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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 14, 2001
COMMISSION FILE NUMBER: 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State of incorporation) (I.R.S. Employer
Identification No.)
1945 LAKEPOINTE DRIVE, BOX 299013
LEWISVILLE, TEXAS 75029
(Address of principal executive offices)
(972) 906-8000
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At the close of business on August 10, 2001, 44,275,000 shares of the
registrant's common stock, par value $2.50 per share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
12 Weeks Ended July 14, 2001,
and July 8, 2000
Consolidated Condensed Statements of Operations -
28 Weeks Ended July 14, 2001,
and July 8, 2000
Consolidated Condensed Balance Sheets -
July 14, 2001, and December 30, 2000
Consolidated Condensed Statements of Cash Flows -
28 Weeks Ended July 14, 2001,
and July 8, 2000
Notes to Consolidated Condensed Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 12 WEEKS ENDED JULY 14, 2001 AND JULY 8, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
--------------- ---------------
Net sales $ 3,457,279 $ 3,289,878
Costs and expenses:
Cost of sales 3,193,922 2,998,624
Selling and administrative 211,092 261,374
Interest expense 34,435 38,447
Interest income (5,788) (9,340)
Equity investment results (279) 1,694
Impairment/restructuring charge (credit) (117) 21,013
Litigation charges 46,600 --
--------------- ---------------
Total costs and expenses 3,479,865 3,311,812
--------------- ---------------
Loss before taxes (22,586) (21,934)
Taxes on loss (9,128) (8,585)
--------------- ---------------
Net loss $ (13,458) $ (13,349)
=============== ===============
Basic and diluted net loss per share $ (0.31) $ (0.35)
Dividends paid per share $ 0.02 $ 0.02
Basic and diluted weighted average shares
outstanding 43,276 38,576
=============== ===============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 28 WEEKS ENDED JULY 14, 2001 AND JULY 8, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
-------------- --------------
Net sales $ 7,618,470 $ 7,621,376
Costs and expenses:
Cost of sales 6,988,869 6,913,448
Selling and administrative 526,377 633,681
Interest expense 91,937 91,548
Interest income (15,060) (18,845)
Equity investment results 72 3,585
Impairment/restructuring charge (credit) (26,976) 63,158
Litigation charges 48,628 --
-------------- --------------
Total costs and expenses 7,613,847 7,686,575
-------------- --------------
Income (loss) before taxes 4,623 (65,199)
Taxes on income (loss) 2,615 (25,977)
-------------- --------------
Income (loss) before extraordinary charge 2,008 (39,222)
Extraordinary charge from early retirement of
debt (net of taxes) (3,469) --
-------------- --------------
Net loss $ (1,461) $ (39,222)
============== ==============
Basic net income (loss) per share:
Income (loss) before extraordinary charge $ 0.05 $ (1.02)
Extraordinary charge from early retirement of
debt (net of taxes) (0.08) --
-------------- --------------
Net loss $ (0.03) $ (1.02)
Diluted net income (loss) per share:
Income (loss) before extraordinary charge $ 0.05 $ (1.02)
Extraordinary charge from early retirement of
debt (net of taxes) (0.08) --
-------------- --------------
Net loss $ (0.03) $ (1.02)
Dividends paid per share $ 0.04 $ 0.04
Weighted average shares outstanding
Basic 41,512 38,541
Diluted 44,077 38,541
============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
JULY 14, DECEMBER 30,
Assets 2001 2000
-------------- --------------
Current assets:
Cash and cash equivalents $ 14,290 $ 30,380
Receivables, net 582,537 509,045
Inventories 997,535 831,265
Assets held for sale 24,792 165,800
Other current assets 110,037 86,583
-------------- --------------
Total current assets 1,729,191 1,623,073
Investments and notes receivable, net 113,046 104,467
Investment in direct financing leases 88,271 102,011
Property and equipment 1,390,244 1,370,430
Less accumulated depreciation
and amortization (663,266) (653,973)
-------------- --------------
Net property and equipment 726,978 716,457
Deferred income taxes 103,291 139,852
Other assets 245,761 172,632
Goodwill, net 539,803 544,319
-------------- --------------
Total assets $ 3,546,341 $ 3,402,811
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,015,397 $ 943,279
Current maturities of long-term debt 36,171 38,171
Current obligations under capital leases 20,178 21,666
Other current liabilities 240,753 229,272
-------------- --------------
Total current liabilities 1,312,499 1,232,388
Long-term debt 1,301,468 1,232,400
Long-term obligations under capital leases 331,171 377,239
Other liabilities 115,426 133,592
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 110,396 99,044
Capital in excess of par value 562,338 513,645
Reinvested earnings (deficit) (145,928) (144,468)
Accumulated other comprehensive income -
additional minimum pension liability (41,029) (41,029)
-------------- --------------
Total shareholders' equity 485,777 427,192
Total liabilities and shareholders' equity $ 3,546,341 $ 3,402,811
============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 28 WEEKS ENDED JULY 14, 2001, AND JULY 8, 2000
2001 2000
------------ ------------
Cash flows from operating activities: (IN THOUSANDS)
Net loss $ (1,461) $ (39,222)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 87,451 92,004
Amortization costs in interest expense 3,490 2,618
Credit losses 12,119 12,786
Deferred income taxes 35,389 21,911
Equity investment results 72 3,585
Impairment/restructuring and related charges,
net of impairment credit (not in other lines) 8,898 102,636
Cash payments on impairment/restructuring
and related charges (43,652) (80,692)
Cost of early debt retirement 5,787 --
Change in assets and liabilities:
Receivables (69,454) 22,130
Inventories (132,007) 121,604
Accounts payable 64,039 (189,597)
Other assets and liabilities (36,774) (17,503)
Other adjustments, net 2,080 222
------------ ------------
Net cash provided by (used in) operating activities (64,023) 52,482
------------ ------------
Cash flows from investing activities:
Collections on notes receivable 17,714 17,838
Notes receivable funded (12,277) (12,193)
Purchases of businesses (70,162) --
Purchases of property and equipment (111,619) (62,431)
Proceeds from sale of property and equipment 12,018 11,637
Investments in customers -- (1,512)
Proceeds from sale of investment 97 2,693
Proceeds from sale of businesses 116,905 41,230
Other investing activities 5,916 9,158
------------ ------------
Net cash provided by (used in) investing activities (41,408) 6,420
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings 615,602 60,000
Principal payments on long-term debt (549,031) (105,849)
Payments on cost of debt issuance and debt retirement (21,554) --
Principal payments on capital lease obligations (10,366) (11,698)
Proceeds from sale of common stock 56,343 3,535
Dividends paid (1,653) (1,551)
------------ ------------
Net cash provided by (used in) financing activities 89,341 (55,563)
------------ ------------
Net change in cash and cash equivalents (16,090) 3,339
Cash and cash equivalents, beginning of period 30,380 6,683
------------ ------------
Cash and cash equivalents, end of period $ 14,290 $ 10,022
============ ============
Supplemental information:
Cash paid for interest $ 72,054 $ 90,792
Cash refunded for income taxes $ (17,081) $ (62,561)
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated condensed financial statements of Fleming
Companies, Inc. have been prepared without audit. In our opinion, all
adjustments necessary to present fairly our financial position at July 14, 2001,
and the results of operations and cash flows for the periods presented have been
made. All such adjustments are of a normal, recurring nature except as
disclosed. Both basic and diluted income (loss) per share are computed based on
net income (loss) divided by weighted average shares as appropriate for each
calculation.
The preparation of the consolidated condensed financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain prior period amounts have been reclassified to conform to the current
period classifications, including the reclassification of net sales and cost of
goods due to the adoption of SAB No. 101 and EITF 99-19 in the fourth quarter of
2000.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and related notes included in our 2000
annual report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining the cost of
most grocery and certain perishable inventories. The excess of current cost of
LIFO inventories over their stated value was $57 million at July 14, 2001 and
$58 million at December 30, 2000 ($13 million of which was recorded in assets
held for sale in current assets).
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4. Sales and operating earnings for our distribution and retail segments are
presented below.
12 WEEKS ENDED
JULY 14, JULY 8,
($ IN MILLIONS) 2001 2000
-------------- --------------
Sales:
Distribution $ 3,208 $ 2,923
Intersegment elimination (263) (394)
-------------- --------------
Net distribution 2,945 2,529
Retail 512 761
-------------- --------------
Total sales $ 3,457 $ 3,290
============== ==============
Operating earnings:
Distribution $ 100 $ 61
Retail 10 17
Support services (58) (48)
-------------- --------------
Total operating earnings 52 30
Interest expense (34) (38)
Interest income 6 9
Equity investment results -- (2)
Impairment/restructuring charge -- (21)
Litigation charges (47) --
-------------- --------------
Loss before taxes $ (23) $ (22)
=============== ==============
28 WEEKS ENDED
JULY 14, JULY 8,
($ IN MILLIONS) 2001 2000
-------------- --------------
Sales:
Distribution $ 6,950 $ 6,765
Intersegment elimination (688) (966)
-------------- --------------
Net distribution 6,262 5,799
Retail 1,356 1,822
-------------- --------------
Total sales $ 7,618 $ 7,621
============== ==============
Operating earnings:
Distribution 210 145
Retail 27 29
Support services (133) (100)
-------------- --------------
Total operating earnings 104 74
Interest expense (92) (91)
Interest income 15 19
Equity investment results -- (4)
Impairment/restructuring (charge) credit 27 (63)
Litigation charges (49) --
-------------- --------------
Income(loss)before taxes $ 5 $ (65)
============== ==============
General support services expenses are not allocated to distribution and retail
segments. The transfer pricing between segments is at cost.
Kmart Corporation, our largest customer, represented 15% and 9% of our total net
sales during the second quarter of 2001 and 2000, respectively. Year to date,
sales to Kmart represented 12% and 10% of our total net sales for 2001 and 2000,
respectively.
