Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - UNIFIED GROCERS, INC.Financial_Report.xls
EX-32.1 - EX-32.1 - UNIFIED GROCERS, INC.d462884dex321.htm
EX-31.2 - EX-31.2 - UNIFIED GROCERS, INC.d462884dex312.htm
EX-32.2 - EX-32.2 - UNIFIED GROCERS, INC.d462884dex322.htm
EX-31.1 - EX-31.1 - UNIFIED GROCERS, INC.d462884dex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR

 

THE QUARTERLY PERIOD ENDED DECEMBER 29, 2012

OR

 

¨

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

    

 

FOR THE TRANSITION PERIOD FROM                     TO                     

Commission file number: 0-10815

UNIFIED GROCERS, INC.

(Exact name of registrant as specified in its charter)

 

California   95-0615250

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5200 Sheila Street, Commerce, CA 90040

(Address of principal executive offices) (Zip Code)

(323) 264-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]    No  [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [X]    No  [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  [    ]

  

Accelerated filer  [    ]

Non-accelerated filer  [X]

  

Smaller reporting company  [    ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [    ]    No  [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of January 26, 2013, the number of shares outstanding was:

Class A: 145,600 shares; Class B: 426,302 shares; Class C: 15 shares; Class E: 251,808 shares


Table of Contents

Table of Contents

 

Item

         Page  

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Condensed Balance Sheets

     3   
  

Consolidated Condensed Statements of (Loss) Earnings

     4   
  

Consolidated Condensed Statements of Comprehensive Earnings

     5   
  

Consolidated Condensed Statements of Cash Flows

     6   
  

Notes to Consolidated Condensed Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     38   

Item 4.

  

Controls and Procedures

     39   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     40   

Item 1A.

  

Risk Factors

     40   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     40   

Item 3.

  

Defaults Upon Senior Securities

     40   

Item 4.

  

Mine Safety Disclosures

     40   

Item 5.

  

Other Information

     40   

Item 6.

  

Exhibits

     41   

Signatures

        42   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

 

Unified Grocers, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets – Unaudited

(dollars in thousands)

 

      December 29,
2012
    September 29,
2012
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 14,843      $ 11,169   

Accounts and current portion of notes receivable, net of allowances of $2,962 and $2,930 at December 29, 2012 and September 29, 2012, respectively

     190,841        187,126   

Inventories

     222,580        247,267   

Prepaid expenses and other current assets

     10,803        11,023   

Deferred income taxes

     5,165        5,165   

 

 

Total current assets

     444,232        461,750   

Properties and equipment, net

     177,725        176,338   

Investments

     89,616        88,991   

Notes receivable, less current portion and net of allowances of $68 and $877 at December 29, 2012 and September 29, 2012, respectively

     20,506        16,693   

Goodwill

     38,997        38,997   

Other assets, net

     126,472        138,206   

 

 

Total Assets

   $ 897,548      $ 920,975   

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 204,713      $ 218,404   

Accrued liabilities

     67,000        64,285   

Current portion of notes payable

     4,536        3,878   

Members’ deposits and estimated patronage dividends

     12,428        12,109   

 

 

Total current liabilities

     288,677        298,676   

Notes payable, less current portion

     198,650        196,484   

Long-term liabilities, other

     235,263        263,411   

Members’ and Non-Members’ deposits

     7,385        7,475   

Commitments and contingencies

    

Shareholders’ equity:

    

Class A Shares: 500,000 shares authorized, 145,950 and 149,450 shares outstanding at December 29, 2012 and September 29, 2012, respectively

     27,237        27,922   

Class B Shares: 2,000,000 shares authorized, 425,731 and 434,598 shares outstanding at December 29, 2012 and September 29, 2012, respectively

     76,967        78,411   

Class E Shares: 2,000,000 shares authorized, 251,808 shares outstanding at both December 29, 2012 and September 29, 2012

     25,181        25,181   

Retained earnings – allocated

     75,609        77,365   

Retained earnings – non-allocated

     6,864        6,864   

 

 

Total retained earnings

     82,473        84,229   

Receivable from sale of Class A Shares to Members

     (538     (661

Accumulated other comprehensive loss

     (43,747     (60,153

 

 

Total shareholders’ equity

     167,573        154,929   

 

 

Total Liabilities and Shareholders’ Equity

   $ 897,548      $ 920,975   

 

 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

 

Unified Grocers, Inc. and Subsidiaries

Consolidated Condensed Statements of (Loss) Earnings – Unaudited

(dollars in thousands)

 

      Thirteen Weeks Ended  
      December 29,
2012
    December 31,
2011
 

Net sales

   $ 953,414      $ 991,123   

Cost of sales

     877,183        907,159   

Distribution, selling and administrative expenses

     71,344        73,055   

 

 

Operating income

     4,887        10,909   

Interest expense

     (3,191     (3,074

 

 

Earnings before estimated patronage dividends and income taxes

     1,696        7,835   

Estimated patronage dividends

     (2,536     (1,677

 

 

(Loss) earnings before income taxes

     (840     6,158   

Income taxes

     753        (2,033

 

 

Net (loss) earnings

   $ (87   $ 4,125   

 

 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

 

Unified Grocers, Inc. and Subsidiaries

Consolidated Condensed Statements of Comprehensive Earnings – Unaudited

(dollars in thousands)

 

      Thirteen Weeks Ended  
      December 29,
2012
    December 31,
2011
 

Net (loss) earnings

   $ (87   $ 4,125   

Other comprehensive earnings, net of income taxes:

    

Unrealized net holding (loss) gain on investments, net of income tax (benefit) expense of $(568) and $331 for the thirteen weeks ended December 29, 2012 and December 31, 2011, respectively

     (1,060     612   

Defined benefit pension plans and other postretirement benefit plans: Unrecognized prior service credits arising during the period, and accelerated recognition of existing unrecognized prior service credit and unrecognized gains and losses, as a result of curtailment, net of income tax expense of $9,538 for the thirteen weeks ended December 29, 2012

     17,466        —     

 

 

Comprehensive earnings

   $ 16,319      $ 4,737   

 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

 

Unified Grocers, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows – Unaudited

(dollars in thousands)

 

      Thirteen Weeks Ended  
      December 29,
2012
    December 31,
2011
 

Cash flows from operating activities:

    

Net (loss) earnings

   $ (87   $ 4,125   

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

    

Depreciation and amortization

     6,303        6,303   

Provision for doubtful accounts

     133        229   

(Gain) loss on sale of properties and equipment

     (3     2   

Gain on curtailment of other postretirement benefit plans

     (2,685     —     

Pension contributions

     (997     (2,564

(Increase) decrease in assets:

    

Accounts receivable

     (5,293     (4,570

Inventories

     24,687        23,517   

Prepaid expenses and other current assets

     220        391   

Increase (decrease) in liabilities:

    

Accounts payable

     (13,869     (29,128

Accrued liabilities

     2,715        703   

Long-term liabilities, other

     2,613        4,653   

 

 

Net cash provided by operating activities

     13,737        3,661   

 

 

Cash flows from investing activities:

    

Purchases of properties and equipment

     (5,080     (1,909

Purchases of securities and other investments

     (3,376     (6,329

Proceeds from maturities or sales of securities and other investments

     2,203        5,431   

Origination of notes receivable

     (3,300     (1,700

Collection of notes receivable

     932        914   

Proceeds from sales of properties and equipment

     9        9   

Increase in other assets

     (622     (3,398

 

 

Net cash utilized by investing activities

     (9,234     (6,982

 

 

Cash flows from financing activities:

    

Net borrowings under secured revolving credit agreements

     700        12,100   

Borrowings under notes payable

     3,183        —     

Repayments of notes payable

     (1,059     (914

Payment of deferred financing fees

     (207     —     

Increase (decrease) in Members’ deposits and estimated patronage dividends

     319        (732

(Decrease) increase in Members’ and Non-Members’ deposits

     (90     2,820   

Decrease in receivable from sale of Class A Shares to Members, net

     123        86   

Repurchase of shares from Members

     (3,798     (4,263

Issuance of shares to Members

     —          219   

 

 

Net cash (utilized) provided by financing activities

     (829     9,316   

 

 

Net increase in cash and cash equivalents

     3,674        5,995   

Cash and cash equivalents at beginning of period

     11,169        5,117   

 

 

Cash and cash equivalents at end of period

   $ 14,843      $ 11,112   

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 3,094      $ 2,841   

Income taxes

   $ 1      $ 40   

 

 

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

Unified Grocers, Inc. and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – UNAUDITED

1.     BASIS OF PRESENTATION

The consolidated condensed financial statements include the accounts of Unified Grocers, Inc. and all its subsidiaries (the “Company” or “Unified”). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended September 29, 2012 filed with the SEC. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim periods presented. The preparation of the consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates.

The Company’s banking arrangements allow the Company to fund outstanding checks when presented for payment to the financial institutions utilized by the Company for disbursements. This cash management practice frequently results in total issued checks exceeding the available cash balance at a single financial institution. The Company’s policy is to record its cash disbursement accounts with a cash book overdraft in accounts payable. At December 29, 2012 and September 29, 2012, the Company had book overdrafts of $73.8 million and $69.4 million, respectively, classified in accounts payable and included in cash provided by operating activities.

2.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company evaluates the fair value of its assets and liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and ASC Topic 825, “Financial Instruments.”

ASC Topic 820 establishes a hierarchy for evaluating assets and liabilities valued at fair value as follows:

 

 

·

 

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

 

·

 

Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable. These inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

·

 

Level 3 – Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The Company records marketable securities at fair value in accordance with ASC Topic 320, “Investments – Debt and Equity Securities.” These assets are held by the Company’s Insurance segment. The Company’s Wholesale Distribution segment holds insurance contracts and mutual funds valued at fair value in support of certain employee benefits. See Note 3 for further discussion on investments.

 

7


Table of Contents

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.

Accounts receivable and current portion of notes receivable.    The carrying amount of accounts receivable and the current portion of notes receivable approximates the fair value of net accounts and notes receivable due to their short-term maturity.

Concentration of credit risk.    The Company’s largest customer, Smart & Final, Inc., a Non-Member customer, and the ten largest Member and Non-Member customers (including Smart & Final, Inc.) constituted approximately 15% and 48%, respectively, of total net sales for the thirteen week period ended December 29, 2012, and approximately 12% and 45%, respectively, of total net sales for the thirteen week period ended December 31, 2011. The Company’s ten customers with the largest accounts receivable balances accounted for approximately 38% and 39% of total accounts receivable at December 29, 2012 and September 29, 2012, respectively. Management believes that receivables are well diversified, and the allowances for doubtful accounts are sufficient to absorb estimated losses.

Investments.    Generally, the fair values for investments are readily determinable based on actively traded securities in the marketplace. Investments that are not actively traded are valued based upon inputs including quoted prices for identical or similar assets. Equity securities that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company regularly evaluates securities carried at cost to determine whether there has been any diminution in value that is deemed to be other than temporary and adjusts the value accordingly.

The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of December 29, 2012:

 

(dollars in thousands)

 

      
      Level 1      Level 2      Level 3      Total  

Money market funds

   $ 1,608       $ —         $ —         $ 1,608   

Common equity securities

     9,164         —           —           9,164   

Mutual funds

     13,858         —           —           13,858   

Corporate securities

     —           29,121         —           29,121   

Government securities

     9,556         28,258         —           37,814   

Municipal securities

     —           267         —           267   

 

 

Total

   $ 34,186       $ 57,646       $ —         $ 91,832   

 

 

The following table represents the Company’s financial instruments recorded at fair value and the hierarchy of those assets as of September 29, 2012:

 

(dollars in thousands)

 

      
      Level 1      Level 2      Level 3      Total  

Money market funds

   $ 2,162       $ —         $ —         $ 2,162   

Common equity securities

     9,148         —           —           9,148   

Mutual funds

     13,908         —           —           13,908   

Corporate securities

     —           26,371         —           26,371   

Government securities

     9,617         30,347         —           39,964   

Municipal securities

     —           258         —           258   

 

 

Total

   $ 34,835       $ 56,976       $ —         $ 91,811   

 

 

Money market funds are valued based on quoted prices in active markets (Level 1 inputs) and are included in cash and cash equivalents in the Company’s consolidated condensed balance sheets. Common equity securities and mutual funds are valued based on information received from a third party. These assets are valued based on

 

8


Table of Contents

quoted prices in active markets (Level 1 inputs). As of December 29, 2012, $9.2 million of common equity securities are included in investments and $13.9 million of mutual funds are included in other assets in the Company’s consolidated condensed balance sheets. Corporate securities, consisting of high quality investment grade corporate bonds, and government and municipal securities, consisting of obligations of U.S. government corporations and agencies, U.S. government treasury securities and U.S. state and municipal bonds, are held by two of the Company’s insurance subsidiaries to fund loss reserves. These assets are valued by the Company based on information received from a third party pricing service. For assets traded in active markets, the assets are valued at quoted bond market prices (Level 1 inputs). For assets traded in inactive markets, the service’s pricing methodology uses observable inputs (such as bid/ask quotes) for identical or similar assets. Assets considered to be similar will have similar characteristics, such as: duration, volatility, prepayment speed, interest rates, yield curves, and/or risk profile and other market corroborated inputs (Level 2 inputs). The Company determines the classification of financial asset groups within the fair value hierarchy based on the lowest level of input into each group’s asset valuation. The financial instruments included in the preceding table, other than money market funds and mutual funds discussed above, are included in investments in the Company’s consolidated condensed balance sheets at December 29, 2012.

The Company did not have any transfers into and out of Levels 1 and 2 during the thirteen week period ended December 29, 2012.

Notes payable.    The fair values of borrowings under the Company’s revolving credit facilities are estimated to approximate their carrying amounts due to the short maturities of those obligations. The fair values for other notes payable are based primarily on rates currently available to the Company for debt with similar terms and remaining maturities.

