA 94111 (415) 772-1200 (415) 391-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued February 1, 1999 SAFEWAY LOGO 19,750,000 Shares Safeway Inc. COMMON STOCK ------------------------ THE SELLING STOCKHOLDERS ARE OFFERING ALL OF THE SHARES, WHICH INCLUDE 19,650,304 PRESENTLY OUTSTANDING SHARES AND 99,696 SHARES WHICH WILL BE ISSUED UPON THE EXERCISE OF OUTSTANDING WARRANTS. ------------------------ SAFEWAY INC.'S COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "SWY." ON JANUARY 29, 1999, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $56 1/8 PER SHARE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND SELLING PUBLIC COMMISSIONS STOCKHOLDERS -------- ------------- ------------ Per Share.............................................. $ $ $ Total.................................................. $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. None of the proceeds from the sale of the shares will be received by Safeway other than $49,848 representing the exercise price of the warrants. One of the selling stockholders has granted the underwriters the right to purchase up to an additional 2,000,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on February , 1999. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE ING BARING FURMAN SELZ LLC LEHMAN BROTHERS J.P. MORGAN & CO. SALOMON SMITH BARNEY WARBURG DILLON READ LLC February , 1999 3 [Map of Safeway Operating Territories] 2 4 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. In this prospectus, "we," "us" and "our" refer to Safeway Inc. and its subsidiaries, unless the context otherwise requires. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 4 Where You Can Find More Information......................... 7 Disclosure Regarding Forward-Looking Statements............. 7 Price Range of Common Stock................................. 8 Dividend Policy............................................. 8 Selected Financial Data..................................... 9 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 11 Business.................................................... 16 The Selling Stockholders.................................... 21 Description of Capital Stock and Warrants................... 23 Certain United States Tax Consequences to Non-United States Holders................................................... 24 Underwriters................................................ 27 Legal Matters............................................... 28 Experts..................................................... 29 Information Incorporated by Reference....................... 29
3 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and our financial statements, the notes thereto and the other financial data contained elsewhere in this prospectus or incorporated by reference herein. Unless we indicate otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. THE COMPANY We are one of the largest food and drug retailers in North America based on sales, with 1,497 stores as of January 2, 1999. Our U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona, Illinois and the Mid-Atlantic region. Our Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of our retail operations, we have an extensive network of distribution, manufacturing and food processing facilities. In April 1997, we completed a merger with The Vons Companies, Inc. pursuant to which we issued 83.2 million shares of our common stock for all of the shares of Vons common stock that we did not already own. In connection with the merger, we repurchased 64.0 million shares of our common stock for an aggregate purchase price of $1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V. which, as of January 2, 1999, operated 77 food and general merchandise stores in western Mexico. Dominick's Acquisition. In November 1998, we completed our acquisition of all of the outstanding shares of Dominick's Supermarkets Inc. for $49 cash per share, or a total of approximately $1.2 billion. We funded the acquisition of Dominick's, including the repayment of approximately $560 million of debt and lease obligations, with a combination of bank borrowings and the issuance of commercial paper. Dominick's is now our wholly owned subsidiary through which we operate 114 stores in the greater Chicago metropolitan area, two distribution facilities and a dairy processing plant. Dominick's had sales of $2.6 billion in fiscal 1997 and sales of $1.8 billion through its third quarter of 1998. Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive agreement to acquire all of the outstanding shares of Carr-Gottstein Foods Co. for $12.50 per share, or a total of approximately $110 million, in a cash merger transaction. Carr-Gottstein had approximately $220 million of debt outstanding on September 27, 1998. Carr-Gottstein is the leading food and drug retailer in Alaska, with 49 stores primarily located in Anchorage, as well as Fairbanks, Juneau, Kenai and other Alaska communities. Carr-Gottstein had sales of $589 million in fiscal 1997 and sales of $440 million through its third quarter of 1998. The acquisition of Carr-Gottstein is subject to a number of conditions, including the approval of the holders of a majority of Carr-Gottstein's outstanding shares, receipt of certain regulatory approvals and other customary closing conditions. Although we cannot assure you that all of these conditions to the merger will be satisfied or waived, we believe we will complete the transaction early in the second quarter of 1999. See "Business -- Carr-Gottstein Acquisition." OPERATING STRATEGY During the past five years, our management team has demonstrated proficiency at turning around underperforming assets. Central to our success is a simple but effective formula that focuses on three key priorities to enhance the performance of our operations, including the operations of companies we acquire: (1) controlling costs, (2) increasing sales and (3) improving capital management. Management's focus on these three priorities has produced significant progress in the following key measures of financial performance: - Identical-store sales growth - Expense ratio reduction - Working capital management - Operating cash flow margin - Earnings per share growth 4 6 RECENT DEVELOPMENTS FOURTH QUARTER 1998 EARNINGS On January 28, 1999, we reported net income of $255.0 million ($0.50 per share) for the 16-week fourth quarter of 1998 compared to net income of $214.9 million ($0.43 per share) for the 17-week fourth quarter of 1997. This represents a 19% increase in earnings despite the additional week in the fourth quarter of 1997. Strong store operations helped increase fourth quarter identical-store sales (which exclude replacement stores) 2.4% and comparable-store sales 3.0%. Total sales were $7.9 billion in the 16-week fourth quarter of 1998 compared to $7.8 billion in the 17-week fourth quarter of 1997. The Dominick's acquisition was accounted for as a purchase and Dominick's operating results have been consolidated with ours since approximately midway through the fourth quarter of 1998. The pro forma amounts presented below for 1997 were computed as if we had owned Dominick's for the corresponding period of the prior year. Our continuing improvement in buying practices and product mix helped to increase gross profit 51 basis points to 28.88% of sales in the fourth quarter of 1998 from pro forma 28.37% in the fourth quarter of 1997. LIFO expense was $2.5 million in the fourth quarter of 1998 compared to LIFO income of $8.4 million in 1997. Operating and administrative expense declined 42 basis points to 22.42% of sales in the fourth quarter of 1998 from pro forma operating and administrative expense of 22.84% in 1997, reflecting increased sales and ongoing efforts to reduce or control expenses. This represents the 23rd consecutive quarter of improvement in operating and administrative expense, after pro forma adjustments for acquisitions of Vons and Dominick's. Interest expense increased to $81.8 million in the fourth quarter of 1998 from $77.5 million for the fourth quarter of 1997, due to borrowings incurred in connection with the Dominick's acquisition. In spite of higher interest expense, strong operating results pushed the interest coverage ratio (operating cash flow divided by interest expense) to 8.44 times in 1998 from 7.53 times in 1997. Operating cash flow as a percentage of sales was 8.72% for the quarter and 8.75% for the year. Equity in earnings of Casa Ley, our unconsolidated affiliate, was $11.8 million for the quarter compared to $9.3 million in 1997. For the year, net income was $806.7 million in 1998 compared to $621.5 million of income before extraordinary loss in 1997. Sales for the year were $24.5 billion in 1998 compared to $22.5 billion in 1997. The gross profit margin improved 57 basis points to 29.10% in 1998 from 28.53% in 1997. Operating and administrative expense improved 28 basis points to 22.56% of sales in 1998 compared to 22.84% in 1997. At fiscal year end 1998, our outstanding debt was approximately $5.0 billion and our stockholders' equity was approximately $3.1 billion. 5 7 SAFEWAY INC. AND SUBSIDIARIES OPERATING RESULTS (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED YEAR ENDED* ------------------------ ------------------------ JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (16 WEEKS) (17 WEEKS) (52 WEEKS) (53 WEEKS) Sales......................................... $ 7,922.6 $ 7,785.4 $24,484.2 $22,483.8 ========= ========= ========= ========= Gross profit.................................. $ 2,228.1 $ 2,211.3 $ 7,124.5 $ 6,414.7 Operating and administrative expense.......... (1,776.3) (1,771.7) (5,522.8) (5,135.0) --------- --------- --------- --------- Operating profit.............................. 511.8 439.6 1,601.7 1,279.7 Interest expense.............................. (81.8) (77.5) (235.0) (241.2) Equity in earnings of unconsolidated affiliates.................................. 11.8 9.3 28.5 34.9 Other income (expense), net................... (0.2) 0.8 1.7 2.9 --------- --------- --------- --------- Income before income taxes and extraordinary loss........................................ 441.6 372.2 1,396.9 1,076.3 Income taxes.................................. (186.6) (157.3) (590.2) (454.8) --------- --------- --------- --------- Income before extraordinary loss.............. 255.0 214.9 806.7 621.5 Extraordinary loss related to early retirement of debt, net of income tax benefit of $41.1....................................... -- -- -- (64.1) --------- --------- --------- --------- Net income.................................... $ 255.0 $ 214.9 $ 806.7 $ 557.4 ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary loss............ $ 0.50 $ 0.43 $ 1.59 $ 1.25 Extraordinary loss.......................... -- -- -- (0.13) --------- --------- --------- --------- Net income.................................. $ 0.50 $ 0.43 $ 1.59 $ 1.12 ========= ========= ========= ========= Weighted average shares outstanding: Diluted..................................... 511.3 504.4 508.8 497.7 ========= ========= ========= ========= OPERATING CASH FLOW: Income before extraordinary loss.............. $ 255.0 $ 214.9 $ 806.7 $ 621.5 Add (subtract): Income taxes................................ 186.6 157.3 590.2 454.8 Interest expense............................ 81.8 77.5 235.0 241.2 Depreciation................................ 155.6 135.6 475.1 414.0 Goodwill amortization....................... 21.1 15.8 56.3 41.8 LIFO expense (income)....................... 2.5 (8.4) 7.1 (6.1) Equity in earnings of unconsolidated affiliates............................... (11.8) (9.3) (28.5) (34.9) --------- --------- --------- --------- Total operating cash flow..................... $ 690.8 $ 583.4 $ 2,141.9 $ 1,732.3 ========= ========= ========= ========= As a percent of sales....................... 8.72% 7.49% 8.75% 7.70% As a multiple of interest expense........... 8.44x 7.53x 9.11x 7.18x
- --------------- * The annual income statements include Vons' operating results since the companies merged at the beginning of the second quarter of 1997. Before the merger, our operating results include our 34.4% equity interest in Vons. Our principal executive offices are located at 5918 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number is (925) 467-3000. 6 8 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You can inspect and copy these reports, proxy statements and other information at the public reference facilities of the Commission, in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago, Illinois 60661-2511. You can also obtain copies of these materials from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. The Commission also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with it (http://www.sec.gov). You can inspect reports and other information we file at the office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. We have filed a registration statement and related exhibits with the Commission under the Securities Act of 1933, as amended. The registration statement contains additional information about us and our common stock. You may inspect the registration statement and exhibits without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies from the Commission at prescribed rates. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This prospectus, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements relate to, among other things, capital expenditures, cost reduction, cash flow and operating improvements and are indicated by words or phrases such as "anticipate," "estimate," "plans," "projects," "continuing," "ongoing," "expects," "management believes," "the Company believes," "the Company intends," "we believe," "we intend" and similar words or phrases. The following factors are among the principal factors that could cause actual results to differ materially from the forward-looking statements: - general business and economic conditions in our operating regions, including the rate of inflation/deflation, population, employment and job growth in our markets; - pricing pressures and other competitive factors, which could include pricing strategies, store openings and remodels; - results of our programs to reduce costs; - the ability to integrate any companies we acquire and achieve operating improvements at those companies; - relations with union bargaining units; - issues arising from addressing year 2000 information technology issues, including for companies we acquire; - opportunities or acquisitions that we pursue; - conditions to the acquisition of Carr-Gottstein, including regulatory approval, which could affect the timing of or our ability to complete the acquisition; and - the availability and terms of financing. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. 7 9 PRICE RANGE OF COMMON STOCK Our common stock has been listed on the New York Stock Exchange under the symbol "SWY" since our initial public offering in May 1990. The following table sets forth the high and low sales prices for our common stock for the fiscal quarters indicated as reported by the New York Stock Exchange Composite Tape. Prices have been adjusted to give effect to two-for-one stock splits effected on January 30, 1996 and February 25, 1998.
