UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 29, 2001
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
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
Number)
1945 Lakepointe Drive
PO Box 299013
Lewisville, Texas 75029
(972) 906-8000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, $2.50 Par Value New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the common stock of Fleming Companies, Inc. held
by nonaffiliates is $801 million (based on the New York Stock Exchange closing
price on February 25, 2002).
As of February 25, 2002, 44,478,000 shares of common stock were outstanding.
Documents Incorporated by Reference
Part III of this report has been incorporated by reference from our 2002 proxy
statement in connection with our 2002 annual meeting of shareholders, which the
Registrant will file no later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
Fleming is the industry leader in the wholesale distribution of consumable
goods, and also has a growing presence in operating "price impact" supermarkets.
Through our distribution segment, we distribute products to customers that
operate approximately 3,000 supermarkets, 6,800 convenience stores and over
2,000 supercenters, discount stores, limited assortment stores, drug stores,
specialty stores and other stores across the United States. At December 29,
2001, our retail segment operated 116 stores, predominantly supermarkets that
focus on low prices and high quality perishables. In the fiscal year ended
December 29, 2001, we generated total net sales of $15.6 billion.
Our distribution segment net sales were $13.3 billion for 2001, an 18.9%
increase over the prior period. Distribution represented approximately 85% of
total net sales in 2001. To supply our customers, we have a network of 24
full-line distribution centers and six general merchandise/specialty foods and
five convenience store distribution centers that have a total of approximately
21 million square feet of warehouse space.
Our retail segment net sales were $2.3 billion for 2001, which represented
approximately 15% of total net sales. Of this amount, $1.9 billion was
attributable to continuing operations, which represents a 1.1% increase over the
prior period. As of December 29, 2001, we owned and operated 94 price impact
supermarkets and five additional supermarkets that we are converting to the
price impact format. Price impact supermarkets offer everyday low prices that
are typically below the prices of market-leading conventional supermarkets.
These stores typically cost less to build, maintain and operate than
conventional supermarkets. In addition, we operated 17 limited assortment stores
under the yes!LESS(R) banner. Limited assortment stores offer a narrow selection
of low-price, private label food and other consumable goods, as well as general
merchandise at deep-discount prices.
In recent years, consumers have been shifting their purchases of food and other
consumable goods away from conventional full-service grocery stores toward other
retail channels, such as price impact supermarkets, discount stores,
supercenters, convenience stores, drug stores and ethnic food stores. Since
1998, we have repositioned our distribution segment to become a highly efficient
supplier to these retail channels. As a result, our distribution segment has
experienced renewed sales growth. In addition, we believe price-sensitive
consumers are underserved in the retail grocery market, and we have repositioned
our retail segment to expand our presence in the price impact format.
REPOSITIONING OF FLEMING
Since 1998, in the course of implementing our strategic initiatives, we have,
among other accomplishments:
o closed or consolidated 12 distribution centers, which resulted
in:
-- increased sales per full-line distribution center on
a weighted average basis by more than 40% from $389
million in 1998 to $552 million in 2001, and
-- increased sales per full-line distribution center
employee on a weighted average basis by 23% from 1998
to 2001;
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o currently centralized approximately 84% of our purchasing
operations in our customer support center near Dallas, Texas;
o centralized our accounting, human resources, information
technology and other support services in our shared services
center in Oklahoma City, Oklahoma;
o sold or closed 238 conventional supermarkets through the end
of 2001;
o opened 40 additional price impact supermarkets; and
o instituted a "culture of thrift" among our employees, in part
through our Low Cost Pursuit Program.
We believe these initiatives have lowered our cost structure, improved the
economics we can offer our traditional retail customers and strengthened our
appeal to new channel retailers. We believe these improvements have been the key
to our ability to increase distribution segment sales for the last eight
consecutive quarters (year-over-year comparisons). We added approximately $1.6
billion (pro forma for acquisitions) in gross annualized distribution segment
sales from both new channel retailers and our traditional supermarket customers
in 2001.
OUR DISTRIBUTION SEGMENT
Our distribution segment sells food and non-food products to supermarkets,
convenience stores, supercenters, discount stores, limited assortment stores,
drug stores, specialty stores and other stores across the United States. Net
sales for our distribution segment were $13.3 billion for fiscal 2001, excluding
sales to our own retail stores. Sales to our own retail stores totaled $1.2
billion during fiscal 2001.
Customers Served. Our distribution segment serves a wide variety of retail
operations located in all 50 states, the Caribbean and the South Pacific. The
segment serves customers operating as conventional supermarkets (averaging
approximately 23,000 total square feet), superstores (supermarkets of 30,000
square feet or more), supercenters (a combination of discount store and
supermarket encompassing 110,000 square feet or more), warehouse stores
("no-frills" operations of various large sizes), combination stores (which have
a high percentage of non-food offerings) and convenience stores (generally under
4,000 square feet and offering only a limited assortment of products).
Our top ten customers accounted for approximately 27% of our total net sales
during 2001. Kmart Corporation, our largest customer, represented approximately
20% of our total net sales in 2001. No other single customer represented more
than 2% of our 2001 net sales. In February 2001, we announced a ten-year
distribution agreement under which we supply to Kmart substantially all of the
food and consumable products in all current and future Kmart and Kmart
supercenter stores in the United States and the Caribbean. Shipments under this
new supply agreement began in April 2001, with full implementation in July 2001.
This supply arrangement includes grocery, frozen, dairy, packaged meat and
seafood, produce, bakery/deli, fresh meat, cigarettes, tobacco and candy.
Pricing. The distribution segment uses market research and cost analyses as a
basis for pricing its products and services. We have three basic marketing
programs for our distribution business: FlexMate, FlexPro and FlexStar.
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The FlexMate marketing program prices product to customers at a quoted sell
price, a selling price established by us that might include a mark-up. Under the
FlexPro and FlexStar programs, grocery, frozen and dairy products are priced at
their net acquisition value, which is generally comparable to the net cash price
paid by the distribution segment. Customers pay fees for specific activities
related to the selection and distribution of products. Certain vendor allowances
and service income are passed through to the customer under the FlexPro and
FlexStar programs, but service charges are different between the two programs.
Kmart product pricing for grocery, frozen, dairy, produce, packaged meat, bakery
and deli products follows the FlexPro/FlexStar pricing methodology, using net
acquisition value and passing through vendor allowances. Random weight meat and
deli products are priced at our last received cost. Certain other items are
priced at net acquisition value plus a negotiated fee. In addition, Kmart pays
us a logistics fee equal to a percentage of purchases, based on volume, and a
negotiated fixed annual procurement fee.
Private Label. Fleming's private label brands are Fleming-owned brands that we
offer exclusively to our customers. Our predominant brand is BestYet, and we
also market a small number of products under the Comida Sabrosa and Exceptional
Value brands. Private label lines offer quality products that are equal or
superior in quality to comparable nationally advertised brands and value brand
products at more competitive prices. As part of our Kmart distribution
agreement, Kmart has adopted our BestYet private label program in its Kmart and
Kmart supercenter stores and pays fees to us based on brand management. We
believe our private label brands generate higher margins for us and for our
customers than nationally advertised brands and other value brand products
because we are able to acquire them at lower costs.
Controlled labels are offered only in stores operating under specific banners
(which may or may not be controlled by us). Controlled labels are products for
which we have exclusive distribution rights to a particular customer or in a
specific region. We offer two controlled labels, IGA and Piggly Wiggly brands,
which are national quality brands.
Procurement. We have currently centralized approximately 84% of our merchandise
procurement in our customer support center near Dallas, Texas. This makes more
efficient use of our procurement staff, improves buying efficiency for us and
selling efficiency for our suppliers and reduces the cost of goods. We believe
our customer support center near Dallas is one of the largest volume-buying
locations of consumable goods in the United States. We believe that our
centralized purchasing capabilities and the volume discount pricing we have
achieved are valuable to national retailers as well as the smaller, independent
retailers that make up our traditional customer base. We make a small percentage
of our procurement decisions at the distribution center level where local market
needs and trends can best be addressed, such as decisions regarding local brand
or niche products, and where transportation costs may be minimized.
Retail Services and Franchising. Retail services are marketed, priced and
delivered separately from other distribution operations. Our retail services
marketing and sales personnel look for opportunities to cross-sell additional
retail services as well as other distribution segment products to their
customers. Through our retail account executive, or RAE, programs, we become
closely involved in the strategic planning and long-term success of our
customers. Incentive compensation for our RAEs is based on the performance of
the customers they serve. We also license from third parties for our own use or
grant franchises to retailers to use certain registered trade names.
Acquisitions. In April 2001, we acquired Minter-Weisman Co., a wholesale
distribution company serving over 800 convenience stores in Minnesota, Wisconsin
and surrounding states. In September 2001, we
4
acquired certain assets and inventory of Miller & Hartman South, LLC, a
wholesale distributor serving over 1,800 convenience stores in Kentucky and
surrounding states. During August 2001, we facilitated the third-party purchase
of 36 stores located in New Mexico and Texas from Furrs Supermarkets, most of
which were purchased by Fleming-supplied independent operators.
Facilities and Transportation. Our distribution segment operates 24 full-line
distribution centers which are responsible for the distribution of national
brands and private label Fleming brands, including groceries, meat, dairy and
delicatessen products, frozen foods, produce, bakery goods and a variety of
related food and non-food items. Six general merchandise and specialty food
operating units distribute health and beauty care items and other items of
general merchandise as well as specialty foods. Five warehouse facilities serve
convenience stores. All facilities are equipped with modern material handling
equipment for receiving, storing and shipping large quantities of merchandise.
Our distribution centers comprise approximately 21 million square feet of
warehouse space. Additionally, the distribution segment rents, on a short-term
basis, approximately 904,000 square feet of off-site temporary storage space.
Transportation arrangements and operations vary by distribution center and may
vary by customer.
Capital Invested in Customers. As part of our services to retailers, we provide
capital to certain customers by extending credit for inventory purchases, by
becoming primarily or secondarily liable for store leases, by leasing equipment
to retailers and by making secured loans to customers:
o Extension of Credit for Inventory Purchases. Customary trade
credit terms are usually the day following statement date for
customers on FlexPro or FlexStar and up to seven days for
other marketing plan customers. Convenience store trade credit
terms average approximately 14 days.
o Store and Equipment Leases. We lease stores for sublease to
certain customers. At December 29, 2001, we were the primary
lessee of approximately 600 retail store locations subleased
to and operated by customers. We also lease a substantial
amount of equipment to retailers.
o Secured Loans and Lease Guarantees. We selectively make loans
to customers primarily for store expansions or improvements.
These loans are typically secured by inventory and store
fixtures, have personal guarantees, bear interest at rates
above the prime rate, and are for terms of five to ten years.
Loans are approved by our business development committee
following written approval standards. We believe our loans to
customers are illiquid and would not be investment grade if
rated. From time to time, we also guarantee the lease
obligations of certain of our customers.
RECENT DEVELOPMENTS
On January 22, 2002, Kmart and certain of its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Kmart, our
largest customer, accounted for 20% of our net sales in 2001 and 10% of our net
sales in 2000. Kmart has announced that it will disclose its store closure plan
in March 2002. See Risk Factors in Management's Discussion and Analysis.
OUR RETAIL SEGMENT
As of December 29, 2001, our retail segment operated 116 supermarkets, including
99 price impact supermarkets primarily under the Food 4 Less and Rainbow Foods
banners. In addition, we operated 17 limited assortment stores under the
yes!LESS banner, 11 of which we opened in 2001.
5
As part of our strategic plan, we sold or closed 238 of our conventional format
supermarkets to focus resources on growing our price impact and limited
assortment stores. The following chart illustrates the number of supermarkets
and limited assortment stores we operated as of the dates indicated:
December 29, December 30, December 25, December 26,
2001 2000 1999 1998
------------ ------------ ------------ ------------
Continuing Stores
Price Impact(1) .................... 99 74 71 57
Limited Assortment ................. 17 6 -- --
------------ ------------ ------------ ------------
Subtotal ......................... 116 80 71 57
Non-Strategic Stores ............... -- 107 171 228
------------ ------------ ------------ ------------
Total ............................ 116 187 242 285
============ ============ ============ ============
--------
(1) The number of price impact stores at December 29, 2001 includes five
Sentry Foods stores that we are converting to the price impact format
in early 2002.
Price Impact Supermarkets. As of December 29, 2001, our retail segment owned and
operated 94 price impact supermarkets, of which 42 are located in Minnesota, 26
in Northern California, eight in Wisconsin, seven in the Salt Lake City, Utah
area, six in Texas, four in the Phoenix, Arizona area, and one in Las Cruces,
New Mexico. We also owned and operated five Sentry Food Stores in Wisconsin, two
of which have been converted to the price impact format since year-end and three
that we are converting in the next few months. Our price impact stores average
approximately 45,000 square feet and offer deep-discount, everyday low prices
well below those offered by conventional supermarkets and carry prices for
grocery products that are also generally lower than supercenters. Our price
impact supermarkets are particularly known for their quality meat and produce
offerings. Our price impact supermarkets that have been open at least one year
generated average weekly sales of approximately $450,000 per store for the year
ended December 29, 2001.
Our price impact supermarkets serve price-sensitive middle-income consumers who
may have larger-than-average families. These stores have a wider trade area than
conventional supermarkets yet are generally more convenient to shop than
supercenters. Our price impact supermarkets offer name-brand food and consumable
goods at significantly lower prices than conventional format retail store
operators because of the many low-cost features of our stores. These features
include: offering a reduced number of product selections, focusing on popular,
name-brand products and product categories; employing flow-through distribution
methods that reduce product storage and handling expense; and minimizing store
operating costs.
These stores do not cost as much as conventional stores to construct and
maintain, as price impact stores typically feature cement floors, cinder block
walls and exposed ceilings which combine the typically separate storage and
display areas. In addition, the efficiencies in the store design and operations
result in lower overall operating expenses. Because price impact stores cost
less to build and maintain than conventional supermarkets, we expect to be able
to grow our price impact supermarket operations while incurring lower capital
expenditures.
We believe price-sensitive consumers are underserved on a nationwide basis. We
believe the success of our price impact stores is based on an underserved trade
area and does not require significant market share. As a result, we spend less
on advertising and marketing for these stores compared to conventional format
stores.
6
Acquisitions. In April 2001, we purchased seven Food 4 Less stores located in
Central California from Whitco Foods, Inc. which we continue to operate as price
impact stores under the Food 4 Less banner. In August 2001, we purchased five
Smith's Food & Drug Stores located in New Mexico and Texas from Kroger Co. which
we operate under the Rainbow Foods banner.
Limited Assortment Stores. In 2000, we began to develop our limited assortment
retail concept operating under the yes!LESS trade name, operating stores
averaging 12,000 to 15,000 square feet of selling space. Our yes!LESS concept is
designed to appeal to a needs-based consumer, primarily with low-price private
label food and other consumables and an attractive selection of general
merchandise products at opening price points. Eleven stores were opened in 2001.
As of December 29, 2001, there were 17 yes!LESS retail stores open, 16 in Texas
and one in Louisiana.
PRODUCTS
We supply a full line of national brands and Fleming brands, including
groceries, meat, dairy and delicatessen products, frozen foods, produce, bakery
goods and a variety of general merchandise, health and beauty care and other
related items. During 2001, the average number of stock keeping units, or SKUs,
carried in full-line distribution centers was approximately 16,000. General
merchandise and specialty food operating units carried an average of
approximately 20,000 SKUs. SKU's carried by our distribution centers that
primarily distribute to convenience stores was approximately 6,000. During 2001,
our product mix as a percentage of sales was approximately 61% groceries, 33%
perishables and 6% general merchandise.
SUPPLIERS
We purchase our products from numerous vendors and growers. As a large customer
with centralized procurement, we are able to secure favorable terms and volume
discounts on many of our purchases, leading to lower unit costs. We purchase
products from a diverse group of suppliers and believe we have adequate sources
of supply for substantially all of our products.
