ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES, AND OTHER FACTORS DISCUSSED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
Certified is the largest grocery wholesaler serving independent supermarket chains in California. The Company also serves retail food stores in Nevada, Arizona, Hawaii and various foreign countries in the South Pacific and elsewhere. In addition to offering a complete line of dry grocery, frozen food, deli, meat, dairy, bakery and general merchandise products, the Company also provides finance, insurance, store design and real estate services to its patrons. As of August 30, 1997, Certified provided products and services to 2,781 retail food stores operated by 729 patrons. The Company's marketing platform is built on offering its patrons greater value than found elsewhere by combining competitive pricing with superior selection, quality, service and convenience.
A California corporation organized in 1922 and incorporated in 1925, Certified does business primarily with those patrons who qualify and have been accepted as "member-patrons." Certified is owned by its member-patrons who are primarily independent grocers. The Company is operated and, with the exception of its subsidiaries, is taxed on a cooperative basis. The primary businesses operated by Certified's subsidiary companies include the distribution of general merchandise, health and beauty care and specialty products and the sale of insurance, finance and store planning services primarily to operators of retail food stores. The earnings of the Company's subsidiaries are generally retained by the Company, while the earnings of the parent company ("Cooperative") are generally distributed to its patrons in the form of patronage dividends. The benefit of this structure is that taxes are paid on the Cooperative's earnings only once, that is, when notice of a patronage dividend payout is received by the patron. (See "BUSINESS--Tax Matters") The Company establishes minimum purchase requirements for the member-patrons, which may be modified from time to time. Patrons which do not meet purchasing requirements are termed "associate patrons."
Associate patrons do not own shares in the Company; accordingly, they are not allowed to vote on matters requiring shareholder approval. However, associate patrons have the same deposit requirements and are entitled to other benefits similar to member-patrons.
WHOLESALE DISTRIBUTION
Certified's wholesale distribution business represented approximately 98% of fiscal 1997 sales. The wholesale business includes a broad range of branded and private label products in dry grocery, frozen, delicatessen, general merchandise, boxed meat, service deli, ice cream, bakery and dairy.
The Company distributes its various product lines from warehouse and manufacturing complexes located in Los Angeles, Stockton, and Fresno, California.
Certified sells a full line of branded grocery and nonfood items supplied by unrelated manufacturers and also sells merchandise under its own private labels, including the Springfield, Gingham, Special Value, La
Corona, and Golden Creme labels. Certified also operates its own bakery and dairy facilities. The Company is not dependent upon any single source of supply in any of its businesses. Management believes that alternative suppliers are available for substantially all of its products and that the loss of any one supplier would not have a material adverse effect on the Company's business.
The Company currently makes certain charges in addition to the listed prices for merchandise, including fees for warehousing and delivery, based on published schedules. Warehousing fees (also known as service fees) are primarily based on average order sizes and frequency of orders, while delivery fees are based primarily on the distance from the Company's supplying warehouse and the amount of capacity or cube used by the load.
SUPPORT BUSINESSES
The Company's retail support businesses collectively accounted for approximately 2% of the Company's total sales in fiscal 1997. Retail support operations include Grocers Capital Company ("GCC"), which provides financing for inventory purchases, equipment purchases, store remodeling and new store acquisitions, and Grocers Equipment Company ("GEC"), which provides store planning and development services, retail pricing comparisons, scanning support and also sells and leases equipment to the Company's customers. During fiscal 1997, the Company operated three conventional supermarkets and one limited assortment store in Northern California and one limited assortment store in Southern California. The Company also provides insurance brokerage services for retailers through Grocers and Merchants Insurance Services, Inc., and underwrites selected insurance risks through two insurance subsidiaries.
RETAIL DEVELOPMENT
The Company recently introduced a banner store program designed to convert older stores into state-of-the-art retail operations. Operating under the common name "Apple Markets", the stores are owned and operated by patrons of Certified or by Certified; however, they have the look of a chain store because each store carries the same name and logo, and utilize the same design layout throughout the stores. Other formats to meet the diverse needs of independent retailers are also in the development stage.
COMPETITION
The food industry is characterized by intense competition and low profit margins. In order to compete effectively, the Company must provide its patrons with the capability to meet rapidly fluctuating competitive market prices, provide a wide range of perishable and nonperishable products, make prompt and efficient deliveries, and provide the services which are required by modern market operations. The Company competes with local, regional and national grocery wholesalers and with a number of major manufacturers which market their products directly to retailers. The Company's success is dependent upon its ability to supply food and nonfood products and services to its patrons in a cost-effective manner and upon the ability of its independent retail customers to compete with the large chain store operations.
CUSTOMERS
The Company's patrons are primarily retail grocery store operators ranging in size from single store operators to multiple store chains. The Company's largest customer and ten largest customers accounted for approximately 5% and 31%, respectively, of net sales in fiscal 1997.
STOCK OWNERSHIP
Class A Shares
Class A Shares are issued to and may be held only by member-patrons of Certified. In order to qualify for and retain membership as a member-patron, a person or other entity (1) must patronize Certified in such amounts and manner, and otherwise must comply with the Bylaws and with such rules, regulations and policies, as may be established by Certified; (2) must have and maintain acceptable financial standing; (3) must make application in such form as is prescribed; and (4) must be accepted as a member after approval by the Board of Directors.
Each member-patron of Certified is required to hold exactly 100 Class A Shares. The price for such shares will be the book value per share of the outstanding shares at the close of the fiscal year ended prior to acceptance as a member-patron.
Class B Shares
The Board of Directors may approve the issuance of Class B Shares to any person and for any purpose. However, the Board of Directors does not intend to authorize the issuance of Class B Shares except to member-patrons.
With the exception of new members (see below), each member-patron is required to hold Class B Shares having combined Issuance Values (as defined below) in an amount equal to the lesser of the member-patron's required subordinated cash deposit (see "BUSINESS--Patron Deposits") or twice the member-patron's average weekly purchases ("Class B Share Requirement"). For purposes of this requirement, each Class B Share held by a member-patron is valued at the book value of Certified's outstanding shares as of the close of the fiscal year ended prior to the issuance of such Class B Share ("Issuance Value").
Class B Shares are generally issued to new member-patrons as part of the patronage dividends (see "BUSINESS--Patronage Dividends") paid to such member- patron over a period of five consecutive fiscal years, beginning with the second fiscal year following admission as a member-patron. The Class B issuance formula provides that the member-patron will hold Class B Shares having Issuance Values equal to 20% of the member-patron's Class B Share Requirement after the first patronage dividend, 40% of the Class B Share Requirement after the second patronage dividend, and so on until the member- patron reaches 100% of their Class B Share Requirement after the fifth patronage dividend.