The fair value of notes payable, excluding capital leases, was $205.2 million and $203.2 million compared to their carrying value of $203.2 million and $200.3 million at December 29, 2012 and September 29, 2012, respectively.

The methods and assumptions used to estimate the fair values of the Company’s financial instruments at December 29, 2012 and September 29, 2012 were based on estimates of market conditions, estimates using present value and risks existing at that time (Level 3 inputs). These values represent an approximation of possible value and may never actually be realized.

3. INVESTMENTS

The amortized cost and fair value of investments are as follows:

 

(dollars in thousands)

                          

December 29, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available for sale securities:

          

Fixed maturity securities:

          

U.S. Treasury securities and obligations of U.S. government corporations and agencies

   $ 37,051       $ 798       $ (35   $ 37,814   

Municipal securities

     245         22         —          267   

Corporate securities

     28,381         755         (15     29,121   

 

 

Total fixed maturity securities

     65,677         1,575         (50     67,202   

Equity securities

     9,541         125         (502     9,164   

 

 

Total available for sale securities

   $ 75,218       $ 1,700       $ (552     76,366   

 

   

Common stock, at cost

             13,250   

 

 

Total investments

           $ 89,616   

 

 

 

9


Table of Contents

(dollars in thousands)

                          

September 29, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 

Available for sale securities:

          

Fixed maturity securities:

          

U.S. Treasury securities and obligations of U.S. government corporations and agencies

   $ 39,014       $ 958       $ (8   $ 39,964   

Municipal securities

     245         13         —          258   

Corporate securities

     25,617         761         (7     26,371   

 

 

Total fixed maturity securities

     64,876         1,732         (15     66,593   

Equity securities

     9,251         273         (376     9,148   

 

 

Total available for sale securities

   $ 74,127       $ 2,005       $ (391     75,741   

 

   

Common stock, at cost

             13,250   

 

 

Total investments

  

  $ 88,991   

 

 

During the interim period ended December 29, 2012 and the fiscal year ended September 29, 2012, the Company did not hold any trading or held-to-maturity securities.

The Company’s insurance subsidiaries invest a significant portion of premiums received in fixed maturity securities and equity securities to fund loss reserves. As a result, the Company’s insurance subsidiaries are subject to both credit and interest rate risk. Management has established guidelines and practices to limit the amount of credit risk through limitation of non-investment grade securities. The Company assesses whether unrealized losses are other-than-temporary. The discussion and table that follow describe the Company’s securities that have unrealized losses.

Unrealized losses on the Company’s investments in fixed maturity securities were caused by interest rate increases rather than credit quality. Unrealized losses on the Company’s investments in equity securities were caused by market conditions deemed temporary by the Company. Because the Company’s insurance subsidiaries do not intend to sell, nor do they have or anticipate having a regulatory requirement to sell, these investments until recovery of fair value, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 29, 2012.

The table below illustrates the length of time available for sale fixed maturity securities and equity securities, not deemed to be other-than-temporarily impaired, have been in a continuous unrealized loss position at December 29, 2012:

 

(dollars in thousands)

   Less than 12 Months      12 Months or Greater      Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

   $ 6,007       $ 35       $ —         $ —         $ 6,007       $ 35   

Corporate debt securities

     2,310         15         —           —           2,310         15   

Equity securities

     3,314         154         1,581         348         4,895         502   

 

 

Total investments

   $ 11,631       $ 204       $ 1,581       $ 348       $ 13,212       $ 552   

 

 

 

10


Table of Contents

The table below illustrates the length of time available for sale fixed maturity securities and equity securities, not deemed to be other-than-temporarily impaired, have been in a continuous unrealized loss position at September 29, 2012:

 

(dollars in thousands)

   Less than 12 Months      12 Months or Greater      Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies

   $ 2,643       $ 8       $ —         $ —         $ 2,643       $ 8   

Corporate debt securities

     677         7         —           —           677         7   

Equity securities

     3,164         54         1,607         322         4,771         376   

 

 

Total investments

   $ 6,484       $ 69       $ 1,607       $ 322       $ 8,091       $ 391   

 

 

Available for sale fixed maturity securities are due as follows:

 

(dollars in thousands)

 

             

December 29, 2012

   Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 2,586       $ 2,601   

Due after one year through five years

     29,268         29,966   

Due after five years through ten years

     15,864         16,319   

Due after ten years

     17,959         18,316   

 

 
   $ 65,677       $ 67,202   

 

 

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. Corporate mortgage-backed securities are shown as being due at their average expected maturity dates.

Amounts reported as “due in one year or less” are included in long-term investments, as the Company’s insurance subsidiaries are required to maintain investments in support of regulatory deposit requirements. Hence, investments with maturities less than one year maintained in support of this long-term commitment are generally sold to repurchase investments with longer maturities. As these investments continue to support a long-term commitment obligation related to insurance reserves, the Company classifies such amounts as long-term. At December 29, 2012 and September 29, 2012, the long-term portion of the related insurance reserves of $34.8 million and $36.1 million, respectively, are included in long-term liabilities, other in the Company’s consolidated condensed balance sheets.

Investments carried at fair values of $45.5 million and $45.6 million at December 29, 2012 and September 29, 2012 (which include $0.5 million and $0.3 million recorded in cash and cash equivalents), respectively, are maintained in support of regulatory deposit requirements ($40.9 million in direct deposit of securities at both December 29, 2012 and September 29, 2012) in compliance with statutory regulations. Investments with fair values of $7.2 million and $7.3 million at December 29, 2012 and September 29, 2012, respectively (which include $0.1 million recorded in cash and cash equivalents) are on deposit with regulatory authorities in compliance with statutory regulations. Investments with fair values of $0.9 million at both December 29, 2012 and September 29, 2012 (which include zero recorded in cash and cash equivalents) are on deposit in compliance with collateral requirements on reinsurance arrangements.

 

11


Table of Contents

Net investment income, which is included in net sales, is summarized as follows:

 

(dollars in thousands)

 

            
      Thirteen Weeks Ended  
      December 29,
2012
    December 31,
2011
 

Fixed maturity securities

   $ 334      $ 583   

Equity securities

     290        399   

Cash and cash equivalents

     —          —     

 

 
     624        982   

Less: investment expenses

     (67     (75

 

 
   $ 557      $ 907   

 

 

Equity investments held by the Company that do not have readily determinable fair values are accounted for using the cost or equity methods of accounting. The Company evaluated its equity investments for impairment as of December 29, 2012, and the Company did not consider any of these equity investments to be impaired.

The Company held investments in Western Family Holding Company (“Western Family”) common stock of $9.2 million at both December 29, 2012 and September 29, 2012. Western Family is a private cooperative located in Oregon from which the Company purchases food and general merchandise products. The investment represents approximately an 18% ownership interest at both December 29, 2012 and September 29, 2012. The Company’s ownership percentage in Western Family is based, in part, on the volume of purchases transacted with Western Family. The investment is accounted for using the equity method of accounting.

The Company’s wholly-owned finance subsidiary, Grocers Capital Company (“GCC”), has an investment in National Consumer Cooperative Bank (“NCB”), which operates as a cooperative and therefore its participants are required to own its Class B common stock. The investment in the Class B common stock of NCB, accounted for using the cost method of accounting, aggregated $4.1 million at both December 29, 2012 and September 29, 2012. The Company did not recognize dividend income from NCB in the interim period ended December 29, 2012 or the fiscal year ended September 29, 2012.

4.     SEGMENT INFORMATION

Unified is a retailer-owned, grocery wholesale cooperative serving supermarket, specialty and convenience store operators located primarily in the western United States and the Pacific Rim. The Company’s customers range in size from single store operators to regional supermarket chains. The Company sells a wide variety of products typically found in supermarkets. The Company’s customers include its owners (“Members”) and non-owners (“Non-Members”). The Company sells products through Unified or through its specialty food subsidiary and international sales subsidiary. The Company reports all product sales in its Wholesale Distribution segment. The Company also provides support services, including insurance and financing, to its customers through the Wholesale Distribution segment and through separate subsidiaries. Insurance activities are reported in Unified’s Insurance segment while finance activities are grouped within Unified’s All Other business activities. The availability of specific products and services may vary by geographic region.

Management identifies segments based on the information monitored by the Company’s chief operating decision makers to manage the business and, accordingly, has identified the following two reportable segments:

 

 

·

 

The Wholesale Distribution segment includes the results of operations from the sale of groceries and general merchandise products to both Members and Non-Members, including a broad range of branded and corporate brand products in nearly all the categories found in a typical supermarket, including dry grocery, frozen food, deli, meat, dairy, eggs, produce, bakery, ethnic, gourmet, specialty foods, natural and organic, general merchandise and health and beauty care products. Support services (other than insurance and financing), including merchandising, retail pricing, advertising, promotional planning, retail technology, equipment purchasing and real estate services, are reported in the Wholesale Distribution segment. As of, and for the thirteen weeks ended, December 29, 2012, the Wholesale Distribution segment collectively represented approximately 84% of the Company’s total assets, and 99% of total net sales.

 

12


Table of Contents

Non-perishable products consist primarily of dry grocery, frozen food, deli, ethnic, gourmet, specialty foods, natural and organic, general merchandise and health and beauty care products. They also include (1) retail support services and (2) products and shipping services provided to Non-Member customers through Unified International, Inc. Perishable products consist primarily of service deli, service bakery, meat, eggs, produce, bakery and dairy products. Net sales within the Wholesale Distribution segment include $651.7 million and $684.5 million, or 68.7% and 69.4% of total Wholesale Distribution segment net sales, for the thirteen weeks ended December 29, 2012 and December 31, 2011, respectively, attributable to sales of non-perishable products, and $296.7 million and $302.5 million, or 31.3% and 30.6% of total Wholesale Distribution segment net sales, for the thirteen weeks ended December 29, 2012 and December 31, 2011, respectively, attributable to sales of perishable products. Wholesale Distribution segment net sales also include revenues attributable to the Company’s retail support services, which comprised less than 1% of total Wholesale Distribution segment net sales, for each of the foregoing respective periods.

 

 

·

 

The Insurance segment includes the results of operations for the Company’s three insurance subsidiaries (Unified Grocers Insurance Services, Springfield Insurance Company and Springfield Insurance Company, Limited). These subsidiaries provide insurance and insurance-related products, including workers’ compensation and liability insurance policies, to both the Company and its customers. Unified Grocers Insurance Services is an insurance agency that places business with insurance carriers, both non-affiliated and Springfield Insurance Company. Springfield Insurance Company, Limited is a captive re-insurer for Springfield Insurance Company. Unified Grocers Insurance Services is a licensed insurance agency in Alaska, Arizona, California, Idaho, New Mexico, Nevada, Oregon, Texas, Washington and Utah. Springfield Insurance Company is a licensed insurance carrier in Arizona, California, Colorado, Idaho, Montana, New Mexico, Nevada, Oregon, Texas, Washington, Wyoming and Utah. Springfield Insurance Company, Limited is a licensed insurance carrier in the Commonwealth of Bermuda. As of, and for the thirteen weeks ended, December 29, 2012, the Company’s Insurance segment collectively accounted for approximately 13% of the Company’s total assets, and 1% of total net sales.

The All Other category includes the results of operations for the Company’s other support businesses, including its finance subsidiary, whose services are provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. As of, and for the thirteen weeks ended, December 29, 2012, the All Other category collectively accounted for approximately 3% of the Company’s total assets, and less than 1% of total net sales.

 

13


Table of Contents

Information about the Company’s operating segments is summarized below.

 

(dollars in thousands)

      
      Thirteen Weeks Ended  
      December 29,
2012
    December 31,
2011
 

Net sales

    

Wholesale distribution

   $ 948,436      $ 986,961   

Insurance

     7,613        7,054   

All other

     363        345   

Inter-segment eliminations

     (2,998     (3,237

 

 

Total net sales

   $ 953,414      $ 991,123   

 

 

Operating income (loss)

    

Wholesale distribution

   $ 5,688      $ 10,156   

Insurance

     (922     638   

All other

     121        115   

 

 

Total operating income

     4,887        10,909   

 

 

Interest expense

     (3,191     (3,074

Estimated patronage dividends

     (2,536     (1,677

Income taxes

     753        (2,033

 

 

Net (loss) earnings

   $ (87   $ 4,125   

 

 

Depreciation and amortization

    

Wholesale distribution

   $ 6,177      $ 6,205   

Insurance

     112        84   

All other

     14        14   

 

 

Total depreciation and amortization

   $ 6,303      $ 6,303   

 

 

Capital expenditures

    

Wholesale distribution

   $ 4,998      $ 1,904   

Insurance

     82        5   

All other

     —          —     

 

 

Total capital expenditures

   $ 5,080      $ 1,909   

 

 

Identifiable assets at December 29, 2012 and December 31, 2011

    

Wholesale distribution

   $ 755,161      $ 772,519   

Insurance

     115,026        113,687   

All other

     27,361        25,983   

 

 

Total identifiable assets

   $ 897,548      $ 912,189   

 

 

5.     SHAREHOLDERS’ EQUITY

During the thirteen week period ended December 29, 2012, the Company redeemed 3,500 Class A Shares with a redemption value of $1.1 million. The Company also redeemed 8,867 Class B Shares with a redemption value of $2.7 million during the thirteen week period ended December 29, 2012.

6.     CONTINGENCIES

The Company is a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company believes the outcome of these matters will not result in a material adverse effect on its financial condition or results of operations.

 

14


Table of Contents

7.     PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a cash balance plan (“Unified Cash Balance Plan”). The Unified Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Benefits under the Unified Cash Balance Plan are provided through a trust.