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5. Our comprehensive loss for the 12 and 28 weeks ended July 14, 2001, totaled
$13.5 million and $1.5 million, respectively, and our comprehensive loss for the
12 and 28 weeks ended July 8, 2000, totaled $13.3 million and $39.2 million,
respectively. The comprehensive loss for these periods was comprised only of the
reported net loss.
6. In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities (including those associated with litigation
matters) when we determine that a material loss is "probable" and either
"quantifiable" or "reasonably estimable." Additionally, we disclose material
loss contingencies when the likelihood of a material loss is deemed to be
greater than "remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, we and certain of our present and former officers
and directors were named as defendants in nine purported class action suits
filed by certain stockholders and one purported class action suit filed by two
noteholders. All cases were filed in the United States District Court for the
Western District of Oklahoma. In 1997, the court consolidated the stockholder
cases; the noteholder case was also consolidated, but only for pre-trial
purposes. The plaintiffs in the consolidated cases sought undetermined but
significant damages, and asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products. The plaintiffs claimed that these alleged practices led to the David's
case and to other material contingent liabilities, caused us to change our
manner of doing business at great cost and loss of profit and materially
inflated the trading price of our common stock.
During 1998 the complaint in the noteholder case was dismissed, and during 1999
the complaint in the consolidated stockholder case was also dismissed, each
without prejudice. The court gave the plaintiffs the opportunity to restate
their claims in each case, and they did so in amended complaints. We again filed
motions to dismiss all claims in both cases. On February 4, 2000, the court
dismissed the amended complaint in the stockholder case with prejudice. The
stockholder plaintiffs filed a notice of appeal on March 3, 2000. Briefing was
completed in the United States Court of Appeals for the Tenth Circuit, and oral
argument was conducted on May 15, 2001. The Tenth Circuit has not yet issued an
opinion.
On August 1, 2000, the court dismissed the claims in the noteholder complaint
alleging violations of the Securities Exchange Act of 1934, but the court
determined that the noteholder plaintiffs had stated a claim under Section 11 of
the Securities Act of 1933. On September 15, 2000, defendants filed a motion to
allow an immediate appeal of the court's denial of their motion to dismiss
plaintiffs' claim under Section 11. That motion was denied on January 8, 2001.
The case was set for a status and scheduling conference on January 30, 2001. The
court has entered an order setting this case for trial in October 2001.
On April 30, 2001, a Memorandum of Understanding was signed which provides,
among other things, for the parties in the noteholder case to proceed to agree
on a Settlement Agreement which will include a payment by defendants and our
insurer of $2.5 million in full satisfaction of the claim. That Settlement
Agreement was executed and filed on May 25, 2001. Preliminary approval by the
court was entered May 30, 2001. The parties will seek final approval of the
settlement following notice and hearing. Notice of the proposed settlement has
been published and mailed to class members, with the final hearing to approve
the settlement scheduled for September 5, 2001.
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In 1997, we won a declaratory judgment against certain of our insurance carriers
regarding policies issued to us for the benefit of our officers and directors.
On motion for summary judgment, the court ruled that our exposure, if any, under
the class action suits is covered by D&O policies written by the insurance
carriers, aggregating $60 million in coverage, and that the "larger settlement
rule" will apply to the case. According to the trial court, under the larger
settlement rule, a D&O insurer is liable for the entire amount of coverage
available under a policy even if there is some overlap in the liability created
by the insured individuals and the uninsured corporation. If a corporation's
liability is increased by uninsured parties beyond that of the insured
individuals, then that portion of the liability is the sole obligation of the
corporation. The court also held that allocation is not available to the
insurance carriers as an affirmative defense. The insurance carriers appealed.
In 1999, the appellate court affirmed the decision that the class actions were
covered by D&O policies aggregating $60 million in coverage but reversed the
trial court's decision as to allocation as being premature.
We intend to vigorously defend any remaining claims in these class action suits
and pursue the issue of insurance discussed above, but we cannot predict the
outcome of the cases. An unfavorable outcome could have a material adverse
effect on our financial condition and prospects.
Don's United Super (and related cases). We and two of our retired executives
were named in a suit filed in 1998 in the United States District Court for the
Western District of Missouri by several of our current and former customers
(Don's United Super, et al. v. Fleming, et al.). The 19 plaintiffs operate
retail grocery stores in the St. Joseph and Kansas City metropolitan areas. The
plaintiffs in this suit allege product overcharges, breach of contract, breach
of fiduciary duty, misrepresentation, fraud and RICO violations, and they are
seeking actual, punitive and treble damages, as well as a declaration that
certain contracts are voidable at the option of the plaintiffs.
During 1999, plaintiffs produced reports of their expert witnesses calculating
alleged actual damages of approximately $112 million. During 2000, plaintiffs
revised these damage calculations, and although it is not clear what their
precise damage claim will ultimately be, it appears that plaintiffs will claim
damages (together with interest on those damages) of about $120 million,
exclusive of any punitive or treble damages.
In October 1998, we and the same two retired executives were named in a suit
filed by another group of retailers in the same court as the Don's case
(Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, 16
plaintiffs are asserting claims in the Coddington case, all but one of which
have arbitration agreements with us. The plaintiffs assert claims virtually
identical to those set forth in the Don's case, and although plaintiffs have not
yet quantified the damages in their pleadings, it is anticipated that they will
claim actual damages approximating the damages claimed in the Don's case.
In July 1999, the court ordered two of the plaintiffs in the Coddington case to
arbitration, and otherwise denied arbitration as to the remaining plaintiffs. We
appealed the court's denial of arbitration to the United States Court of Appeals
for the Eighth Circuit. In June 2001, the Eighth Circuit ruled that all of the
claims made by each plaintiff in Coddington which has an arbitration agreement
with us are subject to arbitration. The plaintiffs filed a motion for rehearing
by the Eighth Circuit which was denied on July 20, 2001.
Two other cases had been filed before the Don's case in the same court (R&D
Foods, Inc., et al. v. Fleming, et al.; and Robandee United Super, Inc., et al.
v. Fleming, et al.) by 10 customers, some of whom are also plaintiffs in the
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Don's case. The earlier two cases, which principally seek an accounting of our
expenditure of certain joint advertising funds, have been consolidated. All
proceedings in these cases have been stayed pending the arbitration of the
claims of those plaintiffs who have arbitration agreements with us.
In March 2000, we and one former executive were named in a suit filed in the
United States District Court for the Western District of Missouri by current and
former customers that operated five retail grocery stores in and around Kansas
City, Missouri, and four retail grocery stores in and around Phoenix, Arizona
(J&A Foods, Inc., et al. v. Dean Werries and Fleming Companies, Inc.). The
plaintiffs have alleged product overcharges, fraudulent misrepresentation,
fraudulent nondisclosure and concealment, breach of contract, breach of duty of
good faith and fair dealing and RICO violations, and they are seeking actual,
punitive and treble damages, as well as other relief. The damages have not been
quantified by the plaintiffs; however, we anticipate that substantial damages
will be claimed.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our
motion and ordered the related Missouri cases (Don's United Super, Coddington
Enterprises, Inc. and J&A Foods, Inc.) and the Storehouse Markets case
(described below) transferred to the United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
On March 2, 2001, the court ordered the parties in the related Missouri cases,
the Storehouse Markets case and the Welsh case (described below)to mediate their
claims within 45 days of the order. On April 9 -- 11, 2001, the parties to the
related Missouri cases participated in a mediation process held in Kansas City,
Missouri pursuant to the court's order.
On August 16, 2001, we announced that an agreement in principle had been reached
to settle all claims related to the Don's United Super, Coddington Enterprises,
Inc., J&A Foods, Inc., R&D Foods, Inc., and Robandee United Super, Inc., cases.
The settlement, which is contingent on the preparation and execution of a
definitive agreement, includes a full release of us from liability to the
plaintiffs in these cases; payments by us to the plaintiffs over a 16 month
period; the transfer of a minority interest in several price-impact stores in
Arizona to us; and lease concessions by us to certain plaintiffs. As a result of
this agreement in principle, we recorded a $21 million after-tax charge in the
second quarter to reflect the total estimated cost of the settlement and other
related expenses.
We expect to execute this definitive agreement in the next few weeks. If a
definitive agreement is not reached, we intend to vigorously defend against the
claims in these related cases, but we cannot predict the outcome. An unfavorable
outcome could have a material adverse effect on our financial condition and
prospects.
Storehouse Markets. In 1998, we and one of our former executives were named in a
suit filed in the United States District Court for the District of Utah by
several of our current and former customers (Storehouse Markets, Inc., et al. v.
Fleming Companies, Inc., et al.). The plaintiffs have alleged product
overcharges, fraudulent misrepresentation, fraudulent nondisclosure and
concealment, breach of contract, breach of duty of good faith and fair dealing
and RICO violations, and they are seeking actual, punitive and treble damages.
Damages have not been quantified by the plaintiffs; however, we anticipate that
substantial damages will be claimed.
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The plaintiffs have made these claims on behalf of a class that would
purportedly include approximately 250 current and former customers of our Salt
Lake City division covering a four-state region. On June 12, 2000, the court
entered an order certifying the case as a class action. On July 11, 2000, the
United States Court of Appeals for the Tenth Circuit granted our request for a
discretionary appeal of the class certification order, and we are pursuing that
appeal on an expedited basis.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our
motion and ordered the Storehouse Markets case and the related Missouri cases
(described above) transferred to the United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
On March 2, 2001, the court ordered the parties in the related Missouri cases,
the Storehouse Markets case and the Welsh case to mediate their claims within 45
days of the order. On April 9 -- 11, 2001, the parties to the Storehouse Markets
case participated in a mediation process held in Kansas City, Missouri pursuant
to the court's order.
