Unified Grocers Deposit Accounts Prospectus

Unified Grocers operates as a retailer-owned grocery wholesale cooperative, distinguishing itself from traditional wholesale structures. Its shareholders, referred to as members, are existing or former customers, creating a unique collaborative business model. The cooperative serves a diverse clientele encompassing both members and non-members, expanding its market reach. This structure facilitates the supply of a broad spectrum of grocery products, encompassing items typically found in supermarkets, specialty stores, and convenience stores. Unified's operational framework is segmented into key divisions: the Cooperative Division handles a wide array of supermarket products; the Dairy Divisions focus on dairy products; Market Centre caters to the specialty food market; and Unified International, Inc. manages international sales. Beyond product distribution, Unified extends its services to include comprehensive support for its customer base. This encompasses vital areas such as promotional planning, the provision of cutting-edge retail technology, facilitating efficient equipment purchasing, and offering valuable real estate services. Further solidifying its position within the grocery industry, Unified offers additional support through its subsidiaries; providing critical insurance and financing options to its members. This comprehensive suite of services is strategically dispersed across three significant geographical marketing regions: Southern California, Northern California, and the Pacific Northwest, aligning resources with market demand. The availability of specific products and services may naturally vary by geographic region, ensuring localized needs are met.

Unified Grocers' operational structure is built on a foundation of distinct divisions, each contributing to its comprehensive service model. The Cooperative Division assumes a central role in the supply of a vast array of grocery staples to supermarkets, reflecting the core of Unified’s business. Complementing this, the Dairy Divisions focus exclusively on the dairy product segment, providing specialized expertise and consistent supply. Expanding beyond the traditional grocery sector, Market Centre focuses on specialty food products, catering to a discerning clientele and emerging market trends. Furthermore, Unified's international presence is managed by Unified International, Inc., underlining the cooperative's commitment to global expansion and market diversification. The cooperative’s far-reaching influence is not limited to product distribution; it also extends to support services. This commitment to comprehensive customer support is exemplified by the Wholesale Distribution segment, where crucial services are reported. These services include providing essential promotional planning, assisting with the implementation of innovative retail technology, streamlining equipment procurement, and offering valuable real estate support. The scope of Unified's operations is significant, extending across three key geographical regions: Southern California, Northern California, and the Pacific Northwest. This geographically focused strategy allows the cooperative to better respond to the unique needs and demands within each region, ensuring efficient operations and optimal market penetration. However, the availability of products and services may differ geographically to best meet regional needs.

Membership in Unified Grocers necessitates the ownership of both Class A and Class B shares, with the precise number of shares mandated by the Board of Directors. This shareholding requirement forms a cornerstone of the cooperative's structure, directly linking membership with financial investment in the company. Members have the option to acquire their Class B shares gradually over time. This phased acquisition approach allows for a more manageable financial commitment. However, this gradual acquisition typically necessitates a subordinated cash deposit, equivalent to the full value of the required Class B share ownership. This deposit serves as a form of security for the cooperative and is only waived once the member possesses enough Class B shares to meet the stipulated ownership requirement. The prospectus focuses specifically on the conditions surrounding these subordinated cash deposits and their relation to the member's Class B share ownership obligation. Importantly, these required deposits are secondary to Unified's senior debt, do not accrue interest, and lack any form of security. This is a crucial point for potential investors to understand, as it reflects the risk profile associated with these deposits. The bylaws clearly outline that each member is obligated to own a specific number of Class B shares; a number that's established and potentially modified by the board. This flexibility allows the cooperative to adapt to evolving economic situations and adjust investment requirements to match the financial health of the organization. The prospectus underscores that the described rights and responsibilities of members are entirely subject to the stipulations detailed within individual membership agreements. The formats of these agreements have undergone revisions over time, a point to note when examining the specific conditions for any given member.