The Company also sponsors an Executive Salary Protection Plan (“ESPP”) for the executive officers of the Company that provides supplemental post-termination retirement income based on each participant’s salary and years of service as an officer of the Company. Funds are held in a rabbi trust for the ESPP consisting primarily of life insurance policies reported at cash surrender value and mutual fund assets consisting of various publicly-traded mutual funds reported at estimated fair value based on quoted market prices. In accordance with ASC Topic 710, “Compensation – General,” the assets and liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. In addition, all earnings and expenses of the rabbi trust are reported in the Company’s consolidated condensed statement of (loss) earnings. The cash surrender value of such life insurance policies aggregated to $16.8 million at both December 29, 2012 and September 29, 2012, and are included in other assets in the Company’s consolidated condensed balance sheets. Mutual funds reported at their estimated fair value of $13.9 million at both December 29, 2012 and September 29, 2012 are included in other assets in the Company’s consolidated condensed balance sheets. The related accrued benefit cost (representing the Company’s benefit obligation to participants) of $42.5 million and $46.0 million at December 29, 2012 and September 29, 2012, respectively, is recorded in long-term liabilities, other in the Company’s consolidated condensed balance sheets. The assets held in the rabbi trust are not available for general corporate purposes. The rabbi trust is subject to creditor claims in the event of insolvency. The trust assets are excluded from ESPP plan assets as they do not qualify as plan assets under ASC Topic 715, “Compensation – Retirement Benefits.

The Company sponsors other postretirement benefit plans that provide certain medical coverage to retired non-union employees and provide unused sick leave benefits for certain eligible non-union and union employees. Those plans are not funded.

In December 2012, the Company amended several of its employee benefit plans. The Company amended the Unified Grocers, Inc. Executive Insurance Plan and the Unified Grocers, Inc. Officer Retiree Medical Plan to close the plans to new entrants as of September 30, 2012. Accordingly, no employee that is either hired or becomes an officer on or after such date can become a participant or recommence participation in either plan. The Company also amended the ESPP for executive officers to close the eligibility provisions of the ESPP to new entrants as of September 30, 2012 (the “Freeze Date”); accordingly, no employee that is either hired or becomes an officer on or after the Freeze Date can become a participant or recommence participation in the ESPP. Additionally, benefit accruals under the ESPP were frozen for officers who have already attained a 65% gross benefit accrual (generally attained after fifteen (15) or more years of service under the ESPP) as of September 30, 2012; accordingly, no such officers will accrue further gross benefits under the ESPP after the Freeze Date. For officers participating in the ESPP as of the Freeze Date who had less than a 65% gross benefit accrual, such officers will continue to accrue gross benefits under the ESPP until they reach a 65% gross benefit accrual. Lastly, in connection with freezing the benefit accrual under the ESPP, a participant’s gross accrued benefit will not consider any compensation earned by the participant after the Freeze Date, which effectively freezes the final pay and final average pay formulas under the plan at the September 30, 2012 levels.

In December 2012, the Company also amended the Unified Grocers, Inc. Retiree Medical Plan (the “RMP”) to modify the eligibility requirements for the RMP. Effective as of the end of the first quarter of fiscal 2013, only employees of the Company who have reached 49 years of age with at least 15 years of continuous service with Unified as of the end of the first quarter of fiscal 2013 will remain eligible to participate in the RMP. To receive benefits under the RMP, those employees who remain eligible must remain in continuous service with Unified through their retirement following the attainment of at least 55 years of age.

As a result of the foregoing benefit plan amendments, the Company remeasured the projected pension and accumulated postretirement benefit obligations associated with the respective plans as of the end of the first quarter of fiscal 2013. Such remeasurement resulted in a $29.7 million reduction in the Company’s long-term liabilities associated with the foregoing plans. These reductions were offset by an increase in other comprehensive

 

15


Table of Contents

earnings of $17.5 million (net of income tax of $9.5 million) and the recognition of a one-time curtailment gain of $2.7 million, related to the RMP, which is recorded in addition to the net periodic postretirement benefit cost in the Company’s accompanying Consolidated Condensed Statements of (Loss) Earnings.

The components of net periodic cost for pension and other postretirement benefits for the respective thirteen weeks ended December 29, 2012 and December 31, 2011 consist of the following:

 

(dollars in thousands)

     
     Pension Benefits     Other Postretirement Benefits  
     Thirteen Weeks Ended     Thirteen Weeks Ended  
     December 29,
2012
    December 31,
2011
    December 29,
2012
    December 31,
2011
 

Service cost

  $ 2,173      $ 1,942      $ 386      $ 381   

Interest cost

    2,968        3,161        614        630   

Expected return on plan assets

    (3,661     (3,168     —          —     

Amortization of prior service cost (credit)

    3        3        (247     (247

Recognized actuarial loss (gain)

    1,998        1,303        326        (77

One-time curtailment gain

    —          —          (2,686     —     

 

 

Net periodic benefit cost (income)

  $ 3,481      $ 3,241      $ (1,607   $ 687   

 

 

The Company’s funding policy is to make contributions to the Unified Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. The Company expects to make estimated minimum contributions to the Unified Cash Balance Plan totaling $7.4 million during fiscal 2013, which is comprised of $3.6 million for the 2013 plan year and $3.8 million for the 2012 plan year. At its discretion, the Company may contribute in excess of these amounts. Additional contributions, if any, will be based, in part, on future actuarial funding calculations and the performance of plan investments. The Company contributed zero and $1.0 million to the Unified Cash Balance Plan during the thirteen weeks ended December 29, 2012 for the 2013 and 2012 plan years, respectively.

Additionally, the Company expects to contribute $0.7 million to the ESPP to fund projected benefit payments to participants for the 2013 plan year. The Company contributed $0.2 million to the ESPP during the thirteen weeks ended December 29, 2012 to fund benefit payments to participants for the 2013 plan year.

During fiscal year 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (collectively, the “Acts”) was passed and signed into law. The Acts contain provisions that could impact the Company’s accounting for retiree medical benefits in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Acts and additional interpretations of the Acts become available. Elements of the Acts, the impact of which are currently not determinable, include the elimination of lifetime limits on retiree medical coverage and reduction of the existing insurance coverage gap for prescription drug benefits that are actuarially equivalent to benefits available to retirees under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Company will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. In addition, the Company may consider plan amendments in future periods that may have accounting implications.

8.     RELATED PARTY TRANSACTIONS

Members affiliated with directors of the Company make purchases of merchandise from the Company and also may receive benefits and services that are of the type generally offered by the Company to similarly situated eligible Members. Management believes such transactions are on terms that are generally consistent with terms available to other Members similarly situated.

During the course of its business, the Company enters into individually negotiated supply agreements with its Members. These agreements typically require the Member to purchase certain agreed amounts of its merchandise requirements from the Company and obligate the Company to supply such merchandise under agreed terms and conditions relating to such matters as pricing and delivery.

 

16


Table of Contents

In October 2012, the Company assumed a lease and sublease wherein Metropolitan Markets, LLC, a Member affiliated with Terry R. Halverson, a director of the Company, became a subtenant of the Company. The sublease agreement provides for payments of $27,000 per month and will expire in the Company’s fiscal year 2016. Also, in October 2012, the Company loaned $0.3 million with interest of 3% per annum to this Member, pursuant to a six-month note. At December 29, 2012, the outstanding loan balance was $0.2 million. Mr. Halverson will not be standing for re-election at the Company’s 2013 annual shareholders’ meeting to be held in February 2013.

On October 16, 2012, one of the Company’s directors, Michael A. Provenzano, Jr., resigned from the Company’s Board of Directors effective immediately.

As of the date of this report, other than noted above, there have been no material changes to the related party transactions disclosed in Note 17 to “Notes to Consolidated Financial Statements” in Part II, Item 8. “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended September 29, 2012.

9.     RECENTLY ADOPTED AND RECENTLY ISSUED AUTHORITATIVE ACCOUNTING GUIDANCE

In June 2011, the FASB and the International Accounting Standards Board (“IASB”) issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”). ASU No. 2011-05 addresses concerns about how other comprehensive income is reported under U.S. GAAP and International Financial Reporting Standards (“IFRSs”) and increases the prominence of other comprehensive income in the financial statements. ASU No. 2011-05 allows for the option of presenting either one continuous statement of net income and other comprehensive income or two consecutive statements. Further, an entity will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented for both interim and annual periods. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications Out of Accumulated Other Comprehensive Income in ASU No. 2011-05” (“ASU No. 2011-12”). ASU No. 2011-12 indefinitely defers only the specific provision requiring companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented.

The Company adopted ASU No. 2011-05 commencing in the first quarter of fiscal 2013. Other than presentation, the adoption of the required portion of ASU No. 2011-05 did not have an impact on the consolidated condensed financial statements.

In October 2010, the FASB issued ASU No. 2010-26, “Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2010-26”). ASU No. 2010-26 addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. ASU No. 2010-26 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in ASU No. 2010-26 are to be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. Accordingly, the Company adopted ASU No. 2010-26 commencing in the first quarter of fiscal 2013. The adoption of ASU No. 2010-26 did not have a significant impact on the Company’s consolidated condensed financial statements.

10.     SUBSEQUENT EVENTS

Subsequent events have been evaluated by the Company through the date the financial statements were issued.

 

17


Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. These forward-looking statements involve risks, uncertainties and assumptions. When we use words such as “believe,” “expect,” “anticipate” or similar expressions, we are making forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond our control. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors discussed in the sections entitled “Risk Factors” and “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements attributable to us are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date hereof. We undertake no duty or obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”).

COMPANY OVERVIEW

General

Unified Grocers, Inc. (referred to in this Form 10-Q, together with its consolidated subsidiaries, as “Unified,” “the Company,” “we,” “us” or “our”), a California corporation organized in 1922 and incorporated in 1925, is a retailer-owned, grocery wholesale cooperative serving supermarket, specialty and convenience store operators located primarily in the western United States and the Pacific Rim. We operate our business in two reportable business segments: (1) Wholesale Distribution; and (2) Insurance. All remaining business activities are grouped into All Other (see Note 4 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion).

We sell a wide variety of products typically found in supermarkets, including dry grocery, frozen food, deli, ethnic, gourmet, specialty foods, natural and organic, general merchandise, health and beauty care, service deli, service bakery, meat, eggs, produce, bakery and dairy products. We also provide insurance and financing services to our customers, as well as various support services, including merchandising, retail pricing, advertising, promotional planning, retail technology, equipment purchasing and real estate services. Our Wholesale Distribution segment represents approximately 99% of our total net sales. Insurance activities account for approximately 1% of total net sales. The availability of specific products and services may vary by geographic region. We have three separate geographical and marketing regions: Southern California, Northern California and the Pacific Northwest.

Our customers include our owners (“Members”) and non-owners (“Non-Members”). We do business primarily with those customers that have been accepted as Members. Our Members operate supermarket companies that range in size from single store operators to regional supermarket chains. Members are required to meet specific requirements, which include ownership of our capital shares and may include required cash deposits. Customers who purchase less than $1 million annually from us would not generally be considered for membership, while customers who purchase over $3 million annually are typically required to become Members. See Part I, Item 1. “Business – Member Requirements,” Part I, Item 1. “Business – Capital Shares” and Part I, Item 1. “Business – Customer Deposits” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information. Additionally, see “DESCRIPTION OF DEPOSIT ACCOUNTS” in our Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed on February 7, 2013, with respect to our offering of Partially Subordinated Patrons’ Deposit Accounts for further information. The membership requirements, including purchase and capitalization requirements, may be modified at any time at the discretion of our Board of Directors (the “Board”).

 

18


Table of Contents

We distribute the earnings from patronage activities conducted by us, excluding our subsidiaries, with our Members (“Patronage Business”) in the form of patronage dividends. The Board approves the payment of patronage dividends and the form of such payment for our three patronage earnings divisions: the Cooperative Division, the Southern California Dairy Division and the Pacific Northwest Dairy Division. See Part I, Item 1. “Business – Company Structure and Organization – Wholesale Business – Wholesale Distribution” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional discussion. An entity that does not meet Member purchase requirements may conduct business with us as a Non-Member customer. We may also grant an entity that meets our Member purchase requirements the ability to conduct business with us as a Non-Member customer. We retain the earnings from our subsidiaries and from business conducted with Non-Members (collectively, “Non-Patronage Business”).

Facilities and Transportation

We operate various warehouse and office facilities that are located in Commerce, Los Angeles, Santa Fe Springs and Stockton, California, Milwaukie, Oregon and Seattle, Washington. We also operate a bakery manufacturing facility and a milk, water and juice processing plant in Los Angeles, which primarily serve the Southern California region.

During the first quarter of fiscal 2013, we completed the closure of our Fresno dry warehouse facility and consolidated the distribution of general merchandise and health and beauty care products into our facilities in Southern and Northern California.

We believe our properties are generally in good condition, well maintained and suitable and adequate to carry on our business as presently conducted.

Our customers may choose either of two delivery options for the distribution of our products: have us deliver orders to their stores or warehouses or pick-up their orders from our distribution centers. For delivered orders, we primarily utilize our fleet of tractors and trailers.

INDUSTRY OVERVIEW AND THE COMPANY’S OPERATING ENVIRONMENT

Competition

We compete in the wholesale grocery industry with regional and national food wholesalers such as C&S Wholesale Grocers, Inc. and Supervalu, Inc. We also compete with many local and regional meat, produce, grocery, specialty, general food, bakery and dairy wholesalers and distributors.

