Item 1. Business
The registrant, United Grocers, Inc. ("United" or "the Company"), is an Oregon business corporation primarily engaged in the wholesale grocery and food service distribution business. The Company was organized in 1915 and operates and is taxed as a cooperative.
The Company supplies groceries and related products to independent retail grocers located in Oregon, Western Washington and California. In addition, the Company and certain of its wholly owed subsidiaries, provides many services needed for the operation of a modern, successful grocery business. These services include marketing assistance, engineering, accounting, financing.
The Company's food service distribution business is conducted through its Cash & Carry food service division, and its wholly owned subsidiary, Rich & Rhine, Inc. The Company's Cash & Carry division sells grocery and related products to non member retail stores, restaurants, and other institutional entities through its 38 stores located in Oregon, Washington, California, and Idaho. Rich & Rhine distributes tobacco and candy products to other non member retail businesses.
The Company is also engaged in providing multiple line insurance and related insurance to the grocery industry in 29 states through various wholly owned subsidiaries. These subsidiaries include Grocers Insurance Company, Grocers Insurance Agency, Inc., UGIC, Ltd., United Work Place Consultants, Inc., and Grocers Insurance Group, Inc.
In December, 1995, United acquired the assets and related business of the wholesale division of Bay Area Foods, Inc., doing business as Market Wholesale Grocery ("Market Wholesale"). The acquired operations increased the Company's business in California. Annual revenues in 1996 from the acquired operations were approximately $249 million.
Financial data regarding the Company's industry segments is included in the financial statements appearing in Item 6.
Membership
Independent retail grocers within United's market area are eligible to apply for membership. All applicants for membership are subject to approval by United's board of directors on the basis of financial responsibility and operational ability. On approval, applicants are required to purchase shares of United's common stock. United has approximately 248 members operating a total of approximately 353 retail grocery stores.
By pooling the buying power of its members, United is able to purchase goods in large quantities at prices lower than the prices generally available to independent retail grocers. The savings from the bulk purchases are passed along to members in the form of rebates, allowances and patronage dividends.
United also pays its members annual patronage dividends based on the overage, or excess of revenues over expenses, on sales to members for the year. Each year United's board of directors determines the portion of the overage which is to be distributed as patronage dividends. Decisions concerning the portion of the overage to be retained are based upon various factors including United's future capital needs and the amount of earnings available from operations not qualifying for distribution as patronage dividends. The patronage dividends are allocated among the members in proportion to the contribution to United's gross profit (before rebates and allowances) attributable to their purchases from United. The patronage dividends are paid partly in cash and partly in Membership Stock.
No member or other customer of United accounts for as much as 10 percent of its sales. Management believes that the loss of any one or a few of its members or other customers would not have a material effect on its business or financial condition.
Member Services
United provides a number of retail services to its members. Services which do not carry a specific fee or charge include marketing information, merchandising assistance, competitive retail price reporting and developmental services such as store site selection, design and engineering.
United also offers its members, at a fee, complete bookkeeping, accounting and tax services for their retail operations. A computerized payroll service is also available. Other miscellaneous retail services which generally carry a scheduled fee assessment include customized retail pricing, retail shelf "unit pricing," and retail information service products.
Members can receive finance services from United's subsidiary, United Resources, Inc. United Resources makes loans and provides other financial services to members. Loans to members are generally made at one and three quarters to two and one quarter percentage points over the prime interest rate. Such loans generally are for terms of one to ten years. Loan funds are obtained under a note purchase agreement with National Consumer Cooperative Bank at rates varying with market interest rates. At September 27, 1996, the aggregate principal amount of member loans outstanding due the subsidiary was $27,515,354. The subsidiary's interest income for the year then ended was approximately $2,572,000. In the normal course of its activities, United Resources, Inc., acquires retail stores through foreclosure or purchase and operates them on a temporary basis. United Resources owned three such stores at September 27, 1996. During 1996, United Resources acquired two stores through foreclosure, and disposed of three stores through sale or closure.
United, where appropriate, leases retail space and subleases the space to qualified members to enable them to obtain prime commercial space. At September 27, 1996, United was obligated on 51 such leases. During 1996, the Company changed its policy of requiring lease insurance on subleases whereby United is the main lessee, and replaced the lease insurance with a program whereby United recognizes profits on its subleases to compensate the Company for its sublease risk. See Notes to Consolidated Financial Statements for more information on these subleases.
Technology
During 1996 United Grocers strategically focused its Information Services group on building systems platforms to allow for future growth. The Inventory and Distribution Management system in use by United Grocers was updated to the DCS2000 system provided by British American Consulting Group (BAcg). This system is a full multi-warehouse distribution system with a complete set of modules to support purchasing and warehousing functions. Another key strategic project this year was the migration of UG's Finance and Accounting system from the mainframe to a client-server financial package provided by Oracle. The combination of these two systems helps position United Grocers for maximum flexibility and capability for business expansion.
In the Retail Systems area, United Grocers has continued to build strategic computer system platforms that will greatly assist in the success of independent retail grocers while competing in today's marketplace against the large chains. To take advantage of the economies of scale enjoyed by retail chains with the development, purchase, implementation, and support of computer systems, United Grocers has taken a strong leadership role in providing a high-quality, standard computing package for its retail customers. This standard platform has been marketed under the name Project Enterprise.
Project Enterprise bundles software, hardware, network connections, and maintenance together into a single product offering. This entire system is placed in the retail location; store personnel are trained by United Grocers staff. The retailer's only financial responsibility is to pay a weekly fee for the use of the system. Project Enterprise has allowed United Grocers to make a strong computing system affordable to its retailers while allowing for volume discounts for hardware and maintenance. United Grocers can now leverage and build upon these systems in a similar fashion as a standardized chain environment. The Project Enterprise platform includes an integrated store processor (I.S.P.), UG's U-Link family of services, a laser printer, and UG's Ready Pay electronic payment system. In a mass rollout effort, the UG Retail Systems group has implemented over 160 of these Project Enterprise systems this year.
Food Service Distribution
The Company's food service distribution operations generate significant annual volume for its distribution segment, as well as a prominent source of potential growth in the future. The main source of food service volume is the Company's Cash & Carry wholesale outlets. These outlets provide a convenient, low cost method of purchasing groceries and institutional products for non member grocers, restaurants, and institutional buyers. Cash & Carry customers select their merchandise at the outlet much in the same manner that a customer at a retail grocery store would. Cash & Carry customers provide their own transportation.
At September 27, 1996, the Cash & Carry outlets generated $233 million in sales, an increase of 13% over 1995 sales of $206 million. In 1997, the Company is scheduled to open six new locations, for a total capital investment of approximately $6 million.
In addition to Cash & Carry operations, the Company's food service distribution includes Rich & Rhine, Inc., which contributed $38.9 million to distribution segment sales in 1996.
Insurance
Overview
Grocers Insurance Group, Inc. was formed on October 25, 1990, and is the holding company for the Company's insurance-related subsidiaries. Grocers Insurance Group, Inc. assists in marketing insurance-related services offered by those subsidiaries.
Grocers Insurance Agency, Inc., is an insurance agency offering commercial and personal lines coverages.
United Workplace Consultants, Inc. offers consulting and rehabilitation services to corporate clients including members of the Group.
UGIC, Ltd. provides reinsurance services for property and casualty lines.
Grocers Insurance Company, Inc., is a commercial lines underwriter rated A- by A.M. Best.
Operations
The following analysis of insurance operations is limited to Grocers Insurance Company (GIC), the significant underwriting subsidiary of the company.
Premiums Written
An analysis of GIC's premiums written during the past three years is shown in the following table.
($ in thousands) Direct Reinsurance Reinsurance Net Year Written Assumed Ceded Written
1994 $23,992 $ 861 $6,652 $18,201 1995 27,809 698 7,364 21,143 1996 28,988 567 8,185 21,370
The three states accounting for the largest amounts of direct premiums written for the year ending September 30, 1996, were Oregon with 33%, California with 24%, and Washington with 10%. No other state accounted for more than 7% of such premiums. In 1996 there were no significant changes in business, geographic mix or types of risks assumed.
Underwriting Results
A commonly used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of net incurred losses and related loss adjustment expenses to net premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio). The loss ratio, expense ratio and combined ratio for GIC for the last three calendar years are as follows:
Loss Expense Combined Year Ratio Ratio Ratio
1993 89.6% 13.0% 102.6% 1994 79.0% 21.9% 100.9% 1995 82.9% 21.1% 104.0%
These ratios compare to industry composite combined ratios of 105.7% for 1993, 107.1% for 1994 and 105.0% for 1995.
There have been no unusually large gains or losses from underwriting or investment operations during the year. There are no effects from currency fluctuations, with all business being transacted within the United States.
Claim Operations
Net Unpaid Loss and Loss Adjustment Expenses (LAE) for the last three fiscal years are:
($ in thousands) Increase Year Losses LAE Total or (Decrease)
1994 22,968 4,671 27,639 (2.7%) 1995 24,534 4,819 29,353 6.2% 1996 23,676 4,981 28,657 (2.4%)
For additional historical information on loss reserve development and reconciliation of claim reserves, please refer to Appendix 1 and Appendix 2 to this report.
Reinsurance
GIC reinsures limits above $100,000 per risk through a treaty reinsurance program with upper limits of $20 million for workers' compensation and liability exposures, and limits up to $3 million for property risks. Facultative reinsurance is purchased for property risks written with limits above $3 million. Current reinsurers on the main working layers are all rated A- or better by A.M. Best.
Risk Based Capital / IRIS
The National Association of Insurance Commissioners (NAIC) has adopted, effective December 31, 1994, a risk-based capital formula for property and casualty companies which will be used by insurance regulators in assessing the capital adequacy of insurance companies.
The ratio for GIC as determined at December 31, 1995, was significantly above the levels which would require regulatory action. Regulatory total adjusted capital was $15.7 million; authorized control level risk based capital was $1.9 million.
The NAIC produces an annual evaluation, the Insurance Regulatory Information System (IRIS), utilizing data from the statutory annual statements filed as of each December 31 with state insurance departments.
GIC had no ratios designated as an "unusual value" in its IRIS Report for the year ended December 31, 1995.
Competition
The grocery industry is characterized by intense competition. United's wholesale grocery marketing area is comprised of Oregon, California and Western Washington. United's principal competitors are two national grocery wholesalers (which because of their operations in other areas are larger than United) and four regional grocery wholesalers.
Other competitors include a number of local grocery wholesalers, many of whom are limited to special product lines, such as candy or produce, or sell only to limited market segments, such as restaurants or institutions. United also competes with a significant number of producers which market their products directly to retailers and with several chain store organizations which control both their wholesale and retail operations.
Based on information available to it, United estimates that its members, many of whom are in competition with one another, account for approximately 14% of the retail grocery market within United's marketing area. Although members are free to purchase from sources other than United, members generally purchase goods (except goods which United does not supply (such as beer and wine) principally from United. United does not account for a significant percentage of the national wholesale grocery market.
Recent trends in the results of the Company's member stores have continued. In general, members outside major metropolitan areas, and those operating newer stores, price oriented or super store formats registered various gains in volume. Members operating average-sized conventional stores generally registered small volume losses overall. As a result of these trends, the Company's member unit volume in the distribution segment decreased approximately 1%.
Like the grocery industry, the insurance industry is highly competitive. Grocers Insurance Group is well positioned to serve the retail food industry. Due to its specialization in the retail food business, Grocers Insurance Group generally operates on lower expense ratios than most of its competitors, allowing it to offer competitive prices for its policies.
Employees
United employed approximately 2,000 persons at September 27, 1996. Approximately 880 of its employees are members of Teamster or other unions.
United's collective bargaining agreements expired in April, 1996, and new contracts have been ratified. The Company considers its employee relations to be satisfactory.
Supplies
United purchases goods from a wide variety of sources ranging from local farmers to large multinational corporations. United attempts to obtain the lowest possible price by pooling the buying power of its members. United is not dependent on any single supplier and the loss of any single supplier would not have a material effect on its business.
United is one of the five stockholders of Western Family Holding Company, a corporation which pools the buying power of its stockholders in order to obtain lower cost merchandise. Purchases from Western Family Holding Company, which account for about 11% of United's total purchases, are distributed under labels such as "Western Family" and "Cottage."
United's operations are not of a type which ordinarily result in the discharge of significant quantities of pollutants. United believes that its operations substantially meet or exceed all applicable environmental regulations.
Income Taxes
United operates and is taxed as a cooperative. Accordingly, patronage dividends are not included in United's taxable income but are instead taxed to the individual members receiving the patronage dividends. The Internal Revenue Code of 1986, as amended ("Code") requires that not less than 20 percent of each member's patronage dividend be paid in cash. United's patronage dividend policy meets that requirement, providing for cash payments of up to 100% of dividends based on ratios of the value of stock holdings by member stores to their average weekly purchases, and total number of shares of stock owned. Patronage dividends not paid in cash are paid in additional Membership Stock. Members are required to agree to abide by all United's bylaw provisions, including those applicable to federal income taxation of patronage dividends. Accordingly, members must report as taxable income the total amount of patronage dividends, whether paid in cash or Membership Stock, in the year such patronage dividends are received, and such amounts are not taxable to United.
