UNITED GROCERS, INC., AND SUBSIDIARIES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------------------
Quarterly report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
--------------------------------------------
For the Quarterly period ended January 1, 1999
Commission File Number 2-60487
United Grocers, Inc.
(Exact name of registrant as specified in its charter)
Oregon 93-0301970
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
6433 S.E. Lake Road
Post Office Box 22187, Milwaukie, Oregon 97269
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 833-1000
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 the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 15, 1999
Common shares, $5 par value 523,165 shares
1
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
INDEX
PART I: Financial Information Pages
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the quarters ended January 1, 1999 and
January 2, 1998 3
Condensed Consolidated Balance Sheets as of
January 1, 1999 and October 2, 1998 4-5
Condensed Consolidated Statements of Cash Flows
for the quarters ended January 1, 1999
and January 2, 1998 6
Notes to the Condensed Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
January 1, 1999 January 2, 1998
--------------- ---------------
<S> <C> <C>
Net sales and operations $ 265,912,793 $ 304,141,408
------------- -------------
Costs and expenses:
Cost of sales 228,625,381 265,321,895
Members' allowances 4,848,865 2,273,164
Operating expenses 22,078,518 27,040,527
Selling and administrative
expenses 5,374,388 6,738,043
Depreciation and amortization 2,349,532 2,504,020
------------- -------------
Total costs and expenses 263,276,684 303,877,649
------------- -------------
Other (income)/expense:
Interest expense 2,549,829 3,948,144
Interest income (609,087) (253,205)
------------- -------------
Total other (income)/expense 1,940,742 3,694,939
------------- -------------
Income (loss) from continuing operations
before income tax provision (benefit) 695,367 (3,431,180)
(Provision) benefit for income taxes (278,147) 1,372,472
------------- -------------
Income (loss) from continuing
operations 417,220 (2,058,708)
Discontinued operations (Note 3), less
applicable income taxes of $292,316
in 1998 - 438,474
------------- -------------
Net income (loss) $ 417,220 $ (1,620,234)
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS January 1, 1999 October 2, 1998
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,519,006 $ 1,294,137
Accounts and notes receivable, net 68,153,048 67,269,129
Inventories 72,576,514 68,898,336
Other current assets 6,029,221 5,115,026
Deferred income taxes 1,525,237 1,525,237
------------ ------------
Total current assets 156,803,026 144,101,865
------------ ------------
Non-current assets:
Notes receivable 28,177,284 29,201,865
Investment in affiliated companies 3,484,579 3,359,579
Other receivables 3,111,859 3,032,683
Property, plant and equipment, net 32,559,461 37,913,621
Other assets, net 15,342,073 16,032,195
------------ ------------
Total non-current assets 82,675,256 89,539,943
------------ ------------
TOTAL $239,478,282 $233,641,808
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
LIABILITIES AND MEMBERS' EQUITY January 1, 1999 October 2, 1998
--------------- ---------------
<S> <C> <C>
Current liabilities:
Notes payable, current portion $ 65,236,761 $ 41,159,191
Accounts payable 53,644,938 59,675,586
Compensation and taxes payable 5,202,733 6,335,369
Other current liabilities 5,146,569 5,778,587
------------ ------------
Total current liabilities 129,231,001 112,948,733
Notes payable, net of current portion 65,345,059 74,433,616
Other liabilities 9,776,192 11,011,261
------------ ------------
Total liabilities 204,352,252 198,393,610
------------ ------------
Redeemable members' equity 3,365,682 3,905,070
------------ ------------
Members' equity:
Common stock -- authorized, 10,000,000
shares at $5.00 par value;
523,955 shares issued and outstanding 2,619,775 2,619,775
Additional paid-in capital 20,394,270 20,394,270
Retained earnings 8,746,303 8,329,083
------------ ------------
Total members' equity 31,760,348 31,343,128
------------ ------------
TOTAL $239,478,282 $233,641,808
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
January 1, 1999 January 2, 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 417,220 $ (1,620,234)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities (14,704,233) 6,378,612
------------ ------------
Net cash provided by (used in)
operating activities (14,287,013) 4,758,378
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to members (63,175) (1,094,453)
Collections on loans to members 937,756 1,761,717
Proceeds from sale of member loans - 284,169
Redemption of investments - 3,813,940
Purchase of investments - (3,166,617)
Sale of property, plant and equipment 6,658,642 2,582,744
Purchase of property, plant and equipment (470,966) (607,660)
------------ ------------
Net cash provided by investing
activities 7,062,257 3,573,840
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (539,388) -
Proceeds from (repayment of)
long-term liabilities:
Revolving bank lines of credit, net 17,186,615 (5,281,433)
Mortgages and notes (1,576,715) (1,192,717)
Redeemable notes and certificates (620,887) (70,300)
------------ ------------
Net cash provided by (used in)
financing activities 14,449,625 (7,244,450)
------------ ------------
Net increase in cash and
cash equivalents 7,224,869 1,087,768
Cash and cash equivalents, beginning of period 1,294,137 10,223,434
------------ ------------
Cash and cash equivalents, end of period $ 8,519,006 $ 11,311,202
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
UNITED GROCERS, INC., AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. MANAGEMENT'S STATEMENT
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the consolidated financial
position of United Grocers, Inc. and subsidiaries (the Company) at January 1,
1999 and the consolidated results of operations for the quarterly periods ended
January 1, 1999 and January 2, 1998 and consolidated cash flows for the
quarterly periods ended January 1, 1999 and January 2, 1998. The Notes to the
Consolidated Financial Statements which are contained in the 1998 Annual Report
to Shareholders should be read in conjunction with these Condensed Consolidated
Financial Statements.
Operating results for the period ended January 1, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
October 1, 1999, or any other period.
Note 2. ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This
statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement suggests combined formats for presentation of pension and other
postretirement benefit disclosures. The statement is effective for fiscal years
beginning after December 15, 1997, but is not required to be presented in
interim financial information in the year of adoption.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the derivative instrument's
fair value be recognized currently in results of operations unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 1999.
The Company's management has studied the implications of SFAS 132, and based on
the initial evaluation, expects the adoption to have no material impact on the
Company's financial condition or results of operations, but will require revised
disclosures when the statement becomes effective. The Company's management has
studied the implications of SFAS 133 and based on the initial evaluation,
expects the adoption to have no material impact on the Company's financial
condition or results of operations.
7
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Note 3. DISCONTINUED OPERATIONS
In September 1997, the Company's management and Board of Directors approved a
plan whereby the insurance operations would be sold to an unrelated party.
Accordingly, the results of operations of the insurance segment for the 1998
first quarter has been presented as "discontinued operations" in the
accompanying condensed statements of operations.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's 1998
Annual Report on Form 10-K and the consolidated financial statements and notes
thereto of the Company.
Year-to-date period ended January 1, 1999 ("1999") compared to year-to-date
period ended January 2, 1998 ("1998").
RESULTS OF OPERATIONS
OVERVIEW
During the first quarter of the prior year, the Company's financial condition
and results of operations were affected by implementation of the closure of the
Medford, Oregon grocery distribution facility and the consolidation of certain
California operations with Oregon operations.
NET SALES AND OPERATIONS
Net sales and operations decreased 12.6% from 1998 to $265.9 million for 1999.
The decrease in sales is primarily due to the sale of the Cash & Carry division
in May 1998, and lower volume due to the elimination of certain unprofitable
accounts.
COSTS AND EXPENSES
Total costs and expenses decreased $40.6 million (13.4%) from 1998 to $263.3
million for 1999 (99.0% of sales). This compares to $303.9 million (99.9% of
sales) in 1998. The components of costs and expenses are outlined below:
Costs and Expenses as a Percent of Net Sales and Operations:
<TABLE>
<CAPTION>
Quarter ended Quarter ended
January 1, 1999 January 2, 1998
--------------- ---------------
<S> <C> <C>
Cost of sales 86.0% 87.2%
Members' allowances 1.8 0.7
Operating expenses 8.3 8.9
Selling and administrative expenses 2.0 2.2
Depreciation and amortization 0.9 0.8
---- ----
Total 99.0% 99.9%
==== ====
</TABLE>
9
<PAGE>
Cost of sales as a percent of net sales and operations decreased from 87.2% to
86.0% from 1998 to 1999. The decrease in cost of sales is primarily due to
changes in the Company's marketing plan, which caused an offsetting increase in
members' allowances as a percentage of sales. Operating expenses as a percent of
net sales and operations decreased from 8.9% to 8.3% from 1998 to 1999. The
decrease in operating expenses is primarily due to internal cost efficiencies,
including the consolidation of the procurement and accounting staffs of the
Company's California division with those of the Oregon operations. In addition,
1998 included some costs incurred in connection with the closure of the
Company's Medford grocery distribution facility.
