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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 29, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Commission file number 0-10815
UNIFIED WESTERN GROCERS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
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(Address of principal executive offices) (Zip Code)
5200 Sheila Street, Commerce, CA 90040
I.R.S. Employer Identification No.: 95-0615250
Registrant's telephone number, including area code: (323) 264-5200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE
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Class A Shares None
Class B Shares None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The Company's shares are not publicly traded and therefore market value is not
readily ascertainable.
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 1, 2001 were as follows:
Class A: 69,125 shares Class B: 447,289 shares Class C: 18 shares
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the
2002 annual meeting in Part III.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business........................................................... 3
2. Properties......................................................... 11
3. Legal Proceedings.................................................. 11
4. Submission of Matters to a Vote of Security Holders................ 11
PART II
5. Market for Registrants's Common Equity and Related Shareholder
Matters............................................................ 12
6. Selected Financial Data............................................ 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 13
7a. Quantitative and Qualitative Disclosures About Market Risk......... 19
8. Financial Statements............................................... 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 52
PART III
10. Directors and Executive Officers of the Registrant................. 52
11. Executive Compensation............................................. 53
12. Security Ownership of Certain Beneficial Owners and Management..... 53
13. Certain Relationships and Related Transactions..................... 53
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 54
Signatures.............................................................. 62
2
PART 1
ITEM 1. BUSINESS
GENERAL
Unified Western Grocers, Inc. ("Unified" or the "Company") is a grocery
wholesaler serving supermarket operators in California, Oregon, Washington,
western Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and various foreign
countries in the South Pacific and elsewhere. Unified sells a wide variety of
products to its customers, including dry grocery, frozen food, deli, meat,
dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise
products. Unified, through its subsidiaries, also operates a limited number of
retail stores in California, Oregon and Washington. Unified also provides
services to its patrons, including finance, insurance, store design, security,
payroll, real estate and information technology. 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 Unified.
The Merger provided Unified members with various benefits, including economies
of scale, an expanded range of products and services, elimination of
duplicative facilities and functions, including legal and accounting services
and management information systems. The Merger allowed for an increase of
purchasing volume resulting in more favorable pricing on certain products and
wider availability of specialized products and services not previously offered
by the separate companies.
A California corporation organized in 1922 and incorporated in 1925, Unified
does business primarily with those patrons that qualify and have been accepted
as "member-patrons." Unified's member-patrons 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 purchase 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.
WHOLESALE DISTRIBUTION
Unified's wholesale distribution business represented approximately 93% and
94% of sales for the fiscal years ended September 30, 2000 and September 29,
2001, 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, Santa Fe Springs, Stockton,
Hayward and Fresno, California, Milwaukie, Oregon, and Renton, Washington.
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 States of California and Oregon. 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.
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During the course of its business, Unified enters into supply agreements with
certain members or customers of Unified. These agreements require the member
or customer 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 of such supply agreements may vary in terms and length.
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. Two
stores that were owned and operated by United were converted to the SavMax
format following the Merger. Unified, through its subsidiaries, also operates
two stores in the Pacific Northwest under the "Thriftway" banner and three
stores in Northern California under the "Apple Market" banner.
In May 1999, Unified entered into an agreement to purchase certain assets
related to 32 stores divested in connection with Albertsons, 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 operated
the remaining 6 stores for a period of time (the "Divestiture Stores"). The
Company has either sold or subleased 4 of the 6 stores. Subsequent to year
end, the remaining 2 stores were closed and are expected to be sold in the
fiscal year ending in 2002. The Albertson's, Inc. transaction resulted in $96
million and $71 million of wholesale volume to the Company for the fiscal
years ended September 30, 2000 and September 29, 2001, respectively. The
Company continues to maintain a supply volume of $64 million related to the
ongoing activity of the member stores.
Retail subsidiary sales were $206.6 million and $159.3 million for the fiscal
years ended September 30, 2000 and September 29, 2001 and represented
approximately 6% and 5% of net sales, respectively.
SUPPORT BUSINESSES
Unified's retail support businesses collectively accounted for approximately
1% of Unified's net sales for the fiscal years ended September 30, 2000 and
September 29, 2001. The Company's retail support operations include financing
for inventory and equipment purchases, store remodeling and new store
acquisitions. The Company also provides store planning, equipment procurement,
information technology, security, payroll and training services. In addition,
the Company provides insurance brokerage services and underwrites selected
insurance risks through two insurance subsidiaries.
COMPETITION
The food industry is characterized by intense competition and low profit
margins. In order to compete effectively, Unified must provide its customers
with the capability to meet rapidly fluctuating competitive market conditions,
provide a wide range of perishable and nonperishable products, make prompt and
efficient deliveries, and provide services that are required by modern
supermarket operations. Unified competes with local, regional and national
grocery wholesalers and with a number of major manufacturers that market their
products directly to retailers. Unified's success is dependent upon its
ability to supply food and non-food products and services to its customers in
a cost-effective manner and upon the ability of Unified's independent retail
supermarket customers to compete effectively with large chain store
operations.
CUSTOMERS
Unified is a cooperative organization that conducts business principally with
its members. Unified's Bylaws provide for:
. Member-patrons, that are the shareholders of the Company and participate
in the patronage dividend programs; and
. Associate patrons that do not own shares but do participate in the
patronage dividend programs.
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Unified also conducts business with non-member customers on a non-patronage
basis. Unified's customers and 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 28%; 7% and 28%; and 7% and 29% of net sales for the
fiscal years ended August 28, 1999, September 30, 2000 and September 29, 2001,
respectively. In addition, Unified's 10 largest credit customers accounted for
approximately 30% and 27% of total accounts receivable for fiscal years ended
September 30, 2000 and September 29, 2001, 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 member-patron status, a person or other
entity (1) must patronize Unified in amounts and in a manner as is 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 only after approval by the Board of Directors.
Unified requires that each of its member-patrons acquire and hold 100 Class A
Shares. The price for these shares is the book value per share of the
Company's outstanding shares at the close of the fiscal year ended prior to
purchase.
Class B Shares. Each holder of Class A Shares must also own a number of Class
B Shares in an amount established by the Board of Directors of Unified. The
Board of Directors establishes the number of Class B Shares that each member-
patron must own, 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 that have tendered such 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 value in an amount equal to the member-patron's
required subordinated cash deposit. The share price is the book value per
share of the outstanding shares at the close of the fiscal year ended prior to
purchase.
Class B Shares are generally issued to new member-patrons as part of the
patronage dividends paid to the member-patron over a period of five
consecutive fiscal years, beginning with the first full fiscal year following
admission as a member-patron. The Class B issuance formula generally 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 does 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 must be
purchased by 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 that were former United members and who did not receive
sufficient Class B Shares in the Merger to meet the minimum Class B Share
ownership deposit requirements were provided with the following alternatives
following the Merger: (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. Member-patron deposit fund deficiencies were approximately $13.0
million and $7.6 million for fiscal years ended September 30, 2000 and
September 29, 2001, respectively.
Class C Shares. Class C Shares are held by members of the Board of Directors.
Each Director 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.
5
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 that 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 prior to September 30, 2000, the
repurchase price is Unified's book value at the fiscal year end prior to the
effective date of the Merger. Class B Shares of terminated members will not be
redeemed until after September 28, 2002.
Unless otherwise restricted from doing so under applicable law, limitations of
credit agreements or provisions of the Bylaws, Unified's Bylaws currently
provide that until September 28, 2002, excess Class B Shares will be redeemed
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 that such repurchase will not occur until after September 28,
2002.
Unified's Bylaws provide that after September 28, 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.
Pursuant to the Merger, Unified agreed to repurchase excess Class B Shares
held by former shareholders of United that were received in the Merger and
were tendered for redemption prior to January 28, 2001 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 of the shares
so redeemed is evidenced by promissory notes of Unified that are payable in
twenty equal quarterly principal installments and bear interest at 6% per
year.
Pursuant to the Bylaws, the amount of Class B Shares that Unified may redeem
in any fiscal year will be typically limited to approximately 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 modify this policy.
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, because of the operations of its subsidiaries, the Company had
sufficient retained earnings to accomplish its share repurchase program. As a
result of operating losses of retail stores and other subsidiaries of the
Company, 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 that 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
6
members or new members that 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 three patronage earnings divisions: the Southern California Dairy
Division, the Pacific Northwest Dairy Division and the Cooperative Division.
. The Southern California Dairy Division consists of patronage earnings
generated from sales of products primarily manufactured at a fluid milk
and juice bottling plant located in Los Angeles, California. Patronage
dividends for this division are paid solely to patrons who purchase
dairy and related products from the Southern California Dairy Division.
. The Pacific Northwest Dairy Division consists of patronage earnings
generated from sales of dairy products manufactured by third party
suppliers located in Oregon. This division was established in the third
quarter of fiscal year 2001. Patronage dividends are paid solely to
patrons who purchase dairy products from the Pacific Northwest Dairy
Division.
. The Cooperative Division consists of patronage earnings generated from
all other patronage activities of Unified and without distinction to
geographic location. Beginning in fiscal 2000, the Cooperative Division
includes sales of general merchandise products that were previously sold
by a non-patronage subsidiary of Unified.
The following table illustrates the patronage dividend experience of Unified
during the past three fiscal years and the transition period.
dollars in thousands
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Division 1999 1999(2) 2000 2001
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Southern California Dairy $ 9,902 -- $11,028 $10,704
Pacific Northwest Dairy -- -- -- 60
Cooperative(3) 4,293 -- 4,398 4,170
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TOTAL (1) $14,195 -- $15,426 $14,934
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(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 for activities that occurred
during 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. The various patronage earnings divisions in the 1999 period
other than dairy have been consolidated into the Cooperative Division.
Net patronage earnings are based on the combined results of the Southern
California and Pacific Northwest Dairy Divisions 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 the treatment of the loss.
Due to logistic and geographic constraints, patrons located in Southern
California purchase dairy products from the Southern California Dairy Division
while those patrons located in the Pacific Northwest purchase dairy products
from the Pacific Northwest Dairy Division. As a result, patrons of Unified
located outside of Southern California and the Pacific Northwest generally do
not participate in dairy division activities.
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
7
the stated dollar amount allocated to the recipient by Unified and the portion
thereof, if any, which constitutes a patronage dividend. Written notices of
allocation may be in the form of qualified written notices of allocation or
non-qualified written notices of allocation. To constitute a qualified written
notice of allocation, a patronage dividend must be paid at least 20% in cash
and the balance in a form which constitutes a written notice of allocation and
which the recipient has agreed to take into income for tax purposes in the
year of receipt. If at least 20% of the patronage dividend is not paid in
cash, the entire distribution, whether in the form of stock, subordinated
patronage dividend certificates or other debt instrument, constitutes a non-
qualified written notice of allocation.
Except with respect to member-patrons who were former United members that did
not have sufficient Class B Shares immediately following the Merger to meet
minimum Class B Share ownership deposit requirements, patronage dividends for
the Cooperative Division for the year 2001 will be 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. Patronage dividends generated
by the dairy divisions are generally paid in cash after the close of each
fiscal quarter.
The Board of Directors adopted an equity enhancement plan for fiscal year
2002. As part of that plan the patronage dividend payment policy has been
modified as follows: net earnings from business transacted on a patronage
basis in the Cooperative Division with member and associate patrons shall be
distributed on a patronage basis based upon the volume of business transacted
in the Cooperative Division by written notices of allocation as defined in
Section 1388 of the Internal Revenue Code in the form of:
. Shares of Class B Common Stock to the extent there exists any deficiency
of a member-patron in meeting the requirements for holding Class B
Shares specified in the Bylaws of the Company;
. Subordinated Patronage Dividend Certificates ("Certificates") to the
extent of the balance of such patronage dividends for member patrons,
such Certificates to have a minimum term of five years, an interest rate
equal to an appropriate benchmark interest rate as such rate exists on
the issuance date of the Certificates, such rate to be adjusted annually
thereafter to be equal to the same benchmark interest rate on each
anniversary of the date of issuance of the Certificates, with such other
terms and conditions as shall be recommended by management and approved
by the Board of Directors, which terms may include provision for
conversion of Certificates into Class B Shares for member patrons on a
basis to be determined.
Such patronage dividends shall be in the form of non-qualified written notices
of allocation and no cash dividends shall be paid.
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 permitted 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
purchases are not on a regular basis. Required deposits are typically
determined at least twice a year, at the end of Unified's second and fourth
fiscal quarters, based on a review of a 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 a
patron's required deposit.
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
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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 that did not have sufficient Class B Shares
immediately following the Merger to meet the minimum deposit requirements were
provided the following 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 at least 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 that participate in Unified's price reservation program
are required to maintain a noninterest-bearing deposit based upon the value of
the inventory involved in the program. Under Unified's price reservation
program, patrons are permitted to submit price reservations in advance for
certain 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 that 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
on any 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, 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, PLEDGE OF SHARES AND GUARANTEES
Unified requires each patron, whether a member-patron or an associate-patron,
to execute a subordination agreement that 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 that each shareholder pledge its Class A and B Shares of Unified to
secure its obligations to Unified. Generally, individual shareholders of
corporate members are required to guarantee the obligations of the corporate
member except that former shareholders of United who were, at the date of the
Merger, 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. Unified files consolidated income tax returns with its
subsidiaries.
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 1/2
months of the close of such fiscal year. To qualify as patronage dividends,
payments are made on the basis of the value of the business done with or for
patrons, under a pre-existing obligation to make such payment, and with
reference to the net earnings from business done with or for the cooperative's
patrons. Patronage dividends are paid in cash or 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.
9
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 written
notices of allocation or other property (except a non-qualified written notice
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. For fiscal year 2001, Unified will deduct 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. Members
sign a consent form as a part of membership to satisfy the consent
requirement. 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.
Class B Shares distributed as part of qualified 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 qualified
written notices of allocation and on net earnings derived from nonpatronage
business. For the fiscal year 2002 it is anticipated that all Cooperative
Division patronage dividends will be paid in the form of non-qualified written
notices of allocation. The patron does not take a non-qualified written notice
of allocation into income in the year of receipt and the Company is not
entitled to a deduction in that year. The Company will have a deduction, and
the patron will have taxable income when the stock is redeemed or the
subordinated patronage dividend certificate is paid in cash or property.
To the extent that Class B Shares are received by the patron as qualified
notices of allocation 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 urged to consult their own tax advisors with respect to the U.S.
federal income tax consequences of the acquisition, ownership and disposition
of Class A Shares and Class B Shares and the receipt of patronage dividends in
the light of their own particular circumstances, as well as the effect of any
state or local laws.
EMPLOYEES
Unified employs approximately 4,200 employees, of whom approximately 2,700 are
members of one of several unions, the two largest being the International
Brotherhood of Teamsters and the United Food and Commercial Workers.
Collective bargaining agreements affecting the Company's employees have
various expiration dates ranging from 2002 through 2004. Unified believes its
labor relations to be good.
During the 1st quarter of fiscal 2002, the Company implemented a comprehensive
expense reduction initiative. As part of this initiative the Company
eliminated approximately 200 existing positions impacting nearly all
divisions, departments and facilities. Position reductions have been
accomplished by attrition, layoff and elimination of unfilled but budgeted
positions. The Company expects that the position eliminations will result in a
reduction of personnel costs of approximately $6.2 million on an annualized
basis.
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 adverse impact on
the Company's earnings.
10
ITEM 2. PROPERTIES
Unified's corporate offices, warehouses, retail stores and manufacturing
facilities as of September 29, 2001 are summarized as follows:
Approximate Square
Footage
Description Owned Leased
- ---------------------------------------------
Corporate offices 60,000 150,000
Dry warehouses 1,753,000 1,023,000
Refrigerated warehouses 822,000 945,000
Manufacturing facilities 165,000 --
Retail stores 105,000 641,000
These properties are located in California, Oregon, Washington and Arizona.
