SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 30, 2002
AND
[_] 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 95-0615250
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 Sheila Street, Commerce, CA 90040
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (323) 264-5200
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Outstanding Shares on March 30,
2002:
Class A Shares 69,149
Class B Shares 446,081
Class C Shares 18
Table of Contents
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
Signatures 21
Exhibit Index 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------
UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
March 30,
September 29, 2002
2001 (Unaudited)
------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 14,802 $ 7,572
Accounts and notes receivable, net of allowances of $9,498 at
September 29, 2001 and $9,658 at March 30, 2002 193,761 177,801
Inventories 224,438 204,304
Prepaid expenses 7,533 7,202
Deferred taxes 10,043 10,043
------------------------------
Total current assets 450,577 406,922
Properties, net 122,657 120,155
Investments 48,983 54,325
Notes receivable, net of allowances of $3,841 at September 29, 2001 and
$3,365 at March 30, 2002 33,093 33,992
Goodwill, net 56,512 55,457
Other assets, net 56,345 63,102
------------------------------
TOTAL ASSETS $768,167 $733,953
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $184,810 $141,590
Accrued liabilities 96,824 96,970
Current portion of notes payable 10,535 11,850
Patrons' excess deposits and estimated patronage dividends 18,708 14,649
------------------------------
Total current liabilities 310,877 265,059
Notes payable, due after one year 288,241 300,129
Long-term liabilities, other 63,944 65,884
Patrons' deposits and certificates:
Patrons' required deposits 14,804 17,459
Subordinated patronage dividend certificates 1,843 ----
Shareholders' equity:
Class A Shares: 500,000 shares authorized, 69,125 and 69,149
outstanding at September 29, 2001 and March 30, 2002, respectively 11,576 11,580
Class B Shares: 2,000,000 shares authorized, 447,289 and 446,081
outstanding at Sepember 29, 2001 and March 30, 2002, respectively 79,100 78,800
Additional paid-in capital 18,095 18,095
Accumulated deficit (18,708) (21,503)
Accumulated other comprehensive loss (1,605) (1,550)
------------------------------
Total shareholders' equity 88,458 85,422
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $768,167 $733,953
==============================
The accompanying notes are an integral part of these statements.
3
UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Twenty Six Weeks Ended
------------------------- ---------------------------
March 31, March 30, March 31, March 30,
2001 2002 2001 2002
------------------------- ---------------------------
Net sales $705,404 $712,660 $1,445,976 $1,455,205
Costs and expenses:
Cost of sales 628,235 634,873 1,287,584 1,296,964
Distribution, selling and administrative 68,520 69,452 138,569 142,952
------------------------ ---------------------------
Operating income 8,649 8,335 19,823 15,289
Interest expense (7,364) (6,401) (14,837) (12,466)
------------------------ ---------------------------
Earnings before estimated patronage dividends, income taxes and
cumulative effect of a change in accounting principle 1,285 1,934 4,986 2,823
Estimated patronage dividends (2,930) (2,752) (7,570) (5,619)
------------------------ ----------------------------
Loss before income taxes and cumulative effect of change in
accounting principle (1,645) (818) (2,584) (2,796)
Income taxes (benefit) -- -- -- --
------------------------ ---------------------------
Loss before cumulative effect of a change in accounting principle (1,645) (818) (2,584) (2,796)
Cumulative effect of a change in accounting principle, net of taxes -- -- 31 --
------------------------ ---------------------------
Net loss (1,645) (818) (2,553) (2,796)
Other comprehensive earnings (loss), net of income taxes:
Cumulative effect of a change in accounting principle -- -- 1,143 --
Unrealized (loss) gain on valuation of interest rate collar 135 473 (775) 491
Unrealized holding (loss) gain 154 (240) 686 (436)
------------------------ ----------------------------
Comprehensive loss $ (1,356) $ (585) $ (1,499) $ (2,741)
======================== ============================
The accompanying notes are an integral part of these statements.
4
UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
TWENTY SIX WEEKS ENDED
------------------------------------
March 31, March 30,
2001 2002
------------------- --------------
Cash flows from operating activities:
Net loss $ (2,553) $ (2,796)
Adjustments to reconcile net loss to net
cash (utilized) provided by operating activities:
Depreciation and amortization 12,137 13,089
Provision for allowance for doubtful accounts 1,602 899
Gain on disposal of properties (95) (19)
Purchases of trading securities (3,140) (866)
Proceeds from maturities or sales of trading securities 1,288 585
(Increase) decrease in assets:
Accounts and notes receivable 15,631 14,983
Inventories 2,584 20,134
Prepaid expenses (911) 331
Pension plan assets (372) (99)
Increase (decrease) in liabilities:
Accounts payable (53,162) (43,220)
Accrued liabilities 8,435 146
Long-term liabilities, other 507 2,210
------------------------------------
Net cash (utilized) provided by operating activities (18,049) 5,377
------------------------------------
Cash flows from investing activities:
Purchase of properties (10,059) (6,367)
Purchases of securities and other investments (18,683) (8,522)
Proceeds from maturities or sales of securities and other investments 10,562 3,516
Increase in notes receivable (4,606) (899)
Proceeds from sales of properties 1,004 394
Increase in other assets (5,025) (10,009)
------------------------------------
Net cash utilized by investing activities (26,807) (21,887)
------------------------------------
Cash flows from financing activities:
Additions to long-term notes payable 53,900 17,199
Additions to short-term notes payable 1,825 ----
Reduction of short-term notes payable (6,919) (4,295)
Payment of deferred financing fees ---- (459)
Patrons' excess deposits and estimated patronage dividends 983 (3,562)
Redemption of patronage dividend certificates (1,862) (2,262)
(Decrease) increase in members' required deposits (1,680) 2,655
Issuance of shares to members 619 4
------------------------------------
Net cash provided by financing activities 46,866 9,280
------------------------------------
Net increase (decrease) in cash and cash equivalents 2,010 (7,230)
Cash and cash equivalents at beginning of year 10,355 14,802
-----------------------------------
Cash and cash equivalents at end of period $ 12,365 $ 7,572
===================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 14,312 $ 11,895
Income taxes 74 15
Supplemental disclosure of non-cash item:
Issuance of subordinated redemption notes to repurchase Class B Shares
from members $ 1,423 $ 299
The accompanying notes are an integral part of these statements.
5
UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements include the accounts of Unified
Western Grocers, Inc. and all of its subsidiaries (the "Company" or "Unified").
Inter-company transactions and accounts with subsidiaries have been eliminated.
The interim financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations promulgated by the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to Commission rules and regulations; nevertheless, management believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's latest annual report filed on Form 10-K. The results of operations for
the interim periods are not necessarily indicative of the results for the full
year.
The accompanying consolidated condensed financial statements reflect all
adjustments which, in the opinion of management, are both of a normal recurring
nature and necessary for a fair statement of the results of the interim periods
presented. The preparation of the consolidated condensed financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. As a result, actual results
could differ from those estimates.
