ITEM 1. BUSINESS
GENERAL
Unified Western Grocers, Inc. ("Unified" or the "Company") is a grocery wholesaler serving supermarket operators in California, Oregon, Washington, Nevada, Arizona, Hawaii and various foreign countries in the South Pacific and elsewhere. In addition to offering dry grocery, frozen food, deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise products, Unified also provides finance, insurance, store design, security services, information services, and real estate services to its patrons. Products and services available to patrons may differ depending upon location. Unified's marketing platform is built on offering its patrons better value than available elsewhere by combining competitive pricing with superior selection, quality, service and convenience.
In September 1999, Unified completed a merger (the "Merger") with United Grocers, Inc. ("United"), a grocery cooperative headquartered in Milwaukie, Oregon. In connection with the Merger, the Company changed its name from Certified Grocers of California, Ltd. to its current name.
The merger provided to the independent retailer various benefits. These benefits included: economies of scale and an expanded range of products and services; eliminating duplicative facilities and transportation equipment in overlapping service areas; eliminating duplicative functions, including legal and accounting services and management information systems; increasing purchasing volume in order to obtain more favorable pricing on product purchases; and offering to members the opportunity to purchase specialized products and services that were previously offered by the separate companies.
A California corporation organized in 1922 and incorporated in 1925, Unified does business primarily with those patrons which qualify and have been accepted as "member-patrons." Unified is owned by its member-patrons who are primarily independent grocers. Unified is operated as a cooperative for tax purposes except with respect to business conducted with non-patrons and business conducted by its subsidiaries. Unified establishes minimum purchase requirements for its member-patrons, which may be modified from time to time. Patrons not meeting member-patron purchasing requirements conduct business with Unified either as "associate-patrons" or as customers on a non-patronage basis. Associate patrons have reduced minimum purchase requirements, are required to establish deposits, and do not own shares of capital stock of Unified. The earnings of Unified's subsidiaries are generally retained by Unified, while the earnings of the parent company attributable to business conducted with its members are generally distributed to its patrons in the form of patronage dividends. The benefit of this structure is that taxes are paid on the Unified patronage earnings only once, by the patron, after notice of a patronage dividend payout is received by the patron.
WHOLESALE DISTRIBUTION
Unified's wholesale distribution business represented approximately 95% and 93% of sales for the fiscal years ended August 28, 1999 and September 30, 2000, respectively. 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, dairy and produce.
Unified distributes its various product lines from warehouse and manufacturing complexes located in Los Angeles, Commerce, Stockton, Hayward and Fresno, California, Renton, Washington and in Milwaukie, Oregon.
Unified 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 trade names. Unified also sells private label brand goods under the Western Family, Home & Garden, Valley Fare and Better Buy labels. Unified operates its own bakery and dairy facilities in Southern California. Unified is not dependent upon any single source of supply in any of its businesses, except for the dairy. Most of the raw milk used in production is purchased from a dairy cooperative which provides such products at prices established by the State of California. Management believes that alternative suppliers are available for substantially all of Unified's products and that the loss of any one supplier would not have a material adverse effect on Unified's business.
During the course of its business, Unified enters into supply agreements with certain members or customers of Unified. These agreements require the member to purchase certain agreed amounts of its merchandise
requirements from Unified and obligate Unified to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery. The terms and conditions in such supply agreements may vary in terms and length.
SUPPORT BUSINESSES
Unified's retail support businesses collectively accounted for approximately 1% of Unified's total revenues for fiscal years ended August 28, 1999 and September 30, 2000. These retail support operations include services for financing inventory purchases, equipment purchases, store remodeling and new store acquisitions. The Company also provides store planning and development services, equipment procurement, insurance brokerage services, and underwrites selected insurance risks through two insurance subsidiaries. Unified operates retail support services to members and customers in Oregon, Washington and California, including financial services, retail development services for advertising groups offering "chain"-like identity, and technology, security, accounting and training services.
RETAIL BUSINESS
Unified, through its subsidiaries, currently owns all of the common stock of SavMax Foods, Inc. ("SavMax") which operates nine retail grocery stores in Northern California. Unified acquired SavMax as of December 31, 1998. Unified, through its subsidiaries, also owns two stores in Washington operated under the "Thriftway" banner. Retail sales were $75 million and $197 million, respectively, for the period December 31, 1998 through August 28, 1999 for SavMax and for the fiscal year ended September 30, 2000 for SavMax, Thriftway and the Company-owned stores acquired from Albertson's. The retail sales represented approximately 4% and 6% of sales for the fiscal years ended August 28, 1999 and September 30, 2000, respectively.
In May 1999, Unified entered into an agreement to purchase certain assets related to 32 stores being divested in connection with Albertson's, Inc.'s merger with American Stores, Inc. The acquisition was completed in October, 1999. Unified sold or otherwise permitted the direct transfer of 26 of these stores to Unified members coincident with the closing of the transaction. Pursuant to agreements with state and federal regulatory agencies, the Company was required to operate the remaining six stores for a minimum period. The Company has closed two stores. There are two stores, including one of the closed stores, under contract for sale. Three stores will be operated until a suitable buyer can be located.
RETAIL DEVELOPMENT
Unified offers 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 Unified. Unified intends them to have the look of a chain store because each store carries the same name and logo and generally utilizes the same design layout.
COMPETITION
The food industry is characterized by intense competition and low profit margins. In order to compete effectively, Unified 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. Unified competes with local, regional and national grocery wholesalers and with a number of major manufacturers which market their products directly to retailers. Unified's success is dependent upon its ability to supply food, general merchandise and services to its patrons in a cost-effective manner and upon the ability of its independent retail customers to compete with large chain store operations.
CUSTOMERS
Unified is a cooperative organization that conducts business on a patronage basis principally for its members. Unified also conducts business with non- member customers on a non-patronage basis. Unified's bylaws provide for:
. Member-patrons, who are the shareholders of the company and participate in the patronage dividend programs; and
. Associate-patrons, who do not own shares but do participate in the patronage dividend programs.
Unified's patrons are primarily retail grocery store operators ranging in size from single store operators to multiple store chains. Unified's largest customer and ten largest customers accounted for approximately 6% and 31%, 6% and 28% and 7% and 28% of net sales for the fiscal years ended August 29, 1998, August 28, 1999 and September 30, 2000, respectively.
CAPITAL STOCK
Class A Shares. Class A Shares may be held only by member-patrons of Unified. In order to qualify for and retain membership as a member-patron, a person or other entity (1) must patronize Unified in amounts and in a manner as may be established by the board of directors; (2) must have approved financial standing; (3) must make application in such form as is prescribed by Unified; and (4) must be accepted as a member after approval by the board of directors.
Unified requires that each of its member-patrons acquire 100 Class A Shares. The price for these shares is the book value per share of the outstanding shares at the close of the fiscal year ended prior to purchase. Those former United shareholders who received less than 100 Class A Shares in the merger and meet the member-patron minimum purchase requirement are required to purchase additional Class A Shares in order to maintain member-patron status. Unified has agreed to repurchase Class A Shares received in the merger by former United shareholders who do not maintain member-patron status at $253.95 per share. Class A Shares have the right to elect not less than 80% of the authorized directors of Unified.
Class B Shares. Each holder of Class A Shares is also required to hold a number of Class B Shares determined by the board of directors of Unified. The board of directors establishes the number of Class B Shares that each member- patron must hold, whether based on average weekly purchases or on some other basis. Ownership of Class B Shares is limited to member-patrons or former member-patrons who have tendered these shares to Unified for redemption. The holders of Class B Shares currently have the right to elect approximately 20% of the authorized number of directors. Except as provided above or by California law, the holders of Class B Shares do not have any other voting rights.
Unified requires each member-patron to acquire over time Class B Shares having combined issuance values in an amount equal to the member-patron's required subordinated cash deposit.
Class B Shares are generally issued to a new member-patron as part of the patronage dividends paid to the 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 full year of patronage dividend, 40% of the Class B Share requirement after the second patronage dividend, and so on until the member-patron reaches 100% of its 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 will be issued to the member-patron in a quantity sufficient to achieve the required amount. Issuance of these additional Class B Shares will be paid for by charging the member-patron's cash deposit account in an amount equal to the issuance value of the additional Class B Shares.
Member-patrons who were former United members and did not receive sufficient Class B Shares in the merger to meet the minimum Class B Share ownership deposit requirements have the following alternatives: (i) provide a cash deposit for the deficiency; (ii) purchase additional Class B Shares to cover the deficiency;
or (iii) assign 80% of the patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified will require the member to purchase at least the percentage of product purchased during the most recent 12 month period prior to the merger under a supply agreement with Unified.
