-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SsWmK5T61+4h3ak3650U+Hh2XhRhnDdUYIytqonjKw9uT4tSiXjwYOLRBksREnyA NO+2trH+qUfdJVQJCr0q5w== 0000898430-99-004337.txt : 19991122 0000898430-99-004337.hdr.sgml : 19991122 ACCESSION NUMBER: 0000898430-99-004337 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990828 FILED AS OF DATE: 19991119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED WESTERN GROCERS INC CENTRAL INDEX KEY: 0000320431 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 950615250 STATE OF INCORPORATION: CA FISCAL YEAR END: 0925 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10815 FILM NUMBER: 99761504 BUSINESS ADDRESS: STREET 1: PO BOX 513396 STREET 2: C/O H E COLLINS VICE PRESIDENT CITY: LOS ANGELES STATE: CA ZIP: 90051 BUSINESS PHONE: 3232645200 MAIL ADDRESS: STREET 1: 5200 SHEILA STREET STREET 2: TERMINAL ANNEX CITY: LOS ANGELES STATE: CA ZIP: 90040 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- FORM 10-K - ------------------------------------------------------------------------------- (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended August 28, 1999 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 - ------------------------------------------------------------------------------- Commission file number 0-10815 UNIFIED WESTERN GROCERS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA (State or other jurisdiction of incorporation or organization) - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 5200 Sheila Street, Commerce, CA 90040 I.R.S. Employer Identification No.: 95-0615250 Registrant's telephone number, including area code: (323) 264-5200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: - -------------------------------------------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE - ------------------------------------------ Class A Shares None Class B Shares None
- ------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The Company's shares are not publicly traded and therefore market value is not readily ascertainable. The number of shares outstanding of each of the registrant's classes of common stock, as of October 29, 1999 were as follows: Class A: 64,753 shares Class B: 395,674 shares Class C: 24 shares - ------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the 2000 annual meeting in Part III. - ------------------------------------------------------------------------------- TABLE OF CONTENTS
ITEM PAGE - ------------------------------------------------------------------------------- PART I 1. Business.......................................................... 3 2. Properties........................................................ 10 3. Legal Proceedings................................................. 10 4. Submission of Matters to a Vote of Security Holders............... 10 PART II Market for Registrant's Common Equity and Related Shareholder 5. Matters........................................................... 11 6. Selected Financial Data........................................... 11 Management's Discussion and Analysis of Financial Condition and 7. Results of Operations............................................. 11 7a. Quantitative and Qualitative Disclosures About Market Risk........ 16 8. Financial Statements.............................................. 17 Changes in and Disagreements with Accountants on Accounting and 9. Financial Disclosure.............................................. 43 PART III 10. Directors and Executive Officers of the Registrant................ 44 11. Executive Compensation............................................ 45 12. Security Ownership of Certain Beneficial Owners and Management.... 45 13. Certain Relationships and Related Transactions.................... 45 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 46 Signatures.............................................................. 51
2 INFORMATION CONCERNING UNIFIED PART 1 ITEM 1. BUSINESS On September 27, 1999, the shareholders of Certified Grocers of California, Ltd. ("Certified") and United Grocers, Inc. ("United") (a grocery cooperative headquartered in Portland, Oregon) approved a merger agreement in which United merged with a wholly owned subsidiary of Certified. The merger became effective on September 29, 1999. In connection with the merger, Certified Grocers of California, Ltd. changed its name to Unified Western Grocers, Inc. (the "Company" or "Unified"). Unified's historical financial information contained herein does not include information with respect to United. GENERAL Unified is a grocery wholesaler serving supermarket operators in California, Oregon, Western Washington, Nevada, Arizona, Hawaii and various foreign countries in the South Pacific and elsewhere. In addition to offering dry grocery, frozen food, deli, meat, dairy, bakery, gourmet/specialty foods and general merchandise products, Unified also provides finance, insurance, store design, security services, information services and real estate services to its patrons. Products and services available to patrons may differ depending upon location. Unified offers egg and produce programs in areas formerly served by United. Unified's marketing platform is built on offering its patrons greater value than found elsewhere by combining competitive pricing with superior selection, quality, service and convenience. A California corporation organized in 1922 and incorporated in 1925, Unified does business primarily with those patrons who qualify and have been accepted as "member-patrons." Unified is owned by its member-patrons who are primarily independent grocers. Unified is operated as, and, with the exception of certain subsidiaries, is taxed on a cooperative basis. The primary businesses operated by Unified's subsidiary companies include the distribution of specialty products and the sale of insurance, finance and store planning services primarily to operators of retail food stores. Unified establishes minimum purchase requirements for the member-patrons, which may be modified from time to time. Patrons not meeting member-patron purchasing requirements conduct business with Unified either as "associate-patrons" or as customers on a non-patronage basis. The earnings of Unified's subsidiaries are generally retained by Unified, while the earnings of the parent company attributable to business conducted with its members are generally distributed to its patrons in the form of patronage dividends. The benefit of this structure is that taxes are paid on the Unified patronage earnings only once, that is, when notice of a patronage dividend payout is received by the patron. WHOLESALE DISTRIBUTION Unified's wholesale distribution business represented approximately 98% and 95% of sales for the fiscal years ended August 29, 1998 and August 28, 1999, respectively. The wholesale business includes a broad range of branded and private label products in dry grocery, frozen, delicatessen, general merchandise, boxed meat, service deli, ice cream, bakery and dairy. Unified distributes its various product lines from warehouse and manufacturing complexes located in Los Angeles, Commerce, Stockton, Hayward, Fresno, Modesto and Tracy, California and in Portland, Oregon. Unified expects to consolidate warehouse facilities in Northern California and to concentrate Northern California operations in Stockton, Fresno and Hayward. Unified sells a full line of branded grocery and nonfood items supplied by unrelated manufacturers and also sells merchandise under its own private labels, including the Springfield, Gingham, Special Value, La Corona, and Golden Creme trade names. To former members of United, Unified sells private label brand goods under the Western Family, Home & Garden, Valley Fare and Better Buy labels. Unified also operates its own bakery and dairy facilities in Southern California. Unified is not dependent upon any single source of supply in any of its businesses, except for the dairy. Most of the raw milk used in production is purchased from a dairy cooperative which provides such products at prices established by the State of California. Management believes that alternative suppliers are available for substantially all of Unified's products and that the loss of any one supplier would not have a material adverse effect on Unified's business. 3 During the course of its business, Unified enters into supply agreements with certain members of Unified. These agreements require the member to purchase certain agreed amounts of its merchandise requirements from Unified and obligate Unified to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery. The terms and conditions in such supply agreements may vary from standard terms and conditions, and vary in terms and length. SUPPORT BUSINESSES Unified's retail support businesses collectively accounted for approximately 2% and 1% of Unified's total sales for fiscal years ended August 29, 1998 and August 28, 1999, respectively. These retail support operations include Grocers Capital Company ("GCC"), which provides financing for inventory purchases, equipment purchases, store remodeling and new store acquisitions, and Grocers Equipment Company, which provides store planning and development services and equipment to Unified's customers. Unified also provides insurance brokerage services for retailers through Grocers and Merchants Insurance Services, Inc., and underwrites selected insurance risks through two insurance subsidiaries. By reason of the United merger, Unified operates retail support services in Oregon and Northern California, including United Resources, Inc., which offers financial services to members, retail development services for advertising groups offering "chain"-like identity, and technology, security, accounting and training services. RETAIL BUSINESS Unified, through its subsidiaries, currently owns all of the common stock of SavMax Foods, Inc. ("SavMax") which operates seven retail grocery stores in Northern California. Unified acquired SavMax as of December 31, 1998. Retail sales for the period December 31, 1998 through August 28, 1999 were $75 million. The retail sales represented approximately 4% of sales for fiscal year ended August 28, 1999. The ownership of SavMax is temporary. Unified plans to sell the retail operations to one or more qualified buyers and secure the volume within the cooperative membership. Periodically, Unified makes investments in retail grocery businesses and temporarily manages these businesses until a suitable new owner can be located. In May 1999, Unified entered into an agreement to purchase certain assets related to 32 stores being divested in connection with Albertson's, Inc.'s merger with American Stores, Inc. The acquisition was completed in October, 1999. Unified sold or otherwise permitted the direct transfer of 26 of these stores to Unified members coincident with the closing of the transaction. The remaining six stores will be retained and operated by Unified until suitable buyers are identified. RETAIL DEVELOPMENT Unified offers a banner store program designed to convert older stores into state-of-the-art retail operations. Operating under the common name "Apple Markets", the stores are owned and operated by patrons of Unified or by Unified. Unified intends them to have the look of a chain store because each store carries the same name and logo and utilizes the same design layout. COMPETITION The food industry is characterized by intense competition and low profit margins. In order to compete effectively, Unified must provide its patrons with the capability to meet rapidly fluctuating competitive market prices, provide a wide range of perishable and nonperishable products, make prompt and efficient deliveries, and provide the services which are required by modern market operations. Unified competes with local, regional and national grocery wholesalers and with a number of major manufacturers which market their products directly to retailers. Unified's success is dependent upon its ability to supply food, general merchandise and services to its patrons in a cost-effective manner and upon the ability of its independent retail customers to compete with large chain store operations. CUSTOMERS Unified's patrons are primarily retail grocery store operators ranging in size from single store operators to multiple store chains. Unified's largest customer and ten largest customers accounted for approximately 5% and 31%, 6% and 31%, and 6% and 28% of net sales for fiscal 1997, 1998, and 1999, respectively. 4 CAPITAL STOCK Class A Shares. Class A Shares are issued to and may be held only by member- patrons of Unified. In order to qualify for and retain membership as a member- patron, a person or other entity (1) must patronize Unified in amounts and in a manner as may be established by the board of directors; (2) must have approved financial standing; (3) must make application in such form as is prescribed; and (4) must be accepted as a member after approval by the board of directors. Unified requires that each of its member-patrons acquire 100 Class A Shares. The price for these shares is the book value per share of the outstanding shares at the close of the fiscal year ended prior to purchase. Those former United shareholders who received less than 100 Class A Shares in the merger and meet the member-patron minimum purchase requirement are required to purchase additional Class A Shares in order to maintain member-patron status. Unified has agreed to repurchase Class A Shares received in the merger by former United shareholders who do not maintain member-patron status at a price equal to the book value as of April 2, 1999 of United shares for which they were exchanged ($57.90 per United share). Class A Shares have the right to elect approximately 80% of the authorized directors of Unified. Class B Shares. Each holder of Class A Shares is also required to hold a number of Class B Shares determined by the board of directors of Unified. The board of directors establishes the number of Class B Shares that each member- patron must hold, whether based on average weekly purchases or on some other basis. Ownership of Class B Shares is limited to member-patrons or former member-patrons who have tendered these shares to Unified for redemption. The holders of Class B Shares currently have the right to elect approximately 20% of the authorized number of directors. Except as provided above or by California law, the holders of Class B Shares do not have any other voting rights. Unified requires each member-patron to acquire Class B Shares having combined issuance values in an amount equal to the member-patron's required subordinated cash deposit. Class B Shares are generally issued to a new member-patron as part of the patronage dividends paid to the member-patron over a period of five consecutive fiscal years, beginning with the second fiscal year following admission as a member-patron. The Class B issuance formula provides that the member-patron will hold Class B Shares having issuance values equal to 20% of the member-patron's Class B Share requirement after the first full year of patronage dividend, 40% of the Class B Share requirement after the second patronage dividend, and so on until the member-patron reaches 100% of its Class B Share requirement after the fifth patronage dividend. If following the issuance of Class B Shares as part of the patronage dividend for any given fiscal year, the member-patron would not hold Class B Shares having combined issuance values equal to the amount of Class B Shares required to be held by the member-patron, then additional Class B Shares will be issued to the member-patron in a quantity sufficient to achieve the required amount. Issuance of these additional Class B Shares will be paid for by reinvestment of 80% of the patronage dividend and secondly, charging the member-patron's cash deposit account in an amount equal to the issuance value of the additional Class B Shares. Member-patrons who were former United members and did not receive sufficient Class B Shares in the merger to meet the minimum Class B Share ownership deposit requirements have the following alternatives: (i) provide a cash deposit for the deficiency; or (ii) purchase additional Class B Shares to cover the deficiency; or (iii) assign 80% of the patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified will require the member to purchase at least the percentage of product purchased during the most recent 12 month period under a supply agreement with Unified. Class C Shares. Class C Shares are held by members of the board of directors. Each board member purchases one Class C Share for $10. Class C Shares are nonvoting shares and share in liquidation only to the extent of $10 per share. 5 REDEMPTION OF CAPITAL STOCK Class A Shares and Class B Shares held by a shareholder who is no longer a qualified and active member-patron will be redeemed at the book value of the Company as of the close of the fiscal year last ended prior to termination of member status. However, with respect to terminations occurring prior to September 30, 2000, the repurchase price will be Unified's book value at the fiscal year end prior to the effective date of the merger. There is no obligation to redeem Class B Shares of terminated members until after September 27, 2002. Until September 27, 2002, Unified will redeem excess Class B Shares at the option of the shareholder, at either: . an amount equal to Unified's book value as of the close of the fiscal year prior to the effective date of the merger; or . an amount equal to the book value as of the close of the fiscal year prior to the date the shares are tendered to the Company for repurchase, provided the repurchase price will not be paid until after the end of the third full fiscal year following the effective date of the merger. After September 27, 2002, Unified will repurchase excess Class B Shares tendered for redemption at the book value as of the close of the fiscal year prior to the date the shares are tendered for repurchase. During the period beginning on the effective date of the merger and ending January 28, 2001, Unified will repurchase excess Class B Shares received in the merger tendered for redemption which are held by former shareholders of United at the book value as of April 2, 1999 of the shares of United's Common Stock for which the excess Class B Shares were exchanged in the merger. The purchase price will be evidenced by a promissory note of Unified which will be payable in twenty equal quarterly principal installments and will bear interest at 6% per year. Such purchases will not be subject to the 5% limit described below. Subject to the limitations on the repurchase of Class B Shares held by terminated member-patrons, the amount of Class B Shares which Unified will be obligated to redeem in any fiscal year will be limited to 5% of the sum of: . The number of Class B Shares outstanding as of the close of the preceding fiscal year, and . The number of Class B Shares issued as a part of the patronage dividend for such preceding fiscal year. The board of directors has discretion to exceed the 5% limit. Redemption of all capital stock is subject to limitations imposed by the Articles of Incorporation and Bylaws, credit agreements to which the Company is a party, and restrictions imposed by law on the ability of a company to redeem its own shares. PATRONAGE DIVIDENDS Unified distributes patronage dividends based upon the net patronage earnings during the fiscal year. The board of directors approves divisional dividends. Unified distributes patronage dividends to each patron in proportion to the dollar volume of patronage purchases from each division by the patron. Patronage dividends are distributed after the close of the fiscal year, except for dividends on dairy products which are distributed after the close of each fiscal quarter. The following table shows the patronage dividend experience of Unified during the past three fiscal years. (In thousands) - ---------------------------------------
Division 1997(1) 1998(1) 1999(1) - --------------------------------------- Dairy $ 9,154 $ 9,169 $ 9,902 Dry grocery 2,970 562 2,976 Beans and rice 400 190 -- Delicatessen 1,030 182 1,088 Frozen food 730 46 229 Ice cream 180 -- -- - --------------------------------------- TOTAL (1) $14,464 $10,149 $14,195 - ---------------------------------------
(1) Results in prior periods are not necessarily indicative of results for future periods. 6 In connection with the merger, Unified changed its patronage dividend policies for periods subsequent to the effective date of the merger. Unified will pay its patronage dividends to member-patrons and associate-patrons on the basis of patronage business transacted with Unified's two patronage earnings divisions: the Dairy Division and the Cooperative Division. . The Dairy Division consists of patronage earnings generated by the fluid milk and juice bottling plant located in Los Angeles, California. Patronage dividends for this division will be paid solely to patrons who purchase manufactured and related products from the Dairy Division. . The Cooperative Division consists of patronage earnings generated from all other patronage activities of Unified and will not give distinction to geographic location. The Cooperative Division includes the general merchandise activity which previously was conducted in a non-patronage subsidiary of Unified. In the event of losses in one of these divisions, the loss will be offset against earnings of the other division to determine net earnings available for patronage dividends. Due to logistics and geographic constraints, patrons who purchase from the Dairy Division are primarily in Southern California. Patrons of Unified outside of Southern California generally do not participate in the Dairy Division. Unified's bylaws provide that patronage dividends may be distributed in cash or in any other form that constitutes a written notice of allocation under Section 1388 of the Internal Revenue Code. Section 1388 defines the term "written notice of allocation" to mean any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice, that discloses to the recipient the stated dollar amount allocated to the recipient by Unified and the portion thereof, if any, which constitutes a patronage dividend. Dairy Division patronage dividends are generally paid in cash. Except with respect to member-patrons who were former United members and did not receive sufficient Class B Shares immediately following the merger to meet minimum Class B share ownership deposit requirements, patronage dividends for the remaining divisions are currently paid out in the following order and manner: first, member-patrons receive 20% in cash; second, member-patrons receive the required amount of Class B Shares; third, the remainder is credited to the member-patron's deposit account. MINIMUM PURCHASE REQUIREMENT Unified requires that each patron meet the minimum purchase requirements established by the board of directors. Currently, Unified's minimum purchase requirement for member-patrons is $5,000 per week and $3,500 per week for associate-patrons. Exceptions to the minimum purchase requirements may be granted by the board of directors. Entities not meeting these minimum purchase requirements may be eligible to purchase product on a non-patronage basis. PATRON DEPOSITS Unified generally requires that its patrons maintain a subordinated cash deposit equal to the greater of twice the amount of each patron's average weekly purchases or twice the amount of the patron's average purchases, if the purchases are not on a regular basis. Required deposits are determined twice a year, at the end of Unified's second and fourth fiscal quarters, based upon a review of the patron's purchases from certain of the cooperative divisions during the preceding two quarters. Member-patrons meeting certain qualifications established by the board of directors may elect to maintain a reduced required deposit of $500,000 or one and one-quarter weeks' average purchases, whichever is greater. Unified pays no interest on the required deposits. Interest is paid on cash deposits which are in excess of patrons' required deposits. Member-patrons may satisfy the minimum deposit requirement through a combination of a cash deposit and the ownership of Class B Shares. The deposit value of a Class B Share is based upon its book value at the year end prior to the initial issuance of the Class B Shares except that for former United shareholders, the deposit value of the Class B Shares received in the merger is equal to the book value of the shares of United's Common Stock for which they were exchanged, calculated as of April 2, 1999. As of April 2, 1999, the book value for each share of United's Common Stock was $57.90. 