HIGH LOW ---- --- 1997 First quarter............................................. $26 $20 9/16 Second quarter............................................ 24 13/16 21 1/8 Third quarter............................................. 27 3/4 23 1/16 Fourth quarter............................................ 31 23/32 25 11/32 1998 First quarter............................................. $37 1/4 $30 1/2 Second quarter............................................ 40 7/16 34 Third quarter............................................. 46 7/16 37 1/4 Fourth quarter............................................ 61 3/8 37 5/8 1999 First quarter (through January 29, 1999).................. $62 7/16 $53 9/16
The reported last sale price of the common stock on the New York Stock Exchange Composite Tape on January 29, 1999 was $56 1/8. DIVIDEND POLICY We have not declared or paid any cash dividends on our common stock since we were acquired by a corporation formed by Kohlberg Kravis Roberts & Co. in 1986, and we do not currently intend to declare or pay any cash dividends. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on our results of operations, financial condition, capital expenditures, working capital requirements, any contractual restrictions and other factors deemed relevant by our Board of Directors. See "Description of Capital Stock and Warrants -- Dividends." 8 10 SELECTED FINANCIAL DATA SAFEWAY INC. AND SUBSIDIARIES The financial data below are derived from our audited consolidated financial statements, except for the financial data for the 36-week periods ended September 12, 1998 and September 6, 1997, which are derived from unaudited consolidated financial statements. You should read the selected financial data in conjunction with our consolidated financial statements and accompanying notes, which we have incorporated by reference herein. In the opinion of our management, the results of operations for the 36 weeks ended September 12, 1998 and September 6, 1997 contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The results for the 36 weeks ended September 12, 1998 are not necessarily indicative of the results expected for the full year.
36 WEEKS ENDED ---------------------- 53 52 52 52 52 SEPT. 12, SEPT. 6, WEEKS WEEKS WEEKS WEEKS WEEKS 1998 1997(1) 1997(1) 1996 1995 1994 1993 ---------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) RESULTS OF OPERATIONS: Sales.............................. $ 16,561.6 $14,698.4 $22,483.8 $17,269.0 $16,397.5 $15,626.6 $15,214.5 ---------- --------- --------- --------- --------- --------- --------- Gross profit....................... 4,836.4 4,203.4 6,414.7 4,774.2 4,492.4 4,287.3 4,123.3 Operating and administrative expense.......................... (3,746.5) (3,363.3) (5,135.0) (3,882.5) (3,765.0) (3,675.2) (3,681.8) ---------- --------- --------- --------- --------- --------- --------- Operating profit................... 1,089.9 840.1 1,279.7 891.7 727.4 612.1 441.5 Interest expense................... (153.2) (163.7) (241.2) (178.5) (199.8) (221.7) (265.5) Equity in earnings of unconsolidated affiliates........ 16.7 25.6 34.9 50.0 26.9 27.3 33.5 Other income, net.................. 1.9 2.1 2.9 4.4 2.0 6.4 6.8 ---------- --------- --------- --------- --------- --------- --------- Income before income taxes and extraordinary loss............... 955.3 704.1 1,076.3 767.6 556.5 424.1 216.3 Income taxes....................... (403.6) (297.5) (454.8) (307.0) (228.2) (173.9) (93.0) ---------- --------- --------- --------- --------- --------- --------- Income before extraordinary loss... 551.7 406.6 621.5 460.6 328.3 250.2 123.3 Extraordinary loss, net of tax benefit of $41.1, $41.1, $1.3 and $6.7............................. -- (64.1) (64.1) -- (2.0) (10.5) -- ---------- --------- --------- --------- --------- --------- --------- Net income......................... $ 551.7 $ 342.5 $ 557.4 $ 460.6 $ 326.3 $ 239.7 $ 123.3 ========== ========= ========= ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary loss........................... $ 1.09 $ 0.82 $ 1.25 $ 0.97 $ 0.68 $ 0.51 $ 0.25 Extraordinary loss............... -- (0.13) (0.13) -- -- (0.02) -- ---------- --------- --------- --------- --------- --------- --------- Net income....................... $ 1.09 $ 0.69 $ 1.12 $ 0.97 $ 0.68 $ 0.49 $ 0.25 ========== ========= ========= ========= ========= ========= ========= FINANCIAL STATISTICS: Identical-store sales(2)(3)........ 4.2% 0.8% 1.3% 5.1% 4.6% 4.4% 2.1% Comparable-store sales(2).......... 4.8 2.5 2.2 6.1 5.5 5.0 3.5 Gross profit margin................ 29.20 28.60 28.53 27.65 27.40 27.44 27.10 Operating and administrative expense as a percent of sales............ 22.62 22.88 22.84 22.48 22.96 23.52 24.20 Operating profit margin............ 6.6 5.7 5.7 5.2 4.4 3.9 2.9 Operating cash flow(4)............. $ 1,451.1 $ 1,148.9 $ 1,732.3 $ 1,239.5 $ 1,068.6 $ 947.6 $ 777.0 Operating cash flow margin......... 8.76% 7.82% 7.70% 7.18% 6.52% 6.06% 5.11% Capital expenditures(5)............ $ 538.1 $ 379.6 $ 829.4 $ 620.3 $ 503.2 $ 352.2 $ 290.2 Depreciation and amortization...... 354.7 304.4 455.8 338.5 329.7 326.4 330.2 Total assets....................... 8,603.4 8,176.2 8,493.9 5,545.2 5,194.3 5,022.1 5,074.7 Total debt......................... 2,854.1 3,353.2 3,340.3 1,984.2 2,190.2 2,196.1 2,689.2 Stockholders' equity............... 2,778.0 1,921.5 2,149.0 1,186.8 795.5 643.8 382.9 Weighted average shares outstanding -- diluted (in millions)........................ 508.1 494.6 497.7 475.7 481.2 494.2 493.8 OTHER STATISTICS: Vons stores acquired in 1997....... -- 316 316 -- -- -- -- Total stores at period-end......... 1,381 1,367 1,368 1,052 1,059 1,062 1,078 Remodels completed during the period(6)........................ N/A N/A 181 141 108 71 45 Total retail square footage at period-end (in millions)......... 53.8 52.0 53.2 40.7 40.1 39.5 39.4
9 11 - --------------- (1) We completed the merger with Vons in April 1997. The results of operations of Vons are included in our results of operations as of the beginning of the second quarter of 1997. (2) Reflects sales increases for stores (including Vons stores for the final 41 weeks of 1997 and for 1998) operating the entire measurement period in both the current and prior periods. The 1997 and 1996 annual identical-store sales and comparable-store sales exclude British Columbia stores, which were closed during a labor dispute in 1996. (3) Excludes replacement stores. (4) Defined as FIFO income before income taxes, interest, depreciation, amortization, equity in earnings from unconsolidated affiliates and extraordinary losses. Operating cash flow is similar to net cash flow from operations presented in our consolidated statements of cash flows because it excludes certain noncash items. However, operating cash flow also excludes interest expense and income taxes. Management believes that operating cash flow is relevant because it assists investors in evaluating our ability to service our debt by providing a commonly used measure of cash available to pay interest, and it facilitates comparisons of our results of operations with those of companies having different capital structures. Other companies may define operating cash flow differently, and, as a result, those measures may not be comparable to our operating cash flow. (5) Defined under "Business -- Capital Expenditure Program." (6) Defined as store projects, other than maintenance, generally requiring expenditures in excess of $200,000. 10 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS PERIOD ENDED SEPTEMBER 12, 1998 COMPARED TO PERIOD ENDED SEPTEMBER 6, 1997 Our net income was $193.7 million ($0.38 per share) for the third quarter ended September 12, 1998, compared to income before extraordinary loss of $150.0 million ($0.30 per share) for the third quarter of 1997. In the third quarter of 1997, we incurred an extraordinary loss of $59.9 million ($0.12 per share) related to the early retirement of debt which reduced net income to $90.1 million ($0.18 per share). Our third-quarter sales increased 4.1% to $5.6 billion in 1998 from $5.4 billion in 1997, primarily because of strong store operations. Identical-store sales (which exclude replacement stores) increased 4.2%, while comparable-store sales increased 4.8%. Continuing improvement in buying practices and product mix helped increase gross profit 62 basis points to 29.52% of sales in the third quarter of 1998 from 28.90% in the third quarter of 1997. LIFO expense was $2.3 million in the third quarter of 1998. No LIFO expense was recorded in the third quarter of 1997. Operating and administrative expense declined 24 basis points to 22.76% of sales in the third quarter of 1998 compared to 23.00% in 1997, reflecting increased sales and ongoing efforts to reduce or control expenses. Interest expense declined to $48.8 million in the third quarter of 1998 from $62.3 million last year, due to reduced borrowings and lower interest rates achieved through the refinancing of certain debt in the third quarter of 1997. For the first 36 weeks of the year, interest expense was $153.2 million compared to $163.7 million in 1997. The combination of lower interest expense and strong operating results increased the interest coverage ratio (operating cash flow divided by interest expense) to an all-time high of 10.25 times in the third quarter of 1998. Operating cash flow (as defined under "-- Liquidity and Financial Resources") as a percentage of sales was 8.95% for the quarter and 8.36% for the last four quarters. Equity in earnings of Casa Ley, our unconsolidated affiliate, was $6.3 million in the third quarter of 1998 compared to $4.1 million in the third quarter of 1997. For the first three quarters of 1998, equity in earnings of Casa Ley was $16.7 million. In the first three quarters of 1997, we recorded equity in earnings of unconsolidated affiliates of $25.6 million, which included $12.2 million recognized in the first quarter of 1997 for the effect of our 34.4% equity interest in Vons. We merged with Vons at the beginning of the second quarter of 1997. Consequently, our income statement for the first 36 weeks of 1998 includes Vons' operating results for the entire period, while the income statement for the first 36 weeks of 1997 includes Vons' operating results for the second and third quarters plus the effect of our 34.4% equity interest in Vons for the first quarter. The following paragraph compares actual results for the first 36 weeks of 1998 with pro forma results for the same period in 1997, as if we merged with Vons at the beginning of 1997. Sales for the first 36 weeks of 1998 were $16.6 billion compared to pro forma sales of $15.9 billion in 1997. The gross profit margin for the first 36 weeks of 1998 improved 46 basis points to 29.20% from pro forma gross profit margin of 28.74% in 1997. Operating and administrative expense improved 42 basis points to 22.62% of sales in 1998 from pro forma expense of 23.04% in 1997. 1997 COMPARED TO 1996 AND 1995 Our net income was $557.4 million ($1.12 per share) in 1997, $460.6 million ($0.97 per share) in 1996, and $326.3 million ($0.68 per share) in 1995. In 1997 and 1995, income before extraordinary items related to debt refinancings was $621.5 million ($1.25 per share) and $328.3 million ($0.68 per share), respectively. Our 1997 income statement includes Vons' operating results since the second quarter plus the effect of our 34.4% equity interest in Vons in the first quarter, while the 1996 and 1995 income statements reflect our 11 13 equity interest in Vons for the full year. In order to facilitate an understanding of our operations, this financial review presents certain pro forma information based on the 1997 and 1996 combined historical financial statements of the two companies as if the merger with Vons had been effective as of the beginning of each of the years discussed. See Note B to our 1997 Consolidated Financial Statements which are incorporated herein by reference. During the second quarter of 1997, we were engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. We estimate that the Alberta strike reduced 1997 net income by approximately $0.04 per share, and labor disputes in the British Columbia and Denver operating areas reduced 1996 net income by an estimated $0.07 per share. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. We estimate that this dispute reduced 1995 earnings by approximately $0.01 per share. Sales. Sales for the 53 weeks of 1997 were $22.5 billion compared to $17.3 billion for the 52 weeks of 1996 and $16.4 billion for the 52 weeks of 1995. The increase was due primarily to our merger with Vons and the additional week in 1997. Identical-store sales (stores operating the entire year in both 1997 and 1996, excluding replacement stores but including Vons stores for 41 weeks in both years) increased 1.3% while comparable-store sales, which includes replacement stores, increased 2.2%. The effects of the second-quarter strike in Alberta weakened 1997 identical-store and comparable-store sales comparisons. Lack of inflation also softened 1997 sales comparisons. Excluded from identical-store and comparable-store sales comparisons are 86 stores in British Columbia that were closed during a strike-lockout for a portion of the second and third quarters of 1996. Gross Profit. Gross profit was 28.53% of sales in 1997 compared to 27.65% in 1996 and 27.40% in 1995. On a pro forma basis, gross profit increased to 28.63% of sales in 1997 from 28.20% in 1996, primarily due to improvements in buying practices and product mix. In addition, we recorded LIFO income of $6.1 million in 1997 compared to LIFO expense of $4.9 million in 1996 reflecting slight deflation in 1997. Operating and Administrative Expense. Operating and administrative expense was 22.84% of sales in 1997 compared to 22.48% in 1996 and 22.96% in 1995. Our operating and administrative expense-to-sales ratio increased compared to 1996 because Vons' operating and administrative expense ratio was higher than ours (partially due to the high cost of real estate and labor in southern California). In addition, goodwill amortization increased by approximately $30 million as a result of the merger with Vons. On a pro forma basis, operating and administrative expense declined 35 basis points to 22.95% of sales in 1997, from 23.30% in 1996. Interest Expense. Interest expense increased to $241.2 million in 1997 from $178.5 million in 1996 because of the debt incurred during the second quarter of 1997 to repurchase stock in conjunction with the merger with Vons. During 1997, we recorded an extraordinary loss of $64.1 million ($0.13 per share) for the repurchase of $588.5 million of our public debt, $285.5 million of Vons' public debt, and $40.0 million of medium-term notes. The extraordinary loss represented the payment of premiums on retired debt and the write-off of deferred finance costs, net of the related tax benefit. We financed this repurchase with a public offering of $600 million of senior debt securities and the balance with commercial paper. The refinancing extended our overall long-term debt maturities and increased our financial flexibility. In May 1997, we entered into interest rate cap agreements which expire in 1999 and entitle us to receive from counterparties the amounts, if any, by which interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized cost to purchase the cap agreements was $2.5 million at year-end 1997. As of year-end 1997, we had effectively converted $135.1 million of our floating rate debt to fixed interest rate debt through the use of interest rate swap agreements. Interest rate swap and cap agreements increased interest expense by $3.3 million in 1997, $3.0 million in 1996 and $0.3 million in 1995. The significant terms of swap and cap agreements outstanding at year-end 1997 are described in Note E to our 1997 Consolidated Financial Statements which are incorporated herein by reference. 12 14 Equity in Earnings of Unconsolidated Affiliates. We record our equity in earnings of unconsolidated affiliates on a one-quarter delay basis. Income from our equity investment in Casa Ley increased to $22.7 million in 1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa Ley's financial results have gradually improved. Equity in earnings of unconsolidated affiliates included our share of Vons' earnings of $12.2 million in the first quarter of 1997, $31.2 million in 1996 and $18.3 million in 1995. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operations was $920.5 million in the first 36 weeks of 1998 compared to $728.4 million in 1997, primarily due to improved results from operations. Working capital (excluding cash and debt) at September 12, 1998 was a deficit of $302.2 million compared to a $314.9 million deficit at September 6, 1997. Cash flow used by investing activities for the first 36 weeks of the year was $472.5 million in 1998, compared to $257.7 million in 1997. During the first 36 weeks of 1998 we increased capital expenditures to open 18 new stores and to continue construction of a new distribution center in Maryland. In 1997 we acquired $57.2 million in cash from the merger with Vons. Cash flow used by financing activities was $473.4 million in the first three quarters of 1998, primarily due to repayment of long-term debt. In the first 36 weeks of 1997, financing activities used cash flow of $518.3 million, primarily to purchase treasury stock related to the merger with Vons, which was partially offset by long-term borrowings. Net cash flow from operations as presented in the consolidated statements of cash flows is an important measure of cash generated by our operating activities. Operating cash flow, as defined below, is similar to net cash flow from operations because it excludes certain noncash items. However, operating cash flow also excludes interest expense and income taxes. Our management believes that operating cash flow is relevant because it assists investors in evaluating our ability to service our debt by providing a commonly used measure of cash available to pay interest, and it facilitates comparisons of our results of operations with those of companies having different capital structures. Other companies may define operating cash flow differently, and as a result, such measures may not be comparable to our operating cash flow. Our computation of operating cash flow is as follows:
36 WEEKS ENDED ----------------------------- SEPTEMBER 12, SEPTEMBER 6, 53 WEEKS 52 WEEKS 52 WEEKS 1998 1997 1997 1996 1995 ------------- ------------ -------- -------- -------- (DOLLARS IN MILLIONS) Income before income taxes and extraordinary loss.............. $ 955.3 $ 704.1 $1,076.3 $ 767.6 $ 556.5 LIFO expense (income)............. 4.6 2.3 (6.1) 4.9 9.5 Interest expense.................. 153.2 163.7 241.2 178.5 199.8 Depreciation and amortization..... 354.7 304.4 455.8 338.5 329.7 Equity in earnings of unconsolidated affiliates....... (16.7) (25.6) (34.9) (50.0) (26.9) -------- -------- -------- -------- -------- Operating cash flow............... $1,451.1 $1,148.9 $1,732.3 $1,239.5 $1,068.6 ======== ======== ======== ======== ======== As a percent of sales............. 8.76% 7.82% 7.70% 7.18% 6.52% As a multiple of interest expense......................... 9.47x 7.02x 7.18x 6.94x 5.35x
Based upon the current level of operations, we believe that operating cash flow and other sources of liquidity, including borrowings under our commercial paper program and our bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance that our business will continue to generate cash flow at or above current levels. The bank credit agreement is used primarily as a 13 15 backup facility to the commercial paper program. We funded the acquisition of Dominick's, including the repayment of approximately $560 million of debt and lease obligations, with a combination of bank borrowings and the issuance of commercial paper. On November 9, 1998, we closed the public offering of $1.4 billion of senior debt securities. We used most of the proceeds of that offering to repay outstanding indebtedness under our commercial paper program and the bank credit agreement. We expect to fund the acquisition of Carr-Gottstein through the issuance of commercial paper. CAPITAL EXPENDITURE PROGRAM During 1998, we invested $1.2 billion in capital expenditures while opening 46 new stores, remodeling 234 stores and completing construction of the new Maryland distribution center. During 1999, we expect to spend approximately $1.2 billion to add 55 to 60 stores and complete approximately 250 remodels. The acquisition of Carr-Gottstein could result in additional capital spending in 1999. YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. To the extent that our software applications contain source code that is unable to interpret appropriately the upcoming calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary to avoid system failures and the temporary inability to process transactions or engage in other normal business activities. In 1997 we established a year 2000 project group, headed by our Chief Information Officer, to coordinate our year 2000 compliance efforts. The project group is staffed primarily with representatives of our Information Technology department and also uses outside consultants on an as-needed basis. The Chief Information Officer reports regularly on the status of the year 2000 project to a steering committee headed by the Chief Executive Officer, and to our Board of Directors. The year 2000 project group has identified all computer-based systems and applications (including embedded systems) we use in our operations that might not be year 2000 compliant, and has categorized these systems and applications into three priority levels based on how critical the system or application is to our operations. The year 2000 project group is determining what modifications or replacements will be necessary to achieve compliance; implementing the modifications and replacements; conducting tests necessary to verify that the modified systems are operational; and transitioning the compliant systems into our regular operations. The systems and applications in the highest priority level are being assessed and modified or replaced first. Management estimates that these actions with respect to all priority levels are approximately eighty percent complete. We estimate that all critical systems and applications will be year 2000 compliant by June 30, 1999. We completed our acquisition of Dominick's in November 1998 and are in the process of identifying which systems and applications of Dominick's might not be year 2000 compliant and integrating those systems and applications into our year 2000 project. We estimate that all critical systems and applications of Dominick's will be year 2000 compliant by September 30, 1999. We are not yet able to estimate the incremental costs associated with achieving compliance, but we do not expect that these costs will have any material adverse effect on the benefits we expect from the acquisition of Dominick's. The year 2000 project group is also examining our relationships with certain key outside vendors and others with whom we have significant business relationships to determine, to the extent practical, the degree of such outside parties' year 2000 compliance. The project group has begun testing procedures with certain vendors identified as having potential year 2000 compliance issues. Management does not believe that our relationship with any third party is material to our operations and, therefore, does not believe that the failure of any particular third party to be year 2000 compliant would have a material adverse effect on Safeway. The year 2000 project group is in the process of establishing and implementing a contingency plan to provide for viable alternatives to ensure that our core business operations are able to continue in the event of a 14 16 year 2000-related systems failure. Management expects to have a comprehensive contingency plan established by March 31, 1999. Through December 31, 1998, we expended approximately $17 million to address year 2000 compliance issues. We estimate that we will incur an additional $8 million, for a total of approximately $25 million (excluding Dominick's), to address year 2000 compliance issues, which includes the estimated costs of all modifications, testing and consultants' fees. Management believes that, should we or any third party with whom we have a significant business relationship have a year 2000-related systems failure, the most significant impact would likely be the inability, with respect to a group of stores, to conduct operations due to a power failure, to deliver inventory in a timely fashion, to receive certain products from vendors or to process electronically customer sales at store level. We do not anticipate that any such impact would be material to our liquidity or results of operations. 15 17 BUSINESS We are one of the largest food and drug retailers in North America based on sales, with 1,497 stores as of January 2, 1999. Our U.S. retail operations are located principally in northern California, southern California, Oregon, Washington, Colorado, Arizona, Illinois and the Mid-Atlantic region. Our Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support of our retail operations, we have an extensive network of distribution, manufacturing and food processing facilities. In April 1997, we completed a merger with Vons pursuant to which we issued 83.2 million shares of our common stock for all of the shares of Vons common stock that we did not already own. In connection with the merger, we repurchased 64.0 billion shares of our common stock for an aggregate purchase price of $1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V. which, as of January 2, 1999, operated 77 food and general merchandise stores in western Mexico. Dominick's Acquisition. In November 1998, we completed our acquisition of all of the outstanding shares of Dominick's for $49 cash per share, or a total of approximately $1.2 billion. We funded the acquisition of Dominick's, including the repayment of approximately $560 million of debt and lease obligations, with a combination of bank borrowings and the issuance of commercial paper. Dominick's is now our wholly owned subsidiary through which we operate 114 stores. Dominick's is the second largest supermarket operator in the greater Chicago metropolitan area based on sales. Dominick's also operates two distribution facilities and a dairy processing plant. The Dominick's stores average approximately 61,000 square feet in size. Dominick's had sales of $2.6 billion in fiscal 1997 and sales of $1.8 billion through its third quarter of 1998. Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive agreement to acquire all of the outstanding shares of Carr-Gottstein for $12.50 per share, or a total of approximately $110 million, in a cash merger transaction. Carr-Gottstein had approximately $220 million of debt outstanding as of September 27, 1998. Carr-Gottstein had sales of $589 million in fiscal 1997 and sales of $440 million through its third quarter of 1998. Carr-Gottstein is the leading food and drug retailer in Alaska, with 49 stores, including liquor and tobacco stores described below, primarily located in Anchorage, as well as Fairbanks, Juneau, Kenai and other Alaska communities. Carr-Gottstein is Alaska's highest-volume alcoholic beverage retailer through its chain of 17 wine and liquor stores operated under the name Oaken Keg Spirit Shops. Carr-Gottstein also operates seven specialty tobacco stores under the name The Great Alaska Tobacco Company. In addition, Carr-Gottstein's vertically integrated organization includes freight transportation operations and a full-line food warehouse and distribution center. The definitive agreement requires Carr-Gottstein to call a special meeting of its stockholders where they will be asked to approve the merger of one of our wholly owned subsidiaries with Carr-Gottstein, with Carr-Gottstein surviving as our wholly owned subsidiary. An affiliate of Leonard Green & Associates owns approximately 35% of the outstanding shares and has agreed to vote its shares in favor of the transaction. The acquisition of Carr-Gottstein is subject to a number of conditions, including the approval of the holders of a majority of Carr-Gottstein's outstanding shares, receipt of certain regulatory approvals and other customary closing conditions. Safeway and Carr-Gottstein have received a request for additional information from the Federal Trade Commission, and we and Carr-Gottstein are in the process of compiling information in response to this request. In late October 1998, an Alaska consumer group and five individuals filed a purported class-action lawsuit in Alaska state court seeking an injunction to prevent our merger with Carr-Gottstein. The consumer group has dismissed its claims. The individual plaintiffs are seeking to amend the complaint to add an additional individual plaintiff. We and Carr-Gottstein believe the lawsuit is without merit and intend to defend the lawsuit vigorously. Although we cannot assure you that all of these conditions to the merger will be satisfied or waived, or that this lawsuit will be resolved to our satisfaction, we believe we will complete the transaction early in the second quarter of 1999. There is a risk that we may not be able to implement programs to enhance the performance of operations at Dominick's in a timely manner, if at all. The same risk exists with respect to Carr-Gottstein. In addition, we may not be able to complete the acquisition of Carr-Gottstein because one or more of the conditions to the transaction may not be satisfied. If we do achieve success in any one area, that success may be diluted by our 16 18 inability to produce results in another. These acquisitions also present certain risks with regard to the integration of Dominick's and Carr-Gottstein with Safeway, including risks relating to coordinating different operations and integrating personnel and corporate cultures. If we are not successful in integrating these operations, our financial results could be adversely affected. OPERATING STRATEGY During the past five years, our management team has demonstrated proficiency at turning around underperforming assets. Central to our success is a simple but effective formula that focuses on three key priorities: (1) controlling costs, (2) increasing sales and (3) improving capital management. Management's focus on these three priorities has produced significant progress in the following key measures of financial performance: - Identical-store sales growth - Expense ratio reduction - Working capital management - Operating cash flow margin - Earnings per share growth We continue to be focused on these same three priorities and expect continued improvement, but we cannot assure you as to the future results we will be able to achieve. Controlling Costs We have focused on controlling and reducing elements of our cost of sales through better buying practices, lower advertising expenses, distribution efficiencies, manufacturing plant closures and consolidations, improved category management and increased private label mix. Our efforts to control or reduce operating and administrative expenses have included overhead reduction in our administrative support functions, negotiation of competitive labor agreements, store level work simplification, consolidation of our information technology operations, elimination of certain corporate perquisites and the general encouragement of a "culture of thrift" among employees. Increasing Sales We have increased sales by achieving and maintaining competitive pricing, improving store standards, enhancing customer service and offering high quality products. Our efforts to upgrade store standards have focused on improving store appearance, in-stock condition, employee friendliness and speed of checkout. We have over 850 premium corporate brand products under the "Safeway SELECT" banner and have repackaged over 3,000 corporate brand products primarily under the "Safeway," "Lucerne" and "Mrs. Wright's" labels. Since our merger with Vons, we have been applying certain sales strategies that we and Vons have each employed successfully. By October 1998, we had introduced in all of our operating areas the Safeway Club Card (a customer loyalty program designed to reward frequent shoppers) which was inspired by a similar program at Vons. Improving Capital Management Our capital management has improved in two key areas: capital expenditures and working capital. In the capital expenditure area, we have expanded our use of standardized layouts and centralized purchasing agreements for building materials, fixtures and equipment for our new stores and remodels. As a result, our new store prototype is less expensive to build and more efficient to operate than the stores we and Vons previously built and operated. These lower project costs, coupled with our improved operations, have allowed us to improve our returns on capital investment. Working capital invested in the business has declined 17 19 substantially since year-end 1993, primarily through lower warehouse inventory levels and improved payables management. RETAIL OPERATIONS Stores We operate stores ranging in size from approximately 5,900 square feet to over 89,000 square feet. We determine the size of a new store based on a number of considerations, including the needs of the community the store serves, the location and site plan, and the estimated return on capital invested. Our primary new store prototype is 55,000 square feet and is designed to accommodate changing consumer needs and to achieve certain operating efficiencies. Most stores offer a wide selection of both food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral and pharmacy. In most of our larger stores, specialty departments are showcased in each corner and along the perimeter walls of the store to create a pleasant shopping atmosphere. Merchandising Our operating strategy is to provide value to our customers by maintaining high store standards and a wide selection of high quality products at competitive prices. We emphasize high quality perishables, such as produce and meat, and specialty departments, including in-store bakery, delicatessen, floral and pharmacy, designed to provide one-stop shopping for today's busy shoppers. We have developed a line of over 850 premium corporate brand products under the "Safeway SELECT" banner. These products include, among others, soft drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt, pet food and laundry detergent. The line also includes Safeway SELECT "Healthy Advantage" items such as low-fat ice cream and low-fat cereal bars, and Safeway SELECT "Gourmet Club" frozen entrees and hors d'oeuvres. We have repackaged over 3,000 corporate brand products primarily under the "Safeway," "Lucerne" and "Mrs. Wright's" labels. DISTRIBUTION Each of our 11 retail operating areas is served by a regional distribution center consisting of one or more facilities. With the acquisition of Dominick's, we have 15 distribution/warehousing centers (12 in the United States and three in Canada), which collectively provide the majority of all products to our stores. Our distribution centers in northern California and British Columbia are operated by a third party. Management regularly reviews distribution operations focusing on whether these operations support their operating areas in a cost-effective manner. We completed construction of a replacement distribution center in Maryland in December 1998. CAPITAL EXPENDITURE PROGRAM A component of our long-term strategy is our capital expenditure program. Our capital expenditure program funds new stores, remodels, information technology advances, and other facilities, including plant and distribution facilities and corporate headquarters. In the last several years, our management has significantly strengthened our program to select and approve new capital investments, resulting in improved returns on investment. 