STRONG RESULTS STRONGER TOGETHER
2015 ANNUAL REPORT BOARD OF DIRECTORS
Barry Queen, Chairman David Ball Danny Boyle Jim Brown Roger Collins Victor Cosentino Queen’s Enterprises - Paola, KS Four B Corp Country Boy Markets Doc’s Food Stores Harp’s Foods Cosentino’s Kansas City, KS Harrah, OK Bixby, OK Springdale, AR Prairie Village, KS
Don Woods, Jr., Vice-Chairman Scott Hayes Alan Larsen Jay Lawrence Alan McKeever Chuck Murfin Woods Supermarket - Bolivar, MO Albertson’s, LLC Houchens Industries Lawrence Brothers McKeever’s Ozark Supermarkets Fort Worth, TX Bowling Green, KY Sweetwater, TX Independence, MO Ozark, MO
Dave Nicholas James Neumann Pat Raybould Jeff Reasor Randy Stepherson Erick Taylor Dale Trahan Nicholas Valu Market, Inc. B&R Stores Reasor’s Superlo Foods RPCS, Inc. Dale Trahan Supermarkets Louisville, KY Lincoln, NE Tahlequah, OK Memphis, TN Springfield, MO Enterprises Boonville, MO Rayne, LA DEAR SHAREHOLDERS
March 20, 2016
Your Board of Directors and management are pleased for AWG and member stores. Also, resulting from the to present the audited results for our fiscal year reduced shrink, AWG is paying a one-time reclamation 2015. Consolidated company sales reached another bonus payment of 10%, which is supplemental to the all-time record of $8.94 billion. Total year-end typical reclaim rebate of 30%. patronage after retainage was $193.8 million, which AWG’s strong results for 2015, which overcame our was 2.79% of qualifying sales. Total distribution top-line sales challenges, were made possible by our including patronage, allowances and interest back members and a superior cooperative model, whereby to members was $544.4 million. Additionally, AWG independent grocers are stronger together. This theme stock trading value was increased four percent to is communicated as the title of this year’s annual report: $1,915 per share. “Strong Results – Stronger Together!” AWG achieved this strong patronage achievement AWG is proud to be a primary resource in our despite slightly lower year-over-year sales within retailers’ ongoing fight against all risks and the cooperative. Cooperative net sales were $7.58 challenges, while seeking new sources of billion, down 1.41% from the prior year, due growth, revenue and success. We are truly primarily to over 130 direct competitive impacts Stronger Together! to our member stores and a significant decline in overall average wholesale product cost by $1.44 per Sincerely, case, or 5.5%.
This year marked the 20th anniversary of both our Oklahoma City Division and our subsidiary, David Smith Valu Merchandisers Company (VMC). Due to the President/CEO support and growth of our member stores and their collective business, since its first year, the Oklahoma City Division sales volume has more than tripled and VMC has increased an incredible six times. Both Barry Queen businesses are great examples of grocers achieving Chairman of much more through their combined efforts. the Board Beyond our operating results, AWG members also benefited by a new product freshness program, tracking all open-dated inventory by expiration date. This ensures acceptable product dating at receipt by AWG, proper rotation in our supply chain and significantly improved product freshness at delivery to member stores. Our product dating standards for members has improved by approximately 50%, resulting in fresher product and reduced shrink
1 FIVE-YEAR TREND Founded in 1926, Associated cated to providing service to AWG distribution centers, located in Wholesale Grocers, Inc. (AWG) was cooperative members in various re- Springfield, MO; Oklahoma City, OK; established to provide its fami- tail locations. Members are required Ft. Worth, TX; Southaven, MS; Mem- ly-owned retail member stores the to purchase and hold 15 shares of phis, TN; Pearl River, LA; Goodletts- essential building blocks needed "Class A" stock to be supplied on a ville, TN; Ft. Scott, KS and Kansas to establish strategic positions in cooperative basis. City, KS. their unique retail marketplaces. This Annual Report marks 89 years The remaining two facilities were AWG achieved sales on a consoli- of providing products, support ser- operated under the banner of Valu dated basis, after eliminations, of vices and financial returns to our Merchandisers Company, a whol- $8.94 billion. Within the cooper- member-retailers, and the collec- ly-owned subsidiary which pri- ative, net sales were $7.58 billion. tive strength of our cooperative marily provided health and beauty Operating income was $203 mil- model has provided ongoing oppor- care items, general merchandise lion, with net income of $199 mil- tunities for our members to develop and specialty foods, serving co- lion. and grow unique and sustainable operative as well as non-member businesses that have survived, as retailers. Additionally, the compa- Total patronage returned to share- well as thrived, in an ever-changing ny operated Always Fresh, Inc., a holders was $193.8 million, distrib- retail environment. wholly-owned military supply sub- uted on a 60/40 basis (the payout sidiary, providing products to com- consisting of 60% cash and 40% Operating nine distribution centers missaries and base exchanges on a certificates). As a percent to quali- during the 2015 fiscal year, AWG non-member basis. fying sales, the patronage payout delivered grocery and related prod- was 2.79%, AWG stock trading val- ucts to active retailers throughout Headquartered in Kansas City, Kan- ue was increased by four percent to the midwestern and southeastern sas, the AWG corporate support $1,915 per share. Total members’ United States. Seven of the nine fa- team provided operational and investment and equity ended the cilities are full-line divisions, dedi- administrative support to all nine year valued at $477.7 million.
CONSOLIDATED RESULTS (thousands) 2011 2012 2013 2014 2015 Net Sales $ 7,766,807 $ 7,852,006 $ 8,380,214 $ 8,934,239 $ 8,935,915 Operating Income 180,059 176,513 201,406 231,622 202,620 Net Income 169,527 175,949 192,490 226,920 198,919 Weeks 53 52 52 52 52
COOPERATIVE OPERATIONS (before eliminations)*
Net Sales $ 6,711,570 $ 6,713,047 $ 7,148,757 $ 7,685,985 $ 7,579,129 Distribution to Members Interest 3,002 1,522 227 223 406 Promotional Allowances 314,979 311,201 338,828 351,820 350,155 Year-End Patronage 163,791 172,872 182,576 194,675 193,815 Total Distribution to Members $ 481,772 $ 485,595 $ 521,631 $ 546,718 $ 544,376
Members’ Investments $ 54,346 $ 9,308 $ 10,846 $ 9,411 $ 22,105 Members’ Equity 304,406 386,850 422,979 439,632 455,610 Total Members’ Investments & Equity $ 358,752 $ 396,158 $ 433,825 $ 449,043 $ 477,715 *Includes the accounts of members/subsidiaries.
2 NET SALES Consolidated (after eliminations) $8.94 BILLION
$8.38 $8.93 BILLION BILLION
$7.85 $7.77 BILLION BILLION
2011 2012 2013 2014 2015 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
$195.0 Patronage Dollars 6.0% Total Gross Profit (Millions) $194.7 $193.8 (Co-op only, includes cash discount) $185.0 5.9% $182.6 *As percent of total net sales $175.0 5.90% 5.8% 5.83% $172.9 5.81% $165.0 5.71% 5.7% $163.8 $155.0 5.69% 5.6% $145.0
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
2.90% Co-op Patronage (Percentage to qualifying sales) 3.5% Selling, General & 2.81% 2.77% 2.79% Administrative Expense 2.80% 2.76% 3.4% (Co-op only) 2.71% 3.30% 3.32% *As percent of total net sales 2.70% 3.3% 3.22% 2.60% 3.2% 3.12% 3.13%
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
3 RETIREMENT JERRY GARLAND
to outsource wholesale supply his right hand and Vice-President of for the company. During this Marketing. After leaving the high- process, Jerry was evaluating AWG volume business in Springfield, and other for-profit voluntary both Mike and Jerry were surprised Jerry Garland has been a wholesalers within the area. His and underwhelmed when their first- leader with an undeniable most memorable takeaways from week sales were tallied and were a drive for delivering strong the process were not only that small fraction of Springfield’s sales. results since joining AWG in 1991. AWG had an unquestionable cost He was born in 1950 in the small advantaged model as compared to In only two years, they successfully town of Nocona, Texas; as the son of other wholesalers, but that dealing led the new Oklahoma City Division a homemaker and an oil field worker, with AWG was an open book – all to a strong sales base exceeding he learned his strong work ethic retailers pay the same along with $900 million annually. Due to this early in life. In 1970 he enlisted with complete transparency in the cost successful start-up and operation, the U.S. Army, ultimately becoming of goods and services. Jerry was called upon again in 1997 a tank commander, which no doubt to accept another challenge: move strengthened his “never give up” Jerry’s introduction to AWG during back to Kansas City and lead AWG’s attitude and helped establish an his wholesaler evaluation process largest division. Jerry made the extraordinary discipline that Jerry opened an important door to his move and successfully operated the carried forward into his successful future and ultimately, for AWG. division until 1999 when another subsequent business career. Subsequent to the meetings with door of advancement opened for AWG and its leadership team, in him: lead all of the merchandising After graduating from North Texas 1991 Mike DeFabis, President and and marketing of AWG. For the University in Denton, Texas in 1973, CEO, recruited Jerry to join AWG as next ten years Jerry flourished, he married Melinda Runyon, his the Vice-President of Marketing at serving as Executive Vice-President high school sweetheart and began the Springfield, Missouri division. of Marketing and Merchandising, working for the Kroger Company Jerry came in like a whirlwind, a position from which he shaped in a variety of roles. Very quickly, working for Gary Phillips, Senior many of today’s programs and Kroger identified Jerry’s leadership Vice-President and Springfield offerings, as well as supported Gary skills and began promoting him Division Manager and working Phillips as his “go-to guy” in that through the ranks of management closely with his contemporaries time of tremendous growth. and supervisory positions, leading Mike Rand in warehousing, Don up to the position of Chief Merchant McBride in meat, Larry Collins in In 2003, while Gary Phillips was for the Dallas Division. David Dillon, produce, Walt Lemons in grocery President and CEO, Jerry stepped up past President, CEO and Chairman and Kevin Hale in bakery/deli. as lead and primary architect of the of the Kroger Company describes largest acquisition project in AWG’s Jerry as “the big fish that got away” After four years in Springfield, history. In April of that year the because of the loss Kroger felt due to tremendous growth and nation’s largest wholesale supplier, following his leaving the company an expanding trade area, Jerry Fleming Companies, filed for and watching all his further accepted a new challenge and Chapter 11 bankruptcy protection accomplishments. left to open up and operate and began the process to sell all its
a newly-acquired division in wholesale assets. With Jerry and After 24 years of service, Jerry left Oklahoma City, Oklahoma. Jerry Gary’s incredible negotiating skills Kroger for a brief stint to head a and Melinda promptly packed up and AWG’s superior cooperative regional retail grocery chain based their belongings and children, model, AWG was the successful in Little Rock, Arkansas. While there, Mendalyn and Michael, and moved bidder on five facilities, three of Jerry led a process to evaluate the to open up AWG’s first expansion which are now operated by AWG potential sale of the company’s division. Jerry recruited Mike Rand as our Nashville and Memphis warehouse and distribution to accompany him in this venture as divisions and VMC Memphis. assets along with an arrangement
4 The remaining volume in the accessibility to all Nashville and Memphis wholesale resources in one divisions at the time of purchase physical location. in August 2003 was approximately $550 million. These new divisions During his tenure quickly became the highest- as AWG’s leader, growth divisions in the company, Jerry gained ultimately with annualized sales national attention eclipsing $2.3 billion before as a “go-to guy” volume was transferred to the new by supporting Gulf Coast Division in 2013. Today, the needs of due to this expansion, AWG’s sales independent in the combined areas of Gulf Coast, grocery retailers. Memphis and Nashville exceed He served on $3.3 billion annually, six times the the Board of original volume. Directors and various leadership In March, 2009 AWG’s Board committees, including the of Directors selected Jerry as Independent Grocers Alliance (IGA), Gary Phillips’ replacement as its IGA International, National Grocers twelfth President and CEO. During Association and UMB Bank, N.A. Jerry’s tenure as President, AWG For the past seven years Jerry also achieved record high sales, record served on the Board of Directors low operating expenses, reduced and Executive Committee for the the gross margin, landed product Food Marketing Institute (FMI), cost on products sold to members ultimately being elected as the and achieved record patronage. Chairman of the Board of FMI with Additionally, with approval his term ending in January 2016. and support by AWG’s Board of Directors and due to the confidence Delivering strong results for the in his leadership, Jerry led the benefit of AWG and its member company in building, and in 2013 retailers was certainly Jerry’s successfully launching our first ever passion, but his first love was always “green field” new division in Pearl his family. No matter what his busy River, Louisiana. After transferring schedule required, Jerry always approximately $455 million of found a way to celebrate every annualized sales from the Nashville special occasion with Melinda, and Memphis divisions, the new his lovely wife of 42 years. It was division quickly grew to a current also hard to have a conversation sales base of approximately $1.2 with Jerry without hearing about billion in 2016. his son, Dr. Michael Garland, currently serving a residency at In 2012, Jerry also saw an Yale University Hospital in New opportunity to improve intra- Haven, Connecticut. Fortunately company communication and for parents Jerry and Melinda, reduce expenses by combining all their beautiful daughter Mendalyn corporate functions for AWG and Garland-Hellman and her husband VMC into a single location on Kansas Pasi live in the Kansas City area, so Avenue in Kansas City, Kansas. After access for the doting grandparents obtaining generous support from to their grandson Reino is always the state of Kansas, the expanded available. corporate office complex was completed in 2013. Included were As Jerry has now left AWG to AWG and a visible impact on the many new features for the benefit begin the next phase of his life in industry, for which he will be long of our members including a store retirement, he has left us in a very remembered. design center, customer-connect good place. He leaves behind a center for digital marketing and legacy of growth and prosperity at Thank you, Jerry Garland!
