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Page 1: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,
Page 2: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

Dale TrahanDale L. Trahan Enterprises, Inc.Rayne, LA

Erick TaylorRPCS, Inc.Rogersville, MO

Pat RaybouldB&R Stores, Inc.Lincoln, NE

Jim BrownDoc’s Food Stores, Inc.Bixby, OK

Jay LawrenceMAL Enterprises, Inc. Sweetwater, TX

Je� ReasorReasor’s LLCTahlequah, OK

Alan McKeeverMcKeever Enterprises, Inc.Independence, MO

Randy StephersonStepherson, Inc.Memphis, TN

Victor CosentinoCosentino Enterprises, Inc.Prairie Village, KS

Chuck Mur�nOzark Supermarket, Inc. Ozark, MO

James NeumannValu Discount, Inc.Mt. Washington, KY

Danny BoyleCountry Boy Mr. 'D' Corp.Harrah, OK

Alan LarsenHouchens Food Group, Inc.Bowling Green, KY

Kim EskewHarp's Food Stores, Inc.Springdale, AR

Barry Queen, ChairmanQueen Enterprises, L.L.C. Paola, KS

Don Woods, Jr., Vice-ChairmanWoods Super Markets, Inc.Bolivar, MO

Dave NicholasNicholas Supermarkets, Inc.Tipton, MO

David BallFour B Corp. Kansas City, KS

John ClarkeCounty Fair, Inc. Mitchell, SD

Board of DirectorsBoard of Directors

Page 3: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

Dale TrahanDale L. Trahan Enterprises, Inc.Rayne, LA

Dear ShareholdersMarch 28, 2018

Dear Shareholders,

Your Board of Directors and management are pleased to present the audited results for �scal year 2017. Consolidated sales reached another record of $9.7 billion, up 5.7%. Total year-end patronage after retain-age was $203.4 million, another record, at 2.62% of qualifying sales. Total distribution including patronage, allowances and interest was $577 million, an increase of $31 million. Additionally, due to strong subsidiary performance and gains from non-operating investments, AWG stock trading value increased 10% to $2,200 per share.

AWG achieved these �nancial results primarily due to strong sales and membership growth. Cooperative net sales were $8.5 billion, up 10.5% from the prior year. To all the new members that joined AWG in the past year, thank you!

Beyond our operating results, AWG and VMC members also bene�ted from meaningful cost of goods reductions. Beginning in the fall of 2016, our merchant team worked closely with our vendor partners to establish and build upon relationships that would further leverage our collective membership’s scale that currently represents over $22 billion in retail sales. �ose new partnership arrangements have now yielded an incremental cost of goods savings for our members that is documented at over $51.7 million.

In summary, 2017 was an extraordinary year. It was extraordinary due to sales growth, new members, distribution area expansion, new o�erings and lower cost of goods. It was also extraordinary due to challeng-es in our industry, to our member stores and to our cooperative. It was a hard-fought year and we are so very thankful for the leadership of our board, the support and patience of our members, and the great e�orts of our vendor partners and our AWG teammates that make it all happen.

We are now fully focused on 2018 and beyond as is symbolized by the theme of this Annual Report: “Future Focused”. Our primary areas of emphasis are improved product supply, distribution, logistics, com-munication, service, and to achieve further reductions to your cost of goods. We are very optimistic about the future for AWG’s members and our cooperative and we are executing plans to assist in accelerating same store sales growth and to make doing business easier and more e�cient. In the coming months, you will see signif-icant enhancements to our technology o�erings and tools and we will jointly bene�t from investments in our workforce and distribution infrastructure. Members will also gain from exciting upgrades to our program that are designed to help you compete aggressively with dollar stores and hard discounters.

Our mission at AWG is to provide our member-retailers all the tools, products, and services they need to compete favorably in all markets served. �is includes top quality supermarket merchandise and support

services, all at the lowest possible cost. We truly appreciate your contributions to this year’s success and we will do our very best to continue to ful�ll our mission objective for you.Sincerely,

Barry QueenChairman of the Board

David SmithPresident and CEO

Page 4: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

2

Founded in 1926, Associ-ated Wholesale Grocers, Inc. (AWG) was established to pro-vide its family owned retail mem-ber stores the essential building blocks needed to establish stra-tegic positions in their unique retail marketplaces. �is Annual Report marks 91 years of provid-ing products, support services and �nancial returns to our member retailers. �e collective strength of our cooperative model has provided ongoing opportuni-ties for our members to develop and grow unique and sustainable businesses that have survived, as well as thrived, in an ever-chang-ing retail environment. Operating ten distribution centers at the end of the 2017 �s-cal year, AWG delivered grocery and related products to active re-tailers throughout the midwest-ern, southwestern and southeast-ern United States. Eight of the ten facilities are full-line divisions,

dedicated to providing service to AWG cooperative members in various retail locations. �e remaining two facili-ties were operated by our whol-ly-owned subsidiary, Valu Mer-chandisers Company, which primarily provided wholesale supply of health and beauty care, general merchandise, pharma-ceutical supplies, and specialty, natural, organic and international foods to our cooperative members as well as non-member retailers. Additionally, AWG operated other wholly-owned subsidiaries Media Solutions Corporation, a digital marketing services compa-ny and Super Market Developers, Inc., AWG's commercial real es-tate and development service arm for cooperative members.

Headquartered in Kansas City, Kansas, the AWG corporate support team provided opera-tional and administrative support to all ten distribution centers,

located in Spring�eld, Missou-ri; Oklahoma City, Oklahoma; Southaven, Mississippi; Mem-phis, Tennessee; Pearl River, Lou-isiana; Goodlettsville, Tennessee; Ft. Scott, Kansas; Norfolk, Ne-braska; Kenosha, Wisconsin and Kansas City, Kansas. AWG achieved sales on a consolidated basis, after elimina-tions, of $9.70 billion. Within the cooperative, net sales were $8.48 billion. Operating income was $208.4 million, with net in-come of $199.1 million. Total patronage returned to shareholders was $203.4 million, distributed on a 60/40 basis (the payout consisting of 60% cash and 40% certi�cates). As a percent to qualifying sales, the patronage payout was 2.62%, and AWG stock trading value increased by 10.0 percent to $2,200 per share. Total members’ investment and equity ended the year valued at $551.1 million.

CONSOLIDATED RESULTS (thousands) 2013 2014 2015 2016 2017 Net Sales $ 8,380,214 $ 8,934,239 $ 8,935,915 $ 9,183,802 $ 9,703,821Operating Income 201,406 231,622 202,620 188,709 208,430Net Income 192,490 226,920 198,919 189,907 199,103 Weeks 52 52 52 53 52 COOPERATIVE OPERATIONS (before eliminations)* Net Sales $ 7,148,757 $ 7,685,985 $ 7,579,129 $ 7,671,138 $ 8,475,733Distribution to Members Interest 227 223 406 553 859 Promotional Allowances 338,828 351,820 350,155 344,219 372,668 Year-End Patronage 182,576 194,675 193,815 201,731 203,441Total Distribution to Members $ 521,631 $ 546,718 $ 544,376 $ 546,503 $ 576,968 Members’ Investments $ 10,846 $ 9,411 $ 22,105 $ 36,162 $ 41,375Members’ Equity 422,979 439,632 455,610 508,172 509,683Total Members’ Investments & Equity $ 433,825 $ 449,043 $ 477,715 $ 544,334 $ 551,058 *Includes the accounts of members/subsidiaries.

Year TrendYear Trend55

Page 5: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

Consolidated (after eliminations)

201452 WEEKS

201352 WEEKS

201552 WEEKS

AWG has experienced an incredible 8.69% compounded annual growth rate (CAGR) on net sales and an even more impressive 11.46% CAGR on patronage returned to our member companies. �is clearly demonstrates the strength and stability of the

cooperative's members and the long term success achieved by our unique business model. Successful retail members created this cooperative and it has withstood the test of time.

3

201653 WEEKS

201752 WEEKS

$8.38 BILLION

$8.94 BILLION

$9.70 BILLION

$8.93 BILLION

Net SalesNet Sales

Long Term Growth and ProsperityLong Term Growth and Prosperity

1,730X

XX

$9.18 BILLION

1,7301,730XX

XXXX1,7301,730X1,7301,730

1967 1977 1987 1997 2007 2017

$10,000.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

1967 1977 1987 1997 2007 2017

$200,000

$50,000

$100,000

$150,000

50 Year Net Sales Trend(MILLIONS)

50 Year Patronage Trend(MILLIONS)

Page 6: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

4

Growth FocusedGrowth Focused �e greater Chicago area became the location of a substantial amount of growth for AWG in 2017. Centrel-la, also known as Central Grocers ("Central"), was one of the oldest and largest cooperatives (founded in 1917) serving independent retailers across the Chicagoland area. Unforunately, after 100 years in operation, Central closed their doors in May, 2017 leaving their members the di�cult task of choosing a new supplier from the many wholesalers that were calling on them. A large number of those retailers chose AWG. �e close proximity of our newly acquired Great Lakes Division in Kenosha, Wis-consin, our superior cooperative model and related cost of goods, and the great team members from every division who worked tirelessly to meet with prospective members who needed to quickly �nd an alternate form of supply were the driving forces behind the decision to choose AWG. �e end result was 254 new stores joined our cooperative to secure a continuing source of supply when Central determined it would no longer operate. �e new members include world class retailers, who serve their

New business growth for your AWG cooperative in

2017 totaled over 300 stores and nearly $2 Billion in

additional sales...

Great Lakes

254

New Stores by DivisionGreat Lakes 254Nebraska 3Nashville 18Memphis 6Gulf Coast 3Kansas City 8Springfield 4OKC 6

Page 7: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

5

communities with the great American spirit that de�nes independent retailers. “Joining AWG was about �nding the right partner who would, in the long term, help us meet our goals” said Christ Kam-beros Jr., VP of Development for Treasure Island Foods. “We believe that AWG will provide a strong platform and partnership for us to continue to build our brand for the next several decades.” Overall new business growth for your AWG cooperative in 2017 totaled over 300 stores and nearly $2 billion in additional sales, with a large part of the

growth coming from independents in literally every division and state we serve. AWG now serves more independent retailers across the country than any other cooperative wholesaler in the United States. Our family owned member busi-nesses continue to grow from generation to generation and still show that they have that �re and drive to compete in today’s ever-changing environment. We are excit-ed to play a role in helping them achieve their focus on the future and keep the �re burning for them. We welcome all of our new member stores to your AWG cooperative.