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 Foundation filed an
action against the Company and others asserting patent infringement and
seeking damages in unstated amounts. The Company and the Foundation have
reached an agreement to settle the matter, subject only to final documentation
of the agreement, at an amount that will not exceed the amounts which Unified
has reserved. The Company expects to complete documentation of the agreement
during the first quarter of fiscal year 2002.
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 has entered into a
consent decree that, subject to final approval of the court with jurisdiction
over the matter, will resolve the matter at an amount that will not exceed the
amounts which Unified has reserved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY H0LDERS.
NONE
11
PART II
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 December 1, 2001, Unified's Class A Shares were held of record
by 692 shareholders, Class B Shares were held of record by 679 shareholders,
and Unified's Class C Shares were held of record, one share each, by the 18
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. SELECTED FINANCIAL DATA
The selected financial information below has been derived from the audited
consolidated financial statements of Unified as of the fiscal years ended
August 30, 1997, August 29, 1998 and August 28, 1999, the transition period
ended October 2, 1999, and the fiscal years ended September 30, 2000 and
September 29, 2001. 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)
- --------------------------------------------------------------------------------------------------------
October
August 30, August 29, August 28, 2, September 30, September 29,
Fiscal Period Ended 1997 1998 1999(1) 1999(2) 2000 2001
- --------------------------------------------------------------------------------------------------------
Net sales $1,927,092 $1,831,686 $1,893,523 $211,633 $3,067,395 $2,929,473
Operating income (loss) 31,549 26,252 34,589 (1,149) 27,905 27,391
Patronage dividends 14,464 10,149 14,195 -- 15,426 14,934
Net earnings (loss) 2,307 3,389(3) 2,639(4) (7,269)(5) (11,366) (13,136)
Total assets 394,002 389,218 451,135 753,513 765,850 762,285
Long-term notes payable 92,217 125,130 143,727 292,871 259,229 288,241
Book value per share 175.22 183.47 188.27 227.56 200.78 171.29
- --------------------------------------------------------------------------------------------------------
(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. The transition period includes the results of the Merger, which was
accounted for as a purchase, from September 29, 1999. Refer to Note 4 in
the Consolidated Financial Statements included in item 8.
(3) 1998 includes a $3.2 million gain on sale of 24 acres in Commerce,
California, offset by a $1.1 million extraordinary charge for early
retirement of debt.
(4) 1999 includes a $7.3 million impairment charge recorded on the company's
investment in Hawaiian Grocery Stores offset by a $1.5 million gain on
sale of the Company's 10% investment in Common Stock of K. V. Mart Co.
(5) The transition period includes a $6.3 million charge for an early
retirement plan, the write-off of United's deferred financing costs of
$0.7 million, and integration consulting costs of $0.3 million.
12
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 consolidated financial
statements and notes to the consolidated 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:
- ------------------------------------------------------------------------------
August 28, October 2, September 30, September 29,
Fiscal Period Ended 1999 1999(1) 2000 2001
- ------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.7 90.9 89.2 89.1
Distribution, selling and
administrative expenses 7.5 9.6 9.9 9.9
Operating income (loss) 1.8 (0.5) 0.9 1.0
Interest expense 0.6 0.7 0.9 1.0
Other income (expense), net (0.3) (3.4) -- --
Earnings (loss) before pa-
tronage dividends, income
taxes and cumulative ef-
fect of a change in ac-
counting principle 0.9 (4.6) -- --
Patronage dividends 0.8 0.0 0.5 0.5
Income taxes -- (1.2) (0.1) (0.1)
Cumulative effect of a
change in accounting prin-
ciple -- -- -- --
Net earnings (loss) 0.1 (3.4) (0.4) (0.4)
- ------------------------------------------------------------------------------
(1) Transition period of August 29, 1999 through October 2, 1999.
FISCAL YEAR ENDED SEPTEMBER 29, 2001 ("2001 PERIOD") COMPARED TO FISCAL YEAR
ENDED SEPTEMBER 30, 2000 ("2000 PERIOD")
Net sales. Net sales totaled $2.9 billion for the 2001 period as compared to
$3.1 billion for the 2000 period. Net sales declined $138 million, which
represents a 4.5% decrease over the 2000 period. The overall change in sales
is related to the following matters:
Wholesale Distribution Segment:
. The Company experienced a reduction in distribution volume of $87.2
million due primarily to certain chain store supplemental business in
northern California that transitioned to self-distribution.
. In the fiscal 2000 period, the Company had $41.0 million of low margin
non-member activity associated with the former United operations. The
Company subsequently eliminated this activity as part of its overall
profit improvement and Merger integration activities.
. Offsetting the declining factors, the Company's membership added 51 new
stores during the period. Volume from the new stores, less sales from
store closures generated $37.0 million in additional wholesale volume in
the 2001 period.
Retail Segment:
. The Company's owned-retail locations had lower volume for the 2001
period as compared to the 2000 period by $47.3 million. The reduction is
due to the closure of three Divestiture Stores and an overall volume
decline in same store sales at the Company's other owned-retail stores.
Partially offsetting the reduction was the addition of three corporate
stores in northern California that were acquired during the fourth
quarter of 2001.
Cost of sales. In the 2001 period, cost of sales were $2.6 billion (89.1% of
net sales) compared to $2.7 billion (89.2% of net sales) in the 2000 period.
The decline in overall cost of sales is due to lower sales volume. The Company
has been successful at maintaining the overall margin structure on its pricing
to the membership and its retail store operations.
13
Distribution, selling and administrative. Distribution, selling and
administrative expenses were $289.9 million (9.9% of net sales) in the 2001
period, as compared to $304.5 million (9.9% of net sales) in the 2000 period.
Several factors contributed to the decrease in expenses in the 2001 period.
. In the wholesale distribution segment, certain distribution costs are
variable and fluctuate with the volume changes noted above. Additionally,
the Company was successful in realizing $6.5 million in fixed cost
reductions from the Merger through the elimination of duplicate facilities
in Northern California and the integration of marketing, administration and
information services activities.
. Total retail expenses declined $5.2 million in the 2001 period due to
Divestiture Store closures. Additionally, the Company's other remaining
owned-retail stores experienced an increase in costs as a percent of sales
due to a weakening in same-store sales as described above.
Interest. Interest expense was $28.1 million (1.0% of net sales) in the 2001
period as compared to $28.9 million (0.9% of net sales) in the 2000 period.
The Company's effective borrowing rates for the 2001 and 2000 periods were
7.79% and 8.16% respectively. The effect of the decrease in interest rates
offset the Company's higher borrowing levels.
Patronage dividends. Estimated patronage dividends totaled $14.9 million for
the 2001 period as compared to $15.4 million for the 2000 period. The
estimated patronage earnings for fiscal 2001 are comprised of patronage
earnings from the Company's three patronage pools: the Cooperative, Southern
California Dairy and Pacific Northwest Dairy Divisions. For the 2001 period,
the Company had patronage earnings of $4.2 million in the Cooperative
Division, $10.7 million from the Southern California Dairy Division, and
$60,000 from the Pacific Northwest Dairy Division. For the 2000 period, the
Company had patronage earnings of $4.4 million in the Cooperative Division and
$11.0 million from the Southern California Dairy Division.
Income Taxes. The income tax benefit was $2.5 million and $5.0 million for the
2001 and 2000 periods, respectively. 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 or carried forward to
offset taxable income in future periods generated from operations and
available tax planning strategies.
Net loss. The net loss for the 2001 period was $13.1 million compared to a net
loss of $11.4 million for the 2000 period. Net profits or losses are generated
by the Company's subsidiaries and non-patronage activities and are not
included in patronage earnings of the cooperative.
. The Company's Wholesale Distribution segment had a non-patronage loss in
its specialty food products subsidiary of $2.7 million and $130,000 for
the 2001 and 2000 periods, respectively. The Company began transitioning
the source for certain northern California specialty volume from
southern to northern California in the 2000 period but did not complete
the transition until the second quarter of the 2001 period. The
transition delay created operational inefficiencies from duplicative
inventories and resulted in lower gross profits. Additionally, the
Company entered the Washington marketplace during the 2000 period and
experienced higher costs related to the transition to the marketplace.
. Retail losses were $13.0 and $13.9 million for the 2001 and 2000
periods, respectively. Operating losses and shutdown costs from the
Divestiture Stores were the primary factors. The Company's other owned-
retail stores experienced higher losses in the 2001 period as a result
of increased competitive pressures resulting in weakening sales. The
Company also experienced higher costs associated with a re-merchandising
and remodeling activity that occurred in the 2001 period.
. Earnings from the Company's other subsidiaries improved $2.1 million in
the 2001 period. Financing activities earned $1.1 million for the 2001
period compared to a loss of $60,000 for the 2000 period. The
improvement over the 2000 period is primarily related to the
reorganization of retail lease activities that were separated from the
finance operations and included in the Cooperative Division in the 2001
period. Losses related to equipment sales and member services in the
2000 period were $1.2 million. These activities were reorganized and
included in the Cooperative Division in the 2001 period.
The Company will continue to evaluate underperforming subsidiary operations
and make a determination with regards to possible sale or closure.
14
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 $1.2 billion
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 Divestiture Stores ($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 was $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 losses are generated by the
Company's subsidiaries and nonpatronage activities, which do not distribute
patronage dividends. The
15
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.
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 fiscal year 2000
compared to $20.0 million for fiscal year 2001. Net cash provided by operating
activities in the 2001 period is primarily due to increased accrued and long-
term liabilities, as well as decreases in notes and accounts receivable and
inventory. Working capital was $133.0 million and $142.0 million and the
current ratio was 1.4 for the fiscal years ended September 30, 2000 and
September 29, 2001, respectively. Working capital varies primarily as a result
of seasonal inventory requirements.
Capital expenditures totaled $23.3 million in the 2001 period, $23.4 million
in the 2000 period and $17.3 million in the 1999 period. The majority of the
capital spending for fiscal year 2001 included expenditures for machinery and
equipment at $12.1 million, computer equipment at $3.0 million and other
miscellaneous items totaling $8.2 million. Proceeds from the sale of
properties of $7.4 million in the 2001 period is primarily due to the
disposition of 3 Divestiture Stores.
At September 29, 2001, Unified had $73.9 million and $40.0 million outstanding
in senior secured notes to certain insurance companies and pension funds under
a Note Purchase Agreement dated September 29, 1999, (as amended the "Senior
Note Agreement").
Unified also has a $200 million secured revolving credit facility with a group
of banks. The revolving credit agreement is secured, expires on October 1,
2004 and bears interest at either the bank's base rate plus .75% or at an
adjusted LIBOR rate plus a margin ranging from 2.00% to 3.00% 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.
Subsequent to year end, Unified amended the Senior Note Agreement and the
revolving credit facility. For the Senior Note Agreement, the amendment
modified two financial covenants (consolidated tangible net worth and fixed
charge coverage). The amendment assumes that improvements will be made in
future performance with respect to both ratios. In addition, the interest
rates on both senior secured notes have increased by 0.25% until such time as
the consolidated tangible net worth increases to $80.0 million after excluding
future consolidated net income generated after September 29, 2001. The
amendment related to the revolving credit facility changed the requirements of
certain financial covenants at September 29, 2001 and through fiscal year
2002, with respect to minimum tangible net worth, the fixed charge coverage
ratio and the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization, and patronage dividends ("EBITDAP"). At its
December meeting, the Board of Directors adopted a plan for Equity
Enhancement--Fiscal Year 2002 and, as required by the amendment, provided the
adopted plan to the lenders. The amended covenants in the revolving credit
facility require improved performance in future periods with respect to
minimum adjusted tangible net worth, the fixed charge coverage ratio and
EBITDAP. The amendment also increased borrowing costs to either: (i) LIBOR
plus an increased applicable margin (the increase is reflected above) based on
funded debt to operating cash flow or (ii) the higher of the lender's base
rate or 0.50% above the lender's borrowing rate plus 0.75%.
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
16
senior to the rights of members with respect to deposits, patronage dividend
certificates and subordinated Notes. Both the Senior Note Agreement 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. In
the event Unified achieves designated investment grade ratings for a period of
not less than one year, the interest rate on the $73.9 million senior secured
notes would be reduced by 0.50% and the securitization of all the senior
secured 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
and 3.73% at September 29, 2001.
Unified's Capital Investment Notes are serialized, have a stated interest rate
of 5%, currently bear interest at 7%, and mature ten years from the date of
issuance. The notes are subordinated and have maturity dates through 2005. The
notes originated with the former United entity and were assumed as part of the
Merger. The Board of Directors at its discretion may change the interest rate
above the stated rate of 5%.
A $10.0 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. The funding for loans made by GCC is provided by GCC's cash
reserves as well as the $10.0 million credit agreement. The credit agreement
as amended and restated has a maturity date of October 31, 2004. Amounts
advanced under the credit agreement bear interest at prime (6.0% at September
29, 2001) or Eurodollar (2.95% at September 29, 2001) plus 2.50%. No amounts
were outstanding under this credit line at September 30, 2000. The outstanding
balance was $7.0 million at September 29, 2001. The unused portion of this
credit line is subject to commitment fees of 0.125%.
Member loan receivables are periodically sold by GCC to a bank through a loan
purchase agreement. This loan purchase agreement, as amended and restated,
extends through October 31, 2004. Total loan purchases under the agreement are
limited to a total aggregate principal outstanding of $70.0 million,
previously $50.0 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 thirty days prior written notice. There is no
maximum limitation on the loan purchases pursuant to the additional loan
purchase agreement. At September 30, 2000 and September 29, 2001, the
aggregate principal outstanding balance of loans purchased by the banks was
approximately $17.3 million and $16.0 million, respectively. The loan sales
are subject to limited recourse provisions.
United Resources ("UR"), a subsidiary of the Company, had an agreement with a
bank whereby it sold certain of its notes receivable from members subject to
limited recourse provision. At September 30, 2000 the balance of such sold
notes that were outstanding and subject to recourse provision was
approximately $11.0 million. The UR obligations with respect to these notes
have been transferred to GCC and are included in the September 29, 2001 loan
sale balance disclosed above.
The Company has also guaranteed loans made directly to members by third-party
lenders. At September 30, 2000 and September 29, 2001 the maximum principal
amount of these guarantees was $0.7 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.
Patrons are generally required to maintain subordinated deposits with Unified
and member-patrons are required to 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.
17
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("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. The Company adopted this statement, as amended by SFAS Nos. 137 and
138, effective October 1, 2000.
The Company entered into a five-year interest rate collar agreement during
February 1999 in relation to certain borrowings on its variable rate revolving
credit facility. The Company has designated the interest rate collar agreement
as a cashflow hedge. Under the provisions of SFAS No. 133, the fair value of
the collar must be reflected in the Company's financial statements. On October
1, 2000 the Company recognized the fair value of the collar, which totaled
$1.2 million, as a cumulative effect of a change in accounting principle in
other comprehensive earnings (loss). Additionally, SFAS No. 133 requires that
the fair value of the collar be adjusted with the change in fair value being
recorded as an adjustment to other comprehensive earnings (loss). Due to
declining interest rates, the Company recorded an unrealized loss on valuation
against the fair value of the collar of $3.0 million during fiscal year 2001.
The Company holds investments in various marketable securities and convertible
bonds. Prior to the adoption of SFAS No. 133, the Company classified its
convertible bonds as available for sale, with the changes in fair value
recorded in other comprehensive earnings (loss). With the adoption of SFAS No.