Class C Shares. Class C Shares are held by members of the board of directors. Each board member purchases one Class C Share for ten dollars. Class C Shares are nonvoting shares and share in liquidation only to the extent of ten dollars per share.
REDEMPTION OF CAPITAL STOCK
Unless otherwise restricted from doing so under applicable law, limitations of credit agreements or provisions of the Bylaws as described below, Class A Shares and Class B Shares held by a shareholder who is no longer a qualified or an active member-patron will be redeemed at the book value of the Company as of the close of the fiscal year last ended prior to termination of member status. However, with respect to terminations occurring prior to September 30, 2000, the repurchase price will be Unified's book value at the fiscal year end prior to the effective date of the merger. There is no obligation to redeem Class B Shares of terminated members until after September 27, 2002.
Unless otherwise restricted from doing so under applicable law, limitations of credit agreements or provisions of the Bylaws until September 27, 2002, Unified will redeem excess Class B Shares at the option of the shareholder, at either:
. an amount equal to Unified's book value as of the close of the fiscal year prior to the effective date of the merger ($188.27); or
. an amount equal to the book value as of the close of the fiscal year prior to the date the shares are tendered to the Company for repurchase, provided the repurchase price will not be paid until after September 30, 2002.
Unless otherwise restricted from doing so under applicable law, limitations of credit agreements or provisions of the Bylaws after September 27, 2002, Unified will repurchase excess Class B Shares tendered for redemption at the book value as of the close of the fiscal year prior to the date the shares are tendered for repurchase.
Unless otherwise restricted from doing so under applicable law or limitations of credit agreements, until January 28, 2001, Unified will repurchase excess Class B Shares received in the merger tendered for redemption which are held by former shareholders of United at the book value as of April 2, 1999 of the shares of United's Common Stock for which the excess Class B Shares were exchanged in the merger. The purchase price will be evidenced by a promissory note of Unified which will be payable in twenty equal quarterly principal installments and will bear interest at 6% per year. Such purchases will not be subject to the 5% limit described below.
Pursuant to the Bylaws, the amount of Class B Shares which Unified will be obligated to redeem in any fiscal year will be limited to 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 such preceding fiscal year.
The board of directors has discretion to exceed the 5% limit.
Redemption of all capital stock is subject to limitations imposed by the Articles of Incorporation and Bylaws, credit agreements to which the Company is a party, and restrictions imposed by law on the ability of a company to redeem its own shares.
As a California corporation, the Company is subject to the provisions of the California General Corporation Law including Section 500 which limits the ability of the Company to make distributions, including distributions to repurchase its own shares and any payments on notes issued to repurchase Unified shares. Section 500 permits such repurchase and note payments only when retained earnings calculated in accordance with generally accepted accounting principles ("GAAP") equal or exceed the amount of any
proposed distribution or an alternative asset/liability ratio test is met. Historically through the operations of its subsidiaries, the Company has maintained sufficient retained earnings to accomplish its share repurchase program. As a result of expenses associated with the merger with United, current operating losses of subsidiaries acquired from United as well as operating losses of retail stores owned by the Company, including stores acquired from Albertson's for resale to members or others, the Company's retained earnings have been depleted such that they are currently inadequate to permit repurchase of Company shares. The repurchase test permitted under Section 500 based on the ratio of assets to liabilities determined under GAAP with certain adjustments cannot currently be met since the Company relies heavily on borrowings to finance its operations. The Company is also a party to credit agreements containing financial and other covenants, which limit the ability of the Company to make purchases of its capital stock under certain circumstances.
The Company has established a trust for the purpose of facilitating the transfer of shares by Unified members obligated or entitled to sell shares in accordance with the Company's redemption policy to existing members or new members who are authorized by the Board of Directors to buy shares in accordance with the Bylaws, during periods when the Company is legally unable to buy shares or otherwise elects to cause or permit outstanding shares to be transferred between members. Funds used to purchase shares from selling members are exclusively sourced from funds provided by buying members.
PATRONAGE DIVIDENDS
Unified distributes patronage dividends based upon its patronage earnings during the fiscal year. The board of directors approves dividends for the Company's two patronage earnings divisions: the Dairy Division and the Cooperative Division.
The following table shows the patronage dividend experience of Unified during the past three fiscal years and the transition period.
(1) Results in prior periods are not necessarily indicative of results for future periods. (2) Effective September 27, 1999, the Company changed its fiscal year end from the Saturday nearest August 31 to the Saturday nearest September 30. The transition period covers the period of August 29, 1999 through October 2, 1999. Patronage dividends were not paid in the transition period. (3) The Cooperative Division dividends are paid based on the patronage purchases for the following product areas: dry grocery, delicatessen, frozen food, ice cream, meat and bakery. Beginning in fiscal 2000, the Cooperative Division also included patronage purchases for general merchandise. Prior periods have been restated to reflect payments as if these two divisions had been in place throughout the period.
In connection with the merger, Unified changed its patronage dividend policies for periods subsequent to the effective date of the merger. Unified currently pays its patronage dividends to member-patrons and associate-patrons on the basis of patronage business transacted with Unified's two patronage earnings divisions: the Dairy Division and the Cooperative Division.
. The Dairy Division consists of patronage earnings generated by the fluid milk and juice bottling plant located in Los Angeles, California. Patronage dividends for this division are paid solely to patrons who purchase manufactured and related products from the Dairy Division.
. The Cooperative Division consists of patronage earnings generated from all other patronage activities of Unified and without distinction to geographic location. The Cooperative Division includes the general merchandise activity which previously was conducted in a non-patronage subsidiary of Unified.
Net patronage earnings are based on the combined results of the Dairy Division and the Cooperative Division. In the event of a loss in one division, the Board of Directors will make an equitable decision with respect to treatment of the loss.
Due to logistics and geographic constraints, patrons who purchase from the Dairy Division are primarily in Southern California. Patrons of Unified outside of Southern California generally do not participate in the Dairy Division.
Unified'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 Unified and the portion thereof, if any, which constitutes a patronage dividend.
Except with respect to member-patrons who were former United members and did not receive sufficient Class B Shares immediately following the merger to meet minimum Class B share ownership deposit requirements, patronage dividends for the cooperative division is 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; third, the remainder is credited to the member-patron's deposit account. Dairy Division patronage dividends are generally paid in cash after the close of each fiscal quarter.
MINIMUM PURCHASE REQUIREMENT
Unified requires that each patron meet the minimum purchase requirements established by the board of directors, which may be changed from time to time. Currently, Unified's minimum purchase requirement for member-patrons is $5,000 per week and $3,500 per week for associate-patrons. Exceptions to the minimum purchase requirements may be granted by the board of directors. Entities not meeting these minimum purchase requirements may be eligible to purchase products on a non-patronage basis.
PATRON DEPOSITS
Unified generally requires that its 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 the purchases are not on a regular basis. Required deposits are determined twice a year, at the end of Unified's second and fourth fiscal quarters, based upon a review of the patron's purchases from the Cooperative Division 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. Unified pays no interest on the required deposits. Interest is paid on cash deposits which are in excess of patrons' required deposits.
Member-patrons may satisfy the minimum deposit requirement through a combination of a cash deposit and the ownership of Class B Shares. The deposit value of a Class B Share is based upon its book value at the year end prior to the initial issuance of the Class B Shares except that for former United shareholders, the deposit value of the Class B Shares received in the merger is equal to $253.95 per share.
Former United shareholders who did not have sufficient Class B Shares immediately following the merger to meet the minimum deposit requirements have three alternatives: (i) provide a cash deposit for the deficiency; or (ii) purchase additional Class B Shares to cover the deficiency; or (iii) agree to assign 80% of the patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified requires the member to purchase at least the percentage of their total product that was purchased from United during the most recent 12 month period prior to the merger under a supply agreement with Unified.
Associate-patrons may only satisfy the minimum deposit requirement through a cash deposit.
In addition, patrons who participate in Unified's price reservation program are required to maintain a noninterest-bearing deposit based upon the value of their inventory included in this program. Under Unified'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 Unified. 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 Unified with respect to the required deposits in the event of an uncured default by Unified 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, Unified 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 Unified. On termination of membership, patrons are entitled to a return of deposits, less all amounts that may be owing by the patron to Unified. 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.