If following the issuance of Class B Shares as part of the patronage dividend for any given fiscal year, the member-patron would not hold Class B Shares having combined Issuance Values equal to the amount of Class B Shares required to be held by the member-patron, then additional Class B Shares would be issued to the member-patron in a quantity sufficient to achieve the required amount. Issuance of these additional Class B Shares would be paid for by charging the member-patron's cash deposit account in an amount equal to the Issuance Value of such additional Class B Shares.
At August 30, 1997, the book value per share of Certified's Class A and Class B Shares was $175.22.
Class C Shares
Class C Shares are held one share each by the members of the Board of Directors. Each board member purchases one Class C Share for $10. Class C Shares are nonvoting shares and would share in liquidation only to the extent of $10 per share.
PATRONAGE DIVIDENDS
Certified distributes patronage dividends based upon the net patronage earnings of the Cooperative during the fiscal year. The divisional dividends are approved by the Board of Directors. Patronage dividends are distributed to each patron in proportion to the dollar volume of patronage purchases from each division of the Cooperative by the patron. Patronage dividends are distributed after the close of the fiscal year, except for dividends on dairy products which are distributed after the close of each fiscal quarter.
The following table shows the patronage dividend experience of the Company during the past three fiscal years.
- -------- (1) Certified expects to continue to distribute patronage dividends in the future, although there can be no assurance of the amounts of such dividends.
Certified's bylaws provide that patronage dividends may be distributed in cash or in any other form that constitutes a written notice of allocation under Section 1388 of the Internal Revenue Code. Section 1388 defines the term "written notice of allocation" to mean any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice, that discloses to the recipient the stated dollar amount allocated to the recipient by Certified and the portion thereof, if any, which constitutes a patronage dividend.
Dairy patronage dividends are generally paid in cash. Patronage dividends for the remaining divisions are currently paid out in the following order and manner: first, member-patrons receive 20% in cash; second, member-patrons receive the required amount of Class B Shares (see "BUSINESS--Stock Ownership"); third, the remainder is credited to the member-patron's deposit account (see "BUSINESS--Patron Deposits"). In addition, Certified issued subordinated patronage dividend certificates (see Footnote 8 to Notes to Consolidated Financial Statements) evidencing the retention of a portion of patronage dividends ("Patronage Certificates") for fiscal years 1993, 1994 and 1995. The amounts retained as Patronage Certificates in those years were deducted from each member-patron's patronage dividend prior to the issuance of Class B Shares to such member-patron.
PATRON DEPOSITS
The Company generally requires that its cooperative patrons maintain a subordinated cash deposit equal to the greater of twice the amount of each patron's average weekly purchases or twice the amount of the patron's average purchases, if such purchases are not on a regular basis. Required deposits are determined twice a year, at the end of the Company's second and fourth fiscal quarters, based upon a review of the patron's purchases from certain of the cooperative divisions during the preceding two quarters. Member-patrons meeting certain qualifications established by the Board of Directors may elect to maintain a reduced required deposit of $500,000 or one and one-quarter weeks' average purchases, whichever is greater.
Member-patrons holding Class B Shares are presently given credit against the above described cash deposit requirement based upon the respective book values of such shares as of the fiscal years last ended prior to their issuance. The Company pays no interest on the required deposits. Interest is paid on cash deposits which are in excess of patrons' required deposits.
In addition, patrons who participate in the Company's price reservation program are required to maintain a noninterest-bearing deposit based upon the value of their inventory included in this program. Under the Company's price reservation program, patrons are permitted to submit price reservations in advance for their dry grocery, frozen, delicatessen and general merchandise purchases. For the patron to get the benefit of the price reservation, an actual order must be placed. The price which the patron will be charged is the price in effect at the time of the reservation.
The required deposits of patrons are contractually subordinated and subject to the prior payment in full of certain senior indebtedness of the Company. As a condition of becoming a patron, each patron is required to execute a subordination agreement providing for the subordination of the patron's required deposits. Generally, the subordination is such that no payment can be made by the Company with respect to the required deposits in the event of an uncured default by the Company with respect to senior indebtedness, or in the event of dissolution, liquidation, insolvency or other similar proceedings, until all senior indebtedness has been paid in full.
Upon request, the Company will return to patrons the amount of cash deposits that are in excess of the required deposits, provided the patron is not in default of its obligations to the Company. On termination of membership, patrons are entitled to a return of deposits, less all amounts that may be owing by the patron to the Company. In all cases, however, return of that portion of the patron's cash deposits which consists of required deposits will be governed by the applicable subordination provisions.
TAX MATTERS
The Company is a corporation operating primarily on a cooperative basis. The Company is subject to federal and state income and franchise taxes and must pay other taxes applicable to corporations, such as sales, excise, real and personal property taxes.
As a corporation operating on a cooperative basis, the Company is subject to Subchapter T of the Internal Revenue Code ("Subchapter T"). Under Subchapter T, the Company pays patronage dividends to patrons pertaining to its fiscal year within 8 1/2 months of the close of such fiscal year. To qualify as patronage dividends, payments are made on the basis of the value of the business done with or for patrons, under a pre-existing obligation to make such payment, and with reference to the net earnings from business done with or for the Cooperative's patrons. Patronage dividends are paid in cash or written notices of allocation. A written notice of allocation is distributed to the patron and provides notice of the amount allocated to the patron by the Company and the portion thereof which constitutes a patronage dividend.
Under Subchapter T, the Company may deduct, in the fiscal year for which they are paid, the amount of patronage dividends paid in cash and qualified notices of allocation. A written notice of allocation will be qualified if the Company pays at least 20% of the patronage dividend in cash, and the patron consents to take the stated dollar amount of the written notice into income in the year in which it is received. The Company deducts for tax purposes the entire amount of its patronage dividends by paying at least 20% in cash and issuing qualified notices of allocation for the remainder.
The Company currently intends to continue to make patronage distributions to member-patrons comprised of cash and qualified notices of allocation (including its Class B Shares). At least 20% of patronage dividends are expected to be paid in cash. The Company will notify patrons of the stated dollar amount allocated to them and the portion thereof which is a patronage dividend. Patrons are required to consent to include in their gross income, in the year received, all cash as well as the stated dollar amount of all qualified notices of allocation including the Patronage Certificates and the book value of the Class B Shares distributed to them as patronage dividends.
Patronage Certificates and Class B Shares distributed as part of the patronage dividend are also subject to state income and corporation franchise taxes in California and may be subject to such taxes in other states.
The Company is subject to federal income tax and California franchise tax on net earnings of business with or for patrons which is not distributed as deductible patronage dividends and on net earnings derived from nonpatronage business. The Company files consolidated income tax returns with its subsidiaries, none of which is a cooperative and each of which is therefore subject to tax.