United is taxed on income which does not qualify for distribution as patronage dividends and on the portion of overage which is not distributed to members. United's subsidiaries retain all profits (or losses) from their operations and are part of the consolidated federal income tax return.
Government Contract Business
The Company does not generate significant business based upon contracts with local, state or federal government entities.
Item 2.
Item 2. Properties
United owns and operates two distribution centers. Its main distribution center, located in Milwaukie, Oregon, contains over 815,000 square feet of warehouse space situated on a 62-acre site owned by United. Also at this location are 84,900 square feet of office space, a 20,000-square- foot truck repair shop, and a 114,000-square-foot frozen food distribution center.
United's southern Oregon division distribution center, located in Medford, Oregon, contains approximately 200,000 square feet of warehouse space, plus related office and maintenance areas.
United's distribution center warehouses are of modern, one-floor, sprinklered, concrete construction. The warehouses are subject to various mortgages, the terms of which are summarized in the Notes to the Consolidated Financial Statements.
United and its subsidiaries operate a truck fleet consisting of 228 tractor cabs and 417 dry freight and refrigerated semitrailers, including both owned and leased units.
United leases a mainframe computer, together with related peripheral equipment, under various leases expiring in April, 1997. The leases call for annual rental of approximately $797,000.
United, as described under "Services," is also the prime lessee of retail stores, which are subleased to members, totaling approximately 1.2 million square feet. Further, United and its subsidiaries are the lessees and operators of two retail stores acquired through foreclosure and purchase totaling an additional 90,000 square feet. United owns an additional retail store occupying approximately 38,000 square feet.
Additionally, United owns five Cash & Carry stores ranging in size from 10,800 to 23,520 square feet.
United rents several warehouse and cash and carry stores with lease terms and rents as follows:
Area in Lease Monthly Facility Type Location Square Feet Expiration Rent - ------------- -------- ----------- ----------- ---- Warehouse Santa Rosa, CA 244,000 7/27/05 $80,250 Modesto, CA 275,000 7/27/05 $74,250 Tracy, CA 160,166 7/27/05 $84,888 Portland, OR 18,000 9/30/98 $ 5,000 Milwaukie, OR 9,600 9/30/00 $ 2,836 Woodland, CA 68,400 10/01/05 $24,640
Cash & Carry Stores Aloha, OR 20,500 2/28/97 $ 6,970 Bend, OR 18,460 4/21/07 $ 5,532 Coos Bay, OR 14,250 8/31/97 $ 2,262 Gresham, OR 18,220 12/31/96 $ 5,830 Newport, OR 16,000 11/30/07 $ 6,700 Portland, OR 17,508 7/01/01 $ 6,000 Portland, OR 20,000 5/31/01 $ 7,948 The Dalles, OR 16,400 6/02/02 $ 2,419 Arcata, CA 23,000 10/31/97 $ 8,288 Redding, CA 25,380 10/31/00 $ 8,882 Olympia, WA 17,780 9/02/99 $ 8,150 Seattle, WA 23,500 5/22/99 $11,280 Seattle, WA 23,764 7/24/99 $12,000 Tacoma, WA 20,400 9/01/99 $ 8,976 Clackamas, OR 21,000 6/01/01 $ 7,600 Bellingham, WA 20,000 11/30/99 $ 8,800 Portland, OR 20,600 3/31/01 $ 9,475 Salem, OR 19,600 9/04/06 $ 7,812 Warrenton, OR 14,700 4/21/07 $ 4,434 Everett, WA 18,750 10/31/00 $ 9,000 Kent, WA 18,896 3/31/06 $10,012 Federal Way, WA 21,453 9/12/08 $11,048 Lynnwood, WA 22,200 6/12/08 $15,000 Bellevue, WA 18,000 12/14/03 $10,500 Sacramento, CA 23,120 1/14/09 $ 8,092 Medford, OR 22,150 6/06/10 $ 8,938 Yuba City, CA 26,871 6/15/10 $19,616 Ballard, WA 15,000 5/31/00 $ 6,000 Bremerton, WA 10,000 4/30/00 $ 2,250 Tukwila, WA 21,000 4/30/00 $ 6,720 Boise, ID 21,094 3/31/16 $13,950 Chico, CA 20,680 7/04/06 $ 6,204 Oakland, CA 25,709 6/10/15 $11,260
Item 3.
Item 3. Legal proceedings
The Company is regularly a party to routine legal proceedings not expected to have a material effect on its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no market for United's Common Stock, which is non-transferable. The approximate number of holders of United's Membership Stock as of December 24, 1996, was 248.
United's earnings are distributed only in the form of patronage dividends. Accordingly, no earnings are available for the purpose of paying dividends on Membership Stock.
Item 6.
Item 6. Selected Financial Data
Consolidated revenues by principal product lines and services appear in the following table:
The following balance sheet data at September 27, 1996 and September 29, 1995 and the income statement data for the years ended September 27, 1996, September 29, 1995, and September 30, 1994 have been derived from audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The balance sheet data at September 30, 1994, October 1, 1993, and October 2, 1992 and income statement data for the years ended October 1, 1993 and October 2, 1992 have been derived from audited financial statements not required to be included in this report. The data should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein.
Fiscal Years Sept 27 Sept 29 Sept 30 Oct 1 Oct 2 1996 1995 1994 1993 1992 ------- ------- ----- ----- ------- (Dollars in thousands, except per share amounts)
Income Statement: Net sales and operations $1,301,507 $1,018,248 $954,220 $876,587 $896,587 Income before members' patronage dividends, income taxes and accounting change 4,227 10,503 11,294 11,291 13,314 Patronage dividends 4,000 8,350 8,730 9,000 10,211 Net income 152 1,379 1,563 1,714 2,723 Balance Sheet: Working capital 59,224 52,510 45,258 41,819 53,326 Total assets 384,144 322,456 306,836 285,342 261,289 Long-term liabilities 143,134 115,624 114,669 105,539 104,645 Members' equity 41,459 42,357 40,425 39,112 39,141
Adjusted book value per share 61.53 62.15 59.50 57.00 53.94
Notes to Selected Financial Data A. Data concerning net income per common share and cash dividends per common share is omitted because United is a cooperative.
B. Adjusted book value per share is computed by subtracting from total members' equity at year end, stock to be issued from patronage and paid-in capital on such stock, unrealized gain on investments, and undistributed equity from investments accounted for on the equity method and dividing the resulting number by shares outstanding at year end.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
During fiscal year 1996, net sales and operations increased 27.8 % to $1,301.5 million. This compares to an 6.7% increase in 1995 to $1,018.2 million. Income before members' allowances, patronage dividends, and income taxes decreased $6.2 million to $15.8 million (1.22 % of sales). This compares to $22.0 million (2.16% of sales) and $22.7 million (2.38% of sales) in 1995 and 1994 respectively.
In December, 1995, United acquired the assets and related business of the wholesale division of Bay Area Foods, Inc., doing business as Market Wholesale Grocery ("Market Wholesale"). In December 1995, United acquired operations were approximately $249.2 million. Total assets at year end from the acquired operations amounted to $47.6 million, and the Company's net investment in the assets was approximately $34.0 million.
During 1996, the increase in net sales and operations was primarily attributable to the distribution segment which enjoyed increased food service distribution unit volume and increased sales from the Company's acquisition of Market Wholesale. These gains were off set by decreased premium income in the insurance segment, lower volume from member owned retail stores, and lower unit volume in the distribution segment's member business.
In 1996, the Company had increased profits within its distribution segment from its food service and other nonmember distribution segment operations, and lower operating losses at company-owned retail stores. Within the insurance segment, profits increased from the agency and underwriting operations. These profit gains were offset by increased operating expenses in the distribution segment due to cost inflation and system integration activities. Profit gains were also impacted by higher interest expenses due to increased average levels of debt caused by the acquisition of Market Wholesale and increased software investments.
During 1995, the increase in net sales and operations was primarily attributable to the distribution segment. In addition, the insurance segment generated increased sales primarily due to increased premium volume from growth in policies issued. These gains in sales were offset by lower sales from company-owned retail stores. In 1995, the Company had increased profits within its distribution segment from its Cash & Carry and other nonmember distribution segment operations, and lower operating losses at company-owned retail stores. Within the insurance segment, profits increased from agency operations and lease insurance activities. These profit gains were offset by higher interest expenses, increased operating expenses in the distribution segment, and increased property losses in Grocers Insurance Company.
Net Sales and Operations
During 1996, sales of the Company's distribution segment increased 30.5% to $1,275.0 million. The sales gain was primarily due to volume realized from acquired operations and increased food service distribution unit volume. Price changes during 1996 impacted warehouse sales by approximately 2.1 %.
Food service distribution increased 15.4% to $271.8 million compared to $235.5 million in 1995. Sales at new units and businesses acquired in 1995 contributed 9.1% to the sales increase. Sales at company- owned retail stores, which are primarily acquired as a result of store finance operations, decreased $20.1 million to $22.4 million. During the year, the company acquired two stores and disposed of three stores. As a net result, the number of company-owned retail stores decreased by one store.
In 1996, the insurance segment's net insurance premiums, commissions, and fees decreased $2.7 million to $20.1 million. The decrease was primarily attributed to increased unearned premium reserves in the Company's workman's compensation business, and increased reinsurance expenses associated with the increase in business mix towards larger volume accounts. Policy premiums increased approximately $1.1 million despite declining rates in workman's compensation, and flat rates in property and casualty lines of business.
Gross Operating Income
Gross operating income increased to $174.3 million (13.4% of sales) in 1996 from $148.2 million (14.6% of sales) in 1995, and $137.5 million (14.4% of sales) in 1994. Gross operating income from the acquired operations of Market Wholesale contributed $26.6 million to gross operating income. The Company's gross operating income also increased due to higher unit sales in food service distribution, and improved loss experience in Grocers Insurance Company. These improvements were off set by lower gross operating income from retail stores owned by the Company due to a lower number of stores.
In 1996, loss and loss adjustment expenses were 68.7% of total premium income, compared to 74.7% and 64.7% in 1995 and 1994, respectively. The improvement in loss experience resulted from the absence of major property and casualty losses during the year, and continued improvement in loss experience in the workman's compensation area.
Operating, Selling, and Administrative Expenses
In 1996, operating, selling, and administrative expenses increased $29.3 million to $141.2 million (11.0% of sales). In 1995 and 1994, these expenses were $111.8 million (11.0% of sales), and $103.5 million (10.9% of sales), respectively. Operating expenses associated with the acquired operations of Market Wholesale were $23.7 million of the increase.
The components of these expenses are summarized below:
Percent of Total Sales 1996 1995 1994 ---- ---- ---- Salaries & Wages 5.8 6.1 6.0 Rents, Maintenance, and Repairs 1.8 1.7 1.7 Taxes, Other Than Income 0.9 0.8 0.9 Utilities, Supplies, & Services 1.2 1.1 1.6 Other Expenses 1.1 1.0 0.5 Provision for Doubtful Accounts 0.2 0.2 0.2 --- ---- ---- Total 11.0 11.0 10.9 ==== ==== ====
During 1996, total operating, selling, and administrative expenses increased primarily due to higher unit volume in both the distribution and the insurance segments, and as a result of the acquired operations of Market Wholesale. Operating expenses associated with the acquired operations of Market Wholesale were $23.7 million of the increase in total operating, selling, and administrative expenses. Excluding the impact from Market Wholesale, operating, selling, and administrative expenses changed due to increases in salaries, telephone, temporary labor, maintenance and repairs, and other taxes.
Insurance segment operating expenses increased to 38.5% of segment net sales and operations. In 1995 and 1994, insurance segment operating expenses were 32.3% and 36.3% of segment net sales and operations, respectively. Operating expenses increased due to the opening of new offices in other states during the year.
Provision for doubtful accounts was $2.1 million (0.2% of sales) in 1996. This compares to $1.9 million (0.2% of sales) and $2.0 million (0.3% of sales) in 1995 and 1994, respectively.
Interest expense increased $2.0 million to $14.8 million (1.1% of sales) in 1996. This increase was primarily due to the debt associated with the Market Wholesale acquisition.
Member Allowances and Dividends
In 1996, total member allowances and dividends decreased $4.3 million to $15.6 million (1.2% of sales). In 1995, total member allowances and dividends decreased 1.6% to $19.9 million (2.0% of sales).
Total member allowances and dividends as a percent of member sales decreased to 2.15% in 1996, compared to 2.84% in 1995, and 2.90% in 1994.
Net Income and Income Taxes
In 1996, income before taxes was $0.2 million compared to $2.2 million (0.2% of sales) in 1995 and $2.6 million (0.3% of sales) in 1994.
