<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 33-51457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933.
CERTIFIED GROCERS OF CALIFORNIA, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0615250
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
------------------------
2601 South Eastern Avenue
Los Angeles, California 90040
(213) 723-7476
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
Robert M. Ling, Jr., General Counsel
Certified Grocers of California, Ltd.
2601 South Eastern Avenue
Los Angeles, California 90040
(213) 723-7476
(Name, Address, Including Zip Code, and Telephone Number.
Including Area Code of Agent for Service)
------------------------------
Copy to:
Neil F. Yeager, Esq.
Burke, Williams & Sorensen
611 W. Sixth Street
25th Floor
Los Angeles, California 90017
(213) 236-0600
------------------------
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933 CHECK THE FOLLOWING BOX /X/
IF THE REGISTRANT ELECTS TO DELIVER ITS LATEST ANNUAL REPORT TO SECURITY
HOLDERS, OR A COMPLETE AND LEGIBLE FACSIMILE THEREOF, PURSUANT TO ITEM 11(a)(1)
of this Form, check the following box / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
Cross-reference between items of Part I of Post-Effective Amendment No. 4 to
Form S-2 and Prospectus filed by Certified Grocers of California, Ltd., as part
of Registration Statement covering Partially Subordinated Patrons' Deposit
Accounts.
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
------------------------------------ ------------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Cover Page; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page of
Prospectus; Outside Back Cover Page
of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Outside Front Cover Page of
Prospectus; Risk Factors; Ratio of
Earnings to Fixed Charges
4. Use of Proceeds..................... Use of Proceeds
5. Determination of Offering Price..... (Not Applicable)
6. Dilution............................ (Not Applicable)
7. Selling Security Holders............ (Not Applicable)
8. Plan of Distribution................ Method of Offering
9. Description of Securities to Be
Registered......................... Description of Deposit Accounts
10. Interests of Named Experts and
Counsel............................ (Not Applicable)
11. Information with Respect to the
Registrant......................... Outside Front Cover Page of
Prospectus; The Company; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Index to Financial
Statements
12. Incorporation of Certain Information
by Reference....................... Inside Front Cover Page of
Prospectus
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ (Not Applicable)
</TABLE>
<PAGE>
PROSPECTUS
CERTIFIED GROCERS OF CALIFORNIA, LTD.
$11,935,845 PARTIALLY SUBORDINATED
PATRONS' DEPOSIT ACCOUNTS
This Prospectus relates to the Partially Subordinated Patrons' Deposit
Accounts (the "Deposit Accounts") maintained with Certified Grocers of
California, Ltd. ("Certified" or the "Company") by the member-patrons and
associate patrons of the Company and the Deposit Accounts to be maintained with
the Company by such persons or entities who from time to time become
member-patrons or associate patrons of the Company. (Member-patrons and
associate patrons are collectively referred to herein as "patrons".) Patrons are
generally required to maintain deposits with the Company in certain required
amounts and may also maintain deposits in excess of such required amounts. All
such deposits of a patron are maintained in the patron's Deposit Account.
Patrons are required to execute subordination agreements providing for the
pledging of their Deposit Accounts to the Company and the subordination of that
portion of their Deposit Accounts which consists of required deposits to Senior
Indebtedness (as defined) of the Company. THE SUBORDINATION AGREEMENTS EXECUTED
BY PATRONS ON AND AFTER JANUARY 14, 1994 DIFFER FROM THE SUBORDINATION
AGREEMENTS WHICH HAVE BEEN EXECUTED BY PATRONS BEFORE JANUARY 14, 1994. See,
"THE COMPANY -- Patron Deposits," and "DESCRIPTION OF DEPOSIT ACCOUNTS --
Subordination."
That portion of each Deposit Account consisting of required deposits does
not bear interest. Interest is paid with respect to that portion, if any, of a
Deposit Account which exceeds the required amounts. The rate is 8.25% per annum
at the date of this Prospectus. The Deposit Accounts are not secured by any lien
on any assets of the Company, are nontransferable without the consent of the
Company, which will normally be withheld, and are required to be pledged to the
Company as security for obligations to the Company and its subsidiaries. On
termination of membership of a member-patron or on an associate patron ceasing
to do business with the Company the patron will be entitled to the return of its
Deposit Account, less all amounts that may be owing by the patron to the Company
or any of its subsidiaries, provided, however, that return of that portion of
the Deposit Account which consists of required deposits will be governed by the
subordination provisions to which it is subject and will be returned only as and
to the extent permitted thereby. That portion of the Deposit Account which is in
excess of the required deposits will be paid to the patron on its request
provided the patron is not in default in any of its obligations to the Company
or any of its subsidiaries. (See "DESCRIPTION OF DEPOSIT ACCOUNTS".)
SINCE THE DEPOSIT ACCOUNTS ARE NOT SEGREGATED FROM THE COMPANY'S OTHER FUNDS
AND ARE UNSECURED OBLIGATIONS, AND SINCE THE COMPANY HAS NOT ESTABLISHED ANY
RESERVES FOR THEIR REPAYMENT, THERE CAN BE NO ASSURANCE THAT THE COMPANY WOULD
HAVE THE ABILITY TO REPAY THE DEPOSIT ACCOUNTS IN THE EVENT OF INSOLVENCY OR
OTHER FINANCIAL DIFFICULTY OR IN THE EVENT THE COMPANY WERE REQUIRED TO RETURN A
SUBSTANTIAL AMOUNT OF THE DEPOSIT ACCOUNTS AT ONE TIME OR OVER A BRIEF PERIOD OF
TIME. SEE, "DESCRIPTION OF DEPOSIT ACCOUNTS -- REPAYMENT."
---------------------
CAREFUL CONSIDERATION SHOULD BE GIVEN TO THE MATTERS DISCUSSED UNDER
"RISK FACTORS," BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO THE
TO PUBLIC COMMISSIONS COMPANY (1)(2)
<S> <C> <C> <C>
$11,935,845 Partially Subordinated
Patrons' Deposit Accounts................ $11,935,845 none $11,935,845
<FN>
(1) As of the date of registration, the expenses payable by the Company were
estimated at $44,345.
(2) Based on the assumption that this amount of Deposit Accounts will be
acquired by patrons. There is no assurance that this amount will be so
acquired.
</TABLE>
THIS OFFER IS NOT UNDERWRITTEN.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
("Commission"). Copies of such materials can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
In addition, such material can be inspected and copied at the public reference
facilities maintained by the Commission and located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, New York, New York 10048.
ADDITIONAL INFORMATION
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information and exhibits contained in a Registration Statement on
Form S-2 filed by the Company with the Commission. For further information,
reference is made to the Registration Statement including the exhibits filed as
a part thereof. Copies of the Registration Statement and exhibits may be
obtained from the principle office of the Commission in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations of the Commission.
INCORPORATION BY REFERENCE
The following document filed with the Commission is incorporated by
reference into this Prospectus: Annual Report on Form 10-K for the fiscal year
ended August 31, 1996.
The Company will provide without charge to each person or patron of the
Company to whom a copy of this Prospectus is delivered, upon the written or oral
request of such person or patron, a copy of the foregoing Report incorporated by
reference herein, other than exhibits to such Report. Requests should be
directed to: Certified Grocers of California, Ltd., 2601 South Eastern Avenue,
Los Angeles, California 90040, Attention: Corporate Secretary, (213) 723-7476.
2
<PAGE>
RISK FACTORS
CAREFUL CONSIDERATION SHOULD BE GIVEN TO THE FOLLOWING FACTORS CONCERNING
THE COMPANY AND THE SECURITIES OFFERED IN THIS PROSPECTUS:
SUBORDINATION
The portion of the Deposit Accounts consisting of required deposits will be
subordinated to the prior payment in full of Senior Indebtedness (as defined) of
the Company. Patrons are required to execute subordination agreements with
respect to their Deposit Accounts. THE SUBORDINATION AGREEMENTS EXECUTED BY
PATRONS ON AND AFTER JANUARY 14, 1994 DIFFER FROM THE SUBORDINATION AGREEMENTS
WHICH HAVE BEEN EXECUTED BY PATRONS BEFORE JANUARY 14, 1994. The portion of the
Deposit Accounts consisting of required deposits cannot be repaid by the Company
in the event of an uncured default by the Company respecting Senior
Indebtedness, or in the event of dissolution, liquidation or insolvency
proceedings involving the Company, until all Senior Indebtedness has been paid
in full or provision made for such payment satisfactory to the holders of Senior
Indebtedness. The total amount of outstanding Senior Indebtedness to which
required deposits are subordinated aggregated approximately $132,000,000 as of
November 15, 1996. There is no limitation on the Company's creation of
additional Senior Indebtedness. See, "DESCRIPTION OF DEPOSIT ACCOUNTS --
Subordination."
UNSECURED OBLIGATIONS
The Deposit Accounts are not secured by any lien upon any assets of the
Company and are unsecured obligations of the Company.
NONTRANSFERABILITY
The Deposit Accounts are nontransferable without the consent of the Company,
which will normally be withheld. Patrons are required to pledge their Deposit
Accounts to the Company as security for their obligations to the Company and its
subsidiaries.
INTEREST
The portion of the Deposit Accounts consisting of required deposits does not
bear interest. See, "DESCRIPTION OF DEPOSIT ACCOUNTS -- Interest."
REPAYMENT
Amounts in a patron's Deposit Account in excess of the amount consisting of
required deposits are returnable upon request of the patron if the patron is not
in default of its obligations to the Company or any of its subsidiaries. Upon
termination of membership of a member-patron or on an associate patron ceasing
to do business with the Company, the patron is entitled to the return of its
Deposit Account, less all amounts owing to the Company and its subsidiaries. In
all cases, however, return of the portion of the Deposit Account consisting of
required deposits is governed by the subordination provisions to which it is
subject.
Since the Deposit Accounts are not segregated from the Company's other funds
and are unsecured obligations, and since the Company has not established any
reserves for their repayment, there can be no assurance that the Company would
have the ability to repay the Deposit Accounts in the event of insolvency or
other financial difficulty or in the event the Company were required to return a
substantial amount of the Deposit Accounts at one time or over a brief period of
time. See, "DESCRIPTION OF DEPOSIT ACCOUNTS -- Repayment."
VOLUME LOSSES IN PAST PERIODS
The Company experienced reductions in sales volume from fiscal 1991 levels
totaling approximately $945 million between fiscal years 1992 and 1995. During
this period, certain of the Company's large member patrons either grew to the
size where they elected to establish self-distribution programs or were acquired
by chains that had existing self-distribution programs. Additionally, sales
volume was lost as a result of the decision of certain large patrons to expand
their own warehousing and distribution operations in fiscal 1994 and the
decision of one patron to utilize another source of supply. During fiscal year
1995, the Company added two significant customers which through fiscal 1996 have
contributed approximately $200 million in annual sales volume to the Company,
spread among most sales categories. The Company is attempting to increase sales
volume by adding new customers and expanding the volume of sales to existing
customers.
3
<PAGE>
There can be no assurance that future sales volume reductions will not
occur, whether by merger or acquisition of patrons or election by patrons to
switch to self-distribution or other supply sources. At this time, including
patrons already engaged in self-distribution, there is no patron whose purchases
represent more than 10% of total sales volume. Also, excluding patrons already
engaged in self-distribution, there is no patron whose purchases represent
greater than 5% of total sales volume. See, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)............. 1.94x 1.71x 1.63x 1.78x 1.44x
<FN>
- ------------------------
(1) Earnings used in computing the ratio of earnings to fixed charges consist
of earnings before patronage dividends, provision (benefit) for income
taxes, and cumulative effect of change in accounting principle in 1994 of
$2.5 million, plus fixed charges. Fixed charges consist of interest expense
(including amortization of deferred financing costs) and the portion of
rental expense that is representative of the interest factor.
</TABLE>
THE COMPANY
GENERAL DESCRIPTION OF BUSINESS
The Company, a California corporation organized in 1922 and incorporated in
1925, is a wholesale grocery distributor which does business primarily on a
cooperative basis with those patrons who qualify and have been accepted as
"member-patrons." The Company is owned by its member-patrons, which are
primarily independent grocers, and is operated and taxed on a cooperative basis.
The Company also does some business on a cooperative basis with some patrons who
are not member-patrons and who are referred to as "associate patrons." Pursuant
to the Company's Bylaws, the net earnings of the Company on business done on a
cooperative basis are distributed as patronage dividends to member-patrons and
associate patrons based in amount on the volume of such business transacted with
the patron. The Bylaws provide that patronage dividends may be paid in money or
in any other form which constitutes a written notice of allocation under Section
1388 of the Internal Revenue Code. For the fiscal year ended August 31, 1996,
declared patronage dividends totalled $13,200,000.
The Company also does business on a nonpatronage basis (that is, no
patronage dividends are distributed) with other customers and in some instances
with member-patrons and associate patrons. The Company's subsidiaries do
business on a nonpatronage basis with member-patrons, associate patrons and
other customers.
Patrons engaged in the retail grocery business who purchase 350 or more dry
grocery cases weekly (approximately $5,000), or whose combined average weekly
purchases (excluding cigarettes) are $5,000 or more, are required to become
member-patrons. Associate patrons generally purchase 200 or more dry grocery
cases weekly and have combined average weekly purchases of less than $5,000. At
August 31, 1996, the Company had 491 member-patrons operating a total of 2,361
retail food stores and 265 associate patrons operating a total of 624 retail
food stores.
The shares of the Company are owned entirely by its member-patrons. Each
member-patron is required to hold 100 Class A Shares, and no member-patron may
hold more than 100 Class A Shares. Member-patrons are also required to hold
Class B Shares in an amount, based on book values, equal to the lesser of (a)
the amount of the member-patron's required deposit, or (b) twice the
member-patron's average weekly purchases. Member-patrons and associate patrons
are required to maintain cash deposits with the Company. For a discussion of
these required deposits, see "THE COMPANY -- Patron Deposits."
The Company sells a full line of branded grocery and nonfood items supplied
by unrelated manufacturers and also sells merchandise under its own private
labels, including the Springfield, Gingham, Special Value, La Corona and Golden
Creme labels. Grocers Specialty Company, a subsidiary, carries a product line
4
<PAGE>
consisting of specialty-type items, such as ethnic and gourmet foods, and also
carries a general product line sold to non-member retailers. General merchandise
items including housewares, hardware and health and beauty care products are
primarily sold by another subsidiary, Grocers General Merchandise Company.
Consolidated sales by product line for the fiscal year ended August 31,
1996, are as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Dry Grocery (includes specialty products)........................... $1,100,753
Delicatessen........................................................ 207,931
Meat................................................................ 175,312
General Merchandise................................................. 159,714
Frozen Food......................................................... 123,725
Dairy............................................................... 90,066
Ice Cream........................................................... 20,109
Bakery.............................................................. 19,120
Drop Shipment....................................................... 11,410
Beans and Rice...................................................... 5,759
Other............................................................... 35,020
----------
Total........................................................... $1,948,919
----------
----------
</TABLE>
The majority of the Company's warehouse facilities, and its two
manufacturing plants (dairy and bakery), are located in the Los Angeles
metropolitan area. In addition, the Company has two warehouses in Stockton,
California and one warehouse in Fresno, California.
In addition to supplying a wide variety of grocery and nonfood items, the
Company and its subsidiaries also provide patrons with a variety of other
support services, including advertising programs, insurance services, store site
selection and site evaluation services, store design and layout, front end
layout and support, store equipment and inventory financing, store remodeling
support services, data processing, and in-store counseling services.
PATRONAGE DIVIDENDS
As required by its Bylaws, the Company distributes patronage dividends based
upon its net earnings from patronage business during the fiscal year. Such
earnings are distributed to each patron in proportion to the dollar volume of
purchases from each division of the Company by the patron. The Company's Bylaws
provide that patronage dividends may be distributed in money or in any other
form which constitutes a written notice of allocation under Section 1388 of the
Internal Revenue Code. Said section 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, which discloses to the recipient the stated dollar amount allocated to
him by the Company and the portion thereof, if any, which constitutes a
patronage dividend. Patronage dividends are distributed after the close of the
fiscal year, except for dividends on dairy products which are distributed after
the close of each fiscal quarter.