SUBORDINATION AGREEMENT AND PLEDGE OF SHARES
Unified requires each patron, whether a member-patron or an associate-patron, to execute a subordination agreement which provides for the subordination in certain circumstances of the patron's right to repayment of its deposit to the prior payment in full of certain indebtedness of Unified. In addition, Unified requires each shareholder to pledge the Class A Shares and Class B Shares of Unified to secure its obligations to Unified, and individual shareholders of corporate members are required to guarantee the obligations of the corporate member except that former shareholders of United who are in compliance with their obligations to United and its subsidiaries are not required to provide individual guarantees in the absence of financing transactions.
TAX MATTERS
Unified is a corporation operating primarily on a cooperative basis. Unified is subject to federal and state income and franchise taxes and must pay other taxes applicable to corporations, such as sales, excise and real and personal property taxes.
As a corporation operating on a cooperative basis, Unified is subject to Subchapter T of the Internal Revenue Code. Under Subchapter T, Unified pays patronage dividends to patrons pertaining to its fiscal year within 8 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 in any form that constitutes a written notice of allocation. A written notice of allocation is distributed to the patron and provides notice of the amount allocated to the patron by Unified and the portion thereof which constitutes a patronage dividend.
Under Subchapter T, Unified 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 Unified 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. Unified 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.
Unified currently intends to continue to make patronage distributions to the extent earned 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. Unified 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 dividends are also subject to state income and corporation franchise taxes in California and may be subject to these taxes in other states.
Unified 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. Unified files consolidated income tax returns with its subsidiaries.
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.
EMPLOYEES
Unified employs approximately 4,000 employees, of whom approximately 2,500 are members of one of several unions, the two largest being the International Brotherhood of Teamsters and the United Food and Commercial Workers. The union contracts have various expiration dates ranging from 2001 through 2004. Unified believes its labor relations to be good.
ENERGY MATTERS
Unified's operations are dependent upon the continued availability of electric power, diesel fuel, and gasoline. Unified'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 Unified's service representatives and, thus, adversely affect Unified's sales. Additionally, a significant increase in the cost of electricity and/or diesel fuel could have a material impact on the Company's earnings.
ITEM 2.
ITEM 2. PROPERTIES
FACILITIES
Unified's corporate offices, warehouses, retail stores and manufacturing facilities as of September 30, 2000 are summarized as follows:
These properties are located in California, Oregon, and Washington.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Unified 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 Unified's financial position, results of operations, or cash flow.
The Jerome Lemelson Foundation (the "Foundation"), which asserts ownership of certain patents relating to bar code technology, issued a demand that the Company enter into a license agreement with respect to certain patented technology which the Company is claimed to use and which allegedly infringes upon patents issued to Jerome Lemelson, which patents, upon the death of Jerome Lemelson, were assigned to the Foundation. The Company has been advised that the Foundation has filed an action against the Company and others asserting patent infringement and seeking damages in unexpected amounts. The Foundation continues to seek a negotiated settlement of its claim. Due to the early stage of the proceeding, the Company is unable to assess the merits of the lawsuit or to determine its potential liability, if any. The Company intends to vigorously defend the action.
The United States Environmental Protection Agency ("EPA") notified Unified 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. In 1999, the EPA notified the Company that, together with others, it was a PRP for the disposal of hazardous substances at a landfill site located in Patterson, California. Unified believes that its share of cost for the remaining phases of cleanup for these sites will not exceed the amounts which Unified has reserved.
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 Unified's Class A Shares, Class B Shares, or Class C Shares. As of November 25, 2000, Unified's Class A Shares were held of record by 673 shareholders, Class B Shares were held of record by 560 shareholders, and Unified's Class C Shares were held of record, one share each, by the 24 directors of Unified. 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
The selected financial information below has been derived from the audited consolidated financial statements of Unified as of and for its fiscal years ended August 31, 1996, August 30, 1997, August 29, 1998 and August 28, 1999, its transition period ended October 2, 1999, and its fiscal year ended September 30, 2000. This information is only a summary and should be read in conjunction with Unified's historical financial statements, and related notes, contained elsewhere in this document.
(In thousands, except book value per share)
- ------------------------------------------------------------------------------- (1) 1999 includes the acquisition of SavMax Foods, Inc. from December 31, 1998.
(2) Effective September 27, 1999, the Company changed its fiscal year end from the Saturday nearest August 31 to the Saturday nearest September 30. The transition period covers the period of August 29, 1999 through October 2, 1999. In September 1999, Unified completed a merger (the "Merger") with United Grocers, Inc. ("United"), a grocery cooperative headquartered in Milwaukie, Oregon. The transition period from September 29, 1999 and the fiscal year ended September 30, 2000 include the results of the Merger with United which was accounted for as a purchase.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Unified's financial condition and results of operations should be read in conjunction with the financial statements and notes to the financial statements included elsewhere in this document.
RESULTS OF OPERATIONS
The following table sets forth selected financial data of Unified expressed as a percentage of net sales for the periods indicated below:
(1) Transition period of August 29, 1999 through October 2, 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 2000 ("2000 PERIOD") COMPARED TO FISCAL YEAR ENDED AUGUST 28, 1999 ("1999 PERIOD")
Net Sales. Net sales totaled $3.1 billion for the 2000 period as compared to $1.9 billion for the 1999 period. The sales increase of $1,173 million represents a 61.9% increase over the 1999 period. The increase in sales is primarily related to the Merger with United ($873.1 million), additional wholesale supply volume to stores which certain member retailers acquired as a result of the Albertson's divestiture ($70.9 million), the consolidation of SavMax ($36.7 million), the purchase of the operating assets of Gourmet Specialties ($35.8 million), and the retail volume from stores the Company acquired as a result of the Albertson's divestiture ($35.9 million).
Cost of Sales. In the 2000 period, cost of sales were $2.7 billion compared to $1.7 billion in the 1999 period. The overall gross margin as a percentage of net sales is 1.5% higher compared to the comparable period in 1999. The increase in gross margin is due primarily to an increase in retail sales, which have higher gross margins than distribution activities, and to an increase in higher margin sales from Gourmet Specialties.
Distribution, Selling and Administrative. Distribution, selling and administrative expenses were $304.5 million in the 2000 period, as compared to $141.2 million in the 1999 period. The increase is due primarily to higher operating costs for Unified's expanding retail operations, the higher costs of the Gourmet Specialties operations, and higher warehousing and distribution costs related to the accelerated transition process during the second quarter to combine the distribution operations of the former United and Certified in northern California ($1.5 million).
Interest. Interest expense was $28.9 million in the 2000 period as compared to $11.9 million in the 1999 period. Borrowings under the Company's Credit Agreements were higher during the 2000 period as compared to the 1999 period as a result of the financing required by the merger with United ($126.8 million). Borrowings related to inventory purchases decreased as a result of the accelerated consolidation of the northern California facilities ($15.0 million). The Company has also experienced higher interest rates in the 2000 period compared to the 1999 period. Weighted average interest rates relating to the Senior Notes and Revolving Credit in the 2000 period were 8.16% compared with 6.89% in the 1999 period.
Other Income (Expense), Net. During the 1999 period, Unified sold its 10% investment in common stock of K.V. Mart Co. for $4.5 million. The sales resulted in a pretax gain of $1.5 million. The gain was offset by an impairment of $7.3 million recorded on Unified's investment in Hawaiian Grocery Stores ("HGS"). HGS defaulted on principal and interest payments required by a note receivable and was also delinquent in paying accounts receivable. Due to the uncertainty of when or if the default could be cured and the belief that the impairment was other than temporary, the Company wrote down the investment and trade receivable to a nominal carrying value.
Patronage Dividends. Patronage dividends totaled $15.4 million for the 2000 period as compared to $14.2 million for the 1999 period. The patronage earnings for fiscal 2000 are comprised of the patronage earnings from the Company's two patronage pools: the Cooperative and Dairy Divisions. For the 2000 period, the Company had patronage earnings of $4.4 million for the Cooperative Division and patronage earnings of $11.0 million from the Dairy Division. For the 1999 period, the Company had patronage income of $4.3 million in the Cooperative Division and patronage earnings of $9.9 million from the Dairy Division.
Income Taxes. The income tax benefit is $5.0 million for the 2000 period compared to a provision for income taxes of $64,000 for the 1999 period. The income tax benefit reflects the effect of the current year losses in non- patronage subsidiaries that can be utilized to offset taxable income in previous periods and carried forward to offset taxable income in future periods generated from operations and available tax planning strategies.
Net (Loss) Earnings. Net loss for the 2000 period was $11.4 million compared to net earnings $2.6 million for the 1999 period. The losses resulted primarily from Unified's retail operations ($13.7 million pre-tax). This was predominately due to start-up costs, operating losses, and shutdown costs from the stores operated by the Company as a result of its store acquisitions from Albertson's, along with losses of Unified's other retail operations including retail operations acquired from United. Net earnings/losses are generated by the Company's subsidiaries and nonpatronage activities, which do not distribute patronage dividends. The Company intends to sell or close unprofitable retail operations and is evaluating under-performing subsidiary operations.