To the extent that Class B Shares are received by the patron as patronage dividends under Subchapter T, the Internal Revenue Service ("IRS") has held that if such Class B Shares are redeemed in full or in part or are
otherwise disposed of, there will be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income. However, since Class B Shares may be issued other than as a part of patronage dividends, it is possible that the IRS could take the position that the proceeds from a partial redemption of Class B Shares should be taxed as a dividend. Patrons are strongly urged to consult with their tax advisors for further clarification of this issue and for the impact the position of the IRS may have on their own federal and state tax returns.
The Company's subsidiaries do not pay patronage dividends and are not taxed in accordance with Subchapter T.
EMPLOYEES
The Company employs approximately 2,400 employees, of whom approximately 1,420 are members of one of several unions, the largest being the International Brotherhood of Teamsters ("IBT"). The IBT contracts cover approximately 1,320 employees and have various expiration dates. The Stockton and Southern California warehouse workers' and truck drivers' IBT contract covers approximately 1,160 employees and expires on September 13, 1998. The IBT contract which covers approximately 130 Fresno warehouse workers and truck drivers expires on February 3, 1999. The IBT contract which covers approximately 30 mechanical maintenance workers expires on March 29, 1999. The Company believes its labor relations to be good.
ENERGY MATTERS
The Company's operations are dependent upon the continued availability of electric power, diesel fuel, and gasoline. The Company's trucking operations are extensive. Diesel fuel storage capacity represents approximately two weeks average usage. A shortage of diesel fuel and gasoline could materially affect deliveries of merchandise and the activities of the Company's service representatives and, thus, adversely affect the Company's sales.
ITEM 2.
ITEM 2. PROPERTIES
FACILITIES
The Company's corporate offices, warehouses, retail stores, and manufacturing facilities as of August 30, 1997 are summarized as follows:
All of the Company's warehouse facilities are located in California.
As of September 12, 1997, the Company entered into an agreement to sell approximately 24 acres of property located in Commerce, California. This transaction will require certain administrative offices and distribution facilities to be relocated. The Company expects to utilize its remaining properties to accommodate most of the displaced facilities. This sale is not expected to have an adverse impact on the ongoing operations of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of cases currently in litigation or potential claims encountered in the normal course of business that are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material adverse effect on the Company's financial position or results of operations.
The United States Environmental Protection Agency ("EPA") notified the Company in 1993 that, together with others, it was a potentially responsible party ("PRP") for the disposal of hazardous substances at a landfill site located in Monterey Park, California. Cleanup of this site consists of five phases: site control and monitoring; management and leachate treatment; landfill gas control and landfill cover; final remedy and ground water treatment; and thirty-year post cleanup site control and monitoring. As of August 1997, the Company's share of cleanup costs for the first three phases was approximately $379,000. This amount was paid in October 1996. While the Company's share of the cost for the last two phases of cleanup has not yet been established, based upon overall estimates of the range of potential cost, the Company believes that its share of the remaining cost for all five phases of cleanup will not exceed the amounts which the Company has reserved. As of August 30, 1997, the total reserve established with respect to environmental liabilities is approximately $1.2 million. The Company is pursuing recovery of a portion of its reserve from its insurance carriers.
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 SHAREHOLDER MATTERS
There is no market for the Company's Class A Shares, Class B Shares, or Class C Shares. As of November 1, 1997, the Company's Class A Shares were held of record by 479 shareholders, Class B Shares were held of record by 515 shareholders, and the Company's Class C Shares were held of record, one share each, by the 15 directors of the Company. In the past, the Company has not paid cash dividends on its stock, and it has no intention to do so in the future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Financial Statements and notes thereto included under Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors Certified Grocers of California, Ltd.
We have audited the accompanying consolidated balance sheets of Certified Grocers of California, Ltd. and subsidiaries (the "Company") as of August 30, 1997 and August 31, 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the years then ended. 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 audits 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, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of August 30, 1997 and August 31, 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California October 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors Certified Grocers of California, Ltd.
We have audited the related consolidated statements of earnings, shareholders' equity, and cash flows of Certified Grocers of California, Ltd. and subsidiaries for the fiscal year ended September 2, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations and cash flows of Certified Grocers of California, Ltd. and subsidiaries for the fiscal year ended September 2, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California November 27, 1995
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
AUGUST 30, 1997 AND AUGUST 31, 1996
ASSETS
The accompanying notes are an integral part of these statements.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS)
FOR FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND SEPTEMBER 2, 1995
The accompanying notes are an integral part of these statements.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
FOR FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND SEPTEMBER 2, 1995
The accompanying notes are an integral part of these statements.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) FOR FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND SEPTEMBER 2, 1995
The accompanying notes are an integral part of these statements.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of Certified Grocers of California, Ltd. and its subsidiaries ("Certified" or the "Company"). Intercompany transactions and accounts with subsidiaries have been eliminated.
Nature of Business:
The Company is a cooperative organization engaged primarily in the distribution of food products and related nonfood items primarily to retail establishments owned by shareholders of the Company. All establishments with which directors are affiliated, as members of the Company, purchase groceries, related products and store equipment from the Company in the ordinary course of business pursuant to published terms or according to the provisions of supply agreements.
The Company's fiscal year ends on the Saturday nearest to August 31.
Use of Estimates:
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications:
Certain reclassifications have been made to prior years' financial statements to present them on a basis comparable with the current year's presentation.
Cash Equivalents:
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or market.
Depreciation:
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are 40 years for buildings and 10 years for equipment. Leasehold improvements are amortized based on the estimated life of the asset or the life of the lease, whichever is shorter. Expenditures for replacements or major improvements are capitalized; expenditures for normal maintenance and repairs are charged to operations as incurred. Upon sale or retirement of properties, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in operations.
Environmental Costs:
The Company expenses, on a current basis, certain recurring costs incurred in complying with environmental regulations and remediating environmental pollution. The Company also reserves for certain non-recurring future costs required to remediate environmental pollution for which the Company is liable whenever,
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
by diligent legal and technical investigation, the scope or extent of pollution has been determined, the Company's contribution to the pollution has been ascertained, remedial measures have been specifically identified as practical and viable, and the cost of remediation and the Company's proportionate share can be reasonably estimated.
Impairment of Long-Lived Assets:
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires an entity to review long-lived assets for impairment and recognize a loss if expected future cash flows are less than the carrying amount of the assets; such losses are measured as the difference between the carrying value and the estimated fair value of the assets. The estimated fair value is determined based on expected future cash flows. The Company adopted this standard in fiscal 1997. The adoption of this standard had no impact on the 1997 consolidated financial statements.
Transfers and Servicing of Financial Assets:
The FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which was adopted in 1997. The Statement provides for standards that are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Accordingly, the Company conformed to the new requirements of SFAS No. 125 for transactions involving the sale of member loans receivable for applicable transactions occurring after December 31, 1996.
Disclosures about Segments of an Enterprise and Related Information:
The FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments and requires reporting for selected information about operating statements in financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. Management estimates that the adoption of this pronouncement will not have a material impact on the Company.
