<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended August 29, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Commission file number 0-10815
CERTIFIED GROCERS OF CALIFORNIA, LTD.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
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(Address of principal executive offices) (Zip Code)
5200 Sheila Street, Commerce 90040
I.R.S. Employer Identification No.: 95-0615250
Registrant's telephone number, including area code: (323) 264-5200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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<TABLE>
<CAPTION>
- ---------------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
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<S> <C>
Class A Shares None
Class B Shares None
</TABLE>
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Company's shares are not publicly traded and therefore market value is not
readily ascertainable.
The number of shares outstanding of each of the registrant's classes of common
stock, as of October 30, 1998 were as follows:
Class A: 46,900 shares Class B: 380,146 shares Class C: 15 shares
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the
1999 annual meeting in Part III.
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<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
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<C> <S> <C>
1. Business.......................................................... 3
2. Properties........................................................ 8
3. Legal Proceedings................................................. 8
4. Submission of Matters to a Vote of Security Holders............... 8
PART II
Market for Registrant's Common Equity and Related Shareholder
5. Matters........................................................... 9
6. Selected Financial Data........................................... 9
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations............................................. 9
7a. Quantitative and Qualitative Disclosures About Market Risk........ 14
8. Financial Statements and Supplementary Data....................... 15
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure.............................................. 36
PART III
10. Directors and Executive Officers of the Registrant................ 37
11. Executive Compensation............................................ 38
12. Security Ownership of Certain Beneficial Owners and Management.... 38
13. Certain Relationships and Related Transactions.................... 38
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 39
Signatures.............................................................. 43
</TABLE>
2
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PART I
Certified Grocers of California, Ltd. and its consolidated subsidiaries are
hereinafter referred to as "Certified" or the "Company."
ITEM 1. BUSINESS
GENERAL
Certified is the largest grocery wholesaler serving independent supermarket
operators in California. The Company also serves retail food stores in Nevada,
Arizona, Hawaii and various foreign countries in the South Pacific and
elsewhere. In addition to offering a complete line of dry grocery, frozen
food, deli, meat, dairy, bakery and general merchandise products, the Company
also provides finance, insurance, store design and real estate services to its
patrons. As of August 29, 1998, Certified provided products and services to
2,759 retail food stores operated by 684 patrons. The Company's marketing
platform is built on offering its patrons greater value than found elsewhere
by combining competitive pricing with superior selection, quality, service and
convenience.
A California corporation organized in 1922 and incorporated in 1925, Certified
does business primarily with those patrons who qualify and have been accepted
as "member-patrons." Certified is owned by its member-patrons who are
primarily independent grocers. The Company is operated and, with the exception
of its subsidiaries, is taxed on a cooperative basis. The primary businesses
operated by Certified's subsidiary companies include the distribution of
general merchandise, health and beauty care and specialty products and the
sale of insurance, finance and store planning services primarily to operators
of retail food stores. The earnings of the Company's subsidiaries are
generally retained by the Company, while the earnings of the parent company
("Cooperative") are generally distributed to its patrons in the form of
patronage dividends. The benefit of this structure is that taxes are paid on
the Cooperative's earnings only once, that is, when notice of a patronage
dividend payout is received by the patron. (See "BUSINESS--Tax Matters") The
Company establishes minimum purchase requirements for the member-patrons,
which may be modified from time to time. Patrons not meeting member-patron
purchasing requirements are termed "associate patrons."
Associate patrons do not own shares in the Company; accordingly, they are not
allowed to vote on matters requiring shareholder approval. However, associate
patrons have the same deposit requirements and are eligible for other benefits
similar to member-patrons.
WHOLESALE DISTRIBUTION
Certified's wholesale distribution business represented approximately 98% of
fiscal 1998 sales. The wholesale business includes a broad range of branded
and private label products in dry grocery, frozen, delicatessen, general
merchandise, boxed meat, service deli, ice cream, bakery and dairy.
The Company distributes its various product lines from warehouse and
manufacturing complexes located in Los Angeles, Stockton, and Fresno,
California.
Certified sells a full line of branded grocery and nonfood items supplied by
unrelated manufacturers and also sells merchandise under its own private
labels, including the Springfield, Gingham, Special Value, La Corona, and
Golden Creme labels. Certified also operates its own bakery and dairy
facilities. The Company is not dependent upon any single source of supply in
any of its businesses, except for the dairy. Most of the raw milk is purchased
from a dairy cooperative which provides such products at prices established by
the State of California. Management believes that alternative suppliers are
available for substantially all of its products and that the loss of any one
supplier would not have a material adverse effect on the Company's business.
The Company currently makes certain charges in addition to the listed prices
for merchandise, including fees for warehousing and delivery, based on
published schedules. Warehousing fees (also known as service fees) are
primarily based on average order sizes and frequency of orders, while delivery
fees are based primarily on the distance from the Company's supplying
warehouse and the amount of capacity or cube used by the load.
3
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During the course of its business, the Company enters into supply agreements
with members of the Company. These agreements require the member to purchase
certain agreed amounts of its merchandise requirements from the Company and
obligate the Company to supply such merchandise under agreed terms and
conditions relating to such matters as pricing, delivery, discounts and
allowance which terms and conditions may vary from standard terms and
conditions. These supply agreements vary in terms and length.
SUPPORT BUSINESSES
The Company's retail support businesses collectively accounted for
approximately 2% of the Company's total sales in fiscal 1998. Retail support
operations include Grocers Capital Company ("GCC"), which provides financing
for inventory purchases, equipment purchases, store remodeling and new store
acquisitions, and Grocers Equipment Company ("GEC"), which provides store
planning and development services, retail pricing comparisons, scanning
support and also sells equipment to the Company's customers. The Company also
provides insurance brokerage services for retailers through Grocers and
Merchants Insurance Services, Inc., and underwrites selected insurance risks
through two insurance subsidiaries.
RETAIL DEVELOPMENT
The Company offers a banner store program designed to convert older stores
into state-of-the-art retail operations. Operating under the common name
"Apple Markets", the stores are owned and operated by patrons of Certified or
by Certified; however, they are intended to have the look of a chain store
because each store carries the same name and logo and utilizes the same design
layout.
COMPETITION
The food industry is characterized by intense competition and low profit
margins. In order to compete effectively, the Company must provide its patrons
with the capability to meet rapidly fluctuating competitive market prices,
provide a wide range of perishable and nonperishable products, make prompt and
efficient deliveries, and provide the services which are required by modern
market operations. The Company competes with local, regional and national
grocery wholesalers and with a number of major manufacturers which market
their products directly to retailers. The Company's success is dependent upon
its ability to supply food and nonfood products and services to its patrons in
a cost-effective manner and upon the ability of its independent retail
customers to compete with large chain store operations.
CUSTOMERS
The Company's patrons are primarily retail grocery store operators ranging in
size from single store operators to multiple store chains. The Company's
largest customer and ten largest customers accounted for approximately 6% and
31%, respectively, of net sales in fiscal 1998.
STOCK OWNERSHIP
Class A Shares
Class A Shares are issued to and may be held only by member-patrons of
Certified. In order to qualify for and retain membership as a member-patron, a
person or other entity (1) must patronize Certified in such amounts and
manner, and otherwise must comply with the Bylaws and with such rules,
regulations and policies, as may be established by Certified; (2) must have
and maintain acceptable financial standing; (3) must make application in such
form as is prescribed; and (4) must be accepted as a member after approval by
the Board of Directors.
Each member-patron of Certified is required to hold 100 Class A Shares. The
price for such shares is the book value per share of the outstanding shares at
the close of the fiscal year ended prior to acceptance as a member-patron.
4
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Class B Shares
The Board of Directors may approve the issuance of Class B Shares to any
person and for any purpose. However, the Board of Directors currently does not
intend to authorize the issuance of Class B Shares except to member-patrons.
With the exception of new members (see below), each member-patron is required
to hold Class B Shares having combined Issuance Values (as defined below) in
an amount equal to the lesser of the member-patron's required subordinated
cash deposit (see "BUSINESS--Patron Deposits") or twice the member-patron's
average weekly purchases ("Class B Share Requirement"). For purposes of this
requirement, each Class B Share held by a member-patron is valued at the book
value of Certified's outstanding shares as of the close of the fiscal year
ended prior to the issuance of such Class B Share ("Issuance Value").
Class B Shares are generally issued to new member-patrons as part of the
patronage dividends (see "BUSINESS--Patronage Dividends") paid to such member-
patron over a period of five consecutive fiscal years, beginning with the
second fiscal year following admission as a member-patron. The Class B
issuance formula provides that the member-patron will hold Class B Shares
having Issuance Values equal to 20% of the member-patron's Class B Share
Requirement after the first patronage dividend, 40% of the Class B Share
Requirement after the second patronage dividend, and so on until the member-
patron reaches 100% of their Class B Share Requirement after the fifth
patronage dividend.
If following the issuance of Class B Shares as part of the patronage dividend
for any given fiscal year, the member-patron would not hold Class B Shares
having combined Issuance Values equal to the amount of Class B Shares required
to be held by the member-patron, then additional Class B Shares would be
issued to the member-patron in a quantity sufficient to achieve the required
amount. Issuance of these additional Class B Shares would be paid for by
charging the member-patron's cash deposit account in an amount equal to the
Issuance Value of such additional Class B Shares.
At August 29, 1998, the book value per share of Certified's Class A and Class
B Shares was $183.47.
Class C Shares
Class C Shares are held one share each by the members of the Board of
Directors. Each board member purchases one Class C Share for $10. Class C
Shares are nonvoting shares and would share in liquidation only to the extent
of $10 per share.
PATRONAGE DIVIDENDS
Certified distributes patronage dividends based upon the net patronage
earnings of the Cooperative during the fiscal year. The divisional dividends
are approved by the Board of Directors. Patronage dividends are distributed to
each patron in proportion to the dollar volume of patronage purchases from
each division of the Cooperative by the patron. Patronage dividends are
distributed after the close of the fiscal year, except for dividends on dairy
products which are distributed after the close of each fiscal quarter.
The following table shows the patronage dividend experience of the Company
during the past three fiscal years.
<TABLE>
<CAPTION>
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Division (dollars in thousands) 1998 1997 1996
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<S> <C> <C> <C>
Dairy $ 9,169 $ 9,154 $ 8,100
Dry Grocery 562 2,970 2,940
Beans and Rice 190 400 390
Delicatessen 182 1,030 940
Frozen Food 46 730 660
Ice Cream 180 170
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TOTAL (1) $10,149 $14,464 $13,200
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</TABLE>
(1) Certified expects to continue to distribute patronage dividends in the
future, although there can be no assurance of the amounts of such
dividends.
Certified's bylaws provide that patronage dividends may be distributed in cash
or in any other form that constitutes a written notice of allocation under
Section 1388 of the Internal Revenue Code. Section 1388
5
<PAGE>
defines the term "written notice of allocation" to mean any capital stock,
revolving fund certificate, retain certificate, certificate of indebtedness,
letter of advice, or other written notice, that discloses to the recipient the
stated dollar amount allocated to the recipient by Certified and the portion
thereof, if any, which constitutes a patronage dividend.
Dairy patronage dividends are generally paid in cash. Patronage dividends for
the remaining divisions are currently paid out in the following order and
manner: first, member-patrons receive 20% in cash; second, member-patrons
receive the required amount of Class B Shares (see "BUSINESS--Stock
Ownership"); third, the remainder is credited to the member-patron's deposit
account (see "BUSINESS--Patron Deposits"). In addition, Certified issued
subordinated patronage dividend certificates (see Footnote 8 to Notes to
Consolidated Financial Statements) evidencing the retention of a portion of
patronage dividends ("Patronage Certificates") for fiscal years 1993, 1994 and
1995. The amounts retained as Patronage Certificates in those years were
deducted from each member-patron's patronage dividend prior to the issuance of
Class B Shares to such member-patron.
PATRON DEPOSITS
The Company generally requires that its cooperative patrons maintain a
subordinated cash deposit equal to the greater of twice the amount of each
patron's average weekly purchases or twice the amount of the patron's average
purchases, if such purchases are not on a regular basis. Required deposits are
determined twice a year, at the end of the Company's second and fourth fiscal
quarters, based upon a review of the patron's purchases from certain of the
cooperative divisions during the preceding two quarters. Member-patrons
meeting certain qualifications established by the Board of Directors may elect
to maintain a reduced required deposit of $500,000 or one and one-quarter
weeks' average purchases, whichever is greater.
Member-patrons holding Class B Shares are presently given credit against the
above described cash deposit requirement based upon the respective book values
of such shares as of the fiscal years last ended prior to their issuance. The
Company pays no interest on the required deposits. Interest is paid on cash
deposits which are in excess of patrons' required deposits.
In addition, patrons who participate in the Company's price reservation
program are required to maintain a noninterest-bearing deposit based upon the
value of their inventory included in this program. Under the Company's price
reservation program, patrons are permitted to submit price reservations in
advance for their dry grocery, frozen, delicatessen and general merchandise
purchases. For the patron to get the benefit of the price reservation, an
actual order must be placed. The price which the patron will be charged is the
price in effect at the time of the reservation.
The required deposits of patrons are contractually subordinated and subject to
the prior payment in full of certain senior indebtedness of the Company. As a
condition of becoming a patron, each patron is required to execute a
subordination agreement providing for the subordination of the patron's
required deposits. Generally, the subordination is such that no payment can be
made by the Company with respect to the required deposits in the event of an
uncured default by the Company with respect to senior indebtedness, or in the
event of dissolution, liquidation, insolvency or other similar proceedings,
until all senior indebtedness has been paid in full.
Upon request, the Company will return to patrons the amount of cash deposits
that are in excess of the required deposits, provided the patron is not in
default of its obligations to the Company. On termination of membership,
patrons are entitled to a return of deposits, less all amounts that may be
owing by the patron to the Company. In all cases, however, return of that
portion of the patron's cash deposits which consists of required deposits will
be governed by the applicable subordination provisions.
TAX MATTERS
The Company is a corporation operating primarily on a cooperative basis. The
Company is subject to federal and state income and franchise taxes and must
pay other taxes applicable to corporations, such as sales, excise, real and
personal property taxes.
As a corporation operating on a cooperative basis, the Company is subject to
Subchapter T of the Internal Revenue Code ("Subchapter T"). Under Subchapter
T, the Company pays patronage dividends to patrons pertaining to its fiscal
year within 8 1/2 months of the close of such fiscal year. To qualify as
patronage
6
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dividends, payments are made on the basis of the value of the business done
with or for patrons, under a pre-existing obligation to make such payment, and
with reference to the net earnings from business done with or for the
Cooperative's patrons. Patronage dividends are paid in cash or written notices
of allocation. A written notice of allocation is distributed to the patron and
provides notice of the amount allocated to the patron by the Company and the
portion thereof which constitutes a patronage dividend.
Under Subchapter T, the Company may deduct, in the fiscal year for which they
are paid, the amount of patronage dividends paid in cash and qualified notices
of allocation. A written notice of allocation will be qualified if the Company
pays at least 20% of the patronage dividend in cash, and the patron consents
to take the stated dollar amount of the written notice into income in the year
in which it is received. The Company deducts for tax purposes the entire
amount of its patronage dividends by paying at least 20% in cash and issuing
qualified notices of allocation for the remainder.