133, the convertible bonds were reclassified to trading securities, which
resulted in the Company recognizing gains of $52,000 at October 1, 2000. The
$52,000 of gains was comprised of a $31,000 cumulative effect of a change in
accounting principle and a $21,000 reclassification of previously unrealized
holding gains. During the year ended September 29, 2001, the Company recorded
losses due to the changes in the fair value of the convertible bonds totaling
$0.7 million.
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 was the quarter ended September 29, 2001. The implementation of SAB
No. 101 did not have a material impact on the Company's financial position or
its results of operations.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control. This statement was effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001 and is to be applied prospectively. Management has
determined the effect on the Company's financial statements to be immaterial.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
all business combinations be accounted for under the purchase method. The
statement further requires separate recognition of intangible assets that meet
one of two specified criteria. The statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 requires that an
intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill should not
be amortized, but shall be tested for impairment annually, or more frequently
if circumstances indicate potential impairment, through a comparison of fair
value to its carrying amount. SFAS No. 142 is effective for fiscal periods
beginning after December 15, 2001. The Company will implement the
pronouncement beginning in the first quarter of fiscal year 2003. Existing
goodwill will continue to be amortized through the remainder of fiscal 2002 at
which time amortization will cease and the Company will perform a transitional
goodwill impairment test. The Company is currently evaluating the impact of
the new accounting standards on existing goodwill and other intangible assets.
While the ultimate impact of the new accounting standards has yet to be
determined, goodwill amortization expense for the fiscal year ended September
29, 2001 was $1.5 million.
In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121 on the same topic and the accounting and
certain
18
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
defined in that Opinion). This Statement also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for fiscal periods beginning after
December 15, 2001. The Company will implement the pronouncement beginning in
the first quarter of fiscal year 2003. The Company is currently evaluating the
impact of the new accounting standards on existing long-lived assets.
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 take steps to stem
losses in its retail operations; the inability of the Company to establish and
perform plans to improve its operating performance and equity base in order to
meet financial covenants applicable to future periods; 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Unified has only limited involvement with derivative financial instruments.
They are used to manage well-defined interest rate risks. Unified entered into
a five-year interest rate collar agreement in 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 million. The weighted average interest rate, prior
to lender's margin, on borrowings on the revolving credit was 3.73% at
September 29, 2001. In addition, the Company recorded a negative fair value of
$1.8 million on the interest rate collar agreement at September 29, 2001, due
to declining interest rates.
Unified is subject to interest rate changes on its notes payable under the
Company's credit agreements that may affect the fair value of the notes
payable and cash flow and earnings. Based on the notes payable outstanding at
September 29, 2001 and the current market condition, a 100 basis point
increase in the applicable interest rates would decrease Unified's annual cash
flow and pretax earnings by approximately $1.1 million. Conversely, a 100
basis point decrease in the applicable interest rates would increase annual
cash flow and pretax earnings by $1.1 million.
With the adoption of SFAS No. 133, the Company's investments in convertible
bonds were reclassified from available for sale securities to trading
securities. As a result of changing the classification of the convertible
bonds, the Company is subject to market risk associated with fluctuations in
interest rates and the market value of the embedded conversion feature. During
the year ended September 29, 2001, the Company recorded losses due to the
changes in the fair value of the convertible bonds totaling $0.7 million.
19
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 September 30,
2000 and September 29, 2001, and the related consolidated statements of
earnings and comprehensive earnings, shareholders' equity, and cash flows for
the year ended August 28, 1999, the transition period ended October 2, 1999,
and the years ended September 30, 2000 and September 29, 2001. Our audits also
included the financial statement schedule listed in the Index at Item
14(a)(2). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule 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 September 30,
2000 and September 29, 2001, and the results of their operations and their
cash flows for the year ended August 28, 1999, the transition period ended
October 2, 1999, and the years ended September 30, 2000 and September 29,
2001, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
implemented the provisions of Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" effective
October 1, 2000.
Deloitte & Touche LLP
Los Angeles, California
December 12, 2001
20
- --------------------------------------------------------------------------------
Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- -----------------------------------------------------------------------------
September 30, September 29,
2000 2001
- -----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,355 $ 14,802
Accounts and notes receivable, net 190,654 187,879
Inventories 230,259 224,438
Prepaid expenses 6,493 7,533
Deferred taxes 14,210 10,043
- -----------------------------------------------------------------------------
Total current assets 451,971 444,695
Properties, net 123,374 122,657
Investments 43,585 48,983
Notes receivable 46,780 33,093
Goodwill, net 55,745 56,512
Other assets, net 44,395 56,345
- -----------------------------------------------------------------------------
TOTAL ASSETS $765,850 $762,285
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $214,607 $184,810
Accrued liabilities 77,258 90,942
Current portion of notes payable 10,760 10,535
Patrons' excess deposits and declared patronage
dividends 16,428 16,446
- -----------------------------------------------------------------------------
Total current liabilities 319,053 302,733
Notes payable, due after one year 259,229 288,241
Long-term liabilities, other 62,114 63,944
Commitments and contingencies
Patrons' deposits and certificates:
Patrons' required deposits 21,970 14,804
Subordinated patronage dividend certificates 5,926 4,105
Shareholders' equity:
Class A Shares 10,899 11,576
Class B Shares 74,870 79,100
Additional paid-in capital 18,095 18,095
Accumulated deficit (5,572) (18,708)
Accumulated other comprehensive loss (734) (1,605)
- -----------------------------------------------------------------------------
Total shareholders' equity 97,558 88,458
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $765,850 $762,285
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
21
- --------------------------------------------------------------------------------
Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
(dollars in thousands)
- -------------------------------------------------------------------------------
Transition
Period
Year ended ended Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Net sales $1,893,523 $211,633 $3,067,395 $2,929,473
Costs and expenses:
Cost of sales 1,717,779 192,323 2,735,011 2,612,213
Distribution, selling and
administrative 141,155 20,459 304,479 289,869
- -------------------------------------------------------------------------------
Operating income (loss) 34,589 (1,149) 27,905 27,391
Interest expense (11,911) (1,495) (28,880) (28,124)
Other income (expense), net (5,780) (7,218) -- --
- -------------------------------------------------------------------------------
Earnings (loss) before
patronage dividends,
income taxes and
cumulative effect of a
change in accounting
principle 16,898 (9,862) (975) (733)
Patronage dividends (14,195) -- (15,426) (14,934)
- -------------------------------------------------------------------------------
Earnings (loss) before
income taxes and
cumulative effect of a
change in accounting
principle 2,703 (9,862) (16,401) (15,667)
Income taxes (benefit) 64 (2,593) (5,035) (2,500)
- -------------------------------------------------------------------------------
Earnings (loss) before
cumulative effect of a
change in accounting
principle 2,639 (7,269) (11,366) (13,167)
- -------------------------------------------------------------------------------
Cumulative effect of a
change in accounting
principle, net of income
taxes -- -- -- 31
- -------------------------------------------------------------------------------
NET EARNINGS (LOSS) 2,639 (7,269) (11,366) (13,136)
- -------------------------------------------------------------------------------
Other comprehensive
earnings (loss), net of
income taxes:
Cumulative effect of a
change in accounting
principle 1,143
Unrealized loss on valua-
tion of interest rate col-
lar (2,933)
Unrealized holding (loss)
gain (738) (54) 189 555
Minimum pension liability
adjustment 56 -- (364) 364
- -------------------------------------------------------------------------------
COMPREHENSIVE EARNINGS
(LOSS) $ 1,957 $(7,323) $ (11,541) $ (14,007)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
22
- --------------------------------------------------------------------------------
Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------
for fiscal years
ended August 28, 1999, Accumulated
the transition period Other
ended October 2, 1999 Class A Class B Additional Comprehensive
and September 30, 2000 --------------- ---------------- Paid-in Accumulated Earnings
and September 29, 2001 Shares Amount Shares Amount Capital Deficit (Loss)
- ---------------------------------------------------------------------------------------------------
Balance, August 28, 1998 46,800 $ 5,479 380,146 $56,992 $ 15,685 $ 177
Class A Shares issued 4,800 879
Class A Shares redeemed (5,200) (689) (264)
Class B Shares issued 18,210 3,429
Class B Shares redeemed (19,007) (2,588) (900)
Net earnings 2,639
Net unrealized loss on
depreciation of
investments (net of
deferred tax benefit
of $375) (738)
Minimum pension
liability adjustment
(net of deferred tax
liability of $41) 56
- ---------------------------------------------------------------------------------------------------
Balance, August 28, 1999 46,400 5,669 379,349 57,833 17,160 (505)
Class A Shares issued 18,952 4,793 $ 3,176
Class A Shares redeemed (500) (64) (30)
Class B Shares issued 87,526 22,227 14,919
Class B Shares redeemed (71,310) (9,469) (3,614)
Net loss (7,269)
Net unrealized loss on
depreciation of
investments (net of
deferred tax benefit
of $27) (54)
- ---------------------------------------------------------------------------------------------------
Balance, October 2, 1999 64,852 10,398 395,565 70,591 18,095 6,247 (559)
Class A Shares issued 4,280 1,024
Class A Shares redeemed (3,294) (523) (110)
Class B Shares issued 37,131 7,490
Class B Shares redeemed (12,645) (3,211) (343)
Net loss (11,366)
Net unrealized gain on
appreciation of
investments (net of
deferred tax liability
of $91) 189
Minimum pension
liability adjustment
(net of deferred tax
benefit of $241) (364)
- ---------------------------------------------------------------------------------------------------
Balance, September 30,
2000 65,838 10,899 420,051 74,870 18,095 (5,572) (734)
Class A Shares issued 3,617 761
Class A Shares redeemed
(Shares exchanged for
Class B Shares) (330) (84)
Class B Shares issued 32,843 5,653
Class B Shares redeemed (5,605) (1,423)
Net loss (13,136)
Cumulative effect of a
change in accounting
principle 1,143
Net unrealized loss on
valuation of interest
rate collar (2,985)
Net unrealized gain on
appreciation of
investments (net of
deferred tax liability
of $285) 607
Minimum pension
liability adjustment
(net of deferred tax
liability of $241) 364
- ---------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29,
2001 69,125 $11,576 447,289 $79,100 $18,095 $(18,708) $(1,605)
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
23
- --------------------------------------------------------------------------------
Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
- -------------------------------------------------------------------------------
Transition Year Year
Year ended Period ended ended ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Cash flows from operating
activities:
Net earnings (loss) $2,639 $(7,269) $(11,366) $(13,136)
Adjustments to reconcile
net earnings (loss) to
net cash provided (util-
ized) by operating ac-
tivities:
Depreciation and amorti-
zation 16,906 2,478 26,514 24,735
Deferred taxes (1,535) (5,035) (2,250)
Gain on sale of invest-
ments in affiliates,
member loan receivables,
and properties, net (1,360) (32) (50) (172)
Reduction in fair value
of investment 7,280
(Increase) decrease in
assets:
Accounts and notes re-
ceivable, net (11,971) (17,173) (2,258) 5,853
Inventories (15,166) (5,804) (1,262) 6,621
Prepaid expenses (275) 1,554 4,859 (1,040)
Notes receivable (2,753) (700) (3,865) 13,687
Increase (decrease) in
liabilities:
Accounts payable 7,713 8,517 43,896 (29,797)
Accrued liabilities (1,438) 9,155 (6,798) 13,193
Patrons' excess deposits
and declared patronage
dividends 2,461 (3,065) 3,402 18
Long-term liabilities,
other 6,978 6,458 3,269 2,380
- -------------------------------------------------------------------------------
Net cash provided (util-
ized) by operating activ-
ities 9,479 (5,881) 51,306 20,092
- -------------------------------------------------------------------------------
Cash flows from investing
activities:
Purchase of properties (11,372) (1,141) (23,363) (23,355)
Investment in securities,
net (7,720) 200 (2,917) (6,783)
Proceeds from sales of
notes receivable 6,590 2,511
Proceeds from sales of
properties 82 81 674 7,438
Increase in other assets (3,024) (4,473) (7,970) (15,427)
Acquisition of net assets
from wholesale distribu-
tion companies* (8,954) 7,134 (428)
Acquisition of net assets
in retail store opera-
tions** 75 (2,334)
- -------------------------------------------------------------------------------
Net cash (utilized) pro-
vided by investing activ-
ities (24,323) 1,801 (31,493) (40,461)
- -------------------------------------------------------------------------------
Cash flows from financing
activities:
Additions to long-term
notes payable 20,500 114,000 38,600
Reduction of long-term
notes payable (139) (86,098) (26,248)
Additions to short-term
notes payable 109 81
Reduction of short-term
notes payable (1,593) (3,010) (7,531) (11,086)
Redemption of patronage
dividend certificates (172) (1,862)
Repurchase of shares from
members (4,441) (13,177) (976)
Increase (decrease) in
members' required depos-
its 303 1,230 (713) (7,166)
Issuance of shares to
members 4,308 56 8,872 6,330
- -------------------------------------------------------------------------------
Net cash provided (util-
ized) by financing activ-
ities 18,766 13,110 (26,515) 24,816
- -------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 3,922 9,030 (6,702) 4,447
Cash and cash equivalents
at beginning of year 4,105 8,027 17,057 10,355
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $8,027 $17,057 $ 10,355 $ 14,802
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
24
- -------------------------------------------------------------------------------
Unified Western Grocers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(dollars in thousands)
- ------------------------------------------------------------------------------------
Transition
Year ended Period ended Year ended Year ended
August 29, October 2, September 30, September 29,
1999 1999 2000 2001
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMA-
TION:
Cash paid during the
year for:
Interest $ 11,962 $ 2,426 $26,262 $26,124
Income taxes $ 1,673 $ 78
- ------------------------------------------------------------------------------------
*ACQUISITION OF NET AS-
SETS FROM WHOLESALE
DISTRIBUTION COMPANIES:
Working capital, other
than cash $ (6,292) $(62,814) $ (431)
Properties (1,442) (40,709) 850
Notes receivable and
other assets (1,220) (45,457) (2,217)
Goodwill - United Gro-
cers, Inc. (29,233) (2,452)
Goodwill - Central Food
Sales (428)
Long-term notes payable 119,429
Long-term liabilities,
other 17,485 4,250
--------
(41,299)
Total equity investment
in United Grocers,
Inc. 48,433
- ------------------------------------------------------------------------------------
Net cash effect due to
acquisition of net as-
sets from wholesale
distribution companies $ (8,954)(a) $ 7,134 (b) $ (428)(c)
- ------------------------------------------------------------------------------------
**ACQUISITION OF NET AS-
SETS IN RETAIL STORE
OPERATIONS:
Working capital, other
than cash $111,327 $ (800)
Properties (4,467) (600)
Notes receivable and
other long-term assets (2,681) (36)
Goodwill (23,354) (898)
Long-term liabilities,
other 1,883
Long-term notes payable 5,479
- ------------------------------------------------------------------------------------
(11,813) (2,334)
Previous investment in
retail store opera-
tions 11,888
- ------------------------------------------------------------------------------------
Net cash effect due to
acquisition of net
assets in retail
store operations $ 75 $(2,334)(d)
- ------------------------------------------------------------------------------------
(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.
(d) Acquisition of three retail stores operating under the "Apple Markets"
banner on June 22, 2001.
NONCASH TRANSACTIONS:
During the years ended September 30, 2000 and September 29, 2001, the Company
issued $3.2 million and $1.4 million, respectively of subordinated redemption
notes to repurchase Class B Shares from members.
During the year ended September 29, 2001, the Company exchanged 330 Class A
Shares (valued at $84,000) for equivalent Class B Shares in a non-cash
transaction. The Company established a trust for the purpose of facilitating
the transfer of shares between members.
The accompanying notes are an integral part of these statements.