Certain reclassifications have been made to prior period financial statements to
present them on a basis comparable with the current period's presentation. In
the 2001 period, the retail segment of the business was separated from the "all
other" category to facilitate quarterly comparisons of reportable segments,
since the retail segment now meets the quantitative thresholds of a reportable
segment. Previously, the retail segment was grouped in the "all other" category
that included finance, insurance and other services provided to members.
2. Acquisitions
On September 27, 1999, the shareholders of Unified and United Grocers, Inc.
("United") each approved the provisions of a merger agreement (the "Merger").
The Merger became effective on September 29, 1999 and was accounted for as a
purchase pursuant to Accounting Principles Board Opinion No. 16, "Business
Combinations."
As a result of the Merger, Unified now serves a broader geographic region. The
Company serves independent supermarket operators in California, Oregon,
Washington, western Idaho, Nevada, Arizona, Hawaii, Colorado, Utah 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, security, payroll, real estate and information
technology services to its patrons.
In connection with the Merger, the Company established a reserve for the closure
of various facilities. Periodic charges against the reserve represent lease
costs for non-subleased facilities and rental income shortfalls for subleased
facilities. The amount of this reserve and current period charges against the
reserve are presented below.
Balance at September 29, 2001 $ 4,778,000
Charges to the reserve (279,000)
-----------------
Balance at March 30, 2002 $ 4,499,000
=================
6
3. Segment Information
The Company has identified two reportable segments - Wholesale Distribution and
Retail.
... Wholesale distribution consists of patronage and non-patronage activities
and includes the results of operations from the sale of food and general
merchandise products to independent supermarket operators, both members and
non-members, and sales to company-owned retail stores.
... The retail segment includes the results of operations of SavMax, Thriftway,
Apple Markets and stores that were purchased by the Company in connection
with the merger of Albertsons, Inc. and American Stores, Inc. (the
"Divestiture Stores"). The Company's two remaining Divestiture Stores were
closed during the first quarter of fiscal 2002 and were subsequently sold.
Refer to Note 6.
The "all other" category includes the aggregation of finance, insurance and
other services provided to a common customer base, none of which individually
meets the quantitative thresholds of a reportable segment.
Information about the Company's operations by segment is as follows (in
thousands):
THIRTEEN WEEKS TWENTY SIX WEEKS
ENDED ENDED
March 31, March 30, March 31, March 30,
2001 2002 2001 2002
----------------------------------- ------------------------------------
Net sales
Wholesale distribution $683,987 $693,487 $1,401,907 $1,415,476
Retail 35,139 32,944 76,112 69,992
All other 11,750 10,429 22,360 21,145
Intersegment elimination (25,472) (24,200) (54,403) (51,408)
----------------------------------- ------------------------------------
Total net sales $705,404 $712,660 $1,445,976 $1,455,205
Operating income (loss)
Wholesale distribution $ 9,892 $ 9,030 $ 22,232 $ 18,557
Retail (2,280) (1,073) (3,641) (4,301)
All other 1,037 378 1,232 1,033
----------------------------------- ------------------------------------
Total operating income $ 8,649 $ 8,335 $ 19,823 $ 15,289
Interest expense 7,364 6,401 14,837 12,466
Estimated patronage dividends 2,930 2,752 7,570 5,619
----------------------------------- ------------------------------------
Loss before income taxes and change in
accounting principle $ (1,645) $ (818) $ (2,584) $ (2,796)
=================================== ====================================
Depreciation and amortization
Wholesale distribution $ 5,459 $ 6,032 $ 11,116 $ 11,740
Retail 396 547 782 1,102
All other 121 128 239 247
----------------------------------- ------------------------------------
Total depreciation and amortization $ 5,976 $ 6,707 $ 12,137 $ 13,089
=================================== ====================================
Capital expenditures
Wholesale distribution $ 2,994 $ 1,415 $ 7,537 $ 3,875
Retail 713 573 2,177 2,226
All other 243 172 345 266
----------------------------------- ------------------------------------
Total capital expenditures $ 3,950 $ 2,160 $ 10,059 $ 6,367
=================================== ====================================
Identifiable assets
Wholesale distribution $611,917 $578,794 $ 611,917 $ 578,794
Retail 56,769 62,904 56,769 62,904
All other 98,303 92,255 98,303 92,255
----------------------------------- ------------------------------------
Total identifiable assets $766,989 $733,953 $ 766,989 $ 733,953
=================================== ====================================
7
4. Contingencies
The Jerome Lemelson Foundation (the "Foundation"), which asserts ownership of
certain patents relating to bar code technology, issued a demand that the
Company enter into a license agreement with respect to certain patented
technology which the Company is claimed to use and which allegedly infringes
upon patents issued to Jerome Lemelson, which patents, upon the death of Jerome
Lemelson, were assigned to the Foundation. The Foundation filed an action
against the Company and others asserting patent infringement and seeking damages
in unspecified amounts. During the 2002 period, the Company and the Foundation
reached a settlement of the matter at an amount that did not exceed $280,000,
the amount which Unified had reserved.
5. New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("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. The Company adopted this
statement, as amended by SFAS Nos. 137 and 138, effective October 1, 2000.
The Company entered into a five-year interest rate collar agreement during
February 1999 in relation to approximately $50 million of certain borrowings on
its variable rate revolving credit facility. The Company has designated the
interest rate collar agreement as a cash flow hedge. Under the provisions of
SFAS No. 133, the fair value of the collar must be reflected in the Company's
financial statements. On October 1, 2000 the Company recognized the fair value
of the collar, which totaled $1,195,000, as a cumulative effect of a change in
accounting principle in other comprehensive earnings (loss). Additionally, SFAS
No. 133 requires that the fair value of the collar be adjusted, with the change
in fair value being recorded as an adjustment to other comprehensive earnings
(loss). Due to changes in interest rates, the fair value of the collar was
$(1,299,000) as of March 30, 2002 and $(1,772,000) as of December 29, 2001
compared to $(1,790,000) as of September 29, 2001. As a result, the Company
recorded an unrealized gain of $473,000 and $491,000 for the thirteen and
twenty-six week period ended March 30, 2002, respectively.
The Company holds investments in various marketable securities and convertible
bonds. Prior to the adoption of SFAS No. 133, the Company classified its
convertible bonds as available for sale, with the changes in the fair value
recorded in other comprehensive earnings (loss). With the adoption of SFAS No.
