UNITED LOOKING UP 1998-09-14 (2)

ELLIOT ZWIEBACH

PORTLAND, Ore. -- United Grocers is back on track. After resolving a debilitating debt problem and overhauling its corporate culture, the $1.3 billion retailer-owned cooperative here is forging forward with a series of cost-cutting efforts and new operating disciplines that a new management team believes will enable it to prosper, Charles E. Carlbom, chief executive officer, told SN.

"We're making changes that would normally take two or three years and doing it all in five or six months -- and we think we are succeeding," Carlbom said. Supporting his optimism, he noted, "are five months of black numbers. And though I've always been taught that the first swallow doesn't mean it's spring, we've seen four or five swallows now, and I believe we're over the hump." Helping UG remain over that hump -- and ensuring it has a future -- is a new $135 million financial package the company secured in late August that will provide sufficient liquidity to make necessary investments, Carlbom said. Armed with that security, UG has an aggressive agenda for the next few months, Carlbom said, including the following: * Developing a series of joint-venture initiatives with Associated Grocers, Seattle, including reconsidering the possibility of a merger. * Seeking additional partners among other Western-based retailer-owned cooperatives for joint-venture projects. * Adding to its customer base and attempting to convert non-affiliated customers to become co-op members. United Grocers is an 83-year-old co-op with 2,500 customers, including 420 members, in Oregon, California, Washington and Idaho. It operates full-service distribution centers here and in Modesto, Calif., plus a refrigerated warehouse in Tracy, Calif., and a produce cross-docking facility in Medford, Ore. Its financial problems date back to 1995, when UG expanded into northern California with the acquisition of Market Wholesale Grocery Co. but never developed a plan to pay down the resultant debt, local observers told SN. Complicating the situation was an entrenched management team and a corporate culture that wasn't open to change, they added. The prospects for any kind of future for UG did not look very bright when Carlbom joined the company in mid-1997. "The company was broken and needed a lot of surgery," Carlbom said. "We had to get rid of a whole host of financial and operating difficulties before we could proceed. "But we were in no shape to do anything, and the banks wouldn't let us do anything. What they told us was that UG was not going to make it, and they would force us into bankruptcy." Carlbom, 64, had been chief executive officer of Western Family Foods, UG's private-label supplier, for 15 years. He had retired at the end of 1996 but was asked to become UG's interim president and CEO less than six months later when Alan Jones stepped down after 13 years at the helm. Jones did not return SN's calls seeking comment last week.

While Carlbom was reluctant to discuss the job his predecessor did, a UG member retailer was more forthcoming, albeit anonymously. "Jones did a good job running the warehouse, but he lacked the vision, the expertise and the personnel to take UG past the $1 billion mark," the retailer told SN. UG's volume had been stuck at just over $1 billion for about three years and the membership was static, Carlbom said. Less than two months after he was hired on a temporary basis, Carlbom agreed to take the job permanently -- "partly because we were having difficulty finding someone to fill this spot, given the shape the company was in, and partly because the board was considering a merger with AG, Seattle, and felt we needed someone who understood the industry and the company." In order to tackle the problems at hand, Carlbom assembled a new management team, which included Terry Olsen, 58, formerly president and CEO at United A.G. Cooperative, Omaha, Neb., as chief operating officer (and, since late August, president); Mark Tweedie, 40, formerly director of finance at Foodland Distributors, Livonia, Mich., as chief financial officer; Myron Fleck, 60, a former certified public accountant with Coopers & Lybrand, as chief financial consultant; Mike Clark, 58, formerly CFO at Evergreen Aviation, McMinnville, Ore., as refinance consultant; and Keith Miller, 38, UG's former director of marketing, as vice president for strategy. With the team in place, the company launched a major internal audit, which found several discrepancies in accounting that had to be resolved before the company could move on, Carlbom said. The company also fell into technical default on some of its bank covenants and was forced by the bank to operate at a virtual financial standstill, Carlbom said.

Although the company was still in the red for the first half of the fiscal year ended July 3 -- with a pretax loss of approximately $2.3 million compared with a restated loss of $15.4 million a year ago -- it said it was in the black for the second quarter, with pretax profit of approximately $2.5 million, compared with a restated loss of $6.9 million a year ago. Having overcome its worst problems, Carlbom said, UG is moving ahead on plans to achieve cost savings through synergies with AG of Seattle -- either through a series of joint ventures or a full-scale merger. The two companies are already connected through Western Family Foods, the private-label distributor for both UG and AG, "and we're about equal in size and sales, and we believe we can achieve substantial savings by working or joining together," Carlbom told SN. Merger talks were tabled more than a year ago as UG attempted to deal with its internal problems. "At the time merger talks started a year and a half ago, we were digging into where we were, with virtually no knowledge of how horribly in trouble we were, and our priority was to set up a protocol to get ourselves out of that situation," Carlbom said. "And the banks wouldn't allow us to even think merger or joint ventures in the shape we were in. "We had begun to spend time looking into the merger and doing the due diligence about how a merger would look and how much it could save both companies, but once we realized the trouble we were in, we backed off all exploration till we could get UG operating soundly." However, the two companies did form a company to serve as a liaison between them -- temporarily called Newco, although that name will change to something more permanent at some future point, Carlbom said.