25
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal year ended August 28, 1999, the transition period ended October 2,
1999, and fiscal years ended September 30, 2000 and September 29, 2001.
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"). 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 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 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.
26
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments:
The Company has classified all investments in non-convertible 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. Convertible bonds are classified as trading and carried at fair
market value with any changes recorded in net earnings (loss). 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 accumulated other comprehensive earnings (loss).
Capitalized Software Costs:
The Company capitalizes costs associated with the development of software for
internal use. Costs incurred in the planning and post implementation
activities are expensed as incurred.
Goodwill and Other Long Lived Assets:
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 and other long lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Management deems goodwill or long
lived assets to be impaired if the estimated expected future cash flows on an
undiscounted basis are less than the carrying amount. For purposes of review,
goodwill that arose in a transaction is included as part of the asset grouping
in determining recoverability. Estimates of expected future cash flows are
based on management's best estimates of anticipated operating results over the
remaining useful lives of the assets.
Included in the consolidated balance sheets at September 30, 2000 and
September 29, 2001 is goodwill totaling $55.7 million and $56.5 million net of
accumulated amortization of $1.9 million, and $3.7 million, respectively.
Derivative Instruments and Hedging Activity:
Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS Nos. 137 and 138, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Accounting for changes in the fair value of a
derivative depends on the intended use and resulting designation of the
derivative. For derivatives designated as hedges, changes in the fair value
are either offset against the change in fair value of the assets or
liabilities through earnings or recognized in other comprehensive
earnings/(loss) in the consolidated balance sheet until the hedged item is
recognized in earnings. The adoption of SFAS No. 133 resulted in a transition
adjustment of $1.1 million that was recorded as a cumulative-effect type
adjustment in other comprehensive earnings/(loss) to recognize the fair value
of derivatives that are designated as cash flow hedges.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as the risk-management objective and strategy for entering into
various hedge transactions. In this documentation, the Company identifies the
asset, liability, firm commitment, or forecasted transaction that has been
designated as a hedged item and indicates how the hedging instrument is
expected to hedge the risks related to the hedged item. The Company formally
measures effectiveness of its hedging relationships both at the hedge
inception and on an ongoing basis in accordance with its risk management
policy. The Company would discontinue hedge accounting prospectively if it is
determined that the derivative is no longer effective in offsetting changes in
the hedged item.
27
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unified makes limited use of derivative instruments, primarily to manage the
risks associated with interest rates of its debt agreement.
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.
Comprehensive Earnings (Loss):
During fiscal 1999, the Company adopted 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 accumulated other comprehensive earnings (loss), bypassing net earnings.
The balance and current period change for each component of comprehensive
earnings (loss) are summarized as follows:
- -------------------------------------------------------------------------------
Fair Value Net Unrealized Gain
Interest (Loss) On Appreciation Minimum Pension
Rate Collar (Depreciation) of Investments Liability Adjustment
- ----------------------------------------------------------------------------------------
Balance, August 29, 1998 $ 233 $ (56)
Current-period change (738) 56
- ----------------------------------------------------------------------------------------
Balance, August 28, 1999 (505) 0
Current-period change (54) 0
- ----------------------------------------------------------------------------------------
Balance, October 2, 1999 (559) 0
Current-period change 189 (364)
- ----------------------------------------------------------------------------------------
Balance, September 30,
2000 (370) (364)
Current-period change $(1,790) 555 364
- ----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29,
2001 $(1,790) $ 185 $ 0
- -------------------------------------------------------------------------------
The components of the change in net unrealized gains (losses) are as follows:
- -------------------------------------------------------------------------------
Transition
Year ended Period ended Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- ------------------------------------------------------------------------------
Unrealized holding (loss-
es) gains arising during
the period $(641) $(49) $253 $847
Less reclassification
adjustment for gains
included in net earnings 97 5 64 240
Conversion of convertible
debt securities from
available for sale to
trading (52)
- ------------------------------------------------------------------------------
NET UNREALIZED HOLDING
(LOSSES) GAINS $(738) $(54) $189 $555
- -------------------------------------------------------------------------------
28
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company entered into a five-year interest rate collar agreement during
February 1999 in relation to certain borrowings on its variable rate revolving
credit facility. The Company has designated the interest rate collar as a cash
flow hedge. Under the provisions of SFAS No. 133, the fair value of the collar
must be reflected in the Company's financial statements. On October 1, 2000,
the Company recognized the fair value of the collar, which totaled $1.2
million, as a cumulative effect of adopting SFAS No. 133 in other
comprehensive earnings (loss). Additionally, SFAS No. 133 requires that the
fair value of the collar be adjusted with the change in fair value being
recorded as an adjustment to other comprehensive earnings (loss). Due to
declining interest rates, the Company recorded an unrealized loss on valuation
of the collar of $3.0 million during fiscal year 2001.
The Company holds investments in various marketable securities and convertible
bonds. Prior to the adoption of SFAS No. 133, the Company classified its
convertible bonds as available for sale, with changes in fair value recorded
in other comprehensive earnings (loss). With the adoption of SFAS No. 133, the
convertible bonds were reclassified to trading securities, which resulted in
the Company recognizing gains of $52,000 at October 1, 2000. The $52,000 of
gains was comprised of $31,000 cumulative effect of a change in accounting
principle and a $21,000 reclassification of previously unrealized holding
gains. During the year ended September 29, 2001, the Company recorded losses
due to the changes in the fair value of the convertible bonds totaling $0.7
million.
Recently Issued Pronouncements:
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 was the quarter ending September 29, 2001. The implementation of SAB
No. 101 did not have a material impact on the Company's financial position or
its results of operations.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control. This statement was effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001 and is to be applied prospectively. The adoption of this
statement had no impact on the Company's consolidated financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. The statement further requires
separate recognition of intangible assets that meet one of two specified
criteria. The statement applies to all business combinations initiated after
June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired
shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but should be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying
amount. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. The Company will implement the pronouncement beginning in the first
quarter of fiscal year 2003. Existing goodwill will continue to be amortized
through the remainder of fiscal 2002 at which time amortization will cease and
the Company will perform a transitional goodwill impairment test. The Company
is currently evaluating the impact of the new accounting standards on existing
goodwill and other intangible assets. While the ultimate impact of the new
accounting standards has yet to be determined, goodwill amortization expense
for the fiscal year ended September 29, 2001 was $1.5 million.
29
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supercedes SFAS No. 121 on the same topic and the accounting and
certain reporting provisions of Accounting Principles Board ("APB") Opinion
No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a segment
of a business (as defined in that Opinion). This Statement also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 is effective for fiscal periods beginning
after December 15, 2001. The Company will implement the pronouncement
beginning in the first quarter of fiscal year 2003. The Company is currently
evaluating the impact of the new accounting standards on existing long-lived
assets.
2. PROPERTIES:
Properties stated at cost, are comprised of:
- -------------------------------------------------------------------------------
September 30, September 29,
2000 2001
- ---------------------------------------------------------------------------
Land $ 16,250 $ 16,250
Buildings and leasehold improvements 114,410 123,914
Equipment 131,518 136,213
Equipment under capital leases 6,364 --
- ---------------------------------------------------------------------------
268,542 276,377
Less accumulated depreciation and amortization 145,168 153,720
- ---------------------------------------------------------------------------
$123,374 $122,657
- -------------------------------------------------------------------------------
3. INVESTMENTS:
The amortized cost and fair value of investments are as follows:
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2000 Cost Gains Losses Value
- -------------------------------------------------------------------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $18,645 $ 59 $ 469 $18,235
Corporate securities 5,544 380 229 5,695
Mortgage backed securities 8,655 33 173 8,515
- -------------------------------------------------------------------------
Sub-total 32,844 472 871 32,445
Redeemable preferred stock 1,611 113 158 1,566
Equity securities 9,572 7 5 9,574
- -------------------------------------------------------------------------
$44,027 $592 $1,034 $43,585
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 29, 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $22,929 $662 $ 43 $23,548
Corporate securities 10,330 206 3,719 6,817
- -------------------------------------------------------------------------
Sub-total 33,259 868 3,762 30,365
Redeemable preferred stock 9,938 46 394 9,590
Equity securities 9,028 -- -- 9,028
- -------------------------------------------------------------------------
$52,225 $914 $4,156 $48,983
- -------------------------------------------------------------------------------
30
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed maturity investments are due as follows:
- -------------------------------------------------------------------------------
Amortized Fair
September 30, 2000 Cost Value
- ----------------------------------------------------------
Fixed Maturities Available for Sale:
Due after one year through five years $12,076 $11,994
Due after five years through ten years 6,399 6,372
Due after ten years 14,369 14,079
- ----------------------------------------------------------
$32,844 $32,445
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Amortized Fair
September 29, 2001 Cost Value
- ----------------------------------------------------------
Fixed Maturities Available for Sale:
Due after one year through five years $ 7,308 $ 4,450
Due after five years through ten years 4,244 4,229
Due after ten years 21,707 21,686
- ----------------------------------------------------------
$33,259 $30,365
- -------------------------------------------------------------------------------
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.
Net investment income is summarized as follows:
- -------------------------------------------------------------------------------
Transition
Period
Year Ended Ended Year Ended Year Ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- ----------------------------------------------------------------------------
Fixed maturities $2,280 $129 $2,292 $2,229
Preferred stock 115 (21) 305 259
Equity securities (18) -- 125 3
Cash and cash equivalents 131 17 294 347
- ----------------------------------------------------------------------------
2,508 125 3,016 2,838
Less investment expenses 232 20 218 225
- ----------------------------------------------------------------------------
$2,276 $105 $2,798 $2,613
- -------------------------------------------------------------------------------
Investments carried at fair values of $23.6 million and $27.1 million at
September 30, 2000 and September 29, 2001, 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
$5.6 million and $5.4 million at September 30, 2000 and September 29, 2001,
respectively. Western Family Holding Company is a cooperative located in
Oregon from which the Company purchases food and related general merchandise
products. The investment represents approximately a 22% and 17% ownership
interest at September 30, 2000 and September 29, 2001. The investment is
accounted for by the equity method of accounting.
On December 19, 2000, the Company purchased 80,000 shares of preferred stock
of C&K Market, Inc. ("C&K") for $8.0 million. Douglas H. Nidiffer, a director
of the Company, is a shareholder, director and officer of C&K. In connection
with the stock purchase transaction, C&K executed a ten-year supply agreement
and the shareholders of C&K granted to the Company a put with respect to the
preferred stock, exercisable upon occurrence of designated events including
the nonpayment of permitted dividends or mandatory redemption payments. The
preferred stock bears a 9.5% cumulative dividend rate, with cash payment of
31
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends deferred until November 15, 2002, and then payable only if permitted
by applicable loan agreements. The preferred stock is convertible into 15% of
the common stock of C&K under certain circumstances.
At August 28, 1999, the Company held investments in preferred stock ($1.0
million), a note receivable ($5.3 million), and was owed trade receivables
($1.0 million) 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.
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 APB 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:
- --------------------------------------------------
Current assets $148,520
Properties 39,859
Other 47,674
- --------------------------------------------------
Total assets 236,053
- --------------------------------------------------
Accounts payable 58,546
Other liabilities 37,709
Notes payable 123,050
- --------------------------------------------------
Total liabilities 219,305
- --------------------------------------------------
Net 16,748
Total investment in United Grocers, Inc. 48,433
- --------------------------------------------------
Goodwill $ 31,685
- --------------------------------------------------
As a result of the Merger, the Company established reserves for the closure of
various facilities, involuntary employee terminations and lease termination
costs. 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.
Fiscal 2000
- -------------------------------------------------------------------------------------
October 2, Charges to Charges to Fair Value September 30,
Description 1999 reserve earnings Adjustments 2000
- -------------------------------------------------------------------------------------
Facility closure costs $ (7,741) $2,977 $ 230 $ (4,534)
Severance costs (1,250) 235 1,015 --
Lease buyout reserve (2,100) -- 2,100 --
- -------------------------------------------------------------------------------------
TOTAL $(11,091) $3,212 $3,345 $(4,534)
- -------------------------------------------------------------------------------------
Fiscal 2001
- -------------------------------------------------------------------------------------
September 30, Charges to Charges to Fair Value September 29,
Description 2000 reserve earnings Adjustments 2001
- -------------------------------------------------------------------------------------
Facility closure costs $ (4,534) $ 58 $(302) -- $ (4,778)
- -------------------------------------------------------------------------------------
TOTAL $ (4,534) $ 58 $(302) -- $ (4,778)
- -------------------------------------------------------------------------------------
32
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 1999 and unaudited
information for United for that period. 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, 1998.
- ------------------------------------------------------------------------
Year ended
August 28,
1999
- ------------------------------------------------------------------------
Sales $2,932,521
Earnings (loss) before patronage dividends and income taxes $ (6,902)
Patronage dividends $ 10,501
Net earnings (loss) $ (15,292)
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, 1998, 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 APB 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.
5. ACCRUED LIABILITIES:
Accrued liabilities are summarized as follows:
September 30, September 29,
2000 2001
- -----------------------------------------------------------------------------
Insurance loss reserves and other insurance lia-
bilities $35,008 $45,667
Accrued wages and related taxes 18,506 18,937
Accrued income and other taxes payable 5,996 5,950
Other accrued liabilities 17,748 20,388
- -----------------------------------------------------------------------------
$77,258 $90,942
- -----------------------------------------------------------------------------
33
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE:
Notes payable are summarized as follows:
September 30, September 29,
2000 2001
- -------------------------------------------------------------------------------
Senior secured notes expiring April 1, 2008, in-
terest payable monthly (interest rate of 7.72% at
September 30, 2000 and 7.72% at September 29,
2001) $854 principal and interest through April
1, 2008, remaining $36.0 million due April 1,
2008. $ 78,283 $ 73,929
Senior secured notes expiring October 1, 2009,
payable monthly, interest only (interest rate of
8.71% at September 30, 2000 and 8.71% at Septem-
ber 29, 2001) 40,000 40,000
Secured notes expiring October 31, 2004, interest
rate 6.00% as of September 29, 2001. -- 7,000
Notes to banks under a $200 million secured re-
volving credit agreement expiring October 1,
2004, interest rate at the agent's base rate or
adjusted LIBOR (6.71% plus 1.75% at September 30,
2000 and 3.73% plus 2.00 at September 29, 2001) 116,000 147,600
Capital stock subordinated residual notes, payable
in twenty quarterly installments plus interest at
a variable interest rate based on the current
capital investment note rate 3,626 2,286
Redemption subordinated notes, payable in twenty
quarterly installments plus interest at 6.0%. 2,922 4,346
Capital investment notes (subordinated), interest
at 7.0%, maturity dates through 2005 28,640 23,615
Other notes payable 518 --
- -------------------------------------------------------------------------------
Total notes payable 269,989 298,776
Less portion due within one year 10,760 10,535
- -------------------------------------------------------------------------------
$259,229 $288,241
- -------------------------------------------------------------------------------
Maturities of notes payable as of September 29, 2001 are:
Fiscal
year
- --------------------
2002 10,535
2003 9,888
2004 164,355
2005 9,287
2006 11,791
Thereafter 92,920
- --------------------
$298,776
- --------------------
At September 29, 2001, Unified had $73.9 million and $40.0 million outstanding
in senior secured notes to certain insurance companies and pension funds under
a Note Purchase Agreement dated September 29, 1999, (as amended, the "Senior
Note Agreement").
Unified also has a $200 million secured revolving credit facility with a group
of banks. The revolving credit agreement is secured, expires on October 1,
2004 and bears interest at either the bank's base rate plus .75% or at an
adjusted LIBOR rate plus a margin ranging from 2.00% to 3.00% 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.
