UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 2, 2016
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-10815
UNIFIED GROCERS, INC.
(Exact name of registrant as specified in its charter)
California |
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95-0615250 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
5200 Sheila Street, Commerce, CA 90040
(Address of principal executive offices) (Zip Code)
(323) 264-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] |
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Accelerated filer [ ] |
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Non-accelerated filer [X] |
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Smaller reporting company [ ] |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 30, 2016, the number of shares outstanding was:
Class A: 122,500 shares; Class B: 410,537 shares; Class C: 15 shares; Class E: 116,532 shares
Item |
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Page |
PART I. |
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Item 1. |
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3 |
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4 |
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Consolidated Condensed Statements of Comprehensive Earnings (Loss ) |
5 |
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6 |
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7 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
20 |
Item 3. |
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46 |
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Item 4. |
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46 |
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PART II. |
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Item 1. |
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50 |
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Item 1A. |
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50 |
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Item 2. |
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50 |
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Item 3. |
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50 |
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Item 4. |
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50 |
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Item 5. |
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50 |
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Item 6. |
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51 |
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52 |
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Unified Grocers, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets – Unaudited
(dollars in thousands) |
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July 2, |
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October 3, |
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2016 |
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2015 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,505 |
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$ |
3,056 |
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Accounts and current portion of notes receivable, net of allowances of $3,760 and $4,171 at July 2, 2016 and October 3, 2015, respectively |
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195,518 |
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191,744 |
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Inventories |
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244,660 |
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279,576 |
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Prepaid expenses and other current assets |
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9,815 |
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10,814 |
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Deferred income taxes |
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9,210 |
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9,210 |
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Assets of discontinued operations – current |
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— |
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125,904 |
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Total current assets |
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461,708 |
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620,304 |
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Properties and equipment, net |
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159,878 |
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163,808 |
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Investments |
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12,729 |
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13,069 |
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Notes receivable, less current portion and net of allowances of $20 and $54 at July 2, 2016 and October 3, 2015, respectively |
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15,601 |
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17,523 |
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Goodwill |
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37,846 |
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37,846 |
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Other assets, net |
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109,463 |
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111,775 |
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Total Assets |
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$ |
797,225 |
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$ |
964,325 |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable |
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$ |
259,453 |
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$ |
281,478 |
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Accrued liabilities |
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45,834 |
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46,287 |
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Current portion of notes payable |
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22,668 |
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16,960 |
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Members’ deposits and estimated patronage dividends |
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9,419 |
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10,175 |
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Liabilities of discontinued operations – current |
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— |
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99,682 |
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Total current liabilities |
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337,374 |
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454,582 |
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Notes payable, less current portion |
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233,970 |
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261,585 |
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Long-term liabilities, other |
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153,571 |
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161,180 |
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Members’ and Non-Members’ deposits |
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9,943 |
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7,995 |
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Commitments and contingencies |
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Shareholders' equity: |
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Class A Shares: 500,000 shares authorized, 122,500 shares outstanding at July 2, 2016 and October 3, 2015 |
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23,088 |
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23,088 |
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Class B Shares: 2,000,000 shares authorized, 410,537 shares outstanding at July 2, 2016 and October 3, 2015 |
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75,198 |
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75,198 |
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Class E Shares: 2,000,000 shares authorized, 119,204 and 205,704 shares outstanding at July 2, 2016 and October 3, 2015, respectively |
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11,920 |
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20,570 |
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Retained earnings – allocated |
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17,110 |
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25,748 |
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Retained earnings – non-allocated |
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6,864 |
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6,864 |
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Total retained earnings |
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23,974 |
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32,612 |
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Receivable from sale of Class A Shares to Members |
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(164 |
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(255 |
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Accumulated other comprehensive loss |
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(71,649 |
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(72,230 |
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Total shareholders' equity |
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62,367 |
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78,983 |
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Total Liabilities and Shareholders' Equity |
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$ |
797,225 |
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$ |
964,325 |
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The accompanying notes are an integral part of these statements.
3
Unified Grocers, Inc. and Subsidiaries
Consolidated Condensed Statements of Earnings (Loss) – Unaudited
(dollars in thousands) |
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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July 2, 2016 |
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June 27, 2015 |
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July 2, 2016 |
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June 27, 2015 |
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Net sales (gross billings including vendor direct arrangements were $973,597 and $1,069,587 for the thirteen weeks ended July 2, 2016 and June 27, 2015 and $2,913,870 and $2,995,888 for the thirty-nine weeks ended July 2, 2016 and June 27, 2015 respectively) |
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$ |
948,314 |
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$ |
1,038,615 |
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$ |
2,836,248 |
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$ |
2,912,778 |
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Cost of sales |
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878,583 |
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965,638 |
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2,622,651 |
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2,706,554 |
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Distribution, selling and administrative expenses |
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67,477 |
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70,710 |
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208,428 |
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204,134 |
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Operating income |
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2,254 |
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2,267 |
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5,169 |
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2,090 |
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Interest expense |
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(2,578 |
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(2,477 |
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(7,557 |
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(7,508 |
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Loss on early extinguishment of debt |
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— |
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— |
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— |
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(3,200 |
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Loss before estimated patronage dividends and income taxes |
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(324 |
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(210 |
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(2,388 |
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(8,618 |
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Estimated patronage dividends |
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(1,848 |
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(1,636 |
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(6,489 |
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(4,492 |
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Loss before income taxes |
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(2,172 |
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(1,846 |
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(8,877 |
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(13,110 |
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Income tax provision |
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(14 |
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(66 |
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(42 |
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(293 |
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Net loss from continuing operations |
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(2,186 |
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(1,912 |
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(8,919 |
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(13,403 |
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Earnings (loss) from discontinued operations, net of income tax benefit (provision) of $0 and $(2) for the thirteen weeks ended July 2, 2016 and June 27, 2015 and $0 and $92 for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively |
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102 |
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(518 |
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281 |
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(929 |
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Net loss |
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$ |
(2,084 |
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$ |
(2,430 |
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$ |
(8,638 |
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$ |
(14,332 |
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The accompanying notes are an integral part of these statements.
4
Unified Grocers, Inc. and Subsidiaries
Consolidated Condensed Statements of Comprehensive Earnings (Loss) – Unaudited
(dollars in thousands) |
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Thirteen Weeks Ended |
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Thirty-Nine Weeks Ended |
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July 2, 2016 |
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June 27, 2015 |
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July 2, 2016 |
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June , 2015 |
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Net loss |
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$ |
(2,084 |
) |
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$ |
(2,430 |
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$ |
(8,638 |
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$ |
(14,332 |
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Other comprehensive earnings (loss), net of income taxes: |
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Unrealized net holding gain (loss) on investments, net of income tax expense (benefit) of $146 and $(542) for the thirteen weeks ended July 2, 2016 and June 27, 2015 and $240 and $(242) for the thirty-nine weeks ended July 2, 2016 and June 27, 2015,respectively |
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267 |
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(1,049 |
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440 |
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(470 |
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Defined benefit pension plans and other postretirement benefit plans: Changes in unrecognized prior service credits during the period, and changes in unrecognized gains and losses, net of income tax expense (benefit) of $26 and $(602) for the thirteen weeks ended July 2, 2016 and June 27, 2015 and $77 and $(1,806) for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively |
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47 |
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(1,102 |
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141 |
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(3,308 |
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Comprehensive loss |
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$ |
(1,770 |
) |
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$ |
(4,581 |
) |
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$ |
(8,057 |
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$ |
(18,110 |
) |
The accompanying notes are an integral part of these statements.
5
Unified Grocers, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows – Unaudited
(dollars in thousands) |
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Thirty-Nine Weeks Ended |
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July 2, |
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June 27, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(8,638 |
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$ |
(14,332 |
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Less: Net loss from discontinued operations |
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— |
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(88 |
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Less: Gain (loss) on sale of discontinued operations |
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281 |
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(841 |
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Net loss from continuing operations |
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(8,919 |
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(13,403 |
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Adjustments to reconcile net loss to net cash provided (utilized) by operating activities: |
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Depreciation and amortization |
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22,966 |
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22,089 |
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Provision for doubtful accounts |
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535 |
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1,064 |
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Gain on sale of properties and equipment |
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(26 |
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(192 |
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Loss on early extinguishment of debt |
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— |
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3,200 |
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Loss on equity method investment |
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400 |
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— |
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(Increase) decrease in assets: |
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Accounts receivable |
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(4,036 |
) |
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(21,486 |
) |
Inventories |
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34,916 |
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(41,266 |
) |
Prepaid expenses and other current assets |
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999 |
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(1,511 |
) |
Increase (decrease) in liabilities: |
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Accounts payable |
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(22,025 |
) |
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44,297 |
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Accrued liabilities |
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(699 |
) |
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3,650 |
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Long-term liabilities, other |
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(7,145 |
) |
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(9,458 |
) |
Net cash provided (utilized) by continuing operating activities |
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16,966 |
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(13,016 |
) |
Net cash provided (utilized) by sale of discontinued operations |
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281 |
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(841 |
) |
Net cash provided (utilized) by continuing operating activities |
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17,247 |
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(13,857 |
) |
Net cash provided by discontinued operating activities |
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— |
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4,367 |
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Net cash provided (utilized) by operating activities |
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17,247 |
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(9,490 |
) |
Cash flows from investing activities: |
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Purchases of properties and equipment |
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(5,761 |
) |
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(7,199 |
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Purchases of securities and other investments |
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(60 |
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(10,000 |
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Proceeds from sales of securities and other investments |
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— |
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206 |
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Proceeds from sale of discontinued operations |
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26,222 |
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— |
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Origination of notes receivable |
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(1,503 |
) |
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(1,215 |
) |
Collection of notes receivable |
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3,152 |
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2,971 |
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Proceeds from sales of properties and equipment |
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26 |
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|
192 |
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Increase in other assets |
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(9,069 |
) |
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(12,301 |
) |
Net cash provided (utilized) by continuing investing activities |
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13,007 |
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(27,346 |
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Net cash utilized by discontinued operations |
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— |
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(2,894 |
) |
Net cash provided (utilized) by investing activities |
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13,007 |
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(30,240 |
) |
Cash flows from financing activities: |
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Net (repayments) borrowings under secured credit agreements |
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(11,400 |
) |
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20,500 |
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Borrowings under notes payable |
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644 |
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86,262 |
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Repayments of notes payable |
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(12,596 |
) |
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(54,500 |
) |
Payment of deferred financing fees |
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(86 |
) |
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(1,977 |
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Payment of debt extinguishment costs |
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— |
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(3,023 |
) |
Decrease in Members’ deposits and estimated patronage dividends |
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(756 |
) |
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(2,933 |
) |
Increase (decrease) in Members’ and Non-Members' deposits |
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1,948 |
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(965 |
) |
Decrease in receivable from sale of Class A Shares to Members, net |
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91 |
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|
97 |
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Repurchase of shares from Members |
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(8,650 |
) |
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(1,271 |
) |
Net cash (utilized) provided by financing activities |
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(30,805 |
) |
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|
42,190 |
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Net (decrease) increase in cash and cash equivalents from continuing operations |
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(551 |
) |
|
|
987 |
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Cash and cash equivalents at beginning of year |
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3,056 |
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|
1,207 |
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Cash and cash equivalents at end of period |
|
$ |
2,505 |
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$ |
2,194 |
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Supplemental disclosure of cash flow information: |
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Interest paid during the period |
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$ |
6,471 |
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$ |
6,409 |
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Income taxes paid during the period |
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$ |
82 |
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$ |
89 |
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Supplemental disclosure of non-cash items: |
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Capital leases |
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$ |
1,445 |
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$ |
721 |
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Write-off of unamortized deferred financing fees due to debt extinguishment |
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$ |
— |
|
|
$ |
177 |
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Loss on equity method investment |
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$ |
400 |
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|
$ |
— |
|
The accompanying notes are an integral part of these statements.
6
Unified Grocers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – UNAUDITED
1. |
BASIS OF PRESENTATION |
The consolidated condensed financial statements include the accounts of Unified Grocers, Inc. and all its subsidiaries (the “Company” or “Unified”). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended October 3, 2015 filed with the SEC. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
The consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim periods presented. The preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates.
The Company’s banking arrangements allow the Company to fund outstanding checks when presented for payment to the financial institutions utilized by the Company for disbursements. This cash management practice frequently results in total issued checks exceeding the available cash balance at a single financial institution. The Company’s policy is to record its cash disbursement accounts with a cash book overdraft in accounts payable. At July 2, 2016 and October 3, 2015, the Company had book overdrafts of $80.6 million and $88.1 million, respectively, classified in accounts payable and included in cash provided by operating activities.
2. |
Discontinued Operations |
On October 7, 2015 (the “Closing Date”), the Company completed the sale of all of the outstanding shares of the Company’s wholly owned subsidiary, Unified Grocers Insurance Services (“UGIS”), to AmTrust Financial Services, Inc. (“AmTrust” or the “Buyer”) pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and between the Company and AmTrust dated as of April 16, 2015. As of the Closing Date, UGIS owned all of the outstanding shares of the capital stock of Springfield Insurance Company (“SIC”) and Springfield Insurance Company Limited (Bermuda) (“SICL,” and collectively with UGIS and SIC, the “Acquired Companies”). For additional information, see Item 1.01. “Entry into a Material Definitive Agreement,” including Exhibit 99.1, “Stock Purchase Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of April 16, 2015” thereto, of the Company’s Current Report on Form 8-K, filed on April 22, 2015 and Item 2.01. “Completion of Acquisition or Disposition of Assets,” including Exhibit 99.2, “Master Services Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of October 7, 2015” thereto, of the Company’s Current Report on Form 8-K, filed on October 14, 2015. The Acquired Companies were previously reported by the Company as a segment identified as the Insurance Segment (“Insurance”).
The estimated purchase price received for the Acquired Companies was approximately $26.2 million in cash proceeds, representing an agreed-upon discount to the Tangible Book Value (“TBV”), which was calculated as defined in the Stock Purchase Agreement. In May 2016, the Buyer delivered to the Company a final closing statement, including its calculation of the TBV as of the Closing Date. The final purchase price was adjusted to reflect an increase in the purchase price of $0.4 million between the estimated TBV as of the Closing Date and the actual TBV as of the Closing Date. The Company utilized the net proceeds of this transaction to repay certain indebtedness.
At the Closing Date, AmTrust and the Company also entered into a Master Services Agreement for a term of five (5) years, pursuant to which, among other things, each party agreed to provide the other with certain transition services relating to the business of the Acquired Companies. AmTrust has also agreed to pay the Company an annual payment following each of the first five years (ended December 31) of the term of the Master Services Agreement (each, an “Earn-Out Payment”). Each Earn-Out Payment will be equal to four and one-half percent (4.5%) of gross written premium in respect of each of these first five years. For purposes of such payments, gross written premium will be based on premiums written on or attributable to all insurance policies purchased during the applicable year by Members or customers of the Company, issued by SIC or SICL or any other affiliate of AmTrust, to the extent that such policies were purchased from or through UGIS or by a different sales channel if there is a change in UGIS.
7
Based on agreed upon terms with AmTrust, the Company recorded a $1.3 million impairment on the Company’s investment in the Acquired Companies in its fiscal year ended October 3, 2015. Additionally, the Company wrote-off $0.7 million in expenses related to an investigation of issues relating to the setting of case reserves and management of claims by the Company’s former insurance subsidiaries and related matters (the “Audit Committee Investigation”) and incurred $1.2 million in selling costs related to the Acquired Companies. The Acquired Companies incurred an operating loss of $3.7 million for the fiscal year ended October 3, 2015. The Company incurred approximately $0.2 million in additional expenses attributable to the Audit Committee Investigation during the thirty-nine weeks ended July 2, 2016, and such expenses are included in earnings (loss) from discontinued operations in our consolidated condensed statements of earnings (loss).
The Company’s historical financials have been revised to present the operating results of the Acquired Companies as discontinued operations.
Summarized results of the discontinued operations are as follows for the thirteen and thirty-nine weeks ended July 2, 2016, and June 27, 2015:
(dollars in thousands) |
|
|
|
|
|
|
||||||||||
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
||||||||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
||||
Revenue |
|
$ |
— |
|
|
$ |
2,627 |
|
|
$ |
— |
|
|
$ |
9,428 |
|
Earnings (loss) from discontinued operations |
|
|
102 |
|
|
|
(516 |
) |
|
|
281 |
|
|
|
(1,021 |
) |
(Provision) benefit for income taxes |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
92 |
|
Earnings (loss) from discontinued operations net of tax |
|
$ |
102 |
|
|
$ |
(518 |
) |
|
$ |
281 |
|
|
|
(929 |
) |
The operating results of the Acquired Companies were historically reported as the results of operations included in the Insurance segment.
Assets and liabilities identifiable within the Acquired Companies are reported as “Assets of discontinued operations – current” and “Liabilities of discontinued operations – current,” respectively, in the Company’s consolidated condensed balance sheets. The major classes of assets and liabilities of the discontinued operations as of July 2, 2016 and October 3, 2015 are as follows:
(dollars in thousands) |
|
|
|
|
|
|
||
|
|
July 2, 2016 |
|
|
October 3, 2015 |
|
||
Cash |
|
$ |
— |
|
|
$ |
8,428 |
|
Accounts receivable, net of allowance for bad debt |
|
|
— |
|
|
|
2,715 |
|
Prepaid expenses |
|
|
— |
|
|
|
676 |
|
Property, plant & equipment, net |
|
|
— |
|
|
|
1,351 |
|
Investments |
|
|
— |
|
|
|
85,052 |
|
Other assets |
|
|
— |
|
|
|
27,682 |
|
Assets of discontinued operations – current |
|
|
— |
|
|
$ |
125,904 |
|
Accounts payable |
|
$ |
— |
|
|
$ |
592 |
|
Accrued liabilities |
|
|
— |
|
|
$ |
97,619 |
|
Other reserves |
|
|
— |
|
|
|
1,471 |
|
Liabilities of discontinued operations – current |
|
$ |
— |
|
|
$ |
99,682 |
|
3. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
The Company evaluates the fair value of its assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and ASC Topic 825, “Financial Instruments.”
Management has evaluated its assets and liabilities valued at fair value as follows:
|
· |
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
· |
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable. These inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
8
The Company records marketable securities at fair value in accordance with ASC Topic 320, “Investments – Debt and Equity Securities.” The Company’s Wholesale Distribution segment holds insurance contracts and mutual funds valued at fair value in support of certain employee benefits. See Note 4 for further discussion on investments.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value (these values represent an approximation of possible value and may never actually be realized):
Cash and cash equivalents. The carrying amount approximates fair value due to the short maturity of these instruments.
Accounts receivable and notes receivable. The carrying amount of accounts receivable approximates its fair value due to its short-term maturity. Except as discussed below, the carrying amount of notes receivable approximates its fair value based principally on the underlying interest rates and terms, maturities, collateral and credit status of the receivables and after consideration of recorded allowances.
Concentration of credit risk. The Company’s largest customer, Cash & Carry Stores, LLC, a wholly-owned subsidiary of Smart & Final, Inc., a Non-Member customer, and the ten largest Member and Non-Member customers (including Cash & Carry Stores, LLC) constituted approximately 16% and 49%, respectively, of total net sales for the thirty-nine week period ended July 2, 2016. The Company’s ten customers with the largest accounts receivable balances accounted for approximately 44% and 43% of total accounts receivable at July 2, 2016 and at October 3, 2015, respectively. Management believes that receivables are well diversified and that the allowances for doubtful accounts are sufficient to absorb estimated losses.
Investments. Generally, the fair values for investments are readily determinable based on actively traded securities in the marketplace. Investments that are not actively traded are valued based upon inputs including quoted prices for identical or similar assets. Equity securities that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company regularly evaluates securities carried at cost to determine whether there has been any diminution in value that is deemed to be other than temporary and adjusts the value accordingly.
The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of July 2, 2016:
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Mutual funds |
|
$ |
11,458 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,458 |
|
Total |
|
$ |
11,458 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,458 |
|
The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of October 3, 2015:
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Mutual funds |
|
$ |
12,546 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,546 |
|
Total |
|
$ |
12,546 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,546 |
|
Mutual funds are valued by the Company based on information received from a third party. These assets are valued based on quoted prices in active markets (Level 1 inputs). As of July 2, 2016 and October 3, 2015, respectively, $11.5 million and $12.5 million of mutual funds, held in rabbi trusts to provide for employee benefit obligations, are included in other assets in the Company’s consolidated condensed balance sheets. For assets traded in active markets, the assets are valued at quoted bond market prices (Level 1 inputs). For assets traded in inactive markets, the service’s pricing methodology uses observable inputs (such as bid/ask quotes) for identical or similar assets. Assets considered to be similar will have similar characteristics, such as: duration, volatility, prepayment speed, interest rates, yield curves, and/or risk profile and other market corroborated inputs (Level 2 inputs). The Company determines the classification of financial asset groups within the fair value hierarchy based on the lowest level of input into each group’s asset valuation.
The Company did not have any significant transfers into or out of Levels 1 and 2 during the thirty-nine week period ended July 2, 2016.
9
Notes payable. The fair values of borrowings under the Company’s credit facilities are estimated to approximate their carrying amounts due to the short maturities of those obligations. The fair values for other notes payable are based primarily on rates currently available to the Company for debt with similar terms and remaining maturities.
The fair value of notes payable was $259.9 million and $278.8 million compared to their carrying value of $256.6 million and $278.5 million at July 2, 2016 and October 3, 2015, respectively. These fair values were based on estimates of market conditions, estimates using present value and risks existing at that time (Level 2 inputs).
4. |
INVESTMENTS |
The amortized cost and fair value of investments are as follows:
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
July 2, 2016 |
|
Amortized Cost |
|
Gross Unrealized Gains |
|
Gross Unrealized Losses |
|
Fair Value |
|
|
Common stock, at cost |
|
|
|
|
|
|
|
$ |
12,729 |
|
Total investments |
|
|
|
|
|
|
|
$ |
12,729 |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
October 3, 2015 |
|
Amortized Cost |
|
Gross Unrealized Gains |
|
Gross Unrealized Losses |
|
Fair Value |
|
|
Common stock, at cost |
|
|
|
|
|
|
|
$ |
13,069 |
|
Total investments |
|
|
|
|
|
|
|
$ |
13,069 |
|
During the interim period ended July 2, 2016 and the fiscal year ended October 3, 2015, the Company did not hold any trading or held-to-maturity securities.
Net investment income, which is included in net sales, is summarized as follows:
(dollars in thousands) |
|
|||||||||||||||
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
||||||||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
||||
Dividend Income |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Less: investment expenses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Equity investments held by the Company that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company evaluated its equity investments for impairment as of July 2, 2016, and the Company did not consider any of these equity investments to be impaired.
The Company held investments in Western Family Holding Company (also doing business as Western Family Foods Inc.) (“Western Family”) common stock of $8.6 million and $9.0 million at July 2, 2016 and October 3, 2015, respectively. Western Family is a privately held company located in Oregon that provides procurement, quality assurance, packaging and other services exclusively for its member-owners from which the Company purchases food and general merchandise products. The investment represents approximately a 17.2% ownership interest at both July 2, 2016 and October 3, 2015. The Company’s ownership percentage in Western Family is based, in part, on the volume of purchases transacted with Western Family. The investment is accounted for using the equity method of accounting.
In June 2016, Western Family reached an agreement with Topco Associates, LLC (“Topco”) authorizing Topco to procure, manage and market three of Western Family’s private label brands, including the Western Family and Natural Directions premium corporate brands that are sold through the Company. Western Family will continue to own its private label brands and Unified will continue its ownership in Western Family. Western Family announced that the transition of procurement and marketing to Topco will take several months, with all orders and invoices continuing through Western Family until that time. When the transition of the products is complete, Western Family’s headquarters in Oregon will close and Western Family will lay off the majority of its workforce. In conjunction with its agreement with Topco, Western Family provided its investors an estimate of the anticipated costs for the closure of its headquarters, and the Company has accordingly reduced its investment in Western Family by its proportionate share of such costs in the amount of $0.4 million.
10
As discussed in Part I, Item 1, “Business – Products – Corporate Brands” of our Annual Report on Form 10-K for the year ended October 3, 2015, the Company currently sells products under premium and value-oriented corporate brands. During fiscal 2016, the Company joined Topco, a cooperative, concurrent with an investment of $60 thousand in Topco’s capital stock. Topco is a privately held company that provides procurement, quality assurance, packaging and other services exclusively for its member-owners, which include supermarket retailers, food wholesalers and foodservice companies. Commencing in the fourth quarter of fiscal 2016, the Company will begin transitioning to Topco as its primary supplier for the Company’s Springfield premium corporate brand and its value-oriented Special Value corporate brand products. In addition, Topco will serve as the Company’s sole-source supplier for general merchandise and health and beauty care products under its TopCare label.
The Company’s wholly-owned finance subsidiary, Grocers Capital Company (“GCC”), has an investment in National Consumer Cooperative Bank (“NCB”), which operates as a cooperative, and therefore, its participants are required to own its Class B common stock. The investment in the Class B common stock of NCB, accounted for using the cost method of accounting, aggregated $4.1 million at both July 2, 2016 and October 3, 2015. The Company recognized no dividend income from NCB for the thirty-nine weeks ended July 2, 2016 and June 27, 2015.
5. |
SEGMENT INFORMATION |
Unified is a retailer-owned, grocery wholesale cooperative serving supermarket, specialty and convenience store operators located primarily in the western United States and the Pacific Rim. The Company’s customers range in size from single store operators to regional supermarket chains. The Company sells a wide variety of products typically found in supermarkets. The Company’s customers are comprised of its owners (“Members”) and non-owners (“Non-Members”). Our focus is on our Members, but we also do business with Non-Member customers. For the thirty-nine weeks ended July 2, 2016, approximately 69% of our net sales were to Members. The Company sells products through Unified, including its specialty food division, and through its international sales subsidiary. The Company reports all product sales in its Wholesale Distribution segment. The Company also provides support services, including financing, to its customers through the Wholesale Distribution segment and through separate subsidiaries. Finance activities are grouped within Unified’s All Other business activities. The availability of specific products and services may vary by geographic region.
Management identifies segments based on the information monitored by the Company’s chief operating decision maker (the Chief Executive Officer) to manage the business and, accordingly, has identified the following reportable segments:
· |
The Wholesale Distribution segment includes the results of operations from the sale of groceries and general merchandise products to both Members and Non-Members, including a broad range of branded and corporate brand products in nearly all the categories found in a typical supermarket, including dry grocery, frozen food, deli, meat, dairy, eggs, produce, bakery, ethnic, gourmet, specialty foods, natural and organic, general merchandise and health and beauty care products. Support services (other than financing), including merchandising, retail pricing, advertising, promotional planning, retail technology, equipment purchasing and real estate services, are reported in the Wholesale Distribution segment. As of, and for the thirty-nine weeks ended, July 2, 2016, the Wholesale Distribution segment collectively represented approximately 97% of the Company’s total assets and nearly 100% of total net sales. |
|
Non-perishable products consist primarily of dry grocery, frozen food, deli, ethnic, gourmet, specialty foods, natural and organic, general merchandise and health and beauty care products. They also include (1) retail support services and (2) products and shipping services provided to Non-Member customers through the Company’s wholly-owned subsidiary, Unified International, Inc. Perishable products consist primarily of service deli, service bakery, meat, eggs, produce, bakery and dairy products. Net sales within the Wholesale Distribution segment include $632.2 million and $672.5 million, or 66.7% and 64.8% of total Wholesale Distribution segment net sales, for the thirteen weeks ended July 2, 2016 and June 27, 2015, respectively, attributable to sales of non-perishable products, and $315.8 million and $365.8 million, or 33.3% and 35.2% of total Wholesale Distribution segment net sales, for the thirteen weeks ended July 2, 2016 and June 27, 2015, respectively, attributable to sales of perishable products. Net sales within the Wholesale Distribution segment include $1.904 billion and $1.882 billion, or 67.2% and 64.6% of total Wholesale Distribution segment net sales, for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively, attributable to sales of non-perishable products, and $0.931 billion and $1.030 billion, or 32.8% and 35.4% of total Wholesale Distribution segment net sales, for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively, attributable to sales of perishable products. Wholesale Distribution segment net sales also include revenues attributable to the Company’s retail support services (other than financing), which comprised less than 1% of total Wholesale Distribution segment net sales, for each of the foregoing respective periods. |
11
by management to assess our operating performance, was $973.3 million and $1.069 billion for the thirteen weeks ended July 2, 2016 and June 27, 2015, respectively, and $2.913 billion and $2.995 billion for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively. |
· |
The Company’s former Insurance segment included the results of operations for the Acquired Companies (Unified Grocers Insurance Services and the Company’s two insurance subsidiaries, Springfield Insurance Company and Springfield Insurance Company, Limited). As of June 27, 2015, the Company’s discontinued insurance operations collectively accounted for approximately 14% of total assets. |
The All Other category includes the results of operations for the Company’s other support businesses, including its finance subsidiary, Grocers Capital Company, whose services are provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. As of, and for the thirty-nine weeks ended, July 2, 2016, the All Other category collectively accounted for approximately 3% of the Company’s total assets, and less than 1% of total net sales.
Information about the Company’s operating segments is summarized below.
(dollars in thousands) |
|
|||||||||||||||
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
||||||||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale distribution: Gross billings |
|
$ |
973,306 |
|
|
$ |
1,069,320 |
|
|
$ |
2,912,987 |
|
|
$ |
2,995,081 |
|
Less: Gross billings through vendor direct arrangements |
|
|
(25,283 |
) |
|
|
(30,972 |
) |
|
|
(77,622 |
) |
|
|
(83,110 |
) |
Wholesale distribution: Net sales |
|
|
948,023 |
|
|
|
1,038,348 |
|
|
|
2,835,365 |
|
|
|
2,911,971 |
|
All other |
|
|
365 |
|
|
|
379 |
|
|
|
1,177 |
|
|
|
1,159 |
|
Inter-segment eliminations |
|
|
(74 |
) |
|
|
(112 |
) |
|
|
(294 |
) |
|
|
(352 |
) |
Total net sales |
|
$ |
948,314 |
|
|
$ |
1,038,615 |
|
|
$ |
2,836,248 |
|
|
$ |
2,912,778 |
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale distribution |
|
$ |
2,121 |
|
|
$ |
2,158 |
|
|
$ |
4,759 |
|
|
$ |
1,752 |
|
All other |
|
|
133 |
|
|
|
109 |
|
|
|
410 |
|
|
|
338 |
|
Total operating income |
|
|
2,254 |
|
|
|
2,267 |
|
|
|
5,169 |
|
|
|
2,090 |
|
Interest expense |
|
|
(2,578 |
) |
|
|
(2,477 |
) |
|
|
(7,557 |
) |
|
|
(7,508 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,200 |
) |
Estimated patronage dividends |
|
|
(1,848 |
) |
|
|
(1,636 |
) |
|
|
(6,489 |
) |
|
|
(4,492 |
) |
Income tax provision |
|
|
(14 |
) |
|
|
(66 |
) |
|
|
(42 |
) |
|
|
(293 |
) |
Net loss from continuing operations |
|
$ |
(2,186 |
) |
|
$ |
(1,912 |
) |
|
$ |
(8,919 |
) |
|
$ |
(13,403 |
) |
Earnings (loss) from discontinued operations, net of tax |
|
|
102 |
|
|
|
(518 |
) |
|
|
281 |
|
|
|
(929 |
) |
Net loss |
|
$ |
(2,084 |
) |
|
$ |
(2,430 |
) |
|
$ |
(8,638 |
) |
|
$ |
(14,332 |
) |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale distribution |
|
$ |
7,471 |
|
|
$ |
7,589 |
|
|
$ |
22,905 |
|
|
$ |
22,028 |
|
All other |
|
|
21 |
|
|
|
21 |
|
|
|
61 |
|
|
|
61 |
|
Total depreciation and amortization |
|
$ |
7,492 |
|
|
$ |
7,610 |
|
|
$ |
22,966 |
|
|
$ |
22,089 |
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale distribution |
|
$ |
2,308 |
|
|
$ |
3,945 |
|
|
$ |
5,761 |
|
|
$ |
7,199 |
|
All other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total capital expenditures |
|
$ |
2,308 |
|
|
$ |
3,945 |
|
|
$ |
5,761 |
|
|
$ |
7,199 |
|
Identifiable assets at July 2, 2016 and June 27, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale distribution |
|
$ |
772,786 |
|
|
$ |
832,992 |
|
|
$ |
772,786 |
|
|
$ |
832,992 |
|
Discontinued operations |
|
|
— |
|
|
|
137,371 |
|
|
|
— |
|
|
|
137,371 |
|
All other |
|
|
24,439 |
|
|
|
25,960 |
|
|
|
24,439 |
|
|
|
25,960 |
|
Total identifiable assets |
|
$ |
797,225 |
|
|
$ |
996,323 |
|
|
$ |
797,225 |
|
|
$ |
996,323 |
|
6. |
NOTES PAYABLE |
The Company is party to an Amended and Restated Credit Agreement dated as of June 28, 2013, as amended in fiscal 2014 and fiscal 2015 (as so amended, the “Credit Agreement”), among the Company, the lenders party thereto, and Wells Fargo Bank, National Association (“N.A.”), as administrative agent (“Administrative Agent”). See Note 7 to “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015 for a full description of the Credit Agreement and the
12
amendments thereto. On December 28, 2015, the Company entered into a consent and waiver (the “Consent”) whereby the Administrative Agent and the Lenders (as defined in the Credit Agreement) consented to (i) the extension to June 30, 2016 of the deadline for delivery of the annual financial statements and associated certifications and information required pursuant to the Credit Agreement and (ii) the extension to January 31, 2016 of the deadline for delivery of annual financial projections required pursuant to the Credit Agreement. The financial projections were delivered prior to the January 31, 2016 deadline. The annual financial statements and associated required certifications were delivered to the Company’s Administrative Agent and the Lenders on June 1, 2016, who confirmed that the Company is now in compliance with the reporting requirements of the Credit Agreement.