Net income after taxes was $0.2 million in 1996, a decrease of $1.2 million from $1.4 million (0.1% of sales) and $1.6 million (0.2% of sales) in 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operating Activities
In 1996, the Company generated $6.2 million in cash in its operating activities. Increases in accounts receivable, inventories, and information services platform investments were the major factors contributing to the use of cash in operations.
Cash Flow From Investing Activities
In 1996, the Company used $40.2 million in its investing activities, a increase of $37.3 million from the $2.9 million used in 1995. The acquisition of Market Wholesale accounted for $34.0 million in 1996. Purchases of property and equipment increased to $16.2 million in 1996 from $10.4 million in 1995.
In fiscal year 1996, anticipated capital expenditures will approximate $7.0 million, representing $1.0 million in replacement assets, $3.0 million for new Cash & Carry units, and $3.0 million in continuing investments in upgraded operations software.
Cash Flow From Financing Activities
In 1995, the Company provided $37.5 million from its financing activities by increasing its levels of senior debt to fund its operations.
Capital Structure and Resources The following table summarizes the Company's capital structure for the last two years:
Year Ended ------------------------------------------------- September 27, 1996 September 29, 1995 $000 % $000 % ------------------ ------------------ Average Short Term Borrowings $ 56,740 22.7 $ 42,632 20.6
End of Year Amounts Senior Term Debt $ 95,027 38.0 $ 68,135 32.9 Subordinated Debt $ 57,181 22.8 $ 53,844 26.0 Equity $ 41,259 16.5 $ 42,357 20.5
Total $250,207 100.0 $206,968 100.0
In 1996, the Company's working capital increased $6.7 million to $59.2 million. The Company's main sources of funds include earnings, member capital stock, capital investment notes, bank debt, and note purchase programs. As of September 27, 1996, the Company had $14.5 million in unused credit lines available. In addition, the Company had $10.7 million available under its Note Purchase Agreement.
The Company purchased the net assets of the wholesale operations of Bay Area Foods, Inc., on December 14, 1995, for approximately $21 million. Funding for the acquisition was provided by increased bank credit. The Company anticipates refinancing with asset reductions or the securitization of eligible trade accounts receivable.
Grocers Insurance Company investments are held to support the payment of claims. These investments are not available to the Company to meet its capital needs due to restrictions imposed by insurance regulators regarding intercompany loans and advances.
In addition, state regulators require that Grocers Insurance Company maintain minimum amounts of capital and surplus. As a result of these regulatory requirements, $5.0 million of Grocers Insurance Company's equity may not be paid as dividends to the Company.
At September 27, 1996, the Company was not in compliance with its fixed charge financial covenant. The Company will be working with its senior creditors to establish a plan to return to compliance with this ratio, and will request the necessary waivers of the covenant. In connection with the above, certain terms and conditions of the senior credit agreements could change.
Item 8.
Item 8. Financial Statements and Supplementary Data
UNITED GROCERS, INC. AND SUBSIDIARIES -------------------------------------
AUDIT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1996 ---------------------------------------------------
-----------------
Page ----
Independent auditor's report on financial statements 1 - ----------------------------------------------------
Consolidated financial statements - ---------------------------------
Balance sheets 2-3
Statements of income 4
Statements of members' equity 5
Statements of cash flows 6-7
Notes to financial statements 8-32
Independent auditor's report on supplemental - -------------------------------------------- information 33 -----------
Supplemental information - ------------------------
Pro forma consolidated schedules of income for the years ended September 27, 1996 and September 29, 1995 34
Independent auditor's report on financial - ----------------------------------------- statement schedules 35 ------------------- Financial statement schedules included - --------------------------------------
Schedule I - Condensed financial information of registrant 36-39 Schedule II - Valuation and qualifying accounts 40-41
Schedule V - Supplementary information concerning property-casualty insurance operations 42
Financial statement schedules not included Reason - ------------------------------------------ ---------- Schedule III - Real Estate and Accumulated Depreciation Not applicable
Schedule IV - Mortgage Loans on Real Estate Not applicable
Board of Directors United Grocers, Inc.
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS ----------------------------------------------------
We have audited the accompanying consolidated balance sheets of United Grocers, Inc. and subsidiaries as of September 27, 1996 and September 29, 1995, and the related consolidated statements of income, members' equity and cash flows for each of the three years in the period ended September 27, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Grocers, Inc. and subsidiaries as of September 27, 1996 and September 29, 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 27, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1.f. to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1995-96. Also, as discussed in Notes 1.g. and 1.h. respectively, the Company changed its method of accounting for investments in 1994-95 and for reinsurance in 1993-94.
/s/ DeLap, White & Raish
Portland, Oregon December 12, 1996
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995 -----------------------------------------
ASSETS -------
1996 1995 ------------ ----------- Current assets: Cash and cash equivalents $ 16,509,866 $ 13,045,456 Investments maintained for insurance reserves (Note 1.g. & j. & 2) 46,828,893 40,809,762 Accounts and notes receivable (Note 3) 78,571,016 70,706,049 Inventories (Note 1.i.) 105,420,187 81,477,754 Other current assets 4,814,449 3,870,703 Deferred income taxes (Note 8) 2,317,772 2,537,323 ------------ ------------
Total current assets 254,462,183 212,447,047 ------------ ------------
Non-current assets: Notes receivable (Note 3) 24,715,039 21,950,478 Investment in and accounts with affiliated companies (Note 1.c. & 15) 12,477,107 8,392,281 Other receivables and investments 6,363,865 6,869,895 Other non-current assets (Note 4) 17,223,023 11,668,590 ------------ ------------
Total non-current assets 60,779,034 48,881,244 ------------ ------------
Property, plant and equipment - (net of accumulated depreciation) (Note 5) 68,902,737 61,127,772 ------------ ------------
Total $384,143,954 $322,456,063 ============ ============
The accompanying notes are an integral part of this financial statement.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEETS - CONTINUED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995 -----------------------------------------
LIABILITIES AND MEMBERS' EQUITY -------------------------------
1996 1995 ----------- ------------ Current liabilities: Notes payable - bank (Note 6) $ 61,173,867 $ 48,515,543 Accounts payable 82,076,707 60,461,117 Insurance reserves supported by investments (Note 1.j. and 2) 29,561,657 29,958,678 Compensation and taxes payable 5,021,977 3,118,827 Other accrued expenses 5,130,182 3,662,495 Members' patronage payable (Note 9) 3,200,110 6,646,867 Current installments of long-term liabilities (Note 7) 9,073,983 7,573,215 ------------ ------------
Total current liabilities 195,238,483 159,936,742
Long-term liabilities (Note 7) 143,134,105 115,623,670
Deferred income taxes (Note 8) 3,312,267 3,651,247
Deferred income (Note 13) 1,000,026 886,917 ------------ ------------
Total liabilities 342,684,881 280,098,576 ------------ ------------
Commitments and contingencies (Note 18)
Members' equity: Common stock (authorized, 10,000,000 shares at $5.00 par value; issued and outstanding, 638,451 shares in 1996 and 655,663 shares in 1995) (shares owned by a member in excess of 4,000 are subject to repurchase Note 1.o. & p.) 3,192,255 3,278,315 Additional paid-in capital 24,224,262 23,956,797 Retained earnings 13,842,966 14,923,491 Unrealized gain on investments (Note 2) 199,590 198,884 ------------ ------------
Total members' equity 41,459,073 42,357,487 ------------ ------------
Total $384,143,954 $322,456,063 ============ ============
The accompanying notes are an integral part of this financial statement.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 29, 1995, AND SEPTEMBER 30, 1994 --------------------------------------------------------------------------
1996 1995 1994 ------------- -------------- --------------
Net sales and operations $1,301,506,666 $1,018,248,456 $954,220,350 -------------- -------------- ------------
Costs and expenses: Cost of sales (Note 1.i.) 1,127,188,263 870,097,228 816,721,077 Operating expenses 126,205,437 101,029,068 93,991,529 Selling and administrative expenses 14,989,440 10,872,432 9,533,741 Depreciation (Note 1.k. & 5) 6,629,240 5,952,576 5,609,779 Interest: Interest expense 14,825,357 12,773,947 9,156,822 Interest income (4,162,561) (4,494,053) (3,535,802) -------------- -------------- ------------ Interest expense, net 10,662,796 8,279,894 5,621,020 -------------- -------------- ------------
Total costs and expenses 1,285,675,176 996,231,198 931,477,146 -------------- -------------- ------------
Income before members' allowances and patronage dividends, and income taxes 15,831,490 22,017,258 22,743,204
Members' allowances (11,604,949) (11,513,784) (11,449,305)
Members' patronage dividends (Note 9) (4,000,000) (8,350,000) (8,730,168) -------------- ------------- ------------
Income before income taxes 226,541 2,153,474 2,563,731
Provision for income taxes (Note 8) (74,229) (774,469) (1,000,341) -------------- ------------- ------------
Net income $ 152,312 $ 1,379,005 $ 1,563,390 ============== ============= ============
The accompanying notes are an integral part of this financial statement.
Common stock share information: Number Description of shares ----------- ---------
Balance, October 1, 1993 632,312 Issued 54,457* Repurchased (66,888) ---------
Balance, September 30, 1994 619,881 Issued 81,899* Repurchased (46,117) ---------
Balance, September 29, 1995 655,663 Issued 31,724* Repurchased (48,936) ---------
Balance, September 27, 1996 638,451 =========
* Includes prior year patronage dividends to be issued.
The accompanying notes are an integral part of this financial statement.
The accompanying notes are an integral part of this financial statement.
The accompanying notes are an integral part of this financial statement.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies ------------------------------------------
a. Reporting year
United Grocers, Inc. (the Parent) and subsidiaries (the Company) reports on a fiscal year of 52 or 53 weeks which is the fiscal year of the distribution segment. The Parent's fiscal closing date is the Friday nearest September 30. The fiscal year of the subsidiaries included in the insurance segment ends on September 30.
b. Organization and nature of operations
The Company has two operating segments. See Note 11 for segment details. The Parent operates primarily as a wholesale grocery cooperative. The Parent's stock is owned by its member customers. Sales to these members account for approximately 80% of the wholesale grocery sales.
c. Principles of consolidation
The consolidated financial statements include the accounts of United Grocers, Inc. and its wholly-owned subsidiaries as follows: Grocers Insurance Group, Inc., Grocers Insurance Agency, Inc., UGIC, Ltd., Grocers Insurance Company, United Workplace Consultants, Inc., Western Passage Express, Inc., Northwest Process, Inc., UG Resources, Inc., United Resources, Inc., Premier Consulting, Inc., Western Security Services, Ltd., and Rich and Rhine, Inc. All intercompany balances and transactions have been eliminated upon consolidation. Investment in affiliated companies is stated at cost plus the Company's share of undistributed earnings since acquisition (see Note 15).
d. Business combination
On December 14, 1995 the Company acquired, using the purchase method of accounting, certain assets of the Market Wholesale (Market) grocery division operations of Bay Area Foods, Inc. (Bay Area Foods), for a cash purchase price of approximately $21 million. The Company assumed certain liabilities including obligations under certain real and personal property leases relating to Bay Area Foods, including three leased warehouse locations and leased equipment. The operations of Market are included in the consolidated statement of income beginning December 3, 1995.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies (continued) ------------------------------------------------------
d. Business combination (continued)
The approximate values allocated to the assets acquired, amount of liabilities assumed, and net value of assets acquired, are stated below:
Acquired assets Amount --------------- ----------- Accounts receivable and customer loans $12,290,000 Inventories 20,796,000 Deposits and other assets 1,541,000 Equipment including capitalized leases 5,286,000 Goodwill amortized over 15 years 484,000 ----------- Total acquired assets 40,397,000 ----------- Assumed liabilities Accounts payable 13,360,000 Customer rebates and employee accruals 1,500,000 Capitalized lease payable 2,286,000 ----------- Total assumed liabilities 17,146,000 -----------
Net value of assets acquired $23,251,000 ===========
In connection with the acquisition, the Company entered into a five year supply agreement with Bay Area Foods and some of their retail stores. The agreement calls for normal rebates, other than year-end patronage, that is available to other customers. These retail stores account for approximately 20 percent of the total warehouse volume of the acquired operations.
Funding for the acquisition was provided by increased short-term bank credit. The Company anticipates refinancing the additional bank credit with new senior debt, or the securitization of eligible trade accounts receivable.