COMPETITION
Our distribution segment operates in a competitive market. Our primary
competitors are national, regional and local food distributors and national
chains that perform their own distribution. The principal factors on which we
compete include price, quality and assortment of product lines, schedules and
reliability of delivery and the range and quality of customer services.
The primary competitors of our retail segment supermarkets are national,
regional and local grocery chains, as well as supercenters, independent
supermarkets, convenience stores, drug stores, restaurants and fast food
outlets. Principal competitive factors include price, quality and assortment,
store location and format, sales promotions, advertising, availability of
parking, hours of operation and store appeal.
INTELLECTUAL PROPERTY
We or our subsidiaries use many trade names registered either by us or by third
parties from whom we license the rights to use such trade names at either the
federal or state level or a combination of both, such as Piggly Wiggly, PWPETRO,
Piggly Wiggly xpress, Super 1 Foods, Festival Foods, Jubilee Foods, Jamboree
Foods, MEGAMARKET, Shop 'N Kart, ABCO Desert Market, American Family, Big Star,
7
Big T, Big Bear, Big Dollar, Buy for Less, County Pride Markets, Rainbow Foods,
Red Fox, Sentry, Shop N Bag, Super Duper, Super Foods, Super Thrift, Thriftway
and Value King.
We license the Food 4 Less service mark and trade name from Ralph's Grocery
Company, a subsidiary of Kroger Co., and have the exclusive right to use and
sublicense the name in California excluding certain areas of Southern
California. We also have the exclusive license to use and sublicense the name in
all other states, excluding certain areas in various states previously licensed
to others by Ralph's or its predecessors. Additionally, should the rights to
such a previously licensed area terminate, we would automatically obtain the
exclusive license for that area. The Food 4 Less license agreement generally
provides for protected trade area status for five years after the date that we,
our franchisees or Ralph's commit to entering a new market area under the Food 4
Less banner. However, we are not prohibited by the licensing agreement from
opening stores under a different trade name in any of these areas.
EMPLOYEES
At December 29, 2001, we had approximately 23,000 full-time and part-time
employees, with 11,000 employed by the distribution segment, 10,000 by the
retail segment and 2,000 employed in shared services, customer support and other
functions.
Approximately 42% of our employees are covered by collective bargaining
agreements. Most of these agreements expire at various times throughout the next
five years. We consider our employee relations in general to be satisfactory.
ITEM 2. PROPERTIES
The following table sets forth facilities information with respect to our
distribution segment:
APPROXIMATE
LOCATION SQUARE FEET OWNED OR LEASED
-------- ----------- ---------------
(IN THOUSANDS)
FULL-LINE DISTRIBUTION CENTERS:
Ewa Beach, HI 361 Leased
Ft. Wayne, IN 1,043 Leased
Fresno, CA 828 Owned/Leased
Garland, TX 1,175 Owned
Geneva, AL 793 Leased
Kansas City, KS 937 Leased
La Crosse, WI 907 Owned
Lafayette, LA 443 Owned
Lincoln, NE 516 Leased
Lubbock, TX 762 Owned/Leased
Massillon, OH 874 Owned
Memphis, TN 1,071 Owned/Leased
Miami, FL 764 Owned
Milwaukee, WI 600 Owned
Minneapolis, MN 480 Owned
Nashville, TN 941 Leased
North East, MD 591 Owned/Leased
Oklahoma City, OK 671 Leased
Phoenix, AZ 1,033 Owned/Leased
Sacramento, CA 787 Owned/Leased
Salt Lake City, UT 555 Owned/Leased
South Brunswick, NJ 526 Leased
Superior, WI 371 Owned
Warsaw, NC 672 Owned/Leased
---------
Total 17,701
GENERAL MERCHANDISE DISTRIBUTION CENTERS:
Dallas, TX 262 Owned/Leased
King of Prussia, PA 377 Leased
La Crosse, WI 163 Owned
Memphis, TN 495 Owned/Leased
Sacramento, CA 439 Leased
Topeka, KS 223 Leased
---------
Total 1,959
CONVENIENCE STORE DISTRIBUTION CENTERS:
Altoona, PA 172 Owned
Leitchfield, KY 169 Owned/Leased
Marshfield, WI 157 Owned
Plymouth, MN 239 Leased
Romeoville, IL 125 Leased
---------
Total 862
TEMPORARY STORAGE:
Outside storage facilities -- typically rented on
a short-term basis 904
---------
Total for distribution 21,426
=========
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In addition to the above, we have five closed distribution facilities in various
states and we are actively marketing them.
As of December 29, 2001, our retail segment operated 116 supermarkets in a
variety of formats in Arizona, California, Minnesota, New Mexico, Louisiana,
Texas, Utah and Wisconsin. Our continuing chains included 94 price impact
supermarkets, five supermarkets which we are converting to the price impact
format in early 2002, and 17 limited assortment stores. For more information,
see the subsection "Our Retail Segment."
Our shared service center office is located in Oklahoma City, Oklahoma. The
shared service center occupies leased office space totaling approximately
229,000 square feet. Our customer support center near Dallas, Texas occupies
leased office space totaling approximately 153,000 square feet.
We own and lease other significant assets, such as inventories, fixtures and
equipment and capital leases.
ITEM 3. LEGAL PROCEEDINGS
The following paragraphs describe two recently resolved legal proceedings. For
additional information see the Litigation Charges and the Contingencies
footnotes in the notes to the consolidated financial statements.
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. All cases were filed in the United States
District Court for the Western District of Oklahoma and in 1997 were
consolidated. The
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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.
In February 2000, the court dismissed the plaintiffs' complaint with prejudice.
In September 2001 the plaintiff lost their appeal to the Tenth Circuit and in
October 2001 their petition for a rehearing to the court was denied. The
plaintiffs did not request a review of the judgment of the lower courts to the
United States Supreme Court. As a result, all appeals by the plaintiffs are
exhausted and the judgment of the courts, as outlined above, will stand
unchanged.
Welsh. In April 2000, the operators of two grocery stores in 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 alleged product overcharges, breach of contract, fraud, conversion,
breach of fiduciary duty, negligent misrepresentation and breach of the Texas
Deceptive Trade Practices Act, and sought unspecified actual damages, punitive
damages, attorneys' fees and pre-judgment and post-judgment interest. On
December 31, 2001, the parties executed a settlement agreement that resolved all
claims related to the case. Fleming is not required to pay any amounts to the
plaintiffs pursuant to this settlement.
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 the following parties: customers; vendors; owners or creditors of
financially troubled or failed customers; suppliers; landlords and lessees;
employees regarding labor conditions, wages, workers' compensation matters and
alleged discriminatory practices; insurance carriers; and tax assessors.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Fleming common stock is traded on the New York, Chicago and Pacific stock
exchanges under the symbol FLM. As of February 25, 2002, approximately 44.5
million outstanding shares were owned by 14,000 shareholders of record and
approximately 15,500 beneficial owners whose shares are held in street name by
brokerage firms and financial institutions. The high and low common stock prices
per share were as follows:
2001 2000
--------------------- ----------------------
QUARTER HIGH LOW HIGH LOW
------- ------- ------- ------- ------
First $ 26.80 $ 10.75 $ 16.25 $ 8.69
Second 36.14 23.97 16.56 12.75
Third 37.89 23.55 17.63 12.38
Fourth 29.60 18.05 15.06 10.31
Cash dividends on Fleming common stock have been paid for 85 consecutive years.
Dividends are generally declared on a quarterly basis with holders as of the
record date being entitled to receive the cash dividend on the payment date.
Cash dividends of $.02 per share were paid on a quarterly basis in 2001 and
2000.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries for the periods and at the dates indicated. The
selected financial data were derived from our consolidated financial statements
and accounting records. The data presented below should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
2001(a) 2000(b) 1999(c) 1998(d) 1997(e)
------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 15,628 $ 14,444 $ 14,272 $ 14,678 $ 14,966
Earnings (loss) before
extraordinary charge 27 (122) (45) (511) 39
Net earnings (loss) 23 (122) (45) (511) 25
Diluted net earnings (loss)
per common share before
extraordinary charge 0.60 (3.15) (1.17) (13.48) 1.02
Diluted net earnings (loss)
per common share 0.52 (3.15) (1.17) (13.48) .67
Total assets 3,655 3,403 3,573 3,491 3,924
Long-term debt and
capital leases 1,760 1,610 1,602 1,503 1,494
Cash dividends declared
per common share .08 .08 .08 .08 .08
See Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 8. Financial Statements
and Supplementary Data.
(a) The results in 2001 reflect charges totaling $24 million ($25 million
after-tax) relating to the strategic plan, $70 million ($42 million
after-tax) for unusual items and $6 million ($3 million after-tax)
related to an extraordinary charge.
(b) The results in 2000 reflect charges of $309 million ($183 million
after-tax) relating to the strategic plan and income of less than $1
million ($1 million loss after-tax) for unusual items.
(c) The results in 1999 reflect charges totaling $137 million ($92 million
after-tax) related to the strategic plan and income of $6 million ($3
million after-tax) for unusual items.
(d) The results in 1998 reflect charges totaling $668 million ($543 million
after-tax) related to the strategic plan.
(e) The results in 1997 reflect a charge of $19 million ($9 million
after-tax) related to an unusual item and $22 million ($13 million
after-tax) related to an extraordinary charge.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report may be forward-looking. These statements are based on
current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors
discussed in the Risk Factors included in this report.
RESULTS OF OPERATIONS FOR 2001, 2000 AND 1999
Set forth in the following table is information regarding our net sales and
certain components of earnings expressed as a percent of sales which are
referred to in the accompanying discussion:
2001 2000 1999
------------ ------------ ------------
Net sales 100.00% 100.00% 100.00%
Gross margin 7.61 9.33 10.07
Less:
Selling and administrative 6.14 8.22 8.84
Interest expense 1.06 1.21 1.16
Interest income (.16) (.23) (.28)
Equity investment results .01 .06 .07
Impairment/restructuring charge (credit) (.15) 1.47 .72
Litigation charge (credit) .31 (.01) --
------------ ------------ ------------
Total expenses 7.21 10.72 10.51
------------ ------------ ------------
Income (loss) before taxes and
extraordinary charge .40 (1.39) (.44)
Taxes on income (loss) .23 (.54) (.13)
------------ ------------ ------------
Income (loss) before extraordinary
charge .17% (.85)% (.31)%
============ ============ ============
13
Included in amounts reported under generally accepted accounting principles
(GAAP) are charges (credits) related to our strategic plan and certain other
unusual items that affect the year-to-year comparisons of operating results. The
following tables show which income statement caption these items affected and
reconcile our reported gaap amounts to adjusted amounts for 2001, 2000 and 1999.
The adjusted amounts are not presentations made in accordance with GAAP and are
not a better indicator of our operating performance. We believe the ability to
compare GAAP amounts and adjusted amounts on a year-to-year basis is important
to understand the impact of these items and the changes in our operations.
(IN THOUSANDS) ADJUSTMENTS
-------------- -----------------------------
STRATEGIC UNUSUAL
2001 GAAP PLAN(1) ITEMS(2) ADJUSTED
----------------------------------- ------------ ------------ ------------ ------------
Net sales $ 15,627,744 $ (2,740) $ -- $ 15,625,004
Costs and expenses:
Cost of sales 14,437,841 (32,781) (2,500) 14,402,560
Selling and administrative 960,590 (17,501) (17,300) 925,789
Interest expense 165,534 -- (2,833) 162,701
Interest income (25,586) -- 1,102 (24,484)
Equity investment results 1,533 -- -- 1,533
Impairment/restructuring credit (23,595) 23,595 -- --
Litigation charge 48,628 -- (48,628) --
------------ ------------ ------------ ------------
Total costs and expenses 15,564,945 (26,687) (70,159) 15,468,099
------------ ------------ ------------ ------------
Income before taxes $ 62,799 $ 23,947 $ 70,159 $ 156,905
============ ============ ============ ============
STRATEGIC UNUSUAL
2000 GAAP PLAN(1) ITEMS(3) ADJUSTED
----------------------------------- ------------ ------------ ------------ ------------
Net sales $ 14,443,815 $ 2,181 $ (8,636) $ 14,437,360
Costs and expenses:
Cost of sales 13,096,915 (56,990) 13,039,925
Selling and administrative 1,186,919 (36,550) (10,426) 1,139,943
Interest expense 174,569 -- -- 174,569
Interest income (32,662) -- -- (32,662)
Equity investment results 8,034 (315) -- 7,719
Impairment/restructuring charge 212,845 (212,845) -- --
Litigation credit (1,916) -- 1,916 --
------------ ------------ ------------ ------------
Total costs and expenses 14,644,704 (306,700) (8,510) 14,329,494
------------ ------------ ------------ ------------
Income (loss) before taxes $ (200,889) $ 308,881 $ (126) $ 107,866
============ ============ ============ ============
STRATEGIC UNUSUAL
1999 GAAP PLAN(1) ITEMS(4) ADJUSTED
----------------------------------- ------------ ------------ ------------ ------------
Net sales $ 14,272,036 $ 94 $ (5,600) $ 14,266,530
Costs and expenses:
Cost of sales 12,834,869 (17,806) 12,817,063
Selling and administrative 1,261,631 (15,124) (8,966) 1,237,541
Interest expense 165,180 -- -- 165,180
Interest income (40,318) -- 9,157 (31,161)
Equity investment results 10,243 (832) -- 9,411
Impairment/restructuring charge 103,012 (103,012) -- --
------------ ------------ ------------ ------------
Total costs and expenses 14,334,617 (136,774) 191 14,198,034
------------ ------------ ------------ ------------
Income (loss) before taxes $ (62,581) $ 136,868 $ (5,791) $ 68,496
============ ============ ============ ============
(1) See the Impairment/Restructuring Charge (Credit) and Related Costs
footnote in the notes to the consolidated financial statements.
14
(2) Includes $19.8 million in charges related to the Kmart bankruptcy
reorganization ($2.5 million in cost of sales and $17.3 million in
selling and administrative), net additional interest expense of $1.7
million due to early retirement of debt ($2.8 million in interest
expense and $1.1 million in interest income) and $48.6 million in
charges from litigation settlements (in litigation charge).
(3) Includes $8.6 million in gains from the sale of distribution facilities
(in net sales), $10.4 million in charges related to retail stores (in
selling and administrative) and income of $1.9 million relating to
litigation settlements (in litigation credit).
(4) Includes income of $5.6 million in gains from the sale of distribution
facilities (in net sales), $31.0 million in charges to close certain
retail stores and income of $22.0 million from extinguishing a portion
of the self-insured workers' compensation liability (both netted in
selling and administrative) and interest income of $9.2 million related
to refunds of federal income taxes from prior years (in interest
income).
Net Sales.
Our net sales increased by over 8% to $15.63 billion in 2001, following a 1%
increase to $14.44 billion in 2000 from $14.27 billion in 1999. 2001 and 1999
were 52-week years; 2000 was a 53-week year.
Distribution segment net sales increased 19% in 2001 and 6% in 2000. The net
growth in 2001 was a result of several factors including increased activity with
Kmart, acquisitions of certain assets of Miller & Hartman South and the stock of
Minter-Weisman Co. (combined annualized sales of approximately $850 million) and
growth in distribution sales from a wide variety of new-channel and conventional
customers, offset by customer closings and the consolidation of
self-distributing chains. New-channel customers, including convenience stores,
supercenters, limited assortment stores, drug stores and self-distributing
chains, are an important part of our strategic growth plan. Sales to customers
other than Kmart increased over 4% in 2001 compared to 2000 (over 6% on a
52-week comparable basis). In 2000, the increase in sales was primarily due to
new business added from independent retailers, convenience stores, e-tailers,
and supercenter customers, including Super Target stores. This increase was
partially offset by a loss of previously announced sales from Randall's (in
1999) and United (in 2000). In 1999, sales to Randall's and United accounted for
less than 4% of our total sales. We expect sales to customers other than Kmart
to increase at least 5% in 2002, factoring in known losses due to bankruptcies,
customer closings and the consolidation of self-distributing chains.