Subsequent to year end, Unified amended the Senior Note Agreement and the
revolving credit facility. For the Senior Note Agreement, the amendment
modified two financial covenants, (consolidated tangible net worth and fixed
charge coverage). The amendment assumes that improvements will be made in
future performance
34
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with respect to both ratios. In addition, the interest rates on both senior
secured notes have increased by .25% until such time as the consolidated
tangible net worth increases to $80 million after excluding future
consolidated net income generated after September 29, 2001. The amendment
related to the revolving credit facility changed the requirements of certain
financial covenants at September 29, 2001 and through fiscal 2002 with respect
to minimum tangible net worth, the fixed charge coverage ratio and the ratio
of funded debt to earnings before interest, taxes, depreciation and
amortization, and patronage dividends ("EBITDAP"). At its December meeting,
the Board of Directors adopted a plan for Equity Enhancement--Fiscal Year
2002, and, as required by the amendment, provided the adopted plan to the
lenders. The amended covenants in the revolving credit facility require
improved performance in future periods with respect to minimum adjusted
tangible net worth, the fixed charge coverage ratio and EBITDAP. The amendment
also increased borrowing costs to either: (i) LIBOR plus an increased
applicable margin (the increase is included above) based on funded debt to
operating cash flow or (ii) the higher of the lender's base rate or 0.50%
above the lender's borrowing rate plus 0.75%.
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 Note Agreement 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. In the event Unified
achieves designated investment grade ratings for a period of not less than one
year, the interest rate on the $73.9 million senior secured notes would be
reduced by 0.50% and the securitization of all the senior secured 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
and 3.73% at September 29, 2001.
Unified's Capital Investment Notes are serialized, have a stated interest rate
of 5%, currently bear interest at 7%, and mature ten years from the date of
issuance. The notes are subordinated and have maturity dates through 2005. The
notes originated with the former United entity and were assumed as part of the
Merger. The Board of Directors at its discretion may change the interest rate
above the stated rate of 5%.
A $10.0 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. The funding for loans made by GCC is provided by GCC's cash
reserves as well as the $10.0 million credit agreement. The credit agreement
as amended and restated has a maturity date of October 31, 2004. Amounts
advanced under the credit agreement bear interest at prime (6.0% at September
29, 2001) or Eurodollar (2.95% at September 29, 2001) plus 2.50%. No amounts
were outstanding under this credit line at September 30, 2000. The outstanding
balance was $7.0 million at September 29, 2001. The unused portion of this
credit line is subject to commitment fees of 0.125%.
Member loan receivables are periodically sold by GCC to a bank through a loan
purchase agreement. This loan purchase agreement, as amended and restated,
extends through October 31, 2004. Total loan purchases under the agreement are
limited to a total aggregate principal outstanding of $70.0 million,
previously $50.0 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 thirty days prior written notice. There is no
maximum limitation on the loan purchases pursuant to the additional loan
purchase agreement. At September 30, 2000 and September 29, 2001, the
aggregate principal outstanding balance of loans purchased by the banks was
approximately $17.3 million and $16.2 million, respectively. The loan sales
are subject to limited recourse provisions.
35
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
United Resources ("UR"), a subsidiary of the Company, had an agreement with a
bank whereby it sold certain of its notes receivable from members subject to
limited recourse provision. At September 30, 2000 the balance of such sold
notes that were outstanding and subject to recourse provision was
approximately $11.0 million. The UR obligations with respect to these notes
have been transferred to GCC and are included in the September 29, 2001 loan
sale balance disclosed above.
The Company has also guaranteed loans made directly to members by third-party
lenders. At September 30, 2000 and September 29, 2001 the maximum principal
amount of these guarantees was $0.7 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.
The redemption subordinated notes represent the remaining obligation to former
United shareholders which owned excess Class B Shares that were received in
the Merger. Payment of principal and interest are currently restricted by
provisions of the California General Corporation Law including section 500.
See Note 10 for a complete description.
7. LEASES:
The Company has entered into operating leases for certain warehouse,
transportation and data processing equipment. The Company has also entered
into operating leases for approximately 73 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, at September 29, 2001, the Company was contingently liable with
respect to 16 lease guarantees for certain member-patrons. The total current
annual rent on locations underlying such lease guarantees on that date was
approximately $5.8 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 $18.4 million, $2.3 million, $49.4 million and $38.5 million
in the fiscal year ended August 28, 1999, the transition period ended October
2, 1999 and the fiscal years ended September 30, 2000 and September 29, 2001,
respectively. Sublease rental income was $4.5 million, $0.4 million, $13.2
million and $13.6 million in fiscal year August 28, 1999, the transition
period ended October 2, 1999 and the fiscal years ended September 30, 2000 and
September 29, 2001, respectively.
36
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Minimum rentals on properties leased by the Company, including properties
subleased to third parties, as of September 29, 2001 are summarized as
follows:
Operating
Fiscal year Leases
- -----------------------------------------------------------------------------
2002 $ 36,773
2003 32,235
2004 28,374
2005 23,585
2006 19,083
Thereafter 95,074
- -----------------------------------------------------------------------------
Total minimum lease payments $235,124
- -----------------------------------------------------------------------------
Future minimum sublease rental income on operating leases as of September 29,
2001 is summarized as follows:
Fiscal year
- -----------------------------------------------------------------------------
2002 $ 14,234
2003 10,870
2004 9,770
2005 8,789
2006 7,541
Thereafter 45,669
- -----------------------------------------------------------------------------
$ 96,873
- -----------------------------------------------------------------------------
8. INCOME TAXES:
The significant components of income tax expense (benefit) are summarized as
follows:
Transition
Year Ended Period Year Ended Year Ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Federal:
Current $ 1,299 -- -- $ (39)
Deferred (1,077) $(2,018) $(4,379) (2,711)
- -------------------------------------------------------------------------------
Total federal 222 (2,018) (4,379) (2,750)
- -------------------------------------------------------------------------------
State:
Current 300 -- -- (211)
Deferred (458) (575) (656) 461
- -------------------------------------------------------------------------------
Total state (158) (575) (656) 250
- -------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENE-
FIT) $ 64 $(2,593) $(5,035) $(2,500)
- -------------------------------------------------------------------------------
37
Unified Western Grocers, Inc. and Subsidiaries
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:
September 30, September 29,
2000 2001
- -----------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 5,757 $ 5,573
Accrued benefits 19,151 21,563
Deferred income 1,404 1,613
Lease reserve 6,092 5,970
Store reserve and facility consolidation 1,909 1,852
Insurance reserves 2,219 2,989
Investment valuation adjustment 642 478
Accrued environmental liabilities 292 292
Accrued rent 740 794
Asset impairment adjustment 849 849
Alternative minimum tax and other credits 1,923 1,923
Net operating loss carryforwards 14,488 12,612
Other 3,061 4,358
- -----------------------------------------------------------------------
Total gross deferred tax assets 58,527 60,866
Less valuation allowance 6,450 9,150
- -----------------------------------------------------------------------
Deferred tax assets $52,077 $51,716
- -----------------------------------------------------------------------
Deferred tax liabilities:
Properties $11,565 $10,045
Market value adjustment 6,718 5,777
Accrued pension cost 3,604 4,063
Capitalized software 4,503 7,835
Intangible assets 987 987
Deferred state taxes 1,408 311
Deferred gain on installment method 383 356
Other 346 385
- -----------------------------------------------------------------------
Total gross deferred tax liabilities 29,514 29,759
- -----------------------------------------------------------------------
NET DEFERRED TAX ASSET $22,563 $21,957
- -------------------------------------------------------------------------------
Net deferred tax assets of $14.2 million and $10.0 million are included in
deferred taxes, current and $8.4 million and $12.0 million in other assets on
the Company's accompanying consolidated balance sheets as of September 30,
2000 and September 29, 2001, respectively.
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The remaining balance of the
net deferred tax assets should be realized through future operating results,
the reversal of taxable temporary differences, and available tax planning
strategies.
38
Unified Western Grocers, Inc. and Subsidiaries
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:
Transition
Year ended Period Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Federal income tax expense
(benefit) at the statutory
rate $919 $ (3,353) $ (5,576) $ (5,337)
State income taxes, net of
federal income tax benefit 158 (575) (656) (136)
Insurance subsidiary not
recognized for state taxes (41) 53 122 60
Tax exempt income (94) (6) (80) (47)
(Reduction) increase in val-
uation allowance (820) 914 -- 2,700
Non-deductible equity trans-
actions -- 358 -- --
Non-deductible goodwill am-
ortization -- -- 593 471
Other, net (58) 16 562 (211)
- -------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR IN-
COME TAXES $ 64 $ (2,593) $ (5,035) $ (2,500)
- -------------------------------------------------------------------------------
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 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 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 29, 2001 and
their respective terms:
Aggregate Annual
Fiscal Principal Interest Maturity
Year Amount Rate Date
- -----------------------------------
1994 $2,219 8% 12/15/01
1995 $1,886 7% 12/15/02
Unified set off approximately $60,000 in Patronage Certificates against a
portion of amounts owed to the Company by the holders in fiscal 2000 and
$28,000 in fiscal 2001.
Patronage Certificates have not been issued subsequent to fiscal 1995.
However, the program has not been discontinued, and the Board of Directors has
authorized the issuance of Patronage Certificates in connection with patronage
dividends payable in fiscal 2002 and future years.
The Board of Directors adopted an equity enhancement plan for fiscal year
2002. As part of that plan the patronage dividend payment policy has been
modified as follows: net earnings, from business transacted on a patronage
basis in the Cooperative Division with member and associate patrons shall be
distributed on a patronage basis based upon the volume of business transacted
in the Cooperative Division by written notices of allocation as defined in
Section 1388 of the Internal Revenue Code in the form of:
. Shares of Class B Common Stock to the extent there exists any deficiency
of a member-patron in meeting the requirements for holding Class B Shares
specified in the Bylaws of the Company;
. Subordinated Patronage Dividend Certificates ("Certificates") to the
extent of the balance of such patronage dividends for member patrons,
such Certificates to have a minimum term of five years, an interest rate
equal to an appropriate benchmark interest rate as such rate exists on
the issuance date of the Certificates, such rate to be adjusted annually
thereafter to be equal to the same
39
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
benchmark interest rate on each anniversary of the date of issuance of the
Certificates, with such other terms and conditions as shall be recommended
by management and approved by the Board of Directors, which terms may
include provision for conversion of Certificates into Class B Shares for
member patrons on a basis to be determined.
Such patronage dividends shall be in the form of non-qualified written notices
of allocation and no cash dividends shall be paid.
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.
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. 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:
Redemption
Value at
September
Class B Shares Tendered Redeemed Remaining 29, 2001
- ------------------------------------------------------------------------------
Fiscal year 1999 25,177 19,007 81,802 $14,012
The transition period ended October 2,
1999 1,233 71,310 11,725 $ 2,008
Fiscal year 2000 25,842 12,645 24,922 $ 4,269
Fiscal year 2001 13,248 5,605 32,565 $ 5,578
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. The shares redeemed during fiscal year 2000 and 2001 represent the
excess Class B Shares owned by former United shareholders that were received
in the Merger and were tendered for redemption prior to January 29, 2001. The
purchase price is evidenced by promissory notes of Unified.
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 its
shares. Section 500 permits such repurchase and note payments only when
retained earnings calculated in
40
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 had 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 Inc. 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 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 65,838, and 69,125 were
outstanding at September 30, 2000 and September 29, 2001, respectively. There
are 2,000,000 authorized Class B Shares, of which 420,051 and 447,289 were
outstanding at September 30, 2000 and September 29, 2001, respectively. In
fiscal 2002, the Board of Directors adopted an equity enhancement plan (see
Note 9).
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 18 were outstanding as of
September 29, 2001. 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 benefit 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.
These two defined benefit pension plans will be combined into one plan as of
January 1, 2002 with a cash balance plan design. Under this plan design,
participants will be credited with an annual accrual based on years of service
with the Company. This plan balance will then receive an annual interest
credit, currently tied to the 30-year Treasury rate that is in effect the
previous November. On retirement, participants will receive a lifetime annuity
based on the total cash balance in their account.
41
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (benefit) for the benefit plans totaled $1.4 million, $3.5
million, $0.8 million and $(0.1) million in fiscal year ended August 28, 1999,
the transition period ended October 2, 1999, and fiscal years ended September
30, 2000 and September 29, 2001, respectively.
The components of net periodic costs for the benefit plans and ESPP II consist
of the following:
Benefit Plans
- -------------------------------------------------------------------------------
Transition
Year ended Period Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Service cost $1,926 $ 187 $2,768 $ 2,143
Interest cost 2,927 287 5,046 4,656
Expected return on plan as-
sets (3,733) (373) (6,846) (7,072)
Amortization of prior serv-
ice cost (39) (4) (35) (34)
Recognized actuarial loss
(gain) -- -- 120 (885)
Amortization of transition
asset (309) (30) (280) (199)
Effect of curtailments, set-
tlements, special benefits -- 3,410 (715) --
- -------------------------------------------------------------------------------
NET PERIODIC COST (BENEFIT) $ 772 $3,477 $ 58 $(1,391)
- -------------------------------------------------------------------------------
ESPP II
- ------------------------------------------------------------------------------
Transition
Year ended Period Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- ------------------------------------------------------------------------------
Service cost $150 $24 $252 $ 529
Interest cost 301 32 334 479
Amortization of prior serv-
ice cost 141 16 171 206
Recognized actuarial loss -- -- -- 36
- ------------------------------------------------------------------------------
NET PERIODIC COST (BENEFIT) $592 $72 $757 $1,250
- -------------------------------------------------------------------------------
The following table sets forth the change in benefit obligation for the
benefit plans and ESPP II:
Benefit Plans ESPP II
- ------------------------------------------------------------------------------
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
- ------------------------------------------------------------------------------
Benefit obligation at
beginning of year $72,899 $58,351 $4,775 $5,839
Service cost 2,768 2,143 252 529
Interest cost 5,046 4,656 334 479
Plan amendments 3,430 -- -- --
Actuarial loss (gain) (10,284) 2,706 996 144
Benefits paid (15,508) (5,313) (518) (418)
- ------------------------------------------------------------------------------
BENEFIT OBLIGATION AT
END OF YEAR $58,351 $62,543 $5,839 $6,573
- -------------------------------------------------------------------------------
42
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the change in plan assets for the benefit plans
and ESPP II:
Benefit Plans ESPP II
- ------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
- ------------------------------------------------------------------------------------
Fair value of plan
assets at beginning of
period $ 81,392 $79,345 -- --
Actual return on plan
assets 13,462 (8,524) -- --
Employer contribution -- -- $ 518 $ 418
Benefits paid (15,509) (5,313) (518) (418)
- ------------------------------------------------------------------------------------
FAIR VALUE OF PLAN AS-
SETS AT END OF PERIOD $ 79,345 $65,508 $ 0 $ 0
- ------------------------------------------------------------------------------------
The accrued pension and other benefit costs recognized in the accompanying
consolidated balance sheets are computed as follows:
Benefit Plans ESPP II
- --------------------------------------------------------------------------------------
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
- --------------------------------------------------------------------------------------
Funded status at June 1
overfunded/(underfunded) $ 20,994 $2,965 $(5,839) $(6,573)
Unrecognized actuarial
(gain)/loss (14,890) 4,712 990 339
Unrecognized prior serv-
ice cost (129) (95) 2,306 2,667
Unrecognized transition
asset (200) -- -- --
Effect of curtailments,
settlements, special
benefits -- -- -- --
Fourth quarter net peri-
odic pension (expense)
income 415 -- (192) 49
- --------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 6,190 $7,582 $(2,735) $(3,518)
- --------------------------------------------------------------------------------------
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 $364 and
$0 is reported as a separate component of shareholders' equity at September
30, 2000 and September 29, 2001, respectively.