2. PROPERTIES:
Properties at August 30, 1997, and August 31, 1996 stated at cost, are comprised of:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
On September 12, 1997, the Company entered into an agreement to sell approximately 24 acres of property located in Commerce, California. This transaction will require certain administrative offices and distribution facilities to be relocated. The Company expects to utilize its remaining properties to accommodate most of the displaced facilities. This sale is not expected to have an adverse impact on the ongoing operations of the Company.
3. INVESTMENTS:
The amortized cost and fair values of investments available-for-sale, including equity securities, were as follows:
Fixed maturity investments are due as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
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. Mortgage-backed securities are shown as being due at their average expected maturity dates.
Investment income is summarized as follows:
Investments carried at fair values of $20,359,000 and $11,586,000 at August 30, 1997 and August 31, 1996, respectively, are on deposit with regulatory authorities in compliance with insurance company regulations. Equity securities which do not have readily determinable fair values are accounted for using the cost method.
The Company owns an equity interest in SavMax Foods, Inc., a member-patron of Certified. The investment consists of (a) 10% of the outstanding Series A common stock with an original cost of $2,500,000 and (b) $6,300,000 of 8.5% Series B cumulative redeemable preferred stock. The Company has also entered into lease guarantees or subleases (see Note 6) on seven SavMax stores. The current minimum annual rent on locations underlying such lease guarantees or subleases is $3,251,000. The commitments have expiration dates through 2012. In addition, Grocers Capital Company ("GCC") has made loans to SavMax for tenant improvements with an aggregate outstanding principal balance of $1,136,000 at August 30, 1997.
At March 1, 1997, SavMax was in default under the terms of the Preferred Stock Purchase Agreement and was in default on its bank debt. SavMax completed a restructuring of its financing arrangements with its bank and Certified in May 1997. This restructuring required SavMax to make certain changes to its operations.
Pursuant to the restructuring:
(i) Certified agreed to guarantee SavMax obligations to a bank consisting of a $3,000,000 line of credit and an $850,000 term loan;
(ii) $4,000,000 due Certified by SavMax with respect to inventory purchases was converted into a note payable at prime plus 1%, with monthly interest payments commencing June 1997 and monthly principal payments of $111,111 commencing in December 1998, with the balance due in November 2001;
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
(iii) Defaults with respect to dividends and mandatory redemptions of the preferred stock, and the remedies associated therewith, were waived so long as there is no default by SavMax with respect to its obligations to the bank or to Certified in accordance with the Restructuring Agreement;
(iv) SavMax executed a new supply agreement expanding the purchases to be made from Certified;
(v) SavMax and its principal shareholder agreed to a neutral sale process in the event of a default with respect to the obligations owed to the bank or to Certified;
(vi) SavMax, Certified and the SavMax shareholders agreed to a mutual release of claims arising prior to closing of the restructuring; and
(vii) SavMax agreed to reduce the salaries of certain key officers and implement plans to reduce ongoing operating costs.
In December 1995, GCC purchased 10% of the common stock of K.V. Mart Co. , of which Certified director Darioush Khaledi is affiliated, for a purchase price of approximately $3,000,000. The stock purchase agreement contains certain provisions which allow K.V. Mart Co. to repurchase the shares and GCC to acquire additional shares upon the occurrence of certain events.
4. ACCRUED LIABILITIES:
Accrued liabilities at August 30, 1997 and August 31, 1996 are summarized as follows:
5. NOTES PAYABLE:
Notes payable at August 30, 1997 and August 31, 1996 are summarized as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
Maturities of notes payable as of August 30, 1997 are:
During fiscal 1997, the Company maintained two credit agreements with certain banks that provide for committed lines of credit for general working capital, acquisitions, and maturing long-term debt. The credit agreements contain various financial covenants pertaining to working capital, debt-to- equity ratios, tangible net worth, earnings, and similar provisions. In addition, required member deposits and Class A and Class B Shares cannot be redeemed if a default exists with respect to any senior indebtedness, as defined, until such default has been cured or waived or until such senior indebtedness has been paid in full.
The $135,000,000 credit agreement is collateralized by accounts receivable, inventory and certain other assets of the Company and two of its principal subsidiaries, excluding equipment, real property and the assets of GCC. The maturity date is March 17, 1999, but is subject to extension by the mutual consent of the Company and the banks. $79,400,000 of this credit line was not utilized at August 30, 1997. The unused portion of this credit line is subject to annual commitment fees of 0.375%.
A $10,000,000 credit agreement is collateralized by GCC's member loan receivables. The primary function of GCC is to provide loan financing to the Company's member-patrons. Member loans are made at a market rate of interest starting at prime plus 1/2%. The funding for loans made by GCC is provided by GCC's cash reserves as well as the $10,000,000 credit agreement. The maturity date of the credit agreement is September 20, 2001, but is subject to an annual extension of one year by the mutual consent of GCC and the bank. The credit agreement bears interest at prime (8.5% at August 30, 1997) plus 1/2% or Eurodollar (5.82% at August 30, 1997) plus 1 1/2%. No amounts were outstanding under this credit line at August 30, 1997. The unused portion of this credit line is subject to commitment fees of 0.125% plus $25,000 annually.
Member loans receivable are periodically sold by GCC to a bank through a loan purchase agreement. The maturity date of the loan purchase agreement is August 20, 2001, but is subject to extension by mutual agreement of the Company and the bank for an additional one year on each anniversary date of the initial purchase date. Total loan purchases under the agreement are limited to a total aggregate principal outstanding of $50,000,000. At August 30, 1997, the aggregate principal outstanding balance of loans purchased by the bank was $22,100,000. The loan sales are subject to limited recourse provisions.
The Company and GCC have also guaranteed loans made directly to members by third party lenders. At August 30, 1997, the maximum principal amount of these guarantees was $8,200,000. Member loans, provided by GCC and third parties, are generally secured with collateral which usually consists of personal and real property owned by member-patrons and personal guarantees of member- patrons.
As a result of maturing long-term debt (a noncash financing activity), the Company reclassified from long to short-term debt $11,329,000, $11,440,000, and $11,570,000 in fiscal 1997, 1996, and 1995, respectively.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
6. LEASES:
The Company has entered into operating and capital leases for certain warehouse, transportation and data processing equipment. The Company has also entered into operating leases for approximately 24 retail supermarkets. The majority of these locations are subleased to various member-patrons of the Company. The operating leases and subleases are noncancelable, renewable, include purchase options in certain instances, and require payment of real estate taxes, insurance and maintenance.
In addition, the Company is contingently liable with respect to lease guarantees for certain member-patrons. The total current annual rent on locations underlying such lease guarantees is approximately $5,800,000. The commitments have expiration dates through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, the Company would be able to recover a substantial portion of the guaranteed amounts in the event the Company is required to satisfy its obligations under the guarantees.
