<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
10-QA
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended February 27, 1999
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________________ to _______________________
Commission file number 0-10815
- ------------------------------------------------------------------------------
Certified Grocers of California, Ltd.
(Exact name of registrant as specified in its charter)
California 95-0615250
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 Sheila Street, Los Angeles 90040
(Address of principal executive offices) (Zip Code)
(323) 264-5200
- ------------------------------------------------------------------------------
Registrant's telephone number, including area code
- ------------------------------------------------------------------------------
(Former Name, former address and former fiscal year, if changed since last
report)
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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Shares 46,800 Shares as of February 27, 1999
Class B Shares 361,139 Shares as of February 27, 1999
Class C Shares 15 Shares as of February 27, 1999
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
February 27,
1999 August 29,
(as restated) 1998
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $ 8,942 $ 4,105
Accounts and notes receivable, net 96,699 95,672
Inventories 136,960 124,419
Prepaid expenses 4,746 4,744
Deferred taxes 4,277 3,853
-------- --------
Total current assets 251,624 232,793
Properties, at cost 177,858 160,808
Less, accumulated depreciation (99,518) (84,509)
-------- --------
78,340 76,299
Investments 38,232 41,341
Notes receivable 17,756 21,792
Other assets 41,291 16,993
-------- --------
TOTAL ASSETS $427,243 $389,218
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Accounts payable $ 81,600 $ 80,870
Accrued liabilities 60,462 51,767
Notes payable 5,736 743
Patrons' excess deposits and estimated patronage dividends 18,047 13,630
-------- --------
Total current liabilities 165,845 147,010
Notes payable, due after one year 144,332 125,130
Long-term liabilities 23,565 20,440
Patrons' deposits and certificates:
Patrons' required deposits 11,454 12,147
Subordinated patronage dividend certificates 5,986 6,158
Shareholders' equity:
Class A Shares 5,602 5,479
Class B Shares 54,404 56,992
Retained earnings 15,577 15,685
Net unrealized gain on appreciation of investments 534 233
Minimum pension liability adjustment (56) (56)
-------- --------
Total shareholders' equity 76,061 78,333
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $427,243 $389,218
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------------- --------------------------------
February 27, February 27,
1999 February 28, 1999 February 28,
(as restated) 1998 (as restated) 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $456,787 $462,007 $918,928 $948,960
------------- ------------- ------------ -------------
Costs and expenses:
Cost of sales 414,255 420,345 837,235 865,565
Distribution, selling and administrative 35,208 33,821 67,457 67,715
-------------- ------------- ------------ -------------
Operating income 7,324 7,841 14,236 15,680
Interest expense (2,981) (3,292) (5,837) (6,507)
------------- ------------- ------------ -------------
Earnings before estimated patronage dividends
and provision for income taxes 4,343 4,549 8,399 9,173
Estimated patronage dividends (3,808) (3,618) (7,071) (7,410)
------------- ------------- ------------ -------------
Earnings before income tax provision 535 931 1,328 1,763
Provision for income taxes 162 299 412 584
------------- ------------- ------------ -------------
Net earnings $ 373 $ 632 $ 916 $ 1,179
============= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CERTIFIED GROCERS OF CALIFORNIA, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
February 27,
1999 February 28,
(as restated) 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 916 $ 1,179
Adjustments to reconcile net earnings to net
cash provided (utilized) by operating activities:
Depreciation and amortization 8,040 7,253
Deferred taxes (424)
(Gain) loss on disposal of properties (28) 171
Decrease (increase) in assets:
Accounts and notes receivable (1,027) 3,595
Inventories (12,541) 9,239
Prepaid expenses (2) (471)
Notes receivable 1,384 (2,684)
Increase (decrease) in liabilities:
Accounts payable 730 (27,243)
Accrued liabilities 8,695 (2,102)
Patrons' excess deposits and estimated
patronage dividends 4,417 1,711
Long-term liabilities, other 3,125 732
---------- ---------
Net cash provided (utilized) by operating activities 13,285 (8,620)
---------- ---------
Cash flows from investing activities:
Purchase of properties (8,997) (9,629)
Proceeds from sales of properties 43 1,181
Increase in other assets (25,397) (2,372)
Investment in securities, net 4,446 (1,427)
Proceeds from sale of notes receivable 2,652
---------- ---------
Net cash utilized by investing activities (27,253) (12,247)
---------- ---------
Cash flows from financing activities:
Additions to long-term notes payable 19,593 26,548
Additions to short-term notes payable 3,931
Reduction of short-term notes payable (365) (1,317)
Decrease in members' required deposits (693) (13)
Redemption of patronage dividend certificates (172)
Repurchase of shares from members (3,909) (3,802)
Issuance of shares to members 420 260
---------- ---------
Net cash provided by financing activities 18,805 21,676
---------- ---------
Net increase in cash and cash equivalents 4,837 809
Cash and cash equivalents at beginning of year 4,105 7,900
---------- ---------
Cash and cash equivalents at end of period $ 8,942 $ 8,709
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,212 $ 6,632
Income taxes $ 763 $ 700
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CERTIFIED GROCERS OF CALIFORNIA, LTD., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the accounts of
Certified Grocers of California, Ltd. and all of its subsidiaries (the
"Company"). Intercompany transactions and accounts with subsidiaries have been
eliminated. The interim financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations promulgated
by the Securities and Exchange Commission (the "Commission"). Certain
information and footnote disclosures, normally included in the financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to Commission rules and regulations; nevertheless,
management believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's latest annual report filed on Form 10-K. The results of
operations for the interim periods are not necessarily indicative of the results
for the full year.