Patronage dividends are currently paid out in the following order and
manner: first, patrons receive 20% in cash; second, member-patrons receive the
required amount of Class B Shares; third, the remainder is credited to the
patron's deposit account.
In addition, the Company issued subordinated patronage dividend certificates
("Patronage Certificates") evidencing the retention of a portion of patronage
dividends for fiscal years 1993, 1994 and 1995. The amounts retained were
deducted from each patron's patronage dividend prior to the issuance of Class B
Shares to such patron.
Patronage Certificates are unsecured general obligations of the Company, are
subordinated to certain other indebtedness of the Company, and are
nontransferable without the consent of the Company. The Patronage Certificates
are subject to redemption, at any time in whole and from time to time in part,
without premium, at the option of the Company, and are subject to being set off,
at the option of the Company, against all or any portion of the amounts owing to
the Company by the holder.
5
<PAGE>
The Board of Directors determined that in fiscal 1993, 1994 and 1995, the
portion of the patronage dividend retained and evidenced by the issuance of
Patronage Certificates was 20% of the fourth quarter fiscal 1993 dairy division
patronage dividend, 20% of the fiscal 1994 dairy division patronage dividends
and 20% of the first and second quarter fiscal 1995 patronage dividends for the
dairy division. The Patronage Certificates were 40% of the fiscal 1993, 1994 and
1995 patronage dividends for non-dairy products. The 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 Patronage Certificates
issued and their respective terms in fiscal 1993, 1994 and 1995.
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
FISCAL PRINCIPAL INTEREST MATURITY
YEAR AMOUNT RATE DATE
- ------------------------------ ---------- --------- --------
<S> <C> <C> <C>
1993.......................... $2,018,000 7% 12/15/00
1994.......................... $2,426,000 8% 12/15/01
1995.......................... $2,117,000 7% 12/15/02
</TABLE>
During fiscal 1996, the Company set off approximately $12,000 in Patronage
Certificates against a portion of amounts owed to the Company by the holders.
For the third and fourth quarters of fiscal 1995, the Company suspended the
retention of any of the dairy division patronage dividends due to competitive
market conditions. During fiscal 1996 the retention program was suspended for
all divisions, including the dairy. While the Company suspended the retention
program for fiscal 1996, the retention program has not been discontinued.
The Company expects to continue to distribute patronage dividends in the
future, although there can be no assurance of the amounts of such dividends.
PATRON DEPOSITS
It is the general policy of the Company to require that its cooperative
patrons maintain a subordinated cash deposit equal to the greater of twice the
amount of each patron's average weekly purchases, or twice the amount of the
patron's average purchases if such purchases are not on a regular basis.
Required deposits are determined twice a year, at the end of the Company's
second and fourth fiscal quarters, based upon a review of the patron's purchases
from certain of the cooperative divisions during the preceding two quarters.
Member-patrons meeting certain qualifications established by the Board of
Directors may elect to maintain a reduced required deposit of $500,000 or one
and one-quarter weeks' average purchases, whichever is greater. Presently, two
of the Company's largest member-patrons have elected to maintain such reduced
deposits. With the consent of the Company, which may be granted or withheld in
the Company's sole discretion, a qualified member-patron who has elected to
maintain this reduced deposit may later have its deposit increased up to an
amount equal to twice the amount of its average weekly purchases. Following such
increase, the member-patron will not be permitted to reduce its deposit (even
though otherwise eligible to maintain a reduced deposit) for a period of two
years without the Company's consent. Further, in all cases, reduction of the
deposit will be governed by the subordination provisions to which it is subject.
The Company charges interest to those member-patrons who maintain a reduced
deposit. Interest is presently charged at the prime rate established by Bankers
Trust Company, subject to periodic review and change by the Board of Directors.
Interest is charged on the difference between the balance that would have been
maintained based on two weeks' purchases and the balance actually maintained.
Under the Company's Deposit Fund Loan Program, member-patrons whose credit
has been approved by the Company may finance all or a portion of their deposit
requirement. Payments under this program are billed to the member-patron on its
weekly statement from the Company. Subject to credit approval, patrons may also
deposit an amount equal to one and one-half of the patron's average weekly
purchases or one and one-half of the patron's average purchases, whichever is
greater, and pay the balance of the deposit over a period of 26 weeks, at no
interest, by payments on its weekly statement from the Company.
Member-patrons holding Class B Shares are presently given credit against the
above described cash deposit requirement based upon the combined, respective
book values of such shares as of the respective
6
<PAGE>
fiscal years last ended prior to their issuance. The Company pays no interest on
the required deposits of patrons. Interest is paid on the above described cash
deposits which are in excess of patrons' required deposits, see "DESCRIPTION OF
DEPOSIT ACCOUNTS -- Interest."
In addition, patrons who participate in the Company's price reservation
program are required to maintain a noninterest bearing deposit based upon the
value of the inventory participation in this program. Under the Company's price
reservation program, patrons are permitted to submit price reservations in
advance for their dry grocery, frozen, delicatessen and general merchandise
purchases. For the patron to get the benefit of the price reservation, an actual
order must be placed. The price which the patron will be charged is the price in
effect at the time of the reservation.
The Company's policies regarding deposits, issuance of Class B Shares and
credits against deposits as a result of issuance of Class B Shares are subject
to change by the Board of Directors which may, in its discretion, add to,
increase, decrease, limit, eliminate or otherwise change such policies.
DESCRIPTION OF DEPOSIT ACCOUNTS
GENERAL
As described under the caption "THE COMPANY -- Patron Deposits," patrons are
generally required to maintain deposits with the Company in certain required
amounts and may also maintain deposits with the Company in excess of such
required amounts. All such deposits of a patron are maintained in the patron's
Deposit Account. Patrons are required to execute subordination agreements
providing for the pledging of their Deposit Accounts to the Company and the
subordination of that portion of their Deposit Accounts which consists of
required deposits to Senior Indebtedness (as defined) of the Company. As
described below under the caption "Subordination," the subordination agreements
executed by patrons on and after January 14, 1994, differ from the subordination
agreements which have been executed by patrons before January 14, 1994. Thus,
persons or entities who become member-patrons or associate patrons on or after
January 14, 1994 are required to execute the new subordination agreements. In
addition, patrons who executed subordination agreements before January 14, 1994
may be required to execute the new subordination agreements if there is a change
in the patron's business form. For example, in the event of a change in a patron
which is a proprietorship or partnership, or a change in the stock ownership of
a patron which is a corporation, the Company may require the execution of a new
subordination agreement.
Amounts in the Deposit Accounts are not segregated from other funds of the
Company. The Deposit Accounts are recorded in the Company's records by means of
book entries, and no note, certificate or other instrument is issued as evidence
of the Deposit Accounts. After the close of each fiscal year, the Company
provides each patron with a statement showing patronage dividends allocated to
the patron's Deposit Account. In addition, written inquiry concerning the
Deposit Accounts and other additions to the account, as well as withdrawals and
charges and the account balance, may be made at any time, and telephone inquiry
may be made at any time during normal business hours. The Company's policies
regarding deposits are subject to change by the Board of Directors which may, in
its discretion, add to, increase, decrease, limit, eliminate or otherwise change
such policies.
SUBORDINATION
As described below in this section, the subordination of that portion of the
Deposit Accounts which consists of required deposits will differ depending upon
whether a patron executes a subordination agreement on or after January 14, 1994
or has executed a subordination agreement before that date.
1. SUBORDINATION AGREEMENTS EXECUTED ON OR AFTER JANUARY 14, 1994.
With respect to patrons who execute subordination agreements on or after
January 14, 1994, that portion of the Deposit Account of each such patron which
consists of required deposits will, under the terms of such agreements, be
subordinated and subject in right of payment to all Senior Indebtedness. As to
such patrons, the term "Senior Indebtedness" means all indebtedness, liabilities
or obligations of the Company, contingent or otherwise, whether existing on the
date of execution of the subordination agreement or thereafter incurred, (A) in
respect of borrowed money; (B) evidenced by bonds, notes, debentures or other
instruments of indebtedness; (C) evidenced by letters of credit, bankers'
acceptances or similar credit
7
<PAGE>
instruments; (D) in respect of Capitalized Lease Obligations; (E) in respect of
the deferred purchase price of property or assets (whether real, personal,
tangible or intangible) or in respect of any mortgage, security agreement, title
retention agreement or conditional sale contract; (F) in respect of any interest
rate swap agreement, interest rate collar agreement or other similar agreement
or arrangement designed to provide interest rate protection; (G) in respect of
all indebtedness, liabilities or obligations of others of any of the types
referred to in clauses (A) through (F) for which the Company is responsible or
liable as obligor, guarantor or otherwise or in respect of which recourse may be
had against any of the property or assets (whether real, personal, tangible or
intangible) of the Company; and (H) in respect of all modifications, renewals,
extensions, replacements and refundings of any indebtedness, liabilities or
obligations of any of the types described in clauses (A) through (G); provided,
however, that the term "Senior Indebtedness" shall not mean any indebtedness,
liabilities or obligations of the Company, contingent or otherwise, whether
existing on the date of execution of the subordination agreement or thereafter
incurred, (i) to trade creditors arising or incurred in the ordinary course of
the Company's business, (ii) in respect of any redemption, repurchase or other
payments on capital stock, (iii) in respect of Patron's Deposits or (iv) in
respect of Patronage Dividend Certificates.
For purposes of the foregoing definition, "Capitalized Lease Obligations"
means the discounted present value of the rental obligations of any person or
entity under any lease of any property which, in accordance with generally
accepted accounting principles, has been recorded on the balance sheet of such
person or entity as a capitalized lease; "Patrons' Deposits" means the deposits
from time to time required to be made or maintained with the Company by its
patrons or customers in accordance with the Bylaws of the Company as in effect
from time to time or in accordance with the policies for the servicing of
accounts of patrons or customers established from time to time by the Company,
and any deposits from time to time made or maintained with the Company by its
patrons or customers in excess of such required deposits; and "Patronage
Dividend Certificates" means any notes, revolving fund certificates, retain
certificates, certificate of indebtedness, patronage dividend certificates or
any other written evidences of indebtedness of the Company at any time
outstanding which evidence the indebtedness of the Company respecting the
distribution by the Company of patronage dividends.
The subordination is such that in the event of any insolvency or bankruptcy
proceedings relative to the Company or its property, any receivership,
liquidation, reorganization, arrangement or other similar proceedings in
connection therewith, or in the event of any proceedings for voluntary
liquidation, dissolution or other winding up of the Company, the holders of
Senior Indebtedness shall be entitled to receive payment in full of all Senior
Indebtedness (whether accrued prior or subsequent to the commencement of such
proceedings) before any payment is made with respect to that portion of the
Deposit Accounts which consists of required deposits. By reason of such
subordination, in the event of insolvency, creditors of the Company who are
holders of Senior Indebtedness may recover more ratably than holders of the
Deposit Accounts. In addition, (i) no payment shall be made with respect to that
portion of the Deposit Accounts which consists of required deposits in the event
and during the continuation of any default in the payment of any Senior
Indebtedness and (ii) in the event any default (other than those referred to in
clause (i)), shall occur and be continuing with respect to any Senior
Indebtedness permitting the holders of such Senior Indebtedness to accelerate
the maturity thereof, no payment shall be made with respect to that portion of
the Deposit Accounts which consists of required deposits during any period (a)
of 180 days after the giving of written notice of such default by the holders of
such Senior Indebtedness to the Company, or (b) in which judicial proceedings
shall be pending in respect of such default, a notice of acceleration of the
maturity of such Senior Indebtedness shall have been transmitted to the Company
in respect of such default and such judicial proceedings shall be diligently
pursued in good faith. With respect to clause (ii)(a) above, only one such
notice shall be given in any twelve consecutive months.
2. SUBORDINATION AGREEMENTS EXECUTED PRIOR TO JANUARY 14, 1994.
With respect to patrons who executed subordination agreements prior to
January 14, 1994 and who do not execute new subordination agreements after that
date, that portion of the Deposit Account of each such patron which consists of
required deposits is, under the terms of such agreements, subordinated and
subject in right of payment to the prior payment in full of the principal of
(and premium, if any) and interest upon all
8
<PAGE>
Senior Indebtedness. As to such patrons, the term "Senior Indebtedness" means,
(A) any and all indebtedness of the Company which may from time to time be
outstanding as shall be payable with respect to short term notes and other
commercial paper issued by the Company and which are rated by a nationally
recognized securities rating agency, (B) any and all indebtedness, whether
contingent or otherwise, of the Company which may from time to time be
outstanding and be payable to any bank, insurance company, or other financial
institution, and (C) any and all indebtedness of others which may from time to
time be guaranteed by the Company and is payable to any bank, insurance company
or other financial institution.
The subordination is such that upon any distribution of the assets of the
Company upon any voluntary or involuntary dissolution, winding up or
liquidation, reorganization, readjustment, arrangement, or similar proceedings,
relating to the Company or its property, whether or not the Company is a party
thereto, and whether in bankruptcy, insolvency or receivership proceedings or
otherwise, or on any assignment by the Company for the benefit of creditors, or
upon any other marshaling of the assets and liabilities of the Company, all
Senior Indebtedness shall be paid in full, or provision made for such payment
satisfactory to the holders of such Senior Indebtedness, before any payment is
made on account of the principal of or interest, if any, on that portion of the
Deposit Accounts which consists of required deposits. By reason of such
subordination, in the event of insolvency, creditors of the Company who are
holders of Senior Indebtedness may recover more ratably than holders of the
Deposit Accounts. In addition, no payment shall be made on account of the
principal of or interest, if any, on that portion of any Deposit Account which
consists of required deposits, if (i) there shall have occurred a default in
payment in the principal of (or premium, if any) or interest on any Senior
Indebtedness, or (ii) there shall have occurred any other event of default with
respect to any Senior Indebtedness, permitting the holders thereof to accelerate
the maturity thereof and if written notice of election so to accelerate shall
have been given to the Company by the holder or holders of such Senior
Indebtedness or their representative or representatives, or (iii) payment on
account of principal of or interest, if any, on that portion of any Deposit
Account which consists of required deposits would itself constitute an event of
default with respect to any Senior Indebtedness, unless or until such event of
default described in clauses (i), (ii) or (iii) shall have been cured or waived
or shall have ceased to exist.
3. NO LIMIT ON SENIOR INDEBTEDNESS.
There is no limitation on the creation of additional Senior Indebtedness by
the Company. Outstanding Senior Indebtedness to which the required deposits of
patrons is subordinated aggregated approximately $132,000,000 as of November 15,
1996.
INTEREST
That portion of the Deposit Accounts which consists of required deposits is
non-interest bearing. While the Board of Directors of the Company could, in its
sole discretion, authorize the payment of interest on such portion, it has no
present plans to do so.
Except for deposits under the Company's price reservation program, the
Company currently pays interest on amounts in the Deposit Accounts which are in
excess of required deposits. The rate of interest is 8.25% per annum at the date
of this Prospectus. The rate of interest during each fiscal month of the Company
will be the prime rate established by Bankers Trust Company and as in effect on
the 25th day of the preceding calendar month, or, if not then available for any
reason, on the next succeeding day when such rate is available. However, if such
rate is not available for any reason prior to the beginning of the applicable
fiscal month, the rate used for the previous fiscal month will continue to be
used. Interest for a fiscal month will be paid only on those amounts which do
not consist of required deposit and which are in the Deposit Accounts during the
entire fiscal month. Such interest will not be compounded. Such interest will be
paid to the patron semi-annually by the Company in March and September of each
year. However, upon request of the patron, such interest will be paid by credit
to the patron's Deposit Account.
The payment of interest on that portion of the Deposit Accounts which does
not consist of required deposits may be changed or eliminated at any time in the
discretion of the Board of Directors.
9
<PAGE>
REPAYMENT
Upon request, the Company will return to patrons the amount of their Deposit
Accounts which is in excess of the portion thereof which consists of required
deposits, provided that the patron is not in default in its obligations to the
Company or any of its subsidiaries.