In consideration of lease guarantees and subleases, the Company receives a monthly fee equal to 5% of the monthly rent under the leases and subleases. Obligations of member-patrons to the Company, including lease guarantees, are generally supported by the Company's right of offset, upon default, against the member-patrons' cash deposits, shareholdings and Patronage Certificates, as well as in certain instances, personal guarantees and reimbursement and indemnification agreements.
Total rent expense was $17,050,000, $20,539,000, and $21,051,000 in 1997, 1996, and 1995 respectively. Sublease rental income was $5,300,000, $6,214,000, and $5,308,000 in 1997, 1996, and 1995, respectively.
Minimum rentals on properties leased by the Company, including properties subleased to third parties, as of August 30, 1997 are summarized as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
Future minimum sublease rental income as of August 30, 1997 is summarized as follows:
In fiscal 1995, the Company completed a sale leaseback transaction with Trinet Corporate Realty Trust, Inc. ("Trinet"), an unaffiliated third party, with respect to an office building in the Los Angeles metropolitan area. The total sales price for the property was $11,500,000. Concurrent with the sale of the real property, the Company and Trinet entered into a twenty year lease of the property, with two ten year extension options. The monthly rental is approximately $108,000 and is subject to CPI adjustment commencing on the first day of the sixth, eleventh and sixteenth years. However, such CPI adjustments shall not exceed four percent per annum on a cumulative basis during each five year period. The deferred gain on this transaction was $1,200,000 of which $55,000, $55,000 and $41,000 was recognized during fiscal 1997, 1996 and 1995, respectively.
7. INCOME TAXES:
The significant components of income tax expense are summarized as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
The effects of temporary differences and other items that give rise to deferred tax assets and deferred tax liabilities are presented below:
Net deferred tax assets of $3,427,000 and $5,356,000 are included in deferred taxes, current and $2,117,000 and $2,663,000 in other assets on the Company's accompanying consolidated balance sheets as of August 30, 1997 and August 31, 1996, respectively.
A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The remaining balance of the net deferred tax assets should be realized through future operating results, the reversal of taxable temporary differences, and tax planning strategies.
The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate (34%) as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
At August 30, 1997, the Company has alternative minimum tax credit carryforwards of approximately $281,000 available to offset future regular income taxes payable to the extent such regular taxes exceed alternative minimum taxes payable.
8. SUBORDINATED PATRONAGE DIVIDEND CERTIFICATES:
The Company has a patronage dividend retention program whereby, subject to annual Board approval, it may retain a portion of the patronage dividends and issue Patronage Certificates (the "Patronage Certificates") evidencing the indebtedness respecting the retained amounts. The program provides for the issuance of the Patronage Certificates to patrons in a portion and at an interest rate determined by the Board in connection with its approval of a particular issuance. The Patronage Certificates are unsecured general obligations, subordinated to certain indebtedness of Certified, and nontransferable without the consent of Certified.
The Company has issued Patronage Certificates for fiscal years 1993, 1994 and 1995. The outstanding Patronage Certificates have a seven year term and bear interest payable annually on December 15 in each year. The following table represents a summary of the outstanding Patronage Certificates and their respective terms:
During fiscal 1997 and 1996, Certified set off approximately $273,000 and $12,000, respectively, in Patronage Certificates against a portion of amounts owed to the Company by the holders.
Patronage Certificates have not been issued subsequent to fiscal 1995. However, the program has not been discontinued, and the Board could authorize the issuance of Patronage Certificates in connection with patronage dividends payable in future years.
9. CAPITAL SHARES:
The Company requires that each member-patron hold 100 Class A Shares. Each member-patron must also hold Class B Shares having combined issuance values equal to the lesser of the amount of the member-patron's required deposit or twice the member-patron's average weekly purchases (the "Class B Share requirement"). For this purpose, each Class B Share held by a member-patron has an issuance value equal to the book value of Certified's outstanding shares as of the close of the fiscal year last ended prior to the issuance of such Class B Share.
After payment of at least 20% of patronage dividend in cash and the issuance of the Patronage Certificates, Class B Shares are issued as a portion of each member-patron's patronage dividend and, to the extent necessary to fulfill the member-patron's Class B Share requirement, by crediting the member-patron's cash deposit account for the issuance values of such shares.
All shares of a terminated member, or member who holds Class B Shares in excess of their Class B Share requirement, may be redeemed by the Company (subject to certain legal limitations, provisions of the Company's redemption policy, and provisions of certain of the Company's committed lines of credit) at a price equal to the book value of the shares as of the close of the fiscal year ended prior to the redemption, less all amounts that may be owing by the member to the Company. All shares are pledged to the Company to secure the Company's
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
redemption rights and as collateral for all obligations to the Company. The Company is not obligated in any fiscal year to redeem more than 5% of the sum of the number of Class B Shares outstanding as of the close of the preceding fiscal year and the number of Class B Shares issued as a part of the patronage dividend for the preceding year (the "5% limit"). Thus, shares tendered for redemption in a given fiscal year may not necessarily be redeemed in that fiscal year. The 5% limit for fiscal year 1998 will allow for redemption of 19,300 shares. Additionally, 483 shares have been tendered for redemption between August 31, 1997 and October 31, 1997. The following table summarizes the Class B Shares tendered and presently approved for redemption, shares redeemed, and the remaining number of shares pending redemption:
Because the 5% limit for fiscal year 1998 has been met, Board approval would be required to redeem the remaining 47,934 shares (or approximately $8.4 million, using fiscal 1997 year end book value) not redeemed in fiscal year 1998, as well as the redemption of any additional Class B Shares tendered during fiscal 1998. At present, such approvals are not expected to be given. The total of Class B Shares tendered and awaiting redemption will also cause the 5% limits for fiscal 1999 through 2001 to be met, thereby delaying the redemption of Class B Shares tendered during those years. The redemptions required for fiscal years 1998 through 2001 are estimated to be $11.8 million based on the fiscal 1997 year end book value. The funds needed to redeem shares are expected to be provided from operations, patron deposits, new share issuances and borrowings under the Company's credit lines. Any additional tenderings of Class B Shares could also potentially cause 5% limits beyond fiscal 2001 to be exceeded.
There are 500,000 authorized Class A Shares, of which 47,900 and 49,100 were outstanding at August 30, 1997 and August 31, 1996, respectively. There are 2,000,000 authorized Class B Shares, of which 385,990 and 383,815 were outstanding at August 30, 1997 and August 31, 1996, respectively, including 21,366 and 18,286 respectively issued after year-end. Once redeemed, such shares are not available for reissuance to member-patrons.
