barry queen, chairmanawginc.com/2016 annual report low2.pdf · company, which primarily provid-ed...

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Pat RaybouldB&R StoresLincoln, NE

Jim BrownDoc’s Food StoresBixby, OK

Jay LawrenceLawrence Brothers Sweetwater, TX

Jeff ReasorReasor’s Tahlequah, OK

Alan McKeeverMcKeever’sIndependence, MO

Randy StephersonSuperlo FoodsMemphis, TN

Victor CosentinoCosentino’s Prairie Village, KS

Chuck MurfinOzark Supermarkets Ozark, MO

James NeumannValu Market, Inc.Louisville, KY

Danny BoyleCountry Boy MarketsHarrah, OK

Alan LarsenHouchens IndustriesBowling Green, KY

Kim EskewHarp's FoodsSpringdale, AR

Barry Queen, ChairmanQueen’s Enterprises - Paola, KS

Don Woods, Jr., Vice-ChairmanWoods Supermarkets - Bolivar, MO

Dave NicholasNicholas SupermarketsBoonville, MO

David BallFour B Corp Kansas City, KS

John ClarkeCounty Fair Food StoreMitchell, SD

BOARD OF DIRECTORS

DEARSHAREHOLDERS

1

March 22, 2017Dear Shareholders, Your Board of Directors and management are pleased to present the audited results for our fiscal year 2016. Consolidated company sales reached another record of $9.18 billion, up 2.78%. Total year-end patronage after retainage was $201.7 million, another record, which was 2.78% of qualifying sales. Total distribution including patronage, allowances and interest back to members was $546.5 million, an increase of $2.1 million even after reflecting an increase in the amount of promotional allowances that converted to EDLP programs. Additionally, AWG stock trading value increased 4.4 percent to $2,000 per share. AWG achieved these strong financial results despite record product price deflation and significant changes in our membership base. Cooperative net sales were $7.67 billion, up 1.21% from the prior year, running counter to year-over-year product price deflation of 2.5% and overcoming the loss of a significant member which initiated self-supply. These positive sales results are due primarily to the fourth quarter supply initiation to approximately 800 new members’ stores in conjunction with the Affiliated Foods Midwest (AFM) unification. To all of those new members, thank you! This year marks the end of our 90th anniversary of our cooperative. Due to the support and continued growth of our member stores and their collective business, AWG has achieved a compounded annual sales growth rate of 8.69% and compounded annual patronage growth rate of 11.81% for the past 50 years. These results position your company as the top performing grocery wholesaler in the U.S. This is a strong testimonial to the vision set by a handful of independent grocers who founded our company and way of doing business in 1926. These visionaries knew that they could achieve so much more through

combined efforts and a common purpose. Beyond just our operating results, AWG and VMC members also benefited from meaningful cost of goods reductions. In 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 of over $20 billion in retail sales. These improved and new vendor arrangements have an annualized cost of goods impact over $30.9 million, span multiple product categories and include both national brand and store brand products. In summary, 2016 was a year of change and growth. These changes affected AWG and member companies alike. We are very thankful for the new members formerly with AFM and new business in our Great Lakes and Nebraska Divisions. The confidence to undertake that unification project came from you, our members, and your support of our cooperative model. It has worked well for 90 years and we are very excited about all we will accomplish together in the coming decades. AWG is proud of our heritage and will continue to strive to serve you well as a primary resource in the ongoing retail battle, while seeking additional ways to lower costs and provide new sources of growth, revenue and ongoing success. Sincerely,

David SmithPresident/CEO

Barry QueenChairman of the Board

2

FIVE-YEAR TREND Founded in 1926, Associated Wholesale Grocers, Inc. (AWG) was established to provide its family owned retail member stores the essential building blocks needed to establish strategic positions in their unique retail marketplaces. This Annual Report marks 90 years of providing products, support ser-vices and financial returns to our member retailers. The 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-changing retail environment. Operating eleven distribution centers during the 2016 fiscal year, AWG delivered grocery and related products to active retailers through-out the midwestern , southwestern and southeastern United States. Nine of the eleven facilities are full-line divisions, dedicated to pro-viding service to AWG cooperative members in various retail locations. Members are required to purchase

and hold 15 shares of "Class A" stock to be supplied on a coopera-tive basis. The remaining two facilities were operated by our wholly-owned subsidiary, Valu Merchandisers Company, which primarily provid-ed wholesale supply of health and beauty care, general merchandise, pharmaceutical supplies, and spe-cialty, natural, organic and inter-national foods to our cooperative as well as non-member retailers. Additionally, AWG operated whol-ly-owned subsidiaries including Always Fresh, Inc., a military chan-nel distribution company, providing products to commissaries and base exchanges on a non-member basis , Media Solutions Corporation, a digital marketing services compa-ny, Retail Accounting Services, Inc., an accounting and payroll services company, and Super Market Devel-opers, Inc., AWG's commercial real estate and development service arm for cooperative members. Headquartered in Kansas City, Kansas, the AWG corporate sup-

port team provided operational and administrative support to all eleven distribution centers, located in Springfield, Missouri; Oklahoma City, Oklahoma; Ft. Worth, Texas; Southaven, Mississippi; Memphis, Tennessee; Pearl River, Louisiana; Goodlettsville, Tennessee; Ft. Scott, Kansas; Norfolk, Nebraska; Kenosha, Wisconsin and Kansas City, Kansas. AWG achieved sales on a con-solidated basis, after eliminations, of $9.18 billion. Within the co-operative, net sales were $7.67 billion. Operating income was $188.7 million, with net income of $189.9 million. Total patronage returned to shareholders was $201.7 million, distributed on a 60/40 basis (the payout consisting of 60% cash and 40% certificates). As a percent to qualifying sales, the patronage payout was 2.78%, and AWG stock trading value increased by 4.4 per-cent to $ 2,000 per share. Total members’ investment and equity ended the year valued at $544.3 million.

CONSOLIDATED RESULTS (thousands) 2012 2013 2014 2015 2016 Net Sales $ 7,852,006 $ 8,380,214 $ 8,934,239 $ 8,935,915 $ 9,183,802Operating Income 176,513 201,406 231,622 202,620 188,709Net Income 175,949 192,490 226,920 198,919 189,907 Weeks 52 52 52 52 53 COOPERATIVE OPERATIONS (before eliminations)* Net Sales $ 6,713,047 $ 7,148,757 $ 7,685,985 $ 7,579,129 $ 7,671,138Distribution to Members Interest 1,522 227 223 406 553 Promotional Allowances 311,201 338,828 351,820 350,155 344,219 Year-End Patronage 172,872 182,576 194,675 193,815 201,731Total Distribution to Members $ 485,595 $ 521,631 $ 546,718 $ 544,376 $ 546,503 Members’ Investments $ 9,308 $ 10,846 $ 9,411 $ 22,105 $ 36,162Members’ Equity 386,850 422,979 439,632 455,610 508,172Total Members’ Investments & Equity $ 396,158 $ 433,825 $ 449,043 $ 477,715 $ 544,334

*Includes the accounts of members/subsidiaries.

2013 20152014 20162012

NET SALESConsolidated (after eliminations)

201252 WEEKS

201352 WEEKS

201452 WEEKS

3

2.70%

2.80%

2.90%

2.76%2.81%

2.77% 2.79% 2.78%

2012 2013 2014 2015 2016

Co-op Patronage (Percentage to qualifying sales)

$172.9

$182.6 $194.7 $193.8

$201.7

2012 2013 2014 2015 2016

$155.0

$165.0

$175.0

$185.0

$195.0

$205.0 Total Gross Profit(Co-op only, includes cash discount)

*As percent of total net sales

5.6%

5.8%

5.7%

6.0%

5.9%5.90%

5.83%

5.69%

5.71%5.76%

2012 2013 2014 2015 2016

Patronage Dollars(Millions)

Selling, General & Administrative Expense

(Co-op only)*As percent of total net sales

3.2%

3.3%

3.5%

3.4%3.32%

3.22%

3.12% 3.13%

3.25%

2012 2013 2014 2015 2016

201552 WEEKS

201653 WEEKS

$7.85BILLION

$8.38 BILLION

$8.94 BILLION

$9.18 BILLION

$8.93 BILLION

4

As mentioned in the Letter to Shareholders, 2016 was a special year for

Associated Wholesale Grocers, Inc. (AWG) due to the successful unification with Affiliated Foods Midwest Cooperative, Inc. (AFM). This project became a reality at the Annual Shareholders Meeting of AFM on September 10, 2016, where AFM shareholders approved the transaction by a vote of 410 to 2 and executed agreements to become part of their new co-op.

David Smith, President and CEO of AWG, was overwhelmed by the support from AFM’s membership. “While we were anticipating tremendous support for the unification by AFM’s members, I was humbled by the virtually unanimous vote in favor and by the enthusiasm and standing ovation the members demonstrated at AFM’s shareholders meeting. AWG will indeed be stronger together by joining forces with this amazing group of like-minded retailers. I have also been very impressed by the progressive nature of these retailers. They are very attuned to their customers, clearly know what they need to successfully compete and communicate that to us effectively, and are very supportive of the cooperative business model.