The assets acquired include all owned warehouse equipment, furniture, and fixtures of the Market operations, such as forklifts, warehouse racking, office equipment and computers, and software. The Company intends to continue to utilize these assets in the wholesale grocery distribution business in substantially the same manner as used by Bay Area Foods.
e. Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies (continued) ------------------------------------------------------
f. Accounting changes
Beginning in 1995-96, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106 requires that companies accrue the projected future cost of providing postretirement benefits during the period that employees render the services necessary to be eligible for such benefits. While the adoption of this standard does have an impact on the Company's reported net income, it does not impact the Company's cash flow because the Company intends to continue its current practice of paying the cost of postretirement benefits as incurred. The Company has elected to recognize the effect of the change to SFAS No. 106 by amortizing the transition obligation of $3,668,682 over 20 years (see Note 13).
g. Investments
Beginning in 1994-95, the Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company's investments are primarily in non-equity securities and their intent is to hold most of these securities until maturity. Sales and redemptions of investments are primarily the result of maturities. Any realized gains or losses are usually the result of immaterial differences between the called amount and amortized cost. The market value of these investments at September 27, 1996 and September 29, 1995 is $46,966,058 and $41,610,228, respectively (see Note 2).
h. Reinsurance
Beginning in 1993-94 the Company adopted the Statement of Financial Accounting Standards (SFAS) No. 113, ACCOUNTING AND REPORTING FOR REINSURANCE OF SHORT-DURATION AND LONG-DURATION CONTRACTS. The Statement requires that transactions relating to reinsurance transactions be reported at gross amounts rather than net amounts. The effect on the consolidated financial statements of the Company is to gross up the insurance liabilities by reclassifying the ceded reinsurance amounts for reinsurance recoverables and prepaid reinsurance premiums as assets. There is no effect or change to the consolidated statement of income as classifications did not change. Net premiums earned continue to be reported as net sales and operations while net losses and loss adjustment expenses continue to be reported as cost of sales.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies (continued) ------------------------------------------------------
h. Reinsurance (continued)
In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Amounts paid for prospective reinsurance are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided.
i. Inventories and cost of sales
Inventories relate primarily to the distribution segment and are valued at the lower of cost or market. The cost of these inventories is determined under the first-in, first-out (FIFO) method.
Cost of sales includes primarily the cost of distribution and insurance operations. The distribution segment costs include the purchases of product net of allowances paid and received, less the net advertising department margins, plus the handling allowances made to members based upon the cost of servicing their accounts. The insurance segment costs include losses reported, a provision for losses incurred but not reported and premium refunds.
j. Restricted assets and net assets
Restricted assets and net assets that may not be transferred to the Parent in the form of loans, advances, or cash dividends by the insurance subsidiary without the consent of state insurance agencies as of September 27, 1996 are as follows:
Cash and cash equivalents $ 410,903 Investments 16,417,243 -----------
Total $16,828,146 ===========
In addition, although not formally restricted, the balance of the investments of $30,212,060 represent assets that have been accumulated for the possible payment of claims against the insurance reserves.
k. Property, plant and equipment
Property, plant and equipment is carried at cost and includes expenditures for new facilities and those which substantially increase the useful lives of the existing plant and equipment. The Company capitalizes interest when applicable as a component of the cost of significant construction projects. No interest was capitalized for the three years ended September 27, 1996.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies (continued) ------------------------------------------------------
k. Property, plant and equipment (continued)
Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Estimated useful lives are generally as follows:
Buildings 40-75 years Building improvements Balance of building life Warehouse equipment 5-20 years Truck equipment 3-8 years Office equipment 5-10 years
l. Amortization
Long-term liability loan costs, software costs, goodwill, and non- competition agreements are being amortized and charged to operating expenses on a straight-line basis over five to twenty years.
m. Income taxes
The Company and its subsidiaries file a consolidated federal income tax return. Income tax expense is allocated among those companies with taxable income. The Company operates and is taxed as a cooperative. Accordingly, amounts distributed as patronage dividends are not included in its taxable income but are instead taxed to the individual members receiving the patronage dividends. Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the years in which the differences are expected to affect taxable income. In 1996 a valuation allowance of approximately $500,000 was considered necessary for the insurance reserves and the state NOL carryovers to reduce the deferred tax asset to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in net deferred tax assets and liabilities. See Note 9 for details.
n. Earnings per common share
The Company's policy is to distribute earnings only in the form of patronage dividends. No dividends have ever been declared on the common stock of the Company, and all earnings not distributed as patronage dividends have been retained. Earnings per common share are not shown because no earnings are available for the purpose of paying dividends on the common stock.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
1. Summary of significant accounting policies (continued) ------------------------------------------------------
o. Treasury stock
The Company uses the par value method of accounting for treasury stock. Under Oregon corporation law, treasury stock must be canceled upon redemption.
p. Common stock
The Company's board policy, subject to change without notice, requires the Company to repurchase on request the number of shares a member owns in excess of 4,000 shares. The excess shares are repurchased over a five year period at the current adjusted book value each year, payable in cash. At September 27, 1996 and September 29, 1995, there were 19,926 and 18,229 shares, respectively, subject to repurchase in the amount of $1,238,202 and $1,084,626, respectively. At September 27, 1996 and September 29, 1995, there were 2,779 and 1,471 shares, respectively, held for possible redemption in the amount of $172,687 and $87,525, respectively.
q. Advertising costs
The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense for 1996, 1995 and 1994 was $2,593,450, $1,191,436 and $1,027,214, respectively.
r. Statement of cash flows
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
s. Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year classification.
2. Investments -----------
Investments are classified and accounted for as follows:
- Held-to-maturity securities are reported at amortized cost. - Trading securities are reported at fair value, with unrealized gains and losses included in earnings. - Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of members' equity.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
2. Investments (continued) -----------------------
The amortized cost and estimated fair market values of investments in debt securities and other investments at the balance sheet date are as follows:
Carrying amount and Number amortized Market Name of issuer and of shares cost of value of title of each issue or units each issue each issue --------- ---------- ---------- 1996: United States Government and its agencies 35,295,000 $35,714,257 $35,918,833
Any state of the United States and its agencies 2,520,000 2,619,934 2,644,354
Political subdivision of a state of the United States and its agencies 4,100,000 4,198,701 4,283,334
Corporate bonds 4,060,000 4,094,930 4,106,350 ---------- ---------- ----------- Subtotal - debt securities 46,627,822 46,952,871
Corporate stock 298 1,481 13,187 ---------- ----------- Subtotal 46,629,303 46,966,058
Unrealized gain on available- for-sale securities 199,590 -- ---------- -----------
Total $46,828,893 $46,966,058 =========== =========== 1995: United States Government and its agencies 25,350,000 $25,769,781 $26,506,490
Any state of the United States and its agencies 2,840,000 2,979,132 3,018,919
Political subdivision of a state of the United States and its agencies 5,995,000 6,201,500 6,319,852
Corporate bonds 5,610,000 5,658,984 5,756,735 ----------- ----------- Subtotal - debt securities 40,609,397 41,601,996
Corporate stock 298 1,481 8,232 ----------- ----------- Subtotal 40,610,878 41,610,228
Unrealized gain on available- for-sale securities 198,884 -- ----------- -----------
Total $40,809,762 $41,610,228 =========== ===========
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
2. Investments (continued) -----------------------
Investments of debt securities by classification under SFAS No. 115 at September 27, 1996 are as follows:
For the years ended September 27, 1996 and September 29, 1995 (initial year of application) the gross proceeds from the sales of securities available- for-sale were $1,104,720 and $3,607,299, respectively. The gross realized gains from these sales were $4,226 and $142,257, respectively, and gross realized losses were nil. The method used to determine cost when calculating the realized gains was the amortized cost of the specific security sold. There are no gains or losses included in earnings as a result of transfers of securities between categories. There were no securities classified as trading securities during the initial year.
During the initial year of 1994-95, because of changing market conditions, management decided to transfer certain securities from the held-to-maturity category to the available-for-sale category. The amortized cost of these securities at the time of transfer was $4,751,807 with a related net unrealized gain of $386,834.
The amortized cost and estimated market value of debt securities at the balance sheet date, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
When SFAS No. 115 was adopted in 1994-95 it was not applied retroactively to the prior years' financial statements. The cumulative effect of the change in accounting principle as of October 1, 1994 was an unrealized loss of $45,693 charged to retained earnings.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
3. Accounts and notes receivable -----------------------------
These consist of amounts due principally from members at the balance sheet date as follows: 1996 1995 ----------- ----------- Accounts receivable $64,638,621 $59,229,982 Insurance premiums and related balances 12,237,565 8,509,160 Less allowance for doubtful accounts (1,140,724) (1,176,767) ----------- ----------- Net accounts receivable 75,735,462 66,562,375 ----------- -----------
Notes receivable - current portion 3,072,175 4,224,381 Less allowance for doubtful notes (236,621) (80,707) ----------- ----------- Net current notes receivable 2,835,554 4,143,674 ----------- -----------
Net current accounts and notes receivable $78,571,016 $70,706,049 =========== ===========
Notes receivable - non-current portion $25,588,062 $22,378,000 Less allowance for doubtful notes (873,023) (427,522) ----------- -----------
Net non-current notes receivable $24,715,039 $21,950,478 =========== ===========
The notes receivable from members are generally for periods of two years to ten years at interest rates of 3.00% to 11.00%. The annual maturities for each of the next five fiscal years following September 27, 1996 are as follows:
Year Amount ----- ----------- 1997 $ 2,325,916 1998 2,666,459 1999 2,890,812 2000 2,933,663 2001 2,825,431 Thereafter 15,017,956
The Company performs ongoing credit evaluations of its members' financial condition and maintains allowances for potential credit losses. Actual losses and allowances have been within management's expectations. The provision for doubtful accounts and notes charged to operating expenses for the three years ended September 27, 1996 amounted to $2,063,041, $1,894,189, and $1,992,589, respectively.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
4. Other non-current assets ------------------------
Other non-current assets at the balance sheet date consists of the following: 1996 1995 ----------- ----------- Covenant not to compete - net of accumulated amortization of $1,485,557 in 1996 and $1,232,869 in 1995 $ 1,238,727 $ 1,641,813 Software - net of accumulated amortization of $2,440,207 in 1996 and $1,737,639 in 1995 2,070,007 1,582,531 Loan fees - net of accumulated amortization of $700,109 in 1996 and $682,199 in 1995 529,818 425,189 Goodwill - net of accumulated amortization of $291,609 in 1996 and $114,613 in 1995 1,951,246 1,413,557 Software in progress 10,172,326 5,162,152 Deposits 1,082,439 494,252 Other 178,460 949,096 ----------- -----------
Total $17,223,023 $11,668,590 =========== ===========
5. Property, plant and equipment (at cost) ---------------------------------------
Property, plant and equipment as of the balance sheet date consists of the following: 1996 1995 ----------- -----------
Land $ 3,424,677 $ 3,580,477 Buildings and improvements 57,907,740 54,103,086 Warehouse and truck equipment 33,110,049 37,627,830 Office equipment 13,621,540 11,104,702 Construction in progress 4,528,122 1,323,492 ----------- ----------- Total property, plant and equipment 112,592,128 107,739,587 Less accumulated depreciation (43,689,391) (46,611,815) ----------- -----------
Net property, plant and equipment $68,902,737 $61,127,772 =========== ===========
Depreciation expense for 1996, 1995 and 1994 was $6,629,240, $5,952,576 and $5,609,779, respectively.
6. Notes payable - bank --------------------
Notes payable - bank consists of borrowings on bank lines of credit at a weighted average interest rate of 6.41% at September 27, 1996 and 6.75% at September 29, 1995.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
6. Notes payable - bank (continued) --------------------------------
At September 27, 1996 and September 29, 1995, the Company had unused lines of credit totaling $14,400,000 and $24,500,000, respectively.
In April of 1993, the Company entered into a three year reverse interest swap agreement with a bank. Under the agreement, the Company receives a fixed rate of 4.40% on $20 million (notional amount) and pays a floating rate based on LIBOR, as determined in six month intervals. The transaction effectively changes a portion of the Company's interest rate exposure from a fixed rate to a floating rate basis, accordingly, all gains or losses have been recognized as adjustments to interest expense. This swap agreement has been entered into with a major financial institution which is expected to fully perform under the terms of the agreement thereby further mitigating the risk from the transaction.