18 20 The table below reconciles for the last three fiscal years cash paid for property additions reflected in our consolidated statements of cash flows to our broader definition of capital expenditures, excluding Vons, and also details changes in our store base during such period:
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
Improved operations and lower project costs have raised the return on capital projects, allowing us to increase capital expenditures. ACQUISITIONS Our management believes that the supermarket industry in North America is fragmented and that there may be opportunities to make other acquisitions that would enhance our long-term growth. Our criteria for considering acquisition targets include, but are not limited to, strong market share and the potential for improving operating cash flow margin. These criteria are subject to review and modification from time to time. We cannot assure you that we will complete any such acquisition or that, if completed, the business acquired will make any contribution to our long-term growth. EMPLOYEES As of January 2, 1999, we had approximately 170,000 full and part-time employees. Approximately 90% of our employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three to five-year terms. Accordingly, we renegotiate a significant number of these agreements every year. In the last three years there have been four significant work stoppages. During the second quarter of 1997, we were engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. We continued to operate the affected stores with a combination of replacement workers, management and employees who returned to work. During the second and third quarters of 1996, we were engaged in a labor dispute in British Columbia which lasted 40 days and affected 86 stores. Under Provincial law in British Columbia, replacement workers could not be hired, and therefore all the affected stores were closed throughout the strike-lockout. Separately, we were engaged in a strike-lockout in the Denver operating area which lasted 44 days also during the second and third quarters of 1996. All of the Denver stores operated during the strike-lockout, largely with replacement workers. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. These work stoppages were resolved in a manner that management considered generally satisfactory. We estimate that the Alberta strike reduced 1997 net income by approximately $0.04 per share, that the combined impact of the disputes in Denver and British Columbia reduced 1996 earnings by approximately $0.07 per share, and that the dispute in northern California reduced 1995 earnings by an estimated $0.01 per share. 19 21 We concluded early negotiations and signed new labor contracts covering employees whose collective bargaining agreements expired in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Seattle and Spokane, Washington and by the International Brotherhood of Teamsters in southern California. In addition, union members in British Columbia ratified a new labor contract. Our management considers the terms of these new contracts to be satisfactory. During 1999, collective bargaining agreements covering employees in our stores in Denver, southern California (Vons) and northern Illinois (Dominick's) come up for renewal. Dominick's Litigation. We acquired Dominick's in November 1998. At that time, there was pending against Dominick's a class action lawsuit filed in March 1995 alleging gender discrimination and seeking compensatory and punitive damages in an unspecified amount. The lawsuit also alleges national origin discrimination, but the court has denied plaintiffs' class certification motion as to those claims. We plan to vigorously defend this lawsuit. It is our management's opinion that although the amount of liability with respect to this lawsuit cannot be ascertained at this time, any resulting liability, including any punitive damages, is not likely to have a material adverse effect on our financial statements taken as a whole. 20 22 THE SELLING STOCKHOLDERS All of the shares of common stock are being sold by the selling stockholders identified in the following table and the footnotes. The table and the footnotes also set forth information regarding the beneficial ownership of our outstanding common stock as of January 25, 1999 for each of the selling stockholders. Except as indicated by the notes to the following table, the holders listed below have sole voting power and investment power over the shares beneficially held by them. The address of SSI Associates, L.P., KKR Partners II, L.P., KKR Associates, L.P., SSI Equity Associates, L.P. and SSI Partners, L.P. is 9 West 57th Street, New York, New York 10019.
AFTER OFFERING AND BEFORE OFFERING AFTER DISTRIBUTIONS(4) -------------------------- -------------------------- NUMBER OF NUMBER OF NUMBER OF SHARES PERCENTAGE(3) SHARES OFFERED SHARES PERCENTAGE(5) ---------- ------------- -------------- ---------- ------------- KKR Associates, L.P.(1)....... 64,337,639 13.1% 19,650,304 44,091,592 8.9% SSI Equity Associates, L.P.(2)..................... 9,969,660 2.0% 99,696 6,429,533 1.3%
- --------------- (1) The shares are beneficially owned by KKR Associates, L.P. and two limited partnerships, SSI Associates, L.P. and KKR Partners II, L.P. KKR Associates is the general partner of each of SSI Associates and KKR Partners II. KKR Associates, in its capacity as general partner, may be deemed to beneficially own shares that are owned of record by SSI Associates and KKR Partners II. James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell, George R. Roberts, Edward A. Gilhuly, Perry Golkin, Michael W. Michelson, Paul E. Raether, Clifton S. Robbins, Scott Stuart and Michael T. Tokarz are the general partners of KKR Associates. In their capacity as general partners, they may be deemed to share beneficial ownership of any shares beneficially owned by KKR Associates, but disclaim any such beneficial ownership. Messrs. Greene, Kravis, MacDonnell and Roberts are members of our Board of Directors. Shares owned before the offering include 48,352,750 shares held by KKR Associates, of which 4,261,158 are being offered by this prospectus, 14,862,296 shares held by SSI Associates, all of which are being offered by this prospectus, and 1,122,593 shares held by KKR Partners II, of which 526,850 are being offered by this prospectus. On or prior to the completion of the offering, KKR Partners II will distribute the remaining 595,743 shares to its limited partners. After the offering and the distribution, neither SSI Associates nor KKR Partners II will own any of our common stock. To the extent that the over-allotment option is exercised, all of the shares to be sold pursuant to the option will be sold by KKR Associates. If the underwriters exercise the entire over-allotment option, then following the offering and the distribution, KKR Associates will own approximately 42.1 million shares (representing approximately 8.5% of the outstanding shares). (2) The shares are beneficially owned by SSI Equity Associates, L.P. SSI Partners, L.P. is the sole general partner of SSI Equity Associates. SSI Partners, in its capacity as general partner, may be deemed to beneficially own shares that are beneficially owned by SSI Equity Associates. Messrs. Kravis, MacDonnell, Raether and Roberts are the general partners of SSI Partners. In their capacity as general partners, they may be deemed to share beneficial ownership of any shares beneficially owned by SSI Partners, but disclaim any such beneficial ownership. Messrs. Kravis, MacDonnell and Roberts are members of our Board of Directors. We are a limited partner of SSI Equity Associates and own 64.5% of the partnership. All 9,969,660 shares shown as beneficially owned by SSI Equity Associates prior to the offering represent shares of common stock issuable upon exercise of warrants to purchase common stock. Of those shares, 3,540,127 shares issuable upon exercise of warrants are attributable to limited partners other than Safeway and 6,429,533 shares issuable upon exercise of warrants are attributable to our limited partner interest in SSI Equity Associates. Of the 3,540,127 shares, SSI Equity Associates will sell warrants to purchase 99,696 shares of common stock pursuant to this prospectus. On or prior to the completion of the offering, the remaining warrants to purchase 3,440,431 shares will be exercised and the shares issued upon exercise will be distributed to limited partners other than Safeway. In connection with the exercise, warrants to purchase approximately 30,000 shares will be canceled as payment of the exercise price. After 21 23 the offering and the distribution, SSI Equity Associates will hold warrants to purchase 6,429,533 shares of common stock (representing approximately 1.3% of the outstanding shares) and we will be the sole limited partner of SSI Equity Associates. SSI Partners will no longer serve as the general partner of SSI Equity Associates. We intend for the partnership to hold such warrants until November 15, 2001 when they expire and to not exercise such warrants. (3) Based on 490.3 million shares outstanding at January 2, 1999. For purposes of calculating the percentage of shares owned by SSI Equity Associates, we have assumed that SSI Equity Associates has exercised all of its warrants. (4) Gives effect to the offering and distributions by KKR Partners II and SSI Equity Associates described in notes (1) and (2) above. (5) Based on 493.8 million shares outstanding after the offering and distribution. For purposes of calculating the percentage of shares owned by SSI Equity Associates, we have assumed that SSI Equity Associates has exercised all of its warrants. SSI Associates made its investment in Safeway in 1986. The limited partnership agreement pursuant to which SSI Associates was organized, by its terms, expired on December 31, 1998. As a result of the expiration, the general partner is in the process of dissolving and winding up SSI Associates. Following the offering, SSI Associates will not own any of our common stock. KKR Associates, SSI Associates, KKR Partners II, SSI Equity Associates and we entered into a Registration Rights Agreement dated as of November 25, 1986. A copy of the Registration Rights Agreement is incorporated by reference as an exhibit to the registration statement. Pursuant to that agreement, we agreed to register the offer and sale of shares of common stock offered hereby. We and the other parties to the agreement agreed to indemnify each other against certain liabilities under the Securities Act in connection with the sale of the shares offered hereby. Pursuant to the Registration Rights Agreement, the selling stockholders are required to pay the underwriting discounts and commissions and transfer taxes associated with the offering, and we are required to pay substantially all expenses directly associated with the offering, including the registration and filing fees, printing expenses, underwriting expenses and expenses for counsel and accountants incurred by us or the selling stockholders. Sales of substantial amounts of common stock, including shares issued upon the exercise of stock options, or the perception that such sales could occur, could adversely affect prevailing market prices of the common stock. As a condition to receiving shares from KKR Partners II and SSI Equity Associates in the distributions described above, the limited partners who will receive shares will agree not to sell these shares for 120 days following the distributions. KKR Associates and SSI Partners have agreed with the underwriters not to waive this sale restriction for a period of 90 days from the date of this prospectus. 22 24 DESCRIPTION OF CAPITAL STOCK AND WARRANTS GENERAL Pursuant to our Restated Certificate of Incorporation, as amended, our authorized capital stock consists of 1.5 billion shares of common stock, par value $0.01 per share, and 25 million shares of preferred stock, par value $0.01 per share. At January 2, 1999, we had outstanding 490.3 million shares of common stock and no outstanding shares of preferred stock. All shares of common stock are fully paid and nonassessable. COMMON STOCK Each holder of common stock is entitled to one vote for each share owned of record on all matters voted upon by stockholders, and a majority vote is required for all action to be taken by stockholders. In the event of a liquidation, dissolution or winding-up of Safeway, the holders of common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all of our debts and liabilities and the liquidation preference of any outstanding preferred stock. The common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions. Our Restated Certificate of Incorporation provides for a classified Board of Directors consisting of three classes as nearly equal in size as practicable. Each class will hold office until the third annual meeting for election of directors following the election of such class. Our bylaws provide for additional notice requirements for stockholder nominations and proposals at our annual or special meetings. At annual meetings, stockholders may submit nominations for directors or other proposals only upon written notice to us at least 50 days prior to the annual meeting. The common stock is listed on the New York Stock Exchange. The transfer agent and registrar for the common stock is First Chicago Trust Company of New York. PREFERRED STOCK Our Board of Directors is authorized without further stockholder action, to divide any or all shares of the authorized preferred stock into series and to fix and determine the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of the date of this prospectus, the Board of Directors has not authorized any series of preferred stock and there are no plans, agreements or understandings for the issuance of any shares of preferred stock. DIVIDENDS Holders of common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued and subject to certain limitations in our bank credit agreement. WARRANTS Each warrant is exercisable to purchase one share of common stock at an exercise price of $.50 per share. The warrants were issued in 1986 to SSI Equity Associates. There are currently outstanding warrants to purchase an aggregate of 9,969,660 shares of common stock, all of which are held by SSI Equity Associates. The warrants are exercisable until they expire on November 15, 2001. The exercise price of the warrants is subject to adjustment in the event we effect a stock dividend, subdivision of stock and certain other distributions described in the warrant. A copy of the warrant is filed as an exhibit to the registration statement and is incorporated herein by reference. The determination of when or whether to exercise the warrants is within the sole discretion of the general partner of SSI Equity Associates, except under certain limited circumstances following the sale of common stock by SSI Associates and KKR Partners II. After the offering and the distribution, there will be outstanding warrants to purchase 6,429,533 shares of common stock, all of which will be held by SSI Equity Associates. We will be the sole limited partner of SSI Equity Associates and intend for the partnership to hold the warrants until they expire. See "The Selling Stockholders." 