TRANSITION PERIOD ENDED OCTOBER 2, 1999
The transition period resulting from the change in the Company's fiscal year- end includes the operating activities of Unified for the period between August 29, 1999 and October 2, 1999 and the operating activities of United for the three day period between the effective date of the merger, September 29, 1999 and October 2, 1999. The operating results for the five week transition period reflected a pretax loss of $9.9 million. Transition activities accounted for $8.2 million of the loss. The primary components of the transition activities included: an early retirement plan for employees of Unified totaling $6.3 million (included in other expense), the write-off of United's deferred financing costs of $0.7 million, and integration consulting costs of $0.3 million.
FISCAL YEAR ENDED AUGUST 28, 1999 ("1999 PERIOD") COMPARED TO FISCAL YEAR ENDED AUGUST 29, 1998 ("1998 PERIOD")
Net Sales. Net sales totaled $1.9 billion for the 1999 period and $1.8 billion in the 1998 period. The sales increase of $61.8 million represents a 3.4% increase over the 1998 period. In October 1998, North State Grocery Company was added as a member-patron. Sales to North State Grocery amounted to $35.4 million in the 1999 period. Additionally, retail sales generated by SavMax since the acquisition date of December 31, 1998, added net sales of $75 million. Also, there were increased sales to the ongoing membership of approximately $33.6 million. Offsetting these increases were $82.2 million of sales volume lost as a result of losing two member-patrons, Hughes Family Markets ("Hughes") and Nob Hill Markets ("Nob Hill"). Hughes and Nob Hill were acquired by entities that have self-distribution programs; accordingly, product supply to these member-patron stores migrated into the corresponding self-distribution facilities in the period between March 1998 through November 1998.
Cost of Sales. In the 1999 period cost of sales were $1.7 billion, or 90.7% of net sales, compared to $1.7 billion, or 91.1% of net sales, in the 1998 period. The overall gross margin as a percentage of net sales is slightly higher compared to the comparable period in 1998. The increase in gross margin is due to additional gross margin from retail sales generated by SavMax which Unified acquired in December 1998. The
increased margins were partially offset by increased claims expense of approximately $4.0 million in one of Unified's insurance subsidiaries and lower margins in the cooperative divisions.
Distribution, Selling and Administrative. Distribution, selling and administrative expenses were $141.2 million, or 7.5% of net sales in the 1999 period, as compared to $137.2 million, or 7.5% of net sales, in the 1998 period. The increase is due to additional costs of $15.5 million related to retail operations of SavMax. These costs were partially offset by improvements in wholesale distribution expenses in the 1999 period. The Company incurred nonrecurring charges relating to a settlement of litigation in the 1998 period. Also, expenses decreased as a result of retail operations that were disposed of in fiscal 1998.
Interest. Interest expense decreased from $12.3 million, or 0.7% of net sales, in the 1998 period to $11.9 million, or 0.6% of net sales, in the 1999 period. The decrease is due to lower interest rates associated with the $180.0 million refinancing completed in April 1998. Average interest rates related to the senior notes and revolving credit in the 1998 period were 7.94% and 6.89% in the 1999 period.
Other Income (Expense), Net. During the 1999 period, Unified sold its 10% investment in common stock of K.V. Mart Co. for $4.5 million. The sale resulted in a pretax gain of $1.5 million. The gain was offset by an impairment of $7.3 million recorded on Unified's investment in HGS. Subsequent to year-end, HGS defaulted on principal and interest payments required by a note receivable and was also delinquent in paying accounts receivable. Due to the uncertainty of when or if the default could be cured and the belief that the impairment was other than temporary, the Company wrote down the investment and trade accounts receivable to a nominal carrying value. In May 1998, Unified completed the sale of approximately 24 acres of property located in Commerce, California. This sale resulted in a gain (net of expenses related to the sale) of $3.2 million.
Patronage Dividends. Declared patronage dividends totaled $14.2 million for the 1999 period as compared to $10.1 million for the 1998 period. The increase is due to lower wholesale distribution, selling and administrative expenses, interest expense, and the non-recurrence of expense related to the early extinguishment of debt in the 1998 period, offset by impairment expenses related to HGS as discussed above.
Extraordinary charge. The extraordinary loss of $1.08 million, net of income taxes, in fiscal 1998 is related to the early extinguishment of debt in connection with the Company's refinancing transaction. This charge covers prepayment premiums paid and the write-off of financing costs relating to debt refinanced in the transaction.
Net Earnings. Net earnings for the 1999 period were $2.6 million compared to $3.4 million for the 1998 period. Net earnings are generated by the Company's subsidiaries and nonpatronage activities, which do not distribute patronage dividends.
LIQUIDITY AND CAPITAL RESOURCES
Unified relies upon cash flow from operations, patron deposits, shareholdings and borrowings under Unified's credit lines, to finance operations. Net cash provided by operating activities totaled $51.3 million for the 2000 period. Net cash provided by operating activities totaled $9.5 million for the 1999 period. Net cash provided by operating activities in the 2000 period is primarily due to increased accounts payable and long-term liabilities in the distribution and SavMax operations and increased depreciation and amortization. At September 30, 2000, working capital was $132.9 million. The current ratio was 1.5, 1.7 and 1.4 as of August 28, 1999, October 2, 1999 and September 30, 2000, respectively. Working capital varies primarily as a result of seasonal inventory requirements.
Capital expenditures totaled $23.4 million in the 2000 period, $17.3 million in the 1999 period, and $18.4 million in the 1998 period.
Unified has a five-year, $200 million revolving credit facility which expires October 1, 2004, secured by accounts receivable and inventories. Borrowings bear interest at either LIBOR plus an applicable margin based on a funded debt to operating cash flow ratio or the higher of the lender's base rate or 0.50% above the lender's federal funds borrowing rate. The revolving credit facility permits advances up to 85% of eligible accounts receivable and 65% of eligible inventories. The security interest would be released if Unified achieves designated investment grade ratings for a period of not less than one year.
Unified also has outstanding to certain insurance companies and pension funds $78.3 million of 7.72% senior notes due April 2008, and $40 million of 8.71% senior notes due October 2009, both of which are secured by property, plant and equipment. The interest rate on the $78.3 million senior notes would reduce .50% and the securitization of both notes would be eliminated in the event Unified achieves designated investment grade ratings for a period of not less than one year.
The credit agreements contain customary representations, warranties, covenants, including financial covenants, and default provisions for financing of this type. Obligations under the credit agreements are senior to the rights of members with respect to deposits, patronage dividend certificates and subordinated Notes. Both the Senior Notes and the revolving credit facility limit the incurrence of additional funded debt, restrict the issuance of secured debt, and prohibit distributions to shareholders (including repurchase of shares) under certain circumstances.
Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its revolving credit facility. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50,000,000. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit was 6.71% at September 30, 2000.
A $10 million credit agreement is collateralized by Grocers Capital Company's ("GCC's") member loan receivables. GCC is a wholly owned subsidiary of Unified. The primary function of GCC is to provide loan financing to Unified's member-patrons. The funding for loans made by GCC is provided by GCC's cash reserves as well as the $10 million 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. No amounts were outstanding under this credit line at September 30, 2000. The unused portion of this credit line is subject to commitment fees of 0.125% plus $25,000 annually.
Member loan receivables are periodically sold by GCC to a bank through a loan purchase agreement. The maturity date of the loan purchase agreement is August 29, 2001, but is subject to extension by mutual agreement of GCC 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 million. GCC entered into an additional loan purchase agreement with a different bank in January 1999. This additional loan purchase agreement can be terminated upon ninety days prior written notice and there is no maximum limitation on the loan purchases. At August 28, 1999 and September 30, 2000, the aggregate outstanding principal balance of loans purchased by the banks was $27 million and $17 million, respectively. The loan sales are subject to limited recourse provisions.