On termination of membership of a member-patron or on an associate patron
ceasing to do business with the Company, the Company will return the Deposit
Account, less all amounts that may be owing to the Company and any of its
subsidiaries. In all cases, however, return of that portion of the Deposit
Account which consists of required deposits will be governed by the
subordination provisions to which it is subject and will be returned only as and
to the extent permitted thereby.
Since the Deposit Accounts are not segregated from the Company's other
funds, the Company's liquidity might be adversely affected if the Company were
required to return a substantial amount of the Deposit Accounts at one time or
over a brief period of time. While the Company's liquidity has not been
adversely affected in the past as a result of the return of deposits to patrons,
there can be no assurance that the Company's liquidity would not be adversely
affected in the future as a result of the return to patrons of a substantial
amount of Deposit Accounts. In addition, the Company has not established any
reserves to provide for the repayment of Deposit Accounts, nor are the Deposit
Accounts secured obligations of the Company. Thus, in the event a substantial
amount of Deposit Accounts were required to be repaid by the Company at one time
or over a brief period of time, or in the event the Company were to experience
financial difficulties or to become insolvent, there can be no assurance
respecting the Company's ability to repay the Deposit Accounts and respecting
the ability of the Company's patrons to recover the amount of their Deposit
Accounts.
OTHER SIGNIFICANT ASPECTS
The Deposit Accounts are not secured by any lien upon any assets of the
Company. They are nontransferable without the consent of the Company, which will
normally be withheld. Patrons will be required to pledge their Deposit Accounts
to the Company as security for their obligations to the Company and its
subsidiaries.
METHOD OF OFFERING
As a condition of doing business with the Company, patrons are required to
have executed subordination agreements providing for the maintenance of Deposit
Accounts with the Company, the pledging of their Deposit Accounts to the Company
to secure their obligations to the Company and its subsidiaries, and the
subordination of that portion of their Deposit Accounts which consists of
required deposits.
Such persons or entities who from time to time may be accepted as new
patrons of the Company will be required, as a condition of such acceptance, to
execute subordination agreements, which subordination agreements will be
effective from and after their date of execution, providing for the maintenance
of Deposit Accounts with the Company, the pledging of their Deposit Accounts to
the Company to secure their obligations to the Company and its subsidiaries, and
the subordination of that portion of their Deposit Accounts which consists of
required deposits. The subordination agreements to be executed by patrons on and
after January 14, 1994 will differ from the subordination agreements which have
been executed by patrons before that date. See, "DESCRIPTION OF DEPOSIT ACCOUNTS
- -- Subordination."
The offering of the Deposit Accounts is made by the Company only through its
regular employees who will not receive any additional remuneration in connection
therewith.
USE OF PROCEEDS
To the extent that Deposit Accounts of patrons increase in amount and to the
extent that Deposit Accounts are opened and maintained in connection with the
acceptance of new patrons, proceeds to the Company therefrom will be utilized as
working capital.
10
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
(THOUSANDS OMITTED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $1,948,919 $1,822,804 $1,873,872 $2,007,288 $2,377,740
Declared patronage dividends....... 13,200 11,571 10,837 12,880 12,977
Net earnings (loss)................ 1,517 769 94 473 (3,648)
Total assets....................... 373,360 398,603 398,569 403,979 449,713
Long-term notes payable............ 75,617 129,686 149,673 158,585 178,702
Book value per share............... 167.94 165.86 163.03 163.52 162.42
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED AUGUST 31, 1996
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and notes
thereto.
RESULTS OF OPERATIONS
The following table sets forth selected financial data of the Company
expressed as a percentage of net sales for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
AUGUST 31, SEPTEMBER 2, SEPTEMBER 3,
1996 1995 1994
----------- ------------ -------------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 90.8 90.7 90.6
Distribution, selling and administrative............... 7.7 7.8 8.0
Operating income....................................... 1.5 1.5 1.4
Interest expense....................................... 0.7 0.8 0.8
Other income (expense), net............................ 0.0 0.0 (0.1)
Earnings before patronage dividends, provision for
income taxes and cumulative effect of accounting
change................................................ 0.8 0.7 0.5
Declared patronage dividends........................... 0.7 0.7 0.6
Cumulative effect of accounting change................. 0.1
Net earnings........................................... 0.1 0.0 0.0
</TABLE>
FISCAL YEAR ENDED AUGUST 31, 1996 ("FISCAL 1996") COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 2, 1995 ("FISCAL 1995")
NET SALES. Sales increased $126.1 million or 6.9% over fiscal 1995. This
increase is a result of $134.8 million of additional large customer volume added
during fiscal 1995 and 1996, and $47.6 million of increased sales to the
existing membership. These improvements in sales volume were achieved even
though the Company experienced lower volume in its general merchandise division
of approximately $56.3 million, resulting from the reduction in general
merchandise and health and beauty care purchases by Food 4 Less GM, Inc..
COST OF SALES. Cost of sales for fiscal 1996 totaled $1.8 billion, an
increase of $116.7 million or 7.1% over fiscal 1995. The increase is related to
the additional sales discussed above and as a percentage of sales is slightly
higher than the fiscal 1995 averages. This increase is reflective of pricing
efficiencies passed on to the Company's membership as a result of the additional
volume.
DISTRIBUTION, SELLING AND ADMINISTRATIVE. Distribution, selling and
administrative expenses were $149.1 million or 7.7% of net sales in fiscal 1996,
as compared to $141.9 million or 7.8% of net sales in fiscal 1995. The level of
expenses for fiscal 1996 is relatively consistent with fiscal 1995, reflecting
only the required marginal increase in costs associated with the additional
volume.
OPERATING INCOME. As a result of the Company's continued cost control
measures and the benefits of additional volume, operating income increased over
fiscal 1995 by 8.5%. Operating income totaled $29.5 million for fiscal 1996
compared to $27.2 million for fiscal 1995.
INTEREST. Interest expense totaled $14.4 million for fiscal 1996, which is
approximately $0.9 million or 5.6% lower than fiscal 1995. The decrease is
primarily associated with lower borrowing requirements due to the Company's
improved cash flow management.
OTHER INCOME (EXPENSE), NET. In the third quarter of fiscal 1996, the
Company sold 100% of its common stock ownership in Hawaiian Grocery Stores, Ltd.
("HGS"), a wholly-owned subsidiary, for $2.4 million. The sale resulted in a
pretax gain of $366,000. Pursuant to this transaction, the Company retained an
ownership interest in HGS represented by 1,000 shares of preferred stock with a
total book value of $1 million. The
12
<PAGE>
Company and HGS intend to continue a business relationship in the future through
supply and joint purchasing arrangements. Fiscal 1995 reflects a $511,000 gain
on the sale of the Company's investment in preferred and common stock of Major
Market, Inc. ("MMI") as discussed below.
NET EARNINGS. Net earnings for fiscal 1996 increased to $1,517,000. Fiscal
1996 earnings represent a 97% increase over fiscal 1995 earnings of $769,000 and
1,514% increase over fiscal 1994 earnings of $94,000. The earnings increase
reflects the benefits generated from the Company's subsidiaries, whose earnings
are retained by the Company.
FISCAL YEAR ENDED SEPTEMBER 2, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
3, 1994 ("FISCAL 1994")
NET SALES. Fiscal 1994 included 53 weeks of sales while fiscal 1995
included 52 weeks of sales. Taking this difference into consideration, net sales
during fiscal 1995 remained relatively consistent with net sales during fiscal
1994. During 1995, the Company added two significant customers which contributed
approximately $64 million in net sales, spread among most sales categories.
These sales gains were offset by the loss of a significant frozen food customer
during 1994 and a reduction in transportation service fees.
COST OF SALES. Cost of sales decreased $45 million (2.7%) to $1.7 billion
in fiscal 1995 as compared to fiscal 1994. Cost of sales, as a percentage of
sales, has remained consistent with fiscal 1994. The decrease in cost of sales
results primarily from the decreased sales discussed above.
DISTRIBUTION, SELLING AND ADMINISTRATIVE. Distribution, selling and
administrative expenses were $141.9 million or 7.8% of net sales in fiscal 1995,
as compared to $149.3 million or 8.0% of net sales in fiscal 1994. The decrease
in total expense was primarily due to the reduction of payroll costs and the
implementation of other programs in the Company's distribution and manufacturing
facilities to increase efficiency. Partially offsetting the benefits of these
cost reduction programs was a one time charge of $1.6 million resulting from the
adoption of Statement of Financial Accounting Standards No. 112 "Employers'
Accounting for Postemployment Benefits" ("SFAS No. 112").
OPERATING INCOME. Operating income increased 6.1% in fiscal 1995, totalling
$27.2 million. This compares to $25.6 million for fiscal 1994. This increase is
a direct result of the reduction in distribution and manufacturing costs
described above.
OTHER INCOME (EXPENSE), NET. In fiscal 1993, Grocers Capital Company
("GCC") acquired an 81% investment in MMI for $1.6 million. The investment was
previously consolidated in the Company's financial statements. In fiscal 1995,
GCC sold its preferred stock and 282,600 shares of common stock to MMI. GCC
received proceeds of $120,000 and a note receivable for approximately $2.6
million. GCC now holds approximately 20% of MMI's outstanding common shares and
accounts for the investment using the cost method. GCC does not have significant
influence or control of MMI. GCC recorded a pretax gain of $511,000 on the sale
of this investment.
INTEREST. Interest expense of $15.3 million in fiscal 1995 has remained
relatively consistent with fiscal 1994.
NET EARNINGS. Net earnings increased to $769,000 in fiscal 1995,
representing a 718% increase from fiscal 1994 net earnings of $94,000. Excluding
the impact of adopting SFAS No. 109 in the 1994 period, and SFAS No. 112 in the
1995 period, the Company experienced an improvement in after-tax earnings of
approximately $4.8 million for fiscal 1995 as compared to fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies upon cash flow from operations, patron deposits,
Patronage Certificates, shareholdings and borrowings under the Company's credit
lines, to finance operations. Net cash provided from operating activities
totalled $38.3 million for fiscal 1996, $9.1 million for fiscal 1995, and $18.2
million for fiscal 1994. The Company's cost and expense reductions, revised
marketing programs, and the dividend retention program provide adequate
operating cash flow to conduct the Company's business operations. At August 31,
1996, working capital was $63.1 million, and the current ratio was 1.3 and 1.7
at fiscal year end 1996 and 1995, respectively. Working capital varies
throughout the year primarily as a result of seasonal inventory requirements.
13
<PAGE>
Capital expenditures totalled $13.3 million in fiscal 1996 and $9.4 million
in fiscal 1995 and $5.9 million in fiscal 1994.
The Company has agreements with certain banks that provide for committed
lines of credit. These credit lines are available for general working capital,
acquisitions, and maturing long-term debt. At the end of fiscal 1996, the
Company had a $135 million committed line of credit, of which $107.3 million was
not utilized. The $135 million secured, committed line of credit matures March
17, 1999. The credit agreement is collateralized by accounts receivable,
inventory, and certain other assets of the Company and two of its principal
subsidiaries, excluding equipment, real property and the assets of GCC. The
agreement provides for Eurodollar basis or prime basis borrowings at the
Company's option. As of August 31, 1996, the Company's outstanding borrowings,
including obligations under capital leases of approximately $3.7 million,
amounted to $87.1 million, of which $75.6 million was classified as noncurrent.
On August 30 ,1996, a $25 million credit agreement was paid off in full and
terminated by the Company. Funds for the payoff were provided through a loan
purchase agreement with a bank. The loan purchase agreement maturity date is
August 29, 2001, but is subject to extension by mutual agreement of the Company
and the bank for an additional one year on each anniversary date of the initial
purchase date. Total loan purchases under the agreement are limited to a total
aggregate principal outstanding of $50 million.
On September 20, 1996, the Company entered into a credit agreement for $10
million. This line is available for funding loans. The credit agreement is
collateralized by GCC's member loan receivables. The maturity date is September
20, 2001, but is subject to an annual extension of one year by the mutual
consent of the Company and the bank. The agreement provides for prime basis or
Eurodollar basis borrowings at the Company's option.
In fiscal 1995, the Company completed a sale leaseback transaction involving
an office building used to house the Company's support personnel. Proceeds from
the transaction were $11.5 million. Concurrent with the sale of the real
property, the Company entered into a twenty year lease of the property, with two
ten year extension options.
Patronage dividends are currently paid out in the following order and
manner: first, patrons receive 20% in cash; second, member-patrons receive the
required amount of Class B Shares; third, the remainder is credited to the
patron's deposit account.
In addition, Certified issued subordinated patronage dividend certificates
("Patronage Certificates") evidencing the retention of a portion of patronage
dividends for fiscal years 1993, 1994 and 1995. The amounts retained were
deducted from each member-patron's patronage dividend prior to the issuance of
Class B Shares to such member-patron.
Patronage Certificates are unsecured general obligations of Certified, are
subordinated to certain other indebtedness of Certified, and are nontransferable
without the consent of the Company. The Patronage Certificates are subject to
redemption, at any time in whole and from time to time in part, without premium,
at the option of Certified, and are subject to being set off, at the option of
Certified, against all or any portion of the amounts owing to the Company by the
holder.
The Board of Directors determined that in fiscal 1993, 1994 and 1995, the
portion of the patronage dividend retained and evidenced by the issuance of
Patronage Certificates was 20% of the fourth quarter fiscal 1993 dairy division
dividend, 20% of the fiscal 1994 dairy division dividends and 20% of the first
and second quarter fiscal 1995 dividends for the dairy division. The Patronage
Certificates were 40% of the fiscal 1993, 1994 and 1995 dividends for non-dairy
products. The Patronage Certificates have a seven year term, and bear interest
payable annually on December 15 in each year.
14
<PAGE>
The following table represents a summary of the Patronage Certificates
issued and their respective terms in fiscal 1993, 1994 and 1995.
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
FISCAL PRINCIPAL INTEREST MATURITY
YEAR AMOUNT RATE DATE
- ------------------------------ ---------- --------- --------
<S> <C> <C> <C>
1993.......................... $2,018,000 7% 12/15/00
1994.......................... $2,426,000 8% 12/15/01
1995.......................... $2,117,000 7% 12/15/02
</TABLE>
During fiscal 1996, the Company set off approximately $12,000 in Patronage
Certificates against a portion of amounts owed to the Company by the holders.
For the third and fourth quarters of fiscal 1995, the Company suspended the
retention of any of the dairy division patronage dividends due to competitive
market conditions. During fiscal 1996 the retention program was suspended for
all divisions, including the dairy. While the Company suspended the retention
program for fiscal 1996, the retention program has not been discontinued. The
Company expects to continue to distribute patronage dividends in the future,
although there can be no assurance of the amounts of such dividends.
Patrons are generally required to maintain subordinated deposits with the
Company and member-patrons purchase shares of stock of the Company. Upon
termination of patron status, the withdrawing patron will be entitled to recover
deposits in excess of its obligations to the Company 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. The Company's current redemption
policy limits the Class B Shares that the Company is obligated to redeem in any
fiscal year to 5% of the number of Class B Shares deemed outstanding at the end
of the preceding fiscal year. In fiscal 1996, this limitation restricted the
Company's redemption of shares to 19,238 shares for $3,190,815. In fiscal 1997,
the 5% limitation will restrict the Company's redemption of shares to 19,191
shares for $3,222,937. The number of shares tendered for redemption at October
31, 1996 totalled 77,481 (or approximately $13.0 million, using fiscal 1996 year
end book value), which exceeds the amount that can be redeemed in fiscal 1997.
Consequently, the Company will be required to make redemptions in fiscal 1998,
1999 and 2000, with such redemptions approximating $9.8 million based on 1996
year end book value and estimated share issuances for those years. The
redemption price for shares is based upon their book value as of the end of the
year preceding redemption. Cash flow to fund redemption of shares is provided
from operations, patron deposits, Patronage Certificates, current shareholdings
and borrowings under the Company's credit lines.
LEGAL MATTERS
The validity of the Deposit Accounts has been passed upon for the Company by
Burke, Williams & Sorensen, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of August 31, 1996
and for the fiscal year then ended, included in this Prospectus, and included in
the Annual Report on Form 10-K of the Company incorporated by reference into
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, which are included and incorporated by
reference herein and have been so included and incorporated in reliance on the
report of such firm, given upon their authority as experts in accounting and
auditing.