23 25 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of common stock by a holder who is not a United States person or entity (a "Non-U.S. Holder"). The term "Non-U.S. Holder" means any person or entity that is, for United States federal income tax purposes, a foreign corporation, a non-resident alien individual, a non-resident fiduciary of a foreign estate or trust, or a foreign partnership. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to United States federal tax as if they were United States citizens and residents. This discussion does not address all aspects of United States federal income and estate taxes or consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and local consequences that may be relevant to Non-U.S. Holders. Furthermore, this discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, existing and proposed regulations promulgated thereunder and public administrative and judicial interpretations thereof, all of which are subject to changes which could be applied retroactively. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK. We do not currently intend to pay cash dividends on shares of common stock. See "Dividend Policy." In the event that such dividends are paid on shares of common stock, except as described below, dividends paid to a Non-U.S. Holder of common stock will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States. If the dividends are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, if a tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder, the dividends will be subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates and will be exempt from the 30% withholding tax described above (assuming the necessary certification and disclosure requirements are met). Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above (unless the payor has knowledge to the contrary), and, under currently applicable United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under recently promulgated United States Treasury regulations generally effective with respect to payments made after December 31, 1999, however, a Non-U.S. Holder of common stock who wishes to claim the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) will be required to satisfy specified certification and other requirements, which will include filing a Form W-8 containing the Non-U.S. Holder's name, address and a certification that such Holder is eligible for the benefits of the treaty under its Limitations in Benefits Article. In addition, certain certification and disclosure requirements must be met to be exempt from withholding under the effectively connected income exemption discussed above. A Non-U.S. Holder of common stock who is eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate, timely claim for refund with the IRS. 24 26 GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to United States federal income tax on any gain recognized on a disposition of a share of common stock unless: - subject to the exception discussed below, we are or have been a "United States real property holding corporation" (a "USRPHC") within the meaning of section 897(c)(2) of the Internal Revenue Code at any time within the shorter of the five-year period preceding such disposition or such Non-U.S. Holder's holding period (the "Required Holding Period"); - the gain is effectively connected with the conduct of a trade or business within the United States of the Non-U.S. Holder and, if a tax treaty applies, is attributable to a permanent establishment maintained by the Non-U.S. Holder; - the Non-U.S. Holder is an individual who holds the share of common stock as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and either (a) such individual has a "tax home" (as defined for United States federal income tax purposes) in the United States or (b) the gain is attributable to an office or other fixed place of business maintained in the United States by such individual; or - the Non-U.S. Holder is subject to tax pursuant to the Internal Revenue Code provisions applicable to certain United States expatriates. If an individual Non-U.S. Holder falls under the second or fourth clause above, he or she will be taxed on his or her net gain derived from the sale under regular United States federal income tax rates. If the individual Non-U.S. Holder falls under the third clause above, he or she will be subject to a flat 30% tax on the gain derived from the sale which may be offset by United States source capital losses (notwithstanding the fact that he or she is not considered a resident of the United States). If a Non-U.S. Holder that is a foreign corporation falls under the second clause above, it will be taxed on its gain under regular graduated United States federal income tax rates and, in addition, will under certain circumstances be subject to the branch profits tax equal to 30% of its "effectively connected earnings and profits" within the meaning of the Internal Revenue Code for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable income tax treaty. A corporation is generally a USRPHC if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we are not currently a USRPHC. However, a Non-U.S. Holder would generally not be subject to tax, or withholding in respect of such tax, on gain from a sale or other disposition of common stock by reason of our USRPHC status if the common stock is regularly traded on an established securities market ("regularly traded") during the calendar year in which such sale or disposition occurs, provided that such holder does not own, actually or constructively, common stock with a fair market value in excess of 5% of the fair market value of all common stock outstanding at any time during the Required Holding Period. We believe that the common stock will be treated as regularly traded. If we are or have been a USRPHC within the Required Holding Period, and if a Non-U.S. Holder owns in excess of 5% of the fair market value of common stock (as described in the preceding paragraph), such Non-U.S. Holder of common stock will be subject to United States federal income tax at regular graduated rates under certain rules ("FIRPTA tax") on gain recognized on a sale or other disposition of such common stock. In addition, if we are or have been a USRPHC within the Required Holding Period and if the common stock were not treated as regularly traded, a Non-U.S. Holder (without regard to its ownership percentage) would be subject to withholding in respect of FIRPTA tax at a rate of 10% of the amount realized on a sale or other disposition of common stock and could be further subject to FIRPTA tax in excess of the amounts withheld. Any amount withheld pursuant to such withholding tax would be creditable against such Non-U.S. Holder's United States federal income tax liability. Non-U.S. Holders are urged to consult their tax advisors concerning the potential applicability of these provisions. 25 27 FEDERAL ESTATE TAXES An individual Non-U.S. Holder who (i) is not a citizen or resident of the United States (as specifically defined for United States estate tax purposes) at the time of his or her death and (ii) owns, or is treated as owning common stock at the time of his or her death, or has made certain lifetime transfers of an interest in common stock, will be required to include the value of such common stock in his or her gross estate for federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply regardless of whether withholding is required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty or other agreement with the tax authorities in that country. United States backup withholding tax (which, in general, is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) generally will not apply to: - the payment of dividends paid on common stock to a Non-U.S. Holder at an address outside the United States (unless the payor has knowledge that the payee is a United States person); or - the payment of the proceeds of the sale of common stock to or through the foreign office of a broker. In the case of the payment of proceeds from such a sale of common stock through a foreign office of a broker that is a United States person or a "U.S. related person," however, information reporting (but not backup withholding) is required with respect to the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder (and has no actual knowledge to the contrary) and certain other requirements are met or the holder otherwise establishes an exemption. For this purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for United States federal income tax purposes under current regulations, or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business. The payment of the proceeds of a sale of shares of common stock to or through a United States office of a broker is subject to information reporting and possible backup withholding unless the owner certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holder's United States federal income tax liability, provided that the required information is furnished to the IRS. On October 6, 1997, the United States Treasury Department promulgated new regulations regarding the withholding and information reporting rules discussed above, effective for payments made after December 31, 1999. In general, these new regulations do not significantly alter the substantive withholding and information reporting requirements but rather unify current certification procedures and forms and clarify reliance standards. The new regulations also alter the procedures for claiming benefits of an income tax treaty and permit the shifting of primary responsibility for withholding to certain financial intermediaries acting on behalf of beneficial owners under some circumstances. On January 15, 1999, the IRS issued Notice 99-8 proposing certain changes to these new withholding regulations for non-resident aliens and foreign corporations and providing a model "qualified intermediary" withholding agreement to be entered into with the IRS to allow certain institutions to certify on behalf of their non-U.S. customers or account holders who invest in U.S. securities. Non-U.S. Holders should consult their own tax advisors with respect to the impact of the new regulations. 26 28 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, ING Baring Furman Selz LLC, Lehman Brothers Inc., J.P. Morgan Securities Inc., Salomon Smith Barney Inc. and Warburg Dillon Read LLC are acting as representatives, have severally agreed to purchase, directly or through the exercise of warrants held by SSI Equity Associates, and the selling stockholders have agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of such underwriters below:
NUMBER OF SHARES NAME ---------- Morgan Stanley & Co. Incorporated........................... Goldman, Sachs & Co. ....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Donaldson, Lufkin & Jenrette Securities Corporation......... ING Baring Furman Selz LLC.................................. Lehman Brothers Inc. ....................................... J.P. Morgan Securities Inc. ................................ Salomon Smith Barney Inc. .................................. Warburg Dillon Read LLC..................................... ---------- Total............................................. 19,750,000 ==========
The Underwriting Agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock (directly or through the purchase and exercise of warrants held by SSI Equity Associates) offered hereby (other than those covered by the underwriters' over-allotment option described below) if any such shares are taken. With respect to shares of common stock obtained upon the purchase and exercise of warrants held by SSI Equity Associates, the underwriters will remit the exercise price of the warrants to Safeway. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $. a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $. a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. KKR Associates, one of the selling stockholders, has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 2,000,000 additional shares of common stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and total proceeds to the selling stockholders would be $ . 27 29 Safeway and the selling stockholders have agreed not to (1) offer, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, provided that the foregoing shall not apply to distributions of common stock by either of KKR Partners II or SSI Equity Associates to any of their respective limited partners or (2) with respect to Safeway only, enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, except for (a) the shares to be sold and the warrants to be cancelled in connection with the offering, (b) any shares of common stock issued by Safeway pursuant to stock option plans for our employees and directors or existing stock option plans for consultants, (c) option grants under stock option plans for our employees and directors or existing stock option plans for consultants, (d) any agreement of Safeway in connection with an acquisition of assets or properties or any capital stock issuable pursuant to the terms of such an agreement, (e) capital stock issuable upon the exercise of warrants outstanding on the date of this prospectus or (f) the cancellation of warrants for a period of at least 90 days from the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters. If any such consent is given it would not necessarily be preceded or followed by a public announcement thereof. As a condition to receiving shares from KKR Partners II and SSI Equity Associates, the limited partners who will receive shares will agree not to sell those shares for 120 days following the distributions. KKR Associates and SSI Partners have agreed with the underwriters not to waive this sale restriction for a period of 90 days from the date of this prospectus. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. The warrants held by SSI Equity Associates being purchased by the several underwriters from SSI Equity Associates will be purchased at a price per underlying share equal to the price to public less the exercise price of each such warrant and the underwriting discount per underlying share. The underwriters will immediately exercise such warrants held by SSI Equity Associates by paying Safeway the aggregate exercise price of the warrants, and will include in the offering the 99,696 shares of common stock issuable as a result of such exercise. Safeway, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Latham & Watkins of San Francisco, California, and Michael C. Ross, our General Counsel, will issue an opinion about certain legal matters with respect to the common stock and warrants for Safeway and the selling stockholders. Certain partners of Latham & Watkins, members of their families, related persons and others, have an indirect interest, through limited partnerships, in less than 1% of our common stock. These persons do not have the power to vote or dispose of such shares of common stock. Michael C. Ross holds common stock and options to purchase common stock which in the aggregate constitute less than 1% of our common stock. Brown & Wood LLP of San Francisco will act as counsel for the underwriters. Paul C. Pringle is a partner of Brown & Wood LLP and owns 1,000 shares of Safeway common stock. 28 30 EXPERTS Our consolidated financial statements as of January 3, 1998 and December 28, 1996 and for each of the three fiscal years in the period ended January 3, 1998, which are incorporated by reference herein from our Annual Report on Form 10-K for the year ended January 3, 1998, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is also incorporated by reference herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. INFORMATION INCORPORATED BY REFERENCE The Commission allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the Commission will automatically update and supersede this information. We incorporate by reference the following documents we filed with the Commission pursuant to Section 13 of the Exchange Act (Commission file number 1-00041): - Annual Report on Form 10-K for the year ended January 3, 1998 (including information specifically incorporated by reference into our Form 10-K from our 1997 Annual Report to Stockholders and Proxy Statement for our 1998 Annual Meeting of Stockholders) and Form 10-K/A filed March 10, 1998; - Quarterly Reports on Form 10-Q for the quarters ended March 28, 1998, June 6, 1998 and September 12, 1998; - Current Reports on Form 8-K filed on July 15, 1998, October 19, 1998, November 9, 1998 and November 24, 1998; - Description of our common stock contained in our registration statement on Form 8-A filed with the Commission on February 20, 1990, including the amendment on Form 8 dated March 26, 1990; and - All documents filed by us with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and before the offering the common stock thereby is completed (other than those portions of such documents described in paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated by the Commission). You may request a copy of these filings at no cost, by writing or telephoning us at the following address: Investor Relations Safeway Inc. 5918 Stoneridge Mall Road Pleasanton, California 94588 (925) 467-3790 You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. 29 31 SAFEWAY LOGO 32 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be paid by us in connection with the distribution of the securities being registered are as set forth in the following table: Securities Act Registration Fee........................... $ 327,660 * Legal Fees and Expenses (other than Blue Sky)............. 400,000 * Accounting Fees and Expenses.............................. 75,000 * Printing Expenses......................................... 150,000 * Blue Sky Fees and Expenses................................ 30,000 * Miscellaneous............................................. 17,340 ---------- Total..................................................... $1,000,000 ==========