Unified distributes at least 20% of the patronage dividends in cash and distributes Class B Shares as a portion of the patronage dividends distributed to its member-patrons. Patrons are generally required to maintain subordinated deposits with Unified and member-patrons purchase Class B shares to satisfy this requirement. In the Merger, former United members were provided the opportunity to build the minimum subordinated deposit over time, provided that they agree to assign 80% of patronage dividends received and maintain a supply agreement with Unified until the minimum deposit condition is satisfied. Upon termination of patron status, the withdrawing patron will be entitled to recover deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and a member-patron also will be entitled to have its shares redeemed, subject to applicable legal requirements, company policies and credit agreement limitations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that Unified recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. As amended by SFAS No. 137, this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Unified makes limited use of hedge agreements, primarily to manage the risk associated with interest rates of its debt agreements. Additionally, Unified has investments in convertible bonds that are held for sale. The
convertible feature of the bonds constitutes an embedded derivative, as defined by SFAS No. 133. Unified classifies these investments as available for sale in its financial statements and reflects them at fair value. With respect to derivatives used as hedges, management has determined that the adoption of SFAS No. 133 will result in a cumulative after tax increase to other comprehensive earnings (loss) for the year ended September 29, 2001 of approximately $800,000 and will not have a significant impact on net earnings. The adoption of SFAS No. 133 relative to the embedded derivatives in the convertible bonds will not have a material effect on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB No. 101") which summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The effective date of SAB No. 101 for the Company is the quarter ending September 29, 2001. The application of SAB No. 101 will not have a material impact on the Company's financial position or its results of operations.
FORWARD-LOOKING INFORMATION
This document and the documents of Unified incorporated by reference may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, (c) embody assumptions which may prove to have been inaccurate, including Unified's assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; and Unified's expectations regarding the adequacy of capital and liquidity. Also, when we use words such as "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable, we cannot give you any assurance that such expectations will prove correct. Important factors that could cause actual results to differ materially from such expectations include the adverse effects of the changing industry environment and increased competition; sales decline and loss of customers; exposure to the uncertainties of litigation and other contingent liabilities; the failure of Unified to integrate the operations and systems of Certified and United; and the increased credit risk to Unified caused by the ability of former United members to establish their required minimum deposits over time through use of patronage dividends to purchase Class B Shares if such members default on their obligations to Unified prior to their deposit requirements being met and the existing deposit proves inadequate to cover such members' obligation. All forward-looking statements attributable to Unified are expressly qualified in their entirety by the factors which may cause actual results to differ materially.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Unified has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50,000,000. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit was 6.71% at September 30, 2000. The fair value of the collar agreement at September 30, 2000 was approximately $1,195,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors Unified Western Grocers, Inc.
We have audited the accompanying consolidated balance sheets of Unified Western Grocers, Inc. and subsidiaries (the "Company") as of August 28, 1999, October 2, 1999, and September 30, 2000, and the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows for the years ended August 29, 1998 and August 28, 1999, the transition period ended October 2, 1999, and the year ended September 30, 2000. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 28, 1999, October 2, 1999, and September 30, 2000, and the results of its operations and its cash flows for the years ended August 29, 1998 and August 28, 1999, the transition period ended October 2, 1999, and the year ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California December 5, 2000
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Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
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The accompanying notes are an integral part of these statements.
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Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
(dollars in thousands)
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The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(dollars in thousands)
(A) Acquisition of Gourmet Specialties in fiscal 1999.
(B) Acquisition of United Grocers, Inc. on September 29, 1999.
(C) Acquisition of Central Food Sales in fiscal 2000 and adjustments to acquisition of net assets from United Grocers, Inc. at September 29, 1999.
NONCASH TRANSACTION: During the year ended September 30, 2000, the Company issued $3,211 of subordinated redemption notes to repurchase Class B Shares from members.
The accompanying notes are an integral part of these statements.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
Fiscal years ended August 29, 1998 and August 28, 1999, the transition period ended October 2, 1999 and fiscal year ended September 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
On September 27, 1999, the shareholders of Certified Grocers of California, Ltd. ("Certified") and United Grocers, Inc. ("United") (a grocery cooperative headquartered in Milwaukie, Oregon) approved a merger agreement (the "Merger") in which United merged with a wholly owned subsidiary of Certified (see Note 4). The Merger became effective on September 29, 1999. In connection with the Merger, Certified changed its name to Unified Western Grocers, Inc. (the "Company" or "Unified"). The acquisition was accounted for as a purchase as of September 29, 1999.
Effective September 27, 1999, the Company changed its fiscal year end from the Saturday nearest August 31 to the Saturday nearest September 30. The transition period covers the period from August 29, 1999 through October 2, 1999.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and accounts with subsidiaries have been eliminated.
Nature of Business:
The Company is a cooperative organization engaged principally in the distribution of food products and related general merchandise products 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 makes investments in retail grocery operations to assist its members. Periodically, the Company will own and manage retail grocery stores on a temporary basis until a qualified and suitable owner can be identified.
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.
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 or market. Cost is determined on the first-in, first-out method for items of warehouse stock and on the retail method for retail stores.
Depreciation:
Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from 3 to 40 years. 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
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Investments:
The Company has classified all investments in debt securities as held-to- maturity securities, based on the Company's positive intent and ability to hold those securities. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Equity investments and subordinated interests, residual interests and servicing fee amounts from the sale of member loan receivables are carried at estimated fair value and are classified as investments available-for-sale. Unrealized gains and losses, net of taxes, on available-for-sale investments are recorded as a separate component of shareholder's equity.
Goodwill:
Goodwill, representing the excess of the purchase price over the estimated fair value of net assets acquired (see Note 4), is amortized over the period of expected benefit. Management reviews goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Management deems goodwill to be impaired if the estimated expected undiscounted future cash flows are less than the carrying amount. Estimates of expected future cash flows are based on management's best estimates of anticipated operating results over the remaining useful life of the assets. Included in the consolidated balance sheet at August 28, 1999, October 2, 1999, and September 30, 2000 is goodwill totaling $23.4 million, $54.8 million, and $57.6 million, net of accumulated amortization of $0.4 million, $0.5 million, and $1.9 million, respectively.
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, 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.
Reclassifications:
Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Comprehensive Earnings (Loss):
During fiscal 1999, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is net earnings, plus certain other items that are recorded by the Company directly to shareholders' equity, bypassing net earnings. The only items currently applicable to the Company are the unrealized gain or loss on appreciation or depreciation of investments and the minimum pension liability adjustment. The balance and current period change for each component of comprehensive earnings (loss) are summarized as follows:
The components of the net change in unrealized holding gains (losses) are as follows:
Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that the Company recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. As amended, this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Unified makes limited use of hedge agreements, primarily to manage the risk associated with interest rates of its debt agreements. Additionally, Unified has investments in convertible bonds that are held for sale. The convertible feature of the bonds constitutes an embedded derivative, as defined by SFAS No. 133. Unified classifies these investments as available for sale in its financial statements and reflects them at fair value. With respect to derivatives used as hedges, management has determined that the adoption of SFAS No. 133 will result in a cumulative after tax increase to other comprehensive earnings (loss) for the year ended September 29, 2001 of approximately $800 thousand and will not have a significant impact on net earnings. The adoption of SFAS No. 133 relative to the embedded derivatives in the convertible bonds will not have a material effect on the financial statements.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB No. 101") which summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The effective date of SAB No. 101 for the Company is the quarter ending September 29, 2001. The application of SAB No. 101 will not have a material impact on the Company's financial position or its results of operations.
2. PROPERTIES:
Properties stated at cost, are comprised of:
On May 19, 1998, the Company completed the sale of approximately 24 acres of property located in Commerce, California. The sale resulted in a gain (net of expenses related to the sale) of $3.2 million. This transaction required certain administrative offices and distribution facilities to be relocated. The Company utilized its remaining properties to accommodate most of the displaced facilities.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS:
The amortized cost and fair value of available-for-sale investments, including equity securities, were as follows:
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed maturity investments are due as follows:
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 $19,688, $19,681 and $23,590 at August 28, 1999, October 2, 1999 and September 30, 2000, 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 held investments in Western Family Holding Company common stock of $5,541 and $5,553 at October 2, 1999 and September 30, 2000, respectively. The investment represents approximately 22% ownership. The investment is accounted for under the equity method of accounting.
At August 28, 1999, the Company held investments in preferred stock ($1,000), a note receivable ($5,300), and was owed trade receivables ($980) from Hawaiian Grocery Stores, Inc. ("HGS"), a customer. The entire amount was either reserved or written-off in fiscal 1999 based on developments pertaining to HGS. Subsequent to the fiscal 1999 year end, HGS defaulted on the principal and interest payments required by the note receivable. The trade receivables also became delinquent during the Company's fiscal 1999 fourth quarter.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACQUISITIONS:
On September 27, 1999, the shareholders of Unified and United each approved the Merger pursuant to which shareholders of United exchanged their shares for Unified's Class A Shares and Class B Shares based on an exchange ratio of 0.228 shares of the Company's stock for each share of United Common Stock outstanding. The Merger became effective on September 29, 1999 and was accounted for as a purchase pursuant to Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the consideration was allocated to the assets acquired and liabilities assumed based on their relative estimated fair values. The excess of the purchase price over the fair value of the net assets acquired was $31.7 million and was recorded as goodwill. Goodwill is being amortized over forty years. In the Merger, United shareholders received 18,652 Class A Shares and 87,526 Class B Shares. The following summarizes the fair value of assets acquired and liabilities assumed of United as of September 29, 1999.