I could not be more proud to serve this great group of new members.” Then on October 23, 2016, AWG and AFM combined the two cooperatives’ distribution businesses, converted to a common operating platform, and shared a common purpose. This unification was made possible by the support and approval of AWG’s Board of Directors, AFM’s Board of Directors, a virtually unanimous vote of AFM’s shareholders, and the hard work of hundreds of AWG and AFM teammates from throughout the organizations. To all our new members, THANK YOU and WELCOME ABOARD! Because of this transaction, the expanded AWG now provides products and services to approx-imately 3,800 independently owned member stores located in 36 states from nine full-line wholesale divisions, making it the nation's largest cooperative food wholesaler. It also provides our cooperative members the additional scale and buying power of more than $20 billion in retail volume, and provides us the best of both cooperatives from implementing the best practices of each cooperative. Combining our distribution center networks and support infrastructure allows us to more effectively serve independent member-retailers, strengthen our relationship and ability to perform for the vendor community, reduces our operating expenses and subsequent cost of goods, and further enhances our ability to support and serve our growing membership for the challenges we will collectively face in the future. Martin Arter, former President

and CEO of AFM stated, "Before our members voted to unify, they learned how they would benefit from a lower cost of goods and an expanded array of services. Our boards knew that unifying the cooperatives would produce substantial financial rewards for the retailer-members and would produce long-term growth.” Arter also noted that many AFM members have told him "AWG’s retailers are just like us." Following the transaction, Arter assumed the position of Senior Vice President and Manager of the Northern Region of AWG overseeing operations for the new Nebraska and Great Lakes Divisions. AWG is very excited to have Martin as a new leader with his fantastic track record of meeting and exceeding members' needs, as well as his experience, knowledge, and passion. Under his leadership we expect tremendous growth and an improved service and support to not only the Northern Region members, but throughout AWG. AFM, its leadership team, and its retailer owners are to be commended for many class-leading services and offerings they developed and leveraged to make their retailer members jobs easier and to allow them to compete favorably. They developed several unique retailer tools, such as Connect®, a customer portal for virtually all store communications, interactions, and services. As a part of the combined cooperative, this program will continue to be supported by AWG for our new membership as we design and develop Connect 2.0®, its cloud-based replacement capable of supporting stores throughout the AWG and VMC network.

AWG WELCOMES AFMOVER 3,800 MEMBER STORES IN 36 STATES

5

Combining our companies and the related benefits of this exciting unification are aligned well with our company’s Mission and Vision:

MISSION STATEMENT “Our mission is to provide our member-retailers all the tools, products, and services they need to compete favorably in all markets served. This includes top quality supermarket merchandise and support services, all at the lowest possible cost.”

VISION “To be the most retailer-focused and highest performing member-owned food whole-saler.”

Norfolk

Kenosha

DISTRIBUTING SUCCESS FOR 90 YEARS

OUR STORY! It was an idea by a small

group of some 20 grocers in Kansas City, Missouri in

1924, all wanting a way to compete with chain supermarkets, that started it all….. In 1924, that group of grocers met for the first time at Ed Glenn’s grocery in Kansas City, Missouri. They began buying groceries together and storing them in the back room of a store owned by J.C. Harline at 39th and Troost in Kansas City, Missouri. In 1926, we incorporated as Associated Grocers of Kansas City (AG) and began operating on the second floor of Morehead Grocery Company at 3842 Troost Avenue in Kansas City, Missouri. J.C. Harline managed the cooperative along with his own grocery store. Profits from the company were paid back each year to member stores in the form of dividends. Rapid growth necessitated a move to the W.E. Murray Transfer and Storage building where Associated Grocers occupied the fourth and fifth floors. In 1930, AG moved again into a 16,000 square foot former mattress factory on 23rd Street. This facility later collapsed, often told that they had too much inventory, and the company moved again to 19th and Troost, which was our home in Kansas City from 1933 until 1956. Following demand, the company purchased warehouses in the 1930’s in Joplin, Missouri and the former United Grocers warehouse in Springfield, Missouri.

Although chains dominated most markets, AG’s member stores were gathering force with their combined advertising and buying power. AG launched the Thriftway group and began reaching consumers through radio and print advertising. In the 1940’s, following the war, suburban areas began, as did the strip center anchored by a supermarket. AG added refrigerated space in the Springfield and Joplin warehouses as consumer demands changed. AG's member stores transformed quickly from full-service to self-service; thus the modern supermarket was born. In the 1950’s, to avoid confusion, Associated Wholesale Grocers, Inc. became the official name of the corporation, we paid out our first patronage, closed the warehouse in Joplin, and we were up and operating in a newly constructed space on Fairfax Avenue in Kansas City, Kansas along with the warehouse in Springfield, Missouri. In 1954, AWG had sales of $14 million and paid out total patronage of $20,441. The 1960’s and 1970’s were great decades for AWG. Our members

were becoming very aggressive, opening new stores and taking on the chain competitors. Consumers were becoming more price conscious and AWG’s members relied on AWG for competitive costs as well as merchandising and operating techniques to help them compete. The Cash & Carry Department sold single units as well as full and half-cases, we started a controlled label program, and fresh meat as well as health and beauty items were added to the Kansas City warehouse. In the 1960’s, AWG constructed another warehouse in Springfield from the ground up,which was subsequently destroyed by fire and was replaced by an even larger facility in 1972. Later in the 1970’s, AWG developed the now very successful licensed banners of Price Chopper/ Price Mart. By the 1980’s and 1990’s, AWG members collectively were market leaders in the Kansas City and Springfield trade areas and AWG topped $1 billion in sales. AWG developed Best Choice and Always Save store brands, replacing

6

1926 1944 19621932 1950 19681938 1953

90TH ANNIVERSARY

Shur Fine and Shur Fresh, and the first Country Mart opened. The competitive landscape required AWG to expand its offerings to include deli and bakery departments. To compete with a rapidly expanding discounter, we opened a new subsidiary – Valu Merchandisers Company (VMC), for low cost supply of health and beauty care and general merchandise. Later in 1995, AWG stepped into its third wholesale division in Oklahoma City. This new operation gave our cooperative the experience and confidence to grow beyond the boundaries of our original trade areas. The Sun Fresh and Apple Market banners were also successfully launched, and additional services such as insurance were added to support the needs of the membership. In 1996, AWG sales topped $3 billion from three Divisions in Kansas City, Springfield and Oklahoma City. In 2003, following the bank-ruptcy of Fleming, AWG expanded east of the Mississippi River into Southaven, Mississippi (Memphis Division) and Nashville Divisions, as well as a new VMC facility in Memphis, Tennessee for specialty foods, general merchandise, and seasonal goods. AWG added ice cream and fluid milk to its product offerings. In 2007, AWG acquired a former Albertsons facility in Fort Worth, Texas and expanded our trade area deeper into the Southwest, and opened a ground-up replacement

of the Oklahoma City Division. In 2011, due to extraordinary growth in the deep south from the Memphis and Nashville Divisions, AWG broke ground on our Gulf Coast Division in Louisiana, which opened in 2013. Business in the Gulf Coast Division exceeded all projections and was expanded in 2015 to accommodate that increased business. 2016 was another year of growth and expansion for the cooperative through the unification with Affiliated

Foods Midwest, which brought about our newest divisions in Norfolk, Nebraska (Nebraska Division) and Kenosha, Wisconsin (Great Lakes Division). Our expanded footprint is now over 8 million square feet and includes eleven modern facilities, and we are well positioned to serve a growing membership in the midwest, southwest, south and southeast for many decades to come. Thanks to our visionary founders and members for making all this possible!

7

1971 1995OKC

20131980 2003 20161984 2007Memphis

Ft. WorthLou Fox Gulf Coast

Norfolk

8

mobile-friendly formats, promoted content from a registered dietitian, and optimized sites for search. These programs will continue to expand consumers’ connection to member stores and AWG Brands. Sales and customer engagement also grew with AWG Marketing’s programs focused on enhanced e-mail, text, online and social media offerings. These solutions continue to be essential and evolving methods for retailers in reaching consumers with their digital weekly ad, special offers, and in-store offerings. These programs can provide simple, turnkey solutions to retailers and growing the connectivity consumers are seeking with their retail store in digital and mobile communication. The AWG online program op-tions grew in 2016 with the addition of Media Solutions Corporation (MSC), a new AWG wholly-owned subsidiary. Media Solutions provides unique online, mobile and in-store electronic marketing solutions to assist single-store owners to multi-store groups with digital and online marketing tools. Many MSC tools were integrated into the AWG Marketing suite of offerings late in 2016 and are being leveraged by retailers across divisions with the help of specialists from the Customer Connect Center within the AWG Marketing team. 2017 will be a continued growth area for all things digital and the team is ready to support members' needs.

Consumers continue to change the way they shop for groceries. AWG’s

digital marketing programs, including an expanded online shopping offering, growth of AWG Brands’ social media properties, and revamped e-mail, text, and web offerings provide retailers a way to adapt to these changes. Launched in 2016, the AWG Marketing online shopping program provides retailers four distinct offerings to meet their needs in the online shopping space. These offerings are geared toward helping retailers profitability, and introduce online shopping while making the programs easy-to-use for consumers. Consumers are seeking convenience and simple time saving solutions; AWG’s marketing team helps with programs to economically and efficiently launch online shopping solutions. With online sales growth in grocery categories rising at a record pace, now is the time to expand members' offerings to include online and mobile shopping solutions. AWG Marketing and Brands teams continue to expand digital programs, online presence, and customer-friendly solutions to keep up with the consumers digital information needs. On their web properties, AWG Brands introduced video recipes, created food holiday giveaways, adapted websites to

INITIATIVES

NEW DIGITAL SERVICES

INITIATIVES

CENTER STORE

9

Center Store continues to play a critical role in today’s grocery stores and provides

a significant portion of total store sales at retail. Center Store is a key portion of retail basket size, important in consumers' food and non-food needs and is a significant contributor to retail store profits. Consumers’ needs are changing, which highlights the importance of Center Store categories in supporting one-stop shopping, simplified meal solutions and solutions to complete the traditional shopping trip. Though some Center Store categories are experiencing moderate declines, solid growth continues in increased snacking opportunities with consumers, expanding beverage consumption choices, and growing "better-for-you" options within the Center Store. At AWG and VMC, we are driven to provide solutions to grow our members' Center Store sales. Creating a vibrant Center Store and increasing shopper engagement are the keys to success. At AWG, we launched multiple aisle-based solutions in 2016 to help retailers capitalize on the latest trends, optimize the store space and aisle layout, and improve product and placement solutions at the shelf. Meeting the consumers’ needs at the shelf each day is critical to sales success in Center Store. Several solutions were launched integrating all AWG and VMC departments, private brand solutions and National Brand options by division to provide the optimal regional assortment to meet the local consumers' needs. In addition, several stand-alone wellness solutions were deployed in health, wellness and beauty care to complement the consumer

needs in these rapidly growing sales categories. By creating simple aisle-based solutions for our members and retail stores, AWG is creating programs that can assist in growing Center Store sales. The Center Store aisle initiatives provide a cross-functional solution for members to achieve sales growth within the Center Store. These solutions will build

basket sizes at retail and improve the overall sales and margins within the category. In 2017, AWG and VMC will again partner to impact multiple Center Store categories for growth. Our division teams and field resources are ready to help achieve success in this critical area of the store to compete effectively in the markets we serve.