The Company currently intends to continue to make patronage distributions to
member-patrons comprised of cash and qualified notices of allocation
(including its Class B Shares). At least 20% of patronage dividends are
expected to be paid in cash. The Company will notify patrons of the stated
dollar amount allocated to them and the portion thereof which is a patronage
dividend. Patrons are required to consent to include in their gross income, in
the year received, all cash as well as the stated dollar amount of all
qualified notices of allocation including the Patronage Certificates and the
book value of the Class B Shares distributed to them as patronage dividends.
Patronage Certificates and Class B Shares distributed as part of the patronage
dividend are also subject to state income and corporation franchise taxes in
California and may be subject to such taxes in other states.
The Company is subject to federal income tax and California franchise tax on
net earnings of business with or for patrons which is not distributed as
deductible patronage dividends and on net earnings derived from nonpatronage
business. The Company files consolidated income tax returns with its
subsidiaries, none of which is a cooperative and each of which is therefore
subject to tax.
To the extent that Class B Shares are received by the patron as patronage
dividends under Subchapter T, the Internal Revenue Service ("IRS") has held
that if such Class B Shares are redeemed in full or in part or are otherwise
disposed of, there will be included in the computation of the gross income of
the patron, as ordinary income, in the year of redemption or other
disposition, the excess of the amount realized on the redemption or other
disposition over the amount previously included in the computation of gross
income. However, since Class B Shares may be issued other than as a part of
patronage dividends, it is possible that the IRS could take the position that
the proceeds from a partial redemption of Class B Shares should be taxed as a
dividend. Patrons are strongly urged to consult with their tax advisors for
further clarification of this issue and for the impact the position of the IRS
may have on their own federal and state tax returns.
The Company's subsidiaries do not pay patronage dividends and are not taxed in
accordance with Subchapter T.
EMPLOYEES
The Company employs approximately 2,200 employees, of whom approximately 1,320
are members of one of several unions, the largest being the International
Brotherhood of Teamsters ("IBT"). The IBT contracts cover approximately 1,230
employees and have various expiration dates. The Stockton and Southern
California warehouse workers' and truck drivers' IBT contract covers
approximately 1,080 employees and expires on September 15, 2002. The IBT
contract which covers approximately 120 Fresno warehouse workers and truck
drivers expires on February 3, 1999. The IBT contract which covers
approximately 30 mechanical maintenance workers expires on March 29, 1999. The
Company believes its labor relations to be good.
ENERGY MATTERS
The Company's operations are dependent upon the continued availability of
electric power, diesel fuel, and gasoline. The Company's trucking operations
are extensive. Diesel fuel storage capacity represents approximately two weeks
average usage. A shortage of diesel fuel and gasoline could materially affect
deliveries of merchandise and the activities of the Company's service
representatives and, thus, adversely affect the Company's sales.
7
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ITEM 2. PROPERTIES
FACILITIES
The Company's corporate offices, warehouses, retail stores, and manufacturing
facilities as of August 29, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Approximate
Square Footage
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Description Owned Leased
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<S> <C> <C>
Corporate offices 17,000 142,000
Dry grocery 1,361,000 990,000
General merchandise 323,000
Frozen foods, ice cream, delicatessen and meat 454,000 66,000
Bakery 91,000
Dairy 74,000
</TABLE>
All of the Company's warehouse facilities are located in California.
On May 19, 1998, the Company completed the sale of approximately 24 acres of
property located in Commerce, California. This transaction required certain
administrative offices and distribution facilities to be relocated. The
Company is utilizing its remaining properties to accommodate most of the
displaced facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of cases currently in litigation or
potential claims encountered in the normal course of business that are being
vigorously defended. In the opinion of management, the resolutions of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
The United States Environmental Protection Agency ("EPA") notified the Company
in 1993 that, together with others, it was a potentially responsible party
("PRP") for the disposal of hazardous substances at a landfill site located in
Monterey Park, California. The Company believes that its share of cost for the
remaining phases of cleanup will not exceed the amounts which the Company has
reserved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no market for the Company's Class A Shares, Class B Shares, or Class
C Shares. As of October 30, 1998, the Company's Class A Shares were held of
record by 469 shareholders, Class B Shares were held of record by 513
shareholders, and the Company's Class C Shares were held of record, one share
each, by the 15 directors of the Company. In the past, the Company has not
paid cash dividends on its stock, and it has no intention to do so in the
future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
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<CAPTION>
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fiscal year 1998 1997 1996 1995 1994
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(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks)
Net sales $1,831,686 $1,927,092 1,948,919 $1,822,804 $1,873,872
Operating income 26,252 31,549 29,502 27,197 25,639
Declared patronage divi-
dends 10,149 14,464 13,200 11,571 10,837
Net earnings 3,389 2,307 1,517 769 94
Total assets 389,218 394,002 374,737 398,603 398,569
Long-term notes payable 125,130 92,217 75,617 129,686 149,673
Book value per share 183.47 175.22 167.94 165.86 163.03
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and
notes thereto included under Item 8 in this Form 10-K.
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>
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<CAPTION>
fiscal year ended August 29, 1998 August 30, 1997 August 31, 1996
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<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 91.1 91.0 90.8
Distribution, selling and ad-
ministrative 7.5 7.4 7.7
Operating income 1.4 1.6 1.5
Interest expense 0.7 0.7 0.7
Other income 0.2
Earnings before patronage
dividends, provision for
income taxes and
extraordinary item 0.9 0.9 0.8
Declared patronage dividends 0.5 0.7 0.7
Provision for income taxes 0.1 0.1 0.0
Extraordinary item, net of
taxes (0.1)
Net earnings 0.2 0.1 0.1
</TABLE>
FISCAL YEAR ENDED AUGUST 29, 1998 ("FISCAL 1998") COMPARED TO FISCAL YEAR
ENDED AUGUST 30, 1997 ("FISCAL 1997")
Net sales. Net sales totaled $1.8 billion for fiscal 1998 as compared to $1.9
billion in fiscal 1997. Sales decreased 4.9% from fiscal 1997. The reduction
in sales is primarily the result of reduced sales to Megafoods Stores
("Megafoods"), Nob Hill General Store, Inc. ("Nob Hill") and Hughes Markets,
Inc. ("Hughes"). Megafoods, Nob Hill and Hughes were all acquired by entities
that have self-distribution
9
<PAGE>
programs; accordingly, product supply to their respective stores migrated into
the corresponding self-distribution facilities in the period between February
1997 through August 1998.
Cost of sales. In fiscal 1998, the overall gross margin as a percentage of net
sales is consistent with fiscal 1997. An increase in service fees implemented
mid-year was offset by a substantial reduction in margins from retail
operations that were disposed of in fiscal 1997.
Distribution, selling and administrative. Distribution, selling and
administrative expenses were $137.2 million (or 7.5% of net sales) in fiscal
1998, as compared to $142.6 million (or 7.4% of net sales) in fiscal 1997. The
level of expense as a percentage of sales for fiscal 1998 is greater than
fiscal 1997 primarily due to the lower volume levels discussed under "Net
Sales", nonrecurring charges relating to a settlement of litigation and costs
to update computer programs that will be impacted by the year 2000. These
increased costs were partially offset by reduced costs resulting from the
implementation of radio frequency and automated routing programs in several of
the Company's distribution facilities.
Interest. Interest expense decreased from $13.0 million in fiscal 1997 to
$12.3 million in fiscal 1998. The decrease is primarily due to lower interest
rates associated with the Company's refinancing of its debt completed in April
1998 (see Liquidity and Capital Resources) and reduced average borrowing
requirements resulting from reductions in inventories and accounts receivable.
Other income (expense). Other income in fiscal 1998 was $3.2 million compared
to other expense of $655,000 in fiscal 1997. In May 1998, the Company
completed the sale of approximately 24 acres of property located in Commerce,
California ("Commerce property"). This sale resulted in a gain (net of
expenses related to the sale) of $3.2 million. Other expense of $655,000 in
fiscal 1997 resulted from a $1.5 million reduction in the fair value of the
Company's investment in SavMax Foods, Inc. ("SavMax"), offset by gains
realized from the sale of finance receivables ($387,000) and the remainder of
the Company's interest in Major Market, Inc. ("MMI") ($458,000).
Declared patronage dividends. Declared patronage dividends totaled $10.1
million for fiscal 1998 as compared to $14.5 million for fiscal 1997. The
reduction is primarily due to lower sales through the cooperative divisions,
the refinancing charge and the nonrecurring charges discussed previously;
offset by reduced interest costs.
Extraordinary charge. The extraordinary loss of $1.08 million, net of income
taxes, in fiscal 1998 is related to the early extinguishment of debt in
connection with the Company's refinancing transaction. This charge covers
prepayment premiums paid and the write-off of financing costs relating to debt
refinanced in the transaction.
Net earnings. Net earnings were $3.4 million for fiscal 1998 as compared to
$2.3 million for fiscal 1997. The increase reflects the earnings generated by
the Company's subsidiaries and the gain on the sale of the Commerce property,
which are not subject to patronage distribution but are retained and serve to
increase book value per share.
FISCAL YEAR ENDED AUGUST 30, 1997 ("FISCAL 1997") COMPARED TO FISCAL YEAR
ENDED AUGUST 31, 1996 ("FISCAL 1996")
Net sales. Fiscal 1997 sales decreased $21.8 million or 1.1% from fiscal 1996.
This decrease is a result of reduced purchases by Food 4 Less GM, Inc.
("F4LGM"), Megafoods, and the sale of the Company's Hawaiian subsidiary,
Hawaiian Grocery Stores, Ltd. ("HGS") in May 1996. During fiscal 1997, sales
relating to F4LGM, Megafoods and HGS were approximately $120 million below
fiscal 1996. These sales decreases were partially offset by additional sales
in all divisions resulting from the benefits of the Company's impact-based
pricing strategy, which was implemented at the beginning of fiscal 1997. Sales
have also increased as a result of three Northern California retail stores
acquired at the beginning of fiscal 1997, the addition of a significant dairy
customer in February 1996, and the expansion of meat distribution in Northern
California in September 1996.
Cost of sales. Cost of sales increased from 90.8% of sales in fiscal 1996 to
91.0% of sales in fiscal 1997. The impact-based pricing program has resulted
in an increase in the cost of sales as a percent of sales due to the reduced
fees charged to customers who contribute to the efficiency of the warehouse.
This fee reduction has been partially offset by the reduced cost of sales
associated with the retail stores operated by the Company in Northern
California.
10
<PAGE>
Distribution, selling and administrative. Distribution, selling and
administrative expenses were $142.6 million or 7.4% of net sales in fiscal
1997, as compared to $149.1 million or 7.7% of net sales in fiscal 1996. The
Company has implemented several new programs and procedures in its
distribution facilities that have impacted the level of operating costs as a
percentage of sales. Two significant examples of these changes, and the
associated benefits are: (1) radio frequency transmitters have been installed
on forklifts in some facilities, which facilitates the receiving and selection
process and (2) plastic pallets have replaced wooden pallets in most
facilities, which reduces the cost of pallet repairs and allows for greater
utilization of truck space for backhauls.
Operating income. Operating income increased to $31.5 million in fiscal 1997,
representing a $2.0 million increase over fiscal 1996. This increase is due to
the reduction in operating costs, which more than offset the impact of lost
sales and reduced margins.
Interest expense. Interest expense decreased from $14.4 million in fiscal 1996
to $13.0 million in fiscal 1997. The decrease is due to lower borrowing
requirements resulting from the sale of finance receivables in August 1996,
January 1997 and August 1997.
Other (expense) income, net. Other expense of $655,000 in fiscal 1997 resulted
from a $1.5 million reduction in the fair value of the Company's investment in
SavMax Foods, Inc., offset by gains realized from the sale of finance
receivables and the remainder of the Company's minority interest in MMI. In
fiscal 1996, the Company sold 100% of its common stock ownership in HGS 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.
Declared patronage dividends. Declared patronage dividends totaled $14.5
million for the 1997 period as compared to $13.2 million for the 1996 period.
The increase is primarily due to cost control measures, and lower interest
expense.
Net earnings. Net earnings for fiscal 1997 were $2.3 million compared to net
earnings of $1.5 million for fiscal 1996, an increase of 52%. The increase
reflects the earnings generated by the Company's subsidiaries, which are not
subject to patronage distribution but are retained and serve to increase book
value per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies upon cash flow from operations, patron deposits,
shareholdings and borrowings under the Company's credit lines, to finance
operations. Net cash utilized by operating activities totaled $12.6 million
for fiscal 1998, while net cash provided from operating activities totaled
$6.2 million for fiscal 1997 and $38.2 million for fiscal 1996. 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 29, 1998, working capital was $85.8
million, and the current ratio was 1.6 and 1.3 at fiscal year end 1998 and
1997, respectively. Working capital varies throughout the year primarily as a
result of seasonal inventory requirements.
Capital expenditures totaled $18.4 million in fiscal 1998, $15.2 million in
fiscal 1997, and $13.4 million in fiscal 1996.
On April 14, 1998, the Company issued $80,000,000 in Senior Notes (the "Senior
Notes") to a life insurance company and pension funds. The proceeds of the
Senior Notes were utilized to pay off substantially all existing senior,
subordinated and secured long-term notes payable and a portion of amounts due
under the Company's revolving credit agreement with banks. The Senior Notes
are unsecured, due in April 2008 and bear interest at 7.22% per annum. On the
same date, the Company entered into a new $100,000,000 revolving credit
facility with a group of banks (the "Revolving Credit"). The Revolving Credit
is unsecured, expires in April of 2003 and bears interest at the bank's base
rate or at an adjusted LIBOR rate plus a margin ranging from 0.375% to 0.90%
depending on the Company's leverage ratio. Both the Senior Notes and the
Revolving Credit (the "Credit Agreements") limit the incurrence of additional
funded debt, restrict the issuance of secured indebtedness and prohibit the
payment of dividends (other than patronage dividends). The Credit Agreements
contain various financial covenants. Obligations under the Credit Agreements
are senior to the rights of member patrons with respect to deposits and
patronage dividend certificates.
11
<PAGE>
A $10 million credit agreement is collateralized by Grocers Capital Company's
("GCC") member loan receivables. The primary function of GCC is to provide
loan financing to the Company's member-patrons. The funding for loans made by
GCC is provided by GCC's cash reserves as well as the $10 million credit
agreement. The maturity date of the credit agreement is September 20, 2001,
but is subject to an annual extension of one year by the mutual consent of GCC
and the bank. No amounts were outstanding under this credit line at August 29,
1998. The unused portion of this credit line is subject to commitment fees of
0.125% plus $25,000 annually.
Member loans receivable are periodically sold by GCC to a bank through a loan
purchase agreement. The loan purchase agreement maturity date is August 20,
2001, but is subject to extension by mutual agreement of the Company and the
bank for an additional one year on each anniversary date of the initial
purchase date. Total loan purchases under the agreement are limited to a total
aggregate principal outstanding of $50 million. At August 29, 1998, the
aggregate principal outstanding balance of loans purchased by the bank was
$17.0 million. The loan sales are subject to limited recourse provisions.
