As filed with the Securities and Exchange Commission on November __, 1999
Registration No. 333-51931
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
UNIFIED WESTERN GROCERS, INC.
(formerly 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
Commerce, California 90040
(323) 264-5200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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Robert M. Ling, Jr., General Counsel
Unified Western Grocers, Inc.
5200 Sheila Street
Commerce, California 90040
(323) 264-5200
(Name, address, including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------
Copy To:
John D. Hussey, Esquire
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street
48th Floor
Los Angeles, California 90071
(213) 617-4112
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to
securities holders, or a complete and legible facsimile thereof, pursuant
to Item 11(a)(1) of this Form, check the following box. [X]
================================================================================
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Prospectus
UNIFIED WESTERN GROCERS, INC.
$41,040,591 Partially Subordinated Patrons' Deposit Accounts
Unified Western Grocers, Inc. We operate a grocery wholesale
5200 Sheila Street distribution business
Commerce, California 90040 primarily on a cooperative
(323) 264-5200 basis. Our customers are
termed patrons. Patrons are
Price to the Public: $41,040,591 generally required to maintain
Proceeds to Unified: $41,040,591 deposits with us in proportion
to the volume of purchases
. Offering of deposit accounts to made from us. The deposits
existing and prospective customers act as security for amounts
of Unified. owed by the customer to us.
When patrons terminate their
. The amount registered is intended relationship with us, we
to cover deposits which may be return their deposit after
required in the current year. deducting any amounts the patron
owes to us if permitted by the
. There is no market for these subordination provisions of the
deposit accounts. deposits. The requirement to
maintain deposits can be satisfied
through a combination of a
cash deposits and the ownership
of our Class B Shares.
Placing funds in deposit accounts involves certain risks. See "Risk
Factors" beginning on page 2 for a discussion of certain factors you
should consider before placing funds in deposit accounts.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
November __, 1999
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RISK FACTORS
You should carefully consider the risks described below before placing funds in
deposit accounts.
Your required minimum deposit will be at risk.
We will require all patrons to execute a subordination agreement which provides
for the subordination of the patron's right to repayment of its deposit to the
prior payment in full of certain indebtedness of Unified. If Unified goes into
default on its other indebtedness, member patrons will not receive back their
deposit unless the other creditors holding indebtedness are paid in full. In
addition, Unified will require each shareholder to pledge its Class A Shares and
Class B Shares of Unified to secure its obligations, and individual shareholders
of corporate members may be required to guaranty the obligations of the
corporate member. See "DESCRIPTION OF DEPOSIT ACCOUNTS - Subordination."
Your deposit account is not transferable.
You must have our permission to transfer your ownership of a deposit account to
someone else. We will generally not agree to let you do this. If you do not pay
the amounts you owe, we may take your deposit account balance as necessary to
pay those obligations.
A portion of the deposit accounts does not bear interest.
The minimum required amount of the deposit accounts does not bear interest.
See "DESCRIPTION OF DEPOSIT ACCOUNTS -- Interest."
We may not be able to repay your deposit account in a timely manner.
You may request that any amount you have in a deposit account in excess of the
minimum required amount be returned to you if you have paid your obligations to
Unified and its subsidiaries in a timely manner. If you ever cease being a
patron, then you may get back the full amount in your deposit account once we
deduct all obligations you owe us and our subsidiaries. Our ability to repay
your deposit account is subject to its obligations under subordination
provisions of the deposit accounts. See "DESCRIPTION OF DEPOSIT ACCOUNTS -
Repayment."
We will continue to be subject to risk of loss of member volume.
We will continue to be subject to the risks associated with the consolidation of
the grocery industry. When independent retailers are acquired by large chains
with self distribution capacity, are driven from business by larger grocery
chains, or become large enough to develop their own self-distribution system, we
will lose distribution volume. Members may also select other wholesale
providers. Reduced volume is normally injurious to profitable operations since
fixed costs must be spread over a lower volume of transactions.
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Your deposit account will be an unsecured obligation.
Your investment in a deposit account will not be secured by any lien upon any
assets of Unified.
Integrating business operations may prove difficult and may harm operating
results.
The United merger will require integrating the operations and systems of the two
companies and eliminating duplicate facilities in Northern California. The costs
of eliminating duplicative facilities in Northern California may be greater than
Unified anticipated. If Unified is not successful in eliminating duplicate
personnel in administrative functions, anticipated cost savings will not be
realized. If planned efficiencies in distribution can not be realized, cost
saving will not be realized and prepatronage dividend income would be reduced or
eliminated. These and other difficulties associated with the merger, including
the challenges in assimilating personnel, may harm operating results.
BUSINESS DESCRIPTION
Unified was formed in California in 1922 and became a corporation in 1925.
Unified distributes groceries as a wholesale basis to customers on a cooperative
basis. Customers are called patrons in this document. Patrons meeting certain
volume purchase requirements are required to become shareholders of Unified.
RECENT DEVELOPMENTS
On September 27, 1999, the shareholders of Certified Grocers of California, Ltd.
and United Grocers, Inc. (a grocery cooperative headquartered in Portland,
Oregon) approved a merger agreement in which United merged with a wholly owned
subsidiary of Certified. The merger became effective on September 29, 1999. In
connection with the merger, Certified Grocers of California, Ltd. changed its
name to Unified Western Grocers, Inc. Also, in connection with the merger, the
board of directors agreed that to the extent a former United shareholder did not
hold sufficient Class B Shares to meet the deposit requirement, the
member-patron would be permitted to continue as a member-patron provided that
the member-patron agreed to purchase any deficiency in the required number of
Class A shares and assigned 80% of all future patronage dividends to Unified to
be utilized to purchase Class B Shares until holdings of Class B Shares are
sufficient to meet the minimum deposit requirements. The historical financial
statements of United and the unaudited Pro Forma Condensed Combined Financial
Statements of Unified and United are included in this prospectus. See -- "Index
to Financial Statements."
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RATIO OF EARNINGS TO FIXED CHARGES
Fiscal Year
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratio of earnings to fixed charges(1)......... 2.23x 2.22x 2.21x 1.94x 1.71x
- ------------------------
(1)Earnings used in computing the ratio of earnings to fixed charges consist of
earnings before patronage dividends, provision (benefit) for income taxes,
extraordinary item in 1998 of $1.079 million, plus fixed charges. Fixed
charges consist of interest expense (including amortization of deferred
financing costs) and the portion of rental expense that is representative of
the interest factor.
DESCRIPTION OF DEPOSIT ACCOUNTS
General
Patrons are generally required to maintain deposits with Unified in certain
required amounts and may also maintain deposits with Unified in excess of such
required amounts. All such deposits of a patron are maintained in the patron's
deposit account. Patrons are required to execute subordination agreements
providing for the pledging of their deposit accounts to Unified and the
subordination in certain circumstances of the patron's right to repayment of its
deposit to the prior payment in full of certain senior indebtedness of Unified.
As described below under the caption "Subordination," the subordination
agreements executed by patrons on and after January 14, 1994 differ from the
subordination agreements which have been executed by patrons before January 14,
1994. Thus, persons or entities who become member-patrons or associate-patrons
on or after January 14, 1994 are required to execute the new subordination
agreements. In addition, patrons who executed subordination agreements before
January 14, 1994 may be required to execute the new subordination agreements if
there is a change in the patron's business form. For example, in the event of a
change in a patron which is a proprietorship or partnership, or a change in the
stock ownership of a patron which is a corporation, Unified may require the
execution of a new subordination agreement.
Amounts in the deposit accounts are not segregated from other funds of Unified.
The deposit accounts are recorded in Unified's records by means of book entries,
and no note, certificate or other instrument is issued as evidence of the
deposit accounts. After the close of each fiscal year, we provide each patron
with a statement showing patronage dividends allocated to the patron's deposit
account. In addition, written inquiry concerning the deposit accounts and other
additions to the account, as well as withdrawals and charges and the account
balance, may be made at any time, and telephone inquiry may be made at any time
during normal business hours. Our policies regarding deposits are subject to
change by the board of directors, which may, in its discretion, add to,
increase, decrease, limit, eliminate or otherwise change such policies.
Subordination
As described below in this section, the subordination of the portion of the
deposit accounts which consists of required deposits will differ depending upon
whether a patron executes a subordination agreement on or after January 14, 1994
or has executed a subordination agreement before that date.
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Subordination Agreements Executed On Or After January 14, 1994.
With respect to patrons who execute subordination agreements on or after January
14, 1994, the portion of the deposit account of that patron which consists of
required deposits will, under the terms of the subordination agreements, be
subordinated and subject in right of payment to payment in full of all senior
indebtedness of Unified. As to patrons who execute subordination agreements on
or after January 19, 1994, the term "senior indebtedness" means all principal
indebtedness, liabilities or obligations of Unified, contingent or otherwise,
whether existing on the date of execution of the subordination agreement or
incurred after execution of the subordination agreement:
. in respect of borrowed money;
. evidenced by bonds, notes, debentures or other instruments of
indebtedness;
. evidenced by letters of credit, bankers' acceptances or similar
credit instruments;
. in respect of capitalized lease obligations;
. in respect of the deferred purchase price of property or assets,
whether real, personal, tangible or intangible, or in respect of any
mortgage, security agreement, title retention agreement or
conditional sale contract;
. in respect of any interest rate swap agreement, interest rate collar
agreement or other similar agreement or arrangement designed to
provide interest rate protection;
. in respect of all indebtedness, liabilities or obligations of others
of any of the types referred to above for which Unified is
responsible or liable as obligor, guarantor or otherwise or in
respect of which recourse may be had against any of the property or
assets, whether real, personal, tangible or intangible, of Unified;
and
. in respect of all modifications, renewals, extensions,
replacements and refundings of any indebtedness, liabilities or
obligations of any of the types described above;
provided, however, that the term "senior indebtedness" shall not mean any
indebtedness, liabilities or obligations of Unified, contingent or otherwise,
whether existing on the date of execution of the subordination agreement or
incurred after execution of the subordination agreement, (a) to trade creditors
arising or incurred in the ordinary course of Unified's business, (b) in respect
of any redemption, repurchase or other payments on capital stock, (c) in respect
of patron's deposits or (d) in respect of patronage dividend certificates.
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For purposes of the above definition of senior indebtedness,
. "capitalized lease obligations" means the discounted present value
of the rental obligations of any person or entity under any lease of
any property which, in accordance with generally accepted accounting
principles, has been recorded on the balance sheet of such person or
entity as a capitalized lease;
. "Patrons' deposits" means the deposits from time to time required to
be made or maintained with us by our patrons or customers in
accordance with our bylaws as in effect from time to time or in
accordance with the policies for the servicing of accounts of
patrons or customers established from time to time by us, and any
deposits from time to time made or maintained with us by our patrons
or customers in excess of such required deposits; and
. "Patronage dividend certificates" means any notes, revolving fund
certificates, retain certificates, certificate of indebtedness,
patronage dividend certificates or any other written evidences of
indebtedness of Unified at any time outstanding which evidence the
indebtedness of Unified respecting the distribution by Unified of
patronage dividends.
The subordination agreements provide that in the event of any insolvency or
bankruptcy proceedings relative to Unified or its property, any receivership,
liquidation, reorganization, arrangement or other similar proceedings, or in the
event of any proceedings for voluntary liquidation, dissolution or other winding
up of Unified, the holders of senior indebtedness shall be entitled to receive
payment in full, whether accrued prior or subsequent to the commencement of the
proceedings, before any payment is made with respect to that portion of the
deposit accounts which consists of required deposits. By reason of the
subordination, in the event of insolvency, creditors of Unified who are holders
of senior indebtedness may recover more ratably than holders of the deposit
accounts. In addition:
. no payment shall be made with respect to that portion of the
deposit accounts which consists of required deposits in the event
and during the continuation of any default in the payment of any
senior indebtedness; and
. in the event any default, other than those referred to directly
above, shall occur and be continuing with respect to any senior
indebtedness permitting the holders of such senior
indebtedness to accelerate the maturity thereof, no payment shall be
made with respect to that portion of the deposit accounts which
consists of required deposits during any period (a) of 180 days
after the giving of written notice of such default by the holders of
such senior indebtedness to Unified, or (b) in which judicial
proceedings shall be pending in respect of such default, a notice of
acceleration of the maturity of such senior indebtedness shall have
been transmitted to Unified in respect of such default and such
judicial proceedings shall be diligently pursued in good faith. With
respect to clause (a) above, only one such notice shall be given in
any twelve consecutive months.
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Subordination Agreements Executed Prior to January 14, 1994.
With respect to patrons who executed subordination agreements prior to January
14, 1994 and who do not execute new subordination agreements after that date,
the portion of the deposit account of each patron which consists of required
deposits is, under the terms of the subordination agreements, subordinated and
subject in right of payment to the prior payment in full of the principal of,
and premium, if any, and interest upon all senior indebtedness. As to these
patrons, the term "senior indebtedness" means:
. any and all indebtedness of Unified which may from time to time be
outstanding as shall be payable with respect to short term notes and
other commercial paper issued by Unified and which are rated by a
nationally recognized securities rating agency;
. any and all indebtedness, whether contingent or otherwise, of
Unified which may from time to time be outstanding and be payable to
any bank, insurance company, or other financial institution; and
. any and all indebtedness of others which may from time to time be
guaranteed by Unified and is payable to any bank, insurance company
or other financial institution.