133, the convertible bonds were reclassified to trading securities, which
resulted in the Company recognizing a gain of $52,000 at October 1, 2000. The
$52,000 gain was comprised of a $31,000 cumulative effect of a change in
accounting principle and a $21,000 reclassification of previously unrealized
holding gains. For the thirteen and twenty six week period ended March 30, 2002,
the Company recorded a net (loss)/gain, due to the changes in the fair value of
the convertible bonds of approximately ($9,000) and $241,000, respectively.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all
business combinations be accounted for under the purchase method. The statement
further requires separate recognition of intangible assets that meet one of two
specified criteria. The statement applies to all business combinations initiated
after June 30, 2001. SFAS No. 142 requires that an intangible asset that is
acquired be initially recognized and measured based on its fair value. The
statement also provides that intangible assets with finite useful lives continue
to be amortized over their estimated economic lives. However, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of its implied fair value to its
carrying amount. If an impairment is deemed to exist, the impact of the
impairment, if any, will be affected by the determination of how the goodwill is
allocated to the Company's reporting units as defined by SFAS No. 142. The
statement is effective for fiscal years beginning after December 15, 2001. As a
result, the Company will implement the pronouncement beginning in the first
quarter of fiscal year 2003. Existing goodwill will continue to be amortized
through the remainder of fiscal 2002 at which time amortization will cease and
the Company will perform a transitional goodwill impairment test. The Company is
currently evaluating the impact of the new accounting standards on existing
goodwill and other intangible assets. Goodwill amortization expense for the
twenty six week period ended March 30, 2002 was $785,000.
8
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," on the accounting for the recognition and measurement of a
liability for the costs of asset retirement obligations. Under SFAS No. 143, the
costs of retiring an asset will be recorded as a liability when the retirement
obligation arises, and will be amortized over the life of the asset. The Company
is currently evaluating the impact of the new accounting standard but believes
the pronouncement will not have a material affect on the Company's consolidated
financial statements.
In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and the disposal
of discontinued operations. This statement supercedes SFAS No. 121 on the same
topic and the accounting and certain reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business (as defined in that Opinion). This
statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal periods beginning after December 15, 2001. The Company will
implement the pronouncement beginning in the first quarter of fiscal year 2003.
The Company is currently evaluating the impact of the new accounting standards
on existing long-lived assets.
6. Subsequent Event
In April 2002, the Company sold the last two remaining Divestiture Stores of the
six held and operated by the Company that were part of the original 32 stores
divested by Albertson's in connection with its merger with American Stores. The
sale is expected to result in a gain of approximately $1,800,000.
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; 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; sales decline and loss of customers;
exposure to the uncertainties of litigation and other contingent liabilities;
the failure of Unified to take steps to stem losses in its retail operations;
the inability of the Company to establish and perform plans to improve its
operating performance and equity base in order to meet financial covenants
applicable to future periods; and 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 are
expressly qualified in their entirety by the factors which may cause actual
results to differ materially.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Liquidity and Capital Resources
Cash Flow
Unified relies primarily upon cash flow from operations, patron deposits and
member shareholdings to fund the Company's operations. In the event that these
sources of cash are not adequate to meet the Company's requirements, additional
sources of cash will be obtained from the Company's available credit facilities.
The
9
Company believes that both cash flow from its operations and available credit
lines will be sufficient to meet operating needs and capital spending
requirements for the fiscal 2002 period. For the twenty-six week period ending
March 30, 2002, net cash decreased by $7.2 million. At March 30, 2002, working
capital was $141.9 million compared to $139.7 million at September 29, 2001, and
the Company's current ratio was 1.5 to 1 at March 30, 2002 compared to 1.4 to 1
at September 29, 2001.
Operating Activities: Net cash provided by operating activities totaled $5.4
million for the first twenty-six weeks of fiscal 2002 (the "2002 period"), as
compared to net cash utilized by operating activities of $18.0 million for the
first twenty-six weeks of fiscal 2001 (the "2001 period"). The improvement in
net cash provided by operating activities for the 2002 period, as compared to
the 2001 period, is due to a decrease in overall inventory levels of
approximately $20.1 million resulting from management actions to implement an
inventory reduction program and increases in payroll benefit liabilities of
approximately $2.1 million. These factors were partially offset by a decrease in
accounts payable of approximately $43.2 million and a net operating loss of $2.8
million.
Investing Activities: Net cash utilized by investing activities was
approximately $21.9 million for the 2002 period compared to $26.8 million for
the 2001 period. Capital expenditures totaled $6.4 million in the 2002 period
compared to $10.1 million in the 2001 period. The fiscal 2002 expenditures were
primarily attributable to leasehold improvements and equipment associated with
the remodeling of stores in the Company's SavMax operation, purchases of
computer software and hardware, and warehousing and equipment. In addition, the
significant increase in other assets was due to software development costs
totaling approximately $4.0 million that were capitalized for the twenty-six
week period ended March 30, 2002. Significant projects currently in development
include a common sales and ordering system for the Pacific Northwest and
Southern California regions; implementation of a meat sales and inventory
tracking system; and a project to digitally store accounts payable records. The
Company paid a member approximately $2.0 million for entering into a ten-year
supply agreement and a right of first refusal agreement relating to certain of
the member's assets and stock. The remaining investing activities result from
the investment securities transactions of the Company's insurance subsidiaries.
This activity consists of investment purchases to replace maturing investments
in the portfolio.
Financing Activities: Net cash provided by financing activities was
approximately $9.3 million for the 2002 period compared to $46.9 million for the
2001 period. Cash provided resulted primarily from incremental borrowings
against the Company's revolving credit line of approximately $17.2 million in
the 2002 period compared to $53.9 million for the 2001 period and increases in
member required deposits of $2.7 million. This was offset by reductions in short
term notes payable of $4.3 million due to scheduled payments of the Company's
current portion of long term debt, withdrawals by patrons of excess cash of $3.6
million, redemption of patronage dividend certificates of $2.3 million and
payment of deferred financing fees of $0.4 million in connection with the
amendment of the Company's debt agreements as discussed below.
Outstanding Debt and Other Financing Arrangements
The Company issued Patronage Certificates in fiscal years 1993, 1994 and 1995.
The outstanding Patronage Certificates have a seven-year term and bear interest
payable on December 15 of each year. In the 2002 period, the Company redeemed
the Patronage Certificates issued in 1994 for approximately $2.3 million and in
the 2001 period, the Company redeemed the Patronage Certificates issued in 1993
for approximately $1.9 million. The Patronage Certificates issued in 1995 are
due December 15, 2002.
Unified has a $200 million secured revolving credit facility with a group of
banks. The revolving credit agreement is secured, expires October 1, 2004 and
bears interest at either an adjusted LIBOR rate plus a margin ranging from 2.00%
to 3.00% depending on Unified's leverage ratio or 0.75% plus the higher of the
bank base rate or 0.50% above the bank's federal funds borrowing rate. The
revolving credit facility permits advances of up to 85% of eligible accounts
receivable and 65% of eligible inventories. The Company had approximately $164.3
million outstanding in revolver debt as of March 30, 2002.
At March 30, 2002, Unified had $71.6 million and $40.0 million outstanding in
senior secured notes to certain insurance companies and pension funds under a
note purchase agreement dated September 29, 1999 (as amended, the "Senior Note
Agreement").