As a result of the Merger, the Company established reserves for the closure of various facilities. In addition, reserves for involuntary employee termination and lease termination costs were recorded at the time of the Merger. The type and amount of such reserves, charges against the reserves, and fair value adjustments to the liabilities representing changes in the cost of the acquired company are presented in the table below.
The transition period reflects the operating activities of United for the three day period between September 29, 1999 and October 2, 1999. Transition activities included an early retirement plan for employees of Unified totaling $6.3 million which was included in other expense, the write-off of United's deferred financing costs of $0.7 million, and integration consulting costs of $0.3 million.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated statements of earnings do not include any revenues or expenses related to United prior to the September 29, 1999 acquisition date. The following unaudited consolidated pro forma information utilizes the audited information for the Company for fiscal 1998 and 1999 and unaudited information for United for those periods. The unaudited consolidated pro forma information presents the results of operations of the Company as if the acquisition of United had taken place on August 31, 1997.
These unaudited consolidated pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisition been in effect on August 31, 1997, or of future results of operations.
At August 29, 1998, the Company owned an equity interest in SavMax Foods, Inc. ("SavMax"), a member-patron. SavMax operated seven retail grocery stores with retail sales of approximately $75 million for the period December 31, 1998 through August 28, 1999. Sales on an annual basis were approximately $115 million. The investment consisted of (a) 10% of the outstanding Series A common stock with an original cost of $2.5 million and (b) $6.3 million of 8.5% Series B cumulative redeemable preferred stock.
The Company purchased the remaining common and preferred shares of SavMax as of December 31, 1998, for an aggregate purchase price of approximately $4.5 million. The transaction also included an ongoing covenant not to compete from a selling shareholder, termination of the sellers' existing employment and consulting agreements, and the entry into a consulting arrangement with a selling shareholder. The acquisition has been accounted for as a purchase pursuant to Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the consideration was allocated to the assets acquired and liabilities assumed based on the relative fair values. The excess of the purchase price over the fair value of the net assets acquired was $23.4 million and was recorded as goodwill. Goodwill is being amortized over forty years. The results of the acquired business have been included in the consolidated financial statements from December 31, 1998. The following summarizes the fair value of assets acquired and the liabilities assumed of SavMax as of January 2, 1999.
The accompanying consolidated statements of earnings do not include any revenues or expenses related to SavMax prior to the December 31, 1998 acquisition date.
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities are summarized as follows:
6. NOTES PAYABLE:
Notes payable are summarized as follows:
Maturities of notes payable as of September 30, 2000 are:
At September 30, 2000, Unified had outstanding $78.3 million and $40 million in senior notes to certain insurance companies and pension funds. The $78.3 million senior notes are secured, due in April 2008 and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
bear interest at 7.72% per annum. The $40 million senior notes are secured, due in October 2009 and bear interest at 8.71% per annum.
Unified also has a $200 million secured revolving credit facility with a group of banks. The revolving credit agreement is secured, expiring on October 1, 2004 and bears interest at the bank's base rate or at an adjusted LIBOR rate plus a margin ranging from 1.25% to 2% depending on Unified's leverage ratio. The revolving credit facility permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. Both the senior notes and the revolving credit facility limit the incurrence of additional funded debt, restrict the issuance of secured indebtedness and prohibit the payment of dividends (other than patronage dividends) and distributions to shareholders in certain circumstances. These credit agreements contain various financial covenants, including fixed charge coverage ratios, maximum capital expenditures, and tangible net worth. Obligations under the credit agreements are senior to the rights of member-patrons with respect to deposits, redemption notes, and patronage dividend certificates.
In the event Unified achieves designated investment grade ratings for a period of not less than one year, the interest rate on the $78.3 million senior notes would be reduced by 0.50% and the securitization of the senior notes and the revolving credit facility would be eliminated.
Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee. The collar agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50 million. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit was 6.71% at September 30, 2000.
The extraordinary loss of $1.08 million, net of income taxes, in fiscal 1998 is related to the early extinguishment of debt in connection with the Company's refinancing transaction. This charge covers prepayment premiums paid and the write-off of financing costs relating to debt refinanced in the transaction.
Unified's Capital Investment Notes are serialized, bear interest at 7%, and mature ten years from the date of issuance. The notes are subordinated and have maturity dates through 2005. As of October 2, 1999 and September 30, 2000, the total balance of the notes outstanding was $33.8 million and $28.6 million, respectively. The notes originated with the former United and were assumed as part of the Merger.
A $10 million credit agreement is collateralized by Grocers Capital Company's ("GCC") member loan receivables. GCC is a wholly owned subsidiary of Unified. The primary function of GCC is to provide loan financing to Unified's member- patrons. Member loans are made at a market rate of interest starting at prime plus 0.5%. The funding for loans made by GCC is provided by GCC's cash reserves as well as the $10 million 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. Amounts advanced under the credit agreement bear interest at prime (9.5% at September 30, 2000) or Eurodollar (6.77% at September 30, 2000) plus 0.9%. No amounts were outstanding under this credit line at August 28, 1999, October 2, 1999 or September 30, 2000. The unused portion of this credit line is subject to commitment fees of 0.125% plus $25 annually.
Member loan receivables are periodically sold by GCC to a bank through a loan purchase agreement. The maturity date of the loan purchase agreement is August 29, 2001, but is subject to extension by mutual agreement of GCC 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 million. GCC entered into an additional loan purchase agreement with a different bank in January 1999. This additional loan purchase agreement can be terminated upon ninety days prior written notice. There is no maximum limitation on the additional loan purchase agreement. At August 28, 1999, October 2, 1999 and September 30, 2000, the aggregate principal outstanding balance of loans purchased by the banks was approximately $27 million, $25 million and $17 million, respectively. The loan sales are subject to limited recourse provisions.
United Resources, a subsidiary of the Company, has an agreement whereby it sold certain of its notes receivable from members subject to limited recourse provisions. At October 2, 1999 and September 30,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2000, the balance of transferred notes that were outstanding and subject to recourse provisions was approximately $18 million and $11 million, respectively.
The Company has also guaranteed loans made directly to members by third-party lenders. At August 28, 1999, October 2, 1999 and September 30, 2000 the maximum principal amount of these guarantees was $1.1 million. Member loans, provided by the Company 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 $0.7 million, $2.3 million and $10.0 million in 1998, 1999 and 2000, respectively.
7. 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 83 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, on September 30, 2000, the Company was contingently liable with respect to 14 lease guarantees for certain member-patrons. The total current annual rent on locations underlying such lease guarantees on that date was approximately $3.9 million. The commitments have expiration dates through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, 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 normally receives a monthly fee equal to 5% of the monthly rent under the lease guarantees 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.
Rent expense was $16.2 million, $18.4 million, $2.3 million and $49.4 million in fiscal years ended August 29, 1998, August 28, 1999, the transition period ended October 2, 1999, and the fiscal year ended September 30, 2000, respectively. Sublease rental income was $6.2 million, $4.5 million, $0.4 million and $13.2 million in fiscal years ended August 29, 1998, August 28, 1999, the transition period ended October 2, 1999 and the fiscal year ended September 30, 2000, respectively.
Minimum rentals on properties leased by the Company, including properties subleased to third parties, as of September 30, 2000 are summarized as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum sublease rental income on operating leases as of September 30, 2000 is summarized as follows:
8. INCOME TAXES:
The significant components of income tax expense are summarized as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $4.3 million, $7.0 million and $14.2 million are included in deferred taxes, current and $4.1 million, $7.0 million and $8.4 million in other assets on the Company's accompanying consolidated balance sheets as of August 28, 1999, October 2, 1999 and September 30, 2000, respectively.
A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The change in the valuation allowance between fiscal 1999 and the transition period ended October 2, 1999 is primarily a result of the acquisition of United. The remaining balance of the net deferred tax assets should be realized through future operating results, the reversal of taxable temporary differences, and available tax planning strategies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
At September 30, 2000, the Company has alternative minimum tax credit carryforwards of approximately $1,386 available to offset future regular income taxes payable to the extent such regular taxes exceed alternative minimum taxes payable. In addition, the Company has tax benefits associated with the net operating loss carryforwards for federal and state income tax purposes of approximately $11,843 and $2,645, which begin expiring in 2011 and 2000, respectively.