The consolidated balance sheet of the Company and subsidiaries as of
September 2, 1995 and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the two fiscal years in the
period ended September 2, 1995, included in this Prospectus, and included in the
Annual Report on Form 10-K of the Company, incorporated by reference into this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of said firm as
experts in accounting and auditing.
15
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Reports............................................................................ 17
Consolidated Balance Sheets as of August 31, 1996 and September 2, 1995.................................. 19
Consolidated Statements of Earnings for Fiscal Years Ended August 31, 1996, September 2, 1995 and
September 3, 1994....................................................................................... 20
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended August 31, 1996, September 2, 1995
and September 3, 1994................................................................................... 21
Consolidated Statements of Cash Flows for Fiscal Years Ended August 31, 1996, September 2, 1995 and
September 3, 1994....................................................................................... 22
Notes to Consolidated Financial Statements............................................................... 23
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Certified Grocers of California, Ltd.
We have audited the consolidated balance sheet of Certified Grocers of
California, Ltd. and subsidiaries as of August 31, 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the fiscal year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Certified Grocers of California, Ltd. and subsidiaries as of August 31, 1996 and
the results of their operations and their cash flows for the fiscal year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 31, 1996
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Certified Grocers of California, Ltd.
We have audited the consolidated balance sheet of Certified Grocers of
California, Ltd. and subsidiaries as of September 2, 1995 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the two fiscal years in the period ended September 2, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Certified Grocers of California, Ltd. and subsidiaries as of September 2, 1995
and the results of their operations and their cash flows for each of the two
fiscal years in the period ended September 2, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes and postretirement benefits
other than pensions in 1994 and postemployment benefits in 1995.
COOPERS AND LYBRAND L.L.P.
Los Angeles, California
November 27, 1995
18
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AUGUST 31, 1996 AND SEPTEMBER 2, 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current:
Cash and cash equivalents............................................................ $ 6,451 $ 7,329
Accounts and notes receivable, net................................................... 98,424 104,249
Inventories.......................................................................... 136,303 149,432
Prepaid expenses..................................................................... 4,625 4,789
Deferred taxes....................................................................... 5,356 2,850
---------- ----------
Total current assets........................................................... 251,159 268,649
Properties, net........................................................................ 73,571 71,816
Investments............................................................................ 27,541 22,051
Notes receivable....................................................................... 8,309 25,622
Other assets........................................................................... 12,780 10,465
---------- ----------
TOTAL ASSETS................................................................. $ 373,360 $ 398,603
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Accounts payable..................................................................... $ 98,468 $ 86,159
Accrued liabilities.................................................................. 62,986 51,018
Current portion of notes payable..................................................... 11,440 11,573
Patrons' excess deposits and declared patronage dividends............................ 15,157 12,214
---------- ----------
Total current liabilities...................................................... 188,051 160,964
Notes payable, due after one year...................................................... 75,617 129,686
Long-term liabilities.................................................................. 14,913 12,210
Commitments and contingencies -- See Notes 12 and 15
Patrons' deposits and certificates:
Patrons' required deposits........................................................... 15,524 17,022
Subordinated patronage dividend certificates......................................... 6,549 6,561
Shareholders' equity
Class A Shares....................................................................... 5,305 5,292
Class B Shares ...................................................................... 56,504 56,266
Retained earnings ................................................................... 11,436 10,488
Net unrealized gain (loss) on appreciation (depreciation) of investments............. (284) 114
Minimum pension liability adjustment................................................. (255)
---------- ----------
Total shareholders' equity..................................................... 72,706 72,160
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 373,360 $ 398,603
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
FOR FISCAL YEARS ENDED AUGUST 31, 1996, SEPTEMBER 2, 1995, AND SEPTEMBER 3, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales......................................................... $ 1,948,919 $ 1,822,804 $ 1,873,872
Costs and expenses:
Cost of sales................................................... 1,770,339 1,653,660 1,698,930
Distribution, selling and administrative........................ 149,078 141,947 149,303
------------ ------------ ------------
Operating income.................................................. 29,502 27,197 25,639
Interest expense.................................................. (14,406) (15,260) (15,405)
Other income (expense), net....................................... 366 509 (1,600)
------------ ------------ ------------
Earnings before patronage dividends, provision for income taxes
and cumulative effect of accounting change...................... 15,462 12,446 8,634
Declared patronage dividends...................................... (13,200) (11,571) (10,837)
------------ ------------ ------------
Earnings (loss) before income tax provision and cumulative effect
of accounting change............................................ 2,262 875 (2,203)
Provision for income taxes........................................ 745 106 203
------------ ------------ ------------
Earnings (loss) before cumulative effect of accounting change..... 1,517 769 (2,406)
Cumulative effect of accounting change............................ 2,500
------------ ------------ ------------
Net earnings...................................................... $ 1,517 $ 769 $ 94
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
FOR FISCAL YEARS ENDED AUGUST 31, 1996, SEPTEMBER 2, 1995, AND SEPTEMBER 3, 1994
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON MINIMUM
CLASS A CLASS B APPRECIATION PENSION
-------------------- -------------------- RETAINED (DEPRECIATION) LIABILITY
SHARES AMOUNT SHARES AMOUNT EARNINGS OF INVESTMENTS ADJUSTMENT
--------- --------- --------- --------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 28, 1993..................... 49,700 $ 4,285 394,326 $ 57,238 $ 11,085
Class A Shares issued...................... 6,000 981
Class A Shares redeemed.................... (6,600) (562) (517)
Class B Shares issued...................... 13,676 2,230
Class B Shares redeemed.................... (19,716) (2,875) (349)
Net earnings............................... 94
Net unrealized loss on depreciation of
investments (net of deferred tax benefit
of $157).................................. $ (304)
--------- --------- --------- --------- --------- -----
Balance, September 3, 1994................... 49,100 4,704 388,286 56,593 10,313 (304)
Class A Shares issued...................... 7,800 1,271
Class A Shares redeemed.................... (6,600) (683) (393)
Class B Shares issued...................... 15,895 2,637
Class B Shares redeemed.................... (19,414) (2,964) (201)
Net earnings............................... 769
Net unrealized gain on appreciation of
investments (net of deferred tax of
$216)..................................... 418
--------- --------- --------- --------- --------- -----
Balance, September 2, 1995................... 50,300 5,292 384,767 56,266 10,488 114
Class A Shares issued...................... 4,800 796
Class A Shares redeemed.................... (6,000) (783) (212)
Class B Shares issued...................... 18,286 3,072
Class B Shares redeemed.................... (19,238) (2,834) (357)
Net earnings............................... 1,517
Net unrealized loss on depreciation of
investments (net of deferred tax benefit
of $205).................................. (398)
Minimum pension liability adjustment (net
of tax of $195)........................... $ (255)
--------- --------- --------- --------- --------- ----- -----
Balance, August 31, 1996..................... 49,100 $ 5,305 383,815 $ 56,504 $ 11,436 $ (284) $ (255)
--------- --------- --------- --------- --------- ----- -----
--------- --------- --------- --------- --------- ----- -----
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR FISCAL YEARS ENDED AUGUST 31, 1996, SEPTEMBER 2, 1995, AND SEPTEMBER 3, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................................... $ 1,517 $ 769 $ 94
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Gain on sale of investments in affiliates.................................. (366) (511)
Cumulative effect of accounting change..................................... (2,500)
Depreciation and amortization.............................................. 10,022 9,982 10,680
Deferred taxes............................................................. (3,819) (273)
(Gain) loss on disposal of properties...................................... (158) 366 (445)
Accrued benefit costs...................................................... 2,595 5,616 2,940
Accrued environmental liabilities.......................................... 110 1,100
Accrued sublease liability................................................. (167) (230) 1,228
Facility relocation........................................................ 520
Decrease (increase) in assets:
Accounts and notes receivable............................................ 1,892 (7,757) 3,428
Inventories.............................................................. 6,893 (3,976) 1,611
Prepaid expenses......................................................... 131 (1,041) 170
Notes receivable......................................................... (10,547) 293 2,720
Increase (decrease) in liabilities:
Accounts payable......................................................... 14,905 4,825 (2,741)
Accrued liabilities...................................................... 12,449 218 2,584
Patrons' excess deposits and declared patronage dividends................ 2,943 673 (3,205)
--------- --------- ---------
Net cash provided by operating activities...................................... 38,290 9,064 18,184
--------- --------- ---------
Cash flows from investing activities:
Purchase of properties....................................................... (13,350) (9,363) (5,921)
Proceeds from sales of properties............................................ 1,846 12,489 1,295
Decrease in other assets..................................................... (1,703) (1,793) (244)
Investment in securities, net................................................ (4,888) (1,316) (7,974)
Proceeds from sale of notes receivable....................................... 27,860
Sales of investments in affiliates, net of cash disposed*.................... 1,785 (479)
--------- --------- ---------
Net cash provided (utilized) by investing activities........................... 11,550 (462) (12,844)
--------- --------- ---------
Cash flows from financing activities:
Reduction of long-term notes payable......................................... (37,329) (7,534) (5,934)
Reduction of short-term notes payable........................................ (11,573) (2,658) (3,132)
Decrease in members' required deposits....................................... (1,498) (567) (1,312)
Issuance of subordinated patronage dividend certificates..................... 2,117 2,421
Repurchase of shares from members............................................ (4,186) (4,224) (4,303)
Issuance of shares to members................................................ 3,868 3,891 3,211
--------- --------- ---------
Net cash utilized by financing activities...................................... (50,718) (8,975) (9,049)
--------- --------- ---------
Net decrease in cash and cash equivalents...................................... (878) (373) (3,709)
Cash and cash equivalents at beginning of year ................................ 7,329 7,702 11,411
--------- --------- ---------
Cash and cash equivalents at end of year....................................... $ 6,451 $ 7,329 $ 7,702
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................................................... $ 14,929 $ 15,006 $ 15,232
Income taxes ................................................................ 980 2,388 70
--------- --------- ---------
$ 15,909 $ 17,394 $ 15,302
--------- --------- ---------
--------- --------- ---------
*Sales of investments in affiliates, net of cash disposed:
Working capital, other than cash............................................. $ 7,188 $ (980)
Property, plant and equipment................................................ 460 1,596
Note receivable.............................................................. (2,580)
Investment in preferred stock................................................ (1,000)
Other assets................................................................. 71 1,857
Proceeds in excess of net assets of affiliates sold, net..................... 366 511
Long-term debt............................................................... (5,300) (883)
--------- ---------
Net cash effect from sales of investments in affiliates.................... $ 1,785 $ (479)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Certified
Grocers of California, Ltd. and its subsidiaries ("Certified" or the "Company").
Intercompany transactions and accounts with subsidiaries have been eliminated.
NATURE OF BUSINESS:
The Company is a cooperative organization engaged primarily in the
distribution of food products and related nonfood items primarily to retail
establishments owned by shareholders of the Company. All establishments with
which directors are affiliated, as members of the Company, purchase groceries,
related products and store equipment from the Company in the ordinary course of
business at prices and on terms available to members generally.
The Company's fiscal year ends on the Saturday nearest to August 31. Fiscal
years 1996 and 1995 included 52 weeks, while fiscal year 1994 included 53 weeks.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' financial
statements to present them on a basis comparable with the current year's
presentation.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost (first-in, first-out) or market.
DEPRECIATION:
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which are 40 years for buildings and 10 years for
equipment. Leasehold improvements are amortized based on the estimated life of
the asset or the life of the lease, whichever is shorter. Expenditures for
replacements or major improvements are capitalized; expenditures for normal
maintenance and repairs are charged to operations as incurred. Upon sale or
retirement of properties, the cost and accumulated depreciation are removed from
the accounts, and any gain or loss is included in operations.
POSTRETIREMENT BENEFITS:
Effective August 29, 1993, the Company implemented Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS No. 106"). This statement requires that the cost of
these benefits, which are primarily for health care and life insurance, be
recognized in the financial statements throughout the employees' active working
careers. The Company's previous practice was to expense these costs on a cash
basis, principally after retirement. The transition obligation is being
amortized on a straight-line basis over twenty years as allowed under SFAS No.
106.
POSTEMPLOYMENT BENEFITS:
The Financial Accounting Standards Board ("FASB") issued Statement No. 112
"Employers Accounting for Postemployment Benefits", which is effective for
fiscal years beginning after December 15, 1993. Accordingly, the Company
conformed to the new requirements in fiscal 1995. The new accounting standard
requires an accrual rather than a pay-as-you-go basis of recognizing expenses
for postemployment benefits (provided by an employer to former or inactive
employees after termination of employment but before retirement).
23
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
INCOME TAXES:
Effective August 29, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative
effect of this change in accounting principle increased the Company's fiscal
1994 net earnings by $2.5 million. Accordingly, the Company provides for income
taxes using the asset and liability method under which deferred income taxes are
recognized for the estimated future tax effects attributable to temporary
differences and carryforwards that result from events that have been recognized
either in the financial statements or in the income tax returns but not both.
The measurement of current and deferred income tax liabilities and assets is
based on provisions of enacted tax laws. Valuation allowances are recognized if
based on the weight of available evidence, it is more likely than not that some
portion of the deferred tax assets will not be realized.
INVESTMENTS:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"), on September 3, 1994. Investments in debt
securities and equity securities with readily determinable fair values are
classified into categories based on the Company's intent. Investments available
for sale are carried at estimated fair value. Unrealized holding gains and
losses are excluded from earnings and reported, net of income taxes, as a
separate component of shareholders' equity until realized. For all investment
securities, unrealized losses that are other than temporary are recognized in
net income. Realized gains and losses are determined on the specific
identification method and are reflected in net earnings.
In accordance with SFAS 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect as
of September 3, 1994 of adopting SFAS 115 decreases shareholders' equity by
$304,000. There was no effect on net income.
The cost of securities sold is determined by the specific identification
method.
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.
IMPAIRMENT OF LONG-LIVED ASSETS:
The FASB issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", which is effective for fiscal years beginning after December
15, 1995. Accordingly, the Company will conform to the new requirements in
fiscal 1997. The Statement establishes guidelines to be used when evaluating
long-lived assets, identifiable intangibles, and related goodwill that an entity
plans to continue to use in operations for impairment and prescribes the
accounting when such assets are determined to be impaired. The Statement also
provides guidance on the accounting for similar assets that a company plans to
dispose of, except for those assets of a discontinued operation. Management
estimates that the adoption of this pronouncement will not have a material
effect on the Company's consolidated financial position and results of
operations.
24
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSFERS AND SERVICING OF FINANCIAL ASSETS:
The FASB issued Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which is effective for transfers and servicing of assets and
liabilities occurring after December 31, 1996. The Statement provides for
standards that are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Accordingly, the Company will conform to the new requirements for applicable
transactions occurring after December 31, 1996.