In June 2001, counsel for the parties in the Storehouse Markets case informed
the court that they had reached an agreement in principle to settle all claims
for a total payment of $16 million. The settlement is subject to a number of
conditions, including final court approval. On July 9, 2001, the parties
executed a definitive agreement and the court preliminarily approved the
settlement subject to final court approval at a hearing scheduled for September
10, 2001.
The U.S. Court of Appeals for the Tenth Circuit has abated defendants' appeal of
the trial court order certifying the Storehouse plaintiff class until the final
approval or disapproval of the proposed settlement.
If the settlement is not approved by the district court, or if the Storehouse
Markets case otherwise goes forward, we intend to vigorously defend against
these claims, but we cannot predict the outcome of the case. An unfavorable
outcome could have a material adverse effect on our financial condition and
prospects.
Welsh. In April 2000, the operators of two grocery stores in Van Horn and Marfa,
Texas filed an amended complaint in the United States District Court for the
Western District of Texas, Pecos Division (Welsh v. Fleming Foods of Texas,
L.P.). The amended complaint alleges product overcharges, breach of contract,
fraud, conversion, breach of fiduciary duty, negligent misrepresentation and
breach of the Texas Deceptive Trade Practices Act. The amended complaint seeks
unspecified actual damages, punitive damages, attorneys' fees and pre-judgment
and post-judgment interest. Pursuant to the order of the Judicial Panel on
Multidistrict Litigation, the Welsh case has been transferred to the Western
District of Missouri for pre-trial proceedings. No trial date has been set in
this case.
On March 2, 2001, the court ordered the parties in the related Missouri cases,
the Storehouse Markets case and the Welsh case to mediate their claims within 45
days of the order. The parties in the Welsh case have not yet mediated their
claims.
Other. Our facilities and operations are subject to various laws, regulations
and judicial and administrative orders concerning protection of the environment
and human health, including provisions regarding the transportation, storage,
distribution, disposal or discharge of certain materials. In conformity with
these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
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remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection Agency
and by similar state agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
or similar state laws, as applicable, with respect to EPA-designated Superfund
sites. While liability under CERCLA for remediation at these sites is generally
joint and several with other responsible parties, we believe that, to the extent
we are ultimately determined to be liable for the expense of remediation at any
site, such liability will not result in a material adverse effect on our
consolidated financial position or results of operations. We are committed to
maintaining the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws, regulations and
orders.
We are a party to or threatened with various other litigation and contingent
loss situations arising in the ordinary course of our business including:
disputes with customers and former customers; disputes with owners and former
owners of financially troubled or failed customers; disputes with landlords and
former landlords; disputes with employees and former employees regarding labor
conditions, wages, workers' compensation matters and alleged discriminatory
practices; disputes with insurance carriers; tax assessments and other matters,
some of which are for substantial amounts. Except as noted above, we do not
believe that any such claim will have a material adverse effect on us.
7. Long-term debt consists of the following:
JULY 14, DECEMBER 30,
2001 2000
----------- -----------
(IN THOUSANDS)
10 1/8 % senior notes due 2008 $ 355,000 $ --
10 5/8 % senior notes due 2001 -- 300,000
10 1/2 % senior subordinated notes due 2004 250,000 250,000
10 5/8% senior subordinated notes due 2007 250,496 250,000
5 1/4 % convertible senior subordinated notes due 2009 150,000 --
Revolving credit, average interest rates of 6.2%
for 2001 and 7.7% for 2000, due 2003 200,000 300,000
Term loans, due 2001 to 2004, average interest
rate of 7.6% for 2001 and 8.0% for 2000 137,151 154,421
Other debt (including discounts) (5,008) 16,150
----------- -----------
1,337,639 1,270,571
Less current maturities (36,171) (38,171)
----------- -----------
Long-term debt $ 1,301,468 $ 1,232,400
=========== ===========
Five-year maturities: Aggregate maturities of long-term debt for the next five
years are approximately as follows: in 2001, $9 million; in 2002, $40 million;
in 2003, $240 million; in 2004, $299 million; and in 2005, $0.
The 10 5/8% $300 million senior notes due 2001 were issued in 1994. During the
first quarter of 2001, we redeemed these notes with the proceeds from the
issuance of $355 million of senior notes, as described below. In connection with
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this redemption, we recognized a $3.5 million after-tax extraordinary charge
from early retirement of debt during the first quarter of 2001.
On March 15, 2001, we issued $355 million of 10 1/8% senior notes that mature on
March 15, 2008. Most of the net proceeds were used to redeem all of the 10 5/8%
senior notes due 2001, including an amount to cover accrued interest and the
redemption premium. The balance of the net proceeds was used to pay down
outstanding revolver loans. The new senior notes are unsecured senior
obligations, ranking the same as all other existing and future senior
indebtedness and senior in right of payment to our senior subordinated notes.
The senior notes are effectively subordinated to secured senior indebtedness
with respect to assets securing such indebtedness, including loans under our
senior secured credit facility. The 10 1/8% senior notes are guaranteed by
substantially all of our subsidiaries (see -Subsidiary Guarantee of Senior Notes
and Senior Subordinated Notes below).
On March 15, 2001, we issued $150 million of 5 1/4% convertible senior
subordinated notes that mature on March 15, 2009 and have a conversion price of
$30.27 per share. The net proceeds were used to pay down outstanding revolver
loans. The convertible notes are general unsecured obligations, subordinated in
right of payment to all existing and future senior indebtedness, and rank senior
to or of equal rank with all of our existing and future subordinated
indebtedness.
During July 2001, we entered into two interest rate swap agreements. The swaps
are tied to our 10 5/8% senior subordinated notes due 2007, and have a combined
notional amount of $150 million. The maturity, call dates, and call premiums
mirror those of the notes. The swaps are designed for us to receive a fixed rate
of 10 5/8% and pay a floating rate based on a spread plus the 3-month LIBOR. The
floating rate resets quarterly beginning July 31, 2001. We have documented and
designated these swaps to qualify as fair value hedges.
We adopted Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities, as amended, on
December 31, 2000. In accordance with SFAS 133, on the date we enter into a
derivative contract, management designates the derivative as a hedge of the
identified exposure (fair value, cash flow, foreign currency, or net investment
in foreign operations). If a derivative does not qualify in a hedging
relationship, the derivative is recorded at fair value and changes in its fair
value are reported currently in earnings. We formally document all relationships
between hedging instruments and hedged items, as well as our risk-management
objective and strategy for undertaking various hedge transactions.
For all qualifying and highly effective fair value hedges, the changes in the
fair value of a derivative and the loss or gain on the hedged asset or liability
relating to the risk being hedged are recorded currently in earnings. These
amounts are recorded to interest income and provide offset of one another. For
the periods ended July 14, 2001, we recorded no ineffectiveness relating to fair
value.
Subsidiary Guarantee of Senior Notes and Senior Subordinated Notes: The senior
notes, convertible senior subordinated notes, and senior subordinated notes are
guaranteed by substantially all of Fleming's wholly-owned direct and indirect
subsidiaries. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to Fleming (the parent) in the form of
cash dividends, loans or advances.
14
15
The following condensed consolidating financial information depicts, in separate
columns, the parent company, those subsidiaries which are guarantors, those
subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. The financial information may not necessarily be indicative
of the results of operations or financial position had the subsidiaries been
operated as independent entities.