7. Long-term liabilities ---------------------
Long-term liabilities at the balance sheet date consists of the following:
1996 1995 ------------ ----------- Notes payable - bank:
Credit agreement notes maturing on April 30, 1998 with interest rates of 6.24% per annum at September 27, 1996 and 6.70% per annum at September 29, 1995. The interest rates ranged from 6.02% to 6.74% in 1996 and from 5.95% to 7.00% in 1995. $ 44,400,000 $ 17,000,000
Notes payable - insurance companies:
Senior notes payable to seven insurance companies with interest rates of 8.42% and 9.15% per annum. Interest payable monthly. Principal repayments annually commencing October 1, 1992 in the amount of $3,336,000 and each October 1 thereafter in the amount of $3,333,000 until 2000; and $4,000,000 due annually beginning in 2001, maturing in full 2005. 36,665,000 39,998,000
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
7. Long-term liabilities (continued) 1996 1995 ----------- ----------- Notes payable - other:
Capital stock residual notes, payable in twenty quarterly installments with a variable interest rate based on the current capital investment note rate. $ 4,225,006 $ 4,239,958
A discounted note payable in the original amount of $1,741,265 without interest, discounted at 9.90%, payable in two installments of $641,265 in 1996 and $1,100,000 in 1997. 935,000 1,528,170
A covenant not-to-compete in the original amount of $1,072,008 with interest at 9.90%, payable in monthly installments of $42,500 until 2004. 951,312 1,022,795
Four notes with interest at 7.50% per annum payable in monthly installments of $23,017 beginning October 1995 (secured by equipment). 951,780 1,217,712
Five notes with interest at 7.50% per annum payable in monthly installments of $24,108 beginning October 1995 (secured by equipment). 997,084 --
Several capitalized equipment leases, payable in monthly installments of $43,853 including interest at 12% to 20% over seven to ten years until 2005 (secured by equipment). 2,123,571 --
A real property contract for the purchase of an office building, payable in 180 monthly installments of $2,346 including interest at 12.5% per annum until 1999 (secured by real property). 66,872 85,386
Other note payable -- 2,292
Mortgage notes (secured by real property):
A note payable in monthly installments of $41,449 including interest at 9% until 1996. -- 442,243
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
7. Long-term liabilities (continued) --------------------------------- 1996 1995 ----------- ----------- Mortgage notes (secured by real property) - continued:
A note payable in monthly installments of $31,615 including interest at 7.25% until 2013. $ 3,710,663 $ 3,816,529
Redeemable notes and certificates:
Capital investment notes (subordinated), interest ranging from 6.25% to 8%. Maturity dates range from 1996 to 2005 which is ten years from dates of issue. 54,018,200 50,619,400
Registered redeemable building notes (subordinated), interest at 8%. No fixed maturity date. 3,138,300 3,199,100
Redeemable transferable notes, (subordinated), interest at 6.50%. No fixed maturity. 25,300 25,300 ------------ ------------ Total 152,208,088 123,196,885 Less current installments (9,073,983) (7,573,215) ------------ ------------
Total long-term liabilities $143,134,105 $115,623,670 ============ ============
Total maturities of long-term liabilities in each of the next five fiscal years are as follows:
Year Amount ---- ------------ 1997 $ 9,073,983 1998 50,911,311 1999 6,755,475 2000 7,087,769 2001 9,458,923
The terms of certain financing agreements contain, among other provisions, requirements for maintaining certain financial ratios. Also, a minimum amount of equity must be maintained, subordinated debt restrictions on the sale of assets, and allowable contingent indebtedness. The Company was not in compliance with the fixed charge coverage covenant as of September 27, 1996. The Company will be working with its senior creditors to establish a plan to return to compliance with this ratio and will request the necessary waivers for noncompliance with this particular covenant.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
8. Income taxes ------------
The provision for income taxes for the three years consists of the following: 1996 1995 1994 ---------- ---------- ---------- Current payable: Federal $ 146,016 $ 542,585 $ 439,200 State 47,640 50,156 86,252 Deferred: Federal (95,036) 113,948 506,977 State (24,391) 67,780 (32,088) ---------- ---------- ----------
Total $ 74,229 $ 774,469 $1,000,341 ========== ========== ==========
The effective income tax rate for the three years ended September 27, 1996 does not correspond with the Federal tax rate. The reconciliation of this rate to the effective income tax rate is as follows:
1996 1995 1994 ---------- ---------- ----------
Statutory income tax rate (34%) $ 82,934 $ 732,181 $ 871,668 State income taxes, net of Federal income tax benefit 31,443 33,103 56,926 Tax exempt interest (97,712) (133,622) (158,673) Refunds as a result of carrybacks -- (64,954) -- Prior year under accrual -- -- 179,235 Other 57,564 207,761 51,185 ---------- ---------- ----------
Income tax expense $ 74,229 $ 774,469 $1,000,341 ========== ========== ==========
Effective income tax rate 30.4% 36.0% 39.0% ==== ==== ====
The significant components of the deferred income taxes - current asset and non-current liability as of the balance sheet date are as follows:
1996 1995 ---------- ---------- Deferred income taxes - current asset: Insurance reserves $ 785,964 $1,041,485 Inventories 839,507 746,442 Unearned insurance premiums 571,239 508,089 Allowance for doubtful accounts 294,566 420,530 Other (173,504) (179,223) ---------- ----------
Total $2,317,772 $2,537,323 ========== ==========
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
8. Income taxes (continued) ----------------------- 1996 1995 ---------- ---------- Deferred income taxes - non-current liability: Accumulated depreciation $5,017,128 $5,070,833 Deferred income (634,029) (345,898) Allowance for doubtful notes (401,818) (233,679) Deferred compensation (174,550) (174,550) Alternative minimum tax (AMT) credit (446,739) (611,439) Other (47,725) (54,020) ---------- ----------
Total $3,312,267 $3,651,247 ========== ==========
Net amount by tax paying component: Federal $ 597,823 $ 692,860 State 396,672 421,064 ---------- ----------
Total $ 994,495 $1,113,924 ========== ==========
The significant components of deferred income tax expense for the three years are as follows: 1996 1995 1994 ---------- ---------- ---------- Decrease (increase) in deferred income taxes - asset $ 219,551 $ 274,590 $ 11,915 (Decrease) increase in deferred income taxes - liability after applying AMT credit (338,980) (92,862) 462,974 ---------- ---------- ----------
Total $ (119,429) $ 181,728 $ 474,889 ========== ========== ==========
The Company has net operating loss carryovers of approximately $5,000,000 to apply against future years' State income taxes, expiring in years 2007 through 2011. These operating loss carryovers are the result of the insurance company subsidiary being required to file a separate calendar year State tax return and not giving the parent the benefit of this offset on its State tax return. The Company also has unused State energy tax credits of approximately $45,000, expiring in 1998.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
9. Members' patronage dividends ----------------------------
The Company's income from sales to members, before income taxes and patronage dividends, is available, at the discretion of the Board of Directors, to be returned to the members in the form of patronage dividends. As of year end, the Board of Directors voted to distribute the following in patronage dividends: 1996 1995 1994 ----------- ----------- ----------- Payable in cash and shown as a current liability $ 3,200,110 $ 6,646,867 $ 6,865,736 Distributable in the form of common stock 799,890 1,703,133 1,864,432 ----------- ----------- -----------
Total $ 4,000,000 $ 8,350,000 $ 8,730,168 =========== =========== ===========
10. Reinsurance -----------
Reinsurance amounts reflected in the financial statements are as follows: 1996 1995 ----------- ----------- For the balance sheet: Reinsurance recoverable for ceded losses $ 6,496,713 $ 5,081,542 Prepaid reinsurance premiums 2,831,215 2,050,101 ----------- -----------
Total $ 9,327,928 $ 7,131,643 =========== ===========
1996 1995 1994 ----------- ----------- ----------- For the income statement: Premiums written: Gross $28,987,953 $27,808,928 $23,992,639 Assumed 567,243 698,280 860,953 Ceded (8,184,619) (7,364,002) (6,652,410) ----------- ----------- -----------
Net premiums written $21,370,577 $21,143,206 $18,201,182 =========== =========== ===========
Percentage of amount assumed to net 2.65% 3.30% 4.73% ==== ==== ====
Premiums earned: Gross $26,515,356 $26,719,189 $23,736,321 Assumed 598,048 718,692 829,978 Ceded (7,403,505) (6,708,155) (6,505,887) ----------- ----------- -----------
Net premiums earned $19,709,899 $20,729,726 $18,060,412 =========== =========== ===========
Percentage of amount assumed to net 3.03% 3.47% 4.60% ==== ==== ====
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
10. Reinsurance (continued): -----------------------
Reinsurance contracts do not relieve the Company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
1996 1995 1994 ----------- ----------- ----------- Expenses: Losses and loss adjustment expenses $18,051,136 $21,000,749 $15,079,858 Reinsurance recoveries (4,616,616) (5,511,850) (3,389,844) ----------- ----------- -----------
Net losses and loss adjustment expenses $13,434,520 $15,488,899 $11,690,014 =========== =========== ===========
11. Segment reporting -----------------
The Company has two operating segments which are located primarily in the Pacific Northwest. The distribution segment includes all operations relating to wholesale grocery and related product sales, retail grocery sales, service department revenues, and financing income and fees. The insurance segment includes all operations relating to insurance underwriting, commissions, and reinsurance primarily to provide workers' compensation and property-casualty coverage.
A summary of information about the Company's operations by segment before intersegment eliminations for the three years is as follows:
1996 1995 1994 -------------- -------------- --------------
Net sales and operations: Distribution $1,283,119,244 $ 996,966,961 $ 936,266,067 Insurance 20,095,633 22,794,952 18,788,523 Less intersegment insurance sales and expenses (1,708,211) (1,513,457) (834,240) -------------- -------------- --------------
Total $1,301,506,666 $1,018,248,456 $ 954,220,350 ============== ============== ==============
Income before allowances, dividends, income taxes and accounting change: Distribution $ 13,351,190 $ 18,889,425 $ 19,791,157 Insurance 2,480,300 3,127,833 2,952,047 -------------- -------------- --------------
Total $ 15,831,490 $ 22,017,258 $ 22,743,204 ============== ============== ==============
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
11. Segment reporting (continued) -----------------------------
1996 1995 1994 -------------- -------------- -------------- Total assets: Distribution $ 314,180,675 $ 260,365,677 $ 243,267,148 Insurance 69,963,279 63,698,155 64,923,598 -------------- -------------- --------------
Total $ 384,143,954 $ 324,063,832 $ 308,190,746 ============== ============== ==============
Depreciation expense: Distribution $ 6,442,124 $ 5,770,681 $ 5,408,896 Insurance 187,124 181,895 200,883 -------------- -------------- --------------
Total $ 6,629,248 $ 5,952,576 $ 5,609,779 ============== ============== ==============
Capital expenditures: Distribution $ 16,151,402 $ 10,096,516 $ 5,161,425 Insurance 79,735 275,224 93,157 -------------- -------------- --------------
Total $ 16,231,137 $ 10,371,740 $ 5,254,582 ============== ============== ==============
For net sales and operations during the three years ended September 27, 1996, wholesale grocery sales (primarily to members) accounted for approximately 95% of the distribution total. Premium revenue (primarily from members) accounted for approximately 95% of the insurance total.
12. Retirement plans ----------------
The Company has a Company-sponsored pension plan that covers substantially all of its salaried employees. The Company also has separate Company- sponsored 401(k) plans for salaried and union employees. The Company has made annual contributions to the plans equal to the amount annually accrued for pension expense. The Company's funding policy is to satisfy the funding requirements of the Employees' Retirement Income Security Act.
The Company also participates in several multi-employer pension plans for the benefit of its employees who are union members. The data available from administrators of the multi-employer plans is not sufficient to determine the accumulated benefit obligation, nor the net assets attributable to the multi-employer plans in which the Company's union employees participate.
The financial statements include pension expense for the Company-sponsored pension plan as determined using Statement of Financial Accounting Standards (SFAS) No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS. The effect of SFAS No. 87 was an increase of pension expense in the amount of $191,893 for 1996, and a decrease of $362,794 for 1995 and $546,894 for 1994. The Company's unrecognized net asset resulting from the initial application of SFAS No. 87 of $3,027,024 is being amortized over eighteen years with a remaining balance of $1,547,153 as of September 27, 1996.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 -------------------------------------------- 12. Retirement plans (continued) ----------------------------
In determining the actuarial present value of the projected benefit obligation, a discount rate of 8% and a future maximum compensation increase rate of 4% were used. The expected long-term rate of return on assets was 8%.
Pension costs for all plans for the three years consist of the following: 1996 1995 1994 ----------- ----------- ----------- Company-sponsored: Service costs of benefits earned $ 952,126 $ 945,413 $ 918,423 Interest cost on the projected benefit obligation 1,667,852 1,557,954 1,448,447 Expected return on plan assets (1,932,053) (1,713,673) (1,688,595) Net amortization of unrecognized net asset (168,168) (168,168) (168,168) Unrecognized net gain (37,901) -- (4,414) Unrecognized prior service cost 61,478 61,478 73,760 ----------- ----------- -----------
Net salaried pension cost 543,334 683,004 579,453
Multi-employer plan costs 3,326,359 2,590,269 2,395,300 Matching costs of 401(k) plans 290,518 384,282 391,605 ----------- ----------- -----------
Total pension expense $ 4,160,211 $ 3,657,555 $ 3,366,358 =========== =========== ===========
The following table sets forth the Company-sponsored plan's funded status as of year end: 1996 1995 1994 ----------- ----------- ----------- Actuarial present value of benefit obligations: Vested $14,458,251 $14,997,208 $13,337,570 Non-vested 985,366 927,101 823,015 ----------- ----------- ----------- Accumulated benefit obligation 15,443,617 15,924,309 14,160,585 Effect of projected future compensation levels 5,837,535 4,767,286 4,881,117 ----------- ----------- ----------- Projected benefit obligation 21,281,152 20,691,595 19,041,702 Plan assets at fair value, primarily listed stocks, fixed income, and bond and equity funds 27,252,210 24,482,376 22,030,725 ----------- ----------- ----------- Excess of plan assets over projected benefit obligation 5,971,058 3,790,781 2,989,023 Unrecognized prior service cost 655,515 716,993 778,471 Unrecognized net gain (4,802,538) (2,745,049) (1,422,307) Unrecognized net asset, net of amortization (1,561,167) (1,729,335) (1,897,503) ----------- ----------- -----------
Prepaid pension cost $ 262,868 $ 33,390 $ 447,684 =========== =========== ===========
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
12. Retirement plans (continued) ----------------------------
In addition to providing pension benefits, the Company provides certain medical benefits for certain salaried retirees, spouse and eligible dependents. Employees who were hired prior to January 1, 1989, the last eligibility date, and have met the Company's minimum service requirements, become eligible for these benefits. The medical benefits available are non-contributory in nature, and it is the Company's practice to fund these benefits as incurred.