The weighted average assumptions used in computing the preceding information
as of June 1 were as follows:
- --------------------------------------------------------------
Benefit Plan
1999 2000 2001
- --------------------------------------------------------------
Discount rate for benefit obligation 7.00% 7.75% 7.50%
Discount rate for net periodic benefit cost 7.00% 7.00% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 5.50% 5.50% 5.50%
- --------------------------------------------------------------
ESPP II
1999 2000 2001
- --------------------------------------------------------------
Discount rate for benefit obligation 7.00% 7.75% 7.50%
Discount rate for net periodic benefit cost 7.00% 7.00% 7.75%
Expected return on plan assets NA NA NA
Rate of compensation increase 4.00% 4.00% 4.00%
The Company also made contributions of $6.6 million, $0.5 million, $11.1
million and $11.1 million in fiscal year ended August 28, 1999, the transition
period ended October 2, 1999, and the fiscal years ended
43
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
September 30, 2000 and September 29, 2001, 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.
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 nonunion 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.
As of January 1, 2002, all Company employees will be moved into the existing
SSP already in place for California employees. Oregon nonunion employees will
become 100% vested in their plan balances from the Special 401(k) Savings Plan
and begin to receive Company matching contributions as outlined in the
existing SSP document.
The Company contributed approximately $1.9 million, $0.1 million, $2.4 million
and $2.4 million related to its 401 (k) savings plans in the fiscal year ended
August 28, 1999, the transition period ended October 2, 1999 and the fiscal
years ended September 30, 2000 and September 29, 2001, 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 and 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. Additionally, certain
eligible union and nonunion employees have separate plans providing a lump-sum
payout for unused days in the sick leave bank. The post retirement medical
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 nonunion
employees in Oregon participate in a postretirement benefit plan providing
medical, dental, and vision care benefits. The plans are unfunded.
44
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net periodic benefit cost consist of the following:
- -------------------------------------------------------------------------------
Transition
Year ended Period ended Year ended Year ended
August 28, October 2, September 30, September 29,
1999 1999 2000 2001
- -------------------------------------------------------------------------------
Service cost $1,055 $ 112 $1,433 $1,391
Interest cost 2,345 241 3,140 3,690
Amortization of transition
obligation 1,124 108 1,100 1,093
Recognized actuarial loss 75 12 86 89
Curtailment cost -- 2,580 -- --
- -------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $4,599 $3,053 $5,759 $6,263
- -------------------------------------------------------------------------------
The change in the benefit obligations consist of the following:
- ----------------------------------------------------------------------
September 30, September 29,
2000 2001
- ----------------------------------------------------------------------
Benefit obligation at beginning of year $43,025 $ 47,642
Service cost 1,433 1,391
Interest cost 3,140 3,690
Actuarial loss (gain) 2,098 (10,846)
Benefits paid (2,054) (2,324)
Merger of United retirement plan
- ----------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $47,642 $ 39,553
- ----------------------------------------------------------------------
The change in the plan assets during the year is:
- -----------------------------------------------------------------------------
September 30, September 29,
2000 2001
- -----------------------------------------------------------------------------
Fair value of plan assets at beginning of year -- --
Employer contribution $ 2,054 $ 2,324
Benefits paid (2,054) (2,324)
- -----------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 0 $ 0
- -----------------------------------------------------------------------------
The funded status of the plans is:
- --------------------------------------------------------------------------
September 30, September 29,
2000 2001
- --------------------------------------------------------------------------
Funded status at June 1 (underfunded) $(47,642) $(39,553)
Unrecognized actuarial (gain) loss 4,620 (7,622)
Unrecognized transition obligation 14,096 12,996
Fourth quarter contribution 446 429
Fourth quarter net periodic pension expense (1,315) --
- --------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $(29,795) $(33,750)
- --------------------------------------------------------------------------
The weighted-average assumptions as of June 1 are:
- --------------------------------------------------------------
1999 2000 2001
- --------------------------------------------------------------
Discount rate for benefit obligation 7.00% 7.75% 7.50%
Discount rate for net periodic benefit cost 7.00% 7.00% 7.75%
Rate of compensation increase 5.50% 5.50% 5.50%
45
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For measurement purposes, a 7.00% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal 2002; the rate was
assumed to decrease by 1/2% annually until reaching 5.00% in fiscal 2006 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 29, 2001 by $4.5 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 29, 2001 by $3.8 million and
the aggregate benefit cost for the year then ended by $0.5 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 $0.1 million in
fiscal 1999, $7,000 in the transition period ended October 2, 1999, $1.2
million in fiscal 2000 and $1.5 million in fiscal 2001.
13. CONTINGENCIES:
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 Foundation has filed an
action against the Company and others asserting patent infringement and
seeking damages in unstated amounts. The Company and the Foundation have
reached an agreement to settle the matter, subject only to final documentation
of the agreement at an amount that will not exceed the amounts which Unified
has reserved. The Company expects to complete documentation of the agreement
during the first quarter of fiscal 2002.
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 has entered into a
consent decree that, subject to final approval of the court with jurisdiction
over the matter, will resolve the matter at an amount that will not exceed the
amounts which Unified has reserved.
14. SEGMENT INFORMATION:
Unified is a grocery wholesaler serving supermarket operators in California,
Oregon, Washington, western Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and
various foreign countries in the South Pacific and elsewhere. Unified sells a
wide variety of products to its customers, including dry grocery, frozen food,
deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general
merchandise products. Unified through a subsidiary, also operates a limited
number of retail stores in California, Oregon and Washington. Unified, also
provides services to its patrons, including finance, insurance, store design,
security, payroll, real estate and information technology. Products and
services available to patrons may differ depending upon location.
Based on the information monitored by the Company's operating decision makers
to manage the business, the Company has identified two reportable segments:
- -- 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.
46
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -- The retail segment includes the results of operations of Divestiture
Stores, SavMax, Thriftway and Apple Markets.
The "all other" category includes the aggregation of finance, insurance and
other services provided to a common customer base, none of which individually
meets the quantitative thresholds of a reportable segment.
Information about the Company's operations by operating segment is as follows:
- -------------------------------------------------------------------------------
Transition
Year Ended Period Year Ended Year Ended
August 28, October 2, September 30, September 29,
1999 Ended 1999 2000 2001
- ------------------------------------------------------------------------------
Net sales
Wholesale distribution $1,822,382 $208,279 $2,960,883 $2,824,015
Retail 74,896 9,810 206,585 159,270
All other 37,179 3,159 47,135 47,714
Intersegment elimination (40,934) (9,615) (147,208) (101,526)
- ------------------------------------------------------------------------------
TOTAL NET SALES $1,893,523 $211,633 $3,067,395 $2,929,473
- ------------------------------------------------------------------------------
Operating income (loss)
Wholesale distribution $ 33,638 $ (499) $ 43,866 $ 39,540
Retail 493 (24) (13,919) (13,013)
All other 458 (626) (2,042) 864
- ------------------------------------------------------------------------------
Total operating income
(loss) 34,589 (1,149) 27,905 27,391
Interest expense (11,911) (1,495) (28,880) (28,124)
Other income (expense),
net (5,780) (7,218) -- --
Patronage dividends (14,195) -- (15,426) (14,934)
- ------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE
INCOME TAXES AND CHANGE
IN ACCOUNTING PRINCIPLE $ 2,703 $ (9,862) $ (16,401) $ (15,667)
- ------------------------------------------------------------------------------
Depreciation and amortiza-
tion
Wholesale distribution $ 15,690 $2,328 $24,137 $22,382
Retail 828 109 1,684 1,890
All other 388 41 693 463
- ------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AM-
ORTIZATION $ 16,906 $ 2,478 $ 26,514 $ 24,735
- ------------------------------------------------------------------------------
Capital expenditures
Wholesale distribution $ 11,756 $ 40,561 $ 17,505 $ 17,985
Retail 4,778 146 5,595 4,858
All other 747 1,143 263 512
- ------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 17,281 $ 41,850 $ 23,363 $ 23,355
- ------------------------------------------------------------------------------
Identifiable assets
Wholesale distribution $ 336,635 $618,311 $ 581,453 $ 602,140
Retail 42,997 45,690 46,690 56,078
All other 71,503 89,512 137,707 104,067
- ------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS $ 451,135 $753,513 $ 765,850 $ 762,285
- ------------------------------------------------------------------------------
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.
47
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 28%, 7% and 28%, and 7% and 29%, of net sales for the
fiscal years ended August 28, 1999, September 30, 2000 and September 29, 2001,
respectively. In addition, Unified's 10 largest credit customers accounted for
approximately 30% and 27% of total accounts receivable at September 30, 2000
and September 29, 2001, respectively.
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, Subordinated patronage dividend certificates and Interest rate
collar agreement:
The fair values for notes payable, 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 value of variable interest
rate notes payable approximates their carrying value at September 30, 2000 and
September 29, 2001, respectively. The fair value of fixed rate notes payable
was $142 million and $156 million compared to their carrying value of $150
million and $142 million at September 30, 2000 and September 29, 2001,
respectively. The fair value for patronage dividend certificates approximated
their carrying value at September 30, 2000 and September 29, 2001. However, due
to declining interest rates, the Company recorded a negative fair value of
$1.8 million on the interest collar agreement at September 29, 2001.
The methods and assumptions used to estimate the fair values of the Company's
financial instruments at September 30, 2000 and September 29, 2001 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.
48
Unified Western Grocers, Inc. and Subsidiaries
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 29, 2001 to members affiliated with
directors of the Company:
- -----------------------------------------
Aggregate
Loan
Balance at
September 29, Maturity
DIRECTOR 2001 Date
- -----------------------------------------
Darioush Khaledi $12,482 2002-2005
David Bennett 2,000 2003
Doug Nidiffer 783 2009
Jay McCormick 328 2001-2005
Edmund K. Davis 31 2001
Mimi R. Song 349 2002
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, as
proposed to be amended, will be payable over a period of five years and will
be secured by real property owned by Lawndale. 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 UR are periodically sold to banks, subject
to limited recourse provisions. At September 29, 2001, the principal balances
of loans to members affiliated with directors of the Company that were sold
with recourse were as follows:
- ---------------------------------------
Aggregate
Loan
Balance at
September 29, Maturity
DIRECTOR 2001 Date
- ---------------------------------------
Peter J. O'Neil $993 2009
The Company provides loan guarantees to its members. GCC has guaranteed 10% of
the principal amount of certain third-party loans to KV and KV Property
Company of which director Darioush Khaledi is an affiliate. The maximum amount
of this guarantee is $0.7 million. At September 29, 2001, the principal amount
of this guarantee was $0.3 million.
GCC has guaranteed 10% of the principal amount of certain third-party loans to
companies owned by director Michael A. Provenzano, Jr. The maximum amount of
this guarantee is $0.6 million. At September 29, 2001, the guaranteed loan
amounts totaled $0.5 million.
49
Unified Western Grocers, Inc. and Subsidiaries
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 29, 2001 as follows:
- ------------------------------------------------------
No. Of Total Current Expiration
DIRECTOR Stores Annual Rent Date(s)
- ------------------------------------------------------
Darioush Khaledi 5 $1,415 2002-2011
Edmund K. Davis 1 1,560 2010
Michael A. Provenzano 2 351 2016-2017
Richard L. Wright 1 264 2007
Mimi R. Song 1 240 2020
David Bennett 1 193 2004
John Berberian 2 310 2006-2007
Mark Kidd 1 121 2008
James R. Stump 1 36 2003
Sale and Purchase of Assets
The Company has signed an agreement with Supercenter Concepts, of which
director Mimi R. Song is affiliated, to simultaneously sell certain real
property and enter into a seven year supply agreement.
Other Leases:
The Company leases its produce warehouse to Joe Notrica, Inc., of 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 $24,000.
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 Bennett, Davis, Khaledi, Kidd, McCormack, Nidiffer,
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 2010, 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 $3.0 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 and purchased the shares for $4.5 million, payable in cash and
in an interest-bearing note. 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 $0.9 million 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.
On December 19, 2000, the Company purchased 80,000 shares of preferred stock
of C&K Market, Inc. ("C&K") for $8.0 million. Douglas H. Nidiffer, a director
of the Company, is a shareholder, director and officer of C&K. In connection
with the stock purchase transaction, C&K executed a ten-year supply agreement
and the shareholders of C&K granted to the Company a put with respect to the
preferred stock, exercisable
50
Unified Western Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
upon occurrence of designated events including the nonpayment of permitted
dividends or mandatory redemption payments. The preferred stock bears a 9.5%
cumulative dividend rate, with cash payment of dividends deferred until
November 15, 2002, and then payable only if permitted by applicable loan
agreements. The preferred stock is convertible into 15% of the common stock of
C&K under certain circumstances.
The Company is a member of RAF Limited Liability Company ("RAF"). The only
other member is Wright's Foodliner, Inc., an entity controlled by director
Richard L. Wright. Wright's Foodliner, Inc. is the managing member of RAF.
During fiscal 1999, RAF purchased groceries and other products in the ordinary
course of business from United on the same terms and conditions as United's
other members. In October, 1999, the store was closed and the parties are in
the process of liquidating RAF in accordance with the terms of the limited
liability company operating agreement. Pursuant to that agreement, the Company
was obligated to fund a payment to Wright's Foodliner, Inc. of approximately
$0.4 million. The Company and Wright resolved issues relating to the
liquidation and Unified agreed to credit Wright's RAF capital account for
$40,000 and Wright and Wright's Foodliner, Inc. have provided Unified with
releases.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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, senior and other officers that have direct financial reporting
responsibilities. Information on all other officers will be provided in the
Company's annual report.
Officer's Name Age Business Experience During Last Five Years
-------------- --- ------------------------------------------------------
Alfred A. Plamann 59 President and Chief Executive Officer since February
1994.
Robert M. Ling, Jr. 44 Executive Vice President, General Counsel and
Secretary since November 1999; Senior Vice President,
General Counsel and Secretary, August 1996 to November
1999; Vice President and General Counsel, April 1996
to August 1996.
Richard J. Martin 56 Executive Vice President, Finance & Administration and
Chief Financial Officer since November 1999; Senior
Vice President and Chief Financial Officer, May 1998
to November 1999; previously Executive Vice President
and Chief Financial Officer, Rykoff-Sexton, Inc.
through December 1997 when it merged with J.P.
Foodservice to form US Foodservice and Executive Vice
President Finance and Administration of US Foodservice
through January 1998.
Charles J. Pilliter 53 Executive Vice President, Sales and Marketing since
November 1999; Senior Vice President and President,
Northern California, January 1990 to November 1999.
Harley J. Delano 63 Senior Vice President, Special Projects, since July
2001; Senior Vice President, Retail Development and
President, SavMax Foods, Inc., November 1999 to July
2001; President, SavMax Foods, Inc., April 1999 to
November 1999; President Cala Foods, Inc., division of
Ralphs Grocery Company, prior to March 1999.
Mr. Delano retired from the Company effective January
2, 2002.
Daniel J. Murphy 54 Senior Vice President, Retail Support Services and
President, SavMax Foods, Inc., since July 2001; Senior
Vice President, Retail Support Services, October 2000
to June 2001; Vice President of Merchandising,
HomeGrocer.com, May 1999 to September 2000; Vice
President of Retail Client Services, Interact
Electronic Marketing, Inc., October 1998 to May 1999;
Vice President, Super Fresh Food Markets, October 1997
to October 1998, Vice President, Sales and
Merchandising, Wakefern Food Corp., July 1989 to
October 1997.