The subordination agreements provide that upon any distribution of the assets of
Unified upon any voluntary or involuntary dissolution, winding up or
liquidation, reorganization, readjustment, arrangement, or similar proceedings,
relating to Unified or its property, whether or not Unified is a party, and
whether in bankruptcy, insolvency or receivership proceedings or otherwise, or
on any assignment by Unified for the benefit of creditors, or upon any other
marshaling of the assets and liabilities of Unified, all senior indebtedness
shall be paid in full, or provision made for such payment satisfactory to the
holders of the senior indebtedness, before any payment is made on account of the
principal of or interest, if any, on that portion of the deposit accounts which
consists of required deposits. By reason of such subordination, in the event of
insolvency, creditors of Unified who are holders of senior indebtedness may
recover more ratably than holders of the deposit accounts. In addition, no
payment shall be made on account of the principal of or interest, if any, on
that portion of any deposit account which consists of required deposits, if:
. there shall have occurred a default in payment in the principal of,
or premium, if any, or interest on any senior indebtedness; or
. there shall have occurred any other event of default with respect to
any senior indebtedness, permitting the holders to accelerate the
maturity of the indebtedness and if written notice of election so to
accelerate shall have been given to Unified by the holder or holders
of such senior indebtedness or their representative or
representatives; or
. payment on account of principal of or interest, if any, on that
portion of any deposit account which consists of required deposits
would itself constitute an event of default with respect to any
senior indebtedness, unless or until such event of default described
above shall have been cured or waived or shall have ceased to exist.
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No Limit on Senior Indebtedness.
There is no limitation on the creation of additional senior indebtedness by
United. The outstanding principal amount of senior indebtedness to which the
required deposits of patrons is subordinated aggregated approximately
$334 million as of October 30, 1999.
Interest
That portion of the deposit accounts which consists of required deposits is
non-interest bearing. While the board of directors of Unified could, in its sole
discretion, authorize the payment of interest on such portion, it has no present
plans to do so.
Except for deposits under Unified's price reservation program, Unified currently
pays interest on cash amounts in the deposit accounts which are in excess of
required deposits. The rate of interest is 8.50% per annum at the date of this
prospectus. The rate of interest during each fiscal month of Unified will be the
prime rate established by Union Bank and as in effect on the 25th day of the
preceding calendar month, or, if not then available for any reason, on the next
succeeding day when such rate is available. However, if such rate is not
available for any reason prior to the beginning of the applicable fiscal month,
the rate used for the previous fiscal month will continue to be used. Interest
for a fiscal month will be paid only on those amounts which do not consist of
required deposits and which are in the deposit accounts during the entire fiscal
month. Such interest will not be compounded. Such interest will be paid to the
patron semi-annually by Unified in March and September of each year. However,
upon request of the patron, such interest will be paid by credit to the patron's
deposit account.
The payment of interest on that portion of the deposit accounts which does not
consist of required deposits may be changed or eliminated at any time in the
discretion of the board of directors.
Repayment
Upon request, Unified will return to patrons the amount of their deposit
accounts which is in excess of the portion which consists of required deposits,
provided that the patron is not in default in its obligations to Unified or any
of its subsidiaries.
On termination of membership of a member-patron or on an associate patron
ceasing to do business with Unified, Unified will return the deposit account,
less all amounts that may be owing to Unified and any of its subsidiaries. In
all cases, however, return of that portion of the deposit account which consists
of required deposits will be governed by the subordination provisions to which
it is subject and will be returned only to the extent permitted by the
subordination provisions.
Since the deposit accounts are not segregated from Unified's other funds,
Unified's liquidity might be adversely affected if Unified were required to
return a substantial amount of the deposit accounts at one time or over a brief
period of time. While Unified's liquidity has not been adversely affected in the
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past as a result of the return of deposits to patrons, there can be no assurance
that Unified's liquidity would not be adversely affected in the future as a
result of the return to patrons of a substantial amount of deposit accounts. In
addition, Unified has not established any reserves to provide for the repayment
of deposit accounts, nor are the deposit accounts secured obligations of
Unified. Thus, in the event a substantial amount of deposit accounts were
required to be repaid by Unified at one time or over a brief period of time, or
in the event Unified were to experience financial difficulties or to become
insolvent, there can be no assurance respecting Unified's ability to repay the
deposit accounts and respecting the ability of Unified's patrons to recover the
amount of their deposit accounts.
Other Significant Aspects
The deposit accounts are not secured by any lien upon any assets of Unified.
They are nontransferable without the consent of Unified, which will normally be
withheld. Patrons will be required to pledge their deposit accounts to Unified
as security for their obligations to Unified and its subsidiaries.
METHOD OF OFFERING
As a condition of doing business with Unified, patrons are normally required to
have executed subordination agreements providing for the maintenance of deposit
accounts with Unified, the pledging of their deposit accounts to Unified to
secure their obligations to Unified and its subsidiaries, and the subordination
of that portion of their deposit accounts which consists of required deposits.
Such persons or entities who from time to time may be accepted as new patrons of
Unified may be required, as a condition of acceptance, to execute subordination
agreements, which will be effective from and after their date of execution,
providing for the maintenance of deposit accounts with Unified, the pledging of
their deposit accounts to Unified to secure their obligations to Unified and its
subsidiaries, and the subordination of that portion of their deposit accounts
which consists of required deposits. See "DESCRIPTION OF DEPOSIT ACCOUNTS --
Subordination."
The offering of the deposit accounts is made by Unified only through its regular
employees who will not receive any additional remuneration in connection
therewith.
INCORPORATION BY REFERENCE
The following documents are on file with the Commission and are incorporated by
reference into this prospectus: (i) Annual Report on Form 10-K (File No.
0-10815) for the fiscal year ended August 28, 1999, and (ii) all other reports
filed pursuant to Section 13(a) or 15(a) of the Exchange Act since the end of
the fiscal year covered by the Annual Report. You may request a copy of these
filings at no cost, by contacting us, either in writing or by telephone at the
following address: Office of General Counsel, Unified Western Grocers, Inc.,
5200 Sheila Street, Commerce, California 90040, (323) 264-5200.
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AVAILABLE INFORMATION
We have certain obligations pursuant to the Securities Exchange Act of 1934 to
file documents which provide updated information with the Securities and
Exchange Commission. Therefore, we file reports, proxy statements and other
information with the Commission. You can obtain copies of such materials from
the Public Reference Section of the Commission, Washington, D.C. 20549 or by
calling the Commission at 1-800-SEC-0330, for a charge set by the Commission. In
addition, you can inspect and copy these documents at public reference
facilities maintained by the Commission and located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, New York, New York 10048. Additional information can also be
obtained at the Securities and Exchange website at http://www.sec.gov.
ADDITIONAL INFORMATION
This prospectus omits certain information and exhibits contained in a
Registration Statement on Form S-2 (File No. 33-51931) filed with the Commission
on May 6, 1998. For further information, you should refer to that Registration
Statement, including its exhibits. You may obtain copies of that Registration
Statement and exhibits from the principal office of the Commission in
Washington, D.C. once you pay the fee which the Commission requires. This
prospectus is accompanied by a copy of our latest annual report to patrons and
our latest Form 10-K as filed with the Commission.
USE OF PROCEEDS
To the extent that deposit accounts of patrons increase in amount and to the
extent that deposit accounts are opened and maintained in connection with the
acceptance of new patrons, proceeds to Unified will be utilized as working
capital.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from Unified Western Grocers Inc.'s Annual Report on Form 10-K for
the year ended August 28, 1999 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of United Grocers, Inc. as of October 2, 1998 and
October 3, 1997, and for each of the three years in the period ended October 2,
1998, included in this prospectus, have been included in reliance on the report
(which contains an explanatory paragraph related to the restatement of the 1996
financial statements as described in Note 2 to the financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
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FORWARD-LOOKING INFORMATION
This document and the documents of Unified incorporated by reference may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to expectations
concerning matters that (a) are not historical facts, (b) predict or forecast
future events or results, (c) embody assumptions which may prove to have been
inaccurate, including Unified's assessment of the probability and materiality of
losses associated with litigation and other contingent liabilities; Unified's
ability to develop and implement Year 2000 systems solutions; and Unified's
expectations regarding the adequacy of capital and liquidity. Also, when we use
words such as "believes," "expects," "anticipates" or similar expressions, we
are making forward-looking statements. Although Unified believes that the
expectations reflected in such forward-looking statements are reasonable, we
cannot give you any assurance that such expectations will prove correct.
Important factors that could cause actual results to differ materially from such
expectations include the adverse effects of the changing industry environment
and increased competition; continuing sales decline and loss of customers;
exposure to the uncertainties of litigation and other contingent liabilities;
the failure of Unified, its vendors or its customers to develop and implement
year 2000 systems solutions; and the failure of Unified to integrate the
operations and systems of Certified and United; and the increased credit risk to
Unified caused by the ability of former United members to maintain their
required minimum deposits if such members default on their obligations to
Unified prior to their full deposit requirements being met and the existing
deposit proves inadequate to cover such members obligation. All forward-looking
statements attributable to Unified or United are expressly qualified in their
entirety by the factors which may cause actual results to differ materially.
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INDEX TO FINANCIAL STATEMENTS
United Grocers, Inc.
United Grocers, Inc.
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets at October 3, 1997, October 2, 1998
and July 2, 1999........................................................ F-3
Consolidated Statements of Operations for the years ended September 27,
1996 (as restated), October 3, 1997 and October 2, 1998 and the
nine month periods ended July 3, 1998 and July 2, 1999 (Unaudited)...... F-4
Consolidated Statements of Members' Equity for the years ended
September 27, 1996 (as restated), October 3, 1997 and October 2, 1998
and the nine month period ended July 2, 1999 (Unaudited)................ F-6
Consolidated Statements of Cash Flows for the years ended September 27,
1996 (as restated), October 3, 1997 and October 2, 1998, and the
nine month periods ended July 3, 1998 and July 2, 1999 (Unaudited)...... F-7
Notes to Consolidated Financial Statements................................. F-9
Unaudited Pro Forma Condensed Combined Financial Statements
Unaudited Pro Forma Condensed Combined Balance Sheet at August 28, 1999....F-38
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet at
August 28, 1999.........................................................F-40
Unaudited Pro Forma Condensed Combined Statement of Operations for
the year ended August 28, 1999..........................................F-42
Notes to Unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended August 28, 1999...........................F-43
F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
United Grocers, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, members' equity and cash flows, present
fairly, in all material respects, the financial position of United Grocers, Inc.
and Subsidiaries (United) at October 3, 1997 and October 2, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 2, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
United's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, during the
year ended October 2, 1998, United changed its method of amortizing the
unrecognized gains and losses in connection with its defined benefit plan.
As discussed in Note 2 to the consolidated financial statements, results of
operations for the year ended September 27, 1996 and members' equity as of
September 29, 1995 and September 27, 1996 have been restated.