GRILLING/PICNIC

ORGANIC

HOT BEVERAGES

PET CARE

PASTA/SAUCES

BABY

ANNUAL REPORT

AWG BRANDS

10

AWG Brands achieved record sales in 2016 of $1.18 billion. Overall cases

shipped to our members grew by 7.45%! With record deflation in dairy and meat along with commodity impacts within frozen and dry grocery, sales were negatively impacted in several areas. AWG Brands' focus on improving the sales mix, adding new items in high growth categories and trading up the customer to higher value category solutions all helped to offset portions of the deflationary trends in 2016 to achieve an overall sales gain. 2016 was a successful year in achieving growth in multiple Center Store categories that enabled our members to improve sales with AWG Brands and help achieve margin goals at retail. The AWG Brands team successfully leveraged volume growth to lower acquisition costs by over $21 million, (annualized incremental to deflation impact) enabling improved everyday and promotional program costs to our members. With a focus on growing sales at retail and expanding incremental selling opportunities, AWG Brands delivered benefits in 2016 by utilizing the Web Blast program, pantry building sales events and continuous investment into everyday cost reduction opportunities. This increased activity supplemented our ongoing commitment to market-leading aggressive super sales and event specials throughout 2016.

AWG Brands' product develop-ment led to the launch of 186 new and reformulated products across Always Save, Best Choice, IGA, Superior Selection and Clearly Organic. We updated 600 products through rebranding and product development in both food and non-food with the ongoing conversion to our new Best Choice logo. AWG Brands continues to be committed to new item sales growth through category and product innovations that meet consumer needs. Quality remains the top priority within AWG Brands. By utilizing a third-party independent lab for quality testing, our commitment to high quality continues with each of our brands. AWG Brands quality control team members supplement the third party product testing to incrementally monitor specifications and product performance. With both independent external testing and internal product reviews, AWG Brands are committed to product safety and high performing products that consumers trust. The AWG Brands sales teams at each division continue to provide members with retail support to drive incremental sales growth. These sales teams are vital to the success of AWG Brands' programs and are a valuable asset to our members and the consumer they serve. This dedicated AWG staff, in partnership with our division teams and retail members, are focused on further growing private brand sales in 2017.

2016

VALU MERCHANDISERS

11

In 2016, VMC's Pharmacy program performed an exhaustive service provider search to further leverage our members' collective buying power and collaboratively entered into a strategic alliance with Associated Food Stores in Utah. By leveraging our collective buying power, we will deliver higher retail margins and lower overall pharmaceutical costs to our members to continue to meet future needs in 2017 and beyond. In 2017, VMC is committed to providing the lowest possible cost of goods, promotional programs to meet all retailer needs and deliver full solution sales programs to ensure our members can exceed their customers’ expectations.

2016 completed a successful year for Valu Merchandisers Company with record total

net sales of $815 million, up 6.6% from prior year. VMC’s dedication in supporting consumers’ healthy lifestyles and wellness trends to drive same store sales translated into growth across all business segments. Through strong partnerships with retailers, focusing on consumers needs and supporting retail execution, VMC delivered business solutions, that contributed to the overall sales growth. VMC enables retailers to meet their consumers’ needs in health and wellness by expanding on emerging growth categories. These high-growth categories aided VMC and our members to grow retail sales. With expanded health and wellness solutions, "better-for-you" products, wholesome snacking and cleaner ingredient-focused food items available through VMC, our members are meeting the needs of their changing consumer. Delivering actionable business plans, consumer focused programs and rapidly evolving innovation in key growth categories, VMC products and services will aid retail stores in delivering on their customers health and wellness needs. With an expanded Power Buy program, Extreme Show Promotions and simple-to-execute End Cap programs, VMC provides retailers the ability to drive profitable sales in today’s highly competitive marketplace. Turnkey non-food programs for all seasons made it easy for retailers to capitalize on profitable holiday and seasonal sales opportunities while tying in key general merchandise products, along with core food items for incremental sales success. VMC offers end-to-end solutions for our retailers to be competitive in

the Natural and Organic marketplace, which increased by 16.5% in 2016. By leveraging in-depth category reviews, providing educational seminars, hosting VMC trade shows, and converting insights to action at retail, VMC brings successful solutions to life for our member stores. The health care industry continues to redefine our pharmacy business. Increases in specialty medications, expansion of generics and the growth of Medicare patients becoming an even larger portion of total prescriptions filled, the Rx business continued upward sales trends. Preferred Networks brought more customers to our members' stores but in turn created overall margin compression for the stores.

VMC Total Net Sales (millions)

2012 2013 2014 2015 2016

$700

$750

$725

$800

$775

12

EXCELLENCE IN MERCHANDISING

VMC


CENTER STORE

ROUSES DONALD ROUSE KENNER, LA

Under the leadership of Mike O'Shell, the Rouses team emphasizes a total customer experience in their Kenner, LA store. From buying and promoting local flavor, merchandising Health and Wellness, featuring displays of organic products and creating a seasonal treasure hunt, Rouses is considered to be "my store" in each of the communities it serves. Falling right behind "Southern Living" magazine in popularity, the "My Rouses Everyday" publication is customer-focused with local recipes that utilize the products they sell. Customers

10 BOX HARPS CONWAY, AR

10 Box, what’s that? Now trending in Conway, Arkansas, it’s THE place to save on groceries. In April 2016, Harps transformed this former traditional store into an up-to-date savings mecca. Operating in a cost-plus format, sales volume has exploded. Week after week, sales continue to outpace prior year by over 200%! 10 Box displays every item at cost and then adds just 10% at checkout. O f f e r i n g both national brands and Always Save and Best

anxiously await each new edition. For the health conscious customers, Rouses partners with local dietitians to educate their customer and promote the ‘Eat Right’ program. Store displays and on-site dietitians answer questions and make it easy to promote healthy products. With attractively built displays and taking advantage of the many VMC TPRs, Power Buys and show deals, Rouses d r i v e s sales and profitability across the whole store.

Choice labels, attractive signage throughout the store guides shoppers to great savings down every aisle. Wooden bins, bunkers, and pallet displays are highlighted with Hot Price Zone signs throughout the store. Roll-around bunkers are utilized to cross merchandise end displays for great deals in every aisle. While 10 Box pricing is low, quality and freshness are hallmarks of the perishable departments with the “Pick 5 for $19.95” meat program and locally-grown seasonal items. There’s no card or member-ship required to save at 10 Box! With a philosophy to stack it high and sell it cheap, 10 Box is synonymous with saving in Conway.

CATEGORY WINNERS

DIVISION WINNERS

#0237 - Super Saver, Lincoln, NE#4818 - Reasor's, Owasso, OK#6801 - Rouses, Baton Rouge, LA#2282-Murfin'sMarket,Clever,MO#2477-WoodsSupermarket, Sunrise Beach, MO

#0466-Ray’sAppleMarket,Beloit,KS#4195-HomelandCashSaver,OklahomaCity,OK#7136-JD’sSupermarket,Austin,TX#3068 - Piggly Wiggly, Haynesville, LA#3476-Edward’sCashSaver, Jacksonville,AR#5872-FoodGiant,Calvert,KY

13


SEAFOOD


MEAT

HEN HOUSE DAVID BALL LEAWOOD, KS

Closed for an eight-month remodel, this Ball’s Hen House re-opened with a magnificent state-of-the-art store with an additional 20,000 sq. ft. Serving an affluent, upscale community, it was a strategic decision to enhance the seafood department. The new and improved seafood department features a full service showcase with fresh catches from around the world, a live lobster tank, and a full line of frozen seafood. Upon request, customers can order individually steamed items or any other items cooked to their

REED'S PIGGLY WIGGLY MIKE REED BATESVILLE, MS

The team at Reed’s Piggly Wiggly developed a plan to overcome the challenges with other grocery retailers in the same town and they not only survived, they thrived! The meat department played an integral role in their strategy to ‘win’ in this highly competitive market. They offer over 1,400 linear feet of selling space, and a large variety of fresh meat along with processed and frozen meat, allowing Reed's to achieve a 38% meat distribution!

specifications. This convenience, along with well-planned cross-merchandising and suggestive selling is quickly making this department a ‘destination’ for seafood lovers. A knowledgeable, well-trained team that is focused on customer service is the winning combination in this store. The department enjoys a staggering 88.88% increase since the remodel. The entire Hen House team was involved in this new and expanded department and has set the new standard for what a seafood department can and should be.

Reed’s has seven frozen food doors dedicated to fish and seafood and another twelve doors of frozen meats. They are cashing in on these categories and experiencing major growth! The sales floor is always staffed ready and willing to greet and assist with any request. Their commitment to superior customer service resonates throughout the store.