2. PROPERTIES:
Properties at August 31, 1996, and September 2, 1995 stated at cost, are
comprised of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land......................................................................... $ 8,812 $ 8,856
Buildings and leasehold improvements......................................... 64,269 64,321
Equipment.................................................................... 74,839 65,849
Equipment under capital leases............................................... 7,779 9,259
---------- ----------
155,699 148,285
Less accumulated depreciation and
amortization............................................................... 82,128 76,469
---------- ----------
$ 73,571 $ 71,816
---------- ----------
---------- ----------
</TABLE>
3. INVESTMENTS:
The amortized cost and fair values of investments available-for-sale,
including equity securities, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AUGUST 31, 1996 COST GAINS LOSSES VALUE
- --------------------------------------------------------- ----------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 10,219 $ 21 $ 350 $ 9,890
Corporate securities................................... 3,008 32 110 2,930
Mortgage backed securities............................. 1,052 35 1,017
----------- --- ----- ---------
Sub-total............................................ 14,279 53 495 13,837
Redeemable preferred stock............................... 7,739 22 10 7,751
Equity securities........................................ 5,953 5,953
----------- --- ----- ---------
$ 27,971 $ 75 $ 505 $ 27,541
----------- --- ----- ---------
----------- --- ----- ---------
</TABLE>
25
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 2, 1995 COSTS GAINS LOSSES VALUE
- --------------------------------------------------------- ----------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 9,941 $ 138 $ 83 $ 9,996
Corporate securities................................... 1,765 57 14 1,808
Mortgage backed securities............................. 933 19 1 951
----------- ----- --- ---------
Sub-total............................................ 12,639 214 98 12,755
Redeemable preferred stock............................... 6,696 58 1 6,753
Equity securities........................................ 2,543 2,543
----------- ----- --- ---------
$ 21,878 $ 272 $ 99 $ 22,051
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
Fixed maturity investments are due as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
AUGUST 31, 1996 COST VALUE
- -------------------------------------------------------------------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed Maturities Available for Sale:
Due in one year or less....................................................... $ -- $ --
Due after one year through five years......................................... 6,109 6,006
Due after five years through ten years........................................ 5,173 5,004
Due after ten years........................................................... 2,997 2,827
----------- -----------
$ 14,279 $ 13,837
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
SEPTEMBER 2, 1995 COST VALUE
- -------------------------------------------------------------------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed Maturities Available for Sale:
Due in one year or less....................................................... $ 300 $ 304
Due after one year through five years......................................... 4,420 4,438
Due after five years through ten years........................................ 4,475 4,481
Due after ten years........................................................... 3,444 3,532
----------- -----------
$ 12,639 $ 12,755
----------- -----------
----------- -----------
</TABLE>
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.
26
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities................................................................ $ 1,834 $ 1,469 $ 1,094
Preferred stock................................................................. 350 563 461
Equity securities............................................................... 132
Cash and cash equivalents....................................................... 197 171 95
--------- --------- ---------
2,513 2,203 1,650
Less investment expenses........................................................ 95 85 110
--------- --------- ---------
Net investment income....................................................... $ 2,418 $ 2,118 $ 1,540
--------- --------- ---------
--------- --------- ---------
</TABLE>
Investments carried at fair values of $11,586,000 and $11,272,000 at August
31, 1996 and September 2, 1995 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.
4. ACCRUED LIABILITIES:
Accrued liabilities at August 31, 1996 and September 2, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accrued promotional & other liabilities........................................ $ 12,686 $ 6,777
Insurance loss reserves & other liabilities.................................... 15,492 11,261
Accrued income & other taxes payable........................................... 9,641 5,395
Accrued wages & related taxes.................................................. 9,021 8,985
Other accrued liabilities...................................................... 16,146 18,600
--------- ---------
$ 62,986 $ 51,018
--------- ---------
--------- ---------
</TABLE>
27
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE:
Notes payable at August 31, 1996 and September 2, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable to banks under revolving credit agreements, expiring March 17,
1999, interest rate at prime (8.25% and 8.75% at August 31, 1996 and
September 2, 1995, respectively) plus 1/2% or Eurodollar (5.88% at August
31, 1996 and September 2, 1995) plus 1 1/2%................................ $ 27,682 $ 53,439
Subordinated note payable to a life insurance company, due April 1, 1999,
interest rate of 10.8%, $8,750,000 due April 1 each year beginning in
1996....................................................................... 26,250 35,000
Senior note payable to a life insurance company, collateralized through an
inter-creditor agreement with banks under the revolving credit agreement of
$135 million, due January 15, 2005, interest rate of 9.55%, $62,500 due
monthly each year beginning in 1992 through 2000 and then $220,833 monthly
until maturity............................................................. 15,750 16,500
Notes payable, collateralized by land and warehouses, payable monthly,
approximately $60,000 plus interest at 9.88%, due February 1, 2006......... 13,636 14,462
Note payable to banks under revolving credit agreements, terminated August
30, 1996, interest rate at prime (8.75% at September 2, 1995) plus 1/2% or
Eurodollar (5.88% at September 2, 1995) plus 1 1/2%........................ -- 15,500
Obligations under capital leases............................................. 3,739 6,358
---------- ----------
87,057 141,259
Less portion due within one year............................................. (11,440) (11,573)
---------- ----------
$ 75,617 $ 129,686
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt as of August 31, 1996 are:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1997................................................................. $ 11,440
1998................................................................. 11,343
1999................................................................. 39,035
2000................................................................. 4,039
2001................................................................. 4,334
Beyond 2001.......................................................... 16,866
------------
$ 87,057
------------
------------
</TABLE>
During fiscal 1996, the Company maintained two credit agreements with
certain banks that provide for committed lines of credit for general working
capital, acquisitions, and maturing long-term debt. At the end of fiscal 1996,
the Company had a $135 million committed line of credit, of which $107.3 million
was not utilized. The unused portion of this credit line is subject to annual
commitment fees of 0.375%.
The credit agreement contains various financial covenants pertaining to
working capital, debt-to-equity ratios, tangible net worth, earnings, and
similar provisions. In addition, on the required portion of member
28
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deposits and redemption of Class A and Class B Shares, no payment may be made if
there exists a default with respect to any senior indebtedness, as defined,
until such default has been cured or waived or until such senior indebtedness
has been paid in full.
The $135 million credit agreement is collateralized by accounts receivable,
inventory and certain other assets of the Company and two of its principal
subsidiaries, excluding equipment, real property and the assets of Grocers
Capital Company ("GCC"). The maturity date is March 17, 1999, but is subject to
extension by the mutual consent of the Company and the banks. The agreement
provides for Eurodollar basis or prime basis borrowings at the Company's option.
On August 30, 1996, a $25 million credit agreement was paid off in full and
terminated by GCC. Funds for the payoff were provided through a loan purchase
agreement with a bank. The loan purchase agreement maturity date is August 29,
2001, but is subject to extension by mutual agreement of the Company and the
bank for an additional one year on each anniversary date of the initial purchase
date. Total loan purchases under the agreement are limited to a total aggregate
principal outstanding of $50 million.
On September 20, 1996, the Company entered into a credit agreement for $10
million. This credit line is available for funding loans. The credit agreement
is collateralized by GCC's member loan receivables. The maturity date is
September 20, 2001, but is subject to an annual extension of one year by the
mutual consent of the Company and the bank. The agreement provides for prime
basis or Eurodollar basis borrowings at the Company's option.
As a result of maturing long-term debt (a non-cash financing activity), the
Company reclassified from long to short-term debt $11,440,000, $11,570,000, and
$2,978,000 in fiscal 1996, 1995, and 1994, respectively.
6. LEASES:
The Company has entered into both operating and capital leases for certain
warehouse, transportation and data processing computer equipment. The Company
has also entered into operating leases for approximately 40 retail supermarkets.
The majority of these locations are subleased to various member-patrons of the
Company. The operating leases and subleases are noncancelable, renewable,
include purchase options in certain instances, and require payment of real
estate taxes, insurance and maintenance. In addition, the Company is
contingently liable with respect to lease guarantees for certain member-patrons.
The total commitment for such lease guarantees approximates $38.2 million to
$40.2 million. The Company's security respecting these lease guarantees is
discussed in Note 13 under "Concentration of Credit Risk."
Total rent expense was $20,539,000, $21,051,000, and $22,707,000 in 1996,
1995, and 1994, respectively. Sublease rental income was $6,214,000, $5,308,000,
and $4,713,000 in 1996, 1995, and 1994, respectively.
29
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Minimum rentals (exclusive of real estate taxes, insurance, and other
expenses payable under the terms of the leases) as of August 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
--------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997............................................................... $ 1,255 $ 20,743
1998............................................................... 999 18,045
1999............................................................... 852 14,391
2000............................................................... 852 12,791
2001............................................................... 340 10,979
Beyond 2001........................................................ -- 84,030
------ --------
Total minimum lease payments..................................... 4,298 $ 160,979
--------
--------
Less amount representing interest.................................. (559)
------
Present value of net minimum lease payments........................ 3,739
Less current portion............................................... (1,028)
------
Total long-term portion.......................................... $ 2,711
------
------
</TABLE>
Minimum sublease rentals (exclusive of real estate taxes, insurance and
other expenses payable under the terms of the leases) as of August 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1997.............................................................................. $ 6,929
1998.............................................................................. 7,333
1999.............................................................................. 6,850
2000.............................................................................. 6,368
2001.............................................................................. 6,260
Beyond 2001....................................................................... 53,343
-------
$ 87,083
-------
-------
</TABLE>
In fiscal 1995, the Company completed a sale leaseback transaction with
Trinet Corporate Realty Trust, Inc. ("Trinet"), an unaffiliated third party. The
total sales price for the property was $11,500,000. Concurrent with the sale of
the real property, the Company and Trinet entered into a twenty year lease of
the property, with two ten year extension options. The monthly rental is
approximately $108,000 and is subject to CPI adjustment commencing on the first
day of the sixth, eleventh and sixteenth years. However, such CPI adjustments
shall not exceed four percent per annum on a cumulative basis during each five
year period. The gain on this transaction was $1.2 million of which $55,000 and
$41,000 of the deferred gain was recognized during fiscal 1996 and 1995.
30
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES:
The significant components of income tax expense (benefit) are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................... $ 3,641 $ 290 $ 2,049
Utilization of net operating loss carryforwards........... (800)
Deferred.................................................. (2,849) (72) (1,156)
--------- --------- ---------
792 218 93
--------- --------- ---------
State:
Current................................................... 923 114 377
Deferred.................................................. (970) (226) (267)
--------- --------- ---------
(47) (112) 110
--------- --------- ---------
$ 745 $ 106 $ 203
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's income taxes currently payable in 1995 and 1994 are in part
due to alternative minimum tax.
The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable....................................................... $ 5,058 $ 2,223
Accrued vacation/incentives............................................... 692 808
Closed store reserves..................................................... 886 562
Lease reserve............................................................. 382 483
Deferred income........................................................... 559 597
Insurance reserves........................................................ 1,794 1,736
Postretirement/postemployment benefits other than pensions................ 5,676 4,366
Alternative minimum tax credits........................................... 1,199 1,810
Tax credits............................................................... 110 110
Net operating loss carryforwards.......................................... 12 93
Other..................................................................... 1,418 1,362
----------- ------------
Total gross deferred tax assets......................................... 17,786 14,150
Less valuation allowance.................................................. (1,400) (1,400)
----------- ------------
Deferred tax assets..................................................... $ 16,386 $ 12,750
----------- ------------
----------- ------------
Deferred tax liabilities:
Property, plant and equipment............................................. $ 5,226 $ 4,561
Capitalized software...................................................... 1,587 1,380
Intangible assets......................................................... 676 1,878
Deferred state taxes...................................................... 679 349
Other..................................................................... 199 341
----------- ------------
Total gross deferred tax liabilities.................................... $ 8,367 $ 8,509
----------- ------------
----------- ------------
Net deferred tax asset.................................................. $ 8,019 $ 4,241
----------- ------------
----------- ------------
</TABLE>
Net deferred tax assets of $5,356,000 and $2,850,000 are included in
deferred taxes, current and $2,663,000 and $1,346,000 in other assets on the
Company's Consolidated Balance Sheets as of August 31, 1996 and September 2,
1995, respectively.
31
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The remaining balance of
the net deferred tax assets should be realized through future operating results,
the reversal of taxable temporary differences, and tax planning strategies.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit) at the statutory
rate....................................................... $ 769 $ 297 $(749)
State income taxes, net of federal income tax benefit....... 139 (75) 73
Insurance subsidiary not recognized for state taxes......... (123)
Dividend received deduction................................. (64) (128) (105)
Alternative minimum tax..................................... 385
Increase in valuation allowance............................. 392
Other, net.................................................. 24 12 207
----- ------- -----
Provision for income taxes.................................. $ 745 $ 106 $ 203
----- ------- -----
----- ------- -----
</TABLE>
At August 31, 1996, the Company has alternative minimum tax credit
carryforwards of approximately $1.2 million available to offset future regular
income taxes payable to the extent such regular taxes exceed alternative minimum
taxes payable.
8. SUBORDINATED PATRONAGE DIVIDEND CERTIFICATES:
In December 1992, the Company's Board of Directors authorized a patronage
dividend retention program to be effective commencing with the dividends payable
for fiscal 1993, whereby, subject to annual Board approval, Certified retains a
portion of the patronage dividends and issues Patronage Certificates (the
"Certificates") evidencing its indebtedness respecting the retained amounts. In
addition, the program provides for the issuance of the Certificates to patrons
on an annual basis in a portion and at an interest rate to be determined
annually by the Board of Directors. However, as to any particular patron, if the
amount of the retention is less than a specified minimum (presently $500), then
no retention occurs and a Certificate is not issued. Certificates for each year
are unsecured general obligations of Certified, are subordinated to certain
other Certified indebtedness, and are nontransferable without the consent of
Certified. The certificates are subject to redemption, at any time in whole and
from time to time in part, without premium, at the option of Certified.
The Board of Directors determined that in fiscal 1993, 1994 and 1995, the
portion of the patronage dividend retained and evidenced by the issuance of
Patronage Certificates was 20% of the fourth quarter fiscal 1993 dairy division
dividend, 20% of the fiscal 1994 dairy division dividends and 20% of the first
and second quarter fiscal 1995 dividends for the dairy division. The Patronage
Certificates were 40% of the fiscal 1993, 1994 and 1995 dividends for non-dairy
products. The Patronage Certificates have a seven year term, and bear interest
payable annually on December 15 in each year.
32
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents a summary of the Certificates issued and
their respective terms in fiscal 1993, 1994 and 1995.
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
FISCAL PRINCIPAL INTEREST MATURITY
YEAR AMOUNT RATE DATE
- ------------------------------ ---------- --------- --------
<S> <C> <C> <C>
1993.......................... $2,018,000 7% 12/15/00
1994.......................... $2,426,000 8% 12/15/01
1995.......................... $2,117,000 7% 12/15/02
</TABLE>
During fiscal 1996, the Company set off approximately $12,000 in Patronage
Certificates against a portion of amounts owed to the Company by the holders.
The Company expects to continue to distribute patronage dividends in the future,
although there can be no assurance of the amounts of such dividends.
For the third and fourth quarters of fiscal 1995, the Company suspended the
retention of any of the dairy division partronage dividends due to competitive
market conditions. During fiscal 1996 the retention program was suspended for
all divisions, including the dairy. While the Company suspended the retention
program for fiscal 1996, the retention program has not been discontinued.
9. CAPITAL SHARES:
The Company requires that each member-patron hold 100 Class A shares. Each
member-patron must also hold Class B Shares having combined issuance values
equal to the lesser of the amount of the member-patron's required deposit or
twice the member-patron's average weekly purchases (the "Class B Share
requirement"). For this purpose, each Class B Share held by a member-patron has
an issuance value equal to the book value of Certified's outstanding shares as
of the close of the fiscal year last ended prior to the issuance of such Class B
Share.
After payment of at least 20% of the patronage dividend in cash and the
issuance of the Patronage Certificates, Class B Shares are issued as a portion
of each member-patron's patronage dividend and, to the extent necessary to
fulfill the member-patron's Class B Share requirement, by crediting the
member-patron's cash deposit account for the issuance values of such shares.
All shares of a terminated member will be redeemed by the Company (subject
to certain legal limitations, provisions of the Company's redemption policy, and
provisions of certain of the Company's committed lines of credit) at a price
equal to the book value of the shares as of the close of the fiscal year ended
prior to the redemption, less all amounts that may be owing by the member to the
Company. All shares are pledged to the Company to secure the Company's
redemption rights and as collateral for all obligations to the Company. The
Company is not obligated in any fiscal year to redeem more than 5% of the sum of
the number of Class B Shares outstanding as of the close of the preceding fiscal
year and the number of Class B Shares issued as a part of the patronage dividend
for the preceding year (the "5% limit"). Thus, shares tendered for redemption in
a given fiscal year may not necessarily be redeemed in that fiscal year. The 5%
limit for fiscal year 1997 will allow for redemption of 19,191 shares.