The bylaws of Unified Grocers stipulate that each member must hold a predetermined quantity of Class B shares, a number set by the Board of Directors. Currently, the standard Class B Share Requirement is approximately double the member's average weekly purchases from the Cooperative Division. However, this ratio is reduced to roughly one times the weekly purchase amount for meat and produce purchases. For members who don't make weekly purchases, the average is calculated based on the actual number of weeks in which purchases were made. To accurately determine whether a member’s Class B share ownership is sufficient, the issuance value of each share is calculated using the Exchange Value Per Share determined at the fiscal year-end before the share’s issuance. A crucial aspect of membership is the potential for a subordinated cash deposit. When a member's total Class B shares don't meet the required issuance value, they are typically required to make a subordinated deposit, often referred to as a Required Deposit. This deposit can be made either as a lump sum or in installments over a 26-week period, offering members flexibility in their payment schedule. This deposit functions as collateral against the share ownership requirements, ensuring that members are actively contributing to Unified Grocers. If a member's Class B shares still don't meet the requirement by the end of the fourth fiscal quarter, they are obligated to acquire additional shares, either through direct purchase (potentially spread over 26 weeks) or by drawing on the existing deposit fund. The Board maintains the authority to adjust or alter the Class B Share Requirement as it deems necessary, reflecting a dynamic approach to member investment responsibilities.

Unified Grocers provides members with an alternative to the standard share buy-in option (SBI), called the Reduced Investment option (RBI). This option is designed to encourage member growth by reducing the investment requirements for those who meet specific criteria. Eligibility for the RBI requires members to pay for their purchases electronically by the due date and maintain a demonstrated record of creditworthiness. The RBI contrasts with the SBI which mandates Class B shares with an issuance value of approximately twice the member’s average weekly purchases from the Cooperative Division (except for meat and produce, where it’s closer to one times the average). The RBI system adopts a sliding scale, so increased purchase volumes lead to a proportionately smaller investment requirement. This structured approach aims to make membership more accessible to members experiencing growth, while also placing a cap on the investment requirement at certain volume thresholds, offering stability for high-volume buyers. This flexibility aims to attract and retain members by balancing investment needs with the members' varying levels of business volume and financial capabilities. The sliding scale of the RBI is intended to provide a scalable investment requirement, incentivizing members to expand their operations without proportionally increasing their initial capital outlay. The RBI is a crucial strategy in attracting and retaining a broad range of members, promoting the overall growth and stability of the cooperative.

Unified Grocers' members are often required to maintain subordinated cash deposits, a key aspect of their membership. These deposits are directly tied to the member's Class B share ownership requirement. The prospectus clarifies that these deposits are subordinate to Unified's senior indebtedness. This subordination means that in the event of financial distress or insolvency, repayment of these deposits is secondary to the repayment of senior debt. A significant implication of this subordination is that the deposits do not bear interest and are not secured. This lack of interest and security adds a layer of risk for the members, highlighting the importance of understanding the terms before committing funds. The prospectus emphasizes that these deposits are not segregated from Unified's other funds, which is a noteworthy point regarding liquidity risk. Unified currently operates under three different forms of subordination agreements: the 2008 Subordination Agreement, the 1994 Subordination Agreement, and a Pre-1994 Subordination Agreement. The variations across these agreements might affect repayment conditions for members depending on the specific agreement they signed. This underscores the importance of knowing which subordination agreement governs a particular member's deposit.

The repayment of subordinated cash deposits is governed by specific terms and conditions. Members can request the return of any cash deposit exceeding the sum of the Required Deposit and any required Credit Deposit, provided they are not in default on their obligations to Unified. The existence of excess deposits can arise from several scenarios. A decline in a member's purchases compared to the prior measurement period can create excess deposits. Patronage dividends, deposited into members' accounts, can similarly increase deposit amounts beyond the required level. Finally, part of the Required Deposit may be classified as excess following the issuance of Class B shares as part of a patronage dividend distribution. If a member's membership is terminated, they are entitled to a refund of all deposits, less any outstanding amounts owed to Unified. However, it's crucial to remember that Unified is not obligated to return any collateral, including the proceeds from pledged assets, so long as any matured or unmatured debts remain. The repayment of the Required Deposits portion specifically adheres to the applicable subordination provisions, meaning repayment depends on the absence of any defaults on senior indebtedness. Importantly, Unified doesn't permit members to offset any obligations against the Required Deposit, nor are deposit accounts segregated from other company funds. These aspects of the repayment process are critical for members to understand, as they directly influence the accessibility and timing of their deposit returns.

