The placing of Denver, Colo-based meat processing company Future Beef Operations LLC in Chapter 11 bankruptcy on 4 March 2002 has raised the spectre of a 2001 charge for supermarket giant Safeway Inc.

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Safeway is a 15% equity investor in Future Beef and has a supply contract to purchase beef from the company. In addition, Safeway has a first loss deficiency agreement with Future Beef’s principal lender, which provides that under certain circumstances and in the event of liquidation, Safeway will pay the lender up to US$40m if proceeds from the sale of collateral do not fully repay the amount owed by Future Beef to the lender.


With its first plant in Arkansas City, Kansas, Future Beef had planned to pioneer new practices in integrated beef supply chain management. The plant began operations in August 2001 and failed to meet performance expectations. Subsequent to year-end, the plant continued to underperform and larger-than-expected start-up losses caused the company to be placed into Chapter 11 proceedings.


Safeway will accrue an after-tax charge of US$30.5m (US$0.06 per share) related to the Future Beef bankruptcy in its 2001 financial statements. The charge is primarily for potential payments under contractual obligations and the first loss deficiency agreement in the event Future Beef is liquidated.


Because Safeway has not yet filed its 2001 Form 10-K with the SEC, generally accepted accounting principles require that this estimated charge be reflected in 2001 financial statements. Net income for the year 2001 was US$1,253.9m (US$2.44 per share) including the US$0.06 per share impact of the Future Beef bankruptcy.

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