In fiscal year 2002, Unified amended the Senior Note Agreement and the revolving
credit facility. For the Senior Note Agreement, the amendment modified two
financial covenants (consolidated tangible net worth and fixed
10
charge coverage). The amendment assumes that improvements will be made in future
performance with respect to both ratios starting in fiscal 2003. In addition,
interest rates on both senior secured notes were increased by 0.25% until such
time consolidated tangible net worth increases to $80.0 million after excluding
future consolidated net income generated after September 29, 2001. The amendment
relating to the revolving credit facility changed the requirements of certain
financial covenants at September 29, 2001 and through fiscal year 2002, with
respect to minimum tangible net worth, the fixed charge coverage ratio and the
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization, and patronage dividends ("EBITDAP"). The amendment also increased
borrowing costs to either: (i) LIBOR plus an increased applicable margin (the
increase is reflected above) based on Unified's leverage ratio or (ii) 0.75%
plus the higher of the lender's base rate or 0.50% above the lender's borrowing
rate. At its December 2001 meeting, the Board of Directors adopted a plan for
Equity Enhancement - Fiscal Year 2002 and, as required by the amendment,
provided the adopted plan to the lenders.
The credit agreements contain customary representations, warranties, covenants
and default provisions for these types of financing. Obligations under the
credit agreements are senior to the rights of members with respect to deposits,
patronage dividend certificates and subordinated notes. Both the Senior Note
Agreement and the revolving credit facility limit the incurrence of additional
funded debt and the incurrence of liens except permitted liens. Additional
funded debt is also limited when an event of default has occurred and is
continuing. Examples of default conditions include the failure to pay an
installment of principal or interest under the agreements, the making of false
representations and warranties, and non-compliance with one or more financial
covenants (minimum tangible net worth, fixed charge coverage ratio and funded
debt to EBITDAP). The Senior Note Agreement and the revolving credit facility
limit distributions to shareholders (including repurchase of shares) to
permitted distributions which include patronage dividends and repurchases of the
Company's Class A Shares and Class B Shares as required by its bylaws, and
prohibit all distributions when an event of default has occurred and is
continuing. In the event the Company is not in compliance with the financial
covenants of the Senior Note or revolving credit facility, the continued
availability of loan funds or the terms upon which such loans would be available
could be adversely impacted, and the impact could be material.
In December 2000, the Company purchased 80,000 shares of preferred stock of C&K
Market, Inc. ("C&K") for $8.0 million. Douglas H. Nidiffer, a director of the
Company, is a shareholder, director and officer of C&K. In connection with the
stock purchase transaction, C&K executed a ten-year supply agreement and the
shareholders of C&K granted to the Company a put with respect to the preferred
stock, exercisable upon occurrence of designated events including the nonpayment
of permitted dividends or mandatory redemption payments. The supply agreement
serves as a form of collateral for the Company until C&K redeems their preferred
stock in full. As a result, no value was ascribed to the supply agreement. The
preferred stock bears a 9.5% cumulative dividend rate, with cash payment of
dividends deferred until November 15, 2002, and then payable only if permitted
by applicable loan agreements. The preferred stock is convertible into 15% of
the common stock of C&K under certain circumstances.
Patronage Dividends
Historically, Unified has distributed at least 20% of the patronage dividends in
cash and distributed Class B Shares as a portion of the patronage dividends
distributed to its member-patrons. Dairy patronage dividends were paid in cash
in the periods presented. The Board of Directors has adopted an equity
enhancement plan for fiscal year 2002. As part of that plan, the patronage
dividend payment policy was modified as follows: net earnings from business
transacted on a patronage basis in the Cooperative Division with member and
associate patrons shall be distributed on a patronage basis by written notices
of allocation as defined in Section 1388 of the Internal Revenue Code in the
form of:
... Shares of Class B Common Stock to the extent there exists any
deficiency of a member-patron in meeting the requirements for holding
Class B Shares specified in the Bylaws of the Company;
... Subordinated Patronage Dividend Certificates ("Certificates") to the
extent of the balance of such patronage dividends for member patrons,
such Certificates to have a minimum term of five years, an interest
rate equal to an appropriate benchmark interest rate as such rate
exists on the issuance date of the Certificates, such rate to be
adjusted annually thereafter to be equal to the same benchmark interest
rate on each anniversary of the date of issuance of the Certificates,
with such other terms and conditions as shall be recommended by
management and approved by the Board of Directors, which terms may
include provision for conversion of Certificates into Class B Shares
for member patrons on a basis to be determined.
Continued net operating losses from the Company's subsidiary and other
non-patronage activities, if not offset by gains from other non-patronage
activities or, enhancement to the Company's equity by other means could
adversely affect operating results and the Company's equity. The current deficit
in the Company's retained earnings has created restrictions on the Company's
current ability to redeem its own shares. The Company's inability to redeem or
repurchase Class B Shares could have an adverse effect on the Company's ability
to attract new members. In addition to the Equity Enhancement Plan, the Board of
Directors continues to consider other alternatives to improve the Company's
shareholder equity.
11
Patrons are generally required to maintain a subordinated cash deposit with
Unified. Member-patrons may satisfy the minimum deposit requirement through a
combination of a cash deposit and the ownership of Class B Shares. In the
Merger, former United members were provided the opportunity to build the minimum
subordinated deposit over time, provided that they agreed to assign 80% of
patronage dividends received for this purpose and maintain a supply agreement
with Unified until the minimum deposit condition is satisfied. Upon termination
of patron status, the withdrawing patron is 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. With certain exceptions, 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 fiscal year. For fiscal 2000, this limitation was
exceeded by repurchases of shares in connection with the Merger. In connection
with the Merger, Unified redeemed 71,310 Class B Shares of discontinued members
for a total consideration before set-offs of $13.4 million. As described in the
Form 10-K, Unified is not obligated to repurchase Class B Shares of terminated
members until after September 27, 2002.
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. As a California corporation, the Company is subject to the
provisions of the California General Corporation Law including Section 500 which
limits the ability of the Company to make distributions, including distributions
to repurchase its own shares and any payments on notes issued to repurchase
Unified shares. Section 500 permits such repurchase and note payments only when
retained earnings calculated in accordance with generally accepted accounting
principles ("GAAP") equal or exceed the amount of any proposed distribution or
an alternative asset/liability ratio test is met. Historically through the
operations of its subsidiaries, the Company has maintained sufficient retained
earnings to accomplish its share repurchase program. As a result of expenses
associated with the Merger with United, operating losses of subsidiaries and
Company-owned retail stores, including the Divestiture Stores, the Company's
retained earnings have been eliminated and are currently inadequate to permit
repurchase of Company shares. The repurchase test permitted under Section 500
based on the ratio of assets to liabilities determined under GAAP with certain
adjustments cannot currently be met since the Company relies heavily on
borrowings to finance its operations. The Company is also a party to credit
agreements containing financial and other covenants, which limit the ability of
the Company to make purchases of capital stock under certain circumstances. The
Company has established a trust for the purpose of facilitating the transfer of
shares by Unified members obligated or entitled to sell shares in accordance
with the Company's redemption policy to existing members or new members who are
authorized by the Board of Directors to buy shares in accordance with the
Bylaws, during periods when the Company is legally unable to buy shares or
otherwise elects to cause or permit outstanding shares to be transferred between
members. Funds used to purchase shares from selling members are exclusively
sourced from funds provided by buying members.