A significant risk highlighted in the prospectus is the potential for liquidity problems. Because deposit accounts are not segregated from Unified's other funds, a substantial and simultaneous demand for deposit returns could negatively impact the company's liquidity. This means that if many members request their deposits back at the same time, Unified might struggle to meet those obligations without impacting other operational functions. While past experience indicates that liquidity hasn't been negatively affected by deposit returns, there's no guarantee this will remain the case in the future. The lack of segregated funds specifically designated for deposit repayment increases the risk. If a substantial amount of deposits needed to be repaid concurrently, or if the company faces financial hardship or insolvency, there's no guarantee that Unified could meet these obligations and that members would fully recover their deposits. This lack of security underlines the importance of understanding the investment's risk profile. The absence of segregated accounts means that all funds are intermingled, making repayment dependent on the overall financial health of the company. A sudden, large-scale demand for deposit returns could easily exceed the immediately available funds, posing a substantial risk to members' investments.

Unified Grocers is exposed to concentrations of credit risk, primarily linked to its trade receivables, notes receivable, and lease guarantees for members. This concentration risk implies that a significant portion of Unified's revenue comes from a relatively small number of customers. The document notes that the top ten customers accounted for approximately 38% and 37% of total accounts receivable as of December 31, 2011, and October 1, 2011, respectively. This level of concentration means that financial difficulties at one or more of these key customers could severely impact Unified's financial health. These concentrations are vulnerable to broader economic changes affecting the Western US, particularly states like Arizona, California, Nevada, Oregon, and Washington. While management expresses confidence in the diversification of receivables and the adequacy of allowances for doubtful accounts, there's an inherent risk. In a significant economic downturn, these key customers might default on their obligations, impacting Unified's financial condition. Although Unified utilizes offsetting rights against members' cash deposits and shareholdings, along with personal guarantees, to mitigate this risk, it cannot completely eliminate it. This means losses remain a possibility in the case of a severe economic downturn affecting the company's largest accounts.

Beyond liquidity and credit risks, the prospectus outlines several other financial risks that potential investors should consider. The possibility of product liability claims and negative publicity stemming from food safety incidents is a significant concern. While Unified implements quality control measures, and seeks indemnification from suppliers, the potential impact of a major product recall, or a significant product liability lawsuit, could be severe. Additionally, the prospectus addresses potential inadequacies in insurance reserves. Insurance subsidiaries are subject to state regulation, and reserve calculations rely on actuarial estimations, which are susceptible to error. Unexpected losses could quickly deplete reserves, jeopardizing the financial stability of these subsidiaries. Further, the document highlights the risk associated with Unified's reliance on cash flow from operations and member investments to fund its operations. Should these sources prove insufficient, Unified will rely on credit facilities, which are subject to financial covenants (like minimum tangible net worth and debt-to-EBITDAP ratios). Non-compliance could severely restrict the company’s ability to operate. This dependence on sufficient cash flow from its core business and its reliance on credit facilities underlines the risk inherent in the investment. Failure to meet the covenants within the revolving credit agreement could jeopardize the company’s financial health and ability to conduct business.

Unified Grocers distributes patronage dividends to its members, reflecting a key element of its cooperative structure. These dividends represent a return of earnings to the members based on their patronage (purchases). The distribution of patronage dividends can take two forms: cash payments or qualified written notices of allocation. The latter may include Class E shares or Class B shares, the value of which is determined by the Exchange Value Per Share. The decision of whether to distribute dividends in cash or through allocation is made by the Board of Directors. A crucial distinction lies in the tax implications of these different methods. Members must include all cash patronage dividends, along with the stated dollar value of qualified written notices of allocation, in their gross income for the year received. This includes the value of any Class B or Class E shares received. In contrast, nonqualified written notices of allocation are not considered taxable income in the year received; instead, taxation occurs upon redemption for cash or property, at which point Unified receives a corresponding tax deduction. Class B Shares distributed as part of a qualified written notice of allocation are also subject to state income and corporation franchise taxes in California, with potential for taxation in other states as well. This complexity underscores the importance for members to consult tax professionals to fully understand the implications of the different distribution methods and their tax liabilities.