AWG serves more independent

retailers across the country than any other cooperative

wholesaler in the U.S.

Ray Pruett - Oklahoma

“ AWG has been a fantastic warehouse in so many ways. They have

always been by my side as an advisor and friend. Their level of ex-

pertise in our field is unmatched by any I have ever seen. We have

been with AWG for over 15 years and during that time our company

has grown five fold. AWG deserves a lot of credit for our success.”

Jan Greer Endfinger - Alabama

“ AWG has an awesome Marketing and Advertising Department.

Greer’s has worked with AWG for the past several years to

expand our reach and influence in our trade area. We coordinate

Print, Social Media and Web marketing efforts through AWG.

The AWG Marketing Department continues to be a critical part of

Greer’s growth.”

Nick Graham - Iowa

“ AWG has helped lower costs and deliver an unbelievable item

mix and selection, allowing me to be competitive and grow my

sales as well as company in my 5 locations.”

John Cosentino - Kansas/Missouri

“ AWG is the heart of our operation. Their commitment and

warehouse concept allows retailers, like us, to be successful

and competitive within the ever-changing grocery industry.

Our growth with store development and design is in part

due to their instrumental support and knowledge. They have

always understood that our success is their success, making it a

privilege to have them as partners. It truly is an honor to say that

AWG and our family’s stores have grown together for 70 years. ”

Ben and Kerri Dishman - Nebraska

" We opened our business with Affiliated Foods Midwest six years

ago. Since then we have experienced the merger of AFM with

Associated Wholesale Grocers. Anytime you have a dramatic

transition like that there will be hiccups. We understand that

and we're thankful for how hard the employees from AWG

worked to make things right. We appreciate having an in-state

warehouse so not only do we help our local economy but also

our state. Associated Wholesale Grocers has been helpful

with resetting our aisles, finding new products and giving us

competitive pricing to compete in our market. We look forward

to growing our business with AWG."

Great Lakes 254Nebraska 3Nashville 18Memphis 6Gulf Coast 3Kansas City 8Springfield 4OKC 6

Page 8: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

Solutions Solutions FocusedFocused

AWG and VMC will install Blue Tree trail-er monitoring on the entire trailer ¶eet in 2018. We made a commitment to deploy this state of the art technology to become a leader in food safety, cold-chain management, and ultimately deliver the best possible quality of product to our members in the most e�cient manner possible. Bene�ts of the system include real-time temperature monitoring of the trailer, and alerts if the temperature falls outside predetermined tolerances. �e system also provides ongoing location tracking via GPS, which will be proactively used to improve communication to members. Other bene�ts include improved asset utilization, fuel monitoring and conservation, im-proved asset visibility, security due to door open/clos-ing reporting and the ability to support maintenance programs.

We are re-energizing e�orts to improve the quality of our distribution and logistics throughout the entire supply chain. AWG’s quality assurance and food safety department is partnering with the vendor com-munity to ensure that food is safe, correctly labeled and exceeds quality standards. On the inbound side, we are inspecting ship-ments with our newly certi�ed QC team to ensure that product is unadulterated and within the appropriate temperature speci�cations. Procedures have been reviewed to promote con-sistency, and our extended training program has equipped the team for success. Audits have been increased at all distribution centers and at our member stores by utilizing the reinstituted role of the Distribu-tion Specialist. Continued e�orts have been directed towards date compliance, rotation and damage reduction, in addi-tion to extensive re-slotting projects in the warehouse. Signi�cant capital improvements and investments are being made, including enhancements to refrigeration, technology, banana room upgrades and new trailers.

BLUE TREE

QUALITY

6

33561

M33490135567

M33646

M33483 33560

M33500

M33659

M33652

22

2

2• Compliance• Temperature Management• Real-time Visibility• Cargo Protection• Communication• Alerts

Tech-Driven Fleet Management

Page 9: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

AWG’s Design & Décor Source Group (“DSG”) is "Future Focused" on supporting our member's needs by designing and producing an exciting and in-viting in-store experience and driving retail member pro�tability. DSG provides professional supermarket design and décor services and is committed to delivering the components that help drive pro�table sales for our member stores and deliver-ing lighting solutions which make products appealing and drives down operating expenses. As Anthony Smith, our new leader at DSG, says, “Just spending money to look pretty isn’t good enough. Every design and remodel project must drive sales through the register and deliver a worthwhile return on investment.” Our na-tional award winning DSG team works closely with AWG’s Real Estate and Store Engineering teams to understand each market and how to create the right envi-ronment for every location and project. �is collaboration and neighborhood-centric creativity is then coupled with fresh ideas from its experienced certi�ed design team, allowing DSG to create the “look” retailers need to compete and di�erentiate in a positive way. In 2017, DSG completed over 100 separate projects, including many small remodel projects which transformed the store's look and feel on a limited bud-get and yielded real bang for the buck.

In 2017, AWG began a multi-year project to expand our produce procurement and support team, strategically invest in facility and equipment upgrades as well as technology. Our plan is to positively impact the freshness and quality of our produce o�erings and to help our members become even more competitive in this increasing-ly important department. �e planned result of these investments is to be the very best at fresh produce procurement, distribution and merchandising. You can expect to see noticeably improved freshness and quality as well as an expansion of our pro-curement and operational expertise at the division level while leveraging our collec-tive scale to obtain the best product available at the best cost. In the �rst quarter of 2018 we will be adding skilled produce operations and procurement professionals to each of our eight divisions. �ese produce experts will help drive quality, freshness and improve turns at each division so our members will experience improved service level and the freshest possible product. We are also adding multiple category leaders, sourcing managers and expertise to our central team to enhance our vendor/grower partnerships in our mission to lower costs, im-prove quality and increase the speed with which AWG can bring new opportunities to our membership. We are also investing in the latest technology available to improve quality and handling within our produce operations. We are introducing the best-in-class iTradeNetwork as our company-wide quality and freshness monitoring system. �is will enable us to implement tighter quality standards and speci�cations, as well as monitor these conditions from the �eld to our facilities, electronically documenting all inspections and archiving photos and speci�cations of the products throughout.

7

DSG

PRODUCE

• Compliance• Temperature Management• Real-time Visibility• Cargo Protection• Communication• Alerts

Page 10: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

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Retail FocusedRetail Focused

AWG is enhancing its promotion and invoicing systems to provide for allowances associated with advertising and performance-based manufacturers allowance programs to now be given o�-invoice and re¶ected at the time of delivery. Currently, these al-lowances are collected and passed to retailers through secondary bill back programs. �is enhancement will provide retailers greater visibility to true cost of goods on their invoice and will show both inter-nal and external allowances with AWG/VMC now managing all collection e�orts with participating vendor partners. In addition, retailers will realize the signi�cant bene�t of improved cash ¶ow as these monies will be a reduction to their AWG statement. Retailers will also realize administrative savings due to a more simpli�ed process to verify that all expect-ed allowance monies due are being collected.

A new retail pricing application is being de-ployed to replace two aging legacy applications that no longer o�er the ¶exibility and control necessary in today’s business environment. �is new system is de-signed to provide AWG member stores signi�cantly more ¶exibility as it relates to their individual pricing strategy, as well as greater visibility and control over promotional pricing. It will also make the day-to-day management of retail and promotional pricing easier and more convenient due to the improved ac-cessibility and manipulation of this data. �e online application provides visibility to store speci�c cost of goods components (including internal and external allowances, store speci�c delivery charges, etc.) and allows projections for the impact that retail price changes may have on gross margins and other pow-erful tools to assist members in operating their stores.

PROJECT PASS THRU RETAIL PRICING

Page 11: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

9

Our StoreFront project is driven by the desire to enhance and improve the retailer experience in its daily interactions with AWG through a new, singular retailer portal. Our technology goal with this investment is making it easier for our retailers and their employees to have visibility and control of the information and data they desire to see and utilize based on their role(s) or interest and to improve the navigation to other applications and websites needed in conducting their daily activities. �is solution will be web-based and device agnos-tic, meaning it will be accessible everywhere and able to communicate seamlessly with all personal computing hardware and most mobile devices. Retailers will bene�t from a single point of interaction as well as improved communication.

Our members continue to embrace multiple online tools and resources at an increasing rate so that they can meet the changing demands of today's consumers. Our past year demonstrated strong growth for AWG e-commerce services with many new members joining one of our e-commerce platforms and expanding their respective online shopping options to multiple new markets. In addition, many new members joined or expanded their use of loyalty programs. �ese programs enable our members with leading edge consumer tools to allow personalized and unique consumer o�ers and accelerate our member’s ability to leverage digital discounts and coupons. Our in-house Marketing team, along with our subsidiary business unit Media Solutions Corporation, continues to expand the tools and services available to our members so they can be more relevant with websites, text, social media, and many other electronic consumer marketing platforms. All of our o�erings in these areas are designed to engage consumers, build sales, and increase loyalty to our member stores, while being cost e�ective and easy for our members to implement. �is year will continue to be Future Focused for AWG e-commerce services. We anticipate explosive growth within this space as we launch more tools that tap into emerging technology advance-ments that enable the phone and other mobile devices as the primary research and shopping tool that drives purchase behavior.

STOREFRONT

ONLINE SHOPPING

StoreFront

Page 12: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

AWG BrandsAWG Brands�e AWG Brands program completed another record setting year in �e AWG Brands program completed another record setting year in �e A

2017 with sales topping $1.24 billion and over 71 million cases shipped to our members. As the AWG Brands business grew, the teams system-atically worked across the entire supplier base and lowered acquisition costs by over $13 million by leveraging our scale.