15
16
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
JULY 14, 2001
-----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 15,394 $ (1,934) $ 830 $ -- $ 14,290
Receivables, net 483,356 97,770 1,411 -- 582,537
Inventories 819,975 182,939 3,905 -- 1,006,819
Other current assets 119,472 6,029 44 -- 125,545
----------- ----------- ----------- ----------- -----------
Total current assets 1,438,197 284,804 6,190 -- 1,729,191
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 336,032 -- -- (336,032) --
Property and equipment, net 479,114 236,105 11,759 -- 726,978
Goodwill,net 403,533 132,647 3,623 -- 539,803
Other assets 490,137 47,473 12,759 -- 550,369
----------- ----------- ----------- ----------- -----------
$ 3,240,254 $ 706,385 $ 34,331 $ (434,629) $ 3,546,341
=========== =========== =========== =========== ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 896,820 $ 116,633 $ 1,944 $ -- $ 1,015,397
Intercompany payables -- 299,298 36,734 (336,032) --
Other current liabilities 268,452 26,795 1,855 -- 297,102
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,165,272 442,726 40,533 (336,032) 1,312,499
Obligations under capital leases 196,482 134,689 -- 331,171
Long-term debt and other
liabilities 1,392,723 24,126 45 -- 1,416,894
Equity (deficit) 485,777 104,844 (6,247) (98,597) 485,777
----------- ----------- ----------- ----------- -----------
$ 3,240,254 $ 706,385 $ 34,331 $ (434,629) $ 3,546,341
=========== =========== =========== =========== ===========
DECEMBER 30, 2000
-----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ -----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 22,487 $ 6,753 $ 1,140 $ -- $ 30,380
Receivables, net 406,203 101,884 958 -- 509,045
Inventories 635,227 192,499 3,539 -- 831,265
Other current assets 247,400 4,943 40 -- 252,383
----------- ----------- ----------- ----------- -----------
Total current assets 1,311,317 306,079 5,677 -- 1,623,073
Investment in subsidiaries 65,475 5,356 -- (70,831) --
Intercompany receivables 372,356 -- -- (372,356) --
Property and equipment, net 424,321 285,117 7,019 -- 716,457
Goodwill,net 411,094 129,440 3,785 -- 544,319
Other assets 463,008 42,918 13,036 -- 518,962
----------- ----------- ----------- ----------- -----------
$ 3,047,571 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811
=========== =========== =========== =========== ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 821,407 $ 120,145 $ 1,727 $ -- $ 943,279
Intercompany payables -- 339,688 32,668 (372,356) --
Other current liabilities 244,524 43,275 1,310 -- 289,109
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,065,931 503,108 35,705 (372,356) 1,232,388
Obligations under capital leases 214,611 162,628 -- -- 377,239
Long-term debt and other
liabilities 1,339,837 26,096 59 -- 1,365,992
Equity (deficit) 427,192 77,078 (6,247) (70,831) 427,192
----------- ----------- ----------- ----------- -----------
$ 3,047,571 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811
=========== =========== =========== =========== ===========
16
17
CONDENSED CONSOLIDATED OPERATING STATEMENT INFORMATION
12 WEEKS ENDED JULY 14, 2001
------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 2,842,544 $ 827,623 $ 15,872 $ (228,760) $ 3,457,279
Costs and expenses:
Cost of sales 2,695,547 715,375 11,760 (228,760) 3,193,922
Selling and administrative 107,553 98,803 4,736 -- 211,092
Other 70,443 5,279 (754) -- 74,968
Impairment/restructuring charge (credit) 2,569 (2,686) -- -- (117)
Equity results from subsidiaries (12,010) -- -- 12,010 --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 2,864,102 816,771 15,742 (216,750) 3,479,865
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (21,558) 10,852 130 (12,010) (22,586)
Taxes on income (loss) (8,100) (1,108) 80 -- (9,128)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary charge $ (13,458) $ 11,960 $ 50 $ (12,010) $ (13,458)
=========== =========== =========== =========== ===========
12 WEEKS ENDED JULY 8, 2000
-----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 2,722,357 $ 867,357 $ 16,597 $ (316,433) $ 3,289,878
Costs and expenses:
Cost of sales 2,580,547 721,863 12,647 (316,433) 2,998,624
Selling and administrative 124,520 132,204 4,650 -- 261,374
Other 30,853 165 (217) -- 30,801
Impairment/restructuring charge 20,873 79 61 -- 21,013
Equity results from subsidiaries (7,406) -- -- 7,406 --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 2,749,387 854,311 17,141 (309,027) 3,311,812
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (27,030) 13,046 (544) (7,406) (21,934)
Taxes on income (loss) (13,681) 5,324 (228) -- (8,585)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary charge $ (13,349) $ 7,722 $ (316) $ (7,406) $ (13,349)
=========== =========== =========== =========== ===========
17
18
CONDENSED CONSOLIDATED OPERATING STATEMENT INFORMATION (CONTINUED)
28 WEEKS ENDED JULY 14, 2001
-------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 6,307,710 $ 1,862,678 $ 38,082 $ (590,000) $ 7,618,470
Costs and expenses:
Cost of sales 5,975,812 1,574,424 28,633 (590,000) 6,988,869
Selling and administrative 255,848 260,710 9,819 -- 526,377
Other 88,928 33,884 2,765 -- 125,577
Impairment/restructuring charge (credit) 8,824 (35,800) -- -- (26,976)
Equity results from subsidiaries (15,608) -- -- 15,608 --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 6,313,804 1,833,218 41,217 (574,392) 7,613,847
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (6,094) 29,460 (3,135) (15,608) 4,623
Taxes on income (loss) (8,102) 12,009 (1,292) -- 2,615
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary charge $ 2,008 $ 17,451 $ (1,843) $ (15,608) $ 2,008
=========== =========== =========== =========== ===========
28 WEEKS ENDED JULY 8, 2000
-------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 6,292,355 $ 2,043,061 $ 39,312 $ (753,352) $ 7,621,376
Costs and expenses:
Cost of sales 5,941,455 1,695,485 29,860 (753,352) 6,913,448
Selling and administrative 310,288 313,852 9,541 -- 633,681
Other 33,817 40,016 2,455 -- 76,288
Impairment/restructuring charge 62,310 787 61 -- 63,158
Equity results from subsidiaries 5,506 -- -- (5,506) --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 6,353,376 2,050,140 41,917 (758,858) 7,686,575
----------- ----------- ----------- ----------- -----------
Loss before taxes (61,021) (7,079) (2,605) 5,506 (65,199)
Taxes on loss (21,799) (3,085) (1,093) -- (25,977)
----------- ----------- ----------- ----------- -----------
Net loss before extraordinary charge $ (39,222) $ (3,994) $ (1,512) $ 5,506 $ (39,222)
=========== =========== =========== =========== ===========
18
19
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
28 WEEKS ENDED JULY 14, 2001
--------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities $ (42,546) $ (21,739) $ 262 $ -- $ (64,023)
--------- --------- --------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment (91,262) (13,796) (6,561) -- (111,619)
Other 50,583 19,548 80 -- 70,211
--------- --------- --------- -------- ---------
Net cash provided by (used in) investing
activities (40,679) 5,752 (6,481) -- (41,408)
--------- --------- --------- -------- ---------
Cash flows from financing activities:
Repayments on capital lease obligations (7,044) (3,322) -- -- (10,366)
Advance to (from) parent (16,531) 10,622 5,909 -- --
Other 99,707 -- -- -- 99,707
--------- --------- --------- -------- ---------
Net cash provided by financing activities: 76,132 7,300 5,909 -- 89,341
--------- --------- --------- -------- ---------
Net decrease in cash and cash equivalents (7,093) (8,687) (310) -- (16,090)
Cash and cash equivalents at beginning of year 22,487 6,753 1,140 -- 30,380
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of year $ 15,394 $ (1,934) $ 830 $ -- $ 14,290
========= ========= ========= ======== =========
28 WEEKS ENDED JULY 8, 2000
-------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities $ (274) $ 57,746 $ (4,990) $ -- $ 52,482
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (19,834) (40,528) (2,069) -- (62,431)
Other 68,725 126 -- -- 68,851
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities 48,891 (40,402) (2,069) -- 6,420
-------- -------- -------- -------- --------
Cash flows from financing activities:
Repayments on capital lease obligations (8,886) (2,812) -- -- (11,698)
Advance to (from) parent 48,902 (66,722) 17,820 -- --
Other (43,865) -- -- -- (43,865)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities: (3,849) (69,534) 17,820 -- (55,563)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 44,768 (52,190) 10,761 -- 3,339
Cash and cash equivalents at beginning of year (54,803) 61,307 179 -- 6,683
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year $(10,035) $ 9,117 $ 10,940 $ -- $ 10,022
======== ======== ======== ======== ========
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8. In December 1998, we announced the implementation of a strategic plan
designed to improve the competitiveness of the retailers we serve and improve
our performance by building stronger operations that can better support
long-term growth. The four major initiatives of the strategic plan were to
consolidate distribution operations, grow distribution sales, improve retail
performance, and reduce overhead and operating expenses, in part by centralizing
the procurement and other functions in the Dallas, Texas area. Additionally, in
2000, we decided to reposition certain retail operations into our price-impact
format and sell or close the remaining conventional retail chains. During the
first and second quarters of 2001, we sold or closed our remaining conventional
retail stores.
The plan, as expected, took two years to implement and is now substantially
complete. Total charges of approximately $20 million are estimated in 2001. The
remaining charges represent severance related expenses, and other exit costs
that cannot be expensed until incurred. Charges after 2001 are expected to be
minimal.
We recorded a pre-tax charge of $14 million ($8 million after-tax) in the second
quarter of 2001 as a result of the strategic plan. The charge was included on
several lines of the Consolidated Condensed Statements of Operations: $3 million
of income was included in net sales relating primarily to gains on the sale of
conventional retail stores; $12 million of charges was included in cost of sales
and was primarily related to inventory markdowns for clearance for closed
operations; $5 million of charges was included in selling and administrative
expense as disposition related costs recognized on a periodic basis; and less
than $1 million of income included in the impairment/restructuring line related
to net impairment recovery and restructuring charges as described below. The
second quarter charge consisted of the following components:
o Net impairment recovery of $5 million. The components included recovering,
through sales of the related operations, previously recorded goodwill
impairment of $2 million and long-lived asset impairment of $5 million.
Also included was impairment of $2 million related to other long-lived
assets.
o Restructuring charges of $5 million. The restructuring charges consisted
primarily of severance related expenses for the sold or closed operating
units, adjustments to pension withdrawal liabilities, and professional fees
incurred related to the restructuring process.
o Other disposition and related costs of $14 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations,
disposition related costs recognized on a periodic basis and other costs,
offset partially by gains on sales of conventional retail stores.
The second quarter of 2001 charge relates to our business segments as follows:
$9 million relates to the distribution segment and $4 million relates to the
retail segment with the balance relating to support services expenses.
The pre-tax charge for the first two quarters of 2001 totaled $12 million ($7
million after-tax), and was included on several lines of the Consolidated
Condensed Statements of Operations: $1 million of income was included in net
sales relating primarily to gains on the sale of conventional retail stores; $29
million charge included in cost of sales, primarily related to inventory
markdowns for clearance for closed operations; and $11 million included in
selling and administrative as disposition related costs recognized on a periodic
basis. These charges were offset by $27 million of income included in the
impairment/restructuring line related primarily to the recovery of previously
20
21
recorded asset impairment resulting from the sale of some retail stores. The
charge for the first two quarters consisted of the following components:
o Net impairment recovery of $40 million. The components included recovering,
through sales of the related operations, previously recorded goodwill
impairment of $15 million and long-lived asset impairment of $28 million.
Also included was impairment of $3 million related to other long-lived
assets.
o Restructuring charges of $13 million. The restructuring charges consisted
primarily of severance related expenses for the sold or closed operating
units, adjustments to pension withdrawal liabilities, and professional fees
incurred related to the restructuring process.
o Other disposition and related costs of $39 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations,
disposition related costs recognized on a periodic basis and other costs,
offset partially by gains on sales of conventional retail stores.
The charge for the first two quarters of 2001 relates to the company's segments
as follows: a $16 million charge relates to the distribution segment and income
of $9 million relates to the retail segment. The balance relates to support
services expenses.