The Company’s outstanding revolver borrowings under the Credit Agreement decreased to $150.4 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.48% per annum) from $161.8 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 1.99% per annum). The Company’s outstanding FILO borrowings under the Credit Agreement were $17.2 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 3.71% per annum) and $20.7 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 3.20% per annum). The Company’s outstanding term loan borrowings under the Credit Agreement were $85.0 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.43% per annum) and $92.5 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 2.20% per annum).
Subsidiary Financing Arrangement
On December 28, 2015, GCC received consent from California Bank & Trust, as arranger and administrative agent for the Amended and Restated Loan and Security Agreement, dated as of September 26, 2014 as amended by Amendment Number One dated as of June 26, 2015 (as so amended, the “GCC Loan Agreement”), to extend the due date of the covenant requirement to deliver consolidated audited financial statements of the Company to June 30, 2016. The consolidated audited financial statements of the Company and associated certifications have been delivered to California Bank & Trust, which has confirmed that the Company is now in compliance with the reporting requirements of the GCC Loan Agreement.
GCC had no revolving loan borrowings outstanding at July 2, 2016 and October 3, 2015.
7. |
PENSION AND OTHER POSTRETIREMENT BENEFITS |
The Company sponsors a cash balance plan (“Unified Cash Balance Plan”). The Unified Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Participants’ balances receive an annual interest credit, currently tied to the 30-year Treasury rate that is in effect the previous November, but in no event shall the rate be less than 5%. Benefits under the Unified Cash Balance Plan are provided through a trust. Prior to the end of fiscal 2014, the Company amended the Unified Cash Balance Plan to close the plan to new entrants effective December 31, 2014. In addition, the plan was frozen at December 31, 2014 such that current participants will no longer accrue salary-based service credits based on years of service with the Company and pensionable compensation after that date. The annual interest credit as described above will continue for participants active in the plan as of December 31, 2014. Selected groups of vested terminated participants were each given one-time opportunities to elect a lump sum distribution of their benefits from the plan’s assets or immediate receipt of an annuity in December 2015 and December 2014. As a result, benefit payments of $8.7 million and $7.9 million, respectively, were distributed from the plan’s assets to those participants who elected such option prior to the end of the Company’s first quarters ended January 2, 2016 and December 27, 2014.
The Company also sponsors an Executive Salary Protection Plan III (“ESPPIII”) for the executive officers of the Company that provides supplemental post-termination retirement income based on each participant's salary and years of service as an officer of the Company. This plan was amended in December 2012 to close the plan to new entrants as of September 30, 2012. This plan was replaced in fiscal 2013 with the Company’s Supplemental Executive Retirement Plan (see discussion below). The Company has informally funded its obligation to plan participants in a rabbi trust, comprised primarily of life insurance policies reported at cash surrender value and mutual fund assets consisting of various publicly-traded mutual funds reported at estimated fair value based on quoted market prices. In accordance with ASC Topic 710, “Compensation – General,” the assets and liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. In addition, all earnings and expenses of the rabbi trust are reported in the Company’s consolidated condensed statements of earnings (loss). The cash surrender value of such life insurance policies aggregated to $21.5 million and $20.8 million at July 2, 2016 and October 3, 2015, respectively, and are included in other assets in the Company’s consolidated condensed balance sheets. Mutual funds reported at their estimated fair value of $7.2 million and $10.5 million at July 2, 2016 and October 3, 2015, respectively, are included in other assets in the Company’s consolidated condensed balance sheets. The assets held in the rabbi trust are not available for general corporate purposes. The rabbi trust is subject to the Company’s creditors’ claims in the event of its insolvency. The trust assets are excluded from ESPPIII plan assets as they do not qualify as plan assets under ASC Topic 715, “Compensation
13
– Retirement Benefits.” The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $38.0 million and $40.7 million at July 2, 2016 and October 3, 2015, respectively, is recorded in long-term liabilities, other in the Company’s consolidated condensed balance sheets.
The Company sponsors other postretirement benefit plans that provide certain medical coverage to retired non-union employees and officers and provide unused sick leave benefits for certain eligible union employees. Those plans are not funded.
The components of net periodic cost for pension and other postretirement benefits for the respective thirteen weeks and thirty-nine weeks ended July 2, 2016 and June 27, 2015 consist of the following:
(dollars in thousands) |
|
|||||||||||||||||||||||||||||||
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
||||||||||||||||||||||||||
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
||||||||||||||||||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
||||||||
Service cost |
|
$ |
95 |
|
|
$ |
247 |
|
|
$ |
284 |
|
|
$ |
2,030 |
|
|
$ |
9 |
|
|
$ |
14 |
|
|
$ |
26 |
|
|
$ |
42 |
|
Interest cost |
|
|
2,566 |
|
|
|
3,030 |
|
|
|
7,697 |
|
|
|
9,090 |
|
|
|
272 |
|
|
|
303 |
|
|
|
815 |
|
|
|
909 |
|
Expected return on plan assets |
|
|
(3,643 |
) |
|
|
(4,138 |
) |
|
|
(10,929 |
) |
|
|
(12,414 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of prior service (credit) cost |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
(5 |
) |
|
|
(21 |
) |
|
|
(313 |
) |
|
|
(2,081 |
) |
|
|
(937 |
) |
|
|
(6,243 |
) |
Recognized actuarial loss |
|
|
516 |
|
|
|
357 |
|
|
|
1,547 |
|
|
|
1,071 |
|
|
|
(129 |
) |
|
|
26 |
|
|
|
(387 |
) |
|
|
78 |
|
Net periodic benefit cost (income) |
|
$ |
(468 |
) |
|
$ |
(511 |
) |
|
$ |
(1,406 |
) |
|
$ |
(244 |
) |
|
$ |
(161 |
) |
|
$ |
(1,738 |
) |
|
$ |
(483 |
) |
|
$ |
(5,214 |
) |
The Company’s funding policy is to make contributions to the Unified Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. During August 2014, legislation to extend pension funding relief was enacted as part of the Highway and Transportation Funding Act of 2014 (“HATFA”). As a result, the Company expects to make no estimated minimum contributions to the Unified Cash Balance Plan during fiscal 2016 for the 2015 plan year, and there will be no quarterly contributions required for the 2016 plan year. At its discretion, the Company may contribute in excess of the minimum (zero) requirement. Additional contributions, if any, will be based, in part, on future actuarial funding calculations and the performance of plan investments.
Additionally, the Company anticipates making benefit payments of $4.0 million to participants in the ESPPIII for the 2016 plan year. The Company made benefit payments of $3.8 million to participants in the ESPPIII during the thirty-nine weeks ended July 2, 2016 for the 2016 plan year.
The Company sponsors a supplemental retirement plan for a select group of management or highly compensated employees that are at the Vice President level and above of the Company under the Unified Grocers, Inc. Supplemental Executive Retirement Plan (the “SERP”). This plan was established to replace the ESPPIII, which has been frozen. The SERP provides participating officers with supplemental retirement income in addition to the benefits provided under the Company’s Cash Balance and 401(k) plans.
The SERP is a non-qualified defined contribution type plan under which benefits are derived based on a notional account balance to be funded by the Company for each participating officer. The account balance will be credited each year with a Company contribution based on the officer’s compensation, calculated as base salary plus bonus, earned during a fiscal year and the officer’s executive level at the end of the fiscal year. Plan participants may select from a variety of investment options (referred to as “Measurement Funds” in the plan document) concerning how the contributions are hypothetically invested. Assets of the SERP (i.e., the participants’ account balances) will not be physically invested in the investments selected by the participants; rather, the Measurement Funds are utilized for the purpose of debiting or crediting additional amounts to each participant’s account. The Company informally funds its obligation to plan participants in a rabbi trust, comprised of mutual fund assets consisting of various publicly-traded mutual funds reported at estimated fair value based on quoted market prices. Mutual funds reported at their estimated fair value of $3.0 million and $2.0 million at July 2, 2016 and October 3, 2015, respectively, are included in other assets in the Company’s consolidated condensed balance sheets. The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $4.4 million and $3.2 million at July 2, 2016 and October 3, 2015, respectively, is recorded in long-term liabilities, other in the Company’s consolidated condensed balance sheets.
The SERP is accounted for pursuant to FASB ASC section 715-70, “Compensation – Retirement Benefits – Defined Contribution Plans” (“ASC 715-70”). SERP participants are credited with a contribution to an account and will receive,
14
upon separation, a benefit based upon the vested amount accrued in their account, which includes the Company’s contributions plus or minus the increase or decrease in the fair market value of the hypothetical investments (Measurement Funds) selected by the participant. ASC 715-70 requires companies to record, on a periodic basis, that portion of a company’s contribution earned during the period by the participants (the “Expense”). The Company is accruing the Expense under the assumption that all participants in the SERP will achieve full vesting (five years of service). The related benefit expense was $1.3 million and $1.0 million for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively.
8. |
CONTINGENCIES |
The Company is a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company believes the outcome of these matters will not result in a material adverse effect on its financial condition, results of operations or cash flows.
9. |
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS) |
The balance and components of the change in accumulated other comprehensive earnings (loss), net of taxes, are as follows:
(dollars in thousands) |
|
|||||||||||
|
|
Unrealized Net Holding Gain (Loss) on Investments |
|
|
Defined Benefit Pension Plans and Other Postretirement Benefit Plans Items |
|
|
Total |
|
|||
Beginning balance, October 3, 2015 |
|
$ |
(533 |
) |
|
$ |
(71,697 |
) |
|
$ |
(72,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss) before reclassifications |
|
|
427 |
|
|
|
— |
|
|
|
427 |
|
Reclassification adjustment for gains (losses) included in net earnings (loss) |
|
|
13 |
|
|
|
141 |
|
|
|
154 |
|
Net current period other comprehensive (loss) gain |
|
|
440 |
|
|
|
141 |
|
|
|
581 |
|
Ending balance, July 2, 2016 |
|
$ |
(93 |
) |
|
$ |
(71,556 |
) |
|
$ |
(71,649 |
) |
The reclassifications out of accumulated other comprehensive earnings (loss) for the thirteen weeks ended July 2, 2016 and June 27, 2015 were as follows:
(dollars in thousands) |
||||||||||
|
|
Amount Reclassified from Accumulated Other Comprehensive Earnings (Loss) |
|
|
Affected Line Item in the Consolidated Condensed Statements of Earnings (Loss) |
|||||
|
|
Thirteen Weeks Ended |
|
|
|
|||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
|
||
Unrealized net holding gain (loss) on investments: |
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) – Wholesale Distribution segment |
|
$ |
20 |
|
|
$ |
18 |
|
|
Distribution, selling and administrative expenses |
|
|
|
20 |
|
|
|
18 |
|
|
Earnings (loss) before income taxes |
|
|
|
(7 |
) |
|
|
(7 |
) |
|
Income taxes |
|
|
$ |
13 |
|
|
$ |
11 |
|
|
Net earnings (loss) |
Defined benefit pension plans and other postretirement benefit plans items: |
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service credits |
|
$ |
314 |
|
|
$ |
2,088 |
|
|
(a) |
Amortization of actuarial losses |
|
|
(386 |
) |
|
|
(384 |
) |
|
(a) |
|
|
|
(72 |
) |
|
|
1,704 |
|
|
Earnings (loss) before income taxes |
|
|
|
25 |
|
|
|
(602 |
) |
|
Income taxes |
|
|
$ |
(47 |
) |
|
$ |
1,102 |
|
|
Net earnings (loss) |
Total reclassifications for the period |
|
$ |
(34 |
) |
|
$ |
1,113 |
|
|
Net earnings (loss) |
15
The reclassifications out of accumulated other comprehensive earnings (loss) for the thirty-nine weeks ended July 2, 2016 and June 27, 2015 were as follows:
(dollars in thousands) |
||||||||||
|
|
Amount Reclassified from Accumulated Other Comprehensive Earnings (Loss) |
|
|
Affected Line Item in the Consolidated Condensed Statements of Earnings (Loss) |
|||||
|
|
Thirty-Nine Weeks Ended |
|
|
|
|||||
|
|
July 2, 2016 |
|
|
June 27, 2015 |
|
|
|
||
Unrealized net holding gain (loss) on investments: |
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) – Wholesale Distribution segment |
|
$ |
20 |
|
|
$ |
(18 |
) |
|
Distribution, selling and administrative expenses |
|
|
|
20 |
|
|
|
(18 |
) |
|
Earnings (loss) before income taxes |
|
|
|
(7 |
) |
|
|
6 |
|
|
Income taxes |
|
|
$ |
13 |
|
|
$ |
(12 |
) |
|
Net earnings (loss) |
Defined benefit pension plans and other postretirement benefit plans items: |
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service credits |
|
$ |
942 |
|
|
$ |
6,264 |
|
|
(a) |
Amortization of actuarial losses |
|
|
(1,160 |
) |
|
|
(1,150 |
) |
|
(a) |
|
|
|
(218 |
) |
|
|
5,114 |
|
|
Earnings (loss) before income taxes |
|
|
|
77 |
|
|
|
(1,806 |
) |
|
Income taxes |
|
|
$ |
(141 |
) |
|
$ |
3,308 |
|
|
Net earnings (loss) |
Total reclassifications for the period |
|
$ |
(128 |
) |
|
$ |
3,296 |
|
|
Net earnings (loss) |
(a) |
These accumulated other comprehensive earnings (loss) components are included in the computation of net periodic benefit cost for pension and postretirement benefit plans. See Note 7, “Pension and Other Postretirement Benefits” for further information. |
10. |
RELATED PARTY TRANSACTIONS |
Members affiliated with directors of the Company make purchases of merchandise from the Company. Such Members may enter into loan agreements, lease guarantees and subleases and receive benefits and services that are of the type generally offered by the Company to similarly situated eligible Members. Management believes such transactions are on terms that are generally consistent with terms available to other Members similarly situated.
During the course of its business, the Company enters into individually negotiated supply agreements with its Members. These agreements typically require the Member to purchase certain agreed amounts of its merchandise requirements from the Company and obligate the Company to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery.
Effective March 22, 2016, the Company entered into a commitment with Jon’s Markets, a Member affiliated with John Berberian, a Unified Member-Director, to fund a twenty-six week inventory loan for $500,000. Funding for the loan occurred on May 16, 2016. During the third quarter of fiscal 2016, Jon’s Markets also extended a lease agreement for a store location, subleased through the Company, until 2021. In addition, we renewed supply agreements with Super Center Concepts, a Member affiliated with Mimi Song, a Unified Member-Director and Yucaipa Trading Co., a Member affiliated with Jay McCormack, a Unified Member-Director, which were extended into 2019 and 2021, respectively.
As of the date of this report, other than as indicated above, there have been no material changes to the related party transactions disclosed in Note 20 to “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015.
16
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” (“ASU No. 2016-13”). ASU No. 2016-13 requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by using a valuation account to deduct credit loss allowances from the amortized cost basis of the financial asset(s). In addition, credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU No. 2016-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Early adoption of ASU No. 2016-13 is permitted. The Company will adopt ASU No. 2016-13 commencing in the first quarter of fiscal 2021. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). The principal objective of ASU No. 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU No. 2016-02 continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than twelve months. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of ASU No. 2016-02 is permitted. The Company will adopt ASU No. 2016-02 commencing in the first quarter of fiscal 2020. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”). The principal objective of ASU No. 2016-01 is to improve the reporting of financial instruments in order to provide users of financial statements with more decision-useful information. ASU No. 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The amendment also affects the presentation and disclosure requirements for financial instruments. ASU No. 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU No. 2016-01 commencing in the first quarter of fiscal 2019. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which changes how deferred taxes are classified on organizations’ balance sheets. ASU No. 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company will adopt ASU No. 2015-17 commencing in the first quarter of fiscal 2018. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures.
In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting – Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965) – (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient” (“ASU No. 2015-12”). ASU No. 2015-12 covers three distinct items. Item I removes the requirement to disclose fully benefit-responsive investment contracts at their fair value with a reconciliation to their contract value. A fully benefit-responsive investment contract’s relevant measure is the contract amount as that is the amount a participant would receive upon disbursement. Item II eliminates the current requirement to disclose (1) individual investments that represent 5% or more of net assets available for benefits and (2) the net appreciation or depreciation for investments by general type for investments that are participant-directed or non-participant directed investments. Companies are still required to disclose the net appreciation or depreciation of investments in the aggregate for the period, but are no longer required to present the information disaggregated by general type. Item III amends each of the above topics to allow a practical expedient for measurement of plan assets on a month-end date that is nearest to the Company’s fiscal year-end. ASU No. 2015-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective application is required for items I and II; however, only prospective application is allowed for item III. Early adoption of ASU No. 2015-12 is permitted. The Company adopted ASU No. 2015-12 beginning with the Company’s fiscal year-end 2015. ASU No. 2015-12 did not have an impact on the Company’s financial statements and had a minimal impact on the related footnote disclosures.
17
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) – Simplifying the Measurement of Inventory” (“ASU No. 2015-11”). ASU No. 2015-11 requires entities to measure most inventory at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” ASU No. 2015-11 will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). No other changes were made to the current guidance on inventory measurement. ASU No. 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company will adopt ASU No. 2015-11 commencing in the first quarter of fiscal 2018. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures.
In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU No. 2015-07”). ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient and instead requires disclosure of sufficient information about these investments to permit reconciliation of the fair value of investments categorized within the fair value hierarchy to the investments presented in the consolidated balance sheet. ASU No. 2015-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective application is required. Early application of ASU No. 2015-07 is permitted. The Company anticipates that it will elect early adoption of ASU No. 2015-07 coincident with the Company’s fiscal year end 2016. Other than the reduction of certain disclosures for its defined benefit plan investments that use the net asset value per share practical expedient, the Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-04, “Compensation – Retirement Benefits (Topic 715) – Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets” (“ASU No. 2015-04”). ASU No. 2015-04 provides an entity whose fiscal year does not coincide with a calendar month-end to utilize a practical expedient for the measurement of the entity’s defined benefit plan assets. The practical expedient allows an entity to measure its plan assets as of the nearest calendar month-end that is closest to the entity’s fiscal year-end. The month-end selected must be consistently used amongst all plans if an entity has more than one plan and must be applied consistently from year to year. ASU No. 2015-04 also provides guidance for significant events that occur between the entity’s fiscal year-end and the month-end selected for measurement. If the event is an entity-initiated event that results in a plan remeasurement, then the plan assets must also be revalued (there is a practical expedient allowed similar to the overall practical expedient). If the event is out of the entity’s control (for example, changes in market prices or interest rates), the entity is not required to remeasure the assets. An entity must disclose the practical expedient election and the date used to measure the assets and obligations. ASU No. 2015-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company will adopt ASU No. 2015-04 commencing in the first quarter of fiscal 2017. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03. Entities should apply the amendments in ASU No. 2015-03 on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
Since the issuance of ASU No. 2015-03, it has been unclear whether and, if so, how ASU No. 2015-03 applies to revolving debt arrangements. At the Emerging Issues Task Force’s June 18, 2015 meeting, the SEC staff clarified that ASU No. 2015-03 does not address debt issuance costs associated with such arrangements and announced that it would “not object to an entity deferring and presenting such costs as an asset and subsequently amortizing the costs ratably over the term of the revolving debt arrangement.” The Company anticipates that it will elect to apply the accounting policy outlined by the SEC staff as stated above. Under that policy, an entity presents remaining unamortized debt issuance costs associated with a revolving debt arrangement as an asset even if the entity currently has a recognized debt liability for amounts outstanding under the arrangement. Further, such costs are amortized over the life of the arrangement even if the entity repays previously drawn amounts.
For public entities, ASU No. 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company will adopt ASU No. 2015-03 commencing in the first quarter of fiscal 2017. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures.
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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards that (1) removes inconsistencies and weaknesses in revenue requirements; (2) provides a more robust framework for addressing revenue issues; (3) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provides more useful information to users of financial statements through improved disclosure requirements; and (5) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The original effective date for ASU 2014-09 would have required the Company to adopt commencing in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 for an additional year and provided the option to elect early adoption of ASU No. 2014-09 on the original effective date. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). ASU No. 2016-08 does not change the core principle of the guidance under ASU No. 2014-09; however, it does clarify the implementation guidance on principal versus agent considerations and includes indicators to assist in evaluating whether an entity controls the good or the service before it is transferred to the customer. In April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing” (“ASU No. 2016-10”). ASU No. 2016-10 does not change the core principle of the guidance under ASU No. 2014-09; however, it does clarify the implementation guidance on identifying performance obligations and licensing while retaining the related principles for those areas. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). ASU No. 2016-12 does not change the core principle of the guidance under ASU No. 2014-09, however, it does clarify the guidance on assessing collectability, presentation of sales taxes, noncash consideration, contract modifications at transition, and completed contracts at transition. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Accordingly, the Company will adopt ASU No. 2014-09 commencing in the first quarter of fiscal 2019. The Company is currently assessing the impact this standard may have on its consolidated financial statements and the related expansion of its footnote disclosures.
12. |
SUBSEQUENT EVENTS |
In July 2016, the Company’s Market Centre Division entered into a four-year supply agreement with Gelson’s Markets, a Member affiliated with Robert McDougall, a Unified Member-Director, effective retroactively from January 1, 2016.
In July 2016, the Company’s wholly-owned finance subsidiary, Grocers Capital Company, entered into a commitment with Mar-Val Food Stores, a Member affiliated with Mark Kidd, a Unified Member-Director, to fund a twenty-six week inventory loan for $500,000. Funding for the loan occurred on July 19, 2016.
In July 2016, the Company entered into a commitment with Yucaipa Trading Co., a Member affiliated with Jay McCormack, a Unified Member-Director, to fund a thirteen-week inventory loan for $150,000. Funding for the loan occurred on July 22, 2016.
Subsequent events have been evaluated by the Company through the date the financial statements were issued.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains “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, or (c) embody assumptions that may prove to have been inaccurate. These forward-looking statements involve risks, uncertainties and assumptions. When we use words such as “believe,” “expect,” “anticipate” or similar expressions, we are making forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond our control. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors discussed in the sections entitled “Risk Factors” and “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements attributable to us are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date hereof. We undertake no duty or obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) for an understanding of the negative variables that can affect our business and results of operations.
COMPANY OVERVIEW
General
Unified Grocers, Inc. (referred to in this Form 10-Q, together with its consolidated subsidiaries, as “Unified,” “the Company,” “we,” “us” or “our”), a California corporation organized in 1922 and incorporated in 1925, is a retailer-owned, grocery wholesale cooperative serving supermarket, specialty, restaurant supply (through Cash & Carry Stores, LLC, a wholly-owned subsidiary of Smart & Final, Inc.) and convenience store operators located primarily in the western United States and the Pacific Rim. We operate our business in one reportable business segment, Wholesale Distribution. All remaining business activities are grouped into All Other (see Note 5 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion).
We sell a wide variety of products typically found in supermarkets, including dry grocery, frozen food, deli, ethnic, gourmet, specialty foods, natural and organic, general merchandise, health and beauty care, service deli, service bakery, meat, eggs, produce, bakery and dairy products. We also provide financing services to our customers, as well as various support services, including merchandising, retail pricing, advertising, promotional planning, retail technology, equipment purchasing and real estate services. Our Wholesale Distribution segment represents nearly 100% of our total net sales. The availability of specific products and services may vary by geographic region. We have three separate geographical and marketing regions: Southern California, Northern California and the Pacific Northwest.
Our customers are comprised of our owners (“Members”) and non-owners (“Non-Members”). Our focus is on our members, but we also do business with Non-Member customers. Our Members operate grocery stores and supermarkets that range in size from single store operators to regional supermarket chains. Members are required to meet specific requirements, which include ownership of our capital shares and may include required cash deposits. Customers who purchase less than $1 million annually from us would not generally be considered for membership, while customers who purchase over $3 million annually from us are typically required to become Members. See Part I, Item 1. “Business – Member Requirements,” Part I, Item 1. “Business – Capital Shares” and Part I, Item 1. “Business – Customer Deposits” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information. The membership requirements, including purchase and capitalization requirements, may be modified at any time at the discretion of our Board of Directors (the “Board”).
Earnings from patronage activities conducted by us, excluding our subsidiaries, with our Members (“Patronage Business”) are eligible for distribution in the form of patronage dividends. The Board approves the payment of patronage dividends and the form of such payment for our three patronage earnings divisions: the Cooperative Division, the Southern California Dairy Division (through June 2016) and the Pacific Northwest Dairy Division (through May 2016). In July 2016, we ceased operating our Southern California Dairy Division manufacturing facility but will continue offering fluid milk and other products, including our private label brands, to our Members and customers through a vendor direct arrangement with Alta-Dena Certified Dairy, LLC, a wholly-owned subsidiary of Dean Foods Company (“Dean Foods Company”). As indicated above, we will no longer pay patronage dividends on sales of products from both the Southern California Dairy
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Division and Pacific Northwest Dairy Division. See Part I, Item 1. “Business – Company Structure and Organization – Wholesale Business – Wholesale Distribution” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional discussion. An entity that does not meet Member purchase requirements may conduct business with us as a Non-Member customer. We may also grant an entity that meets our Member purchase requirements the ability to conduct business with us as a Non-Member customer. We retain the earnings from our subsidiaries and from business conducted with Non-Members (collectively, “Non-Patronage Business”).
Facilities and Transportation
We operate various warehouse and office facilities that are located in Commerce, Los Angeles, Santa Fe Springs and Stockton, California, as well as Milwaukie, Oregon and Seattle, Washington. We also operate a bakery manufacturing facility and a milk, water and juice processing plant in Los Angeles, which primarily serve the Southern California region. In July 2016, we ceased operating our milk, water and juice processing plant, but will continue offering our products to our Members and customers through a vendor direct arrangement with Dean Foods Company.
We consider our corporate offices, warehouses and manufacturing properties to be generally in good condition, well maintained, suitable and adequate to carry on our business as presently conducted.
Our customers may choose either of two delivery options for the distribution of our products. They may have us deliver orders to their stores or warehouses, or they may pick-up their orders from our distribution centers. For delivered orders, we primarily utilize our fleet of tractors and trailers.
INDUSTRY OVERVIEW AND THE COMPANY’S OPERATING ENVIRONMENT
Competition
We compete in the wholesale grocery industry with many regional and local grocery, general food, meat, produce, specialty, bakery and dairy wholesalers and distributors, such as KeHE Distributors, LLC, as well as with national food wholesalers, namely C&S Wholesale Grocers, Inc., Supervalu, Inc. and United Natural Foods, Inc. (UNFI). Many of our customers, including Members, buy from such competing wholesalers and distributors in addition to us, such that we are competing for business at the wholesale grocery level on a daily basis. This competition is intense with respect to, among other things, price, selection, availability and service.
Our customers include grocery retailers with a broad range of store sizes and types targeting a diverse range of consumers. Depending on the nature of their stores and consumer focus, our customers may compete directly with vertically integrated regional and national chains, such as Albertsons Companies Inc. (including Albertson’s, Safeway, Vons and Pavilions), Kroger Co. (including Ralphs, Food 4 Less and QFC), Trader Joe’s Company and WinCo Foods, which operate traditional and specialty format full-service grocery stores. They may also compete with warehouse club stores and supercenters such as Costco Wholesale Corp., Sam’s Club and Wal-Mart Stores, Inc., hard discount stores such as ALDI, drug channel stores and alternative format stores such as Target Corp., and the various “dollar” stores, stores focused on upscale and natural and organic products such as Sprouts Farmers Markets, LLC and Whole Foods Market Inc., and various convenience stores. Certain of our customers also serve niche markets such as the Hispanic and Asian communities. The marketplace in which our customers compete continues to evolve and present challenges. These challenges include such recent trends as the continued proliferation of discount stores, supercenters and warehouse club stores and the efforts of many of the non-traditional format stores to expand their offerings of product to cover a greater range of the products offered by the traditional format full-service grocery store.
The success of our customers in attracting consumers to shop at their stores, as opposed to any of their various competitors, has a direct and significant impact on our sales and earnings. For more information about the competitive environment we and our customers face, please refer to “Risk Factors.”
In helping our customers remain competitive, whether they operate a traditional full-service grocery store or a non-traditional format store targeting particular consumers, we emphasize providing a diverse line of high quality products, competitive pricing and timely and reliable deliveries. We also provide a wide range of other services, including merchandising, retail pricing support, advertising, promotional planning, retail technology, equipment purchasing, real estate services and financing, to further support our customers’ businesses.
Economic Factors
We and others in the grocery industry are impacted by changes in the overall economic environment, including such factors as consumer confidence and the employment rate, shifts in consumer tastes and buying patterns, and changes in government programs that may reduce assistance to certain consumers in support of their grocery purchases. Overall, recent economic growth has produced a gradual improvement in consumer confidence and unemployment, conditions which caused consumers to be highly price sensitive and seek lower-cost alternatives in their grocery purchases. These
21
conditions have improved slowly in some of our operating markets; however, in other of our operating markets, these conditions have substantially improved and consumers, while continuing to seek value in their purchases, have increasingly opted for higher priced, higher quality products. The significant industry growth in sales of natural and organic products is an example of this trend. One trend that appears to be continuing in all market areas is the willingness of consumers to shop at multiple stores of various formats, for both greater selection and value, rather than obtaining all of their grocery needs from one full-service store. This trend has continued to benefit the various specialty, discount and other alternative format stores.
We are impacted by the level of inflation and deflation in a variety of areas, including, but not limited to, sales, cost of sales, employee wages and benefits, workers’ compensation insurance and energy and fuel costs. We typically experience significant volatility in the cost of certain commodities, the cost of ingredients for our manufactured breads and processed fluid milk and the cost of packaged goods purchased from other manufacturers. Our operating programs are designed to give us the flexibility to pass these costs on to our customers; however, we may not always be able to pass such increases on to customers on a complete or timely basis. Any delay may result in our recovering less than all of a price increase. It is also difficult to predict the effect that possible future purchased or manufactured product cost decreases might have on our profitability. The effect of deflation in purchased or manufactured product costs would depend on the extent to which we had to lower selling prices of our products to respond to sales price competition in the market. Our earnings are impacted by inventory holding gains or losses, such that during inflationary periods we benefit from increased product pricing, while during periods of low inflation or deflation, these gains are reduced or eliminated. We are subject to changes in energy costs (excluding fuels) which we may not be able to pass along to customers. With respect to fuel costs, we assess a fuel surcharge on product shipments to address the potential volatility in fuel costs. The fuel surcharge is indexed to allow us to recover costs over a specified level. Our continual focus on cost control and operational efficiency improvements helps us mitigate other changes in operating costs. See “Risk Factors – We are vulnerable to changes in general economic conditions” for additional discussion.