Tax Matters
Income taxes are provided using the liability method prescribed by SFAS 109,
"Accounting for Income Taxes". At September 29, 2001, the Company had net
deferred tax assets totaling $22.0 million, of which $12.6 million related to
net operating loss carryforwards that expire in various years through 2020. The
Company has established a valuation allowance of $9.1 million to reduce the net
deferred tax assets to their estimated net realizable value as the Company may
not realize the entire net operating loss carryforwards before their expiration.
The valuation allowance is primarily related to retail store losses which
include the Divestiture Stores. The remaining balance of the net deferred tax
asset is expected to be realized through future operating results, reversal of
taxable temporary differences, and tax planning strategies. For the 2002 period,
the Company reported a net loss of $2.8 million. However, a tax benefit was not
recorded because the realization requirement per SFAS 109 of "more likely than
not" was not met during the quarter.
The Internal Revenue Service (the "IRS") is currently examining the Company's
consolidated federal income tax returns for the fiscal year ended August 29,
1998, the transition period between August 29, 1999 through October 2, 1999 and
fiscal year ended September 30, 2000. The IRS has proposed no adjustments to
date and the Company is not aware of any issues that may result in a material
misstatement.
12
Results of Operations
The following table sets forth selected financial data of the Company expressed
as a percentage of net sales for the periods indicated below:
For the Thirteen For the Twenty Six
Weeks Weeks
Ended Ended
--------------------------- -----------------------------
March 31, March 30, March 31, March 30, 2002
2001 2002 2001
------------- ------------- ------------- ---------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.1 89.1 89.0 89.1
Distribution, selling and administrative 9.7 9.7 9.6 9.8
Operating income 1.2 1.2 1.4 1.1
Interest expense 1.0 0.9 1.1 0.9
Earnings before estimated patronage dividends, income
taxes and cumulative effect of change in accounting
principle 0.2 0.3 0.3 0.2
Estimated patronage dividends (0.4) (0.4) (0.5) (0.4)
Loss before income taxes and cumulative effect of a
change in accounting principle (0.2) (0.1) (0.2) (0.2)
Income taxes --- --- --- ---
Loss before cumulative effect of change in accounting
principle (0.2) (0.1) (0.2) (0.2)
Cumulative effect of a change in accounting principle --- --- --- ---
Net loss (0.2) (0.1) (0.2) (0.2)
Thirteen Week Period
Net sales. Net sales for the 2002 and 2001 periods were $712.7 million and
$705.4 million, respectively. Sales for the 2002 period increased $7.3 million
over the 2001 period. The overall increase in sales is primarily related to the
following:
... Wholesale Distribution Segment: Wholesale Distribution Segment sales
increased $9.5 million in the 2002 period compared to the 2001 period.
The contributors to this increase were the addition of $3.1 million of
new member business which added 29 new store locations to the southern
California region and $11.2 million of new business resulting from a
supply agreement, effective September 2001, to provide general
merchandise products to a wholesaler in the Pacific Northwest. The
Company's specialty food products subsidiary and international division
also grew by approximately $2.6 million in the 2002 period due to new
business activity with a national chain. These improvements were offset
by lower sales volume of $4.2 million in the Pacific Northwest region
because of competitive pressures and the weak economic conditions in
the area, despite adding 7 new member stores. In addition, the Company
has either closed or sold 5 company-owned stores resulting in reduced
distribution volume of approximately $3.2 million.
... Retail Segment: The Company's retail sales decreased $2.2 million in
the 2002 period compared to the 2001 period. The Company has either
closed or sold 5 stores in the 2002 period. As a result of these
closures or sales, the retail sales volume decreased by approximately
$4.0 million. The Company is currently operating eight SavMax banner
stores, two Apple Market banner stores in the northern California
region, and two Thriftway banner stores in the Pacific Northwest
region. As a result of competitive pressures, same store sales for the
Company's retail locations were lower by approximately $2.2 million
compared to the 2001 period. Offsetting the sale or closure of Company
owned stores and lower same store growth, the addition of two Apple
Market stores acquired in June 2001 contributed approximately $4
million.
... All Other: Net Sales for the Company's other wholly owned subsidiaries
for the 2002 period decreased over the 2001 period by approximately
$1.3 million. The decline in sales is attributable to lower insurance
premiums earned by the Company's insurance subsidiaries and lower
financing revenues from the Company's finance subsidiary.
13
Cost of sales. Cost of sales was $634.9 million (89.1% of net sales) for the
fiscal 2002 period compared to $628.2 million (89.1% of net sales) in the 2001
period and is attributable to the increase in sales volume.
Distribution, selling and administrative. Distribution, selling and
administrative expenses were $69.5 million (9.7% of net sales) in the 2002
period, as compared to $68.5 million (9.7% of net sales) in the 2001 period. The
$1.0 million increase in expenses is due to several factors.
... Wholesale Distribution Segment: Certain distribution costs are variable and
will fluctuate with volume changes. The increased volume in the wholesale
distribution segment accounts for an increase in variable expense of $0.5
million. Additionally, the Company's pension expense for the 2002 period is
$0.4 higher due to additional funding requirements associated with a
decline in the value of pension plan assets attributable to a decline in
the equity markets in 2001. Offsetting these cost increases, the Company
realized a decrease in expenses of $0.9 million due mainly to a personnel
reduction initiative and other efficiency improvement initiatives.
... Retail Segment: Total retail distribution, selling and administrative
expense for the 2002 period was $1.1 million higher than the comparable
2001 period. The higher expenses are due to costs associated with
re-merchandising activity at SavMax, and higher utility and wage related
costs.
... All Other: Distribution, selling and administrative expenses for the
Company's other wholly owned subsidiaries for the 2002 period were
comparable to the 2001 period.
Interest. Interest expense was $6.4 million (0.9% of net sales) in the 2002
period as compared to $7.4 million (1.0% of net sales) in the 2001 period. The
Company's effective borrowing rates for the 2002 and 2001 periods were 6.1% and
8.1%, respectively. The decrease in interest expense is due to the lower
effective borrowing rates and lower overall borrowing levels as a result of
reduced levels of inventory and receivables.