Patrons are generally required to maintain subordinated deposits with the
Company and member-patrons purchase Class B shares to satisfy this
requirement. 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 1998,
this limitation restricted the Company's redemption of shares to 19,300 shares
for $3.4 million. In fiscal 1999, the 5% limitation will restrict the
Company's redemption of shares to 19,007 shares for $3.5 million. The number
of shares tendered for redemption at October 30, 1998 totaled 77,538, which
exceeds the amount that can be redeemed in fiscal 1999. Consequently, the
Company will be required to make redemptions in fiscal 1999, 2000, 2001, and
2002, with such redemptions approximating $14.2 million based on fiscal 1998
year-end book value. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive
Income". Comprehensive income and its components are required to be presented
for each year for which an income statement is presented. Components of
comprehensive income include unrealized gains and losses on marketable
securities and minimum pension liability adjustments. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that the adoption of this standard will not have a material impact on
the Company's financial statement disclosures.
The FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for reporting information
about operating segments and requires reporting for selected information about
operating statements in financial statements. It also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. Management is in the process of
determining the effects on the Company's financial statement disclosures of
adopting this statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP provides guidance
with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. This SOP is
effective for fiscal years beginning after December 15, 1998. The Company will
adopt SOP 98-1 in fiscal 1999. Management believes that the adoption of this
SOP will not have a material impact on the Company.
12
<PAGE>
YEAR 2000
The Company has had an active Year 2000 ("Y2K") program since August 1996.
This program includes a detail review of the Company's software applications,
hardware, and embedded technology. The Company has contracted an outside
consultant to assess the embedded technology within our facilities.
In 1996, the Company began assessing the application software of the Company
to determine risk of Y2K failure. The assessment process was used to identify
the business applications that would be at risk for potential century date
impact and to prioritize the critical, moderate, and low risk applications for
remediation or replacement. Applications that will be impacted by Y2K are
scheduled for remediation or replacement. The Company is approximately 80%
complete with replacing or remediating critical applications, 50% complete
with respect to applications that were identified as moderate risk and 30%
complete as to low risk applications. The schedules for remediation or
replacement are reviewed monthly by management. The Company expects that all
critical and moderate risk applications will be completed by June 1999.
The Company has determined that it would be more cost effective to replace
certain systems rather than remediate them. In most circumstances, the systems
that are being replaced are older systems that would have been replaced prior
to Y2K regardless of the non-compliant issue. The estimated total cost of the
Y2K project is approximately $5.9 million. Approximately $3 million is for new
software and hardware purchases and will be capitalized. The remaining $2.9
million will be expensed. The total amount incurred on the project through
August 29, 1998 was $3 million, of which $1 million related to the cost to
remediate software and $2 million related to the replacement of systems
including hardware. The estimated future cost of completing the Y2K project is
estimated to be approximately $2.9 million.
The Company has notified its members of the Y2K issues through newsletters,
meetings, and discussions. In some instances, retailers are offered software
and hardware that is Y2K compliant. Retailers that use Certified's Interactive
Ordering Program, which allows them to order electronically, and CertiNet,
which is a comprehensive in-store system, are Y2K compliant.
The Y2K project team is also addressing interaction with vendors and the
potential impact of Y2K issues. The Company is working with Uniform Commercial
Standard ("UCS") vendors to make sure that processing of orders, invoices, and
payments will be Y2K compliant. For those UCS vendors that are not ready for
Y2K, the Company will have a contingency plan that will convert the vendor's
data into Y2K compliant data before processing through the Company's systems.
Additionally, the Company is a member of the National Grocers Association's
("NGA") Year 2000 Task Force, which was formed to assist retailers in
resolving the Y2K problem in their businesses through the sharing of
information. The objectives of this group are to: (1) identify the hardware
and software systems at risk; (2) communicate with the vendor community and
establish definitive position statements regarding cash systems; and (3)
communicate these findings to NGA members. Many of Certified's members are
members of NGA. A comprehensive report on the findings of the Task Force is
available to all members and vendors that are associated with Certified, and
the contents thereof have been discussed at several recent industry meetings.
As the Y2K program progresses, the Company will be developing additional
contingency plans. The Company's contingency plans will be intended to address
both remediation of systems and the overall business operating risk.
Since the Company has not confirmed with its members or vendors on their state
of readiness for Y2K, it is not possible for the Company to assess the
potential business interruption impact. Failure of the Company's members or
vendors to be Y2K compliant could have a material adverse impact on the
Company's operations. However, as discussed above, the Company is actively
working with members and vendors to address the Y2K issues.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that (a) predict or forecast
future events or results, (b) depend on future events for their accuracy, or
(c) embody assumptions which may prove to have been inaccurate, including the
Company's assessment of the probability and materiality of losses associated
with litigation and other contingent liabilities; the Company's ability to
develop and implement year-2000 systems
13
<PAGE>
solutions; and the Company's expectations regarding the adequacy of capital
and liquidity. It is the Company's intention to ensure that these forward-
looking statements are accompanied by meaningful cautionary statements
pursuant to the safe harbor established in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements and the Company's
business and prospects are subject to a number of factors which could cause
actual results to differ materially including the adverse effects of the
changing industry environment and increased competition; continuing sales
declines and loss of customers; exposure to the uncertainties of litigation
and other contingent liabilities; and the failure of the Company, its vendors
or its customers to develop and implement year-2000 systems solutions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not currently use derivative financial instruments for
speculative purposes which expose the Company to market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its long-term debt. Information required by this item is set forth
in Notes 3, 5, and 14 of the Notes to Consolidated Financial Statements, and
is incorporated herein by reference.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Certified Grocers of California, Ltd.
We have audited the accompanying consolidated balance sheets of Certified
Grocers of California, Ltd. and subsidiaries (the "Company") as of August 29,
1998 and August 30, 1997, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for the years ended August 29, 1998,
August 30, 1997, and August 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 29, 1998
and August 30, 1997, and the results of its operations and its cash flows for
the years ended August 29, 1998, August 30, 1997, and August 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 30, 1998
15
<PAGE>
- --------------------------------------------------------------------------------
Certified Grocers of California, Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 29, 1998 and August 30, 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,105 $ 7,900
Accounts and notes receivable, net 95,672 94,493
Inventories 124,419 135,272
Prepaid expenses 4,744 4,907
Deferred taxes 3,853 3,427
- -------------------------------------------------------------------------------
Total current assets 232,793 245,999
Properties, net 76,299 76,135
Investments 41,341 36,714
Notes receivable 21,792 19,515
Other assets 16,993 15,639
- -------------------------------------------------------------------------------
TOTAL ASSETS $389,218 $394,002
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 80,870 $104,498
Accrued liabilities 51,767 54,320
Current portion of notes payable 743 11,329
Patrons' excess deposits and declared patronage dividends 13,630 16,826
- -------------------------------------------------------------------------------
Total current liabilities 147,010 186,973
Notes payable, due after one year 125,130 92,217
Long-term liabilities, other 20,440 18,151
Commitments and contingencies (Note 12)
Patrons' deposits and certificates:
Patrons' required deposits 12,147 14,358
Subordinated patronage dividend certificates 6,158 6,276
Shareholders' equity
Class A Shares 5,479 5,361
Class B Shares 56,992 57,349
Retained earnings 15,685 13,162
Net unrealized gain on appreciation of investments 233 238
Minimum pension liability adjustment (56) (83)
- -------------------------------------------------------------------------------
Total shareholders' equity 78,333 76,027
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $389,218 $394,002
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Certified Grocers of California, Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
August 29, August 30, August 31,
for fiscal years ended 1998 1997 1996
- -------------------------------------------------------------------------------
Net sales $1,831,686 $1,927,092 $1,948,919
Costs and expenses:
Cost of sales 1,668,202 1,752,899 1,770,339
Distribution, selling and administrative 137,232 142,644 149,078
- -------------------------------------------------------------------------------
Operating income 26,252 31,549 29,502
Interest expense (12,320) (13,020) (14,406)
Other income (expense), net 3,200 (655) 366
- -------------------------------------------------------------------------------
Earnings before patronage dividends, pro-
vision for income taxes and extraordinary
item 17,132 17,874 15,462
Declared patronage dividends (10,149) (14,464) (13,200)
- -------------------------------------------------------------------------------
Earnings before provision for income taxes
and extraordinary item 6,983 3,410 2,262
Provision for income taxes 2,515 1,103 745
- -------------------------------------------------------------------------------
Earnings before extraordinary item 4,468 2,307 1,517
- -------------------------------------------------------------------------------
Extraordinary item (net of income taxes of
$714) 1,079
- -------------------------------------------------------------------------------
Net earnings $ 3,389 $ 2,307 $ 1,517
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
- --------------------------------------------------------------------------------
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Class A Class B
-------------- ---------------- Net Unrealized
for fiscal years ended Gain (Loss) Minimum
August 29, 1998, on Appreciation Pension
August 30, 1997 and Retained (Depreciation) Liability
August 31, 1996 Shares Amount Shares Amount Earnings of Investments Adjustment
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
deferred tax benefit
of $195) $(255)
- ----------------------------------------------------------------------------------------------------
Balance, August 31, 1996 49,100 5,305 383,815 56,504 11,436 (284) (255)
Class A Shares issued 4,100 689
Class A Shares redeemed (5,300) (633) (257)
Class B Shares issued 21,366 3,744
Class B Shares redeemed (19,191) (2,899) (324)
Net earnings 2,307
Net unrealized
gain on depreciation
of investments (net
of deferred tax
liability of $271) 522
Minimum pension liability
adjustment (net of
deferred tax liability
of $132) 172
- ----------------------------------------------------------------------------------------------------
Balance, August 30, 1997 47,900 5,361 385,990 57,349 13,162 238 (83)
Class A Shares issued 4,800 841
Class A Shares redeemed (5,900) (723) (311)
Class B Shares issued 13,456 2,470
Class B Shares redeemed (19,300) (2,827) (555)
Net earnings 3,389
Net unrealized loss on
depreciation of
investments (net of
deferred tax liability
of $5) (5)
Minimum pension liability
adjustment (net of
deferred tax liability
of $17) 27
- ----------------------------------------------------------------------------------------------------
Balance, August 29, 1998 46,800 $5,479 380,146 $56,992 $15,685 $ 233 $ (56)
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
- --------------------------------------------------------------------------------
Certified Grocers of California, Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
for fiscal years ended August 29, 1998, August 30, 1997
and August 31, 1996 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,389 $ 2,307 $ 1,517
Adjustments to reconcile net earnings to net cash
(utilized) provided by operating activities:
Depreciation and amortization 14,792 12,204 10,022
Deferred taxes (1,219) (107) (3,819)
Gain on sale of investments in affiliates, member
loan receivables, and properties, net (2,460) (562) (524)
Reduction in fair value of investment 1,500
(Increase) decrease in assets:
Accounts and notes receivable, net (1,297) (93) 1,892
Inventories 10,853 1,031 6,893
Prepaid expenses 163 (282) 131
Notes receivable (5,057) (13,462) (10,547)
Increase (decrease) in liabilities:
Accounts payable (23,628) 6,030 14,905
Accrued liabilities (7,293) (2,474) 9,846
Patrons' excess deposits and declared patronage divi-
dends (3,196) 1,669 2,943
Long-term liabilities, other 2,329 (1,586) 4,963
- -----------------------------------------------------------------------------------
Net cash (utilized) provided by operating activities (12,624) 6,175 38,222
- -----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of properties (18,414) (15,166) (13,350)
Investment in securities, net (4,632) (9,839) (4,888)
Proceeds from sales of notes receivable 2,780 6,256 27,860
Proceeds from sales of properties 12,320 1,229 1,846
Increase in other assets (2,236) (3,100) (1,635)
Sales of investments in affiliates, net of cash dis-
posed* 500 1,785
- -----------------------------------------------------------------------------------
Net cash (utilized) provided by investing activities (10,182) (20,120) 11,618
- -----------------------------------------------------------------------------------
Cash flows from financing activities:
Additions to long-term notes payable 124,000 27,944
Reduction of long-term notes payable (90,344) (15) (37,329)
Reduction of short-term notes payable (11,329) (11,440) (11,573)
Redemption of patronage dividend certificates (249)
Repurchase of shares from members (4,416) (4,112) (4,186)
Decrease in members' required deposits (2,211) (1,166) (1,498)
Issuance of shares to members 3,311 4,432 3,868
- -----------------------------------------------------------------------------------
Net cash provided (utilized) by financing activities 19,011 15,394 (50,718)
- -----------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,795) 1,449 (878)
Cash and cash equivalents at beginning of year 7,900 6,451 7,329
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,105 $ 7,900 $ 6,451
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $12,790 $13,264 $14,929
Income taxes $ 3,179 $ 2,688 $ 980
- -----------------------------------------------------------------------------------
*SALES OF INVESTMENTS IN AFFILIATES, NET OF CASH DIS-
POSED:
Working capital, other than cash $ 7,188
Property, plant and equipment 460
Investment in preferred stock (1,000)
Other assets 71
Proceeds in excess of net assets of affiliates sold,
net $ 500 366
Long-term debt (5,300)
- -----------------------------------------------------------------------------------
Net cash effect from sales of investments in affili-
ates $ 500 $ 1,785
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended August 29, 1998, August 30, 1997 and August 31, 1996
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. Grocers Capital Company ("GCC") is a wholly owned subsidiary.
Nature of Business:
The Company is a cooperative organization engaged principally in the
distribution of food products and related nonfood items primarily to retail
establishments owned by shareholders of the Company. All establishments with
which directors are affiliated, as members of the Company, purchase groceries,
related products and store equipment from the Company in the ordinary course
of business pursuant to published terms or according to the provisions of
supply agreements.
The Company's fiscal year ends on the Saturday nearest to August 31.
Use of Estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 range from 3 to 40 years. Leasehold
improvements are amortized based on the estimated life of the asset or the
life of the lease, whichever is shorter. Expenditures for replacements or
major improvements are capitalized; expenditures for normal maintenance and
repairs are charged to operations as incurred. Upon sale or retirement of
properties, the cost and accumulated depreciation are removed from the
accounts, and any gain or loss is included in operations.
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.
Transfers and Servicing of Financial Assets:
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
20
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liabilities," which the Company adopted in 1997. The Statement provides for
standards that are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. Accordingly, the Company conformed to the new requirements of SFAS
No. 125 for transactions involving the sale of member loans receivable for
applicable transactions occurring after December 31, 1996.
Comprehensive Income:
The FASB issued SFAS No. 130 "Reporting Comprehensive Income". Comprehensive
income and its components are required to be presented for each year for which
an income statement is presented. Components of comprehensive income include
unrealized gains and losses on marketable securities and minimum pension
liability adjustments. This statement is effective for fiscal years beginning
after December 15, 1997. Management believes that the adoption of this
standard will not have a material impact on the Company's financial statement
disclosures.
Disclosures about Segments of an Enterprise and Related Information:
The FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for reporting information
about operating segments and requires reporting for selected information about
operating statements in financial statements. It also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. Management is in the process of
determining the effects on the Company's financial statement disclosures.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use:
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP provides guidance
with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. This SOP is
effective for fiscal years beginning after December 15, 1998. The Company will
adopt SOP 98-1 in fiscal 1999. Management believes that the adoption of this
SOP will not have a material impact on the Company.