The charges related to workforce reductions are as follows:
AMOUNT
($ IN
THOUSANDS) HEADCOUNT
--------- ---------
1998 Ending Liability $ 21,983 1,260
1999 Activity:
Charge 12,029 1,350
Terminations (24,410) (1,950)
-------- --------
Ending Liability 9,602 660
2000 Activity:
Charge 53,906 5,610
Terminations (26,180) (1,860)
-------- --------
Ending Liability 37,328 4,410
2001 Quarter 1 Activity:
Charge 6,760 180
Terminations (10,186) (3,350)
-------- --------
Ending Liability 33,902 1,240
2001 Quarter 2 Activity:
Charge 4,853 40
Terminations (13,350) (1,260)
-------- --------
Ending Liability $ 25,405 20
======== ========
The ending liability of approximately $25 million is primarily comprised of
union pension withdrawal liabilities, but also includes accruals for payments
over time to associates already severed as well as accruals for associates still
to be severed. The breakdown of the 220 headcount reduction recorded for the
first two quarters of 2001 is: 185 from the distribution segment; 25 from the
retail segment; and 10 from support services.
21
22
Additionally, the strategic plan includes charges related to lease obligations
which will be utilized as operating units or retail stores close, but ultimately
reduced over remaining lease terms ranging from 1 to 20 years. The charges and
utilization have been recorded to-date as follows:
AMOUNT
(IN THOUSANDS)
-------------
1998 Ending liability $ 27,716
1999 Activity:
Charge 15,074
Utilized (10,281)
--------
Ending Liability 32,509
2000 Activity
Charge 37,149
Utilized (48,880)
--------
Ending Liability 20,778
2001 Quarter 1 Activity
Charge 500
Utilized (5,263)
--------
Ending Liability 16,015
2001 Quarter 2 Activity
Charge --
Utilized (9,090)
--------
Ending Liability $ 6,925
========
Assets held for sale included in current assets at the end of the second quarter
of 2001 were approximately $25 million, consisting of $16 million of
distribution operating units and $9 million of retail stores.
We recorded a $46 million pre-tax charge in the second quarter of 2000 as a
result of the strategic plan. The charge was included on several lines of the
Consolidated Condensed Statements of Operations: $1 million was included in net
sales related to rent income impairment due to division closings; $22 million
was included in cost of sales and was primarily related to inventory valuation
adjustments, moving and training costs, and additional depreciation and
amortization on assets to be disposed of but not yet held for sale; $2 million
was included in selling and administrative expense and equity investment results
as disposition related costs recognized on a periodic basis; and the remaining
$21 million was included in the impairment/restructuring line. The second
quarter charge consisted of the following components:
o Impairment of assets of $1 million. The impairment related to other
long-lived assets.
o Restructuring charges of $20 million. The restructuring charges consisted
primarily of severance related expenses due to the consolidation of certain
administrative departments announced during the second quarter of 2000. The
22
23
restructuring charges also consisted of operating lease liabilities and
professional fees incurred related to the restructuring process.
o Other disposition and related costs of $25 million. These costs consisted
primarily of inventory valuation adjustments, additional depreciation and
amortization on assets to be disposed of but not yet held for sale,
disposition related costs recognized on a periodic basis and other costs.
The charge for the second quarter of 2000 relates to the company's segments as
follows: $20 million relates to the distribution segment and $10 million relates
to the retail segment with the balance relating to support services expenses.
We recorded a pre-tax charge of $110 million in the first two quarters of 2000
as a result of the strategic plan. The charge was included on several lines of
the Consolidated Condensed Statements of Operations: $2 million was included in
net sales related primarily to rent income impairment due to division closings;
$35 million was included in cost of sales and was primarily related to inventory
valuation adjustments, moving and training costs, and additional depreciation
and amortization on assets to be disposed of but not yet held for sale; $10
million was included in selling and administrative expense and equity investment
results as disposition related costs recognized on a periodic basis; and the
remaining $63 million was included in the impairment/restructuring line. The
charge for the first two quarters consisted of the following components:
o Impairment of assets of $3 million. The impairment related to other
long-lived assets.
o Restructuring charges of $61 million. The restructuring charges consisted
of severance related expenses and pension withdrawal liabilities for the
closings of the York and Philadelphia distribution facilities which were
announced during the first quarter of 2000 as part of an effort to grow in
the northeast by consolidating distribution operations and expanding the
Maryland facility. Additionally, the charge consisted of severance related
expenses due to the consolidation of certain administrative departments
announced during the second quarter of 2000. The restructuring charges also
consisted of operating lease liabilities and professional fees incurred
related to the restructuring process.
o Other disposition and related costs of $46 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations,
additional depreciation and amortization on assets to be disposed of but
not yet held for sale, disposition related costs recognized on a periodic
basis and other costs.
The charge for the first two quarters of 2000 relates to the company's segments
as follows: $57 million relates to the distribution segment and $27 million
relates to the retail segment with the balance relating to support services
expenses.
Asset impairments were recognized in accordance with SFAS No. 121 - Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and such assets were written down to their estimated fair values based on
estimated proceeds of operating units to be sold or discounted cash flow
projections. The operating costs of operating units to be sold or closed are
treated as normal operations during the period they remain in use. Salaries,
wages and benefits of employees at these operating units are charged to
operations during the time such employees are actively employed. Depreciation
expense is continued for assets that the company is unable to remove from
operations.
23
24
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders
Fleming Companies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Fleming Companies, Inc. and subsidiaries as of July 14, 2001, and the related
condensed consolidated statements of operations for the 12 and 28 weeks ended
July 14, 2001 and July 8, 2000 and condensed consolidated statements of cash
flows for the 28 weeks ended July 14, 2001 and July 8, 2000. These financial
statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Fleming Companies Inc. and subsidiaries as of December 30, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 14,
2001 (except for the information under long-term debt and contingencies included
in the notes to consolidated financial statements as to which the date is March
22, 2001), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 30, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 20, 2001
24
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We have substantially completed our strategic plan. Total charges of
approximately $20 million are estimated in 2001. The remaining charges represent
severance related expenses, inventory markdowns for clearance for closed
operations, and other exit costs that cannot be expensed until incurred. Charges
after 2001 are expected to be minimal.
The second quarter of 2001 included a pre-tax charge related to the strategic
plan of $14 million ($8 million after-tax or $.17 per share). The charge
included non-cash impairment adjustments of asset values, inventory markdowns
for clearance for closed operations, and cash restructuring costs for severance
related and other expenses. We also recorded in the second quarter of 2001
litigation settlement charges of $47 million ($28 million after-tax or $.65 per
share). The full impact of the strategic plan charges and litigation charges was
approximately $60 million ($36 million after-tax or $.83 per share) which
includes a $.01 per share impact due to the increase in diluted weighted average
shares from the first quarter to the second quarter.
The second quarter of 2000 included a pre-tax charge of $46 million ($27 million
after-tax or $.70 per share which includes a $.01 per share impact due to
converting from basic to diluted weighted average shares). The charge included
severance related expenses due to consolidation of certain administrative
departments, operating lease liabilities, inventory markdowns for clearance for
closed operations, additional depreciation and amortization on assets to be
disposed of but not yet held for sale, and impairment of asset values.
The first two quarters of 2001 included a pre-tax charge of $12 million ($7
million after-tax or $.17 per share). The charge included non-cash impairment
adjustments of asset values, inventory markdowns for clearance for closed
operations, and cash restructuring costs for severance related and other
expenses. We also recorded approximately $49 million in litigation settlement
charges ($30 million after-tax or $.66 per share) and net additional interest
expense of approximately $2 million due to the early retirement of debt ($1
million after-tax or $.02 per share). The full impact of the strategic plan
charges, litigation charges and additional interest expense was $63 million ($38
million after-tax or $.85 per share). An extraordinary charge from the early
retirement of debt of $6 million ($3 million after-tax or $.07 per share) was
also recorded.
The first two quarters of 2000 included a pre-tax charge of $110 million ($65
million after-tax or $1.67 per share). The charge included severance related
expenses due to consolidation of certain administrative departments, operating
lease liabilities, inventory markdowns for clearance for closed operations,
additional depreciation and amortization on assets to be disposed of but not yet
held for sale, and impairment of asset values.
We recorded a net loss for the second quarter of 2001 of $13 million and a net
loss for the first two quarters, after an extraordinary charge of $3 million
related to the early retirement of debt, of $1 million. Adjusted EBITDA for the
second quarter of 2001 was $107 million and $243 million for the first two
quarters of 2001. That represents a 4% increase in the second quarter and a 5%
increase in the first two quarters of 2001 compared to the same time periods in
2000. "Adjusted EBITDA" is earnings before extraordinary items, interest
expense, income taxes, depreciation and amortization, equity investment results,
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LIFO adjustments and one-time adjustments (e.g., strategic plan charges and
specific litigation charges). Adjusted EBITDA should not be considered as an
alternative measure of our net income, operating performance, cash flow or
liquidity. It is provided as additional information related to our ability to
service debt; however, conditions may require conservation of funds for other
uses. Although we believe adjusted EBITDA enhances a reader's understanding of
our financial condition, this measure, when viewed individually, is not
necessarily a better indicator of any trend as compared to conventionally
computed measures (e.g., net sales, net earnings, net cash flows, etc.).
Finally, amounts presented may not be comparable to similar measures disclosed
by other companies. The following table sets forth the calculation of adjusted
EBITDA:
12 WEEKS ENDED 28 WEEKS ENDED
JULY 14, JULY 8, JULY 14, JULY 8,
2001 2000 2001 2000
------- ------ ------- -------
Net income (loss) before
extraordinary charge $ (13) $ (13) $ 2 $ (39)
Add back:
Taxes on income (loss) (9) (9) 3 (26)
Depreciation/amortization 37 38 87 92
Interest expense 34 38 92 92
Equity investment results -- 2 -- 3
LIFO adjustments (2) 2 (1) 5
----- ----- ----- -----
EBITDA 47 58 183 127
Add back non-cash strategic
plan and one-time items * 6 5 (12) 12
----- ----- ----- -----
EBITDA excluding non-cash
strategic plan charges 53 63 171 139
Add back strategic plan and
one-time items requiring cash 54 40 72 92
----- ----- ----- -----
Adjusted EBITDA $ 107 $ 103 $ 243 $ 231
===== ===== ===== =====
* Excludes amounts already added back for depreciation/amortization for
2000 of $2 million and $6 million for the 12 and 28 weeks, respectively;
interest expense of $3 million for the 28 weeks of 2001; and immaterial
amounts for equity investment results.