PricewaterhouseCoopers LLP
Portland, Oregon
April 30, 1999
F-2
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<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
<CAPTION>
October 3, October 2, July 2,
1997 1998 1999
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 10,223 $ 1,294 $ 3,907
Investments restricted or maintained for insurance reserves...... 51,513 -- --
Accounts and notes receivable, net............................... 78,537 67,269 64,582
Inventories...................................................... 102,333 68,898 69,716
Other current assets............................................. 7,037 5,115 5,918
Deferred income taxes............................................ 8,147 1,526 1,525
--------- --------- ---------
Total current assets.......................................... 257,790 144,102 145,648
Notes receivable, net................................................ 16,498 29,201 20,143
Investments in affiliated companies.................................. 6,971 3,360 3,354
Other receivables.................................................... 4,837 3,033 3,169
Deferred income taxes................................................ 553 -- --
Other assets, net.................................................... 17,335 16,032 13,129
Property, plant and equipment, net................................... 61,443 37,914 30,386
--------- --------- ---------
$ 365,427 $ 233,642 $ 215,829
========= ========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Notes payable, current portion................................... $ 10,191 $ 41,159 $ 55,688
Accounts payable................................................. 97,587 59,676 57,840
Insurance reserves............................................... 26,356 -- --
Compensation and taxes payable................................... 8,328 6,335 4,578
Other current liabilities........................................ 8,115 5,780 2,708
--------- --------- ---------
Total current liabilities..................................... 150,577 112,950 120,814
Notes payable, net of current portion................................ 187,995 74,434 56,596
Deferred gains on sale-leaseback transactions........................ 3,650 1,257 1,168
Deferred income taxes................................................ -- 2,233 2,233
Other liabilities.................................................... 7,434 7,520 5,647
--------- --------- ---------
Total liabilities............................................. 349,656 198,394 186,458
--------- --------- ---------
Commitments and contingencies
Redeemable members' equity........................................... 1,120 3,905 1,886
Members' equity:
Common stock--authorized, 10,000,000 shares at
$5.00 par value; issued and outstanding, 586,834,
523,955 and 508,479 (unaudited) shares, respectively........... 2,934 2,620 2,542
Additional paid-in capital....................................... 22,886 20,394 18,827
Retained earnings (accumulated deficit).......................... (11,431) 8,329 6,116
Unrealized gain on investments................................... 262 -- --
--------- --------- ---------
Total members' equity......................................... 14,651 31,343 27,485
--------- --------- ---------
$ 365,427 $ 233,642 $ 215,829
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands)
<CAPTION>
Nine month periods
------------------
Years ended ended
------------------------------ -----
September 27,
-------------
1996 October 3, October 2, July 3, July 2,
---- ---------- ---------- ------- -------
(Restated) 1997 1998 1998 1999
---------- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales and operations....................................... $ 1,280,453 $ 1,306,602 $ 1,175,279 $ 892,279 $ 773,475
----------- ----------- ----------- ---------- ----------
Costs and expenses:
Cost of sales............................................. 1,115,735 1,133,690 1,015,268 771,653 667,883
Operating expenses........................................ 119,785 130,323 114,595 83,214 68,659
Selling and administrative expenses....................... 15,365 22,425 19,565 16,795 16,405
Depreciation and amortization............................. 8,015 11,483 10,416 7,715 7,413
----------- ----------- ----------- ---------- ----------
1,258,900 1,297,921 1,159,844 879,377 760,360
----------- ----------- ----------- ---------- ----------
Other income (expense):
Interest expense.......................................... (14,825) (16,307) (13,585) (11,229) (7,069)
Interest income........................................... 828 733 2,206 1,330 1,912
Gain on sale of Cash & Carry division..................... -- -- 29,033 26,670 --
Gain (loss) on write-down or disposition of assets, net... -- (4,385) 2,213 1,077 1,956
----------- ----------- ----------- ---------- ----------
(13,997) (19,959) 19,867 17,848 (3,201)
----------- ----------- ----------- ---------- ----------
Income (loss) from continuing operations before
members' allowances, members' patronage
dividends, cumulative effect on prior years of a
change in accounting principle and income taxes.... 7,556 (11,278) 35,302 30,750 9,914
Members' allowances............................................ (11,605) (10,349) (14,108) (9,060) (13,602)
Members' patronage dividends................................... (4,000) -- -- -- --
----------- ----------- ----------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect on prior years of a change in
accounting principle and income taxes.............. (8,049) (21,627) 21,194 21,690 (3,688)
Income tax benefit (provision)................................. -- 10,466 (7,939) (8,676) 1,475
----------- ----------- ----------- ---------- ----------
Net income (loss) from continuing operations, before
cumulative effect of a change in accounting
principle.......................................... (8,049) (11,161) 13,255 13,014 (2,213)
Discontinued operations:
Income from operations of insurance segment (less income
Taxes of $0, $1,666, $903 and $624 (unaudited),
Respectively)........................................... 2,480 2,501 1,355 1,355 --
Gain on disposal of insurance segment (less income taxes
of $2,000 for 1998)..................................... -- -- 3,403 -- --
----------- ----------- ----------- ---------- ----------
Net income (loss) before cumulative effect of a change
in accounting principle............................ (5,569) (8,660) 18,013 $ 14,369 $ (2,213)
========== ==========
</TABLE>
F-4
<PAGE>
<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Statements of Operations (Continued)
(dollars in thousands)
<CAPTION>
Nine month periods
------------------
Years ended ended
------------------------------ -----
September 27,
-------------
1996 October 3, October 2, July 3, July 2,
---- ---------- ---------- ------- -------
(Restated) 1997 1998 1998 1999
---------- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cumulative effect on prior years (to October 3, 1997) of
changing methods of amortizing the unrecognized net gain in
the Company's defined benefit pension plan (less income taxes
of $1,165 for 1998)......................................... -- -- 1,747
----------- ----------- -----------
Net income (loss).................................... $ (5,569) $ (8,660) $ 19,760
=========== =========== ===========
Pro forma net income (loss), assuming the new
amortization method is applied retroactively....... $ (4,877) $ (8,342) $ 18,013
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Statements of Members' Equity
(dollars in thousands, except for share data)
<CAPTION>
Retained
--------
Additional Earnings Unrealized
---------- -------- ----------
Paid-in (Accumulate Gain on
------- ----------- -------
Common Stock Capital Deficit) Investments Total
------------ ------- -------- ----------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 29, 1995 (restated)................. 655,663 $ 3,278 $ 23,957 $ 4,918 $ 199 $ 32,352
Common stock issued.................................... 18,724 94 1,059 -- -- 1,153
Repurchase of common stock............................. (48,936) (245) (1,527) (1,232) -- (3,004)
Patronage dividends.................................... 13,000 65 735 -- -- 800
Net loss (restated).................................... -- -- -- (5,569) -- (5,569)
Changes in unrealized gains on
investments......................................... -- -- -- -- 1 1
------- --------- --------- --------- --------- ---------
Balance, September 27, 1996 (restated)................. 638,451 3,192 24,224 (1,883) 200 25,733
Common stock issued.................................... 13,775 69 780 -- -- 849
Repurchase of common stock............................. (34,609) (173) (1,152) (888) -- (2,213)
Redemptions pending.................................... (30,783) (154) (966) -- -- (1,120)
Net loss............................................... -- -- -- (8,660) -- (8,660)
Change in unrealized gain on
investments......................................... -- -- -- -- 62 62
------- --------- --------- --------- --------- ---------
Balance, October 3, 1997............................... 586,834 2,934 22,886 (11,431) 262 14,651
Repurchase of common stock............................. (577) (3) (18) -- -- (21)
Redemptions pending.................................... (62,302) (311) (2,474) -- -- (2,785)
Net income............................................. -- -- -- 19,760 -- 19,760
Change in unrealized gain on
investments......................................... -- -- -- -- (262) (262)
------- --------- --------- --------- --------- ---------
Balance, October 2, 1998............................... 523,955 2,620 20,394 8,329 -- 31,343
Common stock issued (unaudited)........................ 21,528 108 655 -- -- 763
Repurchase of common stock
(unaudited)......................................... (96,124) (481) (3,947) -- -- (4,428)
Redemptions pending (unaudited)........................ 59,120 295 1,725 -- -- 2,020
Net loss (unaudited)................................... -- -- -- (2,213) -- (2,213)
------- --------- --------- --------- --------- ---------
Balance, July 2, 1999 (unaudited)...................... 508,479 $ 2,542 $ 18,827 $ 6,116 $ -- $ 27,485
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
<CAPTION>
Nine month
----------
Years ended Periods ended
---------------------------- -------------
September 27,
-------------
1996 October 3, October 2, July 3, July 2,
---- ---------- ---------- ------- -------
(Restated) 1997 1998 1998 1999
---------- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ (5,569) $ (8,660) $ 19,760 $ 14,369 $ (2,213)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.............................. 8,202 11,842 10,522 7,875 7,413
Patronage dividends paid in common stock................... 800 -- -- -- --
Loss (gain) on write-down or disposition of assets......... -- 4,385 (2,213) (1,077) (1,956)
Gain on disposal of discontinued operations................ -- -- (5,403) -- --
Gain on sale of Cash & Carry division...................... -- -- (29,033) (26,670) --
Equity in earnings of affiliated companies................. (568) (107) (41) -- --
Deferred income taxes...................................... -- (8,700) 9,407 -- --
Changes in assets and liabilities:
Accounts receivable.................................... 4,731 (2,133) (6,932) (2,910) 3,137
Inventories............................................ (2,631) 2,312 7,900 16,296 (818)
Other assets........................................... 1,354 (96) (1,731) 4,400 (2,081)
Accounts payable....................................... 8,902 14,864 (11,465) (18,225) (1,836)
Insurance reserves..................................... (397) (3,206) 1,406 1,406 --
Compensation and taxes payable......................... 403 3,306 (1,850) (1,468) (1,757)
Other liabilities...................................... 791 (1,117) (1,418) 7,278 (5,034)
Members' patronage payable............................. (3,447) (2,427) -- -- --
Deferred gains on sale leaseback transactions.......... -- 2,650 (2,393) -- --
---------- -------- ---------- -------- --------
Net cash flows provided by (used in) operating activities.. 12,571 12,913 (13,484) 1,274 (5,145)
---------- -------- ---------- -------- --------
Cash flows from investing activities:
Loans to members................................................ (22,512) (10,396) (2,416) (1,647) (358)
Collections on member loans..................................... 10,626 4,988 3,798 2,603 8,966
Proceeds from sale of member loans.............................. 10,549 13,205 2,918 1,550 --
Sale of investment in affiliated company........................ -- 6,023 -- -- --
Purchase of investments restricted or maintained for insurance
reserves...................................................... (13,404) (10,226) (3,167) (3,167) --
Sale of investments restricted or maintained for insurance
reserves...................................................... 7,385 5,604 8,685 8,685 --
Investment in affiliated companies.............................. (267) (48) -- -- --
Proceeds from disposition of assets............................. 6,884 11,036 18,313 15,193 7,912
Purchase of property, plant and equipment....................... (16,231) (15,607) (3,677) (1,870) (1,789)
Purchase of other assets........................................ (6,417) (6,446) (1,011) -- --
Acquisition of California operations............................ (23,252) -- -- -- --
Proceeds from sale of discontinued operations, net.............. -- -- 26,813 -- --
Proceeds from sale of Cash & Carry division..................... -- -- 37,986 37,986 --
---------- -------- ---------- -------- --------
Net cash flows provided by (used in) investing activities.. (46,639) (1,867) 88,242 59,333 14,731
---------- -------- ---------- -------- --------
</TABLE>
F-7
<PAGE>
<TABLE>
United Grocers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
<CAPTION>
Nine month
----------
Years ended Periods ended
---------------------------- -------------
September 27,
-------------
1996 October 3, October 2, July 3, July 2,
---- ---------- ---------- ------- -------
(Restated) 1997 1998 1998 1999
---------- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Sale of common stock............................................ 1,153 76 -- -- 762
Repurchase of common stock...................................... (3,004) (2,213) (21) -- (4,427)
Proceeds from notes payable..................................... 1,091,567 932,370 1,171,161 871,891 818,850
Repayments of notes payable..................................... (1,052,183) (947,566) (1,253,754) (927,050) (822,158)
Payment of debt issuance costs.................................. -- -- (1,073) -- --
---------- -------- ---------- -------- --------
Net cash flows provided by (used in) financing activities.. 37,533 (17,333) (83,687) (55,159) (6,973)
---------- -------- ---------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 3,465 (6,287) (8,929) 5,448 2,613
Cash and cash equivalents, beginning of year......................... 13,045 16,510 10,223 10,223 1,294
---------- -------- ---------- -------- --------
Cash and cash equivalents, end of year............................... $ 16,510 $ 10,223 $ 1,294 $ 15,671 $ 3,907
=========== ========= =========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-8
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies:
Organization and Nature of Operations
United Grocers, Inc. and subsidiaries (United) operates a distribution
business primarily in Oregon, Southern Washington and Northern California. The
distribution business includes all operations relating to wholesale grocery and
related product sales, service department revenues and financing income and
fees. Through July 1998, United had an additional operating segment, which
included all operations relating to insurance underwriting, commissions and
reinsurance, primarily to provide workers' compensation and property-casualty
coverage. As discussed in Note 9, the insurance operations were sold in July
1998 and those operations discontinued by United.
Its member customers own United's stock. Sales to these members accounted
for approximately 80%, 56% and 57% of sales from continuing operations for the
years ended September 27, 1996, October 3, 1997 and October 2, 1998,
respectively.
Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the consolidated
financial position of United at July 2, 1999 and the consolidated results of
operations and cash flows for the nine month periods ended July 3, 1998 and July
2, 1999.
Operating results for the interim period ended July 2, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending October 1, 1999, or any other period.
Fiscal Year
United reports on a fiscal year of 52 or 53 weeks, which is the fiscal year
of the distribution segment. United's fiscal closing date is the Friday nearest
September 30. The fiscal year of the subsidiaries included in the insurance
segment ended on September 30.
Principles of Consolidation
The consolidated financial statements include the accounts of United
Grocers, Inc. and its wholly-owned subsidiaries as follows: Western Passage
Express, Inc.; Northwest Process, Inc.; UG Resources, Inc.; United
Resources, Inc.; Western Security Services, Ltd.; R&R Liquidating
Corporation; and Bergrens Market, Inc. The consolidated financial
statements also include: Grocers Insurance Group, Inc.; Grocers Insurance
Agency, Inc., UGIC Ltd., Grocers Insurance Company and United Workplace
Consultants, Inc. (collectively, the insurance segment) through July 1998
(see Notes 9 and 13); and Rich and Rhine, Inc. through May 1998. All
intercompany balances and transactions have been eliminated upon
consolidation.
F-9
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
United considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Investments
Investments, which were held by subsidiaries within the insurance segment,
were classified and accounted for as follows:
. held-to-maturity securities were reported at amortized cost.
. available-for-sale securities were reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a
separate component of members' equity.
The cost of investments used in computing realized gains or losses was
determined using the specific identification method.
Reinsurance
United accounted for reinsurance transactions in accordance with Statement
of Financial Accounting Standards (SFAS) No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113 requires
that transactions relating to reinsurance transactions be reported at gross
amounts rather than net amounts. Net premiums earned are reported as net sales
and operations while net losses and loss adjustment expenses are reported as
cost of sales.
In the normal course of business, United sought to reduce the losses that
may have resulted from catastrophes or other events that would cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers. Amounts recoverable
from reinsurers were estimated in a manner consistent with the claim liability
associated with the reinsured policy. Amounts paid for prospective reinsurance
were reported as prepaid reinsurance premiums and amortized over the remaining
contract period in proportion to the amount of insurance protection provided.
Inventories and Cost of Sales
Inventories are stated at the lower of cost or market. The cost of these
inventories is determined under the first-in, first-out (FIFO) method or other
methods that approximate FIFO.
