GROCERYWORKS SHAREHOLDERS SEEK DAMAGES FROM SAFEWAY

ELLIOT ZWIEBACH

DALLAS -- Safeway, Pleasanton, Calif., is being sued by minority shareholders of GroceryWorks.com here, the on-line grocery delivery company in which the retail chain owns the controlling interest.

The petition, filed in U.S. District Court here, charges Safeway and its two top executives -- Steve Burd, chairman and chief executive officer, and Vasant M. Prabhu, executive vice president and chief financial officer -- with conspiring to steal the dot-com company's intellectual property while failing to honor a variety of agreements to promote the GroceryWorks name.

Safeway officials said the suit is without merit.

The suit, which seeks damages of "not less than" $180 million, was filed by five minority shareholders of Grocery Works, including JF Partners, Richard W. Adkisson, David M. Dean, Kenneth Bruder and the BruderWolf Family Partnership, all based here.

The suit alleges that Safeway's true intent in investing in the on-line grocer "is to usurp GroceryWorks' proprietary knowledge of the Internet grocery business while simultaneously allowing GroceryWorks to deteriorate as a going concern. This places Safeway in the best position to 'pick-off' the remaining minority shareholders of GroceryWorks for little or no consideration."

According to the suit, GroceryWorks needs a capital infusion before May to remain viable. But Burd and Prabhu "have failed to obtain necessary financing to continue the operations," the suit says. "Failure to obtain additional capital before May of 2001 would cause irreparable harm to GroceryWorks.

"... Safeway, which has complete and absolute control of GroceryWorks, is not taking steps to keep GroceryWorks viable," the suit continued. "Unless actions are taken soon, GroceryWorks either will become a complete captive of Safeway or will cease being able to serve its customers, which would destroy GroceryWorks as a going concern."

Safeway has been working with the two-year-old on-line company for about a year. Safeway's Texas operations include Randall's Supermarkets in Houston and Austin and Tom Thumb here.

The suit says Safeway invested $30 million in GroceryWorks.com last June in return for preferred stock convertible into 50% of the company's common stock, plus two seats on the board of directors; the chain subsequently invested additional funds and increased its stake to 62%, the suit indicates.

According to the suit, Safeway signed a strategic alliance agreement last June 5 in which it said it would co-brand with GroceryWorks in all joint markets and would sell all products covered by the agreement with GroceryWorks on its Web site.

Safeway signed a product purchase agreement on June 6, the suit points out, that said GroceryWorks would purchase all covered products from Safeway and Safeway would sell those products to the on-line company at cost.

"These two contracts were extremely valuable to GroceryWorks," the suit says, "since they obligate Safeway to use GroceryWorks.com as [its] exclusive Internet channel for a 10-year period" for groceries, pharmaceuticals, florals and other perishables, videos and other general merchandise.

"After ... obtaining control of GroceryWorks, Safeway ... totally ignored [its] contractual obligations and began a process of oppressing the minority owners of GroceryWorks, ... [which] damaged GroceryWorks and diluted the value of the minority shareholders' interest," the suit alleges.

The suit also says Burd and Prabhu breached their fiduciary duties as directors of GroceryWorks "by directing Safeway to ... repudiate the agreements" by selling floral items through the Randalls/Tom Thumb Web sites and bypassing GroceryWorks; offering weekly specials without directing customers to GroceryWorks; failing to indicate Safeway's Web sites are "powered by GroceryWorks.com," and failing to mention GroceryWorks on its home page; and failing to provide GroceryWorks with customer data from Safeway's loyalty cards.

The suit also says Safeway has not worked with GroceryWorks to implement the procedures for picking up on-line orders at Safeway stores, and further alleges that Burd and Prabhu have not acted in good faith.