Postretirement benefit costs for 1996 were $491,993, which is comprised of $52,361 for service costs, $270,543 for interest cost and $169,089 for the amortization of the transition obligation. The Company's unrecognized transition obligation resulting from the initial application of SFAS No.106 of $3,668,682 is being amortized over twenty years and has a remaining balance of $3,499,593 as of September 27, 1996. The assumed health care cost trend used to measure the expected cost of benefits was 10% in year one, decreasing 1% per year to a minimum rate of 4%. Prior to adopting SFAS No. 106, postretirement benefits were expensed as claims were paid, and amounted to approximately $349,000 and $356,000 for 1995 and 1994, respectively.
13. Leases ------
The Company is obligated under one hundred and twenty-seven significant leases in 1996. Fifty-one of these leases are for twenty to twenty-five years with renewal options and involve supermarket properties which are subleased to members. Six of these leases are subleased to affiliated companies. The remaining leases represent property and equipment used by the Company. The leases expire at various dates, the last expiring in 2022. Rental expense for the three years consists of the following:
1996 1995 1994 ----------- ----------- ----------- Minimum rentals $19,463,073 $15,252,948 $13,690,702 Less sublease income (6,873,099) (6,549,338) (5,971,461) ----------- ----------- -----------
Net rental expense $12,589,974 $ 8,703,610 $ 7,719,241 =========== =========== ===========
The following is a schedule by years showing future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 27, 1996: Fiscal Minimum Minimum Net year payments (A) receipts (B) minimum --------- ------------ ------------ ------------ 1996-1997 $ 21,279,652 $ 7,904,468 $ 13,375,184 1997-1998 20,060,119 8,923,638 11,136,481 1998-1999 18,556,581 8,859,209 9,697,372 1999-2000 17,548,978 8,664,809 8,884,169 2000-2001 16,884,746 8,502,442 8,382,304 Later years 143,943,281 94,120,970 49,822,311 ------------ ------------ ------------
Total $238,273,357 $136,975,536 $101,297,821 ============ ============ ============
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
13. Leases (continued) ------------------ Minimum Minimum Net payments (A) receipts (B) minimum ----------- ----------- ----------- Summary: Building leases $229,625,277 $136,122,368 $ 93,502,909 Equipment leases 8,648,080 853,168 7,794,912 ------------ ------------ ------------
Total $238,273,357 $136,975,536 $101,297,821 ============ ============ ============
(A) Minimum payments are those required by the Company over the terms of the significant leases.
(B) Minimum receipts are those to be received by the Company from sublease agreements.
The Company has sale-leaseback transactions for four cash and carry outlets. The sales resulted in deferred gains of approximately $1,200,000 which are being amortized over the leaseback period of fifteen years. The total remaining lease commitments are approximately $3,940,000 over fourteen years with an annual rental of approximately $310,000.
14. Supplemental cash flow information ----------------------------------
1996 1995 1994 ----------- ----------- ----------- Supplemental disclosures: Cash paid during the year for: Interest $14,546,216 $11,753,143 $ 8,898,144 Income taxes - net of refunds 278,730 341,836 336,810
Supplemental schedule of noncash investing and financing activities: Patronage dividends payable in common stock 799,890 1,703,103 1,864,432 Exchange of member loan for equity interest in affiliate 3,250,000 -- --
15. Affiliated companies --------------------
The Company owns interests in three separate affiliates which are accounted for on the equity method. All of these affiliates are in the grocery distribution business. One affiliate is a vendor that provides private label brand merchandise. The other affiliates operate retail grocery stores and are also members of the Company.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
15. Affiliated companies (continued) --------------------------------
An approximate summary of accounts aggregate transactions with these affiliates is as follows: 1996 1995 ------------ ----------- For the balance sheet: Equity interest $ 12,477,000 $ 8,392,000 Accounts receivable 3,800,000 4,820,000 Notes receivable 2,853,000 6,440,000 Accounts payable (5,259,000) (4,930,000) Undistributed earnings 1,975,000 1,416,000
1996 1995 1994 ------------ ----------- ----------- For the income statement: Increase in equity investments $ 3,517,000 $ 607,000 $ 6,094,000 Sales (129,855,000) (91,447,000) (22,945,000) Purchases 111,348,000 97,541,000 89,179,000 Volume incentive rebate (2,931,000) (1,707,000) (1,561,000) Refunds, rebates and allowances 2,570,000 3,013,000 701,000 Equity interest income (loss) 568,000 (47,000) (192,000)
Dividends received -- -- --
These affiliates and the Company's percentage of ownership are as follows:
Western Family Holding Company 22% C & K Market, Inc. 22% R.A.F. Limited Liability Company 94% North State Grocery, Inc. 26% West Linn Foods Marketplace, L.L.C. 20% Willamette Foods Marketplace, L.L.C. 49%
All of these affiliates are privately held companies for which no ready market values are available. In management's opinion, the equity interest as stated is equal to or less than the fair value of their interest in these affiliates.
16. Concentrations of credit risk -----------------------------
Financial instruments that potentially subject the company to significant concentrations of credit risk consist principally of cash and cash equivalents, investments, store financing loans and trade accounts receivable.
The Company holds its cash and cash equivalents in several banks located in the Pacific Northwest and a zero balance bank account located in the Midwest. Each bank is covered by FDIC insurance; balances in excess of coverage are not insured.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 ---------------------------------------------
16. Concentrations of credit risk (continued) -----------------------------------------
As a cooperative, the majority of the Company's accounts receivable represent sales to its members who are located throughout the Pacific Northwest. These accounts are not generally secured by collateral but each member has stock holdings in the Company as well as patronage rebates which the Company could apply against account balances.
The Company makes store financing loans to members from time to time mainly to finance the acquisition of grocery store properties and equipment. These loans are represented by notes receivable which are secured by collateral consisting of personal property, securities and guarantees. See Note 18.a. for sale of notes subject to limited recourse provisions.
The insurance subsidiaries have investments primarily in federal securities and state municipal bonds which are backed by the full faith and credit of the respective governmental agency. See Note 2 for investment details.
17. Fair value of financial instruments -----------------------------------
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, INVESTMENTS MAINTAINED FOR INSURANCE RESERVES AND LONG-TERM NOTES RECEIVABLES INCLUDING THE CURRENT PORTION: The carrying amounts reported in the balance sheet for cash and cash equivalents and long-term receivables approximate their fair value.
INVESTMENT IN AND ACCOUNTS WITH AFFILIATED COMPANIES: It is not practicable to estimate the fair value of an investment representing the common stock of a non-public company because this stock is not traded; that investment is carried at its original cost plus equity in earnings to date in the consolidated balance sheet.
NOTES PAYABLE - BANK AND LONG-TERM LIABILITIES, INCLUDING CURRENT MATURITIES: The carrying amounts of commercial paper and other variable- rate debt instruments approximate their fair value. The fair values of fixed-rate long-term debt are estimated using discounted cash flow analyses based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The assumed incremental borrowing rates used to determine the fair value of fixed-rate long-term debt were 7.50% to 8.30% and 7.50% to 8.00% for 1996 and 1995, respectively.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
17. Fair value of financial instruments (continued) -----------------------------------------------
INSURANCE RESERVES SUPPORTED BY INVESTMENTS: The fair value of insurance accruals, which represent contractual obligations to pay cash in the future, is estimated based on a discounted cash flow analysis using the Company's incremental borrowing rate as the discount rate.
The carrying amounts and fair values of the Company's financial instruments at the balance sheet date are as follows:
18. Commitments and contingencies -----------------------------
a. The Company has entered into various agreements under which it sells certain of its notes receivable from members subject to limited recourse provisions. These notes are secured by collateral which usually consists of personal property, securities and guarantees. The Company in turn receives a monthly service fee. In 1996, 1995 and 1994, the Company sold notes totaling approximately $10,549,000, $20,800,000 and $8,600,000, respectively. The balances of transferred notes that were outstanding and subject to recourse provisions were approximately $27,426,000, $28,537,000 and $13,652,000 at September 27, 1996, September 29, 1995 and September 30, 1994, respectively.
b. In connection with its loan activities to members, the Company has approved loan applications totaling approximately $16,528,900 for which funds have been committed, but not disbursed, as of September 27, 1996.
c. The Company is guarantor of a covenant and a loan by members as of September 27, 1996 totaling approximately $2,137,000 with annual payments of approximately $291,000.
UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 27, 1996 --------------------------------------------
18. Commitments and contingencies (continued) -----------------------------------------
d. The Company is in labor negotiations with several of its unions, whose contract expired in April, 1996. If the Company is unable to reach a negotiated settlement, it is likely that a strike would occur which would depress volumes and cause plant efficiencies to suffer.
e. The Company is a party to various litigation and claims arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company expects that the outcome of these matters will not result in a material adverse effect on the Company's consolidated financial position or results of operations.
Board of Directors United Grocers, Inc.
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION --------------------------------------------------------
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in United Grocers, Inc.'s annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated December 12, 1996. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The pro forma consolidated schedules of income for the years ended September 27, 1996 and September 29, 1995 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on it.
/s/ DeLap, White & Raish
Portland, Oregon December 12, 1996
UNITED GROCERS, INC. -------------------- PRO FORMA CONSOLIDATED SCHEDULES OF INCOME YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995 -----------------------------------------------------
1996 1995 -------------- -------------- Net sales and operations $1,352,302,776 $1,326,522,799 -------------- --------------
Cost and expenses: Cost of sales 1,172,830,590 1,149,986,553 Operating expenses 130,089,635 126,054,112 Selling and administrative expenses 15,997,692 11,705,432 Depreciation 6,631,292 6,392,862 Interest:
Interest expense 14,825,357 14,175,652 Interest income (4,162,561) (4,494,053) -------------- -------------- Interest expense, net 10,662,796 9,681,599 -------------- --------------
Total costs and expenses 1,336,212,005 1,303,820,558 -------------- --------------
Income before members' allowances and patronage dividends, and income taxes 16,090,771 22,702,241
Members' allowances (11,604,949) (11,513,784)
Members' patronage dividends (4,000,000) (8,350,000) -------------- --------------
Income before income taxes 485,822 2,838,457
Provision for income taxes (185,052) (1,021,063) -------------- --------------
Net income $ 300,770 $ 1,817,394 ============== ==============
This pro forma presentation attempts to show United Grocers, Inc. and Market combined and operating as one business unit using historical financial statements as if the transaction had been consummated at the beginning of the year that ended September 29, 1995. (See Note 1.d. of the notes to consolidated financial statements for more details of this transaction.)
The accompanying independent auditor's report on supplemental information should be read as part of this schedule.
Board of Directors United Grocers, Inc.
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULES -------------------------------------------------------------
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in United Grocers, Inc.'s annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated December 12, 1996. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. Schedules I, II and V listed in the index under Section 210.12-04 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ DeLap, White & Raish
Portland, Oregon December 12, 1996
SCHEDULE I UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- CONDENSED FINANCIAL INFORMATION OF REGISTRANT SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995 ---------------------------------------- BALANCE SHEETS: - -------------- ASSETS ------ 1996 1995 ------------ ------------- Current assets: Cash and cash equivalents $ 6,538,664 $ 1,215,643 Accounts receivable - net of allowance 60,052,031 55,014,559 Inventories 99,762,081 73,880,989 Other current assets 3,791,262 2,875,918 Deferred income taxes 683,022 884,350 ------------ ------------ Total current assets 170,827,060 133,871,459 ------------ ------------
Non-current assets: Investments in affiliated companies and intercompany accounts 75,357,036 74,593,758 Other non-current assets 22,796,883 15,410,908 ------------ ------------ Total non-current assets 98,153,919 90,004,666 ------------ ------------
Property, plant and equipment - (net of accumulated depreciation) 63,667,719 55,669,749 ------------ ------------
Total $332,648,698 $279,545,874 ============ ============
LIABILITIES AND MEMBERS' EQUITY -------------------------------
Current liabilities: Notes payable - bank $ 61,173,867 $ 48,515,543 Accounts payable 61,126,166 49,765,896 Other expenses and taxes 9,130,914 4,678,846 Members' patronage payable 3,200,110 6,646,867 Current installments on long-term liabilities 9,073,983 7,573,215 ------------ ------------ Total current liabilities 143,705,040 117,180,367
Long-term liabilities 143,134,105 115,623,670 Deferred income taxes 3,550,044 3,696,317 Deferred income 1,000,026 886,917 ------------ ------------ Total liabilities 291,389,215 237,387,271 ------------ ------------ Members' equity: Common stock 3,192,255 3,278,315 Additional paid-in capital 24,224,262 23,956,797 Retained earnings 13,842,966 14,923,491 ------------ ------------ Total members' equity 41,259,483 42,158,603 ------------ ------------
Total $332,648,698 $279,545,874 ============ ============
The independent auditor's report on financial statement schedules should be read with this supplemental schedule along with the notes to the consolidated financial statements.