Cost of sales includes primarily the costs of distribution, which include
the purchases of product, net of allowances paid and received and the net
advertising department margins, plus the handling allowances made to members
based upon the cost of servicing their accounts.
Restricted Assets and Net Assets
Restricted assets and net assets that could not be transferred to the parent
company in the form of loans, advances or cash dividends by the insurance
subsidiary without the consent of state insurance agencies as of October 3, 1997
were as follows:
F-10
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted cash... $ 401,000
Investments....... 18,486,000
-------------
Total.......... $ 18,887,000
=============
In addition, the balance of the investments of $32,626,000 represented
assets that had been accumulated for the possible payment of claims against the
insurance reserves.
Investments in Affiliated Companies
Investments in affiliated companies represent United's ownership in entities
in which it does not have a controlling interest. The investments are accounted
for using the equity method, in which carrying value represents cost plus
United's share of earnings since acquisition, less distributions received.
Other Assets
Software costs, non-competition agreements and other intangibles, included
in other assets in the accompanying balance sheets, are stated at cost and are
being amortized and charged to operating expenses on a straight-line basis over
the estimated or contractual lives of three to five years.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include expenditures
for new facilities and those that substantially increase the useful lives of the
existing plant and equipment. United capitalizes interest when applicable as a
component of the cost of significant construction projects. No interest was
capitalized for the years ended September 27, 1996, October 3, 1997 and October
2, 1998.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Estimated useful lives are generally as
follows:
Buildings and improvements................. 4-75 years
Warehouse equipment........................ 5-20 years
Truck equipment............................ 3-8 years
Office equipment........................... 3-10 years
Maintenance and repairs are charged to expense as incurred. Upon the sale or
retirement of property, plant and equipment, any gain or loss on disposition is
reflected in the consolidated statement of operations and the related asset cost
and accumulated depreciation are removed from the respective accounts.
Recoverability of Long-Term Assets
Management of United reviews the carrying value of long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
F-11
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Debt Classification
United classifies as current liabilities any line of credit arrangements that
contain a subjective acceleration clause and a lock-box arrangement.
Income Taxes
United files a consolidated income tax return. United operates and is taxed
as a cooperative. Accordingly, amounts distributed as qualified patronage
dividends are not included in its taxable income but are instead taxed to the
patrons receiving the patronage dividends. Deferred income taxes are recorded to
reflect the tax consequences on future years of the non-patronage portion of
temporary differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be
realized. Income tax expense is the combination of the tax payable for the year
and the change during the year in net deferred tax assets and liabilities.
Earnings per Common Share
United's policy is to distribute earnings only in the form of patronage
dividends. No dividends have ever been declared on the common stock of United
and all earnings not distributed as patronage dividends have been retained. In
accordance with generally accepted accounting principles, earnings per share
information is not presented because United does not have publicly held common
stock.
Common Stock
United's Board of Directors' policy, subject to change without notice,
requires United to repurchase on request the number of shares a member owns in
excess of 4,000 shares. The excess shares are redeemed in exchange for cash or
capital stock residual notes, payable over a five-year period. In fiscal 1998,
United's Board of Directors temporarily suspended redemptions of members'
capital stock. Future redemptions are at the discretion of the Board of
Directors.
At October 3, 1997, October 2, 1998 and July 2, 1999, there were 30,783,
93,085 and 33,965 (unaudited) shares in the amounts of $1,120,000, $3,905,000
and $1,886,000 (unaudited), respectively, which have been presented by members
for redemption, but which had not yet been redeemed. These shares are included
in redeemable members' equity in the accompanying consolidated balance sheet.
As of October 2, 1998, United holds $111,000 to be used for issuance of
5,400 shares to new members.
F-12
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Advertising Costs
United expenses the costs of advertising the first time the advertising
takes place. Advertising expense for the years ended September 27, 1996, October
3, 1997 and October 2, 1998 was $2,593,000, $1,734,000 and $444,000,
respectively, exclusive of costs incurred on behalf of members
for which United is reimbursed.
Members' Allowances
United makes rebates to members based on the respective members' volume of
purchases over defined periods of time.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Change in Method of Accounting for Net Periodic Pension Costs
For the year ended October 2, 1998, United began amortizing its unrecognized
net gains and losses in connection with its defined benefit pension plan (see
Note 14) over a three-year period. In previous years United used the minimum
amortization allowed by SFAS No. 87, Employer's Accounting for Pensions. The new
method was adopted to more currently recognize the effects of changes in
actuarial assumptions and differences between the assumptions used and the
actual experience. The pro forma amounts in the statement of operations have
been adjusted for the effect of the retroactive application of the change on
operating expenses and related income taxes. The effect of the change on the
statement of operations for the year ended October 2, 1998 was to increase net
income before the cumulative effect of the change in accounting method by
approximately $996,000.
Transfers and Servicing of Financial Assets
The Financial Accounting Standards Board (FASB) issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which United 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, United 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.
F-13
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Accounting Pronouncements
During the first quarter of 1998, United adopted FASB SFAS No. 130,
Reporting Comprehensive Income, which establishes requirements for disclosure of
comprehensive income. The objective of SFAS No. 130 is to report a measure of
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. Comprehensive income did not differ
significantly from reported net income or loss in the periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement will change the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and earns revenues and its major customers.
The statement is effective for fiscal years beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Post-retirement Benefits. This statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. The statement suggests
combined formats for presentation of pension and other post-retirement benefit
disclosures. The statement is effective for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative instrument's fair
value be recognized currently in results of operations unless specific hedge
accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000.
United's management has studied the implications of SFAS Nos. 131 and 132, and
based on the initial evaluation, expects the adoption to have no impact on
United's financial condition or results of operations, but will require revised
disclosures when the respective statements become effective. United's management
has studied the implications of SFAS No. 133 and based on the initial
evaluation, expects the adoption to have no impact on United's financial
condition or results of operations.
F-14
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Restatement:
United previously reported retained earnings as of September 29, 1995 and
September 27, 1996 of $14,923,000 and $13,843,000, respectively. These amounts
have been restated to retained earnings of $4,918,000 as of September 29, 1995
and an accumulated deficit of $1,883,000 as of September 27, 1996 in the
accompanying consolidated statements of members' equity. The adjustments which
necessitated the restatement, and their effect on United's net income for the
year ended September 27, 1996 and members' equity as of September 29, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Decrease (Increase) In:
-----------------------
Members' Equity
---------------
Fiscal 1996 September 29,
----------- -------------
Net Income 1995
---------- ----
<S> <C> <C>
Accruals for losses on lease/sublease arrangements........................ $(2,258,000) $ 11,872,000
Write-off of advertising and other receivables............................ 3,561,000 --
Accrual of vendor trust account liabilities............................... 1,581,000 --
Adjustment of carrying value of used store equipment to net
realizable value....................................................... 1,309,000 --
Income taxes.............................................................. (74,000) (2,126,000)
Other..................................................................... 1,602,000 259,000
----------- -------------
Net restatement..................................................... $ 5,721,000 $ 10,005,000
=========== =============
</TABLE>
F-15
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Investments Restricted or Maintained for Insurance Reserves:
The amortized costs and estimated fair values of investments in debt
securities and other investments at October 3, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
----- -----
Amortized Unrealized Unrealized
--------- ---------- ----------
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Available-for-sale securities
U.S. Treasury securities....................................... $ 3,512,000 $ 103,000 $ -- $ 3,615,000
Obligations of states, political subdivisions and
government agencies......................................... 4,410,000 134,000 -- 4,544,000
Corporate securities........................................... 1,026,000 25,000 -- 1,051,000
------------ ----------- ---------- ------------
Subtotal........................................... 8,948,000 262,000 -- 9,210,000
Common stocks.................................................. 225,000 -- -- 225,000
------------ ----------- ---------- ------------
Total.............................................. $ 9,173,000 $ 262,000 $ -- $ 9,435,000
============ =========== ========== ============
Held-to-maturity securities
U.S. Treasury securities....................................... $ 16,547,000 $ 848,000 $ (42,000) $ 17,353,000
Obligations of states, political subdivisions and
government agencies......................................... 19,154,000 255,000 (66,000) 19,343,000
Corporate securities........................................... 5,976,000 141,000 (19,000) 6,098,000
------------ ----------- ---------- ------------
Total.............................................. $ 41,677,000 $ 1,244,000 $ (127,000) $ 42,794,000
============ =========== ========== ============
Restricted assets
Cash and cash equivalents...................................... $ 401,000 $ -- $ -- $ 401,000
============ =========== ========== ============
Reconciliation to balance sheet:
Available-for-sale securities, at fair value............. $ 9,435,000
Held-to-maturity securities, at amortized cost........... 41,677,000
Restricted assets, at fair value......................... 401,000
------------
Total investments.................................. $ 51,513,000
============
</TABLE>
Gross realized gains of $3,000 were realized in the year ended October 3,
1997 from the maturity and redemption of held-to-maturity securities being
called by the issuers. The amortized cost of these securities at the time of
call was $4,470,000. There were no realized losses.
Proceeds from the sale of available-for-sale securities were $1,105,000 and
$1,131,000 in the years ended September 27, 1996 and October 3, 1997,
respectively. The gross realized gains on these sales were $4,226 in the year
ended September 27, 1996 and losses on these sales were $9,000 in the year ended
October 3, 1997.
F-16
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Accounts and Notes Receivable:
These consist of amounts due principally from members at the balance sheet
date as follows:
<TABLE>
<CAPTION>
Nine-Month
----------
Year Ended Period Ended
---------- ------------
October 3, October 2, July 2,
---------- ---------- -------
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Accounts receivable.............................................. $69,778,000 $60,503,000 $60,198,000
Insurance premiums receivable and related balances............... 14,521,000 -- --
Less allowance for doubtful accounts............................. (7,598,000) (1,236,000) (1,185,000)
----------- ----------- -----------
Net accounts receivable.................................... 76,701,000 59,267,000 59,013,000
----------- ----------- -----------
Notes receivable, current portion................................ 1,977,000 8,002,000 5,569,000
Less allowance for doubtful notes................................ (141,000) -- --
----------- ----------- -----------
Net current notes receivable............................... 1,836,000 8,002,000 5,569,000
----------- ----------- -----------
Net accounts and current notes receivable.................. $78,537,000 $67,269,000 $64,582,000
=========== =========== ===========
Notes receivable, non-current portion............................ $18,886,000 $29,515,000 $20,899,000
Less allowance for doubtful accounts............................. (2,388,000) (314,000) (756,000)
----------- ----------- -----------
Net non-current notes receivable........................... $16,498,000 $29,201,000 $20,143,000
</TABLE>
During the year ended October 2, 1998, United wrote off approximately $11
million of accounts and notes receivable, and adjusted the related allowance for
doubtful accounts, for amounts determined to be uncollectible.
The notes receivable from members are generally for periods of two to ten years
at annual interest rates of 3% to 11%. The notes receivable as of October 2,
1998 include $17.5 million in connection with the sale of the Cash & Carry
division (see Note 10). This note carries an annual interest rate of 6.5%. The
annual maturities of notes receivable for each of the next five fiscal years
following October 2, 1998 are as follows:
F-17
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1999........................... $ 8,002,000
2000........................... 4,349,000
2001........................... 6,859,000
2002........................... 6,632,000
2003........................... 6,562,000
Thereafter..................... 5,113,000
-----------
$37,517,000
===========
Changes in the allowance for doubtful accounts for the years ended September
27, 1996, October 3, 1997 and October 2, 1998 and for the nine month period
ended July 2, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance at
---------- ---------- ----------
Beginning costs and end of
--------- --------- ------
Description of year expenses Deductions year
----------- ------- -------- ---------- ----
1996:
- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts for:
Accounts receivable....................... $ 1,177,000 $ 6,213,000 $ (6,250,000) $ 1,140,000
Notes receivable.......................... 508,000 1,062,000 (460,000) 1,110,000
------------ ------------ ------------- ------------
Total............................... $ 1,685,000 $ 7,275,000 $ (6,710,000) $ 2,250,000
============ ============ ============= ============
1997:
- ----
Allowance for doubtful accounts for:
Accounts receivable....................... $ 1,140,000 $ 7,829,000 $ (1,371,000) $ 7,598,000
Notes receivable.......................... 1,110,000 2,943,000 (1,524,000) 2,529,000
------------ ------------ ------------- ------------
Total..................................... $ 2,250,000 $10,772,000 $ (2,895,000) $10,127,000
============ ============ ============= ============
1998:
- ----
Allowance for doubtful accounts for:
Accounts receivable....................... $ 7,598,000 $ 1,440,000 $ (7,802,000) $ 1,236,000
Notes receivable.......................... 2,529,000 1,000,000 (3,215,000) 314,000
------------ ------------ ------------- ------------
Total............................... $10,127,000 $ 2,440,000 $(11,017,000) $ 1,550,000
============ ============ ============= ============
1999:
- ----
Allowance for doubtful accounts for:
Accounts receivable (unaudited)........... $ 1,236,000 $ 291,000 $ (342,000) $ 1,185,000
Notes receivable (unaudited).............. 314,000 450,000 (8,000) 756,000
------------ ------------ ------------- ------------
Total (unaudited)................... $ 1,550,000 $ 741,000 $ (349,000) $ 1,941,000
============ ============ ============= ============
</TABLE>
F-18
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
Nine-Month
----------
Year Ended Period Ended
---------- ------------
October 3, October 2, July 2,
---------- ---------- -------
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Software................................ $18,356,000 $19,999,000 $21,195,000
Prepaid loan fees....................... -- 1,073,000 1,111,000
Other................................... 2,570,000 1,941,000 1,973,000
----------- ----------- -----------
Subtotal.......................... 20,926,000 23,013,000 24,279,000
Less accumulated amortization........... (3,591,000) (6,981,000) (11,150,000)
----------- ----------- -----------
Total other assets, net........... $17,335,000 $16,032,000 $13,129,000
=========== =========== ===========
</TABLE>
Amortization expense for the years ended September 27, 1996, October 3, 1997
and October 2, 1998 was $1,573,000, $4,152,000 and $4,143,000, respectively, and
$3,091,000 (unaudited) and $4,052,000 (unaudited) for the nine month periods
ended July 3, 1998 and July 2, 1999, respectively.