We (and our customers) are subject to changes in federal, state or local minimum wage and overtime laws that could cause us to incur additional wage costs, which could adversely affect the profitability of our business and that of our customers. See “Risk Factors – We (and our customers) are subject to changes in laws and regulations” for additional discussion.
Additionally, we are impacted by changes in prevailing interest rates or interest rates that have been negotiated in conjunction with our credit facilities. A lower interest rate (used, for example, to discount our pension and postretirement unfunded obligations) may increase certain expenses, particularly pension and postretirement benefit costs, while decreasing potential interest expense for our credit facilities. An increase in interest rates may have the opposite impact. Consequently, it is difficult for us to accurately predict the impact that inflation, deflation or changes in interest rates might have on our operations.
We invest in life insurance policies (reported at cash surrender value) and various publicly-traded mutual funds (reported at estimated fair value based on quoted market prices) to fund obligations pursuant to our Executive Salary Protection Plan III, Supplemental Executive Retirement Plan and deferred compensation plan (see Note 7 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion). Life insurance and mutual fund assets with values tied to the equity markets are impacted by overall market conditions. During the thirty-nine weeks ended July 2, 2016, net earnings and net comprehensive earnings experienced an increase corresponding to the increase in the value of life insurance and mutual fund assets, respectively.
RECENT DEVELOPMENTS
Audit Committee Investigation. In September 2014, the Audit Committee of the Company’s Board of Directors announced that it was conducting, with the assistance of independent legal counsel, an investigation of issues relating to the setting of case reserves and management of claims by our former insurance subsidiaries and related matters (the “Audit Committee Investigation”). On or about November 2015, the Audit Committee Investigation concluded. We incurred approximately $5.5 million in expenses through the fiscal year ended October 3, 2015 and $2.7 million for the thirty-nine weeks ended July 2, 2016 in connection with the Audit Committee Investigation. Approximately $0.7 million and $0.2 million, respectively, of these expenses were included in our loss on sale of our discontinued operations for the fiscal year ended October 3, 2015 and the thirty-nine weeks ended July 2, 2016 as further discussed below. For additional information on the Audit Committee Investigation, see Part I, Item 1, “Business – Explanatory Note,” Part I, Item 1, “Business –Audit Committee Investigation,” Note 2, “Audit Committee Investigation,” of “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” and Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended October 3, 2015.
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Haggen. In December 2014, Haggen, a Member, entered into an agreement to acquire 146 stores divested in the merger of Albertson’s LLC and Safeway, Inc. At that time, we entered into an agreement (the “Supply Agreement”) with Haggen to be its primary supplier in California, Arizona and Nevada (the “Pacific Southwest” stores) and a substantial supplier in Washington and Oregon. In addition, we agreed to provide Haggen with certain business services. As the new Haggen stores were converted, our weekly product shipments to Haggen reached approximately $11 million at their peak at the end of June 2015.
In September 2015, Haggen filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Prior to Haggen’s bankruptcy filing, we terminated our product supply agreement with Haggen and had already begun reducing our potential exposure including, but not limited to, arranging for payment in advance for product supplied to Haggen and reducing the amount of inventory we were carrying specifically for Haggen. In October 2015, we entered into a trade agreement (the "Trade Agreement") with Haggen under which we continued to supply product to Haggen as a critical vendor during Haggen's Chapter 11 case. Pursuant to the Trade Agreement, Haggen paid a substantial portion of our prepetition receivable in exchange for certain shipping terms from Unified. Haggen also agreed to stipulate to an allowed administrative expense priority claim under section 503(b)(9) of the Bankruptcy Code for the balance of our prepetition claim for goods shipped to Haggen. We also filed a proof of claim against Haggen for breach of contract damages related to the termination of the Supply Agreement and various ancillary agreements. Such claim would be treated as a general unsecured claim in the Haggen chapter 11 cases. Haggen has not yet filed a chapter 11 plan and projected recoveries on general unsecured claims are not yet determined in Haggen's case.
Effective November 21, 2015, we ceased supplying product to Haggen’s Pacific Southwest stores. Accordingly, we do not expect the sales to Haggen to continue at the levels generated during the last half of fiscal 2015 or during the first quarter of fiscal 2016. Sales to Haggen’s Pacific Southwest stores were approximately $9.6 million for the first quarter of fiscal 2016. Pursuant to the Trade Agreement, we continued to supply Haggen’s Washington and Oregon stores with product during Haggen’s bankruptcy case. In June 2016, we entered into a one-year supply agreement with Safeway, Inc., a subsidiary of Albertsons Companies Inc., to continue supplying the Haggen stores operated by Safeway, Inc. in the Pacific Northwest. Sales to the Haggen Pacific Northwest stores were approximately $30.0 million and $94.8 million for the thirteen weeks and thirty-nine weeks ended July 2, 2016, respectively.
Raley’s. In February 2015, we entered into an agreement with Raley’s Supermarkets (“Raley’s”) under which we subleased its existing Stockton, California facility for five years. We currently operate that facility to distribute general merchandise and health and beauty products to Raley’s under a five-year supply agreement. This facility also services our other customers, and has created the opportunity for Unified to consolidate and distribute all general merchandise and health and beauty care products from a single location.
Sale of Insurance Segment. In July 2014, our management and Board made a strategic determination to focus the Company’s efforts on our core grocery business operations in order to better serve Unified’s Members and customers. In conjunction with this decision, our management and Board determined that our insurance operations represented a significant non-core portion of our business, and accordingly began discussions with a previously unsolicited potential buyer to sell our Insurance segment. On October 7, 2015 (the “Closing Date”), we completed the sale, at a discount to Tangible Book Value (“TBV”) (as defined in the Stock Purchase Agreement discussed below), of all of the outstanding shares of our wholly owned subsidiary, Unified Grocers Insurance Services (“UGIS”), to AmTrust Financial Services, Inc. (“AmTrust”) pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and between the Company and AmTrust dated as of April 16, 2015. As of the Closing Date, UGIS owned all of the outstanding shares of the capital stock of Springfield Insurance Company and Springfield Insurance Company Limited (Bermuda). We refer to UGIS, Springfield Insurance Company and Springfield Insurance Company Limited (Bermuda) collectively as the “Acquired Companies.”
We received $26.2 million in cash proceeds for the Acquired Companies, representing an agreed-upon discount to the estimated TBV, which was calculated as defined in the Stock Purchase Agreement. In May 2016, AmTrust delivered to us a final closing statement, including its calculation of the TBV as of the Closing Date. The final purchase price was adjusted to reflect an increase in the purchase price of $0.4 million between the estimated TBV as of the Closing Date and the actual TBV as of the Closing Date. We utilized the net proceeds of this transaction to repay certain indebtedness.
We incurred a net loss of $6.9 million in conjunction with the sale of the Acquired Companies at the Closing Date, including a net operating loss from discontinued operations of $3.7 million and a $1.3 million impairment on our investment in the Acquired Companies, in addition to $1.9 million of charges related to the sale, primarily comprised of costs incurred by us directly attributable to the Audit Committee Investigation and to the preparation and consummation of the sale of the Acquired Companies to AmTrust. Our historical financial statements have been revised to present the operating results of the Acquired Companies as discontinued operations. See Note 2, “Discontinued Operations” in Part I, Item 1, “Financial Statements – Unaudited” for additional information.
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Market Centre. In fiscal 2015, our Market Centre subsidiary was dissolved as a legal entity and ceased operating as a wholly-owned subsidiary of the Company. Market Centre now conducts business as a separate division within our Wholesale Distribution segment. Additionally, beginning in fiscal 2015, earnings from sales of food products such as Hispanic, other ethnic, gourmet, natural, organic and other specialty foods sold to Members through our Market Centre division are included in patronage earnings and may be eligible for patronage distributions. Earnings from sales to Non-Member customers are retained by the Company.
Dairy Divisions. In July 2016, we ceased operating our Southern California Dairy Division manufacturing facility, but will continue offering fluid milk and other products, including our private label brands, to our Members and customers through a vendor direct arrangement with Dean Foods Company. Coincident with this change, we will no longer pay patronage dividends on products supplied by Dean Foods Company. In addition to the changes to the Southern California Dairy Division, the Pacific Northwest Dairy Division ceased paying patronage dividends on sales of dairy products after May 2016.
Addition of New Supplier for Private Label Products. As discussed in Part I, Item 1, “Business – Products – Corporate Brands” of our Annual Report on Form 10-K for the year ended October 3, 2015, we currently sell products under premium and value-oriented corporate brands. In February 2016, we joined Topco Associates, LLC (“Topco”) as a member. Topco is a privately held company that provides procurement, quality assurance, packaging and other services exclusively for its member-owners, which include supermarket retailers, food wholesalers and foodservice companies. Commencing in the fourth quarter of fiscal 2016, we will begin transitioning to Topco as our primary supplier for our Springfield premium corporate brand and our value-oriented Special Value corporate brand products. In addition, Topco will serve as our sole-source supplier for general merchandise and health and beauty care products under its TopCare label.
In June 2016, Western Family Foods Inc. (“Western Family”) reached an agreement with Topco authorizing Topco to procure, manage and market three of Western Family’s private label brands, including the Western Family and Natural Directions premium corporate brands that are sold through us. Western Family will continue to own its private label brands and we will continue our ownership in Western Family. Western Family announced that the transition of procurement and marketing to Topco will take several months, with all orders and invoices continuing through Western Family until that time. When the transition of the products is complete, Western Family’s headquarters in Oregon will close and Western Family will lay off the majority of its workforce. In conjunction with its agreement with Topco, Western Family provided its investors an estimate of the anticipated costs for the closure of its headquarters, and we have accordingly reduced our investment in Western Family by our proportionate share of such costs in the amount of $0.4 million.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated condensed financial statements and notes to the consolidated condensed financial statements, specifically Note 5 of “Notes to Consolidated Condensed Financial Statements – Unaudited,” “Segment Information,” included in Part I, Item 1, “Financial Statements (Unaudited)” of this report. Certain statements in the following discussion are not historical in nature and should be considered to be forward-looking statements that are inherently uncertain.
Sales and Earnings Highlights – Fiscal 2016. During the thirty-nine weeks ended July 2, 2016, net sales decreased in our Wholesale Distribution segment compared to the same period in fiscal 2015 primarily due to the loss of business from Haggen’s Pacific Southwest stores (effective November 21, 2015), lower meat sales prices due to declines in the related commodity cost that were passed along to our customers and store closures, partially offset by the growth in sales to existing customers and the addition of new customers.
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The following table sets forth our selected consolidated financial data expressed as a percentage of net sales for the periods indicated and the percentage increase or decrease in such items over the prior year period.
|
|
Thirteen Weeks Ended |
|
|
Thirty-Nine Weeks Ended |
|
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|
|
July 2, |
|
|
June 27, |
|
|
|
|
|
|
July 2, |
|
|
June 27, |
|
|
|
|
|
||||
Fiscal Period Ended |
|
2016 |
|
|
2015 |
|
|
% Change |
|
|
2016 |
|
|
2015 |
|
|
% Change |
|
||||||
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(8.7 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(2.6 |
)% |
Cost of sales |
|
|
92.6 |
|
|
|
93.0 |
|
|
|
(9.0 |
) |
|
|
92.5 |
|
|
|
92.9 |
|
|
|
(3.1 |
) |
Distribution, selling and administrative expenses |
|
|
7.1 |
|
|
|
6.8 |
|
|
|
(4.6 |
) |
|
|
7.3 |
|
|
|
7.0 |
|
|
|
2.1 |
|
Operating income |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
147.3 |
|
Interest expense |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
4.1 |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
0.7 |
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(100.0 |
) |
Estimated patronage dividends |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
13.0 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
44.5 |
|
Income tax provision |
|
|
— |
|
|
|
— |
|
|
|
(79.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(85.7 |
) |
Net gain (loss) on discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(119.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(130.2 |
) |
Net loss |
|
|
(0.2 |
)% |
|
|
(0.2 |
)% |
|
|
(14.2 |
)% |
|
|
(0.3 |
)% |
|
|
(0.5 |
)% |
|
|
(39.7 |
)% |
We present sales and cost of sales related to certain transactions involving vendor direct arrangements on a net basis to conform to GAAP. Transactions involving vendor direct arrangements are comprised principally of sales of produce in the Pacific Northwest and Northern California and sales of branded ice cream in Southern California. These transactions are reported within our Wholesale Distribution segment. “Gross billings,” an internal financial metric that adds back gross billings through vendor direct arrangements to net sales and is used by management to assess our operating performance, were $0.974 billion for the thirteen weeks ending July 2, 2016 as compared to $1.070 billion in the thirteen weeks ending June 27, 2015, a decrease of $96.0 million, or 9.0%. By comparison, net sales (which do not include gross billings through vendor direct arrangements) decreased 8.7% for the same periods. Gross billings were $2.914 billion for the thirty-nine week 2016 Period as compared to $2.996 billion in the thirty-nine week 2015 Period, a decrease of $82.0 million, or 2.7%. Similarly, net sales (which do not include gross billings through vendor direct arrangements) decreased 2.6% for the same periods.
THIRTEEN WEEK PERIOD ENDED JULY 2, 2016 (“2016 13-WEEK PERIOD”) COMPARED TO THE THIRTEEN WEEK PERIOD ENDED JUNE 27, 2015 (“2015 13-WEEK PERIOD”)
Overview of the 2016 13-Week Period. We experienced an overall net sales decrease of $90.3 million, or 8.7%, to $948.3 million for the 2016 13-Week Period as compared to $1.039 billion for the 2015 13-Week Period. Our net sales for the Wholesale Distribution segment decreased to $948.0 million, or 8.7%, for the comparable 2016 and 2015 13-Week Periods. Net sales decreased primarily due to the loss of business from Haggen’s Pacific Southwest stores (effective November 21, 2015) and lower meat sales prices due to declines in the related commodity cost that were passed along to our customers, partially offset by the growth in sales to existing customers. Net sales in our All Other business activities were relatively consistent at $0.3 million for the comparable 2016 and 2015 13-Week Periods.
Our consolidated operating income was comparable to the same period in the prior year, reflecting earnings of $2.2 million in both the 2016 and 2015 13-Week Periods.
The overall activity in operating income is summarized in our operating segments and other business activities as follows:
|
· |
Wholesale Distribution Segment: The Wholesale Distribution segment’s operating income was comparable to the same period in the prior year, reflecting earnings of $2.1 million in both the 2016 and 2015 13-Week Periods. Gross margin declined compared to the 2015 13-Week Period, primarily reflecting the loss of business from Haggen’s Pacific Southwest stores, but this was offset by decreased distribution, selling and administrative costs related to that business. |
|
· |
All Other: Operating income in our All Other business activities reflected earnings of $0.1 million in both the 2016 and 2015 13-Week Periods. All Other business activities consist of activities conducted through our finance subsidiary. |
25
The following tables summarize the performance of each business segment for the 2016 and 2015 13-Week Periods.
Wholesale Distribution Segment (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended July 2, 2016 |
|
|
Thirteen Weeks Ended June 27, 2015 |
|
|
|
|
|
||||||||||
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Difference |
|
|||||
Gross billings |
|
$ |
973,306 |
|
|
|
— |
|
|
$ |
1,069,320 |
|
|
|
— |
|
|
$ |
(96,014 |
) |
Less: Gross billings through vendor direct arrangements |
|
|
(25,283 |
) |
|
|
— |
|
|
|
(30,972 |
) |
|
|
— |
|
|
|
5,689 |
|
Net sales |
|
|
948,023 |
|
|
|
100.0 |
% |
|
|
1,038,348 |
|
|
|
100.0 |
% |
|
|
(90,325 |
) |
Cost of sales |
|
|
878,583 |
|
|
|
92.7 |
|
|
|
965,638 |
|
|
|
93.0 |
|
|
|
(87,055 |
) |
Distribution, selling and administrative expenses |
|
|
67,319 |
|
|
|
7.1 |
|
|
|
70,552 |
|
|
|
6.8 |
|
|
|
(3,233 |
) |
Operating income |
|
$ |
2,121 |
|
|
|
0.2 |
% |
|
$ |
2,158 |
|
|
|
0.2 |
% |
|
$ |
(37 |
) |
All Other (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended July 2, 2016 |
|
|
Thirteen Weeks Ended June 27, 2015 |
|
|
|
|
|
||||||||||
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Difference |
|
|||||
Gross sales |
|
$ |
365 |
|
|
|
— |
|
|
$ |
379 |
|
|
|
— |
|
|
$ |
(14 |
) |
Inter-segment eliminations |
|
|
(74 |
) |
|
|
— |
|
|
|
(112 |
) |
|
|
— |
|
|
|
38 |
|
Net sales |
|
|
291 |
|
|
|
100.0 |
% |
|
|
267 |
|
|
|
100.0 |
% |
|
|
24 |
|
Selling and administrative expenses |
|
|
158 |
|
|
|
54.3 |
|
|
|
158 |
|
|
|
59.2 |
|
|
|
— |
|
Operating income |
|
$ |
133 |
|
|
|
45.7 |
% |
|
$ |
109 |
|
|
|
40.8 |
% |
|
$ |
24 |
|
Net sales. Consolidated net sales decreased $90.3 million, or 8.7%, to $948.3 million in the 2016 13-Week Period compared to $1.039 billion for the 2015 13-Week Period. Factors impacting net sales are as follows:
· |
Wholesale Distribution Segment: Wholesale Distribution gross billings decreased $96.0 million to $973.3 million in the 2016 13-Week Period compared to $1.069 billion for the 2015 13-Week Period. Significant components of this decrease are summarized below. |
(dollars in millions) |
|
|
|
|
Key Gross Billings Changes |
|
Increase (Decrease) |
|
|
Decrease in Haggen Pacific Southwest business |
|
$ |
(87.6 |
) |
Increase in gross billings to continuing customers |
|
|
9.2 |
|
New customers |
|
|
2.0 |
|
Lost customers |
|
|
(4.6 |
) |
Store closures of existing customers |
|
|
(2.8 |
) |
Decrease in meat pricing due to decline in commodity cost |
|
|
(12.2 |
) |
Change in gross billings |
|
$ |
(96.0 |
) |
Our customer base continues to be impacted by consumers who are highly price sensitive, seek lower-cost alternatives in their grocery purchases and have shown a willingness to shop at multiple stores for grocery products, including discounters and other non-traditional format stores. This trend continues to have an adverse impact on gross billings as well as pressuring profit margins. Sales decreased primarily due to the loss of business from Haggen’s Pacific Southwest stores (effective November 21, 2015). We were also impacted by lower meat sales prices due to declines in the related commodity cost that were passed along to our customers. These decreases were partially offset through the growth in sales to continuing customers.
· |
All Other: Net sales were $0.3 million in both the 2016 and 2015 13-Week Periods. |
26
Cost of sales. Consolidated cost of sales were $878.6 million for the 2016 13-Week Period and $965.6 million for the 2015 13-Week Period and comprised 92.6% and 93.0% of consolidated net sales for the 2016 and 2015 13-Week Periods, respectively. Factors impacting cost of sales were as follows:
· |
Wholesale Distribution Segment: Cost of sales decreased $87.0 million to $878.6 million in the 2016 13-Week Period compared to $965.6 million in the 2015 13-Week Period. As a percentage of Wholesale Distribution net sales, cost of sales were 92.7% and 93.0% for the 2016 and 2015 13-Week Periods, respectively. |
|
· |
We experienced increased margins in the perishable product lines, including improvements in the dairy operation and reduced product costs, resulting in a 0.15% decrease in cost of sales as a percent of Wholesale Distribution net sales in the 2016 13-Week Period compared to the 2015 13-Week Period. |
|
· |
Vendor related activity resulted in a 0.15% decrease in cost of sales as a percent of Wholesale Distribution net sales in the 2016 13-Week Period compared to the 2015 13-Week Period. |
Distribution, selling and administrative expenses. Consolidated distribution, selling and administrative expenses were $67.5 million in the 2016 13-Week Period compared to $70.7 million in the 2015 13-Week Period, reflecting a decrease of $3.2 million, and comprised 7.1% and 6.8% of consolidated net sales for the 2016 and 2015 13-Week Periods, respectively. Factors impacting distribution, selling and administrative expenses are as follows:
· |
Wholesale Distribution Segment: Distribution, selling and administrative expenses decreased $3.2 million to $67.3 million in the 2016 13-Week Period compared to $70.5 million in the 2015 13-Week Period, and comprised 7.1% and 6.8% of Wholesale Distribution net sales for the 2016 and 2015 13-Week Periods, respectively. |
|
· |
Employee Pension and Postretirement Benefits: During the 2016 13-Week Period, we experienced an increase of $1.5 million, or 0.1% as a percent of Wholesale Distribution net sales, in non-union employee postretirement benefit expenses, primarily due to a reduction in the amortization of prior service credits that arose from changes in our retiree medical program, as certain of these prior service credits were fully utilized in our fiscal year ended October 3, 2015. |
|
· |
Audit Committee Investigation Expenses: During the 2016 13-week period, the expense related to the Audit Committee Investigation decreased $0.5 million, but was zero as a percent of Wholesale Distribution net sales. Total Audit Committee Investigation expenses for the 2016 13-week period were $0.6 million compared to $1.1 million for the same period in the prior year. These expenses are comprised primarily of legal and audit fees. We anticipate that these expenses will continue to diminish during fiscal 2016. |
|
· |
General Expenses: During the 2016 13-Week Period, general expenses decreased $4.2 million, but increased 0.2% as a percent of Wholesale Distribution net sales due to the decrease in net sales. The decrease in general expenses was primarily due to decreased logistics costs related to the loss of business from Haggen’s Pacific Southwest stores. |
· |
All Other: Selling and administrative expenses for our All Other business activities were $0.2 million for both the 2016 and 2015 13-Week Periods. |
Interest. Interest expense increased $0.1 million to $2.6 million in the 2016 13-Week Period compared to $2.5 million for the 2015 13-Week Period and comprised 0.3% and 0.2% of consolidated net sales for the 2016 and 2015 13-Week Periods, respectively. Factors impacting interest expense are as follows:
· |
Interest expense on our primary debt instruments (as described below) increased $0.1 million to $2.5 million in the 2016 13-Week Period compared to $2.4 million in the 2015 13-Week Period. |
|
· |
Interest Rates: Interest expense increased $0.3 million in the 2016 13-Week Period from the 2015 13-Week Period. Our effective borrowing rate for the combined primary debt, made up of the revolving lines of credit for Unified and Grocers Capital Company and the term loan, was 3.3% and 2.9% for the 2016 and 2015 13-Week Periods, respectively. The rate increase was due to the recent overall market rate change, partially offset by lower effective rates on Unified’s revolving line of credit and the debt refinancing that occurred in December 2014, which replaced the remaining senior secured notes with variable rate term debt. |
|
· |
Weighted Average Borrowings: Interest expense decreased $0.2 million in the 2016 13-Week Period from the 2015 13-Week Period as a result of lower outstanding debt. Weighted average borrowings decreased by $25.3 million primarily due to net proceeds received from the sale of our discontinued operations, partially offset by increases in non-working capital items such as costs incurred during fiscal 2015 in preparing for anticipated increased business and resulting wind down with Haggen, Audit Committee Investigation costs and stock repurchases made in the current fiscal year. |
27
Borrowings under Unified’s credit agreement are subject to market rate fluctuations. A 25 basis point change in the market rate of interest over the period would have resulted in a $0.2 million increase or decrease in corresponding interest expense.
· |
Interest expense on our other debt instruments was $0.1 million for both the 2016 and 2015 13-Week Periods. |
Estimated patronage dividends. Estimated patronage dividends for the 2016 13-Week Period were $1.8 million, compared to estimated patronage dividends of $1.6 million in the 2015 13-Week Period. Estimated patronage dividends for the 2016 and 2015 13-Week Periods consisted of the patronage activities from our three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2016 and 2015 13-Week Periods, respectively, we had patronage earnings of $1.7 million and $1.4 million in the Southern California Dairy Division, $0.1 million and $0.2 million in the Pacific Northwest Dairy Division and no patronage earnings in the Cooperative Division. The Southern California Dairy Division implemented operational improvements in the second half of fiscal 2015, resulting in higher patronage earnings due to improved margins in addition to lower operating expenses during the 2016 13-Week Period compared to the 2015 13-Week Period. The Cooperative Division experienced a loss in the 2016 13-Week Period due primarily to the loss of business from Haggen’s Pacific Southwest stores, partially offset by decreased distribution, selling and administrative costs and improved margins in our perishable product line. Patronage dividends produced by the Cooperative Division are distributed annually, historically in cash, Class B and Class E Shares (see Part I, Item 1. “Business – Patronage Dividends” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information), while patronage dividends produced by the dairy divisions are paid quarterly, historically in cash. Commencing in July 2016, as discussed in “Recent Developments,” we will no longer pay patronage dividends on sales of dairy products from the Southern California Dairy Division and the Pacific Northwest Dairy Division.
Income taxes. Our effective income tax rate was (0.7)% for the 2016 13-Week Period compared to (2.9)% for the 2015 13-Week Period. The negative effective rates for the 2016 and 2015 13-Week Periods are due to valuation allowances provided to offset the income tax benefits associated with the 2016 and 2015 13-Week Period pre-tax losses.
THRITY-NINE WEEK PERIOD ENDED JULY 2, 2016 (“2016 39-WEEK PERIOD”) COMPARED TO THE THRITY-NINE WEEK PERIOD ENDED JUNE 27, 2015 (“2015 39-WEEK PERIOD”)
Overview of the 2016 39-Week Period. We experienced an overall net sales decrease of $76.5 million, or 2.6%, to $2.836 billion for the 2016 39-Week Period as compared to $2.913 billion for the 2015 39-Week Period. Our net sales for the Wholesale Distribution segment decreased $76.6 million, or 2.6%, for the comparable 2016 and 2015 39-Week Periods. Net sales decreased primarily due to the loss of business from Haggen’s Pacific Southwest stores (effective November 21, 2015) and lower meat sales prices due to declines in the related commodity cost that were passed along to our customers, partially offset by the growth in sales to existing customers and the addition of new customers. Net sales in our All Other business activities increased $0.1 million for the comparable 2016 and 2015 39-Week Periods.
Our consolidated operating income increased $3.1 million to earnings of $5.2 million in the 2016 39-Week Period compared to earnings of $2.1 million in the 2015 39-Week Period.
The overall increase in operating income is summarized in our operating segments and other business activities as follows:
|
· |
Wholesale Distribution Segment: The Wholesale Distribution segment’s operating income increased $3.0 million to earnings of $4.8 million in the 2016 39-Week Period compared to earnings of $1.8 million in the 2015 39-Week Period. This increase in earnings was primarily due to improved margins in our perishable product lines. |
|
· |
All Other: Operating income in our All Other business activities reflected earnings of $0.4 million and $0.3 million in the 2016 and 2015 39-Week Periods, respectively. All Other business activities consist of activities conducted through our finance subsidiary. |
28
The following tables summarize the performance of each business segment for the 2016 and 2015 39-Week Periods.
Wholesale Distribution Segment (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended July 2, 2016 |
|
|
Thirty-Nine Weeks Ended June 27, 2015 |
|
|
|
|
|
||||||||||
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Difference |
|
|||||
Gross billings |
|
$ |
2,912,987 |
|
|
|
— |
|
|
$ |
2,995,081 |
|
|
|
— |
|
|
$ |
(82,094 |
) |
Less: Gross billings through vendor direct arrangements |
|
|
(77,622 |
) |
|
|
— |
|
|
|
(83,110 |
) |
|
|
— |
|
|
|
5,488 |
|
Net sales |
|
|
2,835,365 |
|
|
|
100.0 |
% |
|
|
2,911,971 |
|
|
|
100.0 |
% |
|
|
(76,606 |
) |
Cost of sales |
|
|
2,622,651 |
|
|
|
92.5 |
|
|
|
2,706,554 |
|
|
|
92.9 |
|
|
|
(83,903 |
) |
Distribution, selling and administrative expenses |
|
|
207,955 |
|
|
|
7.3 |
|
|
|
203,665 |
|
|
|
7.0 |
|
|
|
4,290 |
|
Operating income |
|
$ |
4,759 |
|
|
|
0.2 |
% |
|
$ |
1,752 |
|
|
|
0.1 |
% |
|
$ |
3,007 |
|
All Other (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended July 2, 2016 |
|
|
Thirty-Nine Weeks Ended June 27, 2015 |
|
|
|
|
|
||||||||||
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Amounts in 000’s |
|
|
Percent to Net Sales |
|
|
Difference |
|
|||||
Gross sales |
|
$ |
1,177 |
|
|
|
— |
|
|
$ |
1,159 |
|
|
|
— |
|
|
$ |
18 |
|
Inter-segment eliminations |
|
|
(294 |
) |
|
|
— |
|
|
|
(352 |
) |
|
|
— |
|
|
|
58 |
|
Net sales |
|
|
883 |
|
|
|
100.0 |
% |
|
|
807 |
|
|
|
100.0 |
% |
|
|
76 |
|
Selling and administrative expenses |
|
|
473 |
|
|
|
53.6 |
|
|
|
469 |
|
|
|
58.1 |
|
|
|
4 |
|
Operating income |
|
$ |
410 |
|
|
|
46.4 |
% |
|
$ |
338 |
|
|
|
41.9 |
% |
|
$ |
72 |
|
Net sales. Consolidated net sales decreased $76.5 million, or 2.6%, to $2.836 billion in the 2016 39-Week Period compared to $2.913 billion for the 2015 39-Week Period. Factors impacting net sales are as follows:
· |
Wholesale Distribution Segment: Wholesale Distribution gross billings decreased $82.1 million to $2.913 billion in the 2016 39-Week Period compared to $2.995 billion for the 2015 39-Week Period. Significant components of this decrease are summarized below. |
(dollars in millions) |
|
|
|
|
Key Gross Billings Changes |
|
Increase (Decrease) |
|
|
Decrease in Haggen Pacific Southwest business |
|
$ |
(80.8 |
) |
Increase in gross billings to continuing customers |
|
|
47.9 |
|
New customers |
|
|
22.3 |
|
Lost customers |
|
|
(3.8 |
) |
Store closures of existing customers |
|
|
(5.0 |
) |
Decrease in meat pricing due to decline in commodity cost |
|
|
(62.7 |
) |
Change in gross billings |
|
$ |
(82.1 |
) |
Our customer base continues to be impacted by consumers who are highly price sensitive, seek lower-cost alternatives in their grocery purchases and have shown a willingness to shop at multiple stores for grocery products, including discounters and other non-traditional format stores. This trend continues to have an adverse impact on gross billings as well as pressuring profit margins. Sales decreased primarily due to the loss of business from Haggen’s Pacific Southwest stores (effective November 21, 2015). We were also impacted by lower meat sales prices due to declines in the related commodity cost that were passed along to our customers and by store closures of existing customers. These decreases were partially offset through the growth in sales to continuing customers, primarily due to the new agreement with Raley’s (see “Recent Developments – Raley’s”) and the addition of new customers.