7 Former United shareholders who did not have sufficient Class B Shares immediately following the merger to meet the minimum deposit requirements have three alternatives: (i) provide a cash deposit for the deficiency; or (ii) purchase additional Class B Shares to cover the deficiency; or (iii) agree to assign 80% of the patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified will require the member to purchase at least the percentage of their total product that was purchased from United during the most recent 12 month period under a supply agreement with Unified. Associate-patrons may only satisfy the minimum deposit requirement through a cash deposit. In addition, patrons who participate in Unified's price reservation program are required to maintain a noninterest-bearing deposit based upon the value of their inventory included in this program. Under Unified's price reservation program, patrons are permitted to submit price reservations in advance for their dry grocery, frozen, delicatessen and general merchandise purchases. For the patron to get the benefit of the price reservation, an actual order must be placed. The price which the patron will be charged is the price in effect at the time of the reservation. The required deposits of patrons are contractually subordinated and subject to the prior payment in full of certain senior indebtedness of Unified. As a condition of becoming a patron, each patron is required to execute a subordination agreement providing for the subordination of the patron's required deposits. Generally, the subordination is such that no payment can be made by Unified with respect to the required deposits in the event of an uncured default by Unified with respect to senior indebtedness, or in the event of dissolution, liquidation, insolvency or other similar proceedings, until all senior indebtedness has been paid in full. Upon request, Unified will return to patrons the amount of cash deposits that are in excess of the required deposits, provided the patron is not in default of its obligations to Unified. On termination of membership, patrons are entitled to a return of deposits, less all amounts that may be owing by the patron to Unified. In all cases, however, return of that portion of the patron's cash deposits which consists of required deposits will be governed by the applicable subordination provisions. SUBORDINATION AGREEMENT AND PLEDGE OF SHARES Unified requires each patron, whether a member-patron or an associate-patron, to execute a subordination agreement which provides for the subordination in certain circumstances of the patron's right to repayment of its deposit to the prior payment in full of certain indebtedness of Unified. In addition, Unified requires each shareholder to pledge the Class A Shares and Class B Shares of Unified to secure its obligations to Unified, and individual shareholders of corporate members are required to guarantee the obligations of the corporate member. With respect to former shareholders of United who are in compliance with their obligations to United and its subsidiaries, Unified will not require individual guarantees in the absence of financing transactions. TAX MATTERS Unified is a corporation operating primarily on a cooperative basis. Unified is subject to federal and state income and franchise taxes and must pay other taxes applicable to corporations, such as sales, excise and real and personal property taxes. As a corporation operating on a cooperative basis, Unified is subject to Subchapter T of the Internal Revenue Code. Under Subchapter T, Unified pays patronage dividends to patrons pertaining to its fiscal year within 8 months of the close of such fiscal year. To qualify as patronage dividends, payments are made on the basis of the value of the business done with or for patrons, under a pre-existing obligation to make such payment, and with reference to the net earnings from business done with or for the cooperative's patrons. Patronage dividends are paid in cash or written notices of allocation. A written notice of allocation is distributed to the patron and provides notice of the amount allocated to the patron by Unified and the portion thereof which constitutes a patronage dividend. Under Subchapter T, Unified may deduct, in the fiscal year for which they are paid, the amount of patronage dividends paid in cash and qualified notices of allocation. A written notice of allocation will be qualified if Unified pays at least 20% of the patronage dividend in cash, and the patron consents to take the stated 8 dollar amount of the written notice into income in the year in which it is received. Unified deducts for tax purposes the entire amount of its patronage dividends by paying at least 20% in cash and issuing qualified notices of allocation for the remainder. Unified currently intends to continue to make patronage distributions to the extent earned to member-patrons comprised of cash and qualified notices of allocation, including its Class B Shares. At least 20% of patronage dividends are expected to be paid in cash. Unified will notify patrons of the stated dollar amount allocated to them and the portion thereof which is a patronage dividend. Patrons are required to consent to include in their gross income, in the year received, all cash as well as the stated dollar amount of all qualified notices of allocation including the patronage certificates and the book value of the Class B Shares distributed to them as patronage dividends. Patronage certificates and Class B Shares distributed as part of the patronage dividends are also subject to state income and corporation franchise taxes in California and may be subject to these taxes in other states. Unified is subject to federal income tax and California franchise tax on net earnings of business with or for patrons which is not distributed as deductible patronage dividends and on net earnings derived from nonpatronage business. Unified files consolidated income tax returns with its subsidiaries. To the extent that Class B Shares are received by the patron as patronage dividends under Subchapter T, the Internal Revenue Service ("IRS") has held that if such Class B Shares are redeemed in full or in part or are otherwise disposed of, there will be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income. However, since Class B Shares may be issued other than as a part of patronage dividends, it is possible that the IRS could take the position that the proceeds from a partial redemption of Class B Shares should be taxed as a dividend. Patrons are strongly urged to consult with their tax advisors for further clarification of this issue and for the impact the position of the IRS may have on their own federal and state tax returns. EMPLOYEES Unified (including United) employs approximately 3,945 employees, of whom approximately 2,315 are members of one of several unions, the two largest being the International Brotherhood of Teamsters and the United Food and Commercial Workers. Unified believes its labor relations to be good. ENERGY MATTERS Unified's operations are dependent upon the continued availability of electric power, diesel fuel, and gasoline. Unified's trucking operations are extensive. Diesel fuel storage capacity represents approximately two weeks average usage. A shortage of diesel fuel and gasoline could materially affect deliveries of merchandise and the activities of Unified's service representatives and, thus, adversely affect Unified's sales. 9 ITEM 2. PROPERTIES FACILITIES Unified's corporate offices, warehouses, retail stores and manufacturing facilities as of August 28, 1999 are summarized as follows:
Approximate Square Footage ----------------- Description Owned Leased - ----------------------------------------------------------------- Corporate offices 17,000 153,000 Dry grocery 1,361,000 566,000 General merchandise -- 323,000 Frozen foods, ice cream, delicatessen and meat 454,000 66,000 Bakery 91,000 -- Dairy 74,000 -- Retail stores -- 360,000
All of these properties are located in California. In connection with the merger with United, Unified added three distribution facilities. United's main distribution center is owned and is located in Milwaukie, Oregon and contains 904,500 square feet of warehouse space. Also at this location are 43,000 square feet of office space, a small credit union office building and a small truck repair shop. United also operates leased product distribution facilities in Modesto (approximately 275,000 square feet) and Tracy, California, (approximately 160,166 square feet). Unified intends to combine northern California distribution into its existing facilities in Stockton and Fresno. United is also the prime lessee of certain retail stores, which are subleased, totaling approximately 1.2 million square feet. ITEM 3. LEGAL PROCEEDINGS Unified is a defendant in a number of cases currently in litigation or potential claims encountered in the normal course of business that are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material adverse effect on Unified's financial position, results of operations, or cash flow. The United States Environmental Protection Agency ("EPA") notified Unified in 1993 that, together with others, it was a potentially responsible party ("PRP") for the disposal of hazardous substances at a landfill site located in Monterey Park, California. In 1999, the EPA notified the Company that, together with others, it was a PRP for the disposal of hazardous substances at a landfill site located in Patterson, California. Unified believes that its share of cost for the remaining phases of cleanup for these sites will not exceed the amounts which Unified has reserved. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS There is no market for Unified's Class A Shares, Class B Shares, or Class C Shares. As of October 29, 1999, the Unified's Class A Shares were held of record by 676 shareholders, Class B Shares were held of record by 585 shareholders, and the Unified's Class C Shares were held of record, one share each, by the 24 directors of Unified. In the past, the Company has not paid cash dividends on its stock, and it has no intention to do so in the future. ITEM 6. SELECTED FINANCIAL DATA The selected financial information below has been derived from the audited consolidated financial statements of Unified as of and for its fiscal years ended September 2, 1995, August 31, 1996, August 30, 1997, August 29, 1998, and August 28, 1999. This information is only a summary and should be read in conjunction with Unified's historical financial statements, and related notes, contained elsewhere in this document. (In thousands, except book value per share) - -----------------------------------------------------------------------------------
Fiscal Year(1) 1995 1996 1997 1998 1999(1) - ----------------------------------------------------------------------------------- Net sales $1,822,804 $1,948,919 $1,927,092 $1,831,686 $1,893,523 Operating income 27,197 29,502 31,549 26,252 34,589 Declared patronage divi- dends 11,571 13,200 14,464 10,149 14,195 Net earnings 769 1,517 2,307 3,389 2,639 Total assets 398,603 374,737 394,002 389,218 451,135 Long-term notes payable 129,686 75,617 92,217 125,130 143,727 Book value per share 165.86 167.94 175.22 183.47 188.27
- ------------------------------------------------------------------------------- (1) 1999 includes the acquisition of SavMax Foods, Inc. from December 31, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Unified's financial condition and results of operations should be read in conjunction with the financial statements and notes to the financial statements included elsewhere in this document. RESULTS OF OPERATIONS The following table sets forth selected financial data of Unified expressed as a percentage of net sales for the periods indicated below: - -------------------------------------------------------------------------------
August 30, August 29, August 28, Fiscal Year Ended 1997 1998 1999 - ------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 91.0 91.1 90.7 Distribution, selling and administrative ex- penses 7.4 7.5 7.5 Operating income 1.6 1.4 1.8 Interest expense 0.7 0.7 0.6 Other (income) expense, net (0.2) 0.3 Earnings before patronage dividends, provision for income taxes and extraordinary item 0.9 0.9 0.9 Patronage dividends 0.7 0.5 0.8 Provision for income taxes 0.1 0.1 Extraordinary item, net of taxes 0.1 Net earnings 0.1 0.2 0.1
- ------------------------------------------------------------------------------- FISCAL YEAR ENDED AUGUST 28, 1999 ("1999 PERIOD") COMPARED TO FISCAL YEAR ENDED AUGUST 29, 1998 ("1998 PERIOD") Net Sales. Net sales totaled $1.9 billion for the 1999 period and $1.8 billion in the 1998 period. The sales increase of $61.8 million represents a 3.4% increase over the 1998 period. In October 1998, North State Grocery Company was added as a member-patron. Sales to North State Grocery amounted to $35.4 million 11 in the 1999 period. Additionally, retail sales generated by SavMax Foods, Inc., ("SavMax") since the acquisition date of December 31, 1998, added net sales of $75 million. Also, there were increased sales to the ongoing membership of approximately $33.6 million. Offsetting these increases were $82.2 million of sales volume lost as a result of losing two member-patrons, Hughes Family Markets ("Hughes") and Nob Hill Markets ("Nob Hill"). Hughes and Nob Hill were acquired by entities that have self-distribution programs; accordingly, product supply to these member-patron stores migrated into the corresponding self-distribution facilities in the period between March 1998 through November 1998. Cost of Sales. In the 1999 period cost of sales were $1.7 billion, or 90.7% of net sales, compared to $1.7 billion, or 91.1% of net sales, in the 1998 period. The overall gross margin as a percentage of net sales is slightly higher compared to the comparable period in 1998. The increase in gross margin is due to additional gross margin from retail sales generated by SavMax which Unified acquired in December 1998. The increased margins were partially offset by increased claims expense of approximately $4.0 million in one of Unified's insurance subsidiaries and lower margins in the cooperative divisions. Distribution, Selling and Administrative. Distribution, selling and administrative expenses were $141.2 million, or 7.5% of net sales in the 1999 period, as compared to $137.2 million, or 7.5% of net sales, in the 1998 period. The increase is due to additional costs of $15.5 million related to retail operations of SavMax. These costs were partially offset by improvements in wholesale distribution expenses in the 1999 period. The Company incurred nonrecurring charges relating to a settlement of litigation in the 1998 period. Also, expenses decreased as a result of retail operations that were disposed of in fiscal 1998. Interest. Interest expense decreased from $12.3 million, or 0.7% of net sales, in the 1998 period to $11.9 million, or 0.6% of net sales, in the 1999 period. The decrease is due to lower interest rates associated with the $180.0 million refinancing completed in April 1998. Average interest rates related to the senior notes and revolving credit in the 1998 period were 7.94% and 6.89% in the 1999 period. Other Income (Expense), Net. During the 1999 period, Unified sold its 10% investment in common stock of K.V. Mart Co. for $4.5 million. The sale resulted in a pretax gain of $1.5 million. The gain was offset by an impairment of $7.3 million recorded on Unified's investment in Hawaiian Grocery Stores ("HGS"). Subsequent to year-end, HGS defaulted on principal and interest payments required by a note receivable and was also delinquent in paying accounts receivable. Due to the uncertainty of when or if the default could be cured and the belief that the impairment was other than temporary, the Company wrote down the investment and trade accounts receivable to a nominal carrying value. In May 1998, Unified completed the sale of approximately 24 acres of property located in Commerce, California. This sale resulted in a gain (net of expenses related to the sale) of $3.2 million. Patronage Dividends. Declared patronage dividends totaled $14.2 million for the 1999 period as compared to $10.1 million for the 1998 period. The increase is due to lower wholesale distribution, selling and administrative expenses, interest expense, and the non-recurrence of expense related to the early extinguishment of debt in the 1998 period, offset by impairment expenses related to HGS as discussed above. Net Earnings. Net earnings for the 1999 period were $2.6 million compared to $3.4 million for the 1998 period. Net earnings are generated by the Company's subsidiaries and nonpatronage activities, which do not distribute patronage dividends. FISCAL YEAR ENDED AUGUST 29, 1998 ("1998 PERIOD") COMPARED TO FISCAL YEAR ENDED AUGUST 30, 1997 ("1997 PERIOD") Net Sales. Net sales totaled $1.8 billion for the 1998 period as compared to $1.9 billion in the 1997 period. Sales decreased 4.9% from fiscal 1997. The reduction in sales is the result of reduced sales to Megafoods Stores, Nob Hill and Hughes which amounted to $86.3 million. Megafoods, Nob Hill and Hughes were all acquired by entities that have self-distribution programs. Accordingly, product supply to their respective stores migrated into the corresponding self-distribution facilities in the period between February 1997 through August 1998. Cost of Sales. In the 1998 period, the overall gross margin as a percentage of net sales is consistent with the 1997 period. An increase in service fees implemented mid-year was offset by a substantial reduction in margins from retail operations that were disposed of in the 1997 period. 12 Distribution, Selling and Administrative. Distribution, selling and administrative expenses were $137.2 million, or 7.5% of net sales, in the 1998 period, as compared to $142.6 million, or 7.4% of net sales, in the 1997 period. The level of expense as a percentage of sales for the 1998 period is greater than the 1997 period primarily due to the lower volume levels discussed under "Net Sales," nonrecurring charges relating to a settlement of litigation and costs to update computer programs that will be impacted by the Year 2000 issue. These increased costs were partially offset by reduced costs resulting from the implementation of radio frequency and automated routing programs in several of Unified's distribution facilities. Interest. Interest expense decreased from $13.0 million in the 1997 period to $12.3 million in the 1998 period. The decrease is primarily due to lower interest rates associated with Unified's refinancing of its debt completed in April 1998 and reduced average borrowing requirements resulting from reductions in inventories and accounts receivable. Other Income (Expense), Net. Net other income in the 1998 period was $3.2 million as compared to other expense of $655,000 in the 1997 period. In May 1998, Unified completed the sale of approximately 24 acres of property located in Commerce, California. This sale resulted in a gain, net of expenses related to the sale, of $3.2 million. Other expense of $655,000 in the 1997 period resulted from a $1.5 million reduction in the fair value of Unified's investment in SavMax, offset by gains realized from the sale of finance receivables ($387,000) and the remainder of Unified's interest in Major Market, Inc. ($458,000). Patronage Dividends. Patronage dividends totaled $10.1 million for the 1998 period as compared to $14.5 million for the 1997 period. The reduction is primarily due to lower sales through the cooperative divisions, the refinancing charge and the nonrecurring charges discussed previously, offset by reduced interest costs. Extraordinary Charge. The extraordinary loss of $1.08 million, net of income taxes, in the 1998 period is related to the early extinguishment of debt in connection with Unified's refinancing transaction. This charge covers prepayment premiums paid and the write-off of financing costs relating to debt refinanced in the transaction. Net Earnings. Net earnings were $3.4 million for the 1998 period as compared to $2.3 million for the 1997 period. The increase reflects the earnings generated by Unified's subsidiaries and the gain on the sale of the Commerce property, which are not subject to patronage distribution but are retained and serve to increase book value per share. LIQUIDITY AND CAPITAL RESOURCES Unified relies upon cash flow from operations, patron deposits, shareholdings and borrowings under Unified's credit lines, to finance operations. Net cash provided by operating activities totaled $9.5 million for the 1999 period. Net cash utilized by operating activities totaled $12.6 million for the 1998 period. Net cash provided by operating activities in the 1999 period is primarily due to increased accounts payable and long-term liabilities in the distribution and SavMax operations. At August 28, 1999, working capital was $98.0 million. The current ratio was 1.6 and 1.5 at fiscal year end 1998 and 1999, respectively. Working capital varies primarily as a result of seasonal inventory requirements. Capital expenditures totaled $17.3 million in the 1999 period, $18.4 million in the 1998 period, and $15.2 million in the 1997 period. At August 28, 1999, Unified had $80,000,000 in senior notes outstanding to certain insurance companies and pension funds. The senior notes were unsecured, due in April 2008 and bore interest at 7.22% per annum. Unified also had a $100,000,000 revolving credit facility with a group of banks. The revolving credit was unsecured, expired in April of 2003 and bore interest at the bank's base rate or at an adjusted LIBOR rate plus a margin ranging from 0.375% to 0.90% depending on Unified's leverage ratio. Both the senior notes and the revolving credit facility limited the incurrence of additional funded debt, restricted the issuance of secured indebtedness and prohibited the payment of dividends (other than patronage dividends). These credit agreements contained various financial covenants. Obligations under the credit agreements were senior to the rights of member-patrons with respect to deposits and patronage dividend certificates. The terms of the senior notes and revolving credit facility were amended subsequent to year end (see "Financing of the Merger"). 13 Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50,000,000. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit was 5.30% at August 28, 1999. A $10 million credit agreement is collateralized by GCC's member loan receivables. GCC is a wholly owned subsidiary of Unified. The primary function of GCC is to provide loan financing to Unified's member-patrons. The funding for loans made by GCC is provided by GCC's cash reserves as well as the $10 million credit agreement. The maturity date of the credit agreement is September 20, 2001, but is subject to an annual extension of one year by the mutual consent of GCC and the bank. No amounts were outstanding under this credit line at August 28, 1999. The unused portion of this credit line is subject to commitment fees of 0.125% plus $25,000 annually. Member loan receivables are periodically sold by GCC to a bank through a loan purchase agreement. The maturity date of the loan purchase agreement is August 29, 2001, but is subject to extension by mutual agreement of GCC and the bank for an additional one year on each anniversary date of the initial purchase date. Total loan purchases under the agreement are limited to a total aggregate principal outstanding of $50 million. GCC entered into an additional loan purchase agreement with a different bank in January 1999. This additional loan purchase agreement can be terminated upon ninety days prior written notice and there is no maximum limitation on the loan purchases. At August 29, 1998 and August 28, 1999, the aggregate principal outstanding balance of loans purchased by the banks was $17 million and $27 million, respectively. The loan sales are subject to limited recourse provisions. FINANCING OF THE MERGER In connection with the merger with United and subsequent to year end, Unified refinanced its existing institutional and bank indebtedness. Unified entered into a five-year, $200 million revolving credit facility secured by accounts receivable and inventories. Borrowings bear interest at either LIBOR plus an applicable margin based on a funded debt to operating cash flow ratio or the higher of the lender's base rate or 0.50% above the lender's federal funds borrowing rate. The new revolving credit facility permits advances up to 85% of eligible accounts receivable and 65% of eligible inventories. The security interest would be released if Unified achieves designated investment grade ratings for a period of not less than one year. Pursuant to new term credit agreements with existing term lenders, Unified collateralized its existing $80 million of 7.22% senior unsecured notes with property, plant and equipment and issued $40 million of new ten-year senior secured notes. The interest rate on the existing $80 million senior notes increased by 0.50% and the senior mortgage notes bear interest at 8.71%. The interest rate increase on the existing $80 million senior notes and the securitization of both notes would be eliminated in the event the combined entity achieves designated investment grade ratings for a period of not less than one year. The new credit agreements contain customary representations, warranties, covenants and default provisions for financing of this type. These agreements will provide funds to meet the on-going borrowing requirements of Unified and were used to repay existing institutional indebtedness of United, to fund redemption of shares of terminated members and to meet other cash requirements of the merger. Unified distributes at least 20% of the patronage dividends in cash and distributes Class B Shares as a portion of the patronage dividends distributed to its member-patrons. Patrons are generally required to maintain subordinated deposits with Unified and member-patrons purchase Class B shares to satisfy this requirement. In the merger, former United members were provided the opportunity to build the minimum subordinated deposit over time, provided that they agree to assign 80% of patronage dividends received and maintain a supply agreement with Unified until the minimum deposit condition is satisfied. Upon termination of patron status, the withdrawing patron will be entitled to recover deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and a member-patron also will be entitled to have its shares redeemed, subject to applicable legal requirements, company policies and credit agreement limitations. Unified's current redemption policy limits the Class B Shares that Unified is obligated to redeem in any fiscal year to 5% of the number of Class B Shares deemed outstanding at the end of the preceding 14 fiscal year. In fiscal 1999, this limitation restricted Unified's redemption of shares to 19,007 shares for $3.5 million. In connection with the merger, (i) Unified redeemed 71,310 Class B shares of discontinued members for a total consideration before set-offs of $13.4 million, leaving excess shares tendered by active members of 11,725, (ii) adopted a policy that it would not be obligated to redeem Class B Shares of terminated member-patrons for three full fiscal years following the merger, and (iii) modified the share repurchase price formula. Cash flow to fund redemption of shares is provided from operations, patron deposits, patronage certificates, current shareholdings and borrowings under Unified's credit lines. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that Unified recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. As amended by SFAS No. 137, this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management is in the process of determining the effects on Unified's financial statements. YEAR 2000 Unified has had an active Year 2000 program since August 1996. This program includes a detailed review of Unified's software applications, hardware, and embedded technology. Unified has utilized an outside consultant to assess the embedded chip technology within its facilities. This assessment found 95% of the chips to be either already compliant or in the process of being updated by various vendors. Unified estimates that 99% of the embedded chip technology has been completed and the remaining 1% will be completed by December 1, 1999. In 1996, Unified began assessing the application software of Unified to determine risk of Year 2000 failure. The assessment process was used to identify the business applications that would be at risk for potential century date impact and to prioritize the critical, moderate, and low risk applications for remediation or replacement. Applications that will be impacted by Year 2000 were scheduled for remediation or replacement. Unified is 100% complete with replacing or remediating both business critical applications and moderate risk applications. Unified is 95% complete as to low risk applications and expects that 100% of the remaining applications will be completed by December 1, 1999. Unified decided to replace certain systems that were not Year 2000 compliant. The systems being replaced were older systems that would have been replaced prior to Year 2000 regardless of the non-compliant issue. The estimated total cost of the Year 2000 project, including replacement of the systems, is approximately $11.7 million. The estimated total cost of the new systems is approximately $5.1 million, which is being capitalized. The remaining $6.6 million has been or will be expensed. The total amount incurred on the project through November 10, 1999 was $10.8 million, of which $5.9 million related to the cost to remediate software, which has been expensed, and $4.9 million related to the replacement of systems including hardware. An additional $75,000 has been expensed related to the cost of identifying and communicating with third party suppliers. Unified has notified its members of the Year 2000 issues through newsletters, meetings, and discussions. Unified's Interactive Ordering Program, which allows retailers to order electronically, and CertiNet, which is a comprehensive in-store system, are Year 2000 compliant. The Year 2000 project team is also addressing interaction with vendors and the potential impact of Year 2000 issues. Unified has completed the upgrade and implementation of the Year 2000 compliant version of the Uniform Commercial Standard ("UCS") transactions. Unified is working with UCS vendors to make sure that processing of orders, invoices, and payments via electronic data interchange will be Year 2000 compliant. For those UCS vendors that are not ready for Year 2000, Unified has a contingency plan that converts the vendor's data into Year 2000 compliant data before processing through Unified's systems. Additionally, Unified is a member of the National Grocers Association's ("NGA") Year 2000 Task Force, which was formed to assist retailers in resolving the Year 2000 problem in their businesses through the sharing of information. The objectives of this group are to: . identify the hardware and software systems at risk; 15 . communicate with the vendor community and establish definitive position statements regarding cash systems; and . communicate these findings to NGA members. Many of Unified's members are members of NGA. A comprehensive report of the findings of the Task Force is available to all members and vendors that are associated with Unified and the contents thereof have been discussed at several recent industry meetings. Unified has set up an electronic bulletin board with information on Year 2000 issues for its members. Unified has aggressively pursued a formal confirmation process with its trading partners on their state of readiness for Year 2000. This area includes the identification and prioritizing of critical suppliers, financial institutions, and utilities, and communicating with them about their plans and progress in addressing the Year 2000 issue. Unified has identified and contacted over 4,000 suppliers requesting information on their plans and progress on the Year 2000 issue. Unified currently has responses from 89% of the identified suppliers. Out of these responses, 85% have responded that they expect full compliance prior to Year 2000, or are already 100% compliant. Unified is continuing to pursue the remaining suppliers, through their representatives, for compliance information. The critical suppliers have responded positively with compliance in place or prior to Year 2000. As the Year 2000 program progresses, Unified will be developing additional contingency plans. Unified's contingency plans will be intended to address both remediation of systems and the overall business operating risk. Unified has been meeting with its members during the last two years to raise their awareness of the potential for business interruption due to Year 2000. Unified has established contingency plans that will convert member and vendor data into Year 2000 compliant data before processing through Unified's systems. Failure of Unified's members or vendors to be Year 2000 compliant could have a material adverse impact on Unified's operations. However, as discussed above, Unified is actively working with members and vendors to address the Year 2000 issues. FORWARD-LOOKING INFORMATION This document and the documents of Unified incorporated by reference may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, (c) embody assumptions which may prove to have been inaccurate, including Unified's assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; Unified's ability to develop and implement Year 2000 systems solutions; and Unified's expectations regarding the adequacy of capital and liquidity. Also, when we use words such as "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable, we cannot give you any assurance that such expectations will prove correct. Important factors that could cause actual results to differ materially from such expectations include the adverse effects of the changing industry environment and increased competition; continuing sales decline and loss of customers; exposure to the uncertainties of litigation and other contingent liabilities; the failure of Unified, its vendors or its customers to develop and implement year 2000 systems solutions; and the failure of Unified to integrate the operations and systems of Certified and United; the increased credit risk to Unified caused by the ability of former United members to establish their required minimum deposits over time through use of patronage dividends to purchase Class B Shares if such members default on their obligations to Unified prior to their deposit requirements being met and the existing deposit proves inadequate to cover such members obligation. All forward-looking statements attributable to Unified or United are expressly qualified in their entirety by the factors which may cause actual results to differ materially. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Unified has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50,000,000. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit were 5.30% at August 28, 1999. 16 ITEM 8. FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT The Board of Directors Unified Western Grocers, Inc. We have audited the accompanying consolidated balance sheets of Unified Western Grocers, Inc. (formerly Certified Grocers of California, Ltd.) and subsidiaries (the "Company") as of August 29, 1998 and August 28, 1999, and the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows for the years ended August 30, 1997, August 29, 1998, and August 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 29, 1998 and August 28, 1999, and the results of its operations and its cash flows for the years ended August 30, 1997, August 29, 1998, and August 28, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California October 29, 1999 17 - -------------------------------------------------------------------------------- Unified Western Grocers, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (dollars in thousands) - --------------------------------------------------------------------------------
August 29, 1998 and August 28, 1999 1998 1999 - ------------------------------------------------------------------------------ ASSETS Current Assets: Cash and cash equivalents $ 4,105 $ 8,027 Accounts and notes receivable, net 95,672 108,786 Inventories 124,419 150,800 Prepaid expenses 4,744 5,544 Deferred taxes 3,853 4,286 - ------------------------------------------------------------------------------ Total current assets 232,793 277,443 Properties, net 76,299 79,231 Investments 41,341 35,017 Notes receivable 21,792 13,914 Other assets, net 16,993 45,530 - ------------------------------------------------------------------------------ TOTAL ASSETS $389,218 $451,135 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 80,870 $102,172 Accrued liabilities 51,767 54,536 Current portion of notes payable 743 6,623 Patrons' excess deposits and declared patronage dividends 13,630 16,091 - ------------------------------------------------------------------------------ Total current liabilities 147,010 179,422 Notes payable, due after one year 125,130 143,727 Long-term liabilities, other 20,440 29,393 Commitments and contingencies Patrons' deposits and certificates: Patrons' required deposits 12,147 12,450 Subordinated patronage dividend certificates 6,158 5,986 Shareholders' equity: Class A Shares 5,479 5,669 Class B Shares 56,992 57,833 Retained earnings 15,685 17,160 Accumulated other comprehensive earnings (losses) 177 (505) - ------------------------------------------------------------------------------ Total shareholders' equity 78,333 80,157 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $389,218 $451,135 - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 18 - -------------------------------------------------------------------------------- Unified Western Grocers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS (dollars in thousands) - -------------------------------------------------------------------------------- August 30, August 29, August 28, years ended 1997 1998 1999 - ------------------------------------------------------------------------------- Net sales $1,927,092 $1,831,686 $1,893,523 Costs and expenses: Cost of sales 1,752,899 1,668,202 1,717,779 Distribution, selling and administrative 142,644 137,232 141,155 - ------------------------------------------------------------------------------- Operating income 31,549 26,252 34,589 Interest expense (13,020) (12,320) (11,911) Other income (expense), net (655) 3,200 (5,780) - ------------------------------------------------------------------------------- Earnings before patronage dividends, pro- vision for income taxes and extraordinary item 17,874 17,132 16,898 Patronage dividends (14,464) (10,149) (14,195) - ------------------------------------------------------------------------------- Earnings before provision for income taxes and extraordinary item 3,410 6,983 2,703 Provision for income taxes 1,103 2,515 64 - ------------------------------------------------------------------------------- Earnings before extraordinary item 2,307 4,468 2,639 - ------------------------------------------------------------------------------- Extraordinary item (net of income taxes of $714) -- 1,079 -- - ------------------------------------------------------------------------------- Net earnings 2,307 3,389 2,639 - ------------------------------------------------------------------------------- Other comprehensive earnings, net of in- come taxes: Unrealized holding gains (losses) 522 (5) (738) Minimum pension liability adjustment 172 27 56 - ------------------------------------------------------------------------------- COMPREHENSIVE EARNINGS $ 3,001 $ 3,411 $ 1,957 - -------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 19 - -------------------------------------------------------------------------------- Unified Western Grocers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 30, 1997, AUGUST 29, 1998 AND AUGUST 28, 1999 (dollars in thousands) - ------------------------------------------------------------------------------------
Accumulated Other Class A Class B Comprehensive -------------- ---------------- Retained Earnings Shares Amount Shares Amount Earnings (Losses) - ------------------------------------------------------------------------------------ Balance, August 31, 1996 49,100 $5,305 383,815 $56,504 $11,436 $(539) Class A Shares issued 4,100 689 Class A Shares redeemed (5,300) (633) (257) Class B Shares issued 21,366 3,744 Class B Shares redeemed (19,191) (2,899) (324) Net earnings 2,307 Net unrealized gain on appreciation of investments (net of deferred tax liability of $271) 522 Minimum pension liability adjustment (net of deferred tax liability of $132) 172 - ------------------------------------------------------------------------------------ Balance, August 30, 1997 47,900 5,361 385,990 57,349 13,162 155 Class A Shares issued 4,800 841 Class A Shares redeemed (5,900) (723) (311) Class B Shares issued 13,456 2,470 Class B Shares redeemed (19,300) (2,827) (555) Net earnings 3,389 Net unrealized loss on depreciation of investments (net of deferred tax benefit of $5) (5) Minimum pension liability adjustment (net of deferred tax liability of $17) 27 - ------------------------------------------------------------------------------------ Balance, August 29, 1998 46,800 5,479 380,146 56,992 15,685 177 Class A Shares issued 4,800 879 Class A Shares redeemed (5,200) (689) (264) Class B Shares issued 18,210 3,429 Class B Shares redeemed (19,007) (2,588) (900) Net earnings 2,639 Net unrealized loss on depreciation of investments (net of deferred tax benefit of $375) (738) Minimum pension liability adjustment (net of deferred tax liability of $41) 56 - ------------------------------------------------------------------------------------ BALANCE, AUGUST 28, 1999 46,400 $5,669 379,349 $57,833 $17,160 $(505) - ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 20 - -------------------------------------------------------------------------------- Unified Western Grocers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) - ------------------------------------------------------------------------------
fiscal years ended August 30 1997, August 29, 1998 and August 28, 1999 1997 1998 1999 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings $ 2,307 $ 3,389 $ 2,639 Adjustments to reconcile net earnings to net cash provided (utilized) by operating activities: Depreciation and amortization 12,204 14,792 16,906 Deferred taxes (107) (1,219) (1,535) Gain on sale of investments in affiliates, member loan receivables, and properties, net (562) (2,460) (1,360) Reduction in fair value of investment 1,500 7,280 (Increase) decrease in assets: Accounts and notes receivable, net (93) (1,297) (11,971) Inventories 1,031 10,853 (15,166) Prepaid expenses (282) 163 (275) Notes receivable (13,462) (5,057) (2,753) Increase (decrease) in liabilities: Accounts payable 6,030 (23,628) 7,713 Accrued liabilities (2,474) (7,293) (1,438) Patrons' excess deposits and declared patronage dividends 1,669 (3,196) 2,461 Long-term liabilities, other (1,586) 2,329 6,978 - ------------------------------------------------------------------------------ Net cash provided (utilized) by operating activi- ties 6,175 (12,624) 9,479 - ------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of properties (15,166) (18,414) (11,372) Investment in securities, net (9,839) (4,632) (7,720) Proceeds from sales of notes receivable 6,256 2,780 6,590 Proceeds from sales of properties 1,229 12,320 82 Increase in other assets (3,100) (2,236) (3,024) Sales of investments in affiliates, net of cash disposed* 500 Acquisition of net assets from wholesale distribu- tion company** (8,954) Acquisition of net assets in retail store opera- tions*** 75 - ------------------------------------------------------------------------------ Net cash utilized by investing activities (20,120) (10,182) (24,323) - ------------------------------------------------------------------------------ Cash flows from financing activities: Additions to long-term notes payable 27,944 124,000 20,500 Reduction of long-term notes payable (15) (90,344) (139) Reduction of short-term notes payable (11,440) (11,329) (1,593) Redemption of patronage dividend certificates (249) (172) Repurchase of shares from members (4,112) (4,416) (4,441) (Decrease) increase in members' required deposits (1,166) (2,211) 303 Issuance of shares to members 4,432 3,311 4,308 - ------------------------------------------------------------------------------ Net cash provided by financing activities 15,394 19,011 18,766 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equiva- lents 1,449 (3,795) 3,922 Cash and cash equivalents at beginning of year 6,451 7,900 4,105 - ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,900 $ 4,105 $ 8,027 - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 21 - -------------------------------------------------------------------------------- Unified Western Grocers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) (dollars in thousands) - ---------------------------------------------------------------------------------
for fiscal years ended August 30 1997, August 29, 1998 and August 28, 1999 1997 1998 1999 - --------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $13,264 $12,790 $ 11,962 Income taxes $ 2,688 $ 3,179 $ 1,673 - --------------------------------------------------------------------------------- *SALES OF INVESTMENTS IN AFFILIATES, NET OF CASH DIS- POSED: Proceeds in excess of net assets of affiliates sold, net $ 500 **ACQUISITION OF NET ASSETS FROM WHOLESALE DISTRIBU- TION COMPANY: Working capital, other than cash $ (6,292) Property, plant and equipment (1,442) Other assets (1,220) - --------------------------------------------------------------------------------- Acquisition of net assets from wholesale distribution company $ (8,954) - --------------------------------------------------------------------------------- ***ACQUISITION OF NET ASSETS IN RETAIL STORE OPERA- TIONS: Working capital, other then cash $ 11,327 Property, plant and equipment (4,467) Notes receivable and other long-term assets (2,681) Goodwill (23,354) Long-term liabilities, other 1,883 Long-term notes payable 5,479 - --------------------------------------------------------------------------------- (11,813) Previous investment in retail store operations 11,888 - --------------------------------------------------------------------------------- Net cash effect due to acquisition of net assets in retail store operations $ 75 - ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 22 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Years Ended August 30, 1997, August 29, 1998 and August 28, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation: On September 27, 1999, the shareholders of Certified Grocers of California, Ltd. ("Certified") and United Grocers, Inc. ("United") (a grocery cooperative headquartered in Portland, Oregon) approved a merger agreement in which United merged with a wholly owned subsidiary of Certified (see Note 18). The merger became effective on September 29, 1999. In connection with the merger, Certified Grocers of California, Ltd. changed its name to Unified Western Grocers, Inc. (the "Company" or "Unified"). Unified's historical financial information for the fiscal years contained herein does not include information with respect to United. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and accounts with subsidiaries have been eliminated. Nature of Business: The Company is a cooperative organization engaged principally in the distribution of food products and related general merchandise products primarily to retail establishments owned by shareholders of the Company. All establishments with which directors are affiliated, as members of the Company, purchase groceries, related products and store equipment from the Company in the ordinary course of business pursuant to published terms or according to the provisions of supply agreements. The Company makes investments in retail grocery operations to assist its members. Periodically, the Company will own and manage retail grocery stores on a temporary basis until a qualified and suitable owner can be identified. The Company's fiscal year ends on the Saturday nearest to August 31. Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories: Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out method for items of warehouse stock and on the retail method for retail stores. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from 3 to 40 years. Leasehold improvements are amortized based on the estimated life of the asset or the life of the lease, whichever is shorter. Expenditures for replacements or major improvements are capitalized; expenditures for normal maintenance and repairs are charged to operations as incurred. Upon sale or retirement of properties, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in operations. 23 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Investments: The Company has classified all investments in debt securities as held-to- maturity securities, based on the Company's positive intent and ability to hold those securities. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Equity investments and subordinated interests, residual interests and servicing fee amounts from the sale of member loan receivables are carried at estimated fair value and are classified as investments available-for-sale. Unrealized gains and losses, net of taxes, on available-for-sale investments are recorded as a separate component of shareholder's equity. Goodwill: Goodwill, representing the excess of the purchase price over the estimated fair value of net assets acquired (see Note 4), is amortized over the period of expected benefit. Management reviews goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Management deems goodwill to be impaired if the estimated expected undiscounted future cash flows are less than the carrying amount. Estimates of expected future cash flows are based on management's best estimates of anticipated operating results over the remaining useful life of the assets. As of August 28, 1999, goodwill net of accumulated amortization amounted to $23 million and is included in other assets in the accompanying consolidated balance sheet. Environmental Costs: The Company expenses, on a current basis, certain recurring costs incurred in complying with environmental regulations and remediating environmental pollution. The Company also reserves for certain non-recurring future costs required to remediate environmental pollution for which the Company is liable whenever, by diligent legal and technical investigation, the scope or extent of pollution has been determined, the Company's contribution to the pollution has been ascertained, remedial measures have been specifically identified as practical and viable, and the cost of remediation and the Company's proportionate share can be reasonably estimated. Reclassifications: Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. Comprehensive Earnings (Losses): During fiscal 1999, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is net income, plus certain other items that are recorded by the Company directly to shareholders' equity, bypassing net income. The only items currently applicable to the Company are the unrealized gain or loss on appreciation or depreciation of investments and the minimum pension liability adjustment. The balance and current period change for each component of comprehensive earnings are summarized as follows: - ----------------------------------------------------------------------------