6. Property, Plant and Equipment:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
Nine-Month
----------
Year Ended Period Ended
---------- ------------
October 3, October 2, July 2,
---------- ---------- -------
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land................................................ $ 3,865,000 $ 2,163,000 $ 537,000
Buildings and improvements.......................... 55,999,000 42,996,000 37,128,000
Warehouse and truck equipment....................... 31,316,000 24,022,000 22,148,000
Office equipment.................................... 14,185,000 14,432,000 13,405,000
Construction in progress............................ 5,069,000 466,000 470,000
----------- ----------- -----------
Total property, plant and equipment........... 110,434,000 84,079,000 73,688,000
Less accumulated depreciation....................... (48,991,000) (46,165,000) (43,302,000)
----------- ----------- -----------
Property, plant and equipment, net............ $61,443,000 $37,914,000 $30,386,000
=========== =========== ===========
</TABLE>
F-19
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Depreciation expense for the years ended September 27, 1996, October 3, 1997
and October 2, 1998 was $6,629,000, $7,690,000 and $6,379,000, respectively,
including $187,000, $359,000 and $160,000, respectively, related to discontinued
operations. Depreciation expense for the nine month periods ended July 3, 1998
and July 2, 1999 was $4,784,000 (unaudited) and $3,361,000 (unaudited),
respectively, including $160,000 (unaudited) related to discontinued operations
for the nine month period ended July 3, 1998. Due to operating losses incurred
by a retail store in Sacramento, California, United recorded during the year
ended October 3, 1997 a write-down of approximately $1.8 million to reduce the
carrying cost of the store's assets to estimated net realizable value. The loss
is included in "gain/loss on write-down or disposition of assets, net" in the
accompanying statements of operations. The store incurred losses for the years
ended September 27, 1996, October 3, 1997 and October 2, 1998 of $601,000,
$520,000 and $562,000, respectively. The carrying value of the store's assets at
October 2, 1998 is $10,000. The store is being operated but is being held for
sale.
F-20
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Notes Payable:
Notes payable consists of the following:
<TABLE>
<CAPTION>
Nine-Month
----------
Year Ended Period Ended
---------- ------------
October 3, October 2, July 2,
---------- ---------- -------
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Line of credit with financial institution............................... $ 69,000,000 $34,315,000 $47,568,000
Notes payable with financial institution:
Term loan, interest at 7.344%, payable in four equal
annual payments beginning May 1999............................. -- 10,000,000 10,000,000
Real estate term loan, interest at 7.344%, payable in
120 equal monthly principal and interest payments
beginning February 1999........................................ -- 25,000,000 16,863,000
Notes payable, other:
Capital stock residual notes, payable in 20 quarterly
installments plus interest at a variable interest rate
based on the current capital investment note rate.............. 4,071,000 2,327,000 3,683,000
Capitalized equipment leases, payable in monthly
installments of $43,853, including interest at 12% to
20% through 2005 (collateralized by equipment)................. 2,276,000 1,563,000 --
Other notes payable............................................... 1,495,000 281,000 150,000
Redeemable notes and certificates:
Capital investment notes (subordinated), interest at 7.5%,
maturity dates through 2005.................................... 41,745,000 39,277,000 31,302,000
Registered redeemable building notes (subordinated),
interest at 8%, not fixed maturity date........................ 3,088,000 2,830,000 2,718,000
Credit agreement notes, interest from 7.0875% to
7.1875%........................................................ 42,915,000 -- --
Senior notes payable to insurance companies, interest at
8.42% and 9.15%...................................................... 29,999,000 -- --
Mortgage notes payable, interest at 7.25%............................... 3,597,000 -- --
------------ ----------- -----------
Total....................................................... 198,186,000 115,593,000 112,284,000
Less current portion.................................................... (10,191,000) (41,159,000) (55,688,000)
------------ ----------- -----------
Total notes payable, net of current portion................. $187,995,000 $74,434,000 $56,596,000
============ =========== ===========
</TABLE>
Maturities of notes payable subsequent to October 2, 1998 are as follows:
1999............ $ 41,159,000
2000............ 7,942,000
2001............ 9,984,000
2002............ 9,206,000
2003............ 6,200,000
Thereafter...... 41,102,000
------------
$115,593,000
============
F-21
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
United has a credit agreement with a financial institution providing for a
line of credit of $100 million for revolving loans and $35 million for term loan
facilities. The agreement was entered into in August 1998 and matures in
February 2002. The agreement provides for letter of credit accommodations up to
$1 million.
The amount of borrowings available under the revolving line of credit, based
upon a lending formula applied to accounts and notes receivable and inventory,
was $70.4 million as of October 2, 1998. The revolving line of credit bears
interest at LIBOR plus 1.75% or at prime rate (7.125% and 8.5%, respectively, at
October 2, 1998). United had $34.3 million outstanding under the revolving
loans, $20 million at LIBOR and $14.3 million at prime. The term loans bear
interest at LIBOR plus 1.75% as of October 2, 1998. The revolving line of credit
and term loans are collateralized by account receivables, inventory and other
assets.
As of October 2, 1998, United had letters of credit totaling $11 million, $1
million required by certain real property leases and $10 million required under
its cash management agreement with a bank. The revolving and term loans and
letters of credit are cross-collateralized by essentially all assets of the
borrowers (United Grocers, Inc. and United Resources, Inc.) and are guaranteed
by all subsidiaries.
United's most restrictive covenants require it to maintain certain minimum
adjusted net worth, minimum accounts receivable turnover and fill rates (as
defined). United is in compliance with covenants related to its credit
agreements as of October 2, 1998.
Amounts available under the credit agreement and letter of credit
accommodations are subject to reduction by the lender being permitted to
establish availability reserves based upon certain events, conditions,
contingencies or risks which it may in good faith determine.
8. Income Taxes:
The income tax (provision) benefit, including amounts associated with
discontinued operations and the cumulative effect of a change in accounting
method, for the years ended September 27, 1996, October 3, 1997 and October 2,
1998 consists of the following:
1996 1997 1998
--------- ---------- ------------
Current:
Federal.................... $ -- $ 100,000 $ (2,600,000)
--------- ---------- ------------
Deferred:
Federal.................... -- 7,493,000 (8,135,000)
State...................... -- 1,207,000 (1,272,000)
--------- ---------- ------------
-- 8,700,000 (9,407,000)
--------- ---------- ------------
$ -- $8,800,000 $(12,007,000)
========= ========== ============
The current provision for the year ended October 2, 1998 primarily relates
to the gain on disposal of the insurance segment.
F-22
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The reconciliation of the statutory Federal tax rate to the effective income
tax rate for the years ended September 27, 1996, October 3, 1997 and October 2,
1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate (34%).......................... $ 1,893,000 $5,937,000 $(10,801,000)
State income taxes, net of Federal income tax
benefit............................................... 223,000 797,000 (1,272,000)
Tax exempt interest...................................... 98,000 -- --
Establishment of valuation allowance..................... (2,156,000) -- --
Reversal of valuation allowance due to tax
planning strategy..................................... -- 3,568,000 --
Patronage-related book/tax differences -- (1,502,000) --
Other.................................................... (58,000) -- 66,000
----------- ---------- ------------
Total.............................................. $ -- $8,800,000 $(12,007,000)
=========== ========== ============
</TABLE>
The significant components of deferred income taxes as of October 3, 1997
and October 2, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Deferred income taxes, current asset:
Insurance reserves........................................... $ 1,359,000
Inventories.................................................. 362,000 $ 309,000
Allowance for doubtful accounts.............................. 1,650,000 253,000
Accrued employee benefits.................................... 192,000 168,000
Capitalized lease insurance.................................. 244,000 244,000
Nonpatronage net operating loss carryforward................. 4,128,000 --
Alternative minimum tax credit 150,000 178,000
Other........................................................ 62,000 374,000
-------------
Net current deferred tax asset......................... 8,147,000 1,526,000
------------
Deferred income taxes, non-current asset (liability):
Accumulated depreciation..................................... (2,561,000) (3,088,000)
Impairment reserve........................................... 689,000 --
Lease accrual................................................ 1,474,000 1,302,000
Prepaid pension cost......................................... -- (738,000)
Deferred income on sale-leaseback transactions............... 845,000 --
Deferred compensation........................................ 106,000 291,000
----------- -----------
Net non-current deferred tax asset (liability)......... 553,000 (2,233,000)
----------- -----------
Total.................................................. $ 8,700,000 $ (707,000)
=========== ===========
</TABLE>
F-23
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Discontinued Operations:
In September 1997, United's management and board of directors approved a
plan whereby the insurance operations would be sold to an unrelated party. The
sale of the insurance operations was completed in July 1998. Accordingly, the
results of operations of the insurance segment for the years ended September 27,
1996, October 3, 1997 and October 2, 1998 have been presented as "discontinued
operations" in the accompanying statements of operations.
The following is a summary of the assets and liabilities of the insurance
segment as of October 3, 1997:
Assets:
Investments............................................ $51,513,000
Receivables and other current assets................... 22,070,000
Long-term assets....................................... 1,328,000
----------
74,911,000
Liabilities:
Insurance reserves supported by investments............ 26,356,000
Accounts payable and other current liabilities......... 19,544,000
----------
Net investment in insurance segment................. $29,011,000
===========
10. Sale of Cash & Carry Division:
On May 15, 1998, United sold to an unrelated party the assets and
liabilities of its Cash & Carry division, consisting of 40 wholesale grocery
stores. The net sales proceeds included a $17,500,000 note from the buyer.
United realized a gain on the sale, as follows:
Net sales proceeds............................... $55,486,000
-----------
Net investment in Cash & Carry division:
Current assets................................ 26,589,000
Non-current assets............................ 5,864,000
Current liabilities........................... (6,000,000)
-----------
26,453,000
-----------
$29,033,000
===========
The accompanying consolidated statements of operations for the years ended
September 27, 1996, October 3, 1997 and October 2, 1998 (through May 15, 1998)
include the following amounts with respect to the Cash & Carry division:
F-24
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1996 1997 1998
------------ ------------ ------------
Net sales and operations......... $ 32,882,000 $ 37,530,000 $ 22,797,000
Costs and expenses............... (32,133,000) (34,551,000) (22,380,000)
Other income..................... 1,707,000 1,179,000 1,519,000
------------ ------------ ------------
Income before income taxes.... 2,456,000 4,158,000 1,936,000
============ ============ ============
11. Members' Patronage Dividends:
United's income from sales to members, before income taxes and patronage
dividends, is available at the discretion of the Board of Directors, to be
returned to the members in the form of patronage dividends. For the year ended
September 27, 1996, the Board of Directors voted to distribute $4 million in
patronage dividends, approximately $3.2 million which was paid in cash and
approximately $800,000 which was distributable in the form of common stock. No
patronage earnings were available to pay patronage dividends for the years ended
October 3, 1997 and October 2, 1998.
12. Reinsurance:
Reinsurance contracts do not relieve United from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to United. United evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
United limits the maximum net loss that can arise from large risks or risks
in concentrated areas of exposure by reinsuring (ceding) certain levels of high
risk with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Ceded reinsurance is treated as the risk and
liability of the assuming companies.
Reinsurance amounts reflected in the financial statements as of October 3,
1997 and for the years ended September 27, 1996 and October 3, 1997 are as
follows:
F-25
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
For the balance sheet:
Reinsurance recoverable.................................. $ 9,440,000
Prepaid reinsurance premiums............................. 3,746,000
-----------
Total.............................................. $13,186,000
===========
For the statement of operations:
Premiums written:
Gross.............................................. $28,988,000 $31,198,000
Assumed............................................ 567,000 742,000
Ceded.............................................. (8,185,000) (10,331,000)
----------- -----------
Net premiums written............................... $21,370,000 $21,609,000
=========== ===========
Premiums earned:
Gross.............................................. $26,515,000 $29,596,000
Assumed............................................ 598,000 682,000
Ceded.............................................. (7,403,000) (9,698,000)
----------- -----------
Net premiums earned................................ $19,710,000 $20,580,000
=========== ===========
Expenses:
Losses and loss adjustment expenses................ $18,051,000 $16,610,000
Reinsurance recoveries............................. (4,617,000) (3,142,000)
----------- -----------
Net losses and loss adjustment expenses............ $13,434,000 $13,468,000
=========== ===========
</TABLE>
13. Segment Reporting:
A summary of information about United's operations by the distribution and
insurance segments for the years ended September 27, 1996 and October 3, 1997 is
as follows:
F-26
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Net sales and operations:
Distribution................................... $1,280,453,000 $1,306,602,000
Insurance (1).................................. 20,096,000 22,231,000
-------------- --------------
Total....................................... $1,300,549,000 $1,328,833,000
============== ==============
Income (loss) before income taxes:
Distribution................................... $ (8,049,000) $ (21,627,000)
Insurance (1).................................. 2,480,000 4,167,000
-------------- --------------
Total....................................... $ (5,569,000) $ (17,460,000)
============== =============
Depreciation and amortization expense:
Distribution................................... $ 8,015,000 $ 11,483,000
Insurance (1).................................. 187,000 359,000
-------------- --------------
Total....................................... $ 8,202,000 $ 11,842,000
============== =============
Capital expenditures, including software:
Distribution................................... $ 22,568,000 $ 21,974,000
Insurance...................................... 80,000 79,000
-------------- --------------
Total....................................... $ 22,648,000 $ 22,053,000
============== ==============
Total assets at October 3, 1997:
Distribution................................... $ 290,516,000
Insurance...................................... 74,911,000
--------------
Total....................................... $ 365,427,000
==============
</TABLE>
(1) Reported as discontinued operations.