Kmart Corporation, our largest customer, accounted for 20% and 10% of our total
net sales in 2001 and 2000, respectively. In 2001, we became the sole supplier
of food and consumable products to Kmart Corporation's more than 2,100 stores
and supercenters. We began shipments under the new ten-year agreement in April
2001, with full implementation in July 2001. Sales to Kmart increased to
approximately $3.1 billion in 2001 from $1.4 billion in 2000. In January 2002,
Kmart filed voluntary petitions for chapter 11 bankruptcy. Kmart has announced
that it will announce its store closure plan in March 2002. At that time, we
will be able to better assess the impact on our future sales.
Retail segment sales decreased 28% in 2001, following a 12% decrease in 2000.
The primary reasons for the decreases in both 2001 and 2000 relate to the
divestiture of under-performing and non-strategic conventional retail stores to
increase focus on our price impact retail stores partially offset by store
acquisitions. We operated 116, 187 and 242 retail stores at the end of 2001,
2000 and 1999, respectively. Sales in our price impact retail stores increased
over 14% in 2001 with the number of stores increasing from 74 at the beginning
of 2001 to 99 at the end of 2001. Same store sales in 2001 increased 1.1 % over
2000.
15
Gross Margin.
Gross margin as a percentage of net sales, decreased to 7.61% in 2001 from 9.33%
in 2000 and 10.07% for 1999. The decrease was primarily due to a change in mix
between the distribution and retail segments. The sales of the distribution
segment represent a larger portion of total company sales in 2001 compared to
2000 and in 2000 compared to 1999 due to the continual increase in distribution
sales as well as the divestiture of non-strategic retail. The distribution
segment has lower margins as a percentage of sales versus the retail segment.
Distribution segment gross margin as a percentage of sales increased to 4.81% in
2001 from 4.70% in 2000 and decreased in 2000 from 4.93% in 1999. Adjusted gross
margin as a percentage of sales decreased to 4.88% in 2001 from 4.93% in 2000
and 4.97% in 1999. The decrease in 2001 was primarily due to increased Kmart
business that is at a lower margin, and the decrease in 2000 was due primarily
to increased transportation costs due to the consolidation of distribution
centers. Both years' decreases were partially offset by the centralization of
procurement to support services.
Retail segment gross margin as a percentage of sales decreased to 21.58% in 2001
from 23.05% in 2000 and increased in 2000 from 22.26% in 1999. Adjusted gross
margin as a percentage of sales decreased to 22.50% in 2001 from 23.37% in 2000
but increased in 2000 from 22.47% in 1999. The decreasing margin in 2001
reflects our transition out of conventional retail and into price impact retail,
which has lower shelf prices and gross margins. Improvements in 2000 compared to
1999 were primarily due to the divesting or closing of under-performing stores.
Selling and Administrative Expenses.
Selling and administrative expenses decreased as a percentage of net sales to
6.14% in 2001 from 8.22% in 2000 and 8.84% in 1999. The decreases were due to
asset rationalization, our low cost pursuit program, and centralizing
administrative functions, but also due to a reduction in the volume of the
retail segment. The distribution segment has lower selling and administrative
expenses as a percentage of sales versus the retail segment.
Distribution segment selling and administrative expenses as a percentage of
sales decreased to 1.77% in 2001 from 1.88% in 2000 and 2.12% in 1999. Adjusted
selling and administrative expenses as a percentage of sales decreased to 1.61%
in 2001 from 1.74% in 2000 and 2.05% in 1999. The primary reasons for the
decreases during these years are due to leveraging the effect of sales growth
and low cost pursuit initiatives along with centralizing administrative
functions to support services.
Retail segment selling and administrative expenses as a percentage of sales
decreased to 21.13% in 2001 from 23.18% in 2000 and 33.01% in 1999. Adjusted
selling and administrative expenses as a percentage of sales decreased to 20.78%
in 2001 from 22.68% in 2000 and 23.17% in 1999. The decrease is primarily
attributed to our shift in focus from conventional retail to price impact
retail, a format that has lower operating expense levels than conventional
retail.
Operating Earnings.
For distribution and retail segments, we measure operating earnings as sales
less cost of sales less selling and administrative expenses. The change in
operating earnings is a combination of the explanations included in sales, gross
margin and selling and administrative expenses described above.
Operating earnings as a percentage of net sales for 2001 were 1.47%, up from
1.11% in 2000 and down in 2000 from 1.23% in 1999. Adjusted operating earnings
as a percentage of net sales increased to 1.90% in 2001 from 1.78% in 2000 and
1.49% in 1999.
16
Distribution segment operating earnings as a percentage of net sales for 2001
were 2.98%, up from 2.66% in 2000 and down in 2000 from 2.75% in 1999. Adjusted
operating earnings as a percentage of net sales increased to 3.23% in 2001 from
3.10% in 2000 and 2.86% in 1999.
Retail segment operating earnings as a percentage of sales for 2001 were 2.40%,
up from 1.89% in 2000 and a loss of .04% in 1999. Adjusted operating earnings as
a percentage of net sales increased to 3.67% in 2001 from 2.72% in 2000 and
1.14% for 1999.
Interest Expense.
Interest expense in 2001 was $166 million, down from $175 million in 2000 and
2000 was up from $166 million in 1999. The decrease in 2001 was due primarily to
lower average debt balances for revolver loans and capitalized lease obligations
along with lower average interest rates for revolver and term loans. The
increase in 2000 related to both higher average balances and interest rates. The
$166 million in 2001 included $3 million of interest expense related to the
early retirement of debt in the first quarter of 2001.
For 2001, interest rate hedge agreements resulted in a $2.5 million reduction of
net interest expense compared to additional expense of $0.9 million in 2000 and
$4.8 million in 1999. The company enters into interest rate swap transactions to
manage our debt portfolio and interest rate risks. See the Long-term Debt
footnote in the notes to the consolidated financial statements for further
discussion of these transactions.
Interest Income.
Interest income of $26 million in 2001 decreased from $33 million in 2000 and
$40 million in 1999 due to reduced customer and other interest-bearing
receivable balances, lower interest rates and an unusual item in 1999 related to
interest on refunds of federal income taxes from prior years. The $26 million in
2001 included $1 million of interest income related to the early retirement of
debt in the first quarter of 2001.
Equity Investment Results.
Equity investment results improved to a loss of $1.5 million for 2001 compared
to losses of $8.0 million for 2000 and $10.2 million for 1999. The improvement
is due to the liquidation of investments resulting in a smaller portfolio.
Impairment/Restructuring Charge (Credit).
The pre-tax charge for our strategic plan totaled $24 million for 2001, $309
million for 2000 and $137 million for 1999. Of these totals, a recovery of $24
million in 2001 and charges of $213 million and $103 million in 2000 and 1999,
respectively, were reflected in the impairment/restructuring charge (credit)
line with the balance of the charges reflected in other financial statement
lines. See the Impairment/Restructuring Charge (Credit) and Related Costs
footnote in the notes to the consolidated financial statements for further
discussion of these charges.
Litigation Charge.
In 2001, we recorded litigation settlements and other related pre-tax expenses
totaling $49 million related to the settlement of 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., and other cases. In 2000, we recorded $2 million of net income in
settlements relating to other cases. See Item 3. Legal Proceedings and the
Contingencies footnote in the notes to the consolidated financial statements for
further discussion regarding these litigation charges.
17
Taxes on Income.
The effective tax rates used for 2001, 2000 and 1999 were 57.4%, 39.2% and
28.5%, respectively, with 2000 and 1999 representing a tax benefit. These are
blended rates taking into account operations activity, strategic plan activity,
write-offs of non-deductible goodwill and the timing of these transactions
during the year. The effective tax rate for 2001 was high due to the impact of
goodwill permanent differences from the sale of certain retail stores.
Extraordinary charge.
We reflected an extraordinary after-tax charge of $3 million ($6 million
pre-tax) in 2001 due to the early retirement of debt. See the Long-term Debt
footnote in the notes to the consolidated financial statements for further
discussion regarding the debt retirement.
Certain Accounting Matters.
The Financial Accounting Standards Board (FASB) 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 and
other indefinite intangibles. 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 currently testing for impairment and expect to have
such testing defined by the end of the first quarter of 2002; the tests will be
performed by the end of the second quarter of 2002. Goodwill amortization in
2001 was $21.2 million. Our estimate of the impact that goodwill amortization
had on the diluted per share amount for 2001, excluding the strategic plan
charges, litigation charges, Kmart credit loss and net additional interest
expense due to the early retirement of debt, was $0.43 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 and EITF 01-9 - Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products). EITF 00-25
and EITF 01-9 provide guidance on income statement classification on
consideration paid to a reseller of a vendor's products. They will be
implemented in the first quarter of 2002, as required, and will provide for
certain reclassifications of revenues and cost of sales within our financial
statements totaling approximately $70 million for 2001 with no effect on gross
margin or earnings.
The FASB 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 fiscal year 2003, as required. The FASB issued SFAS
No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. We
will implement SFAS 144 as of the beginning of fiscal year 2002, as required. In
December 2001, the AICPA's Accounting Standards Executive Committee issued
Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others. The SOP is effective for our 2002 fiscal year. This SOP provides
guidance on the accounting for and disclosure of amounts due to us from
customers included in our accounts and notes receivable. We do not expect the
adoption of these new standards to have a significant effect on our results of
operations or financial position.
Critical Accounting Policies and Estimates.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on an on-going basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates
18
and assumptions include, but are not limited to, customer receivables,
inventories, assets held for sale, fixed asset lives, intangible assets, income
taxes, self-insurance reserves, retirement benefits, and contingencies and
litigation. We have also chosen certain accounting policies when options are
available, including:
o the last-in, first-out (LIFO) method to value a majority of our
inventories; and
o the intrinsic value method, or APB Opinion No. 25, to account for our
common stock incentive awards.
These accounting policies are applied consistently for all years presented. Our
operating results would be affected if other alternatives were used. Information
about the impact on our operating results of using LIFO and APB Opinion No. 25
is included in the footnotes to our consolidated financial statements.
We believe that the following represent our more critical estimates and
assumptions used in the preparation of our consolidated financial statements,
although not inclusive.
o We record estimates for certain health and welfare and workers'
compensation and casualty insurance costs that are self-insured
programs. Should a greater amount of claims occur compared to what was
estimated or costs of the medical profession increase beyond what was
anticipated, reserves recorded may not be sufficient and additional
costs to the consolidated financial statements could be required.
o We record allowance for credit losses based on estimates of customers'
ability to pay and the fair value of collateral. If the financial
condition of our customers or the fair value of the collateral were to
deteriorate, additional allowances may be required.
o We record reserves for closed stores based on future lease commitments,
anticipated future subleases of properties and current risk-free
interest rates. If interest rates or the real estate leasing markets
change, additional reserves may be required.
LIQUIDITY AND CAPITAL RESOURCES
In the fiscal year ended December 29, 2001, our principal sources of cash were
cash flows from operating activities, the sale of certain assets and investments
and debt offerings. During this period, sources of long-term capital, excluding
shareholders' equity, were borrowings under our credit facility, lessors of
equipment and retail locations, and the issuance of bonds in the capital market.
On December 29, 2001, we had $347 million available under the revolving portion
of our credit facility and $475 million of net working capital (including $17
million of cash and cash equivalents).
Net cash provided by (used in) operating activities.
Net cash used in operating activities was $32 million for the year ended
December 29, 2001, compared to cash provided by operating activities of $127
million for the same period in 2000. The use of cash in 2001 can be attributed
to an increase in inventories and trade receivables as a result of growth in our
distribution business. The growth can be attributed to a long-term supply
agreement with Kmart Corporation and other new customers added during the year.
The Kmart contract alone required approximately $150 million of additional
working capital investment.
The use of cash in 2001 was partially offset by lower cash payments for
strategic plan expenditures of $68 million compared to $118 million in 2000.
Although the strategic plan has been completed, cash requirements for recorded
liabilities will continue for the next few years as closed-store leases and
multi-employer pension obligations are paid.
19
Net cash used in investing activities.
Net cash used in investing activities totaled $190 million in fiscal 2001
compared to $48 million for 2000. Included in the 2001 net investment
expenditures were $238 million for capital expenditures and $121 million for
acquisitions of businesses. Offsetting these expenditures in part were $146
million in proceeds from the sale of property and equipment and conventional
retail stores.
For fiscal 2002, capital expenditures are expected to be approximately $200
million to maintain our distribution system, grow our price impact retail
operations, and further upgrade our information technology systems. Acquisitions
of supermarket groups or chains or distribution operations will be made only on
a selective basis and are not necessarily included in the $200 million estimate
above.
Net cash provided by (used in) financing activities.
For fiscal 2001, net cash provided by financing activities was $209 million
compared to a use of $55 million in 2000. Included in 2001 was a net increase in
long-term debt of $187 million. In March of 2001, we issued $355 million of 10
1/8% senior notes that mature April 1, 2008 and $150 million of 5 1/4%
convertible senior subordinated notes that mature March 15, 2009. The proceeds
were used to redeem all of the 10 5/8% notes due December 2001 and to pay down
outstanding revolver loans. Also in March 2001, we sold $50 million of common
stock in a private placement. In October 2001, we sold an additional $150
million of our existing 10 5/8% senior subordinated notes due 2007 and the
proceeds were used to pay down outstanding revolver loans. The net increase in
debt can primarily be attributed to various new Kmart business from the
long-term supply agreement and acquisitions in 2001. Also in 2001, capital lease
obligations decreased $46 million as a result of lease terminations and payments
to lessors.
EBITDA
We generated $476 million, $456 million and $411 million of adjusted EBITDA for
fiscal 2001, 2000 and 1999, respectively. "Adjusted EBITDA" is earnings before
extraordinary items, interest expense, income taxes, depreciation and
amortization, equity investment results, LIFO provision and unusual adjustments
(e.g., strategic plan charges and other unusual expense or income items).
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.
20
The following table sets forth our calculation of adjusted EBITDA (in millions):
2001 2000 1999
----------- ----------- -----------
Net income (loss) before extraordinary charge $ 27 $ (122) $ (45)
Add back:
Taxes on income (loss) 36 (79) (18)
Depreciation/amortization 166 169 158
Interest expense 166 175 165
Equity investment results 2 8 10
LIFO (12) 3 11
----------- ----------- -----------
EBITDA 385 154 281
Add back non-cash strategic plan
charges and unusual items* 8 129 92
----------- ----------- -----------
EBITDA excluding non-cash
strategic plan charges 393 283 373
Add back strategic plan charges and
unusual items ultimately requiring cash* 83 173 38
----------- ----------- -----------
Adjusted EBITDA $ 476 $ 456 $ 411
=========== =========== ===========
* - Excludes amounts already added back: interest expense of $3 million for
2001; depreciation/amortization of $7 million for 2000; and equity
investment results of $1 million for 1999.
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 our ability to service debt.
For fiscal 2002, our principal sources of liquidity and capital are expected to
be cash flows from operating activities, our ability to borrow under the
revolving portion of our credit facility, and our ability to access the capital
markets. In addition, lease financing may be employed for new retail stores,
distribution facilities and certain equipment. Management believes the sources
mentioned will be adequate to meet working capital needs, capital expenditures,
expenditures for acquisitions (if any), strategic plan reserve payouts and other
capital needs for the remainder of fiscal 2002.
Contractual Obligations and Commitments.
We enter into certain obligations in the normal course of business with
contractual future cash payments as summarized below:
Payments due in:
FISCAL FISCAL FISCAL FISCAL FISCAL THERE-
2002 2003 2004 2005 2006 AFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
Long-term debt(1) $ 30 $ 240 $ 299 $ -- $ -- $ 889 $ 1,458
Capital lease obligations(2) 62 61 60 59 55 187 484
Operating leases(2) 85 75 69 59 50 144 482
Closed store reserves 17 17 9 5 5 20 73
Pension withdrawals(3) 10 4 -- -- -- -- 14
Litigation settlement payout 11 11 -- -- -- -- 22
21
(1) See Long-Term Debt in the notes to the consolidated financial
statements.