5 THE NEW CHAIRMAN OF THE BOARD BARRY QUEEN
Following his parents’ advice, Barry industry associations: a Retail worked in every position in the Grocers Association Board member company from the bottom up so he since 1999, Chairman from 2006- would gain an in-depth appreciation 08; Associated Wholesale Grocers for the long hours and hard work it Board Member since 2001, Finance takes to be an independent retailer. Committee member since 2008 Immediately following the Upon completion of college, Barry and Board Chair; National Grocers Annual Shareholders joined the family business full-time Association Board Member since meeting in March, 2015, and in 1991, the family’s holdings 2010, Executive Committee since the Board of Directors elected Barry expanded into multiple stores; Barry 2014. Queen as the new Chairman of the became part of the management Board, successor to Bob Hufford who team. He is currently President/ As AWG heads into our 90th year, retired from this position. Don Woods Managing Owner of Queen’s Price Barry looks forward to his new was re-elected Vice-Chairman of Chopper and continues the tradition responsibilities as Chairman of the the Board for Associated Wholesale his parents began. They own and Board. As a life-long grocer himself, Grocers. operate five large Price Chopper he clearly understands that the stores in the Kansas City area, future of AWG is totally dependent Barry Queen is a 1987 graduate of proudly employing over 650 people. on the success of its members. Kansas State University, Manhattan, Committed to a focus on retailers’ Kansas and holds a Bachelor of Barry recognizes the value of serving needs, Barry’s ultimate goal is to Science Degree in Business. Barry has the communities which support his achieve continuing growth and been married to his beautiful wife business and has served on the Paola prosperity for existing and new Kim for 27 years and they are very Chamber of Commerce Board, Paola members of our cooperative family. proud parents of two great children: Country Club Board and Paola Rotary Dylan, 21, a full-time student at Club. He has also been actively Missouri Western State University involved in numerous school, and Paige, 23, a pharmaceutical athletic and charitable events. In sales representative. his free time, he enjoys spending time with his family, sports, hunting, Barry’s roots in AWG and the grocery fishing and showing livestock. industry run deep, as he’s been in the business his entire life. Barry’s In addition to his community father, Jim Queen, was formerly involvement, he is engaged in Vice-President and Treasurer of AWG leadership positions with multiple Jim and Barbara Queen during Lou Fox’s tenure as President and CEO. Back in the early ’70s Barry often came to AWG’s office with his father on weekends when he was “closing out the books.” He remembers checking the pay phones for unclaimed change and making himself at home in the AWG office! Later, his parents, Jim and Barbara, entered the retail side of the business as store operators, and at the age of 11, Barry began working in the family store sorting glass pop bottles, among many other tasks his parents found for him to do.
6 THE NEW AWG LEADERSHIP TEAM
A/ Jeff Pedersen; B/Dan Funk; C/Scott Welman; D/Gary Koch; E/ Pat Reeves and F/ Richard Kearns
AWG’s commitment to ensuring the success and prosperity of its retail members is the sole focus of B its Leadership Team. D F
Drawing on the wealth C of background diversity, A E experience and talents of its employees, the Leadership Team aligns itself to provide guidance within its core values: Humility - Accountability - Transparency - Service.
7 INITIATIVES FRESHEN UP
Our online “Freshen Up” “Freshen Up” interviews were series was created as an recorded with owners, category informative, easy-access way managers, department heads and to help our member retailers and industry experts within each topic to their teams focus on innovative ways give our members the widest scope and best practices to continuously of pertinent information. improve their people, facilities and operations. New additions to the series will
appear throughout 2016, all
Dollar stores, “small marts” and focused on supporting members’ M E other new niche-format competitors profitability in same-store sales, Y R are changing the retail landscape keeping up-to-date with consumer T TO OW S in many markets, so we created a trends and identifying upcoming N • MY proactive, accessible resource to opportunities for additional growth give our members a retail-level and development. advantage against these new formats. Our vision is to be the most retailer- focused, highest-performing In 2015, AWG created the short member-owned grocery wholesaler web series “Freshen Up My Town in America. It is our responsibility • My Store,” its primary focus to to listen, research, collect and share key-area insights and provide share relevant information vital to a competitive edge in today’s our members’ ongoing growth and constantly-changing grocery prosperity. industry. You can find the entire series online The online information is at www.awginc.com; just click on structured by department or topic the “Freshen Up” logo to access the to easily communicate real-world video library. observations, recommend best practices and give easy, actionable items for immediate in-store implementation. The series not only covers center store, fresh and non-foods, but also provides insight into people, customer service, plan- o-grams, pricing, re-models, store décor, cost-plus stores and many other categories.
“ At AWG, we are focused on your retail success and have people and programs available to help you compete.”
8 INITIATIVES FRESHNESS DATING
Product freshness is a key 2015 INCREASES IN GUARANTEED element, essential to the SHELF LIFE TO THE STORES overall success of any grocery store as well as being a top factor toward attracting CANNED VEGETABLES and retaining retail customers. Freshness helps reduce shrink 30 DAYS 90 DAYS and its associated financial losses throughout the entire supply chain, ultimately ending at retail. CHEESE AWG implemented a company- wide initiative in 2015 to increase 10 DAYS 30 DAYS the shelf life of every product we provide our members. From receiving to shipping, every phase of our operation was scrutinized. FROZEN FOOD The resulting findings, along with support and guidance from our members, were implemented as 30 DAYS 60 DAYS major changes to AWG’s operating policies, procedures and practices. Already at the industry’s leading edge, implementing this initiative FROZEN MEAT improved shelf life by an average of 50% overall and impacted virtually 30 DAYS 60 DAYS every product category.
Improvements started with adjusting receiving dates from vendor- customer perception of freshness on partners, followed by revamped the shelf, improving overall shopper management of in-house dating and satisfaction. tracking within AWG’s distribution centers down to the actual item. As we move into 2016 and beyond, Strict adherence to first-in, first-out these changes will ensure our methods based on product sell-by members receive the freshest dates helped guarantee extended product available, allowing them shelf-life at time of shipment. The to not only meet, but exceed their net benefits have been an improved customers’ expectations.
“ Convenience, Price, FRESHNESS, Cleanliness and Service are the TOP 5 reasons a customer shops at a store.”
9 ANNUAL REPORT AWG BRANDS
AWG Brands finished 2015 with impressively strong results. Case volumes grew year- over-year and helped our members compete favorably at retail, despite a year of competitive challenges and retail deflation. 2015 also saw AWG’s greatest Our members successfully utilize to-date investment: reducing the the brands program as a competitive cost and increasing promotional advantage within their stores and allowances on the entire family markets, which is demonstrated by of brands. Our members received AWG's industry-leading distribution. improved everyday costs and Twenty-five percent of all cases sold incremental promotional offers on and well over one billion dollars in Always Save, Best Choice, Clearly annual sales make these brands a Organic and Superior Selections key differentiator within the store brands. brands arena and overall industry. Our members’ collective scale and volume make this sales advantage AWG Brands will continue to grow available at all retail levels. throughout 2016 by adding new items within all labels in its portfolio. Our focus will be driving same- With multiple tiers and labels, our store sales through private-label brands meet consumers’ needs. offerings; introducing innovative Our everyday low-price program new items with an eye toward ever- (Always Save), our national-brand changing consumer tastes will be a equivalent core line (Best Choice) renewed focus. A new AWG Brands and our premium-product lines sales management team will be (Clearly Organic and Superior installed at division level to head Selections) are designed to meet local support as well as continue all different categories of shoppers’ building on the successful growth of requirements. the Brands program.
With keen focus on quality and value, our brands meet our members’ and consumers’ needs with the highest product standards. In 2015, AWG Brands updated over 1,000 products with new packaging, as well as introducing a new Best Choice logo. Both are delivering positive feedback and incremental sales from retailers and shoppers across the country.