Private brands continue to grow nationally and the AWG Brands program has continued to outperform all national growth trends in this segment and AWG continues to have the highest reported sales penetration of store brands by a full-line wholesale supplier. More importantly, the future for continued growth is bright as millennials are embracing private brands at an increasing rate and will likely be our highest growth - heaviest users, well beyond prior generations.

To keep up with the demands of today’s consumers, Clearly Organic To keep up with the demands of today’s consumers, Clearly Organic Twas expanded in 2017 into three distinct branches including organic, “free from” and gluten free product o�erings. �e Clearly brand will become our master brand that consumers will seek out in member stores for healthy, better for you choices in these fast-growing catego-ries aligned with the consumers’ current product preferences for cleaner ingredient-based food choices. In the next year, you’ll see over 200 new products launched across the entire store that are aligned with today’s consumer trends under the Clearly brand.

In the past year AWG Brands developed and launched over 300 new items that contributed $15 million in incremental sales at whole-sale. �is was one of the largest new item launches in recent history for the AWG Brands portfolio and provided AWG members with more opportunities to drive increased sales and pro�ts while building custom-er loyalty in an increasingly competitive marketplace.

In response to the increased prevalence of dollar stores and hard discounters, in 2018 we will expand our highly successful Always Save brand with over 100 new EDLC items. �e Always Save brand contin-ues to grow and meets a need with consumers looking for good quality everyday low priced products that provides a true value to consumers.

Quality remains the cornerstone of our commitment to our mem-Quality remains the cornerstone of our commitment to our mem-Qbers. AWG continues to build on the quality and brand equity of the AWG Brands portfolio as the leading private label program in sales, case sales penetration and consumer acceptance in our member stores' trade areas. We continue to increase the testing of all products and keep AWG at the forefront in product quality to exceed our member stores consumers’ expectations.

�e AWG Brands sales teams across each division provide the �e AWG Brands sales teams across each division provide the �e Anecessary expertise and support to pull together resources necessary for our members to grow overall sales and pro�ts through improved private brand participation. �e future is bright for our AWG Brands portfolio and we look forward to another record year in 2018!

10

Page 13: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

11

Valu Merchandisers Valu Merchandisers Company (VMC) has achieved another record sales year with an overall increase of 4.9%. VMC experienced strong growth across all business segments led by a Natural, Organic and Special-ty Foods increase of 18.9%. �is is the �fth consecutive double digit growth year for this business segment. Shoppers' increasing demand for healthier snacking and beverage options, coupled with millennials' passion for unique cooking ingredients, helped fuel this growth. VMC continues to add categories, vendors and item level variety to meet the needs of our members, while driving down the cost of goods to our members through our aggressive sales plans, promotional programs and ongoing event based merchandising. �e VMC Pharmacy program also had a very successful year. VMC partnered and launched a new Rx contract in 2017 through a creative collaboration of partners across the retail and wholesale pharmacy business segments to drive down cost of goods to all participating members. �e agreement drove down costs by more than 7% in 2017 through the new contract and price reductions within the generic segment, all negotiated as part of the new agreement. �ese reductions improved retail cost of goods, our members' competitive position in the pharmacy segment and improved the department’s margin dollar contributions to the bottom line of their organizations. In addition, the VMC team added �ve pharmacy speci�c professionals to our Pharmacy team. �ese team members will expand our programs to support and grow the retail pharmacy business in our member and non-member stores. �is year we continued to witness the evolution of consumer’s shopping behavior, as well as disruptors to our traditional retail model. VMC continued to develop new programs and services to help our members compete in this changing marketplace with added focus on health, wellness, and our core general merchandise categories. �ese programs created turnkey solutions for our members in advertising, merchandising, category management, display programs, and ongoing promotional events to drive member sales success in 2017. As VMC looks to the future, our key areas of focus are: • Delivering best-in-class category solutions • Growing same store sales • O�er retail programs and options that will help shoppers lead healthier lifestyles • Drive down overall cost of goods • Assist our members in increasing sales and pro�ts As both the consumer and marketplace continues to rede�ne the retail landscape, VMC is leveraging its expertise, volume and capabilities to develop new solutions for your business and your shoppers. We look forward to assisting you and your growth plans in 2018 and beyond.

Record sales year for VMC with

an overall increase of 4.9%73%

Page 14: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

12

CENTER STOREFreddie's Family Market - Atlanta, Michigan �e news never made it to Freddie’s Family Market in Atlanta, Michigan that the supermarket’s center store is dead. Center store sales at Freddie’s enjoyed year-over-year gains in a market of only 1,000 people and median household income of $30,000. Sales are up over 30% versus prior year! Freddie's success is attributed to aggressive merchandising, competitive pricing and outstanding customer service. An avid supporter of the cooperative since transitioning from A�liated Foods Midwest in October 2016, Freddie’s relies solely on the AWG Great Lakes Division for all of the store's needs. �e store leverages a combination of direct mail, an active social media presence, and front page ads, as well as special monthly sales featuring a minimum of six center store items, all at irresistible prices. Dedicated center store end caps featuring AWG web-blast, items purchased with favorable ad allowance windows and buying deal to deal keep prices low everyday on key center store items. Customers regularly travel over 150 miles to the store, including shoppers from Canada, making it Freddie’s International Family Market!

VMCSuperLo -Memphis, Tennessee For more than seventy years, the family owners of the SuperLo group have been serv-ing Memphis and surrounding areas. A major factor in their longevity and success has been an understanding of the changing needs of the communities they serve and �nding ways to supply these needs. �is was never more apparent than when second-generation owners Randy Stepherson and Bob Reed opened their �rst SuperLo Foods. Sandwiched between two of the largest Kroger stores in the area, they adapted and found solutions that not only allow them to compete, but to thrive. One of their keys to success as it relates to products they receive from Valu Merchan-disers is providing a wide variety of competitively priced products, including the best of the best in Specialty & Hispanic Foods, General Merchandise, and a full complement of Dol-lar products. Rounding it out with a wide assortment of Health and Beauty Care items makes SuperLo a one-stop shopping destination. �is focus and continued aggressive promotion translated into a 10%+ overall increase in VMC sales for 2017.

CENTER STORE DIVISION WINNERS VMC WINNERS#0366 - Scott's Thriftway, Lindsborg, KS

#2108 - Harp's 10 Box, Springdale, AR

#3327 - Tate's Family Foods, Greenfield, TN

#5135 - Piggly Wiggly Country Fresh, Hazelhurst, GA

#6023 - Jubilee Foods, Pearl River, LA

#8146 - Richter's Marketplace, Twin Lakes, WI

#4004 - Crest Foods, Edmond, OK

#6780 - Rouses, Metarie, LA

#9644 - Russ's Market, Lincoln, NE

#2357 - Harp's 10 Box, Rogers, AR

#0424 - Ball's Hen House, Leawood, KS

AWG Excellence Awards

Page 15: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

MEATSuper Saver - Lincoln, Nebraska Rod Luft and the team at Super Saver in Fallbrook, Nebraska have a weekly plan that maximizes sales. �ey focus on cross-merchandising opportunities throughout the meat department, displays that correspond with the season, and weekly ads and promotions that incorporate all the key items a customer needs. Customers enjoy and appreciate the shopping experience at Super Saver. �e depart-ment is always clean and fresh with proper signage throughout. TPR’s are always available in fresh, frozen, seafood, and processed sections. �e store is always a top performer during B&R’s company-wide Meat sale. Super Saver challenges the competition by o�er-ing fresh proteins cut in their stores daily by their own butchers. �ey also o�er items from numerous local producers such as Smart Chicken, Greater Omaha Beef, and Smith�eld Foods to enhance their local image and insure they sell only the freshest product. All of these elements contribute to the success and sales of the department. Consumers in the area will tell you that Fallbrook Super Saver is THE place to shop for high quality fresh cut meat.

SEAFOODRouses - New Orleans, Louisiana In a trade area with hundreds of options for fresh local seafood, it takes a big com-mitment to become the leader in fresh seafood sales. Rouses maintains the highest quality and presentation standards and o�ers their customers the freshest seafood items with eye catching displays every day. �ey o�er the area’s largest seafood selection and customers can choose from fresh caught local favorites. �ey also o�er a wide variety of items that are stu�ed or seasoned for the grab and go consumer. �e sta� are well-trained seafood experts, ready, willing and able to assist customers with a recipe or cooking instruction. Shrimp along the Gulf Coast is a perennial favorite and there is always a massive display on ice at Rouses. �eir unique in-store boiling room allows Rouses to o�er perfectly sea-soned shrimp, craw�sh and all the �xings on a hot table, ready for the time-starved and hungry customer. �ey also o�er a wide selection of crab, wild-caught oysters and delicious store-prepared blue crab cakes that are always a customer favorite. Rouses also features dozens of specialty and signature items in the seafood department. Customers seek out the seafood dips and special recipe products for every occasion, festival, and especially for Mardi Gras parties.

MEAT DIVISION WINNERS SEAFOOD DIVISION WINNERS#8146 - Richter's Marketplace, Twin Lakes, WI

#4004 - Crest Foods, Edmond, OK

#6780 - Rouses, Metarie, LA

#9644 - Russ's Market, Lincoln, NE

#2357 - Harp's 10 Box, Rogers, AR

#0424 - Ball's Hen House, Leawood, KS

#0104 - Cosentino's Price Chopper, Blue Springs, MO

#2294 - Harter House, Shell Knob, MO

#4008 - Crest Foods, Oklahoma City, OK

#3484 - FoodWise, Pine Bluff, AR

#1171 - Park DuValle Cash Saver, Louisville, KY

#6778 - Rouses, Youngsville, LA

#8193 - Kyle's Market, Colfax, WI

#0006 - Queen's Price Chopper, Stanley, KS

#2423 - Price Chopper, Rolla, MO

#3752 - Greenwood Marketplace, Greenwood, MS

#5526 - Riesbecks, Cambridge, OH

#9170 - Hansen's IGA, Westby, WI

AWG Excellence Awards

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14

PRODUCECash Saver - Beebe, ArkansasCash Savers do fresh and do it well! �ey’re not just about low prices. Edwards Cash Saver in Beebe, Arkansas has proven that the produce department is a destination category in a discount price format supermarket. Massive displays with a wide selection of fresh produce and a large assortment of “grab & go” products greet you at the door. Several varieties of fresh salads are prepared in-store daily, along with a fresh cut fruit program that adds to the variety in Cash Saver. Each season, Cash Saver sources and promotes locally grown produce for their custom-ers. Incorporating Produce Web Blast items into their plans provides strong promotions and competitive pricing. Incremental sales are captured with massive displays of nuts, candy, juices, and a large variety of other non-fresh produce items. Overall, Cash Saver executes an aggressive approach to produce, focusing on merchandis-ing, quality, value, and a competitive leading selection. CASH SAVER IS TRULY A ONE STOP GROCERY SHOP!