Net Unrealized Gain (Loss) On Appreciation Minimum Pension (Depreciation) of Investments Liability Adjustment - ---------------------------------------------------------------------------- Balance, August 31, 1996 $(284) $(255) Current-period change 522 172 - ---------------------------------------------------------------------------- Balance, August 30, 1997 238 (83) Current-period change (5) 27 - ---------------------------------------------------------------------------- Balance, August 29, 1998 233 (56) Current-period change (738) 56 - ---------------------------------------------------------------------------- BALANCE, AUGUST 28, 1999 $(505) $ 0 - ----------------------------------------------------------------------------
24 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the net change in unrealized holding gains (losses) for fiscal years 1997, 1998, and 1999 are as follows: - -------------------------------------------------------------------------------
1997 1998 1999 - ------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period $436 $205 $(641) Less reclassification adjustment for gains (losses) included in net earnings (86) 210 97 - ------------------------------------------------------------------------------- NET UNREALIZED HOLDING GAINS (LOSSES) $522 $ (5) $(738) - -------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements: The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that the Company recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. As amended by SFAS No. 137, this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management is in the process of determining the effects on the Company's financial statements. 2. PROPERTIES: Properties at August 29, 1998 and August 28, 1999 stated at cost, are comprised of: - -----------------------------------------------------------------
1998 1999 - ----------------------------------------------------------------- Land $ 8,350 $ 8,338 Buildings and leasehold improvements 52,353 61,910 Equipment 94,011 104,932 Equipment under capital leases 6,094 6,364 - ----------------------------------------------------------------- 160,808 181,544 Less accumulated depreciation and amortization 84,509 102,313 - ----------------------------------------------------------------- $ 76,299 $ 79,231 - -----------------------------------------------------------------
On May 19, 1998, the Company completed the sale of approximately 24 acres of property located in Commerce, California. The sale resulted in a gain (net of expenses related to the sale) of $3.2 million. This transaction required certain administrative offices and distribution facilities to be relocated. The Company utilized its remaining properties to accommodate most of the displaced facilities. 3. INVESTMENTS: The amortized cost and fair value of available-for-sale investments, including equity securities, were as follows: - -------------------------------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair August 29, 1998 Cost Gains Losses Value - ------------------------------------------------------------------------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $13,276 $150 $ 7 $13,419 Corporate securities 3,807 268 131 3,944 Mortgage backed securities 10,776 86 14 10,848 - ------------------------------------------------------------------------- Sub-total 27,859 504 152 28,211 Redeemable preferred stock 8,253 59 49 8,263 Equity securities 4,867 4,867 - ------------------------------------------------------------------------- $40,979 $563 $201 $41,341 - -------------------------------------------------------------------------
25 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) - -------------------------------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair August 28, 1999 Cost Gains Losses Value - ------------------------------------------------------------------------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $17,083 $ 26 $ 660 $16,449 Corporate securities 6,055 375 209 6,221 Mortgage backed securities 8,192 11 286 7,917 - ------------------------------------------------------------------------- Sub-total 31,330 412 1,155 30,587 Redeemable preferred stock 1,324 99 103 1,320 Equity securities 3,114 12 16 3,110 - ------------------------------------------------------------------------- $35,768 $523 $1,274 $35,017 - -------------------------------------------------------------------------
Fixed maturity investments are due as follows: - ----------------------------------------------------------
Amortized Fair August 29, 1998 Cost Value - ---------------------------------------------------------- Fixed Maturities Available for Sale: Due after one year through five years $10,762 $10,954 Due after five years through ten years 7,584 7,612 Due after ten years 9,513 9,645 - ---------------------------------------------------------- $27,859 $28,211 - ---------------------------------------------------------- - ---------------------------------------------------------- Amortized Fair August 28, 1999 Cost Value - ---------------------------------------------------------- Fixed Maturities Available for Sale: Due after one year through five years $ 8,723 $ 8,722 Due after five years through ten years 9,060 8,914 Due after ten years 13,547 12,951 - ---------------------------------------------------------- $31,330 $30,587 - ----------------------------------------------------------
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown as being due at their average expected maturity dates. Investment income is summarized as follows: - ------------------------------------------------
1997 1998 1999 - ------------------------------------------------ Fixed maturities $1,728 $2,526 $2,280 Preferred stock 91 444 115 Equity securities 75 82 (18) Cash and cash equivalents 332 364 131 - ------------------------------------------------ 2,226 3,416 2,508 Less investment expenses 137 22 232 - ------------------------------------------------ NET INVESTMENT INCOME $2,089 $3,394 $2,276 - ------------------------------------------------
Investments carried at fair values of $17,975 and $19,688 at August 29, 1998 and August 28, 1999, respectively, are on deposit with regulatory authorities in compliance with insurance company regulations. Equity securities which do not have readily determinable fair values are accounted for using the cost method. At August 28, 1999, the Company held investments in preferred stock ($1,000), a note receivable ($5,300), and was owed trade receivables ($980) from Hawaiian Grocery Stores, Inc. ("HGS"), a customer. The entire amount has been either reserved or written-off based on developments pertaining to HGS. Subsequent to year end, HGS defaulted on the principal and interest payments required by the note receivable. The trade receivables also became delinquent during the Company's fourth quarter. The Company believes there is an 26 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) impairment of its investment in HGS which is other than temporary and has written the preferred stock and note receivable down to a nominal carrying value and has fully reserved the trade accounts receivable. HGS has notified the Company that it is experiencing cash flow difficulties due to operating difficulties and reduced sales, it is uncertain when or if the default can be cured. 4. ACQUISITION: At August 29, 1998, the Company owned an equity interest in SavMax Foods, Inc. ("SavMax"), a member-patron. SavMax is an operator of seven retail grocery stores with retail sales of approximately $75 million for the period December 31, 1998 through August 28, 1999. Sales on an annual basis are approximately $115 million. The investment consisted of (a) 10% of the outstanding Series A common stock with an original cost of $2.5 million and (b) $6.3 million of 8.5% Series B cumulative redeemable preferred stock. The Company purchased the remaining common and preferred shares of SavMax as of December 31, 1998, for an aggregate purchase price of approximately $4.5 million. The transaction also included an ongoing covenant not to compete from a selling shareholder, termination of the sellers' existing employment and consulting agreements, and the entry into a consulting arrangement with a selling shareholder. The acquisition has been accounted for as a purchase pursuant to Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the consideration has been allocated to the assets and liabilities based on the relative fair values. The excess of the purchase price over the fair value of the net assets acquired was $23.4 million and was recorded as goodwill. The results of the acquired business have been included in the consolidated financial statements from December 31, 1998. Although SavMax has been consolidated, the Company intends to sell its investment to a qualified buyer(s) in the future. The following summarizes the fair value of assets acquired and the liabilities assumed based on SavMax's balance sheet as of January 2, 1999. - ------------------------------------------------------ Current assets $ 8,530 Equipment and leasehold improvements, net 4,467 Other assets 2,681 - ------------------------------------------------------ Total assets 15,678 - ------------------------------------------------------ Accounts payable 12,724 Accrued liabilities and deferred credits 5,747 Notes payable 8,673 - ------------------------------------------------------ Total liabilities 27,144 - ------------------------------------------------------ Net (11,466) Total investment common and preferred stock 11,888 - ------------------------------------------------------ Goodwill $ 23,354 - ------------------------------------------------------
The accompanying consolidated statements of earnings do not include any revenues or expenses related to SavMax prior to the December 31, 1998 acquisition date. The following unaudited consolidated pro forma information utilizes the audited information for the Company for fiscal 1998 and 1999 and unaudited information for SavMax for those periods. The pro forma information presents the results of operations of the Company as if the acquisition had taken place on September 1, 1997. - --------------------------------------------------------------------------
Fiscal year 1998 1999 - -------------------------------------------------------------------------- Sales $1,903,832 $1,920,540 Earnings before patronage dividends, provision for income taxes and extraordinary item $ 15,517 $ 9,481 Patronage dividends $ 10,149 $ 14,195 Net earnings (losses) $ 1,855 $ (4,559) - --------------------------------------------------------------------------
27 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisition been in effect on September 1, 1997, or of future results of operations. 5. ACCRUED LIABILITIES: Accrued liabilities at August 29, 1998 and August 28, 1999 are summarized as follows:
1998 1999 - -------------------------------------------------------------- Insurance loss reserves and other liabilities $17,290 $21,122 Accrued wages and related taxes 12,136 13,401 Accrued income and other taxes payable 6,230 5,292 Accrued promotional liabilities 2,561 277 Other accrued liabilities 13,550 14,444 - -------------------------------------------------------------- $51,767 $54,536 - --------------------------------------------------------------
6. NOTES PAYABLE: Notes payable at August 29, 1998 and August 28, 1999 are summarized as follows:
1998 1999 - ------------------------------------------------------------------------------- Senior notes payable expiring April 1, 2008, interest rate at 7.22% payable monthly, interest only through April 1, 2000 and $832 principal and interest thereafter through April 1, 2008, remaining $34.8 million due May 1, 2008. $ 80,000 $ 80,000 Notes payable to banks under a $100 million revolving credit agreement expiring April 10, 2003, interest rate at the agent's base rate (8.5% at August 29, 1998 and 8.25% at Au- gust 28, 1999) or adjusted LIBOR (5.69% plus 0.825% at Au- gust 29, 1998 and 5.36% plus 0.9% at August 28, 1999) 44,000 64,500 Other debt related to SavMax 4,599 Obligations under capital leases 1,873 1,251 - ------------------------------------------------------------------------------- Total notes payable 125,873 150,350 Less portion due within one year 743 6,623 - ------------------------------------------------------------------------------- $125,130 $143,727 - -------------------------------------------------------------------------------
Maturities of notes payable as of August 28, 1999 are:
Fiscal year - -------------------- 2000 $ 6,623 2001 4,918 2002 4,929 2003 69,690 2004 5,532 Thereafter 58,658 - -------------------- $150,350 - --------------------
At August 28, 1999, Unified had $80 million in senior notes outstanding to certain insurance companies and pension funds. The senior notes were unsecured, due in April 2008 and bore interest at 7.22% per annum. Unified also had a $100 million revolving credit facility with a group of banks. The revolving credit was unsecured, expired in April of 2003 and bore interest at the bank's base rate or at an adjusted LIBOR rate plus a margin ranging from 0.375% to 0.90% depending on Unified's leverage ratio. Both the senior notes and the revolving credit facility limited the incurrence of additional funded debt, restricted the issuance of secured indebtedness and prohibited the payment of dividends (other than patronage dividends). These credit agreements contained various financial covenants. Obligations under the credit agreements were senior to the rights of member-patrons with respect to deposits and patronage dividend certificates. 28 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Unified entered into a five-year interest rate collar agreement during February 1999 in relation to certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50 million. The weighted average interest rate, prior to lender's margin, on borrowings on the revolving credit was 5.30% at August 28, 1999. The extraordinary loss of $1.08 million, net of income taxes, in fiscal 1998 is related to the early extinguishment of debt in connection with the Company's refinancing transaction. This charge covers prepayment premiums paid and the write-off of financing costs relating to debt refinanced in the transaction. A $10 million credit agreement is collateralized by Grocers Capital Company's ("GCC") member loan receivables. GCC is a wholly owned subsidiary of Unified. The primary function of GCC is to provide loan financing to Unified's member- patrons. Member loans are made at a market rate of interest starting at prime plus 0.5%. The funding for loans made by GCC is provided by GCC's cash reserves as well as the $10 million credit agreement. The maturity date of the credit agreement is September 20, 2001, but is subject to an annual extension of one year by the mutual consent of GCC and the bank. Amounts advanced under the credit agreement bear interest at prime (8.25% at August 28, 1999) or Eurodollar (5.50% at August 28, 1999) plus 0.9%. No amounts were outstanding under this credit line at August 29, 1998 or August 28, 1999. The unused portion of this credit line is subject to commitment fees of 0.125% plus $25 annually. Member loan receivables are periodically sold by GCC to a bank through a loan purchase agreement. The maturity date of the loan purchase agreement is August 29, 2001, but is subject to extension by mutual agreement of GCC and the bank for an additional one year on each anniversary date of the initial purchase date. Total loan purchases under the agreement are limited to a total aggregate principal outstanding of $50 million. GCC entered into an additional loan purchase agreement with a different bank in January 1999. This additional loan purchase agreement can be terminated upon ninety days prior written notice. There is no maximum limitation on the additional loan purchase agreement. At August 29, 1998 and August 28, 1999, the aggregate principal outstanding balance of loans purchased by the banks was $17 million and $27 million, respectively. The loan sales are subject to limited recourse provisions. The Company and GCC have also guaranteed loans made directly to members by third party lenders. At August 29, 1998 and August 28, 1999, the maximum principal amount of these guarantees was $7.8 million and $0.6 million, respectively. Member loans, provided by GCC and third parties, are generally secured with collateral which usually consists of personal and real property owned by member-patrons and personal guarantees of member-patrons. As a result of maturing long-term debt (a noncash financing activity), the Company reclassified from long to short-term debt $11.3 million, $0.7 million, and $2.3 million in the 1997 period, 1998 and 1999, respectively. In connection with the merger with United, and subsequent to year end, Unified refinanced its existing institutional and bank indebtedness. Unified entered into a five-year, $200 million revolving credit facility secured by accounts receivable and inventories. Borrowings bear interest at either LIBOR plus an applicable margin based on a funded debt to operating cash flow ratio or the higher of the lender's base rate or 0.50% above the lender's federal funds borrowing rate. The new revolving credit facility permits advances up to 85% of eligible accounts receivable and 65% of eligible inventories. The security interest would be released if Unified achieves designated investment grade ratings for a period of not less than one year. Pursuant to new term credit agreements with existing term lenders, Unified collateralized its existing $80 million 7.22% senior unsecured notes due 2008 with buildings and equipment and issued $40 million of new ten year senior secured notes. The interest rate on the existing $80 million senior notes increased by 0.50% and the senior secured notes bear interest at 8.71%. The interest rate increase on the existing $80 million senior notes and the securitization of both notes would be eliminated in the event the combined entity achieves designated investment grade ratings for a period of not less than one year. 29 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The new credit agreements contain customary representations, warranties, covenants and default provisions for financing of this type, including financial ratio covenants which are modeled after covenants contained in Unified's existing loan agreements, modified to reflect the merger and the additional extension of credit. 7. LEASES: The Company has entered into operating and capital leases for certain warehouse, transportation and data processing equipment. The Company has also entered into operating leases for approximately 31 retail supermarkets. The majority of these locations are subleased to various member-patrons of the Company. The operating leases and subleases are noncancelable, renewable, include purchase options in certain instances, and require payment of real estate taxes, insurance and maintenance. In addition, on August 28, 1999, the Company was contingently liable with respect to 14 lease guarantees for certain member-patrons. The total current annual rent on locations underlying such lease guarantees on that date was approximately $3.8 million. The commitments have expiration dates through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, would be able to recover a substantial portion of the guaranteed amounts in the event the Company is required to satisfy its obligations under the guarantees. In consideration of lease guarantees and subleases, the Company normally receives a monthly fee equal to 5% of the monthly rent under the lease guarantees and subleases. Obligations of member-patrons to the Company, including lease guarantees, are generally supported by the Company's right of offset, upon default, against the member-patrons' cash deposits, shareholdings and patronage certificates, as well as in certain instances, personal guarantees and reimbursement and indemnification agreements. Rent expense was $17.0 million, $16.2 million, and $18.4 million in fiscal 1997, 1998, and 1999, respectively. Sublease rental income was $5.3 million, $6.2 million, and $4.5 million in fiscal 1997, 1998, and 1999, respectively. 30 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Minimum rentals on properties leased by the Company, including properties subleased to third parties, as of August 28, 1999 are summarized as follows:
Capital Operating Fiscal year Leases Leases - -------------------------------------------------------------- 2000 $1,034 $ 16,459 2001 288 14,736 2002 12,108 2003 11,215 2004 10,581 Thereafter 52,820 - -------------------------------------------------------------- Total minimum lease payments 1,322 $117,919 - -------------------------------------------------------------- Less amount representing interest 71 - -------------------------------------------------------------- Present value of net minimum lease payments 1,251 Less current portion 971 - -------------------------------------------------------------- Total long term portion $ 280 - --------------------------------------------------------------
Future minimum sublease rental income on operating leases as of August 28, 1999 is summarized as follows:
Fiscal year - ------------------- 2000 $ 3,407 2001 3,366 2002 2,885 2003 2,600 2004 2,478 Thereafter 21,041 - ------------------- $35,777 - -------------------
8. INCOME TAXES: The significant components of income tax expense are summarized as follows:
1997 1998 1999 - ------------------------------------------------------------------------ Federal: Current $ 932 $2,367 $1,299 Deferred 162 (820) (1,077) - ------------------------------------------------------------------------ Total federal 1,094 1,547 222 - ------------------------------------------------------------------------ State: Current 278 653 300 Deferred (269) (399) (458) - ------------------------------------------------------------------------ Total state 9 254 (158) - ------------------------------------------------------------------------ Income tax expense $1,103 $1,801 $ 64 - ------------------------------------------------------------------------
31 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effects of temporary differences and other items that give rise to deferred tax assets and deferred tax liabilities are presented below:
August 29, August 28, 1998 1999 - ----------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 2,388 $ 2,109 Accrued benefits 9,159 11,109 Deferred income 1,697 1,275 Insurance reserves 1,788 1,702 Investment valuation adjustment 642 642 Accrued environmental liabilities 313 313 Accrued rent -- 619 Asset impairment adjustment -- 849 Alternative minimum tax and other credits 1,080 1,285 Net operating loss carryforwards 5 3,205 Other 786 1,278 - ----------------------------------------------------------------- Total gross deferred tax assets 17,858 24,386 Less valuation allowance 1,400 5,536 - ----------------------------------------------------------------- Deferred tax assets $16,458 $18,850 - ----------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment $ 5,939 $ 6,283 Capitalized software 1,988 1,992 Intangible assets 627 707 Deferred state taxes 753 782 Deferred gain on installment method -- 479 Other 191 248 - ----------------------------------------------------------------- Total gross deferred tax liabilities 9,498 10,491 - ----------------------------------------------------------------- Net deferred tax asset $ 6,960 $ 8,359 - -----------------------------------------------------------------
Net deferred tax assets of $3.9 million and $4.3 million are included in deferred taxes, current and $3.1 million and $4.1 million in other assets on the Company's accompanying consolidated balance sheets as of August 29, 1998 and August 28, 1999, respectively. A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The change in the valuation allowance between fiscal 1998 and 1999 is primarily a result of the acquisition of SavMax (see Note 4). The remaining balance of the net deferred tax assets should be realized through future operating results, the reversal of taxable temporary differences, and tax planning strategies. The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate (34%) as follows:
1997 1998 1999 - ------------------------------------------------------------------------------ Federal income tax expense at the statutory rate $1,159 $1,765 $919 State income taxes, net of federal income tax benefit 209 303 158 Insurance subsidiary not recognized for state taxes (324) (278) (41) Tax exempt income -- -- (94) Reduction in valuation allowance -- -- (820) Other, net 59 11 (58) - ------------------------------------------------------------------------------ Provision for income taxes (net of taxes related to ex- traordinary item in 1998) $1,103 $1,801 $ 64 - ------------------------------------------------------------------------------
32 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At August 28, 1999, the Company has alternative minimum tax credit carryforwards of approximately $693 available to offset future regular income taxes payable to the extent such regular taxes exceed alternative minimum taxes payable. In addition, the Company has tax benefits associated with the net operating loss carryforwards for federal and state income tax purposes of approximately $2,739 and $466, which begin expiring in 2011 and 2000, respectively. 9. SUBORDINATED PATRONAGE DIVIDEND CERTIFICATES: The Company has a patronage dividend retention program whereby, subject to annual Board approval, it may retain a portion of the patronage dividends and issue patronage certificates (the "Patronage Certificates") evidencing the indebtedness respecting the retained amounts. The program provides for the issuance of the Patronage Certificates to patrons in a portion and at an interest rate determined by the Board in connection with its approval of a particular issuance. The Patronage Certificates are unsecured general obligations, subordinated to certain indebtedness of Unified, and nontransferable without the consent of Unified. The Company issued Patronage Certificates for fiscal years 1993, 1994 and 1995. The outstanding Patronage Certificates have a seven-year term and bear interest payable annually on December 15 in each year. The following table represents a summary of the outstanding Patronage Certificates at August 28, 1999 and their respective terms:
Aggregate Annual Fiscal Principal Interest Maturity Year Amount Rate Date - ----------------------------------- 1993 $1,807 7% 12/15/00 1994 $2,257 8% 12/15/01 1995 $1,922 7% 12/15/02
During fiscal 1997 and 1998 Unified set off approximately $273 and $118, respectively, in Patronage Certificates against a portion of amounts owed to the Company by the holders. No amounts were set off in fiscal 1999. Patronage Certificates have not been issued subsequent to fiscal 1995. However, the program has not been discontinued, and the Board could authorize the issuance of Patronage Certificates in connection with patronage dividends payable in future years. 10. CAPITAL SHARES: The Company requires that each member-patron hold 100 Class A Shares. Each member-patron must also acquire Class B Shares having combined issuance values equal to the lesser of the amount of the member-patron's required deposit or twice the member-patron's average weekly purchases (the "Class B Share requirement"). For this purpose, each Class B Share held by a member-patron has an issuance value equal to the book value of Unified's outstanding shares as of the close of the fiscal year last ended prior to the issuance of such Class B Share. After payment of at least 20% of the patronage dividend in cash and the issuance of the Patronage Certificates, Class B Shares are issued as a portion of each member-patron's patronage dividend and, to the extent necessary to fulfill the member-patron's Class B Share requirement, by crediting the member-patron's cash deposit account for the issuance values of such shares. All shares of a terminated member, or member who holds Class B Shares in excess of their Class B Share requirement, may be redeemed by the Company (subject to certain legal limitations, provisions of the Company's redemption policy, and provisions of certain of the Company's committed lines of credit) at a redemption price based on book value, less all amounts that may be owing by the member to the Company as fixed in the Articles of Incorporation. All shares are pledged to the Company to secure the Company's redemption rights and as collateral for all obligations to the Company. The Company is not obligated in any fiscal year to redeem more than 5% of the sum of the number of Class B Shares outstanding as of the close 33 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of the preceding fiscal year and the number of Class B Shares issued as a part of the patronage dividend for the preceding year (the "5% limit"). Thus, shares tendered for redemption in a given fiscal year may not necessarily be redeemed in that fiscal year. In fiscal 1999, the 5% limitation restricted Unified's redemption of shares to 19,007 shares for $3.5 million. The following table summarizes the Class B Shares tendered and presently approved for redemption, shares redeemed, and the remaining number of shares pending redemption at the fiscal year end of each of the following periods:
Book Fiscal Year Tendered Redeemed Remaining Value - -------------------------------------------------------- Years prior to 1997 74,868 $14,095 1997 9,575 19,191 65,252 $12,285 1998 29,680 19,300 75,632 $14,239 1999 25,177 19,007 81,802 $15,401
Subsequent to the 1999 fiscal year end and in connection with the merger with United (see Note 1 and Note 18), the Company (i) redeemed 71,310 Class B Shares held by terminated member-patrons and (ii) adopted amendments to its Articles of Incorporation and Bylaws which restrict the Company's obligation to repurchase Class B Shares of terminated members for a three-year period and changed the redemption provisions in other respects (see Note 18). There are 500,000 authorized Class A Shares, of which 46,800 and 46,400 were outstanding at August 29, 1998 and August 28, 1999, respectively. There are 2,000,000 authorized Class B Shares, of which 380,146 and 379,349 were outstanding at August 29, 1998 and August 28, 1999, respectively. No member-patron may hold more than 100 Class A Shares. However, it is possible that a member-patron may have an interest in another member, or that a person may have an interest in more than one member, and thus have an interest in more than 100 Class A Shares. The board of directors is authorized to accept member-patrons without the issuance of Class A Shares when the board of directors determines that such action is justified by reason of the fact that the ownership of the patron is the same, or sufficiently the same, as that of another member-patron holding 100 Class A Shares. The price for such shares will be the book value per share of outstanding shares at the close of the fiscal year last ended. There were 15 authorized Class C Shares of which 15 are outstanding as of August 28, 1999. These shares are valued at ten dollars per share, and ownership is limited to members of the board of directors with no rights as to dividends or other distributions. Holders of Class A Shares are entitled to vote such shares cumulatively for the election of 80% of the authorized number of directors. Holders of the Class B Shares are entitled to vote such shares cumulatively for the election of 20% of the authorized number of directors. Except as required by California law, the Class C Shares have no voting rights. See Note 1 and Note 18 regarding amendments to the Articles of Incorporation and bylaws of Unified, limitations on redemption of Class B Shares of terminated members, modification of the redemption provisions of Class A Shares and Class B Shares, and changes in Class C Shares in connection with the United merger. 11. BENEFIT PLANS: The Company has a noncontributory, defined benefit pension plan ("benefit plan") covering substantially all of its nonunion employees. The benefits under the plan generally are based on the employee's years of service and average earnings for the three highest consecutive calendar years of compensation during the ten years immediately preceding retirement. The Company makes contributions to the pension plan in amounts which are at least sufficient to meet the minimum funding requirements of applicable laws and regulations but no more than amounts deductible for federal income tax purposes. Benefits under the plan are included in a trust providing benefits through annuity contracts. 34 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company also has an Executive Salary Protection Plan ("ESPP II"), which provides additional post-termination retirement income based on each participant's final salary and years of service with the Company. The funding of this benefit is facilitated through the purchase of life insurance policies, the premiums of which are paid by the Company. Pension expense for the benefit plans totaled $1,602, $1,399, and $1,364 in fiscal 1997, 1998, and 1999, respectively. The components of net periodic costs for the benefit plan and ESPP II at August 30, 1997, August 29, 1998 and August 28, 1999 consists of the following:
Benefit Plan - ----------------------------------------------------------- 1997 1998 1999 - ----------------------------------------------------------- Service cost $1,514 $1,586 $1,926 Interest cost 2,641 2,705 2,927 Expected return on plan assets (2,861) (3,165) (3,733) Amortization of prior service cost (39) (39) (39) Recognized actuarial loss 19 -- -- Amortization of transition asset (309) (309) (309) - ----------------------------------------------------------- NET PERIODIC BENEFIT COST $ 965 $ 778 $ 772 - ----------------------------------------------------------- ESPP II - ----------------------------------------------------------- 1997 1998 1999 - ----------------------------------------------------------- Service cost $193 $200 $150 Interest cost 303 294 301 Expected return on plan assets -- -- -- Amortization of prior service cost 112 112 141 Recognized actuarial loss 29 15 -- - ----------------------------------------------------------- NET PERIODIC BENEFIT COST $637 $621 $592 - -----------------------------------------------------------
The following table sets forth the change in benefit obligation for the benefit plan and ESPP II at August 29, 1998 and August 28, 1999:
Benefit Plan ESPP II - ----------------------------------------------------------------------------- 1998 1999 1998 1999 - ----------------------------------------------------------------------------- Benefit obligation at beginning of year $34,513 $39,914 $3,965 $3,971 Service cost 1,586 1,926 200 150 Interest cost 2,705 2,927 294 301 Plan amendments -- -- -- 889 Actuarial loss (gain) 3,762 (558) (106) (159) Benefits paid (2,652) (3,463) (382) (404) - ----------------------------------------------------------------------------- BENEFIT OBLIGATION AT END OF YEAR $39,914 $40,746 $3,971 $4,748 - ----------------------------------------------------------------------------- The following table sets forth the change in plan assets for the benefit plan and ESPP II at August 29, 1998 and August 28, 1999: Benefit Plan ESPP II - ----------------------------------------------------------------------------- 1998 1999 1998 1999 - ----------------------------------------------------------------------------- Fair value of plan assets at beginning of year $37,276 $41,511 -- -- Actual return on plan assets 6,887 5,086 -- -- Employer contribution -- -- $ 382 $ 404 Benefits paid (2,652) (3,463) (382) (404) - ----------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $41,511 $43,134 $ 0 $ 0 - -----------------------------------------------------------------------------
35 unified Western Grocers, inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The accrued pension and other benefit costs recognized in the accompanying consolidated balance sheets at August 29, 1998 and August 28, 1999 is computed as follows: - ------------------------------------------------------------------------------
Benefit Plan ESPP II 1998 1999 1998 1999 - ------------------------------------------------------------------------------ Funded status at June 1 overfunded/(underfunded) $1,597 $2,388 $(3,971) $(4,748) Unrecognized actuarial (gain)/loss 801 (1,110) 381 327 Unrecognized prior service cost (226) (188) 1,347 2,095 Unrecognized transition asset (912) (603) -- -- Fourth quarter net periodic pension expense (195) (194) (43) (148) - ------------------------------------------------------------------------------ NET AMOUNT RECOGNIZED PREPAID (ACCRUED): $1,065 $ 293 $(2,286) $(2,474) - ------------------------------------------------------------------------------
The additional minimum liability for the ESPP II represents the excess of the unfunded accumulated benefit obligation over previously accrued pension costs. A corresponding intangible asset is recorded as an offset to this additional liability. Because the asset recognized may not exceed the amount of unrecognized prior service cost, the balance, net of tax benefits, of $56 and $0 is reported as a separate component of shareholders' equity at August 29, 1998 and August 28, 1999, respectively. The weighted average assumptions used in computing the preceding information as of June 1 were as follows: - --------------------------------------------------------------
Benefit Plan 1997 1998 1999 - -------------------------------------------------------------- Discount rate for benefit obligation 7.50% 7.00% 7.00% Discount rate for net periodic benefit cost 8.00% 7.50% 7.00% Expected return on plan assets 8.50% 9.00% 9.00% Rate of compensation increase 5.50% 5.50% 5.50%
- --------------------------------------------------------------
ESPP II 1997 1998 1999 - -------------------------------------------------------------- Discount rate for benefit obligation 7.50% 7.00% 7.00% Discount rate for net periodic benefit cost 8.00% 7.50% 7.00% Expected return on plan assets NA NA NA Rate of compensation increase 4.00% 4.00% 4.00%
The Company also made contributions of $6.1 million, $5.6 million, and $6.6 million in fiscal 1997, 1998, and 1999, respectively, to collectively bargained, multiemployer defined benefit pension plans in accordance with the provisions of negotiated labor contracts. Information from the plans' administrators is not available to permit the Company to determine its proportionate share of termination liability, if any. The Company has an Employees' Sheltered Savings Plan ("SSP"), which is a defined contribution plan, adopted pursuant to Section 401 (k) of the Internal Revenue Code for substantially all of its nonunion employees. The Company matches each dollar deferred up to 4% of compensation and, at its discretion, matches 40% of amounts deferred between 4% and 8%. At the end of each fiscal year, the Company also contributes an amount equal to 2% of the compensation of those participants employed at that date. The Company contributed approximately $2.2 million, $2.3 million, and $1.9 million, in fiscal years 1997, 1998, and 1999, respectively. The Company has an Employee Savings Plan ("ESP"), which is a defined contribution plan, for substantially all union and nonunion employees hired prior to March 1, 1983. Subsequent to March 1, 1983, the Company's contribution to the ESP in any fiscal year is based on net earnings as a percentage of total sales and is applicable to union employees only. In the event net earnings are less than 1.5% of total sales, no contribution is required. All nonunion employees who had a previous balance in the ESP had their balances transferred to the SSP effective the first quarter of fiscal 1992. No expense was incurred in fiscal 1997, 1998, and 1999, respectively. 36 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: The Company sponsors postretirement benefit plans that cover both nonunion and union employees. Retired nonunion employees currently are eligible for a plan providing medical benefits. A certain group of retired nonunion employees currently participate in a plan providing life insurance benefits for which active nonunion employees are no longer eligible. Certain eligible union and nonunion employees have separate plans providing a lump-sum payout for unused days in the sick leave bank. The postretirement health care plan is contributory for nonunion employees retiring after January 1, 1990, with the retiree contributions adjusted annually. The life insurance plan and the sick leave payout plans are noncontributory. The plans are unfunded. The components of net periodic benefit cost consist of the following for fiscal 1997, 1998, and 1999, respectively: - -----------------------------------------------------------
1997 1998 1999 - ----------------------------------------------------------- Service cost $ 788 $ 920 $1,055 Interest cost 1,960 2,145 2,345 Amortization of transition obligation 1,124 1,124 1,124 Recognized actuarial loss 19 79 75 - ----------------------------------------------------------- NET PERIODIC BENEFIT COST $3,891 $4,268 $4,599 - -----------------------------------------------------------
The change in the benefit obligations consist of the following during fiscal 1998 and 1999: - ----------------------------------------------------------
1998 1999 - ---------------------------------------------------------- Benefit obligation at beginning of year $28,452 $33,238 Service cost 920 1,055 Interest cost 2,145 2,345 Actuarial loss 3,271 508 Benefits paid (1,550) (1,639) - ---------------------------------------------------------- BENEFIT OBLIGATION AT END OF YEAR $33,238 $35,507 - ----------------------------------------------------------
The change in the plan assets during the year is: - -----------------------------------------------------------------
1998 1999 - ----------------------------------------------------------------- Fair value of plan assets at beginning of year -- -- Employer contribution $ 1,550 $ 1,639 Benefits paid (1,550) (1,639) - ----------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 0 $ 0 - -----------------------------------------------------------------
The funded status of the plan is: - ----------------------------------------------------------------
1998 1999 - ---------------------------------------------------------------- Funded status at June 1 (underfunded) $(33,238) $(35,507) Unrecognized actuarial loss 4,297 5,128 Unrecognized transition obligation 16,800 15,677 Fourth quarter contribution 416 398 Fourth quarter net periodic pension expense (1,123) (1,521) - ---------------------------------------------------------------- NET AMOUNT RECOGNIZED ACCRUED: $(12,848) $(15,825) - ----------------------------------------------------------------
37 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted-average assumptions as of June 1 are: - --------------------------------------------------------------
1997 1998 1999 - -------------------------------------------------------------- Discount rate for benefit obligation 7.50% 7.00% 7.00% Discount rate for net periodic benefit cost 8.00% 7.50% 7.00% Rate of compensation increase 5.50% 5.50% 5.50%
For measurement purposes, a 6.85% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2000; the rate was assumed to decrease gradually to 5.00% in fiscal 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of August 28, 1999 by $4.8 million and the aggregate benefit cost for the year then ended by $541. A decrease of 1% would decrease the accumulated postretirement benefit obligation as of August 28, 1999 by $4.1 million and the aggregate benefit cost for the year then ended by $452. The Company's union employees participate in a multiemployer plan that provides health care benefits for retired union employees. Amounts contributed to the multiemployer plan for these union employees totaled $1.1 million in fiscal 1997 and 1998, and $0.1 million in 1999. 13. CONTINGENCIES: Litigation. The Company is a defendant in a number of cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flow. Environmental Matters. The United States Environmental Protection Agency ("EPA") notified the Company in 1993 that, together with others, it was a potentially responsible party ("PRP") for the disposal of hazardous substances at a landfill site located in Monterey Park, California. In 1999, the EPA notified the Company that, together with others, it was a PRP for the disposal of hazardous substances at a landfill site located in Patterson, California. The Company believes that its share of cost for the remaining phases of cleanup for these sites will not exceed the amounts which the Company has reserved. 14. SEGMENT INFORMATION: During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which changes the way information about operating segments is reported. Unified is a grocery wholesaler serving independent supermarket operators primarily in California, but also Nevada, Arizona, Hawaii, and various countries in the South Pacific and elsewhere. In addition to offering a complete line of food and general merchandise products, Unified also provides finance, insurance, store design and real estate services to its patrons. Based on the information monitored by the Company's operating decision makers to manage the business, the Company has identified one reportable segment. Wholesale distribution includes the results of operations from the sale of food and general merchandise items to independent supermarket operators, both members and non-members, and sales to company-owned retail stores. The "all other" category includes the aggregation of retail sales, finance, insurance and other services provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. 38 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information about the Company's operations by operating segment is as follows: - -----------------------------------------------------------------------------------
1997 1998 1999 - ----------------------------------------------------------------------------------- Net sales Wholesale distribution $1,889,728 $1,807,366 $1,822,382 All other 60,594 38,446 112,075 Intersegment elimination (23,230) (14,126) (40,934) - ----------------------------------------------------------------------------------- TOTAL NET SALES $1,927,092 $1,831,686 $1,893,523 - ----------------------------------------------------------------------------------- Operating earnings Wholesale distribution $ 27,990 $ 22,946 $ 33,638 All other 3,559 3,306 951 - ----------------------------------------------------------------------------------- Total operating earnings 31,549 26,252 34,589 Interest expense (13,020) (12,320) (11,911) Other income (expense), net (655) 3,200 (5,780) Patronage dividends (14,464) (10,149) (14,195) - ----------------------------------------------------------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM $ 3,410 $ 6,983 $ 2,703 - ----------------------------------------------------------------------------------- Depreciation and amortization Wholesale distribution $ 11,819 $ 14,470 $ 15,690 All other 385 322 1,216 - ----------------------------------------------------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION $ 12,204 $ 14,792 $ 16,906 - ----------------------------------------------------------------------------------- Capital expenditures Wholesale distribution $ 13,178 $ 18,060 $ 11,756 All other 1,988 354 5,525 - ----------------------------------------------------------------------------------- TOTAL CAPITAL EXPENDITURES $ 15,166 $ 18,414 $ 17,281 - ----------------------------------------------------------------------------------- Identifiable assets Wholesale distribution $ 332,168 $ 324,907 $ 336,635 All other 61,834 64,311 114,500 - ----------------------------------------------------------------------------------- TOTAL IDENTIFIABLE ASSETS $ 394,002 $ 389,218 $ 451,135 - -----------------------------------------------------------------------------------