The adjusted EBITDA amount represents cash flow from operations
excluding unusual or infrequent items. In our opinion, adjusted EBITDA is the
best starting point when evaluating our ability to service debt. In addition, we
believe it is important to identify the cash flows relating to unusual or
infrequent charges and strategic plan charges, which should also be considered
in evaluating the company's ability to service debt.
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RESULTS OF OPERATIONS
Set forth in the following table is information regarding the company's net
sales and certain components of earnings expressed as a percent of sales which
are referred to in the accompanying discussion:
JULY 14, JULY 8,
FOR THE 12 WEEKS ENDED 2001 2000
-------- -------
Net sales 100.00% 100.00%
Gross margin 7.62 8.85
Less:
Selling and administrative 6.11 7.94
Interest expense 0.99 1.17
Interest income (0.17) (0.28)
Equity investment results (0.01) 0.05
Impairment/restructuring charge -- 0.64
Litigation charges 1.35 --
---- ----
Total expenses 8.27 9.52
---- ----
Income (loss) before taxes (0.65) (0.67)
Taxes on income (loss) (0.26) (0.26)
---- ----
Income (loss) before extraordinary charge (0.39)% (0.41)%
===== =====
JULY 14, JULY 8,
FOR THE 28 WEEKS ENDED 2001 2000
-------- -------
Net sales 100.00 %100.00 %
Gross margin 8.26 9.29
Less:
Selling and administrative 6.90 8.31
Interest expense 1.21 1.20
Interest income (0.20) (0.25)
Equity investment results -- 0.05
Impairment/restructuring charge (0.35) 0.83
Litigation charges 0.64 --
----- -----
Total expenses 8.20 10.14
----- -----
Income (loss) before taxes 0.06 (0.85)
Taxes on income (loss) 0.03 (0.34)
----- -----
Income (loss) before extraordinary charge 0.03 % (0.51)%
===== =====
NET SALES.
Net sales for the second quarter (12 weeks) of 2001 increased by $167 million,
or 5.1%, to $3.5 billion from the same period in 2000. Year to date, net sales
decreased by approximately $3 million, or less than 0.1%, to $7.6 billion from
the same period in 2000.
Net sales for the distribution segment increased by 16.5% for the second quarter
of 2001 to $2.9 billion compared to $2.5 billion in 2000. Year to date, net
sales
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increased by 8.0% to $6.3 billion compared to $5.8 billion in 2000.
Approximately one-half of the 16.5% sales growth in the second quarter was
attributable to the implementation of new business resulting from the
recently-announced Kmart alliance. The remainder of the sales growth was
attributable to growth in distribution sales from a wide variety of conventional
and new-channel customers. New-channel customers, including convenience stores,
supercenters, limited assortments stores, drug stores, and self-distributing
chains, are an important part of the our strategic growth plan and collectively
represent approximately one-half of our distribution customer base.
Kmart Corporation, our largest customer, accounted for 15% and 9% of our total
net sales in the second quarter of 2001 and 2000, respectively. Sales to Kmart
accounted for 12% and 10% of our total net sales for the year-to-date period
ended July 14, 2001, and July 8, 2000, respectively. We expect annual sales to
Kmart for 2001 to be approximately $2.6 billion, with an increase to
approximately $4.5 billion in 2002.
Retail segment sales for the second quarter of 2001 decreased $249 million, or
32.7%, to $512 million from the same period in 2000. Year to date, retail
segment sales decreased $466 million, or 25.6%, in 2001 to $1.4 billion from the
same period in 2000. The decrease in sales was due to the continued disposition
of conventional retail stores in order to increase focus on our price-impact
retail stores. During the first and second quarters of 2001, we sold or closed
our remaining 96 conventional retail stores and opened 6 Yes!Less stores and 8
Food4Less stores. Comparable store sales for the continuing operations were up
1.3 percent for the quarter.
GROSS MARGIN.
Gross margin for the second quarter of 2001 decreased by $28 million, or 9.6%,
to $263 million from $291 million for the same period in 2000, and also
decreased as a percentage of net sales to 7.62% from 8.85% for the same period
in 2000. Year to date, gross margin decreased by $78 million, or 11.1%, to $630
million from $708 million for the same period in 2000, and also decreased as a
percentage of net sales to 8.26% from 9.29% for the same period in 2000. After
excluding the strategic plan charges, gross margin for the second quarter of
2001 decreased by $42 million, or 13.4%, compared to the same period in 2000,
and decreased as a percentage of net sales to 7.88% from 9.55% for the same
period in 2000. Year to date, gross margin, after excluding the strategic plan
charges, decreased by $87 million, or 11.7%, compared to the same period in
2000, and decreased as a percentage of net sales to 8.64% from 9.77% for the
same period in 2000. The decrease in percentage of net sales was due to a change
in mix. The sales of the distribution segment represent a larger portion of
total company sales than the retail segment and the distribution segment has
lower margins as a percentage of sales versus the retail segment.
For the distribution segment, after excluding strategic plan charges, gross
margin as a percentage of gross distribution sales improved by 34 basis points
for both the second quarter and year-to-date periods of 2001 compared to the
same periods in 2000, reflecting the benefits of centralizing procurement and
increasing warehouse productivity. For the retail segment, after excluding
strategic plan charges, gross margin as a percentage of net retail sales
decreased for the second quarter of 2001 by 104 basis points and increased for
the year-to-date period of 2001 by 7 basis points, compared to the same periods
in 2000. The decreasing margin for the second quarter reflects our transition
out of conventional retail and into price-impact retail which has lower shelf
prices and gross margins. The increase in margin year to date reflects
improvement due to the divesting or closing of underperforming stores and the
centralization of procurement, offset partially by the transition out of
conventional retail and into price-impact retail which is described above.
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For the distribution segment, the strategic plan charges decreased in 2001 for
both the second quarter and year-to-date periods compared to the same periods in
2000 primarily due to reduced recruiting and training expenses from 2000 to
2001, and additional depreciation and amortization of assets to be disposed of
but not yet held for sale in 2000. Strategic plan charges for the retail segment
increased in 2001 for both the second quarter and year-to-date periods compared
to 2000 primarily due to inventory markdowns for clearance for closed
operations.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses for the second quarter of 2001 decreased by
approximately $50 million, or 19.2%, to $211 million from $261 million for the
same period in 2000 and decreased as a percentage of net sales to 6.11% for 2001
from 7.94% in 2000. Year to date, selling and administrative expenses decreased
by approximately $108 million, or 16.9%, to $526 million in 2001 from $634
million for the same period in 2000 and decreased as a percentage of net sales
to 6.90% for 2001 from 8.31% in 2000. After excluding the strategic plan
charges, selling and administrative expenses for the second quarter of 2001
decreased by $53 million, or 20.6%, compared to the same period in 2000, and
decreased as a percentage of net sales to 5.97% from 7.88% for the same period
in 2000. Year to date, selling and administrative expenses, after excluding the
strategic plan charges, decreased in 2001 by $109 million, or 17.4%, compared to
the same period in 2000, and decreased as a percentage of net sales to 6.77%
from 8.19% for the same period in 2000. The sales of the distribution segment
represent a larger portion of total company sales than the retail segment, and
the distribution segment has lower operating expenses as a percentage of sales
than the retail segment.
For the distribution segment, after excluding strategic plan charges, selling
and administrative expenses as a percentage of net sales improved for both the
second quarter and year-to-date periods of 2001 compared to the same periods in
2000 due to leveraging the effect of sales growth and low cost pursuit
initiatives. For the retail segment, after excluding strategic plan charges,
selling and administrative expenses as a percentage of retail sales also
improved for both the second quarter and year-to-date periods of 2001 compared
to the same periods in 2000, due to our shift in focus from conventional retail
to price-impact retail, a format that has lower operating expense levels than
conventional retail. The strategic plan charges were higher in the second
quarter and year to date for 2001 compared to the same periods in 2000 due to
costs associated with closing conventional retail stores.
Support services expense increased in the quarter and year-to-date periods of
2001 compared to the same periods of 2000 primarily due to centralizing certain
procurement and administrative functions from the distribution and retail
segments. Strategic plan charges were lower in 2001 due to reduced severance
related expenses, moving costs, and professional fees in connection with
carrying out our strategic plan.
OPERATING EARNINGS.
Operating earnings for the distribution segment increased significantly for the
second quarter of 2001 to $100 million from $61 million for the same period of
2000. Year to date, operating earnings also increased from the same period in
2000, to $210 million in 2001 from $145 million in 2000. After excluding the
strategic plan charges, operating earnings for the second quarter of 2001
increased by $27 million, or 36.6%, to $102 million from $75 million for the
same period of 2000. Year to date, operating earnings, after excluding the
strategic plan charges, increased by $48 million, or 28.4%, to $217 million in
2001 from $169 million for the same period of 2000.
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Operating earnings for the retail segment decreased by $7 million to $10 million
for the second quarter of 2001 from $17 million for the same period of 2000.
Year to date, operating earnings decreased $2 million to $27 million in 2001
from $29 million in 2000. After excluding the strategic plan charges, operating
earnings increased by less than $1 million to $22 million in the second quarter
of 2001 from $21 million for the same period of 2000 and increased by $17
million year to date to $56 million in 2001 from $39 million in 2000.