SCHEDULE I UNITED GROCERS, INC. AND SUBSIDIARIES ------------------------------------- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 29, 1995, AND SEPTEMBER 30, 1994 ----------------------
The independent auditor's report on financial statement schedules should be read with this supplemental schedule along with the notes to the consolidated financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
A. Identification of Directors:
Name Age Principal Occupation ---- --- -------------------- Directors whose terms began in 1994 and expire in 1997:
Raymond Nidiffer 67 President, C & K Markets, Inc. David D. Neal 46 President, SMN Company Peter J. O'Neal 52 President, Quality Food Investments, Inc.
Directors whose terms began in 1995 and expire in 1998:
Dick Leonard 57 President, L & L Market, Inc. Dean Ryan 38 President, Topps Industries, Inc. Gordon Smith 51 President, Market Place Foods, Inc.
Directors whose terms began in 1996 and expire in 1999:
Robert A. Lamb 56 Partner, Lamb Lasko Partnership Ron Mansacola 60 President, Al Mansacola Grocery Market, Inc. H. Larry Montgomery 52 President, Larry's Market, Inc.
Nominees for Director (three to be elected in 1997 for terms expiring in 2000):
Kenneth W. Findley 57 Vice President, Bales Thriftway, Inc. Dennis Blasingame 48 Owner, Da Boys #2 Craig Danielson 48 President, Dan, Inc. Oregon Gaylon Baese 59 President, Howards on Scholls, Inc. James Glassel 56 President, Fatewell, Inc. James Wiley 38 President, Wiley & Sons, Inc.
B. Identification of Executive Officers:
Name Age Offices Held Officer Since ---- --- ------------ ------------- Alan C. Jones 54 President, Secretary, Treas. 1981 John W. White 43 Vice President 1988 George P. Fleming 56 Assistant Secretary 1980
C. Identification of Certain Significant Employees:
None.
D. Family Relationships
None.
E. Business Experience
All executive officers have been employed by United in various management and executive capacities for more than the past five years.
All directors and nominees have been principally engaged in the retail grocery business for more than the past five years with the firms shown opposite their names. Except as described in Item 13 below, none of such firms is a parent, subsidiary or other affiliate of United.
No director or nominee is a director in another company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
F. Involvement in Certain Legal Proceedings
None
Item 11.
Item 11. Executive Compensation
A. Remuneration
The following table shows the compensation, during each of the years in the three year period ended September 27, 1996, earned by each of the Company's executive officers whose total annual salary and bonus for fiscal 1996 exceeded $100,000. The Company does not provide long term compensation to its executive officers other than retirement benefits, as discussed below.
B. Employment Agreement
Mr. Jones has an employment agreement with the Company pursuant to which he is entitled to an annual base salary (subject to cost of living adjustment) plus bonuses subject to performance targets set at the discretion of the board of directors. The agreement further provides for Mr. Jones to receive certain payments if the agreement is terminated without "cause" (as defined) or in the event of a change in control of United.
In the event Mr. Jones is terminated without cause during the term of the agreement, he will be entitled to receive payments for the remaining term of the agreement equal to 50% of his then-current base salary plus the annual premium for his life insurance policy. Further, Mr. Jones would be entitled to be covered under the Company's medical and dental plans for the remaining term of the agreement. As of September 27, 1996, the employment agreement had a remaining term of 12 months.
In the event of a change of control of United (as defined), Mr. Jones will have the right to terminate the employment agreement and receive a severance payment equal to three times an amount which is 150% of his then-current base salary.
C. Retirement Plan
The Company's retirement plan is an actuarially funded defined benefit plan. The following table shows the estimated annual benefits payable upon retirement (assuming normal retirement at age 65) for employees at specified annual salary levels (based upon the highest average of five consecutive years) with various years of service.
The number of years of service under the plan for the officers listed in the table on the preceding page is as follows:
Years of Person Service ------ -------- Alan C. Jones 32 John W. White 9
The amount of compensation used in calculation of pension benefits for Mr. Jones and Mr. White is the dollar amount shown under "salary" and "bonus," subject to plan limitations, in the table for Item 11, Section A. above.
Amounts payable under the plan are not subject to deduction for social security or other offset amounts.
D. Remuneration of directors
Directors, except the Chairman of the Board, received $10, plus expenses, for each board meeting attended. The Chairman received $25, plus expenses, for each board meeting attended and for each additional day spent on the conduct of United's business.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
A. Security Ownership of Certain Beneficial Owners
The following table sets forth information as of December 22, 1996, regarding each person known to United to be the beneficial owner of more than 5 percent of United's Common Stock.
Title of Class Name and address Amount and nature of Percent of of beneficial owner beneficial ownership class - -------------- ------------------- -------------------- ----------
United Grocers, Raymond L. Nidiffer 55,482 shares 8.9% of class Inc., Common P. O. Box 730 Stock Brookings, OR 97415
[FN] Includes 1,409 shares issuable as patronage dividendsithin 60 days. Mr. Nidiffer has sole voting and investment power with respect to the shares indicated in the table.
B. Security Ownership of Management.
As of December 22, 1996, the directors and nominees forelection as directors of United owned the indicated amounts of United's Common Stock, United's only class of voting security.
Amount of Beneficial Stock to Percent Beneficial Owner Ownership be issued of class ---------------- ------------------ -------------- -------- Directors:
Ray Nidiffer 54,073 shares 1,409 shares 8.9 Dave Neal 4,000 shares -0- shares .6 Peter J. O'Neal 4,174 shares 51 shares .7
Deano Ryan 4,263 shares -0- shares .7 Gordon Smith 4,996 shares 27 shares .8 Dick Leonard 4,133 shares -0- shares .7 Robert A. Lamb 13,472 shares 15 shares 2.2 Ron Mancasola 6,376 shares 73 shares 1.0 H. Larry Montgomery 2,862 shares 20 shares .5
Directors and officers as a group 98,349 shares 1,595 shares 16.1
Nominees:
Kenneth W. Findley 11,499 shares 0 shares 1.9 Gaylon G. Baese 4,216 shares 0 shares .7 Craig T. Danielson 19,999 shares 268 shares 3.6 Dennis Blasingame 1,699 shares 19 shares .3 James Glassel 1,073 shares 31 shares .2 James E. Wiley 200 shares 47 shares [FN] According to the bylaws, each stockholder of record is entitled to one vote and one vote only, irrespective of number of shares owned. All of the above-named individuals have only one vote, except for Messrs. Smith, Danielson, Lamb and Findley, who may be deemed to have more than one vote because they have interests in various entities that own shares.
Except as indicated below, all of the above-named individuals have sole voting and investment power with respect to the shares indicated in the table.
These shares are owned jointly by the person named and his spouse or by a corporation whose stock is owned jointly by the person named and his spouse.
These shares are owned by a corporation and a partnership in which Mr. Lamb has an equity or voting interest.
These shares are owned by two corporations in which Mr. Danielson has an equity interest.
These shares are owned by a corporation in which Mr. Findley has a voting interest.
These shares are owned by a corporation in which Mr. Nidiffer has a controlling interest.
These shares are owned by two corporations in which Mr. Smith has an equity interest.
These shares are issuable as patronage dividends within 60 days and are included in the total shown under "Amount of Beneficial Ownership."
C. Changes in Control. None
Item 13.
Item 13. Certain Relationships and Related Transactions.
A. Transactions with Management and Others
All directors and nominees (or their firms), as members of United, purchase groceries and related products from United in the ordinary course of business at prices available to members generally.
In the ordinary course of business, United enters into prime leases and subleases property to qualified members. United presently is a party to subleases with entities affiliated with Ray Nidiffer, Craig Danielson, Ron Mancasola, Gaylon Baese and Robert Lamb, directors or nominees for director of United. At September 27, 1996, monthly payments due pursuant to the subleases were as follows:
Danielson $91,049 Nidiffer $51,660 Mancasola $16,054 Baese $20,078 Lamb $47,841
United guarantees members' indebtedness under certain conditions and loans money to members through its financing department. The Company has guaranteed certain loan obligations of C&K Market, Inc., a corporation owned and controlled by Ray Nidiffer, a director.
During 1996, the company acquired one store in satisfaction of indebtedness from a corporation in which David Neal, a director, had an ownership interest.
B. Certain Business Relationships
During fiscal year 1996, C&K Market, Inc., a corporation controlled by Ray Nidiffer, a director, purchased groceries and other products in the ordinary course of business from United in the amount of $89,279,472. United owns a 22% equity interest in C&K Market, Inc.
C. Indebtedness of Management
The following directors, officers, nominees or related persons or entities were indebted to United during the fiscal year ended September 27, 1996, or thereafter and prior to the date of this report:
All of the above loans were for purchase of inventory and equipment and are secured by inventory and equipment. Variable rate loans bear interest at prime plus 1.75 percent to 2.25 percent.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of the report
1. The following financial statements are filed as part of this report:
Independent Auditor's Report on Financial Statements Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Members' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditor's Report on Supplemental Information Supplemental Information Independent Auditor's Report on Financial Statement Schedules
2. The following financial statement schedules are filed as part of this report:
Schedule I - Condensed financial information of registrant
Schedule II - Valuation and qualifying accounts
Schedule V - Supplementary information concerning property - casualty insurance operations
3. Exhibits. The exhibits listed on the accompanying index to exhibits are filed as part of this report.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED GROCERS, INC. (Registrant)
Dated: December 24, 1996 By: /s/ Alan C. Jones
Alan C. Jones President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ----
/s/ Alan C. Jones President, Secretary and 12-24-96 Alan C. Jones Treasurer (Principal executive officer)
/s/ John W. White Vice President 12-24-96 John W. White (Principal financial officer and principal accounting officer)
/s/ Robert A. Lamb* Director 12-24-96 Robert A. Lamb
/s/Peter J. O'Neal* Peter J. O'Neal Director 12-24-96
/s/ David D. Neal* Director 12-24-96 David D. Neal
/s/ Harry R. (Dick) Leonard* Director 12-24-96 Harry R. (Dick) Leonard
Director 12-24-96 Deano Ryan
/s/ Gordon Smith* Director 12-24-96 Gordon Smith
/s/ Ron L. Mancasola* Director 12-24-96 Ron L. Mancasola
/s/ H. Larry Montgomery* Director 12-24-96 H. Larry Montgomery
/s/Raymond L. Nidiffer* Director 12-24-96 Raymond L. Nidiffer
* By /s/ John W. White John W. White Attorney-in-fact
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
No annual report covering the company's last fiscal year has been sent to security holders. An annual report will be furnished to security holders subsequent to the filing of the annual report on Form 10-K and copies of the annual report shall be sent to the Commission when sent to security holders.
Enclosed with this report is a copy of proxy soliciting material, including the form of proxy, sent to United's shareholders for the January 11, 1997 annual meeting.
The enclosed proxy soliciting material and, when provided, the annual report for the last fiscal year are, or will be, furnished to the Commission for its information and shall not be deemed filed with the Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the company specifically incorporates them in its annual report on this form by reference.
APPENDIX 2
Reconciliation of claim reserves: ($ in thousands)
@ 9 mos @ 9 mos 1995 1994 1994 1993 1992 ======= ======= ====== ====== ======
a Net liabilities, beginning 28,351 27,784 27,784 25,252 22,357 of year
b Incurred claims & claim adjustment expense
i Provision for current accident year claims 12,928 11,837 17,864 18,426 16,933
ii Increase/(decrease) in prior year claims 120 (1,425) (3,162) (1,778) (2,156)
Total incurred claims and claim adjustment expense 13,048 10,412 14,702 16,648 14,777
c Payments
i Provision for current 3,852 2,136 5,426 5,903 5,634 accident year claims
ii Attributable to prior year claims 8,037 6,894 8,708 8,212 6,122
Total Payments 11,888 9,030 14,134 14,115 11,756
d Other None None None None None
e Net liabilities, end of year 29,603 27,639 28,351 27,784 25,252
/TABLE
EXHIBIT INDEX
2.A Copy of agreement for sale and purchase of business assets dated December 7, 1994, between Commissary Cash & Carry, Inc., and the registrant (incorporated by reference to Exhibit 10.1 to the registrant's quarterly report on Form 10-Q for the period ended March 31, 1995).