14. Retirement Plans:
United has a company-sponsored pension plan that covers substantially all of
its salaried employees. United has made annual contributions to the plan equal
to the amount annually accrued for pension expense. United's funding policy is
to satisfy the funding requirements of the Employees' Retirement Income Security
Act.
In determining the actuarial present value of the projected benefit
obligation, a discount rate of 8%, 7.75% and 6.75% was used for the years ended
September 27, 1996, October 3, 1997 and October 2, 1998, respectively, and a
future maximum compensation increase rate of 4%, 3.75% and 2.75% was used for
the years ended September 27, 1996, October 3, 1997 and October 2, 1998,
respectively. The expected long-term rate of return on assets was 8%.
F-27
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Pension costs for the plan consists of the following for the years ended
September 27, 1996, October 3, 1997 and October 2, 1998, respectively:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Company-sponsored:
Service costs of benefits earned................................ $ 952,000 $ 1,155,000 $ 1,184,000
Interest cost on the projected benefit obligation............... 1,668,000 1,788,000 1,856,000
Expected return on plan assets.................................. (1,932,000) (2,197,000) (2,616,000)
Amortization of:
Unrecognized net asset....................................... (168,000) (168,000) (168,000)
Unrecognized net gain........................................ (38,000) (100,000) (4,962,000)
Unrecognized prior service cost.............................. 61,000 61,000 61,000
----------- ----------- -----------
Net periodic pension cost (benefit).......................... $ 543,000 $ 539,000 $(4,645,000)
=========== =========== ===========
</TABLE>
Amortization of the unrecognized net gain for the year ended October 2,
1998, includes the cumulative effect of a change in accounting method (see Note
1) of $2,912,000.
The following table sets forth the plan's funded status as of the years
ended October 3, 1997 and October 2, 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................................ $17,200,000 $27,082,000
Non-vested............................................................ 1,137,000 841,000
----------- -----------
Accumulated benefit obligation.................................. 18,337,000 27,923,000
Effect of projected future compensation levels 5,268,000 2,125,000
----------- -----------
Projected benefit obligation.................................... 23,605,000 30,048,000
Plan assets at fair value, primarily listed stocks, fixed income
and bond and equity funds................................................ 33,541,000 33,919,000
----------- -----------
Excess of plan assets over projected benefit
obligation..................................................... 9,936,000 3,871,000
Unrecognized net asset...................................................... (1,393,000) (1,225,000)
Unrecognized net gain....................................................... (9,064,000) (976,000)
Unrecognized prior service cost............................................. 594,000 271,000
----------- -----------
Prepaid pension cost............................................ $ 73,000 $ 1,941,000
=========== ===========
</TABLE>
F-28
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
United also participates in several multi-employer pension plans for the
benefit of its employees who are union members. The data available from
administrators of the multi-employer plans is not sufficient to determine the
accumulated benefits obligation, nor the net assets attributable to the
multi-employer plans in which United's union employees participate. United's
costs for these multi-employer plans for the years ended September 27, 1996,
October 3, 1997 and October 2, 1998 were $3,326,000, $3,874,000 and $3,965,000,
respectively.
In addition to providing pension benefits, United provides certain medical
benefits for certain salaried retirees, spouse and eligible dependents.
Employees who were hired prior to January 1, 1989, the last eligibility date,
and have met United's minimum service requirements, become eligible for United
Grocers, Inc. and Subsidiaries these benefits. The post-retirement medical
benefits available are non-contributory in nature and it is United's practice to
fund these benefits as incurred.
The following table presents the status of the plan and amounts recognized
for post-retirement benefits in United's financial statements as of and for the
years ended October 3, 1997 and October 2, 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees................................................... $1,810,000 $2,515,000
Fully eligible active plan participants.................... 1,578,000 1,111,000
Other active plan participants............................. 927,000 370,000
---------- ----------
Total accumulated post-retirement benefit
obligation......................................... 4,315,000 3,996,000
Unrecognized net transition obligation........................... (3,331,000) (3,075,000)
---------- ----------
Accrued post-retirement benefit obligation........... $ 984,000 $ 921,000
========== ==========
1996 1997 1998
-------- -------- --------
Net periodic post-retirement benefit cost includes the
following components for the years ended September 27,
1996, October 3, 1997 and October 2, 1998:
Service cost..................................................... $ 52,000 $ 52,000 $ 24,000
Interest cost.................................................... 271,000 271,000 246,000
Amortization of transition obligation............................ 169,000 169,000 178,000
-------- -------- --------
Net periodic post-retirement benefit cost.................. $492,000 $492,000 $448,000
======== ======== ========
</TABLE>
F-29
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The assumed health care cost trend rate used to measure the expected cost of
benefits was 11% in year one, decreasing 1% per year to a minimum rate of 4%.
The effect of a 1% increase in the assumed health care cost trend rate on the
aggregate of the service and interest cost components of the net periodic
post-retirement benefit cost and the accumulated post-retirement benefit
obligation would be to increase these amounts by approximately $170,000,
$170,000 and $12,000 for the years ended September 27, 1996, October 3, 1997 and
October 2, 1998, respectively. The discount rate used in determining the
accumulated post-retirement benefit obligation was 7.75%, 8% and 7% as of
September 27, 1996, October 3, 1997 and October 2, 1998, respectively.
United also has two separate company-sponsored 401(k) plans. In one plan,
all salaried non-union employees are eligible to participate. Contributions by
United are at the discretion of the Board of Directors. In the other plan, union
employees are eligible to participate, but United makes no matching
contributions. For the years ended September 27, 1996, October 3, 1997 and
October 2, 1998, United made matching contributions to the 401(k) plans totaling
$291,000, $305,000 and $262,000, respectively.
15. Leases:
United has various operating leases for buildings and equipment, certain of
which are subleased to affiliated companies and members. The leases expire at
various dates through 2022. Rental United Grocers, Inc. and Subsidiaries expense
consists of the following for the years ended September 27, 1996, October 3,
1997 and October 2, 1998:
1996 1997 1998
----------- ------------ -----------
Minimum rentals.................. $19,463,000 $ 24,551,000 $25,768,000
Less sublease income............. (6,873,000) (10,506,000) (8,844,000)
----------- ------------ -----------
Net rental expense............ $12,590,000 $ 14,045,000 $16,924,000
=========== ============ ===========
The following is a schedule by years showing future minimum rentals under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of October 2, 1998:
F-30
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(a) (b)
Minimum Minimum Net
Fiscal Year Payments Receipts Minimum
----------- ------------ ----------- -----------
1999......................... $ 21,486,000 $ 8,890,000 $ 12,596,000
2000......................... 19,408,000 8,143,000 11,265,000
2001......................... 17,016,000 7,689,000 9,327,000
2002......................... 15,616,000 7,247,000 8,369,000
2003......................... 13,786,000 6,567,000 7,219,000
Thereafter................... 82,695,000 57,044,000 25,651,000
------------ ----------- -----------
Total.................. $170,007,000 $95,580,000 $74,427,000
============ =========== ===========
Summary:
Building leases........... $141,073,000 $89,266,000 $51,807,000
Equipment leases.......... 28,934,000 6,314,000 22,620,000
------------ ----------- -----------
Total.................. $170,007,000 $95,580,000 $74,427,000
============ =========== ===========
(a) Minimum payments are those required by the Company over the terms of
significant leases.
(b) Minimum receipts are those to be received by the Company from sublease
agreements.
United has accrued $7,310,000 and $7,751,000 as of October 3, 1997 and
October 2, 1998, respectively, for the estimated losses on subleasing
arrangements, $5,505,000 and $5,896,000, respectively, of which is included in
other liabilities and $1,805,000 and $1,855,000, respectively, of which is
included in other current liabilities in the accompanying consolidated balance
sheets.
United has entered into sale-leaseback transactions for various supermarket
properties, which resulted in deferred gains of approximately $3,650,000 and
$1,257,000 as of October 3, 1997 and October 2, 1998, respectively. The deferred
gains are being amortized over the leaseback periods of twenty years. The total
remaining lease commitments at October 2, 1998 are approximately $7,877,000 over
nineteen years with an annual rental of approximately $336,000.
F-31
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid during the years for:
Interest.............................................. $14,546,000 $16,342,000 $12,738,000
Income taxes, net of refunds of $1,200,000
in 1998............................................... 279,000 151,000 4,800,000
Supplemental schedule of noncash investing and
financing activities:
Sale of insurance segment in exchange for
note receivable....................................... -- -- 4,000,000
Sale of Cash & Carry division and other
assets in exchange for notes receivable............... -- -- 18,846,346
Members' allowances paid in common
stock................................................. -- 773,000 --
Exchange of member receivable for equity
interest in affiliate................................. 3,250,000 362,000 --
Exchange of investment in affiliate for note
receivable............................................ -- -- 4,550,000
</TABLE>
17. Affiliated Companies:
United owns interests in affiliates, which are accounted for on the equity
method. One affiliate is a vendor that provides private label brand merchandise.
The other affiliates operate retail grocery stores and are also members of
United. A member of United's Board of Directors controls R.A.F. Limited
Liability Company.
An approximate summary of aggregate balances and transactions with
affiliates in which United had an interest as of year-end is as follows:
October 3, October 2,
---------- ----------
1997 1998
---- ----
Balance sheet:
Investment in affiliated companies.......... $6,971,000 $3,360,000
Accounts receivable......................... 2,898,000 2,651,000
Notes receivable............................ 428,000 --
Accounts payable............................ 7,046,000 4,079,000
F-32
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year ended
-------------------------------------------
September 27, October 3, October 2,
------------- ---------- ----------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statement of operations:
Sales................................................... $129,855,000 137,029,000 2,933,000
Purchases............................................... 111,348,000 118,268,000 119,495,000
Volume incentive rebate for purchases from
affiliated company................................... 2,931,000 3,909,000 4,361,000
Refunds, rebates and member allowances to
affiliated companies................................. 2,570,000 1,985,000 34,000
Equity in earnings of affiliated companies.............. 568,000 107,000 169,000
</TABLE>
These affiliates and United's net investments as of October 3, 1997 and
October 2, 1998 and percentages of ownership during the years then ended are as
follows:
Net Percentage
--- ----------
1997 Investment Ownership
---- ---------- ---------
Western Family Holding Company.................. $1,974,000 22%
C & K Market, Inc. (sold July 1997)............. -- 22%
R.A.F. Limited Liability Company................ 1,081,000 94%
North State Grocery, Inc........................ 3,623,000 26%
Other........................................... 293,000
----------
$6,971,000
==========
1998
----
Western Family Holding Company.................. $2,143,000 22%
R.A.F. Limited Liability Company................ 1,081,000 94%
Other........................................... 136,000
----------
$3,360,000
==========
Combined unaudited financial information of the affiliated entities,
including third-party interests is as follows:
October 3, October 2,
---------- ----------
1997 1998
---- ----
Current assets................ $55,359,000 $41,903,000
Non-current assets............ 13,559,000 4,185,000
Current liabilities........... 49,193,000 35,905,000
Non-current liabilities....... 3,872,000 --
Owners' equity................ 15,853,000 10,184,000
F-33
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year Ended Year Ended Year Ended
---------- ---------- ----------
September 27, October 3, October 2,
------------- ---------- ----------
1996 1997 1998
---- ---- ----
Revenues................. $777,379,000 $633,124,000 $525,514,000
Gross profit............. 98,929,000 46,506,000 19,550,000
Net income (loss)........ 2,531,000 220,000 (77,000)
All of these affiliates are privately held companies for which no ready
market values are available. In management's opinion, the equity interests as
stated are equal to or less than the fair market value of United's interests in
these affiliates.
18. Related Party Transactions:
United is owned by its primary customers, and its Board of Directors
consists entirely of members who are also customers; accordingly, the nature of
United's business involves a significant number of related party transactions.
Such transactions with members, some of whom are directors, include leasing and
sub-leasing arrangements, sale of merchandise and related extensions of trade
credit, extensions of long-term credit for members' purchases of fixed assets,
notes payable to members for capital stock and capital investment notes and
payment of purchase incentives (see United Grocers, Inc. and Subsidiaries
members allowances in the accompanying consolidated statements of operations) in
the form of cash and shares of United's stock.
