Safeway 2002 Annual Report Download - page 47

SAFEWAY INC. 2002 ANNUAL REPORT 45
Future Beef Operations Holdings, LLC (“FBO”), a meat
processing company based in Denver, Colorado, was placed in
bankruptcy in March 2002. Safeway was a 15% equity
investor in FBO, had a supply contract for the purchase of beef
from FBO, and had a common board member with FBO.
Safeway had a first-loss deficiency agreement with FBO’s
principal lender which provided that, under certain circum-
stances and in the event of a liquidation of FBO being
initiated, Safeway would pay the lender up to $40 million if
proceeds from the sale of collateral did not fully repay the
amount owed by FBO to the lender. Safeway accrued a pre-
tax charge of $51 million in other (loss) income related to
the bankruptcy in 2001. The charge was primarily for pay-
ments under contractual obligations and the first-loss defi-
ciency agreement in the event FBO was liquidated. FBO is
currently in the process of being liquidated and Safeway
paid the lender $40 million in January 2003.
NOTE L: RELATED PARTY TRANSACTIONS
Prior to April 2000, the Company held an 80% interest in
Property Development Associates (“PDA”), a partnership
formed in 1987 with Pacific Resources Associates, L.P.
(“PacTrust”), a limited partnership, the sole general partner
of which is a corporation owned by approximately 45 indi-
viduals, including three of the Company’s directors.
Through their ownership in the corporate general partner,
these three directors’ ownership interest in PacTrust is
approximately 3.8%. None of these directors is involved in
the day-to-day management of PacTrust or in the negotia-
tions related to the purchase of properties. PDA was dis-
solved in April 2000.
During 2002, Safeway sold eight properties to PacTrust
with an aggregate carrying value of $0.3 million for $2.6
million cash, resulting in an aggregate gain of $2.3 million.
During 2001, Safeway sold 22 properties to PacTrust with
an aggregate carrying value of $7.5 million for $13.9 million
cash, resulting in an aggregate gain of $6.4 million. During
2000, Safeway sold 48 properties to PacTrust with an aggre-
gate carrying value of $43.5 million for total consideration
of $84.4 million, resulting in an aggregate gain of $40.9 mil-
lion. Of the consideration received, $13.4 million was in the
form of a note receivable and the remainder was in cash.
The note bore interest at 8.5% and was fully paid in cash
before the end of 2000.
Safeway paid PDA $1.1 million in 2000 for reimburse-
ment of expenses related to management and real estate
services provided by PDA.
HBS Limited Partnership (“HBS”) is a limited partner-
ship formed in 1996 to own, develop and operate a shopping
center in Hawaii. Safeway is sole general partner of HBS.
Safeway had a note receivable of $26.5 million at year-end
2002 and $25.0 million at year-end 2001 from HBS for
funding the development costs of the shopping center. The
loan is secured by a first mortgage lien against the land and
a first security interest in all personal property of HBS.
Safeway had a supply contract to purchase beef from
FBO, which had a common board member with Safeway. In
March 2002 FBO was placed in bankruptcy. See Note K.
The Company has made loans to certain of its executive
officers in connection with their relocations. The promissory
notes bear no interest and are secured by personal residences.
At year-end 2002, $3.1 million was outstanding on these
notes with repayment terms ranging from 2003 to 2007.
The Company has conducted various transactions in the
normal course of business with each of its equity investees
which are not material.
NOTE M: COMMITMENTS
AND CONTINGENCIES
LEGAL MATTERS In July 1988, there was a major fire at the
Company’s dry grocery warehouse in Richmond, California.
Through February 19, 2003, in excess of 126,000 claims for
personal injury and property damage arising from the fire
had been settled for an aggregate amount of approximately
$125 million. The Company’s loss as a result of the fire dam-
age to its property and settlement of the above claims was
substantially covered by insurance.
As of February 19, 2003, there were still pending approx-
imately 1,900 claims against the Company for personal
injury (including punitive damages), and approximately 290
separate active claims for property damage, arising from the
smoke, ash and embers generated by the fire. A substantial
percentage of these claims have been asserted in lawsuits
against the Company filed in the Superior Court for
Alameda County, California. There can be no assurance
that the pending claims will be settled or otherwise disposed
of for amounts and on terms comparable to those settled to
date. Safeway continues to believe that coverage under its
insurance policy will be sufficient and available for resolu-
tion of all remaining personal injury and property damage
claims arising out of the fire.