Our customers include grocery retailers with a broad range of store sizes and types targeting a diverse range of consumers. Depending on the nature of their stores and consumer focus, our customers may compete directly with vertically integrated regional and national chains, such as Albertsons (owned by Supervalu, Inc.), Kroger Co., Safeway Inc., and WinCo Foods, which operate traditional format full-service grocery stores. They may also compete with warehouse club stores and supercenters such as Costco Wholesale Corp., Sam’s Club and Wal-Mart Stores, Inc., discount, drug and alternative format stores such as CVS Caremark Corporation, Target Corp., and the various “dollar” stores, stores focused on upscale and natural and organic products such as Trader Joe’s and Whole Foods Market Inc., and various convenience stores. Certain of our customers also serve niche markets such as the Hispanic and Asian communities. The marketplace in which our customers compete continues to evolve and present challenges. These challenges include such recent trends as the continued proliferation of discount stores, supercenters and warehouse club stores and the efforts of many of the non-traditional format stores to expand their offerings of product to cover a greater range of the products offered by the traditional format full-service grocery store. The success of our customers in attracting consumers to shop at their stores, as opposed to the traditional and non-traditional format stores of their competitors, has a direct and significant impact on our sales and earnings. For more information about the competitive environment we and our customers face, please refer to “Risk Factors.”

Our strategy to help our customers effectively compete in the marketplace includes a focus on helping our customers understand consumer trends. The ongoing challenging economic climate continues to cause consumers

 

19


Table of Contents

to place a higher emphasis on lower prices. Job losses have also caused a significant shift in consumers’ eating and living habits. To effectively adjust to these conditions, many of our customers have focused on, among other things, enhancing the use of our corporate brand offerings to give consumers a lower-priced alternative to nationally branded products. This includes a corporate brand health and wellness offering to satisfy consumers’ desire for products that support a healthy lifestyle but at a lower price. Differentiation strategies in specialty and ethnic products and items on the perimeter of the store such as produce, service deli, service bakery and meat categories also continue to be an important part of our strategy.

One of our sales initiatives is to continue our development of programs and services designed with consumers in mind. The retail store is becoming a more important source of information for consumers about the products that are available to them. To provide this information, we offer our customers tools to educate consumers about the products we offer through a variety of methods including social media, websites and mobile devices as well as in-store displays. We also promote value and savings through event marketing and everyday low price campaigns.

Economic Factors

Economic factors such as low consumer confidence and high unemployment continue to persist in most of our operating markets. Severe to extreme drought conditions currently prevailing in approximately one-third of the U.S. are expected to result in higher prices on certain food products; however, the timing and degree of any such impact is uncertain at this time. Consumers continue to be highly price sensitive and seek lower-cost alternatives in their grocery purchases, continuing to put pressure on profit margins in an industry already characterized by low profit margins. Job losses have also caused greater demographic shifts that have changed the composition of consumers and their related product focus in a given marketplace. These challenging economic conditions have contributed to continued low levels of consumer spending and a shift in consumer buying patterns, including increased purchases from grocery discounters and other non-traditional format stores for grocery products.

We are impacted by changes in the overall economic environment. An inflationary or deflationary economic period could impact our operating income in a variety of areas, including, but not limited to, sales, cost of sales, employee wages and benefits, workers’ compensation insurance and energy and fuel costs. We typically experience significant volatility in the cost of certain commodities, the cost of ingredients for our manufactured breads and processed fluid milk and the cost of packaged goods purchased from other manufacturers. Our operating programs are designed to give us the flexibility to pass on these costs to our customers; however, we may not always be able to pass on such changes to customers on a timely basis. Any delay may result in our recovering less than all of a price increase. It is also difficult to predict the effect that possible future purchased or manufactured product cost decreases might have on our profitability. The effect of deflation in purchased or manufactured product costs would depend on the extent to which we had to lower selling prices of our products to respond to sales price competition in the market. Additionally, we are impacted by changes in prevailing interest rates or interest rates that have been negotiated in conjunction with our credit facilities. A lower interest rate (used, for example, to discount our pension and postretirement unfunded obligations) may increase certain expenses, particularly pension and postretirement benefit costs, while decreasing potential interest expense for our credit facilities. An increase in interest rates may have the opposite impact. Consequently, it is difficult for us to accurately predict the impact that inflation, deflation or changes in interest rates might have on our operations.

External factors continue to drive volatility in our costs associated with fuel. Our pricing includes a fuel surcharge on product shipments to recover fuel costs over a specified index. When fuel costs differ from a specified index, pricing adjustments are passed on to our customers. The surcharge is reviewed monthly and adjusted when appropriate.

We are subject to recurring wage and benefit increases as a result of negotiated labor contracts with our represented employees and compensation and benefit adjustments for non-represented employees. We continually focus attention on initiatives aimed at improving operating efficiencies throughout the organization to offset the impact of these increases.

Our insurance subsidiaries invest a significant portion of premiums received in fixed maturity securities and equity securities to fund loss reserves. As a result, our operating performance may be impacted by the performance of these investments. The majority of our investments (approximately 85% at December 29, 2012) are held by two of

 

20


Table of Contents

our insurance subsidiaries, and include obligations of U.S. government corporations and agencies, high quality investment grade corporate bonds, U.S. government treasury securities, U.S. state and municipal securities and common equity securities. The investments held by our insurance subsidiaries, excluding the common equity securities, are generally not actively traded and are valued based upon inputs including quoted prices for identical or similar assets. Collectively, the estimated fair value or market value of these investments continued to exceed their cost during the thirteen weeks ended December 29, 2012. Approximately 10% of our investments are held by our Wholesale Distribution segment, which consists primarily of Western Family Holding Company (“Western Family”) common stock. Western Family is a private cooperative located in Oregon from which we purchase food and general merchandise products. Approximately 5% of our investments are held by our other support businesses and consist of an investment by our wholly-owned finance subsidiary in National Consumer Cooperative Bank (“NCB”). NCB operates as a cooperative and therefore its participants are required to own its Class B common stock.

We invest in life insurance policies (reported at cash surrender value) and various publicly-traded mutual funds (reported at estimated fair value based on quoted market prices) to fund obligations pursuant to our Executive Salary Protection Plan and deferred compensation plan (see Note 7 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion). Life insurance and mutual fund assets with values tied to the equity markets are impacted by overall market conditions. During the thirteen weeks ended December 29, 2012, net earnings and net comprehensive earnings experienced an increase corresponding to the increase in life insurance and mutual fund assets, respectively.

Technology

Technology has played a significant role in shaping the grocery industry as companies continue to use technology to improve efficiency and reduce costs. Technological improvements have been an important part of our strategy to improve service to our customers and lower costs. As supermarket chains increase in size and alternative format grocery stores gain market share, independent grocers are further challenged to compete. Our customers benefit from our substantial investment in supply-chain technology, including improvements in our vendor management activities through new item introductions, promotions and payment support activities. We also provide our customers with network connectivity, data exchange and a portfolio of retail automation applications. Most of these offerings are provided under a subscription model allowing our retailers to utilize these systems without high up-front costs. We fully support these products, eliminating the need for our customers to manage these systems. We continue to invest in technology solutions that offer value to the supply chain and bring our customers closer to the consumer.

RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated condensed financial statements and notes to the consolidated condensed financial statements, specifically Note 4 of “Notes to Consolidated Condensed Financial Statements – Unaudited,” “Segment Information,” included in Part I, Item 1. “Financial Statements (Unaudited)” of this report. Certain statements in the following discussion are not historical in nature and should be considered to be forward-looking statements that are inherently uncertain.

The following table sets forth our selected consolidated financial data expressed as a percentage of net sales for the periods indicated and the percentage increase or decrease in such items over the prior year period.

 

      Thirteen Weeks Ended     % Change  

Fiscal Period Ended

   December 29,
2012
    December 31,
2011
    Thirteen
Weeks
 

Net sales

     100.0     100.0     (3.8 )% 

Cost of sales

     92.0        91.5        (3.3

Distribution, selling and administrative expenses

     7.5        7.4        (2.3

Operating income

     0.5        1.1        (55.2

Interest expense

     (0.3     (0.3     3.8   

Estimated patronage dividends

     (0.3     (0.2     51.2   

Income taxes

     0.1        (0.2     (137.0

Net (loss) earnings

         0.4     (102.1 )% 

 

 

 

21


Table of Contents

THIRTEEN WEEK PERIOD ENDED DECEMBER 29, 2012 (“2013 PERIOD”) COMPARED TO THE THIRTEEN WEEK PERIOD ENDED DECEMBER 31, 2011 (“2012 PERIOD”)

Overview of the 2013 Period. We experienced an overall net sales decrease of $37.7 million, or 3.8%, to $953.4 million for the 2013 Period as compared to $991.1 million for the 2012 Period. Our net sales for the Wholesale Distribution segment decreased $38.5 million, or 3.9%, for the comparable 2013 and 2012 Periods. We increased sales due to the addition of new customers; however, those sales improvements did not fully offset reduced sales to continuing customers and the loss of sales due to lost customers and store closures. Net sales in our Insurance segment increased $0.8 million for the comparable thirteen week periods.

Our consolidated operating income decreased $6.0 million to $4.9 million in the 2013 Period compared to $10.9 million in the 2012 Period.

The overall decrease in operating income is summarized in our operating segments and other business activities as follows:

 

 

·

 

Wholesale Distribution Segment:    The Wholesale Distribution segment’s operating income decreased $4.5 million to $5.7 million in the 2013 Period compared to $10.2 million in the 2012 Period. This decrease in earnings was primarily due to a change in sales mix towards lower margin products, decreased inventory holding gains, lower net sales, transition costs incurred during the consolidation of our Fresno dry warehouse facility into our facilities in Southern and Northern California and an increase in our insurance expense, partially offset by an employee postretirement benefit plan curtailment gain recorded in distribution, selling and administrative expenses.

 

 

·

 

Insurance Segment:    Operating income decreased $1.5 million in our Insurance segment to a loss of $0.9 million in the 2013 Period compared to earnings of $0.6 million in the 2012 Period. This decrease was primarily due to an increase in workers compensation reserves for claims exposure related to previous years.

 

 

·

 

All Other:    Operating income in our All Other business activities was $0.1 million in both the 2013 and 2012 Periods. All Other business activities primarily consist of activities conducted through our finance subsidiary.

The following tables summarize the performance of each business segment for the 2013 and 2012 Periods.

Wholesale Distribution Segment

(dollars in thousands)

 

     

Thirteen Weeks Ended

December 29, 2012

   

Thirteen Weeks Ended

December 31, 2011

        
      Amounts in
000’s
     Percent to
Net Sales
    Amounts in
000’s
     Percent to
Net Sales
    Difference  

Gross sales

   $ 948,436         —        $ 986,961         —        $ (38,525

Inter-segment eliminations

     —           —          —           —          —     

 

 

Net sales

     948,436         100.0     986,961         100.0     (38,525

Cost of sales

     873,435         92.1        905,790         91.8        (32,355

Distribution, selling and administrative expenses

     69,313         7.3        71,015         7.2        (1,702

 

 

Operating income

   $ 5,688         0.6   $ 10,156         1.0   $ (4,468

 

 

 

22


Table of Contents

Insurance Segment

(dollars in thousands)

 

     

Thirteen Weeks Ended

December 29, 2012

   

Thirteen Weeks Ended

December 31, 2011

        
      Amounts in
000’s
    Percent to
Net Sales
    Amounts in
000’s
    Percent to
Net Sales
    Difference  

Gross sales – premiums earned and investment income

   $ 7,613        —        $ 7,054        —        $ 559   

Inter-segment eliminations

     (2,961     —          (3,206     —          245   

 

 

Net sales – premiums earned and investment income

     4,652        100.0     3,848        100.0     804   

Cost of sales – underwriting expenses

     3,748        80.6        1,369        35.6        2,379   

Selling and administrative expenses

     1,826        39.3        1,841        47.8        (15

 

 

Operating (loss) income

   $ (922     (19.9 )%    $ 638        16.6   $ (1,560

 

 

All Other

(dollars in thousands)

 

     

Thirteen Weeks Ended

December 29, 2012

   

Thirteen Weeks Ended

December 31, 2011

      
      Amounts in
000’s
    Percent to
Net Sales
    Amounts in
000’s
    Percent to
Net Sales
    Difference

Gross sales

   $ 363        —        $ 345        —        $18

Inter-segment eliminations

     (37     —          (31     —        (6)

 

Net sales

     326        100.0     314        100.0   12

Selling and administrative expenses

     205        62.9        199        63.4      6

 

Operating income

   $ 121        37.1   $ 115        36.6   $6

 

Net sales.    Consolidated net sales decreased $37.7 million, or 3.8%, to $953.4 million in the 2013 Period compared to $991.1 million for the 2012 Period. Factors impacting net sales are as follows:

 

 

·

 

Wholesale Distribution Segment:    Wholesale Distribution net sales decreased $38.5 million to $948.5 million in the 2013 Period compared to $987.0 million for the 2012 Period. Significant components of this decrease are summarized below.

 

(dollars in millions)

  

Key Net Sales Changes

   Increase (Decrease)  

New customers

   $ 3.1   

Decrease in net sales to continuing customers

     (17.7

Lost customers

     (14.1

Store closures

     (9.8

 

 

Change in net sales

   $ (38.5

 

 

 

 

·

 

Insurance Segment:    Net sales, consisting principally of premium revenues and investment income, increased $0.8 million to $4.6 million in the 2013 Period compared to $3.8 million for the 2012 Period. The increase is primarily due to an increase in workers’ compensation premium revenue resulting from the addition of new policyholders and increased renewal premiums.

 

 

·

 

All Other:    Net sales were $0.3 million in both the 2013 and 2012 Periods.

Cost of sales (including underwriting expenses).    Consolidated cost of sales was $877.2 million for the 2013 Period and $907.2 million for the 2012 Period and comprised 92.0% and 91.5% of consolidated net sales for the 2013 and 2012 Periods, respectively. Factors impacting cost of sales are as follows:

 

 

·

 

Wholesale Distribution Segment:    Cost of sales decreased by $32.4 million to $873.4 million in the 2013 Period compared to $905.8 million in the 2012 Period. As a percentage of Wholesale Distribution net sales, cost of sales was 92.1% and 91.8% for the 2013 and 2012 Periods, respectively.