· |
All Other: Net sales were $0.9 million for the 2016 39-Week Period and $0.8 million for the 2015 39-Week Period, respectively. |
29
Cost of sales. Consolidated cost of sales were $2.623 billion for the 2016 39-Week Period and $2.707 billion for the 2015 39-Week Period and comprised 92.5% and 92.9% of consolidated net sales for the 2016 and 2015 39-Week Periods, respectively. Factors impacting cost of sales were as follows:
· |
Wholesale Distribution Segment: Cost of sales decreased $83.9 million to $2.623 billion in the 2016 39-Week Period compared to $2.707 billion in the 2015 39-Week Period. As a percentage of Wholesale Distribution net sales, cost of sales were 92.5% and 92.9% for the 2016 and 2015 39-Week Periods, respectively. |
|
· |
We experienced increased margins in the perishable product lines, including improvements in the dairy operation and reduced product costs, resulting in a 0.2% decrease in cost of sales as a percent of Wholesale Distribution net sales in the 2016 39-Week Period compared to the 2015 39-Week Period. |
|
· |
Vendor related activity resulted in a 0.2% decrease in cost of sales as a percent of Wholesale Distribution net sales in the 2016 39-Week Period compared to the 2015 39-Week Period. |
Distribution, selling and administrative expenses. Consolidated distribution, selling and administrative expenses were $208.4 million in the 2016 39-Week Period compared to $204.1 million in the 2015 39-Week Period, reflecting an increase of $4.3 million, and comprised 7.3% and 7.0% of net sales for the 2016 and 2015 39-Week Periods, respectively. Factors impacting distribution, selling and administrative expenses are as follows:
· |
Wholesale Distribution Segment: Distribution, selling and administrative expenses increased $4.3 million to $207.9 million in the 2016 39-Week Period compared to $203.6 million in the 2015 39-Week Period, and comprised 7.3% and 7.0% of Wholesale Distribution net sales for the 2016 and 2015 39-Week Periods, respectively. |
|
· |
Employee Pension and Postretirement Benefits: During the 2016 39-Week Period, we experienced an increase of $4.3 million, or 0.2% as a percent of Wholesale Distribution net sales, in non-union employee postretirement benefit expenses, primarily due to a reduction in the amortization of prior service credits that arose from changes in our retiree medical program, as certain of these prior service credits were fully utilized in our fiscal year ended October 3, 2015. |
|
· |
Audit Committee Investigation Expenses: During the 2016 39-week period, expenses related to the Audit Committee Investigation decreased $0.5 million, but were zero as a percent of Wholesale Distribution net sales. Total Audit Committee Investigation expenses for the 2016 39-week period were $2.5 million compared to $3.0 million for the same period in the prior year. These expenses are comprised primarily of legal and audit fees. We anticipate that these expenses will continue to diminish during fiscal 2016. |
|
· |
General Expenses: During the 2016 39-Week Period, general expenses increased $0.5 million, or 0.1% as a percent of Wholesale Distribution net sales due to the decline in net sales. |
· |
All Other: Selling and administrative expenses for our All Other business activities were $0.5 million for both the 2016 and 2015 39-Week Periods. |
Interest. Interest expense was $7.5 million in both the 2016 and 2015 39-Week Periods, and comprised 0.3% of consolidated net sales for both the 2016 and 2015 39-Week Periods. Factors impacting interest expense are as follows:
· |
Interest expense on our primary debt instruments (as described below) remained stable at $7.2 million for both the 2016 39-Week Period and the 2015 39-Week Period. |
|
· |
Interest Rates: Interest expense remained stable in the 2016 39-Week Period compared to the 2015 39-Week Period due to the impact of interest rates. Our effective borrowing rate for the combined primary debt, made up of the revolving lines of credit for Unified and Grocers Capital Company, the term loan and the senior secured notes (2015 39-Week Period only), was 3.2% for both the 2016 and 2015 39-Week Periods. Interest rates reflect lower effective rates on Unified’s revolving line of credit and the debt refinancing in December 2014, which replaced the remaining senior secured notes with variable rate term debt, offset by a recent increase in overall market rates. |
|
· |
Weighted Average Borrowings: Interest expense remained stable in the 2016 39-Week Period compared to the 2015 39-Week Period, reflecting a relatively consistent level of outstanding debt. Weighted average borrowings increased by $0.4 million primarily due to increases in non-working capital items such as costs incurred during fiscal 2015 in preparing for anticipated increased business and resulting wind down with Haggen, Audit Committee Investigation costs and stock repurchases made in the current fiscal year, offset by net proceeds received from the sale of our discontinued operations. |
Borrowings under Unified’s credit agreement are subject to market rate fluctuations. A 25 basis point change in the market rate of interest over the period would have resulted in a $0.6 million increase or decrease in corresponding interest expense.
· |
Interest expense on our other debt instruments was $0.3 million for both the 2016 and 2015 39-Week Periods. |
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Loss on early extinguishment of debt. As discussed in “Outstanding Debt and Other Financing Arrangements” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, during the 2015 39-Week Period, we incurred a Make-Whole Amount of $3.0 million in conjunction with the prepayment of $48.5 million of our remaining senior secured notes pursuant to our Amended and Restated Note Purchase Agreement dated as of January 3, 2006, as amended, with the then-current noteholders and John Hancock Life Insurance Company (U.S.A.), acting in its capacity as collateral agent for the then-current noteholders. As a result of the prepayment of the remaining senior secured notes, we recorded a loss on early debt extinguishment of $3.2 million during the first quarter of fiscal year 2015. This amount is comprised of the $3.0 million Make-Whole Amount plus the write-off of unamortized fees associated with the prepayment of the senior secured notes of $0.2 million.
Estimated patronage dividends. Estimated patronage dividends for the 2016 39-Week Period were $6.5 million, compared to estimated patronage dividends of $4.5 million in the 2015 39-Week Period. Estimated patronage dividends for the 2016 and 2015 39-Week Periods consisted of the patronage activities from our three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2016 and 2015 39-Week Periods, respectively, we had patronage earnings of $6.0 million and $3.9 million in the Southern California Dairy Division, $0.5 million and $0.6 million in the Pacific Northwest Dairy Division and no patronage earnings in the Cooperative Division. The Southern California Dairy Division implemented operational improvements in the second half of fiscal 2015, resulting in higher patronage earnings due to improved margins in addition to lower operating expenses during the 2016 39-Week Period compared to the 2015 39-Week Period. The Cooperative Division experienced a loss in the 2016 39-Week Period due primarily to the loss of business from Haggen’s Pacific Southwest stores and increased distribution, selling and administrative costs, partially offset by improved margins in our perishable product lines. Patronage dividends produced by the Cooperative Division are distributed annually, historically in cash, Class B and Class E Shares (see Part I, Item 1. “Business – Patronage Dividends” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information), while patronage dividends produced by the dairy divisions are paid quarterly, historically in cash. Commencing in July 2016, as discussed in “Recent Developments,” we will no longer pay patronage dividends on sales of dairy products from the Southern California Dairy Division and the Pacific Northwest Dairy Division.
Income taxes. Our effective income tax rate was (0.5)% for the 2016 39-Week Period compared to (1.4)% for the 2015 39-Week Period. The negative effective rates for the 2016 and 2015 39-Week Periods are due to valuation allowances provided to offset the income tax benefits associated with the 2016 and 2015 39-Week Period pre-tax losses.
LIQUIDITY AND CAPITAL RESOURCES
We finance our capital needs through a combination of internal and external sources. These sources include cash flows from operations, Member capital and other Member investments, bank borrowings, various types of long-term debt and lease financing.
The acquisition, holding and redemption of our capital shares and making of deposits by our Members, and our policies with respect to such matters, can significantly affect our liquidity and capital resources. Our Bylaws, which may be changed by the Board at its discretion, currently require each Member to own 350 Class A Shares. In addition, we currently require each Member to own such amount of Class B Shares as may be established by the Board. This requirement to own Class B Shares is referred to as the “Class B Share Requirement.” Members who do not satisfy the Class B Share Requirement solely from their holdings of Class B Shares are generally required to make a subordinated deposit (a “Required Deposit”) with us. Member and Non-Member customers may be required to provide us a Credit Deposit in order to purchase products on credit terms established by us. “Credit Deposit” means any non-subordinated deposit that is required to be maintained by a Member or Non-Member customer in accordance with levels established by our credit office from time to time in excess of the amount of the Required Deposit set by the Board. We do not pay interest on Required Deposits or Credit Deposits; however, interest is paid at the prime rate for deposits in excess of a Member’s Required Deposit or Credit Deposit (an “Excess Deposit”). See Part I, Item 1. “Business – Capital Shares,” Part I, Item 1. “Business – Customer Deposits” and Part I, Item 1. “Business – Pledge of Shares and Guarantees” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
At July 2, 2016, we had $0.8 million of tendered Class A Shares, $28.8 million of tendered Class B Shares and $1.4 million of eligible Class E Shares pending redemption or repurchase, whose redemption or repurchase is subject to final approval by the Board, and in the case of Class B Shares, subject to the 5% limitation on redemptions contained in our redemption policy (see Part I, Item 1. “Business – Capital Shares – Redemption of Class A and Class B Shares and Repurchase of Class E Shares” of our Annual Report on Form 10-K for the year ended October 3, 2015 for further information).
Our obligations to repay a Member’s Required Deposit on termination of Member status (once the Member’s obligations to us have been satisfied) is reported as a long-term liability within “Members’ and Non-Members’ deposits” on our
31
consolidated condensed balance sheets. Excess Deposits are not subordinated to our other obligations and are reported as short-term liabilities within “Members’ deposits and estimated patronage dividends” on our consolidated condensed balance sheets. At July 2, 2016 and October 3, 2015, we had $9.9 million and $8.0 million, respectively, in “Members’ and Non-Members’ deposits” and $9.4 million and $10.2 million, respectively, in “Members’ deposits and estimated patronage dividends” (of which $8.6 million and $8.3 million, respectively, represented Excess Deposits).
We believe that the combination of cash flows from operations, current cash balances and available lines of credit will be sufficient to service our debt, redeem or repurchase Members’ capital shares, make income tax payments and meet our anticipated needs for working capital and capital expenditures through at least the next two fiscal years.
On October 7, 2015 (the “Closing Date”), we completed the sale, at a discount to Tangible Book Value (“TBV”) (as defined in the Stock Purchase Agreement), of all of the outstanding shares of our wholly owned subsidiary, Unified Grocers Insurance Services (“UGIS”), to AmTrust Financial Services, Inc. (“AmTrust”) pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and between the Company and AmTrust dated as of April 16, 2015. As of the Closing Date, UGIS owned all of the outstanding shares of the capital stock of Springfield Insurance Company and Springfield Insurance Company Limited (Bermuda). We refer to UGIS, Springfield Insurance Company and Springfield Insurance Company Limited (Bermuda) collectively as the “Acquired Companies.”
We received $26.2 million in cash proceeds for the Acquired Companies, representing an agreed-upon discount to the estimated TBV, which was calculated as defined in the Stock Purchase Agreement. In May 2016, AmTrust delivered to the Company a final closing statement, including its calculation of the TBV as of the Closing Date. The final purchase price was adjusted to reflect an increase in the purchase price of $0.4 million between the estimated TBV as of the Closing Date and the actual TBV as of the Closing Date. We utilized the net proceeds of this transaction to repay certain indebtedness.
We incurred a net loss of $6.9 million in conjunction with the sale of the Acquired Companies at the Closing Date, including a net operating loss from discontinued operations of $3.7 million and a $1.3 million impairment on our investment in the Acquired Companies, in addition to $1.9 million of charges related to the sale, primarily comprised of costs incurred by us directly attributable to the Audit Committee Investigation and to the preparation and consummation of the sale of the Acquired Companies to AmTrust. Our historical financial statements have been revised to present the operating results of the Acquired Companies as discontinued operations. See Note 2, “Discontinued Operations” in Part I, Item 1, “Financial Statements – Unaudited” for additional information.
See Item 2.01. “Completion of Acquisition or Disposition of Assets” and Item 2.05. “Costs Associated With Exit or Disposal Activities” of our Current Report on Form 8-K, filed on October 14, 2015, and Item 1.01. “Entry into a Material Definitive Agreement,” including Exhibit 99.1, “Stock Purchase Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of April 16, 2015” thereto, of our Current Report on Form 8-K, filed on April 22, 2015, for additional information.
CASH FLOW
We had positive cash flow from operating and investing activities during the 2016 39-Week Period. Cash flows from operating and investing activities were used to partially offset cash utilized for financing activities. We also reinvested proceeds from the sale of our discontinued operations to pay down debt and accounts payable.
As a result of these activities, net cash, consisting of cash and cash equivalents, was $2.5 million as of July 2, 2016 compared to $3.1 million as of October 3, 2015.
Our discontinued operations provided cash of $0.2 million in the 2016 39-Week Period compared to cash utilized of $0.8 million in the 2015 39-Week Period. Cash provided in the 2016 39-Week Period resulted from the final sales price adjustment related to the sale of our former insurance subsidiaries, offset by expenses incurred relative to the sale of the former insurance subsidiaries. In the 2015 39-Week Period, discontinued operations utilized cash for expenses related to the sale of the former insurance subsidiaries.
The following table summarizes the impact of operating, investing and financing activities on our cash flows from continuing operations for the 2016 and 2015 39-Week Periods:
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Net (Decrease) Increase in Total Cash from Continuing Operations |
|
|
2016 |
|
|
|
2015 |
|
|
Difference |
|
|
Cash provided (utilized) by continuing operating activities |
|
$ |
17,247 |
|
|
$ |
(13,857 |
) |
|
$ |
31,104 |
|
Cash provided (utilized) by investing activities |
|
|
13,007 |
|
|
|
(27,346 |
) |
|
|
40,353 |
|
Cash (utilized) provided by financing activities |
|
|
(30,805 |
) |
|
|
42,190 |
|
|
|
(72,995 |
) |
Total (decrease) increase in cash from continuing operations |
|
$ |
(551 |
) |
|
$ |
987 |
|
|
$ |
(1,538 |
) |
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Net cash flows from continuing operating, investing and financing activities decreased by $1.5 million, resulting in a $0.5 million decrease in cash for the 2016 39-Week Period compared to an increase of $1.0 million in cash for the 2015 39-Week Period. The decrease in net cash flow for the 2016 39-Week Period consisted of cash utilized by financing activities of $30.8 million, partially offset by cash provided by operating activities of $17.3 million and investing activities of $13.0 million. The primary factors contributing to the changes in cash flow are discussed below. At July 2, 2016 and October 3, 2015, working capital was $124.3 million and $139.5 million, respectively, and the current ratio was 1.4 at both July 2, 2016 and October 3, 2015.
Operating Activities: Net cash provided by continuing operating activities increased by $31.1 million to $17.3 million provided in the 2016 39-Week Period compared to $13.8 million utilized in the 2015 39-Week Period. The increase in cash provided by continuing operating activities compared to the 2015 39-Week Period was attributable to (1) an increase between the periods in cash received from collection of accounts receivable of $17.5 million, (2) an increase in net cash flows related to decreased inventories of $76.2 million (we had increased inventory in the prior year due primarily to the Haggen Pacific Southwest business), (3) an increase in other long term liabilities outstanding of $2.3 million, (4) a decrease in prepaid expenses and other current assets of $2.5 million and (5) an increase between the periods in net cash provided by other operating activities of $6.5 million. The foregoing increases of $105.0 million in cash provided were partially offset by (1) cash used to pay accounts payable and accrued liabilities of $70.7 million and (2) an adjustment in the 2015 39-Week Period to reconcile net loss to net cash utilized by operating activities of $3.2 million related to the loss on early extinguishment of debt.
Investing Activities: Net cash provided by investing activities increased by $40.4 million to $13.0 million in the 2016 39-Week Period compared to cash utilized of $27.4 million in the 2015 39-Week Period. The increase in cash provided by investing activities during the 2016 39-Week Period as compared to the 2015 39-Week Period was due mainly to (1) proceeds of $26.2 million received from the sale of our discontinued insurance operations, (2) a decrease in cash utilized to purchase securities of $10.0 million and (3) a decrease in cash used for other assets and capital expenditures of $4.5 million. The foregoing increases of $40.7 million in cash provided were partially offset by (1) a decrease in cash provided by net notes receivable activities of $0.1 million, reflecting normal fluctuation in loan activity to Members for their inventory and equipment financing, and (2) a decrease of $0.2 million in our investment in Western Family Holding Company due to a return of invested capital in the 2015 39-Week Period. Spending on future investing activities is expected to be funded by existing cash balances, cash generated from operations or additional borrowings.
Financing Activities: Net cash utilized by financing activities was $30.8 million for the 2016 39-Week Period compared to cash provided of $42.2 million in the 2015 39-Week Period. The net decrease of $73.0 million in cash provided by financing activities for the 2016 39-Week Period as compared to the 2015 39-Week Period was due to a decrease in cash provided of $75.6 million related to increased notes payable repayments, lower revolver borrowings and lower borrowings under the “first-in last-out” tranche in our credit agreement. The decreased cash provided by borrowing activities was partially offset by lower payments of deferred financing fees and payments of debt extinguishment costs in the 2016 39-Week Period compared to the 2015 39-Week Period of $4.9 million. See “Outstanding Debt and Other Financing Arrangements” for further discussion regarding our credit facilities and financing arrangements. In addition, there was a net decrease of $2.3 million in cash utilized for the repurchase activity of Members’ shares, partially offset by cash provided by Member and customer deposit activity. Financing to meet future capital spending requirements is expected to be provided by our continuing operating cash flow or additional borrowings.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this report, we do not participate in transactions that result in relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually, narrow or limited purposes.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Other than items discussed below in “Outstanding Debt and Other Financing Arrangements,” there have been no material changes in our contractual obligations and commercial commitments outside the ordinary course of our business during the thirty-nine week period ended July 2, 2016. See “Contractual Obligations and Commercial Commitments” discussed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
OUTSTANDING DEBT AND OTHER FINANCING ARRANGEMENTS
Other than discussed below, there have been no material changes in our outstanding debt and other financing arrangements outside the ordinary course of our business during the thirty-nine week period ended July 2, 2016.
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Amounts outstanding related to our secured credit agreements, senior secured notes and other debt agreements are disclosed below. See “Credit Facilities” and “Outstanding Debt and Other Financing Arrangements” discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 “Notes Payable” of “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
Secured Credit Agreements
Credit Agreement – Consent and Waiver
We are party to an Amended and Restated Credit Agreement dated as of June 28, 2013, as amended in fiscal 2014 and fiscal 2015 (as so amended, the “Credit Agreement”), among the Company, the lenders party thereto, and Wells Fargo Bank, National Association (“N.A.”), as administrative agent (“Administrative Agent”). See “Credit Facilities – Secured Credit Agreement” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015 for a full description of the Credit Agreement and the amendments thereto. On December 28, 2015, we entered into a consent and waiver (the “Consent”) whereby the Administrative Agent and the Lenders (as defined in the Credit Agreement) consented to (i) the extension to June 30, 2016 of the deadline for delivery of the annual financial statements and associated certifications and information required pursuant to the Credit Agreement and (ii) the extension to January 31, 2016 of the deadline for delivery of annual financial projections required pursuant to the Credit Agreement. The financial projections were delivered prior to the January 31, 2016 deadline. The annual financial statements and associated required certifications were delivered to the Company’s Administrative Agent and the Lenders on June 1, 2016, who confirmed that the Company is now in compliance with the reporting requirements of the Credit Agreement.
Our outstanding revolver borrowings under the Credit Agreement decreased to $150.4 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.48% per annum) from $161.8 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 1.99% per annum), with access to approximately $126.7 million of additional capital available under the Credit Agreement to fund our continuing operations and capital spending requirements for the foreseeable future. Our outstanding FILO borrowings under the Credit Agreement were $17.2 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 3.71% per annum) and $20.7 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 3.20% per annum). Our outstanding term loan borrowings under the Credit Agreement were $85.0 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.43% per annum) and $92.5 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 2.20% per annum). As of July 2, 2016, we are in compliance with all applicable covenants of the Credit Agreement. While we are currently in compliance with all required covenants and expect to remain in compliance, this does not guarantee that we will remain in compliance in future periods.
Subsidiary Financing Arrangement
Our wholly-owned finance subsidiary, Grocers Capital Company (“GCC”), is party to an Amended and Restated Loan and Security Agreement, dated as of September 26, 2014 as amended by Amendment Number One dated as of June 26, 2015 (as so amended, the “GCC Loan Agreement”), by and among GCC, the lenders party thereto, and California Bank & Trust (“CBT”), as Arranger and Administrative Agent (“Agent”). See “Credit Facilities – Subsidiary Financing Arrangement” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015 for a full description of the GCC Loan Agreement and the amendments thereto.
On December 28, 2015, GCC received consent from CBT for the GCC Loan Agreement to extend the due date of the covenant requirement to deliver our consolidated audited financial statements to June 30, 2016. The consolidated audited financial statements and associated certifications of the Company were delivered to California Bank & Trust on June 1, 2016, which confirmed that the Company is now in compliance with the reporting requirements of the GCC Loan Agreement.
GCC had no revolving loan borrowings outstanding at July 2, 2016 and October 3, 2015. As of July 2, 2016, we are in compliance with all applicable covenants of the GCC Loan Agreement. While we are currently not in violation of any required covenants and expect to remain in compliance, this does not guarantee that we will remain in compliance in future periods.
Senior Secured Notes
Prior to December 18, 2014, we were party to an Amended and Restated Note Purchase Agreement dated as of January 3, 2006, as amended (the “Senior Note Agreement”), with the then-current noteholders and John Hancock Life Insurance Company (U.S.A.) (“John Hancock”), acting in its capacity as collateral agent for the then-current noteholders, collectively referred to herein as the “Hancock Debt.” On December 18, 2014, we prepaid in full the Hancock Debt. Certain
34
capitalized terms used in this paragraph have the meanings given to them in the Senior Note Agreement. We prepaid principal of and interest on the Hancock Debt in the amount of $48.5 million, and paid the applicable Make-Whole Amount of $3.0 million, as calculated per the Senior Note Agreement, in connection with the prepayment.
Other Debt Agreements
During fiscal 2013, we entered into three secured credit facilities to finance our purchase of tractors. These agreements bear interest at a rate of 2.2% and mature in fiscal 2018. At July 2, 2016 and October 3, 2015, respectively, the outstanding loan balance under the three agreements totaled $0.9 million and $1.4 million.
Capital Lease Agreements
During fiscal 2015, we entered into three capital lease agreements for equipment purchases. Two of the capital lease agreements bear an interest rate of 2.09% and one capital lease agreement bears an interest rate of 2.26%. The three capital lease agreements mature in fiscal 2020. At July 2, 2016 and October 3, 2015, respectively, the outstanding loan balance under the three capital leases totaled $1.8 million and $2.1 million.
During fiscal 2016, we entered into two capital lease agreements for equipment purchases. These capital lease agreements bear an interest rate of 2.10% and mature in fiscal 2021. At July 2, 2016, the outstanding balance under the two capital lease agreements totaled $1.3 million.
REDEMPTION OF CAPITAL STOCK
Our Articles of Incorporation and Bylaws provide that the Board has the absolute discretion to repurchase, or not repurchase, any Class A, Class B or Class E Shares of any outgoing Member regardless of when the membership terminated, and any Class B Shares in excess of the Class B Share Requirement held by a current Member, whether or not the shares have been tendered for redemption and regardless of when the shares were tendered. Historically, the Board considers the redemption of eligible Class A Shares at each board meeting. All other shares eligible for redemption or repurchase are considered by the Board on an annual basis, usually in December. Class E Shares will only be repurchased upon approval of the Board or upon sale or liquidation of the Company, and the repurchase price for the Class E Shares is fixed at their stated value of $100 per share. The Class E Shares become eligible for repurchase at the discretion of the Board at a price of $100 per share ten years after their issuance date, with the outstanding Class E Shares becoming eligible for repurchase between the end of fiscal 2013 and the end of fiscal 2018. There were no redemptions of Class A or Class B Shares during the thirty-nine week period ended July 2, 2016. The Company repurchased 86,500 Class E Shares, which were eligible for repurchase in fiscal 2014 and 2015, for approximately $8.7 million during the thirty-nine week period ended July 2, 2016.
See Part I, Item 1. “Business – Capital Shares – Classes of Shares” and Part I, Item 1. “Business – Capital Shares – Redemption of Class A and Class B Shares and Repurchase of Class E Shares” of our Annual Report on Form 10-K for the year ended October 3, 2015 for a fuller description and additional information.
PENSION AND POSTRETIREMENT BENEFIT PLANS
We sponsor a cash balance plan (“Unified Cash Balance Plan”). The Unified Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all of our employees who are not subject to a collective bargaining agreement. Under the Unified Cash Balance Plan, participants are credited with an annual accrual based on their years of service with us. Participants’ balances receive an annual interest credit, currently tied to the 30-year Treasury rate that is in effect the previous November, but in no event shall the rate be less than 5%. Our funding policy is to make contributions to the Unified Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. Through December 31, 2014, all of our qualifying employees not subject to a collective bargaining agreement accrued benefits pursuant to the Unified Cash Balance Plan. Prior to the end of fiscal 2014, we amended the Unified Cash Balance Plan to close the plan to new entrants effective December 31, 2014. In addition, the plan was frozen effective December 31, 2014 such that current participants will no longer be credited with any future benefit accruals based on their years of service and pensionable compensation after that date. The annual interest credit as described above will continue for participants active in the plan as of December 31, 2014. Selected groups of vested terminated participants were each given one-time opportunities to elect a lump sum distribution of their benefits from the plan’s assets or immediate receipt of an annuity in December 2015 and December 2014. As a result, benefit payments of $8.7 million and $7.9 million, respectively, were distributed from the plan’s assets to those participants who elected such option prior to the end of our second quarters ended April 2, 2016 and March 28, 2015.
We also sponsor an Executive Salary Protection Plan (“ESPPIII”) for our executive officers that provides supplemental post-termination retirement income based on each participant’s salary and years of service as an officer with us. This plan was amended in December 2012 to close the plan to new entrants as of September 30, 2012. We have internally
35
funded our obligation to plan participants in a rabbi trust (not considered plan assets for actuarial valuation purposes), consisting primarily of life insurance policies tied to underlying investments in the equity market (reported at cash surrender value) and mutual fund assets consisting of various publicly-traded mutual funds (reported at estimated fair value based on quoted market prices).
We sponsor a supplemental retirement plan for a select group of management or highly compensated employees that are at the Vice President level and above of the Company under the Unified Grocers, Inc. Supplemental Executive Retirement Plan (the “SERP”). This plan was established to replace the ESPPIII, which has been frozen. The SERP is a non-qualified defined contribution type plan that provides participating officers with supplemental retirement income in addition to the benefits provided under the Unified Cash Balance Plan and 401(k) plan.
We sponsor other postretirement benefit plans that provide certain medical coverage to retired non-union employees and officers and provide unused sick leave benefits for certain eligible union employees. Those plans are not funded.
Our net periodic benefit plan credit for our combined pension and other postretirement benefits was approximately $1.9 million and $5.5 million for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively.
During August 2014, legislation to extend pension funding relief was enacted as part of the Highway and Transportation Funding Act of 2014 (“HATFA”). As a result, we expect to make no estimated minimum contributions to the Unified Cash Balance Plan during fiscal 2016 for the 2015 plan year, and there will be no quarterly contributions required for the 2016 plan year. At our discretion, we may contribute in excess of the minimum (zero) requirement. Additional contributions, if any, will be based, in part, on future actuarial funding calculations and the performance of plan investments.
Additionally, we anticipated making benefit payments of $4.0 million to participants in the ESPPIII for the 2016 plan year. We made benefit payments of $3.8 million to participants in the ESPPIII during the thirty-nine weeks ended July 2, 2016 for the 2016 plan year.
Benefit expense for the SERP is accrued under the assumption that all participants in the SERP will achieve full vesting (five years of service). Our benefit expense was $1.3 million and $1.0 million for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively. See Note 7 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q and Item 5.02. “Compensatory Arrangements of Certain Officers” of our Current Report on Form 8-K, filed on May 14, 2013, for additional discussion.
On December 28, 2015, the Compensation Committee and the Board, as applicable, approved amendments to our Long-Term Incentive Plan (“LTIP”), originally implemented in June 2013 to align, motivate and reward executives for their contributions to our long-term financial success and growth. Effective for fiscal 2016, the LTIP was amended to expand the awards that may be granted thereunder to include Full-Value Units. Full-Value Units entitle the award recipient the “maturity value” on the units at the end of the four-fiscal year performance period (the “Performance Cycle”) assigned to the units. The “maturity value” for a Full-Value Unit is our Exchange Value per Share for a share of the Class A or Class B stock of the Company (see Part II, Item 6, “Selected Financial Data” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information on the calculation of the Exchange Value Per Share), plus cumulative cooperative division patronage dividends, cash dividends and non-allocated retained earnings attributable to such share Exchange Value per Share, as calculated from our financial statements for the fiscal year end that coincides with the end of the performance period assigned to the Full-Value Units. The Full-Value Units will vest in equal monthly installments over the Performance Cycle, and the settlement of vested Full-Value Units will be paid in a lump sum cash payment as soon as administratively practicable following the end of the Performance Cycle, but in no event later than December 31 that immediately follows the end of the Performance Cycle. For fiscal 2016, an officer’s LTIP award is comprised of Full-Value Units, equaling 25% of the targeted compensation gap, and Appreciation Units, equaling 75% of the targeted compensation gap. Appreciation Units entitle the award recipient to the positive difference of the “maturity value” on the units at the end of the four-fiscal year performance period assigned to the units, minus the “base value” assigned to the units at the time of grant. The maturity value for an Appreciation Unit is determined in the same manner as a Full-Value Unit as described above. For the 2016 LTIP awards, a total of 5,470 Full-Value Units were granted and a total of 92,245 Appreciation Units were granted with a base value per unit of $195.34. We anticipate these grants to have a cash value between $3.1 million and $5.2 million, utilizing compound annual growth rates from 2.5% to 5.0%. See Item 5.02. “Compensatory Arrangements of Certain Officers – 2016 Long-Term Incentive Awards” of our Current Report on Form 8-K, filed on December 29, 2015, for additional information.
During fiscal year 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (collectively, the “Acts”) was passed and signed into law. The Acts contain provisions that could impact our retiree medical benefits in future periods, including the related accounting for such benefits, such as the 40% excise tax beginning in 2020 that will be imposed on the value of health insurance benefits exceeding a certain threshold. However, the full extent of the impact of the Acts, if
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any, cannot be determined until all regulations are promulgated under the Acts (or changed as a result of ongoing litigation) and additional interpretations of the Acts become available. We will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. In addition, we may consider plan amendments in future periods that may have accounting implications.
RISK FACTORS
The risks and uncertainties described below are those that we believe are the material risks related to our business. If any of the following risks occur, our business, prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.
Risks Related to the Audit Committee Investigation, the State of the Company’s Internal Control Over Financial Reporting, Our Failure to Timely File Periodic Reports with the SEC and Related Matters
Expenses relating to or arising from the Audit Committee Investigation, including diversion of management’s time and attention, may adversely affect our business and results of operations. As discussed in Part I, Item 1, “Business – Explanatory Note” and Part I, Item 1, “Business – Audit Committee Investigation” and Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended October 3, 2015, in its Notification of Late Filing on Form 12b-25 dated December 19, 2014, with respect to the Company’s Annual Report on Form 10-K for the year ended September 27, 2014, the Company announced that the Audit Committee of the Company’s Board of Directors (“Audit Committee”) was conducting, with the assistance of independent legal counsel, an investigation of issues relating to the setting of case reserves and management of claims by the Company’s former insurance subsidiaries and related matters (“Audit Committee Investigation”). As a result of the Audit Committee Investigation, the filing of our Annual Reports on Form 10-K for fiscal year 2014 and 2015, as well as the Quarterly Reports on Form 10-Q for fiscal year 2015 and the first and second quarters of fiscal year 2016 were delayed until June 2016.
As a result of the Audit Committee Investigation, we have incurred significant expenses to date related to legal, accounting, and other professional services in connection with the investigation and related remediation efforts, and we may continue to incur significant additional expense with regard to our remediation efforts. In addition, senior management has committed, and continues to commit, substantial amounts of time and effort in connection with the remediation efforts and related matters. The significant amount of time and effort spent by our management team on these matters may divert their attention from the operation of our business. The expenses incurred, and expected to be incurred, on the remediation efforts and related matters, and the diversion of the attention of the management team could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our management has identified material weaknesses in the Company’s internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements. We may not be able to fully address the material weaknesses in our internal controls or provide assurance that remediation efforts will prevent future material weaknesses. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and the Sarbanes-Oxley Act of 2002 and SEC rules require that our management report annually on the effectiveness of the Company’s internal control over financial reporting and our disclosure controls and procedures. Among other things, our management must conduct an assessment of the Company’s internal control over financial reporting to allow management to report on the effectiveness of the Company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As disclosed in Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended October 3, 2015, our management has determined that we have material weaknesses in the Company’s internal control over financial reporting as of October 3, 2015 related to (i) the oversight and monitoring of subsidiary and operating unit compliance with accounting and reporting policies and procedures and (ii) controls over ensuring accurate and complete financial statement disclosures.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We are actively engaged in implementing a remediation plan designed to address such material weaknesses. However, future additional material weaknesses in the Company’s internal control over financial reporting may be identified in the future. Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our consolidated financial statements. The possibility of such future additional misstatements could cause us to delay filing our consolidated financial statements on a timely basis and result in noncompliance with covenants in our credit facilities, which could limit or suspend our access to working capital, which in turn could cause us to curtail or cease doing business altogether. Any such future misstatements in our publicly filed financial statements may impose upon us a requirement to restate such financial results. In addition, if we are unable to remediate successfully the material weaknesses in our internal controls or if we are unable to produce accurate and timely financial statements, our Members may lose confidence in our ability to effectively protect their investments in us, which in turn could lead Members to seek to withdraw such investments and to seek other sources to fulfill their supply needs.