(2) See Lease Agreements in the notes to the consolidated financial
statements.
(3) See Impairment/Restructuring Charge (Credit) and Related Costs in the
notes to the consolidated financial statements. Includes contingency
reserves with payments estimated.
We are also contingently committed to certain off balance sheet obligations in
the normal course of business with future expirations as summarized below:
Commitments expire in:
FISCAL FISCAL FISCAL FISCAL FISCAL THERE-
2002 2003 2004 2005 2006 AFTER TOTAL
---------- -------- -------- -------- -------- ---------- ----------
(IN MILLIONS)
Letters of credit * $ 1 $ -- $ -- $ -- $ -- $ 52 $ 53
Loan guarantees 2 -- -- -- -- -- 2
Lease guarantees 4 3 2 1 2 5 17
* - Most of our letters of credit guarantee self-insurance reserves.
To the extent a change of control would occur, we could be required to pay
significant amounts to current management in connection with change in control
agreements.
RISK FACTORS
There are many factors that affect our business and results of operations. The
following is a description of some of the important factors that may cause
actual results of our operations in future periods to differ materially from
those currently expected or desired.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT AND DEBT SERVICE OBLIGATIONS, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have a substantial amount of debt outstanding. The following chart shows
certain important credit statistics as of December 29, 2001.
Total debt (including capital leases)......... $ 1,811 million
Shareholders' equity.......................... 498 million
Total capitalization.......................... 2,309 million
Debt to capitalization........................ 78%
Our debt could have important consequences to you. For example, it could:
o make it more difficult to satisfy our long term debt obligations;
o require us to dedicate a substantial portion of our cash flow to payments
on our debt;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to fund future working capital, capital expenditures and
other general corporate requirements;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
o limit, along with the financial and other restrictive covenants in our
debt, among other things, our ability to borrow additional funds.
Our subsidiaries and we may be able to incur substantial additional debt in the
future, including secured debt. The terms of the indentures governing our
outstanding debt do not fully prohibit us or our subsidiaries from doing so. As
of December 29, 2001, our credit facility permitted additional borrowings of up
to $347 million. If new debt is added to our and our subsidiaries' current debt
levels, the related risks that we and they now face could intensify.
Our ability to make payments on and to refinance our debt will depend on our
financial and operating performance, which may fluctuate significantly from
quarter to quarter and is subject to prevailing economic conditions and to
financial, business and other factors beyond our control.
We cannot assure you that our business will generate sufficient cash flow from
operations or that future borrowings will be available to us under our credit
facility in an amount sufficient to enable us to pay our debt or to fund our
other liquidity needs. We may need to refinance all or a portion of our debt on
or before maturity. We cannot assure you that we will be able to refinance any
of our debt on commercially reasonable terms or at all.
WE MAY BE MATERIALLY ADVERSELY AFFECTED BY THE BANKRUPTCY OF KMART CORPORATION.
Kmart Corporation is our largest customer, accounting for 20% of our net sales
in 2001. On January 22, 2002, Kmart and certain of its subsidiaries filed
voluntary petitions for relief under
22
Chapter 11 of the U.S. Bankruptcy Code. Shortly thereafter, Kmart and Fleming
entered into a critical vendor agreement under the terms of which Kmart paid us
$76 million and we agreed to supply Kmart for two years. We will assert a
prepetition claim in the bankruptcy proceeding for obligations under our
ten-year distribution agreement. A material portion of this claim may not be
paid by Kmart.
The terms of our distribution agreement provide that Kmart can terminate if,
among other things, the volume of Kmart's purchases decline by certain amounts,
if we materially breach our obligations, including a failure to maintain
specified service levels, or if we experience certain types of changes of
control. Kmart can also elect to terminate the distribution agreement on
12-months written notice given after the fifth anniversary of its effective
date, with the termination to take place at the end of a transition period of up
to an additional 12 months at Kmart's discretion.
Subject to the effect of the critical vendor agreement, Kmart has the right to
assume or reject the distribution agreement with us. If Kmart rejects it, a
breach by Kmart will result, effective immediately prior to the bankruptcy
filing date, but we may still have to supply Kmart for a 12-month transition
period. If Kmart assumes the distribution agreement, it would be required to
cure all defaults, including payment of our prepetition claim.
Because Kmart is a substantial portion of our business, negative information
about Kmart's performance, financial condition, business prospects and progress
through its bankruptcy may adversely affect the market and prices of our
securities.
We cannot predict at this date what affect this bankruptcy will have on us, but
if Kmart chooses to close a large number of its stores, our sales and earnings
could be materially adversely affected. Further, a failure by Kmart to
successfully reorganize or to continue as a going concern would have a material
adverse effect on us. Also, although no material litigation is currently
outstanding, we may be involved in litigation related to the Kmart bankruptcy,
including litigation with vendors from whom we ordered product.
THE INDENTURES GOVERNING OUR PUBLICLY TRADED NOTES, OUR CREDIT FACILITY AND OUR
OTHER EXISTING INDEBTEDNESS CONTAIN PROVISIONS THAT COULD MATERIALLY RESTRICT
OUR BUSINESS.
The indentures governing our publicly traded notes, our credit facility and our
other existing indebtedness contain a number of significant covenants that,
among other things, restrict our ability to:
o dispose of assets;
o incur additional debt;
o guarantee third-party obligations;
o repay other debt or amend other debt instruments;
o create liens on assets;
o enter into capital leases;
o make investments, loans or advances;
o make acquisitions or engage in mergers or consolidations;
o make capital expenditures; and
o engage in certain transactions with our subsidiaries and affiliates.
23
Under our credit facility and indentures, we are required to meet a number of
financial ratios and tests. If we fail to achieve a ratio or test, it could
result in an event of default and cause a cross-default under additional
documents governing our other existing indebtedness. Such a default would permit
our lenders to declare all amounts borrowed thereunder to be due and payable,
together with accrued and unpaid interest, and our senior lenders could
terminate their commitments to make further extensions of credit under our
credit facility. If we were unable to repay debt to our secured lenders, they
could proceed against the collateral securing the debt.
IF THE CUSTOMERS TO WHOM WE LEND MONEY OR SUBLEASE REAL PROPERTY OR FOR WHOM WE
GUARANTEE STORE LEASE OBLIGATIONS FAIL TO REPAY US, IT COULD HARM OUR FINANCIAL
CONDITION.
We provide subleases, extend loans to and make investments in many of our retail
store customers, often in conjunction with the establishment of long-term supply
contracts. As of December 29, 2001, we had an aggregate of $118 million in
outstanding loans to our customers. Our loans to our customers are not
investment grade and are highly illiquid. We also have investments in customers
through direct financing leases of real property and equipment, lease
guarantees, operating leases or credit extensions for inventory purchases.
Although we have credit policies and apply cost/benefit analyses to these
investment decisions, we face the risk that credit losses from existing or
future investments or commitments could adversely affect our financial
condition. Our credit loss expense from receivables as well as from investments
in customers was $38 million in 2001 (including a $17 million charge related to
the Kmart bankruptcy) and $29 million in 2000.
VARIOUS CHANGES IN THE DISTRIBUTION AND RETAIL MARKETS IN WHICH WE OPERATE HAVE
LED AND MAY CONTINUE TO LEAD TO REDUCED SALES AND MARGINS AND LOWER
PROFITABILITY FOR OUR CUSTOMERS AND, CONSEQUENTLY, FOR US.
The distribution and retail markets in which we operate are undergoing
accelerated change as distributors and retailers seek to lower costs and provide
additional services in an increasingly competitive environment. An example of
this is the growing trend of large self-distributing chains consolidating to
reduce costs and gain efficiencies. Eating away from home and alternative format
food stores, such as warehouse stores and supercenters, have taken market share
from traditional supermarket operators, including independent grocers, many of
whom are our customers. Vendors, seeking to ensure that more of their
promotional fees and allowances are used by retailers to increase sales volume,
increasingly direct promotional dollars to large self-distributing chains. We
believe that these changes have led to reduced sales, reduced margins and lower
profitability among many of our customers and, consequently, for us. If the
strategies we have developed in response to these changing market conditions are
not successful, it could harm our financial condition and business prospects.
CONSUMABLE GOODS DISTRIBUTION IS A LOW-MARGIN BUSINESS AND IS SENSITIVE TO
ECONOMIC CONDITIONS.
We derive most of our revenues from the consumable goods distribution industry.
This industry is characterized by a high volume of sales with relatively low
profit margins. Significant portions of our sales are at prices that are based
on product cost plus a percentage markup. Consequently, our results of
operations may be negatively impacted when consumable goods prices go down, even
though our percentage markup may remain constant. The consumable goods industry
is also sensitive to national and regional economic conditions, and the demand
for our consumable goods has been adversely affected from time to time by
economic downturns. Additionally, our distribution business is sensitive to
increases in fuel and other transportation-related costs.
24
WE FACE INTENSE COMPETITION IN BOTH OUR DISTRIBUTION AND RETAIL MARKETS, AND IF
WE ARE UNABLE TO COMPETE EFFECTIVELY IN THESE MARKETS, IT COULD HARM OUR
BUSINESS.
Our distribution group operates in a highly competitive market. We face
competition from local, regional and national food distributors on the basis of
price, quality and assortment, schedules and reliability of deliveries and the
range and quality of services provided. We also compete with retail supermarket
chains that self-distribute, purchasing directly from vendors and distributing
products to their supermarkets for sale to the consumer. Consolidation of
self-distributing chains may produce even stronger competition for our
distribution group.
Our retail group competes with other food outlets on the basis of price, quality
and assortment, store location and format, sales promotions, advertising,
availability of parking, hours of operation and store appeal. Traditional mass
merchandisers have gained a growing foothold in food marketing and distribution
with alternative store formats, such as warehouse stores and supercenters, which
depend on concentrated buying power and low-cost distribution technology. We
expect that stores with alternative formats will continue to increase their
market share in the future. Retail consolidations not only produce stronger
competition for our retail group, but may also result in declining sales in our
distribution group if our existing customers are acquired by self-distributing
chains or if self-distributing chains are otherwise able to increase their
market share.
Some of our competitors have greater financial and other resources than we do.
In addition, consolidation in the industry, heightened competition among our
vendors, new entrants and trends toward vertical integration could create
additional competitive pressures that reduce our margins and adversely affect
our business. If we fail to successfully respond to these competitive pressures
or to implement our strategies effectively, it could have a material adverse
effect on our financial condition and business prospects.
BECAUSE WE OWN AND OPERATE REAL ESTATE, WE FACE THE RISK OF BEING HELD LIABLE
FOR ENVIRONMENTAL DAMAGES THAT MAY OCCUR ON OUR PROPERTIES.
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, and
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. Although we have established reserves that we
believe will be sufficient to satisfy the anticipated costs of all known
remediation requirements, we cannot assure you that these reserves will be
sufficient.
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.
25
VARIOUS LEGAL ACTIONS, GOVERNMENTAL INVESTIGATIONS AND PROCEEDINGS AND CLAIMS
ARE PENDING OR THREATENED OR MAY BE ASSERTED IN THE FUTURE AGAINST US.
We are a party to or threatened with various legal proceedings, claims and
contingent loss situations arising in the ordinary course of our business
including:
o disputes with customers and vendors;
o disputes with owners or creditors of financially troubled or failed
customers;
o disputes with employees regarding labor conditions, wages, workers'
compensation matters and alleged discriminatory practices;
o disputes with insurance carriers;
o disputes with landlords and lessees; and
o disputes with tax authorities;
some of which may be for substantial amounts. We will incur the costs of
defending such legal proceedings and claims whether or not they have merit. We
intend to vigorously defend against all lawsuits, but we cannot predict the
outcome of any case. An unfavorable outcome in any case could be expensive and
harm our business and financial condition.
BECAUSE WE SELL FOOD AND OTHER PRODUCTS, WE ARE SUBJECT TO PRODUCT LIABILITY
CLAIMS.
Like any other seller of food and other products, we face the risk of exposure
to product liability claims in the event that people who purchase products we
sell become injured or experience illness as a result. We believe that we have
sufficient primary and excess umbrella liability insurance to protect us against
any product liability claims that may arise. However, this insurance may not
continue to be available at a reasonable cost, or, even if it is available, it
may not be adequate to cover our liabilities. We generally seek contractual
indemnification and insurance coverage from parties supplying our products, but
this indemnification or insurance coverage is limited, as a practical matter, to
the creditworthiness of the indemnifying party and the policy limits of any
insurance provided by suppliers. If we do not have adequate insurance or
contractual indemnification to cover our liabilities, product liability claims
relating to defective food and other products could materially reduce our
earnings.
OUR CURRENT STRATEGY INVOLVES GROWTH THROUGH ACQUISITIONS, WHICH REQUIRES US TO
INCUR SUBSTANTIAL COSTS AND POTENTIAL LIABILITIES FOR WHICH WE MAY NEVER REALIZE
THE ANTICIPATED BENEFITS.
Part of our growth strategy for our retail group involves selective strategic
acquisitions of stores operated by others. In addition, our distribution group
intends to seek strategic acquisitions of other distribution centers on a
limited basis. Since the beginning of 2000, we have acquired several different
businesses. In April 2001, we acquired Minter-Weisman Co., a wholesale
distribution company serving over 800 convenience stores in Minnesota, Wisconsin
and surrounding states. In April 2001, we also purchased seven Food 4 Less
stores located in Central California from Whitco Foods, Inc. which we continue
to operate as price impact stores under the Food 4 Less banner. During August
2001, we facilitated the third-party purchase of 36 stores located in New Mexico
and Texas from Furrs Supermarkets, most of which were purchased by
Fleming-supplied independent operators. In September 2001, we purchased five
Smith's Food & Drug Stores located in New Mexico and Texas from Kroger Co. which
we operate under our price impact format. Also in September 2001, we purchased
certain assets and inventory of Miller & Hartman South, LLC, a wholesale
distributor serving over 1,800 convenience stores in Kentucky and surrounding
states.
26
We cannot assure you that we will be able to continue to implement our growth
strategy, or that this strategy will ultimately be successful. We regularly
engage in evaluations of potential acquisitions and are in various stages of
discussion regarding possible acquisitions, certain of which, if consummated,
could be significant to us. Any potential acquisitions may result in significant
transaction expenses, increased interest and amortization expense, increased
depreciation expense and increased operating expense, any of which could have a
material adverse effect on our operating results.
Achieving the benefits of these acquisitions will depend in part on our ability
to integrate those businesses with our business in an efficient manner. We
cannot assure you that this will happen or that it will happen in an efficient
manner. Our consolidation of operations following these acquisitions may require
substantial attention from our management. The diversion of management attention
and any difficulties encountered in the transition and integration process could
have a material adverse effect on our ability to achieve expected net sales,
operating expenses and operating results for these acquired businesses. We
cannot assure you that we will realize any of the anticipated benefits of any
acquisition, and if we fail to realize these anticipated benefits, our operating
performance could suffer. Furthermore, we may not be able to identify suitable
acquisition candidates, obtain acceptable financing or consummate any new
acquisitions.
WE OPERATE IN A COMPETITIVE LABOR MARKET, AND A SUBSTANTIAL NUMBER OF OUR
EMPLOYEES ARE COVERED BY COLLECTIVE BARGAINING AGREEMENTS.
Our continued success will depend on our ability to attract and retain qualified
personnel in both our distribution and retail groups. We compete with other
businesses in our markets with respect to attracting and retaining qualified
employees. A shortage of qualified employees would require us to enhance our
wage and benefits packages in order to compete effectively in the hiring and
retention of qualified employees or to hire more expensive temporary employees.
In addition, about 42% of our employees are covered by collective bargaining
agreements, most of which expire at various times over the course of the next
five years. We cannot assure you that we will be able to renew our collective
bargaining agreements, that our labor costs will not increase, that we will be
able to recover any increases through increased prices charged to customers or
that we will not suffer business interruptions as a result of strikes or other
work stoppages. If we fail to attract and retain qualified employees, to control
our labor costs, or to recover any increased labor costs through increased
prices charged to our customers, it could harm our business.
TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT THE MARKETS ON
WHICH THE NOTES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR OPERATIONS AND OUR
PROFITABILITY.
Terrorist attacks may negatively affect our operations and your investment.
There can be no assurance that there will not be further terrorist attacks
against the United States or U.S. businesses. These attacks or armed conflicts
may directly impact our physical facilities or those of our suppliers or
customers. Furthermore, these attacks may make travel and the transportation of
our supplies and products more difficult and more expensive and ultimately
affect our sales.
Also as a result of terrorism, the United States has entered into an armed
conflict which could have a further impact on our sales, our supply chain, and
our ability to deliver product to our customers. Political and economic
instability in some regions of the world may also result and
27
could negatively impact our business. The consequences of any of these armed
conflicts are unpredictable, and we may not be able to foresee events that could
have an adverse effect on our business or your investment.
More generally, any of these events could cause consumer confidence and spending
to decrease or result in increased volatility in the United States and worldwide
financial markets and economy. They also could result in economic recession in
the United States or abroad. Any of these occurrences could have a significant
impact on our operating results, revenues and costs and may result in the
volatility of the market price for our securities and on the future price of our
securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure in the financial markets consists of changes in interest rates
related to our investment in notes receivable, the balance of debt obligations
outstanding, and derivatives employed from time to time to hedge long term fixed
interest rates as well as changes on variable interest rate debt. We do not use
foreign currency exchange rate forward contracts or commodity contracts and do
not have any material foreign currency exposure. We do not use financial
instruments or derivatives for any trading purposes. From time to time, we may
use simple derivative transactions, such as interest rate swap transactions. At
fiscal year-end 2001, we had contracts for $210 million of fixed-to-floating
interest rate swaps in place (see the Long-Term Debt footnote in the notes to
the consolidated financial statements for more detail regarding our interest
rate swaps).
To help maintain liquidity and finance business operations, we obtained a
long-term credit commitment from banks and other financial institutional 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.
Changes in interest rates in the credit and capital markets may have a material
impact on our interest expense and interest income, as well as on the fair
values for our investment in notes receivable, our outstanding debt obligations
and any financial derivatives used. The table below presents a summary of the
categories of our financial instruments according to their respective interest
rate profiles. For notes receivable, the table shows the principal amount of
cash we expect to collect each year according to the scheduled maturities, as
well as the average interest rates applicable to such maturities. For 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. For derivatives, the table shows when the
notional principal contracts terminate.
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SUMMARY OF FINANCIAL INSTRUMENTS
MATURITIES OF PRINCIPAL BY FISCAL YEAR
-----------------------------------------------------------
(IN MILLIONS, EXCEPT FAIR VALUE FAIR VALUE THERE-
RATES) AT 12/30/00 AT 12/29/01 2002 2003 2004 2005 2006 AFTER
----------- ----------- ---- ---- ---- ---- ---- -----
NOTES RECEIVABLE WITH VARIABLE INTEREST RATES
Principal receivable $ 97 103 14 21 19 16 13 21
Average variable rate
receivable 12.1% 11.18% Based on the referenced Prime Rate plus a margin
NOTES RECEIVABLE WITH FIXED INTEREST RATES
Principal receivable $ 19 19 5 4 2 2 2 4
Average fixed rate
receivable 9.8% 9.87% 9.91% 9.95% 10.01% 10.16% 10.50% 10.50%
DEBT WITH VARIABLE INTEREST RATES
Principal payable $ 427 318 30 240 49 0 0 0
Average variable rate
payable 8.1% 4.0% Based on LIBOR plus a margin
DEBT WITH FIXED INTEREST RATES
Principal payable $ 668 1,124 0 0 250 0 0 905
Average fixed rate
payable 10.6% 9.7% 6.5% 5.1% 10.5% 0.0% 0.0% 9.5%
FIXED-TO-FLOATING RATE SWAPS
Amount payable None 9
Notional amount 210
Average variable rate
payable None 7.1% Based on LIBOR plus a margin
Average fixed rate
receivable None 10.1%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1. Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information regarding Directors and Executive Officers appearing under the
headings "Board of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our Proxy Statement relating to our 2002 Annual Meeting of the
Shareholders (the "2002 Proxy Statement") is incorporated herein by reference,
which we will file within 120 days after the end of the fiscal year covered by
this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Fleming Companies, Inc. as of March 1, 2002 were as
follows:
NAME AGE PRESENT POSITION
---- --- ----------------
Mark S. Hansen.................................. 47 Chairman and Chief Executive Officer
J.R. Campbell................................... 57 Executive Vice President, Merchandising and Supply
Thomas G. Dahlen................................ 47 Executive Vice President and President, Retail and Corporate
Marketing
E. Stephen Davis................................ 61 Executive Vice President and President, Wholesale
Ron Griffin..................................... 48 Executive Vice President and Chief Information Officer
William H. Marquard............................. 42 Executive Vice President, Business Development and Chief Knowledge
Officer
Scott M. Northcutt.............................. 40 Executive Vice President, Human Resources
Neal J. Rider................................... 40 Executive Vice President and Chief Financial Officer
Michael J. Carey................................ 55 Senior Vice President, Western Operations
Charles L. Hall................................. 51 Senior Vice President, Real Estate and Store Development
Carlos M. Hernandez............................. 47 Senior Vice President, General Counsel and Secretary
Matthew H. Hildreth............................. 36 Senior Vice President, Finance and Treasurer
Leonard Kaye.................................... 63 Senior Vice President, Eastern Operations
Timothy R. LaBeau............................... 47 Senior Vice President, Operations
William A. Merrigan............................. 56 Senior Vice President, Logistics
Philip B. Murphy................................ 53 Senior Vice President, Procurement
Mark D. Shapiro................................. 42 Senior Vice President, Finance and Operations Control
Thomas A. Zatina................................ 50 Senior Vice President, Northern Operations
Mark S. Hansen joined us as Chairman and Chief Executive Officer in November
1998. Prior to joining us, Mr. Hansen served as President and Chief Executive
Officer of SAM'S Club, a division of Wal-Mart Stores, Inc., from 1997 through
1998. Prior to joining Wal-Mart, Mr. Hansen served in multiple capacities at
PETsMART, Inc., a retailer of pet food, pet supplies and related products,
including as President and Chief Executive Officer from 1989 to 1997. Prior to
1989, Mr. Hansen served in various management capacities in the supermarket
industry. He serves as an executive advisory board member of Swander Pace
Capital and is a director of Applebee's Restaurants and Amazon.com.
J.R. Campbell joined us as our Executive Vice President, Merchandising and
Supply in January 2002. Prior to joining us, Mr. Campbell served for over 20
years in various capacities at Wal-Mart Stores, Inc., including Senior Vice
President and General Merchandise Manager of Wal-Mart Stores, Senior Vice
30
President of Merchandising for Sam's Club, and most recently as President,
Global Sourcing Division of Wal-Mart Stores.
Thomas G. Dahlen joined us as our Executive Vice President and President, Retail
and Corporate Marketing in April 2001. From 1999 until joining us, Mr. Dahlen
served as President and Chief Executive Officer of Furrs Supermarkets, Inc. From
1994 until 1999, Mr. Dahlen served in multiple capacities at Ralph's
Supermarkets Division of the Yucaipa Companies, including Executive Vice
President from 1998 to 1999, and Senior Vice President, Sales and Marketing from
1994 to 1998.
E. Stephen Davis joined us in 1960 and has served as our Executive Vice
President and President, Wholesale since February 2000. Prior to that, Mr. Davis
has served us in various positions, including Executive Vice President, Food
Distribution from 1998 to February 2000, Executive Vice President, Operations
from 1997 to 1998, Executive Vice President, Food Operations from 1996 to 1997
and Executive Vice President, Distribution from 1995 to 1996.
Ron Griffin joined us as Executive Vice President and Chief Information Officer
in January 2002. Prior to joining us, Mr. Griffin served for over 10 years in
various capacities at The Home Depot, Inc., including most recently as Senior
Vice President and Chief Information Officer.
William H. Marquard joined us as Executive Vice President, Business Development
and Chief Knowledge Officer in June 1999. From 1991 until joining us, Mr.
Marquard was a partner in the consulting practice of Ernst & Young.
Scott M. Northcutt joined us as Senior Vice President, Human Resources in
January 1999 and he became Executive Vice President, Human Resources in February
2000. From 1997 until joining us, Mr. Northcutt was Vice President-People Group
at SAM's Club, a division of Wal-Mart Stores, Inc. From 1988 to 1995, he served
as Vice President-Human Resources and from 1995 to 1996, he served as Vice
President-Store Operations at Dollar General Corporation.
Neal J. Rider joined us as Executive Vice President and Chief Financial Officer
in January 2000. From 1999 until joining us, Mr. Rider was Executive Vice
President and Chief Financial Officer at Regal Cinemas, Inc. From 1980 to 1999,
Mr. Rider served in multiple capacities at American Stores Company, including
Treasurer and Controller responsibilities from 1994 to 1997 before becoming
Chief Financial Officer in 1998.
Michael J. Carey joined us in 1983 and has served as our Senior Vice President,
Western Operations since June 2000. Prior to that, Mr. Carey served as our
Operating Group President from 1998 to June 2000, our President, LaCrosse
Division from 1996 to 1998, and our Director of IGA Marketing from 1994 to 1996.
Charles L. Hall joined us as Senior Vice President, Real Estate and Store
Development in June 1999. From 1998 until joining us, he was Senior Vice
President-Real Estate and Store Development at Eagle Hardware and Garden, Inc.
From 1992 to 1998, he served as Vice President of Real Estate Development at
PETsMART, Inc.
Carlos M. Hernandez joined us in March 2000 as Associate General Counsel and
Assistant Secretary and has served as our Senior Vice President, General Counsel
and Secretary since February 2001. Prior to joining us, Mr. Hernandez was
employed in various capacities at Armco Inc. from 1981 to 1999, and then as an
attorney at AK Steel Holding Corporation from October to December 1999.
31
Matthew H. Hildreth joined us as Senior Vice President, Finance and Treasurer in
May 2001. Prior to joining us, Mr. Hildreth served in various positions at
JPMorgan since 1989, including most recently as Vice President and Sector Head
of North American Trucking for JPMorgan's Transportation and Logistics Group.
Leonard Kaye joined us in 1963 and has served as our Senior Vice President,
Eastern Operations since June 2000. Prior to that, Mr. Kaye served us in various
positions, including Operating Group President, President, Memphis Division and
Operations Manager.
Timothy R. LaBeau joined us in January 2002 as Senior Vice President of
Operations. Prior to joining us, Mr. LaBeau served as President and Chief
Executive Officer of Royal Ahold subsidiary American Sales Company from 1998 to
December 2001. Prior to that, Mr. LaBeau served as Executive Vice President of
Merchandising and Procurement for Ahold USA from 1994 to 1998.
William A. Merrigan joined us in November 2000 and has served as our Senior Vice
President, Logistics since May 2001. Prior to joining us, Mr. Merrigan served as
Senior Vice President of Logistics at Nash Finch Company from 1998 to November
2000. Prior to that, Mr. Merrigan served in various senior positions at Wakefern
Food Corporation from 1986 to 1998, including most recently as Vice President of
Logistics and Transportation.
Philip B. Murphy joined us in October 2000 as Vice President of Grocery, and has
served as our Senior Vice President, Procurement since May 2001. Prior to that,
Mr. Murphy served as Senior Vice President and General Manager of Services at
PETsMART, Inc. from 1995 to 2000.
Mark D. Shapiro joined us in June 2001 as Senior Vice President, Finance. Prior
to joining us, Mr. Shapiro served in various positions at Big Lots, Inc. since
1992, including most recently as Senior Vice President and Chief Financial
Officer.
Thomas A. Zatina joined us in June 2001 as Senior Vice President, Northern
Operations. Prior to joining us, Mr. Zatina served in various positions at
Bozzuto's, Inc., a Connecticut-based wholesale distributor, since 1986,
including most recently as Executive Vice President and Chief Operating Officer.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2002 Proxy Statement set forth under the captions
"Employment Contracts, Termination of Employment and Change of Control
Arrangements", "Summary Compensation Table", "Directors Compensation",
"Performance Graph", "Pension Plan", "Long-Term Incentive Plan - Awards in Last
Fiscal Year", "Report of the Compensation and Organization Committee" and "Stock
Option Information" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Beneficial Ownership" and
"Securities Authorized for Issuance Under Equity Compensation Plans" of the 2002
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" of the 2002 Proxy Statement is incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
o Consolidated Statements of Operations -
For the years ended December 29, 2001, December 30,
2000 and December 25, 1999
o Consolidated Balance Sheets -
At December 29, 2001 and December 30, 2000
o Consolidated Statements of Cash Flows -
For the years ended December 29, 2001, December 30,
2000 and December 25, 1999
o Consolidated Statements of Shareholders' Equity -
For the years ended December 29, 2001, December 30,
2000 and December 25, 1999
o Notes to Consolidated Financial Statements -
For the years ended December 29, 2001, December 30,
2000 and December 25, 1999
o Independent Auditors' Report
o Quarterly Financial Information (Unaudited)
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts (filed here
within)
3. Exhibits:
The exhibits listed in the accompanying Index to Exhibits are
filed or incorporated by reference as part of this Annual
Report.
(b) Reports on Form 8-K:
1. On November 11, 2001, we disclosed a communication to certain
of our institutional stockholders.
2. On October 15, 2001, we reported that (i) on September 5,
2001, we planned to issue new 10-year senior subordinated
notes in a private placement, and (ii) on October 5, 2001, we
entered into a purchase agreement for the private issuance and
sale, pursuant to Rule 144A and Regulation S, of $150 million
of our 10 5/8% Series C Senior Subordinated Notes due 2007 and
on October 15, 2001, we closed this transaction.
33
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
------------ ------------ ------------
Net sales $ 15,627,744 $ 14,443,815 $ 14,272,036
Costs and expenses (income):
Cost of sales 14,437,841 13,096,915 12,834,869
Selling and administrative 960,590 1,186,919 1,261,631
Interest expense 165,534 174,569 165,180
Interest income (25,586) (32,662) (40,318)
Equity investment results 1,533 8,034 10,243
Impairment/restructuring charge (credit) (23,595) 212,845 103,012
Litigation charge (credit) 48,628 (1,916) --
------------ ------------ ------------
Total costs and expenses 15,564,945 14,644,704 14,334,617
------------ ------------ ------------
Income (loss) before taxes 62,799 (200,889) (62,581)
Taxes on income (loss) 36,022 (78,747) (17,853)
------------ ------------ ------------
Net income (loss) before
extraordinary charge 26,777 (122,142) (44,728)
Extraordinary charge, net of tax (3,469) -- --
------------ ------------ ------------
Net income (loss) $ 23,308 $ (122,142) $ (44,728)
============ ============ ============
Basic net income (loss) per share:
Before extraordinary charge $ 0.63 $ (3.15) $ (1.17)
Extraordinary charge, net of tax (0.08) -- --
------------ ------------ ------------
Net income (loss) $ 0.55 $ (3.15) $ (1.17)
============ ============ ============
Diluted net income (loss) per share:
Before extraordinary charge $ 0.60 $ (3.15) $ (1.17)
Extraordinary charge, net of tax (0.08) -- --
------------ ------------ ------------
Net income (loss) $ 0.52 $ (3.15) $ (1.17)
============ ============ ============
Weighted average shares outstanding
Basic 42,588 38,716 38,305
============ ============ ============
Diluted 44,924 38,716 38,305
============ ============ ============
See notes to consolidated financial statements.