Support services expenses increased in the second quarter of 2001 compared to
the same period of 2000 by $10 million to $58 million from $48 million. Year to
date, support services expenses increased by $33 million to $133 million in 2001
from $100 million in 2000. After excluding the strategic plan charges and
one-time items, support services expenses increased by $17 million to $58
million in the second quarter of 2001 from $41 million for the same period of
2000 and increased by approximately $43 million year to date to $130 million in
2001 from $87 million in 2000.
Operating earnings improvement is described in detail by segment in Net sales,
Gross margin, and Selling and administrative expenses sections above.
INTEREST EXPENSE.
Interest expense for the second quarter of 2001 of $34 million decreased $4
million compared to the same period in 2000, primarily resulting from lower
average interest rates. Year to date, interest expense was $92 million in 2001,
which was unchanged compared to the same period in 2000, although 2001 included
$3 million of additional interest expense related to the early retirement of
debt, which was offset by lower average interest rates.
INTEREST INCOME.
Interest income of $6 million for the second quarter of 2001 was $3 million
lower than the same period of 2000, and year to date, interest income of $15
million in 2001 was $4 million lower than the same period in 2000. The
reductions were primarily due to reduced customer and other interest-bearing
receivable balances.
EQUITY INVESTMENT RESULTS.
Our portion of results from equity investments improved by $2 million for the
second quarter of 2001 reflecting a slight income from operations compared to
the same period of 2000. Year to date, equity investment results improved by
approximately $4 million to reflect a slight loss in 2001 compared to a $4
million loss in 2000.
IMPAIRMENT/RESTRUCTURING CHARGE.
The pre-tax charge recorded in the Consolidated Condensed Statements of
Operations (associated with the implementation of our strategic plan announced
in 1998) was $14 million for the second quarter of 2001 compared to $46 million
for the same period of 2000. The $14 million charge in 2001 was recorded with
less than $1 million of income reflected in the impairment/restructuring line
and the balance reflected in other financial statement lines. The $46 million
charge in 2000 was recorded with $21 million reflected in the
impairment/restructuring line and the balance reflected in other financial
statement lines.
Year to date, the pre-tax charge was $12 million for 2001 compared to $110
million for the same period of 2000. The $12 million charge in 2001 was recorded
with $27 million of income reflected in the impairment/restructuring line and
the balance reflected in other financial statement lines. The $110 million
charge in 2000 was recorded with $63 million reflected in the
impairment/restructuring line and the balance reflected in other financial
statement lines. See "General" above and Note 8 in the notes to the consolidated
condensed financial statements for further discussion regarding the strategic
plan.
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LITIGATION CHARGES.
During the second quarter of 2001, we recorded litigation settlements and other
related expenses totaling $47 million related to agreements in principle to
settle the Storehouse Markets, Inc., et al., Don's United Super, et.al.,
Coddington Enterprises, Inc., et.al, J&A Foods, Inc. et. al., R&D Foods, Inc.
et.al., and Robandee United Super, Inc., et.al., cases. Year to date, we
recorded $2 million in settlements relating to other cases in addition to the
$47 million above for a total of $49 million. See Note 6 in the notes to the
consolidated condensed financial statements and Legal Proceedings for further
discussion regarding these litigation charges.
TAXES ON INCOME.
The effective tax rates for the 28 weeks of 2001 and 2000 were 56.6% (before
extraordinary charge) and 39.8%, respectively. These were both blended rates
taking into account operations activity, strategic plan activity, write-offs of
non-deductible goodwill and the timing of these items during the year. The tax
amount for the second quarter of both years was derived using the 28 week tax
amount with that year's estimated effective tax rate compared to the tax amount
recorded for the first 16 weeks of the year.
EXTRAORDINARY CHARGE.
We reflected an extraordinary after-tax charge of $3 million ($6 million
pre-tax) in the first quarter of 2001 due to the early retirement of debt. See
Note 7 in the notes to the consolidated condensed financial statements for
further discussion regarding the debt retirement.
CERTAIN ACCOUNTING MATTERS.
The Financial Accounting Standards Board (FASB) recently issued SFAS No. 142 --
Goodwill and Other Intangible Assets. One of the provisions of this standard is
to require use of a non-amortization approach to account for purchased goodwill.
Under that approach, goodwill and intangible assets with indefinite lives would
not be amortized to earnings over a period of time. Instead, these amounts would
be reviewed for impairment and expensed against earnings only in the periods in
which the recorded values are more than implied fair value. We are studying the
impact that SFAS 142 will have on our financial statements and planning to
implement it in fiscal year 2002, as required. Goodwill amortization impacted
the diluted per share amount for the second quarter of 2001, excluding the
strategic plan charges and litigation charges, by $0.08 per share. Year to date
in 2001, goodwill amortization impacted the diluted per share amount, excluding
the strategic plan charges, litigation charges, and net additional interest
expense due to the early retirement of debt, by $0.20 per share.
The FASB Emerging Issues Task Force (EITF) reached a consensus on EITF 00-25 -
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products. EITF 00-25 provides guidance on income statement
classification on consideration paid to a reseller of a vendor's products. This
consensus will be implemented by the end of 2001, as required. We anticipate
this consensus will provide for certain reclassifications of revenues and cost
of sales within our financial statements with no effect on gross margin or
earnings.
The FASB recently issued SFAS No. 141 -- Business Combinations. We are planning
to apply SFAS 141 to all business combinations initiated after June 30, 2001.
The FASB recently issued SFAS No. 143 - Accounting for Asset Retirement
Obligations. We are studying the impact that SFAS 143 has on our financial
statements and planning to implement it in the fiscal year after June 15, 2002,
as required. We have not determined the impact on our financial statements from
adopting these new standards.
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LIQUIDITY AND CAPITAL RESOURCES
In the two quarters ended July 14, 2001, our principal sources of liquidity were
borrowings under our credit facility and the proceeds from the sale of certain
assets. Our principal source of capital, excluding shareholders' equity, was the
issuance of bonds in the capital markets.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.
Net cash expended by operating activities was $64 million in the first two
quarters of 2001 compared to a $52 million source of cash for the same period in
2000. The primary use of cash was for working capital.
Cash requirements related to the implementation and completion of the strategic
plan (on a pre-tax basis) were $44 million for the first two quarters of 2001
and are currently expected to be $68 million for the full year 2001. We believe
working capital reductions and increased earnings related to the successful
implementation of the strategic plan will provide more than adequate cash flows
to cover all of these costs.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.
Total investment-related activity resulted in a $41 million use of cash for the
two quarters ended July 14, 2001 compared to a $6 million source of cash in the
same period of 2000. Cash expended for the purchases of businesses and property
and equipment was partially offset by the proceeds from asset sales.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.
Net cash generated by financing activities was $89 million for the first two
quarters of 2001 compared to $56 million net cash required for the same period
last year.
On March 23, 2001, we received approximately $50 million in proceeds from the
sale of common stock to an affiliate of the Yucaipa Companies, which at the time
represented an 8.7% ownership of Fleming's outstanding common stock. At that
time we also issued a warrant to purchase additional shares of common stock to
this entity.
On March 15, 2001, we sold $355 million of new 10 1/8% senior notes due 2008,
and we deposited $315 million with the trustee to redeem all of the 10 5/8%
senior notes due 2001, including an amount to cover accrued interest and the
redemption premium. On April 16, 2001, our obligations under the indenture were
discharged. The balance of the net proceeds was used to pay down our revolver
loans. An extraordinary after-tax charge of approximately $3 million was
recorded in connection with the early redemption. On March 15, 2001, we also
sold $150 million of 5 1/4% convertible senior subordinated notes due 2009 with
a conversion price of $30.27 per share. The net proceeds of $146 million were
used to pay down our revolver loans. At the end of the second quarter of 2001,
outstanding borrowings under the credit facility totaled $137 million of term
loans, $200 million of revolver loans, and $55 million of letters of credit. As
of July 14, 2001, we have additional borrowing capacity of $345 million under
the revolver. Our borrowing capacity is subject to covenants in the senior
subordinated notes.
For the foreseeable future, our principal sources of liquidity and capital are
expected to be cash flows from operating activities and our ability to borrow
under our credit facility. In addition, lease financing may be employed for new
retail stores and certain equipment. We believe these sources will be adequate
to meet working capital needs, capital expenditures, strategic plan
implementation costs and other capital needs in the normal course of business
for the next 12 months. Capital expenditures for the first two quarters of 2000
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totaled $112 million with $225 million projected for the full year of 2001. In
the future, as part of our growth strategy, we may need to raise additional
funds through public or private debt or equity financings in order to acquire
additional retail stores or other third party businesses or to expand our
services more rapidly. In addition, we may access such resources to refinance
existing indebtedness.
CONTINGENCIES
From time to time we face litigation or other contingent loss situations
resulting from owning and operating our assets, conducting our business or
complying (or allegedly failing to comply) with federal, state and local laws,
rules and regulations which may subject us to material contingent liabilities.