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There is also the possibility that one or more Members or a regulatory agency could commence civil litigation against us as a result of any such future misstatement. Any such future misstatement or occurrence could result in increased audit, legal and any investigation-related fees, which could severely adversely affect our operations and financial results.
Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully implemented, the aggregate cost of implementation or whether the remediation plan will be adequate and effective. Until our remediation plan is fully implemented, our management will continue to devote significant time and attention to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate or ineffective, there also will continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected. Further and continued determinations that there are material weaknesses in the effectiveness of the Company’s internal control over financial reporting could also adversely affect our ability to attract new Members and their associated investments, as well as severely adversely affect our ability to retain existing financing or obtain, if at all, future financing on reasonable or acceptable terms. The failure to obtain acceptable or any financing could cause our existing Members to request the redemption of their shares which, depending upon the magnitude and extent of any such redemption, could have a material adverse effect on our business.
For more information relating to the Company’s internal control over financial reporting (and disclosure controls and procedures) and the remediation plan undertaken by us, see Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the year ended October 3, 2015.
The markets in which we operate are highly competitive, characterized by high volume, low profit margins and industry consolidation, and many of our competitors have greater financial resources than us which could place us at a competitive disadvantage and adversely affect our financial performance. The grocery distribution business is generally characterized by a relatively high volume of sales with relatively low profit margins. Price competition among food wholesalers is intense. In addition, we compete with such food wholesalers with regard to quality, variety and availability of products offered, strength of corporate brand labels offered, schedule and reliability of deliveries and the range and quality of services provided.
Some of our competitors, including C&S Wholesale Grocers, Inc., Supervalu, Inc. and United Natural Foods, Inc. (UNFI), are significantly larger and have greater financial resources than us. In addition, industry consolidation has in the past increased, and may continue in the future to increase, the number of large competitors that we face. These large national distributors have the resources to compete aggressively on price and may be able to offer customers a wider range of products and services and a wider area of distribution than we do. We also face intense competition from regional or specialized distributors and, from time to time, new entrants in various niche markets, with such competitors often able to compete very aggressively in such niches with unique or highly tailored products and services.
To compete effectively, we must keep our costs down to maintain margins while simultaneously increasing sales by offering the right products and services at competitive prices, with the expected quality, variety and availability, to appeal to consumers. If we are unable to compete effectively in our highly competitive industry, we may suffer reduced net sales and/or reduced margins and profitability, or suffer a loss, and our business, financial condition, results of operations and cash flows could suffer.
We may experience reduced sales and earnings if Members continue to lose market share to larger, often fully integrated traditional full-service grocery store chains or to warehouse club stores, supercenters and discount stores, many of which have greater financial resources than our Members or us. Our Members continue to face intense competition from large, often fully integrated traditional full-service grocery store chains. Most of these store chains have greater resources than our Members and us and benefit from local or national brand name recognition and efficiencies of scale from a fully integrated distribution network, standardization across stores, concentrated buying power and shared overhead costs. In addition, traditional format full-service grocery stores, which include most of our customers, have in recent years faced intense competition from, and lost market share to, non-traditional format stores, including warehouse club stores, supercenters, discount stores and specialty or niche stores focused on upscale and natural and organic products. Many of these non-traditional format stores are very large, with considerable resources, national brand names and economies of scale. This competition from non-traditional format stores has been particularly intense, and significant market share has been lost, with respect to categories of non-perishable products that we sell. Traditional format grocery stores, including our customers, have tended to move to expand their offerings and sales of perishable products, which generally have lower margins for us than non-perishable products. A continued decline in our sales of non-perishable products may adversely affect our profitability.
The market share of non-traditional format stores may grow in the future, potentially resulting in continued losses of sales volume and reduced earnings for our Members and, in turn, for us. Continued losses of market share by our Members, whether to other traditional full-service grocery store chains or to non-traditional format stores, could reduce our net sales,
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margins and profitability, or cause us to incur losses. As a result, our business, financial condition, results of operations and cash flows could suffer.
We have an increasingly concentrated customer base, which has in the past reduced, and may continue in the future to reduce, our margins and expose us to an increase in risk concentration, including in the areas of credit risk and the sudden loss of significant customer business. Our operating results are highly dependent upon maintaining or growing our sales to our customers. Our largest customer, Cash & Carry Stores, LLC, a wholly-owned subsidiary of Smart & Final, Inc., a Non-Member customer, constituted approximately 16% of our total net sales for the thirty-nine week period ended July 2, 2016. In recent years, we have seen our sales become increasingly concentrated with our large customers, with our top ten customers having increased from 42% of our total net sales in fiscal 2008 to 53% of our total net sales in fiscal 2015. Our top ten customers constituted approximately 51% of our total net sales for the thirty-nine week period ended July 2, 2016. A significant loss in membership or volume by one of our larger customers could have a sudden and material adverse effect on our operating results. For example, in the third quarter of fiscal 2011, we lost one of our top ten customers who represented $144.9 million in net sales for the fifty-two weeks immediately preceding the date they ceased purchasing from us. Between fiscal 2011 and fiscal 2012, this resulted in a loss of $87.2 million in annual net sales, or 2% of total net sales in fiscal 2012. We have also experienced an overall decline in the number of Members every year since the end of fiscal 2008. Since then, the number of Members has declined from 520 to 345 at the end of fiscal 2015, an average decline of 5.7% per year in our membership base. We believe this decline has been due to a number of factors, including smaller-volume retailers deciding to conduct business with us as Non-Members, Members discontinuing operations due to competition they face or challenging economic conditions, Members consolidating with other Members and Members choosing other wholesale distributors.
Any such loss of a large customer, the loss of a number of smaller customers, the continued erosion of our membership base, or the inability to attract new customers, could have a material and adverse effect on our net sales. In addition, to the extent we have suffered, and may in the future suffer, a decline in net sales, our margins and profitability have been and will be further negatively impacted to the extent we are unable to correspondingly reduce our fixed costs, such as warehouses, equipment and headcount. As it is difficult to quickly make significant reductions in fixed costs, if we were to suffer a significant and rapid decline in our net sales, such as from the loss of one or more significant customers, our margins and profitability may be adversely impacted, we may incur losses and our business, financial condition, results of operations and cash flows could suffer.
We will continue to be subject to the risks associated with consolidation within 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 purchase directly from manufacturers or develop their own self-distribution capabilities, 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 sales volume if the volume cannot be replaced. In addition, as a higher percentage of our sales go to larger customers, our margins tend to be adversely affected as these larger customers typically receive discounts based upon the higher volume of their purchases, which may adversely impact our profitability.
We are also exposed to concentrations of credit risk related primarily to trade receivables, notes receivable and lease guarantees for certain Members. Additionally, we are exposed to risk to master landlords if subtenants default under their subleases with us. Our ten customers with the largest accounts receivable balances accounted for approximately 44% and 43% of total accounts receivable at July 2, 2016 and at October 3, 2015, respectively. These concentrations of credit risk may be affected by changes in economic or other conditions affecting the western United States, particularly Arizona, California, Nevada, Oregon and Washington. We could suffer losses as a result of our concentrated credit risk in the event of a significant adverse change in economic or other conditions.
We may experience reduced sales if Members purchase directly from manufacturers or decide to self-distribute. Increased industry competitive pressure is causing some of our Members that can qualify to purchase directly from manufacturers to increase their level of direct purchases from manufacturers and expand their self-distribution activities. Our operating results could be adversely affected if a significant reduction in distribution volume occurred in the future as a result of such a shift to direct purchases and self-distribution by our customers.
The requirement that Members invest in our shares and/or make Required Deposits, and the lack of liquidity with respect to such investments and Required Deposits, may make attracting new Members difficult and may cause existing Members to withdraw from membership. Members are required to meet specific requirements, which include ownership of our capital shares and may include required cash deposits. These investments by Members are a principal source of our capital, and for the thirty-nine weeks ended July 2, 2016, approximately 69% of our net sales were to Members. We compete with other wholesale suppliers who are not structured as cooperatives and therefore have no investment requirements for customers. Our requirements to purchase shares or maintain cash deposits may become an
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obstacle to retaining existing business and attracting new business. For a discussion of required Member equity investments and deposits, see Part I, Item 1, “Business – Capital Shares” and Part I, Item 1, “Business – Customer Deposits” of our Annual Report on Form 10-K for the year ended October 3, 2015.
Our Bylaws give the Board complete discretion with respect to the redemption of shares held by terminated Members and excess shares held by Members. Our redemption policy currently provides that the number of Class B Shares that we may redeem in any fiscal year is limited to no more than 5% of the outstanding Class B Shares (after patronage dividends payable in Class B Shares). During the thirty-nine weeks ended July 2, 2016, we did not redeem any Class B Shares that had been tendered at the close of fiscal 2015, leaving 94,593 Class B Shares, or 23% of our outstanding Class B Shares at the close of fiscal 2015, which have been tendered for redemption but not yet redeemed. This percentage has steadily increased in recent years, from 21%, 17% and 16% of our outstanding Class B Shares at the close of fiscal 2014, 2013 and 2012, respectively, as we have (1) suspended redemptions of Class A Shares and Class B Shares because we had not been current in our periodic SEC filings, (2) had an increase in the number of shares our Members have sought to redeem and (3) redeemed less than the 5% limit in fiscal 2015, 2014, 2013 and 2012. The increase in the number of shares our Members have sought to redeem has been driven by our having an overall decline in the number of Members every year since the end of fiscal 2008. Since then, the number of Members has declined from 520 to 345 at the end of fiscal 2015, an average decline of 5.7% per year in our membership base. Our annual redemption rate has been less than the 5% limit in recent years due in significant part to our Board deciding to conserve capital during years of limited profit or a net loss. Based on our recent history of redemptions as compared to the number of shares tendered for redemption, Members seeking to redeem shares may be required to wait a number of years. In addition, our ability to attract and issue shares to new Members, or redeem shares held by terminated Members and excess shares held by Members, has been impacted by the Audit Committee Investigation. Members may have even less liquidity with respect to shares in Unified should the Board, in its discretion, cease or reduce redemptions of stock. See Part II, Item 8, “Financial Statements and Supplementary Data – Note 12” of our Annual Report on Form 10-K for the year ended October 3, 2015 for recent redemption activity and the number of outstanding shares tendered for redemption but which have not yet been redeemed. Furthermore, required cash deposits are contractually subordinated and subject to the prior payment in full of our senior indebtedness. For a discussion of the limitations on the redemption of capital shares and the subordination of cash deposits, see Part I, Item 1, “Business – Capital Shares – Redemption of Class A and Class B Shares and Repurchase of Class E Shares,” Part I, Item 1, “Business – Customer Deposits” and Part I, Item 1, “Business – Pledge of Shares and Guarantees” of our Annual Report on Form 10-K for the year ended October 3, 2015. These limitations on our obligation to redeem capital shares or repay the cash deposits of Members may cause Members to withdraw from membership or potential Members may decide not to become Members.
We are vulnerable to changes in general economic conditions. We are affected by certain economic factors that are beyond our control, including changes in the overall economic environment. In recent periods, we have experienced significant volatility in the cost of certain commodities, the cost of ingredients for our manufactured breads and processed fluid milk (through July 2016, when we ceased operating our Southern California Dairy Division manufacturing facility) and the cost of packaged goods purchased from other manufacturers. An inflationary economic period could impact our operating expenses in a variety of areas, including, but not limited to, employee wages and benefits, workers’ compensation insurance and energy and fuel costs. A portion of the risk related to employee wages and benefits is mitigated by bargaining agreements that contractually determine the amount of inflationary increases. General economic conditions also impact our pension plan liabilities, as the assets funding or supporting these liabilities are invested in securities that are subject to interest rate and stock market fluctuations. A portion of our debt is at floating interest rates and an inflationary economic cycle typically results in higher interest costs. We operate in a highly competitive marketplace and passing on such cost increases to customers could be difficult. It is also difficult to predict the effect that possible future purchased or manufactured product cost decreases might have on our profitability. A lack of inflation in the cost of food products may also adversely impact our margins when we are unable to take advantage of forward buying opportunities whereby we purchase product at a lower price and, by the time we sell the product, the market price and the price at which we are able to sell the product has risen to a higher price as a result of inflation. The effect of deflation in purchased or manufactured product costs would depend on the extent to which we had to lower selling prices of our products to respond to sales price competition in the market. Additionally, we are impacted by changes in prevailing interest rates or interest rates that have been negotiated in conjunction with our credit facilities. A lower interest rate (used, for example, to discount our pension and postretirement unfunded obligations) may increase certain expenses, particularly pension and postretirement benefit costs, while decreasing potential interest expense for our credit facilities. An increase in interest rates may have the opposite impact. Consequently, it is difficult for us to accurately predict the impact that inflation, deflation or changes in interest rates might have on our operations. To the extent we are unable to mitigate increasing costs, or retain the benefits from decreases in costs, patronage dividends may be reduced and/or the Exchange Value Per Share of our Class A and Class B Shares may decrease.
Changes in the economic environment could adversely affect our customers’ ability to meet certain obligations to us or leave us exposed for obligations we have guaranteed. Loans to Members, trade receivables, Member compliance with
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subleases and lease guarantees could be at risk in a sustained economic downturn. We establish reserves for notes receivable, trade receivables and lease commitments for which the customer may be at risk for default. Under certain circumstances, we would be required to foreclose on assets provided as collateral or assume payments for leased locations for which we have guaranteed payment. Although we believe our reserves to be adequate, our operating results could be adversely affected in the event that actual losses exceed available reserves.
We may on occasion hold investments in the common and/or preferred stock of Members and suppliers. These investments are generally held at cost or the equity method and are periodically evaluated for impairment. As a result, changes in the economic environment that adversely affect the business of these Members and suppliers could result in the write-down of these investments. This risk is unique to a cooperative form of business in that investments are made to support Members’ businesses, and those economic conditions that adversely affect the Members can also reduce the value of our investment, and hence the Exchange Value Per Share of our Class A and Class B Shares. We do not currently hold any equity investments in our Members.
Legal proceedings could lead to unexpected losses. From time to time during the normal course of carrying on our business, we may be a party to various legal proceedings through private actions, class actions, administrative proceedings, regulatory actions or other litigations or proceedings. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. In the event that management determines that the likelihood of an adverse judgment in a pending litigation is probable and that the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 450, “Contingencies.” The final outcome of any litigation could adversely affect operating results if the actual settlement amount exceeds established reserves and insurance coverage.
We are subject to existing and changing environmental, health, food safety and safety laws and regulations. We own and operate various facilities and equipment for the manufacture, warehousing and distribution of products to our customers. We are subject to increasingly stringent federal, state and local laws, regulations and ordinances that (1) govern activities or operations that may have adverse effects on the environment, health and safety (e.g., discharges to air and water and handling and disposal practices for solid and hazardous waste), and (2) impose liability for the costs of cleaning up, and certain damages resulting from, past or present spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including liabilities resulting from lawsuits brought by private litigants) relating to our facilities and the land on which our facilities are situated, regardless of whether we lease or own the facilities or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. In addition, we may be subject to pending federal and state legislation that if ultimately passed, may require us to incur costs to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime. We are unable to predict the ultimate outcome of such legislation; however, should such legislation require us to incur significant expenditures, our business, results of operations and financial condition may be adversely affected.
We (and our customers) are subject to changes in laws and regulations. Our business is subject to various federal, state and local laws, regulations and administrative practices. We must comply with numerous provisions regulating, among other things, health and sanitation standards, food labeling and safety, equal employment opportunity, and licensing for the sale of food and other products. Changes in federal, state or local minimum wage and overtime laws could cause the Company to incur additional wage costs, which could adversely affect the profitability of our business and that of our customers. The Patient Protection and Affordable Care Act (the “PPACA”) may impact our ability to operate profitably, as the full extent of the impact of the PPACA, if any, cannot be determined until all regulations are promulgated under the PPACA (or changed as a result of ongoing litigation) and additional interpretations of the PPACA become available. We cannot predict future laws, regulations, interpretations, administrative orders, or the effect they will have on our operations. Additional requirements or restrictions could be imposed on the products that we sell, or require that we discontinue or recall the sale of certain products, make substantial changes to our facilities or operations, or otherwise change the manner in which we operate our business. Any of these events could significantly increase the cost of doing business, which could adversely impact our operations and financial condition. The occurrence of any of these events could have a similar impact on the operations and financial condition of our customers, which could adversely impact our business, operations, and financial condition.
We may engage in merger and acquisition activity from time to time and may not achieve the contemplated benefits from such activity. Achieving the contemplated benefits from such activity may be subject to a number of significant challenges and uncertainties, including integration issues, coordination between geographically separate organizations, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues. Any of these circumstances could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and
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attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition and results of operations, or cash flows.
We are exposed to potential product liability claims and potential negative publicity surrounding any assertion that our products caused illness or injury. The packaging, marketing and distribution of food products purchased from others or manufactured by us (excluding milk products no longer manufactured by us after July 2016) involves an inherent risk of product liability, product recall and adverse publicity. Such products may contain contaminants that may be inadvertently distributed or redistributed by us. These contaminants may result in illness, injury or death if such contaminants are not eliminated. Product liability claims in excess of insurance coverage, as well as the negative publicity surrounding any assertion that our products caused illness, injury or death could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
We will owe money to AmTrust if our insurance reserves for certain policies increase. Our former insurance subsidiaries were subject to the rules and regulations promulgated by various regulatory agencies, including, but not limited to, the California Department of Insurance and the Commonwealth of Bermuda. Historically, our established policy was to record insurance reserves based on estimates made by management and validated by third party actuaries to ensure such estimates were within acceptable ranges. Actuarial estimates were based on detailed analyses of health care cost trends, claims history, demographics, industry trends and federal and state law. As a result, the amount of reserve and related expense has been significantly affected by the outcome of these studies. In addition, our former Insurance segment has in the past experienced significant volatility in its reserves based on actuarial estimates, including volatility resulting from its relatively small size and concentration of business in the California workers’ compensation marketplace.
Significant and adverse changes in the experience of claims settlement and other underlying assumptions have negatively impacted our operating results. For example, in fiscal 2013, we increased reserves in our former Insurance segment by $9.1 million due to a combination of adverse development and case reserving practices and related accounting within the insurance subsidiaries that deviated from the established policy of setting case reserves at the best estimate of ultimate cost. Thereafter, in fiscal 2014, we further increased the workers’ compensation reserves in our former Insurance segment by an additional $10.0 million. See Note 2, “Audit Committee Investigation,” in Part II, Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
Under the terms of the Stock Purchase Agreement with AmTrust, if during the five-year period following the Closing Date of the sale of the Insurance segment, the insurance reserves in respect of any accident arising prior to the closing and covered by an insurance policy written by an insurance subsidiary prior to January 1, 2015 increase as a result of adverse development, we must pay AmTrust for the amount of the increase, up to $1 million in the aggregate and offset up to $2 million from future Earn-Out Payments (as defined in the Stock Purchase Agreement) due to us under the Stock Purchase Agreement. See Item 1.01, “Entry into a Material Definitive Agreement,” including Exhibit 99.1, “Stock Purchase Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of April 16, 2015” thereto, of our Current Report on Form 8-K, filed on April 22, 2015, and Item 2.01, “Completion of Acquisition or Disposition of Assets,” including Exhibit 99.2, “Master Services Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of October 7, 2015” thereto, of our Current Report on Form 8-K, filed on October 14, 2015, for additional information.
We may not have adequate financial resources to fund our operations. We rely primarily upon cash flow from our operations and Member investments to fund our operating activities. In the event that these sources of cash are not sufficient to meet our requirements, additional sources of cash are expected to be obtained from our credit facilities to fund our daily operating activities. Our credit agreement, which matures on June 28, 2018, requires compliance with various covenants. See Note 7 of Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended October 3, 2015 and “Outstanding Debt and Other Financing Arrangements” in this Quarterly Report on Form 10-Q for additional information. While we are currently in compliance with all required covenants and expect to remain in compliance, this does not guarantee we will remain in compliance in future periods.
As of July 2, 2016, we believe we have sufficient cash flow from operations and availability under the credit agreement to meet our operating needs, capital spending requirements and required debt repayments through June 28, 2018. However, if access to operating cash or to the credit agreement becomes restricted, we may be compelled to seek alternate sources of cash. We cannot assure that alternate sources will provide cash on terms favorable to us or at all. Consequently, the inability to access alternate sources of cash on terms similar to our existing agreement could adversely affect our operations.
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The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate. Our non-union employees participate in a Company sponsored defined benefit pension plan and Company sponsored postretirement benefit plans. Certain eligible union employees participate in a separate plan providing payouts for unused sick leave. Our officers also participate in a Company sponsored Executive Salary Protection Plan III (“ESPPIII”), which provides additional post-termination retirement income based on each participant’s salary and years of service as an officer of the Company. The postretirement plans provide medical benefits for retired non-union employees, life insurance benefits for retired non-union employees for which active non-union employees are no longer eligible and lump-sum payouts for unused sick days covering certain eligible union employees. Liabilities for the ESPPIII and postretirement plans are not funded. We account for these benefit plans in accordance with ASC Topic 715, “Compensation – Retirement Benefits” and ASC Topic 712, “Compensation – Nonretirement Postemployment Benefits,” which require us to make actuarial assumptions that are used to calculate the carrying value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in our consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, health care cost trend rate, projected life expectancies of plan participants and anticipated salary increases. While we believe the underlying assumptions are appropriate, the carrying value of the related assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used. See Notes 13 and 14 of Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
The credit and liquidity crisis in the United States and throughout the global financial system in 2008-2009 triggered substantial volatility in the world financial markets and banking system. As a result, the investment portfolio of the Unified Cash Balance Plan incurred a significant decline in the fair value of plan assets during fiscal 2008. The value of the plan’s investment portfolio increased in fiscal 2012, 2013 and 2014, declined in 2015 and decreased for the thirty-nine weeks ended July 2, 2016. The values of the plan’s individual investments have and will fluctuate in response to changing market conditions, and the amount of gains or losses that will be recognized in subsequent periods, if any, cannot be determined.
Authoritative accounting guidance may necessitate companies who issue and redeem shares based on book value to redefine the method used to value their shares. Authoritative accounting guidance that requires adjustments to shareholders’ equity has the potential to impact companies whose equity securities are issued and redeemed at book value (“book value companies”) disproportionately more than companies whose share values are market-based (“publicly traded”). While valuations of publicly traded companies are primarily driven by their income statement and cash flows, the traded value of the shares of book value companies, however, may be immediately impacted by adjustments affecting shareholders’ equity upon implementation. Therefore, such guidance may necessitate companies who issue and redeem shares based on book value to redefine the method used to value their shares. As such, we modified our Exchange Value Per Share calculation to exclude accumulated other comprehensive earnings (loss) from Book Value (see Part II, Item 6, “Selected Financial Data” of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information on the calculation of the Exchange Value Per Share), thereby excluding the potentially volatile impact that (1) ASC Topic 715-20, “Compensation – Retirement Benefits – Defined Benefit Plans – General” and (2) changes in unrealized gains and losses, net of taxes, on available for sale investments would have on shareholders’ equity and Exchange Value Per Share.
A system failure, a breach of system or network security or events of force majeure could delay or interrupt services to our customers or subject us to significant liability. We have implemented security measures such as firewalls, virus protection, intrusion detection and access controls to address the risk of computer viruses and unauthorized access. A business continuity plan has been developed focusing on the offsite restoration of computer hardware and software applications. We have also developed business resumption plans, which include procedures to ensure the continuation of business operations in response to the risk of damage from energy blackouts, natural disasters, terrorism, war and telecommunication failures, and we have implemented change management procedures and quality assurance controls designed to ensure that new or upgraded business management systems operate as intended. However, there can be no assurances that any of these efforts will be adequate to prevent a system failure, accident or security breach, any of which could result in a material disruption to our business. In addition, substantial costs may be incurred to remedy the damages caused by any such disruptions.
Our success depends on our retention of our executive officers and senior management, and our ability to hire and retain additional key personnel. Our success depends on the skills, experience and performance of our executive officers, senior management and other key personnel. The loss of service of one or more of our executive officers, senior management or other key employees could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, and
43
there can be no assurance that we can retain our key employees or that we can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.
We depend on third parties for the supply of products and raw materials and for marketing and promotional programs. We depend upon third parties for the supply of products, including corporate brand products, and raw materials. Any disruption in the services provided by any of these suppliers, or any failure by them to handle current or higher volumes of activity, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
We participate in various marketing and promotional programs to increase sales volume and reduce merchandise costs. Failure to continue these relationships on terms that are acceptable to us, or to obtain adequate marketing relationships, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Increased electricity, diesel fuel and gasoline costs could reduce our profitability. Our operations require and are dependent upon the continued availability of substantial amounts of electricity, diesel fuel and gasoline to manufacture, store and transport products. Our trucking operations are extensive and diesel fuel storage capacity represents approximately two weeks average usage. The prices of electricity, diesel fuel and gasoline fluctuate significantly over time. Given the competitive nature of the grocery industry, we may not be able to pass on increased costs of production, storage and transportation to our customers. As a result, either a shortage or significant increase in the cost of electricity, diesel fuel or gasoline could disrupt distribution activities and negatively impact our business and results of operations.
A strike or work stoppage by employees could disrupt our business and/or we could face increased operating costs from higher wages or benefits we must pay our employees. Approximately 58% of our employees are covered by collective bargaining agreements, which have various expiration dates ranging from 2016 through 2020. If we are unable to negotiate acceptable contracts with labor unions representing our unionized employees, we may be subject to a strike or work stoppage that disrupts our business and/or increased operating costs resulting from higher wages or benefits paid to union members or replacement workers. Any such outcome could have a material adverse effect on our operations and financial results.
If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and subject us to regulatory scrutiny. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we perform an annual evaluation of our internal controls over financial reporting. See risk factor entitled “Our management has identified material weaknesses in the Company’s internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements. We may not be able to fully address the material weaknesses in our internal controls or provide assurance that remediation efforts will prevent future material weaknesses.” Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully implemented, the aggregate cost of implementation or whether the remediation plan will be adequate and effective. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
A loss of our cooperative tax status could increase tax liability. Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives. As a cooperative, we are allowed to offset patronage earnings with patronage dividends that are paid in cash or through qualified written notices of allocation. However, we are taxed as a typical corporation on the remainder of our earnings from our Member business and on earnings from our Non-Member business. If we are not entitled to be taxed as a cooperative under Subchapter T, our revenues would be taxed when earned by us and the Members would be taxed when dividends are distributed. The Internal Revenue Service can challenge the tax status of cooperatives. The Internal Revenue Service has not challenged our tax status, and we would vigorously defend any such challenge. However, if we were not entitled to be taxed as a cooperative, taxation at both the Company and the Member level could have a material adverse impact on us and our Members.
Each method used to meet the Class B Share Requirement has its own tax consequences. Class B Shares required to be held by a new Member may be purchased directly at the time of admission as a Member or may be acquired over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year. In addition, certain Members, including former shareholders of United Grocers, Inc. or Associated Grocers, Incorporated, may satisfy their Class B Share Requirement only with respect to stores owned at the time of admission as a Member solely from their patronage dividend distributions. Each of these purchase alternatives may have tax consequences which are different from those applicable to other purchase alternatives. Members and prospective Members are urged to consult their tax advisers with respect to the application of U.S. federal income, state or local tax rules to the purchase method selected.
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Members’ Class A, Class B and Class E Shares are subject to risk of loss. Class A and Class B Shares are purchased and sold at purchase prices equal to the Exchange Value Per Share at the close of the last fiscal year end prior to the date the shares are purchased or tendered for redemption. Class E Shares become eligible for repurchase at the discretion of the Board at a price of $100 per share ten years after their issuance date, with the outstanding Class E Shares becoming eligible for repurchase between the end of fiscal 2013 and the end of fiscal 2018. There is no assurance that our financial condition will enable us to, or our Board will determine to, redeem or repurchase Class A, Class B or Class E Shares at such time they become eligible for redemption or repurchase, or ever. During fiscal 2016, it is unlikely that the Company will redeem any Class B Shares that had been tendered for redemption as of the close of fiscal 2015. Accordingly, Members may lose all or a portion of their investment in the Class A, Class B or Class E Shares. See “The requirement that Members invest in our shares and/or make Required Deposits, and the lack of liquidity with respect to such investments and Required Deposits, may make attracting new Members difficult and may cause existing Members to withdraw from membership.”
If the Board decides in any year to retain a portion of our earnings from our Non-Patronage Business, and not to allocate those earnings to the Exchange Value Per Share, the redemption price of Class A and Class B Shares that are repurchased in the year of such retention and in future years will be reduced.
Severe weather, natural disasters and adverse climate changes may adversely affect our financial condition and results of operations. Severe weather conditions, such as hurricanes or tornadoes, or natural disasters, such as earthquakes or fires, in areas in which we have distribution facilities, in which customers’ stores are located or from which we obtain products may adversely affect our results of operations. Such conditions may cause physical damage to our properties, closure of one or more of our distribution facilities, closure of customers’ stores, lack of an adequate work force in a market, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or customer stores or a reduction in the availability of products we offer. In addition, adverse climate conditions and adverse weather patterns, such as droughts and floods, impact growing conditions and the quantity and quality of crops yielded by food producers and may adversely affect the availability or cost of certain products within the grocery supply chain. Our business resumption plans may not be effective in a timely manner and a significant disruption to our business could occur in the event of a natural disaster, terrorism or war. In addition, while we carry insurance to cover business interruption and damage to buildings and equipment, some of the insurance carries high deductibles. Any of these factors may disrupt our business and adversely affect our financial condition, results of operations and cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, assumptions and judgments that affect the amount of assets and liabilities reported in the consolidated condensed financial statements, the disclosure of contingent assets and liabilities as of the date of the consolidated condensed financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions to be reasonable; however, future results could differ from those estimates under different assumptions or conditions.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts, lease loss reserves, investments, goodwill and intangible assets, long-lived assets, income taxes, insurance reserves, pension and postretirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances. The accompanying consolidated condensed financial statements are prepared using the same critical accounting policies and estimates discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended October 3, 2015.
RECENTLY ADOPTED AND RECENTLY ISSUED AUTHORITATIVE ACCOUNTING GUIDANCE
Refer to Note 11 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for management’s discussion of recently adopted and recently issued authoritative accounting guidance and their expected impact, if any, on our consolidated condensed financial statements.
AVAILABILITY OF SEC FILINGS
We make available, free of charge, through our website (http://www.unifiedgrocers.com) our Forms 10-K, 10-Q and 8-K, as well as our registration statements, proxy statements and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. Due to the delay in the preparation of our audited
45
financial statements as described in Part I, Item 1, “Business – Explanatory Note,” of our Annual Report on Form 10-K for the year ended October 3, 2015, we did not file our Annual Report on Form 10-K for the year ended September 27, 2014, and we did not file any Quarterly Reports on Form 10-Q for the quarters ended December 27, 2014, March 28, 2015 and June 27, 2015. A copy of any of the reports filed with the SEC can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. A copy may also be obtained by calling the SEC at 1-800-SEC-0330. All reports filed electronically with the SEC are available on the SEC’s web site at http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the market risks we face contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. See “Quantitative and Qualitative Disclosures About Market Risk” discussed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended October 3, 2015 for additional information.
We are subject to interest rate changes on certain of our notes payable under our credit agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at July 2, 2016 and the current market condition, a one percent change in the applicable interest rates would impact our annual cash flow and pretax earnings by approximately $2.5 million. See Note 3 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” for additional discussion regarding the fair value of notes payable.
We are exposed to credit risk on accounts receivable through the ordinary course of business and we perform ongoing credit evaluations. Concentration of credit risk with respect to accounts receivable is limited due to the nature of our customer base (i.e., primarily Members). We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.