2. PROPERTIES:
Properties at August 29, 1998, and August 30, 1997 stated at cost, are
comprised of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(dollars in thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Land $ 8,350 $ 8,812
Buildings and leasehold improvements 52,353 66,185
Equipment 94,011 82,849
Equipment under capital leases 6,094 7,595
- -----------------------------------------------------------------
160,808 165,441
Less accumulated depreciation and amortization 84,509 89,306
- -----------------------------------------------------------------
$ 76,299 $ 76,135
- -----------------------------------------------------------------
</TABLE>
On May 19, 1998, the Company completed the sale of approximately 24 acres of
property located in Commerce, California. The sale resulted in a gain (net of
expenses related to the sale) of $3.2 million. This transaction required
certain administrative offices and distribution facilities to be relocated.
The Company is utilizing its remaining properties to accommodate most of the
displaced facilities.
21
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS:
The amortized cost and fair value of available-for-sale investments, including
equity securities, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Gross Gross
(dollars in thousands) Amortized Unrealized Unrealized Fair
August 29, 1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obliga-
tions of U.S. government corporations
and agencies $13,276 $150 $ 7 $13,419
Corporate securities 3,807 268 131 3,944
Mortgage backed securities 10,776 86 14 10,848
- -------------------------------------------------------------------------------
Sub-total 27,859 504 152 28,211
Redeemable preferred stock 8,253 59 49 8,263
Equity securities 4,867 4,867
- -------------------------------------------------------------------------------
$40,979 $563 $201 $41,341
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
Gross Gross
(dollars in thousands) Amortized Unrealized Unrealized Fair
August 30, 1997 Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obliga-
tions of U.S. government corporations
and agencies $11,569 $ 73 $143 $11,499
Corporate securities 6,227 271 58 6,440
Mortgage backed securities 4,952 48 22 4,978
- -------------------------------------------------------------------------------
Sub-total 22,748 392 223 22,917
Redeemable preferred stock 8,946 204 12 9,138
Equity securities 4,658 1 4,659
- -------------------------------------------------------------------------------
$36,352 $597 $235 $36,714
- -------------------------------------------------------------------------------
</TABLE>
Fixed maturity investments are due as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(dollars in thousands) Amortized Fair
August 29, 1998 Cost Value
- ---------------------------------------------------------
<S> <C> <C>
Fixed Maturities Available for Sale:
Due after one year through five years $10,762 $10,954
Due after five years through ten years 7,584 7,612
Due after ten years 9,513 9,645
- ---------------------------------------------------------
$27,859 $28,211
- ---------------------------------------------------------
- ---------------------------------------------------------
<CAPTION>
(dollars in thousands) Amortized Fair
August 30, 1997 Cost Value
- ---------------------------------------------------------
<S> <C> <C>
Fixed Maturities Available for Sale:
Due after one year through five years $ 7,356 $ 7,395
Due after five years through ten years 10,739 10,874
Due after ten years 4,653 4,648
- ---------------------------------------------------------
$22,748 $22,917
- ---------------------------------------------------------
</TABLE>
22
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are shown as being due at
their average expected maturity dates.
Investment income is summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------
<S> <C> <C> <C>
Fixed maturities $2,526 $1,728 $1,834
Preferred stock 444 91 350
Equity securities 82 75 132
Cash and cash equivalents 364 332 197
- -----------------------------------------------
3,416 2,226 2,513
Less investment expenses 22 137 95
- -----------------------------------------------
Net investment income $3,394 $2,089 $2,418
- -----------------------------------------------
</TABLE>
Investments carried at fair values of $17,975,000 and $20,359,000 at August
29, 1998 and August 30, 1997, respectively, are on deposit with regulatory
authorities in compliance with insurance company regulations. Equity
securities which do not have readily determinable fair values are accounted
for using the cost method.
The Company owns an equity interest in SavMax Foods, Inc. ("SavMax"), a
member-patron of Certified. The investment consists of (a) 10% of the
outstanding Series A common stock with an original cost of $2.5 million and
(b) $6.3 million of 8.5% Series B cumulative redeemable preferred stock. The
Company has also entered into lease guarantees or subleases (see Note 6) on
six SavMax stores. The current minimum annual rent on locations underlying
such lease guarantees or subleases is $2.7 million. The commitments have
expiration dates through 2012. In addition, GCC has made loans to SavMax for
tenant improvements with an aggregate outstanding principal balance of
$898,000 at August 29, 1998.
At March 1, 1997, SavMax was in default under the terms of the Preferred Stock
Purchase Agreement and was in default on its bank debt. SavMax completed a
restructuring of its financing arrangements with its bank and Certified in May
1997. This restructuring required SavMax to make certain changes to its
operations.
Pursuant to the restructuring:
(i) Certified agreed to guarantee SavMax obligations to a bank consisting
of a $3 million line of credit and an $850,000 term loan;
(ii) $4 million due Certified by SavMax with respect to inventory purchases
was converted into a note payable at prime plus 1%, with monthly interest
payments commencing June 1997 and monthly principal payments of $111,111
commencing in December 1998, with the balance due in November 2001;
(iii) Defaults with respect to dividends and mandatory redemptions of the
preferred stock, and the remedies associated therewith, were waived so long
as there is no default by SavMax with respect to its obligations to the
bank or to Certified in accordance with the Restructuring Agreement;
(iv) SavMax executed a new supply agreement expanding the purchases to be
made from Certified;
(v) SavMax and its principal shareholder agreed to a neutral sale process
in the event of a default with respect to the obligations owed to the bank
or to Certified;
(vi) SavMax, Certified and the SavMax shareholders agreed to a mutual
release of claims arising prior to closing of the restructuring; and
(vii) SavMax agreed to reduce the salaries of certain key officers and
implement plans to reduce ongoing operating costs.
23
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of August 29, 1998, SavMax was in default on certain financial covenants
included in its restructured loan agreements. Certified and SavMax are
currently in discussions regarding this matter. Management believes the outcome
of these discussions will not have a material adverse effect on the Company's
financial position.
4. ACCRUED LIABILITIES:
Accrued liabilities at August 29, 1998 and August 30, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Insurance loss reserves & other liabilities $17,290 $19,676
Accrued wages & related taxes 12,136 9,966
Accrued income & other taxes payable 6,230 6,952
Accrued promotional liabilities 2,561 3,940
Other accrued liabilities 13,550 13,786
- ------------------------------------------------------------
<CAPTION>
$51,767 $54,320
- ------------------------------------------------------------
</TABLE>
5. NOTES PAYABLE:
Notes payable at August 29, 1998 and August 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Senior notes payable to a life insurance company expiring
April 1, 2008, interest rate at 7.22% payable monthly,
interest only through April 1, 2000 and $832,000 principal
and interest thereafter through April 1, 2008, remaining
$34.8 million due May 1, 2008. $ 80,000
Note payable to banks under a $100 million revolving credit
agreement expiring April 10, 2003, interest rate at the
agent's base rate (8.5% at August 29, 1998) or adjusted
LIBOR (5.69% plus 0.825% at August 29, 1998) 44,000
Notes payable to banks under a $135 million revolving credit
agreement, paid on April 14, 1998 $ 55,626
Subordinated note payable to a life insurance company, paid
on April 14, 1998 17,500
Senior note payable to a life insurance company, paid on
April 14, 1998 15,000
Other notes payable, paid on April 14, 1998 12,724
Obligations under capital leases 1,873 2,696
- -------------------------------------------------------------------------------
Total notes payable 125,873 103,546
Less portion due within one year 743 11,329
- -------------------------------------------------------------------------------
$125,130 $ 92,217
- -------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of notes payable as of August 29, 1998 are:
<TABLE>
<CAPTION>
---------------------------------
Fiscal year
---------------------------------
(dollars in thousands)
<S> <C>
1999 $ 743
2000 2,213
2001 4,790
2002 4,790
2003 49,147
Thereafter 64,190
---------------------------------
$125,873
---------------------------------
</TABLE>
On April 14, 1998, the Company issued $80 million in Senior Notes (the "Senior
Notes") to a life insurance company and pension funds. The proceeds of the
Senior Notes were utilized to pay off substantially all existing senior,
subordinated and secured long-term notes payable and a portion of amounts due
under the Company's revolving credit agreement with banks. The Senior Notes
are unsecured, due in April 2008 and bear interest at 7.22% per annum. On the
same date, the Company entered into a new $100 million revolving credit
facility with a group of banks (the "Revolving Credit"). The Revolving Credit
is unsecured, expires in April of 2003 and bears interest at the bank's base
rate or at an adjusted LIBOR rate plus a margin ranging from 0.375% to 0.90%
depending on the Company's leverage ratio. Both the Senior Notes and the
Revolving Credit (the "Credit Agreements") limit the incurrence of additional
funded debt, restrict the issuance of secured indebtedness and prohibit the
payment of dividends (other than patronage dividends). The Credit Agreements
contain various financial covenants. Obligations under the Credit Agreements
are senior to the rights of member patrons with respect to deposits and
patronage dividend certificates.
The extraordinary loss of $1.08 million, net of income taxes, in fiscal 1998
is related to the early extinguishment of debt in connection with the
Company's refinancing transaction. This charge covers prepayment premiums paid
and the write-off of financing costs relating to debt refinanced in the
transaction.
A $10 million credit agreement is collateralized by GCC's member loan
receivables. The primary function of GCC is to provide loan financing to the
Company's member-patrons. Member loans are made at a market rate of interest
starting at prime plus 1/2%. The funding for loans made by GCC is provided by
GCC's cash reserves as well as the $10 million credit agreement. The maturity
date of the credit agreement is September 20, 2001, but is subject to an
annual extension of one year by the mutual consent of GCC and the bank.
Amounts advanced under the credit agreement bear interest at prime (8.5% at
August 29, 1998) or Eurodollar (5.73% at August 29, 1998) plus 0.9%. No
amounts were outstanding under this credit line at August 29, 1998. The unused
portion of this credit line is subject to commitment fees of 0.125% plus
$25,000 annually.
Member loans receivable are periodically sold by GCC to a bank through a loan
purchase agreement. The maturity date of the loan purchase agreement is August
20, 2001, but is subject to extension by mutual agreement of the Company and
the bank for an additional one year on each anniversary date of the initial
purchase date. Total loan purchases under the agreement are limited to a total
aggregate principal outstanding of $50,000,000. At August 29, 1998, the
aggregate principal outstanding balance of loans purchased by the bank was $17
million. The loan sales are subject to limited recourse provisions.
The Company and GCC have also guaranteed loans made directly to members by
third party lenders. At August 29, 1998, the maximum principal amount of these
guarantees was $7.8 million. Member loans, provided by GCC and third parties,
are generally secured with collateral which usually consists of personal and
real property owned by member-patrons and personal guarantees of member-
patrons.
As a result of maturing long-term debt (a noncash financing activity), the
Company reclassified from long to short-term debt $0.7 million, $11.3 million
and $11.4 million in fiscal 1998, 1997, and 1996, respectively.
25
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES:
The Company has entered into operating and capital leases for certain
warehouse, transportation and data processing equipment. The Company has also
entered into operating leases for approximately 26 retail supermarkets. The
majority of these locations are subleased to various member-patrons of the
Company. The operating leases and subleases are noncancelable, renewable,
include purchase options in certain instances, and require payment of real
estate taxes, insurance and maintenance.
In addition, on August 29, 1998, the Company was contingently liable with
respect to 17 lease guarantees for certain member-patrons. The total current
annual rent on locations underlying such lease guarantees is approximately
$6.1 million. The commitments have expiration dates through 2017. The Company
believes the locations underlying these leases are marketable and,
accordingly, the Company would be able to recover a substantial portion of the
guaranteed amounts in the event the Company is required to satisfy its
obligations under the guarantees.
In consideration of lease guarantees and subleases, the Company receives a
monthly fee equal to 5% of the monthly rent under the lease guarantees and
subleases. Obligations of member-patrons to the Company, including lease
guarantees, are generally supported by the Company's right of offset, upon
default, against the member-patrons' cash deposits, shareholdings and
Patronage Certificates, as well as in certain instances, personal guarantees
and reimbursement and indemnification agreements.
Total rent expense was $16.2 million, $17.0 million, and $20.5 million in
1998, 1997, and 1996 respectively. Sublease rental income was $6.2 million,
$5.3 million, and $6.2 million in 1998, 1997, and 1996, respectively.
Minimum rentals on properties leased by the Company, including properties
subleased to third parties, as of August 29, 1998 are summarized as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Fiscal year Capital Leases Operating Leases
- ----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
1999 $ 851 $ 15,456
2000 852 13,936
2001 340 12,162
2002 10,306
2003 9,402
Thereafter 49,156
- ----------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS 2,043 $110,418
-----
Less amount representing interest 170
- ----------------------------------------------------------------------------
Present value of net minimum lease payments 1,873
Less current portion 743
- ----------------------------------------------------------------------------
TOTAL LONG TERM PORTION $1,130
- ----------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum sublease rental income on operating leases as of August 29,
1998 is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------
Fiscal
year (dollars in thousands)
- ----------------------------------
<S> <C>
1999 $ 3,613
2000 3,069
2001 3,015
2002 2,942
2003 2,604
Thereafter 21,748
- ----------------------------------
$36,991
- ----------------------------------
</TABLE>
7. INCOME TAXES:
The significant components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------
(dollars in
thousands) 1998 1997 1996
- --------------------------------------------
<S> <C> <C> <C>
Federal:
Current $2,367 $ 932 $3,641
Deferred (820) 162 (2,849)
- --------------------------------------------
Total federal 1,547 1,094 792
- --------------------------------------------
State:
Current 653 278 923
Deferred (399) (269) (970)
- --------------------------------------------
Total state 254 9 (47)
- --------------------------------------------
INCOME TAX EXPENSE $1,801 $1,103 $ 745
- --------------------------------------------
</TABLE>
27
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects of temporary differences and other items that give rise to deferred
tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) August 29, 1998 August 30, 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 2,388 $ 2,808
Accrued benefits 9,159 7,188
Deferred income 1,697 575
Insurance reserves 1,788 2,034
Investment valuation adjustment 642 646
Accrued environmental liabilities 313 530
Alternative minimum tax and other credits 1,080 435
Net operating loss carryforwards 5 301
Other 786 1,237
- --------------------------------------------------------------------------
Total gross deferred tax assets 17,858 15,754
Less valuation allowance 1,400 1,400
- --------------------------------------------------------------------------
Deferred tax assets $16,458 $14,354
- --------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $ 5,939 $ 5,648
Capitalized software 1,988 1,864
Intangible assets 627 629
Deferred state taxes 753 610
Other 191 59
- --------------------------------------------------------------------------
Total gross deferred tax liabilities $ 9,498 $ 8,810
- --------------------------------------------------------------------------
Net deferred tax asset $ 6,960 $ 5,544
</TABLE>
- --------------------------------------------------------------------------------
Net deferred tax assets of $3.9 million and $3.4 million are included in
deferred taxes, current and $3.1 million and $2.1 million in other assets on
the Company's accompanying consolidated balance sheets as of August 29, 1998
and August 30, 1997, respectively.