Additionally, through October 1996,
33
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
335 shares have been tendered for redemption. The following table summarizes the
Class B Shares tendered and presently approved for redemption, shares redeemed,
and the remaining number of shares pending redemption:
<TABLE>
<CAPTION>
FISCAL
YEAR TENDERED REDEEMED REMAINING
- ------------------------------------------ -------- -------- --------- BOOK
VALUE
-------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Years prior to 1994....................... 118,424 60,094 128,719 $ 21,146
1994...................................... 38,130 19,716 76,744 12,512
1995...................................... 23,959 19,414 81,289 13,483
1996...................................... 15,095 19,238 77,146 12,956
</TABLE>
Because the 5% limit for fiscal year 1997 has been met, the remaining 58,290
shares (or approximately $9.8 million, using fiscal 1996 year end book value)
not redeemed in fiscal year 1997 as well as the redemption of any additional
Class B Shares tendered during fiscal 1997 will require the prior approval of
the Company's Board of Directors. At present, such approvals are not expected to
be given. Accordingly, since the Company's fiscal 1997 5% share redemption
limitation has been met, future redemptions for the 1997 fiscal year will be
postponed. The total of Class B Shares tendered and awaiting redemption has
caused the 5% limit for fiscal 1997, and will cause the limits for fiscal 1998
through 2000 to be met, thereby delaying the redemption of Class B Shares in
excess of such limit. The redemptions required for fiscal years 1998 through
2000 approximate $9.8 million based on 1996 year end book value and estimated
share issuances for those years. Cash flow to fund redemption of shares is
provided from operations, patron deposits, Patronage Certificates, current
shareholdings and borrowings under the Company's credit lines. Any additional
large tenderings of Class B Shares could also potentially cause future year 5%
limitations to be exceeded. Therefore, the Company's ability to redeem
additional shares in excess of the 5% limit without prior approval of the Board
may also be limited.
There are 500,000 authorized Class A Shares, of which 49,100 and 50,300 were
outstanding at August 31, 1996 and September 2, 1995, respectively. There are
2,000,000 authorized Class B Shares, of which 383,815 and 384,767 including
18,286 and 15,895 respectively issued after year end, were outstanding at August
31, 1996 and September 2, 1995, respectively. Once redeemed, such shares are not
available for reissuance to member-patrons.
No member-patron may hold more than one hundred Class A Shares. However, it
is possible that a member may have an interest in another member, or that a
person may have an interest in more than one member, and thus have an interest
in more than one hundred 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 one hundred Class A Shares. The price for such
shares will be the book value per share of outstanding shares at the close of
the fiscal year last ended.
There are also 15 authorized Class C Shares of which 15 are outstanding.
These shares are valued at $10 per share, and ownership is limited to members of
the Board of Directors with no rights as to dividends or other distributions.
Holders of Class A Shares are entitled to vote such shares cumulatively for
the election of 12 of the directors on the Board of Directors. Holders of the
Class B Shares are entitled to vote such shares cumulatively for the election of
3 of the directors on the Board of Directors. Except as required by California
law, the Class C Shares have no voting rights.
10. BENEFIT PLANS:
The Company has a noncontributory, defined benefit pension plan covering
substantially all of its nonunion employees. The benefits under the plan
generally are based on the employee's years of service and
34
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
average earnings for the three highest consecutive calendar years of
compensation during the ten years immediately preceding retirement. The Company
makes contributions to the pension plan in amounts which are at least sufficient
to meet the minimum funding requirements of applicable laws and regulations but
no more than amounts deductible for federal income tax purposes. Benefits under
the plan are included in a trust providing benefits through annuity contracts,
and part of the plan assets are held by a trustee.
The funded status of the plan and the amounts recognized in the balance
sheet are:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits..................................................................... $ 23,259 $ 24,416
Effect of assumed future increase in compensation
levels....................................................................... 10,484 10,319
--------- ---------
Projected benefit obligation for services rendered to
date......................................................................... 33,743 34,735
Plan assets at fair value........................................................ 33,711 32,593
--------- ---------
Plan assets in deficiency of projected benefit obligations....................... 32 2,142
Unrecognized net gain............................................................ (3,570) (6,094)
Unrecognized transition asset.................................................... 1,530 1,839
Unrecognized prior service cost.................................................. 303 342
--------- ---------
Prepaid pension costs at June 1.................................................. (1,705) (1,771)
--------- ---------
Fourth quarter contribution...................................................... -- --
Fourth quarter net periodic pension cost......................................... 328 326
--------- ---------
Prepaid pension cost at fiscal year end.......................................... $ (1,377) $ (1,445)
--------- ---------
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net pension cost for the fiscal years ending included the following components:
Service cost -- benefits earned during the period.............................. $ 1,448 $ 1,398 $ 1,385
Interest cost on projected benefit obligation.................................. 2,709 2,650 2,425
Actual return on plan assets................................................... (6,321) (2,845) (2,628)
Net amortization and deferral.................................................. 3,476 100 (266)
--------- --------- ---------
Net periodic pension cost...................................................... $ 1,312 $ 1,303 $ 916
--------- --------- ---------
Major assumptions:
Assumed discount rate.......................................................... 7.50% 7.50% 7.50%
Assumed rate of future compensation increases.................................. 5.50% 5.50% 5.50%
Expected rate of return on plan assets......................................... 8.50% 8.50% 8.50%
</TABLE>
The method used to compute the vested benefit obligation is the actuarial
present value of the vested benefits to which the employee is entitled if the
employee separates immediately. The vested benefit obligation was $22,927,000,
$24,007,000, and $24,029,000 in 1996, 1995 and 1994, respectively.
The Company also made contributions of $5,713,000, $5,368,000, and
$4,820,000 in 1996, 1995, and 1994, 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.
35
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has an Employees' Sheltered Savings Plan, which is a defined
contribution plan, adopted pursuant to Section 401(k) of the Internal Revenue
Code for its nonunion employees. The Company matches each dollar deferred up to
4% of compensation and, at its discretion, matches 40% of amounts deferred
between 4% and 8%. At the end of each fiscal year, the Company also contributes
an amount equal to 2% of the compensation of those participants employed at that
date. The Company contributed approximately $2,100,000, $2,100,000, and
$2,200,000, in 1996, 1995, and 1994, respectively.
Also, the Company has an Employee Savings Plan ("ESP"), which is a defined
contribution plan, for all union and nonunion employees hired prior to March 1,
1983. Subsequent to March 1, 1983, the Company's contribution to the ESP in any
fiscal year is based on net earnings as a percentage of total sales and is
applicable to union employees only. In the event net earnings are less than 1.5%
of total sales, no contribution is required. All corporate (nonunion) employees
who had a previous balance in the ESP Plan had their balances transferred to the
SSP Plan effective first quarter of fiscal 1992. No expense was incurred in
fiscal years 1996, 1995 and 1994.
In September 1994, the Board of Directors authorized a new supplemental
executive pension plan (effective January 4, 1995) which provides retirement
income to certain officers based on each participant's final salary and years of
service with the Company. The plan, called the Company's Executive Salary
Protection Plan ("ESPP II"), provides additional post-termination retirement
income based on each participant's final salary and years of service with the
Company. The funding of this benefit will be facilitated through the purchase of
life insurance policies, the premiums of which will be paid by the Company and
participant contributions.
The amounts recognized in the balance sheet are:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits..................... $ 3,807 $ 3,026
Effect of assumed future increase in compensation levels....................... 283 282
--------- -----------
Projected benefit obligation for services rendered to date..................... 4,090 3,308
--------- -----------
Plan assets in deficiency of projected benefit obligation........................ 4,090 3,308
Unrecognized net loss............................................................ (868) (217)
Unrecognized prior service cost.................................................. (1,571) (1,659)
--------- -----------
Accrued pension cost as of June 1................................................ 1,651 1,432
--------- -----------
Fourth quarter contributions..................................................... -- (20)
Fourth quarter net periodic pension cost......................................... 140 130
Additional minimum liability..................................................... 2,016 1,484
--------- -----------
Accrued pension cost at fiscal year end.......................................... $ 3,807 $ 3,026
--------- -----------
</TABLE>
The additional minimum liability represents the excess of the unfunded
Accumulated Benefit Obligation over previously accrued pension costs. A
corresponding intangible asset was recorded as an offset to this additional
liability as prescribed. Because the asset recognized may not exceed the amount
of unrecognized prior service cost, the balance, net of tax benefits, of
$255,000 is reported as a separate reduction of shareholders' equity at August
31, 1996.
36
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net periodic pension cost for the fiscal years ending
include:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost -- benefits attributed to service during the period..................... $ 194 $ 136
Interest cost on projected benefit obligation........................................ 257 168
Net amortization and deferral........................................................ 110 85
--------- ---------
Net periodic pension cost............................................................ $ 561 $ 389
--------- ---------
Major assumptions:
Assumed discount rate.............................................................. 7.50% 7.50%
Assumed rate of future compensation increases...................................... 4.00% 4.00%
Expected rate of return on plan assets............................................. 8.50% 8.50%
</TABLE>
The method used to compute the vested benefit obligation is the actuarial
present value of the vested benefits to which the employee is entitled if the
employee separates immediately. The vested benefit obligation was $3,807,000 and
$3,026,000 in 1996 and 1995, respectively.
11. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS:
The Company sponsors postretirement benefit plans that cover both nonunion
and union employees. Nonunion employees are eligible for a plan providing
medical benefits. A certain group of retired nonunion employees participate in a
plan providing life insurance benefits for which currently active nonunion
employees are no longer eligible. Most union and all nonunion employees have
separate plans providing a lump sum payout for unused days in the sick leave
bank. The postretirement health care plan is contributory for nonunion employees
retiring after January 1, 1990, with the retiree contributions adjusted
annually; the life insurance plan and the sick leave payout plans are
noncontributory.
The plans are unfunded. The amounts recognized in the balance sheet are:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 12,159 $ 10,335 $ 11,496
Fully eligible active plan participants........................... 3,687 3,783 4,622
Other active plan participants.................................... 8,660 8,927 9,117
---------- ---------- ----------
Accumulated postretirement benefit obligation....................... 24,506 23,045 25,235
Unrecognized transition obligation.................................. (19,101) (20,224) (21,348)
Unrecognized net gain (loss)........................................ 1,736 1,912 (2,013)
---------- ---------- ----------
Accrued postretirement benefit cost at June 1....................... 7,141 4,733 1,874
Fourth quarter contributions........................................ (369) (303) (294)
Fourth quarter net periodic postretirement benefit cost............. 950 1,044 929
---------- ---------- ----------
Accrued postretirement benefit cost................................. $ 7,722 $ 5,474 $ 2,509
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
37
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net periodic postretirement benefit cost for the fiscal
year ending include:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits attributed to service during the period... $ 796 $ 867 $ 654
Interest cost on accumulated postretirement benefit obligation.... 1,855 2,052 1,915
Amortization of transition obligation over 20 years............... 1,124 1,124 1,124
Net amortization and deferral..................................... (2) 133 21
---------- ---------- ----------
Net periodic postretirement benefit cost.......................... $ 3,773 $ 4,176 $ 3,714
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For measurement purposes, an 8.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 1997; the rate
was assumed to decrease gradually to 5.5% in fiscal 2001 and remain at the level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of August 31, 1996 by $3,438,000 and the
aggregate benefit cost for the year then ended by $421,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8%.
The Company's union employees participate in a multiemployer plan that
provides health care benefits. Amounts charged to postretirement benefit cost
and contributed to the plan totaled $1.1 million in fiscal 1996 and $1.3 million
in fiscal years 1995 and 1994.
12. CONTINGENCIES:
LITIGATION. The Company is a defendant in a number of cases currently in
litigation or potential claims encountered in the normal course of business
which are being vigorously defended. In the opinion of management, the
resolutions of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or cash flow.
ENVIRONMENTAL MATTERS. The Company, together with others, was notified by
the Environmental Protection Agency ("EPA") that it was a potentially
responsible party ("PRP") for the disposal of hazardous substances during the
1970s and early 1980s at OPERATING INDUSTRIES, INC. SUPERFUND SITE in Monterey
Park, California ("OII Site"). The Company has not disposed of any materials at
the site since and believes its current disposal policies to be in accordance
with federal, state and local governmental laws and regulations. Clean up of
this site will occur in five phases and could entail estimated total cleanup
costs of $650 million to $800 million.
The Company appealed the initial findings of the EPA on August 16, 1993
concerning the quantity of disposed waste allocated to the Company. Management
recorded an initial liability of $400,000 for fiscal 1993 for the first three
phases of the five-phase cleanup. The initial liability was based on estimated
cleanup costs of $2 per gallon on approximately 200,000 gallons disposed at the
site. In August 1995, the EPA finalized the Company's allocated share of the
cleanup cost for the first three phases of the cleanup. The Company's allocated
share of $379,000 was paid in October 1996.
The EPA also informed the Company of phases 4 and 5, which include final
remedy and ground water treatment, and a 30 year post-cleanup site control and
monitoring. The estimated costs of these two phases, together with the first
three phases, are reserved in the financial statements. As of August 31, 1996,
the total reserve established in respect to environmental liabilities is $1.6
million. The Company is pursuing recovery of a portion of this amount from its
insurance carriers.
Because of the uncertainties associated with environmental assessment and
remediation activities, future expenses to remediate the currently identified
site could be higher than the accrued liability. Although
38
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
it is difficult to estimate the liability of the Company related to these
environmental matters, management believes that these matters will not have a
materially adverse effect on the Company's financial position or results of
operations.
SALE OF MEMBER NOTES RECEIVABLE. GCC entered into a loan purchase and
servicing agreement with a bank under which it sells certain of its notes
receivable from members subject to limited recourse provisions. These notes are
secured with collateral which usually consists of personal property, real
property and personal guarantees. GCC in return receives a monthly service fee
and guarantee fee. In 1996, the Company sold member notes to the bank totaling
approximately $27,900,000. At August 31, 1996, the balances of member notes sold
that were outstanding and subject to recourse provisions were $27,900,000.
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade receivables and lease guarantees for
certain member-patrons. These concentrations of credit risk may be affected by
changes in economic or other conditions affecting the Western United States,
particularly California. However, management believes that receivables are well
diversified and the allowances for doubtful accounts are sufficient to absorb
estimated losses. Obligations of member-patrons to the Company, including lease
guarantees, are generally supported by the Company's right of offset, upon
default, against the member-patrons' cash deposits, shareholdings and Patronage
Certificates, as well as personal guarantees and reimbursement and
indemnification agreements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short
maturity of these instruments.
INVESTMENTS AND NOTES RECEIVABLE
The fair values for investments and notes receivable are based
primarily on quoted market prices for those or similar instruments.
Equity securities which do not have readily determinable fair values are
accounted for using the cost method.
NOTES PAYABLE, NOTES PAYABLE DUE AFTER ONE YEAR AND SUBORDINATED PATRONAGE
DIVIDEND CERTIFICATES
The fair values for notes payable, notes payable due after one year,
and subordinated patronage dividend certificates are based primarily on
rates currently available to the Company for debt with similar terms and
remaining maturities.
The following table presents the carrying values and the estimated fair
values as of August 31, 1996 and September 2, 1995, of the Company's financial
instruments reportable pursuant to Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial Instruments:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............................ $ 6,451 $ 6,451 $ 7,329 $ 7,329
Investments.......................................... 27,541 27,541 22,051 22,051
Notes receivable..................................... 8,309 8,309 25,622 25,622
Liabilities:
Notes payable and notes payable, due after one
year................................................ $ 87,057 $ 85,552 $ 141,259 $ 139,496
Subordinated patronage dividend certificates......... 6,549 6,549 6,561 6,561
</TABLE>
39
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The methods and assumptions used to estimate the fair values of the
Company's financial instruments at August 31, 1996 and September 2, 1995 were
based on estimates of market conditions, estimates using present value and risks
existing at that time. These values represent an approximation of possible value
and may never actually be realized.
15. RELATED PARTY TRANSACTIONS:
A number of companies with which directors are associated have received
loans from the Company through its regular member loan program and/or obtained
lease guarantees or subleases for certain store locations. In consideration of
lease guarantees and subleases, the Company receives a monthly fee equal to 5%
of the monthly rent under the leases and subleases. Obligations of
member-patrons to the Company, including lease guarantees, are generally
supported by the Company's right of offset, upon default, against the
member-patrons' cash deposits, shareholdings and Patronage Certificates, as well
as personal guarantees and reimbursement and indemnification agreements.