No member-patron may hold more than 100 Class A Shares. However, it is possible that a member may have an interest in another member, or that a person may have an interest in more than one member, and thus have an interest in more than 100 Class A Shares. The Board of Directors is authorized to accept member-patrons without the issuance of Class A Shares when the Board of Directors determines that such action is justified by reason of the fact that the ownership of the patron is the same, or sufficiently the same, as that of another member-patron holding 100 Class A Shares. The price for such shares will be the book value per share of outstanding shares at the close of the fiscal year last ended.
There are also 15 authorized Class C Shares of which 15 are outstanding. These shares are valued at $10 per share, and ownership is limited to members of the Board of Directors with no rights as to dividends or other distributions.
Holders of Class A Shares are entitled to vote such shares cumulatively for the election of 12 of the directors on the Board of Directors. Holders of the Class B Shares are entitled to vote such shares cumulatively for the election of 3 of the directors on the Board of Directors. Except as required by California law, the Class C Shares have no voting rights.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
10. BENEFIT PLANS:
The Company has a noncontributory, defined benefit pension plan covering substantially all of its nonunion employees. The benefits under the plan generally are based on the employee's years of service and average earnings for the three highest consecutive calendar years of compensation during the ten years immediately preceding retirement. The Company makes contributions to the pension plan in amounts which are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than amounts deductible for federal income tax purposes. Benefits under the plan are included in a trust providing benefits through annuity contracts, and part of the plan assets are held by a trustee.
The funded status of the plan and the amounts recognized in the balance sheet are:
The method used to compute the vested benefit obligation is the actuarial present value of the vested benefits to which the employee is entitled if the employee separates immediately. The vested benefit obligation was $23,303,000, $22,927,000, and $24,007,000 in 1997, 1996, and 1995, respectively.
The Company also made contributions of $6,120,000, $5,713,000, and $5,368,000 in 1997, 1996, and 1995, respectively, to collectively bargained, multiemployer defined benefit pension plans in accordance with the
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995 provisions of negotiated labor contracts. Information from the plans' administrators is not available to permit the Company to determine its proportionate share of termination liability, if any.
The Company has an Employees' Sheltered Savings Plan ("SSP"), which is a defined contribution plan, adopted pursuant to Section 401(k) of the Internal Revenue Code for its nonunion employees. The Company matches each dollar deferred up to 4% of compensation and, at its discretion, matches 40% of amounts deferred between 4% and 8%. At the end of each fiscal year, the Company also contributes an amount equal to 2% of the compensation of those participants employed at that date. The Company contributed approximately $2,168,000, $2,100,000, and $2,100,000, in 1997, 1996, and 1995, respectively.
Also, the Company has an Employee Savings Plan ("ESP"), which is a defined contribution plan, for all union and nonunion employees hired prior to March 1, 1983. Subsequent to March 1, 1983, the Company's contribution to the ESP in any fiscal year is based on net earnings as a percentage of total sales and is applicable to union employees only. In the event net earnings are less than 1.5% of total sales, no contribution is required. All corporate (nonunion) employees who had a previous balance in the ESP Plan had their balances transferred to the SSP Plan effective first quarter of fiscal 1992. No expense was incurred in fiscal years 1997, 1996, and 1995.
The Company's Executive Salary Protection Plan ("ESPP II"), provides additional post-termination retirement income based on each participant's final salary and years of service with the Company. The funding of this benefit is facilitated through the purchase of life insurance policies, the premiums of which are paid by the Company.
The amounts recognized in the balance sheet are:
The additional minimum liability represents the excess of the unfunded accumulated benefit obligation over previously accrued pension costs. A corresponding intangible asset was recorded as an offset to this additional liability as prescribed. Because the asset recognized may not exceed the amount of unrecognized prior service cost, the balance, net of tax benefits, of $83,000 is reported as a separate reduction of shareholders' equity at August 30, 1997.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
The components of the net periodic pension cost for the fiscal years ending include:
The method used to compute the vested benefit obligation is the actuarial present value of the vested benefits to which the employee is entitled if the employee separates immediately. The vested benefit obligation was $3,648,000 and $3,807,000 in 1997 and 1996, respectively.
11. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS:
The Company sponsors postretirement benefit plans that cover both nonunion and union employees. Retired nonunion employees are eligible for a plan providing medical benefits. A certain group of retired nonunion employees participate in a plan providing life insurance benefits for which currently active nonunion employees are no longer eligible. Most union and all nonunion employees have separate plans providing a lump-sum payout for unused days in the sick leave bank. The postretirement health care plan is contributory for nonunion employees retiring after January 1, 1990, with the retiree contributions adjusted annually. The life insurance plan and the sick leave payout plans are noncontributory.
The plans are unfunded. The amounts recognized in the balance sheet are:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
The components of the net periodic postretirement benefit cost for the fiscal year ending include:
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal year 1998; the rate was assumed to decrease gradually to 5.25% in fiscal 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of August 30, 1997 by $3,893,000 and the aggregate benefit cost for the year then ended by $428,000.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%.
The Company's union employees participate in a multiemployer plan that provides health care benefits. Amounts charged to postretirement benefit cost and contributed to the plan totaled $1,100,000 in fiscal 1997, $1,100,000 in fiscal 1996, and $1,300,000 in fiscal 1995.
12. CONTINGENCIES:
Litigation. The Company is a defendant in a number of cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flow.
Environmental Matters. The United States Environmental Protection Agency ("EPA") notified the Company in 1993 that, together with others, it was a potentially responsible party ("PRP") for the disposal of hazardous substances at a landfill site located in Monterey Park, California. Cleanup of this site consists of five phases: site control and monitoring; management and leachate treatment; landfill gas control and landfill cover; final remedy and ground water treatment; and thirty-year post cleanup site control and monitoring. As of August 1997, the Company's share of cleanup costs for the first three phases was approximately $379,000. This amount was paid in October 1996. While the Company's share of the cost for the last two phases of cleanup has not yet been established, based upon overall estimates of the range of potential cost, the Company believes that its share of the remaining cost for all five phases of cleanup will not exceed the amounts which the Company has reserved. As of August 30, 1997, the total reserve established with respect to environmental liabilities is approximately $1,200,000. The Company is pursuing recovery of a portion of its reserve from its insurance carriers.
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade receivables and lease guarantees for certain member-patrons. These concentrations of credit risk may be affected by changes in economic or other conditions affecting the Western United States, particularly California. However, management believes that receivables are well diversified, and the allowances for doubtful
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995 accounts are sufficient to absorb estimated losses. Obligations of member- patrons to the Company, including lease guarantees, are generally supported by the Company's right of offset, upon default, against the member-patrons' cash deposits, shareholdings and Patronage Certificates, as well as personal guarantees and reimbursement and indemnification agreements.
The Company's largest customer and ten largest customers accounted for approximately 5% and 31%, respectively, of net sales in fiscal 1997.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents
The carrying amount approximates fair value due to the short maturity of these instruments.