10 20TH ANNIVERSARY VALU MERCHANDISERS
2015 marked the 20th This highly-regulated, ever-changing Looking to the future, VMC’s goals anniversary of VMC, founded segment is a constant focus in VMC’s are clear: to continue delivering in 1995 to help our members efforts to provide better cost of best-in-class category solutions, more effectively compete within goods and add services that support help shoppers lead healthier an ever-evolving marketplace. Over better patient outcomes. lifestyles through a variety of time, the primary competitors have product offerings, drive down shifted, but the strategic mission of Changing local and national overall cost of goods and help our VMC has not. With over $785 million demographics challenge retailers members increase both sales and in total net sales, spread out over to better serve the needs of bottom-line profits. more than 40,000 SKUs, VMC offers a wider clientele; VMC has programs encompassing Health and built comprehensive General Wellness, General Merchandise, Merchandise, Dollar and Hispanic Natural/Organic, Specialty Foods programs, which are currently and Pharmacy options for member growing by double digits nationally. stores. Members and customers are Its General Merchandise and supplied from distribution centers Seasonal offerings drive incremental in Memphis, Tennessee and Ft. Scott, sales, increase basket spend and Kansas. ultimately, store margins.
One of the highest-growth categories in today’s supermarkets, healthy lifestyle products and services are offered in an end-to- end solution, catering to customers’ health and wellness goals. VMC offers a complete Natural and Organic program, focused on shoppers’ changing lifestyles. This program includes grocery, dairy and frozen items from both established brands as well as trending items. This low-cost program includes a variety of promotional support offerings, national/regional brands VMC Total Net Sales plus our own Clearly Organic private (millions) label brand, all designed to drive customer traffic, incremental sales $800 and margin. $775 With an aging population a Pharmacy program, stretching $750 across both branded and generic medications, offering one-on-one $725 counseling and holistic wellness solutions, is an in-store solution that $700 can be a valuable addition to your Health and Wellness program. 2011 2012 2013 2014 2015
11 EXCELLENCE IN MERCHANDISING GROCERY
CASH SAVER slogans greet shoppers Owner: Rick James every day, exemplifying the commitment to excellence Memphis, TN that makes this store such an Under the supervision of Mark outstanding retailer. Owner Gatlin, Memphis Mid-Town Cash Rick James buys aggressively, Saver completely achieves its taking full advantage of AWG’s stated mission to be a true low- direct-store delivery deals, Solo price leader, featuring massive items, Food Show and Web Blast product displays, impressive specials to position his store variety and top quality in a as a true one-stop shopping customer-friendly shopping destination. DIVISION WINNERS venue. Cash Saver offers a complete selection of national James is an accomplished, creative merchandiser with Checkers - Lawrence, KS brands, plus award-winning Best Choice and Always Save forward-looking goals for his Roy’s Cardinal Foods - Wilburton, OK store; Cash Saver’s in-store Piggly Wiggly - Tylertown, MS products as private-label offerings. displays, merchandising, pro- Hank’s Market - Washington, IN motions and featured items are Hudson’s Market - Harrison, AR solid building blocks to carry Cash Saver - Weatherford, TX “Eat Fresh - Pay Less,” “Where More is Less,” “Taste the Local this store successfully into the Flavor;” all these marketing future.
DIVISION WINNERS EXCELLENCE IN MERCHANDISING
Harps - Bellafonte, AR VMC Five Star Marketplace - Knox, IN Price Chopper #2423 - Rolla, MO REASOR’S helped them achieve high Crest Foods - Edmond, OK sales goals. Houchens IGA - Olney, IL Tulsa, OK Reasor’s newest store is located Sharing a parking lot with in the popular Brookside area of Whole Foods, this store was Tulsa, OK. Mike Todd, Director intended to emphasize natural, of Health and Beauty/General organic and specialty foods, Merchandise and Mike Naylor, while not losing sight of the Director of Grocery, combine conventional grocery side their skills and resources in of the business. Although a this 55,000-square-foot venue difficult undertaking in such to create an atmosphere for a small space, outstanding sales, growth and profitability. merchandising, innovative ideas and a great customer An entire team is involved experience combine to achieve in this ongoing effort: Store these goals and more. Director Tim Willingham and HBC Manager Darla Johnson Reasor’s theme for this store are integral parts of the was “Bring Your Table to Life;” Reasor’s team concept. Taking and the Brookside store has full advantage of AWG’s TPRs, exceeded all expectations! Power Buys and Show Deals 12 EXCELLENCE IN MERCHANDISING MEAT
CREST MARKETPLACE Certified Angus Beef, USDA Owner: Bruce Harroz Prime cuts and self-service CAB Choice Beef offer customers Norman, OK the widest possible selection of beef. Hormel Natural Congratulations to owner Bruce Choice pork, Crest’s own, all- Harroz, store manager Gary natural poultry line round out Tiedke and Meat department the usual choices, but Crest buyer Arthur Villareal and the goes further, with all-natural entire team at Crest Foods! specialties like buffalo, ground elk, venison, wild boar sausage Known throughout the Norman and grass-fed beef, plus organic area for its aggressive low- selections. Their seafood and DIVISION WINNERS price stance, Crest provides its special-cuts service areas offer shoppers with fantastic displays, quick, convenient shopping for Price Chopper - Shawnee, KS wide meat selection and overall discriminating customers. great customer experience. Main’s Market - Folsom, LA Cash Saver - Paducah, KY The meat department wows Crest Foods is justly famous Collins Country Market - Garrison, KY shoppers with 40 feet of full- for their “Massive Meat” 3-day Price Cutter - East Battlefield, MO service beef, pork, poultry and sales; the impressive bottom- Cash Saver - Seminole, TX seafood offerings with helpful, line results bear out the hard experienced associates behind work of the entire Norman store the counter. team.
EXCELLENCE IN MERCHANDISING DIVISION WINNERS
SEAFOOD Buehler’s IGA - Evansville, IN Reasor’s - Tulsa, OK Harps Food Stores - Springdale, AR ROUSES alligator meat; these aren’t items Food Giant - Little Rock, AR Layfayette, LA you find just anywhere! Yoss Brothers Grocers - Holden, MO
Harvested from the Gulf waters Keta salmon is always popular and bayous of southern Louisiana with customers; Rouses recently as well as the Atlantic and Pacific purchased a huge supply to oceans, Rouses Market has the kick off a company-wide sales freshest seafood to be found! program and had it flown in just for the event. Vast offerings of Gulf crab, shrimp and fresh fish are always In an area where “Gulf-fresh” available, plus multiple varieties is always the norm, Rouses has of always-popular salmon risen to become the number-one fill their cases. Their shrimp seafood retailer in this town of selection deserves special 125,000, which has over 65 other mention: delivered straight from locations selling seafood. Using the docks to the store by local creative signage, eye-catching shrimpers. Many of the offerings decor and an assortment of are prepared from family recipes ocean-fresh product have or are unique to the Louisiana enabled Rouses to achieve that market. Added to their selection: honor, no small thing in these turtle meat, crawfish tails and parts! 13 EXCELLENCE IN MERCHANDISING PRODUCE
RAMEY'S items. Aggressive cross- Sumrall, MS merchandising is a department hallmark: as an example, most Ramey’s Marketplace’s eye- strawberry displays routinely catching produce department feature pie filling nearby, but is everything it should be: fully Ramey’s makes sure customers stocked with fresh, colorful can easily pick up chocolate for displays, plus a knowledgeable dipping, cake mix or smoothie staff, ready to assist customers mix for shoppers to use those with selection, recipes and strawberries! education. The strength of this store’s team lies in its in-depth Summer sales, holidays or DIVISION WINNERS knowledge of product and Ramey’s annual Open House are dedication to great customer all opportunities for Bennet to service. showcase her department. Fruit Piggly Wiggly - Batesville, MS fountains, free samples, easy Country Mart #5763 - Elizabeth Bennet, Produce recipes, cross-merchandising Taylorsville, KY Manager, is an outstanding and helpful associates are only Lindley Grocery - Hartshorne, OK salesperson: customers are a few of the many effective and Town & Country - Farmington, MO always greeted with seasonal profitable tools she uses to full Super Saver - Grand Island, NE displays featuring great prices advantage to drive sales, both on the week’s most in-demand at special events and every day!
DIVISION WINNERS EXCELLENCE IN MERCHANDISING
Reasor’s - Sand Springs, OK FLORAL Rouse’s - Lafayette, LA Banks Market - Paducah, KY Fishers Foods - Canton, OH QUEEN’S teammates Phyllis Shea and Price Chopper - Branson, MO Angie Isenberg are instrumental PRICE CHOPPER in coordinating the beautiful Overland Park, KS displays and guaranteeing Dedicated to being the area’s outstanding customer service. finest floral retailer, Queen’s Price Chopper’s recent remodel With an average increase in not only expanded their sales of 25% over previous amazing Floral department, but year, this department hit a new pushed its overall sales to new high with holiday sales, making heights. it tops in the Kansas City market and well above the average for Well-timed displays entice U.S. grocery floral sales. shoppers right on the sidewalk, featuring colorful product Impressive, colorful displays to complement the seasonal themed to seasonal offerings, themes throughout the store plus ceaseless dedication to and setting the stage for outstanding customer service increased impulse sales and are the keys to the continuing custom orders. Floral & Bakery success of Queen’s Price Director Robin Bird, along with Chopper Floral. 14 EXCELLENCE IN MERCHANDISING DELI
COUNTRY MART display rack to promote fresh St. James, MO breads and cookies, capitalizing on impulse buys. An impressive remodel and great merchandising strategies Rick Baker, Deli/Bakery Director, earned Country Mart in St. James, instituted several department Missouri the AWG “Excellence in programs designed to further Merchandising” Award for Deli differentiate Country Mart from in 2015. This store, a member of area competition. A expanded the Gott group, is an outstanding variety of available meals example of aggressive retail included a pizza program, more merchandising in the face of grab-&-go offerings plus smoked increasing competition. meats of all sorts from a local DIVISION WINNERS favorite, Glen’s Smokehouse. A new hot foods case, service Cosentino's Price Chopper - case and self-serve section Remodeling the department Kearney, MO plus a convenient sit-down and implementing a revamped Homeland #4267 - Oklahoma, OK dining area highlighted the merchandising scheme is Rameys - Purvis, MS deli overhaul. The bakery area already showing substantial Vowell’s - Starkville, MS added a new thaw-and-sell sales increases for the store; Fresh n Low - Ocoee, TN merchandiser, a doughnut self- a proven return on time and serve case plus an up-to-date money invested!