Life insurance and mutual fund assets with values tied to the equity markets are impacted by overall market conditions. During the thirty-nine weeks ended July 2, 2016, net earnings and net comprehensive earnings experienced an increase corresponding to the increase in the value of life insurance and mutual fund assets, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
At the end of the period covered by this report, our management, with the participation of our CEO and CFO, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Background of Audit Committee Investigation
As discussed in Part I, Item 1, “Business – Explanatory Note” and Part I, Item 1, “Business –Audit Committee Investigation,” of our Annual Report on Form 10-K for the year ended October 3, 2015, in its Notification of Late Filing on Form 12b-25 dated December 19, 2014 with respect to the Company’s Annual Report on Form 10-K for the year ended September 27, 2014, the Company announced that the Audit Committee was conducting, with the assistance of independent legal counsel, an investigation of issues relating to the setting of case reserves and management of claims by the Company’s former insurance subsidiaries and related matters (the “Audit Committee Investigation”).
In conjunction with the findings of the Audit Committee Investigation, and in consultation with outside actuarial professionals engaged by the Audit Committee and by the Company, management has concluded that errors existed in the insurance reserves reported within the Company’s previously issued financial statements. Management has determined that the quantitative effect and qualitative nature of the errors do not require restatement and re-issuance of previously issued financial statements.
46
See Part I, Item 1, “Business – Explanatory Note,” of our Annual Report on Form 10-K for the year ended October 3, 2015 for further information on the quantitative effect of these errors, as well as Item 6, “Selected Financial Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” As disclosed in Note 2, “Discontinued Operations,” of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1, “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q, the Company’s Insurance segment was sold in October 2015 and is no longer part of the Company’s continuing operations.
Evaluation of Disclosure Controls and Procedures
As discussed in Part I, Item 1, “Business – Explanatory Note” and Part I, Item 1, “Business – Audit Committee Investigation,” of our Annual Report on Form 10-K for the year ended October 3, 2015, in connection with the Audit Committee Investigation, management evaluated the design and effectiveness of our disclosure controls and procedures and the effectiveness of the Company’s internal control over financial reporting as of the fiscal year ended October 3, 2015. Management has also performed such evaluation as of the end of the period covered by this report. As described below, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. As a result of these material weaknesses, we have concluded that our disclosure controls and procedures were not effective as of July 2, 2016.
Changes in internal controls over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO and implemented by the Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
Under the supervision and with the participation from management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In connection with the preparation and filing of this Form 10-Q, and in conjunction with the findings of the Audit Committee Investigation described above, the Company’s management has evaluated the effectiveness of our internal control over financial reporting as of July 2, 2016 and concluded that, because of the material weaknesses described below, our internal control over financial reporting was not effective as of July 2, 2016.
Notwithstanding such material weaknesses, which are described herein, our management has concluded that the consolidated condensed financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based upon such evaluation, management has determined that the Company had material weaknesses in its internal control over financial reporting as of July 2, 2016 related to:
47
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described in Part I, Item 1, “Business – Explanatory Note,” of our Annual Report on Form 10-K for the year ended October 3, 2015. Specifically, while these entities were included in oversight activities similar to our other subsidiaries and operating units, we believe the design of our controls and procedures did not adequately address the additional risks associated with the entities, including the specialized and complex nature of the underlying accounting. In addition to its review of the former insurance subsidiaries, the Company evaluated its controls around its ongoing oversight of other subsidiaries and/or separately managed operating entities and has determined that its deficiencies in oversight controls regarding subsidiaries and separately managed operating entities are considered to be a material weakness requiring remediation. Our subsidiary oversight was insufficiently designed to prevent or timely detect material misstatement of financial information. |
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Controls over ensuring accurate and complete financial statement disclosures. As detailed above, the design of our controls over disclosures related to the insurance reserves was not adequate to ensure accurate and complete disclosure related to those financial statement items. In addition, we have concluded that a related party transaction that occurred at our former insurance subsidiaries in fiscal year 2012 was not properly reviewed and approved, and was not properly disclosed. Based upon the above findings, management has concluded that a material weakness exists in its controls over the completeness and accuracy of required disclosures within its financial statements and SEC filings. |
As a result, management has determined that the Company’s disclosure controls and procedures and internal control over financial reporting were not effective as of July 2, 2016.
Plans for Remediation
Our management has worked, and continues to work, to strengthen our disclosure controls and procedures and internal control over financial reporting in connection with the material weaknesses that have been described above. We intend to continue taking measures, including engaging outside professionals, as may be necessary and advisable, to assist us as we continue to address and rectify the foregoing material weaknesses.
We are committed to maintaining an effective control environment and making changes necessary to enhance effectiveness. This commitment has been, and will continue to be, communicated to and reinforced throughout our organization. We are in the process of implementing a plan for remediation of the ineffective internal control over financial reporting described above. In addition, we have designed and plan to implement, and in some cases have already implemented, the specific remediation initiatives described below.
The oversight and monitoring of subsidiary and operating unit compliance with accounting and reporting policies and procedures.
The Company has designed a remediation plan related to oversight of subsidiaries and operating units that imposes a more formalized approach to the oversight of financial results of subsidiaries and operating units, ensuring that management’s authority and accountability is documented through policies and procedures, and that those policies and procedures establish transparency of subsidiary and operating unit transactions. The plan includes the establishment or enhancement of:
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Required subsidiary/operating unit reporting timelines to ensure adequate time for management and, if needed, board level review (in process); |
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Standard analytical procedures for financial results with explanations required for trends (in process); and |
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Documentation of process owners at the corporate and accounting level, and a formalized process for each reporting period by which process owners are able to inquire of subsidiary/operating unit personnel about the financial results and underlying transactions (in process). |
Controls over ensuring accurate and complete financial statement disclosures.
The Company is implementing a disclosure controls and procedures remediation plan that supplements the steps outlined above by requiring the following:
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Update and re-issuance of the management disclosure committee charter, as well as assessment of disclosure committee membership (in process); |
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Create or enhance a formalized set of policies and procedures related to the periodic disclosure activities, which will include: |
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Creation of formal timelines and meeting structures/content (in process); |
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Incorporation of assessment and inquiry regarding substantive items within the financial statement in addition to edits and number tie-outs (in process); |
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Defined parameters for items to be addressed by the disclosure committee, such as material occurrences (completed); |
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Preparation and dissemination of formal minutes for each disclosure committee meeting (completed); and |
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Formalized process for reporting out to CEO and CFO of disclosure committee conclusions and recommendations (completed). |
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Implement a formal set of policies and procedures over the identification, review, approval and disclosure of related party transactions (completed). |
Overall Control Environment
Based upon the various internal controls deficiencies and resulting material weaknesses discussed above, Management and the Audit Committee determined that incorporating certain broad-based remediation efforts would be necessary to provide the most effective results going forward. The deficiencies constituting the material weaknesses affect key higher level corporate activities such as compliance and risk monitoring. In addition the processes and procedures, and related communications, around capture and assessment of information required for disclosure and identification of potential inaccuracies in financial reporting and related party disclosures were found to have deficiencies. As a result, the Company and the Audit Committee determined that certain improvements to the overall control infrastructure are warranted:
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Provide additional resources and structure to enhance the current internal audit function (in process); and |
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Assess the Company’s ethics and compliance program and provide additional resources and structure to areas such as the risk assessment process and reporting mechanisms such as the ethics hotline (in process). |
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We are a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we believe the outcome of these matters will not have a material adverse effect on our financial condition or results of operations.
There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015, filed on June 1, 2016. Refer to “Risk Factors” in Part I, Item 2 of this Quarterly Report on Form 10-Q for discussion of our risk factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
COMPANY PURCHASES OF EQUITY SECURITIES
Period |
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Total Number of Shares Purchased |
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Average Price Paid Per Share |
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April 3, 2016 – April 30, 2016 |
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6,191 Class E Shares |
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$ |
100.00 |
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May 1, 2016 – May 28, 2016 |
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218 Class E Shares |
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$ |
100.00 |
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May 29, 2016 – July 2, 2016 |
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1,346 Class E Shares |
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$ |
100.00 |
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Total |
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7,755 Class E Shares |
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$ |
100.00 |
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Refer to “Redemption of Capital Stock” in Part I, Item 2 of this Quarterly Report on Form 10-Q for discussion of our share redemptions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Effective as of June 22, 2016, the Board approved certain amendments to the Company’s Bylaws. The amendments (1) clarified that the calculation of “exchange value” used in the determination of the repurchase price of the Company’s Class A and Class B Shares made with respect to a fiscal year end on or after September 30, 2006 excludes non-allocated retained earnings from Non-Patronage Business, and (2) added a section to the Bylaws entitled “Dividend Policy” that states “The Company shall not pay dividends on Class E Shares, whether in cash, capital stock, evidences of indebtedness, property or otherwise.” For the complete text of the amendments, see the marked copy of the Bylaws, as amended, attached as Exhibit 3.2 to this Quarterly Report on Form 10-Q and incorporated herein by this reference.
In its Current Report on Form 8-K filed July 21, 2016, the Company disclosed that on July 15, 2016, Ms. Sue M. Klug announced her decision to resign as Executive Vice President and Chief Marketing Officer of the Company, effective as of July 29, 2016.
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(a) |
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Exhibits |
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3.2* |
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Bylaws of Unified Grocers, Inc. as amended. |
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31.1* |
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Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* |
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Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2* |
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Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1*(**) |
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Amendment No. 1 to Unified Grocers, Inc. Executive Insurance Plan Amended and Restated Split Dollar Agreement, effective as of July 18, 2016, by and between Unified Grocers, Inc., a California Corporation, and Robert M. Ling Jr. |
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101.INS* |
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XBRL Instance Document. |
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101.SCH* |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
* |
Filed herein. |
** |
Management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIFIED GROCERS, INC. |
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By |
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/s/ Robert M. Ling, Jr. |
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Robert M. Ling, Jr. |
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President and Chief Executive Officer (Principal Executive Officer) |
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By |
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/s/ Michael F. Henn |
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Michael F. Henn |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Dated: August 12, 2016
52
Exhibit 3.2
BYLAWS
OF
UNIFIED GROCERS, INC.
(Amended as of December 7, 2011June 22, 2016)
ARTICLE I
SHAREHOLDERS
Section 1.Qualifications for Class A Shareholders. It is the intent and purpose of this Corporation to limit the ownership of its Class A Shares to qualified and active member patrons of this Corporation.
Applicants for membership as member-patrons (referred to sometimes as "members") may be persons, firms, associations, corporations or other legal entities, but must be of good and approved financial standing engaged in or, with the consent of and on such conditions as the Board of Directors may establish, formed for the purpose of holding equity in entities engaged in selling groceries and related merchandise at retail or wholesale, must patronize the Corporation in such amounts and such manner as may be prescribed by policies adopted or approved by the Board of Directors, must comply with the conditions and agreements contained in the application for membership and with the Corporation's Bylaws and with such rules, regulations and policies for the servicing of accounts as may from time to time be established by the Corporation. Any applicant so qualified, wishing to become a member-patron, shall make written application therefor in such form as the Corporation may from time to time require. Any such application shall be considered by the Board of Directors, and no membership shall be accepted or shares of the Corporation be issued to any such applicant without the approval of the Board of Directors.
Section 2.Member-Patrons. The Class A Shares of this Corporation shall be issued only to member-patrons of this Corporation. Each member-patron shall be required to hold 150 Class A Shares in the fiscal year ending in 2003, 200 shares in the fiscal year ending in 2004, 250 shares in the fiscal year ending in 2005, 300 shares in the fiscal year ending in 2006 and 350 shares in the fiscal year ending in 2007 and thereafter. No member-patron shall be entitled to hold more than such number of Class A Shares. Each member-patron shall also hold such amount of Class B Shares of the Corporation as the Board of Directors may establish as being required to be held by member-patrons whether based on a percentage of average weekly purchases or on some other basis. In order to quality for and retain membership, patrons must qualify and be accepted as member-patrons in accordance with Section 1, must patronize the Corporation in such amounts and manner as may be prescribed from time to time by the Bylaws or by policies adopted or approved by the Board of Directors, must purchase and hold the requisite number of the Corporation's Class A Shares set forth above (provided that the manner of purchase of such shares shall be determined by the Board of Directors), must hold such amount of Class B Shares as may be specified by requirements regarding the holding of Class B Shares as may from time to time be established by the Board of Directors, must comply with the agreements contained in the application for membership and with the Corporation's Bylaws and with such rules, regulations, and policies for the servicing of accounts as may from time to time be established by the Corporation including, without limitation, payment of such service dues, maintenance of such deposits and compliance with all terms of purchase and payment as may be prescribed. Membership as a member-patron does not obligate the Corporation to make any sale of merchandise or services or any extension of credit. Membership as a member-patron is not transferable either voluntarily or by operation of law.
Section 3.Affiliated Member-Patrons. Notwithstanding the provisions of Section 2 above, the Board of Directors may, in its discretion, authorize the acceptance and service of member patrons without the issuance thereto of the Corporation's Class A Shares when the Board determines that such action is justified by reason of the fact that the ownership of such member-patron is the same, or in the Board's determination sufficiently the same, as that of another member-patron holding Class A Shares. Such member-patron however shall be required to hold Class B Shares in the same manner as other member-patrons or otherwise comply with requirements established by the Company.
Section 4.Associate-Patrons. The Board of Directors may, in its discretion, authorize doing business on a patronage basis with patrons who are not member-patrons and who are referred to herein as "associate-patrons."
Section 5.Rules and Regulations for Servicing Accounts. The Board of Directors shall establish or shall authorize the establishment, from time to time, of such rules, regulations and policies for the servicing of accounts as it shall deem advisable, including, without limitation, rules prescribing monthly service dues, charges applicable on late
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payments of accounts, amounts and manner of purchases, required deposits, guarantees and other credit requirements and other terms of service, purchases and payment of accounts.
Section 5.APatronage Dividend Deposit Accounts. Without limiting the requirement of any condition, rule, regulation or policy for the servicing of accounts which may otherwise require patron deposits, member-patrons and associate-patrons may be required to maintain "Patronage Dividend Deposit Accounts" which shall consist of that portion of patronage dividends distributable to such patrons and allocated by the Corporation on its books to such patrons' Patronage Dividend Deposit Accounts. The indebtedness of the Corporation respecting such accounts may be evidenced by the issuance of notes, revolving fund certificates, retain certificates, certificates of indebtedness, patronage dividend certificates or any other written evidences of indebtedness of the Corporation (collectively, "Patronage Dividend Certificates"). The portion of the patronage dividends to be so allocated and evidenced by the issuance of Patronage Dividend Certificates, together with the rate of interest payable thereon and the maturity date thereof, will be determined by the Board of Directors prior to their issuance. Such Patronage Dividend Deposit Accounts shall be maintained, and the Patronage Dividend Certificates shall be issued and held, on and be subject to such terms and conditions as may be prescribed by the Corporation, including without limitation the right of the Corporation to set off against principal and interest thereon all or any portion of amounts owing to the Corporation or any of its subsidiaries. The indebtedness evidenced by such Patronage Dividend Certificates shall be subordinated and subject in right of payment to the prior payment in full of all "Senior Indebtedness" as that term may be defined in such Patronage Dividend Certificates or in any indenture under which they are issued and the terms and provisions of such subordination shall be as set forth in such Patronage Dividend Certificates or in such indenture.
Section 6.Termination of Membership as a Member-Patron. Membership as a member patron may be terminated:
(a)By written resignation of the member received by the Treasurer of the Corporation;
(b)By the Corporation on default of the member in any requirement for membership as set forth in the application for membership, the Bylaws of the Corporation, or any rules, regulations or policies established by or pursuant to the authorization of the Board of Directors;
(c)By the Corporation on the member's failure to timely pay or otherwise meet any obligation to the Corporation or any of its subsidiaries or to comply with any rule, regulation, requirement or policy for the servicing of accounts that may be prescribed by the Corporation;
(d)By the Corporation pursuant to provisions of the application for membership or other agreement with the member;
(e)By the Corporation on the levy of an attachment or execution against any account of the member or any of the Corporation's shares held by the member or on any such account or share being subjected to any other process of law;
(f)By the Corporation on the member's becoming insolvent, being adjudged bankrupt, commencing any proceeding under any bankruptcy, insolvency, arrangement or reorganization statute or making an assignment for the benefit of creditors;
(g)By the Corporation on the death or incompetency of a member;
(h)By the Corporation on the assignment, transfer or encumbrance, or attempted or purported assignment, transfer or encumbrance, except to the Corporation or any of its subsidiaries, of any account of the member or of any of the Corporation's shares held by the member;
(i)By the Corporation whenever it shall determine that for a period of six months or more during any fiscal year of the Corporation any member's account is one which entails an operating loss to the Corporation. Termination of membership shall not relieve the patron of obligations incurred prior to termination.
Section 7.Qualifications For Class B and Class E Shareholders. Unless and until the Board of Directors shall expressly authorize Class B Shares and Class E Shares to be issued to or held by any person other than a member-patron, it is the intent and purpose of this Corporation that the ownership of this Corporation's Class B Shares and Class E Shares shall be limited to qualified and active member-patrons of this Corporation or former member-patrons.
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Section 8.Required Class B Shares; Excess Class B Shares. The Board of Directors may from time to time establish the amount of Class B Shares that shall be held by member-patrons. This may be based upon the member's average weekly purchases and/or upon any other basis that the Board may determine. The requirement regarding the holding of Class B Shares as established by the Board of Directors is subject to change from time to time by the Board of Directors which may, in its discretion, add to, increase, decrease, limit, eliminate or otherwise change such requirement.
Class B Shares held by a member-patron in excess of what is established by the Board of Directors as the Class B Shares required to be held by such member-patron will be considered "Excess Class B Shares."
Section 9.Nontransferability of Shares; Changes in Ownership of Members.
(a)Nontransferability of Shares. Neither the Class A Shares, the Class B Shares nor the Class E Shares may be transferred without the prior written consent of the Corporation. Such consent will not normally be given. Without in any way limiting the generality of the foregoing:
(1)Corporation Election to Permit Transfer of Shares. The Corporation may, but shall not be required to, permit the transfer of such shares on such terms and conditions as the Corporation may require, which such terms may, in the Corporation's discretion, include, in whole or in part, the following terms and conditions: (i) the member's membership has not been terminated, (ii) the member is not in default in any requirement for membership or in any obligation to the Corporation or any of its subsidiaries, (iii) all debts and obligations of the member to the Corporation and all of its subsidiaries have been paid and satisfied or otherwise provided for to the satisfaction of the Corporation, (iv) the transfer is to a new member-patron or to an existing member patron and, in each case, is in connection with the transfer of the transferor's business to such new member-patron or existing member-patron, as the case may be, for continuation of such business, (v) such transferee, if a new member-patron, duly executes such forms then in use for application for membership and qualifies in all respects for membership and meets all credit requirements and has been accepted as a new member-patron with the approval of the Board of Directors, and (vi) the Corporation has elected not to purchase or redeem such shares.
(2)Proprietorships and Partnership Members. Any change in a proprietorship or partnership which is a member will require a new membership; however, where the change is a transfer of the business to a family member or to a partnership or corporation in which a proprietor or partner continues as a partner or major shareholder, the Corporation may elect, but shall not be required, to treat such new membership as a continuation of the prior membership and permit the transfer of shares held by the prior member to the new member in accordance with (1) above. The Corporation may, in the discretion of its managing officers, require such guarantees of the obligations of partnership and proprietorship members as said officers deem advisable.
(3)Corporate Members. The Corporation may elect, but shall not be required, to treat as being a change in the ownership of the member and requiring a new membership, any change in the control of the voting power of the shareholders of a corporate member (whether by the transfer, issuance or repurchase of shares or otherwise) (other than the transfer among or issuance to members of the public of shares publicly traded and widely held of a publicly owned corporate member). The transfer of stock in a corporate member by any stockholder thereof shall not affect such stockholder's liability on any guarantees given of the obligations of the corporate member. The Corporation may, in the discretion of its managing officers, require such guarantees of the obligations of a corporate member, from any or all of its shareholders or from other persons, as said officers deem advisable.
(b)Notification of Change in Ownership. Each member must inform the Corporation in writing of any contemplated or actual changes in ownership of a member--whether a proprietorship, partnership or corporate member (other than the transfer in public trading of shares of a corporate member whose shares are publicly traded).
Section 10.Shares Held as Security. All Class A Shares, Class B Shares and Class E Shares shall be pledged to, and held by, the Corporation to secure the prohibition against their transfer, to secure the Corporation's rights to purchase or redeem said shares and as security for the payment of any and all obligations of the member to the Corporation or any of its subsidiaries.
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Section 11.Repurchase of Shares. In addition to the rights of purchase or redemption of shares as contained in the Articles of Incorporation and without limiting or restricting, or being limited or restricted by, the provisions for repurchase or redemption as contained in the Articles, the Corporation shall have the right, to repurchase Class A Shares, Class B Shares and Class E Shares held by a member in accordance with the following and the redemption policy set forth in Section 12.
(a)Repurchase of Class A Shares and Class B Shares.
(i)Right to Repurchase. The Corporation shall have (i) the right to repurchase Class A Shares and Class B Shares held by a member upon or at any time after the termination of membership of such member, and (ii) in the case of Excess Class B Stock (as hereinafter defined), the right to repurchase Excess Class B Shares at any time.
(ii)Repurchase Price. The repurchase price for Class A Shares and Class B Shares repurchased by the Corporation shall be determined as follows:
(A)Except as provided in (B) below, the repurchase price for said shares shall be the greater of:
(1)one cent ($0. 01) per share or
(2)An amount which is calculated by (x) multiplying the number of shares to be repurchased by the "exchange value" (as defined below) per share as of the close of the Corporation's fiscal year last ended prior to the date on which the holder ceases to be a qualified and active member, as conclusively determined by the Board of Directors, provided that with respect to termination of memberships occurring during the first full year following the effective date of the Merger between United Grocers, Inc. ("United") and a wholly-owned subsidiary of the Corporation (the "Merger") the exchange value shall be determined as of the year end immediately preceding the Effective Time of the Merger, and (y) subtracting from the amount computed in clause (x) the amounts of any and all indebtedness that may be owing the Corporation or any of its subsidiaries by either the holder or the member from whom the holder has acquired said shares if such acquisition was without the written consent of the Corporation. Notwithstanding the foregoing, with respect to Class A Shares received in the Merger by former United shareholders that receive less than 100 Class A Shares in the Merger and elect not to become a member and to have their shares repurchased, the repurchase price shall equal an amount equal to the exchange value as of April 2, 1999, of the United Common Shares for which the Class A Shares were exchanged (which amount was $57.90 per United Common Share).
(B)On the repurchase of Excess Class B Shares, other than on termination of membership, and provided the member is in good standing, is not in default or delinquent in any obligation to the Corporation or any of its subsidiaries and there exists no grounds for termination of membership and provided further that prior to the payment for said shares neither the member nor the Corporation terminate such membership, the repurchase of Excess Class B Shares will be effected by paying to the member, crediting to the member's account or delivering a note as provided in (3) below:
(1)during the period prior to the end of the third full fiscal year of the Corporation following the effective date of the Merger, at the option of the member made in writing at the time such shares are tendered for redemption, either: (i) an amount which is equal to the exchange value of said shares as of the close of the fiscal year prior to the effective date of the Merger, as conclusively determined by the Board of Directors, the Corporation having the right however to deduct any amounts owing to the Corporation or any of its subsidiaries; or (ii) an amount which is equal to the exchange value of said shares as of the close of the fiscal year last ended prior to the date said shares are tendered for repurchase, as conclusively determined by the Board of Directors, the Corporation having the right however to deduct any amounts owing to the Corporation or any of its subsidiaries, provided that no redemption pursuant to this subparagraph (1) shall be made until after the end of the third full fiscal year of the Corporation following the effective date of the Merger;
(2)during any period following the end of the third full fiscal year of the Corporation following the effective date of the Merger, an amount which is equal to the exchange value of said shares as of the close of the fiscal year of the Corporation last ended prior to the date said shares are tendered for repurchase, as conclusively determined by the Board of Directors, the Corporation having the right however to deduct any amounts owing to the Corporation or any of its subsidiaries; and
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(3)notwithstanding (1) and (2) above, during the period ending one year and 120 days after the effective date of the Merger, with respect to Excess Class B Shares held by former shareholders of United and received in the Merger, an amount which is equal to the exchange value as of April 2, 1999 (which amount was $57.90 per United common share) of the United common shares for which the Excess Class B Shares were exchanged, payable by delivery of a non-negotiable note of the Corporation payable in twenty quarterly installments and bearing interest at 6% per annum, the Corporation having the right, however, to deduct any amounts owing to the Corporation or any of its subsidiaries.
(C)For purpose for this Section 11, the term "exchange value" shall be equal to: (1) total shareholders' equity, determined in accordance with accounting principles generally accepted in the United States ("GAAP"), plus the receivable for sale of Class A Shares to members, less the cumulative stated value of outstanding Class E Shares, divided by the number of Class A Shares and Class B Shares, for any repurchase price the determination of which is to be made with respect to a fiscal year end before September 30, 2006; and (2) otherwise, total shareholders' equity, determined in accordance with GAAP, plus the receivable for sale of Class A Shares to members, less the cumulative stated value of outstanding Class E Shares, less accumulated other comprehensive earnings (loss), less non-allocated earnings from non-Patronage business, divided by the number of Class A Shares and Class B Shares.
(b)Repurchase of Class E Shares.
(i)Right to Repurchase. Provided that the repurchase price equals or exceeds $1,000 and provided that at least ten years has elapsed since the issuance date of such shares, the Corporation may, upon request repurchase the Class E Shares of a member. Any such repurchase of Class E Shares will be governed by the same rules that govern the redemption of shares upon termination of membership. Such repurchase is subject to the priorities and restrictions in Section 12 below.
(ii)Repurchase Price. The repurchase price for Class E Shares repurchased by the Corporation shall be $100.00 per share.
Section 12.Share Redemption Policy. As used herein, unless the context otherwise requires, the terms "redeem" and "redemption" include repurchase. In the event the Board of Directors decides to redeem shares of the Corporation in its discretion based upon its determination that such redemption is in the best interests of the Corporation, the Corporation will redeem the shares in accordance with and subject to limitations of the share redemption policy described below.
Provided that the redemption price equals or exceeds $1,000 the Corporation may also, upon request redeem the excess Class B Shares of a member who owns Class B Shares in excess of that which is required to be held by such member ("Excess Class B Shares"). Any such redemption of Excess Class B Shares will be governed by the same rules that govern the redemption of shares upon termination of membership. The redemption price for shares being redeemed shall be as set forth in Section 11 (a)(ii). Such redemption is subject to the following priorities and restrictions.
1.Restrictions on Redemption.
Redemption is subject to the restrictions imposed by (a) the Corporations Code of the State of California, (b) any loan agreement, security agreement, mortgage, indenture or contract approved by the Board of Directors, to which the Corporation is or will be a party, and which includes a restriction that prohibits the redemption of shares during the existence thereunder of a breach or default by the Corporation, (c) changes in this redemption policy from time to time and (d) other applicable legal restrictions. The determination of the Board of Directors as to whether or not, and to what extent redemptions are permitted by such restrictions shall be within the authority of the Board and such determination shall be conclusive.
2.Redemption Policy.
Subject to the Board of Directors' determining that the Corporation is able to meet the requirements set forth in Paragraph I above, shares will be redeemed in accordance with the following:
(a)Class A Shares eligible for redemption by reason of termination of membership will be redeemed in the order in which memberships terminate, and will be redeemed prior to the redemption of any Class B Shares or Class E Shares which have not yet been redeemed but are eligible for redemption either by reason of termination of membership, or as Excess Class B Shares or Class E Shares tendered for redemption. All determinations by the Company of the order in which memberships terminate or shares are tendered shall be conclusive.
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(b)The aggregate amount of Class B Shares which the Corporation will redeem in any fiscal year will be limited to So/o of the sum of (i) the number of Class B Shares outstanding as of the close of the preceding fiscal year plus (ii) the number of Class B Shares issued as a part of the patronage dividend for such preceding fiscal year (the "five percent limit"); provided that until after the end of the third full fiscal year following the effective date of the Merger the Corporation shall not redeem any Class B Shares eligible for redemption by reason of termination of membership of such member; and provided further that shares repurchased pursuant to Section II (a)(ii)(B)(3) shall not be subject to the 5% limitation on the obligation to redeem.
(c)Subject to the limitations contained in (b) above, in any fiscal year, the Corporation will redeem, up to the five percent limit, Class B Shares which were eligible for redemption in a prior year, either by reason of termination of membership in a prior year or which were Excess Class B Shares tendered for redemption in a prior year, but which have not yet been redeemed, provided that if the five percent limit would preclude redemption of all such shares, then such shares will be redeemed pro rata. In the event that the five percent limit would permit the redemption of all such shares and would permit the redemption of other Class B Shares as well, then, subject to the five percent limit, the Corporation will redeem other Class B Shares eligible for redemption by reason of termination of membership or which are Excess Class B Shares tendered for redemption, in the order in which memberships terminate or shares are tendered for redemption. All determinations by the Corporation of the order in which memberships terminate or shares are tendered shall be conclusive.
(d)Except as provided in Section 11 (a)(ii)(B)(3), the redemption of shares may be accomplished by paying to the member or crediting to the member's account the redemption price. In making such payment or credit for the redemption of shares, the Corporation shall have the right to deduct any amounts owing by the member to the Corporation or any of its subsidiaries. Such payment or credit for the redemption of shares will be made within 120 days after such shares have become eligible for redemption, either by reason of termination of membership or tender in the case of Excess Class B Shares and Class E Shares, and are otherwise entitled to be redeemed in accordance with legal limitations and as provided in paragraphs (a), (b) and (c) above. In no event will interest be payable on the redemption price for any delay in paying or crediting the redemption price.
(e)Without regard to each year's five-percent limit or any other provision of paragraphs (a), (b) and (c) above, the Corporation's Board of Directors will have the absolute discretion to redeem Excess Class B shares or to redeem Class A or Class B Shares of any outgoing member regardless of when the membership terminated or the Class B shares were tendered. The Board of Directors will also have the right to elect to redeem Excess Class B Shares or Class E Shares even though such redemption has not been requested and without regard to the five percent limit or any other provision of Sections 11 or 12 above.
(f)The Board of Directors will have the absolute discretion, without regard to the five-percent limit or any other provision of the redemption policy, to authorize the Corporation to agree with any shareholder to purchase Class B Shares or Class E Shares held by such shareholder and to make such purchase and payment for such shares in such manner as may be agreed upon, subject only to corporate law requirements.
Section 13.Dividend Policy. The Company shall not pay dividends on Class E Shares, whether in cash, capital stock, evidences of indebtedness, property or otherwise. Nothing in this Section 13 will limit the Company’s ability to pay patronage dividends in accordance with, and in any form permitted under, Article VII of these Bylaws, including, without limitation, in any combination of cash, Class B Shares or Class E Shares.
ARTICLE II
MEETINGS
Section 1.Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the Corporation.
Section 2.Annual Meetings. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting Directors shall be elected, and any other proper, business may be transacted.
Section 3.Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten (I 0) percent of the votes at such meeting. Upon request in writing to the Chairman of the
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Board, the President, any vice President or the Secretary by any person (other than the Board of Directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the persons entitled to call the meeting may give the notice.
Section 4.Notice of Shareholders' Meetings. Written notice of each annual or special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (i) in the case of a special meeting the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election.
Section 5.Manner of Giving Notice. Notice of a shareholders' meeting shall be given either personally or by mail or telegraphic or other means of written communication, charges prepaid, addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice; or, if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.
Section 6.Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shareholders required to constitute a quorum.
Section 7.Adjourned Meeting: Notice. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II.
When any meeting of shareholders is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than 45 days from the date set for the original meeting, in which case notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting.
Section 8.Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 9 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California. The shareholders' vote may be by voice vote or by ballot; provided, however, that any election of Directors must be by ballot if demanded by any shareholder at the meeting and before the voting begins. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of Directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or by the Articles of Incorporation.
Subject to the following sentence and to the provisions of Section 708 of the California General Corporation Law, every shareholder entitled to vote at any election of Directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates’ names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination.
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Section 9.Record Date for Shareholders of Record.
(a)In order that the Corporation may determine the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action.
(b)If no record date is fixed:
(1)The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.
(2)The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given.
(3)The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later.
(c)A detern1ination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting.
(d)Shareholders on the record date are entitled to notice and to vote or to receive the distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as otherwise provided in the Articles or by agreement or by the California General Corporation Law.