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The remaining balance of the net
deferred tax assets should be realized through future operating results, the
reversal of taxable temporary differences, and tax planning strategies.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate (34%) as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense at the statutory rate $1,765 $1,159 $ 769
State income taxes, net of federal income tax benefit 303 209 139
Insurance subsidiary not recognized for state taxes (278) (324) (123)
Other, net 11 59 (40)
- -------------------------------------------------------------------------------
Provision for income taxes, net of taxes related to ex-
traordinary item $1,801 $1,103 $ 745
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At August 29, 1998, the Company has alternative minimum tax credit
carryforwards of approximately $698,000 available to offset future regular
income taxes payable to the extent such regular taxes exceed alternative
minimum taxes payable.
8. SUBORDINATED PATRONAGE DIVIDEND CERTIFICATES:
The Company has a patronage dividend retention program whereby, subject to
annual Board approval, it may retain a portion of the patronage dividends and
issue Patronage Certificates (the "Patronage Certificates") evidencing the
indebtedness respecting the retained amounts. The program provides for the
issuance of the Patronage Certificates to patrons in a portion and at an
interest rate determined by the Board in connection with its approval of a
particular issuance. The Patronage Certificates are unsecured general
obligations, subordinated to certain indebtedness of Certified, and
nontransferable without the consent of Certified.
The Company has issued Patronage Certificates for fiscal years 1993, 1994 and
1995. The outstanding Patronage Certificates have a seven-year term and bear
interest payable annually on December 15 in each year. The following table
represents a summary of the outstanding Patronage Certificates and their
respective terms:
<TABLE>
<CAPTION>
- -----------------------------------------------------
Fiscal Aggregate Annual
Year Principal Amount Interest Rate Maturity Date
- -----------------------------------------------------
<S> <C> <C> <C>
1993 $1,876,000 7% 12/15/00
1994 $2,300,000 8% 12/15/01
1995 $1,982,000 7% 12/15/02
</TABLE>
During fiscal 1998, 1997, and 1996 Certified set off approximately $118,000,
$273,000, and $12,000 respectively, in Patronage Certificates against a
portion of amounts owed to the Company by the holders.
Patronage Certificates have not been issued subsequent to fiscal 1995.
However, the program has not been discontinued, and the Board could authorize
the issuance of Patronage Certificates in connection with patronage dividends
payable in future years.
9. CAPITAL SHARES:
The Company requires that each member-patron hold 100 Class A Shares. Each
member-patron must also hold Class B Shares having combined issuance values
equal to the lesser of the amount of the member-patron's required deposit or
twice the member-patron's average weekly purchases (the "Class B Share
requirement"). For this purpose, each Class B Share held by a member-patron
has an issuance value equal to the book value of Certified's outstanding
shares as of the close of the fiscal year last ended prior to the issuance of
such Class B Share.
After payment of at least 20% of the patronage dividend in cash and the
issuance of the Patronage Certificates, Class B Shares are issued as a portion
of each member-patron's patronage dividend and, to the extent necessary to
fulfill the member-patron's Class B Share requirement, by crediting the
member-patron's cash deposit account for the issuance values of such shares.
All shares of a terminated member, or member who holds Class B Shares in
excess of their Class B Share requirement, may be redeemed by the Company
(subject to certain legal limitations, provisions of the Company's redemption
policy, and provisions of certain of the Company's committed lines of credit)
at a 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
29
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
year 1999 will allow for redemption of 19,007 shares. Additionally, 642 shares
have been tendered for redemption between August 29, 1998 and October 30,
1998. 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> <C>
Years prior to 1996 79,231 $14,537
1996 14,875 19,238 74,868 13,736
1997 10,396 19,191 66,073 12,122
1998 30,123 19,300 76,896 14,108
</TABLE>
Because the 5% limit for fiscal year 1999 has been met, Board approval would
be required to redeem the remaining 58,531 shares (or approximately $10.7
million, using fiscal 1998 year end book value) not redeemed in fiscal year
1999, as well as the redemption of any additional Class B Shares tendered
during fiscal 1999. At present, such approvals are not expected to be given.
The total of Class B Shares tendered and awaiting redemption will also cause
the 5% limits for fiscal 2000 through 2002 to be met, thereby delaying the
redemption of Class B Shares tendered during those years. The redemptions
required for fiscal years 1999 through 2002 are estimated to be $14.2 million
based on the fiscal 1998 year end book value. The funds needed to redeem
shares are expected to be provided from operations, patron deposits, new share
issuances and borrowings under the Company's credit lines. Any additional
tenderings of Class B Shares could also potentially cause 5% limits beyond
fiscal 2002 to be exceeded.
There are 500,000 authorized Class A Shares, of which 46,800 and 47,900 were
outstanding at August 29, 1998 and August 30, 1997, respectively. There are
2,000,000 authorized Class B Shares, of which 380,146 and 385,990 were
outstanding at August 29, 1998 and August 30, 1997, respectively, including
13,456 and 21,366 respectively issued after year-end. Once redeemed, such
shares are not available for reissuance to member-patrons.
No member-patron may hold more than 100 Class A Shares. However, it is
possible that a member may have an interest in another member, or that a
person may have an interest in more than one member, and thus have an interest
in more than 100 Class A Shares. The Board of Directors is authorized to
accept member-patrons without the issuance of Class A Shares when the Board of
Directors determines that such action is justified by reason of the fact that
the ownership of the patron is the same, or sufficiently the same, as that of
another member-patron holding 100 Class A Shares. The price for such shares
will be the book value per share of outstanding shares at the close of the
fiscal year last ended.
There are also 15 authorized Class C Shares of which 15 are outstanding. These
shares are valued at $10 per share, and ownership is limited to members of the
Board of Directors with no rights as to dividends or other distributions.
Holders of Class A Shares are entitled to vote such shares cumulatively for
the election of 12 of the directors on the Board of Directors. Holders of the
Class B Shares are entitled to vote such shares cumulatively for the election
of 3 of the directors on the Board of Directors. Except as required by
California law, the Class C Shares have no voting rights.
10. BENEFIT PLANS:
The Company has a noncontributory, defined benefit pension plan covering
substantially all of its nonunion employees. The benefits under the plan
generally are based on the employee's years of service and average earnings
for the three highest consecutive calendar years of compensation during the
ten years immediately preceding retirement. The Company makes contributions to
the pension plan in amounts which are at least sufficient to meet the minimum
funding requirements of applicable laws and regulations but no more than
amounts deductible for federal income tax purposes. Benefits under the plan
are included in a trust providing benefits through annuity contracts.
30
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plan and the amounts recognized in the balance sheet
are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits $27,566 $23,679
Effect of assumed future increase in compensation levels 12,348 10,834
- ------------------------------------------------------------------------------
Projected benefit obligation for services rendered to date 39,914 34,513
Plan assets at fair value 41,511 37,276
- ------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligations (1,597) (2,763)
Unrecognized net loss (801) (807)
Unrecognized transition asset 912 1,221
Unrecognized prior service cost 226 265
- ------------------------------------------------------------------------------
Prepaid pension costs at June 1 (1,260) (2,084)
Fourth quarter contribution (600)
Fourth quarter net periodic pension cost 195 241
- ------------------------------------------------------------------------------
Prepaid pension cost at fiscal year-end $(1,065) $(2,443)
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost--benefits earned during the period $1,586 $1,514 $1,448
Interest cost on projected benefit obligation 2,705 2,641 2,709
Actual return on plan assets (6,887) (6,292) (6,321)
Net amortization and deferral 3,374 3,102 3,476
- ----------------------------------------------------------------------------
Net periodic pension cost $778 $965 $1,312
- ----------------------------------------------------------------------------
Major assumptions:
Assumed discount rate 7.0% 7.5% 7.5%
Assumed rate of future compensation increases 5.5% 5.5% 5.5%
Expected rate of return on plan assets 9.0% 8.5% 8.5%
</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 $26.8
million and $22.3 million at August 29, 1998 and August 30, 1997,
respectively.
The Company also made contributions of $5.6 million, $6.1 million, and $5.7
million in 1998, 1997, and 1996, respectively, to collectively bargained,
multiemployer defined benefit pension plans in accordance with the provisions
of negotiated labor contracts. Information from the plans' administrators is
not available to permit the Company to determine its proportionate share of
termination liability, if any.
The Company has an Employees' Sheltered Savings Plan ("SSP"), which is a
defined contribution plan, adopted pursuant to Section 401(k) of the Internal
Revenue Code for substantially all of its 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 $2.3 million, $2.2 million, and $2.1 million, in 1998, 1997, and
1996, respectively.
The Company has an Employee Savings Plan ("ESP"), which is a defined
contribution plan, for substantially all union and nonunion employees hired
prior to March 1, 1983. Subsequent to March 1, 1983, the Company's
contribution to the ESP in any fiscal year is based on net earnings as a
percentage of total sales
31
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1998, 1997, and 1996.
The Company's Executive Salary Protection Plan ("ESPP II"), provides
additional post-termination retirement income based on each participant's
final salary and years of service with the Company. The funding of this
benefit is facilitated through the purchase of life insurance policies, the
premiums of which are paid by the Company.
The amounts recognized in the balance sheet relative to ESPP II are:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits $3,846 $3,648
Effect of assumed future increase in compensation levels 453 317
- ----------------------------------------------------------------------------
Projected benefit obligation for services rendered to date 4,299 3,965
- ----------------------------------------------------------------------------
Plan assets in deficiency of projected benefit obligation 4,299 3,965
Unrecognized net loss (592) (618)
Unrecognized prior service cost (1,463) (1,459)
- ----------------------------------------------------------------------------
Accrued pension cost as of June 1 2,244 1,888
Fourth quarter net periodic pension cost 42 159
Additional minimum liability 1,560 1,601
- ----------------------------------------------------------------------------
Accrued pension cost at fiscal year-end $3,846 $3,648
- ----------------------------------------------------------------------------
</TABLE>
The additional minimum liability represents the excess of the unfunded
accumulated benefit obligation over previously accrued pension costs. A
corresponding intangible asset is recorded as an offset to this additional
liability. Because the asset recognized may not exceed the amount of
unrecognized prior service cost, the balance, net of tax benefits, of $56,000
and $83,000 is reported as a separate component of shareholders' equity at
August 29, 1998 and August 30, 1997, respectively.
The components of the net periodic pension cost under ESPP II for the fiscal
years ending include:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits attributed to service during the pe-
riod $200 $193 $194
Interest cost on projected benefit obligation 294 303 257
Net amortization and deferral 127 141 110
- ------------------------------------------------------------------------------
Net periodic pension cost $621 $637 $561
- ------------------------------------------------------------------------------
Major assumptions:
Assumed discount rate 7.0% 7.5% 7.5%
Assumed rate of future compensation increases 4.0% 4.0% 4.0%
</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 $3.8 million
and $3.6 million at August 29, 1998 and August 30, 1997, respectively.
11. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS:
The Company sponsors postretirement benefit plans that cover both nonunion and
union employees. Retired nonunion employees currently are eligible for a plan
providing medical benefits. A certain group of retired nonunion employees
currently participate in a plan providing life insurance benefits for which
active
32
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
nonunion employees are no longer eligible. Certain eligible union and nonunion
employees have separate plans providing a lump-sum payout for unused days in
the sick leave bank. The postretirement health care plan is contributory for
nonunion employees retiring after January 1, 1990, with the retiree
contributions adjusted annually. The life insurance plan and the sick leave
payout plans are noncontributory.
The plans are unfunded. The amounts recognized in the balance sheet are:
<TABLE>
- ---------------------------------------------------------------------------
<CAPTION>
(dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $17,701 $14,377
Fully eligible active plan participants 5,474 4,160
Other active plan participants 10,116 9,915
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation 33,291 28,452
Unrecognized transition obligation (16,853) (17,977)
Unrecognized net (loss) gain (4,297) (1,017)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost at June 1 12,141 9,458
Fourth quarter contributions (416) (380)
Fourth quarter net periodic postretirement benefit cost 1,123 1,052
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost at fiscal year-end $12,848 $10,130
- ---------------------------------------------------------------------------
</TABLE>
The components of the net periodic postretirement benefit cost for the fiscal
year ending include:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits attributed to service during the
period $ 920 $ 788 $ 796
Interest cost on accumulated postretirement benefit ob-
ligation 2,145 1,960 1,855
Amortization of transition obligation over 20 years 1,124 1,124 1,124
Net amortization and deferral 79 19 (2)
- ------------------------------------------------------------------------------
Net periodic postretirement benefit cost $4,268 $3,891 $3,773
- ------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 7.24% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 1999; the
rate was assumed to decrease gradually to 4.97% in fiscal 2003 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
August 29, 1998 by $4.5 million and the aggregate benefit cost for the year
then ended by $486,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
The Company's union employees participate in a multiemployer plan that
provides health care benefits for retired union employees. Amounts contributed
to the multiemployer plan for these union employees totaled $1.1 million in
fiscal years 1998, 1997, and 1996, respectively.
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
resolution of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or cash flow.
33
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Environmental Matters. The United States Environmental Protection Agency
("EPA") notified the Company in 1993 that, together with others, it was a
potentially responsible party ("PRP") for the disposal of hazardous substances
at a landfill site located in Monterey Park, California. The Company believes
that its share of cost for the remaining phases of cleanup will not exceed the
amounts which the Company has reserved.
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.
The Company's largest customer and ten largest customers accounted for
approximately 6% and 31%, respectively, of net sales in fiscal 1998.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents
The carrying amount approximates fair value due to the short maturity of these
instruments.
Investments and Notes receivable
The fair values for investments and notes receivable are based primarily on
quoted market prices for those or similar instruments. Equity securities which
do not have readily determinable fair values are accounted for using the cost
method. The Company regularly evaluates securities carried at cost to
determine whether there has been any diminution in value that is deemed to be
other than temporary and adjusts the value accordingly.
Notes payable, Notes payable due after one year and Subordinated patronage
dividend certificates
The fair values for notes payable, notes payable due after one year, and
subordinated patronage dividend certificates are based primarily on rates
currently available to the Company for debt with similar terms and remaining
maturities. The fair value for notes payable, notes payable due after one
year, and patronage dividend certificates approximated fair value at August
29, 1998 and August 30, 1997.
The methods and assumptions used to estimate the fair values of the Company's
financial instruments at August 29, 1998 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.
34
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. RELATED PARTY TRANSACTIONS:
Members affiliated with directors of the Company make purchases of merchandise
from the Company and also may receive benefits and services which are
generally offered by the Company to its eligible members.
Since the programs listed below are only available to patrons of the Company,
it is not possible to assess whether transactions with members of the Company,
including directors of the Company, are less favorable to the Company than
similar transactions with unrelated third parities. However, management
believes such transactions are on terms which are consistent with terms
available to other patrons similarly situated.
