Safeway 1999 Annual Report Download - page 31

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Off-balance sheet instruments The fair value of interest
rate swaps are the amount at which they could be settled
based on estimates obtained from dealers. At year-end
1999, net unrealized gains on such agreements were
$4.7 million compared to an unrealized loss of $7.0 million
at year-end 1998. Since the Company intends to hold these
agreements as hedges for the term of the agreements, the
market risk associated with changes in interest rates
should not be significant.
Impairment of Long-Lived Assets When Safeway
decides to close a store or other facility, the Company
accrues estimated future losses, if any, which may include
lease payments or other costs of holding the facility, net of
estimated future income in accordance with the provisions
of SFAS No. 121, “Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed
of.” The operating costs, including depreciation, of stores
or other facilities to be sold or closed are expensed during
the period they remain in use. Safeway had an accrued lia-
bility of $87.3 million at year-end 1999 and $84.6 million
at year-end 1998 for such estimated future losses, which is
included in Accrued Claims and Other Liabilities in the
Company’s consolidated balance sheets.
Goodwill Goodwill is $4.8 billion at year-end 1999 and
$3.3 billion at year-end 1998, and is being amortized on a
straight-line basis over its estimated useful life of 40 years.
If it became probable that the projected future undiscounted
cash flows of acquired assets were less than the carrying
value of the goodwill, Safeway would recognize an impair-
ment loss in accordance with the provisions of SFAS No. 121.
Goodwill amortization was $101.4 million in 1999,
$56.3 million in 1998 and $41.8 million in 1997. Goodwill
and related amortization have increased due to the acquisi-
tions of Randall’s, Dominick’s and Carrs and the Vons
Merger discussed in Note B.
Stock-Based Compensation Safeway accounts for
stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” The disclosure requirements of SFAS No. 123,
“Accounting for Stock-Based Compensation,” are set forth
in Note F.
New Accounting Standards In June 1998 the
Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” which was amended by SFAS 137, which
defines derivatives, requires that derivatives be carried at
fair value, and provides for hedge accounting when certain
conditions are met. This statement is effective for Safeway
beginning in the first quarter of 2001. Although the
Company has not fully assessed the implications of this new
statement, the Company believes adoption of this statement
will not have a material impact on its financial statements.
During the first quarter of 1999, the Company adopted
SOP 98-5, “Reporting on the Costs of Start-Up Activities,”
which requires that costs incurred for start-up activities, such
as store openings, be expensed as incurred. This SOP did not
have a material impact on Safeway’s financial statements.
Note B: Acquisitions
In September 1999, Safeway acquired all of the outstand-
ing shares of Randall’s in exchange for $1.3 billion con-
sisting of $754 million of cash and 12.7 million shares of
Safeway stock. The Randall’s Acquisition was accounted
for as a purchase and resulted in goodwill of approximately
$1.3 billion which will be amortized over 40 years.
Safeway used proceeds from the issuance of subordinated
debt to fund the cash portion of the acquisition.
In April 1999, Safeway acquired Carrs by purchasing
all of the outstanding shares of Carrs for approximately
$106 million in cash. The Carrs Acquisition was account-
ed for as a purchase and resulted in goodwill of approxi-
mately $213 million which will be amortized over 40 years.
Safeway funded the acquisition, and subsequent repay-
ment of approximately $239 million of Carrs’ debt, with
issuance of commercial paper
In November 1998 Safeway completed its acquisition
of all of the outstanding shares of Dominick’s for a total
of approximately $1.2 billion in cash. The Dominick’s
Acquisition was accounted for as a purchase and resulted
in additional goodwill of $1.6 billion which is being
amortized over 40 years. Safeway funded the Dominick’s
Acquisition, including the repayment of approximately
$560 million of debt and lease obligations, with a combina-
tion of bank borrowings and commercial paper.
The following unaudited pro forma combined summary
financial information is based on the historical consolidated
results of operations of Safeway, Dominick’s, Carrs and
Randall’s as if the Dominick’s, Carrs and Randall’s
Acquisitions had occurred as of the beginning of each year
presented. This pro forma financial information is presented
for informational purposes only and may not be indicative
of what the actual consolidated results of operations would
have been if the acquisitions had been effective as of the
beginning of the years presented. Pro forma adjustments
were applied to the respective historical financial state-
ments to account for the Dominick’s, Carrs and Randall’s