 

23


Table of Contents
 

·

 

The change in customer sales mix and change in product mix between perishable and non-perishable products resulted in a 0.1% increase in cost of sales as a percent of Wholesale Distribution net sales in the 2013 Period compared to the 2012 Period.

 

 

·

 

Vendor related activity resulted in a 0.2% increase in cost of sales as a percent of Wholesale Distribution net sales in the 2013 Period compared to the 2012 Period. This was comprised of declines in inventory holding gains (realized upon sale) due to a lack of vendor price increases as well as changes in vendor marketing activity.

 

 

·

 

Insurance Segment: Cost of sales primarily consists of claims loss and loss adjustment expenses, underwriting expenses, commissions, premium taxes and regulatory fees. Cost of sales increased $2.4 million to $3.8 million in the 2013 Period compared to $1.4 million in the 2012 Period. The increase is primarily due to additional claims exposure related to new workers’ compensation policies written during the 2013 Period and increased claims exposure for workers’ compensation policies related to previous years. The cost of insurance and the adequacy of loss reserves are impacted by actuarial estimates based on a detailed analysis of health care cost trends, claims history, demographics and industry trends. As a result, the amount of loss reserves and future expenses is significantly affected by these variables and may significantly change, depending on the cost of providing benefits and the results of further legislative action. See additional discussion related to insurance reserves under “Risk FactorsOur insurance reserves may be inadequate if unexpected losses occur.”

Distribution, selling and administrative expenses.    Consolidated distribution, selling and administrative expenses were $71.3 million in the 2013 Period compared to $73.0 million in the 2012 Period, reflecting a decrease of $1.7 million, and comprised 7.5% and 7.4% of net sales for the 2013 and 2012 Periods, respectively. Factors impacting distribution, selling and administrative expenses are as follows:

 

 

·

 

Wholesale Distribution Segment:    Distribution, selling and administrative expenses decreased $1.7 million to $69.3 million in the 2013 Period compared to $71.0 million in the 2012 Period, and comprised 7.3% and 7.2% of Wholesale Distribution net sales for the 2013 and 2012 Periods, respectively.

 

 

·

 

Insurance:    During the 2013 Period, we experienced net insurance expense increases of $1.2 million, or 0.1% as a percent of Wholesale Distribution net sales. This increase in expense is primarily due to the decrease in the cash surrender value of our life insurance policy assets, which are held in a rabbi trust to support post-termination retirement benefits and are not available for general corporate purposes. The changes in our policy assets are a result of changes in the fair value of the underlying securities, which are highly concentrated in U.S. equity markets and priced based on readily determinable market values.

 

 

·

 

Employee Postretirement Benefit Plan Curtailment Gain:    Effective December 31, 2012, we amended several of our employee benefit plans. As a result of these benefit plan amendments, we remeasured the projected pension and accumulated postretirement benefit obligations associated with the plans as of December 31, 2012. Such remeasurement resulted in the recognition of a one-time curtailment gain of $2.7 million, or 0.3% as a percent of Wholesale Distribution net sales, which was recorded in addition to the net periodic postretirement benefit cost in distribution, selling and administrative expenses. See Note 7 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion.

 

 

·

 

General Expenses:    General expenses decreased $0.2 million, but increased 0.3% as a percent of Wholesale Distribution net sales due to the decline in net sales. During the 2013 Period, we reduced both represented and non-represented labor expenses due to a continued focus on cost reduction. This reduction was partially offset by additional expenses associated with the closure and consolidation of one of our warehouses. We anticipate our warehouse expenses will return to normal levels by the end of our fiscal year.

 

 

·

 

Insurance Segment:    Selling and administrative expenses for the Insurance segment were $1.8 million for both the 2013 and 2012 Periods.

 

 

·

 

All Other:    Selling and administrative expenses for our All Other business activities were $0.2 million in both the 2013 and 2012 Periods.

 

24


Table of Contents

Interest.    Interest expense increased $0.1 million to $3.2 million compared to $3.1 million for the 2012 Period and comprised 0.3% of consolidated net sales for both the 2013 and 2012 Periods. Factors impacting interest expense are as follows:

 

 

·

 

Interest expense on our primary debt instruments (as described below) increased $0.1 million to $2.9 million in the 2013 Period compared to $2.8 million in the 2012 Period.

 

 

·

 

Weighted Average Borrowings:    Interest expense decreased $0.2 million from the 2012 Period as a result of lower outstanding debt. Weighted average borrowings decreased by $18.6 million primarily due to decreased inventory levels during the 2013 Period.

 

 

·

 

Interest Rates:    Interest expense increased $0.3 million from the 2012 Period. Our effective borrowing rate for the combined primary debt, made up of the revolving lines of credit for Unified and Grocers Capital Company, and senior secured notes, was 4.5% and 4.1% for the 2013 and 2012 Periods, respectively. The rate increase was due to a higher effective rate on Unified’s revolving line of credit.

Borrowings on Unified’s revolving credit agreement are subject to market rate fluctuations. A 25 basis point change in the market rate of interest over the period would have resulted in a $0.1 million increase or decrease in corresponding interest expense.

 

 

·

 

Interest expense on our other debt instruments was $0.3 million for both the 2013 and 2012 Periods.

Estimated patronage dividends.    Estimated patronage dividends for the 2013 Period were $2.6 million, compared to estimated patronage dividends of $1.7 million in the 2012 Period. Estimated patronage dividends for the 2013 and 2012 Periods consisted of the patronage activities from our three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2013 and 2012 Periods, respectively, we had patronage earnings of $2.3 million and $2.5 million in the Southern California Dairy Division, $0.3 million and $0.3 million in the Pacific Northwest Dairy Division and no patronage earnings for the 2013 Period compared to a $1.1 million loss for the 2012 Period in the Cooperative Division. The improvement in the Cooperative Division patronage earnings for the 2013 Period was primarily due to a one-time curtailment gain related to employee benefit plan amendments partially offset by a change in sales mix towards lower margin products, decreased inventory holding gains and lower net sales. Patronage dividends produced by the Cooperative Division are distributed annually, historically in cash, Class B and Class E Shares (see Part I, Item 1. “Business – Patronage Dividends” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information), while patronage dividends produced by the dairy divisions are paid quarterly, historically in cash.

Income taxes.    Our effective income tax rate was 89.6% for the 2013 Period compared to 33.0% for the 2012 Period. The higher than statutory rate for the 2013 Period was due to our pre-tax loss and favorable adjustments to our tax contingency reserve.

LIQUIDITY AND CAPITAL RESOURCES

We finance our capital needs through a combination of internal and external sources. These sources include cash flows from operations, Member capital and other Member investments, bank borrowings, various types of long-term debt and lease financing.

The acquisition, holding and redemption of our capital shares and making of deposits by our Members, and our policies with respect to such matters, can significantly affect our liquidity and capital resources. Our Bylaws, which may be changed by the Board at its discretion, currently require that each Member own 350 Class A Shares. In addition, we currently require each Member to own such amount of Class B Shares as may be established by the Board. This requirement to own Class B Shares is referred to as the “Class B Share Requirement.” Members who do not satisfy the Class B Share Requirement solely from their holdings of Class B Shares are generally required to make a subordinated deposit (a “Required Deposit”) with us. Member and Non-Member customers may be required to provide us a Credit Deposit in order to purchase products on credit terms established by us. “Credit Deposit” means any non-subordinated deposit that is required to be maintained by a Member or Non-Member customer in accordance with levels established by our credit office from time to time in excess of the amount of the Required Deposit set by the Board. We do not pay interest on Required Deposits or Credit Deposits; however, interest is paid at the prime rate for deposits in excess of a Member’s Required Deposit or Credit Deposit (an “Excess Deposit”).

 

25


Table of Contents

See Part I, Item 1. “Business – Capital Shares,” Part I, Item 1. “Business – Customer Deposits” and Part I, Item 1. “Business – Pledge of Shares and Guarantees” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information. Additionally, see “DESCRIPTION OF DEPOSIT ACCOUNTS” in our Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed on February 7, 2013, with respect to our offering of Partially Subordinated Patrons’ Deposit Accounts and see “OFFERING OF CLASS A, CLASS B AND CLASS E SHARES” in our Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed on February 7, 2013, with respect to our offering of Class A, Class B and Class E Shares for further information.

At December 29, 2012, we had no tendered Class A Shares and $21.2 million of tendered Class B Shares pending redemption, whose redemption is subject to final approval by the Board, and in the case of Class B Shares, subject to the 5% limitation on redemptions contained in our redemption policy (see “DESCRIPTION OF CAPITAL STOCK – Redemption Policy” in our Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed on February 7, 2013, with respect to our offering of Class A, Class B and Class E Shares for further information).

Our obligations to repay a Member’s Required Deposit on termination of Member status (once the Member’s obligations to us have been satisfied) is reported as a long-term liability within “Members’ and Non-Members’ deposits” on our consolidated condensed balance sheets. Excess Deposits are not subordinated to our other obligations and are reported as short-term liabilities within “Members’ deposits and estimated patronage dividends” on our consolidated condensed balance sheets. At December 29, 2012 and September 29, 2012, we had $7.4 million and $7.5 million, respectively, in “Members’ and Non-Members’ deposits” and $12.4 million and $12.1 million, respectively, in “Members’ deposits and estimated patronage dividends” (of which $11.1 million and $10.7 million, respectively, represented Excess Deposits).

We believe that the combination of cash flows from operations, current cash balances and available lines of credit will be sufficient to service our debt, redeem Members’ capital shares, make income tax payments and meet our anticipated needs for working capital and capital expenditures through at least the next two fiscal years.

CASH FLOW

We generated positive cash flow from operating activities during the thirteen week 2013 Period. Cash from operations was used for investing and financing activities, including redemption of Members’ capital shares and investing in our infrastructure. We also reinvested proceeds from maturing investments.

As a result of these activities, net cash, consisting of cash and cash equivalents, increased by $3.7 million to $14.8 million as of December 29, 2012 compared to $11.1 million as of September 29, 2012.

The following table summarizes the impact of operating, investing and financing activities on our cash flows for the thirteen week 2013 and 2012 Periods:

 

(dollars in thousands)

                  

Summary of Net Increase in Total Cash

   2013     2012     Difference  

Cash provided by operating activities

   $ 13,737      $ 3,661      $ 10,076   

Cash utilized by investing activities

     (9,234     (6,982     (2,252

Cash (utilized) provided by financing activities

     (829     9,316        (10,145

 

 

Total increase in cash

   $ 3,674      $ 5,995      $ (2,321

 

 

Net cash flows from operating, investing and financing activities decreased by $2.3 million, resulting in a $3.7 million increase in cash for the 2013 Period compared to an increase of $6.0 million in cash for the 2012 Period. The increase in net cash flow for the 2013 Period consisted of cash provided by operating activities of $13.7 million, offset by cash used in investing activities of $9.2 million and financing activities of $0.8 million. The primary factors contributing to the changes in cash flow are discussed below. At December 29, 2012 and September 29, 2012, working capital was $155.6 million and $163.1 million, respectively, and the current ratio was 1.5 at both December 29, 2012 and September 29, 2012.

Operating Activities:    Net cash provided by operating activities increased by $10.0 million to $13.7 million provided in the 2013 Period compared to $3.7 million provided in the 2012 Period. The increase in cash provided

 

26


Table of Contents

by operating activities compared to the 2012 Period was attributable to (1) an increase between the periods in net cash flows related to decreased inventories of $1.2 million, (2) a decrease between the periods in cash used to pay accounts payable and accrued liabilities of $17.2 million, and (3) a decrease between the periods in cash used to fund pension plan contributions of $1.5 million. The foregoing increases of $19.9 million in cash provided were partially offset by (1) a decrease in long-term liabilities, other between the periods of $2.0 million, primarily attributable to a decrease in pension and postretirement liabilities, (2) an increase in accounts receivable between the periods of $0.7 million, (3) an increase between the periods related to prepaid expenses of $0.2 million, (4) a reduction in net earnings between the periods of $4.2 million, (5) an adjustment in the 2013 Period to reconcile net (loss) earnings to net cash provided by operating activities of $2.7 million related to the curtailment gain for other postretirement benefit plans, and (6) an increase between the periods in net cash used by other operating activities of $0.1 million.

Investing Activities:    Net cash utilized by investing activities increased by $2.2 million to $9.2 million for the 2013 Period compared to $7.0 million in the 2012 Period. The increase in cash utilized by investing activities during the 2013 Period as compared to the 2012 Period was due mainly to (1) an increase in capital expenditures between the periods of $3.2 million for the purchase of tractors, (2) an increase of $0.3 million in net investment activities by our insurance subsidiaries, consisting of the purchase and sale of securities to replace maturing investments in their portfolios, and (3) an increase in cash used for net notes receivable activities of $1.5 million, reflecting normal fluctuation in loan activity to Members for their inventory and equipment financing, offset by a decrease in other assets between the periods of $2.8 million, primarily related to the changes in value between the periods of our mutual fund and life insurance policy assets. Spending on investing activities is expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

Financing Activities:    Net cash utilized by financing activities was $0.8 million for the 2013 Period compared to cash provided of $9.3 million in the 2012 Period. The net increase of $10.1 million in cash utilized by financing activities for the 2013 Period as compared to the 2012 Period was due to a decrease in cash provided of $8.5 million as a result of lower revolver and notes payable borrowings in the 2013 Period offset by deferred financing fees. See “Outstanding Debt and Other Financing Arrangements” for further discussion regarding our credit facilities and financing arrangements. In addition, cash utilized by Member investment and share activity increased by $1.6 million. Future cash used by financing activities to meet capital spending requirements is expected to be funded by our continuing operating cash flow or additional borrowings.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this report, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually, narrow or limited purposes.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Other than “Other Debt Agreements” discussed below in “Outstanding Debt and Other Financing Arrangements,” there have been no material changes in our contractual obligations and commercial commitments outside the ordinary course of our business during the thirteen week period ended December 29, 2012. See “Contractual Obligations and Commercial Commitments” discussed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information.