A brief description of related party transactions with members affiliated with
directors of the Company follows:
Loans and Loan Guarantees:
As described in Note 5 "Notes Payable", GCC provides loan financing to its
members. GCC had the following loans outstanding at August 29, 1998 to members
affiliated with directors of the Company:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Aggregate Loan
Balance at Maturity
DIRECTOR August 29, 1998 Date
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Michael Provenzano $246 2005
</TABLE>
As described in Note 5 "Notes Payable", member loans are periodically sold to a
bank, subject to limited recourse provisions. At August 29, 1998, the principal
balances of loans to members affiliated with directors of the Company that were
sold with recourse were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Aggregate Loan
Balances at Maturity
DIRECTOR August 29, 1998 Dates
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Darioush Khaledi $1,597 1999
Michael A. Provenzano 1,096 2000-2004
Willard R. "Bill" MacAloney 542 2002
Jay McCormack 335 1998-2001
Mark Kidd 292 2003
John Berberian 225 1999-2000
James R. Stump 221 1999-2001
Edward J. Quijada 4 1999
</TABLE>
As described in Note 5 "Notes Payable" the Company provides loan guarantees to
its members. The Company has guaranteed certain third party loans to Super
Center Concepts, Inc., of which director Mimi R. Song is an affiliate. At
August 29, 1998, the maximum principal amount of this guarantee was $3.8
million. GCC has guaranteed 10% of the principal amount of certain third party
loans to K.V. Mart Co. of which director Darioush Khaledi is an affiliate. At
August 29, 1998, the maximum principal amount of this guarantee was $590,000.
35
<PAGE>
Certified Grocers of California, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Guarantees and Subleases:
As described in Note 6 "Leases", the Company provides lease guarantees and
subleases to its members. The Company has executed lease guarantees or
subleases to members affiliated with directors of the Company as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. Of Total Current Expiration
DIRECTOR Stores Annual Rent Date(s)
- ------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Edmund K. Davis 1 $1,319 2009
Darioush Khaledi 3 1,095 2004-2011
Willard R. "Bill" MacAloney 3 385 2002-2012
Michael Provenzano 2 351 2016-2017
Harley DeLano 2 327 2009
Mark Kidd 1 121 2008
James R. Stump 2 110 1998-2002
</TABLE>
Other Leases:
The Company leases its produce warehouse to Joe Notrica, Inc., with which
director Morrie Notrica is affiliated. The lease is for a term of five years
expiring in November 2003. Monthly rent during the term is $24,000.
Supply Agreements:
During the course of its business, the Company enters into supply agreements
with members of the Company. These agreements require the member to purchase
certain agreed amounts of its merchandise requirements from the Company and
obligate the Company to supply such merchandise under agreed terms and
conditions relating to such matters as pricing, delivery, discounts and
allowances. Members affiliated with directors Davis, DeLano, Khaledi, Kidd,
MacAloney, McCormack, Provenzano, and Song have entered into supply agreements
with the Company. These supply agreements vary in terms and length, and expire
at various dates through 2004, but are subject to earlier termination in
certain events.
Direct Investment:
GCC owns 10% of the common stock of K.V. Mart Co., of which Certified director
Darioush Khaledi is affiliated. The cost of the Investment was approximately
$3 million. The stock purchase agreement contains certain provisions which
allow K.V. Mart Co. to repurchase the shares and GCC to acquire additional
shares upon the occurrence of certain events.
Other:
In August 1997, the Company entered into an agreement with Ralphs Grocery
Company ("Ralphs") providing for the dissolution of Golden Alliance
Distribution ("GAD"), a joint venture partnership previously formed for the
purpose of providing for the shared use of the Company's general merchandise
warehouse located in Fresno, California. The dissolution agreement provides
that certain amounts owed by Ralphs to Certified at August 30, 1997 will be
offset by future redemptions of excess Class B shares (see Note 9) held by
Ralphs and its affiliates. If redemptions of Class B shares are insufficient
to satisfy the remaining obligation at December 31, 2000, Ralphs will satisfy
the shortfall with a cash payment.
The Company subleases a store in Riverside, California to Jax Apple Market,
Inc. ("Jax"), of which director Willard R. "Bill" MacAloney is a principal.
Monthly lease payments of $13,900 totalling $212,700 as of August 29, 1998
have not been paid to the Company and are delinquent. Also $189,000 in
equipment purchases for the Riverside store have not been paid and are past-
due. Jax disputes the aggregate amounts claimed due. The Company is in
discussions with Jax to collect the amounts owed to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's proxy statement in
connection with its annual meeting of shareholders to be held on February 23,
1999 to be filed within 120 days after the end of the most recent fiscal year.
The following table sets forth certain information about executive officers of
the Company.
<TABLE>
<CAPTION>
Age At
December 31,
Officer's Name 1998 Business Experience During Last Five Years
- -------------------------------------------------------------------------------
<C> <C> <S>
Alfred A. Plamann 56 Corporate President and Chief Executive
Officer since February 1994; previously
Senior Vice President--Finance and Chief
Financial Officer.
George D. Gardner 45 Vice President--Non Foods and Specialty
Products since May 1996; General Manager of
Grocers Specialty Co., June 1995 to May 1996;
Vice President & General Manager Ingro
Mexican Foods, Inc., May 1993 to June 1995.
Corwin J. Karaffa 44 Vice President--Distribution since January
1995; previously Facilities Manager, Proctor
and Gamble Distribution Co.
Robert M. Ling, Jr. 41 Senior Vice President, General Counsel and
Secretary since October 1997; Vice President,
General Counsel and Secretary since August
1996; Vice President and General Counsel,
April 1996 to August 1996; Vice President,
General Counsel and Secretary, Megafoods
Stores, Inc., July 1994 to April 1996;
previously Vice President, General Counsel
and Secretary, Reliable Drug Stores, Inc.
Richard J. Martin 53 Senior Vice President and Chief Financial
Officer since May 1998; previously Executive
Vice President and Chief Financial Officer,
Rykoff-Sexton, Inc. through December 1997
when it merged with J.P. Foodservice to form
US Foodservice and Executive Vice President
Finance and Administration of US Foodservice
through January 1998.
Joseph A. Ney 50 Vice President--Insurance since November
1998; previously President, Grocers and
Merchants Insurance Service, Springfield
Insurance Company, and Springfield Insurance
Company, Ltd.
Charles J. Pilliter 50 Senior Vice President and President--Northern
California.
Jack E. Scott II 48 Vice President and Chief Information Officer
since June 1996; Chief Information Officer,
World Vision United States, November 1993 to
May 1996.
Randall G. Scoville 38 Vice President--Accounting and Chief
Accounting Officer since May 1998; Corporate
Controller, September 1995 to May 1998;
previously Director, Ralphs Grocery Company.
Philip S. Smith 48 Vice President--Procurement since October
1997; Executive Director--Purchasing, July
1997 to October 1997; General Manager--
Northern California, June 1996 to July 1997;
Manager--Product Sales, September 1994 to
June 1996; previously Division Manager,
Market Wholesale.
David A. Woodward 56 Treasurer since August 1996; previously
Corporate Secretary/Treasurer.
</TABLE>
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's proxy statement in
connection with its annual meeting of shareholders to be held on February 23,
1999 to be filed within 120 days after the end of the most recent fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's proxy statement in
connection with its annual meeting of shareholders to be held on February 23,
1999 to be filed within 120 days after the end of the most recent fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All firms with which directors are affiliated, as members of the Company,
purchase groceries, related products and store equipment from the Company in
the ordinary course of business. As members, firms with which directors are
affiliated may receive various benefits including patronage dividends,
allowances and retail support services. The Company makes a variety of
benefits available to members on a negotiated basis. See Footnote 15 to Notes
to Consolidated Financial Statements, which is incorporated herein by this
reference, for a description of related party transactions.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of August 29, 1998 and August 30, 1997.
Consolidated Statements of Earnings for the Fiscal Years Ended August 29,
1998, August 30, 1997, and August 31, 1996.
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
August 29, 1998, August 30, 1997, and August 31, 1996.
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 29,
1998, August 30, 1997, and August 31, 1996.
(b) Reports on Form 8-K
None.
(c) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Registrant (as amended through May 5,
1997) (incorporated by reference to Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
3.2 Bylaws of the Registrant (as amended through June 21, 1994) (incorporated
by reference to Exhibit 4.2 to Post Effective Amendment No. 6 to Form S-2
Registration Statement of the Registrant filed on December 15, 1994, File
No. 33-38152).
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 Agreement respecting directors' shares (incorporated by reference to
Exhibit 4.9 to Amendment No. 2 to Form S-1 Registration Statement of the
Registrant filed on December 31, 1981, File No. 2-70069).
4.4 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 Form of Class A Share Certificate (incorporated by reference to Exhibit 4.5
to Post Effective Amendment No. 6 to Form S-2 Registration Statement of the
Registrant filed on December 15, 1994, File No. 33-38152).
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
4.9 Form of Class B Share Certificate (incorporated by reference to Exhibit 4.6
to Post Effective Amendment No. 6 to Form S-2 Registration Statement of the
Registrant filed on December 15, 1994, File No. 33-38152).
4.10.1 Articles FIFTH and SIXTH of the Registrant's Articles of Incorporation (See
Exhibit 3.1) (incorporated by reference to Exhibit 4.10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
4.10.2 Article I, Section 5, and Article VII of the Registrant's Bylaws (See Exhibit
3.2) (incorporated by reference to Exhibit 4.10.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
4.11 Indenture between the Registrant and First Interstate Bank of California, as
Trustee, relating to $3,000,000 Subordinated Patronage Dividend Certificates
Due December 15, 2000 (incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to Form S-2 Registration Statement of the Registrant filed on September
27, 1993, File No. 33-68288).
4.12 Indenture between the Registrant and First Interstate Bank of California, as
Trustee, relating to $5,000,000 Subordinated Patronage Dividend Certificates
due December 15, 2001 (incorporated by reference to Exhibit 4.3 to Form S-2
Registration Statement of the Registrant filed on October 12, 1994, File No.
33-56005).
4.13 Indenture between the Registrant and First Interstate Bank of California, as
Trustee, relating to $3,000,000 Subordinated Patronage Dividend Certificates
due December 15, 2002 (incorporated by reference to Exhibit 4.3 to Form S-2
Registration Statement of the Registrant filed on October 13, 1995, File No.
33-63383).
4.14 Note Purchase Agreement dated as of March 15, 1998 among Certified Grocers
of California, Ltd. and the Purchasers named therein relating to $80,000,000
7.22% Senior Notes due 2008 (incorporated by reference to Exhibit 4.16 to
the Registration Statement on Form S-2 (Reg. No. 333-51931) filed on May 6,
1998).
4.15 $100,000,000 Revolving Credit Agreement dated as of April 10, 1998 among
Certified Grocers of California, Ltd., the Lenders named therein and
Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch, as agent (incorporated by reference to Exhibit 4.17 to the
Registration Statement on Form S-2 (Reg. No. 333-51931) filed on May 6,
1998).
4.16 Loan Purchase and Service Agreement Dated as of August 29, 1996 between
Grocers Capital Company and National Consumer Cooperative Bank (incorporated
by reference to Exhibit 4.18 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 31, 1996 filed on November 5, 1996, File
No. 0-10815).
4.17 $10,000,000 Credit Agreement and Security Agreement each dated as of
September 20, 1996 between Grocers Capital Company and National Cooperative
Bank as agent (incorporated by reference to Exhibit 4.19 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended August 31, 1996 filed
on November 5, 1996, File No. 0-10815).
10.1 Comprehensive Amendment to Retirement Plan for Employees of Certified
Grocers of California, Ltd. dated as of July 27, 1995 (incorporated by
reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended August 30, 1997 filed on November 28, 1997, File No.
0-10815).
10.3 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Sheltered Savings Plan dated as of July 27, 1995 (incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-
10815).
10.4 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).
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
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 dated as of December 5, 1995 (incorporated by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-
10815).
10.8 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees'
Supplemental Deferred Compensation Plan dated as of December 5, 1995
(incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28,
1997, File No. 0-10815).
10.9 Comprehensive Amendment to Certified Grocers of California, Ltd. Employee
Savings Plan dated as of August 18, 1995 (incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815).
10.10 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.
10.10.1 Agreement Regarding Termination and Dissolution of Joint Venture Agreement
of Golden Alliance Distribution, dated as of August 15, 1997, between Food 4
Less GM, Inc. and Grocers General Merchandise Company (incorporated by
reference to Exhibit 10.10.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 30, 1997 filed on November 28, 1997, File
No. 0-10815)
10.11 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).
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 Post Effective Amendment No. 6 to Form S-2
Registration Statement of the Registrant filed on December 15, 1994, File
No. 33-38152).
10.14.1 Forbearance and Debt Restructure Agreement, dated May 15, 1997, between
SavMax Foods, Inc., Michael A. Webb, Grocers Capital Company, and the
Registrant (incorporated by reference to Exhibit 10.14.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed
on November 28, 1997, File No. 0-10815)).
10.15 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 Post Effective Amendment No. 6 to Form S-2 Registration
Statement of the Registrant filed on December 15, 1994, File No. 33-38152).
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
10.16 Agreement Regarding Common Stock by and between Michael A. Webb, SavMax
Foods, Inc. and Grocers Capital Company, dated as of December 17, 1993
(incorporated by reference to Exhibit 10.13 to Post Effective Amendment No.
6 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 Company 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).
10.20 Severance Agreement between the Company and Charles J. Pilliter
(incorporated by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 filed on
November 28, 1997, File No. 0-10815).
10.21 Severance Agreement between the Company and Robert M. Ling, Jr.
10.22 Severance Agreement between the Company and Richard J. Martin.
10.23 Form of Indemnification Agreement between the Company and each Director and
Officer (incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated February 24, 1997 filed on February 24, 1997, File No. 0-
10815).
10.24 Annual Incentive Plan for Chief Executive Officer (incorporated by reference
to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-
10815).
10.25 Annual Incentive Plan for Senior Management (incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended August 30, 1997 filed on November 28, 1997, File NO. 0-10815).
10.26 Agreement to Sell and Purchase Real Property and Escrow Instructions, dated
September 12, 1997 between the Registrant and Smart & Final Stores
Corporation (incorporated by reference to Exhibit 10.25 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed
on November 28, 1997, File No. 0-10815).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
(d) Financial Statement Schedules
All required schedule information is presented in the financial statements or
notes thereto. Other schedule information is either not applicable or not
material.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CERTIFIED GROCERS OF CALIFORNIA,
LTD.