OTHER INCOME/EXPENSE
Interest expense decreased $1.4 million from 1998 to 1999, primarily due to debt
reductions resulting from the sale of the Company's Cash & Carry division and
certain non-core assets. Interest income increased $.4 million from 1998 to
1999, primarily as a result of an increase in the Company's notes receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that anticipated needs for working capital, capital
expenditures and repayment of long-term debt through fiscal 1999 will be met
from funds generated by operations and borrowings under the credit facility.
CASH FLOWS FROM OPERATING ACTIVITIES
In 1999, the Company used $14.3 million in cash in its operating activities,
compared to $4.8 million provided from its operations in 1998. The decrease of
$19.1 million is due primarily to increases in inventories and reductions in
accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
In 1999, the Company provided $7.1 million in cash from investing activities,
compared to the $3.6 million in cash provided by investing activities in 1998.
Cash flows from investing activities increased primarily due to proceeds from
the sale of property, plant and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
In 1999, the Company's financing activities provided $14.4 million in cash
compared to $7.2 million used in 1998. The increase in cash provided by
financing is primarily a result of increases in the credit facility.
10
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132. This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. The statement
suggests combined formats for presentation of pension and other postretirement
benefit disclosures. The statement is effective for fiscal years beginning after
December 15, 1997, but is not required to be presented in interim financial
information in the year of adoption.
In June 1998, the FASB issued SFAS No. 133. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133 also requires that changes in the derivative instrument's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after June
15, 1999.
The Company's management has studied the implications of SFAS 132, and based on
the initial evaluation, expects the adoption to have no material impact on the
Company's financial condition or results of operations, but will require revised
disclosures when the statement becomes effective. The Company's management has
studied the implications of SFAS 133 and based on the initial evaluation,
expects the adoption to have no material impact on the Company's financial
condition or results of operations.
YEAR 2000 PREPARATIONS
This section captioned "Year 2000 Preparations" and other statements about Year
2000 issues are "Year 2000 Readiness Disclosures" pursuant to the Year 2000
Information and Readiness Disclosure Act.
The Company is addressing possible Year 2000 (Y2K) problems with a systematic
approach. To make a smooth transition into the next century, the Company has
entered into a "Year 2000 Project," comprised of four major areas of concern -
(1) Infrastructure (Hardware & Operating System Software), (2) Applications
Software, (3) Third Party Suppliers (Trading Partners, Banks, Utilities), and
(4) Process Control and Instrumentation (Embedded Systems).
Area -1- The Infrastructure area consists of hardware and operating system
software. Updating in this area is on schedule and the Company estimates that
approximately 90 percent of the items identified in this area had been completed
as of December 31, 1998. The testing phase is ongoing as the remaining items are
corrected or replaced.
All infrastructure item tasks are expected to be completed by March 31, 1999.
Area -2- The Applications Software area consists of conversion of software that
is not Y2K compliant, and where available, the replacement of such software from
the vendor. The Company has engaged Applied Decisions USA, Inc. to assist in
project management, and in conversion and testing of certain non-compliant
application software code.
11
<PAGE>
The Company estimates that the conversion phase was approximately 95 percent
complete as of December 31, 1998, and full conversion will be completed by March
31, 1999. The testing phase is progressing in an organized fashion as the
software is repaired or replaced. The testing is ongoing.
The Company uses software from The Armature Company for warehousing and
purchasing functions. Y2K compliant software installation was completed on
November 21, 1998.
Area -3- The Third Party Suppliers area includes the identification and
prioritizing of critical suppliers, financial institutions, and utilities, and
communicating with them about their plans and progress in addressing the Y2K
issue. The Company has identified and contacted 4,324 suppliers requesting
information on their plans and progress on the Y2K issue. As of December 31,
1998, the Company had received a response from 75 percent of the identified
suppliers. Responses from the identified suppliers indicate progress in
addressing the Y2K issue, with a majority of the responses expecting full
compliance by September 30, 1999. The Company has a follow-up plan in place
scheduled through the remainder of 1999. Contingency planning in this area began
in February 1999, with the completed plan estimated to be in place by June 30,
1999.