EXCELLENCE IN MERCHANDISING DIVISION WINNERS
BAKERY Hay's - Walnut Ridge, AR Jumbo Foods - Enid, OK Frick’s Market - Union, MO COOKE’S a little out of the ordinary: a Cannata’s - Houma, LA Cleveland, TN custom-designed wedding Price Chopper 600 - Overland Park, KS cake, a Margaritaville-themed Dan Cooke and his daughter, confection, even a replica of Brittany, own Cooke’s Food Store the University of Tennessee’s in Cleveland, Tennessee. Their Neyland Stadium! Cooke’s commitment to driving sales and Bakery won a first-place award increasing customer satisfaction in the Café Valley Nationwide throughout the store is nowhere Display contest. The entire better demonstrated than in store was also selected for the their Bakery department. Outstanding Independent Single Store Award from Progressive Focusing on specialties like Grocer magazine. salted chocolate and thumbprint cookies (plus a Cleveland Of course, distribution is a major favorite: tomato pie!) helps factor for any department; put Cooke’s firmly in the minds Cooke’s Bakery maintains an of shoppers when it comes to enviable high-performing ave- oven-fresh goodies. rage of 4% of total store sales; Bakery and Deli combined Sifted Bakery at Cooke’s helps average an impressive 18.2%. customers who want something 15 EXCELLENCE IN MERCHANDISING OUTSTANDING EVENT
FAMILY MARKET sales topped 150% over previ- Malvern, AR ous-year totals!
When owners David and Doug During their Grand Opening Hendrix decided to relocate week, their first 100 customers their existing supermarket last received a $10 gas certificate; year to a new location that in- the following week, certificates cluded fuel pump equipment, went to the first 75 customers that change sparked an idea each day. The finale of Family’s that ultimately became Family Grand Opening week was the Market’s “Never Pay Full Price awarding of a Grand Prize “Win on Gas Again!” marketing cam- Free Gas for a Year!” DIVISION WINNERS paign.
Promoting item and price on a Building on that initial success Hilltop CeeBee - Clarksville, TN variety of products gave Fam- has been an ongoing goal for Doc’s Family of Food Stores - ily’s shoppers a cents-off gas the Hendrixes; cross-marketing (Multiple locations) discount, which was so pop- food and fuel has continued the Murfin’s Market - Ozark, MO ular that sales were 129% store’s sales amazing growth Ralph’s Market - Gonzales, LA over pre-opening projections, and created a loyal shopper Cash Saver #7477 - Weatherford, TX with a 120% growth in overall base for its future success. Russ’s Markets - Lincoln, NE sales. At times, Family Market
DIVISION WINNERS EXCELLENCE IN MERCHANDISING
PayLess - Olathe, KS AWG BRANDS Beachler’s - El Reno, OK Greer’s Cash Saver - Poplarville, MS Price Less Foods - Louisville, KY SAV U MORE a revamped Wall of Values King Cash Saver - Springfield, MO Bastrop, LA featuring Always Save and Supermercado El Rancho - Best Choice, giving the store Cockrell Hill, TX Bastrop, Louisiana has had its an overall lower price image. share of economic downturns More value appeal was empha- over the past few years: the sized with end caps and wing area’s largest employer shut displays prominently featur- down, the town’s population ing store brands, plus heavy dropped by 12% and more cross-merchandising created grocery competition moved impulse sales with a definite into the area, compounding an bottom-line increase. With the already challenging retail sit- heavy promotion of Always uation for owner Tandy Key’s Save and Best Choice brands, family business. Sav U More not customers are assured that Sav only survived the change, but U More has the best deals in thrived. town!
It was not easy. The entire Store brand penetration has in- store was overhauled, with creased at this single store by Key and his team adding new over 8% in just six months. store-brand display bins plus 16 EXCELLENCE IN MERCHANDISING STORE MANAGER
SHEILA AUSTIN percentage of her time is spent on Buehler's IGA the sales floor, engaging custom- ers, providing service and advice Darmstadt, IN to shoppers throughout the day. Taking any opportunity to increase Sheila Austin of Buelher’s IGA, sales while holding to budget is a Darmstadt, Indiana is AWG’s recip- given. ient of its “Store Manager of the Year” award for 2015. Austin, cho- Austin’s flexibility plus her aggres- sen from AWG’s Nashville division, siveness within the store organi- won out over an impressive roster zation have proven essential in of candidates from all seven divi- building personal and communi- sions, exemplifying what it takes to ty relations throughout the years. be a truly effective and successful Helping others and giving back are store manager. motivators for Buehler’s continued participation in a wide variety of Respected within the surrounding fund-raising events as well as sup- community as well as by her asso- porting many local organizations. a variety of ongoing changes with- ciates, Austin’s 13 years as manager in the local retail environment, have been summed up in her coach- In 2015, Ace Hardware opened an Buehler’s IGA has remained one of ing mantra, “You can make a differ- in-store location within Buehler’s Houchens Industries top-perform- ence!” Her steadfast encourage- IGA; the merger has proven to be ing stores. This overall success could ment and excitement for the job set both profitable and successful, due not have been achieved without the the tone for the entire store team. in large part to Austin’s leadership efforts and expertise of manager Austin leads by example: a large throughout the process. Even with Sheila Austin and her associates.
17 2015 LOU FOX AWARD
he continues to review Greer’s numbers and help teach and train the fourth and fifth generations which continue to manage the company.
Over the years, Jack has been ac- tive in many civic organizations. He has held such diverse positions as president with the Mobile Asso- ciation for the Blind, The Mobile JACK VIDMER GREER, SR. Exploreum, Mobile Rotary Club, AND JANICE GREER Mobile Environmental Association Mobile, AL and advised numerous communi- ty and charity organizations. His The Lou Fox Community Service partnerships with education, such Award is given annually in honor as Greer’s “Apples for Students” of Lou Fox, president of Associat- program, have provided over ed Wholesale Grocers from 1955 $325,000 in equipment and sup- through 1983. Throughout his life, plies to local schools. Lou was a well-known philanthro- pist and civic supporter. Jack helped preserve and renovate two historical buildings, moving This award is presented at the An- them onto the Greer family prop- nual Shareholders Meeting each erty at Belle Fontaine, where he year to an AWG retailer who exem- and wife Janice have lived since plifies the Lou Fox tradition of giv- rebuilding after 1979’s Hurricane ing back to the community which Frederic. has helped make them successful. The spirit of Lou Fox lives on in Along with the Greer Family Chap- each of these recipients. el and Toulminville Schoolhouse, the Greer’s Sunny Cove Village in- This year, the Lou Fox Community cludes a lake, replica of a general Service Award was presented to store, grist mill, covered bridge, Jack Vidmer Greer, Sr. and Janice train station, blacksmith shop and Greer of Mobile, Alabama. Jack’s golf course. The Cove Village has community involvement spans hosted field trips for local school 60-plus years and continues even children and church groups, as well today as he lives out the Greer’s vi- as providing a camp site for local sion: “To bring added joy, well-be- scout troops. ing and value to people’s lives!” God, family and Greer’s - in that order! In 1986, after Jack’s father “Bank” In 1948, Jack started bagging passed away, he and brother Bar- The 2015 Lou Fox Award was proudly and checking groceries and has tee bought out other family mem- given to those who have consistent- since served in many supervisory, bers. Bartee became Chairman ly followed Lou’s example of service managerial and directorial roles of the company and Jack became to the community, Jack Vidmer Greer, throughout the years. Jack says, “I President. Jack and Bartee, along Sr. and Janice Greer. He was properly tried to give my best and to learn with sons Jackie and Robert proud- recognized as a distinguished industry from the best!” ly carry on the Greer’s tradition of leader who has helped so many em- service to others and continue to ployees, customers, organizations and Although Jack is officially “retired,” remind us of their priorities in life: communities by doing good for all!
18 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 26, 2015 and December 27, 2014 (dollars in thousands)
ASSETS ______2015 ______2014
Current Assets: Cash and cash equivalents ...... $ 166,221 $ 154,149 Restricted cash ...... 729 ------Receivables, net of allowance for doubtful accounts of $2,954 in 2015 and $2,897 in 2014 ..... 295,359 265,943 Notes receivable from members, current maturities ...... 12,251 12,081 Inventories ...... 452,669 429,959 Other current assets ...... ______19,675 ______22,691 Total current assets ...... 946,904 884,823 Notes receivable from members, maturing after one year, net of allowance for doubtful accounts of $7,292 in 2015 and $5,945 in 2014 ...... 43,187 23,456 Property and equipment, net (note 6) ...... 405,099 373,542 Investments ...... 619 619 Intangibles, net of accumulated amortization of $19,329 in 2015 and $17,273 in 2014 (note 3) ...... 8,933 9,444 Deferred income taxes (note 10) ...... 28,988 22,987 Other assets ...... ______41,564 ______44,100 Total assets ...... ______$ 1,475,294 ______$ 1,358,971 LIABILITIES AND EQUITY Current Liabilities: Accounts payable ...... $ 572,067 $ 495,139 Cash portion of current year patronage ...... 110,423 130,101 Member deposits ...... 22,106 9,413 Accrued expenses and other current liabilities ...... ______113,261 ______103,617 Total current liabilities ...... 817,857 738,270 Long-term debt maturing after one year (note 7) ...... 146,188 132,938 Deferred income and other liabilities ...... ______48,517 ______48,808 Total liabilities ...... ______1,012,562 ______920,016
Commitments and contingent liabilities (note 12)
Equity: Common stock, $100 par value: Class A, voting; 35,000 shares authorized; 9,120 and 9,045 shares issued in 2015 and 2014 ...... 911 903 Class B, nonvoting; 150,000 shares authorized; 14,249 and 15,099 shares issued in 2015 and 2014...... 1,423 1,508 Additional paid-in capital ...... 12,797 12,551 Retained earnings ...... 444,964 424,783 Accumulated other comprehensive loss (notes 9 and 11) ...... ______(21,745) ______(17,158) Total members’ equity ...... 438,350 422,587 Noncontrolling interest ...... ______24,382 ______16,368 Total equity ...... ______462,732 ______438,955 Total liabilities and equity ...... ______$ 1,475,294 ______$ 1,358,971
See accompanying notes to consolidated financial statements.