15. CONCENTRATION OF CREDIT RISK: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade receivables, notes receivable, and lease guarantees for certain member-patrons. These concentrations of credit risk may be affected by changes in economic or other conditions affecting the Western United States, particularly California. However, management believes that receivables are well diversified, and the allowances for doubtful accounts are sufficient to absorb estimated losses. Obligations of member- patrons to the Company, including lease guarantees, are generally supported by the Company's right of offset, upon default, against the member-patrons' cash deposits, shareholdings and Patronage Certificates, as well as personal guarantees and reimbursement and indemnification agreements. The Company's largest customer and ten largest customers accounted for approximately 5% and 31%, 6% and 31%, and 6% and 28%, of net sales for fiscal 1997, 1998 and 1999. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments. 39 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Investments and Notes receivable: The fair values for investments and notes receivable are based primarily on their quoted market prices or those of similar instruments. Equity securities which do not have readily determinable fair values are accounted for using the cost method. The Company regularly evaluates securities carried at cost to determine whether there has been any diminution in value that is deemed to be other than temporary and adjusts the value accordingly. Notes payable, Notes payable due after one year, Subordinated Patronage Dividend Certificates and Interest rate collar agreement: The fair values for notes payable, notes payable due after one year, subordinated patronage dividend certificates, and the interest rate collar agreement are based primarily on rates currently available to the Company for debt with similar terms and remaining maturities. The fair values for notes payable, notes payable due after one year, and patronage dividend certificates approximated their carrying value at August 29, 1998 and August 28, 1999. There were no material unrealized gains or losses associated with the interest rate collar agreement at August 28, 1999. The methods and assumptions used to estimate the fair values of the Company's financial instruments at August 29, 1998 and August 28, 1999 were based on estimates of market conditions, estimates using present value and risks existing at that time. These values represent an approximation of possible value and may never actually be realized. 17. RELATED PARTY TRANSACTIONS: Members affiliated with directors of the Company make purchases of merchandise from the Company and also may receive benefits and services which are of the type generally offered by the Company to its eligible members. Since the programs listed below are only available to patrons of the Company, it is not possible to assess whether transactions with members of the Company, including entities affiliated with directors of the Company, are less favorable to the Company than similar transactions with unrelated third parties. However, management believes such transactions are on terms which are consistent with terms available to other patrons similarly situated. A brief description of related party transactions with members affiliated with directors of the Company follows: Loans and Loan Guarantees: GCC provides loan financing to its member-patrons (see Note 6). GCC had the following loans outstanding at August 28, 1999 to members affiliated with directors of the Company:
- ------------------------------------------------------------ Aggregate Loan Balance at Maturity Director August 28, 1999 Date - ------------------------------------------------------------ Darioush Khaledi $3,358 2004 Bill Andronico 2,629 2000-2004 David Bennett 2,000 2003
40 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Member-patron loans are periodically sold to a bank, subject to limited recourse provisions. At August 28, 1999, the principal balances of loans to members affiliated with directors of the Company that were sold with recourse were as follows:
- -------------------------------------------------------------------- Aggregate Loan Balance at Maturity DIRECTOR August 28, 1999 Date - -------------------------------------------------------------------- Michael A. Provenzano, Jr. $1,233 2000-2005 Darioush Khaledi 1,229 1999 Mark Kidd 174 2003 David Bennett 154 2001 James R. Stump 128 1999-2001 John Berberian 66 1999-2000 Jay McCormack 21 1999-2000
The Company provides loan guarantees to its members. GCC has guaranteed 10% of the principal amount of certain third-party loans to K.V. Mart Co. ("KV") of which director Darioush Khaledi is an affiliate. At August 28, 1999, the principal amount of this guarantee was $563. Lease Guarantees and Subleases: The Company provides lease guarantees and subleases to its member-patrons. The Company has executed lease guarantees or subleases to members affiliated with directors of the Company at August 28, 1999 as follows: - -------------------------------------------------------------------------------
No. Of Total Current Expiration DIRECTOR Stores Annual Rent Date(s) - ----------------------------------------------------------- Darioush Khaledi 3 $1,095 2004-2011 Bill Andronico 1 861 2014 Michael A. Provenzano, Jr. 2 351 2016-2017 Mark Kidd 1 121 2008 James R. Stump 2 110 2002-2003
The Company has committed to guarantee the store lease of a store currently under development affiliated with a director of Unified as follows: - -------------------------------------------------------------------------------
Estimated Estimated Annual DIRECTOR Term Rent - ------------------------------------ Edmund K. Davis 10 years $1,560
Other Leases: The Company leases its produce warehouse to Joe Notrica, Inc., with which director Morrie Notrica is affiliated. The lease is for a term of five years expiring in November 2003. Monthly rent during the term is $24. Supply Agreements: During the course of its business, the Company enters into supply agreements with members of the Company. These agreements require the member to purchase certain agreed amounts of its merchandise requirements from the Company and obligate the Company to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery. Members affiliated with directors Andronico, Bennett, Khaledi, Provenzano, and Song have entered into supply agreements with the Company. These supply agreements vary in terms and length, and expire at various dates through 2005, and are subject to earlier termination in certain events. 41 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Direct Investment: At August 29, 1998, GCC owned 10% of the common stock of KV, of which Unified director Darioush Khaledi is affiliated. The cost of the investment was approximately $3 million. The stock purchase agreement contained a provision which allowed KV to repurchase the shares upon certain terms and conditions. In March 1999, KV exercised its repurchase rights under the agreement. KV purchased the shares for $4.5 million, payable in cash and in an interest- bearing note, resulting in a pre-tax gain of $1.5 million which is included in Other income (expense), net, in the accompanying consolidated statements of earnings and comprehensive earnings. Coincident to the transaction, KV entered into a supply agreement with Unified for a five-year term. The agreement also provides that for a three-year period commencing as of the date of the agreement, in the event of (i) a change of control of KV or (ii) a breach of the supply agreement by KV, KV shall pay the Company $900 or an amount equal to the difference between 10% of the appraised value of KV as of the approximate date of the Agreement (as prepared by an independent third party appraisal firm) and $4.5 million, whichever is greater. 18. SUBSEQUENT EVENTS Merger: On September 27, 1999, the shareholders of the Company and United each approved a merger agreement pursuant to which shareholders of United exchanged their shares for the Company's Class A Shares and Class B Shares based on an exchange ratio of 0.228 shares of the Company's stock for each share of United Common Stock outstanding. The merger became effective on September 29, 1999. In the merger, United shareholders received 18,553 Class A Shares and 87,635 Class B Shares. Prior to the merger, United was a wholesale grocery cooperative headquartered in Portland, Oregon with annual sales of approximately $1.2 billion. Existing Class A Shares and Class B Shares of the Company remained outstanding except that, prior to the merger, Class B Shares held by previously terminated members (71,310 shares) were redeemed by the Company. This redemption reduced the Class B Shares pending redemption to 11,725. Amendments to the Articles of Incorporation and Bylaws of the Company effective on the date of the merger increased the number of directors of Unified, modified the redemption provisions as they affect Class A Shares and Class B Shares and increased the authorized number of Class C Shares. Pursuant to financing commitments from financial institutions to provide financing necessary to complete the merger, Unified (i) increased its bank revolving credit line to $200 million, secured by accounts receivable and inventories, (ii) secured its existing institutionally placed $80 million of 7.22% senior unsecured notes due 2008 by buildings and equipment and increased the interest rate to 7.72%, and (iii) placed a new issue of $40 million in ten-year senior notes with an interest rate of 8.71%, secured by buildings and equipment. Additionally, the Company changed its fiscal year end from the Saturday nearest August 31 to the Saturday nearest September 30. Early Retirement Plan: Unified adopted an early retirement plan in connection with the merger which was offered to eligible non-union employees who were age 50 or over. Employee acceptance of the proposal was voluntary. The plan was designed to give employees an incentive to retire early primarily by enhancing pension and retiree medical benefits otherwise available through existing plans. The goal of the plan was to achieve headcount reductions associated with the merger through voluntary employee action. Benefits offered under the plan were determined based on a formula tied to the combined total of age and years of service of the participant. As a result of the early retirement plan, approximately 80 employees elected early retirement. Costs of the plan are estimated to be approximately $6.3 million. 42 Unified Western Grocers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Store Acquisitions: In May, 1999, Unified entered into an agreement with Albertson's, Inc. to purchase certain assets related to 32 stores being sold as a result of a required divestiture of stores associated with Albertson's Inc's. merger with American Stores, Inc. The acquisition of the retail stores was completed in October, 1999. Unified sold or otherwise permitted the direct transfer of a total of 26 of the stores to Unified members coincident with the closing of the transaction. Unified will retain and operate the remaining six stores until it locates suitable buyers for the stores. Unified has provided and will provide some members with financing support from GCC in connection with this transaction. Financing support is provided on a member by member basis. In addition, Unified has provided and will provide credit enhancement with respect to certain of the leases involved in the transaction in the form of guarantees or as a sublessor/sublessee. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of Unified is incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year. The following table sets forth certain information about executive officers of Unified.
Officer's Name Age Business Experience During Last Five Years -------------- --- ------------------------------------------------------ Alfred A. Plamann 57 President and Chief Executive Officer since February 1994. Terrence W. Olsen 59 Executive Vice President and Chief Operating Officer since September 1999; President, Chief Executive Officer, United Grocers, Inc., January 1999 to September 1999; Executive Vice President and Chief Operating Officer of United Grocers, Inc., August 1997 to January 1999; prior to August 1997, President of United A.G. Coop, Inc. Robert M. Ling, Jr. 42 Executive Vice President, General Counsel and Secretary since November, 1999; Senior Vice President, General Counsel and Secretary, October 1997 to November 1999; Vice President, General Counsel and Secretary, August 1996 to October 1997; Vice President and General Counsel, April 1996 to August 1996; Vice President, General Counsel and Secretary, Megafoods Stores, Inc., July 1994 to April 1996. Richard J. Martin 54 Executive Vice President, Finance & Administration and Chief Financial Officer since November 1999; Senior Vice President and Chief Financial Officer, May 1998 to November 1999; previously Executive Vice President and Chief Financial Officer, Rykoff-Sexton, Inc. through December 1997 when it merged with J.P. Foodservice to form US Foodservice and Executive Vice President Finance and Administration of US Foodservice through January 1998. Charles J. Pilliter 51 Executive Vice President--Sales and Marketing since November 1999; Senior Vice President and President-- Northern California, January 1990 to November 1999. Harley J. Delano 62 Senior Vice President--Retail Development and President, SavMax Foods, Inc. since November 1999; President, SavMax Foods, Inc., April 1999 to November 1999; President, Cala Foods, Inc., division of Ralphs Grocery Company, prior to March 1999. George D. Gardner 46 Senior Vice President--Non Foods and Specialty Products since November 1999; Vice President--Non Foods and Specialty Products, May 1996 to November 1999; General Manager of Grocers Specialty Co., June 1995 to May 1996; Vice President & General Manager, Ingro Mexican Foods, Inc., May 1993 to June 1995. Philip S. Smith 49 Senior Vice President--Procurement since November 1999; Vice President--Procurement, October 1997 to November 1999; Executive Director--Purchasing, July 1997 to October 1997; General Manager--Northern California, June 1996 to July 1997; Manager--Product Sales, September 1994 to June 1996. Robin L. Thomas 50 Senior Vice President and President, Oregon Division since November 1999; Vice President-Sales of United Grocers, Inc., September 1998 to November 1999; Marketing Director-Northwest Region, Supervalu, Inc., June 1996 to September 1998; Vice president of Marketing-Tacoma Distribution Division, May 1994 to June 1996.
44
Officer's Name Age Business Experience During Last Five Years -------------- --- ------------------------------------------------------- Paula M. Anctil 43 Vice President-Corporate Marketing since November 1999; Senior Vice President/Marketing, United Grocers, Inc., August 1997 to November 1999; Director of Sales and Business Development, United Grocers, Inc., March 1996 to April 1997, Vice President, Brown & Cole, Inc. November 1994 to Mach 1996. William O. Cote 42 Vice President and Controller since November 1999; Director of Accounting prior to November 1999. Carolyn S. Fox 59 Vice President and President of United Resources, Inc. and Grocers Capital Corp., respectively, since November 1999; President, United Resources, Inc., July 1998 to November 1999; prior to July 1998, Vice President/Finance, Corporate Treasurer and a Director, Evergreen International Aviation. Stanley G. Eggink 52 Vice President-Transportation since November 1999; General Manager-Transportation prior to November 1999. Keith A. Miller 40 Vice President-Strategic Planning since November 1999; Vice President of Business Strategy, United Grocers, Inc., April 1998 to November 1999; Director of Business Strategy of United Grocers, Inc., June 1997 to April 1998 and Director of Marketing, United Grocers, Inc., prior to June 1997. Joseph A. Ney 51 Vice President--Insurance since November 1998; President, Grocers and Merchants Insurance Services, Inc., Springfield Insurance Company, and Springfield Insurance Company, Ltd. Jack E. Scott II 49 Vice President and Chief Information Officer since June 1996; Chief Information Officer, World Vision United States, November 1993 to May 1996. David A. Woodward 57 Vice President and Treasurer since November 1999; Treasurer from August 1996 to November 1999; Secretary and Treasurer prior to August 1996.
ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS All firms with which directors are affiliated, as members of Unified, purchase groceries, related products and store equipment from Unified in the ordinary course of business. As members, firms with which directors are affiliated may receive various benefits including patronage dividends, allowances and retail support services. Unified makes a variety of benefits available to members on a negotiated basis. See Footnote 17 to Notes to Consolidated Financial Statements, which is incorporated herein by this reference, for a description of related party transactions. Additional information is incorporated herein by reference to Unified's proxy statement in connection with its next annual meeting of shareholders to be filed within 120 days after the end of the most recent fiscal year. 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements Independent Auditors' Report. Consolidated Balance Sheets as of August 29, 1998 and August 28, 1999. Consolidated Statements of Earnings and Comprehensive Earnings for the Fiscal Years Ended August 30, 1997, August 29, 1998, and August 28, 1999. Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended August 30, 1997, August 29, 1998, and August 28, 1999. Consolidated Statements of Cash Flows for the Fiscal Years Ended August 30, 1997, August 29, 1998, and August 28, 1999. (b) Reports on Form 8-K None. (c) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on October 13, 1999, File No. 0-10815). 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on October 13, 1999, File No. 0-10815). 4.1 Retail Grocer Application and Agreement for Continuing Service Affiliation With Certified Grocers of California, LTD. And Pledge Agreement (incorporated by reference to Exhibit 4.7 to Amendment No. 2 to Form S-1 Registration Statement of the Registrant filed on December 31, 1981, File No. 2-70069). 4.2 Retail Grocer Application And Agreement For Service Affiliation With And The Purchase Of Shares Of Certified Grocers Of California, LTD. And Pledge Agreement (incorporated by reference to Exhibit 4.2 to Post Effective Amendment No. 7 to Form S-2 Registration Statement of the Registrant filed on December 13, 1989, File No. 33-19284). 4.3 Agreement respecting directors' shares (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to Form S-1 Registration Statement of the Registrant filed on December 31, 1981, File No. 2-70069). 4.4 Subordination Agreement (Existing Member-Patron) (incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 4 to Form S-2 Registration Statement of the Registrant filed on July 15, 1988, File No. 33-19284). 4.5 Subordination Agreement (Existing Associate Patron) (incorporated by reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to Form S-2 Registration Statement of the Registrant filed on July 15, 1988, File No. 33-19284). 4.6 Subordination Agreement (New Member-Patron) (incorporated by reference to Exhibit 4.6 to Post-Effective Amendment No. 4 to Form S-2 Registration Statement of the Registrant filed on July 15, 1988, File No. 33-19284). 4.7 Subordination Agreement (New Associate Patron) (incorporated by reference to Exhibit 4.7 to Post-Effective Amendment No. 4 to Form S-2 Registration Statement of the Registrant filed on July 15, 1988, File No. 33-19284). 4.8 Form of Class A Share Certificate (incorporated by reference to Exhibit 4.5 to Post Effective Amendment No. 6 to Form S-2 Registration Statement of the Registrant filed on December 15, 1994, File No. 33-38152).
46 4.9 Form of Class B Share Certificate (incorporated by reference to Exhibit 4.6 to Post Effective Amendment No. 6 to Form S-2 Registration Statement of the Registrant filed on December 15, 1994, File No. 33-38152). 4.10.1 Articles FIFTH and SIXTH of the Registrant's Articles of Incorporation (See Exhibit 3.1). 4.10.2 Article I, Section 5, and Article VII of the Registrant's Bylaws (See Exhibit 3.2). 4.11 Indenture between the Registrant and First Interstate Bank of California, as Trustee, relating to $3,000,000 Subordinated Patronage Dividend Certificates Due December 15, 2000 (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Form S-2 Registration Statement of the Registrant filed on September 27, 1993, File No. 33-68288). 4.12 Indenture between the Registrant and First Interstate Bank of California, as Trustee, relating to $5,000,000 Subordinated Patronage Dividend Certificates due December 15, 2001 (incorporated by reference to Exhibit 4.3 to Form S-2 Registration Statement of the Registrant filed on October 12, 1994, File No. 33-56005). 4.13 Indenture between the Registrant and First Interstate Bank of California, as Trustee, relating to $3,000,000 Subordinated Patronage Dividend Certificates due December 15, 2002 (incorporated by reference to Exhibit 4.3 to Form S-2 Registration Statement of the Registrant filed on October 13, 1995, File No. 33-63383). 4.16 Loan Purchase and Service Agreement Dated as of August 29, 1996 between Grocers Capital Company and National Consumer Cooperative Bank (incorporated by reference to Exhibit 4.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1996 filed on November 5, 1996, File No. 0-10815). 4.17 $10,000,000 Credit Agreement and Security Agreement each dated as of September 20, 1996 between Grocers Capital Company and National Cooperative Bank as agent (incorporated by reference to Exhibit 4.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1996 filed on November 5, 1996, File No. 0-10815). 4.18 Amended and Restated Loan Purchase Agreement (Existing Program) dated January 30, 1998 among United Resources, Inc., United Grocers, Inc. and National Consumer Cooperative Bank (incorporated by reference to Exhibit 4.D1 to United Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October 2, 1998 filed on January 30, 1999, File No. 002-60487, as amended). 4.19 Amended and Restated Loan Purchase Agreement (Holdback Program) dated January 30, 1998 among United Resources, Inc., United Grocers, Inc. and National Consumer Cooperative Bank (incorporated by reference to Exhibit 4.D2 to United Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October 2, 1998 filed on January 30, 1999, File No. 002-60487, as amended). 4.20 Guarantee dated September 29, 1999 by the Registrant of debt securities of United Grocers, Inc. issued pursuant to that certain Indenture dated as of February 1, 1978, and as subsequently amended and supplemented, by and between United Grocers, Inc., and State Street Bank and Trust Company (incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on October 13, 1999, File No. 000-10815). 4.21 Note purchase Agreement dated as of September 29, 1999 by and among Registrant and the persons listed on Schedule I thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current report on Form 8-K filed on October 13, 1999, File No. 000-10815). 4.22 Secured Revolving Credit Agreement dated as of September 29, 1999, by and among Registrant, the Lenders named therein and Rabobank Nederland, New York Branch (incorporated by reference to Exhibit 10.2 to the Registrant's Current report on Form 8-K filed on October 13, 1999, File No. 000-10815). 10.1 Comprehensive Amendment to Retirement Plan for Employees of Certified Grocers of California, Ltd. dated as of July 27, 1995 (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.2 Amended and Restated Deferred Compensation Plan dated as of May 1, 1999.