DIVISION WINNERS

DIVISION WINNERS

#2908 - Food Pyramid, Bartlesville, OK#4814-Reasor’s,BrokenArrow,OK#6810-RousesMarket,Mobile,AL#3362-Vowell’sMarketplace,Starkville,MS#1473 - Buehler’s IGA, Evansville, IN

#0036 -PrengerFoods,Brookfield,MO#2833 -Ron’sSupermarket,Pittsburg,KS#4950 -JumboFoods,Enid,OK#7224 -CashSaver,Odessa,TX#6924 -Adrien’s,Lafayette,LA#5772 -AlexandriaCountyMarket,Alexandria,KY

14


PRODUCE

DIVISION WINNERS#1305 -CashSaver,DesMoines,IA#2477 -WoodsSupermarket, Sunrise Beach, MO#4335 -Pruett’sFood,Naples,TX#3559 -CashSaver,HotSprings,AR#5372 -HackleburgMarket,Hackleburg,AL

ROUSES DONALD ROUSE NEW ORLEANS, LA

Located in the highly competitive Mid-Town New Orleans market, this store uses a tailored variety and high quality standards as their strength to drive customers into the department. Team spirit, personal pride, innovation and the expectation to be the best are the key factors creating the outstanding success of this department. “The best in freshness, the best in variety and the best in service and knowledge” exemplify their foundation principles. Jeff Winding, produce manager, has instilled in his

team the department’s mission and set the expectation to provide the freshest produce available. Through department section assignment, the team is committed to merchandise and maintain the highest quality specifications and attractiveness. A knowledgeable team also allows customer assistance with buying decisions. To cement their ‘fresh’ commitment, during peak shopping hours, four associates maintain the fresh cut fruit and veggie bar and develop value added items such as trays and baskets. With high volume and double digit sales distribution, it takes a well-trained and committed staff to be picture-perfect every day!


BAKERY

DIVISION WINNERS#0006-QueensPriceChopper,OverlandPark,KS#2255-Town&CountryDiscountFoods, Mountain Home, AR#7738-CashSaver,Nashville,AR#6888 - Ramey’s, Purvis, MS#3913 - Big Star, West Memphis, AR#5417-Cooke’s,Cleveland,TN

REASOR'S JEFF REASOR BROKEN ARROW, OK

Reasor’s bakery in Broken Arrow delights their customers with an outstanding variety to tempt every shopper. After a remodel in 2014, their creations are now highlighted in state-of-the-art display cases, including a one-of-a-kind specialty bread kiosk with a Bezerber slicer for their large selection of artisan, organic, and store-made fresh breads. Customers love having their bread sliced to their exact specifications. Mouth-watering displays of gourmet cakes and a large variety of single serve upscale desserts entice the customers to

buy. Their selection covers every customer's ‘sweet tooth’ craving from brownies to cannolis. The skilled bakery team is available to create special order cakes for any occasion. This premier bakery’s merchandising and customer service reputation has made it a ‘foodie’ destination.

15


FLORAL


DELI

DIVISION WINNERS

DIVISION WINNERS

#0424 - Balls Hen House, Leawood, KS#4008-CrestFreshMarket,OklahomaCity,OK#6586-McDade’sMarket,Jackson,MS#3760-HaysSupermarket,Wynne,AR#5417-Cooke’s,Cleveland,TN

#0405-Cosentino’sPriceChopper,Ottawa,KS#2423-PriceChopper,Rolla,MO#6108 - PIggly Wiggly, Wiggins, MS#3682-FoodGiant,CapeGirardeau,MO#5632-PriceLessIGA,BowlingGreen,KY

PRICE CHOPPER GOTT FAMILY ROLLA, MO

Conveniently located just inside the front entrance, this innovative floral department has quickly become “the” place to shop for fresh flowers and plants. There’s always something new and exciting inside this dynamic full-service floral shop to help commemorate those extra special moments or everyday needs. The talented team of floral designers has mastered the art of creating massive sales-building displays for every holiday and season. Artfully decorated for every occasion or event, shoppers are unable to resist the

REASOR'S JEFF REASOR TULSA, OK

After a remodel in 2016, this deli has found no order too big or too small and continues to grow in percent-to-total store sales. Showcased within the department are a state-of-the-art hot line, salad and soup bars, plus a fruit and yogurt bar, offering healthy options and convenience. Customers are drawn to a fresh olive bar to pair with a large variety of domestic and foreign gourmet cheeses, which can be cut and wrapped to order. Reasor’s offers hot, cold, single-serve and family-style meals. Delicious daily specials are served out of Dutch ovens and

impulse to purchase. Throughout spring and fall, floral displays expand outdoors and are the destination for shoppers. From a vast selection of colorful bedding plants, shade-loving ferns to colorful mums, shoppers find these high-impulse items filling their shopping baskets before ever stepping inside the store! Creative, ever-changing displays, cross-merchandising throughout the store, and helpful, knowledgeable employees are a winning combination. This floral department has enjoyed double digit sales increases week after week.

rotisserie chickens are slowly turned, roasted and cooked in flame fired ovens. For those customers who want a quick lunch, there’s a wide variety of grab-and-go specialty sandwiches and signature salads, both prepared daily at the store. This special deli also entices their customers with gourmet selections exclusively crafted for the store by Reasor’s including party trays and holiday meal preparation.

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AWG BRANDS


OUTSTANDING EVENT

GCCS1_BASE_ISERTFR_071316_4CGCCS1_6688

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By texting Greers100 to 72727, I agree to receive periodic recurring marketing text messages via automatic telephone dialing system to the mobile numberprovided. I understand that the number of marketing text messages may vary. Message and data rates may apply. I understand that I am not required to agree to

the receipt of autodialed text messages as a condition of purchase. After activation, text STOP to 72727 to opt-out.

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YOUR CHOICE OF

DIVISION WINNERS

DIVISION WINNERS

CASH SAVER SKYLAR THOMPSON BEAUMONT, TX

As one of our newest members, Skylar Thompson has recognized the value that a strong store brands program brings to their store which was recently converted to the Cash Saver format. The team developed a marketing campaign to introduce Best Choice and Always Save to its customers and have made it a key component in their new format. TV spots feature Best Choice and Always Save products in weekly ads. They also showcase the product quality using the Best Choice in-store demo program.

GREER'S CASH SAVER GREER FAMILY BAYOU LA BATRE, AL

Autry Greer and Sons turned their 100th anniversary into a nearly year-long celebration. It started with a grand reception honoring and thanking vendor partners and community leaders. Next, they hosted ‘Family Day’ aboard the legendary battleship U.S.S. Alabama anchored in Mobile Bay for nearly 700 employees. Lastly, the stage was set for the company-wide celebration recognizing and appreciating the customer. Each store displayed a banner thanking their community and in-store celebrations created the fun. Customers were greeted with Greer’s 100th birthday cakes, giveaways, and children’s

Walls of Value, dump bins and large pallet drops are dominated by AWG Brands and WOW pricing is featured prominently throughout the store, keeping Cash Saver competitive in their trade area. Their customers have embraced the Best Choice Save-A-Label program and the annual fundraising coupon book. Their website contains links to AWGBrands.com so customers can easily search for recipes, nutritional information and promotions. With an amazing 33.2% penetration, their commitment to AWG Brands has been a significant contributor to the overall sales increase experienced with the conversion to Cash Saver.

activities to engage the next generation of shoppers. Jan Greer Endfinger, Marketing Director, and her team executed a sound plan and enthusiasm to ensure success. Social media included ‘Throwback Thursday’ pricing of by gone days, a sweepstakes with several items including a car as the grand prize, along with local TV, radio and print sharing the celebration story line. While the customers were enjoying the fun, Greer’s was also enjoying record sales throughout the company! Current management at Greer’s is known as G3 and G4 (generation 3 and 4). G5 and beyond will have a great model to follow for future benchmark anniversaries as they live out this year’s slogan “Greer’s 100-Here for Good!”

#0405-Cosentino’sPriceChopper,Ottawa,KS#2329-HometownMarket,CaveCity,AR#4199 - Phelps Foods, Mannford, OK#7918-MinyardFoodStores,Dallas,TX#3033-Garvin’sCashSaver,Newton,MS

#0044-Ball’sSunFresh,KansasCity,KS#2673-Dave’sSupermarket, SouthwestCity,MO#4334-Pruett’sFood,DeQueen,AR#7830-MetroFoods,MineralWells,TX#3752-GreenwoodMarketplace, Greenwood, MS#5112-HGHillMarket,Springfield,TN

17


STORE MANAGERJERRY WARDHOMELAND #267OKLAHOMA CITY, OK

Jerry Ward of Homeland is AWG’s 2016 recipient of the Store Manager of the Year award. For the past eleven years, Jerry’s store has experienced sales growth of 2-4%, even with increased competitive pressure. Jerry’s passion for extraordinary customer service contributes to his success and outstanding customer satisfaction. To Jerry, customers are friends and he knows keeping the customer happy and training his staff to do the same will keep the customers coming back. Jerry has a gift of merchandising and promoting products that trigger impulse sales and boosting profits. He regularly hosts events such as crawfish and shrimp boils, Hatch chili roasts and his popular weekend ribeye grilling sale. These events always span the entire store including products from every department. Jerry has mastered the creation of a productive management team. He uses this group to help him inspire the rest

of the team to the next level. Jerry communicates overall company goals, transforming the information into team objectives. He empowers his leadership team to make things happen but, Jerry knows follow-up is vital to maintain focus. At weekly staff meetings, he communicates with passion the ultimate goal: to make the customer happy. Jerry is an exceptional leader and demonstrates care for his customers, staff and the community. Mystery shopping is also a program Jerry embraces. Results are communicated to the team for training, teaching, and mentoring opportunities. Employees recognized by name are rewarded ‘Super Stars’ for exceptional customer service. In honor of the lives lost during the 1995 Oklahoma City bombing, Jerry volunteers at a refreshment stop for Memorial Marathon runners. Jerry donates his time to the VA Hospital in Oklahoma City and participates

in fund-raisers such as March of Dimes and St. Jude’s Children’s Hospital, along with donating fresh fruit and toothbrushes to local charities. “Jerry has a true passion for leading his staff and helping people in his community," said Marc Jones, CEO Homeland Stores. "Jerry's key strength is humility, and he pushes himself and his team to be their best every single day no matter the circumstances. He has very high standards and consistently delivers the best of Homeland to his customers and community every day."