19 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013 (dollars in thousands)
______2015 ______2014 ______2013
Net sales ...... $ 8,935,915 $ 8,934,239 $ 8,380,214 Cost of goods sold ...... ______8,244,604 ______8,243,483 ______7,715,466 Gross profit ...... 691,311 690,756 664,748 General and administrative expenses ...... ______488,691 ______459,134 ______463,342 Operating income ...... 202,620 231,622 201,406 Other income (expenses): Interest income (note 1) ...... 3,879 1,910 1,360 Interest expense (note 7) ...... (3,810) (3,426) (3,255) Other, net ...... ______2,804 ______89 ______(769) Income before income taxes ...... 205,493 230,195 198,742 Income taxes (note 10) ...... ______6,574 ______3,275 ______6,252 Net income ...... 198,919 226,920 192,490
Other comprehensive income (loss) Change in funded status of pension plan, net of taxes (note 9) ...... ______(4,587) ______(12,202) ______9,318 Comprehensive income ...... ______$ 194,332 ______$ 214,718 ______$ 201,808
Amounts attributable to noncontrolling interest
Comprehensive income ...... $ 194,332 $ 214,718 $ 201,808 Comprehensive income attributable to noncontrolling interest ...... ______(8,014) ______(8,839) ______(9,554) Comprehensive income attributable to AWG, Inc. and subsidiaries .. ______$ 186,318 ______$ 205,879 ______$ 192,254
Net income ...... $ 198,919 $ 226,920 $ 192,490 Net income attributable to noncontrolling interest ...... ______(8,014) ______(8,839) ______(9,554) Net income attributable to AWG, Inc. and subsidiaries ...... ______$ 190,905 ______$ 218,081 ______$ 182,936 ______
See accompanying notes to consolidated financial statements. 20 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Fiscal years ended December 26, 2015 and December 27, 2014 (dollars in thousands)
______2015 ______2014 Allocated Balances at beginning of year ...... $ 322,810 $ 305,034 Patronage certificates (note 8): Issued ...... 73,637 74,401 Redeemed ...... (58,372) (57,069) Class B certificates: Issued ...... ------444 Redeemed ...... ______(417) ______------Balances at end of year ...... ______$ 337,658 ______$ 322,810 Unallocated Balances at beginning of year ...... $ 101,973 $ 90,390 Net income...... 198,919 226,920 Net income attributable to noncontrolling interest (note 9) ...... (8,014) (8,839) Less allocated earnings (note 8): Patronage certificates ...... (73,637) (74,400) Class B certificates ...... ------Less cash portion of current year patronage ...... (110,423) (130,101) Redemption and retirement of common stock ...... ______(1,512) ______(1,997) Balances at end of year ...... ______$ 107,306 ______$ 101,973 Total retained earnings ...... ______$ 444,964 ______$ 424,783
See accompanying notes to consolidated financial statements. 21 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013 (dollars in thousands)
______2015 ______2014 ______2013 Cash flows from operating activities: Net income ...... $ 198,919 $ 226,920 $ 192,490 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...... 45,147 44,189 42,275 Impairment of assets and liabilities ...... ------9,463 2,000 Deferred income taxes ...... (6,001 ) (10,521) 1,938 Loss/(gain) on disposition of property and equipment ...... 868 (533) (2,076) Changes in assets and liabilities, net of effects of acquisitions: Receivables ...... (29,416) (42,045) (26,538) Inventories ...... (16,875) 27,150 (78,372) Other assets ...... 5,552 5,161 (23,965) Accounts payable, accrued expenses and other liabilities ...... ______81,694 ______(51,426) ______137,648 Net cash provided by operating activities ...... ______279,888 ______208,358 ______245,400 Cash flows from investing activities: Reductions in restricted cash ...... (729) — 18,024 Additions to intangibles ...... (1,675) (2,336) (593) Proceeds from investments ...... ------58 — Loans to members ...... (51,253) (18,105) (17,884) Repayment of loans by members ...... 31,352 12,156 15,896 Additions to property and equipment...... (80,074) (47,578) (69,891) Proceeds from sale of property and equipment ...... 7,579 10,382 28,782 Acquisition of assets, net of cash acquired (note 4) ...... ______(8,726) ______— ______(6,568) Net cash used in investing activities ...... ______(103,526) ______(45,423) ______(32,234) Cash flows from financing activities: Year-end patronage distributions ...... (130,101) (104,534) (100,643) Redemption of prior year's patronage refund certificates ...... (58,788) (56,625) (49,427) Issuance of common stock ...... 1,419 815 1,461 Redemption and retirement of common stock ...... (2,763) (2,966) (2,048) Net advances (repayments) under credit facilities ...... 13,250 (16,109) (47,186) Net proceeds (repayments) of member deposits ...... ______12,693 ______(1,433) ______1,537 Net cash used in financing activities ...... ______(164,290) ______(180,852) ______(196,306) Net (decrease) in cash and cash equivalents ...... 12,072 (17,917) 16,860 Cash and cash equivalents at beginning of year ...... ______154,149 ______172,066 ______155,206 Cash and cash equivalents at end of year ...... ______$ 166,221 ______$ 154,149 ______$ 172,066
Supplemental cash flow statement information: Cash paid for interest, net of amount capitalized ...... $______3,649 $______3,476 $______3,263 Cash paid for income taxes ...... $______5,886 ______$ 17,635 $______5,178
See accompanying notes to consolidated financial statements. 22 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (dollars in thousands unless otherwise indicated) (1) Summary of Significant Accounting Policies General Associated Wholesale Grocers, Inc. predominately operates on a cooperative basis (see Patronage) procuring grocery merchandise for distribution to its retailer/shareholders (“Members”) throughout the Midwestern, Southwestern and Southeastern United States. Non-Cooperative businesses include nonfood distribution centers, military distribution and retail supermarkets that operate under the banners of Homeland, United Supermarkets, Cash Saver and Price Chopper. The cooperative represents approximately 81% of total net sales. "AWG" and "Company" refer to Associated Wholesale Grocers, Inc. and its subsidiaries.
Principles of Consolidation and Use of Estimates The consolidated financial statements include the accounts of AWG, its subsidiaries and variable interest entities where the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the statements and affects the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The Company’s fiscal year ends on the last Saturday in December. Fiscal 2015, 2014, and 2013 included 52 weeks of operations.
Variable Interest Entity In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810, “Consolidations” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”) in which the Company has a controlling financial interest and, therefore, is the VIE’s primary beneficiary. ASC 810 states that a controlling financial interest in an entity is present when an enterprise has the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company has determined that HAC, Inc. Employee Stock Ownership Plan and Trust (“ESOP”) is a VIE pursuant to certain financing provided by the Company in the sale of its retail grocery operation (see note 4) and has included the ESOP in the Company’s consolidated financial statements for the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013.
Business and Credit Concentrations The majority of the Company’s sales are to Members/retailers located in Kansas, Missouri, Oklahoma, Arkansas, Texas, Louisiana, Mississippi, Kentucky, Alabama and Tennessee. No single customer accounted for more than 10% of sales in any year presented. Lease and equipment financ- ing through AWG is available to qualified retailers for acquisitions/expansion, improvements and opening inventory purchases. Loans to Members are generally collateralized by the Member’s inventory, property and equipment, and the Members’ AWG equity. The Company’s lending rate is generally one percent over the prime rate with borrowing terms to 10 years. For the fiscal years 2015, 2014, and 2013, the Company earned interest income on loans of $2.7 million, $2.1 million and $1.3 million respectively. Interest is recorded when earned.
Trade accounts receivable primarily consists of receivables from Members and are stated at the amount the Company expects to collect, net of allowance. Trade receivables are generally secured (see Note 5).
The Company establishes an allowance for doubtful accounts based on collectability, which reflects management’s best estimate of probable losses determined principally on the basis of historical experience, financial analysis of the retail customer and loan guarantors, and evaluation of the loan collateral.
Changes in Notes Receivable allowance for doubtful accounts are as follows: ______2015 ______2014 Beginning balance ...... $ 5,945 $ 4,487 Provision for doubtful accounts ...... 1,347 1,458 Write-offs / Recoveries ...... ______— ______— Ending balance ...... ______$ 7,292 ______$ 5,945
23 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (1) Summary of Significant Accounting Policies (continued) Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Proceeds due from credit and debit card transactions with settlement terms of less than five days are also included. The Company maintains cash balances at major financial institutions. At times such cash balances may be in excess of the Federal Deposit Insurance Corporation coverage limit. The Company does not fund its disbursement accounts for checks it has written until the checks are presented to the bank for payment. The amount of outstanding checks is recorded in accounts payable. The change in outstanding checks is included in the change in accounts payable, accrued expenses and other liabilities on the consolidated statement of cash flows.
Restricted Cash Restricted cash consists of $0.8 million placed in escrow to be paid to the contractor upon completion of the expansion of the Company’s distribution center in Louisiana. Inventories Merchandise is valued at the lower of cost or market. Cost for 70% and 71% of inventories in both 2015 and 2014, respectively, is determined using the last-in, first-out (LIFO) method. Cost for perishables, general merchandise, health care and retail store inventories is determined using the first-in, first-out (FIFO) method. Had all products been valued at FIFO, inventories would have increased by $112.6 million at December 26, 2015, and $113.8 million at December 27, 2014.
Property and Equipment Property and equipment are stated at cost and include assets held for sale of $0.0 million at December 26, 2015 and $0.2 million December 27, 2014. Expenditures for improvements, which significantly increase property lives, are capitalized. Interest costs incurred during the construction of facilities are included in the cost of such properties. Depreciation and amortization are calculated using the straight-line method over the assets estimated useful lives, which range from 15 to 50 years for buildings; 3 to 10 years for equipment; and 3 to 5 years for vehicles. Leasehold improvements are amortized over the respective lease terms.
Investments The Company has all investments stated at cost; fair value is not assessable or practical to estimate.
Patronage Income from cooperative operations, less a nominal amount authorized by the Board of Directors to be retained, is returned to the Members in the form of year-end patronage. At each year-end, a percentage of net income to be distributed is paid in cash (60%) with the remainder paid in the form of patronage certificates (see notes 5 and 8). Such amounts are apportioned to the Members based on qualifying warehouse purchases. Patronage source income derived from an extraordinary event of significant magnitude may be distributed to members separately based on the quantity of the business done proportionately with a member, which may span multiple years or a combination of years, as provided in the bylaws, as amended.
Sales and Cost of Goods Sold The Company recognizes sales of merchandise when products are shipped and promotional allowances related to selling products to customers are recorded as a reduction in sales. Fees and upfront monies received from vendors are recorded as a reduction of the cost of goods sold in the period in which they are earned, based on contractual commitments to achieve certain milestones in purchases or prorated over the duration of the agreement.
Shipping and Handling Costs Shipping and handling costs incurred to deliver product to our customers are included as a component of general and administrative expenses in the consolidated statements of operations and comprehensive income. Shipping and handling costs for the fiscal years 2015, 2014, and 2013 were $143.8 million, $153.9 million and $148.9 million, respectively.
Advertising Expense Advertising costs are charged to expense as incurred and are included as a component of general and administrative expenses in the consolidated statements of operations and comprehensive income. Advertising expense for the fiscal years 2015, 2014, and 2013 were $7.6 million, $7.6 million and $6.4 million, respectively.
24 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (1) Summary of Significant Accounting Policies (continued)
Income Taxes AWG and its subsidiaries file a consolidated federal income tax return. Deferred income taxes are accounted for under the asset and liability method. Patronage distributions from cooperative operations are deductible for income tax purposes. Deferred income taxes result primarily from differences in financial reporting bases for net receivables, depreciation, insurance, deferred compensation, and the deferred gain on the sale of HAC not yet recog- nized in the financial statements. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During 2015, 2014 and 2013, the Company did not recognize any interest or penalties.