In accordance with applicable accounting standards, we record as a liability
amounts reflecting such exposure when a material loss is deemed by management to
be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, we
disclose material loss contingencies in the notes to our financial statements
when the likelihood of a material loss has been determined to be greater than
"remote" but less than "probable." Such contingent matters are discussed in Note
6 in the notes to the consolidated condensed financial statements. An adverse
outcome experienced in one or more of such matters, or an increase in the
likelihood of such an outcome, could have a material adverse effect on the
company. Also see Legal Proceedings.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that (a) project or offer
guidance regarding earnings, revenues, or other financial results, (b) depend on
future events for their accuracy, or (c) rely upon projections and assumptions
which may prove to be inaccurate. These forward-looking statements and our
business and prospects are subject to a number of factors that could cause
actual results to differ materially, including: the ability to achieve the
expected synergies and anticipated cost savings from the Kmart alliance;
unanticipated transition and costs related to the Kmart alliance; the ability to
obtain capital or obtain it on acceptable terms; unanticipated problems with
product procurement; adverse effects of the changing industry environment and
increased competition; sales declines and loss of customers; exposure to
litigation and other contingent losses; unanticipated charges related to the
strategic initiatives plan or failure to achieve the expected results of such
plan; the inability to integrate acquired companies and to achieve operating
improvements at those companies; increases in labor costs and disruptions in
labor relations with union bargaining units representing our associates; and
negative effects of our substantial indebtedness and the limitations imposed by
restrictive covenants contained in our debt instruments. These and other risk
factors are described in our Securities and Exchange Commission reports,
including but not limited to the 10-K Report for the 2000 fiscal year. We
undertake no obligation to update forward-looking statements to reflect
developments or information obtained after the date hereof.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In order to help maintain liquidity and finance business operations, we obtain
long-term credit commitments from banks and other financial institution lenders
under which term loans and revolving loans are made. Such loans carry variable
interest rates based on the London interbank offered interest rate ("LIBOR")
plus a borrowing margin for different interest periods, such as one week, one
month, and other periods up to one year. To assist in managing our debt
maturities and diversify our sources of debt capital, we also use long-term debt
which carries fixed interest rates. Additionally, we use interest rate swap
agreements to manage our ratio of fixed-to-floating rate debt in a cost
effective manner.
Changes in interest rates in the credit and capital markets and our improved
credit ratings had a material impact on the fair values of our outstanding debt
obligations. The table below presents a summary of our debt obligations. The
table shows the principal amount of cash we expect to pay each year according to
the scheduled maturities, as well as the average interest rates applicable to
such maturities.
SUMMARY OF DEBT OBLIGATIONS
VALUE AT VALUE AT THERE
12/30/00 7/14/01 2001 2002 2003 2004 2005 AFTER
-------- ------- ------- ------ ------- ------ ------ --------
Debt with variable interest rates
Principal payable $ 427 $ 332 $ 9 $ 40 $ 240 $ 49 $ -- $ --
Average variable rate payable 8.1% Based on LIBOR plus a margin
Debt with fixed interest rates
Principal payable $ 668 $1,095 $ -- $ -- $ -- $ 250 $ -- $ 755
Average fixed rate payable 10.6% 9.6% 5.9% 6.5% 5.1% 10.5% -- 9.3%
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Set forth below and further explained above in Note 6 to the consolidated
condensed financial statements is a description of our material pending
litigation:
Class Action Suits. In 1996, we and certain of our present and former officers
and directors were named as defendants in nine purported class action suits
filed by certain stockholders (City of Philadelphia, et al. v. Fleming
Companies, Inc., et al.) and one purported class action suit filed by two
noteholders (Robert Mark and Jerry Schoenbaum, et al v. Fleming Companies, Inc.,
et al.). These plaintiffs asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products.
On February 4, 2000, the court dismissed the amended complaint in the
stockholder case with prejudice. The stockholder plaintiffs filed a notice of
appeal on March 3, 2000. Briefing was completed in the United States Court of
Appeals for the Tenth Circuit, and oral argument was conducted on May 15, 2001.
The Tenth Circuit has not yet issued an opinion.
On May 25, 2001, we and the noteholder plaintiffs executed a settlement
agreement and preliminary approval by the court of this settlement agreement was
entered on May 30, 2001. The parties will seek final approval of the settlement
agreement following notice and hearing. Notice of the proposed settlement has
been published and mailed to class members, with the final hearing to approve
the settlement scheduled for September 5, 2001.
We intend to vigorously defend any remaining claims in these class action suits
and pursue the issue of insurance discussed in Note 6, but we cannot predict the
outcome of the cases. An unfavorable outcome could have a material adverse
effect on our financial condition and prospects.
Don's United Super (and related cases). We and two of our retired executives
were named in a suit filed in 1998 in the United States District Court for the
Western District of Missouri by several of our current and former customers
(Don's United Super, et al. v. Fleming, et al.). The 19 plaintiffs operate
retail grocery stores in the St. Joseph and Kansas City metropolitan areas. The
plaintiffs in this suit allege product overcharges, breach of contract, breach
of fiduciary duty, misrepresentation, fraud and RICO violations.
In October 1998, we and the same two retired executives were named in a suit
filed by another group of retailers in the same court as the Don's case
(Coddington Enterprises, Inc., et al. v. Fleming, et al.). These plaintiffs
assert claims virtually identical to those set forth in the Don's case.
Two other cases had been filed before the Don's case in the same court (R&D
Foods, Inc., et al. v. Fleming, et al.; and Robandee United Super, Inc., et al.
v. Fleming, et al.) by 10 customers, some of whom are also plaintiffs in the
Don's case.
In March 2000, we and one former executive were named in a suit filed in the
United States District Court for the Western District of Missouri by current and
former customers that operated five retail grocery stores in and around Kansas
City, Missouri, and four retail grocery stores in and around Phoenix, Arizona
(J&A Foods, Inc., et al. v. Dean Werries and Fleming Companies, Inc.). These
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plaintiffs have alleged product overcharges, fraudulent misrepresentation,
fraudulent nondisclosure and concealment, breach of contract, breach of duty of
good faith and fair dealing and RICO violations.
On August 16, 2001, we announced that an agreement in principle had been reached
to settle all claims related to the Don's United Super, Coddington Enterprises,
Inc., R&D Foods, Inc., Robandee United Super, Inc., and J&A Foods, Inc., cases.
The settlement, which is contingent on the preparation and execution of a
definitive agreement, includes a full release of us from liability to the
plaintiffs in these cases; payments by us to the plaintiffs over a 16 month
period; the transfer of a minority interest in several price-impact stores in
Arizona to us; and lease concessions by us to certain plaintiffs. As a result of
this agreement in principle, we recorded a $21 million after-tax charge in the
second quarter to reflect the total estimated cost of the settlement and other
related expenses.
We expect to execute this definitive agreement in the next few weeks. If a
definitive agreement is not reached, we intend to vigorously defend against the
claims in these related cases, but we cannot predict the outcome. An unfavorable
outcome could have a material adverse effect on our financial condition and
prospects.
Storehouse Markets. In 1998, we and one of our former executives were named in a
suit filed in the United States District Court for the District of Utah by
several of our current and former customers (Storehouse Markets, Inc., et al. v.
Fleming Companies, Inc., et al.). The plaintiffs have alleged product
overcharges, fraudulent misrepresentation, fraudulent nondisclosure and
concealment, breach of contract, breach of duty of good faith and fair dealing
and RICO violations.
In June 2001, counsel for the parties in the Storehouse Markets case informed
the court that they had reached an agreement in principle to settle all claims
for a total payment of $16 million. The settlement is subject to a number of
conditions, including final court approval. On July 9, 2001, the parties
executed a definitive agreement and the court preliminarily approved the
settlement subject to final court approval at a hearing scheduled for September
10, 2001.
If the settlement is not approved by the district court, or if the Storehouse
Markets case otherwise goes forward, we intend to vigorously defend against
these claims, but we cannot predict the outcome of the case. An unfavorable
outcome could have a material adverse effect on our financial condition and
prospects.
Welsh. In April 2000, the operators of two grocery stores in Van Horn and Marfa,
Texas filed an amended complaint in the United States District Court for the
Western District of Texas, Pecos Division (Welsh v. Fleming Foods of Texas,
L.P.). The amended complaint alleges product overcharges, breach of contract,
fraud, conversion, breach of fiduciary duty, negligent misrepresentation and
breach of the Texas Deceptive Trade Practices Act. The amended complaint seeks
unspecified actual damages, punitive damages, attorneys' fees and pre-judgment
and post-judgment interest. Pursuant to the order of the Judicial Panel on
Multidistrict Litigation, the Welsh case has been transferred to the Western
District of Missouri for pre-trial proceedings. No trial date has been set in
this case.
On March 2, 2001, the court ordered the parties in the related Missouri cases,
the Storehouse Markets case and the Welsh case to mediate their claims within 45
days of the order. The parties in the Welsh case have not yet mediated their
claims.
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Other. Our facilities and operations are subject to various laws, regulations
and judicial and administrative orders concerning protection of the environment
and human health, including provisions regarding the transportation, storage,
distribution, disposal or discharge of certain materials. In conformity with
these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection Agency
and by similar state agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
or similar state laws, as applicable, with respect to EPA-designated Superfund
sites. While liability under CERCLA for remediation at these sites is generally
joint and several with other responsible parties, we believe that, to the extent
we are ultimately determined to be liable for the expense of remediation at any
site, such liability will not result in a material adverse effect on our
consolidated financial position or results of operations. We are committed to
maintaining the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws, regulations and
orders.
We are a party to or threatened with various other litigation and contingent
loss situations arising in the ordinary course of our business including:
disputes with customers and former customers; disputes with owners and former
owners of financially troubled or failed customers; disputes with landlords and
former landlords; disputes with employees and former employees regarding labor
conditions, wages, workers' compensation matters and alleged discriminatory
practices; disputes with insurance carriers; tax assessments and other matters,
some of which are for substantial amounts. Except as noted above, we do not
believe that any such claim will have a material adverse effect on us.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to Form 10-Q for quarter ended April 17, 1999
3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q
for quarter ended April 17, 1999
10.81* Form of Restricted Stock Award Agreement
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
On July 12, 2001, the company filed a report on Form 8-K announcing the
execution of a definitive settlement agreement in the Storehouse Markets, Inc.
et al v. Fleming Companies, Inc. case.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
August 23, 2001 /s/ NEAL J. RIDER
--------------------------------
Neal J. Rider
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer of Registrant
and Principal Accounting and
Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1
to Form 10-Q for quarter ended April 17, 1999
3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q for
quarter ended April 17, 1999
10.81* Form of Restricted Stock Award Agreement
15 Letter from Independent Accountants as to Unaudited Interim Financial
Information
* Management contract, compensatory plan or arrangement.