Unified Grocers’ patronage dividends are allocated across different divisions, each with its own specific criteria and calculation methods. Patronage earnings are calculated individually for each member based on their patronage within the relevant division(s). This calculation ensures that the distribution accurately reflects each member’s contribution to the cooperative's overall success. The Cooperative Division, a central component of Unified’s operations, calculates patronage earnings from all patronage activities except those of the Southern California and Pacific Northwest Dairy Divisions. This division’s patronage dividends are based on purchases of specific product categories: dry grocery, deli, health and beauty care, tobacco, general merchandise, frozen food, ice cream, meat, produce, and bakery. This comprehensive list highlights the breadth of products covered under the Cooperative Division and shows that patronage dividends for each division are solely paid to members who purchase products from that particular division. This highlights the direct link between a member's purchasing activity and their subsequent dividend allocation. The allocation process ensures that the returns accurately reflect the individual contributions and purchases made by each member within each specific operating division of Unified Grocers. Therefore, members involved in purchases from several divisions should anticipate patronage earnings distributed across those same multiple divisions.

The prospectus details how Unified Grocers intends to utilize proceeds from increased member deposits or new member deposits. These funds will be allocated to general corporate purposes. This includes, but isn't limited to, meeting working capital needs. A significant portion will also go towards repaying cash deposits to both members and non-members, though this is naturally subject to the limitations outlined elsewhere in the prospectus, particularly regarding subordination agreements. Unified explicitly states that it will not maintain a segregated account or sinking fund specifically dedicated to repaying these deposits. The allocation of funds will depend on the company's financial situation at the time the proceeds are received. However, a substantial portion will likely be directed towards general corporate operations and working capital. The company anticipates that an increase in the number of members will bring added expenses. These will include items like increased administrative costs, and potential additional support services to meet the increased demands, all of which will be supported by the influx of funds from deposits. If, after a patronage dividend distribution, a member holds the necessary number of Class B shares, then the corresponding portion of their Required Deposit is no longer subject to the subordination agreement and is classified as an excess deposit.

The method for new members to fulfill their Class B share requirements is detailed in the prospectus. New members have two primary options for meeting these requirements. The first option involves purchasing the necessary Class B Shares at the time of admission to membership, ensuring immediate compliance. The second option allows for a more gradual acquisition of shares over a five-year period. In this case, new members purchase 20% of the required amount each fiscal year, ultimately reaching the full requirement by the start of the sixth fiscal year. This staggered approach provides flexibility for members who might not be able to meet the full requirement immediately. Regardless of which method is selected, a key aspect is the possibility of using patronage dividends to fulfill the share requirement. If a member does not meet the Class B Share Requirement when a patronage dividend is issued, some of these dividends may be used to issue Class B shares to the member, helping them toward meeting the requirement. When a sufficient number of Class B shares are acquired through this method, a portion of the Required Deposit is then released from subordination. If, however, a member doesn't hold the required number of Class B shares after receiving a patronage dividend, they must purchase additional shares to satisfy the requirement. This can be done by using funds from their existing deposit or making a direct purchase.

Non-member customers can also be required to provide cash deposits to secure credit purchases. This is a critical distinction because these deposits function similarly to those of members, securing payment obligations, but these deposits are not subject to subordination agreements. This is due to the fundamental differences in the relationship between members (who are shareholders) and non-member customers. Members are subject to the requirements and responsibilities set forth in the bylaws, including subordinated cash deposits related to the share buy-in. Non-members, on the other hand, are strictly customers, and thus their cash deposits primarily serve as credit security without any of the complexities involved in a membership-based capital structure. The difference is key in assessing the risk profile; members bear the risks associated with subordinated debt, while non-member deposits are managed with different conditions. The management of non-member customer deposits demonstrates the flexibility of Unified Grocers' financial strategy, adapting its approach to secure credit transactions while maintaining a distinct framework for shareholder investments.