Section 10.Action Without Meeting. Subject to Section 603 of the California General Corporation Law, any action which, under any provision of the California General Corporation Law, may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Section 11.Proxies. Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary. Any proxy duly executed is not revoked and continues in full force and effect until revoked by the Person executing it prior to the vote pursuant thereto by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy; provided, however, that no proxy shall be valid after the expiration of 11 months from the date of its execution unless otherwise provided in the proxy.
Section 12.Organization. The Chairman of the Board of Directors, or in his absence, any Vice Chairman, or in their absence the President, shall call the meeting of the stockholders to order and shall act as Chairman of such meeting. In the absence of the Chairman of the Board of Directors, and of the Vice Chairman of the Board of Directors, and the President, stockholders shall appoint a Chairman for such meetings. The Secretary of the Company, or in his absence the Assistant Secretary, shall act as Secretary at any meeting of the stockholders, but in the absence of the Secretary and the Assistant Secretary at any meeting of the stockholders, the presiding officer may appoint any person to act as Secretary of the meeting.
Section 13.Inspectors of Election. In advance of any meeting of shareholders, the Board may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof. If inspectors of meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed.
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The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting, the existence of a quorum; the authenticity, validity, and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents, determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act, or certificate of a majority is effective in all respects as the decision, act, or certificate of all.
ARTICLE III
DIRECTORS
Section 1.Powers. Subject to the provisions of the new California General Corporation Law and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors.
Without prejudice to these general powers, and subject to the same limitations, the Directors shall have the power to:
(a)To select and remove all the other officers, agents and employees of the Corporation, prescribe the powers and duties for them as may not be inconsistent with law, or with the Articles or these Bylaws, fix their compensation, and require from them security for faithful service.
(b)To conduct, manage, and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with law, or with the Articles of Incorporation or these Bylaws, as they may deem best.
(c)Change the principal executive office or the principal business office in the State of California from one location to another; cause the Corporation to be qualified to do business in any other state, territory, dependency, or country, and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings.
(d)To adopt, make, and use a corporate seal, and to prescribe the forms of certificates of stock or the system of issuance, recordation and transfer of uncertificated shares of stock, as appropriate, and to alter the form of such seal, certificates and system from time to time as in their judgment they may deem best.
(e)To authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful.
(f)To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor; in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor.
Section 2.Number and Qualification of Directors. The number of Directors of this Corporation shall be as specified in, and such Directors shall be elected as provided in, Article Fifth of this Corporation's Articles of Incorporation. All of the Directors except up to six directors elected by the Class A Shares shall constitute Shareholder-related Directors (as herein defined). "Shareholder-related Director" shall mean a director who is a shareholder, or a partner of a partnership which is a shareholder, or a member of a limited liability company which is a shareholder, or an employee of a corporation, partnership or limited liability company which is a shareholder. Any Shareholder-related Director who shall, if an employee of a shareholder, cease to be employed by the shareholder, or if not an employee, cease to be a partner, member of a shareholder that is a partnership or limited liability company, respectively, shall automatically become disqualified to act as a Shareholder-related Director on the date which is six months from such cessation. If the shareholder to whom the Shareholder-related Director is related ceases to be engaged in the grocery business for a period of six months, the Shareholder-related Director shall likewise automatically become disqualified to act as a Shareholder-related Director.
Section 3.Election and Term of Office. The Directors shall be elected at each annual meeting of shareholders but if any such annual meeting is not held or the Directors are not elected thereat, the Directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified.
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Section 4.Vacancies. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, Secretary, or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective.
Vacancies in the Board excepting those existing as a result of a removal of a director by the vote or written consent of the shareholders, may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation, or removal of any director, or if the authorized number of Directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or Directors arc elected, to elect the full authorized number of Directors to be voted for that meeting.
The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or Directors at any time to fill any vacancy or vacancies not filled by the Directors. Any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. If the Board accepts the resignation of a director tendered to take effect at a future time. The Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective.
No reduction of the authorized number of Directors shall have the effect of removing any director prior to the expiration of the director's term of office.
Section 5.Nominating Committee. On or before the last monthly meeting of the Board of Directors of the Corporation in October of each year, the Directors shall appoint a Nominating Committee of three or more of its members to select nominees for election as Directors of the Corporation for the ensuing year and until their successors are elected and qualified. The President of the Corporation shall be an exofficio member of the Nominating Committee. The Nominating Committee shall give due consideration to geographic representation in selecting a slate of nominees for election to the Board of Directors.
The Nominating Committee shall submit its nominations to the Board of Directors on or before the last monthly meeting of Directors in January of each year, and the nominees so selected shall be those submitted by the Board of Directors to the shareholders to be voted upon at the regular annual meeting of the shareholders of the Corporation.
Section 6.Place of Meetings and Meetings by Telephone. Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the Corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all Directors participating in the meeting can hear one another, and all such Directors shall be deemed to be present in person at the meeting.
Section 7.Regular Meetings. Regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice.
Section 8.Special Meetings. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, or the Secretary or by any two Directors.
Special meetings of the Board shall be held upon four days' written notice or 48 hours' notice given personally or by telephone, telegraph, telex, or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the Director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held.
Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice
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by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient.
Section 9.Quorum. A majority of the authorized number of Directors constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided.
Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for such meeting.
Section 10.Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any Directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the Directors who were not present at the time of the adjournment.
Section 11.Action Without Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board.
Section 12.Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board.
Section 13.Presiding Officers. At the first meeting of the Board of Directors each year (at which a quorum shall be present), held next after the annual meeting of the stockholders, the Board shall elect from its membership a chairman, a First Vice Chairman and a Second Vice Chairman. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors. The First Vice Chairman of the Board of Directors shall preside at all meetings of the Board of Directors during the absence or disability of the Chairman. The Second Vice Chairman of the Board of Directors shall preside at all meetings of the Board of Directors during the absence or disability of the Chairman and the First Vice Chairman.
Section 14.Election of Officers. At the first meeting of the Board of Directors each year (at which a quorum shall be present), held next after the annual meeting of the stockholders, the Directors shall proceed to the election of the executive officers of the Corporation.
Section 15.Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate one or more committees, each consisting of two or more Directors, to serve at the pleasure of the Board. The Board may designate one or more Directors as alternate members of any committee. The Board may delegate to such committee any of the authority of the Board except with respect to:
(a)The approval of any action for which the General Corporation Law also requires shareholders' approval or approval of the outstanding shares;
(b)The filling of vacancies on the Board or on any committee;
(c)The fixing of compensation of the Directors for serving on any committee;
(d)The amendment or repeal of Bylaws or the adoption of new Bylaws;
(e)The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable;
(f)A distribution to the shareholders of the Corporation except at a rate or in a periodic amount or within a price range determined by the Board;
(g)The appointment of other committees of the Board or the members thereof.
The Board shall have the power to prescribe the manner in which proceedings of any committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in
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which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV
OFFICERS
Section 1.Officers. The officers of the Corporation shall be a President, one or more vice Presidents, a Secretary, a Treasurer and chief financial officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman and one or more Vice Chairmen of the Board, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices.
Section 2.Election. The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected.
Section 3.Subordinate Officers. The Board 1nay elect, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board may from time to time determine.
Section 4.Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors at any time, or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 5.Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office.
Section 6.Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and at all meetings of the shareholders, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. In the absence of the Chairman, the First Vice Chairman, and in his absence, the Second Vice Chairman, of the Board of Directors shall preside at all meetings of the shareholders. The Chairman of the Board shall be an ex officio member of all the standing committees.
Section 7.President. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President is the general manager and chief executive officer of the Corporation and has, subject to the control of the Board, general supervision, direction, and control of the business and officers of the Corporation. The President has the general powers and duties of management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board.
Section 8.Vice Presidents. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board, or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board.
Section 9.Secretary. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board of Directors, and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a
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copy of the Bylaws of the corporation at the principal executive office or business office in accordance with Section 213 of the California General Corporation Law.
The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, if any, and the number and date of cancellation of every certificate surrendered for cancellation, if relevant.
The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board and of any com1nittees thereof required by these Bylaws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board.
Section 10.Chief Financial Officer. The chief financial officer of the Corporation shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send of cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them, and shall render to the President and directors, whenever they request it, an account of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. The books of accounts shall at all times be open to inspection by any director.
Section 11.Treasurer. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and Directors, whenever they request it, an account of all transactions as Treasurer, and shall have such other powers and perform such other duties as may be prescribed by the Board.
ARTICLE V
INDEMNIFICATION
The Corporation shall, to the maximum extent permitted by law, have the power to indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the Corporation. For purposes of this Section, an "agent" of the Corporation includes any person who is or was a director, officer, employee, or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, or was a director, officer. employee, or agent of a Corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation.
ARTICLE VI
OTHER PROVISIONS
Section 1.Principal Office. The principal executive office for the transaction of the business of the corporation is hereby fixed and located at:
5200 Sheila Street
Commerce, California 90040
The Board of Directors is hereby granted full power and authority to change said principal office from one location to another within or outside the State of California. Any such change shall be noted on the Bylaws by the Secretary, opposite this Section, or this Section may be amended to state the new location.
Section 2.Other Offices. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the Corporation is qualified to do business.
Section 3.Inspection of Bylaws. The Corporation shall keep in its principal executive office the original or a copy of these Bylaws as amended to date which shall be open to inspection by shareholders at all reasonable times during office hours.
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Section 4.Annual Report to Shareholders. The Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year adopted by the Corporation. This report shall be sent at least 15 days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article II of these Bylaws for giving notice to shareholders of the Corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the Corporation that the statements were prepared without audit from the books and records of the Corporation.
Section 5.Corporate Contracts and Instruments: How Executed. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 6.Certificates of Stock.
(a)Certificates of Stock. The Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of the capital stock of the Corporation shall be uncertificated shares, as provided under Section 416 of the California General Corporation Law. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. With respect to Class A Shares, Class B Shares and Class E Shares pledged to, and held by, the Corporation pursuant to Section 10 of Article I of these Bylaws, any such resolution may provide for the automatic conversion of all such shares to uncertificated form. Notwithstanding the adoption of any such resolution providing for uncertificated shares, every holder of capital stock of the Corporation theretofore represented by certificates and, upon request, every holder of uncertificated shares, when any such shares have been fully paid up and provided such shares are not pledged, and held by, the Corporation pursuant to Section 10 of Article I of these Bylaws or otherwise, shall be entitled to have a certificate for such shares of capital stock of the Corporation. To the extent shares of capital stock are represented by certificates, such certificates shall be signed by the President, or a Vice President, and also by the Secretary, or Assistant Secretary, or be authenticated by the facsimile of the signature of the President and the written signature of the Secretary or Assistant Secretary. A stockholder that holds a certificate representing shares of any class or series of the capital stock of the Corporation for which the Board of Directors has authorized uncertificated shares may request that the Corporation cancel such certificate and issue such shares in an uncertificated form, provided that the Corporation shall not be obligated to issue any uncertificated shares of capital stock to such stockholder until such certificate representing such shares of capital stock shall have been surrendered to the Corporation.
(b)Issuance Prior to Payment. Shares and certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or the Bylaws may provide.
(c)Stock Records. To the extent shares of capital stock are represented by certificates, such certificates shall be consecutively numbered and the names of the owners, the number of shares and the date of issue shall be entered in the stock records of the Corporation. To the extent shares of capital stock are uncertificated, the stock records of the Corporation shall record, and serve as proof of, the name of the owner, the number of shares and the date of ownership.
(d)Transfer of Shares. Registration of transfer of shares of stock of the Corporation shall be effected on the books of the Corporation only as follows:
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transfer or payment of taxes shall not be required in any case in which the officers of the Corporation determine to waive such requirement. |
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(2) |
Uncertificated Shares. In the case of uncertificated shares of stock, upon receipt of proper and duly executed transfer instructions from the registered holder of such shares of stock, or by his attorney authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or with a designated transfer agent or transfer clerk, the payment of all transfer taxes thereon, and compliance with appropriate procedures for transferring shares in uncertificated form. Whenever such transfer instructions are executed by someone other than the person or persons named in the books of the Corporation as the holder thereof, evidence of authority to transfer shall also be submitted with such transfer instructions. Notwithstanding the foregoing, such payment of taxes or compliance shall not be required in any case in which the officers of the Corporation determine to waive such requirement. |
No transfer of shares of capital stock shall be made on the books of the Corporation if such transfer is in violation of a lawful restriction noted conspicuously on the certificate. No transfer of shares of capital stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.
(e)Restrictions on Transfer of Shares. The issued Class A Shares, Class B Shares and Class E Shares of the Corporation shall be transferable only as provided by Article I of these Bylaws. New Class A Shares, Class B Shares and Class E Shares shall be issued only to qualified applicants in accordance with Article I of these Bylaws.
(f)Required Statements Regarding Shares. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, a statement or summary of the rights, preferences, privileges and restrictions granted to or imposed upon each class of stock or series thereof shall be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that in lieu of the foregoing statement or summary, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement setting forth the office or agency of the Corporation from which the stockholders may obtain, upon request and without charge, a copy of such statement of the rights, preferences, privileges or restrictions of each class of stock or series thereof. In the case of uncertificated shares, within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written statement of the information required by this section to be set forth or summarized on certificates.
Section 7.Representation of Shares of Other Corporations. The Chairman of the Board, the President, or any vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the Corporation. The authority granted to these officers to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers.
Section 8.Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction, and definitions contained in the General California Corporation Law shall govern the construction of these Bylaws.
Section 9.Seal. The Board of Directors shall provide a suitable seal containing the name of the Company and the words "Incorporated March, 1925", or other appropriate words, which seal shall be in the charge of the Secretary to be used as required by law and the Bylaws of the Company.
Section 10.Dividends (other than patronage dividends). No ordinary dividends shall be paid with respect to shares of stock of the Corporation from net earnings of the Corporation from business transacted by the Corporation with or for its member patrons and associate patrons (from "patronage earnings"), and patronage earnings shall not be reduced by ordinary dividends. Any ordinary dividends shall be paid; (a) first from net earnings of the Corporation other than patronage earnings; and (b) then from unallocated retained earnings. Any ordinary dividends paid with respect to shares of stock of the Corporation shall be in addition to amounts payable to member patrons and associate patrons as patronage dividends pursuant to Article VII.
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PATRONAGE DIVIDENDS
The net earnings of the Corporation from business transacted by the Corporation with its member patrons and associate patrons, except such amounts as may be required for reserves for normal business requirements, as dictated by good accounting practice, shall be distributed on a patronage basis to the member patrons and associate patrons of the Corporation based in amount upon the volume of business transacted by Divisions of the Corporation with each of such patrons. Said distributions may be made in money or part in money and the balance in written notices of allocation, as defined in Section 1388 of the United States Internal Revenue Code, as determined by the Board of Directors.
ARTICLE VIII
CONSENT OF MEMBERS
Section 1.Each applicant who hereafter applies for and is accepted to membership in Unified Grocers, Inc. and each member of Unified Grocers, Inc. who continues as a member after the adoption of this Bylaw shall, by such act alone, consent that the amount of any patronage dividend payments made to such member which are made in written notices of allocation (as defined in Section 1388 of the United States Internal Revenue Code) will be taken into account by said member at their stated dollar amounts in the manner provided in Section 1385(a) of the United States Internal Revenue Code in the taxable year in which such notices of allocation are received by said member, provided, however, that this consent shall not extend to written notices of allocation that are clearly labeled to be "nonqualified."
Section 2.Each person who hereafter applies for and is accepted to membership in Unified Grocers, Inc. (Unified) and each member of Unified on the date of adoption of this Bylaw who continues as a member after such date shall, by such act alone, consent that the amount of any distributions with respect to his patronage occurring after the adoption of this Bylaw which are made in written notices of allocation (as defined in 26 U.S. Code 1388) and which are received by him from Unified, will be taken into account by him at their stated dollar amounts in the manner provided in 26 U.S. Code 1385 (a) in the taxable year in which such written notices of allocation are received by him, provided, however, that this consent shall not extend to written notices of allocation that are clearly labeled to be "nonqualified." As used herein, "person" includes persons, partnerships, associations and corporations; the masculine includes the feminine and neuter; and the singular includes the plural.
ARTICLE IX
AMENDMENTS
These Bylaws may be repealed or amended or new Bylaws may be adopted at a meeting by the vote of shareholders entitled to exercise a majority of the voting power or by the written assent of such shareholders. Subject to the right of shareholders to adopt, amend or repeal Bylaws, these Bylaws, other than a Bylaw or amendment thereof changing the authorized number of Directors, or a Bylaw or any amendment thereof providing for the payment of patronage dividends to the shareholders of the Corporation, may be adopted, amended or repealed by the Board of Directors. The power of the shareholders to adopt, repeal or amend Bylaws fixing the number of Directors, or the Bylaws providing for the payment of patronage dividends to its shareholders, may not be delegated to the Directors. Whenever any amendment or any Bylaw is adopted, it must be copied in the book of Bylaws with the original Bylaws and immediately after them. If any Bylaw is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted, or written assent was filed, must be stated in said book.
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EXHIBIT 31.1
CERTIFICATION
I, Robert M. Ling, Jr., certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Unified Grocers, Inc. (the “Registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. |
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. |
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Dated: August 12, 2016 |
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/ S / Robert M. Ling, Jr. |
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Robert M. Ling, Jr. |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Michael F. Henn, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Unified Grocers, Inc. (the “Registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. |
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. |
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Dated: August 12, 2016 |
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/ S / Michael F. Henn |
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Michael F. Henn |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Unified Grocers, Inc. (the “Company”) for the fiscal quarter ended July 2, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Ling, Jr., President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. |
Date: August 12, 2016 |
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/s/ Robert M. Ling, Jr. |
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Robert M. Ling, Jr. |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Unified Grocers, Inc. (the “Company”) for the fiscal quarter ended July 2, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael F. Henn, Executive Vice President, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. |
Date: August 12, 2016 |
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/s/ Michael F. Henn |
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Michael F. Henn |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
Unified Grocers, Inc. Executive Insurance Plan
First Amendment to the Amended and Restated Split-Dollar Agreement
THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED SPLIT-DOLLAR AGREEMENT (the “Amendment”) is entered into effective as of July 18, 2016 by and between Unified Grocers, Inc., a California Corporation (the “Employer”) and Robert M. Ling Jr. (the “Employee”). Except where otherwise defined herein, the capitalized terms used in this Amendment shall have the respective meanings assigned to such terms in, and all Section references contain herein shall refer to, the Agreement (as such term is defined in Recital A below). This Amendment is made with reference to the following facts and circumstances:
RECITALS
A.The Employer and Employee previously entered into that certain Amended and Restated Split-Dollar Agreement dated as of May 29, 2013 (the “Agreement”) under the Unified Grocers, Inc. Executive Insurance Plan.
B.The Employer previously secured two Policies under the Agreement in order to provide the death benefit set forth under Section 4 of the Agreement to Employee’s designated beneficiary (the “Death Proceeds”).
C.Pursuant to Section 9 of the Agreement, the parties hereto desire to amend the Agreement to remove Policy# 1563807 from the Agreement’s Policy Endorsement as the proceeds payable under the remaining Policy are sufficient to fund the Death Proceeds.
NOW, THEREFORE, with reference to the foregoing recitals, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows:
1.The “Application or Policy No.” field in the Policy Endorsement to the Agreement shall read as follows:
“Application or Policy No.:1550652 (the “Policy”)”
2.Continuation of Agreement. Except as expressly modified hereby, all other terms and provisions of the Agreement, including the Policy Endorsement, shall remain in full force and effect, are incorporated herein by this reference, and shall govern the conduct of the parties hereto.
3.Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed an original Amendment, but all of which, taken together, shall constitute one (1) and the same Amendment, binding on the parties hereto. The signature of any party hereto to any counterpart hereof shall be deemed a signature to, and may be appended to, any other counterpart hereof.
[Signature Page Follows]
- 1 -
IN WITNESS WHEREOF, the parties have executed this First Amendment to the Amended and Restated Split-Dollar Agreement as of the date set forth below.
EMPLOYER: UNIFIED GROCERS, INC. |
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8/03/16 |
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/s/Michael F. Henn |
Date |
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Signature |
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Michael F. Henn |
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Executive Vice President & Chief Financial Officer |
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EMPLOYEE: |
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7/19/16 |
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s/Robert M. Ling Jr. |
Date |
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Signature |
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Robert M. Ling Jr. |
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Type or Print Name |
[Signature Page to First Amendment to the Amended and Restated Split-Dollar Agreement]
- 2 -
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Jul. 02, 2016 |
Jul. 30, 2016 |
|
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jul. 02, 2016 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q3 | |
Entity Registrant Name | UNIFIED GROCERS, INC. | |
Entity Central Index Key | 0000320431 | |
Current Fiscal Year End Date | --10-01 | |
Entity Filer Category | Non-accelerated Filer | |
Class A | ||
Document Information [Line Items] | ||
Entity Common Stock, Shares Outstanding | 122,500 | |
Class B | ||
Document Information [Line Items] | ||
Entity Common Stock, Shares Outstanding | 410,537 | |
Class C | ||
Document Information [Line Items] | ||
Entity Common Stock, Shares Outstanding | 15 | |
Class E | ||
Document Information [Line Items] | ||
Entity Common Stock, Shares Outstanding | 116,532 |
Consolidated Condensed Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
Jul. 02, 2016 |
Oct. 03, 2015 |
---|---|---|
Accounts and current portion of notes receivable, allowances | $ 3,760 | $ 4,171 |
Notes receivable, less current portion allowances | $ 20 | $ 54 |
Common stock Class A | ||
Common stock, shares authorized | 500,000 | 500,000 |
Common stock, shares outstanding | 122,500 | 122,500 |
Common stock Class B | ||
Common stock, shares authorized | 2,000,000 | 2,000,000 |
Common stock, shares outstanding | 410,537 | 410,537 |
Common stock Class E | ||
Common stock, shares authorized | 2,000,000 | 2,000,000 |
Common stock, shares outstanding | 119,204 | 205,704 |
Consolidated Condensed Statements of Earnings (Loss) (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2016 |
Jun. 27, 2015 |
Jul. 02, 2016 |
Jun. 27, 2015 |
|
Income Statement [Abstract] | ||||
Gross billings including vendor direct arrangements | $ 973,597 | $ 1,069,587 | $ 2,913,870 | $ 2,995,888 |
Income tax provision (benefit) form discontinued operations | $ 0 | $ (2) | $ 0 | $ 92 |
Consolidated Condensed Statements of Comprehensive Earnings (Loss) (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2016 |
Jun. 27, 2015 |
Jul. 02, 2016 |
Jun. 27, 2015 |
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Statement Of Income And Comprehensive Income [Abstract] | ||||
Unrealized net holding (loss) gain on investments, net of income tax (benefit) expense | $ 146 | $ (542) | $ 240 | $ (242) |
Defined benefit pension plans and other postretirement benefit plans: Changes in unrecognized prior service credits during the period, and changes in unrecognized gains and losses, income tax expense (benefit) | $ 26 | $ (602) | $ 77 | $ (1,806) |
Basis of Presentation |
9 Months Ended | ||
---|---|---|---|
Jul. 02, 2016 | |||
Accounting Policies [Abstract] | |||
Basis of Presentation |
The consolidated condensed financial statements include the accounts of Unified Grocers, Inc. and all its subsidiaries (the “Company” or “Unified”). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended October 3, 2015 filed with the SEC. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim periods presented. The preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates. The Company’s banking arrangements allow the Company to fund outstanding checks when presented for payment to the financial institutions utilized by the Company for disbursements. This cash management practice frequently results in total issued checks exceeding the available cash balance at a single financial institution. The Company’s policy is to record its cash disbursement accounts with a cash book overdraft in accounts payable. At July 2, 2016 and October 3, 2015, the Company had book overdrafts of $80.6 million and $88.1 million, respectively, classified in accounts payable and included in cash provided by operating activities. |
Discontinued Operations |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Discontinued Operations And Disposal Groups [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued Operations |
On October 7, 2015 (the “Closing Date”), the Company completed the sale of all of the outstanding shares of the Company’s wholly owned subsidiary, Unified Grocers Insurance Services (“UGIS”), to AmTrust Financial Services, Inc. (“AmTrust” or the “Buyer”) pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and between the Company and AmTrust dated as of April 16, 2015. As of the Closing Date, UGIS owned all of the outstanding shares of the capital stock of Springfield Insurance Company (“SIC”) and Springfield Insurance Company Limited (Bermuda) (“SICL,” and collectively with UGIS and SIC, the “Acquired Companies”). For additional information, see Item 1.01. “Entry into a Material Definitive Agreement,” including Exhibit 99.1, “Stock Purchase Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of April 16, 2015” thereto, of the Company’s Current Report on Form 8-K, filed on April 22, 2015 and Item 2.01. “Completion of Acquisition or Disposition of Assets,” including Exhibit 99.2, “Master Services Agreement by and between Unified Grocers, Inc. and AmTrust Financial Services, Inc. dated as of October 7, 2015” thereto, of the Company’s Current Report on Form 8-K, filed on October 14, 2015. The Acquired Companies were previously reported by the Company as a segment identified as the Insurance Segment (“Insurance”). The estimated purchase price received for the Acquired Companies was approximately $26.2 million in cash proceeds, representing an agreed-upon discount to the Tangible Book Value (“TBV”), which was calculated as defined in the Stock Purchase Agreement. In May 2016, the Buyer delivered to the Company a final closing statement, including its calculation of the TBV as of the Closing Date. The final purchase price was adjusted to reflect an increase in the purchase price of $0.4 million between the estimated TBV as of the Closing Date and the actual TBV as of the Closing Date. The Company utilized the net proceeds of this transaction to repay certain indebtedness. At the Closing Date, AmTrust and the Company also entered into a Master Services Agreement for a term of five (5) years, pursuant to which, among other things, each party agreed to provide the other with certain transition services relating to the business of the Acquired Companies. AmTrust has also agreed to pay the Company an annual payment following each of the first five years (ended December 31) of the term of the Master Services Agreement (each, an “Earn-Out Payment”). Each Earn-Out Payment will be equal to four and one-half percent (4.5%) of gross written premium in respect of each of these first five years. For purposes of such payments, gross written premium will be based on premiums written on or attributable to all insurance policies purchased during the applicable year by Members or customers of the Company, issued by SIC or SICL or any other affiliate of AmTrust, to the extent that such policies were purchased from or through UGIS or by a different sales channel if there is a change in UGIS. Based on agreed upon terms with AmTrust, the Company recorded a $1.3 million impairment on the Company’s investment in the Acquired Companies in its fiscal year ended October 3, 2015. Additionally, the Company wrote-off $0.7 million in expenses related to an investigation of issues relating to the setting of case reserves and management of claims by the Company’s former insurance subsidiaries and related matters (the “Audit Committee Investigation”) and incurred $1.2 million in selling costs related to the Acquired Companies. The Acquired Companies incurred an operating loss of $3.7 million for the fiscal year ended October 3, 2015. The Company incurred approximately $0.2 million in additional expenses attributable to the Audit Committee Investigation during the thirty-nine weeks ended July 2, 2016, and such expenses are included in earnings (loss) from discontinued operations in our consolidated condensed statements of earnings (loss). The Company’s historical financials have been revised to present the operating results of the Acquired Companies as discontinued operations. Summarized results of the discontinued operations are as follows for the thirteen and thirty-nine weeks ended July 2, 2016, and June 27, 2015:
The operating results of the Acquired Companies were historically reported as the results of operations included in the Insurance segment. Assets and liabilities identifiable within the Acquired Companies are reported as “Assets of discontinued operations – current” and “Liabilities of discontinued operations – current,” respectively, in the Company’s consolidated condensed balance sheets. The major classes of assets and liabilities of the discontinued operations as of July 2, 2016 and October 3, 2015 are as follows:
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Fair Value of Financial Instruments |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 02, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Financial Instruments |
The Company evaluates the fair value of its assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and ASC Topic 825, “Financial Instruments.” Management has evaluated its assets and liabilities valued at fair value as follows:
The Company records marketable securities at fair value in accordance with ASC Topic 320, “Investments – Debt and Equity Securities.” The Company’s Wholesale Distribution segment holds insurance contracts and mutual funds valued at fair value in support of certain employee benefits. See Note 4 for further discussion on investments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value (these values represent an approximation of possible value and may never actually be realized): Cash and cash equivalents. The carrying amount approximates fair value due to the short maturity of these instruments. Accounts receivable and notes receivable. The carrying amount of accounts receivable approximates its fair value due to its short-term maturity. Except as discussed below, the carrying amount of notes receivable approximates its fair value based principally on the underlying interest rates and terms, maturities, collateral and credit status of the receivables and after consideration of recorded allowances. Concentration of credit risk. The Company’s largest customer, Cash & Carry Stores, LLC, a wholly-owned subsidiary of Smart & Final, Inc., a Non-Member customer, and the ten largest Member and Non-Member customers (including Cash & Carry Stores, LLC) constituted approximately 16% and 49%, respectively, of total net sales for the thirty-nine week period ended July 2, 2016. The Company’s ten customers with the largest accounts receivable balances accounted for approximately 44% and 43% of total accounts receivable at July 2, 2016 and at October 3, 2015, respectively. Management believes that receivables are well diversified and that the allowances for doubtful accounts are sufficient to absorb estimated losses. Investments. Generally, the fair values for investments are readily determinable based on actively traded securities in the marketplace. Investments that are not actively traded are valued based upon inputs including quoted prices for identical or similar assets. Equity securities that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company regularly evaluates securities carried at cost to determine whether there has been any diminution in value that is deemed to be other than temporary and adjusts the value accordingly. The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of July 2, 2016:
The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of October 3, 2015:
Mutual funds are valued by the Company based on information received from a third party. These assets are valued based on quoted prices in active markets (Level 1 inputs). As of July 2, 2016 and October 3, 2015, respectively, $11.5 million and $12.5 million of mutual funds, held in rabbi trusts to provide for employee benefit obligations, are included in other assets in the Company’s consolidated condensed balance sheets. For assets traded in active markets, the assets are valued at quoted bond market prices (Level 1 inputs). For assets traded in inactive markets, the service’s pricing methodology uses observable inputs (such as bid/ask quotes) for identical or similar assets. Assets considered to be similar will have similar characteristics, such as: duration, volatility, prepayment speed, interest rates, yield curves, and/or risk profile and other market corroborated inputs (Level 2 inputs). The Company determines the classification of financial asset groups within the fair value hierarchy based on the lowest level of input into each group’s asset valuation. The Company did not have any significant transfers into or out of Levels 1 and 2 during the thirty-nine week period ended July 2, 2016. Notes payable. The fair values of borrowings under the Company’s credit facilities are estimated to approximate their carrying amounts due to the short maturities of those obligations. The fair values for other notes payable are based primarily on rates currently available to the Company for debt with similar terms and remaining maturities. The fair value of notes payable was $259.9 million and $278.8 million compared to their carrying value of $256.6 million and $278.5 million at July 2, 2016 and October 3, 2015, respectively. These fair values were based on estimates of market conditions, estimates using present value and risks existing at that time (Level 2 inputs). |
Investments |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Investments Schedule [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments |
The amortized cost and fair value of investments are as follows:
During the interim period ended July 2, 2016 and the fiscal year ended October 3, 2015, the Company did not hold any trading or held-to-maturity securities. Net investment income, which is included in net sales, is summarized as follows:
Equity investments held by the Company that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company evaluated its equity investments for impairment as of July 2, 2016, and the Company did not consider any of these equity investments to be impaired. The Company held investments in Western Family Holding Company (also doing business as Western Family Foods Inc.) (“Western Family”) common stock of $8.6 million and $9.0 million at July 2, 2016 and October 3, 2015, respectively. Western Family is a privately held company located in Oregon that provides procurement, quality assurance, packaging and other services exclusively for its member-owners from which the Company purchases food and general merchandise products. The investment represents approximately a 17.2% ownership interest at both July 2, 2016 and October 3, 2015. The Company’s ownership percentage in Western Family is based, in part, on the volume of purchases transacted with Western Family. The investment is accounted for using the equity method of accounting. In June 2016, Western Family reached an agreement with Topco Associates, LLC (“Topco”) authorizing Topco to procure, manage and market three of Western Family’s private label brands, including the Western Family and Natural Directions premium corporate brands that are sold through the Company. Western Family will continue to own its private label brands and Unified will continue its ownership in Western Family. Western Family announced that the transition of procurement and marketing to Topco will take several months, with all orders and invoices continuing through Western Family until that time. When the transition of the products is complete, Western Family’s headquarters in Oregon will close and Western Family will lay off the majority of its workforce. In conjunction with its agreement with Topco, Western Family provided its investors an estimate of the anticipated costs for the closure of its headquarters, and the Company has accordingly reduced its investment in Western Family by its proportionate share of such costs in the amount of $0.4 million. As discussed in Part I, Item 1, “Business – Products – Corporate Brands” of our Annual Report on Form 10-K for the year ended October 3, 2015, the Company currently sells products under premium and value-oriented corporate brands. During fiscal 2016, the Company joined Topco, a cooperative, concurrent with an investment of $60 thousand in Topco’s capital stock. Topco is a privately held company that provides procurement, quality assurance, packaging and other services exclusively for its member-owners, which include supermarket retailers, food wholesalers and foodservice companies. Commencing in the fourth quarter of fiscal 2016, the Company will begin transitioning to Topco as its primary supplier for the Company’s Springfield premium corporate brand and its value-oriented Special Value corporate brand products. In addition, Topco will serve as the Company’s sole-source supplier for general merchandise and health and beauty care products under its TopCare label. The Company’s wholly-owned finance subsidiary, Grocers Capital Company (“GCC”), has an investment in National Consumer Cooperative Bank (“NCB”), which operates as a cooperative, and therefore, its participants are required to own its Class B common stock. The investment in the Class B common stock of NCB, accounted for using the cost method of accounting, aggregated $4.1 million at both July 2, 2016 and October 3, 2015. The Company recognized no dividend income from NCB for the thirty-nine weeks ended July 2, 2016 and June 27, 2015. |
Segment Information |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information |
Unified is a retailer-owned, grocery wholesale cooperative serving supermarket, specialty and convenience store operators located primarily in the western United States and the Pacific Rim. The Company’s customers range in size from single store operators to regional supermarket chains. The Company sells a wide variety of products typically found in supermarkets. The Company’s customers are comprised of its owners (“Members”) and non-owners (“Non-Members”). Our focus is on our Members, but we also do business with Non-Member customers. For the thirty-nine weeks ended July 2, 2016, approximately 69% of our net sales were to Members. The Company sells products through Unified, including its specialty food division, and through its international sales subsidiary. The Company reports all product sales in its Wholesale Distribution segment. The Company also provides support services, including financing, to its customers through the Wholesale Distribution segment and through separate subsidiaries. Finance activities are grouped within Unified’s All Other business activities. The availability of specific products and services may vary by geographic region. Management identifies segments based on the information monitored by the Company’s chief operating decision maker (the Chief Executive Officer) to manage the business and, accordingly, has identified the following reportable segments:
The All Other category includes the results of operations for the Company’s other support businesses, including its finance subsidiary, Grocers Capital Company, whose services are provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. As of, and for the thirty-nine weeks ended, July 2, 2016, the All Other category collectively accounted for approximately 3% of the Company’s total assets, and less than 1% of total net sales. Information about the Company’s operating segments is summarized below.