Estimated patronage dividends. Estimated patronage dividends for the fiscal 2002
and 2001 periods were $2.8 million and $2.9 million, respectively. Estimated
patronage earnings for fiscal 2002 are comprised of the interim patronage
earnings from the Company's three patronage pools: the Cooperative Division and
the Southern California and Pacific Northwest Dairy Divisions. For the 2002
period, the Company had interim patronage earnings of $0.1 million in the
Cooperative Division, $2.6 million in the Southern California Dairy Division and
$74,000 in the Pacific Northwest Dairy Division. In the 2001 period, the Company
had patronage earnings of $0.3 million in the Cooperative Division and $2.6
million in the Southern California Dairy Division.
Net loss. The net loss for the 2002 period was $0.8 million compared to a net
loss of $1.6 million for the 2001 period. Net profits or losses generated by the
Company's subsidiaries and non-patronage activities are not included in
patronage earnings distributions of the Cooperative Division.
... Wholesale Distribution Segment: The specialty food products, international,
and certain other non-patronage distribution activities within the
wholesale distribution segment contributed profits for the 2002 period of
$0.2 million compared to $37,000 loss for the 2001 period.
... Retail Segment: Retail losses for the 2002 and 2001 period were $1.3
million and $2.6 million, respectively. The reduction in retail losses for
the 2002 period is due to the closure of the five retail locations and the
improvements at the ongoing SavMax stores due to the re-merchandising and
remodel activity implemented during the first quarter of the 2002 period.
... All Other: The Company's other subsidiary activities had earnings of $0.3
million for the 2002 period compared to earnings of $1.0 million for the
2001 period.
Twenty-Six Week Period
Net sales. Net sales for the 2002 period of $1.5 billion improved compared to
the 2001 period by approximately $9.2 million. The overall increase in sales is
attributable to the following:
14
... Wholesale Distribution Segment: Cooperative Division sales increased over
the 2001 period by approximately $13.6 million. Factors contributing to
this increase include $22.9 million of new business resulting from a supply
agreement to provide general merchandise products to a wholesaler in the
Pacific Northwest, increases in distribution volume in California of
approximately $7 million and improvements in sales in the Company's
specialty food products subsidiary and international division of
approximately $2.8 million due to new business with a national chain. These
improvements were partially offset by a decline in general merchandise
sales volume of $7.0 million due to the loss of a large non-member customer
and lower sales volume of $7.6 million in the Pacific Northwest because of
competitive pressures and the weak economic conditions in the area, despite
adding 7 new member stores. In addition, the Company has either closed or
sold 5 company-owned stores, resulting in reduced distribution volume of
approximately $4.5 million.
... Retail Segment: Sales in the 2002 period for the Company-owned retail
locations decreased by $6.1 million compared to the 2001 period. The
decrease in sales is attributable mainly to the closure of five stores and
an overall volume decline in the remaining store locations.
... All Other: Net Sales for the Company's other wholly owned subsidiaries for
the 2002 period decreased over the 2001 period by approximately $1.2
million. The decline in sales is attributable to lower insurance premiums
earned by the Company's insurance subsidiaries and lower financing revenues
from the Company's finance subsidiary.
Cost of sales. Cost of sales was $1.3 billion (89.1% of net sales) for the
fiscal 2002 period compared to $1.3 billion (89.0% of net sales) in the 2001
period. Cost of sales as a percentage of net sales was comparable to the 2001
period.
Distribution, selling and administrative. Distribution, selling and
administrative expenses were $143.0 million (9.8% of net sales) in the 2002
period, as compared to $138.6 million (9.6% of net sales) in the 2001 period.
The $4.4 million increase in expenses is due to several factors.
... Wholesale Distribution Segment: Variable distribution costs increased as a
result of increased distribution volume by approximately $0.7 million. In
addition, the Company implemented a work force reduction in December 2001
as part of a comprehensive expense reduction program. As a result,
severance cost of $0.6 million was recorded in the first quarter of the
2002 period offset by salary savings of $0.7 million in the second quarter
of the 2002 period. The Company also experienced an increase in pension
expense of $0.8 million and other operational expenses of $0.6 million.
... Retail Segment: Total retail expenses increased $2.4 million in the 2002
period compared to the 2001 period. Of the $2.4 million, $1.4 million is
attributable to the SavMax banner stores and was used to re-merchandise and
reset store shelves. In addition, higher operating costs such as utilities,
advertising and labor contributed to approximately $1.0 million additional
expense compared to the 2001 period.
... All Other: Distribution, selling and administrative expenses for the
Company's other wholly owned subsidiaries for the 2002 period were
comparable to the 2001 period.
Interest. Interest expense was $12.5 million (0.9% of net sales) in the 2002
period as compared to $14.8 million (1.1% of net sales) in the 2001 period. The
Company's effective borrowing rates for the 2002 and 2001 periods were 6.1% and
8.31%, respectively. The decrease in interest expense is due to the lower
effective borrowing rates and lower overall borrowing levels.
Estimated patronage dividends. Estimated patronage dividends for the fiscal 2002
and 2001 periods were $5.6 million and $7.6 million, respectively. Estimated
patronage earnings for fiscal 2002 are comprised of the interim patronage
earnings from the Company's three patronage pools: the Cooperative Division and
the Southern California and Pacific Northwest Dairy Divisions. For the 2002
period, the Company had interim patronage earnings of $198,000 in the
Cooperative Division, $5.3 million in the Southern California Dairy Division and
$145,000 in the Pacific Northwest Dairy Division. In the 2001 period, the
Company had patronage earnings of $2.3 million in the Cooperative Division and
$5.3 million in the Southern California Dairy Division.
Net loss. The net loss for the 2002 period was $2.8 million compared to a net
loss of $2.6 million for the 2001 period. Net profits or losses generated by the
Company's subsidiaries and non-patronage activities are not included
15
in patronage earnings of the Cooperative.
... Wholesale Distribution Segment: The specialty food products, international,
and certain other non-patronage distribution activities within the
wholesale distribution segment contributed profits for the 2002 period of
$1.2 million compared to $0.5 million for the 2001 period. The improvement
is attributed to transitioning the source of certain specialty volume from
southern to northern California in the second quarter of the 2001 period
and additional sales volume relating to the Company's non-patronage
activities.
... Retail Segment: Retail losses for the 2002 and 2001 period were $4.9
million and $4.2 million, respectively. Operating losses and shutdown costs
from the closed stores contributed to the losses in both years. Losses in
the 2002 period were higher than the 2001 period due to weakening sales and
the higher costs associated with the re-merchandising and remodeling
activities. Continued operating losses from the Company's retail segment,
if not offset by positive earnings from the Company's other non-patronage
activities, could affect the Company's ability to comply with current
financial covenant requirements, as well as the potential impairment of
related intangible assets.
... All Other: The Company's other subsidiary activities had earnings of $0.8
million for the 2002 period as compared to earnings of $1.1 million for the
2001 period.
Additional Discussion and Analysis
The Company's management deals with many risks and uncertainties in the course
of performing their responsibilities. The Additional Discussion and Analysis
section provides additional information on such issues.