2. The accompanying condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, both of a normal recurring
nature and necessary for a fair statement of the results of the interim periods
presented. Certain reclassifications have been made to prior period financial
statements to present them on a basis comparable with the current period's
presentation. 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.
3. The Company reclassified $391,000 from long-term to short-term debt (a
noncash financing activity) for the twenty-six weeks ended February 27, 1999, in
its Condensed Consolidated Statements of Cash Flows.
4. As of August 30, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income is net income, plus certain other items that
are recorded directly to shareholders' equity, bypassing net income. The only
items currently applicable to the Company are the unrealized gain or loss on
appreciation of investments and the minimum pension liability adjustment.
Comprehensive income was $1,213,000 and $1,333,000 for the twenty-six weeks
ended February 27, 1999 and February 28, 1998, respectively. Comprehensive
income was $474,000 and $565,000 for the thirteen weeks ended February 27, 1999
and February 28, 1998, respectively.
The Financial Accounting Standards Board ("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 segments 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 statements.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that the
Company recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. As amended by SFAS No. 137,
this statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management is in the process of determining the effects on
the Company's financial statements.
5. Prior to December 31, 1998, the Company owned an equity interest in SavMax
Foods, Inc. ("SavMax"), a member-patron. SavMax is an operator of seven retail
grocery stores with retail sales of approximately $110 million per year. The
investment consisted of (a) 10% of the outstanding Series A common stock with an
original cost of $2.5 million and (b) $6.3 million of 8.5% Series B cumulative
redeemable preferred stock. The Company purchased the remaining common and
preferred shares of SavMax as of December 31, 1998, for an aggregate purchase
price of approximately $4.5 million (see note 9). The transaction also included
an ongoing covenant not to compete from a selling shareholder, termination of
the sellers' existing employment and consulting agreements and the entry into a
consulting arrangement with a selling shareholder. The acquisition has been
accounted for as a purchase pursuant to Accounting Principles Board Opinion No.
16, "Business Combinations." Accordingly, the consideration has been allocated
to the assets and liabilities based on their relative fair values. The excess
of the purchase price
5
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over the fair market value of the net assets was $23.4 million and was recorded
as goodwill. Goodwill is based on SavMax's balance sheet dated January 2, 1999
and is subject to final determination based on real estate, leasehold and
equipment valuation studies which are not yet complete. The results of the
acquired business have been included in the consolidated financial statements
from the effective date December 31, 1998 through February 27, 1999. Although
SavMax has been consolidated, the Company's plans are to sell its investment to
a qualified buyer(s) in the future.
Events Subsequent to the Date of the Financial Statements
6. Subsequent to the end of the quarter, in March 1999, the Company executed a
letter of intent with respect to a proposed merger with United Grocers, Inc., a
grocery cooperative headquartered in Portland, Oregon. The consummation of the
merger is conditional upon the execution of a mutually approved definitive
merger agreement following completion of due diligence, approval of the
agreement by the shareholders of both entities, required filings with regulatory
entities, and other customary conditions.
7. Prior to March 27, 1999, Grocers Capital Company ("GCC") owned 10% of the
common stock of K.V. Mart Co. ("KV"), of which Certified director Darioush
Khaledi is affiliated. The cost of the investment was approximately $3 million.
The Stock Purchase Agreement contained a provision which allowed KV to
repurchase the shares upon certain terms and conditions. Prior to March 27,
1999, KV exercised its repurchase rights under the agreement.