MARKETING CAMPAIGN

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RIESBECK'S FOOD MARKETS RICHARD RIESBECK, CEO AND PRESIDENT; BILL RIESBECK, EXECUTIVE

VICE PRESIDENT ST. CLAIRSVILLE, OH

After joining AWG in early 2016, Riesbeck’s adopted the AWG Store Brands program. By creating an aggressive marketing campaign, they achieved a 25.83% Store Brands penetration by the end of 2016, more than doubling their previous penetration percentage! Huge displays of AWG Brands products are arranged at store entrances, plus strategically placed displays throughout the entire

store. Seasonal themed end caps reflecting the new everyday low cost on AWG Brands stimulated consumer interest. Product quality was highlighted at in-store demonstrations of Best Choice and Always Save items. The entire campaign and marketing strategy was presented to the customers through a strong print ad program and social media. The power of social media created a buzz on the Riesbeck’s Facebook page which received more than 24,000 likes. They leveraged their following with engaging

and clever posts and promoted contests based on’ likes’ and ‘shares’. Who wouldn’t want to “Take a Selfie with your favorite Best Choice Product” for a chance of winning a $50 gift certificate? Facebook Live and online videos introduced AWG Brands allowing customers to like, share, and post comments. A “Riesbeck’s Events” Facebook page with 11,000 followers was also utilized to communicate their upcoming promotions and events during the campaign.

18

2016

LOU FOX AWARD

ROGER COLLINS SPRINGDALE, AR

The Lou Fox Community Service Award is given in honor of Lou Fox, president of Associated Wholesale Grocers from 1955 through 1983. Throughout his life, Lou was highly regarded as a philanthropist and civic supporter. This award is presented at the Annual Shareholders Meeting each year to an AWG retailer who follows in the Lou Fox tradition of giving back to the community that helped make them successful. The spirit of Lou Fox lives in each of these recipients. This year’s Lou Fox Community Service Award is presented to Roger Collins of Springdale, Arkansas. Roger is a humble and blessed man who believes giving back to his community creates strong relationships, and in return, yields strong local store performance. Roger has given back to the Northwest Arkansas area for almost three decades. Not only has he helped many charitable agencies financially, he also provides mentoring and leadership and is a firm believer that it takes true team effort to succeed. The legendary Texas Friday Night Lights and a new football coach, helped a young Roger Collins realize the success of teamwork early on. Roger’s high school football team won the very first state championship in Permian High School history in

Odessa, Texas. Roger married his wife, Marilyn in 1978 and they were married for 32 years until her passing in 2011. They raised two beautiful daughters, Lauren and Lindsey. Roger and Marilyn moved to Springdale, Arkansas in 1986 when Roger joined the Harps family business as Vice President of Finance and CFO. From there he was promoted to Executive Vice President in 1995 and CEO in 2000. After 30 years with Harps, Roger has now stepped down from his CEO position but still serves as a guiding voice for the board of directors as their Chairman. Roger has a passion for ‘giving back’ and he shared this with his leadership team at Harps. They established the Harps Charity Golf tournament 22 years ago in efforts to help a local family with a special needs child. Since then, this successful charity has raised over $2.6 million. Roger was also instrumental in introducing and establishing the Snack Pack program in the public schools to provide nutritional food for children on the weekends. Roger served as a board member of the Northwest Arkansas Center for Sexual Assault where he provided valuable leadership, guidance and financial contributions. In appreciation, they established an award in his name. Other agencies Roger is involved with include; Faith in Action, National Grocers Association, Theater Squared, and Hope Cancer Resources. Roger established the Collins Family Research Fund at the Cleveland Clinic and he provides Endowment Scholarships to his Alma Mater, Rice University, and to Illinois Wesleyan University, in honor of his late wife Marilyn’s Alma Mater, and to the NGA for students contemplating a career in the grocery industry. Roger was recently awarded the 2017 NGA Thomas F. Wenning Pinnacle PAC

Award for his work in governmental affairs affecting the independent grocer. He was also elected as the Chairman of the Board of the NGA Foundation at the 2017 NGA Show in Las Vegas, Nevada. Since 2002, Roger has also served on AWG's Board of Directors and later was elected to AWG’s Finance Committee, roles he took very seriously. In his role as a board member, Roger was an integral part of the purchase of the former Fleming warehouses in Memphis and Nashville and traveled to those new divisions to present a very compelling comparison of AWG against the voluntary wholesale competitors. He has always been, and continues to be, a staunch supporter of the cooperative, continually challenging the status quo and providing great financial wisdom. He is well respected by all grocers and is known widely as one of the smartest men in our industry. Roger’s also a “life example” leader to his church community, as well as instilling his devotion, compassion and ethics down through his family line. Roger truly leads by example of his own words: “There’s a fine line between being average and being great. If you can get everyone on the same page and develop a passion that everybody feels, then you can really do great things. Without that, you’re just going to be average.”

ASSOCIATED WHOLESALE GROCERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

December 31, 2016 and December 26, 2015(dollars in thousands)

ASSETS 2016 2015 ________________ ________________

Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,372 $ 166,221 Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ 729 Receivables, net of allowance for doubtful accounts of $4,363 in 2016 and $2,954 in 2015 . . . . . 296,347 295,359 Notes receivable from members, current maturities, net of allowance for doubtful accounts of $6,911 in 2016 and $0 in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,505 12,251 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564,360 452,669 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,579 19,675 ________________ ________________ Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068,163 946,904 Notes receivable from members, maturing after one year, net of allowance for doubtful accounts of $3,230 in 2016 and $7,292 in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,613 43,187 Property and equipment, net (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,340 405,099 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 619 Intangibles, net of accumulated amortization of $21,703 in 2016 and $19,329 in 2015 (note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,559 8,933 Deferred income taxes (note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,966 28,988 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,515 41,564 ________________ ________________ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,675,775 $ 1,475,294 ________________ ________________ ________________ ________________

LIABILITIES AND EQUITYCurrent Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 676,080 $ 572,067 Cash portion of current year patronage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,262 110,423 Member deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,217 22,106 Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,431 113,261 ________________ ________________ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 934,990 817,857Long-term debt maturing after one year (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,338 146,188Deferred income and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,443 48,517 ________________ ________________ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185,771 1,012,562 ________________ ________________

Commitments and contingent liabilities (note 12)

Equity: Common stock, $100 par value: Class A, voting; 35,000 shares authorized; 16,935 and 9,120 shares issued in 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,691 911 Class B, nonvoting; 150,000 shares authorized; 13,444 and 14,249 shares issued in 2016 and 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,341 1,423 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,725 12,797 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,864 444,964 Accumulated other comprehensive loss (notes 9 and 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,535) (21,745) ________________ ________________ Total members’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,086 438,350 Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,918 24,382 ________________ ________________ Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490,004 462,732 ________________ ________________ Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,675,775 $ 1,475,294 ________________ ________________ ________________ ________________

See accompanying notes to consolidated financial statements.

19

2016 2015 2014 __________________ __________________ __________________

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,183,802 $ 8,935,915 $ 8,934,239Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,480,375 8,244,604 8,243,483 __________________ __________________ ___________________ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,427 691,311 690,756General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514,718 488,691 459,134 __________________ __________________ ___________________ Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,709 202,620 231,622Other income (expenses): Interest income (note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,986 3,879 1,910 Interest expense (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,222) (3,810) (3,426) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,255 2,804 89 __________________ __________________ ___________________Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,728 205,493 230,195Income taxes (note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,821 6,574 3,275 __________________ __________________ ___________________ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,907 198,919 226,920

Other comprehensive income (loss) Change in funded status of pension plan, net of taxes (note 9) . . . . . . . . . . . 2,210 (4,587) (12,202) __________________ __________________ ___________________Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,117 $ 194,332 $ 214,718 __________________ __________________ ___________________ __________________ __________________ ___________________

Amounts attributable to noncontrolling interest

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,117 $ 194,332 $ 214,718 Comprehensive (income) loss attributable to noncontrolling interest . 2,464 (8,014) (8,839) __________________ __________________ ___________________ Comprehensive income attributable to AWG, Inc. and subsidiaries . . $ 194,581 $ 186,318 $ 205,879 __________________ __________________ ___________________ __________________ __________________ ___________________

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,907 $ 198,919 $ 226,920 Net (income) loss attributable to noncontrolling interest . . . . . . . . . . 2,464 (8,014) (8,839) __________________ __________________ ___________________ Net income attributable to AWG, Inc. and subsidiaries . . . . . . . . . . . $ 192,371 $ 190,905 $ 218,081 __________________ __________________ ___________________ __________________ __________________ ___________________

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

Fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014(dollars in thousands)

See accompanying notes to consolidated financial statements.20

2016 2015 ____________________ _____________________Allocated Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 337,658 $ 322,810 Patronage certificates (note 8): Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,840 73,637 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,680) (58,372) Class B certificates: Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------ Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ (417) ____________________ _____________________ Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351,818 $ 337,658 ____________________ _____________________