- --------------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Delaware General Corporation Law, the Company's Restated Certificate of Incorporation provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for breach of the duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (governing distributions to stockholders), or (iv) for any transaction for which a director derives an improper personal benefit. In addition, Section 145 of the Delaware General Corporation law and Article III, Section 13 of the Company's bylaws, under certain circumstances, provide for the indemnification of the Company's officers, directors, employees and agents against liabilities which they may incur in such capacities. A summary of the circumstances in which such indemnification is provided for is contained herein, but that description is qualified in its entirety by reference to Article III, Section 13 of the Company's bylaws. In general, any officer, director, employee or agent will be indemnified against expenses, including attorney's fees, fines, settlements or judgments, which were actually and reasonably incurred, in connection with a legal proceeding, other than one brought by or on behalf of the Company, to which he was a party as a result of such relationship, if he acted in good faith, and in the manner he believed to be in or not opposed to the Company's best interest and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If the action is brought by or on behalf of the Company, the person to be indemnified must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the Company's best interest, but no indemnification will be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of Delaware, or the court in which such action was brought, determines upon application that, despite adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expense which such Court of Chancery or such other court shall deem proper. Any indemnification under the previous paragraphs (unless ordered by a court) will be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper under the circumstances because he has met the applicable standard of conduct set forth above. Such determination will be made (i) by the Company's board of directors by a majority vote of a quorum of disinterested directors who were not parties to such actions, (ii) if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent that a director, officer, employee or II-1 33 agent of the Company is successful on the merits or otherwise in defense of any action, suit or proceeding referred to in the previous paragraph, he will be indemnified against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Company as authorized by the Company's bylaws. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Company's board of directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, Section 13 of the Company's bylaws is not deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. If a claim for indemnification or payment of expenses under Section 13 of the Company's bylaws is not paid in full within ninety (90) days after a written claim therefor has been received by the Company, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action, the Company has the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. The Company's board of directors may authorize, by a vote of a majority of a quorum of the Company's board of directors, the Company to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of Section 13 of the Company's bylaws. The Company's board of directors may authorize the Company to enter into a contract with any person who is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise providing for indemnification rights equivalent to or, if the Company's board of directors so determines, greater than those provided for in Section 13 of the Company's bylaws. The Company has also purchased insurance for its directors and officers for certain losses arising from claims or charges made against them in their capacities as directors and officers of the Company. II-2 34 ITEM 16. EXHIBITS The following documents are filed as part of this registration statement.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement 4.1 Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 15, 1996 and Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 20, 1998) 4.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the Fiscal year ended January 2, 1993) 4.3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388) 4.4 Registration Rights Agreement dated as of November 25, 1986 by and between Safeway Stores Holdings Corporation (predecessor to the Company) and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388) 4.5 Common Stock Purchase Warrants to purchase shares of Safeway Inc. common stock (incorporated by reference to Exhibit 4(i).13 to Annual Report on Form 10-K for the year ended January 3, 1998) *5.1 Opinion of Latham & Watkins 23.1 Consent of Deloitte & Touche LLP *23.2 Consent of Latham & Watkins (included in Exhibit 5.1) *24.1 Powers of Attorney (contained on page II-5)
- --------------- * Previously filed. ITEM 17. UNDERTAKINGS (a) We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of our annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Safeway pursuant to the provisions described in this registration statement above, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of us in the successful defense of any action, suit or proceeding) is asserted against us by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-3 35 (c) The undersigned registrant hereby also undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 36 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, California, on January 29, 1999. SAFEWAY INC. By: /s/ MICHAEL C. ROSS ------------------------------------- Michael C. Ross Senior Vice President, Secretary and General Counsel Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the registration statement has been signed by each of the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- *STEVEN A. BURD Chairman, President and January 29, 1999 - ----------------------------------------------------- Chief Executive Officer Steven A. Burd (Principal Executive Officer) *DAVID G. WEED Executive Vice President, January 29, 1999 - ----------------------------------------------------- Chief Financial Officer David G. Weed (Principal Financial Officer and Principal Accounting Officer) *PETER A. MAGOWAN Director January 29, 1999 - ----------------------------------------------------- Peter A. Magowan *WILLIAM Y. TAUSCHER Director January 29, 1999 - ----------------------------------------------------- William Y. Tauscher *JAMES H. GREENE, JR. Director January 29, 1999 - ----------------------------------------------------- James H. Greene, Jr. *PAUL HAZEN Director January 29, 1999 - ----------------------------------------------------- Paul Hazen *HENRY R. KRAVIS Director January 29, 1999 - ----------------------------------------------------- Henry R. Kravis *ROBERT I. MACDONNELL Director January 29, 1999 - ----------------------------------------------------- Robert I. MacDonnell *GEORGE R. ROBERTS Director January 29, 1999 - ----------------------------------------------------- George R. Roberts *By: /s/ MICHAEL C. ROSS January 29, 1999 - ----------------------------------------------------- Michael C. Ross as attorney-in-fact
II-5 37 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 4.1 Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended and Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 20, 1998) 4.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the Fiscal year ended January 2, 1993) 4.3 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).1 to Registration Statement No. 33-33388) 4.4 Registration Rights Agreement dated as of November 25, 1986 by and between Safeway Stores Holdings Corporation (predecessor to the Company) and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388) 4.5 Common Stock Purchase Warrants to purchase shares of Safeway Inc. common stock (incorporated by reference to Exhibit 4(i).13 to Annual Report on Form 10-K for the year ended January 3, 1998) *5.1 Opinion of Latham & Watkins 23.1 Consent of Deloitte & Touche LLP *23.2 Consent of Latham & Watkins (included in Exhibit 5.1) *24.1 Powers of Attorney (contained on page II-5)
- --------------- * Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 19,750,000 Shares SAFEWAY INC. Common Stock, Par Value $0.01 Per Share UNDERWRITING AGREEMENT February [*], 1999 2 February [*], 1999 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation ING Baring Furman Selz LLC Lehman Brothers Inc. J.P. Morgan Securities Inc. Salomon Smith Barney Inc. Warburg Dillon Read LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: Certain stockholders and warrantholders of Safeway Inc., a Delaware corporation (the "Company"), named in Schedule I hereto (the "Selling Stockholders") severally propose to sell to the several underwriters named in Schedule II hereto (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, ING Baring Furman Selz LLC, Lehman Brothers Inc., J.P. Morgan Securities Inc., Salomon Smith Barney Inc. and Warburg Dillon Read LLC are acting as representatives (the "Representatives"), 19,650,304 shares of the Common Stock, par value $0.01 per share, of the Company (the "Firm Shares") and warrants (the "Warrants") for the purchase of an aggregate of 99,696 shares of Common Stock, par value $0.01 per share, of the Company (the "Warrant Shares"). KKR Associates, L.P. ("KKR Associates"), one of the Selling Stockholders, also proposes to sell to the several Underwriters an aggregate of not more than an additional 2,000,000 shares of Common Stock, par value $0.01 per share, of the Company (the "Additional Shares"), if and to the extent that the Representatives shall have determined to exercise, on behalf of the Underwriters, the right to purchase such Additional Shares granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares and the Shares and the Warrant Shares are hereinafter collectively referred to as the Securities. The shares of Common Stock, par value $0.01 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement (Registration No. 333-71231), including a prospectus, relating to the Securities. 1 3 The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Registration Statement." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. All references herein to the Registration Statement and the Prospectus include the documents incorporated or deemed to be incorporated by reference therein. The terms "supplement," "amendment" and "amend" as used herein shall include all documents deemed to be incorporated by reference in the Prospectus that are filed subsequent to the date hereof by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement (other than a Rule 462 Registration Statement) has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and such Registration Statement, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 1(b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter expressly for use therein. (c) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and applicable rules and regulations of the Commission thereunder (except to the extent that any preliminary prospectus did not so comply in a manner corrected in the Prospectus); and no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission. (d) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder. 2 4 (e) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (f) Each subsidiary (each a "Significant Subsidiary"), if any, of the Company which is a "significant subsidiary" as defined in Rule 405 of Regulation C of the Securities Act has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation. (g) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement (including, without limitation, the purchase and exercise by the Underwriters of the Warrants) will not result in any violation of the Restated Certificate of Incorporation or the By-Laws of the Company or any agreement or other instrument (including, without limitation, the Warrant Purchase Agreement dated as of November 28, 1986 between the Company and SSI Equity Associates, L.P. (the "Warrant Purchase Agreement")) binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any statute or any order, rule or regulation of any governmental body, agency or court having jurisdiction over the Company or any subsidiaries, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency having jurisdiction over the Company is required for the performance by the Company of its obligations under this Agreement, except such as may be required under the Act and the rules and regulations thereunder, and the Exchange Act and the rules and regulations thereunder, and the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities. (h) The financial statements (together with the related notes thereto) incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of and at the dates indicated and the results of their operations for the periods specified, except as otherwise disclosed therein; and except as otherwise stated therein or in the Registration Statement and the Prospectus, said financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis. (i) This Agreement has been duly authorized, executed and delivered by the Company. (j) The Warrant Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement and the Warrants, will be validly issued, fully paid and non-assessable, and the issuance of such shares will not be subject to any preemptive rights. (k) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (l) The shares of Common Stock (including the Shares to be sold by the Selling Stockholders hereunder) and the Warrants have been duly authorized and validly issued and are fully paid and non-assessable; none of such Shares or Warrants, when delivered to the Underwriters, will be subject to any preemptive rights; the Shares and Warrant Shares conform as 3 5 to legal matters to the description of the Common Stock contained in the Prospectus and the Warrants conform as to legal matters to the description thereof contained in the Prospectus. (m) The Warrants have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their terms. (n) Upon the Underwriters' purchase of the Warrants and payment to the Company of the Warrant Exercise Price (as defined herein), all of the requirements (whether under the Warrant Purchase Agreement or otherwise) with respect to the Underwriters' exercise of the Warrants for Warrant Shares will be satisfied, and the Company will be unconditionally obligated to immediately issue duly and validly authorized and issued, fully paid and nonassessable shares of Common Stock in respect