FLORALPrice Cutter - Spring�eld, Missouri Lilly’s Floral caught the eye of Super Floral magazine that featured Price Cutter twice and gave them high marks for inventive merchandising ideas. �ey weren’t wrong! �is store’s commitment to the ¶oral department drove a 12% sales increase over the prior year, proving that ¶oral sells! �e department features seasonal and creative displays with vibrant colors to attract cus-tomer’s attention. From the “Create Your Own Sunshine” sun¶ower display to a fully deco-rated Christmas tree to go, customers always �nd that special item from this exciting ¶oral department. Leading the competition in both artistry and sales performance, fresh European bouquets, pre-made arrangements, large displays of beautiful bouquets along with blooming and green plants are o�ered for grab & go convenience. A garden center outside provides a full complement of items for the gardening enthusi-ast. Hundreds of varieties of herbs, vegetables, blooming bedding, tropical plants, perennials and hanging baskets �ll the area. Soil, mulch and other garden supplies round out the items needed to ‘dig in’ to the gardening season.

PRODUCE DIVISION WINNERS FLORAL DIVISION WINNERS#0622 - Good's Cash Saver, Emporia, KS

#2833 - Ron's Supermarket, Pittsburg, KS

#5632 - Price Less IGA, Bowling Green, KY

#6128 - Pic 'n Sav, Andalusia, AL

#9119 - Ken's Super Fair Foods, Aberdeen, SD

#9167 - Hansens IGA, Stanley, WI

#0104 - Cosentino's Price Chopper, Blue Springs, MO

#2471 - Woods Supermarket, Bolivar, MO

#3523 - SuperLo Foods, Memphis, TN

#5526 - Riesbecks, Cambridge, OH

#9207 - Elden's Fresh Foods, Alexandria, MN

#8148 - Richter's Marketplace, Burlington, WI

AWG Excellence Awards

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#0104 - Cosentino's Price Chopper, Blue Springs, MO

#2471 - Woods Supermarket, Bolivar, MO

#3523 - SuperLo Foods, Memphis, TN

#5526 - Riesbecks, Cambridge, OH

#9207 - Elden's Fresh Foods, Alexandria, MN

#8148 - Richter's Marketplace, Burlington, WI

15

DELICosentino's Market - Overland Park, Kansas �e roots of this family business go back to 1948, evolving from a simple fruit stand to this state of the art market in the Kansas City suburbs. Unique to common grocery stores, this extraordinary deli dominates with the highest sales distribution in the store! An island features custom deli meats and cheeses from premium brands. Store pre-pared gourmet and custom salads, dips, hot soups, gourmet hot toasted sandwiches, and fresh foods like hand breaded chicken, brined thick cut pork chops, chicken parmesan, and Beef Wellington are o�ered daily. A unique salad bar wraps around the cheese island where an abundance of salad choic-es of just about everything awaits. A curved glass case draws the customer’s attention to the Italian section. �is stunning display o�ers many top line choices of Italian meats and olives. A resident Cheesemonger can assist with a cheese board, or help select an imported or specialty cheese. �e electronic menu boards sum up the department: Fine Foods Fresh!

BAKERYLishman's Cash Saver - Slidell, Louisiana A celebration in Louisiana calls for a cake and who says that a Cash Saver discount supermarket can’t have a fantastic bakery? Lishman’s Cash Saver is well known for its out-standing quality and variety of decorated cakes and creative bakery items. �is store knows what the customers want and not only competes with, but wins as a destination for decorated cakes. Birthday cake, pink or blue iced cake for a reveal party, or turkey cupcakes for a school party, you can �nd it all at Cash Saver. Decorated cake pops, Rice Krispie treats and decorated cookies are party favorites. Wedding and grooms cakes, strawberry short cakes and expertly dipped chocolate cov-ered strawberries or fruit �lled cheesecake tarts will add a special touch to any party. Mardi Gras isn’t a season or a celebration in south Louisiana without King Cakes and Cash Saver keeps Mardi Gras alive with their wonderful selection. Tables are �lled with a large variety of thaw ‘n sell donuts, breakfast pastries, cakes and cupcakes. Store-made hot and ready to go French bread, pro�t-building garlic bread and the ever popular line of King’s Hawaiian bread add to the selection. Creativity, variety, freshness and eye appeal are the key to sales in this department and it is the backbone of Lishman’s Cash Saver in Slidell, Louisiana.

DELI DIVISION WINNERS BAKERY DIVISION WINNERS#2121 - Rozier's Country Market, Chester, IL

#3422 - Reed's Market, New Albany, MS

#1470 - Hometown IGA, Jasper, IN

#6458 - Piggly Wiggly, Scott, LA

#9008 - County Fair Food Store, Mitchell, SD

#8170 - Big G Foods, Marengo, IA

#0416 - Cosentino's Price Chopper, St. Joseph, MO

#3362 - Vowell's Marketplace, Starkville, MS

#5417 - Cooke's Food Store, Cleveland, TN

#6888 - Ramey's, Purvis, MS

AWG Excellence Awards

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AWG BRANDSMoser's - Columbia, Missouri Roger Moser, owner of Moser’s in Columbia, Missouri, credits a winning combination of a full-store inside and out remodel, store level merchandising expertise, and the strength of his AWG Brands program that continues to deliver sales increases over the last two years despite the competitive marketplace. Moser’s never passes on an opportunity to promote AWG Brands to their customers. �ey feature outstanding displays everyday, cross-mer-chandising, well signed shelves, and a speed-to-shelf focus on new items. �ese ongoing ac-complishments have increased AWG Brands' penetration to 22.5%. �at’s a 6.5% increase! To further boost sales and encourage trial, in store demos and truckload sales highlight AWG Brands products. Solo orders of commodity items allow Moser’s to o�er the lowest available price to their customers. Best Choice end cap displays promote the program and pallet module purchases keep the store competitive and pro�table. AWG Brands has been an integral part of growing sales and remains relevant at Moser’s. In their second year of operation, their overall weekly sales average has grown an impressive 49% and they’re not stopping!

MARKETING & MERCHANDISING DIVISION WINNERS

AWG BRANDS DIVISION WINNERS

#0441 - Ray’s Apple Market, Clay Center, KS

#2674 - Perry County Market Place, Pinckneyville, IL

#3675 - Food Giant, Columbus, MS

#5501/5627/5638 - Houchens IGA, Glasgow, KY

#6665 - Greer's Cash Saver, Mobile, AL

#8155 - Ptacek's IGA, Prescott, WI

#2772 - Muncy's Supermarket, Sarcoxie, MO

#3806 - Country Mart, Kennett, MO

#5426 - Cooke's Fresh N' Low, Chatsworth, GA

#6139 - Main's Market, Folsom, LA

#8087 - Wagoner's Hometown Food Store,

Mattawan, MI

AWG Excellence AwardsMARKETING CAMPAIGNUptown Grocery - Oklahoma City, Oklahoma Uptown Grocery has earned the distinct title of “�e Event Planners” and uses social media, radio, magazines and news sources to capture the attention of anyone seeking to plan special occasions. From baby showers and anniversary parties, to graduations and holiday gatherings, Uptown can deliver. Known and highly rated for wedding day celebrations, the team at Uptown highlights their “Wedding Event Planners" at every major bridal fair. �ey also organize and promote their own bridal fair held in their stores. Focused on the upscale brand they o�er, the team visually spotlights the talented sta� and event ideas throughout the store. In ¶oral, every arrangement imaginable enhances the event. Bakery features wedding day donuts, cup-cakes and, of course, a traditional wedding cake. Deli features mouth watering displays and an endless list of foods sure to satisfy. With a professional Catering Team, and special focus detailing the expertise of their Event Planners, they coordinate well over 200 successful wedding events each year!

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MERCHANDISING EVENTHouchens IGA - Glasgow, Kentucky In 2017, Houchens Industries celebrated the company’s 100th anniversary. Nearly 5,000 current and retired employees attended a celebration honoring a century of hard work. A website speci�cally created for the event shares the journey from Houchens founding to present day. �e 100th anniversary was celebrated with shoppers in Houchens founding com-munity of Glasgow, KY. Houchens collaborated with vendors to create limited edition Houchens 100 year anniversary packaging on classic brands like Folgers, Coca-Cola and Kellogg’s. �e 100th anniversary featured a two-day sale and included print ads paying homage to Houchens founding and proud heritage. �e advertising was a throwback design with deeply discounted pricing to add to the nostalgia. In-store signage, displays, radio remotes and targeted social media posts spread the word to shoppers. Facebook posts for the sale reached over 14,000 shoppers! �ese two days marked the highest sales week of the year for these three stores with a 40% sales increase and a 19% customer count increase over same week prior year.