Unallocated Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,306 $ 101,973 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,907 198,919 Net income (loss) attributable to noncontrolling interest (note 9) . . . . . . . . . . . . . . . . . . . 2,464 (8,014) Less allocated earnings (note 8): Patronage certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76,840) (73,637) Class B certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------ Less cash portion of current year patronage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115,262) (110,423) Redemption and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,529) (1,512) ____________________ _____________________ Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,046 $ 107,306 ____________________ _____________________ Total retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 457,864 $ 444,964 ____________________ _____________________ ____________________ _____________________


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

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

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

Fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014(dollars in thousands)

2016 2015 2014 ____________ ____________ ____________Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,907 $ 198,919 $ 226,920 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,419 45,147 44,189 Impairment of assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569 ------ 9,463 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,022 (6,001) (10,521) Loss/(gain) on disposition of property and equipment . . . . . . . . . . . . . . . . . . . (4,657) 868 (533) Changes in assets and liabilities, net of effects of acquisitions: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (988) (29,416) (42,045) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,281) (16,875) 27,150 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,856) 5,552 5,161 Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . 64,545 81,694 (51,426) ____________ ____________ ____________ Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 246,680 279,888 208,358 ____________ ____________ ____________Cash flows from investing activities: Reductions in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 (729) — Additions to intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ (1,675) (2,336) Proceeds from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ ------ 58 Loans to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,432) (51,253) (18,105) Repayment of loans by members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,084 31,352 12,156 Additions to property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54,686) (80,074) (47,578) Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,323 7,579 10,382 Acquisition of assets, net of cash acquired (note 4) . . . . . . . . . . . . . . . . . . . . . . . (103,697) (8,726) — ____________ ____________ ____________ Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,679) (103,526) (45,423) ____________ ____________ ____________Cash flows from financing activities: Year-end patronage distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110,423) (130,101) (104,534) Redemption of prior year's patronage refund certificates . . . . . . . . . . . . . . . . . . . (62,680) (58,788) (56,625) Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,251 1,419 815 Redemption and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,065) (2,763) (2,966) Net advances (repayments) under credit facilities . . . . . . . . . . . . . . . . . . . . . . . . 25,150 13,250 (16,109) Net proceeds (repayments) of member deposits . . . . . . . . . . . . . . . . . . . . . . . . . . (5,083) 12,693 (1,433) ____________ ____________ ____________ Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (154,850) (164,290) (180,852) ____________ ____________ ____________Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . (5,849) 12,072 (17,917)Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,221 154,149 172,066 ____________ ____________ ____________Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,372 $ 166,221 $ 154,149 ____________ ____________ ____________ ____________ ____________ ____________

Supplemental cash flow statement information: Cash paid for interest, net of amount capitalized . . . . . . . . . . . . . . . . . . . . $ 3,186 $ 3,649 $ 3,476 ____________ ____________ ____________ ____________ ____________ ____________ Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,177 $ 5,886 $ 17,635 ____________ ____________ ____________ ____________ ____________ ____________


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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 82% 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 2014 included 52 weeks of operations. Variable Interest Entity

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810, “Consolidations” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”) in which the Company has a controlling financial interest and, therefore, is the VIE’s primary beneficiary. ASC 810 states that a controlling financial interest in an entity is present when an enterprise has the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company has determined that HAC, Inc. Employee Stock Ownership Plan and Trust (“ESOP”) is a VIE pursuant to certain financing provided by the Company in the sale of its retail grocery operation (see note 4) and has included the ESOP in the Company’s consolidated financial statements for the fiscal years ended December 31, 2016, December 26, 2015 and December 27, 2014. Business and Credit Concentrations

The majority of the Company’s sales are to Members/retailers located in Kansas, Missouri, Oklahoma, Arkansas, Texas, Louisiana, Mississippi, Kentucky, Alabama and Tennessee. No single customer accounted for more than 10% of sales in any year presented. Lease and equipment financ-ing through AWG is available to qualified retailers for acquisitions/expansion, improvements and opening inventory purchases. Loans to Members are generally collateralized by the Member’s inventory, property and equipment, and the Members’ AWG equity. The Company’s lending rate is generally one percent over the prime rate with borrowing terms to 10 years. For the fiscal years 2016, 2015, and 2014, the Company earned interest income on loans of $2.5 million, $2.7 million and $2.1 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: 2016 2015 _________ _________ Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,292 $ 5,945 Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,849 1,347 Write-offs / Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — _________ _________ Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,141 $ 7,292 _________ _________ _________ _________

23

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


(1) Summary of Significant Accounting Policies (continued)

Inventories

Merchandise is valued at the lower of cost or market. Cost for 74% and 70% of inventories in both 2016 and 2015, 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 $113.1 million at December 31, 2016, and $112.6 million at December 26, 2015.

Property and Equipment

Expenditures for improvements, which significantly increase property lives, are capitalized. Interest costs incurred during the construction of facilities are included in the cost of such properties. Depreciation and amortization are calculated using the straight-line method over the assets estimated useful lives, which range from 15 to 50 years for buildings; 3 to 10 years for equipment; and 3 to 5 years for vehicles. Leasehold improvements are amortized over the respective lease terms. Investments

The Company has all investments stated at cost; fair value is not assessable or practical to estimate. Patronage

Income from cooperative operations, less a nominal amount authorized by the Board of Directors to be retained, is returned to the Members in the form of year-end patronage. At each year-end, a percentage of net income to be distributed is paid in cash (60%) with the remainder paid in the form of patronage certificates (see notes 5 and 8). Such amounts are apportioned to the Members based on qualifying warehouse purchases. Patronage source income derived from an extraordinary event of significant magnitude may be distributed to members separately based on the quantity of the business done proportionately with a member, which may span multiple years or a combination of years, as provided in the bylaws, as amended. Sales and Cost of Goods Sold

The Company recognizes sales of merchandise when products are shipped and promotional allowances related to selling products to customers are recorded as a reduction in sales. Fees and upfront monies received from vendors are recorded as a reduction of the cost of goods sold in the period in which they are earned, based on contractual commitments to achieve certain milestones in purchases or prorated over the duration of the agreement. Shipping and Handling Costs

Shipping and handling costs incurred to deliver product to our customers are included as a component of general and administrative expenses in the consolidated statements of operations and comprehensive income. Shipping and handling costs for the fiscal years 2016, 2015, and 2014 were $158.4 million, $143.8 million and $153.9 million, respectively.

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Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Proceeds due from credit and debit card transactions with settlement terms of less than five days are also included. The Company maintains cash balances at major financial institutions. At times such cash balances may be in excess of the Federal Deposit Insurance Corporation coverage limit. The Company does not fund its disbursement accounts for checks it has written until the checks are presented to the bank for payment. The amount of outstanding checks is recorded in accounts payable. The change in outstanding checks is included in the change in accounts payable, accrued expenses and other liabilities on the consolidated statement of cash flows.

Restricted Cash

Restricted cash consisted of $0.0 million in 2016 and $0.8 million in 2015 that had been placed in escrow to be paid to the contractor upon completion of the expansion of the Company’s distribution center in Louisiana.



Income Taxes

AWG and its subsidiaries file a consolidated federal income tax return. Deferred income taxes are accounted for under the asset and liability method. Patronage distributions from cooperative operations are deductible for income tax purposes. Deferred income taxes result primarily from differences in financial reporting bases for net receivables, depreciation, insurance, deferred compensation, and the deferred gain on the sale of HAC not yet recog-nized in the financial statements. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During 2016, 2015 and 2014, the Company did not recognize any interest or penalties.

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, including interim periods within those fiscal years. 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 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company has not yet selected a transition 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)

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 2016, 2015, and 2014 were $7.3 million, $7.6 million and $7.6 million, respectively.



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 will begin on January 6, 2017 (subject to floating rate adjustments based on the Monthly LIBOR Rate + 3% margin). The loan balance outstanding at December 31, 2016 under the restated and consolidated Tranche A1 note was $117.7 million. The aggregate loan balance outstanding at December 26, 2015 under all consolidated notes (Tranche A, B, C, E, E2, E3, and E4) was $125.4 million. $7.7 million of principal payments were made during the year ended December 31, 2016. The total outstanding balance as of December 31, 2015 was $121.1 million for Tranches A, B, and C with the interest rate ranging from 3.25 to 7 percent. Traches E, E2, E3 and E4 were non-interest bearing and had an outstanding balance of $4.3 million as of December 31, 2015.

Beneficial terms of the transaction require ESOP to maintain its purchase concentration of current and future stores for a stated period beyond the final repayment of all the outstanding obligations. The Company provides ESOP access to a line of credit up to $15 million to manage its seasonal bor-rowing needs at a borrowing rate of Prime, which was drawn at $1.3 million at December 31, 2016 and $2.5 million at December 26, 2015. The ESOP paid the $2.5 million obligation on January 2, 2016. On December 17, 2015, the Company provided a guaranty to Bank of America, up to $2.5 million, for Letters of Credit issued by Bank of America for the benefit of HAC. On October 28, 2016 the guaranty provided to Bank of America by the Company was increased to $7.5 million. The amount available under the line of credit is reduced by the amount guaranteed to Bank of America. The guaranteed balance at December 31, 2016 and December 26, 2015 was (in millions) $1.3 and $1.3, respectively.

ESOP is considered a VIE, requiring its continuing operations to be combined with the Company’s consolidated financial statements. Therefore, the Company will not reflect the gain on the sale of the subsidiary until such time as the Company determines it is no longer the primary beneficiary of ESOP.

In March 2015, DGS-Acquisitions, LLC and DGS-RE, LLC, wholly owned subsidiaries of AWG, purchased certain assets of Foods, Inc., Dahl’s Food Mart, Inc. and Dahl’s Holdings I, LLC through the U. S. Bankruptcy Court for the Southern District of Iowa, including 7 supermarket locations and 2 fuel centers in Des Moines, Iowa. The $9.1 million purchase price was allocated as follows: cash - $0.4 million, inventory - $5.8 million, real estate - $1.0 million and property and equipment - $1.9 million. These stores currently operate under the Price Chopper and Cash Saver banners and the results of their operations since the transaction date have been included in the consolidated financial statements.