/s/ Alfred A. Plamann
By _________________________________
Alfred A. Plamann
President and
Chief Executive Officer
/s/ Richard J. Martin
By _________________________________
Richard J. Martin
Senior Vice President--Finance &
Administration and Chief
Financial Officer
/s/ Randall G. Scoville
By _________________________________
Randall G. Scoville
Vice President--Accounting
and Chief Accounting Officer
Date: November 13, 1998
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------
<S> <C> <C>
/s/ Louis A. Amen Director November 13, 1998
__________________________________
Louis A. Amen
(Chairman of the Board)
/s/ Mark Kidd Director November 13, 1998
__________________________________
Mark Kidd
(1st Vice Chairman)
/s/ James R. Stump Director November 13, 1998
__________________________________
James R. Stump
(2nd Vice Chairman)
/s/ John Berberian Director November 13, 1998
__________________________________
John Berberian
/s/ Edmund K. Davis Director November 13, 1998
__________________________________
Edmund K. Davis
/s/ Harley J. DeLano Director November 13, 1998
__________________________________
Harley J. DeLano
/s/ Darioush Khaledi Director November 13, 1998
__________________________________
Darioush Khaledi
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- -----------------------------------------------------------------------------------
<S> <C> <C>
/s/ Willard R. "Bill" MacAloney Director November 13, 1998
__________________________________
Willard R. "Bill" MacAloney
/s/ Jay McCormack Director November 13, 1998
__________________________________
Jay McCormack
/s/ Morrie Nortrica Director November 13, 1998
__________________________________
Morrie Nortrica
/s/ Michael A. Provenzano Director November 13, 1998
__________________________________
Michael A. Provenzano
/s/ Edward J. Quijada Director November 13, 1998
__________________________________
Edward J. Quijada
/s/ Gail Gerrard Rice Director November 13, 1998
__________________________________
Gail Gerrard Rice
/s/ Mimi R. Song Director November 13, 1998
__________________________________
Mimi R. Song
/s/ Kenneth Young Director November 13, 1998
__________________________________
Kenneth Young
</TABLE>
44
<PAGE>
EXHIBIT 10.21
SEVERANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the ninth day of
June, 1998, by and between Certified Grocers of California, Ltd., a California
corporation (the "Company" or "Certified") and Robert M. Ling, Jr. (the
"Executive").
WHEREAS, the Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders; and
WHEREAS, the Executive has been determined to be a vital member of the senior
management team of the Company; and
WHEREAS, the Company recognizes that the possibility of termination due to
Change of Control or without cause may arise and the uncertainty it may raise
among management of the Company may result in the departure or distraction of
management personnel, in each case to the detriment of the Company and its
shareholders.
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, it is agreed as follows:
This Agreement sets forth the severance benefits which the Company agrees will
be provided to the Executive in the event the Executive's employment with the
Company is terminated without cause under the circumstances described below.
1. RIGHT TO TERMINATE. Certified or the Executive may terminate the
------------------
Executive's employment at any time, subject to Certified's providing
the benefits hereinafter specified in accordance with the terms
thereof.
2. TERM OF AGREEMENT. This Agreement shall commence on June 9, 1998; and
-----------------
shall continue in effect until the earlier of June 9, 2001, or
termination of the Executive's employment; provided, however, that
commencing on June 9, 2001 the term of this Agreement shall be
extended for one additional year unless at least 90 days prior to such
date, Certified or the Executive shall have given written notice per
Section 9 herein that this Agreement shall not be extended; and
provided, further, that notwithstanding the delivery of any such
notice, the term of this Agreement shall automatically extend for an
additional period of twelve (12) months after a Change of Control of
the Company. For the purposes of this Agreement, "Change of Control"
shall mean (i) The acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities and Exchange
Act of 1934, of beneficial ownership of fifty-one percent (51%) or
more of the outstanding Class A Shares of Certified Grocers of
California, Ltd.; or (ii) if the individuals who presently serve on
the Certified
<PAGE>
Board of Directors no longer constitute a majority of the members of
the Certified Board of Directors; provided, however, any person who
becomes a director subsequent to the commencement date of this
Employment Agreement, who was elected to fill a vacancy by a majority
of Certified's members shall be considered as if a member prior to the
commencement date of this Agreement; or (iii) A liquidation or
dissolution of Certified or the sale of all or substantially all of
the assets of Certified.
3. TERMINATION. The Executive shall be entitled to the benefits provided
-----------
in Section 4 hereof upon the termination of the Executive's employment
with Certified during this Agreement period, unless such termination
is (i) because of the Executive's death, Disability, or Retirement,
(ii) by Certified for Cause, or (iii) by the Executive other than for
Good Reason (as all such capitalized terms are hereinafter defined).
(a) Disability. Termination by Certified of the
----------
Executive's employment based on "Disability" shall mean the
Executive's incapacity due to physical or mental illness to
substantially perform his duties on a full-time basis for six (6)
consecutive months and, within thirty (30) days after a notice of
termination is thereafter given by the Company, the Executive
shall not have returned to the full-time performance of the
Executive's duties; provided, however, if the Executive shall not
agree with a determination to terminate him because of
Disability, the question of the Executive's disability shall be
subject to the certification of a qualified medical doctor agreed
to by the Company and the Executive or the Executive's legal
representative, in the event of the Executive's incapacity to
designate a doctor. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified
medical doctor and the two doctors shall select a third doctor,
who shall make the determination as to Disability.
(b) Retirement. Termination by the Executive or by
----------
Certified of the Executive's employment based on "Retirement"
shall mean termination on or after the Executive's attainment of
age sixty-five (65) or an earlier age mutually agreed to by the
Executive and Certified.
(c) Cause. Termination by Certified of the Executive's
-----
employment for "Cause" shall mean termination upon:
(i) the willful and continued failure by the Executive
to substantially perform his duties (other than
any such failure resulting from the Executive's
incapacity due to physical or mental illness),
after demand for substantial performance is
delivered in writing by the Company to the
Executive that
-2-
<PAGE>
specifically identifies the manner in which the
Company believes the Executive has not
substantially performed his duties, or
(ii) the willful engaging by the Executive in illegal
or fraudulent misconduct which is materially
injurious to the Company, or
(iii) the willful material breach of the
Confidentiality and Nonsolicitation Agreement set
forth in Section 6.
No act, or failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action
or omission was in the best interest of the Company.
(d) Good Reason. Termination by the Executive of the
-----------
Executive's employment for "Good Reason" shall mean termination
based on (i) an adverse change in the Executive's status or
position(s), in effect immediately prior to the date of this
Agreement, (ii) a reduction in the Executive's base salary as in
effect immediately prior to the date of this Agreement, (iii) a
Change in Control, or (iv) the requirement by the Company that
the Executive be based at an office greater than 35 miles from
where the Executive's office is located on the date of the Change
of Control.
(e) Notice of Termination. Any purported termination by
---------------------
Certified or by the Executive shall be communicated by written
Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this
Agreement relied upon.
(f) Date of Termination. "Date of Termination" shall be
-------------------
the date set forth by written Notice of Termination or, if none,
then by mutual written agreement of the parties or by the
arbitrator in a proceeding as provided in Section 11 hereof.
During the pendency of any such dispute, Certified will continue
to pay the Executive the Executive's full compensation in effect
just prior to the time the Notice of Termination is given and
until the dispute is resolved in accordance with Section 11.
-3-
<PAGE>
4. COMPENSATION UPON TERMINATION.
-----------------------------
(a) Subject to Section 8 hereof, if, the Executive's employment
with Certified shall be terminated (i) by Certified other than for
Cause, Disability, Death or Retirement or (ii) by the Executive for
Good Reason, then within five business days of the Date of
Termination, Certified shall pay the Executive an amount equal to the
Executive's highest annual base salary during the three year period
immediately prior to the Date of Termination, plus an amount equal to
the average annual incentive bonus paid during the three years prior
to the Date of Termination.
(b) Certified shall maintain all benefits for the Executive and
his dependents in substantially the same form as those benefits in
place immediately prior to the Executive's termination for a period
terminating on the earliest of (i) twelve (12) months from the Date of
Termination, (ii) the commencement of similar benefits from a new
employer (but only to the extent that equivalent benefits are offered
by said employer), or (iii) attainment of age 65.
(c) All payments and benefits provided for yet unpaid in this
Section 4 shall be forfeited if the Executive violates any material
provision of this Agreement including, without limitation, the
Confidentiality and Nonsolicitation Agreement specified in Section 6
herein.
(d) In the event of termination of the Executive by the Company
for Cause, death, Disability, Retirement, or by the Executive for
other than Good Reason, no payment shall be provided under this
Agreement. This Agreement does not, and is not intended to, limit any
rights or benefits of the Executive pursuant to any other plan, policy
or written agreement.
5. NO OBLIGATION TO MITIGATE.
-------------------------
The Executive is under no obligation to mitigate damages in the amount
of any payment provided for hereunder by seeking other employment or
otherwise.
Subject to paragraph 4(b), the amount of any payment provided for in
this Agreement shall not be reduced, offset or subject to recovery by
Certified by reason of any compensation earned by the Executive as the
result of employment by another employer after the Date of
Termination, or otherwise.
6. CONFIDENTIALITY AND NONSOLICITATION AGREEMENT.
---------------------------------------------
(a) The Executive acknowledges that in the course of his
employment by the Company, he will have access to and become informed
of confidential and secret information which is a competitive asset of
the Company ("Confidential Information"), including (i) the terms of
any agreement between
-4-
<PAGE>
the Company and any employee, customer or supplier, (ii) pricing
strategy, (iii) product development strategies, (iv) personnel
training and development programs, (v) financial results, (vi)
strategic plans and demographic analyses, (vii) proprietary computer
and systems software, and (viii) any confidential non-public
information received from the Company concerning the Company, its
employees, suppliers and customers. The Executive agrees that he will
keep all Confidential Information in strict confidence during the term
of his employment by the Company and thereafter and will never make
known, divulge, reveal, furnish, make available, or use any
Confidential Information (except in the course of his regular
authorized duties on behalf of the Company). The Executive agrees that
the obligations of confidentiality hereunder shall survive termination
of his employment at the Company regardless of any actual or alleged
breach by the Company of this Agreement and shall continue for one
year following such termination provided that such obligation shall
terminate earlier (i) as to specific information that shall have
become known through no fault of the Executive or (ii) as to
Confidential Information which the Executive is required by law to
disclose (after giving the Company notice and an opportunity to
contest such requirement). The Executive's obligations under this
Section 6 are in addition to, and not in limitation or preemption of,
all other obligation of confidentiality which the Executive may have
to the Company under general legal or equitable principles.
(b) Except in the ordinary course of the Company's business, the
Executive has not made, nor shall at any time following the date of
this Agreement, make or cause to be made, any copies, pictures,
duplicates, facsimiles, or other reproductions or recordings or any
abstracts or summaries including or reflecting Confidential
Information. All such documents and other property furnished to the
Executive by the Company or otherwise acquired or developed by the
Company shall at all times be the property of the Company. Upon
termination of the Executive's employment by the Company, the
Executive will return to the Company any such documents or other
property of the Company which are in the possession, custody or
control of the Executive.
(c) In the event of the Executive's termination of employment at
the Company, the Executive agrees that he will not in any capacity, on
his own behalf or on behalf of any other firm, person, or entity, for
a period of one year, solicit, or assist in the solicitation of, any
employee of the Company to terminate his or her employment with the
Company.
(d) The Executive acknowledges and agrees that a violation of
the foregoing provisions of this Section 6 (referred to collectively
as the Confidentiality and Nonsolicitation Agreement) that results in
material detriment to the Company would cause irreparable harm to the
Company, and that the Company's remedy at law for any such violation
would be inadequate. In recognition of the foregoing, the Executive
agrees that, in addition to any other
-5-
<PAGE>
relief afforded by law or this Agreement, including damages sustained
by a breach of this Agreement and forfeiture of any and all
compensation or benefit otherwise provided under Section 4, and
without any necessity or proof of actual damages, the Company shall
have the right to enforce this Agreement by specific remedies, which
shall include, among other things, temporary and permanent
injunctions, it being the understanding of the undersigned parties
hereto that damages, the forfeitures described above and injunctions
shall all be proper modes of relief and are not to be considered as
alternative remedies.
7. SUCCESSORS; BINDING AGREEMENT.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required
to perform if no such succession had taken place.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees,
and legatees. If the Executive should die while any amount would still
be payable to the Executive hereunder if he had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee, or if there be no such designee,
to the Executive's estate.
(c) This Agreement, and all of the provisions hereof, shall be
binding upon Certified and all of its affiliates, successors,
transferees, or surviving or continuing entity.
8. TAXES.
-----
(a) All payments to be made to the Executive under this
Agreement will be subject to required withholding of federal, state,
and local income and employment taxes.
(b) Notwithstanding anything in the foregoing to the contrary,
if any of the payments provided for in this Agreement, together with
any other payments which the Executive have the right to receive from
Certified, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), the payments pursuant to this
Agreement shall be reduced to the largest amount as will result in no
portion of such payments being subject to the excise tax imposed by
Section 4999 of the code; provided, however, that the determination as
to whether any reduction in the payments under this Agreement
-6-
<PAGE>
pursuant to this provision is necessary shall be made by the Executive
in good faith, and such determination shall be conclusive and binding
on Certified with respect to its treatment of the payment for tax
reporting purposes.
9. NOTICE. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered by United
States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of Certified, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the address set forth below his signature,
provided that all notices to Certified shall be directed to the
attention of the Chief Executive Officer of the Certified, with a copy
to the Secretary of Certified, or to such other address as either
party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective
only upon receipt.
10. VALIDITY. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and
effect.
11. ARBITRATION. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by an
arbitrator selected under the rules of the American Arbitration
Association and the arbitration shall be conducted under the rules of
said association. Any claim must be filed within thirty (30) days of
the Notice of Termination unless extended by mutual written agreement
by both parties. Each party shall be entitled to present evidence and
argument to the arbitrator. The arbitrator shall have the right only
to interpret and apply the provisions of this Agreement and may not
change any of its provisions. The arbitrator shall permit reasonable
pre-hearing discovery of facts, to the extent necessary to establish a
claim or a defense to a claim, subject to supervision by the
arbitrator. The hearing shall begin within thirty (30) days of the
filing of the claim, unless extended by mutual written agreement by
both parties, and the arbitrator's decision shall be rendered within
thirty (30) days of the completion of the hearing unless extended by
mutual written agreement by both parties. The determination of the
arbitrator shall be conclusive and binding upon the parties and
judgment upon the same may be entered in any court having
jurisdiction. The Company shall bear all direct costs of the
arbitration proceedings pursuant to this Section 11 (arbitration fees,
transcript expenses, etc.) and pay reasonable legal fees of the
Executive.
12. SURVIVAL OF PROVISIONS. Notwithstanding any other provision of this
----------------------
Agreement, the parties' respective rights and obligations under
Sections 4, 5, 6, and 7, 11 of this Agreement shall survive
termination of this Agreement.
-7-
<PAGE>
13. MISCELLANEOUS. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modifications or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement
to be performed by such other party will be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or
subsequent time. Unless otherwise noted, references to "Sections" are
to sections of this Agreement. The captions used in this Agreement
are designed for convenient reference only are not to be used for the
purpose of interpreting any provision of this Agreement.
14. ENFORCEABILITY. Notwithstanding any other provision of this
--------------
Agreement, to the extent that any payment to be made pursuant to this
Agreement is prohibited by applicable federal or state law or
regulation, or by any action of any federal or state regulatory
agencies, unless Certified has obtained prior approval for such
otherwise prohibited payment from the appropriate regulatory
authority, Certified shall not be obligated to make such payments
under this Agreement.
15. GOVERNING LAW. The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of California,
without giving effect to the principles of conflict of laws of such
State.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the date set forth below.
CERTIFIED GROCERS OF CALIFORNIA, LTD.
By:
_______________________________________
Alfred A. Plamann
President
Agreed to this ninth day of June, 1998.
___________________________________________
Robert M. Ling, Jr.