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Notes Payable |
9 Months Ended | ||
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Jul. 02, 2016 | |||
Debt Disclosure [Abstract] | |||
Notes Payable |
The Company is party to an Amended and Restated Credit Agreement dated as of June 28, 2013, as amended in fiscal 2014 and fiscal 2015 (as so amended, the “Credit Agreement”), among the Company, the lenders party thereto, and Wells Fargo Bank, National Association (“N.A.”), as administrative agent (“Administrative Agent”). See Note 7 to “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015 for a full description of the Credit Agreement and the amendments thereto. On December 28, 2015, the Company entered into a consent and waiver (the “Consent”) whereby the Administrative Agent and the Lenders (as defined in the Credit Agreement) consented to (i) the extension to June 30, 2016 of the deadline for delivery of the annual financial statements and associated certifications and information required pursuant to the Credit Agreement and (ii) the extension to January 31, 2016 of the deadline for delivery of annual financial projections required pursuant to the Credit Agreement. The financial projections were delivered prior to the January 31, 2016 deadline. The annual financial statements and associated required certifications were delivered to the Company’s Administrative Agent and the Lenders on June 1, 2016, who confirmed that the Company is now in compliance with the reporting requirements of the Credit Agreement. The Company’s outstanding revolver borrowings under the Credit Agreement decreased to $150.4 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.48% per annum) from $161.8 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 1.99% per annum). The Company’s outstanding FILO borrowings under the Credit Agreement were $17.2 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 3.71% per annum) and $20.7 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 3.20% per annum). The Company’s outstanding term loan borrowings under the Credit Agreement were $85.0 million at July 2, 2016 (Eurodollar and Base Rate Loans at a blended average rate of 2.43% per annum) and $92.5 million at October 3, 2015 (Eurodollar and Base Rate Loans at a blended average rate of 2.20% per annum). Subsidiary Financing Arrangement On December 28, 2015, GCC received consent from California Bank & Trust, as arranger and administrative agent for the Amended and Restated Loan and Security Agreement, dated as of September 26, 2014 as amended by Amendment Number One dated as of June 26, 2015 (as so amended, the “GCC Loan Agreement”), to extend the due date of the covenant requirement to deliver consolidated audited financial statements of the Company to June 30, 2016. The consolidated audited financial statements of the Company and associated certifications have been delivered to California Bank & Trust, which has confirmed that the Company is now in compliance with the reporting requirements of the GCC Loan Agreement. GCC had no revolving loan borrowings outstanding at July 2, 2016 and October 3, 2015.
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Pension and Other Postretirement Benefits |
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Compensation And Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension and Other Postretirement Benefits |
The Company sponsors a cash balance plan (“Unified Cash Balance Plan”). The Unified Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Participants’ balances receive an annual interest credit, currently tied to the 30-year Treasury rate that is in effect the previous November, but in no event shall the rate be less than 5%. Benefits under the Unified Cash Balance Plan are provided through a trust. Prior to the end of fiscal 2014, the Company amended the Unified Cash Balance Plan to close the plan to new entrants effective December 31, 2014. In addition, the plan was frozen at December 31, 2014 such that current participants will no longer accrue salary-based service credits based on years of service with the Company and pensionable compensation after that date. The annual interest credit as described above will continue for participants active in the plan as of December 31, 2014. Selected groups of vested terminated participants were each given one-time opportunities to elect a lump sum distribution of their benefits from the plan’s assets or immediate receipt of an annuity in December 2015 and December 2014. As a result, benefit payments of $8.7 million and $7.9 million, respectively, were distributed from the plan’s assets to those participants who elected such option prior to the end of the Company’s first quarters ended January 2, 2016 and December 27, 2014. The Company also sponsors an Executive Salary Protection Plan III (“ESPPIII”) for the executive officers of the Company that provides supplemental post-termination retirement income based on each participant's salary and years of service as an officer of the Company. This plan was amended in December 2012 to close the plan to new entrants as of September 30, 2012. This plan was replaced in fiscal 2013 with the Company’s Supplemental Executive Retirement Plan (see discussion below). The Company has informally funded its obligation to plan participants in a rabbi trust, comprised primarily of life insurance policies reported at cash surrender value and mutual fund assets consisting of various publicly-traded mutual funds reported at estimated fair value based on quoted market prices. In accordance with ASC Topic 710, “Compensation – General,” the assets and liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. In addition, all earnings and expenses of the rabbi trust are reported in the Company’s consolidated condensed statements of earnings (loss). The cash surrender value of such life insurance policies aggregated to $21.5 million and $20.8 million at July 2, 2016 and October 3, 2015, respectively, and are included in other assets in the Company’s consolidated condensed balance sheets. Mutual funds reported at their estimated fair value of $7.2 million and $10.5 million at July 2, 2016 and October 3, 2015, respectively, are included in other assets in the Company’s consolidated condensed balance sheets. The assets held in the rabbi trust are not available for general corporate purposes. The rabbi trust is subject to the Company’s creditors’ claims in the event of its insolvency. The trust assets are excluded from ESPPIII plan assets as they do not qualify as plan assets under ASC Topic 715, “Compensation – Retirement Benefits.” The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $38.0 million and $40.7 million at July 2, 2016 and October 3, 2015, respectively, is recorded in long-term liabilities, other in the Company’s consolidated condensed balance sheets. The Company sponsors other postretirement benefit plans that provide certain medical coverage to retired non-union employees and officers and provide unused sick leave benefits for certain eligible union employees. Those plans are not funded. The components of net periodic cost for pension and other postretirement benefits for the respective thirteen weeks and thirty-nine weeks ended July 2, 2016 and June 27, 2015 consist of the following:
The Company’s funding policy is to make contributions to the Unified Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. During August 2014, legislation to extend pension funding relief was enacted as part of the Highway and Transportation Funding Act of 2014 (“HATFA”). As a result, the Company expects to make no estimated minimum contributions to the Unified Cash Balance Plan during fiscal 2016 for the 2015 plan year, and there will be no quarterly contributions required for the 2016 plan year. At its discretion, the Company may contribute in excess of the minimum (zero) requirement. Additional contributions, if any, will be based, in part, on future actuarial funding calculations and the performance of plan investments. Additionally, the Company anticipates making benefit payments of $4.0 million to participants in the ESPPIII for the 2016 plan year. The Company made benefit payments of $3.8 million to participants in the ESPPIII during the thirty-nine weeks ended July 2, 2016 for the 2016 plan year. The Company sponsors a supplemental retirement plan for a select group of management or highly compensated employees that are at the Vice President level and above of the Company under the Unified Grocers, Inc. Supplemental Executive Retirement Plan (the “SERP”). This plan was established to replace the ESPPIII, which has been frozen. The SERP provides participating officers with supplemental retirement income in addition to the benefits provided under the Company’s Cash Balance and 401(k) plans. The SERP is a non-qualified defined contribution type plan under which benefits are derived based on a notional account balance to be funded by the Company for each participating officer. The account balance will be credited each year with a Company contribution based on the officer’s compensation, calculated as base salary plus bonus, earned during a fiscal year and the officer’s executive level at the end of the fiscal year. Plan participants may select from a variety of investment options (referred to as “Measurement Funds” in the plan document) concerning how the contributions are hypothetically invested. Assets of the SERP (i.e., the participants’ account balances) will not be physically invested in the investments selected by the participants; rather, the Measurement Funds are utilized for the purpose of debiting or crediting additional amounts to each participant’s account. The Company informally funds its obligation to plan participants in a rabbi trust, comprised of mutual fund assets consisting of various publicly-traded mutual funds reported at estimated fair value based on quoted market prices. Mutual funds reported at their estimated fair value of $3.0 million and $2.0 million at July 2, 2016 and October 3, 2015, respectively, are included in other assets in the Company’s consolidated condensed balance sheets. The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $4.4 million and $3.2 million at July 2, 2016 and October 3, 2015, respectively, is recorded in long-term liabilities, other in the Company’s consolidated condensed balance sheets. The SERP is accounted for pursuant to FASB ASC section 715-70, “Compensation – Retirement Benefits – Defined Contribution Plans” (“ASC 715-70”). SERP participants are credited with a contribution to an account and will receive, upon separation, a benefit based upon the vested amount accrued in their account, which includes the Company’s contributions plus or minus the increase or decrease in the fair market value of the hypothetical investments (Measurement Funds) selected by the participant. ASC 715-70 requires companies to record, on a periodic basis, that portion of a company’s contribution earned during the period by the participants (the “Expense”). The Company is accruing the Expense under the assumption that all participants in the SERP will achieve full vesting (five years of service). The related benefit expense was $1.3 million and $1.0 million for the thirty-nine weeks ended July 2, 2016 and June 27, 2015, respectively. |
Contingencies |
9 Months Ended | ||
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Jul. 02, 2016 | |||
Commitments And Contingencies Disclosure [Abstract] | |||
Contingencies |
The Company is a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company believes the outcome of these matters will not result in a material adverse effect on its financial condition, results of operations or cash flows. |
Accumulated Other Comprehensive Earnings (Loss) |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Earnings (Loss) |
The balance and components of the change in accumulated other comprehensive earnings (loss), net of taxes, are as follows:
The reclassifications out of accumulated other comprehensive earnings (loss) for the thirteen weeks ended July 2, 2016 and June 27, 2015 were as follows:
The reclassifications out of accumulated other comprehensive earnings (loss) for the thirty-nine weeks ended July 2, 2016 and June 27, 2015 were as follows:
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Related Party Transactions |
9 Months Ended | ||
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Jul. 02, 2016 | |||
Related Party Transactions [Abstract] | |||
Related Party Transactions |
Members affiliated with directors of the Company make purchases of merchandise from the Company. Such Members may enter into loan agreements, lease guarantees and subleases and receive benefits and services that are of the type generally offered by the Company to similarly situated eligible Members. Management believes such transactions are on terms that are generally consistent with terms available to other Members similarly situated. During the course of its business, the Company enters into individually negotiated supply agreements with its Members. These agreements typically require the Member to purchase certain agreed amounts of its merchandise requirements from the Company and obligate the Company to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery. Effective March 22, 2016, the Company entered into a commitment with Jon’s Markets, a Member affiliated with John Berberian, a Unified Member-Director, to fund a twenty-six week inventory loan for $500,000. Funding for the loan occurred on May 16, 2016. During the third quarter of fiscal 2016, Jon’s Markets also extended a lease agreement for a store location, subleased through the Company, until 2021. In addition, we renewed supply agreements with Super Center Concepts, a Member affiliated with Mimi Song, a Unified Member-Director and Yucaipa Trading Co., a Member affiliated with Jay McCormack, a Unified Member-Director, which were extended into 2019 and 2021, respectively. As of the date of this report, other than as indicated above, there have been no material changes to the related party transactions disclosed in Note 20 to “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended October 3, 2015.
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Recently Adopted and Recently Issued Authoritative Accounting Guidance |
9 Months Ended | ||
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Jul. 02, 2016 | |||
Accounting Changes And Error Corrections [Abstract] | |||
Recently Adopted and Recently Issued Authoritative Accounting Guidance |
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” (“ASU No. 2016-13”). ASU No. 2016-13 requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by using a valuation account to deduct credit loss allowances from the amortized cost basis of the financial asset(s). In addition, credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU No. 2016-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Early adoption of ASU No. 2016-13 is permitted. The Company will adopt ASU No. 2016-13 commencing in the first quarter of fiscal 2021. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). The principal objective of ASU No. 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU No. 2016-02 continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than twelve months. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of ASU No. 2016-02 is permitted. The Company will adopt ASU No. 2016-02 commencing in the first quarter of fiscal 2020. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”). The principal objective of ASU No. 2016-01 is to improve the reporting of financial instruments in order to provide users of financial statements with more decision-useful information. ASU No. 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The amendment also affects the presentation and disclosure requirements for financial instruments. ASU No. 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU No. 2016-01 commencing in the first quarter of fiscal 2019. The Company is currently assessing the impact this standard may have on its financial statements and the related expansion of its footnote disclosures. In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which changes how deferred taxes are classified on organizations’ balance sheets. ASU No. 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company will adopt ASU No. 2015-17 commencing in the first quarter of fiscal 2018. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures. In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting – Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965) – (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient” (“ASU No. 2015-12”). ASU No. 2015-12 covers three distinct items. Item I removes the requirement to disclose fully benefit-responsive investment contracts at their fair value with a reconciliation to their contract value. A fully benefit-responsive investment contract’s relevant measure is the contract amount as that is the amount a participant would receive upon disbursement. Item II eliminates the current requirement to disclose (1) individual investments that represent 5% or more of net assets available for benefits and (2) the net appreciation or depreciation for investments by general type for investments that are participant-directed or non-participant directed investments. Companies are still required to disclose the net appreciation or depreciation of investments in the aggregate for the period, but are no longer required to present the information disaggregated by general type. Item III amends each of the above topics to allow a practical expedient for measurement of plan assets on a month-end date that is nearest to the Company’s fiscal year-end. ASU No. 2015-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective application is required for items I and II; however, only prospective application is allowed for item III. Early adoption of ASU No. 2015-12 is permitted. The Company adopted ASU No. 2015-12 beginning with the Company’s fiscal year-end 2015. ASU No. 2015-12 did not have an impact on the Company’s financial statements and had a minimal impact on the related footnote disclosures. In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) – Simplifying the Measurement of Inventory” (“ASU No. 2015-11”). ASU No. 2015-11 requires entities to measure most inventory at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” ASU No. 2015-11 will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). No other changes were made to the current guidance on inventory measurement. ASU No. 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company will adopt ASU No. 2015-11 commencing in the first quarter of fiscal 2018. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures. In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU No. 2015-07”). ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient and instead requires disclosure of sufficient information about these investments to permit reconciliation of the fair value of investments categorized within the fair value hierarchy to the investments presented in the consolidated balance sheet. ASU No. 2015-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective application is required. Early application of ASU No. 2015-07 is permitted. The Company anticipates that it will elect early adoption of ASU No. 2015-07 coincident with the Company’s fiscal year end 2016. Other than the reduction of certain disclosures for its defined benefit plan investments that use the net asset value per share practical expedient, the Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures. In April 2015, the FASB issued ASU No. 2015-04, “Compensation – Retirement Benefits (Topic 715) – Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets” (“ASU No. 2015-04”). ASU No. 2015-04 provides an entity whose fiscal year does not coincide with a calendar month-end to utilize a practical expedient for the measurement of the entity’s defined benefit plan assets. The practical expedient allows an entity to measure its plan assets as of the nearest calendar month-end that is closest to the entity’s fiscal year-end. The month-end selected must be consistently used amongst all plans if an entity has more than one plan and must be applied consistently from year to year. ASU No. 2015-04 also provides guidance for significant events that occur between the entity’s fiscal year-end and the month-end selected for measurement. If the event is an entity-initiated event that results in a plan remeasurement, then the plan assets must also be revalued (there is a practical expedient allowed similar to the overall practical expedient). If the event is out of the entity’s control (for example, changes in market prices or interest rates), the entity is not required to remeasure the assets. An entity must disclose the practical expedient election and the date used to measure the assets and obligations. ASU No. 2015-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company will adopt ASU No. 2015-04 commencing in the first quarter of fiscal 2017. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures. In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03. Entities should apply the amendments in ASU No. 2015-03 on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Since the issuance of ASU No. 2015-03, it has been unclear whether and, if so, how ASU No. 2015-03 applies to revolving debt arrangements. At the Emerging Issues Task Force’s June 18, 2015 meeting, the SEC staff clarified that ASU No. 2015-03 does not address debt issuance costs associated with such arrangements and announced that it would “not object to an entity deferring and presenting such costs as an asset and subsequently amortizing the costs ratably over the term of the revolving debt arrangement.” The Company anticipates that it will elect to apply the accounting policy outlined by the SEC staff as stated above. Under that policy, an entity presents remaining unamortized debt issuance costs associated with a revolving debt arrangement as an asset even if the entity currently has a recognized debt liability for amounts outstanding under the arrangement. Further, such costs are amortized over the life of the arrangement even if the entity repays previously drawn amounts. For public entities, ASU No. 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company will adopt ASU No. 2015-03 commencing in the first quarter of fiscal 2017. The Company does not believe this standard will have a material impact on its consolidated financial statements or the related footnote disclosures. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). ASU No. 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards that (1) removes inconsistencies and weaknesses in revenue requirements; (2) provides a more robust framework for addressing revenue issues; (3) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provides more useful information to users of financial statements through improved disclosure requirements; and (5) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The original effective date for ASU 2014-09 would have required the Company to adopt commencing in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 for an additional year and provided the option to elect early adoption of ASU No. 2014-09 on the original effective date. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). ASU No. 2016-08 does not change the core principle of the guidance under ASU No. 2014-09; however, it does clarify the implementation guidance on principal versus agent considerations and includes indicators to assist in evaluating whether an entity controls the good or the service before it is transferred to the customer. In April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing” (“ASU No. 2016-10”). ASU No. 2016-10 does not change the core principle of the guidance under ASU No. 2014-09; however, it does clarify the implementation guidance on identifying performance obligations and licensing while retaining the related principles for those areas. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). ASU No. 2016-12 does not change the core principle of the guidance under ASU No. 2014-09, however, it does clarify the guidance on assessing collectability, presentation of sales taxes, noncash consideration, contract modifications at transition, and completed contracts at transition. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Accordingly, the Company will adopt ASU No. 2014-09 commencing in the first quarter of fiscal 2019. The Company is currently assessing the impact this standard may have on its consolidated financial statements and the related expansion of its footnote disclosures.
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Subsequent Events |
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Subsequent Events [Abstract] | |||
Subsequent Events |
In July 2016, the Company’s Market Centre Division entered into a four-year supply agreement with Gelson’s Markets, a Member affiliated with Robert McDougall, a Unified Member-Director, effective retroactively from January 1, 2016. In July 2016, the Company’s wholly-owned finance subsidiary, Grocers Capital Company, entered into a commitment with Mar-Val Food Stores, a Member affiliated with Mark Kidd, a Unified Member-Director, to fund a twenty-six week inventory loan for $500,000. Funding for the loan occurred on July 19, 2016. In July 2016, the Company entered into a commitment with Yucaipa Trading Co., a Member affiliated with Jay McCormack, a Unified Member-Director, to fund a thirteen-week inventory loan for $150,000. Funding for the loan occurred on July 22, 2016. Subsequent events have been evaluated by the Company through the date the financial statements were issued.
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Basis of Presentation (Policies) |
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Accounting Policies [Abstract] | ||||||||||
Principles of Consolidation | The consolidated condensed financial statements include the accounts of Unified Grocers, Inc. and all its subsidiaries (the “Company” or “Unified”). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended October 3, 2015 filed with the SEC. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. |
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Use of Estimates | The consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim periods presented. The preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates. |
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Cash Equivalents | The Company’s banking arrangements allow the Company to fund outstanding checks when presented for payment to the financial institutions utilized by the Company for disbursements. This cash management practice frequently results in total issued checks exceeding the available cash balance at a single financial institution. The Company’s policy is to record its cash disbursement accounts with a cash book overdraft in accounts payable. At July 2, 2016 and October 3, 2015, the Company had book overdrafts of $80.6 million and $88.1 million, respectively, classified in accounts payable and included in cash provided by operating activities. |
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Fair Value Measurements | The Company evaluates the fair value of its assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and ASC Topic 825, “Financial Instruments.” Management has evaluated its assets and liabilities valued at fair value as follows:
The Company records marketable securities at fair value in accordance with ASC Topic 320, “Investments – Debt and Equity Securities.” The Company’s Wholesale Distribution segment holds insurance contracts and mutual funds valued at fair value in support of certain employee benefits. See Note 4 for further discussion on investments. |
Discontinued Operations (Tables) |
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Discontinued Operations And Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summarized Results of Discontinued Operations | Summarized results of the discontinued operations are as follows for the thirteen and thirty-nine weeks ended July 2, 2016, and June 27, 2015:
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Major Classes of Assets and Liabilities of Discontinued Operations | The major classes of assets and liabilities of the discontinued operations as of July 2, 2016 and October 3, 2015 are as follows:
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Fair Value of Financial Instruments (Tables) |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments Recorded at Fair Value and Hierarchy of Those Assets | The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of July 2, 2016:
The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of October 3, 2015:
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Investments (Tables) |
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Investments Schedule [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost and Fair Value of Investments | The amortized cost and fair value of investments are as follows:
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Net Investment Income | Net investment income, which is included in net sales, is summarized as follows:
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Segment Information (Tables) |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Information about Operating Segments | Information about the Company’s operating segments is summarized below.
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Pension and Other Postretirement Benefits (Tables) |
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Compensation And Retirement Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of Net Periodic Costs for Pension and Other Postretirement Benefits | The components of net periodic cost for pension and other postretirement benefits for the respective thirteen weeks and thirty-nine weeks ended July 2, 2016 and June 27, 2015 consist of the following:
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Accumulated Other Comprehensive Earnings (Loss) (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in Accumulated Other Comprehensive Earnings (Loss) by Balance and Component, Net of Tax | The balance and components of the change in accumulated other comprehensive earnings (loss), net of taxes, are as follows:
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Reclassifications Out of Accumulated Other Comprehensive Earnings (Loss) | The reclassifications out of accumulated other comprehensive earnings (loss) for the thirteen weeks ended July 2, 2016 and June 27, 2015 were as follows:
The reclassifications out of accumulated other comprehensive earnings (loss) for the thirty-nine weeks ended July 2, 2016 and June 27, 2015 were as follows:
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Basis of Presentation - Additional Information (Detail) - USD ($) $ in Millions |
Jul. 02, 2016 |
Oct. 03, 2015 |
---|---|---|
Accounts Payable | ||
Basis Of Presentation And Significant Accounting Policies [Line Items] | ||
Book overdrafts | $ 80.6 | $ 88.1 |
Summarized Results of Discontinued Operations (Detail) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2016 |
Jun. 27, 2015 |
Jul. 02, 2016 |
Jun. 27, 2015 |
|
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | ||||
(Provision) benefit for income taxes | $ 0 | $ (2) | $ 0 | $ 92 |
Earnings (loss) from discontinued operations net of tax | 102 | (518) | 281 | (929) |
Discontinued Operations | Unified Grocers Insurance Services | ||||
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | ||||
Revenue | 2,627 | 9,428 | ||
Earnings (loss) from discontinued operations | 102 | (516) | 281 | (1,021) |
Earnings (loss) from discontinued operations net of tax | $ 102 | $ (518) | $ 281 | $ (929) |
Major Classes of Assets and Liabilities of Discontinued Operations (Detail) - Discontinued Operations - Unified Grocers Insurance Services $ in Thousands |
Oct. 03, 2015
USD ($)
|
---|---|
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | |
Cash | $ 8,428 |
Accounts receivable, net of allowance for bad debt | 2,715 |
Prepaid expenses | 676 |
Property, plant & equipment, net | 1,351 |
Investments | 85,052 |
Other assets | 27,682 |
Assets of discontinued operations - current | 125,904 |
Accounts payable | 592 |
Accrued liabilities | 97,619 |
Other reserves | 1,471 |
Liabilities of discontinued operations - current | $ 99,682 |
Fair Value of Financial Instruments - Additional Information (Detail) - USD ($) $ in Millions |
9 Months Ended | 12 Months Ended |
---|---|---|
Jul. 02, 2016 |
Oct. 03, 2015 |
|
Fair Value of Financial Instruments [Line Items] | ||
Other assets, mutual funds | $ 11.5 | $ 12.5 |
Notes payable, fair value | 259.9 | 278.8 |
Notes payable, carrying value | $ 256.6 | $ 278.5 |
Customer Concentration Risk | Sales Revenue, Net | Cash & Carry Stores, LLC | ||
Fair Value of Financial Instruments [Line Items] | ||
Concentration of risk percentage | 16.00% | |
Customer Concentration Risk | Sales Revenue, Net | Ten Largest Customers | ||
Fair Value of Financial Instruments [Line Items] | ||
Concentration of risk percentage | 49.00% | |
Credit Concentration Risk | Accounts Receivable | Ten Largest Customers | ||
Fair Value of Financial Instruments [Line Items] | ||
Concentration of risk percentage | 44.00% | 43.00% |
Financial Instruments Recorded at Fair Value and Hierarchy of Those Assets (Detail) - USD ($) $ in Thousands |
Jul. 02, 2016 |
Oct. 03, 2015 |
---|---|---|
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
Financial instruments at fair value | $ 11,458 | $ 12,546 |
Level 1 | ||
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
Financial instruments at fair value | 11,458 | 12,546 |
Mutual funds | ||
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
Financial instruments at fair value | 11,458 | 12,546 |
Mutual funds | Level 1 | ||
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
Financial instruments at fair value | $ 11,458 | $ 12,546 |
Amortized Cost and Fair Value of Investments (Detail) - USD ($) $ in Thousands |
Jul. 02, 2016 |
Oct. 03, 2015 |
---|---|---|
Schedule of Investments [Line Items] | ||
Fair Value | $ 12,729 | $ 13,069 |
Common stock, at cost | ||
Schedule of Investments [Line Items] | ||
Fair Value | $ 12,729 | $ 13,069 |
Investments - Additional Information (Detail) |
1 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2016
USD ($)
Brand
|
Jul. 02, 2016
USD ($)
|
Jun. 27, 2015
USD ($)
|
Oct. 03, 2015
USD ($)
|
|
Investment [Line Items] | ||||
Trading or held-to-maturity securities | $ 0 | $ 0 | ||
Loss on equity method investment | 400,000 | |||
Investment in capital stock | 60,000 | $ 10,000,000 | ||
Topco Associates, LLC | ||||
Investment [Line Items] | ||||
Investment in capital stock | 60,000 | |||
National Consumer Cooperative Bank | ||||
Investment [Line Items] | ||||
Investment accounted for using the cost method of accounting | 4,100,000 | 4,100,000 | ||
Dividend Income | 0 | $ 0 | ||
Western Family Holding Company | ||||
Investment [Line Items] | ||||
Investment accounted for using the equity method of accounting | $ 8,600,000 | $ 9,000,000 | ||
Percentage of investment accounted for using the equity method of accounting | 17.20% | 17.20% | ||
Number of private label brands | Brand | 3 | |||
Loss on equity method investment | $ 400,000 |
Notes Payable - Additional Information (Detail) - USD ($) |
Jul. 02, 2016 |
Oct. 03, 2015 |
---|---|---|
GCC | ||
Debt Instrument [Line Items] | ||
Amount outstanding under agreement | $ 0 | $ 0 |
Credit Agreement | Revolving Loan | ||
Debt Instrument [Line Items] | ||
Amount outstanding under agreement | $ 150,400,000 | $ 161,800,000 |
Interest rate at the period end | 2.48% | 1.99% |
Credit Agreement | FILO Facility | ||
Debt Instrument [Line Items] | ||
Amount outstanding under agreement | $ 17,200,000 | $ 20,700,000 |
Interest rate at the period end | 3.71% | 3.20% |
Credit Agreement | Term Loan | ||
Debt Instrument [Line Items] | ||
Amount outstanding under agreement | $ 85,000,000 | $ 92,500,000 |
Interest rate at the period end | 2.43% | 2.20% |
Components of Net Periodic Costs for Pension and Other Postretirement Benefits (Detail) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 02, 2016 |
Jun. 27, 2015 |
Jul. 02, 2016 |
Jun. 27, 2015 |
|
Pension Benefits | ||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Service cost | $ 95 | $ 247 | $ 284 | $ 2,030 |
Interest cost | 2,566 | 3,030 | 7,697 | 9,090 |
Expected return on plan assets | (3,643) | (4,138) | (10,929) | (12,414) |
Amortization of prior service (credit) cost | (2) | (7) | (5) | (21) |
Recognized actuarial loss | 516 | 357 | 1,547 | 1,071 |
Net periodic benefit cost (income) | (468) | (511) | (1,406) | (244) |
Other Postretirement Benefits | ||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Service cost | 9 | 14 | 26 | 42 |
Interest cost | 272 | 303 | 815 | 909 |
Amortization of prior service (credit) cost | (313) | (2,081) | (937) | (6,243) |
Recognized actuarial loss | (129) | 26 | (387) | 78 |
Net periodic benefit cost (income) | $ (161) | $ (1,738) | $ (483) | $ (5,214) |
Related Party Transactions - Additional Information (Detail) |
9 Months Ended |
---|---|
Jul. 02, 2016
USD ($)
| |
John Berberian | |
Related Party Transaction [Line Items] | |
Line of credit facility, initiation date | Mar. 22, 2016 |
Line of credit facility, inventory loan | $ 500,000 |
Lease agreement expiration year | 2021 |
Mimi Song | |
Related Party Transaction [Line Items] | |
Supply agreement expiration year | 2019 |
Jay McCormack | |
Related Party Transaction [Line Items] | |
Supply agreement expiration year | 2021 |
Subsequent Events - Additional Information (Detail) - Subsequent Event |
1 Months Ended |
---|---|
Jul. 31, 2016
USD ($)
| |
Robert McDougall | |
Subsequent Event [Line Items] | |
Supply agreement period | 4 years |
Supply agreement effective date | Jan. 01, 2016 |
Mark Kidd | |
Subsequent Event [Line Items] | |
Line of credit facility, inventory loan | $ 500,000 |
Line of credit facility, initiation date | Jul. 19, 2016 |
Jay McCormack | |
Subsequent Event [Line Items] | |
Line of credit facility, inventory loan | $ 150,000 |
Line of credit facility, initiation date | Jul. 22, 2016 |
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