On March 27, 1999, the Company, GCC and KV entered into a stock repurchase
agreement ("the Agreement"). The Agreement provides that KV shall purchase the
shares for $4.5 million, payable in cash and in an interest-bearing note as
provided for in the Stock Purchase Agreement. Coincident to the transaction, KV
entered into a supply agreement with Certified for a five-year term. The
Agreement also provides that for a three year period commencing as of the date
of the Agreement, in the event of (i) a change of control of KV or (ii) a breach
of the supply agreement by KV, KV shall pay the Company $900,000 or an amount
equal to the difference between 10% of the appraised value of KV as of the
approximate date of the Agreement (as prepared by an independent third party
appraisal firm) and $4.5 million, whichever is greater.
8. Prior to April 5, 1999, the Company subleased a store in Riverside,
California to Jax Apple Market, Inc. ("Jax"), of which former Director Willard
R. "Bill" MacAloney is a principal. Mr. MacAloney's term as a director expired
as of the Shareholders' Meeting held February 23, 1999. The Company asserted
that monthly lease and other occupancy-related payments and equipment purchases
related to the Riverside store had not been paid timely by Jax. Jax disputed
the amounts claimed due by the Company.
On April 5, 1999, the Company entered into an agreement with Jax, Mr.
MacAloney and other entities controlled by Mr. MacAloney (collectively, "the
MacAloney entities"). Pursuant to the Agreement, the MacAloney entities paid
the indebtedness due the Company and its affiliates related to the Riverside
store, and the sublease was terminated. In addition, the Company acquired a
right of first refusal to purchase all of the common stock related to
supermarket entities controlled by Mr. MacAloney for a period of five years.
9. Subsequent to the issuance of the Company's quarterly report on Form 10-Q
for the nine months ended May 29, 1999, the Company's management determined to
account for the acquisition of SavMax, as described in Note 5, as a purchase
pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations".
As a result, the financial statements for the six-month period ended February
27, 1999 have been restated from the amounts previously reported to reflect the
consolidation of SavMax with the Company. This restatement decreased current
assets by $10,000 and increased total assets by $11,000. Shareholder's equity
and net earnings each increased by $4.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
General
Subsequent to the end of the quarter, in March 1999, the Company executed a
letter of intent with respect to a proposed merger with United Grocers, Inc., a
grocery cooperative headquartered in Portland, Oregon. The consummation of the
merger is conditional upon the execution of a mutually approved definitive
merger agreement following completion of due diligence, approval of the
agreement by the shareholders of both entities, required filings with regulatory
entities, and other customary conditions.
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 provided by operating activities totaled $13.3 million for
the first twenty-six weeks of fiscal 1999 (the "1999 period"). Net cash
provided for the 1999 period is primarily due to decreased long-term notes
receivable in the distribution operations, increased accrued liabilities in the
distribution, insurance and SavMax operations, and increased long-term
liabilities in the distribution and SavMax operations. Net cash utilized by
operating activities totaled $8.6 million for the first twenty-six weeks of
fiscal 1998 (the "1998 period"). Working capital was $85.8 million at February
27, 1999 and August 29, 1998. The Company's current ratio was 1.5 to 1 at
February 27, 1999 and 1.6 to 1 at fiscal 1998 year end, respectively. Working
capital varies primarily as a result of seasonal inventory requirements.
Capital expenditures totaled $9.0 million in the first twenty-six weeks of
fiscal 1999. The 1999 expenditures include purchases of computer equipment,
leasehold improvements, warehouse equipment and retail store equipment.
The Company has $80,000,000 in Senior Notes (the "Senior Notes")
outstanding to certain life insurance companies and pension funds. The Senior
Notes are unsecured, due in April 2008 and bear interest at 7.22% per annum.
The Company also has a $100,000,000 revolving credit facility with a group of
banks (the "Revolving Credit"). The Revolving Credit is unsecured, expires in
April 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 pertaining to working capital, adjusted tangible net worth, funded
debt to EBITDA, funded debt to total capitalization, fixed charge coverage and
similar provisions. Obligations under the Credit Agreements are senior to the
rights of member patrons with respect to deposits and patronage dividend
certificates. GCC's existing $10,000,000 credit agreement also remains in
place.
The Company entered into a five-year interest rate collar agreement during
February 1999 in relation to certain borrowings on its variable rate Revolving
Credit. The collar agreement was put in place without incurring any costs. The
hedge agreement is structured such that the Company pays a variable rate of
interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount
of $50,000,000. The weighted average interest rate on borrowings on the
revolving credit were 5.96% at February 27, 1999.