-8-
<PAGE>
EXHIBIT 10.22
SEVERANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the ninth day of
June, 1998, by and between Certified Grocers of California, Ltd., a California
corporation (the "Company" or "Certified") and Richard J. Martin (the
"Executive").
WHEREAS, the Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders; and
WHEREAS, the Executive has been determined to be a vital member of the senior
management team of the Company; and
WHEREAS, the Company recognizes that the possibility of termination due to
Change of Control or without cause may arise and the uncertainty it may raise
among management of the Company may result in the departure or distraction of
management personnel, in each case to the detriment of the Company and its
shareholders.
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, it is agreed as follows:
This Agreement sets forth the severance benefits which the Company agrees will
be provided to the Executive in the event the Executive's employment with the
Company is terminated without cause under the circumstances described below.
1. RIGHT TO TERMINATE. Certified or the Executive may terminate the
------------------
Executive's employment at any time, subject to Certified's providing
the benefits hereinafter specified in accordance with the terms
thereof.
2. TERM OF AGREEMENT. This Agreement shall commence on June 9, 1998; and
-----------------
shall continue in effect until the earlier of June 9, 2001, or
termination of the Executive's employment; provided, however, that
commencing on June 9, 2001 the term of this Agreement shall be
extended for one additional year unless at least 90 days prior to such
date, Certified or the Executive shall have given written notice per
Section 9 herein that this Agreement shall not be extended; and
provided, further, that notwithstanding the delivery of any such
notice, the term of this Agreement shall automatically extend for an
additional period of twelve (12) months after a Change of Control of
the Company. For the purposes of this Agreement, "Change of Control"
shall mean (i) The acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities and Exchange
Act of 1934, of beneficial ownership of fifty-one percent (51%) or
more of the outstanding Class A Shares of Certified Grocers of
California, Ltd.; or (ii) if the individuals who presently serve on
the Certified Board of Directors no longer constitute a majority of
the members of the
<PAGE>
Certified Board of Directors; provided, however, any person who
becomes a director subsequent to the commencement date of this
Employment Agreement, who was elected to fill a vacancy by a majority
of Certified's members shall be considered as if a member prior to the
commencement date of this Agreement; or (iii) A liquidation or
dissolution of Certified or the sale of all or substantially all of
the assets of Certified.
3. TERMINATION. The Executive shall be entitled to the benefits provided
-----------
in Section 4 hereof upon the termination of the Executive's employment
with Certified during this Agreement period, unless such termination
is (i) because of the Executive's death, Disability, or Retirement,
(ii) by Certified for Cause, or (iii) by the Executive other than for
Good Reason (as all such capitalized terms are hereinafter defined).
(a) Disability. Termination by Certified of the
----------
Executive's employment based on "Disability" shall mean the
Executive's incapacity due to physical or mental illness to
substantially perform his duties on a full-time basis for six (6)
consecutive months and, within thirty (30) days after a notice of
termination is thereafter given by the Company, the Executive
shall not have returned to the full-time performance of the
Executive's duties; provided, however, if the Executive shall not
agree with a determination to terminate him because of
Disability, the question of the Executive's disability shall be
subject to the certification of a qualified medical doctor agreed
to by the Company and the Executive or the Executive's legal
representative, in the event of the Executive's incapacity to
designate a doctor. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified
medical doctor and the two doctors shall select a third doctor,
who shall make the determination as to Disability.
(b) Retirement. Termination by the Executive or by
----------
Certified of the Executive's employment based on "Retirement"
shall mean termination on or after the Executive's attainment of
age sixty-five (65) or an earlier age mutually agreed to by the
Executive and Certified.
(c) Cause. Termination by Certified of the Executive's
-----
employment for "Cause" shall mean termination upon:
(i) the willful and continued failure by the Executive
to substantially perform his duties (other than
any such failure resulting from the Executive's
incapacity due to physical or mental illness),
after demand for substantial performance is
delivered in
-2-
<PAGE>
writing by the Company to the Executive that
specifically identifies the manner in which the
Company believes the Executive has not
substantially performed his duties, or
(ii) the willful engaging by the Executive in illegal
or fraudulent misconduct which is materially
injurious to the Company, or
(iii) the willful material breach of the
Confidentiality and Nonsolicitation Agreement set
forth in Section 6.
No act, or failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action
or omission was in the best interest of the Company.
(d) Good Reason. Termination by the Executive of the
-----------
Executive's employment for "Good Reason" shall mean termination
based on (i) an adverse change in the Executive's status or
position(s), in effect immediately prior to the date of this
Agreement, (ii) a reduction in the Executive's base salary as in
effect immediately prior to the date of this Agreement, (iii) a
Change in Control, or (iv) the requirement by the Company that
the Executive be based at an office greater than 35 miles from
where the Executive's office is located on the date of the Change
of Control.
(e) Notice of Termination. Any purported termination by
---------------------
Certified or by the Executive shall be communicated by written
Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this
Agreement relied upon.
(f) Date of Termination. "Date of Termination" shall be
-------------------
the date set forth by written Notice of Termination or, if none,
then by mutual written agreement of the parties or by the
arbitrator in a proceeding as provided in Section 11 hereof.
During the pendency of any such dispute, Certified will continue
to pay the Executive the Executive's full compensation in effect
just prior to the time the Notice of Termination is given and
until the dispute is resolved in accordance with Section 11.
-3-
<PAGE>
4. COMPENSATION UPON TERMINATION.
-----------------------------
(a) Subject to Section 8 hereof, if, the Executive's employment
with Certified shall be terminated (i) by Certified other than for
Cause, Disability, Death or Retirement or (ii) by the Executive for
Good Reason, then within five business days of the Date of
Termination, Certified shall pay the Executive an amount equal to the
Executive's highest annual base salary during the three year period
immediately prior to the Date of Termination, plus an amount equal to
the average annual incentive bonus paid during the three years prior
to the Date of Termination.
(b) Certified shall maintain all benefits for the Executive and
his dependents in substantially the same form as those benefits in
place immediately prior to the Executive's termination for a period
terminating on the earliest of (i) twelve (12) months from the Date of
Termination, (ii) the commencement of similar benefits from a new
employer (but only to the extent that equivalent benefits are offered
by said employer), or (iii) attainment of age 65.
(c) All payments and benefits provided for yet unpaid in this
Section 4 shall be forfeited if the Executive violates any material
provision of this Agreement including, without limitation, the
Confidentiality and Nonsolicitation Agreement specified in Section 6
herein.
(d) In the event of termination of the Executive by the Company
for Cause, death, Disability, Retirement, or by the Executive for
other than Good Reason, no payment shall be provided under this
Agreement. This Agreement does not, and is not intended to, limit any
rights or benefits of the Executive pursuant to any other plan, policy
or written agreement.
5. NO OBLIGATION TO MITIGATE.
-------------------------
The Executive is under no obligation to mitigate damages in the amount
of any payment provided for hereunder by seeking other employment or
otherwise.
Subject to paragraph 4(b), the amount of any payment provided for in
this Agreement shall not be reduced, offset or subject to recovery by
Certified by reason of any compensation earned by the Executive as the
result of employment by another employer after the Date of
Termination, or otherwise.
6. CONFIDENTIALITY AND NONSOLICITATION AGREEMENT.
---------------------------------------------
(a) The Executive acknowledges that in the course of his
employment by the Company, he will have access to and become informed
of
-4-
<PAGE>
confidential and secret information which is a competitive asset of
the Company ("Confidential Information"), including (i) the terms of
any agreement between the Company and any employee, customer or
supplier, (ii) pricing strategy, (iii) product development strategies,
(iv) personnel training and development programs, (v) financial
results, (vi) strategic plans and demographic analyses, (vii)
proprietary computer and systems software, and (viii) any confidential
non-public information received from the Company concerning the
Company, its employees, suppliers and customers. The Executive agrees
that he will keep all Confidential Information in strict confidence
during the term of his employment by the Company and thereafter and
will never make known, divulge, reveal, furnish, make available, or
use any Confidential Information (except in the course of his regular
authorized duties on behalf of the Company). The Executive agrees that
the obligations of confidentiality hereunder shall survive termination
of his employment at the Company regardless of any actual or alleged
breach by the Company of this Agreement and shall continue for one
year following such termination provided that such obligation shall
terminate earlier (i) as to specific information that shall have
become known through no fault of the Executive or (ii) as to
Confidential Information which the Executive is required by law to
disclose (after giving the Company notice and an opportunity to
contest such requirement). The Executive's obligations under this
Section 6 are in addition to, and not in limitation or preemption of,
all other obligation of confidentiality which the Executive may have
to the Company under general legal or equitable principles.
(b) Except in the ordinary course of the Company's business, the
Executive has not made, nor shall at any time following the date of
this Agreement, make or cause to be made, any copies, pictures,
duplicates, facsimiles, or other reproductions or recordings or any
abstracts or summaries including or reflecting Confidential
Information. All such documents and other property furnished to the
Executive by the Company or otherwise acquired or developed by the
Company shall at all times be the property of the Company. Upon
termination of the Executive's employment by the Company, the
Executive will return to the Company any such documents or other
property of the Company which are in the possession, custody or
control of the Executive.
(c) In the event of the Executive's termination of employment at
the Company, the Executive agrees that he will not in any capacity, on
his own behalf or on behalf of any other firm, person, or entity, for
a period of one year, solicit, or assist in the solicitation of, any
employee of the Company to terminate his or her employment with the
Company.
(d) The Executive acknowledges and agrees that a violation of the
foregoing provisions of this Section 6 (referred to collectively as
the
-5-
<PAGE>
Confidentiality and Nonsolicitation Agreement) that results in
material detriment to the Company would cause irreparable harm to the
Company, and that the Company's remedy at law for any such violation
would be inadequate. In recognition of the foregoing, the Executive
agrees that, in addition to any other relief afforded by law or this
Agreement, including damages sustained by a breach of this Agreement
and forfeiture of any and all compensation or benefit otherwise
provided under Section 4, and without any necessity or proof of actual
damages, the Company shall have the right to enforce this Agreement by
specific remedies, which shall include, among other things, temporary
and permanent injunctions, it being the understanding of the
undersigned parties hereto that damages, the forfeitures described
above and injunctions shall all be proper modes of relief and are not
to be considered as alternative remedies.
7. SUCCESSORS; BINDING AGREEMENT.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required
to perform if no such succession had taken place.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees,
and legatees. If the Executive should die while any amount would still
be payable to the Executive hereunder if he had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee, or if there be no such designee,
to the Executive's estate.
(c) This Agreement, and all of the provisions hereof, shall be
binding upon Certified and all of its affiliates, successors,
transferees, or surviving or continuing entity.
8. TAXES.
-----
(a) All payments to be made to the Executive under this Agreement
will be subject to required withholding of federal, state, and local
income and employment taxes.
(b) Notwithstanding anything in the foregoing to the contrary, if
any of the payments provided for in this Agreement, together with any
other
-6-
<PAGE>
payments which the Executive have the right to receive from Certified,
would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code), the payments pursuant to this Agreement shall
be reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of
the code; provided, however, that the determination as to whether any
reduction in the payments under this Agreement pursuant to this
provision is necessary shall be made by the Executive in good faith,
and such determination shall be conclusive and binding on Certified
with respect to its treatment of the payment for tax reporting
purposes.
9. NOTICE. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered by United
States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of Certified, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the address set forth below his signature,
provided that all notices to Certified shall be directed to the
attention of the Chief Executive Officer of the Certified, with a copy
to the Secretary of Certified, or to such other address as either
party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective
only upon receipt.
10. VALIDITY. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and
effect.
11. ARBITRATION. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by an
arbitrator selected under the rules of the American Arbitration
Association and the arbitration shall be conducted under the rules of
said association. Any claim must be filed within thirty (30) days of
the Notice of Termination unless extended by mutual written agreement
by both parties. Each party shall be entitled to present evidence and
argument to the arbitrator. The arbitrator shall have the right only
to interpret and apply the provisions of this Agreement and may not
change any of its provisions. The arbitrator shall permit reasonable
pre-hearing discovery of facts, to the extent necessary to establish a
claim or a defense to a claim, subject to supervision by the
arbitrator. The hearing shall begin within thirty (30) days of the
filing of the claim, unless extended by mutual written agreement by
both parties, and the arbitrator's decision shall be rendered within
thirty (30) days of the completion of the hearing unless extended by
mutual written agreement by both parties. The determination of the
arbitrator shall be conclusive and binding upon the parties and
judgment upon the same may be entered in any court having
jurisdiction. The Company shall bear all direct costs of the
arbitration
-7-
<PAGE>
proceedings pursuant to this Section 11 (arbitration fees,
transcript expenses, etc.) and pay reasonable legal fees of the
Executive.
12. SURVIVAL OF PROVISIONS. Notwithstanding any other provision of this
----------------------
Agreement, the parties' respective rights and obligations under
Sections 4, 5, 6, and 7, 11 of this Agreement shall survive
termination of this Agreement.
13. MISCELLANEOUS. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modifications or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party
hereto or compliance with any condition or provision of this Agreement
to be performed by such other party will be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or
subsequent time. Unless otherwise noted, references to "Sections" are
to sections of this Agreement. The captions used in this Agreement
are designed for convenient reference only are not to be used for the
purpose of interpreting any provision of this Agreement.
14. ENFORCEABILITY. Notwithstanding any other provision of this
--------------
Agreement, to the extent that any payment to be made pursuant to this
Agreement is prohibited by applicable federal or state law or
regulation, or by any action of any federal or state regulatory
agencies, unless Certified has obtained prior approval for such
otherwise prohibited payment from the appropriate regulatory
authority, Certified shall not be obligated to make such payments
under this Agreement.
15. GOVERNING LAW. The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of California,
without giving effect to the principles of conflict of laws of such
State.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the date set forth below.
CERTIFIED GROCERS OF CALIFORNIA, LTD.
By:
_______________________________________
Alfred A. Plamann
President
Agreed to this ninth day of June, 1998.
___________________________________________
Richard J. Martin
-8-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of August 29, 1998, the Company's subsidiaries, all wholly-owned and
incorporated in California (except where noted otherwise) are:
Grocers Equipment Co.
Grocers and Merchants Insurance Service, Inc.
(1) Grocers Capital Company
Springfield Insurance Company Limited (incorporated in Bermuda)
Grocers Specialty Company
(2) Grocers Development Center, Inc.
Grocers and Merchants Management Company
Preferred Public Storage Company
Crown Grocers, Inc.
Grocers General Merchandise Company
(3) Springfield Insurance Company
(4) Banner Marketing, Inc.
(5) Cerp Acquisition Corp.
Morga No.12 Acquisition Corp.
Walnut Creek No.7 Acquisition Corp.
Lauresm Corporation
- --------------------------------
(1) Outstanding capital shares are owned by Grocers Equipment Co. (67.63%)
and the Registrant (32.37%)
(2) Outstanding capital shares are owned by Grocers Equipment Co.
(3) Outstanding capital shares are owned by Grocers and Merchants Insurance
Services, Inc.
(4) Outstanding capital shares are owned by Grocers Equipment Co.
(5) Outstanding capital shares are owned by Grocers Capital Company
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<PAGE>
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<PERIOD-START> AUG-31-1997
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<CASH> 4,105
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0
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