34
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 29, 2001 AND DECEMBER 30, 2000
(IN THOUSANDS)
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 17,325 $ 30,380
Receivables, net 588,269 509,045
Inventories 1,014,695 831,265
Assets held for sale 30,066 165,800
Other current assets 89,716 86,583
------------ ------------
Total current assets 1,740,071 1,623,073
Investments and notes receivable, net 105,651 104,467
Investment in direct financing leases 83,118 102,011
Property and equipment:
Land 39,644 40,242
Buildings 373,510 356,376
Fixtures and equipment 653,009 565,472
Leasehold improvements 219,058 210,970
Leased assets under capital leases 203,497 197,370
Construction in progress 135,781 57,039
------------ ------------
1,624,499 1,427,469
Less accumulated depreciation and amortization (704,844) (653,973)
------------ ------------
Net property and equipment 919,655 773,496
Other assets 252,008 255,445
Goodwill, net 554,190 544,319
------------ ------------
TOTAL ASSETS $ 3,654,693 $ 3,402,811
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 971,791 $ 943,279
Current maturities of long-term debt 29,865 38,171
Current obligations under capital leases 21,410 21,666
Other current liabilities 242,061 229,272
------------ ------------
Total current liabilities 1,265,127 1,232,388
Long-term debt 1,427,929 1,232,400
Long-term obligations under capital leases 331,836 377,239
Other liabilities 131,582 133,592
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value, authorized -
100,000 shares, issued and outstanding -
44,438 and 39,618 shares 111,095 99,044
Capital in excess of par value 567,720 513,645
Reinvested earnings (deficit) (121,160) (144,468)
Accumulated other comprehensive income -
additional minimum pension liability (59,436) (41,029)
------------ ------------
Total shareholders' equity 498,219 427,192
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,654,693 $ 3,402,811
============ ============
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
(IN THOUSANDS)
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 23,308 $ (122,142) $ (44,728)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 166,406 169,190 157,510
Amortization costs in interest expense 6,809 4,917 4,869
Credit losses 37,795 28,872 25,394
Deferred income taxes 36,165 (65,538) 3,357
Equity investment results 1,533 8,034 10,243
Impairment/restructuring and related
charges, net of impairment credit (not in other lines) 19,199 288,408 135,346
Cash payments on impairment/
restructuring and related charges (68,141) (118,190) (57,340)
Change in assets and liabilities,
excluding effect of acquisitions:
Receivables (104,458) (26,005) (55,692)
Inventories (139,032) 65,639 (22,049)
Accounts payable 21,714 (49,121) 35,744
Other assets and liabilities (40,140) (63,198) (70,112)
Other adjustments, net 6,697 5,779 (4,925)
------------ ------------ ------------
Net cash provided by (used in) operating activities (32,145) 126,645 117,617
------------ ------------ ------------
Cash flows from investing activities:
Collections on notes receivable 30,691 32,943 34,798
Notes receivable funded (21,879) (35,841) (43,859)
Businesses acquired (121,373) (7,320) (78,440)
Proceeds from sale of businesses 120,947 45,693 7,042
Purchase of property and equipment (238,413) (150,837) (166,339)
Proceeds from sale of property and equipment 24,693 50,957 35,487
Investments in customers -- -- (8,115)
Proceeds from sale of investments 5,115 3,552 2,745
Other investing activities 10,460 12,949 3,337
------------ ------------ ------------
Net cash used in investing activities (189,759) (47,904) (213,344)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings 793,742 185,000 191,000
Principal payments on long-term debt (597,389) (219,519) (71,178)
Principal payments on capital lease obligations (20,903) (20,888) (21,533)
Sale of common stock 59,794 4,051 1,267
Payments on cost of debt (25,775) (571) (31)
Dividends paid (3,410) (3,117) (3,082)
Other financing activities 2,790 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 208,849 (55,044) 96,443
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (13,055) 23,697 716
Cash and cash equivalents,
beginning of year 30,380 6,683 5,967
------------ ------------ ------------
Cash and cash equivalents, end of year $ 17,325 $ 30,380 $ 6,683
============ ============ ============
See notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CAPITAL REINVESTED
COMMON STOCK IN EXCESS EARNINGS
TOTAL SHARES AMOUNT OF PAR VALUE (DEFICIT)
--------- ------------ --------- ------------ ----------
BALANCE AT DECEMBER 27, 1998 $ 569,931 38,542 $ 96,356 $ 509,602 $ 23,155
Comprehensive income
Net loss (44,728) (44,728)
Other comprehensive income,
net of tax
Minimum pension liability
adjustment (net of $21,049
of taxes) 31,573
Comprehensive income
Incentive stock and stock
ownership plans 4,955 314 785 4,170
Cash dividends, $0.08 per share (3,078) (2,325) (753)
ESOP note payments 2,049
--------- ------ --------- --------- ----------
BALANCE AT DECEMBER 25, 1999 560,702 38,856 97,141 511,447 (22,326)
Comprehensive income
Net loss (122,142) (122,142)
Other comprehensive income,
net of tax
Minimum pension liability
adjustment (net of $10,312
of taxes) (15,469)
Comprehensive income
Incentive stock and stock
ownership plans 7,210 762 1,903 5,307
Cash dividends, $0.08 per share (3,109) (3,109)
--------- ------ --------- --------- ----------
BALANCE AT DECEMBER 30, 2000 427,192 39,618 99,044 513,645 (144,468)
Comprehensive income
Net income 23,308 23,308
Other comprehensive income
Minimum pension liability
adjustment (net of $12,271
of taxes) (18,407)
Comprehensive income
Stock sale 47,479 3,850 9,626 37,853
Incentive stock and stock
ownership plans 22,122 970 2,425 19,697
Cash dividends, $.08 per share (3,475) (3,475)
--------- ------ --------- --------- ----------
BALANCE AT DECEMBER 29, 2001 $ 498,219 44,438 $ 111,095 $ 567,720 $ (121,160)
========= ====== ========= ========= ==========
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE ESOP
INCOME INCOME NOTE
------------- ------------- --------
BALANCE AT DECEMBER 27, 1998 $ (57,133) $ (2,049)
Comprehensive income
Net loss $ (44,728)
Other comprehensive income,
net of tax
Minimum pension liability
adjustment (net of $21,049
of taxes) 31,573 31,573
----------
Comprehensive income $ (13,155)
==========
Incentive stock and stock
ownership plans
Cash dividends, $0.08 per share
ESOP note payments 2,049
--------- -------
BALANCE AT DECEMBER 25, 1999 (25,560) --
Comprehensive income
Net loss $ (122,142)
Other comprehensive income,
net of tax
Minimum pension liability
adjustment (net of $10,312
of taxes) (15,469) (15,469)
----------
Comprehensive income $ (137,611)
==========
Incentive stock and stock
ownership plans
Cash dividends, $0.08 per share
--------- -------
BALANCE AT DECEMBER 30, 2000 (41,029) --
Comprehensive income
Net income $ 23,308
Other comprehensive income
Minimum pension liability
adjustment (net of $12,271
of taxes) (18,407) (18,407)
----------
Comprehensive income $ 4,901
==========
Stock sale
Incentive stock and stock
ownership plans
Cash dividends, $.08 per share
--------- -------
BALANCE AT DECEMBER 29, 2001 $ (59,436) $ --
========= =======
See notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER
30, 2000 AND DECEMBER 25, 1999
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Fleming is an industry leader in the distribution of
consumable goods, and also has a growing presence in operating "price impact"
supermarkets. Our activities encompass two major businesses: distribution and
retail operations.
Fiscal Year: Our fiscal year ends on the last Saturday in December. Fiscal 2001
was 52 weeks; 2000 was 53 weeks; 1999 was 52 weeks. The impact of the additional
week in 2000 is not material to the results of operations or financial position.
Basis of Presentation: The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management 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.
Principles of Consolidation: The consolidated financial statements include all
subsidiaries. Material intercompany items have been eliminated. The equity
method of accounting is usually used for investments in certain entities in
which we have an investment in common stock of between 20% and 50% or such
investment is temporary. Under the equity method, original investments are
recorded at cost and adjusted by our share of earnings or losses of these
entities and for declines in estimated realizable values deemed to be other than
temporary.
Reclassifications: Certain reclassifications have been made to prior year
amounts to conform to current year classifications.
Revenue Recognition: Sales are recognized at the point of sale for retail sales
and upon shipment of the product for distribution sales, net of anticipated
returns, which have not been significant. Net sales include retail services
income and net rental income which have consistently been less than 1% of total
net sales.
Advertising: Advertising costs are expensed the first time the advertising
occurs and amounted to $29 million, $42 million and $59 million in 2001, 2000
and 1999, respectively. Advertising is incurred primarily by the retail segment
and is included in selling and administrative expenses.
Taxes on Income: Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities.
Basic and Diluted Net Income (Loss) Per Share: Both basic and diluted per share
amounts are computed based on net income (loss) divided by weighted average
shares as appropriate for each calculation subject to anti-dilution limitations.
38
Cash and Cash Equivalents: Cash equivalents consist of liquid investments
readily convertible to cash with an original maturity of three months or less.
The carrying amount for cash equivalents is a reasonable estimate of fair value.
Receivables: Receivables include the current portion of customer notes
receivable of $30 million in 2001 and $27 million in 2000. Receivables are shown
net of allowance for doubtful accounts of $40 million in 2001 and $34 million in
2000. We extend credit to our retail customers which are located over a broad
geographic base. Regional concentrations of credit risk are limited. Interest
income on impaired loans is recognized only when payments are received.
Inventories: Inventories are valued at the lower of cost or market. Grocery and
certain perishable inventories, aggregating approximately 75% and 70% of total
inventories in 2001 and 2000, respectively, are valued on a last-in, first-out
(LIFO) method. The cost for the remaining inventories is determined by the
first-in, first-out (FIFO) method. Current replacement cost of LIFO inventories
was greater than the carrying amounts by approximately $46 million at year-end
2001 and $58 million ($13 million of which is recorded in assets held for sale
in current assets) at year-end 2000. In 2001 and 2000, the liquidation of
certain LIFO layers related to business closings decreased cost of sales by
approximately $17 million and $7 million, respectively.
Property and Equipment: Property and equipment are recorded at cost or, for
leased assets under capital leases, at the present value of minimum lease
payments. Depreciation, as well as amortization of assets under capital leases,
is based on the estimated useful asset lives using the straight-line method. The
estimated useful lives used in computing depreciation and amortization are:
buildings and major improvements - 20 to 40 years; warehouse, transportation and
other equipment - 3 to 10 years; and data processing equipment and software - 3
to 10 years.
Goodwill: The excess of purchase price over the fair value of net assets of
businesses acquired prior to June 30, 2001 is amortized on the straight-line
method over periods not exceeding 40 years. Goodwill is shown net of accumulated
amortization of $180 million and $193 million in 2001 and 2000, respectively. We
made several small acquisitions in 2001, and we are still finalizing the
allocations of the purchase price.
The Financial Accounting Standards Board (FASB) 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 and
other indefinite intangibles. 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 currently testing for impairment and expect to have
such testing defined by the end of the first quarter of 2002; the tests will be
performed by the end of the second quarter of 2002. Goodwill amortization in
2001 was $21.2 million.
Impairment: Asset impairments are recorded when the carrying amount of assets
are not recoverable. Impairment is assessed and measured, by asset type, as
follows: notes receivable - expected cash collections plus the fair value of the
collateral for each note; and, long-lived assets, goodwill and other intangibles
- estimate of the future cash flows expected to result from the use of the asset
and its eventual disposition aggregated to the operating unit level for
distribution and store level for retail.
39
Financial Instruments: Interest rate hedge transactions and other financial
instruments have been utilized to manage our debt portfolio and interest rate
exposure. The methods and assumptions used to estimate the fair value of
significant financial instruments are discussed in the Investments and Notes
Receivable and Long-Term Debt footnotes.
Stock-Based Compensation: We apply APB Opinion No. 25 - Accounting for Stock
Issued to Employees and related Interpretations in accounting for our plans.
Comprehensive Income: Comprehensive income is reflected in the Consolidated
Statements of Shareholders' Equity. Other comprehensive income is comprised of
minimum pension liability adjustments. The cumulative effect of other
comprehensive income, net of taxes, is reflected in the Shareholders' Equity
section of the Consolidated Balance Sheets.
IMPAIRMENT/RESTRUCTURING CHARGE (CREDIT) AND RELATED COSTS
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. By mid-2001,
we had sold or closed all of our conventional retail stores.
The plan, including the decision to sell or close our conventional retail chains
in 2000, took three years to implement and is finished. Any remaining charges
represent exit costs that cannot be expensed until incurred and are expected to
be minimal.
The pre-tax charge for 2001 was $24 million. After tax, the expense for 2001 was
$25 million (which reflects the tax expense impact of goodwill permanent
differences from the sale of certain retail stores) or $0.55 per share. The $24
million charge in 2001 was included on several lines of the Consolidated
Statements of Operations as follows: $3 million recovery was included in net
sales related primarily to gains on the sale of conventional retail stores; $33
million charge was included in cost of sales and was primarily related to
inventory markdowns for clearance of closed operations; $18 million charge was
included in selling and administrative expense from disposition related costs
recognized on a periodic basis (such as occupancy costs); and the remaining $24
million recovery was included in the impairment/restructuring charge (credit)
line for the recovery of previously recorded asset impairment resulting from the
sale of some retail stores. The charge for 2001 consisted of the following
components:
o Net impairment recovery of $41 million. The components included
recovering, through sales of the related operations, previously
recorded goodwill impairment of $15 million and long-lived asset
impairment of $29 million. The original impairments were measured in
accordance with SFAS 121 for assets to be held and used in 1998. This
method does not allow an upward adjustment to a new carrying amount. In
2000, we decided to sell these operations. This recovery of asset
impairment was recorded in a manner similar to how the original charges
were recorded. Also included was impairment expense of $3 million
related to other long-lived assets.
40
o Restructuring charges of $17 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 $48 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 net charge for 2001 related to our business segments as follows: $24 million
charge relates to the distribution segment and $8 million recovery relates to
the retail segment with the balance relating to support services expenses.
The pre-tax charge for 2000 was $309 million. After tax, the expense for 2000
was $183 million or $4.72 per share. The $309 million charge in 2000 was
included on several lines of the Consolidated Statements of Operations as
follows: $2 million was included in net sales related primarily to rent income
impairment due to division closings; $57 million was included in cost of sales
and was primarily related to inventory valuation adjustments, moving and
training costs relating to procurement and product handling associates, and
additional depreciation and amortization on assets to be disposed of but not yet
held for sale; $37 million was included in selling and administrative expense
and equity investment results as disposition related costs recognized on a
periodic basis (such as moving and training costs related to the consolidation
of certain administrative functions); and the remaining $213 million was
included in the impairment/restructuring charge (credit) line. The charge for
2000 consisted of the following components:
o Impairment of assets of $91 million. The impairment components were $3
million for goodwill and $88 million for other long-lived assets
relating to planned disposals and closures. All of the goodwill charge
was related to a three-store retail acquisition.
o Restructuring charges of $122 million. The restructuring charges
consisted partly of severance related expenses and estimated pension
withdrawal liabilities for the closings of York and Philadelphia 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. The charge included severance related
expenses due to the consolidation of certain administrative departments
announced during the second quarter of 2000. Additionally, the charge
included severance related expenses, estimated pension withdrawal
liabilities and operating lease liabilities for the divestiture and
closing of certain conventional retail stores evaluated during the
second and third quarters of 2000. The restructuring charges also
consisted of professional fees incurred related to the restructuring
process.
o Other disposition and related costs of $96 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 2000 related to our business segments as follows: $99 million
relates to the distribution segment and $164 million relates to the retail
segment with the balance relating to support services expenses.
41
The pre-tax charge for 1999 was $137 million. After tax, the expense for 1999
was $92 million or $2.39 per share. The $137 million charge in 1999 was included
on several lines of the Consolidated Statements of Operations as follows: $18
million was included in cost of sales and was primarily related to inventory
valuation adjustments; $16 million was included in selling and administrative
expense and equity investment results as disposition related costs recognized on
a periodic basis; and the remaining $103 million was included in the
impairment/restructuring charge line. The 1999 charge consisted of the following
components:
o Impairment of assets of $62 million. The impairment components were $36
million for goodwill and $26 million for other long-lived assets
relating to planned disposals and closures. Of the goodwill charge of
$36 million, $22 million related to the 1994 "Scrivner" acquisition
with the remaining amount related to two retail acquisitions.
o Restructuring charges of $41 million. The restructuring charges
consisted primarily of severance related expenses and estimated pension
withdrawal liabilities for the divested or closed operating units
announced during 1999. 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 $34 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operations, impairment of an investment, disposition related costs
recognized on a periodic basis and other costs.