Certified distributes at least 20% of the patronage dividends in cash and
distributes Class B Shares as a portion of the patronage dividends distributed
to its member-patrons.
Patrons are generally required to maintain subordinated deposits with the
Company and member-patrons purchase Class B Shares to satisfy this requirement,
in whole or in part. 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
7
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restricted the Company's redemption of shares to 19,007 shares for $3.5 million.
The number of shares tendered for redemption at February 27, 1999, totaled
64,007 (or approximately $11.7 million using fiscal 1998 year end book value),
which exceeds the amount that can be redeemed in fiscal 2000. Consequently, the
Company will be required to make redemptions in fiscal 2000, 2001, 2002, and
2003 with such redemptions approximating $11.7 million based on 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 to fund redemption of shares
is provided from operations, patron deposits, current shareholdings and
borrowings under the Company's credit lines.
Year 2000
The Company has had an active Year 2000 ("Y2K") program since August 1996.
This program includes a detailed review of the Company's software applications,
hardware, and embedded technology. The Company has utilized an outside
consultant to assess the embedded chip technology within its facilities. This
assessment found 95% of the chips to be either already compliant or in the
process of being updated by various vendors.
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 85%
complete with replacing or remediating business critical applications, 60%
complete with respect to applications that were identified as moderate risk and
35% complete as to low risk applications. The schedules for remediation or
replacement are reviewed monthly by management. The Company expects that 100%
of all critical and moderate risk applications will be completed by August 1999.
The Company had decided to replace certain systems that were not Y2K
compliant. The systems 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, including replacement of the systems, is
approximately $5.9 million. The estimated total cost of the new systems is
approximately $3 million. The remaining $2.9 million will be expensed. The
total amount incurred on the project through February 27, 1999 was $4.8 million,
of which $2.3 million related to the cost to remediate software and $2.5 million
related to the replacement of systems including hardware.
The Company has notified its members of the Y2K issues through newsletters,
meetings, and discussions. Certified's Interactive Ordering Program, which
allows retailers 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 has completed the upgrade and
implementation of the Y2K compliant version of the Uniform Commercial Standard
("UCS") transactions. The Company is working with UCS vendors to make sure that
processing of orders, invoices, and payments via electronic data interchange
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 of 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. The Company has set up
an electronic bulletin board with information on Y2K issues for its members.
8
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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.
Results of Operations
The following table sets forth selected financial data of the Company
expressed as a percentage of sales for the periods indicated below:
<TABLE>
<CAPTION>
Thirteen Week Period Twenty-six Week Period
-------------------- ----------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 90.7 91.0 91.1 91.2
Distribution, selling and administrative 7.7 7.3 7.4 7.1
Operating income 1.6 1.7 1.5 1.7
Interest expense 0.7 0.7 0.6 0.7
Estimated patronage dividends 0.8 0.8 0.8 0.8
Earnings after dividend and before income taxes 0.1 0.2 0.1 0.2
Provision for income taxes 0.0 0.1 0.0 0.1
Net earnings 0.1 0.1 0.1 0.1
</TABLE>
Thirteen Week Period
Net sales
Net sales totaled $456.8 million for the 1999 period as compared to
$462.0 million in the 1998 period. The sales decrease of $5.2 million
represents a 1.1% decrease over the 1998 period. The reduction in sales is
primarily the result of reduced sales to Hughes Family Markets, Inc. ("Hughes"),
Nob Hill General Store Inc. ("Nob Hill"), and Megafood Stores ("Megafoods").
Hughes, Nob Hill, and Megafoods were acquired by entities that have self-
distribution programs. The volume lost as a result of Hughes, Nob Hill, and
Megafoods transactions has been partially offset by the addition of North State
Grocery Company as a member-patron in October 1998 and increased sales to the
ongoing membership base.
Cost of sales
In the 1999 period cost of sales were $414.3 million (90.7% of net
sales) compared to $420.3 million (91.0% of net sales) in the 1998 period. The
overall gross margin as a percentage of net sales is slightly higher compared to
the comparable period in 1998. The increase in gross margin is due to
additional gross margin from retail sales generated by SavMax, which Certified
acquired in December 1998. The increased margins were partially offset by
increased claims expense of $2.0 million in one of Certified's insurance
subsidiaries and lower margins in the cooperative divisions.
Distribution, selling and administrative
Distribution, selling and administrative expenses were $35.2 million
(or 7.7% of net sales) in the 1999 period, as compared to $33.8 million (or 7.3%
of net sales) in the 1998 period. The increase is due to additional costs of
$3.6 million related to retail operations of SavMax. These costs were partially
offset by efficiency improvements in warehouse and delivery expenses in the 1999
period.