26

(2) Fair Value Measurements (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 31, 2016, December 26, 2015, and December 27, 2014, the Company recorded (in millions) $0.6, $0.0, and $9.5 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 2016 and 2015, respectively, which are being amortized over 15 years and have accumulated amortization of $18.2 million and $16.8 million for 2016 and 2015, respectively. The Company’s VIE has recorded goodwill at December 31, 2016 and December 26, 2015 of $5.6 million, which is being amortized over a useful life of 10 years and has accumulated amortization of $1.6 million and $1.0 million, respectively. The Company’s VIE also has gross deferred financing costs of $1.9 million for both 2016 and 2015, respectively, which are being amortized over 5 years, the term of the loan, and has accumulated amortization of $1.9 million and $1.5 million at December 31, 2016 and December 26, 2015, respectively. Amortization expense for intangible assets was $2.4 million in 2016, $2.2 million in 2015 and $2.2 million in 2014. Amortization expense for the next five fiscal years is estimated to be as follows (in millions): 2017 - $1.9; 2018 - $1.4; 2019 - $0.7; 2020 - $0.7 and 2021 - $0.6.

(4) Acquisitions, Divestitures and Certain Transactions with Members In December 2011, the Company sold its subsidiary retail grocery operation, Associated Retail Grocers, Inc. (“ARG”), whose only asset consisted of an investment in HAC, Inc. The operation is commonly referred to as Homeland Stores, which operated grocery stores situated in Oklahoma (72), Texas (4) and Kansas (1) at the time of the transaction. The purchaser, ESOP (see Variable Interest Entity in note 1), bought 100% of the controlling stock of ARG in a transaction valued at $145 million subject to a working capital adjustment of $10.1 million. The Company provided financing in a series of loan tranches, with maturity dates of 5 to 11 years. On December 31, 2016, the Company entered into a new loan agreement (Tranche A1) replacing, refinancing and restating Tranches A, B, C, E, E2, E3 and E4 Term notes in their entirety.



27

(6) Property and Equipment

Property and equipment are summarized as follows: 2016 2015 ____________________ _____________________ Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,610 $ 54,718 Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464,208 378,971 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,963 340,321 Construction in progress and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,190 11,380 ____________________ _____________________ $ 911,971 $ 785,390 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (406,631) (380,291) ____________________ _____________________ Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 505,340 $ 405,099 ____________________ _____________________ ____________________ _____________________ Depreciation expense incurred in 2016, 2015, and 2014 was (in millions) $45.0, $41.1 and $40.1, respectively. In 2016, 2015 and 2014, the Company capitalized an aggregate total of (in millions) $0.1, $0.1 and $0.0, 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 patronage certificates, member deposits, and member savings in 2016, 2015 and 2014 was $0.6 million, $0.4 million and $0.2 million, respectively. Since there is no market for Patronage Refund Certificates and Member Deposits, it is impractical to assess whether the carrying amounts, which are reported on the consolidated balance sheets for these items, approximate fair value.

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.

On October 23, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71.4 Personal property & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.3 Real property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1 Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27.3) Member deposit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19.2) Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14.9) _________ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139.7 _________ _________ In connection with its acquisition of AFM, the Company has agreed to pay additional consideration in future periods of up to an aggregate of $33.8M (undiscounted) payable to the members based on their annual purchases with breakage payable to AFM. Key assumptions include (a) a discount rate range of 1.0%-1.9% and (b) a payout probability factor of 100%. As of December 31, 2016, the amount recognized for the contingent consideration arrangement, the range of outcomes, and the assumptions used to develop the estimates had not changed. 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. 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.

(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 million revolving credit facility and a $75 million tax exempt bond facility. At December 31, 2016, total borrowings and outstanding letters of credit were $203 million, which includes a $72.1 million tax-exempt bond loan. Variable interest rates are based on the London Interbank Borrowing Rate and ranged from 0.69% to 1.44% during 2016 (which included a base rate mark-up charged by the lenders). Daily borrowings during 2016 averaged $126.2 million. At December 31, 2016, the Company had an additional $104 million available for borrowing under this agreement.

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(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. The Board of Directors of the Company declared a 2-for-1 stock dividend effective March 22, 2009 for shareholders of record, whereby every shareholder of A and B stock received additional shares in the form of B stock. All issuances and redemptions since March 20, 2016 have been made at $1,915 per share. Issuances and redemptions between March 22, 2015 and March 19, 2016 were made at $1,840 per share. Issuances and redemptions between March 23, 2014 and March 21, 2015 were made at $1,770 per share.

The following table describes the number of authorized and outstanding shares of AWG Class A and Class B stock at December 31, 2016 and December 26, 2015: OUTSTANDING AT CLASS AUTHORIZED 2016 2015 _____________________________________________________________________________________ Class A Stock, $100 par value 35,000 16,935 9,120 Class B Stock, $100 par value 150,000 13,444 14,249

The changes in common stock for the fiscal years ended December 31, 2016 and December 26, 2015 were as follows: Total Class A Class B Common Stock Members ___________ ___________ ___________ ___________ Balances at December 27, 2014 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,045 15,099 24,144 603 Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 903 $ 1,508 $ 2,411 ___________ ___________ ___________ Issued Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 795 — 795 53 Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ — $ 80 ___________ ___________ ___________ Redeemed Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (720) (850) (1,570) (48) Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (72) $ (85) $ (157) ___________ ___________ ___________ Balances at December 26, 2015 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,120 14,249 23,369 608 Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 911 $ 1,423 $ 2,334 ___________ ___________ ___________ ___________ ___________ ___________ Issued Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,625 — 8,625 575 Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 861 $ — $ 861 ___________ ___________ ___________ Redeemed Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (810) (805) (1,615) (54) Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (82) $ (163) ___________ ___________ ___________ Balances at December 31, 2016 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,935 13,444 30,379 1,129 Dollar Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,691 $ 1,341 $ 3,032 ___________ ___________ ___________ ___________ ___________ ___________

(8) Allocated Earnings

At December 31, 2016 and December 26, 2015, $76.8 and $73.6 million of the current year non-maturing patronage has been allocated within Retained Earnings. The pertinent provisions of these patronage certificates (issued in 2008 or after) are as follows: (a) the certificates are not transferable; (b) AWG has the right to offset, but the certificate holder does not; (c) no interest is accrued on outstanding certificates; (d) the certificates have no stated maturity date, and (e) the certificates are subordinate to the claims of all creditors of AWG.

In July 2005, the Board of Directors created another form of patronage certificate (“Class B Certificates”) for members who are delinquent with their obli-gations owed to the Company. The Class B Certificates are non-interest bearing and have no maturity date. These certificates are only redeemed upon the dissolution of the Company and the redemption of all other patronage certificates. The Class B Certificates are included in Retained Earnings and amounted to $0.1 million as of December 31, 2016 and December 26, 2015, respectively.

(7) Long-term Debt (continued)

The Company’s credit facility contains certain financial covenants related to cash flow leverage and minimum tangible net worth. The Company was in compliance with all covenants at December 31, 2016.

29



Noncontrolling Interest

Changes in noncontrolling interest for the years ended December 31 2016, and December 26, 2015, were as follows: 2016 2015 ____________________ _____________________ Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,382 $ 16,368 Income (loss) attributable to noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,464) 8,014 ____________________ _____________________ Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,918 $ 24,382 ____________________ _____________________ ____________________ _____________________

2016 2015 2014 ____________ ____________ ____________ Federal: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (426) $ 9,110 $ 5,092 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,065 (4,270) (2,012) ____________ ____________ ____________

Total federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 $ 4,840 $ 3,080 ____________ ____________ ____________ State: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (506) $ 1,509 $ 972 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,688 225 (777) ____________ ____________ ____________

Total state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,182 $ 1,734 $ 195 ____________ ____________ ____________ Total income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,821 $ 6,574 $ 3,275 ____________ ____________ ____________ ____________ ____________ ____________

(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 31, 2016 and December 26, 2015, were as follows: 2016 2015 ____________________ _____________________ Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,797 $ 12,551 Stock purchase or redemption surplus value paid in/(out) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,928 246 ____________________ _____________________ Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,725 $ 12,797 ____________________ _____________________ ____________________ _____________________

(9) Equity (continued)

Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss attributable to the Company for the fiscal years ended December 31, 2016 and December 26, 2015 were as follows: 2016 2015 ____________________ _____________________ Balances, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,745) $ (17,158) Change in funded status of pension plan, net of $1,255 in tax in 2016 and ($1,956) in tax credits in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,210 (4,587) ____________________ _____________________ Balances, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (19,535) $ (21,745) ____________________ _____________________ ____________________ _____________________

30



(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 1,268 and 1,415 participants for the fiscal years ended December 31, 2016, and December 26, 2015, 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, and various states and municipalities. At this time, the Company is not subject to U.S. federal or state income tax examinations. As of December 31, 2016 and December 26, 2015, respectively, a valuation allowance of $3,500 and $2,070 was required to reduce deferred income tax assets to a level, which more likely than not, will be realized as future ben-efits. The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and the reported income tax (benefit) expense are comprised of nonmaterial, reconciling items including, but not limited to patronage dividend, state and local income taxes and HPIP credit. Effective December 31, 2006, the Company early adopted the provisions of ASC 740 - Income Taxes. The impact of ASC 740 was not material to the financial state-ments upon adoption or for the years ending December 31, 2016 and December 26, 2015. 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: 2016 2015 ____________________ ____________________ Deferred income tax assets: Gain on sale of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,693 $ 5,631 Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,976 11,009 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,605 4,062 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,502 13,538 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,307 3,885 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,612 2,394 State credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,942 3,686 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,474 1,679 ____________________ ____________________ Deferred income tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,111 45,884 Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,500) (2,070) ____________________ ____________________ Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,611 $ 43,814 ____________________ ____________________ ____________________ ____________________ Deferred income tax liabilities: Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,382 $ 12,739 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240 2,041 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 46 ____________________ ____________________ Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,645 $ 14,826 ____________________ ____________________ ____________________ ____________________

Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,966 $ 28,988 ____________________ ____________________ ____________________ ____________________

(10) Income Taxes (continued)

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(11) Employee Benefit Plans (continued)

2016 2015 2014 ____________ ____________ ____________ Net periodic benefit expense for the DB Plan consisted of the following: Service cost --- benefits earned during the period . . . . . . . . . . . . . . . . . . . . . . $ 9,758 $ 11,420 $ 11,913 Interest cost on projected benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . 6,177 7,007 7,581 Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,053) (10,365) (9,963) Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 271 538 Amortization of net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,123 4,256 4,738 Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,086 6,991 2,928 ____________ ____________ ____________

Net periodic benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,292 $ 19,580 $ 17,735 ____________ ____________ ____________ ____________ ____________ ____________

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 $127,634 and $139,332 at December 31, 2016 and December 26, 2015, respectively.