#2772 - Muncy's Supermarket, Sarcoxie, MO

#3806 - Country Mart, Kennett, MO

#5426 - Cooke's Fresh N' Low, Chatsworth, GA

#6139 - Main's Market, Folsom, LA

#8087 - Wagoner's Hometown Food Store,

Mattawan, MI

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STORE MANAGER OF THE YEARLou DeMarco - Kansas City, Missouri Lou DeMarco of Cosentino’s Price Chopper is AWG’s 2017 recipient of the Store Manager of the Year award. Lou’s store is one of the highest volume grocery stores in the Kansas City metro. He has consistently delivered year-over-year sales growth of 2-4%, even with increased competitive pressure. When a sister store and a new Hy-Vee entered

the market, the store experienced a 7% sales decline. Within one short year, the store won back their lost sales and began growing again, all due to Lou’s outstanding management of the great Cosentino’s Price Chopper team. Lou’s true gift is how he works with his employees and treats his customers. �e motto he lives by and instills in his team is “Like and Respect.” In his 23 years as a Director for Cosentino’s he has mentored, groomed and trained numerous store directors. He works with others as a team; sharing, teaching and encouraging his apprentices to their full potential. Lou holds sta� meetings after every director’s meeting to communicate the corporate initiatives. Every day, Lou spends time on the sales ¶oor, talking with and working side by side with his sta�. He communicates sales goals and works with the department managers to achieve their numbers. Ron Hurd, Cosentino’s District Manager, said, “Lou’s success comes from building his team up, by having fun, and being positive with a creative spirit. He is truly one of a kind.” Lou’s passion for extraordinary customer service contributes to his success. He knows keeping the customer happy will keep the customers coming back. Lou has implemented a “no more than three in line” policy. �ey also have tem-porary mobile check stands available if all lanes are occupied. If the customer wants it, and they don’t carry it, and it’s available, they will get it. Hospitality is a store culture. On a hot summer day customers are greeted with a cold bottle of water as they begin their shopping experience. “I met Lou 18 years ago through a community group. He is very friendly, engages in the community and is always taking care of his customer. Every shopping experience is great,” said Dr. David Sallee, retired president of nearby Wil-liam Jewell College. Community involvement has made Lou one of the most recognized individuals in the area. Fish Fry Friday brings in over 300 patrons during Lent, creating a community event. Wednesday Steak Night was added to keep the community involved throughout the year. Lou’s passion for the business and his loyal customer base is truly measured by continuous sales growth.

AWG Excellence Awards

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LOU FOX AWARDLOU FOX AWARDDonald RouseDonald Rouse

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�e Lou Fox Community Service Award is given in honor of Lou Fox, president of Associated Wholesale Grocers from 1955 -1983. �roughout his life, Lou was highly regarded as a philanthropist and civic supporter. �is award is presented at the Annual Shareholders Meeting each year to an AWG retailer who follows in the Lou Fox tradi-tion of giving back to the community that helped make them successful. �e spirit of Lou Fox lives in each of these recipients. �is year’s Lou Fox Community Service Award is presented to Donald Rouse of �ibodaux, Louisiana. As a small child, Donald was a familiar face at the 7,000 square-

foot Ciro’s Market owned by his father, Anthony J. Rouse, Sr. and uncle, Ciro DiMarco. As he got older, Donald learned to unload trucks, stock shelves, assist customers and work the registers. Eager to know everything about the grocery business, he could often be found in the manager’s o�ce, studying everything from buying to mer-chandising and advertising. When Ciro retired in 1975 – the same year the family opened a second store – Donald bought his uncle’s shares of the business. From his early days at Ciro’s to his role as Man-aging Partner in the 1990s and 2000s, to his new role as Chairman of the Board, Donald has been instrumental in the company’s expansion into one of the largest independent grocers in the United

States with a three-state footprint. Today there are 55 Rouses Markets with nearly 7,000 team members serving customers in Louisiana, Mississippi and Alabama, with more stores on the horizon. Donald Rouse has always looked for ways to help his neighbors any way he can. His company has made improving the lives of its customers, employees and vendor/supplier partners a top priority. Rouses gives back to every neighborhood where they do business, ranging from hunger relief and food donations, to coastal conservation, to local fundraisers and events, to checkout campaigns for local and national chari-ties like the American Heart Association, St. Jude, MDA and the March of Dimes. For Rouses, charity begins at home. When Donald says, “We’re local,” he means it. Rouses buys local, hires local, and invests local. Supporting local farmers, �shermen, bakeries, dairies and manufacturers is his �rst priority. Rouses is an ongoing supporter of the �ibodaux Firemen, the oldest all-volunteer �re department in Louisiana. �ey �nancially support Bayou Country Children’s Museum and also helped create an exhibit that celebrates local culture and teaches children where their food really comes from. �roughout the year Rouses raises money and collects food for local food banks. When Baton Rouge and Lafayette ¶ood-ed in 2015, and again in 2017 when Texas and Southwest Louisiana were inundated, truckloads of food were delivered to communities in need. For Donald, and the Rouse family, it’s all about neighbors helping neighbors. Both through his own charitable giving and his company’s, Donald Rouse has shown exemplary leadership. We’re proud to award him this year’s Lou Fox Community Service Award in recognition of his community service and involvement.

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ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

December 30, 2017 and December 31, 2016(dollars in thousands)

ASSETS 2017 2016 ________________ ________________

Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166,129 $ 160,372 Receivables, net of allowance for doubtful accounts of $4,795 in 2017 and $4,363 in 2016 . . . . . 297,241 296,347 Notes receivable from members, current maturities, net of allowance for doubtful accounts of $0 in 2017 and $6,911 in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,885 11,505 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517,755 564,360 Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,782 35,579 ________________ ________________ Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,042,792 1,068,163 Notes receivable from members, maturing after one year, net of allowance for doubtful accounts of $2,770 in 2017 and $3,230 in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,050 30,613 Property and equipment, net (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439,983 505,340 Intangibles, net of accumulated amortization of $23,642 in 2017 and $21,703 in 2016 (note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,620 6,559 Deferred income taxes (note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,740 23,966 Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,769 41,134 ________________ ________________ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,623,954 $ 1,675,775 ________________ ________________ ________________ ________________

LIABILITIES AND EQUITYCurrent Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 618,649 $ 676,080 Cash portion of current year patronage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,179 115,262 Member deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,476 36,217 Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,039 107,431 ________________ ________________ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 887,343 934,990Long-term debt maturing after one year (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,538 171,338Deferred income and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,907 79,443 ________________ ________________ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,118,788 1,185,771 ________________ ________________

Commitments and contingent liabilities (note 12)

Equity: Common stock, $100 par value: Class A, voting; 35,000 shares authorized; 17,910 and 16,905 shares issued in 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,791 1,691 Class B, nonvoting; 150,000 shares authorized; 11,744 and 13,429 shares issued in 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174 1,341 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,298 26,725 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,727 457,864 Accumulated other comprehensive loss (notes 9 and 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,030) (19,535) ________________ ________________ Total members’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478,960 468,086 Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,206 21,918 ________________ ________________ Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,166 490,004 ________________ ________________ Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,623,954 $ 1,675,775 ________________ ________________ ________________ ________________

See accompanying notes to these consolidated financial statements.

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2017 2016 2015 __________________ __________________ __________________

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,703,821 $ 9,183,802 $ 8,935,915Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,953,310 8,480,375 8,244,604 __________________ __________________ ___________________ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,511 703,427 691,311General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,081 514,718 488,691 __________________ __________________ ___________________ Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,430 188,709 202,620Other income (expenses): Interest income (note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,105 3,986 3,879 Interest expense (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,937) (3,222) (3,810) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,891 3,255 2,804 __________________ __________________ ___________________Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,489 192,728 205,493Income taxes (note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,386 2,821 6,574 __________________ __________________ ___________________ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,103 189,907 198,919

Other comprehensive income (loss) Change in funded status of pension plan, net of taxes (note 9) . . . . . . . . . . . (2,495) 2,210 (4,587) __________________ __________________ ___________________Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196,608 $ 192,117 $ 194,332 __________________ __________________ ___________________ __________________ __________________ ___________________

Amounts attributable to noncontrolling interest

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196,608 $ 192,117 $ 194,332 Comprehensive (income) loss attributable to noncontrolling interest . (4,288) 2,464 (8,014) __________________ __________________ ___________________ Comprehensive income attributable to AWG, Inc. and subsidiaries . . $ 192,320 $ 194,581 $ 186,318 __________________ __________________ ___________________ __________________ __________________ ___________________

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,103 $ 189,907 $ 198,919 Net (income) loss attributable to noncontrolling interest . . . . . . . . . . (4,288) 2,464 (8,014) __________________ __________________ ___________________ Net income attributable to AWG, Inc. and subsidiaries . . . . . . . . . . . $ 194,815 $ 192,371 $ 190,905 __________________ __________________ ___________________ __________________ __________________ ___________________

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015(dollars in thousands)

See accompanying notes to these consolidated financial statements.20

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2017 2016 ____________________ _____________________Allocated Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351,818 $ 337,658 Patronage certificates (note 8): Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,215 76,840 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,428) (62,680) Class B certificates: Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,904 ------ Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------ ____________________ _____________________ Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 366,509 $ 351,818 ____________________ _____________________

Unallocated Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,046 $ 107,306 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,103 189,907 Net (income) loss attributable to noncontrolling interest (note 9) . . . . . . . . . . . . . . . . . . . (4,288) 2,464 Less allocated earnings (note 8): Patronage certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76,215) (76,840) Class B certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,904) ------ Less cash portion of current year patronage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117,179) (115,262) Redemption and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,345) (1,529) ____________________ _____________________ Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 102,218 $ 106,046 ____________________ _____________________ Total retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 468,727 $ 457,864 ____________________ _____________________ ____________________ _____________________

See accompanying notes to these consolidated financial statements.