9. 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 Unified, and nontransferable without the consent of Unified.
The Company 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 at September 2000 and their respective terms:
During fiscal 2000 Unified set off approximately $60 in Patronage Certificates against a portion of amounts owed to the Company by the holders. No amounts were set off in fiscal 1999 or in the transition period.
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.
10. CAPITAL SHARES:
The Company requires that each member-patron hold 100 Class A Shares. Each member-patron must over time also acquire 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 Unified's outstanding shares as of the close of the fiscal year last ended prior to the issuance of such Class B Share.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
After payment of at least 20% of the 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 redemption price based on book value, less all amounts that may be owing by the member to the Company, as fixed in the Articles of Incorporation. All shares are pledged to the Company to secure the Company's redemption rights and as collateral for all obligations to the Company with certain exceptions. 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. In fiscal 1999, the 5% limitation restricted Unified's redemption of shares to 19,007 shares for $3.5 million. The following table summarizes the Class B Shares tendered and presently approved for redemption, shares redeemed, and the remaining number of shares pending redemption at the fiscal year end of each of the following periods:
Subsequent to the 1999 fiscal year end and in connection with the Merger with United (see Note 4), the Company (i) redeemed 71,310 Class B Shares held by terminated member-patrons and (ii) adopted amendments to its Articles of Incorporation and Bylaws which restrict the Company's obligation to repurchase Class B Shares of terminated members for a three-year period and changed the redemption provisions in other respects.
As a California corporation, the Company is subject to the provisions of the California General Corporation Law including Section 500 which limits the ability of the Company to make distributions, including distributions to repurchase its own shares and any payments on notes issued to repurchase Unified shares. Section 500 permits such repurchase and note payments only when retained earnings calculated in accordance with generally accepted accounting principles ("GAAP") equal or exceed the amount of any proposed distribution or an alternative asset/liability ratio test is met. Historically through the operations of its subsidiaries, the Company has maintained sufficient retained earnings to accomplish its share repurchase program. As a result of expenses associated with the merger with United, current operating losses of subsidiaries acquired from United as well as operating losses of retail stores owned by the Company, including stores acquired from Albertson's for resale to members or others, the Company's retained earnings have been depleted such that they are currently inadequate to permit repurchase of Company shares. The repurchase test permitted under Section 500 based on the ratio of assets to liabilities determined under GAAP with certain adjustments cannot currently be met since the Company relies heavily on borrowings to finance its operations. The Company is also a party to credit agreements containing financial and other covenants, which limit the ability of the Company to make purchases of its capital stock under certain circumstances.
The Company has established a trust for the purpose of facilitating the transfer of shares by Unified members in circumstances where the member is obligated or entitled to sell shares in accordance with the Company's redemption policy to members or new members who are authorized by the Board of Directors to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
buy shares in accordance with the Bylaws, during periods when the Company is legally unable to buy shares or otherwise elects to cause or permit outstanding shares to be transferred between members. Funds used to purchase these shares from selling members are exclusively sourced from funds provided by buying members.
There are 500,000 authorized Class A Shares, of which 46,400, 64,852 and 65,838 were outstanding at August 28, 1999, October 2, 1999 and September 30, 2000, respectively. There are 2,000,000 authorized Class B Shares, of which 379,349, 395,565 and 381,217 were outstanding at August 28, 1999, October 2, 1999 and September 30, 2000, respectively.
No member-patron may hold more than 100 Class A Shares. However, it is possible that a member-patron 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 were 24 authorized Class C Shares of which 24 are outstanding as of September 30, 2000. These shares are valued at ten dollars 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 80% of the authorized number of directors. Holders of the Class B Shares are entitled to vote such shares cumulatively for the election of 20% of the authorized number of directors. Except as required by California law, the Class C Shares have no voting rights.
11. BENEFIT PLANS:
The Company has two noncontributory, defined benefit pension plans ("benefit plans") covering substantially all of its nonunion employees. The benefits under the plans generally are based on the employee's years of service and final average earnings for the years immediately preceding retirement. The Company makes contributions to the pension plans 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 plans are provided through a trust and also through annuity contracts.
The Company also has an Executive Salary Protection Plan ("ESPP II"), which provides additional post-termination retirement income based on each participant's final salary and years of service with the Company. The financing of this benefit is facilitated through the purchase of life insurance policies, the premiums of which are paid by the Company.
Pension expense for the benefit plans totaled $1,399, $1,364, $3,549 and $815 in fiscal years ended August 29, 1998, August 28, 1999, the transition period ended October 2, 1999 and fiscal year ended September 30, 2000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net periodic costs for the benefit plan and ESPP II consist of the following:
The following table sets forth the change in benefit obligation for the benefit plan and ESPP II:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accrued pension and other benefit costs recognized in the accompanying consolidated balance sheets at August 28, 1999, October 2, 1999 and September 30, 2000 are computed as follows:
The additional minimum liability for the ESPP II represents the excess of the unfunded accumulated benefit obligation over previously accrued pension costs. A corresponding intangible asset is recorded as an offset to this additional liability. Because the asset recognized may not exceed the amount of unrecognized prior service cost, the balance, net of tax benefits, of $0, $0 and $364 is reported as a separate component of shareholders' equity at August 28, 1999, October 2, 1999 and September 30, 2000, respectively.
The weighted average assumptions used in computing the preceding information as of June 1 were as follows:
The Company also made contributions of $5.6 million, $6.6 million, $0.5 million and $11.1 million in fiscal years ended August 29, 1998, August 28, 1999, the transition period ended October 2, 1999 and the fiscal year ended September 30, 2000, respectively, to collectively bargained, multiemployer defined benefit pension plans in accordance with the 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 substantially all of its California 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. Participants are immediately 100% vested in the Company's contribution.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a Special 401 (k) Savings Plan, which is a defined contribution plan, adopted pursuant to Section 401 (k) of the Internal Revenue Code for substantially all of its Oregon non-union employees. The Company matches 35% of each dollar deferred up to 6% of compensation. Participants become vested in this Company match at the rate of 20% after 2 years of service, 40% after 3 years of service, 60% after 4 years of service, 80% after 5 years of service, and 100% after 6 years of service.
The Company contributed approximately $2.3 million, $1.9 million, $0.1 million and $2.4 million related to its 401 (k) savings plan(s) in the fiscal years ended August 29, 1998 and August 28, 1999, the transition period ended October 2, 1999 and the fiscal year ended September 30, 2000, respectively.
The Company has a bargaining employee savings plan, which is a defined contribution plan, adopted pursuant to Section 401 (k) of the Internal Revenue Code for substantially all of its Oregon union employees. The Company does not match any employee deferrals into this plan, and therefore, there is no related vesting schedule. No expense was incurred in the periods presented.
The Company has an Employee Savings Plan ("ESP"), which is a defined contribution plan, for substantially 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 nonunion employees who had a previous balance in the ESP had their balances transferred to the SSP effective the first quarter of fiscal 1992. No expense was incurred in the periods presented.
12. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS:
The Company sponsors postretirement benefit plans that cover both nonunion and union employees. Retired nonunion employees currently are eligible for a plan providing medical benefits. A certain group of retired nonunion employees currently participate in a plan providing life insurance benefits for which active nonunion employees are no longer eligible. Certain eligible union and 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. A group of retired non-union employees in Oregon participate in a postretirement benefit plan providing medical, dental, and vision care benefits. The plans are unfunded.
The components of net periodic benefit cost consist of the following for the fiscal years ended August 29, 1998, August 28, 1999, the transition period ended October 2, 1999 and the fiscal year ended September 30, 2000, respectively:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The change in the benefit obligations consist of the following during fiscal 1999, the transition period ended October 2, 1999, and fiscal 2000:
The change in the plan assets during the year is:
The funded status of the plans is:
The weighted-average assumptions as of June 1 are:
For measurement purposes, a 6.85% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2001; the rate was assumed to decrease to 5.00% in fiscal 2003 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 September 30, 2000 by $5.3 million and the aggregate benefit cost for the year then ended by $0.7 million. A decrease of 1% would decrease the accumulated postretirement benefit obligation as of September 30, 2000 by $4.5 million and the aggregate benefit cost for the year then ended by $0.6 million.
The Company's union employees participate in a multiemployer plan that provides health care benefits for retired union employees. Amounts contributed to the multiemployer plan for these union employees totaled $1.1 million in fiscal 1998, $0.1 million in fiscal 1999, $7 thousand in the transition period ended October 2, 1999 and $1.2 million in fiscal 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. 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 resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flow.