OUTSTANDING DEBT AND OTHER FINANCING ARRANGEMENTS

As discussed below, we entered into amendments with both of our senior lenders in December 2012 to provide temporary adjustments on certain loan covenants. The changes were pursued to provide flexibility due to the volatility and uncertainty associated with the prevailing economic environment. Other than discussed below, there have been no material changes in our outstanding debt and other financing arrangements outside the ordinary course of our business during the thirteen week period ended December 29, 2012. Amounts outstanding related to our secured revolving credit agreement, senior secured notes, Member financing arrangement and other debt agreements are disclosed below. See “Outstanding Debt and Other Financing Arrangements” discussed in Part II,

 

27


Table of Contents

Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 “Notes Payable” of “Notes to Consolidated Financial Statements” in Part II, Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information.

Secured Revolving Credit Agreement

In fiscal 2011, we entered into a Credit Agreement (the “Agreement”) with the lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. The Agreement replaced our previous revolving credit agreement, with substantially the same parties, terms and conditions. The Agreement expires on October 8, 2015, and it refinanced existing indebtedness and finances capital expenditures, working capital needs, potential acquisitions and general corporate purposes.

Our outstanding borrowings under the Agreement increased to $94.2 million at December 29, 2012 (Eurodollar and Base Rate Loans at a blended average rate of 2.31% per annum) from $90.0 million at September 29, 2012 (Eurodollar and Base Rate Loans at a blended average rate of 2.25% per annum), with access to approximately $180.8 million of additional capital available under the Agreement (based on the amounts indicated above) to fund our continuing operations and capital spending requirements for the foreseeable future.

On December 29, 2012, we entered into the third amendment (the “Third Amendment”) of the Agreement. The Third Amendment raised the Consolidated Total Funded Debt to EBITDAP Ratio (the “Debt Ratio,” as defined) of the Company allowed by the financial covenants in the Agreement for the fiscal quarter ending December 29, 2012 to be no higher than 4.0 to 1 (previously, the maximum Debt Ratio for such fiscal quarter allowed under the Agreement was 3.5 to 1). For subsequent fiscal quarters, the Debt Ratio remains the same as before the Third Amendment.

A copy of the Third Amendment was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed on December 31, 2012. The foregoing description of the Third Amendment does not purport to be complete and is qualified in its entirety by reference to the exhibit.

Senior Secured Notes

At December 29, 2012 and September 29, 2012, respectively, we had a total of $103.9 million and $104.8 million outstanding in senior secured notes to certain insurance companies and pension funds (referred to collectively as “John Hancock Life Insurance Company” or “Hancock”) under a note purchase agreement dated September 29, 1999 (as amended, the “Senior Note Agreement”) as amended and restated effective January 6, 2006 and further amended on November 3, 2009.

On December 26, 2012, we entered into the fifth amendment (“Fifth Amendment”) to the Senior Note Agreement. The Fifth Amendment raised the maximum Indebtedness to Consolidated EBITDAP Ratio (the “Indebtedness Ratio,” as defined) of the Company allowed by the financial covenants in the Senior Note Agreement for the fiscal quarter ending December 29, 2012 to be no higher than 4.0 to 1 (previously, the maximum Indebtedness Ratio for such fiscal quarter allowed under the Senior Note Agreement was no higher than 3.75 to 1). For subsequent fiscal quarters, the Indebtedness Ratio remains the same as before the Fifth Amendment.

A copy of the Fifth Amendment was filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on December 31, 2012. The foregoing description of the Fifth Amendment does not purport to be complete and is qualified in its entirety by reference to the exhibit.

Member Financing Arrangement

In fiscal 2010, our wholly-owned finance subsidiary, Grocers Capital Company (“GCC”), entered into a Loan and Security Agreement (the “GCC Loan Agreement”), by and among GCC, the lenders signatory thereto and California Bank & Trust, as Arranger and Administrative Agent. The GCC Loan Agreement matures on September 24, 2013, and the proceeds therefrom will be used to fund loans to our customers and for GCC’s general corporate purposes, including customary financing and operating activities. The GCC Loan Agreement provides for revolving loans and term loans. GCC had revolving loan borrowings of $2.0 million and $5.5 million, both bearing an interest rate of

 

28


Table of Contents

4.00% (3.25% prime plus 0.75% interest rate margin), outstanding at December 29, 2012 and September 29, 2012, respectively. There were no term loan borrowings outstanding at December 29, 2012 and September 29, 2012.

Other Debt Agreements

During the first quarter of fiscal 2013, we entered into two note and security agreements for the purchase of tractors. At December 29, 2012, the outstanding loan balance under the two agreements totaled $3.1 million.

REDEMPTION OF CAPITAL STOCK

Our Articles of Incorporation and Bylaws provide that the Board has the absolute discretion to repurchase, or not repurchase, any Class A, Class B or Class E Shares of any outgoing Member regardless of when the membership terminated, and any Class B Shares in excess of the Class B Share Requirement held by a current Member, whether or not the shares have been tendered for repurchase and regardless of when the shares were tendered. The Board considers the redemption of eligible Class A Shares at each board meeting. All other shares eligible for redemption are considered by the Board on an annual basis, usually in December. Class E Shares will only be redeemed upon approval of the Board or upon sale or liquidation of the Company. The Class E Shares, when redeemed, will be redeemed at their stated value of $100 per share. The following table presents our redemption of Class A and Class B Shares during the thirteen weeks ended December 29, 2012:

 

Share Class    Date of Redemption    Number of Shares
Redeemed
   Approximate Value of Shares
Redeemed

A

   October 11, 2012    2,450    $  0.8 million

A

   December 27, 2012    1,050    $  0.3 million

B

   December 26, 2012    8,867    $  2.7 million

 

See Part I, Item 1. “Business – Capital Shares – Classes of Shares” and Part I, Item 1. “Business – Capital Shares – Redemption of Class A, Class B and Class E Shares” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information.

PENSION AND POSTRETIREMENT BENEFIT PLANS

We sponsor a cash balance plan (“Unified Cash Balance Plan”). The Unified Cash Balance Plan is a noncontributory defined benefit pension plan covering substantially all of our employees who are not subject to a collective bargaining agreement. Under the Unified Cash Balance Plan, participants are credited with an annual accrual based on their years of service with us. Our funding policy is to make contributions to the Unified Cash Balance Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. All of our qualifying employees not subject to a collective bargaining agreement accrue benefits pursuant to the Unified Cash Balance Plan. We also sponsor an Executive Salary Protection Plan (“ESPP”) for our executive officers that provides supplemental post-termination retirement income based on each participant’s salary and years of service as an officer with us. Funds are held in a rabbi trust for the ESPP consisting primarily of life insurance policies tied to underlying investments in the equity market (reported at cash surrender value) and mutual fund assets consisting of various publicly-traded mutual funds (reported at estimated fair value based on quoted market prices).

We sponsor other postretirement benefit plans that provide certain medical coverage to retired non-union employees and provide unused sick leave benefits for certain eligible non-union and union employees. Those plans are not funded.

In December 2012, we amended several of our employee benefit plans. We amended the Unified Grocers, Inc. Executive Insurance Plan and the Unified Grocers, Inc. Officer Retiree Medical Plan to close the plans to new entrants as of September 30, 2012. Accordingly, no employee that is either hired or becomes an officer on or after such date can become a participant or recommence participation in either plan. We also amended the ESPP for executive officers to close the eligibility provisions of the ESPP to new entrants as of September 30, 2012 (the “Freeze Date”); accordingly, no employee that is either hired or becomes an officer on or after the Freeze Date can

 

29


Table of Contents

become a participant or recommence participation in the ESPP. Additionally, benefit accruals under the ESPP were frozen for officers who have already attained a 65% gross benefit accrual (generally attained after fifteen (15) or more years of service under the ESPP) as of September 30, 2012; accordingly, no such officers will accrue further gross benefits under the ESPP after the Freeze Date. For officers participating in the ESPP as of the Freeze Date who had less than a 65% gross benefit accrual, such officers will continue to accrue gross benefits under the ESPP until they reach a 65% gross benefit accrual. Lastly, in connection with freezing the benefit accrual under the ESPP, a participant’s gross accrued benefit will not consider any compensation earned by the participant after the Freeze Date, which effectively freezes the final pay and final average pay formulas under the plan at the September 30, 2012 levels. See Item 5.02. “Compensatory Arrangements of Certain Officers” of our Current Report on Form 8-K, filed on January 7, 2013, for additional information.

In December 2012, we also amended the Unified Grocers, Inc. Retiree Medical Plan (the “RMP”) to modify the eligibility requirements for the RMP. Effective as of the end of the first quarter of fiscal 2013, only employees of Unified who have reached 49 years of age with at least 15 years of continuous service with us as of the end of the first quarter of fiscal 2013 will remain eligible to participate in the RMP. To receive benefits under the RMP, those employees who remain eligible must remain in continuous service with us through their retirement following the attainment of at least 55 years of age.

As a result of the foregoing benefit plan amendments, we remeasured the projected pension and accumulated postretirement benefit obligations associated with the respective plans as of the end of the first quarter of fiscal 2013. Such remeasurement resulted in a $29.7 million reduction in our long-term liabilities associated with the foregoing plans. These reductions were offset by an increase in other comprehensive earnings of $17.5 million (net of income tax of $9.5 million) and the recognition of a one-time curtailment gain of $2.7 million, related to the RMP, which is recorded in addition to the net periodic postretirement benefit cost in our accompanying Consolidated Condensed Statements of (Loss) Earnings.

Our net periodic benefit cost for our combined pension and other postretirement benefits was approximately $1.9 million (including the one-time curtailment gain of $2.7 million related to the RMP) and $3.9 million for the thirteen weeks ended December 29, 2012 and December 31, 2011, respectively. As a result of the amendments described above, we anticipate that our fiscal 2013 combined pension and other postretirement benefits cost will be $6.4 million, a reduction of $11.8 million (comprised of $1.4 million in reduced pension benefit cost and $10.4 million in reduced postretirement benefit cost) compared to our original estimates for fiscal year 2013.

We expect to make estimated minimum contributions to the Unified Cash Balance Plan totaling $7.4 million during fiscal 2013, which is comprised of $3.6 million for the 2013 plan year and $3.8 million for the 2012 plan year. At our discretion, we may contribute in excess of these amounts. Additional contributions, if any, will be based, in part, on future actuarial funding calculations and the performance of plan investments. We contributed zero and $1.0 million to the Unified Cash Balance Plan during the thirteen weeks ended December 29, 2012 for the 2013 and 2012 plan years, respectively.

During July 2012, legislation to provide pension-funding relief was enacted as part of the 2012 student loan and transportation legislation titled “Moving Ahead for Progress in the 21st Century” (“MAP-21”). Funding relief is to be achieved through changes in the methodology employed to determine interest rates used to calculate required funding contributions. The funding relief applies to Employee Retirement Income Security Act (“ERISA”) single-employer plans that base pension liability calculations on interest rates determined pursuant to the Pension Protection Act of 2006 and was predicted to reduce 2012 and 2013 contribution requirements for typical plans. As a result of MAP-21, we anticipate our fiscal year 2013 contributions to the Unified Cash Balance Plan will be reduced by approximately $7.9 million from our originally estimated amounts.

Additionally, we expect to contribute $0.7 million to the ESPP to fund projected benefit payments to participants for the 2013 plan year. We contributed $0.2 million to the ESPP during the thirteen weeks ended December 29, 2012 to fund benefit payments to participants for the 2013 plan year.

During fiscal year 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (collectively, the

 

30


Table of Contents

“Acts”) was passed and signed into law. The Acts contain provisions that could impact our accounting for retiree medical benefits in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Acts and additional interpretations of the Acts become available. We will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. In addition, we may consider plan amendments in future periods that may have accounting implications. See Note 7 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for additional discussion.

RISK FACTORS

The risks and uncertainties described below are those that we believe are the material risks related to our business. If any of the following risks occur, our business, prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.

The markets in which we operate are highly competitive, characterized by high volume, low profit margins and industry consolidation, and many of our competitors have greater financial resources than us which could place us at a competitive disadvantage and adversely affect our financial performance.    The grocery distribution business is generally characterized by a relatively high volume of sales with relatively low profit margins. Price competition among food wholesalers is intense. In addition, we compete with such food wholesalers with regard to quality, variety and availability of products offered, strength of corporate brand labels offered, schedule and reliability of deliveries and the range and quality of services provided.

Some of our competitors, including C&S Wholesale Grocers, Inc. and Supervalu, Inc., are significantly larger and have greater financial resources than us. In addition, industry consolidation has in the past increased, and may continue in the future to increase, the number of large competitors that we face. These large national distributors have the resources to compete aggressively on price and may be able to offer customers a wider range of products and services and a wider area of distribution than we are. We also face intense competition from regional or specialized distributors and, from time to time, new entrants in various niche markets, with such competitors often able to compete very aggressively in such niches with unique or highly tailored products and services.

To compete effectively, we must keep our costs down to maintain margins while simultaneously increasing sales by offering the right products and services at competitive prices, with the expected quality, variety and availability, to appeal to consumers. If we are unable to compete effectively in our highly competitive industry, we may suffer reduced net sales and/or reduced margins and profitability, or suffer a loss, and our business, financial condition and results of operations could suffer.