GCC guarantees a portion of a loan made by National Consumer Cooperative
Bank ("NCCB") to K.V. Mart Co., of which director Darioush Khaledi is the
President and a shareholder, and KV Property Company, of which director Darioush
Khaledi is a general partner. The term of the loan is eight years, maturing
January 1, 2002, and the loan bears interest at a floating rate based on the
commercial loan base rate of NCCB. The loan is collateralized by certain real
and personal property. The guarantee by GCC is limited to 10% of the $2.1
million principal amount of the loan. In consideration of its guarantee, GCC
receives an annual fee from K.V. Mart Co. equal to 5% of the guarantee amount.
GCC guarantees a portion of a $5,000,000 revolving loan made by NCCB to K.V.
Mart Co. in November 1995. The loan has an initial maturity of two years, with
the outstanding balance then converting to a five year term loan. The loan bears
interest at a floating rate based on the commercial loan rate of NCCB. The loan
is collateralized by certain real and personal property of K.V. Mart Co. The
guaranty of GCC is limited to 10% of the outstanding principal amount of the
loan. Since its inception, the highest outstanding principal amount of the loan
has been and is presently $785,000. In consideration of its guaranty, GCC
receives an annual fee from K.V. Mart Co. equal to 5% of the guaranty amount.
In April 1996, the Company guaranteed rent and certain other obligations of
K.V. Mart Co. for a period of seven years under a lease of store premises under
construction in Lynwood, California. Annual rent under the lease is $408,000.
The lease term will commence upon the earlier of the opening of the store for
business
40
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
or 90 days after occupancy. The guarantee will become effective upon the
commencement date of the lease. In consideration of its guaranty, the Company
will receive an annual fee from K.V. Mart Co. equal to 5% of the annual rent.
In April 1996, the Company guaranteed rent and certain other obligations of
K.V. Mart Co. for a period of seven years under a lease of store premises under
construction in Canoga Park, California. The landlord under the lease is a
corporation in which a family trust established by Mr. Khaledi has an indirect
interest through certain partnerships which in turn have an interest in the
landlord corporation. Annual rent under the lease is $353,976. The lease term
will commence upon the earlier of the opening of the store for business or 180
days after occupancy. The guarantee will become effective upon the commencement
date of the lease. In consideration of its guaranty, the Company will receive an
annual fee from K.V. Mart equal to 5% of the annual rent.
The Company proposes to enter into a guaranty of rent and certain other
obligations of K.V. Mart Co. under a lease of store premises in Los Angeles,
California. The guaranty would be in place during the first fifteen years of the
lease term, which is thirty-four years and eight months. Annual rent under the
lease will be $212,664 during the first twenty months of the lease term;
$332,664 during the next thirty-eight months; $382,560, $439,944, and $505,4544
respectively, during the three succeeding sixty month periods; and thereafter
increasing by 15% every sixty months during the balance of the term. In
consideration of its guaranty, the Company will receive an annual fee from K.V.
Mart Co. equal to 5% of the annual rent.
In December 1995, GCC purchased 10% of the common stock of K.V. Mart Co. for
a purchase price, based upon appraised values, of approximately $3,000,000. In
connection with this purchase, K.V. Mart Co., GCC, Mr. Khaledi and the other
shareholders of K.V. Mart Co. agreed that GCC will have certain preemptive
rights to acquire additional common shares, rights to have its common shares
included proportionately in any transfer of common shares by the other
shareholders, and rights to have its common shares included in certain
registered public offerings of common stock which may be made by K.V. Mart Co.
In addition, GCC has the option to require the repurchase of its shares for any
reason after December 2000, and until that time has the option to require
repurchase upon the occurence of certain specified events, including a material
breach of the supply agreement referred to below, changes in management or
control and noncompliance with financial ratios. After December 1999, the
repurchase price is fair market value as determined by appraisal, and until that
time is the greater of a declining premium over fair market value or the
original purchase price of the shares plus an agreed annual compounded rate of
return. K.V. Mart Co. has the option to repurchase GCC's shares at any time and
also in the event of a change in control of GCC or the Company or a material
breach by the Company under the supply agreement referred to below. In the
absence of a change in control or a material breach under the supply agreement,
and until December 1999, the repurchase price is the greater of a declining
premium over fair market value or the original purchase price of the shares plus
an agreed annual compounded rate of return, and after December 1999 is fair
market value. In the event of a change in control or a material breach under the
supply agreement, and until December 1999, the repurchase price is the lesser of
a declining discount from fair market value or the original purchase price of
the shares, and after December 1999 is fair market value. In connection with
these transactions, K.V. Mart Co. entered into a seven year supply agreement
with the Company whereunder K.V. Mart Co. is required to purchase a substantial
portion of its merchandise requirements from the Company. Fiscal 1996 purchases
totalled approximately $75,300,000. The supply agreement is subject to earlier
termination in certain situations.
The Company guarantees annual rent and certain other obligations of Stump's
Market, Inc., of which director James R. Stump is the President and a
shareholder, as leasee under a lease of store premises located in San Diego,
California. Annual rent under the lease is $26,325, and the lease term expires
in May 1998. The Company also guarantees annual rent and certain other
obligations of Stump's Market, Inc. as lessee under a
41
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
lease of store premises at a second location in San Diego, California. Annual
rent under this lease is $36,075, and the lease term expires in November 1997.
In consideration of these guaranties, the Company receives a fee from Stump's
Market, Inc. equal to 5% of the base monthly rent under these leases.
In June 1989, the Company guaranteed the payment by Cala Foods, Inc. a
subsidiary of a member-patron, of certain promissory notes related to an
acquisition of Bell Markets, Inc. Board member Harley DeLano is an executive
officer of Cala Foods, Inc. The promissory notes matured in June 1996 and
totalled $8 million; however, the Company's guaranty obligation was limited to
$4 million and is now expired. In addition, and in connection with the
acquisition, the Company guaranteed certain lease obligations of Bell Markets,
Inc. during a 20-year period under a lease relating to two retail grocery
stores. Annual rent under the lease is $327,019.
In September 1992, the Company guaranteed a lease for Mar-Val Food Stores,
Inc. (whose President, Mark Kidd, is a director of the Company) on store
premises in Valley Springs, California. The guarantee is for a period of fifteen
years and is limited to the lessee's obligation to pay base rent of $10,080 per
month, common area costs, real estate taxes and insurance. The Company's total
obligation under the guarantee is limited to $736,800. In consideration of the
guarantee, the Company receives a monthly fee from Mar-Val Food Store, Inc.
equal to 5% of the base monthly rent under the lease.
The Company guarantees annual rent and certain other obligations of Willard
R. "Bill" MacAloney, the Chairman of the Company's Board of Directors, as lessee
under a lease of store premises located in La Puente, California. Annual rent
under the lease is $62,487, and the lease term expires in April 1997. The
Company also guarantees annual rent and certain other obligations of G & M
Company, Inc., of which Mr. MacAloney is a shareholder, under a lease of store
premises located in Santa Fe Springs, California. The initial term of the lease
expires in October 2007, but may be extended for one option term expiring in
October 2012. Annual rent under the lease is $100,000, increasing to $110,000 in
November 1997. Thereafter, annual rent increases by $15,000 every five years
during the balance of the term, including the extension term. However, the
Company's guaranty is such that the Company's obligation thereunder is limited
to a maximum of sixty monthly payments (which need not be consecutive) of the
obligations guaranteed. In consideration of its guarantees, the Company receives
a monthly fee from G & M Company, Inc. equal to 5% of the base monthly rent
under each lease.
The Company proposes to enter into a lease of store premises located in
Riverside, California, which it will in turn sublease to G & M Company on the
same terms and conditions. The sublease will be for an initial term of 15 years,
but may be extended for three periods of 5 years each and one period of 4 years
and 11 months. Monthly rent during the initial term is $22,234, increasing to
$24,457, $26,903, $29,596 and $32,561, respectively, during the extension terms.
Under the sublease, the Company will also receive a monthly fee from G & M
Company equal to 5% of the monthly rent.
The Company guarantees certain obligations under a sublease of market
premises located in Pasadena, California, and under which Berberian Enterprises,
Inc., of which Director John Berberian is the President and a shareholder, is
the sublessor. The guaranty is of the obligations of the sublessee to pay
minimum rent, common area costs, real estate taxes and insurance during the
first seven years of the term of the sublease, which commenced in September
1995. Minimum rent under the sublease is $10,000 per month. In consideration of
its guaranty, the Company receives a monthly fee from the sublessee equal to 5%
of the monthly amounts guaranteed.
The Company proposes to lease store locations in Arvin, Delano and Shafter,
California, which it will in turn sublease on the same rental terms to a
corporation to be formed by director Michael A. Provenzano. The Arvin and Delano
subleases will have twenty year terms, while the Shafter lease will have a term
of twenty-five years. Annual rent under the Arvin lease will be $165,088 during
the first ten years and $166,448 during the balance of the term. Annual rent
under the Delano lease will be $183,334 during the first ten years
42
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $174,080 during the balance of the term. Annual rent under the Shafter lease
will be $104,997 during the first ten years, $100,890 during the next ten years
and $108,457 during the balance of the term. In addition, under each of these
subleases, the Company will receive an annual fee equal to 5% of the annual
rent.
In July 1993, the Company entered into an agreement to lease a warehouse to
Joe Notrica, Inc., of which director Morrie Notrica is the President and a
shareholder. The lease period is for five years at a monthly rent of $24,000.
The lease has one five year option and makes provision for inflation adjustments
to monthly rent during the option term.
Grocers General Merchandise Company, ("GM"), a subsidiary of the Company,
and Food 4 Less GM, Inc. ("F4LGM"), an indirect subsidiary of Ralphs Grocery
Company, are partners to a joint venture partnership agreement. Under the
agreement, GM and F4LGM are partners operating as Golden Alliance Distribution
("GAD"). The partnership was formed for the purpose of providing for the shared
use of the Company's general merchandise warehouse located in Fresno, California
and each of the partners has entered into a supply agreement with GAD providing
for the purchase of general merchandise products from GAD. The Company is
currently in discussions with Ralphs regarding the future of the GAD
partnership.
The Company leases certain market premises located in Sacramento and
Vallejo, California, and in turn subleases these premises to SavMax Foods, Inc.
("SavMax"). The Sacramento sublease provides for a term of 20 years and the
Vallejo sublease provides for a term of 10 years. Neither sublease contains
options to extend, although SavMax has the option under each sublease to acquire
the Company's interest under its lease on the condition that the Company is
released from all further liability thereunder. The term of the Sacramento
sublease commenced in September of 1994. The Sacramento premises consist of
approximately 50,000 square feet and annual base rent under the sublease is at
the following per square foot rates: $8.00 during years 1 and 2; $8.40 during
years 3 through 5; $8.82 during years 6 through 10; $9.26 during years 11
through 15; and, $9.72 during years 16 through 20. The term of the Vallejo
sublease commenced in September of 1995 and annual base rent under the sublease
is $279,000. In addition, under each of these subleases, the Company receives
monthly an additional amount equal to 5% of the base monthly rent.
The Company guarantees certain obligations of SavMax under three leases of
market premises located in Sacramento, San Jose and San Leandro, California.
Each of these guarantees relates to the obligation of SavMax to pay base rent,
common area maintenance charges, real estate taxes and insurance during the
initial 20 year terms of these leases. However, the guarantees are such that the
Company's obligation under each of them is limited to an amount equal to sixty
monthly payments (which need not be consecutive) of the obligations guaranteed.
Base rent is $40,482 per month under the Sacramento lease and $56,756 per month
under the San Jose lease, in each case subject to a 7 1/2% increase at the end
of each five years. Base rent is $42,454 per month under the San Leandro lease,
subject to a 10% increase at the end of each five years. In consideration of
these guarantees, the Company receives a monthly fee from SavMax equal to 5% of
the base monthly rent under these leases. If SavMax were to default under the
leases, the Company's remaining liability under its guarantees would range from
$10.2 million to $11.9 million, assuming other support provided to the Company
by way of offset rights and the reimbursement and indemnification agreements
proved to be of no value to the Company.
The Company guarantees certain obligations of SavMax under two leases of
market premises located in Ceres and Vacaville, California. The leases have
initial terms expiring in January 2005 and April 2007, respectively. Base
monthly rent under the Ceres lease is presently $32,175, increasing to $34,425
in January of 2000. Base monthly rent under the Vacaville lease is presently
$29,167, increasing by $25,000 per year in April of 1997 and 2002. In
consideration of these guarantees, the Company will receive a monthly fee from
SavMax equal to 5% of the base monthly rent under these leases. If SavMax were
to default under the leases,
43
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company's contingent liability under its guarantees would approximate $9.5
million, assuming other support provided to the Company by way of offset rights
and the reimbursement and indemnification agreements proved to be of no value to
the Company.
The Company has guarantees remaining on various other member-patron leases
during the period of fiscal 1997 through fiscal 2013. In the event the support
provided to the Company by way of offset rights and the reimbursement and
indemnification agreements proved to be of no value, the Company would be
contingently liable under its guarantees for approximately $11.2 million.
In fiscal 1994, Grocers Capital Company ("GCC"), a subsidiary, acquired an
additional 25,000 shares of preferred stock of SavMax. The purchase price was
$100 per share. At the time, GCC owned 40,000 shares of preferred stock of
SavMax which it acquired in fiscal 1992. As part of the new purchase of
preferred stock, the annual cumulative dividend on the 65,000 shares of
preferred stock owned by GCC was increased from $8.25 per share to $8.50 per
share, payable quarterly. Mandatory partial redemption of this stock at a price
of $100 per share began in 1994 and will continue annually thereafter for eight
years, at which time the stock is to be completely retired. GCC also purchased
from Mr. Michael A. Webb, the President and a shareholder of SavMax, and another
member of his immediate family, 10% of the common stock of SavMax for a price of
$2.5 million. In connection with this purchase, Mr. Webb, SavMax and GCC agreed
that GCC will have certain preemptive rights to acquire additional common
shares, rights to have its common shares included proportionately in any
transfer of common shares by Mr. Webb, and rights to have its common shares
included in certain registered public offerings of common stock which may be
made by SavMax. In addition, GCC has certain rights, at its option, to require
that SavMax repurchase GCC's shares, and SavMax has certain rights, at its
option, to repurchase GCC's shares. In connection with these transactions,
SavMax entered into a seven year supply agreement with the Company (to replace
an existing supply agreement) whereunder SavMax is required to purchase a
substantial portion of its merchandise requirements from the Company. The supply
agreement is subject to earlier termination in certain situations.
Since the Company's retail and financial assistance programs are only
available to persons and entities which are patrons of the Company, it is not
possible to assess whether the foregoing transactions are less favorable to the
Company than similar transactions with unrelated third parties. However,
management believes that each such transaction is on terms no more favorable to
the patron than those which would be available to other similar patrons.
16. STORE PURCHASE TRANSACTION:
On July 17, 1996 Certified and its subsidiary Crown Grocers, Inc. ("Crown")
entered into an asset purchase agreement (the "Agreement") with Bay Area Foods,
Inc. ("BAF") whereby Certified and Crown agreed to purchase up to twelve
supermarkets operated by BAF under the tradename "Petrini's", provided certain
conditions were satisfied with respect to each location. The Agreement provided
that Certified and Crown had the right to assign their respective rights to
purchase any of the assets to operating retailers meeting selected criteria.
This transaction was completed on September 30, 1996.