The Company's operating results are highly dependent upon maintaining and
growing its distribution volume to members. The Company's top ten customers
constitute approximately 30% of total sales. A significant loss in customers or
volume could adversely affect the Company's operating results. The Merger with
United, as described in the Company's Form 10-K Annual Report, created goodwill
approximating $29.4 million, net of amortization at March 30, 2002. To date, the
sales activity and customer base of the combined entity remain strong. However,
a significant loss in volume from former customers of United could potentially
impair the carrying amount of goodwill necessitating a write down in this asset.
Like the wholesale distribution, the Company's retail business is highly
dependent upon increasing sales to its customer base. However, deteriorating
sales and continued operating losses from the Company's retail segment could
adversely affect the valuation of the business units and potentially impair the
carrying amount of the goodwill related to the Company's acquisition of SavMax
Foods, Inc. (SavMax). Goodwill associated with the acquisition of SavMax was
approximately $21.5 million at March 30, 2002.
The Company is subject to certain economic factors that are beyond the control
of the Company, including inflation and deflation. The degree to which the
acquisition cost of products purchased by the Company for resale to customers is
stable and/or deflating could have an adverse effect on the Company's business
and results of operations. The Company's pricing programs typically assess a
percentage fee above the Company's cost of the product. During periods of little
or no inflation in the cost of goods procured for resale, the Company's ability
to maintain the dollar profit margin needed to offset increases in costs is
reduced. The Company operates in a highly competitive market place and passing
on cost increases to customers is difficult. The Company has recently
experienced higher operating expenses, including but not limited to energy, fuel
and employee wages and benefits. The Company's facilities are principally in
California and the Pacific Northwest, regions that have experienced
significantly increased utility costs. In response to the increase in operating
costs, the Company has implemented a comprehensive expense reduction initiative.
As part of this initiative the Company eliminated approximately 200 budgeted
positions impacting nearly all divisions, departments and facilities in the
first quarter of fiscal year 2002. The Company expects that the position
elimination will result in a reduction of personnel costs of approximately $6.2
million on an annualized basis. The Company also implemented an additional
charge to its customers to offset the increased cost of energy incurred by the
Company.
Changes in economic conditions could also adversely affect the customer's
ability to meet certain obligations to the Company or leave the Company exposed
for obligations the Company has guaranteed. Loans to members, trade receivables
and lease guarantees could be at risk in a sustained recessionary environment.
In response to this
16
potential risk, the Company establishes reserves for notes receivable, trade
receivables, and lease guarantees, net of sub-lease offsets, for which the
Company may be at risk for default. In such a situation, the Company would be
required to foreclose on assets provided as collateral or assume payments for
leased locations for which the Company has guaranteed payment. Although the
Company believes its reserves to be adequate, the Company's operating results
could be adversely affected in the event that actual losses exceed available
reserves.
During the normal course of business, the Company may be involved in litigation.
In the event that management determines that the probability of an adverse
judgement in pending litigation is likely and that the exposure can be
reasonably estimated, appropriate reserves are recorded. Although the Company
believes its reserves to be adequate, the final outcome of any litigation could
adversely affect operating results, if the actual liability exceeds recorded
reserves and insurance coverage.
The Company owns and operates facilities for the manufacture, warehousing and
distribution of products to its members. The facilities and operations are
subject to various laws and regulations concerning the protection of the
environment and employee health. Although the Company believes that established
reserves are sufficient to satisfy the anticipated costs of remediation,
operating results could be adversely affected if the actual costs of remediation
exceed available reserves.
An inherent risk of the food distribution industry is the risk of exposure to
product liability claims in the event people who purchase products from the
Company become ill or incur some other form of injury. In response to this
potential risk, the Company purchases liability insurance to protect against
product liability claims that may occur. The Company believes that its current
liability insurance provides adequate coverage.
The Company's insurance subsidiaries are regulated by the State of California
and subject to the rules and regulations promulgated by the appropriate
regulatory agencies. Reserves are established to fund payments under policies
issued to policy holders. The adequacy of the reserves are reviewed annually by
actuarial evaluation conducted by a third party actuary. The amount of required
reserves is affected by various assumptions and actuarial calculations including
but not limited to health care cost trends, mortality rates, demographics,
federal and state law, as well as insurance claim trends. As a result, the
amount of reserves required to settle future claims may vary from year to year.
Although the Company believes its reserves to be adequate, significant and
adverse changes in the experience of claims settlement could negatively impact
operating results if the Company's claim cost experiences exceed the actuarial
calculations.
As disclosed in the Company's Form 10-K Annual Report, the Company's loan
agreements require improved performance in future periods to continue financial
covenant compliance. Failure to improve performance could have an adverse affect
upon the continued availability of loan funds or the terms upon which loan funds
would continue to be available, and the impact could be material.
The Company operates as a cooperative and as such does a portion of its business
with its member shareholders on a patronage basis. Transactions with members are
conducted on terms and conditions generally available to the membership or on
negotiated terms pursuant to supply or credit support agreements. The Company
also does business with non-members that may be on terms different than those
offered to members.
17
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance or "critical accounting policies." The SEC defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the affect of matters that are inherently uncertain and may change in
subsequent periods. We believe that our critical accounting policies and
important accounting pratices are outlined and described below. For a detailed
discussion on the application of these and other policies, see Note 1 in the
Notes to Consolidated Financial Statements in the Company's Form 10-K.
Insurance Reserves: The Company's insurance subsidiaries require management to
make estimates of claims anticipated to be exercised in the future by policy
holders and to establish appropriate reserves for those claims. Insurance
reserves are recorded based on a range provided by third party actuaries who
perform detailed analysis of health care cost trends, mortality rates, claims
history, demographics, industry trends and federal and state law. As a result,
the amount of reserve and related expense is significantly affected by the
outcome of these studies. Insurance reserves maintained by the Company's
insurance subsidiaries were approximately $44.8 million as of March 30, 2002.
Allowance for Uncollectible Accounts and Notes Receivable: The preparation of
the Company's financial statements requires management to make estimates of the
collectability of its accounts and notes receivable. Management specifically
analyzes accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts. In
determining the appropriate level of reserves to be established, the Company
utilizes several techniques including specific account identification,
percentage of aged receivables and historical cash collection trends. In
addition, when establishing reserves, the Company takes into consideration
collateral such as redemption notes, Class B Shares, cash deposits and personal
guarantees. A bankruptcy or financial loss associated with a major customer
could have a material adverse effect on the Company's sales and operating
results. The Company's allowance for doubtful accounts amounted to approximately
$13.3 million as of March 30, 2002.
Lease Loss Reserves: The Company must estimate and record appropriate reserves
for leased property for which the Company provides lease guarantees and
sub-leases to its member patrons. Variables affecting the level of reserves
recorded include the remaining lease term, vacancy rates of leased property,
state of the economy, property taxes, common area maintenance costs and
estimated timeframes to sub-let property. In estimating the appropriate level of
reserves to record, the Company estimates the amount of losses to be incurred
over the remaining term of the lease and discounts these amounts to their net
present value and the reserves are adjusted accordingly. The Company's lease
loss reserves amounted to approximately $14.1 million as of March 30, 2002.