The 1999 charge relates to our business segments as follows: $48 million relates
to the distribution segment and $70 million relates to the retail segment with
the balance relating to support services expenses.
The charges related to workforce reductions are as follows:
($'s in thousands) Amount Headcount
------------------ ------------ ------------
1999 Activity:
Beginning Liability $ 21,983 1,260
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 Activity:
Charge 13,952 400
Terminations (33,189) (4,730)
------------ ------------
Ending Liability $ 18,091 80
============ ============
The ending liability of $18 million consists of $14 million in union pension
withdrawal liabilities with the balance related to severance, most of which
relates to associates already severed and being paid. The breakdown of the 400
headcount reduction recorded for 2001 is: 300 from the distribution segment; 50
from the retail segment; and 50 from support services.
42
Additionally, the strategic plan includes charges related to lease obligations
which will be utilized as operating units or retail stores close, but ultimately
reduced over remaining lease terms. The charges and utilization have been
recorded to-date as follows:
($'S IN THOUSANDS) AMOUNT
------------------ ------------
1999 Activity:
Beginning Liability $ 27,716
Charge 15,074
Utilized (10,281)
------------
Ending Liability 32,509
2000 Activity:
Charge 37,149
Utilized (48,880)
------------
Ending Liability 20,778
2001 Activity:
Charge 2,685
Utilized (21,132)
------------
Ending Liability $ 2,331
============
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 we are unable to remove from operations.
Assets held for sale, reflected on the balance sheet, consisted of $18 million
of distribution operating units and $12 million of retail stores as of year-end
2001 and $22 million of distribution operating units and $144 million of retail
stores as of year-end 2000. Gains on the sale of facilities, which were included
in net sales, totaled approximately $5 million in 2001, $9 million for 2000 and
$6 million for 1999.
LITIGATION CHARGES
In 2001, we recorded litigation settlements and other related pre-tax expenses
totaling $49 million related to settlement agreements regarding 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., and other cases. In 2000, we recorded a $2 million pre-tax
gain in settlements relating to other cases. See Contingencies footnote for
further discussion regarding these litigation charges.
43
PER SHARE RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999
---------------------------------------- ------------ ------------ ------------
Numerator:
Basic and diluted earnings (loss)
before extraordinary charge $ 26,777 $ (122,142) $ (44,728)
============ ============ ============
Denominator:
Weighted average shares for
basic earnings per share 42,588 38,716 38,305
Effect of dilutive securities:
Employee stock options 1,936 -- --
Restricted stock compensation 400 -- --
------------ ------------ ------------
Dilutive potential common shares 2,336 -- --
------------ ------------ ------------
Weighted average shares for
diluted earnings per share 44,924 38,716 38,305
============ ============ ============
Basic earnings (loss) per share
before extraordinary charge $ 0.63 $ (3.15) $ (1.17)
============ ============ ============
Diluted earnings (loss) per share
before extraordinary charge $ 0.60 $ (3.15) $ (1.17)
============ ============ ============
In 2001, we did not reflect 3.9 million of weighted average shares or add back
after-tax interest expense of $4.1 million related to convertible debt due to
antidilution. We did not reflect 1.2 million weighted average potential shares
for the 2000 diluted calculation or 0.4 million weighted average potential
shares for the 1999 diluted calculation because they would be antidilutive.
Other options with exercise prices exceeding market prices in both 2000 and 1999
consisted of 3.6 million potential shares of common stock that were not included
in the computation of diluted earnings per share because the effect would be
antidilutive.
SEGMENT INFORMATION
Considering the customer types and the processes for meeting the needs of
customers, senior management manages the business as two reportable segments:
distribution and retail operations.
The distribution segment sells food and non-food products (e.g., food, general
merchandise, health and beauty care, and Fleming Brands) to supermarkets,
convenience stores, supercenters, discount stores, limited assortment stores,
drug stores, specialty stores and other stores across the U.S. We also offer a
variety of retail support services to independently-owned and company-owned
retail stores. The aggregation is based primarily on the common customer base
and the interdependent marketing and distribution efforts.
Our senior management utilizes more than one measurement and multiple views of
data to assess segment performance and to allocate resources to the segments.
However, the dominant measurements are consistent with our consolidated
financial statements and, accordingly, are reported on the same basis herein.
Some of our operations have been centralized into support services. Support
services now includes procurement and certain administrative costs. These costs,
previously incurred by the
44
segments, are not comparable to the current cost structure of support services
making it impractical to revise prior year amounts to match the 2001
presentation; therefore, prior period amounts have not been restated. Interest
expense, interest income, equity investments, LIFO adjustments, support services
expenses, other unusual charges and income taxes are managed separately by
senior management and those items are not allocated to the business segments.
Intersegment transactions are reflected at cost.
45
The following table sets forth the composition of the segments' and total
company's net sales, operating earnings, depreciation and amortization, capital
expenditures and identifiable assets.
(IN MILLIONS) 2001 2000 1999
-------------- ------------ ------------ ------------
NET SALES
Distribution $ 14,490 $ 12,926 $ 12,718
Intersegment elimination (1,223) (1,757) (2,165)
------------ ------------ ------------
Net distribution 13,267 11,169 10,553
Retail 2,361 3,275 3,719
------------ ------------ ------------
Total $ 15,628 $ 14,444 $ 14,272
============ ============ ============
OPERATING EARNINGS
Distribution $ 395 $ 297 $ 290
Retail 57 62 (2)
Support Services (223) (199) (112)
------------ ------------ ------------
Total operating earnings 229 160 176
Interest expense (166) (175) (165)
Interest income 26 33 40
Equity investment results (2) (8) (10)
Impairment/restructuring charge (credit) 24 (213) (103)
Litigation charge (credit) (48) 2 --
------------ ------------ ------------
Income (loss) before taxes $ 63 $ (201) $ (62)
============ ============ ============
DEPRECIATION AND AMORTIZATION
Distribution $ 113 $ 105 $ 88
Retail 50 57 64
Support Services 10 12 10
------------ ------------ ------------
Total $ 173 $ 174 $ 162
============ ============ ============
CAPITAL EXPENDITURES
Distribution $ 165 $ 99 $ 53
Retail 68 45 112
Support Services 5 7 1
------------ ------------ ------------
Total $ 238 $ 151 $ 166
============ ============ ============
IDENTIFIABLE ASSETS
Distribution $ 2,838 $ 2,499 $ 2,546
Retail 609 681 848
Support Services 208 223 179
------------ ------------ ------------
Total $ 3,655 $ 3,403 $ 3,573
============ ============ ============
Kmart is our largest customer, representing approximately 20% of our total sales
in 2001 and 10% in 2000. No other single customer represented more than 2% of
our net sales in 2001 or 2000.
46
INCOME TAXES
Components of taxes on income (loss) are as follows:
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Current:
Federal $ 643 $ (23,291) $ (17,287)
State (3,104) 10,082 (3,924)
------------ ------------ ------------
Total current (2,461) (13,209) (21,211)
------------ ------------ ------------
Deferred:
Federal 26,048 (41,123) 2,552
State 10,117 (24,415) 806
------------ ------------ ------------
Total deferred 36,165 (65,538) 3,358
------------ ------------ ------------
Taxes on income (loss) $ 33,704 $ (78,747) $ (17,853)
============ ============ ============
Taxes on income in the above table includes a tax benefit of $2.3 million in
2001 which is reported net in the extraordinary charge from the early retirement
of debt in the consolidated statement of operations.
Deferred tax expense (benefit) relating to temporary differences includes the
following components:
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Depreciation and amortization $ 41,263 $ (39,106) $ (9,603)
Asset valuations and reserves (12,368) 29,495 (18,114)
Associate benefits 11,962 (7,187) 31,700
Credit losses (6,571) 1,924 (4,527)
Equity investment results (1,291) 8,837 (172)
Lease transactions 28,269 (4,887) 7,996
Inventory 4,791 4,313 7,019
Acquired loss carryforwards -- 67 4,929
Capital losses 5,815 452 (4,825)
Note sales 105 (41) (139)
Net operating loss carryforwards (45,478) (62,951) --
Other 10,328 3,936 (10,753)
Prepaid expenses (660) (390) (153)
------------ ------------ ------------
Deferred tax expense (benefit) $ 36,165 $ (65,538) $ 3,358
============ ============ ============
47
Temporary differences that give rise to deferred tax assets and liabilities as
of year-end 2001 and 2000 are as follows:
(IN THOUSANDS) 2001 2000
-------------- ------------ ------------
Deferred tax assets:
Depreciation and amortization $ 71,053 $ 57,740
Asset valuations and reserves 59,983 21,772
Associate benefits 140,439 81,172
Credit losses 30,401 24,927
Equity investment results 3,140 2,522
Lease transactions 50,163 45,208
Inventory 34,656 26,918
Capital losses 6,972 8,152
Note sales 3,017 3,017
Net operating loss carryforwards 108,429 62,951
Other 30,848 25,941
Prepaid expenses 1,683 400
------------ ------------
Total deferred tax assets 540,784 360,720
------------ ------------
Deferred tax liabilities:
Depreciation and amortization 102,310 47,734
Asset valuations and reserves 31,324 5,480
Associate benefits 97,596 38,639
Credit losses 17,064 18,162
Equity investment results 4,185 4,857
Lease transactions 34,753 1,528
Inventory 74,285 61,757
Capital losses 4,954 320
Note sales 2,358 2,253
Other 27,635 12,400
Prepaid expenses 3,900 3,277
------------ ------------
Total deferred tax liabilities 400,364 196,407
------------ ------------
Net deferred tax asset $ 140,420 $ 164,313
============ ============
The change in net deferred tax asset from 2000 to 2001 is allocated $36.2
million to deferred income tax expense and $12.3 million benefit to
stockholders' equity.
We have federal net operating loss carryforwards of approximately $215 million
and state net operating loss carryforwards of approximately $393 million that
are due to expire at various times through the year 2022. We also have
charitable contribution carryforwards of approximately $2.5 million that will
begin to expire in 2005. We believe it is more likely than not that all of our
deferred tax assets will be realized.
48
The effective income tax rates are different from the statutory federal income
tax rates for the following reasons:
2001 2000 1999
------------ ------------ ------------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 4.9 5.4 5.1
Acquisition-related differences (0.2) (0.5) --
Other 0.7 2.5 (3.1)
------------ ------------ ------------
Effective rate on operations 40.4 42.4 37.0
Impairment/restructuring and
related charge (credit) 17.0 (3.2) (8.5)
------------ ------------ ------------
Effective rate after impairment/
restructuring and related charge (credit) 57.4% 39.2% 28.5%
============ ============ ============
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
(IN THOUSANDS) 2001 2000
-------------- ------------ ------------
Investments in and advances to customers $ 4,506 $ 7,452
Notes receivable from customers 88,288 85,522
Other investments and receivables 12,857 11,493
------------ ------------
Investments and notes receivable $ 105,651 $ 104,467
============ ============
Investments and notes receivable are shown net of reserves of $31 million and
$26 million in 2001 and 2000, respectively. Sales to customers accounted for
under the equity method were approximately $0.1 billion, $0.2 billion and $0.3
billion in 2001, 2000 and 1999, respectively. Receivables include $5 million and
$4 million in 2001 and 2000, respectively, due from customers accounted for
under the equity method.
We extend long-term credit to certain retail customers. Loans are primarily
collateralized by inventory and fixtures. Interest rates are above prime with
terms up to 10 years.
49
Impaired notes receivable (including current portion) are as follows:
(IN THOUSANDS) 2001 2000
-------------- ------------ ------------
Impaired notes with related allowances $ 55,377 $ 45,711
Credit loss allowance on impaired notes (19,061) (20,101)
Impaired notes with no related allowances 12,721 4,793
------------ ------------
Net impaired notes receivable $ 49,037 $ 30,403
============ ============
Average investments in impaired notes were as follows: 2001-$70 million;
2000-$52 million; and 1999-$65 million.
Activity in the allowance for credit losses is as follows:
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Balance, beginning of year $ 59,718 $ 55,528 $ 47,232
Charged to costs and expenses 37,795 28,872 25,394
Uncollectible accounts written off,
net of recoveries (25,860) (24,682) (17,098)
------------ ------------ ------------
Balance, end of year $ 71,653 $ 59,718 $ 55,528
============ ============ ============
The ending balance of allowance for credit losses includes amounts related to
current receivables of $40 million, $34 million and $32 million for the years
2001, 2000 and 1999, respectively. We sold certain notes receivable at face
value with limited recourse in years prior to 1998. The outstanding balance at
year-end 2001 on all notes sold is $2 million, for which we are contingently
liable if the notes become uncollectible.
50
LONG-TERM DEBT
Long-term debt consists of the following:
(IN THOUSANDS) 2001 2000
-------------- ------------ ------------
10 1/8% senior notes due 2008 $ 345,870 $ --
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 400,000 250,000
5 1/4% convertible senior subordinated notes due 2009 150,000
Revolving credit, average interest rates of
5.8% for 2001 and 7.7% for 2000, due 2003 200,000 300,000
Term loans, due 2001 to 2004, average interest
rate of 6.7% for 2001 and 7.8% for 2000 118,637 154,421
Other debt (including discounts) (6,713) 16,150
------------ ------------
1,457,794 1,270,571
Less current maturities (29,865) (38,171)
------------ ------------
Long-term debt $ 1,427,929 $ 1,232,400
============ ============
Five-year maturities: Aggregate maturities of long-term debt for the next five
years are approximately as follows: $30 million in 2002, $240 million in 2003,
$299 million in 2004, $0 in 2005, and $0 in 2006.
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 $300
million 10 5/8% senior notes due 2001, including an amount to cover accrued
interest and the redemption premium. In connection with this redemption, we
recognized a $3.5 million after-tax extraordinary charge from early retirement
of debt during the first quarter of 2001. 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). See Derivatives below for an explanation
of the mark-to-market adjustment to record these notes at fair value.
On October 15, 2001, we sold an additional $150 million of our existing 10 5/8%
senior subordinated notes due 2007. The proceeds were used to pay down our
revolver loans. The senior subordinated notes consist of two issues: $250
million of 10 1/2% notes due December 1, 2004 and $400 million of 10 5/8% notes
due July 31, 2007. The subordinated notes are general unsecured obligations,
subordinated in right of payment to all existing and future senior indebtedness,
and senior to or of equal rank with all of our existing and future subordinated
indebtedness.
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.
51
In July 1997, we developed a senior secured credit facility which consists of a
$600 million revolving credit facility, with a final maturity of July 25, 2003,
and an amortizing term loan with a maturity of July 25, 2004. The term loan was
originally $250 million but has been paid down to $119 million at December 29,
2001. Up to $300 million of the revolver may be used for issuing letters of
credit. Borrowings and letters of credit issued under the new credit facility
may be used for general corporate purposes and are secured by a first priority
security interest in the accounts receivable and inventories of Fleming and our
subsidiaries and in the capital stock or other equity interests we own in our
subsidiaries. In addition, this credit facility is guaranteed by substantially
all subsidiaries. The stated interest rate on borrowings under the credit
agreement is equal to a referenced index interest rate, normally the London
interbank offered interest rate ("LIBOR"), plus a margin. The level of the
margin is dependent on credit ratings on our senior secured bank debt.