Recently Adopted and Recently Issued Authoritative Accounting Standards In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which implements a five step process of determining revenue from contracts and is intended to improve comparability across entities, jurisdictions, and capital markets. In August 2015, ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” was issued. The standards become effective for public business entities and all other entities for fiscal years beginning after December 15, 2017 and 2018, respectively. The Company is currently assessing the impact of the adoption of ASU 2014-09.
(2) Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; Level 3 – Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions about the assump- tions that market participants would use in valuation. For certain of the Company’s financial instruments, including cash and cash equivalents, accounts and short term notes receivables and accounts payable, the fair values approximate book values due to their short term maturities.
Since there is no market for long term notes receivables, it is impractical to assess whether the carrying amounts, which are reported on the con- solidated balance sheets for these items, approximate fair value. Property, equipment and intangible assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Recoverability of assets held and used is assessed based on the undiscounted future cash flows. Assets to be disposed of are pre- sented at the lower of cost or fair value less costs of disposal. During the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013, the Company recorded (in millions) $0.0, $9.5, and $2.0 respectively, for impairment charges on real property and ongoing lease liabilities, which were measured at fair value using Level 3 inputs. The impairment charges are a component of the general and administrative expenses in the consolidated statements of operations. The carrying amounts of the Company’s long-term debt reported on the consolidated balance sheets approximate fair value since their interest rates are periodically adjusted to reflect market conditions.
(3) Intangible Assets The Company has intangible assets subject to amortization that include wholesale volume agreements and non-compete agreements of $20.7 mil- lion and $20.3 million for 2015 and 2014, respectively, which are being amortized over 15 years and have accumulated amortization of $16.8 million and $15.5 million for 2015 and 2014, respectively. The Company’s VIE has recorded goodwill at December 26, 2015 and December 27, 2014 of $5.6 million and $4.5 million, which is being amortized over a useful life of 10 years and has accumulated amortization of $1.0 million and $0.5 million, respectively. The Company’s VIE also has gross deferred financing costs of $1.9 million and $1.8 million for 2015 and 2014, respectively, which are being amortized over 5 years, the term of the loan, and has accumulated amortization of $1.5 million and $1.1 million at December 26, 2015 and December 27, 2014, respectively. Amortization expense for intangible assets was $2.2 million in 2015, $2.2 million in 2014 and $2.1 million in 2013. Amortization expense for the next five fiscal years is estimated to be as follows (in millions): 2016 - $2.4; 2017 - $1.9; 2018 - $1.4; 2019 - $0.7 and 2020 - $0.7.
25 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (4) Acquisitions, Divestitures and Certain Transactions with Members
In December 2011, the Company sold its subsidiary retail grocery operation, Associated Retail Grocers, Inc, (“ARG”), whose only asset consisted of an investment in HAC, Inc. The operation is commonly referred to as Homeland Stores, which operated grocery stores situated in Oklahoma (72), Texas (4) and Kansas (1) at the time of the transaction. The purchaser, ESOP (see Variable Interest Entity in note 1), bought 100% of the controlling stock of ARG in a transaction valued at $145 million subject to a working capital adjustment of $10.1 million. The Company provided financing in a series of loan tranches, with maturity dates of 5 to 11 years, as follows:
T ranche A – $60 million, due in weekly payments (subject to floating rate adjustments based on Prime + 0% margin) representing principal and an initial 3.25% all-in interest rate. The loan amortizes based on a ten-year life and a balloon payment due December 26, 2016. The loan balance outstanding at December 26, 2015 and December 27, 2014 was (in millions) $38.2 and $43.9 respectively. T ranche B – $50 million, due in weekly payments (subject to floating rate adjustments based on Prime + 1% margin) representing an initial 4.25% all-in interest-only payment until the earlier of: (i) December 26, 2016, or (ii) the repayment of the Tranche-A obligation. Estimated weekly payments of principal and interest will then begin, with principal amortization based on a ten-year life and a balloon payment due December 26, 2021. The loan balance outstanding at December 26, 2015 and December 27, 2014 was (in millions) $47.9 and $48.6 respectively. T ranche C – $35 million, due in weekly payments representing a fixed rate of 7% for 2015 and 2016 and 11% thereafter and interest-only payments until the earlier of: (i) December 26, 2019, or (ii) the repayment of the Tranche-B obligation. Estimated weekly payments of principal and interest will then begin, with principal amortization based on a five-year life and a balloon payment due December 26, 2022. Only Tranche-C is subject to an early termination penalty from early redemption. The borrower can, under certain circumstances, lower the fixed rate if certain performance targets are achieved. Loan balance outstanding as of December 26, 2015 and December 27, 2014, is $35 million. Beneficial terms of the transaction require ESOP to maintain its purchase concentration of current and future stores for a stated period beyond the final repayment of all the outstanding obligations. The Company provides ESOP access to a line of credit up to $15 million to manage its seasonal borrowing needs at a borrowing rate of Prime, which was drawn at $2.5 million at December 27, 2014 and $2.5 million at December 26, 2015. The ESOP paid the $2.5 million obligation on January 2, 2016. On December 17, 2015, the Company provided a guaranty to Bank of America, up to $2.5 million, for Letters of Credit issued by Bank of America for the benefit of HAC. The amount available under the line of credit is reduced by the amount guaranteed to Bank of America. The guaranteed balance as of December 26, 2015 was $1.3 million. Additional commitments beyond the initial transaction relate to assisting HAC, Inc. to borrow up to $10 million to meet its obligations from withdrawing from its sponsoring participation in several UFCW multi-employer pension plans. The Company had loaned HAC an additional $5.6 million during 2013 and 2012, of which $3.8 million is outstanding at December 26, 2015 and $4.3 million was outstanding at December 27, 2014.
ESOP is considered a VIE, requiring its continuing operations to be combined with the Company’s consolidated financial statements. Therefore, the Company will not reflect the gain on the sale of the subsidiary until such time as the Company determines it is no longer the primary beneficiary of ESOP.
In March 2015, DGS-Acquisitions, LLC and DGS-RE, LLC, wholly owned subsidiaries of AWG, purchased certain assets of Foods, Inc., Dahl’s Food Mart, Inc. and Dahl’s Holdings I, LLC through the U. S. Bankruptcy Court for the Southern District of Iowa, including 7 supermarket locations and 2 fuel centers in Des Moines, Iowa. The $9.1 million purchase price was allocated as follows: cash - $0.4 million, inventory - $5.8 million, real estate - $1.0 million and property and equipment - $1.9 million. These stores currently operate under the Price Chopper and Cash Saver banners and the results of their operations since the transaction date have been included in the consolidated financial statements.
(5) Patronage Refunds and Deposits
Patronage Refund Certificates have been issued to Members in the past as part of annual distributions of net income from cooperative operations. In 2008, new non-maturing certificates began being issued (see note 8). The pertinent provisions of Patronage Refund Certificates (issued prior to 2008) are as follows: (a) the certificates are not transferable; (b) AWG has the right to offset, but the certificate holder does not; (c) the Board of Directors of AWG has the authority to set the interest rate on these certificates, subject to the maintenance of an interest rate of at least 4%, but not in excess of 8%; and (d) the certificates are subordinate to the claims of all creditors of AWG. During 2012, interest accrued at 4%, however, all Patronage Refund Certificates had matured and been paid as of December 29, 2012. Member deposits represent interest-bearing accounts that may be required to collateralize weekly purchases of products. Interest expense incurred on patronage certificates, member deposits, and member savings in 2015, 2014 and 2013 was $0.4 million, $0.2 million and $0.2 million, respectively. Since there is no market for Patronage Refund Certificates and Member Deposits, it is impractical to assess whether the carrying amounts, which are reported on the consolidated balance sheets for these items, approximate fair value.
26 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated)
(5) Patronage Refunds and Deposits (continued) In 2010, AWG filed a lawsuit against a group of suppliers of commodity goods and related affiliates for antitrust and unlawful price fixing activities. In August 2015, a special patronage dividend was paid to its members consisting of monies obtained as a result of entering into separate confidential settlement agreements with individual defendants during 2014. Because the proceeds related to multiple years, the patronage dividend was allocated among the members and was paid separately from the current year distribution in 2015.
(6) Property and Equipment Property and equipment are summarized as follows: ______2015 ______2014 Land ...... $ 54,718 $ 47,411 Buildings and leasehold improvements ...... 378,971 350,895 Equipment ...... 340,321 327,764 Construction in progress and other ...... ______11,380 ______1,757 $ 785,390 $ 727,827 Less accumulated depreciation ...... ______(380,291) ______(354,285) Property and equipment, net ...... ______$ 405,099 ______$ 373,542 Depreciation expense incurred in 2015, 2014, and 2013 was (in millions) $41.1, $40.1 and $38.2, respectively. In 2015, 2014 and 2013, the Company capitalized an aggregate total of (in millions) $0.1, $0.0 and $0.1, respectively, of capitalized construction period interest.
(7) Long-term Debt In May 2011, the Company amended its five-year Revolving Credit Agreement, which extended the maturity to May 2016 and provided a $275 million credit facility. At December 27, 2014, total borrowings and outstanding letters of credit were $79 million, which includes a $72.1 million tax-exempt bond loan. Variable interest rates are based on the London Interbank Borrowing Rate and ranged from 0.81% to 1.17% during 2014 (which included a base rate mark-up charged by the lenders). At December 27, 2014, the Company had an additional $196 million available for borrowing under this agreement. This loan was paid off in May 2015.
In May 2014, a 365-day Revolving Credit Agreement was amended, which included a “term-out” feature to extend the maturity to June 15, 2016. At December 27, 2014, the outstanding principal amount of this loan was $66.9 million. Variable interest rates are based on the Fed Funds rate and ranged from 1.06% to 1.12% during 2014 (which included a base rate mark-up charged by the lender). Daily borrowings during 2014 averaged $30.3 million and overall borrowings and repayments were approximately $2.5 billion. At December 27, 2014, the Company had an additional $33.1 million available for borrowing under this agreement. This loan was paid off in May 2015.
In May 2015, the Company entered into a five year revolving Credit Agreement with a maturity date of May 20, 2020, which provides a $300 million revolving credit facility and a $75 million tax exempt bond facility. At December 26, 2015, total borrowings and outstanding letters of credit were $160 million, which includes a $72.1 million tax-exempt bond loan. Variable interest rates are based on the London Interbank Borrowing Rate and ranged from 0.64% to 1.124% during 2015 (which included a base rate mark-up charged by the lenders). Daily borrowings during 2015 averaged $108.4 million and overall annual borrowings and repayments were approximately $2.3 billion. At December 26, 2015, the Company had an additional $215 million available for borrowing under this agreement.
The Company’s credit facility contains certain financial covenants related to cash flow leverage and minimum tangible net worth. The Company was in compliance with all covenants at December 26, 2015.