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Fiscal years ended December 30, 2017 and December 31, 2016

(dollars in thousands)

21

Page 24: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015(dollars in thousands)

2017 2016 2015____________ ____________ ____________Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,103 $ 189,907 $ 198,919Adjustments to reconcile net income to net cash providedby operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,194 47,419 45,147Impairment of assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,378 569 ------Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,226 5,022 (6,001)Loss/(gain) on disposition of property and equipment . . . . . . . . . . . . . . . . . . . (41,210) (4,657) 868

Changes in assets and liabilities, net of effects of acquisitions: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (894) (988) (29,416) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,605 (40,281) (16,875) Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,737) (14,856) 5,552 Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . (78,732) 64,545 81,694 ____________ ____________ ____________ Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 150,933 246,680 279,888 ____________ ____________ ____________Cash flows from investing activities: Reductions and (additions) in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ 729 (729) Additions to intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------ (1,675) Loans to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,252) (1,432) (51,253) Repayment of loans by members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,435 35,084 31,352 Additions to property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,660) (54,686) (80,074) Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,372 26,323 7,579 Acquisition of assets, net of cash acquired (note 4) . . . . . . . . . . . . . . . . . . . . . . . ------ (103,697) (8,726) ____________ ____________ ____________ Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . 28,895 (97,679) (103,526) ____________ ____________ ____________Cash flows from financing activities: Year-end patronage distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115,262) (110,423) (130,101) Redemption of prior year's patronage refund certificates . . . . . . . . . . . . . . . . . . . (63,429) (62,680) (58,788) Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,713 1,251 1,419 Redemption and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,552) (3,065) (2,763) Net advances under credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 25,150 13,250 Net proceeds (repayments) of member deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 5,259 (5,083) 12,693 ____________ ____________ ____________ Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (174,071) (154,850) (164,290) ____________ ____________ ____________Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . 5,757 (5,849) 12,072Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,372 166,221 154,149 ____________ ____________ ____________Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166,129 $ 160,372 $ 166,221 ____________ ____________ ____________ ____________ ____________ ____________

Supplemental cash flow statement information: Cash paid for interest, net of amount capitalized . . . . . . . . . . . . . . . . . . . . $ 5,250 $ 3,186 $ 3,649 ____________ ____________ ____________ ____________ ____________ ____________ Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,733 $ 9,177 $ 5,886 ____________ ____________ ____________ ____________ ____________ ____________

See accompanying notes to these consolidated financial statements.

22

Page 25: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

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 84% 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 2016 included 53 weeks of operations. Fiscal 2015 and 2017 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 HAC, Inc. (“HAC”) in the Company’s consolidated financial statements for the fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015.

Business and Credit Concentrations

The majority of the Company’s sales are to Members located in Missouri, Oklahoma, Kansas, Louisiana, Arkansas, Tennessee, Mississippi, Nebraska, Kentucky and Illinois. No single customer accounted for more than 10% of sales in any year presented. Inventory and equipment financ-ing 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 up to 7 years. For the fiscal years 2017, 2016, and 2015, the Company earned interest income on loans of $2.5 million, $2.5 million and $2.7 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: 2017 2016 _________ _________

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,141 $ 7,292Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) 2,849

Write-offs / Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,321) — _________ _________Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,770 $ 10,141 _________ _________ _________ _________

23

Page 26: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

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)

Inventories

Merchandise is valued at the lower of cost or market. Cost for 74% of inventories in both 2017 and 2016, 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 $117.5 million at December 30, 2017, and $113.1 million at December 31, 2016.

Property and Equipment

Property and equipment are stated at cost. 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 or shorter life of the asset.

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. Any volume rebate paid in advance of purchases is reported as a prepaid asset. 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 2017, 2016, and 2015 were $202.7 million, $158.4 million and $143.8 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 2017, 2016, and 2015 were $5.9 million, $7.3 million and $7.6 million, respectively.

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 basis for net receivables, depreciation, insurance, deferred compensation, and the deferred gain on the sale of HAC not yet recognized 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 2017, 2016 and 2015, the Company did not recognize any interest or penalties.

24

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.

Page 27: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

Recently Adopted and Recently Issued Authoritative Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to recognize a right-of-use asset and lease liability for almost all lease contracts based on the present value of lease payments. There is an exemption for short-term leases. The ASU provides new guidelines for identifying and classifying a lease and classification affects the pattern and income statement line item for the related expense. The ASU is effective for fiscal years beginning after December 15, 2019. The Company is currently assessing the timing and impacts of adopting this standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new revenue recognition standard also requires disclosures that sufficiently describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, deferral of the effective date, which defers the effective date of the new revenue recognition standard by one year. As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years beginning after December 15, 2018. The Company has selected the modified retrospective method and is currently evaluating the impact on its consolidated financial statements and related disclosures.

(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.

25

(1) Summary of Significant Accounting Policies (continued)

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 30, 2017, December 31, 2016, and December 26, 2015, the Company recorded (in millions) $2.4, $0.6, and $0.0 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 million for both 2017 and 2016, respectively, which are being amortized over 15 years and have accumulated amortization of $19.6 million and $18.2million for 2017 and 2016, respectively. The Company’s VIE has recorded goodwill at December 30, 2017 and December 31, 2016 of $5.6 million and $5.6 million, respectively, which is being amortized over a useful life of 10 years and has accumulated amortization of $2.1 million and $1.6 million, respectively. Amortization expense for intangible assets was $1.9 million in 2017, $2.4 million in 2016 and $2.2 million in 2015. Amortization expense for the next five fiscal years is estimated to be as follows (in millions): 2018 - $1.4; 2019 - $0.7; 2020 - $0.7, 2021 - $0.6 and 2022 - $0.6.

Page 28: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

Tranche A1 – $117.7 million, to be reduced by future AWG patronage certificates and quarterly principal payments beginning on March 31, 2017. Weekly interest-only payments began on January 6, 2017 (subject to floating rate adjustments based on the Monthly LIBOR Rate + 3% margin). The loan balance outstanding at December 30, 2017 under the restated and consolidated Tranche A1 note was $93.5 million. $24.1 million of principal payments were made during the year ending December 30, 2017. The total outstanding balance as of December 30, 2017 was $93.5 million for Tranche A1 with the interest rate ranging from 3.76% to 4.39%. The aggregate loan bal-ance outstanding at December 31, 2016 under consolidated notes (Tranche A, B, C, E, E2, E3, and E4) was $121.1 million for Tranches A, B and C with the interest rate ranging from 3.25% to 7.00%. Tranches E, E2, E3, and E4 were non-interest bearing and had an outstanding balance of $4.3 million as of December 31, 2016.

Beneficial terms of the transaction require HAC 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 HAC access to a line of credit up to $15 million to manage its seasonal borrowing needs at a borrowing rate of Prime (4.5% and 3.75% for 2017 and 2016, respectively), which was drawn at $0.0 million at December 30, 2017 and $1.3 million at December 31, 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 guaranty provided to Bank of America by the Company was increased to $7.5 million and $15 million on October 28, 2016 and September 15, 2017, respectively. The amount available under the line of credit is reduced by the amount guaranteed to Bank of America. The guaranteed balance at December 31, 2017 and December 31, 2016 was (in millions) $0.0 and $1.3, respectively.

HAC is considered a VIE, requiring its continuing operation 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 HAC.

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.

26

(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 collateralized by HAC, Inc. assets, with maturity dates of 5 to 11 years. On December 31, 2016, the Company entered into a new loan agreement with HAC (Tranche A1) replacing, refinancing and restating Tranches A, B, C, E, E2, E3 and E4 Term notes in their entirety.

In October 2016, the Company purchased certain assets and liabilities of Affiliated Foods Midwest Cooperative, Inc. (“AFM”) for $139.7 million to expand the distribution area into several adjoining states and add over 800 new member stores. The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed at the date of acquisition:

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71.4Personal property & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.3 Real property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27.3)Member deposit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19.2)Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14.9) _________Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139.7 _________ _________

In connection with its acquisition of AFM, the Company agreed to pay additional consideration in future periods of up to an aggregate of $33.8 million (undiscounted). In 2017, the total amount owed of $11.3 million was paid to the members based upon their annual purchases and the remainder was paid to AFM as breakage. The amount of all future payments that the Company could be required to make under the contingent consideration arrangement at December 30, 2017 and December 31, 2016 was estimated to be (in millions) $21.1 and $33.8, respectively. Key assumptions included (a) a discount rate range of 1.0%-1.9% and (b) a payout probability factor of 90% to 100% as of December 30, 2017 and December 31, 2016. The contingent consideration liabilities are considered Level 3 measurements and are included in both Short-term and Long-term liabilities. 521 members were issued 15 shares of class A stock with 336 Member Deposit Certificates issued to collateralize open accounts receivables.

Page 29: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

27

(6) Property and Equipment Property and equipment are summarized as follows: 2017 2016 ____________________ _____________________

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,351 $ 62,610 Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434,440 464,208 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,556 379,963

Construction in progress and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,869 5,190 ____________________ _____________________ $ 860,216 $ 911,971

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (420,233) (406,631) ____________________ _____________________Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 439,983 $ 505,340 ____________________ _________________________________________ _____________________

Depreciation expense incurred in 2017, 2016, and 2015 was (in millions) $47.3, $45.0 and $41.1, respectively. In 2017, 2016 and 2015, the Company capitalized an aggregate total of (in millions) $0.0, $0.1 and $0.1, respectively, of capitalized construction period interest.

(5) Patronage Refunds and Deposits

Patronage Refund Certificates are issued to Members as part of annual distributions of net income from cooperative operations.

Member deposits represent interest-bearing accounts that may be required to collateralize weekly purchases of products. Interest expense incurred on member deposits and member savings in 2017, 2016 and 2015 was $0.9 million, $0.6 million and $0.4 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 consoli-dated balance sheets for these items, approximate fair value.

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 annual distribution in 2015.

The Company incurred expenses of approximately $4.9 million in conjunction with the acquisition. The Company has expensed all acquisition related costs, which are recorded as a component of general and administrative expenses.

In August 2017, Always Fresh, Inc. a wholly owned subsidiary of the Company, sold substantially all of its assets for a total of $5.0 million. In con-junction with this transaction, the Company sold approximately $7.2 million of military distribution channel related inventory to the same purchaser. In addition, the Company entered into a non-compete agreement with the same party, which will result in annual installment payments over a seven year term totaling over $2.9 million with the short term portion recorded in receivables and the remaining recorded in non current other assets.