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

2016 2015 ____________________ _____________________ Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (129) $ (330) Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,766) (34,006) ____________________ _____________________ Total recognized in AOCI, before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (30,895) $ (34,336) ____________________ _____________________ Total recognized in AOCI, net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (19,535) $ (21,745) ____________________ _____________________ ____________________ _____________________

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 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,159 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,348 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,971 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,249 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,389 Years 2022-2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,449

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

Change in benefit obligation (PBO) 2016 2015 ____________________ ____________________ Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,202 $ 175,029 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,758 11,420 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,177 7,007 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,555) (34,517) Actuarial (gain)/loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,332 (737) ____________________ ____________________ Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,914 $ 158,202 ____________________ ____________________ ____________________ ____________________ ____________________ ____________________ Change in plan assets Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,871 $ 151,777 Actual return (loss) on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,415 (8,396) Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,575 19,007 Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,555) (34,517) ____________________ ____________________ Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,306 $ 127,871 ____________________ ____________________ ____________________ ____________________ ____________________ ____________________

Funded status, end of year $ (14,608) $ (30,331) ____________________ ____________________ ____________________ ____________________ ____________________ ____________________

32




The following is a description of the valuation methodologies used for assets measured at fair value at December 31, 2016 and December 31, 2015:

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 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 fair value of the Company’s DB Plan assets at the end of the 2015 calendar year, by asset category, are as follows:

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

Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,023 $ 2,023 $ ---- $ ----Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,560 110,560 ---- ----Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- ---- ---- ----Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- ---- ---- ----Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,288 ---- ---- 15,288 _______________ _______________ _______________ _______________ Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,871 $ 112,583 $ ---- $ 15,288 _______________ _______________ _______________ _______________ _______________ _______________ _______________ _______________

The 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 $129 and $201, respectively. The majority of the unfunded non-qualified por-tion of the plan has been expensed.

Weighted average assumptions used for the DB Plan are as follows: 2016 2015 2014 ____________ ____________ ____________ Weighted-average assumptions used to determine benefit obligations:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50% 4.65% 4.35% Rate of compensation increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.50%, 3.00% 2.50%, 3.00% 3.00%

Weighted-average assumptions used to determine net periodic benefit cost: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.65% 4.35% 5.10% Rate of compensation increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.50%, 3.00% 3.00% 3.00% Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.25% 7.25%

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The fair value of the Company’s Deferred Compensation plan assets at the end of 2016 and 2015 calendar year, by asset category are as follows: 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 $ ---- _______________ _______________ _______________ _______________ _______________ _______________ _______________ _______________

2015 Level 1 Level 2 Level 3 _______________ _______________ _______________ _______________Money Market Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,318 $ 5,318 $ ---- $ ----Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,245 ---- 1,245 ----Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,446 10,446 ---- ----Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,143 10,143 ---- ---- _______________ _______________ _______________ _______________ Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,152 $ 25,907 $ 1,245 $ ---- _______________ _______________ _______________ _______________ _______________ _______________ _______________ _______________


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 31, 2016 and December 26, 2015 is as follows: 2016 2015 ________________________ ________________________ Fair value, beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,288 $ 15,138 Unrealized gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (385) Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 573 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,294) (38) ________________________ ________________________ Fair value, ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,873 $ 15,288 ________________________ ________________________ ________________________ ________________________ 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 $17.2 million to the DB Plan during 2017.

The Company also makes contributions to its defined contribution plans. The total expense for these plans amounted to (in millions) $8.5, $7.7 and $6.5 in 2016, 2015 and 2014, respectively.

The 2005 Non Qualified Deferred Compensation Plan is available for officers of the Company to elect, by the required deadlines in the preceding year, to have a designated portion of their wages set aside for their own personal tax planning purposes, in a trust held by Wells Fargo. At the time of election, the date for future distribution of wages to the participant is established, according to allowable parameters within the plan documents. Both the asset and offsetting liability recorded at December 31, 2016 and December 26, 2015 were $27.0 million and $27.2 million, respectively.

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(13) Multi-employer Plans

The Company contributes to a single multi-employer defined benefit pension plan under the terms of the collective-bargaining agreements that cover its union-represented employees. The risks of participating in a multi-employer plan are different from single-employer plans in the following aspects:

a. Assets contributed to the multi-employer plan by one employer are used to provide benefits to employees of other participating employers.

b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan are borne by the remaining participating employers.

c. If the Company chooses to stop participating in its multi-employer plan, then it is required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

(12) Commitments and Contingent Liabilities

The Company is obligated as lessee under various noncancelable long-term supermarket property leases with minimum annual rent-als of approximately $38.8 million. These leases have an average remaining life of 6 years. It is expected in the ordinary course of busi-ness that these leases will be renewed or replaced. The Company has subleased the majority of its supermarket properties to Members (except for properties operated by the Company’s subsidiaries) for substantially the same lease terms and rental amounts. Rental income received was (in millions) $40.7, $40.1 and $41.3 in 2016, 2015 and 2014, respectively. Rents charged to general and administra-tive expenses for operating leases, other than supermarket properties, were (in millions) $3.4, $3.1 and $3.0 in 2016, 2015 and 2014, respectively. Operating lease rent expense, expected to be incurred over the next five years, is approximately $3.3 million per year.

The Company is a guarantor of loans issued to members in the amount of $32.5 million and $3.5 million for December 31, 2016 and December 26, 2015, respectively.

In December 2015, the Company entered into a limited guaranty with the Bank of America on behalf of HAC, Inc. Amended in 2016, this limited guaranty allows HAC, Inc. to issue standby letters of credit in amounts up to $7.5 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 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.

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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 2015 and 2014. 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 2016.

(14) Subsequent Events

Subsequent events have been evaluated through March 6, 2017, which is the date the financial statements were available to be issued. On January 3, 2017, AWG Patronage Certificates owned by HAC, dated 2012 through 2015, were offset and applied against the Tranche A1 loan balance. The amount of the Patronage Certificates applied to the loan were $13.5 million. An early redemption fee will be charged to HAC, Inc. if certain covenants are not met. There were no additional 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 2016 2015 2014 Imposed Agreements_________________________________________________________________________________________________________Central States, 36-6044243 Red Red Yes $14,001 $13,184 $13,069 No April 4, 2020Southeast and Plan 001Southwest AreasPension Fund

The Company’s participation in this plan for the annual period ended December 31, 2016, 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 2016 and 2015 is for the plan’s year-end at December 31, 2015 and December 31, 2014, 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 2015 and 2016. 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 2016, 2015 and 2014 contributions.

(13) Multi-employer Plans (continued)

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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 as of December 31, 2016 and December 26, 2015, and the related consolidated statements of operations and comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 31, 2016, 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 31, 2016 and December 26, 2015, 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 6, 2017

2017 AWG

OFFICERS

Jeff PedersenExecutive Vice President, Division Operations

Tony StaffordVice President VMC

Dan FunkExecutive Vice President,Merchandising & Marketing

Danny LaneSr. Vice President, Grocery

Stephanie BeckerVice President Deputy General Counsel

Brian RehagenVice President Oklahoma City

James LukensVice PresidentMedia Solutions Corporation

Jack WallVice PresidentGulf Coast

Robert HenryVice President, Corporate Controller

Bo HawkinsVice President, Meat

John LikensSr. Vice President Nashville

James VaughanPresidentDGS

Patrick ReevesSr. Vice President, Chief Human Resources Officer

Randy BerryVice President Information Technology

Scott WelmanExecutive Vice President and General Counsel

Charlie LynnVice President Springfield

Terry RobertsVice President Nashville

Gary JenningsSr. Vice President Memphis

Dave SuttonPresidentVMC

Linda LawsonSr. Vice President Fort Worth

David GatesSr. Vice President Kansas City

Tim BellantiSr. Vice President Springfield

Bob PesselVice President VMC

Tye AnthonyVice President Great Lakes

Anna ManciniVice President VMC

Frank SchmittVice President Memphis

David CarlSr. Vice President,Finance

Richard KearnsExecutive Vice President, Distribution and Logistics

Jeff OlsonVice President,Real Estate and Engineering

Jerry EdneyVice President Kansas City

Gary KochExecutive Vice President, Chief Financial Officer

Steve ArnoldSr. Vice President Oklahoma City

David Smith President andChief Executive Officer

Martin ArterSr. Vice President Northern Region

Tim MyersVice President Nebraska

Mike SchumacherPresident Always Fresh

Bob DurandSr. Vice President Gulf Coast

Dan KochVice President,Bakery and Deli

ASSOCIATED WHOLESALE GROCERS, INC.

2016 ANNUAL REPORT

barry queen, chairmanawginc.com/2016 annual report low2.pdf · company, which primarily provid-ed...

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