(8) Allocated Earnings At December 26, 2015 and December 27, 2014, $73.6 and $74.4 million of the current year non-maturing patronage has been allocated within Retained Earnings. The pertinent provisions of these Patronage Certificates (issued in 2008 or after) are as follows: (a) the certificates are not transferable; (b) AWG has the right to offset, but the certificate holder does not; (c) no interest is accrued on outstanding certificates; (d) the certificates have no stated maturity date, and (e) the certificates are subordinate to the claims of all creditors of AWG. In July 2005, the Board of Directors created another form of patronage certificate (“Class B Certificates”) for members who are delinquent with their obli- gations owed to the Company. The Class B Certificates are non-interest bearing and have no maturity date. These certificates are only redeemed upon the dissolution of the Company and the redemption of all other patronage certificates. The Class B Certificates are included in Retained Earnings and amounted to $0.1 million and $0.5 million as of December 26, 2015 and December 27, 2014, respectively.
27 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (9) Equity All members of the cooperative are required to hold 15 shares of Class A Common Stock. The by-laws of AWG contain restrictions concerning the trans- fer of common stock, which serves as collateral to secure members’ indebtedness. Each member holding Class A Common Stock is entitled to one vote in shareholder matters. The Board of Directors of the Company declared a 2-for-1 stock dividend effective March 22, 2009 for shareholders of record, whereby every shareholder of A and B stock received additional shares in the form of B stock. All issuances and redemptions since March 22, 2015 have been made at $1,840 per share. Issuances and redemptions between March 23, 2014 and March 21, 2015 were made at $1,770 per share. Issuances and redemptions between March 24, 2013 and March 22, 2014 were made at $1,700 per share. The following table describes the number of authorized and outstanding shares of AWG Class A and Class B stock at December 26, 2015 and December 27, 2014:
OUTSTANDING AT ______CLASS AUTHORIZED 2015 2014 Class A Stock, $100 par value 35,000 9,120 9,045 Class B Stock, $100 par value 150,000 14,249 15,099
The changes in common stock for the fiscal years ended December 26, 2015 and December 27, 2014 were as follows:
Total ______Class A ______Class B ______Common Stock ______Members Balances at December 28, 2013 Shares ...... 9,045 16,359 25,404 603 Dollar Value ...... ______$ 903 ______$ 1,634 ______$ 2,537 Issued Shares ...... 465 — 465 31 Dollar Value ...... ______$ 47 ______$ — ______$ 47 Redeemed Shares ...... (465) (1,260) (1,725) (31) Dollar Value ...... ______$ (47) ______$ (126) ______$ (173) Balances at December 27, 2014 Shares ...... 9,045 15,099 24,144 603 Dollar Value ...... ______$ 903 ______$ 1,508 ______$ 2,411 Issued Shares ...... 795 — 795 53 Dollar Value ...... ______$ 80 ______$ — ______$ 80 Redeemed Shares ...... (720) (850) (1,570) (48) Dollar Value ...... ______$ (72) ______$ (85) ______$ (157) Balances at December 26, 2015 Shares ...... 9,120 14,249 23,369 608 Dollar Value ...... ______$ 911 ______$ 1,423 ______$ 2,334
Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss attributable to the Company for the fiscal years ended December 26, 2015 and December 27, 2014 were as follows: ______2015 ______2014 Balances, beginning of year ...... $ (17,158) $ (4,956) Change in funded status of pension plan, net of ($1,956) in tax credits in 2015 and ($7,570) in tax credits in 2014 ...... ______(4,587) ______(12,202) Balances, end of year ...... ______$ (21,745) ______$ (17,158)
28 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (9) Equity (continued) Additional Paid in Capital Changes in additional paid in capital attributable to the Company for the fiscal years ended December 26, 2015 and December 27, 2014, were as follows: ______2015 ______2014 Balances, beginning of year ...... $ 12,551 $ 12,579 Stock purchase or redemption surplus value paid in/(out) ...... ______246 ______(28) Balances, end of year ...... ______$ 12,797 ______$ 12,551
Noncontrolling Interest Changes in noncontrolling interest for the years ended December 26, 2015 and December 27, 2014, were as follows: ______2015 ______2014 Balances, beginning of year ...... $ 16,368 $ 7,529 Income attributable to noncontrolling interest ...... ______8,014 ______8,839 Balances, end of year ...... ______$ 24,382 ______$ 16,368
(10) Income Taxes The significant components of income tax expense are summarized as follows: ______2015 ______2014 ______2013 Federal: Current ...... $ 9,110 $ 5,092 $ 7,651 Deferred ...... ______(4,270) ______(2,012) ______(4,254) Total federal...... ______$ 4,840 ______$ 3,080 ______$ 3,397 State: Current ...... $ 1,509 $ 972 $ 2,004 Deferred ...... ______225 ______(777) ______851 Total state ...... ______$ 1,734 ______$ 195 ______$ 2,855 Total income tax ...... ______$ 6,574 ______$ 3,275 ______$ 6,252
The effects of temporary differences and other items that give rise to deferred income tax assets and liabilities are presented below: Deferred income tax assets: ______2015 ______2014 Gain on sale of subsidiary ...... $ 5,631 $ 6,391 Pension ...... 11,009 8,889 Insurance ...... 4,062 4,295 Compensation ...... 13,538 9,537 Accounts receivable ...... 3,885 3,296 Inventory ...... 2,394 178 Contribution carryovers ...... — 1,162 State credit carryover ...... 3,686 3,526 Other ...... ______1,679 ______1,701 Deferred income tax assets...... 45,884 38,975 Valuation allowance ...... ______(2,070) ______(1,094) Total deferred income tax assets ...... ______$ 43,814 ______$ 37,881 Deferred income tax liabilities: Fixed assets ...... $ 12,739 $ 12,779 Prepaid expenses ...... 2,041 1,692 Other ...... ______46 ______423 Total deferred income tax liabilities ...... ______$ 14,826 ______$ 14,894
Net deferred income tax assets ...... ______$ 28,988 ______$ 22,987 ______29 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (10) Income Taxes (continued)
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and municipalities. At this time the Company is not subject to U.S. federal income tax examinations. The Company and/or its subsidiaries are subject to various state and local income tax examinations and no adverse tax consequences are anticipated. As of December 27, 2014 and December 26, 2015, respectively, a valuation allowance of a $1.1 million and $2.1 million was required to reduce the deferred income tax assets to a level, which more likely than not, will be realized as future benefit. The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and the reported income tax (benefit) expense are comprised of nonmaterial, reconciling items including, but not limited to patronage dividend, state and local income taxes. In November, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred federal income taxes by requiring all balances be classified as noncurrent on the balance sheet. The Company has early adopted this guidance retrospectively, and accordingly reclassified $22 million of current to non-current deferred tax assets as of December 27, 2014.
(11) Employee Benefit Plans Substantially all employees of the Company and its subsidiaries are covered by various contributory and non-contributory pension or profit sharing plans. Union employees participate in multi-employer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by the Company. The Company sponsors a defined benefit pension plan, both qualified and non-qualified (“the DB Plan”), and several defined contribution pension plans. The DB Plan covers 1,415 and 1,552 participants for the fiscal years ended December 26, 2015, and December 27, 2014, respectively, which is comprised mainly of non-union ware- house, clerical and managerial employees. Beginning November 1, 2012, the Company’s DB Plan was closed to new employees and replaced with an enhanced contribution to the existing defined contribution plan. At present, the Company continues to accrue service costs for eligible participants of the DB Plan. The Company provides no health care, life insurance, nor disability plans to former and inactive employees after retirement under post-employment benefit plans. The benefit obligation (which is the projected benefit obligation or “PBO”), fair value of plan assets, and funded status of the Company’s DB Plan is as follows: Change in benefit obligation (PBO) ______2015 ______2014 Benefit obligation at beginning of year ...... $ 175,029 $ 151,642 Service cost ...... 11,420 11,913 Interest cost ...... 7,007 7,581 Benefits paid ...... (34,517) (20,513) Actuarial (gain)/loss ...... ______(737) ______24,406 Benefit obligation at end of year ...... ______$ 158,202 ______$ 175,029 Change in plan assets Fair value of plan assets at beginning of year ...... $ 151,777 $ 147,691 Actual return on plan assets ...... (8,396) 6,394 Employer contributions ...... 19,007 18,205 Benefits paid ...... ______(34,517) ______(20,514) Fair value of plan assets at end of year ...... ______$ 127,871 ______$ 151,776
Funded status, end of year ______$ (30,331) ______$ (23,253)
30 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (11) Employee Benefit Plans (continued)
Benefit calculations for the Company's sponsored DB Plan for primarily non-union eligible participants are generally based on years of service and the participants' highest compensation during five consecutive years during the last ten years of employment. The Company's accumulated benefit obligation for the DB Plan was $139,332 and $153,938 at December 26, 2015 and December 27, 2014, respectively. The amounts recognized for the DB Plan in the Company's accumulated other comprehensive loss consisted of the following:
______2015 ______2014 Prior service cost ...... $ (330) $ (601) Net actuarial loss ...... ______(34,006) ______(27,230) Total recognized in AOCI, before tax ...... ______$ (34,336) ______$ (27,831) Total recognized in AOCI, net of tax...... ______$ (21,745) ______$ (17,158)
The estimated future benefit payments to be paid from the DB Plan, which reflect expected future service, are as follows: Fiscal year DB______Plan Benefits 2016 ...... $ 38,561 2017 ...... 18,849 2018 ...... 14,993 2019 ...... 14,415 2020 ...... 18,602 Years 2021-2025 ...... 78,069
______2015 ______2014 ______2013 Net periodic benefit expense for the DB Plan consisted of the following: Service cost --- benefits earned during the period ...... $ 11,420 $ 11,913 $ 11,983 Interest cost on projected benefit obligations ...... 7,007 7,581 6,159 Expected return on plan assets...... (10,365) (9,963) (9,417) Amortization of prior service cost ...... 271 538 537 Amortization of net actuarial loss...... 4,256 4,738 6,520 Settlement loss ...... ______6,991 ______2,928 ______756
Net periodic benefit expense ...... ______$ 19,580 ______$ 17,735 ______$ 16,538
31 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (11) Employee Benefit Plans (continued)
The estimated prior service cost and net actuarial loss that will be amortized from accumulated other comprehensive income/loss into net periodic benefit cost for the DB Plan over the next fiscal year are $201 and $6,055, respectively. The majority of the unfunded non-qualified portion of the plan has been expensed.