We may experience reduced sales and earnings if Members continue to lose market share to larger, often fully integrated traditional full-service grocery store chains or to warehouse club stores, supercenters and discount stores, many of which have greater financial resources than our Members or us.    Our Members continue to face intense competition from large, often fully integrated traditional full-service grocery store chains. Most of these store chains have greater resources than our Members and us and benefit from local or national brand name recognition and efficiencies of scale from a fully integrated distribution network, standardization across stores, concentrated buying power and shared overhead costs. In addition, traditional format full-service grocery stores, which include most of our customers, have in recent years faced intense competition from, and lost market share to, non-traditional format stores, including warehouse club stores, supercenters, discount stores and stores focused on upscale and natural and organic products. Many of these non-traditional format stores are very large, with considerable resources, national brand names and economies of scale. This competition from non-traditional format stores has been particularly intense, and significant market share has been lost, with respect to categories of non-perishable products that we sell. Traditional format grocery stores, including our customers, have tended to move to expand their offerings and sales of perishable products, which generally have lower margins for us than non-perishable products. A continued decline in our sales of non-perishable products may adversely affect our profitability.

The market share of non-traditional format stores may grow in the future, potentially resulting in continued losses of sales volume and reduced earnings for our Members and, in turn, for us. Continued losses of market share by our Members, whether to other traditional full-service grocery store chains or to non-traditional format stores, could

 

31


Table of Contents

reduce our net sales, margins and profitability, or cause us to incur losses. As a result, our business, financial condition and results of operations could suffer.

We have an increasingly concentrated customer base, which has in the past reduced, and may continue in the future to reduce, our margins and expose us to an increase in risk concentration, including in the areas of credit risk and the sudden loss of significant customer business.    Our operating results are highly dependent upon maintaining or growing our sales to our customers. Our largest customer, Smart & Final, Inc., a Non-Member customer, constituted approximately 15% of our total net sales for the thirteen week period ended December 29, 2012. In recent years, we have seen our sales become increasingly concentrated with our large customers, with our top ten customers having increased from 42% of our total net sales in fiscal 2008 to 46% of our total net sales in fiscal 2012. Our top ten customers constituted approximately 48% of our total net sales for the thirteen week period ended December 29, 2012. A significant loss in membership or volume by one of our larger customers could have a sudden and material adverse effect on our operating results. For example, in the third quarter of fiscal 2011, we lost one of our top ten customers who represented $144.9 million in net sales for the fifty-two weeks immediately preceding the date they ceased purchasing from us. Between fiscal 2011 and fiscal 2012, this resulted in a loss of $87.2 million in annual net sales, or 2% of total net sales in fiscal 2012. Any other such loss of a large customer, or the loss of a number of smaller customers, could have a material and adverse effect on our net sales. In addition, to the extent we have suffered and may in the future suffer a decline in net sales, our margins and profitability have been and will be further negatively impacted to the extent we are unable to correspondingly reduce our fixed costs, such as warehouses, equipment and headcount. As it is difficult to quickly make significant reductions in fixed costs, if we were to suffer a significant and rapid decline in our net sales, such as from the loss of one or more significant customers, our margins and profitability may be adversely impacted, we may incur losses and our business, financial condition and results of operations could suffer.

We will continue to be subject to the risks associated with consolidation within the grocery industry. When independent retailers are acquired by large chains with self-distribution capacity, are driven from business by larger grocery chains, or become large enough to purchase directly from manufacturers or develop their own self-distribution capabilities, we will lose distribution volume. Members may also select other wholesale providers. Reduced volume is normally injurious to profitable operations since fixed costs must be spread over a lower sales volume if the volume cannot be replaced. In addition, as a higher percentage of our sales go to larger customers, our margins tend to be adversely affected as these larger customers typically receive discounts for the higher volume of their purchases, which may adversely impact our profitability.

We are also exposed to concentrations of credit risk related primarily to trade receivables, notes receivable and lease guarantees for certain Members. Our ten customers with the largest accounts receivable balances accounted for approximately 38% and 39% of total accounts receivable at December 29, 2012 and September 29, 2012, respectively. These concentrations of credit risk may be affected by changes in economic or other conditions affecting the western United States, particularly Arizona, California, Nevada, Oregon and Washington. We could suffer losses as a result of our concentrated credit risk in the event of a significant adverse change in economic or other conditions.

We may experience reduced sales if Members purchase directly from manufacturers or decide to self-distribute.    Increased industry competitive pressure is causing some of our Members that can qualify to purchase directly from manufacturers to increase their level of direct purchases from manufacturers and expand their self-distribution activities. Our operating results could be adversely affected if a significant reduction in distribution volume occurred in the future as a result of such a shift to direct purchases and self-distribution by our customers.

We are vulnerable to changes in general economic conditions.    We are affected by certain economic factors that are beyond our control, including changes in the overall economic environment. In recent periods, we have experienced significant volatility in the cost of certain commodities, the cost of ingredients for our manufactured breads and processed fluid milk and the cost of packaged goods purchased from other manufacturers. An inflationary economic period could impact our operating expenses in a variety of areas, including, but not limited to, employee wages and benefits, workers’ compensation insurance and energy and fuel costs. A portion of the risk related to employee wages and benefits is mitigated by bargaining agreements that contractually determine the amount of inflationary increases. General economic conditions also impact our pension plan liabilities, as the assets funding or supporting these liabilities are invested in securities that are subject to interest rate and stock

 

32


Table of Contents

market fluctuations. A portion of our debt is at floating interest rates and an inflationary economic cycle typically results in higher interest costs. We operate in a highly competitive marketplace and passing on such cost increases to customers could be difficult. It is also difficult to predict the effect that possible future purchased or manufactured product cost decreases might have on our profitability. A lack of inflation in the cost of food products may also adversely impact our margins when we are unable to take advantage of forward buying opportunities whereby we purchase product at a lower price and, by the time we sell the product, the market price and the price at which we are able to sell the product has risen to a higher price as a result of inflation. The effect of deflation in purchased or manufactured product costs would depend on the extent to which we had to lower selling prices of our products to respond to sales price competition in the market. Consequently, it is difficult for us to accurately predict the impact that inflation or deflation might have on our operations. To the extent we are unable to mitigate increasing costs, or retain the benefits from decreases in costs, patronage dividends may be reduced and/or the Exchange Value Per Share of our Class A and Class B Shares may decrease.

Changes in the economic environment could adversely affect our customers’ ability to meet certain obligations to us or leave us exposed for obligations we have guaranteed. Loans to Members, trade receivables and lease guarantees could be at risk in a sustained economic downturn. We establish reserves for notes receivable, trade receivables and lease commitments for which the customer may be at risk for default. Under certain circumstances, we would be required to foreclose on assets provided as collateral or assume payments for leased locations for which we have guaranteed payment. Although we believe our reserves to be adequate, our operating results could be adversely affected in the event that actual losses exceed available reserves.

We may on occasion hold investments in the common and/or preferred stock of Members and suppliers. These investments are generally held at cost or the equity method and are periodically evaluated for impairment. As a result, changes in the economic environment that adversely affect the business of these Members and suppliers could result in the write-down of these investments. This risk is unique to a cooperative form of business in that investments are made to support Members’ businesses, and those economic conditions that adversely affect the Members can also reduce the value of our investment, and hence the Exchange Value Per Share of our Class A and Class B Shares. We do not currently hold any equity investments in our Members.

The United States economy and financial markets have declined and experienced volatility due to uncertainties related to energy prices, availability of credit, difficulties in the banking and financial services sectors, the decline in the housing market, diminished market liquidity, falling consumer confidence and high unemployment rates. As a result, consumers may be more cautious. This may lead to additional reductions in consumer spending, to consumers trading down to a less expensive mix of products or to consumers trading down to discounters for grocery and non-food items, all of which may affect our financial condition and results of operations. We are unable to predict when the economy will improve. If the economy does not improve, our business, results of operations and financial condition may be adversely affected.

Litigation could lead to unexpected losses.    During the normal course of carrying on our business, we may become involved in litigation. In the event that management determines that the likelihood of an adverse judgment in a pending litigation is probable and that the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to FASB’s Accounting Standards Codification (“ASC”) Topic 450, “Contingencies.” The final outcome of any litigation could adversely affect operating results if the actual settlement amount exceeds established reserves and insurance coverage.

We are subject to environmental laws and regulations.    We own and operate various facilities and equipment for the manufacture, warehousing and distribution of products to our customers. Accordingly, we are subject to increasingly stringent federal, state and local laws, regulations and ordinances that (1) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (2) impose liability for the costs of cleaning up, and certain damages resulting from, past or present spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including liabilities resulting from lawsuits brought by private litigants) relating to our facilities and the land on which our facilities are situated, regardless of whether we lease or own the facilities or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. In addition, we may be subject to pending federal and state legislation that if ultimately

 

33


Table of Contents

passed, may require us to incur costs to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime. We are unable to predict the ultimate outcome of such legislation; however, should such legislation require us to incur significant expenditures, our business, results of operations and financial condition may be adversely affected.

We are exposed to potential product liability claims and potential negative publicity surrounding any assertion that our products caused illness or injury.    The packaging, marketing and distribution of food products purchased from others involve an inherent risk of product liability, product recall and adverse publicity. Such products may contain contaminants that may be inadvertently redistributed by us. These contaminants may result in illness, injury or death if such contaminants are not eliminated. Product liability claims in excess of insurance coverage, as well as the negative publicity surrounding any assertion that our products caused illness, injury or death could have a material adverse effect on our reputation, business, financial condition and results of operations.

Our insurance reserves may be inadequate if unexpected losses occur.    Our insurance subsidiaries are subject to the rules and regulations promulgated by various regulatory agencies, including, but not limited to, the State of California and the Commonwealth of Bermuda. Insurance reserves are recorded based on estimates made by management and validated by third party actuaries to ensure such estimates are within acceptable ranges. Actuarial estimates are based on detailed analyses of health care cost trends, claims history, demographics, industry trends and federal and state law. As a result, the amount of reserve and related expense is significantly affected by the outcome of these studies. Significant and adverse changes in the experience of claims settlement and other underlying assumptions could negatively impact our operating results.

We may not have adequate financial resources to fund our operations.    We rely primarily upon cash flow from our operations and Member investments to fund our operating activities. In the event that these sources of cash are not sufficient to meet our requirements, additional sources of cash are expected to be obtained from our credit facilities to fund our daily operating activities. Our revolving credit agreement, which expires on October 8, 2015, and our senior secured notes, which expire on January 1, 2016 and November 1, 2019, require compliance with certain financial covenants, including minimum tangible net worth, fixed charge coverage ratio and total funded debt to earnings before interest, taxes, depreciation, amortization and patronage dividends (“EBITDAP”). See Note 5 of “Notes to Consolidated Financial Statements” in Part II, Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended September 29, 2012 and “Outstanding Debt and Other Financing Arrangements” in this Quarterly Report on Form 10-Q for additional information. While we are currently in compliance with all required covenants and expect to remain in compliance, this does not guarantee we will remain in compliance in future periods.

As of December 29, 2012, we believe we have sufficient cash flow from operations and availability under the revolving credit agreement to meet our operating needs, capital spending requirements and required debt repayments through October 8, 2015. However, if access to operating cash or to the revolving credit agreement becomes restricted, we may be compelled to seek alternate sources of cash. We cannot assure that alternate sources will provide cash on terms favorable to us or at all. Consequently, the inability to access alternate sources of cash on terms similar to our existing agreement could adversely affect our operations.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate.    Our non-union employees participate in a Company sponsored defined benefit pension plan and Company sponsored postretirement benefit plans. Certain eligible union and non-union employees participate in separate plans providing payouts for unused sick leave. Our officers also participate in a Company sponsored Executive Salary Protection Plan (“ESPP”), which provides additional post-termination retirement income based on each participant’s salary and years of service as an officer of the Company. The postretirement plans provide medical benefits for retired non-union employees, life insurance benefits for retired non-union employees for which active non-union employees are no longer eligible and lump-sum payouts for unused sick days covering certain eligible union and non-union employees. Liabilities for the ESPP and postretirement plans are not funded. We account for these benefit plans in accordance with ASC Topic 715, “Compensation – Retirement Benefits” and ASC Topic 712, “Compensation – Nonretirement Postemployment Benefits,” which require us to make actuarial assumptions that are used to calculate the carrying value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in our consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, health care cost trend rate, projected life expectancies of plan

 

34


Table of Contents

participants and anticipated salary increases. While we believe the underlying assumptions are appropriate, the carrying value of the related assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used. See Note 11 of “Notes to Consolidated Financial Statements” in Part II, Item 8. “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information.

The credit and liquidity crisis in the United States and throughout the global financial system triggered substantial volatility in the world financial markets and banking system. As a result, the investment portfolios of the Unified Cash Balance Plan incurred a significant decline in fair value during fiscal 2008. While the values of the investment portfolios of our defined benefit pension plans increased during fiscal 2012 and reflected improvement for the thirteen weeks ended December 29, 2012, as the values of the plans’ individual investments have and will fluctuate in response to changing market conditions, and the amount of gains or losses that will be recognized in subsequent periods, if any, cannot be determined.

Authoritative accounting guidance may necessitate companies who issue and redeem shares based on book value to redefine the method used to value their shares.    Authoritative accounting guidance that requires adjustments to shareholders’ equity has the potential to impact companies whose equity securities are issued and redeemed at book value (“book value companies”) disproportionately more than companies whose share values are market-based (“publicly traded”). While valuations of publicly traded companies are primarily driven by their income statement and cash flows, the traded value of the shares of book value companies, however, may be immediately impacted by adjustments affecting shareholders’ equity upon implementation. Therefore, such guidance may necessitate companies who issue and redeem shares based on book value to redefine the method used to value their shares. As such, we modified our Exchange Value Per Share calculation to exclude accumulated other comprehensive earnings (loss) from Book Value (see Part II, Item 6. “Selected Financial Data” of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information on the calculation of the Exchange Value Per Share), thereby excluding the potentially volatile impact that (1) ASC Topic 715-20, “Compensation – Retirement Benefits – Defined Benefit Plans – General” and (2) changes in unrealized gains and losses, net of taxes, on available for sale investments would have on shareholders’ equity and Exchange Value Per Share.