In August 2017, the Company sold its warehouse located in Ft. Worth, Texas, along with all fixtures and improvements, building equipment, and ware-house supplies for $55.0 million. At closing, a short term lease was executed with the purchaser that allowed the Company to conduct the necessary process of selling or transferring inventory and equipment out of the facility, which was completed in October 2017.

In October 2017, the Company sold 100% of the stock of Retail Accounting Solutions, Inc. (“RAS”) and entered into a non-compete agreement with the purchaser for five years. A purchase price of $0.3 million was received at closing. In conjunction with this transaction, real estate, which included the building that housed the RAS employees, was also sold for $0.3 million to an affiliated entity of the purchaser.

In November 2017, the Company sold a vacant warehouse and adjacent land located in Elwood, Kansas for $14.3 million, which had been obtained as part of the AFM transaction in October of 2016, but never used for grocery distribution.

(4) Acquisitions, Divestitures and Certain Transactions with Members (continued)

(7) Long-term Debt

In May 2015, the Company entered into a five year revolving Credit Agreement, which provides a $300.0 million revolving credit facility and a $75.0 million tax-exempt bond facility. Total borrowings and outstanding letters of credit, including a $72.1 million tax-exempt bond loan, were $190.5 million and $203.0 million at December 30, 2017 and December 31, 2016, respectively. Variable interest rates are based on the London Interbank Borrowing Rate and ranged from 1.43% to 2.19% during 2017 and 0.69% to 1.44% during 2016 (which included a base rate mark-up charged by the lenders). Daily bor-rowings averaged $119.3 million and $126.2 million in 2017 and 2016, respectively and overall annual borrowings and repayments were approximately $7.6 billion and $5.9 billion in 2017 and 2016, respectively. The Company had an additional $184.5 million and $104.0 million available for borrowing under this agreement at December 30, 2017 and December 31, 2016, respectively.

The Company’s credit facility contains certain financial covenants related to cash flow leverage and minimum tangible net worth. The Company is in compliance with all covenants as of December 30, 2017.

Page 30: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

28

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 bylaws 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. All issuances and redemptions since March 22, 2017 have been made at $2,000 per share. Issuances and redemptions between March 20, 2016 and March 21, 2017 were made at $1,915 per share. Issuances and redemptions between March 22, 2015 and March 19, 2016 were made at $1,840 per share.

The following table describes the number of authorized and outstanding shares of AWG Class A and Class B stock at December 30, 2017 and December 31, 2016: OUTSTANDING AT CLASS AUTHORIZED 2017 2016 _____________________________________________________________________________________ Class A Stock, $100 par value 35,000 17,910 16,905 Class B Stock, $100 par value 150,000 11,744 13,429

The changes in common stock for the fiscal years ended December 30, 2017 and December 31, 2016 were as follows:Total

Class A Class B Common Stock Members ___________ ___________ ___________ ___________Balances at December 26, 2015

Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,110 14,234 23,344 608Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 911 $ 1,423 $ 2,334 ___________ ___________ ___________ ___________ ___________ ___________

Issued Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,605 — 8,605 575

Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 861 $ — $ 861 ___________ ___________ ___________ Redeemed

Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (810) (805) (1,615) (54)Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (82) $ (163) ___________ ___________ ___________

Balances at December 31, 2016 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,905 13,429 30,334 1,129Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,691 $ 1,341 $ 3,032 ___________ ___________ ___________ ___________ ___________ ___________

Issued Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,475 — 2,475 162

Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247 $ — $ 247 ___________ ___________ ___________ Redeemed

Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,470) (1,685) (3,155) (95)Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (147) $ (167) $ (314) ___________ ___________ ___________

Balances at December 30, 2017 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,910 11,744 29,654 1,196Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,791 $ 1,174 $ 2,965 ___________ ___________ ___________ ___________ ___________ ___________

(8) Allocated Earnings

At December 30, 2017 and December 31, 2016, $76.2 and $76.8 million of the current year non-maturing patronage has been allocated within Retained Earnings. The pertinent provisions of these patronage certificates 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 obligations 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 Board of Directors may in its sole and absolute discretion cause a Class B Certificate to be converted into a Patronage Refund Certificate if a member who was deemed as delinquent ceases to be deemed as a delinquent member. The Class B Certificates are included in Retained Earnings and amounted to $2.0 million and $0.1 million as of December 30, 2017 and December 31, 2016, respectively.

Page 31: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

29

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

Noncontrolling Interest

Changes in noncontrolling interest for the years ended December 30, 2017, and December 31, 2016, were as follows: 2017 2016 ____________________ _____________________ Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,918 $ 24,382 Income (loss) attributable to noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,288 (2,464) ____________________ _____________________ Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,206 $ 21,918 ____________________ _____________________ ____________________ _____________________

2017 2016 2015 ____________ ____________ ____________ Federal: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,700 $ (426) $ 9,110 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,738 1,065 (4,270) ____________ ____________ ____________

Total federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,438 $ 639 $ 4,840 ____________ ____________ ____________ State: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 928 $ (506) $ 1,509 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2,688 225 ____________ ____________ ____________

Total state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 948 $ 2,182 $ 1,734 ____________ ____________ ____________ Total income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,386 $ 2,821 $ 6,574 ____________ ____________ ____________ ____________ ____________ ____________

(10) Income Taxes

The significant components of income tax expense are summarized as follows:

Additional Paid in Capital

Changes in additional paid in capital attributable to the Company for the fiscal years ended December 30, 2017 and December 31, 2016, were as follows:

2017 2016 ____________________ _____________________Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,725 $ 12,797

Stock purchase or redemption surplus value paid in/(out) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,573 13,928 ____________________ _____________________Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,298 $ 26,725____________________ _________________________________________ _____________________

(9) Equity (continued)

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss attributable to the Company for the fiscal years ended December 30, 2017 and December 31, 2016 were as follows:

2017 2016 ____________________ _____________________Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (19,535) $ (21,745)

Change in funded status of pension plan, net of ($3,922) in tax credits in 2017 and $1,255 in tax in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,495) 2,210 ____________________ _____________________

Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (22,030) $ (19,535)____________________ _________________________________________ _____________________

Page 32: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

30

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

(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 1,173 and 1,268 participants for the fiscal years ended December 30, 2017 and December 31, 2016, 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 Company or one of its subsidiaries files income tax returns in the U.S. Federal jurisdiction, along with various states and municipalities. At this time, the Company is under examination for tax years 2013 and 2014 for federal income tax, tax years 2012 through 2016 for Texas franchise tax and tax years 2012 through 2015 for sales and use tax. The Company does not expect any adverse outcome from open audits and consequently has not included any amounts for uncertain tax liabilities or benefits.

As of December 30, 2017 and December 31, 2016, a High Performance Incentive Program (“HPIP”) valuation allowance of $4.3 million and $3.5 million, respectively, was required to reduce deferred income tax assets to a level, which more likely than not, will be realized as future benefits. The differences between income taxes expected at the current U.S. federal statutory income tax rate of 35% and the reported income tax expense are comprised of reconciling items including, but not limited to, patronage dividend, state and local income taxes, HPIP credit and impact of tax reform.

On December 22, 2017, the United States enacted tax reform legislation known as the H.R.1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Act”), resulting in significant modifications to existing law. Staff Accounting Bulletin 118 (“SAB 118”) provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. The Company has con-sidered SAB 118 and believes the accounting for the income tax effects of the Act is substantially complete and appropriately reflected in the financial statements for the period ended December 30, 2017. The Company financial statements for the year ended December 30, 2017, reflect certain effects of the Act, which includes a reduction in the corporate tax rate from 35% to 21%, as well as other changes. As a result of the changes to tax laws and tax rates under the Act, the Company incurred incremental income tax expense of $7.4 million during the year ended December 30, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from a 35% to a 21% tax rate.

The Company previously adopted Accounting Standards Update (ASC) 2015-17, “Balance Sheet Classification of Deferred Taxes” for the year ended December 26, 2015. The Company’s early adoption of ASU 2015-17 simplifies the presentation of deferred federal income taxes, as it requires all balances to be classified as noncurrent on the balance sheet.

The effects of temporary differences and other items that give rise to deferred income tax assets and liabilities are presented below: 2017 2016 ____________________ ____________________ Deferred income tax assets: Gain on sale of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,242 $ 6,693 Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,088 4,976 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,243 4,605 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,430 13,502 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,848 5,307 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,345 2,612 State credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,845 3,942 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343 1,474 ____________________ ____________________ Deferred income tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,384 43,111 Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,283) (3,500) ____________________ ____________________ Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,101 $ 39,611 ____________________ ____________________ ____________________ ____________________ Deferred income tax liabilities:

Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,041 $ 13,382 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 2,240 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 23 ____________________ ____________________

Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,361 $ 15,645 ____________________ ____________________ ____________________ ____________________

Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,740 $ 23,966 ____________________ ____________________ ____________________ ____________________

(10) Income Taxes (continued)

Page 33: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

31

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

(11) Employee Benefit Plans (continued)

2017 2016 2015____________ ____________ ____________

Net periodic benefit expense for the DB Plan consisted of the following:Service cost --- benefits earned during the period . . . . . . . . . . . . . . . . . . . . . . $ 9,723 $ 9,758 $ 11,420 Interest cost on projected benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . 6,336 6,177 7,007Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,249) (9,053) (10,365)Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 201 271Amortization of net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,793 8,123 4,256Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,228 7,086 6,991____________ ____________ ____________

Net periodic benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,960 $ 22,292 $ 19,580 ____________ ____________ ________________________ ____________ ____________

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 $135,136 and $127,634 at December 30, 2017 and December 31, 2016, respectively.