9
<PAGE>
Interest
Interest expense in the 1999 period is comparable to the 1998 period
(0.7% of net sales). The $311,000 decrease is primarily due to lower interest
rates associated with the $180.0 million refinancing completed in April 1998.
Estimated patronage dividends
Estimated patronage dividends totaled $3.8 million for the 1999 period
as compared to $3.6 million for the 1998 period. The increase is due to
improvements in distribution, selling and administrative expenses and interest
expense as discussed above.
Net earnings
Net earnings for the 1999 period were $373,000 compared to net
earnings of $632,000 for the 1998 period. Net earnings are generated by the
Company's subsidiaries, which do not distribute patronage dividends.
Accordingly, subsidiary earnings are retained by the Company in order to enhance
the book value per share.
Twenty-six Week Period
Net sales
Net sales totaled $918.9 million for the 1999 period as compared to
$949.0 million in the 1998 period. The sales decrease of $30.0 million
represents a 3.2% decrease over the 1998 period. The reduction in sales is
primarily the result of reduced sales to Hughes and Nob Hill. Hughes and Nob
Hill were acquired by entities that have self-distribution programs;
accordingly, product supply to the Hughes and Nob Hill stores migrated into the
corresponding self-distribution facilities in the period between March 1998
through November 1998. The $59 million volume lost as a result of the Hughes
and Nob Hill transactions has been partially offset by $14.9 million from the
addition of North State Grocery Company as a member-patron in October 1998 and
increased sales to the ongoing membership base.
Cost of sales
In the 1999 period cost of sales were $837.2 million (91.1% of net
sales) compared to $865.6 million (91.2% of net sales) in the 1998 period. The
overall gross margin as a percentage of net sales is slightly higher compared to
the comparable period in 1998. The increase in gross margin is due to
additional gross margin from retail sales generated by SavMax, which Certified
acquired in December 1998. The increased margins were partially offset by
increased claims expense of $3.2 million in one of Certified's insurance
subsidiaries and lower margins in the cooperative divisions.
Distribution, selling and administrative
Distribution, selling and administrative expenses were $67.5 million
(or 7.4% of net sales) in the 1999 period, as compared to $67.7 million (or 7.1%
of net sales) in the 1998 period. The increase as a percentage of sales is due
to additional costs of $3.6 million related to retail operations of SavMax.
These costs were partially offset by efficiency improvements in warehouse and
delivery expenses in the 1999 period.
Interest
Interest expense in the 1999 period decreased from $6.5 million (0.7%
of net sales) in the 1998 period to $5.8 million (0.6% of net sales) in the 1999
period. The decrease is primarily due to lower interest rates associated with
the $180.0 million refinancing completed in April 1998.
Estimated patronage dividends
Estimated patronage dividends totaled $7.1 million for the 1999 period
as compared to $7.4 million for the 1998 period. The reduction is due to lower
sales through the cooperative divisions offset by reduced interest costs.
10
<PAGE>
Net earnings
Net earnings for the 1999 period were $916,000 compared to net
earnings of $1,179,000 for the 1998 period. Net earnings are generated by the
Company's subsidiaries, which do not distribute patronage dividends.
Accordingly, subsidiary earnings are retained by the Company in order to enhance
the book value per share.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-
defined interest rate risks. The Company entered into a five-year interest rate
collar agreement during February 1999 in relation to certain borrowings on its
variable rate Revolving Credit. The collar agreement was put in place without
incurring any costs. The hedge agreement is structured such that the Company
pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate)
based on a notional amount of $50,000,000. The weighted average interest rate
on borrowings on the revolving credit were 5.96% at February 27, 1999.
11
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
12
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Certified Grocers of California, Ltd.
-------------------------------------
(Registrant)
Dated: September 10, 1999 By ALFRED A. PLAMANN
--------------------------------
Alfred A. Plamann
President and
Chief Executive Officer
By RICHARD J. MARTIN
--------------------------------
Richard J. Martin
Senior Vice President --
Finance & Administration
and Chief Financial Officer
13
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> FEB-27-1999
<CASH> 8,942
<SECURITIES> 38,232
<RECEIVABLES> 96,699
<ALLOWANCES> (6,900)
<INVENTORY> 136,960
<CURRENT-ASSETS> 251,624
<PP&E> 177,858
<DEPRECIATION> (99,518)
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<CURRENT-LIABILITIES> 165,845
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0
0
<COMMON> 60,006
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<SALES> 918,928
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<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 1,328
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<INCOME-CONTINUING> 916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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