Philip S. Smith 51 Senior Vice President, Procurement since November
1999; Vice President, Procurement, October 1997 to
November 1999; Executive Director, Purchasing, July
1997 to October 1997; General Manager, Northern
California, June 1996 to July 1997.
Rodney L. VanBebber 46 Senior Vice President, Distribution since January
2000; Group Vice President, Distribution, Ralphs
Grocery Company 1996 to January 2000.
William O. Cote 44 Vice President, Controller since November 1999;
Director of Accounting prior to November 1999.
Joseph A. Ney 53 Vice President, Insurance since November 1998;
President, Grocers and Merchants Insurance Services,
Inc., Springfield Insurance Company, and Springfield
Insurance Company, Ltd. Prior to November 1998.
David A. Woodward 59 Vice President, Treasurer since November 1999;
Treasurer from August 1996 to November 1999.
52
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. 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. 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.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of September 30, 2000 and September 29, 2001
Consolidated Statements of Earnings and Comprehensive Earnings for the fiscal
year ended August 28, 1999, the transition period from August 29, 1999 through
October 2, 1999, and the fiscal years ended September 30, 2000 and September
29, 2001
Consolidated Statements of Shareholders' Equity for the fiscal year ended
August 28, 1999, the transition period from August 29, 1999 through October 2,
1999, and the fiscal years ended September 30, 2000 and September 29, 2001.
Consolidated Statements of Cash Flows for the fiscal year ended August 28,
1999, the transition period from August 29, 1999 through October 2, 1999, and
the fiscal years ended September 30, 2000 and September 29, 2001.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K filed on October 13, 1999, File No. 0-10815).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K filed on October 13, 1999, File No.
0-10815).
4.1 Retail Grocer Application and Agreement for Continuing Service Affiliation
With Unified Western Grocers, Inc. And Pledge Agreement (incorporated by
reference to Exhibit 4.7 to Amendment No. 2 to Form S-1 Registration
Statement of the Registrant filed on December 31, 1981, File No. 2-70069).
4.2 Retail Grocer Application And Agreement For Service Affiliation With And
The Purchase Of Shares Of Unified Western Grocers, Inc. And Pledge
Agreement (incorporated by reference to Exhibit 4.2 to Post Effective
Amendment No. 7 to Form S-2 Registration Statement of the Registrant filed
on December 13, 1989, File No. 33-19284).
4.3 Copy of Application and Agreement for Service Affiliation as a Member-
Patron/Affiliate with Unified Western Grocers, Inc. and Pledge and Security
Agreement (incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2000,
file No. 000-10815).
4.4 Copy of Application and Agreement for Service Affiliation as an Associate-
Patron with Unified Western Grocers, Inc. and Pledge and Security Agreement
(incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 1, 2000, file No.
000-10815).
4.5 Agreement respecting directors' shares (incorporated by reference to
Exhibit 4.9 to Amendment No. 2 to Form S-1 Registration Statement of the
Registrant filed on December 31, 1981, File No. 2-70069).
4.6 Subordination Agreement (Member-Patron-1988) (incorporated by reference to
Exhibit 4.4 to Post-Effective Amendment No. 4 to Form S-2 Registration
Statement of the Registrant filed on July 15, 1988, File No. 33-19284).
4.7 Subordination Agreement (Associate Patron-1988) (incorporated by reference
to Exhibit 4.5 to Post-Effective Amendment No. 4 to Form S-2 Registration
Statement of the Registrant filed on July 15, 1988, File No. 33-19284).
54
4.8 Subordination Agreement (New Member-Patron-1988) (incorporated by reference
to Exhibit 4.6 to Post-Effective Amendment No. 4 to Form S-2 Registration
Statement of the Registrant filed on July 15, 1988, File No. 33-19284).
4.9 Subordination Agreement (New Associate Patron-1988) (incorporated by
reference to Exhibit 4.7 to Post-Effective Amendment No. 4 to Form S-2
Registration Statement of the Registrant filed on July 15, 1988, File No.
33-19284).
4.10 Copy of Member Patron/Affiliate Subordination Agreement (Subordination of
Required Deposit)
4.11 Copy of Associate-Patron Subordination Agreement (Subordination of Required
Deposit Agreement).
4.12 Form of Class A Share Certificate (incorporated by reference to Exhibit
4.12 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, filed on December 26, 2000 No. 0.10815.
4.13 Form of Class B Share Certificate (incorporated by reference to Exhibit
4.13 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, filed on December 26, 2000 No. 0-10815
4.14 Articles FIFTH and SIXTH of the Registrant's Articles of Incorporation (See
Exhibit 3.1).
4.15 Article I, Section 5, and Article VII of the Registrant's Bylaws (See
Exhibit 3.2).
4.16 Indenture between the Registrant and First Interstate Bank of California,
as Trustee, relating to $5,000,000 Subordinated Patronage Dividend
Certificates due December 15, 2001 (incorporated by reference to Exhibit
4.3 to Form S-2 Registration Statement of the Registrant filed on October
12, 1994, File No. 33-56005).
4.17 Indenture between the Registrant and First Interstate Bank of California,
as Trustee, relating to $3,000,000 Subordinated Patronage Dividend
Certificates due December 15, 2002 (incorporated by reference to Exhibit
4.3 to Form S-2 Registration Statement of the Registrant filed on October
13, 1995, File No. 33-63383).
4.18 Loan Purchase and Service Agreement Dated as of August 29, 1996 between
Grocers Capital Company and National Consumer Cooperative Bank
(incorporated by reference to Exhibit 4.18 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 31, 1996 filed on
November 5, 1996, File No. 0-10815).
4.19 $10,000,000 Credit Agreement and Security Agreement each dated as of
September 20, 1996 between Grocers Capital Company and National Cooperative
Bank as agent (incorporated by reference to Exhibit 4.19 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended August
31, 1996 filed on November 5, 1996, File No. 0-10815).
4.20 Amended and Restated Loan Purchase Agreement (Existing Program) dated
January 30, 1998 among United Resources, Inc., United Grocers, Inc.
(predecessor-in-interest to the Registrant) and National Consumer
Cooperative Bank (incorporated by reference to Exhibit 4.D1 to United
Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October
2, 1998 filed on January 30, 1999, File No. 002-60487, as amended).
4.21 Amended and Restated Loan Purchase Agreement (Holdback Program) dated
January 30, 1998 among United Resources, Inc., United Grocers, Inc.
(predecessor-in-interest to the Registrant) and National Consumer
Cooperative Bank (incorporated by reference to Exhibit 4.D2 to United
Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October
2, 1998 filed on January 30, 1999, File No. 002-60487, as amended).
4.22 Guarantee dated September 29, 1999 by the Registrant of debt securities of
United Grocers, Inc. (predecessor-in-interest to the Registrant) issued
pursuant to that certain Indenture dated as of February 1, 1978, and as
subsequently amended and supplemented, by and between United Grocers, Inc.,
and State Street Bank and Trust Company (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on October
13, 1999, File No. 000-10815).
4.23 Note purchase Agreement dated as of September 29, 1999 by and among the
Registrant and the persons listed on Schedule I thereto (incorporated by
reference to Exhibit 10.1 to the Registrant's Current report on Form 8-K
filed on October 13, 1999, File No. 000-10815).
55
4.24 Amendment No. 1 and Limited Waiver to Note Purchase Agreement, dated as of
September 14, 2000, by and among the Registrant and the Noteholders listed
on the signature pages thereto (incorporated by reference to Exhibit 4.24
to the Registrant's Annual Report on From 10-K for the fiscal year ended
September 30, 2000, filed on December 26, 2000 No. 0-10815).
4.24.1 Waiver letter and amendment to Note Purchase Agreement dated December 6,
2001, from John Hancock Life Insurance Company.
4.25 Secured Revolving Credit Agreement dated as of September 29, 1999 by and
among the Registrant, the Lenders named therein and Rabobank Nederland, New
York Branch (incorporated by reference to Exhibit 10.2 to the Registrant's
Current report on Form 8-K filed on October 13, 1999, File No. 000-10815).
4.26 Amendment No. 1 to Secured Revolving Credit Agreement dated as of November
18, 1999 by and among the Registrant, the Lenders named therein and
Rabobank Nederland, New York Branch (incorporated by reference to Exhibit
4.26 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, filed on October 13, 1999, File on December 26,
2000 No. 000-10815).
4.27 Amendment No. 2 and Limited Waiver to Secured Revolving Credit dated as of
July, 2000 by and among the Registrant, the Lenders named therein and
Rabobank Nederland, New York Branch (incorporated by reference to Exhibit
4.27 to the Registrant's Annual Report on From 10-K for the fiscal year
ended September 30, 2000, filed on December 26, 2000 No. 0-10815).
4.27.1 Amendment No. 3 to Secured Revolving Credit Agreement dated as of December
7, 2001 by and among the Registrant, the Lenders named therein and Rabobank
Nederland, New York Branch.
4.28 Copy of indenture dated as of February 1, 1978, between Unified Western
Grocers, Inc. (as successor to United Grocers, Inc.) and United States
National Bank of Oregon, as trustee, relating to Unified Western Grocers,
Inc.'s Capital Investment Notes (incorporated by reference to Exhibit 4-1
to United Grocers, Inc.'s Registration Statement on Form S-1, No. 2-60488)
4.29 Copy of supplemental indenture dated as of January 27, 1989, between
Unified Western Grocers, Inc. (as successor to United Grocers, Inc.) and
United States National Bank of Oregon, as trustee, relating to Unified
Western Grocers, Inc.'s Series F 5% Subordinated Redeemable Capital
Investment Notes (incorporated by reference to Exhibit 4-G to the United
Grocers, Inc. Form 10-K for the fiscal year ended September 30, 1989).
4.30 Copy of supplemental indenture dated as of January 22, 1991, between
Unified Western Grocers, Inc. (as successor to United Grocers, Inc.) and
United States National Bank of Oregon, as trustee, relating to Unified
Western Grocers, Inc.'s Series G 5% Subordinated Redeemable Capital
Investment Notes (incorporated by reference to Exhibit 4-D to the United
Grocers, Inc. Registration Statement on Form S-2, No. 33-38617)
4.31 Copy of supplemental indenture dated as of July 6, 1992, between Unified
Western Grocers, Inc. (as successor to United Grocers, Inc.) and United
States National Bank of Oregon, as trustee, relating to Unified Western
Grocers, Inc.'s Series H 5% Subordinated Redeemable Capital Investment
Notes (incorporated by reference to Exhibit 4-C to the United Grocers, Inc.
Registration Statement on Form S-2, No. 33-49450)
4.32 Copy of supplemental indenture dated as of January 9, 1995, between Unified
Western Grocers, Inc. (as successor to United Grocers, Inc.) and First Bank
National Association, as trustee, relating to Unified Western Grocers,
Inc.'s Series J 5% Subordinated Redeemable Capital Investment Notes
(incorporated by reference to Exhibit 4-C to the United Grocers, Inc.
Registration Statement on Form S-2, No. 33-57199)
4.33 Copy of supplemental indenture dated as of January 21, 1997, between
Unified Western Grocers, Inc. (as successor to United Grocers, Inc.) and
First Bank National Association, as successor trustee, relating to Unified
Western Grocers, Inc.'s Series K 5% Subordinated Redeemable Capital
Investment Notes (incorporated by reference to Exhibit 4-C to the United
Grocers, Inc. Registration Statement on Form S-2, No. 33-26285)
4.34 Copy of supplemental indenture dated as of February 11, 2000, between
Unified Western Grocers, Inc., United Grocers, Inc. and State Street Bank
and Trust Company (as successor trustee) (incorporated by reference to
Exhibit 4.29 to Unified Western Grocers, Inc.'s Quarterly Report on Form
10-Q for the fiscal quarter ended January 1, 2000 File No. 00-10815
56
10.1 Comprehensive Amendment to Retirement Plan for Employees of the Registrant
dated as of July 27, 1995 (incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended August
30, 1997 filed on November 28, 1997, File No. 0-10815).
10.2 Amended and Restated Deferred Compensation Plan dated as of May 1, 1999
(incorporated by reference to Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 28, 1999 filed on
November 14, 1999, File No. 0-10815).
10.3 Comprehensive Amendment to Unified Western Grocers, Inc. Employees'
Sheltered Savings Plan dated as of July 27, 1995 (incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-
10815).
10.4.1 Unified Western Grocers, Inc., Executive Salary Protection Plan II ("ESPP
II"), Master Plan Document, effective January 4, 1995 (incorporated by
reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 2, 1995 filed on December 1, 1995, File
No. 0-10815).
10.4.2 Amendment No. 1999-I to Unified Western Grocers, Inc. Executive Salary
Protection Plan II, effective as of January 1, 1999 (incorporated by
reference to Exhibit 10.5 to the registrant's Form 10-Q for the quarterly
period ended December 31, 2000, filed on February 13, 2001, File No. 0-
10815)
10.4.3 Amendment No. 2000-I to Unified Western Grocers, Inc. Executive Salary
Protection Plan II, effective as of January 1, 2000 (incorporated by
reference to Exhibit 10.6 to the registrant's Form 10-Q for the quarterly
period ended December 31, 2000, filed on February 13, 2001, File No. 0-
10815)
10.5 Master Trust Agreement For Unified Western Grocers, Inc. Executive Salary
Protection Plan II, dated as of April 28, 1995 (incorporated by reference
to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0-
10815).
10.6 Unified Western Grocers, Inc. Executive Insurance Plan Split dollar
Agreement and Schedule of Executive Officers party thereto (incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 2, 1995 filed on December 1, 1995, File
No. 0-10815).
10.7 Comprehensive Amendment to Unified Western Grocers, Inc. Employees' Excess
Benefit Plan dated as of December 5, 1995 (incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815).
10.8 Comprehensive Amendment to Unified Western Grocers, Inc. Employees'
Supplemental Deferred Compensation Plan dated as of December 5, 1995
(incorporated by reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
10.9 Comprehensive Amendment to Unified Western Grocers, Inc. Employee Savings
Plan dated as of August 18, 1995 (incorporated by reference to Exhibit 10.9
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
August 30, 1997 filed on November 28, 1997, File No. 0-10815).
10.10 Unified Western Grocers, Inc. Early Retirement Program (incorporated by
reference to Exhibit 10.28 to the Form S-4 Registration Statement filed on
August 26, 1999, File No. 333-05917).
10.11 Lease, dated as of December 23, 1986, between Cercor Associates and Grocers
Specialty Company (incorporated by reference to Exhibit 10.8 to Form S-2
Registration Statement of the Registrant filed on September 2, 1993. File
No. 33-68288).
10.12 Expansion Agreement, dated as of May 1, 1991, and Industrial Lease, dated
as of May 1, 1991, between Dermody Properties and the Registrant
(incorporated by reference to Exhibit 10.9 to Form S-2 Registration
Statement of the Registrant filed on September 2, 1993. File No. 33-68288).
57
10.12.1 Lease Amendment, dated June 20, 1991, between Dermody Properties and the
Registrant (incorporated by reference to Exhibit 10.9.1 to Form S-2
Registration Statement of the Registrant filed on September 2, 1993. File
No. 33-68288).
10.12.2 Lease Amendment, dated October 18, 1991, between Dermody Properties and the
Registrant (incorporated by reference to Exhibit 10.9.2 to Form S-2
Registration Statement of the Registrant filed on September 2, 1993. File
No. 33-68288).
10.17 Commercial Lease-Net dated December 6, 1994 between TriNet Essential
Facilities XII and the Registrant (incorporated by reference to Exhibit
10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 2, 1995 filed on December 1, 1995, File No. 0-10815).
10.18 Purchase Agreement dated November 21, 1994 between the Registrant and
TriNet Corporate Realty Trust, Inc. (incorporated by reference to Exhibit
10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 2, 1995 filed on December 1, 1995, File No. 0-10815).