19. Concentrations of Credit Risk:
Financial instruments that potentially subject United to significant
concentrations of credit risk consist principally of cash and cash equivalents,
investments, store financing loans and trade accounts receivable.
United holds its cash and cash equivalents in several banks located in the
Pacific Northwest and a zero balance bank account located in the Midwest. Each
bank is covered by Federal Depositors Insurance Corporation insurance; balances
in excess of coverage are not insured.
As a cooperative, the majority of United's accounts receivable represent
sales to its members who are located throughout the Pacific Northwest and
Northern California. These accounts are not generally collateralized but each
member has stock holdings in United as well as patronage rebates, which United
could apply against account balances.
United makes store financing loans to members from time-to-time, mainly to
finance the acquisition of grocery store properties and equipment. These loans
are represented by notes receivable which are collateralized with personal
property, securities and guarantees.
United performs ongoing credit evaluations of its members' financial
condition and maintains allowances for potential credit losses.
Two customers accounted for more than 10% of United's net sales for the year
ended October 2, 1998. Sales to these customers were approximately $118 million
and $235 million.
F-34
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
20. Fair Value of Financial Instruments:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by United using available market information and
appropriate valuation methodologies.
United in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
Cash and cash equivalents and long-term notes receivables -- the
carrying amounts reported in the balance sheet for cash and cash equivalents
and long-term receivables approximate their fair value.
Investments restricted or maintained for insurance reserves -- see Note
4.
Investment in and accounts with affiliated companies--it is not
practicable to estimate the fair value of an investment representing the
common stock of a privately-held company because the stock is not traded;
thus, the investments are carried at original cost plus equity in earnings
to date in the consolidated balance sheet. Such investments are subject to
review for possible impairment.
Notes payable--the carrying amounts of variable-rate debt
instruments approximate their fair value. The fair values of fixed-rate
long-term debt are estimated using discounted cash flow United Grocers, Inc.
and Subsidiaries analyses based on United's incremental borrowing rates for
similar types of borrowing arrangements. The assumed incremental borrowing
rates used to determine the fair value of fixed-rate long-term debt were 11%
and 8% for 1997 and 1998.
The carrying amounts and approximate fair values of United's financial
instruments at the balance sheet dates are as follows:
<TABLE>
<CAPTION>
Carrying Fair
-------- ----
1997 Amounts Values
---- ------- ------
<S> <C> <C>
Cash and cash equivalents.............................................. $10,223,000 $10,223,000
Long-term notes receivable, including the current portion,
net of allowance for doubtful notes................................. 18,334,000 18,334,000
Investment in and accounts with affiliated companies 6,971,000 6,971,000
Notes payable.......................................................... 198,186,000 193,886,000
1998
----
Cash and cash equivalents.............................................. $ 1,294,000 $ 1,294,000
Long-term notes receivable, including the current portion,
net of allowance for doubtful notes................................. 37,203,000 37,203,000
Investment in and accounts with affiliated companies 3,360,000 3,360,000
Notes payable.......................................................... 115,593,000 112,688,000
</TABLE>
F-35
<PAGE>
United Grocers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
21. Commitments and Contingencies:
United has entered into various agreements under which it sells certain of
its notes receivable from members subject to limited recourse provisions.
Personal property, securities and guarantees collateralize these notes. United
in turn receives a monthly service fee. United recognizes the net present value
of the excess of the future service fees over the estimated service cost as a
servicing asset and related gain upon the sale of a loan. The service asset is
amortized over the life of the related note agreement. In the years ended
September 27, 1996, October 3, 1997 and October 2, 1998, United sold notes
totaling approximately $10,549,000, $13,205,000 and $1,518,000, respectively,
and recognized $330,852, $1,734,000 and $20,000, respectively, of gains on the
sales. The balances of transferred notes that were outstanding and subject to
recourse provisions were approximately $39,313,000 and $24,426,000 at October 3,
1997 and October 2, 1998, respectively. The unamortized service asset as of
October 3, 1997 and October 2, 1998 was $1,969,000 and $1,281,000, respectively.
In the event United is in default of other credit agreements, the buyer of these
notes has the right to demand collection of the outstanding notes balances from
United.
United is guarantor of a covenant not to compete and loans by members as of
October 2, 1998 totaling approximately $6,740,000 with annual payments of
approximately $837,000.
United is a party to various litigation and claims arising in the ordinary
course of business. While the ultimate effect of such actions cannot be
predicted with certainty, United expects the outcome of these matters will not
result in a material adverse effect on United's consolidated financial position,
results of operations or cash flows.
United is guarantor of a letter of credit a customer has with a bank. The
letter of credit is $1,500,000 of which no amount has been drawn at October 2,
1998.
22. Proposed Merger (Unaudited):
In March 1999, United executed a letter of intent with respect to a proposed
merger with Certified Grocers of California, Ltd., a grocery cooperative
headquartered in Commerce, California. 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.
F-36
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The merger is being accounted for as a purchase pursuant to Accounting
Principles Board Opinion No. 16, "Business Combinations." Accordingly, the
consideration is being allocated to the assets and liabilities based upon the
relative fair values. Such allocations are subject to final determination based
on valuations and other studies to be performed.
The unaudited pro forma condensed combined financial statements, including
the notes thereto, are based upon, and should be read in conjunction with, the
historical consolidated financial statements of both United Western Grocers,
Inc. (formerly Certified) and United, including the notes thereto.
The unaudited pro forma condensed combined balance sheet gives effect to the
merger between United and Unified as if it had occurred as of August 28, 1999.
The unaudited pro forma condensed combined statement of operations for the year
ended August 28, 1999 assumes the merger took place as of the beginning of the
period presented. The unaudited pro forma condensed combined statement of
operations combines Unified Western Grocers, Inc.'s (formerly Certified) year
ended ended August 28, 1999 with United's twelve months ended July 2, 1999.
The adjustments included in the unaudited pro forma condensed combined
financial statements represent a preliminary determination of these adjustments
based upon available information. The consideration exceeded the fair value of
the net assets acquired. This difference has been allocated to goodwill, which
will be amortized over forty years. Such allocations are subject to final
determination based on real estate, leasehold and equipment valuation studies
which are not yet complete. These studies are expected to be completed before
the end of the fiscal year 2000. Accordingly, the final allocations may be
different from the amounts reflected herein.
The computation of patronage earnings involves complex cost allocations
among member/non-member groups and non-patronage activities. United's management
believes that patronage earnings for the twelve month period ended July 2, 1999
would have approximated break-even.
Management is in the process of finalizing its integration plans, which
includes the elimination of duplicative facilities and functions and other
restructuring actions. The pro forma financial information includes only the
impact of transaction costs related to the merger, amortization of goodwill,
interest expense attributable to the amendment of credit facilities and the
related tax effect of these items. The pro forma financial information does not
include any synergy cost savings the combined company is expected to realize.
Based on the finalization of the integration plans and other factors, the final
purchase accounting adjustments may differ materially from those presented in
these unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position and results of operations that would have been
realized had Unified and United been a combined company during the specified
periods.
F-37
<PAGE>
<TABLE>
Unified Western Grocers, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet August 28, 1999
(Dollars in thousands)
<CAPTION>
Unified Western
----------------
Grocers, Inc. Pro Forma
------------- ---------
(formerly United Unified
-------- ------ -------
Certified) Grocers Pro Forma Western
--------- ------- --------- -------
August 28, 1999 July 2, 1999 Adjustments Grocers, Inc.
--------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current:
Cash and cash equivalents...................................$ 8,027 $ 3,907 $ 11,934
Accounts and notes receivable, net.......................... 108,786 64,582 173,368
Inventories................................................. 150,800 69,716 220,516
Other current assets........................................ 5,544 5,918 11,462
Deferred income taxes....................................... 4,286 1,525 $ 412 (3) 6,223
------------ ---------- ----------- -----------
Total current assets.................................. 277,443 145,648 412 423,503
Notes receivable, net............................................. 13,914 20,143 34,057
Investments....................................................... 35,017 -- 35,017
Property, plant and equipment, net................................ 79,231 30,386 13,263 (2) 122,880
Other assets
Goodwill, net............................................... 22,964 -- 29,913 (2) 52,877
Deferred financing costs, net............................... 812 793 2,200 (1) 2,749
(1,056)(3)
Other....................................................... 21,754 18,859 (3,129)(2) 36,652
(832)(2)
Total assets..........................................$ 451,135 $ 215,829 $ 40,771 $ 707,735
============ ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Notes payable...............................................$ 6,623 $ 55,688 $(52,568)(1) $ 10,120
377 (1)
Accounts payable and other current liabilities.............. 156,708 65,126 10,200 (2) 232,034
Patrons' excess deposits and patronage dividends............ 16,091 -- 16,091
------------ ---------- ----------- -----------
Total current liabilities............................. 179,422 120,814 (41,991) 258,245
Notes payable, net of current portion............................. 143,727 56,596 (86,363)(1) 273,526
158,057 (1)
1,509 (1)
Other long-term liabilities....................................... 29,393 9,048 38,441
Patrons' deposits and certificates:
Patrons' required deposits.................................. 12,450 -- 12,450
Subordinated patronage dividend certificates................ 5,986 -- 5,986
------------ ---------- ----------- -----------
Total liabilities..................................... 370,978 186,458 31,212 588,648
Redeemable members' equity........................................ -- 1,886 (1,886)(1) --
------------ ---------- ----------- -----------
</TABLE>
F-38
<PAGE>
<TABLE>
Unified Western Grocers, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet August 28, 1999 (Continued)
(Dollars in thousands)
<CAPTION>
Unified Western
---------------
Grocers, Inc. Pro Forma
------------- ---------
(formerly United Unified
-------- ------ -------
Certified) Grocers Pro Forma Western
--------- ------- --------- -------
August 28, 1999 July 2, 1999 Adjustments Grocers, Inc.
--------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Class A shares.............................................. 5,669 -- 9,510 (3) 15,179
Class B shares.............................................. 57,833 2,542 (2,542)(3) 91,854
(9,469)(1)
43,490 (3)
Additional paid in capital.................................. -- 18,827 (18,827)(3) --
Retained earnings........................................... 17,160 6,116 (6,116)(3) 12,559
(3,957)(1)
(644)(3)
Accumulated other comprehensive earnings.................... (505) -- -- (505)
------------ ---------- ----------- -----------
Total shareholders' equity............................ 80,157 27,485 11,445 119,087
------------ ---------- ----------- -----------
Total liabilities and shareholders' equity............$ 451,135 $ 215,829 $ 40,771 $ 707,735
============ ========== =========== ===========
See Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet
</TABLE>
F-39
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet as of
August 28, 1999 (Dollars in thousands)
(1) Gives effect to the new credit facility as completed in connection with to
the merger, and the anticipated application of the net proceeds therefrom
(including payment of debt, redeemed shares, and related fees) as follows:
<TABLE>
<S> <C> <C>
Proceeds from new credit facility................................................. $ 158,057
Conversion of United redeemable members' equity
Notes payable, current......................................................... $ 377
Notes payable, net of current portion.......................................... 1,509 1,886
---------
Repayment of bank borrowings and senior debt
Notes payable, current......................................................... (52,568)
Notes payable, net of current portion.......................................... (86,363) (138,931)
---------
Purchase of Certified shares pending redemption
Initial issue value............................................................ (9,469)
Redemption value in excess of initial issue value.............................. (3,957) (13,426)
---------
Redeemable members' equity of United.............................................. (1,886)
Merger related costs.............................................................. (3,500)
Financing costs................................................................... (2,200)
--------
Net cash....................................................................... $ --
========
</TABLE>
Unified has entered financing agreements for a new term loan of $40 million,
amendment of the terms of its existing $80 million term loan, and a revolving
credit facility for $200 million.
(2) Consideration for the Merger consists of issuance of Unified Western
Grocers, Inc. shares for all of the outstanding shares of United Grocers,
Inc. based upon a previously negotiated exchange ratio. At the conclusion
of the exchange, former members of Certified and United will own
approximately 75% and 25%, respectively, of the total outstanding shares of
Unified. The merger is being accounted for as a purchase pursuant to
Accounting Principles Board Opinion No. 16, "Business Combinations."
Accordingly, the consideration is being allocated to the assets and
liabilities based upon the relative fair values. Such allocations are
subject to final determination based on valuations and other studies to be
performed. The final values may differ from those set forth below:
F-40
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet as of
August 28, 1999 (Dollars in thousands) -- (Continued)
<TABLE>
<S> <C> <C>
Equity issued (Class A & B shares)............................................. $ 53,000
Acquisition costs.............................................................. 3,500
Less book value of net assets acquired......................................... (27,485)
--------
Excess of purchase price over book value of net assets acquired................ $ 29,015
========
Allocation of excess purchase price over book value of assets of United:
Property, plant and equipment, net
Land................................................................... $ 7,374
Buildings.............................................................. 8,789
Equipment.............................................................. (2,900) $ 13,263
---------
Other assets
Over-funded pension ................................................... 3,871
Capitalized software................................................... (7,000) (3,129)
---------
Accrued liabilities (primarily severance and duplicate facility closure
costs)................................................................... (10,200)
Deferred taxes on temporary differences (39%).................................. (832)
Goodwill....................................................................... 29,913
--------
$ 29,015
========
</TABLE>
(3) Following is a summary of the change in shareholders' equity as a result of
the merger and refinancing:
<TABLE>
<S> <C> <C>
Issuance of new Unified Class A Shares.................................... $ 9,510
Issuance of new Unified Class B Shares.................................... 43,490
Elimination of United historical members' equity.......................... (27,485)
Elimination of former Certified shares tendered for redemption............ (13,426)
</TABLE>
<TABLE>
<CAPTION>
Cost Tax Effect
---- ----------
<S> <C> <C> <C>
Write-off United historical deferred financing costs...................... (793) 309
Write-off Unified historical deferred financing costs..................... (263) 103
------ ------
(1,056) 412 (644)
--------
Pro forma adjustment to shareholders' equity.............................. $ 11,445
========
</TABLE>
F-41
<PAGE>
<TABLE>
Unified Western Grocers, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations for the Year ended August 28, 1999
(Dollars in Thousands)
<CAPTION>
Unified Western
---------------
Grocers, Inc.