Crown has acquired six properties which were sold or assigned directly to
retailers and assumed leases at three locations. The total purchase price for
the assets acquired by Crown, Certified and their assignees was $17.1 million
plus the cost value of inventory at each transferred location. For the three
stores where Crown assumed the leases each facility is operated under the
tradename "Apple Market". The Company intends to vigorously pursue a plan to
sell these locations to member patrons, and expects to operate the stores until
qualified buyers are identified. BAF was unable to satisfy certain conditions to
close as to assets relating to three of the sites subject to the Agreement
within the time frame set forth in the Agreement. Accordingly, the Company's
obligations with respect to such assets have terminated.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
SUCH INFORMATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 2
Additional Information......................... 2
Incorporation By Reference..................... 2
Risk Factors................................... 3
Ratio of Earnings to Fixed Charges............. 4
The Company.................................... 4
Description of Deposit Accounts................ 7
Method of Offering............................. 10
Use of Proceeds................................ 11
Selected Financial Data........................ 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three Fiscal Years Ended August 31,
1996.......................................... 12
Legal Matters.................................. 15
Experts........................................ 15
Index to Financial Statements.................. 16
Independent Auditor's Reports.................. 17
Financial Statements........................... 19
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee Under Securities Act of 1933.............................. $ 10,345
Printing, Engraving and Reproduction....................................... 10,000
Expenses of Qualification Under State Blue Sky Laws........................ 4,000
Legal Fees and Expenses.................................................... 12,000
Accounting Fees and Expenses............................................... 5,000
Miscellaneous.............................................................. 3,000
---------
Total...................................................................... $ 44,345
---------
---------
</TABLE>
All of the expenses listed above will be borne by the Registrant and, except
for the Registration Fee Under Securities Act of 1933, are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Company's Bylaws provides that the Company shall, to the
maximum extent permitted by law, have the power to indemnify its directors,
officers, employees and other agents. Section 317 of the California Corporations
Code provides that a corporation has the power to indemnify agents of the
corporation against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that any such person is or was an agent of the corporation.
In addition, the Company and its subsidiaries maintain a policy of directors'
and officers' liability and company reimbursement insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
S-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit 4 Instruments defining the rights of security holders, including indentures.
4.1 Retail Grocer Application and Agreement For Continuing Service Affiliation
with Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. 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 Retail Grocer Application for Service Affiliation as Associate Patron with
Certified Grocers of California, Ltd. and Pledge Agreement (incorporated by
reference to Exhibit 4.3 to the Form S-2 Registration Statement of the
Registrant filed on December 28, 1987, File No. 33-19284).
4.4 Subordination Agreement (Existing Member-Patron) (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).
4.5 Subordination Agreement (Existing Associate Patron) (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.
33-1 9284).
4.6 Subordination Agreement (New Member-Patron) (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).
4.7 Subordination Agreement (New Associate Patron) (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).
4.8 Member-Patron Subordination Agreement (incorporated by reference to Exhibit
4.8 to Form S-2 Registration Statement of the Registrant filed on December
15, 1993, File No. 33-51457).
4.9 Associate Patron Subordination Agreement (incorporated by reference to
Exhibit 4.9 to Form S-2 Registration Statement of the Registrant filed on
December 15, 1993, File No. 33-51457).
Exhibit 5 Opinion re legality.
5.1 Opinion of Counsel dated December 15, 1993 (incorporated by reference to
Exhibit 5.1 to Form S-2 Registration Statement of the Registrant filed on
December 15, 1993, File No. 33-51457).
Exhibit 10 Material Contracts.
10.1 Comprehensive Amendment to Retirement Plan for Employees of the Registrant
(incorporated by reference to Exhibit 10.1 to Form S-2 Registration
Statement of the Registrant filed on October 12, 1994, File No. 33-56005).
10.2 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to
the Form S-2 Registration Statement of the Registrant filed on December 28,
1987, File No. 33-19284).
10.3 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Sheltered Savings Plan (incorporated by reference to Exhibit 10.3 to the
Form S-2 Registration Statement of the Registrant filed on September 2,
1993, File No. 33-68288).
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C> <C>
10.4 Certified Grocers of California, Ltd., 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).
10.5 Master Trust Agreement For Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. Employees'
Excess Benefit Plan (incorporated by reference to Exhibit 10.6.1 to Form S-2
Registration Statement of the Registrant filed on October 12, 1994, File No.
33-56005).
10.8 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Supplemental Deferred Compensation Plan (incorporated by reference to
Exhibit 10.5.3 to Form S-2 Registration Statement of the Registrant filed on
December 10, 1990, File No. 33-38152).
10.9 Comprehensive Amendment to Certified Grocers of California, Ltd. Employee
Savings Plan (incorporated by reference to Exhibit 10.4 to Form S-2
Registration Statement of the Registrant filed on September 2, 1993, File
No. 33-68288).
10.9.1 First Amendment to Certified Grocers of California, Ltd. Employee Savings
Plan (incorporated by reference to Exhibit 10.4.1 to Form S-2 Registration
Statement of the Registrant filed on October 12, 1994, File No. 33-56005).
10.10 Joint Venture Agreement of Golden Alliance Distribution, dated as of April
8, 1992, between Food 4 Less GM, Inc. and Grocers General Merchandise
Company (incorporated by reference to Exhibit 10.7 to Form S-2 Registration
Statement of the Registrant filed on September 2, 1993. File No. 33-68288).
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).
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).
10.13 Preferred Stock Purchase Agreement by and between Food-4-Less of Modesto,
Inc. and Grocers Capital Company, dated as of July 1, 1992 (incorporated by
reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 28, 1993, filed on November 26, 1993, File
No. 0-10815).
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C> <C>
10.14 Preferred Stock Purchase Agreement by and between SavMax Foods, Inc. and
Grocers Capital Company, dated as of December 17, 1993 (incorporated by
reference to Exhibit 10.11 to Form S-2 Registration Statement of the
Registrant filed on December 15, 1994, File No. 33-38152).
10.15 Common Stock Purchase Agreement by and between Michael A. Webb and Grocers
Capital Company, dated as of December 17, 1993 (incorporated by reference to
Exhibit 10.12 to Form S-2 Registration Statement of the Registrant filed on
December 15, 1994, File No. 33-38152).
10.16 Agreement Regarding Common Stock by and between Michael A. Webb, SavMax
Foods, Inc. and Grocers Capital Company, dated December 17, 1993
(incorporated by reference to Exhibit 10.13 to Form S-2 Registration
Statement of the Registrant filed on December 15, 1994, File No. 33-38152).
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 Registrant and Alfred A. Plamann
(incorporated by reference to Exhibit 10.19 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).
Exhibit 12 Statement re Computation of ratios.
12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 24 Consents of experts and counsel.
24.1 Consent of Company Counsel -- see Page F-1.
24.2 Consents of Independent Auditors -- see Pages F-2 and F-3.
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (a) to include
any prospectus required by section 10(a)(3) of the Securities Act of 1933,
(b) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, (c) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Commerce, State of California, on November 21, 1996.
CERTIFIED GROCERS OF CALIFORNIA, LTD.
By /s/ ALFRED A. PLAMANN
-------------------------------------
Alfred A. Plamann
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------- ----------------------
<C> <S> <C>
/s/ ALFRED A. PLAMANN President and Chief November 21, 1996
------------------------------------------- Executive Officer
Alfred A. Plamann
/s/ DANIEL T. BANE Senior Vice President-- November 21, 1996
------------------------------------------- Finance and Administration,
Daniel T. Bane and Chief Financial Officer
/s/ RANDALL G. SCOVILLE Corporate Controller November 21, 1996
-------------------------------------------
Randall G. Scoville
/s/ WILLARD R. MACALONEY Director November 21, 1996
-------------------------------------------
Willard R. MacAloney
(Chairman of the Board)
/s/ LOUIS A. AMEN Director November 21, 1996
-------------------------------------------
Louis A. Amen
/s/ JOHN BERBERIAN Director November 21, 1996
-------------------------------------------
John Berberian
Director November , 1996
-------------------------------------------
Michael A. Bonfante
/s/ HARLEY DELANO Director November 21, 1996
-------------------------------------------
Harley DeLano
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------- ----------------------
<C> <S> <C>
/s/ LYLE A. HUGHES Director November 21, 1996
-------------------------------------------
Lyle A. Hughes
Director November , 1996
-------------------------------------------
Roger K. Hughes
/s/ DARIOUSH KHALEDI Director November 21, 1996
-------------------------------------------
Darioush Khaledi
/s/ MARK KIDD Director November 21, 1996
-------------------------------------------
Mark Kidd
/s/ JAY MCCORMACK Director November 21, 1996
-------------------------------------------
Jay McCormack
/s/ MORRIE NOTRICA Director November 21, 1996
-------------------------------------------
Morrie Notrica
/s/ MICHAEL A. PROVENZANO Director November 21, 1996
-------------------------------------------
Michael A. Provenzano
Director November , 1996
-------------------------------------------
Allan Scharn
Director November , 1996
-------------------------------------------
James R. Stump
Director November , 1996
-------------------------------------------
Kenneth Young
</TABLE>
S-6
<PAGE>
CONSENT OF COMPANY COUNSEL
We hereby consent to the reference made to us, and to the use of our name,
in this Post-Effective Amendment No. 4 to the Registration Statement on Form
S-2, File No. 33-51457, including the Prospectus filed as a part thereof.
BURKE, WILLIAMS & SORENSEN
Los Angeles, California
November 21, 1996
F-1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use and the incorporation by reference in this
Post-Effective Amendment No. 4 to Registration Statement No. 33-51457 of
Certified Grocers of California, Ltd. on Form S-2 of our report dated October
31, 1996, appearing in this Prospectus and incorporated by reference to the
Annual Report on Form 10-K of Certified Grocers of California, Ltd. for the year
ended August 31, 1996, and to the reference to us under the heading "Experts" in
the Prospectus, which is part of such Registration Statement.
Los Angeles, California
November 22, 1996
F-2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Post-Effective Amendment No. 4 to the
Registration Statement on Form S-2 (File No. 33-51457) of our report dated
November 27, 1995, and the incorporation by reference of said report appearing
on page 24 of the Annual Report on Form 10-K, on our audits of the consolidated
balance sheets of Certified Grocers of California, Ltd. and subsidiaries as of
September 2, 1995 and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the two fiscal years in the
period ended September 2, 1995. We also consent to the reference to our Firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Los Angeles, California
November 21, 1996
F-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBERING
EXHIBITS PAGE NO.
- ----------------- ----------
<C> <S> <C>
Exhibit 4 Instruments defining the rights of security holders, including indentures.
4.1 Retail Grocer Application and Agreement For Continuing Service Affiliation with
Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. 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 Retail Grocer Application for Service Affiliation as Associate Patron with
Certified Grocers of California, Ltd. and Pledge Agreement (incorporated by
reference to Exhibit 4.3 to the Form S-2 Registration Statement of the Registrant
filed on December 28, 1987, File No. 33-19284).
4.4 Subordination Agreement (Existing Member-Patron) (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).
4.5 Subordination Agreement (Existing Associate Patron) (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).
4.6 Subordination Agreement (New Member-Patron) (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).
4.7 Subordination Agreement (New Associate Patron) (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).
4.8 Member-Patron Subordination Agreement (incorporated by reference to Exhibit 4.8 to
Form S-2 Registration Statement of the Registrant filed on December 15, 1993, File
No. 33-51457).
4.9 Associate Patron Subordination Agreement (incorporated by reference to Exhibit 4.9
to Form S-2 Registration Statement of the Registrant filed on December 15, 1993,
File No. 33-51457).
Exhibit 5 Opinion re legality.
5.1 Opinion of Counsel dated December 15, 1993 (incorporated by reference to Exhibit
5.1 to Form S-2 Registration Statement of the Registrant filed on December 15,
1993, File No. 33-51457).
Exhibit 10 Material Contracts.
10.1 Comprehensive Amendment to Retirement Plan for Employees of the Registrant
(incorporated by reference to Exhibit 10.1 to Form S-2 Registration Statement of
the Registrant filed on October 12, 1994, File No. 33-56005).
10.2 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Form
S-2 Registration Statement of the Registrant filed on December 28, 1987, File No.
33-19284).
10.3 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Sheltered Savings Plan (incorporated by reference to Exhibit 10.3 to the Form S-2
Registration Statement of the Registrant filed on September 2, 1993, File No.
33-68288).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBERING
EXHIBITS PAGE NO.
- ----------------- ----------
<C> <S> <C>
10.4 Certified Grocers of California, Ltd., 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).
10.5 Master Trust Agreement For Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. 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 Certified Grocers of California, Ltd. Employees' Excess
Benefit Plan (incorporated by reference to Exhibit 10.6.1 to Form S-2 Registration
Statement of the Registrant filed on October 12, 1994, File No. 33-56005).
10.8 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit
10.5.3 to Form S-2 Registration Statement of the Registrant filed on December 10,
1990, File No. 33-38152).
10.9 Comprehensive Amendment to Certified Grocers of California, Ltd. Employee Savings
Plan (incorporated by reference to Exhibit 10.4 to Form S-2 Registration Statement
of the Registrant filed on September 2, 1993, File No. 33-68288).
10.9.1 First Amendment to Certified Grocers of California, Ltd. Employee Savings Plan
(incorporated by reference to Exhibit 10.4.1 to Form S-2 Registration Statement of
the Registrant filed on October 12, 1994, File No. 33-56005).
10.10 Joint Venture Agreement of Golden Alliance Distribution, dated as of April 8, 1992,
between Food 4 Less GM, Inc. and Grocers General Merchandise Company (incorporated
by reference to Exhibit 10.7 to Form S-2 Registration Statement of the Registrant
filed on September 2, 1993. File No. 33-68288).
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).
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBERING
EXHIBITS PAGE NO.
- ----------------- ----------
<C> <S> <C>
10.13 Preferred Stock Purchase Agreement by and between Food-4-Less of Modesto, Inc. and
Grocers Capital Company, dated as of July 1, 1992 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended August 28, 1993, filed on November 26, 1993, File No. 0-10815).
10.14 Preferred Stock Purchase Agreement by and between SavMax Foods, Inc. and Grocers
Capital Company, dated as of December 17, 1993 (incorporated by reference to
Exhibit 10.11 to Form S-2 Registration Statement of the Registrant filed on
December 15, 1994, File No. 33-38152).
10.15 Common Stock Purchase Agreement by and between Michael A. Webb and Grocers Capital
Company, dated as of December 17, 1993 (incorporated by reference to Exhibit 10.12
to Form S-2 Registration Statement of the Registrant filed on December 15, 1994,
File No. 33-38152).
10.16 Agreement Regarding Common Stock by and between Michael A. Webb, SavMax Foods, Inc.
and Grocers Capital Company, dated December 17, 1993 (incorporated by reference to
Exhibit 10.13 to Form S-2 Registration Statement of the Registrant filed on
December 15, 1994, File No. 33-38152).
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 Registrant and Alfred A. Plamann
(incorporated by reference to Exhibit 10.19 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).
Exhibit 12 Statement re Computation of ratios.
12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 24 Consents of experts and counsel.
24.1 Consent of Company Counsel -- see Page F-1.
24.2 Consents of Independent Auditors -- see Pages F-2 and F-3.
</TABLE>
<PAGE>
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(THOUSANDS OMITTED EXCEPT FOR RATIOS)
<S> <C> <C> <C> <C> <C>
Adjusted net earnings:
Net earnings (loss)...................................... $ 1,517 $ 769 $ 94 $ 473 $ (3,648)
Income tax provision (benefit)........................... 745 106 203 530 (794)
Interest expense......................................... 14,406 15,260 15,405 15,784 17,253
Estimated interest component of rental expense(c)........ 2,105 2,263 2,214 2,099 1,987
Declared Patronage Dividends............................. 13,200 11,571 10,837 12,880 12,977
--------- --------- --------- --------- ---------
Adjusted net earnings(a)............................... $ 31,973 $ 29,969 $ 28,753 $ 31,766 $ 27,775
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fixed Charges:
Gross rental expense..................................... $ 20,539 $ 21,051 $ 22,707 $ 23,326 $ 22,082
Less, estimated rent component........................... 18,434 18,788 20,493 21,227 20,095
--------- --------- --------- --------- ---------
Estimated interest component of rental expense(c)........ 2,105 2,263 2,214 2,099 1,987
Interest incurred........................................ 14,406 15,260 15,405 15,784 17,253
--------- --------- --------- --------- ---------
Fixed charges(b)....................................... $ 16,511 $ 17,523 $ 17,619 $ 17,883 $ 19,240
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges(a)/(b).................. 1.94x 1.71x 1.63x 1.78x 1.44x
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a)(b)(c) -- Cross-reference on page.
EXHIBIT 12.1