thereof. (o) The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (p) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus. (q) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending or, to the Company's knowledge, threatened, to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly, represents and warrants to and agrees with each of the Underwriters and the Company that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder. (b) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement will not result in any violation of any material agreement or other instrument binding upon such Selling Stockholder or any statute or any order, rule or regulation of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement, except the registration under the Securities Act of the Securities, and except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities. (c) Such Selling Stockholder has, and on the Closing Date and any Option Closing Date (each, as defined in Section 5) will have, valid title to all of the Shares or Warrants which may be sold by such Selling Stockholder under this Agreement and the legal right and power, and all authorization and approval required by law or other instruments binding upon such Selling 4 6 Stockholder, to enter into this Agreement and to sell, transfer and deliver the Shares or Warrants to be sold by such Selling Stockholder. (d) Upon delivery of the Shares or Warrants to be sold by such Selling Stockholder and payment therefor pursuant to this Agreement, the Underwriters will hold such Shares or Warrants (including Warrant Shares issued upon exercise of the Warrants after payment of the exercise price therefor) free and clear of any security interests, claims, liens, equities and other encumbrances assuming that such Underwriters have purchased such Shares, Warrants and Warrant Shares in good faith and without notice of any security interest, claims, liens, equities, encumbrances or any other adverse claims within the meaning of the Uniform Commercial Code. (e) The information (other than the percent of shares owned, as to which such Selling Stockholder makes no representation) pertaining to such Selling Stockholder under the caption "The Selling Stockholders" in the Prospectus is complete and accurate in all material respects, and any information pertaining to such Selling Stockholder or its affiliates under the caption "Certain Relationships and Transactions" incorporated by reference into the Prospectus from the Company's 1998 Proxy Statement fairly presents the information required to be set forth therein and contains no material misstatement or omission. Each of KKR Associates, as the sole general partner of KKR Partners II, L.P. ("KKR Partners"), and SSI Partners, L.P. ("SSI Partners"), as the sole general partner of SSI Equity Associates, L.P. ("SSI Equity"), severally and not jointly, represents and warrants to and agrees with each of the Underwriters and the Company that with respect to any distributions of Common Stock by KKR Partners or SSI Equity to any of their respective limited partners, each of them will receive agreements, executed by such limited partners, which provide that such limited partners will not sell such distributed shares for a period of 120 days following the date of the distribution. Any certificate signed by any officer of the Company or by or on behalf of any Selling Stockholder and delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or such Selling Stockholder, as the case may be, to each Underwriter as to the matters covered thereby. 3. AGREEMENTS TO SELL AND PURCHASE. Each Selling Stockholder, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Selling Stockholder (i) at $[*] a Share (the "Share Purchase Price") and (ii) at $[*] a Warrant (the "Warrant Purchase Price") (such Warrant Purchase Price representing the Share Purchase Price less the exercise price of $.50 per Warrant (the "Warrant Exercise Price") for each Warrant Share), the number of Firm Shares or Warrants, as the case may be (subject to such adjustments to eliminate fractional shares as you may determine), that bears the same proportion to the number of Firm Shares or Warrants, as the case may be, to be sold by such Selling Stockholder as the number of Firm Shares and Warrants, respectively, set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares and Warrants, respectively. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, KKR Associates agrees to sell to the Underwriters the Additional Shares and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to 2,000,000 Additional Shares at the Share Purchase Price. If the Representatives, on behalf of the Underwriters, elect to exercise such option, the Representatives shall so notify KKR Associates in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such Additional Shares are to be purchased. Such date may be 5 7 the same as the Closing Date but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares and Warrant Shares. If any Additional Shares are to be purchased, KKR Associates agrees to sell the number of Additional Shares to be sold, and each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares and Warrants, respectively, set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares and Warrants, respectively. At the Closing Date, simultaneous with (i) the purchase by the Underwriters of Warrants and (ii) the payment to the Company of the Warrant Exercise Price, the Underwriters will be deemed to have exercised such Warrants and the Company will immediately issue to the Underwriters at the Closing Date, the related Warrant Shares. Each of the Company and the Selling Stockholders of the Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during a period of 90 days after the date of the Prospectus, (i) offer, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, provided that the foregoing shall not apply to distributions of Common Stock by either KKR Partners or SSI Equity to any of their respective limited partners or (ii) with respect to the Company only, enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities or Warrants to be sold hereunder, (B) any shares of Common Stock issued by the Company pursuant to stock option plans in effect on the date of the Prospectus, (C) option grants under stock option plans in effect on the date of the Prospectus, (D) any agreement of the Company in connection with an acquisition of assets or properties or any capital stock issuable pursuant to the terms of such an agreement, (E) capital stock issuable upon the exercise of warrants outstanding on the date of the Prospectus, or (F) the cancellation of warrants. In addition, each Selling Stockholder agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. With respect to any distributions of shares by KKR Partners and SSI Equity, the limited partners who will receive such shares will agree not to sell those shares for a period of 120 days following the date of the distribution. KKR Associates, as the sole general partner of KKR Partners, and SSI Partners, as the sole general partner of SSI Equity, hereby agree with the Underwriters that they will not waive this sale restriction for a period of 90 days from the date of this Agreement. 4. TERMS OF PUBLIC OFFERING. The Company and the Selling Stockholders are advised by you that the Underwriters propose to make a public offering of their respective portions of the Securities as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company and the Selling Stockholders are further advised by you that the Securities are to be offered to the public initially at $[*] a share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of $.[*] a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $.[*] a share, to any Underwriter or to certain other dealers. 6 8 5. PAYMENT AND DELIVERY. Payment for the Firm Shares and Warrants to be sold by each Selling Stockholder shall be made in Federal or other immediately available funds to an account designated by the Selling Stockholders against delivery of such Firm Shares and Warrants for the respective accounts of the several Underwriters at 7 a.m., California time on February [*], 1999, or at such other time on the same or such other date, not later than [*], 1999, as shall be designated in writing by you. Payment of the Warrant Exercise Price for Warrant Shares shall be made in Federal or other immediately available funds to an account designated by the Company on the same such date. The time and date of such payment are hereinafter referred to as the "Closing Date." Payment for any Additional Shares to be sold by KKR Associates shall be made in Federal or other immediately available funds to an account designated by KKR Associates against delivery of such Additional Shares for the respective accounts of the several Underwriters at 7 a.m., California time on the date specified in the notice described in Section 3 or on such other date, in any event not later than March [*], 1999, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Option Closing Date." Certificates for the Firm Shares, Warrant Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares, Warrant Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Warrants and Securities to the Underwriters duly paid (subject to the provisions of Section 7 hereof), against payment of the Purchase Price, Warrant Purchase Price and Warrant Exercise Price therefor. 6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The several obligations of the Selling Stockholders to sell the Shares and Warrants to the Underwriters and the several obligations of the Underwriters, to purchase and pay for the Shares and Warrants on the Closing Date are subject to the condition that that the Registration Statement shall have become effective not later than the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in clause (a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied in 7 9 all material respects with all of the agreements and satisfied in all material respects all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date (the officer signing and delivering such certificate may rely upon his or her knowledge as to proceedings threatened). (c) Latham & Watkins, counsel for the Company, shall have furnished to you their written opinion dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) the Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; (ii) the Company has authorized capital stock as set forth in the Prospectus, and the Common Stock and Warrants conform to the description thereof contained in the Prospectus; (iii) the Shares to be sold by the Selling Stockholders pursuant to the Underwriting Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the Warrant Shares to be issued and sold by the Company pursuant to the terms of the Warrants have been duly authorized, and when issued to and paid for by you and the other Underwriters in accordance with the terms of the Warrants will be validly issued, fully paid and non-assessable; (iv) this Agreement has been duly authorized, executed and delivered by the Company; (v) the Warrants have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their terms; (vi) the issue and sale of the Warrant Shares being delivered at the Closing Date by the Company and the compliance by the Company with the provisions of this Agreement will not result in the violation by the Company of its Restated Certificate of Incorporation or By-laws or any federal, New York or California statute, rule or regulation known to such counsel to be applicable to the Company (other than federal securities laws, which are specifically addressed elsewhere in such counsel's opinion, or state securities laws, as to which such counsel need not express an opinion) or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any of the indentures relating to the 9.30% Senior Secured Debentures due 2007, 10% Senior Notes due 2002, 10% Senior Subordinated Notes due 2001, 9.875% Senior Subordinated Debentures due 2007, 9.65% Senior Subordinated Debentures due 2004, 9.35% Senior Subordinated Notes due 1999, 6.85% Senior Notes due 2004, 7.00% Senior Notes due 2007, 7.45% Senior Debentures due 2027, 5 3/4% Notes Due 2000, 5 7/8>% Notes Due 2001, 6.05% Notes Due 2003 or 6 1/2% Notes Due 2008, or the bank credit agreement between the Company and a consortium of banks led by Bankers Trust Company; (vii) no consent, approval, authorization or order of, or filing with, any federal, New York or California court or governmental agency or body is required for the issue of the Warrant Shares except such as have been obtained under the Securities Act 8 10 and such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters as to which such counsel need not express an opinion; (viii) each document incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date (other than the financial statements, schedules and other financial data included or incorporated by reference therein, as to which such counsel need express no opinion), when it became effective or was filed with the Commission, as the case may be, appeared on its face to comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. In passing upon the compliance as to form of each of such documents, such counsel may assume that the statements made and incorporated by reference therein are correct and complete; (ix) the statements in the Prospectus under the captions "Certain United States Tax Consequences to Non-United States Holders" and "Description of Capital Stock," in each case insofar as such statements constitute summaries of legal matters, are accurate in all material respects; (x) the Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xi) the Registration Statement and the Prospectus (in each case excluding the documents incorporated by reference therein, and except for financial statements, schedules and other financial data included or incorporated by reference therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements for registration statements on Form S-3 under the Securities Act and the applicable rules and regulations of the Commission thereunder. In passing upon the compliance as to form of the Registration Statement and the Prospectus, such counsel may assume that the statements made and incorporated by reference therein are correct and complete; and (xii) the Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act and no proceedings therefor have been initiated by the Commission; and the Prospectus has been filed in accordance with Rule 424(b) and 430A under the Securities Act. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and your representatives, at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus and such counsel has not made any independent check or verification thereof (except as set forth in paragraph (ix) above), during the course of such participation, no facts came to such counsel's attention that have caused such counsel to believe that the Registration Statement (including the documents incorporated by reference therein), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the 9 11 Prospectus (including the documents incorporated by reference therein), as of its date or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no belief with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus or incorporated by reference therein. In rendering such opinion, such counsel may state that they express an opinion only as to federal securities laws, New York and California law and the General Corporation Law of Delaware. (d) Michael C. Ross, Senior Vice President, General Counsel and Secretary of the Company, shall have furnished to you his written opinion, dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which its ownership or lease of substantial properties or the conduct of its business requires such qualification, and in which the failure to be so qualified and in good standing would have a material adverse effect upon the Company and its subsidiaries considered as a whole; (ii) based solely on certificates from public officials, each Significant Subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; to the best of his knowledge has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which its ownership or lease of substantial properties or the conduct of its business requires such qualification, and in which failure to be so qualified and in good standing would have a material adverse effect upon the Company and its subsidiaries considered as a whole; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued and is fully paid and nonassessable, and the capital stock owned by the Company in such subsidiary is owned by the Company free and clear of any mortgage, pledge, lien, encumbrance, claim or equity; (iii) to the best of such counsel's knowledge there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject, required to be described in the Prospectus, which are not described as required; (iv) the issue and sale of the Warrant Shares being delivered at the Closing Date by the Company and the compliance by the Company with all of the provisions of this Agreement will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument relating to indebtedness in excess of $25 million to which the Company or any of its subsidiaries is a party or by which the 10 12 Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; and (v) the issued and outstanding shares of capital stock of the Company and warrants to purchase capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. (e) Latham & Watkins, counsel for the Selling Stockholders, shall have furnished to you their written opinion, dated the Closing Date, in form and substance satisfactory to you, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders; (ii) each Selling Stockholder has full right, power and authority to enter into the Underwriting Agreement; the sale of the Shares or the Warrants, as applicable, by each Selling Stockholder will not result in the violation by such Selling Stockholder of its partnership agreement or any federal or New York statute, rule or regulation known to such counsel to be applicable to such Selling Stockholder (other than federal securities laws which are specifically addressed elsewhere in such counsel's opinion, or state securities laws, as to which such counsel need not express an opinion); no consent, approval, authorization or order of, or filing with, any federal or New York governmental body or agency is required for the sale of the Shares or the Warrants, as applicable, except such as have been obtained under the Securities Act and except such as may be required under state securities laws in connection with the purchase and distribution of the Securities by the Underwriters, as to which such counsel need not express an opinion; and (iii) Upon (i) payment for the Shares and the Warrants and payment of the exercise price for the Warrant Shares in accordance with the terms of the Underwriting Agreement, (ii) (A) physical delivery by KKR Associates, SSI Associates, L.P. and KKR Partners of the Shares to First Chicago Trust Company of New York (the "Transfer Agent") and (B) instructions from the Company to the Transfer Agent to issue the Warrant Shares in accordance with the terms of the Underwriting Agreement, and registration of the Securities in the name of The Depository Trust Company ("DTC") upon registration of transfer by the Company, (iii) physical delivery of the Securities to DTC, and registration of the Securities in the name of DTC upon registration of transfer by the Company, and (iv) registration by book-entry of the credit to the Underwriters' securities accounts with DTC of the purchase of Securities in the records of DTC and any other "securities intermediary" (as defined in Section 8-102(a)(14) of the New York Uniform Commercial Code (the "New York UCC")) which acts as a "clearing corporation" (as defined in Section 8-102(a)(5) of the New York UCC) or maintains "securities accounts" (as defined in Section 8-501(a) of the New York UCC) with respect to the transfer of the Securities to the Underwriters, then the Underwriters will become the "entitlement holders" (as defined in Section 8-102(a)(7) of the New York UCC) of the Securities, free of any "adverse claims" (as defined in Section 8-102(a)(1) of the New York UCC). (f) The Underwriters shall have received on the Closing Date an opinion of Brown & Wood LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in the first clause of subparagraph (i), the second clause of subparagraph (iii), 11 13 subparagraphs (iv), (xi) and (xii) and the penultimate subparagraph of paragraph (c) above and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. With respect to subparagraph (xi) of paragraph (c) above, Brown & Wood may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto (other than the documents incorporated by reference) and review and discussion of the contents thereof, but are without independent check or verification, except as specified. With respect to paragraph (e) above, Latham & Watkins may rely upon an opinion or opinions of counsel for any Selling Stockholder and, to the extent such counsel deems appropriate, upon the representations of each Selling Stockholder contained herein and in other documents and instruments, provided that (A) each such counsel for the Selling Stockholders is satisfactory to your counsel, (B) a copy of each opinion so relied upon is delivered to you and is in form and substance satisfactory to your counsel, (C) copies of such other documents and instruments, if any, shall be delivered to you and shall be in form and substance satisfactory to your counsel and (D) Latham & Watkins shall state in their opinion that they are justified in relying on each such other opinion. The opinions of Latham & Watkins described in paragraphs (c) and (e) above shall be rendered to the Underwriters at the request of the Company or the Selling Stockholders, as the case may be, and shall so state therein. (g) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed on behalf of each of the Selling Stockholders, to the effect that the representations and warranties of such Selling Stockholders contained herein are true and correct on and as of the Closing Date and that such Selling Stockholders have complied in all material respects with all of the agreements and satisfied in all material respects all of the conditions on their part to be performed or satisfied hereunder on or before the Closing Date. (h) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (i) At the date of this Agreement, the Company and the Selling Stockholders shall have furnished for review by the Underwriters copies of such further information, certificates and documents as they may reasonably request. (j) Simultaneous with the purchase of the Warrants and the payment of the Warrant Exercise Price by the Underwriters, the Company will issue Warrant Shares. (k) If the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 p.m., Washington, D.C. time, on the date of this Agreement. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to the Underwriters on the Option Closing Date of such documents as they 12 14 may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related thereto. 7. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, a signed copy of the Registration Statement (including exhibits thereto and documents incorporated by reference) and to each Underwriter a copy of the Registration Statement (without exhibits thereto but including documents incorporated by reference) and to furnish to you in New York City without charge prior to 5:00 p.m. local time on the business day next succeeding the date of this Agreement, and during the period mentioned in paragraph (c) below, as many copies of the Prospectus, any documents incorporated therein by reference, and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. The terms "supplement" and "amendment" or "amend" as used in this Agreement shall include all documents subsequently filed by the Company with the Commission pursuant to the Exchange Act that are deemed to be incorporated by reference in the Prospectus. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Securities as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Securities may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earnings statement that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Securities under the Securities Act and all other fees or expenses 13 15 in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) the cost of printing or producing any Blue Sky memorandum in connection with the offer and sale of the Securities under state securities laws and all expenses in connection with the qualification of the Securities for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky memorandum, (iii) the cost of printing certificates representing the Securities, (iv) the costs and charges of any transfer agent, registrar or depositary, (v) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expense of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered by the Company in connection with the road show, (vi) all other costs and expenses of the Company in connection with the performance of its obligations hereunder for which provision is not otherwise made in this Section, and (vii) any other costs and expenses of others in connection with the performance of the Company's obligations hereunder which have been previously approved by the Company. Morgan Stanley & Co. Incorporated agrees to pay New York State stock transfer taxes incurred in connection with the sale of the Securities pursuant hereto, if any, and the Selling Stockholders agree to reimburse Morgan Stanley & Co. Incorporated for any associated carrying costs if such tax payment is not rebated on the day of payment and for any portion of such tax payment not rebated. It is understood, however, that except as provided in this Section, Section 8 entitled "Indemnity and Contribution", and the last paragraph of Section 10 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Securities by them, the costs and expenses of the Underwriters relating to investor presentations on any "road shows" undertaken in connection with the marketing of the Shares and any advertising expenses connected with any offers they may make. (g) Upon payment of the purchase price for any or all of the Warrants to the Selling Stockholders, to deem any and all requirements for the transfer of such Warrants to be satisfied. (h) Simultaneous with the purchase from the Selling Stockholders of, and payment for, the Warrants and the payment to the Company of the Warrant Exercise Price by the Underwriters, the Company will issue the Warrant Shares, all as contemplated by this Agreement. 8. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Underwriter or any such controlling person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused 14 16 by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. The Company reaffirms its indemnification of the Selling Stockholders pursuant to that certain Registration Rights Agreement entered into by the Company, KKR Associates, SSI Equity and certain other parties named therein, dated as of November 25, 1986 (the "Registration Rights Agreement"). (b) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as to amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. The Selling Stockholders reaffirm their indemnification of the Company pursuant to the Registration Rights Agreement. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter in paragraph 8(a) above, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to paragraph (a), (b) or (c) of this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall 15 17 pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Stockholders and all persons, if any, who control any Selling Stockholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Stockholders and such controlling persons of Selling Stockholders, such firm shall be designated in writing by the Selling Stockholders. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) To the extent the indemnification provided for in paragraph (a), (b) or (c) of this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as 16 18 the net proceeds from the offering of the Securities received by the Selling Stockholders and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table (including the footnotes thereto) on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Shares and Warrants they have purchased hereunder, and not joint. (f) The Company, the Selling Stockholders and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) of this Section 8. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the proceeds received by such Selling Stockholder from the Shares or Warrant Shares sold by it pursuant to this Agreement exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Securities. 9. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company and the Selling Stockholders, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, either of the New York Stock Exchange or the National Association of Securities Dealers, Inc., (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York or California shall have been declared by either Federal or New York State or California authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event, singly or together with any other such event, 17 19 makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares or Warrants that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares and Warrants which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares and Warrants to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the aggregate number of Firm Shares and Warrants set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares and Warrants set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares and Warrants which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the aggregate number of Shares and Warrants that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of one-ninth of such aggregate number of Firm Shares and Warrants without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares or Warrants and the aggregate number of Firm Shares and Warrants with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares and Warrants to be purchased, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares and Warrants are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. In any such case either you or the Company or the Selling Stockholders shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company or any Selling Stockholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or any Selling Stockholder shall be unable to perform its obligations under this Agreement, the Company and the Selling Stockholders will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder; provided, however, that no such reimbursement shall be required with respect to a termination of this Agreement by the Underwriters pursuant to Section 9 or Section 10. 11. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 18 20 12. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 19 21 13. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, SAFEWAY INC. By: __________________________________________ Name: Title: SELLING STOCKHOLDERS KKR Associates, L.P. By: __________________________________________ Name: Title: General Partner KKR Partners II, L.P. By: KKR Associates, L.P. the General Partner By: __________________________________________ Name: Title: General Partner SSI Associates, L.P. By: KKR Associates, L.P. the General Partner By: __________________________________________ Name: Title: General Partner SSI Equity Associates, L.P. By: SSI Partners, L.P. the General Partner By: __________________________________________ Name: Title: General Partner 20 22 Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED GOLDMAN, SACHS & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ING BARING FURMAN SELZ LLC LEHMAN BROTHERS INC. J.P. MORGAN SECURITIES INC. SALOMON SMITH BARNEY INC. WARBURG DILLON READ LLC Acting severally on behalf of themselves and the several Underwriters named in Schedule II hereto By: Morgan Stanley & Co. Incorporated By: __________________________________________ Name: Title: 21 23 SCHEDULE I
TOTAL NUMBER OF TOTAL NUMBER OF ADDITIONAL SHARES TOTAL NUMBER OF WARRANTS TO BE TO BE SOLD IF FIRM SHARES SOLD (EXPRESSED AS MAXIMUM OPTION SELLING STOCKHOLDERS TO BE SOLD WARRANT SHARES) EXERCISED - -------------------- --------------- ------------------ ----------------- KKR Associates, L.P. 4,261,158 2,000,000 SSI Associates, L.P. 14,862,296 KKR Partners II, L.P. 526,850 SSI Equity Associates, L.P. 99,696 ========== ====== ========= TOTAL 19,650,304 99,696 2,000,000
22 24 SCHEDULE II
TOTAL NUMBER OF TOTAL NUMBER OF ADDITIONAL WARRANTS TO BE SHARES TO BE TOTAL NUMBER OF PURCHASED PURCHASED IF FIRM SHARES TO BE (EXPRESSED AS MAXIMUM OPTION UNDERWRITERS PURCHASED WARRANT SHARES) EXERCISED - ------------ ----------------- --------------- --------------- Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Donaldson, Lufkin & Jenrette Securities Corporation ING Baring Furman Selz LLC Lehman Brothers Inc. J.P. Morgan Securities Inc. Salomon Smith Barney Inc. Warburg Dillon Read LLC ========== ====== ========= TOTAL 19,650,304 99,696 2,000,000
23 EX-23.1 3 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Safeway Inc. on Form S-3 of our report dated February 27, 1998, incorporated by reference in the Annual Report on Form 10-K of Safeway Inc. for the year ended January 3, 1998 and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. DELOITTE & TOUCHE LLP San Francisco, California January 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----