10.19 Form of Employment Agreement between the Company and Alfred A. Plamann
(incorporated by reference to Exhibit 10.19 to Form S-4 Registration
Statement of the Registrant filed on August 26, 1999, File No. 333-85917).
10.19.1 Amendment to Employment Agreement dated as of August, 1999, between the
Registrant and Alfred A. Plamann (incorporated by reference to Exhibit
10.27 to Form S-4 Registration Statement of the Registrant filed on August
26, 1999, File No. 333-85917).
10.19.2 Second Amendment to Employment Agreement dated as of April 2001 between the
Registrant and Alfred A. Plamann (incorporated by reference to Exhibit
10.51 to the Registrant's Form 10-Q for the quarterly period ended June 30,
2001, filed on August 14, 2001, file No. 0-10815).
10.20 Severance Agreement between the Company and Charles J. Pilliter
(incorporated by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
10.21 Severance Agreement between the Company and Robert M. Ling, Jr.
(incorporated by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 29, 1998 filed on
November 16, 1998, File No. 0-10815).
10.22 Severance Agreement between the Company and Richard J. Martin (incorporated
by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended August 29, 1998 filed on November 16, 1998,
File No. 0-10815).
10.23 Form of Indemnification Agreement between the Company and each Director and
Officer (incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated February 24, 1997 filed on February 24, 1997, File No. 0-
10815).
10.24 Annual Incentive Plan for Chief Executive Officer (incorporated by
reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 30, 1997 filed on November 28, 1997, File
No. 0-10815).
10.25 Annual Incentive Plan for Senior Management (incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815).
10.26 Sublease Agreement dated October 27, 1991 for the Eugene Store between
United Grocers, Inc. (predecessor-in-interest to the Registrant) and a
corporation in which Richard L. Wright, a director of the Registrant, has
an interest (incorporated by reference to Exhibit 10.H1 of United Grocers,
Inc. Annual Report on Form 10-K for the fiscal year ended October 2, 1998
filed on January 20, 1999, File No. 002-60487).
10.27 Sublease Agreement dated October 27, 1991 for the Cottage Grove Store
between United Grocers, Inc. (predecessor-in-interest to the Registrant)
and a corporation in which Richard L. Wright, a director of the Registrant,
has an interest (incorporated by reference to Exhibit 10.H2 of United
Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October
2, 1998 filed on January 20, 1999, File No. 002-60487).
58
10.28 Sublease Agreement dated February 1, 1994 for the Albany Store between
United Grocers, Inc. (predecessor-in-interest to the Registrant) and a
corporation in which Richard L. Wright, a director of the Registrant, has
an interest (incorporated by reference to Exhibit 10.H3 of United Grocers,
Inc. Annual Report on Form 10-K for the fiscal year ended October 2, 1998
filed on January 20, 1999, File No. 002-60487).
10.29 Sublease Agreement dated July 26, 1979 for the Gold Beach Store between
United Grocers, Inc. (predecessor-in interest to the Registrant) and
Raymond L. Nidiffer, a holder of more than five percent of the Registrant's
shares (incorporated by reference to Exhibit 10-Q3 of United Grocers'
Registration Statement on Form S-2, File No. 33-26631).
10.30 Assignment of Lease and related documents for Mt. Shasta Store between
United Grocers, Inc. (predecessor-in interest to the Registrant) and C&K
Market, Inc., an affiliate of Raymond L. Nidiffer and Doug Nidiffer
(incorporated by reference to Exhibit 10-Q4 of United Grocers, Inc.'s
Registration Statement on Form S-2, File No. 33-26631).
10.31 Loan guaranties dated June 12, 1980 and September 30, 1988, given by United
Grocers, Inc. (predecessor-in interest to the Registrant) for the benefit
of C&K Market, Inc., an affiliate of Raymond L. Nidiffer and Doug Nidiffer
(incorporated by reference to Exhibit 10-I12 to United Grocer's Form 10-K
for the fiscal year ended September 30, 1989).
10.32 Agreement for Purchase and Sale and Escrow Instructions dated September 17,
1997, between United Grocers, Inc. (predecessor-in-interest to the
Registrant) and C&K Market, Inc., an affiliate of Raymond L. Nidiffer and
Doug Nidiffer (incorporated by reference to Exhibit 10.I5 to United
Grocers, Inc.'s Form 10-K for the fiscal year ended October 2, 1998 filed
on January 20, 1999, File No. 002-60487).
10.33 Stock Purchase Agreement dated November 17, 1997, by and among United
Grocers, Inc. (predecessor-in interest to the Registrant) and C&K Market,
an affiliate of Raymond L. Nidiffer and Doug Nidifer (incorporated by
reference to Exhibit 10.I6 to Form 10-K of United Grocers, Inc. filed on
January 20, 1999, File No. 002-60487).
10.34 Stock Purchase Agreement dated March 26, 1999 by and among Grocers Capital
Company, K.V. Mart Co., an affiliate of Darioush Khaledi, Khaledi Family
Partnership I, Khaledi Family Trust dated May 17, 1995, and Parviz Vazin
and Vida Vazin (incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on From 10-K for the fiscal year ended September
30, 2000, filed on December 26, 2000 No. 0-10815).
10.35 Pledge Agreement dated March 26, 1999 by Khaledi Family Partnership I,
Khaledi Family Trust dated May 17, 1995, and Parviz Vazin and Vida Vazin in
favor of Grocers Capital Company (incorporated by reference to Exhibit
10.35 to the Registrant's Annual Report on From 10-K for the fiscal year
ended September 30, 2000, filed on December 26, 2000 No. 0-10815).
10.36 Guaranty dated March 26, 1999 by K.V. Mart Co. in favor of Grocers Capital
Company (incorporated by reference to Exhibit 10.36 to the Registrant's
Annual Report on From 10-K for the fiscal year ended September 30, 2000,
filed on December 26, 2000 No. 0-10815).
10.37 Term Loan Agreement dated as of May 12, 2000 between K.V. Mart Co. and
Unified Western Grocers, Inc. relating to a $7,000,000 Promissory Note due
May 12, 2005 in favor of Unified Western Grocers, Inc. by K.V. Mart Co.
(incorporated by reference to Exhibit 10.38 to the Registrant's Form 10-Q
for the quarterly period ended July 1, 2000 filed on August 17, 2000, File
No. 0-10815).
10.38 Security Agreement dated as of May 12, 2000 between K.V. Mart Co. and
Unified Western Grocers, Inc. relating to the Term Loan Agreement dated as
of May 12, 2000 between K.V. Mart Co. and Unified Western Grocers, Inc.
(incorporated by reference to Exhibit 10.39 to the Registrant's Form 10-Q
for the quarterly period ended July 1, 2000 filed on August 17, 2000, File
No. 0-10815).
59
10.39 Guaranty dated as of May 12, 2000 by Darioush Khaledi and Shahpar Khaledi,
husband and wife, Darioush Khaledi, as Trustee of the Khaledi Family Trust
under Declaration of Trust dated May 17, 1995, K.V. Property Company, and
Parviz Vazin and Vida Vazin in favor of Unified Western Grocers, Inc.
issued pursuant to that certain Term Loan Agreement dated as of May 12,
2000 between K.V. Mart Co. and Unified Western Grocers, Inc. (incorporated
by reference to Exhibit 10.40 to the Registrant's Form 10-Q for the
quarterly period ended July 1, 2000 filed on August 17, 2000, File No. 0-
10815).
10.40 Stock Collateral Acknowledgement and Consent dated as of May 12, 2000
executed by the shareholders of K.V. Mart Co. (incorporated by reference to
Exhibit 10.41 to the Registrant's Form 10-Q for the quarterly period ended
July 1, 2000 filed on August 17, 2000, File No. 0-10815).
10.41 Term Loan Agreement dated as of July 15, 2000 between 1999 Lawndale
Associates LLC and Unified Western Grocers, Inc. relating to the $3,000,000
Promissory Note due January 5, 2002 in favor of Unified Western Grocers,
Inc. by 1999 Lawndale Associates LLC (incorporated by reference to Exhibit
10.42 to the Registrant's Form 10-Q for the quarterly period ended July 1,
2000 filed on August 17, 2000, File No. 0-10815).
10.42 Pledge Agreement dated as of July 5, 2000 by and among certain shareholders
of K.V. Mart Co., Unified Western Grocers, Inc. and Grocers Capital Company
relating to the Term Loan Agreement dated as of July 5, 2000 between 1999
Lawndale Associates LLC and Unified Western Grocers, Inc. (incorporated by
reference to Exhibit 10.43 to the Registrant's Form 10-Q for the quarterly
period ended July 1, 2000 filed on August 17, 2000, File No. 0-10815).
10.43 Pledge Agreement dated as of July 5, 2000 by and among certain shareholders
of K.V. Mart Co., Unified Western Grocers, Inc. and Grocers Capital Company
relating to the Term Loan Agreement dated as of July 5, 2000 between 1999
Lawndale Associates LLC and Unified Western Grocers, Inc. (incorporated by
reference to Exhibit 10.44 to the Registrant's Form 10-Q for the quarterly
period ended July 1, 2000 filed on August 17, 2000, File No. 0-10815).
10.44 Guaranty dated as of July 5, 2000 by shareholders and affiliates of K.V.
Mart Co. in favor of Unified Western Grocers, Inc. issued pursuant to that
certain Term Loan Agreement dated as of July 5, 2000 between 1999 Lawndale
Associates LLC and Unified Western Grocers, Inc. (incorporated by reference
to Exhibit 10.45 to the Registrant's Form 10-Q for the quarterly period
ended July 1, 2000 filed on August 17, 2000, File No. 0-10815).
10.45 Trust Agreement for Unified Western Grocers, Inc., effective as of April 1,
2000, between Registrant and Robert M. Ling, Jr., Richard J. Martin and
David A. Woodward (incorporated by reference to Exhibit 10.45 to the
Registrant's Annual Report on From 10-K for the fiscal year ended September
30, 2000, filed on December 26, 2000 No. 0-10815).
10.46 Preferred Stock Purchase Agreement by and between C & K Market, Inc. and
Unified Western Grocers, Inc. dated as of December 19, 2000 (incorporated
by reference to Exhibit 10.46 to the Registrant's Form 10-Q for the
quarterly period ended December 31, 2000, filed on February 13, 2001, File
No. 0-10815).
10.47 Shareholders Agreement by and among Unified Western Grocers, Inc., C & K
Market, Inc. and designated shareholders of C & K Market, Inc. dated as of
December 19, 2000 (incorporated by reference to Exhibit 10.47 to the
Registrant's Form 10-Q for the quarterly period ended December 31, 2000,
filed on February 13, 2001, file No. 0-10815).
10.48 Form of Severance Agreement for Executive Vice Presidents with Three Years
or More in an Officer Position executed by Robert M. Ling, Jr., Richard J.
Martin and Charles J. Pilliter (incorporated by reference to Exhibit 10.48
to the Registrant's Form 10-Q for the quarterly period ended December 31,
2000, filed on February 13, 2001, file No. 0-10815).
10.49 Form of Severance Agreement for Vice Presidents, Senior Vice Presidents and
Executive Vice Presidents with Less Than Three Years in an Officer Position
executed by Philip S. Smith, Rodney L. Van Bebber, Daniel J. Murphy, John
C. Bedrosian, William O. Cote, Dirk T. Davis, Luis de la Mata, Stanley G.
Eggink, Joseph L. Falvey, Carolyn S. Fox, Don Gilpin, Gary C. Hammett, Gary
S. Herman, Joseph A. Ney, David A. Woodward (incorporated by reference to
Exhibit 10.49 to the Registrant's Form 10-Q for the quarterly period ended
December 31, 2000, filed on February 13, 2001, file No. 0-10815).
60
10.50 Form of Subordinated Redemption Note--Excess Class B Shares.
21 Subsidiaries of the Registrant.
(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.
61
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 21, 2001
Signature Title Date
- ----------------------------------------------------------------------------------
/s/ Louis A. Amen Director December 21, 2001
__________________________________
Louis A. Amen
/s/ David Bennett Director December 21, 2001
__________________________________
David Bennett
/s/ John Berberian Director December 21, 2001
__________________________________
John Berberian
/s/ Edmund K. Davis Director December 21, 2001
__________________________________
Edmund K. Davis
/s/ James F. Glassel Director December 21, 2001
__________________________________
James F. Glassel
/s/ Darioush Khaledi Director December 21, 2001
__________________________________
Darioush Khaledi
/s/ Mark Kidd Director December 21, 2001
__________________________________
Mark Kidd
/s/ Jay McCormack Director December 21, 2001
__________________________________
Jay McCormack
62
/s/ Doug Nidiffer Director December 21, 2001
__________________________________
Doug Nidiffer
/s/ Morrie Notrica Director December 21, 2001
__________________________________
Morrie Notrica
/s/ Peter J. O'Neal Director December 21, 2001
__________________________________
Peter J. O'Neal
/s/ Michael A. Provenzano Director December 21, 2001
__________________________________
Michael A. Provenzano
/s/ Gordon E. Smith Director December 21, 2001
__________________________________
Gordon E. Smith
/s/ Mimi R. Song Director December 21, 2001
__________________________________
Mimi R. Song
/s/ Robert E. Stiles Director December 21, 2001
__________________________________
Robert E. Stiles
/s/ James R. Stump Director December 21, 2001
__________________________________
James R. Stump
/s/ Kenneth Tucker Director December 21, 2001
__________________________________
Kenneth Tucker
/s/ Richard L. Wright Director December 21, 2001
__________________________________
Richard L. Wright
63
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 29, 2001
Additions Balance
Balance at Charged to at end
Beginning Costs Write- of
of Period and Expense offs Period
---------- ----------- ------- -------
YEAR ENDED AUGUST 28,1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts and notes receivable $ 5,263 $ 5,593(3) $(6,115)(1) $ 4,741
------- ------- ------- -------
TRANSITION PERIOD ENDED OCTOBER 2,
1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts and notes receivable $ 4,741 $ 154(2) $ 9(1) $ 4,904
------- ------- ------- -------
YEAR ENDED SEPTEMBER 30, 2000
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts and notes receivable $ 4,904 $13,847(2) ($2,012)(1) $16,739
------- ------- ------- -------
YEAR ENDED SEPTEMBER 29, 2001
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts and notes receivable $16,739 $ 3,141 ($6,541)(1) $13,339
------- ------- ------- -------
- --------
(1) Accounts written off, net of recoveries.
(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 though October 2,
1999. The Transition Period from October 2, 1999 and the fiscal year ended
September 30, 2000 include the results of the Merger with United which was
accounted for as a purchase. Refer to footnote 4 in the Notes to the
Consolidated Financial Statements.
(3) 1999 includes the acquisition of SavMax Foods, Inc. from December 31,
1998. Refer to footnote 4 in the Notes to the Consolidated Financial
Statements.
64
EXHIBIT LIST
EXHIBIT DESCRIPTION
------- -----------
4.10 Copy of Member Patron/Affiliate Subordination Agreement (Subordination
of Required Deposit)
4.11 Copy of Associate-Patron Subordination Agreement (Subordination of
Required Deposit Agreement)
4.24.1 Waiver letter and amendment to Note Purchase Agreement dated December
6, 2001, from John Hancock Life Insurance Company.
4.27.1 Amendment No. 3 to Secured Revolving Credit Agreement dated as of
December 7, 2001 by and among the Registrant, the Lenders named
therein and Rabobank Nederland, New York Branch.
10.50 Form of Subordinated Redemption Note--Excess Class B Shares
21 Subsidiaries of the Registrant