W eighted average assumptions used for the DB Plan are as follows: ______2015 ______2014 ______2013 Weighted-average assumptions used to determine benefit obligations: Discount rate ...... 4.65% 4.35% 5.10% Rate of compensation increase...... 2.50%, 3.00% 3.00% 3.00%
Weighted-average assumptions used to determine net periodic benefit cost:... Discount rate ...... 4.35% 5.10% 4.25% Rate of compensation increase...... 3.00% 3.00% 3.00% Expected return on plan assets...... 7.25% 7.25% 7.50%
The fair value of the Company’s DB Plan assets at the end of the 2015 calendar year, by asset category, are as follows:
Asset Category ______Total ______Level 1 ______Level 2 ______Level 3 Money Market Funds ...... $ 2,023 $ 2,023 $ ---- $ ---- Mutual Funds ...... 110,560 110,560 ------Government Securities ...... ------Corporate Bonds ...... ------Limited Partnership ...... ______15,288 ______---- ______---- ______15,288 Totals ...... ______$ 127,871 ______$ 112,583 ______$ ---- ______$ 15,288
The fair value of the Company’s DB Plan assets at the end of the 2014 calendar year, by asset category, are as follows:
Asset Category ______Total ______Level 1 ______Level 2 ______Level 3
Money Market Funds ...... $ 5,502 $ 5,502 $ ---- $ ---- Mutual Funds ...... 120,667 120,667 ------Government Securities ...... 4,982 ---- 4,982 ---- Corporate Bonds ...... 5,487 ---- 5,487 ---- Limited Partnership ...... ______15,138 ______---- ______---- ______15,138 Totals ...... ______$ 151,776 ______$ 126,169 ______$ 10,469 ______$ 15,138
32 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated)
(11) Employee Benefit Plans (continued) The following is a description of the valuation methodologies used for assets measured at fair value at December 31, 2015 and December 31, 2014: Money Market Funds, Mutual Funds and Common Stocks are valued at the closing price reported on the active market on which the individual securities are traded. U. S. Government Securities and Corporate Bonds are valued at the closing price reported on the active market on which the individual securities are traded. If no active market is available, they are valued by Interactive Data Corporation based on quoted prices for similar assets or liabilities in an active market. Limited Partnerships that are hedge funds are valued based on estimates for the fair value of investment funds held by the partnership that have calculated net asset value per share as a practical expedient in accordance with the specialized accounting guidance for investment companies. Another limited partnership is valued based on the contributions paid into the fund through year end, which approximates fair value. The majority of Limited Partnerships held as investments are subject to redemption restrictions of a quarterly frequency with 95 day notice periods and a minimum investment period of one year. Self Directed brokerage accounts are managed by officers in the Deferred Compensation Plan. There is no additional information available to the Company. A reconciliation of the beginning and ending balances of financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the fiscal year ended December 26, 2015 and December 27, 2014 is as follows: ______2015 ______2014 Fair value, beginning balance ...... $ 15,138 $ 12,319 Unrealized gains/(losses) ...... (385) 554 Purchases ...... 573 3,363 Distributions ...... ______(38) ______(1,098) Fair value, ending balance ...... ______$ 15,288 ______$ 15,138 The Company's investment policy reflects the nature of the DB Plan's funding obligations. The assets are invested to provide the opportunity for both income and growth of principal. This objective is pursued as a goal designed to provide required benefits for participants without undue risk. It is expected that this objective can be achieved through a well-diversified asset portfolio. Investment managers are directed to maintain equity portfolios at a risk level approximately equivalent to that of the specific benchmark established for the portfolio. The expected rate of return on DB Plan assets was determined based on expectations of future returns for the DB Plan's investments based on the target asset allocation of the DB Plan's investments. The Company expects to contribute approximately $30.7 million to the DB Plan during 2016. The Company also makes contributions to its defined contribution plans. The total expense for these plans amounted to (in millions) $7.7, $6.5 and $4.0 in 2015, 2014 and 2013, respectively. The 2005 Non Qualified Deferred Compensation Plan is available for officers of the Company to elect, by the required deadlines in the preceding year, to have a designated portion of their wages set aside for their own personal tax planning purposes, in a trust held by Wells Fargo. At the time of election, the date for future distribution of wages to the participant is established, according to allowable parameters within the plan documents. Both the asset and offsetting liability recorded at December 26, 2015 and December 27, 2014 were $27.2 million and $18.3 million, respectively.
33 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated) (11) Employee Benefit Plans (continued)
The fair value of the Company’s Deferred Compensation plan assets at the end of 2015 and 2014 calendar year, by asset category are as follows: ______2015 ______Level 1 ______Level 2 ______Level 3 Money Market Funds ...... $ 5,318 $ 5,318 $ ---- $ ---- Corporate Bonds ...... 1,245 ---- 1,245 ---- Common Stocks ...... 10,446 10,446 ------Mutual Funds ...... 10,143 10,143 ------Self Directed brokerage accounts ...... ______---- ______---- ______---- ______---- Totals ...... ______$ 27,152 ______$ 25,907 ______$ 1,245 ______$
______2014 ______Level 1 ______Level 2 ______Level 3 Money Market Funds ...... $ 2,512 $ 2,512 $ ---- $ ---- Corporate Bonds ...... 1,292 ---- 1,292 ---- Common Stocks ...... 10,527 10,527 ------Mutual Funds ...... 2,873 2,873 ------Self Directed brokerage accounts ...... ______1,128 ______---- ______---- ______1,128 Totals ...... ______$ 18,332 ______$ 15,912 ______$ 1,292 ______$ 1,128
(12) Commitments and Contingent Liabilities The Company is obligated as lessee under various noncancelable long-term supermarket property leases with minimum annual rent- als of approximately $39.3 million. These leases have an average remaining life of 6 years. It is expected in the ordinary course of busi- ness that these leases will be renewed or replaced. The Company has subleased the majority of its supermarket properties to Members (except for properties operated by the Company’s subsidiaries) for substantially the same lease terms and rental amounts. Rental income received was (in millions) $40.1, $41.3 and $42.9 in 2015, 2014 and 2013, respectively. Rents charged to general and administra- tive expenses for operating leases, other than supermarket properties, were (in millions) $2.9, $3.0 and $3.8 in 2015, 2014 and 2013, respectively. Operating lease rent expense, expected to be incurred over the next five years, is approximately $3.1 million per year.
The Company is a guarantor of loans issued to members in the amount of $3.5 million and $1.0 million for December 26, 2015 and December 27, 2014, respectively. In December 2015, the Company entered into a limited guaranty with the Bank of America on behalf of HAC, Inc. This limited guaranty allows HAC, Inc. to issue standby letters of credit in amounts up to $2.5 million without requiring HAC to maintain a cash collateral account with Bank of America. The company has since prohibited borrowing by HAC on the existing $15 million revolver above $12.5 million. The Company is able to revoke the limited guaranty at any time in respect to future transactions. The Company will, however, be at risk for existing indebtedness at the time of revocation.
The Company is involved in various claims and litigation arising in the normal course of business. In the opinion of management, the ultimate resolution of these actions will not have a material adverse effect on the Company’s consolidated financial statements.
34 ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (dollars in thousands unless otherwise indicated)
(13) Multi-employer Plans The Company contributes to a single multi-employer defined benefit pension plan under the terms of the collective-bargaining agreements that cover its union-represented employees. The risks of participating in a multi-employer plan are different from single-employer plans in the following aspects: a. Assets contributed to the multi-employer plan by one employer are used to provide benefits to employees of other participating employers. b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan are borne by the remaining participating employers. c. If the Company chooses to stop participating in its multi-employer plan, then it is required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The Company’s participation in this plan for the annual period ended December 31, 2015, is outlined in the table below. The “EIN and Pension Plan Number” column provides the Employee Identification Number (EIN) and the three-digit plan number. Unless otherwise noted, the most recent Pension Protection Act (PPA) zone status available in 2015 and 2014 is for the plan’s year-end at December 31, 2014 and December 31, 2013, respec- tively. The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreements to which the plan is subject. Finally, there have been no significant changes that affect the comparability of 2015, 2014 and 2013 contributions. Expiration Date EIN and Pension Protection Act of Collective- Pension Pension Plan Zone Status FIP/RP Status Company Contributions Surcharge Bargaining Fund Number 2015 2014 Implemented 2015 2014 2013 Imposed Agreements ______Central States, 36-6044243 Red Red Yes $13,184 $13,069 $12,762 No April 4, 2020 Southeast and Plan 001 Southwest Areas Pension Fund
The Company was not listed in the plan’s Form 5500 as providing more than 5% of the total contributions for the plan years ending in 2014 and 2013. At the date the Company’s consolidated financial statements were issued, the plan’s Form 5500 was not available for the plan year ending in 2015.
(14) Subsequent Events
Subsequent events have been evaluated through March 4, 2016, which is the date the financial statements were available to be issued, and there were no material events requiring recognition or disclosure.
35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Associated Wholesale Grocers, Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of Associated Wholesale Grocers, Inc. (a Kansas Corporation) and subsidiaries, which comprise the consolidated balance sheets as of December 26, 2015 and December 27, 2014, and the related consolidated statements of operations and comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 26, 2015, and the related notes to the financial statements.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the prepara- tion and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial state- ments, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Associated Wholesale Grocers and subsidiaries as of December 26, 2015 and December 27, 2014, and the results of their operations and their cash flows for each of the three years in the period ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter As discussed in Note 10 of the consolidated financial statements, in 2015 Associated Wholesale Grocers, Inc. and subsidiaries adopted new accounting guidance related to the presentation of deferred income taxes which was retrospectively applied to the 2014 balance sheet. Our opinion is not modified with respect to this matter.
Kansas City, Missouri March 4, 2016
36 AWG OFFICERS
Randy Berry Tye Anthony Steve Arnold Tim Bellanti Vice President Vice President Sr. Vice President Sr. Vice President Information Fort Worth Oklahoma City Springfield Technology
David Carl John Crumley Mike Danes Bob Durand Jerry Edney Dan Funk David Gates Bo Hawkins Sr. Vice President Vice President Sr. Vice President Sr. Vice President Sr. Vice President Executive Vice Vice President Vice President Finance Engineering Nashville Gulf Coast Perishables President Memphis Meat Merchandising & Marketing
Robert Henry Gary Jennings Richard Kearns Dan Koch Gary Koch Danny Lane Linda Lawson Charlie Lynn Vice President Sr. Vice President Executive Vice Vice President Executive Vice Sr. Vice President Sr. Vice President Vice President Corporate Controller Memphis President Distribution Bakery and Deli President Grocery Fort Worth Springfield and Logistics Chief Financial Officer
Anna Mancini Joe Maslak Jon Payne Jeff Pedersen Bob Pickerill Frances (Chi Chi) Puhl Patrick Reeves Brian Rehagan Vice President Vice President Sr. Vice President Executive Vice Sr. Vice President Sr. Vice President Vice President Vice President VMC Pharmacy Chief Information President Kansas City General Counsel and Human Resources Oklahoma City Officer Division Operations Corporate Secretary
Terry Roberts Frank Schmitt Mike Schumacher David Smith Tony Stafford Dave Sutton Jack Wall Scott Welman Vice President Vice President President President and Vice President President Vice President Sr. Vice President Nashville Kansas City Always Fresh Chief Executive Officer VMC VMC Gulf Coast Real Estate and Development ASSOCIATED WHOLESALE GROCERS, INC.
2015 ANNUAL REPORT