-------------
(formerly United
-------- ------
Certified) Grocers
--------- -------
(August 30, (July 4,
----------- ------
1998- 1998- Pro Forma
----- ----- ---------
August 28, July 2, Pro Forma Unified Western
---------- ------- --------- ---------------
1999) 1999) Adjustments Grocers, Inc.
----- ----- ----------- -------------
<S> <C> <C> <C> <C>
Net sales.............................................................. $ 1,893,523 $1,057,057 -- $ 2,950,580
Costs and expenses:
Cost of sales.................................................... 1,717,779 930,148 2,647,927
Distribution, selling and administrative......................... 141,155 129,328 $ 62 (A) 271,293
748 (A)
------------ --------- ------------- -----------
1,858,934 1,059,476 810 2,919,220
------------ --------- ------------- -----------
Operating income (loss)................................................ 34,589 (2,419) (810) 31,360
Interest expense....................................................... 11,911 7,219 2,996 (B) 22,126
Other (expense) income, net............................................ (5,780) 5,455 (325)
------------ --------- ------------- -----------
Earnings (loss) before patronage dividends and provision
(benefit) for income taxes.......................................... 16,898 (4,183) (3,806) 8,909
Patronage dividends.................................................... 14,195 -- (3,694)(C) 10,501
------------ --------- ------------- -----------
Earnings (loss) before provision (benefit) for income
taxes............................................................... 2,703 (4,183) (112) (1,593)
Provision (benefit) for income taxes................................... 64 (2,212) 248 (D) (1,900)
------------ --------- ------------- -----------
Net earnings (loss).................................................... $ 2,639 $ (1,971) $ (360) $ 308
============ ========= ============= ===========
See Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations
</TABLE>
F-42
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended August 28, 1999
(Dollars in thousands)
(A) Reflects adjustments to depreciation and amortization based upon the
preliminary purchase accounting allocations related to property, plant and
equipment and intangible assets in connection with the merger of Unified
Western Grocers, Inc. (formerly Certified) and United as more fully
described in Note (2) to the unaudited pro forma condensed combined balance
sheet. Buildings and equipment are being depreciated over their remaining
useful lives and goodwill is being amortized over forty years. Depreciation
and amortization for the year ended August 28, 1999 would have increased by
$62 and $748, respectively.
(B) Represents the elimination of historical interest expense on debt which has
been refinanced, offset by the additional interest expense that would have
been incurred had the merger and new credit facility occurred at the
beginning of the pro forma period. For purposes of the unaudited pro forma
condensed combined statement of operations, the interest rate on the new
$200 million revolving credit facility was assumed to be LIBOR plus 2.0% and
the interest rate on the new $40 million subordinated notes was assumed to
be 8.71%. The interest rate on Unified's existing senior term debt
increased from 7.22% to 7.72%. The weighted average rate assumed was 7.84%.
The proceeds from the new credit facility have been used to refinance
substantially all of United's institutional debt, and to refinance
Unified's revolving credit agreement and purchase shares of members
previously tendered for redemption at book value. The unused portion of the
$200 million revolving credit facility will be used to fund the Company's
normal and seasonal business operations and maintain additional working
capital to provide for future business opportunities. The interest rates on
the debt retired ranged from 7.1% to 8.3% on United's institutional debt,
6.07% to 6.76% on Unified's revolving credit agreement and 7.22% on
Unified's senior notes. United's redeemable members' equity converted to
residual stock notes payable over twenty quarters plus interest at 6%.
Following is a summary of the pro forma interest adjustment:
Historical Interest Expense
Congress Term Loan and Revolver.................. $ 5,962
Unified Senior Term Notes........................ 5,840
Unified Revolving Credit Agreement............... 3,923
--------
$ 15,725
--------
Pro Forma Interest Expense
Senior Term Notes................................ $ 6,176
Subordinated Term Notes.......................... 3,484
Revolver (including unused fees)................. 8,848
Residual Stock Notes............................. 213
--------
$ 18,721
--------
Net increase in interest expense...................... $ 2,996
========
F-43
<PAGE>
A 0.125% increase or decrease in the weighted average interest rate would change
pro forma interest expense by $298 for the year ended August 28, 1999.
See Note 7 to the consolidated financial statements of United included elsewhere
herein for further information regarding the historical indebtedness of United.
See Note 6 to the consolidated financial statements of Unified incorporated
by reference herein for further information with respect to the historical
indebtedness of Unified.
(C) Pro forma adjustments to depreciation expense, amortization of goodwill, and
interest expense would be allocated to patronage and non-patronage
activities and result in a reduction of patronage dividends paid of $3,694.
(D) The pro forma adjustment to the provision (benefit) for income taxes is
based upon a tax rate of 39% applied to the pro forma earnings (loss) before
provision (benefit) for income taxes adjusted for amortization of goodwill.
F-44
<PAGE>
======================================= ====================================
You should rely only on the
information contained in this
document. We have not authorized
anyone to provide you with
information with respect to
deposit accounts that is not
contained or referred to in this
prospectus. This document deals
only with the sale of the deposit
accounts and only in places where
it is legal to do so.
Information about Unified may
change subsequent to the date of
this document.
---------------
TABLE OF CONTENTS
Page
Risk Factors......................... 2
Business Description................. 3
Recent Developments.................. 3
Ratio of Earnings to Fixed Charges... 4
Description of Deposit Accounts ..... 4
Method of Offering................... 9
Incorporation By Reference........... 9
Available Information................ 10
Additional Information............... 10
Use of Proceeds...................... 10
Experts.............................. 10
Forward-Looking Information......... 11
Index to Financial Statement........ F-1
======================================= ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Indemnification of Directors and Officers
Article V of Unified's bylaws provides that Unified shall, to the maximum extent
permitted by law, have the power to indemnify its directors, officers, employees
and other agents. Section 317 of the California Corporations code provides that
a corporation has the power to indemnify agents of the corporation against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation. Unified has
entered into agreements with each of its directors and certain of its officers
which provide to such directors and officers the maximum indemnification allowed
under applicable law. In addition, Unified and its subsidiaries maintain a
policy of directors' and officers' liability and company reimbursement
insurance.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of Unified
pursuant to the foregoing provisions, or otherwise, Unified has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Unified of expenses incurred or paid
by a director, officer or controlling person of Unified in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
Unified will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 16. Exhibits
Exhibits:
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1 Consent of Deloitte & Touche LLP
Exhibit 23.2 Consent of PricewaterhouseCoopers LLP
II-1
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual and corporation whose
signature appears below constitutes and appoints Alfred A. Plamann, Richard J.
Martin and Robert M. Ling, Jr., and each of them singly, as his, her or its true
and lawful attorneys-in-fact and agents with full power of substitution, for
him, her or it and in his, her or its name, place and stead, in the capacities
listed below, to sign any and all amendments (including any and all
pre-effective and post-effective amendments) to this Registration Statement, and
to file the same, with all exhibits thereto and all documents therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them singly, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he, she
or it might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them singly, or his or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Commerce, State of California, on November __, 1999.
UNIFIED WESTERN GROCERS, INC.
By /s/ Alfred A. Plamann
-------------------------------------
Alfred A. Plamann
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Alfred A. Plamann
- ----------------------------- President and Chief November 19, 1999
Alfred A. Plamann Executive Officer
/s/ Richard J. Martin
- ----------------------------- Senior Vice President-- November 19, 1999
Richard J. Martin Finance and Administration
and Chief Financial Officer
(principal accounting officer)
S-1
<PAGE>
/s/ Louis A. Amen
- ----------------------------- Director November 19, 1999
Louis A. Amen
/s/ Bill Andronico
- ----------------------------- Director November 19, 1999
Bill Andronico
/s/ Gaylon G. Baese
- ----------------------------- Director November 19, 1999
Gaylon G. Baese
/s/ David Bennett
- ----------------------------- Director November 19, 1999
David Bennett
/s/ John Berberian
- ----------------------------- Director November 19, 1999
John Berberian
/s/ Edmund K. Davis
- ----------------------------- Director November 19, 1999
Edmund K. Davis
/s/ Kenneth W. Findley
- ----------------------------- Director November 19, 1999
Kenneth W. Findley
/s/ James F. Glassel
- ----------------------------- Director November 19, 1999
James F. Glassel
/s/ Darioush Khaledi
- ----------------------------- Director November 19, 1999
Darioush Khaledi
/s/ Mark Kidd
- ----------------------------- Director November 19, 1999
Mark Kidd
/s/ Jay McCormack
- ----------------------------- Director November 19, 1999
Jay McCormack
/s/ Mary McDonald
- ----------------------------- Director November 19, 1999
Mary McDonald
/s/ Morrie Notrica
- ----------------------------- Director November 19, 1999
Morrie Notrica
S-2
<PAGE>
/s/ Peter J. O'Neal
- ----------------------------- Director November 19, 1999
Peter J. O'Neal
/s/ Michael Provenzano
- ----------------------------- Director November 19, 1999
Michael Provenzano
/s/ Edward J. Quijada
- ----------------------------- Director November 19, 1999
Edward J. Quijada
/s/ Gordon E. Smith
- ----------------------------- Director November 19, 1999
Gordon E. Smith
/s/ Mimi R. Song
- ----------------------------- Director November 19, 1999
Mimi R. Song
/s/ Robert E. Stiles
- ----------------------------- Director November 19, 1999
Robert E. Stiles
/s/ James R. Stump
- ----------------------------- Director November 19, 1999
James R. Stump
/s/ Kenneth Tucker
- ----------------------------- Director November 19, 1999
Kenneth Tucker
/s/ Floyd West
- ----------------------------- Director November 19, 1999
Floyd West
/s/ Richard L. Wright
- ----------------------------- Director November 19, 1999
Richard L. Wright
S-3
<PAGE>
INDEX TO EXHIBITS AND SCHEDULES
Exhibits:
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1 Consent of Deloitte & Touche LLP
Exhibit 23.2 Consent of PricewaterhouseCoopers LLP
<PAGE>
<TABLE>
UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Fiscal Year
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Thousands omitted except for ratios)
<S> <C> <C> <C> <C>
Adjusted net earnings:
Net earnings.................................................... $ 2,639 $ 3,389 $ 2,307 $ 1,517 $ 769
Income tax provision............................................ 64 2,515 1,103 745 106
Interest expense................................................ 11,911 12,320 13,020 14,406 15,260
Estimated interest component of rental expense.................. 1,881 1,705 1,790 2,105 2,263
Patronage Dividends............................................. 14,195 10,149 14,464 13,200 11,571
Extraordinary item, net of income taxes......................... -- 1,079
--------- -------- -------- -------- --------
Adjusted net earnings(1)..................................... $ 30,690 $ 31,157 $ 32,684 $ 31,973 $ 29,969
======== ======== ======== ======== ========
Fixed Charges:
Gross rental expense............................................ $ 18,356 $ 16,241 $ 17,050 $ 20,539 $ 21,051
Less, estimated rent component.................................. 16,475 14,536 15,260 18,434 18,788
-------- -------- -------- -------- --------
Estimated interest component of rental expense(1)............... 1,881 1,705 1,790 2,105 2,263
Interest incurred............................................... 11,911 12,320 13,020 14,406 15,260
-------- -------- -------- -------- --------
Fixed charges(1)............................................. $ 13,792 $ 14,025 $ 14,810 $ 16,511 $ 17,523
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges................................. 2.23 2.22 2.21 1.94 1.71
======== ======== ======== ======== ========
............................
(1) Earnings used in computing the ratio of earnings to fixed charges consist of earnings before patronage dividends, provision
(benefit) for income taxes and extraordinary item in 1998 of $1.08 million, plus fixed charges. Fixed charges consist of
interest expense (including amortization of deferred financing costs) and the portion of rental expense that is representative
of the interest factor.
</TABLE>
Exhibit 12.1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 3 to Registration Statement No. 333-51931 of Unified Western Grocers, Inc.
on Form S-2 of our report dated October 29, 1999, appearing in the Annual Report
on Form 10-K of Unified Western Grocers, Inc. for the year ended August 28,
1999, and to the reference to us under the heading "Experts" in the Prospectus,
which is part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Los Angeles, California
November 19, 1999
Exhibit 23.1
<PAGE>
[PricewaterhouseCoopers LLP Letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Post-Effective Amendment No. 3 (File No.
33-51931) to Registration Statement on Form S-2 of Unified Western Grocers,
Inc. of our report dated April 30, 1999, relating to the financial statements of
United Grocers, Inc. and Subsidiaries, which appears in such Registration
Statement. We also consent to the references to us under the headings "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
November 19, 1999
Exhibit 23.2