The Jerome Lemelson Foundation (the "Foundation"), which asserts ownership of certain patents relating to bar code technology, issued a demand that the Company enter into a license agreement with respect to certain patented technology which the Company is claimed to use and which allegedly infringes upon patents issued to Jerome Lemelson, which patents, upon the death of Jerome Lemelson, were assigned to the Foundation. The Company has been advised that the Foundation has filed an action against the Company and others asserting patent infringement and seeking damages in unexpected amounts. The Foundation continues to seek a negotiated settlement of its claim. Due to the early stage of the proceeding, the Company is unable to assess the merits of the lawsuit or to determine its potential liability, if any. The Company intends to vigorously defend the action.
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. In 1999, the EPA notified the Company that, together with others, it was a PRP for the disposal of hazardous substances at a landfill site located in Patterson, California. The Company believes that its share of cost for the remaining phases of cleanup for these sites will not exceed the amounts which the Company has reserved.
14. SEGMENT INFORMATION:
Unified is a grocery wholesaler serving supermarket operators in California, Oregon, Washington, Nevada, Arizona, Hawaii and various foreign countries in the South Pacific and elsewhere. In addition to offering dry grocery, frozen food, deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise products, Unified also provides finance, insurance, store design, security services, information services, and real estate services to its patrons.
Based on the information monitored by the Company's operating decision makers to manage the business, the Company has identified one reportable segment. Wholesale distribution includes the results of operations from the sale of food and general merchandise items to independent supermarket operators, both members and non-members, and sales to company-owned retail stores.
The "all other" category includes the aggregation of retail sales, finance, insurance and other services provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information about the Company's operations by operating segment is as follows:
15. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade receivables, notes receivable, 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 and Oregon. However, management believes that receivables are well diversified, and the allowances for doubtful 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 6% and 31%, 6% and 28%, and 7% and 28%, of net sales for the fiscal years ended August 29, 1998, August 28, 1999 and September 30, 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. 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 their quoted market prices or those of 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, Subordinated patronage dividend certificates and Interest rate collar agreement:
The fair values for notes payable, notes payable due after one year, subordinated patronage dividend certificates, and the interest rate collar agreement are based primarily on rates currently available to the Company for debt and collar agreements with similar terms and remaining maturities. The fair values for notes payable, notes payable due after one year, and patronage dividend certificates approximated their carrying value at August 28, 1999, October 2, 1999 and September 30, 2000. The fair value of the collar agreement at September 30, 2000 was approximately $1.2 million.
The methods and assumptions used to estimate the fair values of the Company's financial instruments at August 28, 1999, October 2, 1999, and September 30, 2000 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.
17. 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 of the type generally offered by the Company to its eligible members.
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 entities affiliated with directors of the Company, are less favorable to the Company than similar transactions with unrelated third parties. However, management believes such transactions are on terms which are consistent with terms available to other patrons similarly situated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A brief description of related party transactions with members affiliated with directors of the Company follows:
Loans and Loan Guarantees:
Unified provides loan financing to its member-patrons. The Company had the following loans outstanding at September 30, 2000 to members affiliated with directors of the Company:
(1) Subsequent to September 30, 2000, Mr. Baese sold his store to another member patron, resulting in the pay-off of the outstanding loan balance.
On May 12, 2000, the Company loaned $7 million to K.V. Mart Co. ("KV") which is payable over a period of five years. The loan is secured by substantially all of the assets of KV, including leasehold deeds of trust on several parcels currently leased by KV. Director Darioush Khaledi, his partner Parviz Vazin and two entities to which these individuals are related have guaranteed the obligations of KV under the loan. Coincident with the transaction, KV and the Company extended the term of their existing supply agreement until May 12, 2005.
On July 5, 2000, the Company loaned $3 million to 1999 Lawndale Associates LLC ("Lawndale"), of which director Darioush Khaledi is an affiliate. The loan is payable over a period of five years and is secured by a pledge of all of the outstanding shares of KV. The proceeds of the loan were used to repay amounts due KV that had been advanced by KV to members of Lawndale. The loan is guaranteed by Darioush Khaledi, his partner Parviz Vazin and three entities to which these individuals are related.
Member-patron loans made by GCC and United Resources are periodically sold to a bank, subject to limited recourse provisions. At September 30, 2000, the principal balances of loans to members affiliated with directors of the Company that were sold with recourse were as follows:
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The Company provides loan guarantees to its members. GCC has guaranteed 10% of the principal amount of certain third-party loans to KV of which director Darioush Khaledi is an affiliate. At September 30, 2000, the principal amount of this guarantee was $535.
GCC has guaranteed 10% of the principal amount of certain third-party loans to companies owned by Michael A. Provenzano, Jr. The maximum amount of this guarantee is $550.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Guarantees and Subleases:
The Company provides lease guarantees and subleases to its member-patrons. The Company has executed lease guarantees or subleases to members affiliated with directors of the Company at September 30, 2000 as follows:
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The Company has committed to guarantee store leases for stores currently under development affiliated with directors of Unified as follows:
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Other Leases:
The Company leases its produce warehouse to Joe Notrica, Inc., with which director Morrie Notrica is affiliated. The lease is for a term of five years expiring in July 2003. Monthly rent during the term is $24.
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 and delivery. Members affiliated with directors Andronico, Bennett, Davis, Khaledi, Kidd, McCormack, Provenzano, Song and Wright have entered into supply agreements with the Company. These supply agreements vary in terms and length, and expire at various dates through 2007, and are subject to earlier termination in certain events.
Direct Investment:
At August 29, 1998, GCC owned 10% of the common stock of KV. The cost of the investment was approximately $3 million. The stock purchase agreement contained a provision which allowed KV to repurchase the shares upon certain terms and conditions. In March 1999, KV exercised its repurchase rights under the agreement.
KV purchased the shares for $4.5 million, payable in cash and in an interest- bearing note, resulting in a pre-tax gain of $1.5 million which is included in Other income (expense), net, in the accompanying consolidated statements of earnings and comprehensive earnings. The stock purchase agreement also provides that for a five-year period commencing as of the date of the agreement, in the event of (i) a change of control of KV or (ii) a breach of the supply agreement by KV, KV shall pay the Company $900 or an amount equal to the difference between 10% of the appraised value of KV as of the approximate date of the Agreement (as prepared by an independent third party appraisal firm) and $4.5 million, whichever is greater.
The Company owns 49% of the interests of RAF, LLC. Wright's Foodliner, Inc., which is controlled by director Richard W. Wright, who owns the remaining 51% of the interests in RAF, LLC. During fiscal 1999, RAF, LLC purchased groceries and other products in the ordinary course of business from United on the same terms and conditions as United's other members. On October 29, 1999, the store was closed and the parties are in the process of liquidating RAF, LLC in accordance with the terms of the Operating Agreement. Pursuant to that agreement, Wright's Foodliner, Inc. is entitled to receive approximately $389 thousand and may be entitled to additional amounts depending on final resolution of issues relating to the liquidation.
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
Information regarding the directors of Unified is incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year. The following table sets forth certain information about executive officers of Unified.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All firms with which directors are affiliated, as members of Unified, purchase groceries, related products and store equipment from Unified in the ordinary course of business. As members, firms with which directors are affiliated may receive various benefits including patronage dividends, allowances and retail support services. Unified makes a variety of benefits available to members on a negotiated basis. See Footnote 17 to Notes to Consolidated Financial Statements, which is incorporated herein by this reference, for a description of related party transactions. Additional information is incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of August 28, 1999, October 2, 1999 and September 30, 2000.
Consolidated Statements of Earnings and Comprehensive Earnings for the Fiscal Years Ended August 29, 1998, August 28, 1999, the transition period from August 29, 1999 through October 2, 1999 and the fiscal year ended September 30, 2000.
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended August 29, 1998, August 28, 1999, the transition period from August 29, 1999 through October 2, 1999 and the fiscal year ended September 30, 2000.
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 29, 1998 and August 28, 1999, the transition period from August 29, 1999 through October 2, 1999 and the fiscal year ended September 30, 2000.
(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.
UNIFIED WESTERN GROCERS, INC.
/s/ Alfred A. Plamann By _________________________________ Alfred A. Plamann President and Chief Executive Officer
/s/ Richard J. Martin By _________________________________ Richard J. Martin Executive Vice President, Finance & Administration and Chief Financial Officer
/s/ William O. Cote By _________________________________ William O. Cote Vice President, Controller
Date: December 20, 2000
EXHIBIT INDEX