47 10.3 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees' Sheltered Savings Plan dated as of July 27, 1995 (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0- 10815). 10.4 Certified Grocers of California, Ltd., Executive Salary Protection Plan II ("ESPP II"), Master Plan Document, effective January 4, 1995 (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0-10815). 10.5 Master Trust Agreement For Certified Grocers of California, Ltd. Executive Salary Protection Plan II, dated as of April 28, 1995 (incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0-10815). 10.6 Certified Grocers of California, Ltd. Executive Insurance Plan Split dollar Agreement and Schedule of Executive Officers party thereto (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0-10815). 10.7 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees' Excess Benefit Plan dated as of December 5, 1995 (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0- 10815). 10.8 Comprehensive Amendment to Certified Grocers of California, Ltd. Employees' Supplemental Deferred Compensation Plan dated as of December 5, 1995 (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.9 Comprehensive Amendment to Certified Grocers of California, Ltd. Employee Savings Plan dated as of August 18, 1995 (incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.10 Certified Grocers of California Early Retirement Program (incorporated by reference to Exhibit 10.28 to the Form S-4 Registration Statement filed on August 26, 1999, File No. 333-05917). 10.11 Lease, dated as of December 23, 1986, between Cercor Associates and Grocers Specialty Company (incorporated by reference to Exhibit 10.8 to Form S-2 Registration Statement of the Registrant filed on September 2, 1993. File No. 33-68288). 10.12 Expansion Agreement, dated as of May 1, 1991, and Industrial Lease, dated as of May 1, 1991, between Dermody Properties and the Registrant (incorporated by reference to Exhibit 10.9 to Form S-2 Registration Statement of the Registrant filed on September 2, 1993. File No. 33-68288). 10.12.1 Lease Amendment, dated June 20, 1991, between Dermody Properties and the Registrant (incorporated by reference to Exhibit 10.9.1 to Form S-2 Registration Statement of the Registrant filed on September 2, 1993. File No. 33-68288). 10.12.2 Lease Amendment, dated October 18, 1991, between Dermody Properties and the Registrant (incorporated by reference to Exhibit 10.9.2 to Form S-2 Registration Statement of the Registrant filed on September 2, 1993. File No. 33-68288). 10.17 Commercial Lease-Net dated December 6, 1994 between TriNet Essential Facilities XII and the Registrant (incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0- 10815). 10.18 Purchase Agreement dated November 21, 1994 between the Registrant and TriNet Corporate Realty Trust, Inc. (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 2, 1995 filed on December 1, 1995, File No. 0-10815).
48 10.19 Form of Employment Agreement between the Company and Alfred A. Plamann (incorporated by reference to Exhibit 10.19 to Form S-4 Registration Statement of the Registrant filed on August 26, 1999, File No. 333-85917). 10.19.1 Amendment to Employment Agreement dated as of August, 1999, between the Registrant and Alfred A. Plamann (incorporated by reference to Exhibit 10.27 to Form S-4 Registration Statement of the Registrant filed on August 26, 1999, File No. 333-85917). 10.20 Severance Agreement between the Company and Charles J. Pilliter (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.21 Severance Agreement between the Company and Robert M. Ling, Jr. (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 29, 1998 filed on November 16, 1998, File No. 0-10815). 10.22 Severance Agreement between the Company and Richard J. Martin (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10- K for the fiscal year ended August 29, 1998 filed on November 16, 1998, File No. 0-10815). 10.23 Form of Indemnification Agreement between the Company and each Director and Officer (incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated February 24, 1997 filed on February 24, 1997, File No. 0- 10815). 10.24 Annual Incentive Plan for Chief Executive Officer (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.25 Annual Incentive Plan for Senior Management (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File NO. 0-10815). 10.26 Agreement to Sell and Purchase Real Property and Escrow Instructions, dated September 12, 1997 between the Registrant and Smart & Final Stores Corporation (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 30, 1997 filed on November 28, 1997, File No. 0-10815). 10.27 Sublease Agreement dated August 28, 1991 for the Tigard Store between United Grocers, Inc. and a corporation in which Gaylon G. Baese, a director of the Registrant, has an interest (incorporated by reference to Exhibit 10.G of United Grocers, Inc. Annual Report on Form 10- K405 for the fiscal year ended October 2, 1998 filed on January 20, 1999, File No. 002-60487). 10.28 Sublease Agreement dated October 27, 1991 for the Eugene Store between United Grocers, Inc. and a corporation in which Richard L. Wright, a director of the Registrant, has an interest (incorporated by reference to Exhibit 10.H1 of United Grocers, Inc. Annual Report on Form 10-K405 for the fiscal year ended October 2, 1998 filed on January 20, 1999, File No. 002-60487). 10.29 Sublease Agreement dated October 27, 1991 for the Cotton Grove Store between United Grocers, Inc. and a corporation in which Richard L. Wright, a director of the Registrant, has an interest (incorporated by reference to Exhibit 10.H2 of United Grocers, Inc. Annual Report on Form 10-K405 for the fiscal year ended October 2, 1998 filed on January 20, 1999, File No. 002-60487). 10.30 Sublease Agreement dated February 1, 1994 for the Albany Store between United Grocers, Inc. and a corporation in which Richard L. Wright, a director of the Registrant, has an interest (incorporated by reference to Exhibit 10.H3 of United Grocers, Inc. Annual Report on Form 10- K405 for the fiscal year ended October 2, 1998 filed on January 20, 1999, File No. 002-60487). 10.31 Sublease Agreement dated July 26, 1979 for the Gold Beach Store between United Grocers, Inc. and Raymond L. Nidiffer, a holder of more than five percent of the Registrant's shares (incorporated by reference to Exhibit 10-Q3 of United Grocers' Registration Statement on Form S-2, File No. 33-26631).
49 10.32 Assignment of Lease and related documents for Mt. Shasta Store between United Grocers, Inc. and C&K Market, Inc., an affiliate of Raymond L. Nidiffer (incorporated by reference to Exhibit 10-Q4 of United Grocers, Inc.'s Registration Statement on Form S-2, File No. 33-26631). 10.33 Loan guaranties dated June 12, 1980 and September 30, 1988, given by United Grocers, Inc. for the benefit of C&K Market, Inc., an affiliate of Raymond L. Nidiffer (incorporated by reference to Exhibit 10-I12 to United Grocer's Form 10-K for the fiscal year ended September 30, 1989). 10.34 Agreement for Purchase and Sale and Escrow Instructions dated September 17, 1997, between United Grocers, Inc. and C&K Market, Inc., an affiliate of Raymond L. Nidiffer (incorporated by reference to Exhibit 10.I5 to United Grocers, Inc.'s Form 10-K405 for the fiscal year ended October 2, 1998 filed on January 20, 1999, File No. 002-60487). 10.35 Stock Purchase Agreement dated November 17, 1997, by and among United Grocers, Inc. and C&K Market, an affiliate of Raymond L. Nidiffer (incorporated by reference to Exhibit 10.I6 to Form 10-K405 of United Grocers, Inc. filed on January 20, 1999, File No. 002-60487). 10.36 Employment Agreement dated as of August, 1999, between Registrant and Terrence W. Olsen (incorporated by reference to Exhibit 10.26 to Form S-4 Registration Statement of the Registrant filed August 26, 1999, File No. 333-85917). 10.37 Binder of Insurance Notifications with respect to the indemnification of officers and directors of United Grocers, Inc. (incorporated by reference to Exhibit 10.x of United Grocers, Inc. Annual Report on Form 10-K for the fiscal year ended October 2, 1998, filed on January 20, 1999, File No. 002- 60487). 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
(d) Financial Statement Schedules All required schedule information is presented in the financial statements or notes thereto. Other schedule information is either not applicable or not material. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIFIED WESTERN GROCERS, INC. /s/ Alfred A. Plamann By _________________________________ Alfred A. Plamann President and Chief Executive Officer /s/ Richard J. Martin By _________________________________ Richard J. Martin Senior Vice President--Finance & Administration and Chief Financial Officer Date: November 19, 1999
Signature Title Date - ---------------------------------------------------------------------------------- /s/ Louis A. Amen Director November 19, 1999 __________________________________ Louis A. Amen Director __________________________________ Bill Andronico /s/ Gaylon G. Baese Director November 19, 1999 __________________________________ Gaylon G. Baese /s/ David Bennett Director November 19, 1999 __________________________________ David Bennett /s/ John Berberian Director November 19, 1999 __________________________________ John Berberian Director __________________________________ Edmund K. Davis /s/ Kenneth W. Findley Director November 19, 1999 __________________________________ Kenneth W. Findley /s/ James F. Glassel Director November 19, 1999 __________________________________ James F. Glassel /s/ David Goodwin Director November 19, 1999 __________________________________ David Goodwin
51
Signature Title Date - ---------------------------------------------------------------------------------- /s/ Darioush Khaledi Director November 19, 1999 __________________________________ Darioush Khaledi /s/ Mark Kidd Director November 19, 1999 __________________________________ Mark Kidd /s/ Jay McCormack Director November 19, 1999 __________________________________ Jay McCormack /s/ Mary McDonald Director November 19, 1999 __________________________________ Mary McDonald /s/ Morrie Notrica Director November 19, 1999 __________________________________ Morrie Notrica /s/ Peter J. O'Neal Director November 19, 1999 __________________________________ Peter J. O'Neal /s/ Michael A. Provenzano Director November 19, 1999 __________________________________ Michael A. Provenzano /s/ Edward J. Quijada Director November 19, 1999 __________________________________ Edward J. Quijada /s/ Gordon E. Smith Director November 19, 1999 __________________________________ Gordon E. Smith /s/ Mimi R. Song Director November 19, 1999 __________________________________ Mimi R. Song __________________________________ Director Robert E. Stiles /s/ James R. Stump Director November 19, 1999 __________________________________ James R. Stump /s/ Kenneth Tucker Director November 19, 1999 __________________________________ Kenneth Tucker /s/ Floyd West Director November 19, 1999 __________________________________ Floyd West /s/ Richard L. Wright Director November 19, 1999 __________________________________ Richard L. Wright
52 EX-10.2 2 AMENDED AND RESTATED DEFERRED COMPENSATION PLAN EXHIBIT 10.2 Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ Effective May 1, 1999 Copyright (C) 1999 By Compensation Resource Group, Inc. All Rights Reserved Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ TABLE OF CONTENTS
Page ---- Purpose..................................................................................... 1 ARTICLE 1 Definitions................................................................... 1 ARTICLE 2 Selection, Enrollment, Eligibility............................................ 6 2.1 Selection by Committee........................................................ 6 2.2 Enrollment Requirements....................................................... 6 2.3 Eligibility; Commencement of Participation.................................... 6 2.4 Termination of Participation and/or Deferrals................................. 7 ARTICLE 3 Deferral Commitments/Annual Excess and Rollover Amounts/Crediting/Taxes....... 7 3.1 Minimum Deferrals............................................................. 7 3.2 Maximum Deferral.............................................................. 8 3.3 Election to Defer; Effect of Election Form.................................... 8 3.4 Withholding of Annual Deferral Amounts........................................ 8 3.5 Annual Excess Amount.......................................................... 8 3.6 Rollover Amount............................................................... 9 3.7 Investment of Trust Assets.................................................... 10 3.8 Vesting....................................................................... 10 3.9 Crediting/Debiting of Account Balances........................................ 10 3.10 FICA and Other Taxes.......................................................... 12 3.11 Distributions................................................................. 12 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election... 12 4.1 Short-Term Payout............................................................. 12 4.2 Other Benefits Take Precedence Over Short-Term................................ 13 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies......... 13 4.4 Withdrawal Election........................................................... 13 ARTICLE 5 Separation Benefit............................................................ 14 5.1 Separation Benefit............................................................ 14 5.2 Payment of Separation Benefit................................................. 14 5.3 Death Prior to Completion of Separation Benefit............................... 14
i Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 6 Pre-Separation Survivor Benefit............................................... 15 6.1 Pre-Separation Survivor Benefit............................................... 15 6.2 Payment of Pre-Separation Survivor Benefit.................................... 15 ARTICLE 7 Disability Waiver and Benefit................................................. 15 7.1 Disability Waiver............................................................. 15 7.2 Continued Eligibility; Disability Benefit..................................... 15 ARTICLE 8 Beneficiary Designation....................................................... 16 8.1 Beneficiary................................................................... 16 8.2 Beneficiary Designation; Change; Spousal Consent.............................. 16 8.3 Acknowledgement............................................................... 16 8.4 No Beneficiary Designation.................................................... 16 8.5 Doubt as to Beneficiary....................................................... 16 8.6 Discharge of Obligations...................................................... 16 ARTICLE 9 Leave of Absence.............................................................. 17 9.1 Paid Leave of Absence......................................................... 17 9.2 Unpaid Leave of Absence....................................................... 17 ARTICLE 10 Termination, Amendment or Modification........................................ 17 10.1 Termination................................................................... 17 10.2 Amendment..................................................................... 18 10.3 Plan Agreement................................................................ 18 10.4 Effect of Payment............................................................. 18 ARTICLE 11 Administration................................................................ 19 11.1 Committee Duties.............................................................. 19 11.2 Administration Upon Change In Control......................................... 19 11.3 Agents........................................................................ 19 11.4 Binding Effect of Decisions................................................... 20 11.5 Indemnity of Committee........................................................ 20 11.6 Employer Information.......................................................... 20 ARTICLE 12 Other Benefits and Agreements................................................. 20 12.1 Coordination with Other Benefits.............................................. 20 ARTICLE 13 Claims Procedures............................................................. 20 13.1 Presentation of Claim......................................................... 20
ii Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 13.2 Notification of Decision...................................................... 20 13.3 Review of a Denied Claim...................................................... 21 13.4 Decision on Review............................................................ 21 13.5 Legal Action.................................................................. 22 ARTICLE 14 Trust......................................................................... 22 14.1 Establishment of the Trust.................................................... 22 14.2 Interrelationship of the Plan and the Trust................................... 22 14.3 Distributions From the Trust.................................................. 22 ARTICLE 15 Miscellaneous................................................................. 22 15.1 Status of Plan................................................................ 22 15.2 Unsecured General Creditor.................................................... 22 15.3 Employer's Liability.......................................................... 23 15.4 Nonassignability.............................................................. 23 15.5 Not a Contract of Employment.................................................. 23 15.6 Furnishing Information........................................................ 23 15.7 Terms......................................................................... 23 15.8 Captions...................................................................... 23 15.9 Governing Law................................................................. 23 15.10 Notice........................................................................ 24 15.11 Successors.................................................................... 24 15.12 Spouse's Interest............................................................. 24 15.13 Validity...................................................................... 24 15.14 Incompetent................................................................... 24 15.15 Court Order................................................................... 24 15.16 Distribution in the Event of Taxation......................................... 25 15.17 Insurance..................................................................... 25 15.18 Legal Fees To Enforce Rights After Change in Control.......................... 25
iii Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ CERTIFIED GROCERS OF CALIFORNIA, LTD. AMENDCED AND RESTATED DEFERRED COMPENSATION PLAN Effective May 1, 1999 Purpose ------- The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees who contribute materially to the continued growth, development and future business success of Certified Grocers of California, Ltd., a California association, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. This Plan combines, amends and restates each of the Certified Grocers of California, Ltd. Employees' Supplemental Deferred Compensation Plan as amended as of September 3, 1989, and the Certified Grocers of California, Ltd. Employees' Excess Benefit Plan, as amended as of May 1, 1999. ARTICLE 1 Definitions ----------- For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the Excess Account balance, and the Rollover Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's annual bonus and cash incentive plans, excluding stock options. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and Annual Bonus that a Participant elects to have, and is deferred, in accordance with Article 3, for any one (1) Plan Year. In the event of a Participant's Separation, Disability (if deferrals cease in accordance with Section 7.1), or death prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.4 "Annual Excess Amount" for any one (1) Plan Year shall be the amount determined in accordance with Section 3.5. -1- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 1.5 "Annual Installment Method" shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the year. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one (1), and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10 year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practicable after the last business day of the applicable year. 1.6 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non- qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.7 "Beneficiary" shall mean one (1) or more persons, trusts, estates or other entities, designated in accordance with Article 8, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.8 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one (1) or more Beneficiaries. 1.9 "Board" shall mean the board of directors of the Company. 1.10 "Change in Control" shall mean the first to occur of any of the following events: (a) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Company's membership interests entitled to vote in the election of directors; -2- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of this Plan, individuals who, at the beginning of such period constitute the board of directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), (d) or (e) of this Section 1.10) whose election by the board of directors or nomination for election by the Company's members was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The members of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the members of the Company immediately prior to the consolidation or merger hold more than 50% of the membership interests of the surviving association immediately after the consolidation or merger; (d) The members of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (e) The members of the Company approve the sale or transfer of all or substantially all of the assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member. 1.11 "Claimant" shall have the meaning set forth in Section 13.1. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.13 "Committee" shall mean the committee described in Article 11. 1.14 "Company" shall mean Certified Grocers of California, Ltd., a California association, and any successor to all or substantially all of the Company's assets or business. 1.15 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited and/or debited -3- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ with additional amounts in accordance with Section 3.9 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.16 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited and/or debited in accordance with all the applicable crediting and debiting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.17 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan, or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion. 1.18 "Disability Benefit" shall mean the benefit set forth in Article 7. 1.19 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.20 "Employee" shall mean a person who is an employee of any Employer. 1.21 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.22 "ERISA" shall mean the Employee Separation Income Security Act of 1974, as it may be amended from time to time. 1.23 "Excess Account" shall mean (i) the sum of the Participant's Annual Excess Amounts, plus (ii) amounts credited and/or debited in accordance with all the applicable crediting and debiting provisions of this Plan that relate to the Participant's Excess Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Excess Account. -4- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 1.24 "First Plan Year" shall mean the period beginning May 1, 1999 and ending December 31, 1999. 1.25 "401(k) Plan" shall mean that certain Certified Grocers of California, Ltd. Employees' Sheltered Savings Plan, dated March 17, 1983 and amended effective as of September 3, 1989. 1.26 "Participant" shall mean any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.27 "Plan" shall mean the Company's Amended and Restated Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.28 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one (1) Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.29 "Pre-Separation Survivor Benefit" shall mean the benefit set forth in Article 6. 1.30 "Retirement Plan" shall mean that certain Retirement Plan for Employees of Certified Grocers of California, Ltd., dated March 1, 1957 and last amended effective as of March 1, 1989. 1.31 "Rollover Account" shall mean (i) the sum of all of a Participant's Rollover Amounts, plus (ii) amounts credited and/or debited in accordance with all the applicable crediting and debiting provisions of this Plan that relate to the Participant's Rollover Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Rollover Account. 1.32 "Rollover Amount" shall mean any single amount determined in accordance with Section 3.6. 1.33 "Separation Benefit" shall mean the benefit set forth in Article 5. -5- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 1.34 "Separation From Service", and its concomitant meanings, shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability. 1.35 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.36 "Trust" shall mean one (1) or more trusts established pursuant to that certain Master Trust Agreement, dated as of May 1, 1999, between the Company and the trustee named therein, as amended from time to time. 1.37 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. ARTICLE 2 Selection, Enrollment, Eligibility ---------------------------------- 2.1 Selection by Committee. Participation in the Plan shall be limited to ---------------------- the following: (i) a select group of management and highly compensated Employees of the Employers, as determined by the Committee in its sole discretion; and (ii) the group comprised of certain Employees for whom the sole purpose of the Plan is to provide benefits in excess of the limitations on contributions and benefits imposed by Code Section 415 on the 401(k) Plan, including Employees whose Account Balances are comprised entirely of Rollover Amounts under Section 3.6. From the sets identified in clauses (i) and (ii) above, the Committee shall select, in its sole discretion, Employees to participate in the Plan. 2.2 Enrollment Requirements. As a condition to participation, each selected ----------------------- Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within thirty (30) days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 Eligibility; Commencement of Participation. Provided an Employee ------------------------------------------ selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with -6- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 Termination of Participation and/or Deferrals. If the Committee --------------------------------------------- determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance as a Separation Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 Deferral Commitments/Annual Excess and Rollover Amounts/Crediting/Taxes ----------------------------------------------------------------------- 3.1 Minimum Deferrals. --------------------- (a) Base Annual Salary and Annual Bonus. For each Plan Year, a ----------------------------------- Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and Annual Bonus in the following minimum amounts for each deferral elected:
Deferral Minimum Amount -------------------------------------------------- Base Annual Salary $2,000 -------------------------------------------------- Annual Bonus $2,000 --------------------------------------------------
If an election is made for less than stated minimum amounts, or if no election is made, the amount deferred shall be zero. (b) Short Plan Year. Notwithstanding the foregoing, if a Participant --------------- first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Base Annual Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is twelve (12). -7- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 3.2 Maximum Deferral. For each Plan Year, a Participant may elect to defer, ---------------- as his or her Annual Deferral Amount, Base Annual Salary and Annual Bonus up to the following maximum percentages for each deferral elected:
Deferral Maximum Amount -------------------------------------------------- Base Annual Salary 100% -------------------------------------------------- Annual Bonus 100% --------------------------------------------------
Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the maximum Annual Deferral Amount, with respect to Base Annual Salary and Annual Bonus shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance. 3.3 Election to Defer; Effect of Election Form. ------------------------------------------- (a) First Plan Year. In connection with a Participant's commencement of --------------- participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) Subsequent Plan Years. For each succeeding Plan Year, an irrevocable --------------------- deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. 3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the Base -------------------------------------- Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 Annual Excess Amount. For each Plan Year, a Participant's Annual Excess -------------------- Amount shall be equal to the sum of the following: -8- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ (a) The amount of benefit which would have accrued on behalf of the Participant under the 401(k) Plan as a result of the Company's contributions to the 401(k) Plan under Section 5.1 of the 401(k) Plan or any successor provisions, but which were not taken into account because of the limitation contained in Section 415 of the Code; (b) The amount of benefit which would have accrued on behalf of the Participant under the 401(k) Plan as a result of the Participant's contributions to the 401(k) Plan under Section 6.1 of the 401(k) Plan and the Company's contributions under Sections 7.1 of the 401(k) Plan or any successor provisions, but which were not taken into account because of the limitation contained in Section 402(g) of the Code; (c) The amount of benefit which would have accrued on behalf of the Participant under the 401(k) Plan as a result of the Company's contributions under Sections 5.1 and 7.1 and the Participant's contributions under 6.1 to the 401(k) Plan or any successor provisions, but that were not taken into account under the 401(k) Plan because of the limitation contained in Section 401(a)(17) of the Code; and (d) The actuarial equivalent of the benefit which would have accrued on behalf of the Participant under the Retirement Plan, but for the fact that the Participant elected to defer a portion of his or her compensation under the Plan, thereby reducing the amount of the Participant's compensation for purposes of calculating the benefit under the Retirement Plan; provided that since in no event can the Retirement Plan in accruing a benefit take into account compensation in excess of the limits provided by Section 401(a)(17) or Section 415 of the Code, the benefit provided by this Section 3.5(d) is limited in the same way. The rate used in the actuarial calculation shall equal the interest rate for immediate annuities used by the Pension Benefit Guaranty Corporation that is in effect on the first day of the month preceding the month in which the Participant's benefit provided by this Section 3.5(d) is contributed to the Plan. 3.6 Rollover Amount. A Participant's Rollover Amount shall be equal to the --------------- sum of the following: (a) The amount attributable to the Participant as of April 30, 1999, which has been transferred to the Participant's Rollover Account from any qualified or non-qualified plan or similar arrangement of the Company, as permitted in the sole discretion of the Committee; and (b) The amount of the Participant's benefit as of April 30, 1999, under the Certified Grocers of California, Ltd. Employees' Excess Benefit Plan, as amended as of May 1, 1999, if any, which has been transferred to the Participant's Rollover Account pursuant to Section 7.4 of such plan. -9- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ Distribution and crediting and debiting of the Rollover Amount shall be governed by the terms and conditions of the Plan, and any elections made by the Participant with regard to his or her benefit under any other plan shall be null and void. 3.7 Investment of Trust Assets. The Trustee of the Trust shall be -------------------------- authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of stock and reinvestment of the proceeds in one (1) or more investment vehicles designated by the Committee. 3.8 Vesting. A Participant shall at all times be one hundred percent (100%) ------- vested in his or her Deferral Account, Excess Account and Rollover Account. 3.9 Crediting/Debiting of Account Balances. In accordance with, and subject -------------------------------------- to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) Election of Measurement Funds. A Participant, in connection with his ----------------------------- or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one (1) or more Measurement Fund(s) (as described in Section 3.9(c) below) to be used to determine the additional amounts to be credited to his or her Account Balance for the first day in which the Participant commences participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first business day that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent business day in which the Participant participates in the Plan, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one (1) or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. (b) Proportionate Allocation. In making any election described in Section ------------------------ 3.9(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance to be allocated to a Measurement Fund (as if the Participant was making an investment in that Measurement Fund with that portion of his or her Account Balance). -10- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ (c) Measurement Funds. The Participant may elect one (1) or more of the ----------------- measurement funds, based on certain mutual funds approved from time to time by the Committee (the "Measurement Funds"), for the purpose of crediting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first business day that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. (d) Crediting or Debiting Method. The performance of each elected ---------------------------- Measurement Fund (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Measurement Funds themselves. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected by the Participant, as determined by ---------------- the Committee in its sole discretion, as though (i) a Participant's ------------------------------------ Account Balance were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred on any day were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, no later than the close of business on the first business day after the day on which such amounts are actually deferred from the Participant's Base Annual Salary and/or Annual Bonus, as the case may be, through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such day, no earlier than one (1) business day prior to the distribution, at the closing price on such date. The Participant's Annual Excess Amount shall be credited to his or her Excess Account for purposes of this Section 3.9(d) no later than the close of business on the first business day after the day on which such amount is actually credited to the Participant's Excess Account, at the closing price on such date. The Participant's Rollover Amount shall be credited to his or her Rollover Account for purposes of this Section 3.9(d) no later than the close of business on May 2, 1999. (e) No Actual Investment. Notwithstanding any other provision of this -------------------- Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an ----- --- actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment -11- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. 3.10 FICA and Other Taxes. -------------------- (a) Annual Deferral Amounts. For each Plan Year in which an Annual ----------------------- Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.10. (b) Annual Excess Amounts. For each Plan Year in which a Participant's --------------------- Annual Excess Amount is a positive number, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Excess Amount. If necessary, the Committee may reduce the Annual Excess Amount in order to comply with this Section 3.10. 3.11 Distributions. The Participant's Employer(s), or the trustee of the ------------- Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; ------------------------------------------------------- Withdrawal Election ------------------- 4.1 Short-Term Payout. In connection with each election to defer an Annual ----------------- Deferral Amount during a particular Plan Year, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to the sum of such Annual Deferral Amount, the Annual Excess Amount for such Plan Year, if any, and, provided that the Short-Term Payout is elected for amounts deferred during the 1999 Plan Year, the Rollover Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the sum of: (i) the Annual Deferral Amount for such Plan Year plus amounts credited or debited in the manner provided in Section 3.9 above on that amount; (ii) the Annual Excess Amount for such Plan Year, plus amounts credited or debited in the manner provided in Section 3.9 above on that amount; plus (iii) the Rollover Amount, provided that the Short-Term Payout is elected for amounts deferred during the 1999 Plan Year, plus amounts credited or debited in the manner provided in Section 3.9 above on that amount; all as determined at the time that the Short-Term Payout becomes payable (rather than the date of a Separation From Service). Subject to the -12- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a sixty (60) day period commencing immediately on the first day of any Plan Year designated by the Participant that is at least five (5) Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a five (5) year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing May 1, 1999, the five (5) year Short-Term Payout would become payable during a sixty (60) day period commencing January 1, 2004. 4.2 Other Benefits Take Precedence Over Short-Term. Should an event occur ---------------------------------------------- that triggers a benefit under Article 5, 6 or 7, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. --------------------------------------------------------------------- If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Separation Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within sixty (60) days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 Withdrawal Election. A Participant (or, after a Participant's death, his - --- ------------------- or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Separation From Service as of the day of the election, less a withdrawal penalty equal to ten percent (10%) of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Separation From Service, Disability or death, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Separation From Service, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Separation From Service as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within sixty (60) days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan for two (2) years. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. -13- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 5 Separation Benefit ------------------ 5.1 Separation Benefit. Subject to the Deduction Limitation, a Participant ------------------ who Separates From Service shall receive, as a Separation Benefit, his or her Account Balance. 5.2 Payment of Separation Benefit. A Participant, in connection with his or ----------------------------- her commencement of participation in the Plan, shall elect on an Election Form to receive the Separation Benefit: (i) on a date certain, which date shall be no earlier then one (1) year prior to such Participant's Separation From Service; and (ii) in a lump sum or pursuant to an Annual Installment Method of five (5), ten (10), fifteen (15) or twenty (20) years. The Participant may annually change his or her election to a different date certain and a different allowable payout period by submitting a new Election Form to the Committee, which Election Form, in order to be effective, must be both (a) submitted at least one (1) year prior to the Participant's Separation From Service and (b) accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Separation Benefit, provided that such election form was submitted at least one (1) year prior to the Participant's Separation From Service. If a Participant does not make any election with respect to a date certain, then Separation Benefit shall be paid no later than sixty (60) days after the date of his or her Separation From Service. If a Participant does not make any election with regard to the payment of the Separation Benefit, then such benefit shall be payable in a lump sum; provided, however, notwithstanding the foregoing, if the Participant's Account Balance at the time of his or her Separation From Service is less than $25,000, payment of the Separation Benefit shall be made in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the later of: (i) the date certain selected by the Participant on the last Election Form which was both (a) submitted at least one (1) year prior to the Participant's Separation From Service and (b) accepted by the Committee; or (ii) the day upon which the Participant Separates From Service. Any payment made shall be subject to the Deduction Limitation. 5.3 Death Prior to Completion of Separation Benefit. If a Participant dies ----------------------------------------------- after Separation but before the Separation Benefit is paid in full, the Participant's unpaid Separation Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. -14- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 6 Pre-Separation Survivor Benefit ------------------------------- 6.1 Pre-Separation Survivor Benefit. Subject to the Deduction Limitation, ------------------------------- the Participant's Beneficiary shall receive a Pre-Separation Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Separates From Service or suffers a Disability. 6.2 Payment of Pre-Separation Survivor Benefit. Payment of the Pre- ------------------------------------------ Separation Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Annual Installment Method of not more than twenty (20) years. The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the last day of the Plan Year in which the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 Disability Waiver and Benefit ----------------------------- 7.1 Disability Waiver. ----------------- (a) Waiver of Deferral. A Participant who is determined by the Committee ------------------ to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and Annual Bonus for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) Return to Work. If a Participant returns to employment with an -------------- Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.4 above. 7.2 Continued Eligibility; Disability Benefit. A Participant suffering a ----------------------------------------- Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5 or 6 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, deem the Participant to have experienced a Separation From Service at any time after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination. The Disability Benefit shall be -15- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ paid in a lump sum within sixty (60) days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 --------- Beneficiary Designation ----------------------- 8.1 Beneficiary. Each Participant shall have the right, at any time, to ----------- designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 8.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall ------------------------------------------------ designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 8.3 Acknowledgment. No designation or change in designation of a Beneficiary -------------- shall be effective until received and acknowledged in writing by the Committee or its designated agent. 8.4 No Beneficiary Designation. If a Participant fails to designate a -------------------------- Beneficiary as provided in Sections 8.1, 8.2 and 8.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 8.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper ----------------------- Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 8.6 Discharge of Obligations. The payment of benefits under the Plan to a ------------------------ Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under -16- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 9 Leave of Absence ---------------- 9.1 Paid Leave of Absence. If a Participant is authorized by the --------------------- Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 9.2 Unpaid Leave of Absence. If a Participant is authorized by the ----------------------- Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 10 Termination, Amendment or Modification -------------------------------------- 10.1 Termination. Although each Employer anticipates that it will continue ----------- the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan, at any time, with respect to any or all of its participating Employees, by the action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer shall terminate and their Account Balances, determined as if they had experienced a Separation From Service on the date of Plan termination, shall be paid to the Participants as follows. Prior to a Change in Control, if the Plan is terminated with respect to all its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to an Annual Installment Method of up to twenty (20) years, with amounts credited and/or debited during the installment period as provided in Section 3.9. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, an Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the -17- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ Account Balance in a lump sum or pursuant to an Annual Installment method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule, making identical assumptions about crediting or debiting under Section 3.9). 10.2 Amendment. Any Employer may, at any time, amend or modify the Plan in --------- whole or in part with respect to that Employer by the action of its board of directors; provided, however, that: (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Separation From Service as of the effective date of the amendment or modification, and (ii) no amendment or modification of Section 10.1 above, this Section 10.2, or Article 11 below shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that, the present value of all payments that will have been received by a Participant at any given point in time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule, making identical assumptions about crediting or debiting under Section 3.9). 10.3 Plan Agreement. Despite the provisions of Sections 10.1 and 10.2 above, -------------- if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 10.4 Effect of Payment. The full payment of the applicable benefit under ----------------- Articles 4, 5, 6 or 7 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. -18- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 11 Administration -------------- 11.1 Committee Duties. Except as otherwise provided in this Article 11, this ---------------- Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 11.2 Administration Upon Change In Control. For purposes of this Plan, the ------------------------------------- Company shall be the "Administrator" at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the "Administrator" shall be an independent third party selected by the Trustee and approved by the individual who, immediately prior to such event, was the Company's Chief Executive Officer or, if not so identified, the Company's highest ranking officer (the "Ex-CEO"). The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (i) pay all reasonable administrative expenses and fees of the Administrator; (ii) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (iii) supply full and timely information to the Administrator or all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Disability, death or Separation From Service of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company. 11.3 Agents. In the administration of this Plan, the Committee may, from ------ time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. -19- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 11.4 Binding Effect of Decisions. The decision or action of the --------------------------- Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 11.5 Indemnity of Committee. All Employers shall indemnify and hold harmless ---------------------- the members of the Committee, and any Employee to whom duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator. 11.6 Employer Information. To enable the Committee and/or Administrator to -------------------- perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Separation From Service of its Participants, and such other pertinent information as the Committee and/or Administrator may reasonably require. ARTICLE 12 ---------- Other Benefits and Agreements ----------------------------- 12.1 Coordination with Other Benefits. The benefits provided for a -------------------------------- Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 13 Claims Procedures ----------------- 13.1 Presentation of Claim. Any Participant or Beneficiary of a deceased --------------------- Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 13.2 Notification of Decision. The Committee shall consider a Claimant's ------------------------ claim within a reasonable time, and shall notify the Claimant in writing: -20- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 13.3 below. 13.3 Review of a Denied Claim. Within sixty (60) days after receiving a ------------------------ notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than thirty (30) days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 13.4 Decision on Review. The Committee shall render its decision on review ------------------ promptly, and not later than sixty (60) days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. -21- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 13.5 Legal Action. A Claimant's compliance with the foregoing provisions of ------------ this Article 13 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 14 Trust ----- 14.1 Establishment of the Trust. The Company shall establish the Trust, and -------------------------- each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Excess Amounts and Rollover Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 14.2 Interrelationship of the Plan and the Trust. The provisions of the Plan ------------------------------------------- and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 14.3 Distributions From the Trust. Each Employer's obligations under the ---------------------------- Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. ARTICLE 15 Miscellaneous ------------- 15.1 Status of Plan. The Plan is intended to be a plan that is not qualified -------------- within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 15.2 Unsecured General Creditor. Participants and their Beneficiaries, -------------------------- heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. -22- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 15.3 Employer's Liability. An Employer's liability for the payment of -------------------- benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 15.4 Nonassignability. Neither a Participant nor any other person shall have ---------------- any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. 15.5 Not a Contract of Employment. The terms and conditions of this Plan ---------------------------- shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 15.6 Furnishing Information. A Participant or his or her Beneficiary will ---------------------- cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 15.7 Terms. Whenever any words are used herein in the masculine, they shall ----- be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 15.8 Captions. The captions of the articles, sections and paragraphs of this -------- Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 15.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be ------------- construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles. -23- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 15.10 Notice. Any notice or filing required or permitted to be given to the ------ Committee under this Plan shall be sufficient if in writing and hand- delivered, or sent by registered or certified mail, to the address below: Certified Grocers of California, Ltd. 5200 Sheila Street Commerce, California 90040 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 15.11 Successors. The provisions of this Plan shall bind and inure to the ---------- benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 15.12 Spouse's Interest. The interest in the benefits hereunder of a spouse ----------------- of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 15.13 Validity. In case any provision of this Plan shall be illegal or -------- invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 15.14 Incompetent. If the Committee determines in its discretion that a ----------- benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 15.15 Court Order. The Committee is authorized to make any payments directed ----------- by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. -24- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ 15.16 Distribution in the Event of Taxation. ------------------------------------- (a) In General. If, for any reason, all or any portion of a Participant's ---------- benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) Trust. If the Trust terminates in accordance with Section 3.7(e) of ----- the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 15.17 Insurance. The Employers, on their own behalf or on behalf of the --------- trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 15.18 Legal Fees To Enforce Rights After Change in Control. The Company and ---------------------------------------------------- each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of the Participant's Employer (which might then be composed of new members) or a member of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company or the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the -25- Certified Grocers of California, Ltd. Amended and Restated Deferred Compensation Plan Master Plan Document ================================================================================ expense of the Company and the Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, member or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this Plan document as of __________, 1999. "Company" Certified Grocers of California, Ltd., a California association By: ____________________________________ Title: _________________________________ -26- EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT As of August 28, 1999, the Company's subsidiaries, all wholly-owned and incorporated in California (except where noted otherwise) are: Grocers Equipment Co. Grocers and Merchants Insurance Service, Inc. (1) Grocers Capital Company Springfield Insurance Company Limited (incorporated in Bermuda) Grocers Specialty Company (2) Grocers Development Center, Inc. Grocers and Merchants Management Company Preferred Public Storage Company Crown Grocers, Inc. Grocers General Merchandise Company (3) Springfield Insurance Company (4) Banner Marketing, Inc. (5) Cerp Acquisition Corp. Morga No. 12 Acquisition Corp. Walnut Creek No. 7 Acquisition Corp. Lauresm Corporation - -------------------------------- (1) Outstanding capital shares are owned by Grocers Equipment Co. (67.63%) and the Registrant (32.37%) (2) Outstanding capital shares are owned by Grocers Equipment Co. (3) Outstanding capital shares are owned by Grocers and Merchants Insurance Services, Inc. (4) Outstanding capital shares are owned by Grocers Equipment Co. (5) Outstanding capital shares are owned by Grocers Capital Company EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-28-1999 AUG-30-1998 AUG-28-1999 8,027 35,017 113,518 4,732 150,800 277,443 181,544 102,313 451,135 179,422 143,727 0 0 63,502 17,160 451,135 1,893,523 1,893,523 1,717,779 1,858,934 5,780 0 11,911 16,898 64 2,639 0 0 0 2,639 0 0
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