The amounts recognized for the DB Plan in the Company's accumulated other comprehensive loss consisted of the following:

2017 2016 ____________________ _____________________Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (129)Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,468) (30,766) ____________________ _____________________Total recognized in AOCI, before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,468) $ (30,895) ____________________ _____________________Total recognized in AOCI, net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (22,030) $ (19,535) ____________________ _____________________ ____________________ _____________________

The estimated future benefit payments to be paid from the DB Plan, which reflect expected future service, are as follows:

DB Plan Benefits ______________________ Fiscal year 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,315 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,440 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,757 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,480 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,028 Years 2023-2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,534

The benefit obligation (which is the projected benefit obligation “PBO”), fair value of plan assets, and funded status of the Company’s DB Plan is as follows:

Change in benefit obligation (PBO) 2017 2016 ____________________ ____________________Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,914 $ 158,202

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,723 9,758 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,335 6,177

Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,383) (36,555) Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,435 9,332 ____________________ ____________________

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,024 $ 146,914 ____________________ ____________________ ____________________ ____________________ ____________________ ____________________Change in plan assets

Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,306 $ 127,871 Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,961 6,415 Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,940 34,575 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,383) (36,555) ____________________ ____________________

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,824 $ 132,306 ____________________ ____________________ ____________________ ____________________ ____________________ ____________________

Funded status, end of year $ (12,200) $ (14,608) ____________________ ____________________ ____________________ ____________________ ____________________ ____________________

Page 34: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

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 30, 2017 and December 31, 2016:

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.

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.

The fair value of the Company’s DB Plan assets at the end of the 2017 calendar year, by asset category, are as follows:

Asset Category Total Level 1 Level 2 Level 3 _______________ _______________ _______________ _______________

Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,117 $ 3,117 $ ---- $ ----Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,971 138,971 ---- ----Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,736 ---- ---- 5,736_______________ _______________ _______________ _______________

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,824 $ 142,088 $ ---- $ 5,736_______________ _______________ _______________ ______________________________ _______________ _______________ _______________

The fair value of the Company’s DB Plan assets at the end of the 2016 calendar year, by asset category, are as follows:

Asset Category Total Level 1 Level 2 Level 3 _______________ _______________ _______________ _______________

Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,232 $ 1,232 $ ---- $ ----Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,201 123,201 ---- ----Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,873 ---- ---- 7,873_______________ _______________ _______________ _______________

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,306 $ 124,433 $ ---- $ 7,873_______________ _______________ _______________ ______________________________ _______________ _______________ _______________

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 $0 and $129, respectively. The majority of the unfunded non-qualified portion of the plan has been expensed.

Weighted average assumptions used for the DB Plan are as follows: 2017 2016 2015 ____________ ____________ ____________ Weighted-average assumptions used to determine benefit obligations:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.80% 4.50% 4.65% Rate of compensation increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.56% 2.50%, 3.00% 2.50%, 3.00%

Weighted-average assumptions used to determine net periodic benefit cost: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50% 4.65% 4.35% Rate of compensation increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.56% 2.50%, 3.00% 3.00% Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.25% 7.25%

Page 35: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

33

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

The fair value of the Company’s Deferred Compensation plan assets at the end of 2017 and 2016 calendar year, by asset category are as follows:

2017 Level 1 Level 2 Level 3 _______________ _______________ _______________ _______________Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,845 $ 7,845 $ — $ —Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,179 — 1,179 —Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,561 6,561 — —Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,910 3,910 — —_______________ _______________ _______________ _______________

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,495 $ 18,316 $ 1,179 $ —_______________ _______________ _______________ ______________________________ _______________ _______________ _______________

2016 Level 1 Level 2 Level 3 _______________ _______________ _______________ _______________

Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,820 $ 11,820 $ — $ —Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 — 109 —Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,784 11,784 — —Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,305 3,305 — —_______________ _______________ _______________ _______________

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,018 $ 26,909 $ 109 $ —_______________ _______________ _______________ ______________________________ _______________ _______________ _______________

(11) Employee Benefit Plans (continued)

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 30, 2017 and December 31, 2016 is as follows: 2017 2016 ________________________ ________________________ Fair value, beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,873 $ 15,288 Unrealized gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) 43 Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 836 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,768) (8,294) ________________________ ________________________ Fair value, ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,736 $ 7,873 ________________________ ________________________ ________________________ ________________________ 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 $16.3 million to the DB Plan during 2018.

The Company also makes contributions to its defined contribution plans. The total expense for these plans amounted to (in millions) $9.2, $8.5 and $7.7 in 2017, 2016 and 2015, 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. The asset is reported as a noncurrent asset with the offsetting liability as a noncurrent liability on the consolidated balance sheet and were $19.5 million and $27.0 million for December 30, 2017 and December 31, 2016, respectively.

Page 36: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

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 amountbased on the underfunded status of the plan, referred to as a withdrawal liability.

(12) Commitments and Contingent Liabilities

The Company is obligated as lessee under various noncancelable long-term supermarket property leases with minimum annual rentals of approximately $36.8 million. These leases have an average remaining life of 5 years. It is expected in the ordinary course of business 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 expense related to these properties were (in millions) $33.4, $34.2, and $35.4 in 2017, 2016, and 2015, respectively. Rental income received was (in mil-lions) $35.8, $35.3 and $36.5 in 2017, 2016 and 2015, respectively. Future minimum lease payments expected to be incurred over the next five fiscal years and thereafter is estimated as follows (in millions): 2018 - $32.5; 2019 - $29.7; 2020 - $25.0; 2021 - $20.8; 2022 - $16.2; and $85.4 thereafter. Offsetting rental income expected to be received over the next five fiscal years and thereafter is estimated as fol-lows (in millions): 2018 - $33.7; 2019 - $30.8; 2020 - $25.9; 2021 - $21.5; 2022 - $16.7; and $89.4 thereafter. Rents charged to general and administrative expenses for operating leases, other than supermarket properties, were (in millions) $6.4, $3.4 and $3.1 in 2017, 2016 and 2015, respectively. Operating lease rent expense, expected to be incurred over the next five years, is approximately $5.4 million per year.

The Company is a guarantor of loans issued to members in the amount of $40.0 million and $32.5 million for December 30, 2017 and December 31, 2016, respectively.

In December 2015, the Company entered into a limited guaranty with the Bank of America on behalf of HAC, Inc. Amended in 2017, this limited guaranty allows HAC, Inc. to issue standby letters of credit in amounts up to $15.0 million without requiring HAC to maintain a cash collateral account with Bank of America. 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.

In September 2016, the Company entered into a limited guaranty with Bank of Oklahoma on behalf of one of its members. This guaranty of payment is limited to $25.0 million of outstanding debt of the member with Bank of Oklahoma.

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.

Page 37: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

35

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands unless otherwise indicated)

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 2016 and 2015. 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 2017.

(14) Subsequent Events

Subsequent events have been evaluated through March 5, 2018, which is the date the financial statements were available to be issued. There were no material events requiring recognition or disclosure.

Expiration Date EIN and Pension Protection Act of Collective- Pension Pension Plan Zone Status FIP/RP Status Company Contributions Surcharge Bargaining Fund Number 2016 2015 Implemented 2017 2016 2015 Imposed Agreements_________________________________________________________________________________________________________Central States, 36-6044243 Red Red Yes $14,193 $14,001 $13,184 No April 4, 2020Southeast and Plan 001Southwest AreasPension Fund

The Company’s participation in this plan for the annual period ended December 30, 2017, 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 2017 and 2016 is for the plan’s year-end at December 31, 2016 and December 26, 2015, respectively. 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 more than 65, but less than 80 percent funded and plans in the green zone are at least 80 percent funded. Based on its projected insolvency, the plan has been deemed to be in “critical and declining” status for 2016 and 2017. 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 2017, 2016 and 2015 contributions.

(13) Multi-employer Plans (continued)

Page 38: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

36

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of DirectorsAssociated 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 and statements of retained earnings as of December 30, 2017 and December 31, 2016, and the related consolidated statements of operations and comprehensive income and cash flows for each of the three years in the period ended December 30, 2017, 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 Stated 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, Inc. and subsidiaries as of December 30, 2017 and December 31, 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Kansas City, MissouriMarch 5, 2018

Page 39: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

2018 AWGOFFICERS

James VaughanPresident,DGS-Acquisitions, LLC

Dave SuttonPresident,Valu Merchandisers Company

Tony Sta�ordVice President of Sales,Valu Merchandisers Company

Jack WallSr. Vice PresidentGulf Coast

David SmithPresident andChief Executive O�cer

Mike SchumacherVice President, Valu Merchandisers Company

Reade SievertVice President,Produce

Scott WelmanExecutive Vice President and General Counsel

James LukensVice PresidentMedia Solutions Corporation

John LikensSr. Vice President Nashville

Sonny LeonVice President Great Lakes

Charlie LynnVice President Spring�eld

Linda LawsonSr. Vice President, Operations

Gary KochExecutive Vice President, Chief Financial O�cer

Danny LaneSr. Vice President Great Lakes

Anna ManciniVice President ofMerchandising, Valu Merchandisers Company

Brian RehagenVice President Oklahoma City

Patrick ReevesSr. Vice President, Chief Human Resources O�cer

Bob PesselVice President ofPharmacy, Valu Merchandisers Company

Terry RobertsVice President Nashville

Je� PedersenExecutive Vice President, Division Operations

Greg OldrightVice PresidentGulf Coast

Je� OlsonVice President,Real Estate and Engineering

Frank SchmittVice President Memphis

Randy BerrySr. Vice President ,Chief Information O�cer

Tim BellantiSr. Vice President Spring�eld

Stephanie BeckerVice President,Deputy General Counsel

David CarlSr. Vice President,Finance

Steve ArnoldSr. Vice President Oklahoma City

Tye AnthonyVice President,Advertising, Merchandising and Marketing

Bob DurandVice President Nebraska

Gary JenningsSr. Vice President Memphis

Robert HenryVice President, Corporate Controller

Bo HawkinsVice President, Meat

Richard KearnsExecutive Vice President, Distribution and Logistics

David GatesSr. Vice President Kansas City

Jerry EdneyVice President Kansas City

Dan FunkExecutive Vice President,Merchandising & Marketing

Dan KochVice President,Bakery and Deli

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Page 40: Board of Directors - awginc.comawginc.com/2017 AWG Annual Report.pdf · Dale Trahan Dale L. Trahan Enterprises, Inc. Rayne, LA Dear Shareholders March 28, 2018 Dear Shareholders,

ASSOCIATED WHOLESALE GROCERS, INC.

2017 ANNUAL REPORT