Investments and Notes receivable
The fair values for investments and notes receivable are based primarily on quoted market prices for those or similar instruments. Equity securities which do not have readily determinable fair values are accounted for using the cost method. The Company regularly evaluates securities carried at cost to determine whether there has been any diminution in value that is deemed to be other than temporary and adjusts the value accordingly.
Notes payable, Notes payable due after one year and Subordinated patronage dividend certificates
The fair values for notes payable, notes payable due after one year, and subordinated patronage dividend certificates are based primarily on rates currently available to the Company for debt with similar terms and remaining maturities. At August 30, 1997, notes payable and notes payable due after one year had a carrying value of $103,546,000 and an estimated fair value of $102,385,000. At August 30, 1997, subordinated patronage dividend certificates had a carrying value of $6,276,000 which approximated fair value.
The methods and assumptions used to estimate the fair values of the Company's financial instruments at August 30, 1997 were based on estimates of market conditions, estimates using present value and risks existing at that time. These values represent an approximation of possible value and may never actually be realized.
15. RELATED PARTY TRANSACTIONS:
Members affiliated with directors of the Company make purchases of merchandise from the Company and also may receive benefits and services which are offered by the Company to its eligible members generally.
Since the programs listed below are only available to patrons of the Company, it is not possible to assess whether transactions with members of the Company, including directors of the Company, are less favorable to the Company than similar transactions with unrelated third parities. However, management believes such transactions are on terms which are consistent with terms available to other patrons similarly situated.
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
A brief description of the specific benefits and services utilized by members affiliated with directors of the Company follows:
Loans and Loan Guarantees:
As described in Note 5 "Notes Payable", GCC provides loan financing to its members. GCC had the following loans outstanding at August 30, 1997 to members affiliated with directors of the Company:
As described in Note 5 "Notes Payable", member loans are periodically sold to a bank, subject to limited recourse provisions. At August 30, 1997, the principal balances of loans to members affiliated with directors of the Company that were sold with recourse were as follows:
As described in Note 5 "Notes Payable" the Company provides loan guarantees to its members. The Company has guaranteed 10% of the principal amount of certain third party loans to K.V. Mart Co. of which director Darioush Khaledi is an affiliate. At August 30, 1997, the maximum principal amount of this guarantee was $609,000.
Lease Guarantees and Subleases:
As described in Note 6 "Leases", the Company provides lease guarantees and subleases to its members. The Company has executed lease guarantees or subleases to members affiliated with directors of the Company as follows:
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND SEPTEMBER 2, 1995
Other Leases:
The Company leases its produce warehouse to Joe Notrica, Inc., with which director Morrie Notrica is affiliated. The lease is for an initial term of five years expiring in November 1998 and contains an option to extend for an additional five year period. Monthly rent during the initial term is $24,000. Rent during the option period will be the lesser of fair rental value or the current rent adjusted to reflect the change in the Consumer Price Index.
Supply Agreements:
During the course of its business, the Company enters into supply agreements with members of the Company. These agreements require the member to purchase certain agreed amounts of its merchandise requirements from the Company and obligate the Company to supply such merchandise under agreed terms and conditions relating to such matters as pricing, delivery, discounts and allowances. Members affiliated with directors Bonfante, DeLano, Khaledi, Kidd, MacAloney, McCormack and Provenzano have entered into supply agreements with the Company. These supply agreements vary in terms and length, and expire at various dates through 2004, but are subject to earlier termination in certain events.
Other:
In August 1997, the Company entered into an agreement with Ralphs Grocery Company ("Ralphs") providing for the dissolution of Golden Alliance Distribution ("GAD"), a joint venture partnership previously formed for the purpose of providing for the shared use of the Company's general merchandise warehouse located in Fresno, California. The dissolution agreement provides that certain amounts owed by Ralphs to Certified at August 30, 1997 will be offset by future redemptions of excess Class B shares (see Note 9) held by Ralphs and its affiliates. If redemptions of Class B shares are insufficient to satisfy the remaining obligation at December 31, 2000, Ralphs will satisfy the shortfall with a cash payment.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective April 3, 1996, the Company dismissed Coopers & Lybrand L.L.P. as its principal accountant to audit the financial statements of the Company.
The report issued by Coopers & Lybrand L.L.P. on the consolidated statement of earnings, shareholders' equity, and cash flows for fiscal 1995 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by the audit committee of the Company following the solicitation and review of bids from other independent accountants, including Coopers & Lybrand L.L.P., and was approved by the Board of Directors on April 3, 1996.
During the two most recent fiscal years and the interim fiscal period prior to such dismissal, there were no disagreements with Coopers & Lybrand L.L.P. on matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Effective April 3, 1996, the Company engaged Deloitte & Touche LLP as its principal accountant to audit the financial statements of the Company.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the directors of the Company.
The following table sets forth certain information about executive officers of the Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1997, the Company's Executive Compensation Committee consisted of director Darioush Khaledi, Committee Chairman, and directors Roger K. Hughes, Mark Kidd, Willard R. "Bill" MacAloney, Jay McCormack, and James R. Stump, as well as ex-officio member Louis A. Amen, Chairman of the Board.
As Chairman of the Board, Mr. Amen is an officer under the Bylaws of the Company, although he is not an employee and does not receive any compensation or expense reimbursement beyond which other directors are entitled. The Company's President and Chief Executive Officer, Alfred A. Plamann, is a member of the Board of Directors of K.V. Mart Co., of which Committee member and director Darioush Khaledi is Chairman and Chief Executive Officer.
The Company has provided loans, subleases and guarantees on loans and leases to, and holds equity interests in, member-patrons with which members of the Executive Compensation Committee are associated. These relationships are discussed in Footnote 15 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information respecting the compensation paid during the Company's last three fiscal years to the President and Chief Executive Officer ("CEO") and to certain other executive officers of the Company.
SUMMARY COMPENSATION TABLE
- -------- (1) Consists of $8,961 Company contribution to the Company's Employees' Sheltered Savings Plan, $20,432 Company contribution to the Company's Employees' Excess Benefit Plan and Supplemental Deferred Compensation Plan, and $2,526 representing the economic benefit associated with the Company paid premium on the Executive Life Plan. (2) Consists of $9,344 Company contribution to the Company's Employees' Sheltered Savings Plan, $5,814 Company contribution to the Company's Employees' Excess Benefit Plan and Supplemental Deferred Compensation Plan, and $979 representing the economic benefit associated with the Company paid premium on the Executive Life Plan. (3) Consists of $9,358 Company contribution to the Company's Employees' Sheltered Savings Plan, $5,578 Company contribution to the Company's Employees' Excess Benefit Plan and Supplemental Deferred Compensation Plan, and $797 representing the economic benefit associated with the Company paid premium on the Executive Life Plan. (4) Consists of $5,466 Company contribution to the Company's Employees' Sheltered Savings Plan. (5) Consists of $10,200 Company contribution to the Company's Employees' Sheltered Savings Plan, $493 Company contribution to the Company's Employees' Excess Benefit Plan and Supplemental Deferred Compensation Plan, and $390 representing the economic benefit associated with the Company paid premium on the Executive Life Plan.