Intangibles and Long Lived Assets: The Company assesses, as required by
paragraphs 4 and 5 of SFAS No. 121, "Accounting for the Impairment of Long Lived
Assets", the recoverability of the carrying amount of its long lived and certain
identifiable intangible assets at least annually or when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If circumstances indicate that the carrying amount of an asset that
the Company expects to hold and use may not be recoverable, the Company will
estimate the future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows is less than the carrying amount of
the asset, the Company then would recognize an impairment loss in accordance
with SFAS No. 121.
Tax Valuation Allowances: The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes", which requires that deferred
tax assets and liabilities be recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized. As of March 30, 2002, the Company
has approximately $22.0 million in deferred tax assets, of which $12.6 million
relates to net operating loss carryforwards that expire in various years through
2020 and a valuation allowance of approximately $9.1 million.
Benefit Plans: Assumptions used in determining projected benefit obligations and
the fair value of plan assets for the Company's pension plans and postretirement
benefit plans other than pension plans are regularly evaluated by management in
consultation with outside actuaries who are relied upon as experts. In the event
that the Company determines that changes are warranted in the assumptions used,
such as the discount rate, expected long term rate of return on plan assets, or
health care cost, future pension and postretirement benefit expenses could
increase or decrease.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- ------------------------------------------------------------------
Unified has only limited involvement with derivative financial instruments. They
are used to manage well defined interest rate risks. Unified entered into a
five-year interest rate collar agreement in February 1999 in relation to
18
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 $50.0 million. The weighted average interest rate, prior to lender's margin,
on borrowings on the revolving credit was 1.89% at March 30, 2002. Due to
changes in interest rates, the fair value of the collar was $(1,299,000) as of
March 30, 2002 and $(1,772,000) as of December 29, 2001 compared to $(1,790,000)
as of September 29, 2001. As a result, the Company recorded an unrealized gain
of $473,000 and $491,000 for the thirteen and twenty-six week period ended March
30, 2002, respectively.
Unified is subject to interest rate changes on its notes payable under the
Company's credit and note agreements which may affect the fair value of the
notes payable. Based on the notes payable outstanding at March 30, 2002 and the
current market condition, a 100 basis point increase in interest rates would
decrease cash flow and earnings by approximately $1.2 million. Conversely, a 100
basis point decrease in interest rates would increase cash flow and earnings by
approximately $1.2 million.
With the adoption of SFAS No. 133, the Company's investments in convertible
bonds were reclassified from available for sale securities to trading
securities. As a result of changing the classification of the convertible bonds,
the Company is subject to market risk associated with fluctuations in interest
rates and the market value of the embedded conversion feature. For the thirteen
and twenty six week period ended March 30, 2002, the Company recorded a net
(loss)/gain, due to the changes in the fair value of the convertible bonds of
approximately ($9,000) and $241,000, respectively.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
As reported in the Company's Annual Report on Form 10-K for the fiscal year
ended 2001, the Jerome Lemelson Foundation (the "Foundation"), which asserts
ownership of certain patents relating to bar code technology, issued a demand
that the Company enter into a license agreement with respect to certain patented
technology which the Company is claimed to use and which allegedly infringes
upon patents issued to Jerome Lemelson, which patents, upon the death of Jerome
Lemelsom, were assigned to the Foundation. The Foundation filed an action
against the Company and others asserting patent infringement and seeking damages
in unspecified amounts. During the 2002 period, the Company and the Foundation
reached a settlement of the matter that did not exceed $280,000, the amount
which Unified had reserved.
Items 2 and 3. Changes in Securities and Defaults Upon Senior Securities
- -------------------------------------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
(a) Date of Meeting: February 26, 2002 (Annual Meeting)
(b) Matters Voted Upon:
Election of Directors
-------------------------------------------------------------------------
Class A Directors For Withheld Authority
-------------------------------------------------------------------------
Louis A. Amen 40,189 2,800
-------------------------------------------------------------------------
David M. Bennett 40,289 2,700
-------------------------------------------------------------------------
John Berberian 40,389 2,600
-------------------------------------------------------------------------
Edmund Kevin Davis 40,289 2,700
-------------------------------------------------------------------------
James F. Glassel 40,289 2,700
-------------------------------------------------------------------------
Mark Kidd 40,289 2,700
-------------------------------------------------------------------------
Jay McCormack 40,189 2,800
-------------------------------------------------------------------------
Morrie Nortrica 40,089 2,900
-------------------------------------------------------------------------
Peter J. O'Neal 39,889 3,100
-------------------------------------------------------------------------
Michael A. Provenzano, Jr. 40,289 2,700
-------------------------------------------------------------------------
Gordon E. Smith 40,089 2,900
-------------------------------------------------------------------------
Robert E. Stiles 40,489 2,500
-------------------------------------------------------------------------
James R. Stump 40,089 2,900
-------------------------------------------------------------------------
Kenneth Ray Tucker 40,289 2,700
-------------------------------------------------------------------------
Richard L. Wright 40,089 2,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Class B Directors
-------------------------------------------------------------------------
Darioush Khaledi 316,110 18,474
-------------------------------------------------------------------------
Douglas A. Nidiffer 313,574 21,010
-------------------------------------------------------------------------
Mimi R. Song 313,917 20,667
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Item 5. Other Information
- ---------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
4.24.1 Second Amendment to Note Purchase Agreement and Notes dated as
of March 27, 2002 by and among the Registrant and the
Noteholders listed on the signature pages thereto.
19
10.42 Modification Agreement dated as of January 5, 2002 by and
between the Registrant and 1999 Lawndale Associates LLC.
10.43 Deed of Trust, Assignment of Rents and Fixture Filing dated as
of January 5, 2002 executed by 1999 Lawndale Associates LLC in
favor of Chicago Title Insurance Company for the benefit of
the Registrant.
(b) Reports on Form 8-K
None
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 2002
Unified Western Grocers, Inc.
- ------------------------------
(Registrant)
_______________________________________________
By
Alfred A. Plamann
President and
Chief Executive Officer
_______________________________________________
By
Richard J. Martin
Executive Vice President,
Finance & Administration
and Chief Financial Officer
_______________________________________________
By
William O. Cote
Vice President, Controller
21
EXHIBIT INDEX
4.24.1 Second Amendment to Note Purchase Agreement and Notes dated as of March
27, 2002 by and among the Registrant and the Noteholders listed on the
signature pages thereto.
10.42 Modification Agreement dated as of January 5, 2002 by and between the
Registrant and 1999 Lawndale Associates LLC.
10.43 Deed of Trust, Assignment of Rents and Fixture Filing dated as of
January 5, 2002 executed by 1999 Lawndale Associates LLC in favor of
Chicago Title Insurance Company for the benefit of the Registrant.