Area -4- The Process Control and Instrumentation area consists of identification
and prioritization of hardware and software associated with embedded chips used
in operation of all facilities of the Company. The Company estimates it has
identified and corrected approximately 80 percent of the identified items. The
remaining 20 percent is expected to be completed by September 30, 1999.
Contingency planning in this area began in January 1999 and will be completed by
September 30, 1999.
The major phases associated with the Y2K Project are: (A) Inventory of potential
Y2K items; (B) Assigning priorities to the items identified as material to the
Company; (C) Assessing the Y2K compliance of the inventoried items; (D)
Repairing or replacing material items that are determined not to be Y2K
compliant; (E) Testing material items; and (F) Developing contingency and
business continuation plans for each functional area and Company location.
On November 21, 1998, the Inventory, Prioritization, and Assessment phases
(phases A, B and C) of the Project were declared completed.
Phase D - Material items are those identified by the Company that affect the
ability of the Company to perform its core business functions, that support the
Company's customer base, or that affect revenues. All material items had been
repaired or replaced as of December 31, 1998.
Phase E - Full systems testing commenced in January 1999, and completion is
expected by June 30, 1999. Vendor software upgrades continue on schedule.
Phase F - Contingency planning for all areas is ongoing and is to be completed
by June 30, 1999.
12
<PAGE>
Cost - The estimated cost of the Y2K Project is approximately $5.6 million. The
total amount expended on the project through December 31, 1998 was $2.7 million,
of which approximately $2.5 million related to the cost of conversion or
replacement of application software, $150,000 related to the replacement of
hardware, and $50,000 related to the cost of identifying and communicating with
Third Party Suppliers. The estimated future cost of completing the Y2K Project
is estimated to be $2.9 million - $2.8 million for replacement of software and
related hardware, and $100,000 to identify and communicate with third party
suppliers and to repair or replace embedded systems.
Risks - The failure to correct material Y2K issues could result in interruption
in, or failure of, key core business processes. The most likely worst case
scenario is business being partially or totally disrupted for a period of a few
hours to one week. There can be no assurance that actual results will not differ
materially for those projected.
Safety Net Preparation - The Y2K team has, as part of their project, been
identifying manual or modified processes that would need to be employed in the
unlikely event that some of the upgrades fail.
FORWARD-LOOKING STATEMENTS
Statements above and elsewhere in this Form 10-Q regarding future events or
performance are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. As with all forward-looking
statements, the forward-looking statements made by the Company herein are
subject to uncertainties that could cause actual results to differ materially
from those projected, including without limitation, uncertainties inherent in
business plans and the changing of business methods, uncertainties related to
the response of customers and suppliers to changing business strategies,
uncertainties related to Y2K issues, and uncertainties concerning the outcome of
sales of subsidiaries or divisions.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes to previously reported information.
13
<PAGE>
Part II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
Pursuant to the requirements 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.
Date: February 16, 1999 UNITED GROCERS, INC.
(Registrant)
By /s/ Mark Tweedie
------------------------------------------
Vice President and Chief Financial Officer
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of United Grocers, Inc., for the
applicable periods ended January 1, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000225966
<NAME> United Grocers, Inc.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> JAN-01-1999
<EXCHANGE-RATE> 1
<CASH> 8,519,006
<SECURITIES> 0
<RECEIVABLES> 68,153,048
<ALLOWANCES> 1,606,880
<INVENTORY> 72,576,514
<CURRENT-ASSETS> 156,803,026
<PP&E> 32,559,461
<DEPRECIATION> 42,391,406
<TOTAL-ASSETS> 239,478,282
<CURRENT-LIABILITIES> 129,231,001
<BONDS> 65,345,059
0
0
<COMMON> 2,619,775
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 239,478,282
<SALES> 265,912,793
<TOTAL-REVENUES> 265,912,793
<CGS> 228,625,381
<TOTAL-COSTS> 255,552,764
<OTHER-EXPENSES> 5,374,388
<LOSS-PROVISION> 255,790
<INTEREST-EXPENSE> 2,549,829
<INCOME-PRETAX> 695,367
<INCOME-TAX> 278,147
<INCOME-CONTINUING> 417,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 417,220
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