The Company has a defined benefit pension plan which covers its non-union and executive employees. Benefits under this plan are based on formulas using compensation and employee service periods and are subject to the appropriate IRS tables and limitations. The Company's Executive Salary Protection Plan ("ESPPII"), provides additional post-termination retirement income based upon the participant's salary and years of service. The funding for this benefit is facilitated through the purchase of life insurance policies, the premiums for which are paid by the Company.
ESPPII is targeted to provide eligible executives with a retirement benefit, including the defined benefit, of up to 65% of the participant's final salary, based on formulas which include years of service and salary. Executives become eligible for ESPPII after three years of service as an executive officer of the Company. Upon eligibility, executives vest at a rate of 5% per year (with all years of continuous service credited) up to a maximum of 13 years. The ESPPII benefit is limited to a maximum amount payable per year based on the year in which the executive retires. That amount for persons retiring in 1997 is $89,888. This limitation is subject to increase based on amounts approved by the Board of Directors. Payments under ESPPII are discounted for
executives who retire prior to age sixty-five. At August 30, 1997, credited years of service for named officers are: Mr. Plamann, 8 years; Mr. Bane, 3 years; Mr. Pilliter, 21 years; Mr. Karaffa, 2 years; and Mr. Ling, 1 year.
The following table illustrates the estimated annual benefits under the combined defined benefit plan and ESPPII plan. The amounts shown represent annual compensation for qualifying executives with selected years of service as if such executives had retired on August 30, 1997 at age sixty-five.
EXECUTIVE EMPLOYMENT, TERMINATION AND SEVERANCE AGREEMENTS
The Company is a party to an employment contract with Alfred A. Plamann, the Company's President and Chief Executive Officer. The contract has a three year term, presently expiring in February 2000. During the first five years, the contract is renewed annually at the end of the first year for one additional year unless notice is given prior to year end by either party of intent to terminate. After the fifth year, such notice is to be given prior to the end of the second year of the then existing term and unless given, the contract is extended for one year. Under the contract, Mr. Plamann serves as the Company's President and Chief Executive Officer and receives a base salary, currently $390,000, subject to annual review and upward adjustment at the discretion of the Board of Directors. Mr. Plamann is also eligible for annual bonuses, up to a maximum of 48% of base salary, based on performance criteria established by the board of directors at the beginning of each fiscal year. Additionally, Mr. Plamann will receive employee benefits such as life insurance and Company pension and retirement contributions.
The contract is terminable at any time by the Company, with or without cause, and will also terminate upon Mr. Plamann's resignation, death or disability. Except where termination is for cause or is due to Mr. Plamann's resignation, death or disability, the contract provides that Mr. Plamann will be entitled to receive his highest base salary during the previous three years, plus an annual bonus equal to the average of the most recent three annual bonus payments, throughout the balance of the term of the agreement. Mr. Plamann would also continue to receive employee benefits such as life insurance and Company pension and retirement contributions throughout the balance of the term of the agreement.
The Company has executed Severance Agreements with Senior Vice Presidents Daniel T. Bane and Charles J. Pilliter. The agreements extend for three years until April 2, 2000 and contain provisions for annual extensions subject to certain parameters. Among other provisions, the agreements provide for the payment of one year's salary plus bonus upon termination, as defined in the agreement.
DIRECTOR COMPENSATION
Each director receives a fee of $500 for each regular board meeting attended, $200 for each committee meeting attended and $200 for attendance at each board meeting of a subsidiary of the Company on which the director serves. In addition, directors are reimbursed for Company related expenses.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
As of November 1, 1997, the only shareholders known by the Company to own beneficially more than 5% of the outstanding Class B Shares of the Company were Ralphs Grocery Company and its affiliates, 1100 West Artesia Boulevard, Compton, California 90220 (24,702 Class B Shares or approximately 6.39% of the outstanding Class B Shares; Cala Co. and Bay Area Warehouse Stores Inc. are wholly-owned by Ralphs Grocery Company) and Hughes Markets, Inc., 14005 Live Oak Avenue, Irwindale, California 91706 (22,739 Class B Shares or approximately 5.89% of the outstanding Class B Shares).
The following table sets forth, as of November 1, 1997, the name of each director of the Company, his or her position with and name of the member- patron, and the amount of Class A Shares and Class B Shares of the Company owned by the member-patron.
- -------- (1) These shares are owned by Ralphs Grocery Company and its affiliates, Cala Foods, Inc., and Bay Area Warehouse Stores, Inc. (2) Mr. McCormack also is affiliated with Glen Avon Food, Inc., which owns 100 Class A Shares (0.21% of the outstanding class of shares) and 361 Class B Shares (0.09% of the outstanding class of shares), and Yucaipa Trading Co., Inc., which owns 100 Class A Shares (0.21% of the outstanding class of shares) and 694 Class B Shares (0.18% of the outstanding class of shares). (3) Mr. Young also is affiliated with Bakersfield Food City Inc. dba Young's Markets, which owns 100 Class A Shares (0.21% of the outstanding class of shares) and 355 Class B Shares (0.09% of the outstanding class of shares).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All firms with which directors are affiliated, as members of the Company, purchase groceries, related products and store equipment from the Company in the ordinary course of business. As members, firms with which directors are affiliated may receive benefits for which all members are eligible, including patronage dividends, allowances and retail support services. See Footnote 15 to Notes to Consolidated Financial Statements, which is incorporated herein by this reference, for a description of related party transactions.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)Financial Statements
Reports of Independent Accountants.
Consolidated Balance Sheets as of August 30, 1997 and August 31, 1996.
Consolidated Statements of Earnings for the Fiscal Years Ended August 30, 1997, August 31, 1996 and September 2, 1995.
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended August 30, 1997, August 31, 1996, and September 2, 1995.
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 30, 1997, August 31, 1996, and September 2, 1995.
(b)Reports on Form 8-K
None.
(c)Exhibits
(d)Financial Statement Schedules
All required schedule information is presented in the financial statements or notes thereto. Other schedule information is either not applicable or not material.
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.
CERTIFIED GROCERS OF CALIFORNIA, LTD.
/s/ Alfred A. Plamann By __________________________________ Alfred A. Plamann President and Chief Executive Officer
/s/ Daniel T. Bane By __________________________________ Daniel T. Bane Senior Vice President -- Finance & Administration and Chief Financial Officer
/s/ Randall G. Scoville By __________________________________ Randall G. Scoville Corporate Controller
Date: November 24, 1997
EXHIBIT INDEX
(d)Financial Statement Schedules
All required schedule information is presented in the financial statements or notes thereto. Other schedule information is either not applicable or not material.