A system failure or breach of system or network security could delay or interrupt services to our customers or subject us to significant liability.    We have implemented security measures such as firewalls, virus protection, intrusion detection and access controls to address the risk of computer viruses and unauthorized access. A business continuity plan has been developed focusing on the offsite restoration of computer hardware and software applications. We have also developed business resumption plans, which include procedures to ensure the continuation of business operations in response to the risk of damage from energy blackouts, natural disasters, terrorism, war and telecommunication failures, and we have implemented change management procedures and quality assurance controls designed to ensure that new or upgraded business management systems operate as intended. However, there can be no assurances that any of these efforts will be adequate to prevent a system failure, accident or security breach, any of which could result in a material disruption to our business. In addition, substantial costs may be incurred to remedy the damages caused by any such disruptions.

Our success depends on our retention of our executive officers and senior management, and our ability to hire and retain additional key personnel.    Our success depends on the skills, experience and performance of our executive officers, senior management and other key personnel. The loss of service of one or more of our executive officers, senior management or other key employees could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, and there can be no assurance that we can retain our key employees or that we can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.

We depend on third parties for the supply of products and raw materials and for marketing and promotional programs.    We depend upon third parties for the supply of products, including corporate brand products, and raw materials. Any disruption in the services provided by any of these suppliers, or any failure by them to handle current or higher volumes of activity, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.

 

35


Table of Contents

We participate in various marketing and promotional programs to increase sales volume and reduce merchandise costs. Failure to continue these relationships on terms that are acceptable to us, or to obtain adequate marketing relationships, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.

Increased electricity, diesel fuel and gasoline costs could reduce our profitability.    Our operations require and are dependent upon the continued availability of substantial amounts of electricity, diesel fuel and gasoline to manufacture, store and transport products. Our trucking operations are extensive and diesel fuel storage capacity represents approximately two weeks average usage. The prices of electricity, diesel fuel and gasoline fluctuate significantly over time. Given the competitive nature of the grocery industry, we may not be able to pass on increased costs of production, storage and transportation to our customers. As a result, either a shortage or significant increase in the cost of electricity, diesel fuel or gasoline could disrupt distribution activities and negatively impact our business and results of operations.

A strike or work stoppage by employees could disrupt our business and/or we could face increased operating costs from higher wages or benefits we must pay our employees.    Approximately 60% of our employees are covered by collective bargaining agreements, which have various expiration dates ranging from 2013 through 2016. If we are unable to negotiate acceptable contracts with labor unions representing our unionized employees, we may be subject to a strike or work stoppage that disrupts our business and/or increased operating costs resulting from higher wages or benefits paid to union members or replacement workers. Any such outcome could have a material adverse effect on our operations and financial results.

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and subject us to regulatory scrutiny.    Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we perform an annual evaluation of our internal controls over financial reporting. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) became law. The Reform Act includes a provision that indefinitely exempts companies that qualify as either a non-accelerated filer or smaller reporting company from the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002. For our fiscal 2012 and subsequent foreseeable fiscal years, we expect to be exempt from such requirement. Although we believe our internal controls are operating effectively, we cannot guarantee that we will not have any material weaknesses in the future. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

A loss of our cooperative tax status could increase tax liability.    Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives. As a cooperative, we are allowed to offset patronage earnings with patronage dividends that are paid in cash or through qualified written notices of allocation. However, we are taxed as a typical corporation on the remainder of our earnings from our Member business and on earnings from our Non-Member business. If we are not entitled to be taxed as a cooperative under Subchapter T, our revenues would be taxed when earned by us and the Members would be taxed when dividends are distributed. The Internal Revenue Service can challenge the tax status of cooperatives. The Internal Revenue Service has not challenged our tax status, and we would vigorously defend any such challenge. However, if we were not entitled to be taxed as a cooperative, taxation at both the Company and the Member level could have a material adverse impact on us and our Members.

Each method used to meet the Class B Share Requirement has its own tax consequences.    Class B Shares required to be held by a new Member may be purchased directly at the time of admission as a Member or may be acquired over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year. In addition, certain Members, including former shareholders of United Grocers, Inc. or Associated Grocers, Incorporated, may elect to satisfy their Class B Share Requirement only with respect to stores owned at the time of admission as a Member solely from their patronage dividend distributions. Each of these purchase alternatives may have tax consequences which are different from those applicable to other purchase alternatives. Members and prospective Members are urged to consult their tax advisers with respect to the application of U.S. federal income, state or local tax rules to the purchase method selected.

Members’ Class A, Class B and Class E Shares are subject to risk of loss.    Class A and Class B Shares are purchased and sold at purchase prices equal to the Exchange Value Per Share at the close of the last fiscal year

 

36


Table of Contents

end prior to the date the shares are purchased or tendered for redemption. Class E Shares are purchased and sold at a value of $100 per share. If a Member were to sell shares at a price that is less than the price at which the shares were purchased, the Member would lose all or a portion of its investment in the Class A, Class B or Class E Shares. See “OFFERING OF CLASS A, CLASS B AND CLASS E SHARES” in our Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed on February 7, 2013, with respect to our offering of Class A, Class B and Class E Shares for further information.

If the Board decides in any year to retain a portion of our earnings from our Non-Patronage Business, and not to allocate those earnings to the Exchange Value Per Share, the redemption price of Class A and Class B Shares that are repurchased in the year of such retention and in future years will be reduced.

The requirement that Members invest in our shares and/or make Required Deposits, and the lack of liquidity with respect to such investments and Required Deposits, may make attracting new Members difficult and may cause existing Members to withdraw from membership.    Members are required to meet specific requirements, which include ownership of our capital shares and may include required cash deposits. These investments by Members are a principal source of our capital, and for the thirteen weeks ended December 29, 2012, approximately 79% of our net sales were to Members. We compete with other wholesale suppliers who are not structured as cooperatives and therefore have no investment requirements for customers. Our requirements to purchase shares or maintain cash deposits may become an obstacle to retaining existing business and attracting new business. For a discussion of required Member equity investments and deposits, see Part I, Item 1. “Business – Capital Shares” and Part I, Item 1. “Business – Customer Deposits” of our Annual Report on Form 10-K for the year ended September 29, 2012.

Our Bylaws give the Board complete discretion with respect to the redemption of shares held by terminated Members and excess shares held by Members. Our redemption policy currently provides that the number of Class B Shares that we may redeem in any fiscal year is limited to no more than 5% of the outstanding Class B Shares (after patronage dividends payable in Class B Shares). In connection with the closing of fiscal 2012, we redeemed 8,867 Class B Shares, leaving 69,442 Class B Shares, or 16.0% of our outstanding Class B Shares, that have been tendered for redemption but not yet redeemed. This percentage has steadily increased in recent years, from 14.8% and 11.9% of our outstanding Class B Shares at the close of fiscal 2011 and 2010, respectively, as we have had an increase in the number of shares our Members have sought to redeem and we have redeemed less than the 5% limit in fiscal 2012, 2011 and 2010. Based on the current level of redemption as compared to the number of shares tendered for redemption, Members seeking to redeem shares may be required to wait a number of years. Members may have even less liquidity with respect to shares in Unified should the Board, in its discretion, cease redemptions of stock. See Part II, Item 8. “Financial Statements and Supplementary Data – Notes 10 and 18” of our Annual Report on Form 10-K for the year ended September 29, 2012 for recent redemption activity and the number of outstanding shares tendered for redemption but which have not yet been redeemed. Furthermore, required cash deposits are contractually subordinated and subject to the prior payment in full of our senior indebtedness. For a discussion of the limitations on the redemption of capital shares and the subordination of cash deposits, see Part I, Item 1. “Business – Capital Shares – Redemption of Class A, Class B and Class E Shares,” Part I, Item 1. “Business – Customer Deposits” and Part I, Item 1. “Business – Pledge of Shares and Guarantees” of our Annual Report on Form 10-K for the year ended September 29, 2012. These limitations on our obligation to redeem capital shares or repay the cash deposits of Members may cause Members to withdraw from membership or potential Members to not become Members.

Severe weather, natural disasters and adverse climate changes may adversely affect our financial condition and results of operations.    Severe weather conditions, such as hurricanes or tornadoes, or natural disasters, such as earthquakes or fires, in areas in which we have distribution facilities, in which customers’ stores are located or from which we obtain products may adversely affect our results of operations. Such conditions may cause physical damage to our properties, closure of one or more of our distribution facilities, closure of customers’ stores, lack of an adequate work force in a market, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or customer stores or a reduction in the availability of products we offer. In addition, adverse climate conditions and adverse weather patterns, such as droughts and floods, impact growing conditions and the quantity and quality of crops yielded by food producers and may adversely affect the availability or cost of certain products within the grocery supply chain. Our business resumption plans may not be effective in a timely manner and a significant disruption to our business could occur

 

37


Table of Contents

in the event of a natural disaster, terrorism or war. In addition, while we carry insurance to cover business interruption and damage to buildings and equipment, some of the insurance carries high deductibles. Any of these factors may disrupt our business and adversely affect our financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, assumptions and judgments that affect the amount of assets and liabilities reported in the consolidated condensed financial statements, the disclosure of contingent assets and liabilities as of the date of the consolidated condensed financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions to be reasonable; however, future results could differ from those estimates under different assumptions or conditions.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts, lease loss reserves, investments, goodwill and intangible assets, long-lived assets, income taxes, insurance reserves, pension and postretirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances. The accompanying consolidated condensed financial statements are prepared using the same critical accounting policies and estimates discussed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended September 29, 2012.

RECENTLY ADOPTED AND RECENTLY ISSUED AUTHORITATIVE ACCOUNTING GUIDANCE)

Refer to Note 9 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q for management’s discussion of recently adopted and recently issued authoritative accounting guidance and their expected impact, if any, on our consolidated condensed financial statements.

AVAILABILITY OF SEC FILINGS

We make available, free of charge, through our website (http://www.unifiedgrocers.com) our Forms 10-K, 10-Q and 8-K, as well as our registration statements, proxy statements and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. A copy of any of the reports filed with the SEC can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. A copy may also be obtained by calling the SEC at 1-800-SEC-0330. All reports filed electronically with the SEC are available on the SEC’s web site at http://www.sec.gov.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the market risks we face contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. See “Quantitative and Qualitative Disclosures About Market Risk” discussed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended September 29, 2012 for additional information.

We are subject to interest rate changes on certain of our notes payable under our credit agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at December 29, 2012 and the current market condition, a one percent change in the applicable interest rates would impact our annual cash flow and pretax earnings by approximately $1.0 million. See Note 2 of “Notes to Consolidated Condensed Financial Statements – Unaudited” in Part I, Item 1. “Financial Statements (Unaudited)” for additional discussion regarding the fair value of notes payable.

We are exposed to credit risk on accounts receivable through the ordinary course of business and we perform ongoing credit evaluations. Concentration of credit risk with respect to accounts receivable is limited due to the nature of our customer base (i.e., primarily Members). We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

 

38


Table of Contents

The majority of our investments are held primarily by two of our insurance subsidiaries, and includes obligations of U.S. government corporations and agencies, high quality investment grade corporate bonds, U.S. government treasury securities, U.S. state and municipal securities and common equity securities. The investments held by our insurance subsidiaries, excluding the common equity securities, are generally not actively traded and are valued based upon inputs including quoted prices for identical or similar assets. Collectively, the estimated fair value or market value of these investments continued to exceed their cost during the thirteen weeks ended December 29, 2012.

Life insurance and mutual fund assets with values tied to the equity markets are impacted by overall market conditions. During the thirteen weeks ended December 29, 2012, net earnings and net comprehensive earnings experienced an increase corresponding to the increase in life insurance and mutual fund assets, respectively.

 

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure controls and procedures.    Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

At the end of the period covered by this report, our management, with the participation of our CEO and CFO, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our CEO and CFO concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.

Changes in internal controls over financial reporting.    Our management, with the participation of our CEO and CFO, has evaluated any changes in our internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, our management concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended December 29, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

39


Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

We are a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we believe the outcome of these matters will not have a material adverse effect on our financial condition or results of operations.

 

ITEM 1A.

RISK FACTORS

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 29, 2012, filed on December 14, 2012. Refer to “Risk Factors” in Part I, Item 2 of this Quarterly Report on Form 10-Q for discussion of our risk factors.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

COMPANY PURCHASES OF EQUITY SECURITIES

 

Period

   Total Number of
Shares Purchased
     Average Price Paid
Per Share

September 30, 2012 – October 27, 2012

     2,450 Class A Shares       $312.31

November 24, 2012 – December 29, 2012

     1,050 Class A Shares       $316.11

November 24, 2012 – December 29, 2012

     8,867 Class B Shares       $304.66

 

Total

     12,367 Shares       $307.15

 

Refer to “Redemption of Capital Stock” in Part I, Item 2 of this Quarterly Report on Form 10-Q for discussion of our share redemptions.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.

OTHER INFORMATION

None.

 

40


Table of Contents

ITEM 6.

EXHIBITS

 

(a)

  

Exhibits

31.1

  

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

  

Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  

Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

  

XBRL Instance Document.

101.SCH*

  

XBRL Taxonomy Extension Schema Document.

101.CAL*

  

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

  

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

  

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

  

XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto, formatted in XBRL (eXtensible Business Reporting Language), are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

41


Table of Contents

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 GROCERS, INC.

By

 

/s/    Alfred A. Plamann        

 

Alfred A. Plamann

Chief Executive Officer

(Principal Executive Officer)

By

 

/s/    Richard J. Martin        

 

Richard J. Martin

Executive Vice President, Finance &
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)

By

 

/s/    Randall G. Scoville        

 

Randall G. Scoville

Senior Vice President, Accounting and

Chief Accounting Officer

Dated: February 12, 2013

 

42