2.B Copy of agreement for sale and purchase of business assets dated December 22, 1994, between Rich and Rhine, Inc., and the registrant (incorporated by reference to Exhibit 10.2 to the registrant's quarterly report on Form 10-Q for the period ended March 31, 1995).
2.C Copy of asset purchase agreement dated as of November 10, 1995, between Bay Area Foods, Inc., and the registrant (incorporated by reference to Exhibit 2 to the registrant's current report on Form 8-K dated December 13, 1995).
3.A Copy of the registrant's restated articles of incorporation, as amended (incorporated by reference to Exhibit 4-E to the registrant's registration statement on Form S-2, No. 33-26631).
3.B Copy of the registrant's bylaws, as amended (incorporated by reference to Exhibit 4-F to the registrant's registration statement on Form S-2, No. 33-26631).
4.A Copy of indenture dated as of February 1, 1978, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Capital Investment Notes (incorporated by reference to Exhibit 4-I to the registrant's registration statement on Form S-1, No. 2-60488).
4.B1 Copy of supplemental indenture dated as of December 15, 1984, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Series D 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-F to the registrant's registration statement on Form S-2, No. 33-95213).
4.B2 Copy of supplemental indenture dated as of December 15, 1986, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Series E 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-G to the registrant's registration statement on Form S-2, No. 33-11212).
4.B3 Copy of supplemental indenture dated as of January 27, 1989, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Series F 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-G to the registrant's Form 10-K for the fiscal year ended September 30, 1989).
4.B4 Copy of supplemental indenture dated as of January 22, 1991, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Series G 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-D to the registrant's registration statement on Form S-2, No. 33-38617).
4.B5 Copy of supplemental indenture dated as of July 6, 1992, between the registrant and United States National Bank of Oregon, as trustee, relating to the registrant's Series H 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-C to the registrant's registration statement on Form S-2, No. 33-49450).
4.B6 Copy of supplemental indenture dated as of January 9, 1995, between the registrant and First Bank National Association, as trustee, relating to the registrant's Series J 5% Subordinated Redeemable Capital Investment Notes (incorporated by reference to Exhibit 4-C to the registrant's registration statement on Form S-2, No. 33-57199).
4.C Copy of amended and restated credit agreement of May 31, 1995, among the registrant, United States National Bank of Oregon, and Seattle-First National Bank. (incorporated by reference to Exhibit 4-C to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
4.D Copy of note agreement dated as of September 20, 1991, and senior notes dated September 24, 1991 among the registrant and various purchasers (incorporated by reference to Exhibit 4-I to the registrant's Form 10-K for the fiscal year ended September 27, 1991).
4.E Copy of Promissory Note, Assignment of Rents and Leases, Deed of Trust, Financing Agreement and Security Agreement, and Environmental Indemnity Agreement dated as of September 30, 1993, between the registrant and United of Omaha Life Insurance Company, relating to the registrant's construction of a new office building (incorporated by reference to Exhibit 4.E to the registrant's Form 10-K for the fiscal year ended October 1, 1993).
4.F1 Copy of Loan Purchase and Servicing Agreement dated as of May 13, 1994, among United Resources, Inc., as Seller and Servicer, the registrant, as Guarantor, and National Consumer Cooperative Bank, as Buyer, relating to the selling of loans originated by the registrant's subsidiary, United Resources, Inc., (incorporated by reference to Exhibit 4.F1 to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
4.F2 Copy of First Amendment to Loan Purchase and Servicing Agreement of May 13, 1994, dated as of July 15, 1994, among United Resources, Inc., the registrant, and National Consumer Cooperative Bank (incorporated by reference to Exhibit 4.F2 to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
4.F3 Copy of Second Amendment to Loan Purchase and Servicing Agreement of May 13, 1994, dated as of September 28, 1995, among United Resources, Inc., the registrant, and National Consumer Cooperative Bank.(incorporated by reference to Exhibit 4.F3 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
4.F4 Copy of Loan Purchase and Servicing Agreement (Holdback Program) dated as of September 28, 1995, between United Resources, Inc., as Seller and Servicer, and National Consumer Cooperative Bank, as Buyer, and related guaranty agreement between the registrant and National Consumer Cooperation Bank.(incorporated by reference to Exhibit 4.F4 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
4.G Copy of Note Agreement dated October 10, 1994, between the registrant and Phoenix Home Life Mutual Insurance Company (incorporated by reference to Exhibit 4.G to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the registrant is not filing certain instruments with respect to its long-term debt because the amount authorized under any such instrument does not exceed 10 percent of the total consolidated assets of the registrant at September 27, 1996. The registrant agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
10.A1* Copy of United Grocers, Inc., pension plan and trust agreement dated as of October 1, 1985 (incorporated by reference to Exhibit 10-A to the registrant's registration statement on Form S-2, No. 33-11212).
10.A2* Copy of first amendment to United Grocers, Inc., pension plan and trust agreement dated as of October 1, 1987 (incorporated by reference to Exhibit 10-B to post effective amendment No. 1 to the registrant's registration statement on Form S-2, No. 33-11212).
10.A3* Copy of policy summary and related documents pertaining to a life insurance policy for Alan C. Jones, President of the registrant, purchased pursuant to the registrant's supplemental executive retirement plan (incorporated by reference to Exhibit 10-E to the registrant's Form 10-K for the fiscal year ended September 28, 1990).
10.A4* Copy of registrant's executive deferred compensation plan (incorporated by reference to Exhibit 10-U to the registrant's Form 10-K for the fiscal year ended September 27, 1991).
10.B* Copy of executive compensation agreement dated March 1, 1991 (incorporated by reference to Exhibit 10-T to the registrant's Form 10-K for the fiscal year ended September 27, 1991).
10.C* Copy of binder of insurance with respect to indemnification of officers and directors (incorporated by reference to Exhibit 10.C to the registrant's Form 10-K for the fiscal year ended October 1, 1993).
10.D1 Typical forms executed in connection with loans to members, including directors:
10.D1a Installment note (Stevens-Ness form 217), with optional interest rate riders (incorporated by reference to Exhibit 10-D1a to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1b Promissory note (Stevens-Ness form 216), with optional interest rate riders (incorporated by reference to Exhibit 10-D1b to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1c Installment note.(incorporated by reference to Exhibit 10-D1c to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.D1d Renewal note for fixed rate loan.(incorporated by reference to Exhibit 10-D1d to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.D1e Subsequent note (three forms) (incorporated by reference to Exhibit 10-D1c to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1f Loan agreement (two forms) (incorporated by reference to Exhibit 10-D1d to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1g Loan agreement for subsequent notes (incorporated by reference to Exhibit 10-D1e to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1h Amendment to loan and security agreements, including optional clauses (incorporated by reference to Exhibit 10-D1f to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1i Amendment to installment note and security agreements. (incorporated by reference to Exhibit 10-D1i to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.D1j Security agreement (Stevens-Ness form 1201) (incorporated by reference to Exhibit 10-D1g to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1k Purchase money security agreement (Stevens-Ness form 1202) (incorporated by reference to Exhibit 10-D1h to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1l Security agreement for equipment (Stevens-Ness form 1203) (incorporated by reference to Exhibit 10-D1i to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1m Inventory loan and security agreement (Stevens-Ness form 1206) (incorporated by reference to Exhibit 10-D1j to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1n Security agreement (equipment and inventory) (incorporated by reference to Exhibit 10-D1k to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
10.D1o Security agreement for subsequent notes (incorporated by reference to Exhibit 10-D1l to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
Pursuant to Instruction 2 to Item 601 of Regulation S-K, the registrant has filed the forms listed above in lieu of filing each copy executed in connection with loans to directors. A schedule showing the principal amount and interest rate of each director loan at November 30, 1996, appears in Item 13.C of this Form 10-K. The registrant agrees to furnish a copy of any omitted loan document to the Securities and Exchange Commission upon request.
10.D2 Typical form of residual stock redemption note executed in connection with redemption of common stock from members (incorporated by reference to Exhibit 10-D2 to the registrant's Form 10-K for the fiscal year ended October 2, 1992).
Pursuant to Instruction 2 to Item 601 of Regulation S-K, the registrant has filed the form listed above in lieu of filing each copy executed in transactions with directors. The registrant agrees to furnish a copy of any omitted document to the Securities and Exchange Commission upon request.
10.E1 Copy of sublease agreement for Aloha store dated January 3, 1994, between the registrant and CTD, L.L.C., a limited liability company controlled by Craig T. Danielson, a director of the registrant (incorporated by reference to Exhibit 10.E to the registrant's Form 10-Q for the quarterly period ended April 1, 1994).
10.E2 Copy of sublease agreement for Tigard store dated January 3, 1994, between the registrant and CTD, L.L.C., a limited liability company controlled by Craig T. Danielson, a director of the registrant (incorporated by reference to Exhibit 10.D to the registrant's Form 10-Q for the quarterly period ended April 1, 1994).
10.E3 Copy of sublease agreement for Sandy store dated May 4, 1994, between the registrant and Dan Inc Oregon, a corporation controlled by Craig T. Danielson, a director of the registrant (incorporated by reference to Exhibit 10.G3 to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
10.E4 Copy of Asset Purchase and Sale Agreement dated May 4, 1994, for Sandy store between the registrant and Dan Inc Oregon, a corporation controlled by Craig T. Danielson, a director of the registrant (incorporated by reference to Exhibit 10.G4 to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
10.E5 Copy of Asset Purchase and Sale Agreement dated January 3, 1994, for Aloha and Tigard stores between the registrant and CTD, L.L.C., a limited liability company controlled by Craig T. Danielson, a director of the registrant (incorporated by reference to Exhibit 10.C to the registrant's Form 10-Q for the quarterly period ended April 1, 1994).
10.F1 Copy of sublease agreement for Troutdale store dated December 15, 1993, between the registrant and a partnership in which Robert A. Lamb, a nominee for director of the registrant, is a partner (incorporated by reference to Exhibit 10-F1 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.F2 Copy of sublease agreement for Wilsonville store dated June 25, 1991, between the registrant and a partnership in which Robert A. Lamb, a nominee for director of the registrant, is a partner (incorporated by reference to Exhibit 10-F2 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.G Copy of sublease agreement for Magalia store dated March 15, 1994, between the registrant and Al Mancasola Grocery Markets, Inc., a corporation controlled by Ronald L. Mancasola, a nominee for director of the registrant (incorporated by reference to Exhibit 10-G to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.H1 Copy of sublease agreement for Silverton store effective as of December 14, 1994, between the registrant and a partnership in which David D. Neal, a director of the registrant, is a partner (incorporated by reference to Exhibit 10-H1 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.H2 Copy of assignment of real property sale contract dated February 20, 1985, by David D. Neal to the registrant (incorporated by reference to Exhibit 10-H2 to the registrant's Form 10-K for the fiscal year ended September 29, 1995).
10.I1 Copy of sublease agreement for Coos Bay store dated February 28, 1991, between the registrant and Raymond Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-I19 to the registrant's Form 10-K for the fiscal year ended September 27, 1991).
10.I2 Copy of sublease agreement for Arcata store dated August 11, 1977, between the registrant and Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-Q2 of the registrant's registration statement on Form S-2, No. 33-26631).
10.I3 Copy of sublease agreement for Gold Beach store dated July 6, 1979, between the registrant and Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-Q3 of the registrant's registration statement on Form S-2, No. 33- 26631).
10.I4 Copy of assignment of lease and related documents for Mt. Shasta store between the registrant and C & K Market, Inc., an affiliate of Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-Q4 of the registrant's registration statement on Form S-2, No. 33-26631).
10.I5 Copy of sublease agreement for Rogue River store dated June 25, 1976, between the registrant and Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-Q5 of the registrant's registration statement on Form S-2, No. 33- 26631).
10.I6 Copy of lease agreement for Coos Bay store dated February 28, 1991, between the registrant and Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-I20 to the registrant's Form 10-K for the fiscal year ended September 27, 1991).
10.I7 Copy of loan guaranties dated June 12, 1980 and September 30, 1988 given by registrant for the benefit of C & K Market, Inc., an affiliate of Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10-I12 to the registrant's Form 10-K for the fiscal year ended September 30, 1989).
10.I8 Copy of stock purchase agreement dated as of June 20, 1994, between the registrant and C&K Market, Inc., an affiliate of Raymond L. Nidiffer, a director of the registrant (incorporated by reference to Exhibit 10.F8 to the registrant's Form 10-K for the fiscal year ended September 30, 1994).
12 Statement of Computation of Ratio of Adjusted Income to Fixed Charges.
22 Subsidiaries of the registrant.
24 Power of Attorney of certain directors of the registrant.
27 Financial Data Schedule.
* Denotes management contract or compensatory plan or arrangement.