The credit agreement and the indentures under which other debt instruments were
issued contain customary covenants associated with similar facilities. The
credit agreement currently contains the following more significant financial
covenants: maintenance of a fixed charge coverage ratio of at least 1.7 to 1,
based on adjusted earnings, as defined, before interest, taxes, depreciation and
amortization and net rent expense and maintenance of a ratio of
inventory-plus-accounts receivable to funded bank debt (including letters of
credit) of at least 1.4 to 1. The credit agreement, senior notes and senior
subordinated notes contain a limitation on restricted payments, including
dividends, based on a formula tied to net earnings and equity issuances. Under
our most restrictive covenant, these payments are limited to $61 million at
year-end 2001. Under the credit agreement, new issues of certain kinds of debt
must have a maturity after January 2005. Covenants contained in our indentures
under which other debt instruments were issued are generally less restrictive
than those of the credit agreement. We are in compliance with all financial
covenants under the credit agreement and its indentures.
The credit facility may be terminated in the event of a defined change of
control. Under the indentures, noteholders may require us to repurchase notes in
the event of a defined change of control coupled with a defined decline in
credit ratings.
At year-end 2001, borrowings under the credit facility totaled $119 million in
term loans and $200 million of revolver borrowings, and $53 million of letters
of credit had been issued. Letters of credit are needed primarily for insurance
reserves associated with our normal risk management activities. To the extent
that any of these letters of credit would be drawn, payments would be financed
by borrowings under the credit agreement.
At year-end 2001, we would have been allowed to borrow an additional $347
million under the revolving credit facility contained in the credit agreement
based on the actual borrowings and letters of credit outstanding.
The other debt in the table above included $17 million of medium term notes at
year-end 2000. These notes were paid off during the first quarter of 2001. The
remaining balance for year-end 2001 and 2000 consists primarily of discounts on
various debt instruments.
Weighted Average Interest Rates: The weighted average interest rate for total
debt (including capital lease obligations) was 8.7% and 9.5% for 2001 and 2000,
respectively.
52
Interest Expense: Components of interest expense are as follows:
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Interest costs incurred:
Long-term debt $ 134,473 $ 135,474 $ 127,271
Capital lease obligations 37,491 39,609 36,768
Other 1,520 1,537 2,258
------------ ------------ ------------
Total incurred 173,484 176,620 166,297
Less interest capitalized (7,950) (2,051) (1,117)
------------ ------------ ------------
Interest expense $ 165,534 $ 174,569 $ 165,180
============ ============ ============
Derivatives: In July 2001, we entered into three interest rate swap agreements
with a combined notional amount of $200 million. The swaps were tied to our
10 5/8% senior subordinated notes due 2007. The maturity, call dates, and call
premiums mirrored those of the notes. The swaps were 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 rates reset quarterly beginning July 31, 2001. We
documented and designated these swaps to qualify as fair value hedges. On
October 26, 2001, we unwound all outstanding swap agreements and in turn
received $9 million in cash. Of which, $1 million was interest we earned on the
swap since the prior payment date, and the remaining $8 million was recorded as
a deferred gain that is being amortized to reduce interest expense over the
remaining life of the related subordinated notes.
In November and December 2001, we entered into five new interest rate swap
agreements with a combined notional amount of $210 million. These swaps are tied
to our 10 1/8% senior notes due 2008. 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 1/8% and pay a floating rate based on a spread plus the 3-month
LIBOR. The floating rates reset quarterly beginning January 1, 2002. We have
documented and designated these swaps to qualify as fair value hedges. For the
year ended December 29, 2001, in accordance with Statement of Financial
Accounting Standards No. 133, the mark-to-market value of these swaps was
recorded as a long-term liability of $9 million offset by a change in fair value
to the senior subordinated notes due 2008.
We adopted 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 year ended December 29, 2001, there was no net earnings impact relating to
our active fair value hedges.
Fair Value of Financial Instruments: The fair value of long-term debt was
determined using valuation techniques that considered market prices for actively
traded debt, and cash flows discounted at current
53
market rates for management's best estimate for instruments without quoted
market prices. At year-end 2001, the fair value of the total debt (excluding
capital leases) was lower than the carrying value by $32 million, or 2.2%. The
fair value was lower for two reasons. First, the interest rates on the senior
subordinated notes, which were set in 1997, were below market levels at year-end
2001. Second, our 5 1/4% convertible senior subordinated notes that mature on
March 15, 2009 have an implied trading value based on the price of our common
stock. The market price for our stock on December 28, 2001 was below the price
used to determine the bond conversion price, causing the bonds to trade at a
discount.
The fair value of notes receivable is comparable to the carrying value because
of the variable interest rates charged on certain notes and because of the
allowance for credit losses.
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.
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.
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
December 29, 2001
-------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ -----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ............. $ 10,175 $ 6,876 $ 274 $ -- $ 17,325
Receivables, net ...................... 483,007 105,250 12 -- 588,269
Inventories ........................... 816,309 198,386 -- 1,014,695
Other current assets .................. 114,733 4,950 99 -- 119,782
----------- ----------- ----------- ----------- -----------
Total current assets ............. 1,424,224 315,462 385 -- 1,740,071
Investment in subsidiaries ............. 93,241 5,356 -- (98,597) --
Intercompany receivables ............... 470,545 -- -- (470,545) --
Property and equipment, net ............ 622,647 287,826 9,182 -- 919,655
Goodwill, net .......................... 401,180 153,010 -- -- 554,190
Other assets ........................... 379,503 47,861 13,413 -- 440,777
----------- ----------- ----------- ----------- -----------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
=========== =========== =========== =========== ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable ...................... $ 861,445 $ 109,311 $ 1,035 $ -- $ 971,791
Intercompany payables ................. -- 443,066 27,479 (470,545) --
Other current liabilities ............. 264,743 27,880 713 -- 293,336
----------- ----------- ----------- ----------- -----------
Total current liabilities ......... 1,126,188 580,257 29,227 (470,545) 1,265,127
Obligations under capital leases ....... 213,293 118,543 -- -- 331,836
Long-term debt and other liabilities ... 1,553,640 5,871 -- -- 1,559,511
Equity (deficit) ....................... 498,219 104,844 (6,247) (98,597) 498,219
----------- ----------- ----------- ----------- -----------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
=========== =========== =========== =========== ===========
54
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 ............ 481,360 285,117 7,019 -- 773,496
Goodwill, net .......................... 411,094 129,440 3,785 -- 544,319
Other assets ........................... 405,969 42,918 13,036 -- 461,923
----------- ----------- ----------- ----------- -----------
$ 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
=========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
52 Weeks Ended December 29, 2001
--------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales ................................... $ 13,098,853 $ 3,625,313 $ 49,873 $ (1,146,295) $ 15,627,744
Costs and expenses:
Cost of sales .............................. 12,451,554 3,096,974 35,608 (1,146,295) 14,437,841
Selling and administrative ................. 442,511 501,579 16,500 -- 960,590
Other ...................................... 146,641 45,570 (2,102) -- 190,109
Impairment/restructuring charge ............ 8,513 (32,108) -- -- (23,595)
Equity income from subsidiaries ............ (7,667) -- -- 7,667 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses ................ 13,041,552 3,612,015 50,006 (1,138,628) 15,564,945
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes .................. 57,301 13,298 (133) (7,667) 62,799
Taxes on income (loss) ...................... 30,524 5,553 (55) -- 36,022
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charge ... $ 26,777 $ 7,745 $ (78) $ (7,667) $ 26,777
============ ============ ============ ============ ============
53 Weeks Ended December 30, 2000
--------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales .......................... $ 12,013,293 $ 3,768,333 $ 70,022 $ (1,407,833) $ 14,443,815
Costs and expenses:
Cost of sales ..................... 11,349,595 3,102,660 52,493 (1,407,833) 13,096,915
Selling and administrative ........ 575,408 591,144 18,451 -- 1,185,003
Other ............................. 100,721 46,796 2,424 -- 149,941
Impairment/restructuring charge ... 155,813 56,971 61 -- 212,845
Equity loss from subsidiaries ..... 20,108 -- -- (20,108) --
------------ ------------ ------------ ------------ ------------
Total costs and expenses ....... 12,201,645 3,797,571 73,429 (1,427,941) 14,644,704
------------ ------------ ------------ ------------ ------------
Loss before taxes .................. (188,352) (29,238) (3,407) 20,108 (200,889)
Taxes on loss ...................... (66,210) (11,095) (1,442) -- (78,747)
------------ ------------ ------------ ------------ ------------
Net loss ........................... $ (122,142) $ (18,143) $ (1,965) $ 20,108 $ (122,142)
============ ============ ============ ============ ============
55
52 Weeks Ended December 25, 1999
--------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales .......................... $ 13,624,272 $ 1,043,109 $ 141,700 $ (537,045) $ 14,272,036
Costs and expenses:
Cost of sales ..................... 12,434,048 821,782 116,084 (537,045) 12,834,869
Selling and administrative ........ 1,012,393 224,572 24,666 -- 1,261,631
Other ............................. 112,593 19,400 3,112 -- 135,105
Impairment/restructuring charge ... 101,058 1,954 -- -- 103,012
Equity loss from subsidiaries ..... 16,896 -- -- (16,896) --
------------ ------------ ------------ ------------ ------------
Total costs and expenses ....... 13,676,988 1,067,708 143,862 (553,941) 14,334,617
------------ ------------ ------------ ------------ ------------
Loss before taxes .................. (52,716) (24,599) (2,162) 16,896 (62,581)
Taxes on loss ...................... (7,988) (8,949) (916) -- (17,853)
------------ ------------ ------------ ------------ ------------
Net loss ........................... $ (44,728) $ (15,650) $ (1,246) $ 16,896 $ (44,728)
============ ============ ============ ============ ============
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
52 Weeks Ended December 29, 2001
-------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by (used in) operating
activities ................................. $ 22,909 $ (56,131) $ 3,077 $ -- $ (30,145)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........ (140,503) (89,780) (8,130) -- (238,413)
Other ...................................... 42,224 4,350 80 -- 46,654
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ....... (98,279) (85,430) (8,050) -- (191,759)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayments on capital lease obligations .... (11,798) (9,105) -- -- (20,903)
Advances (to) from parent .................. (154,896) 150,789 4,107 -- --
Other ...................................... 229,752 -- -- -- 229,752
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities ... 63,058 141,684 4,107 -- 208,849
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents .......................... (12,312) 123 (866) -- (13,055)
Cash and cash equivalents at beginning
of year .................................... 22,487 6,753 1,140 -- 30,380
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year .... $ 10,175 $ 6,876 $ 274 $ -- $ 17,325
============ ============ ============ ============ ============
53 Weeks Ended December 30, 2000
-------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by operating activities ... $ 40,039 $ 86,008 $ 598 $ -- $ 126,645
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........ (75,354) (60,221) (15,262) -- (150,837)
Other ...................................... 101,247 1,686 -- -- 102,933
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities ................................. 25,893 (58,535) (15,262) -- (47,904)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayments on capital lease obligations .... (15,398) (5,490) -- -- (20,888)
Advances (to) from parent .................. 60,912 (76,537) 15,625 -- --
Other ...................................... (34,156) -- -- -- (34,156)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................. 11,358 (82,027) 15,625 -- (55,044)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................ 77,290 (54,554) 961 -- 23,697
Cash and cash equivalents at beginning
of year .................................... (54,803) 61,307 179 -- 6,683
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year .... $ 22,487 $ 6,753 $ 1,140 $ -- $ 30,380
============ ============ ============ ============ ============
56
52 Weeks Ended December 25, 1999
-------------------------------------------------------------------------------
Parent Non-
Company Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by operating activities ... $ 86,780 $ 25,659 $ 5,178 $ -- $ 117,617
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........ (121,414) (42,482) (2,443) -- (166,339)
Other ...................................... (51,214) 4,209 -- -- (47,005)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ....... (172,628) (38,273) (2,443) -- (213,344)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayments on capital lease obligations .... (18,101) (3,112) (320) -- (21,533)
Advances (to) from parent .................. (76,668) 78,853 (2,185) -- --
Other ...................................... 117,976 -- -- -- 117,976
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................. 23,207 75,741 (2,505) -- 96,443
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................ (62,641) 63,127 230 -- 716
Cash and cash equivalents at beginning
of year .................................... 7,838 (1,820) (51) -- 5,967
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year .... $ (54,803) $ 61,307 $ 179 $ -- $ 6,683
============ ============ ============ ============ ============
LEASE AGREEMENTS
Capital And Operating Leases: We lease certain distribution facilities with
terms generally ranging from 20 to 35 years, while lease terms for other
operating facilities range from 1 to 15 years. The leases normally provide for
minimum annual rentals plus executory costs and usually include provisions for
one to five renewal options of five years each.
We lease company-owned store facilities with terms generally ranging from 15 to
20 years. These agreements normally provide for contingent rentals based on
sales performance in excess of specified minimums. The leases usually include
provisions for one to four renewal options of two to five years each. Certain
equipment is leased under agreements ranging from two to eight years with no
renewal options.
Accumulated amortization related to leased assets under capital leases was $38
million at year-end 2001 and 2000.
57
Future minimum lease payment obligations for leased assets under capital leases
as of year-end 2001 are set forth below:
(IN THOUSANDS) LEASE
YEARS OBLIGATIONS
----- ------------
2002 $ 32,631
2003 32,537
2004 32,304
2005 32,610
2006 30,139
Later 103,426
------------
Total minimum lease payments 263,647
Less estimated executory costs (33,502)
------------
Net minimum lease payments 230,145
Less interest (48,740)
------------
Present value of net minimum lease payments 181,405
Less current obligations (8,994)
------------
Long-term obligations $ 172,411
============
Direct Financing Leases: We lease retail store facilities with terms generally
ranging from 15 to 20 years which are subsequently subleased to customers. Most
leases provide for a percentage rental based on sales performance in excess of
specified minimum rentals. The leases usually contain provisions for one to four
renewal options of five years each. The sublease to the customer is normally for
an initial five-year term with automatic five-year renewals at our discretion,
which corresponds to the length of the initial term of the prime lease.
58
The following table shows the future minimum rentals receivable under direct
financing leases and future minimum lease payment obligations under capital
leases in effect at year-end 2001:
(IN THOUSANDS) LEASE RENTALS LEASE
YEARS RECEIVABLE OBLIGATIONS
----- ------------- ------------
2002 $ 27,630 $ 29,214
2003 20,825 28,256
2004 17,704 27,438
2005 15,185 26,913
2006 13,762 24,998
Later 41,885 83,356
------------ ------------
Total minimum lease payments 136,991 220,175
Less estimated executory costs (11,345) (14,884)
------------ ------------
Net minimum lease payments 125,646 205,291
Less interest (30,500) (33,450)
------------ ------------
Present value of net minimum lease payments 95,146 171,841
Less current portion (12,028) (12,416)
------------ ------------
Long-term portion $ 83,118 $ 159,425
============ ============
The following table shows the composition of annual net rental expense under
noncancelable operating leases and subleases with initial terms of one year or
greater:
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Operating activity:
Rental expense $ 75,765 $ 90,018 $ 112,530
Contingent rentals 392 902 1,329
Less sublease income (5,233) (9,014) (9,868)
------------ ------------ ------------
70,924 81,906 103,991
------------ ------------ ------------
Financing activity:
Rental expense 63,524 54,847 47,337
Less sublease income (80,041) (66,757) (68,442)
------------ ------------ ------------
(16,517) (11,910) (21,105)
------------ ------------ ------------
Net rental expense $ 54,407 $ 69,996 $ 82,886
============ ============ ============
We reflect net financing activity, as shown above, as a component of net sales.
59
Future minimum lease payments required at year-end 2001 under operating leases
that have initial noncancelable lease terms exceeding one year are presented in
the following table:
(IN THOUSANDS)
FACILITY FACILITIES EQUIPMENT NET
YEARS RENTALS SUBLEASED RENTALS RENTALS
----- ------------ ------------ ------------ ------------
2002 $ 151,237 $ (78,435) $ 12,271 $ 85,073
2003 135,470 (67,580) 6,651 74,541
2004 121,137 (56,004) 3,647 68,780
2005 108,084 (50,617) 1,841 59,308
2006 91,644 (43,125) 1,236 49,755
Later 259,093 (115,048) -- 144,045
------------ ------------ ------------ ------------
Total lease
payments $ 866,665 $ (410,809) $ 25,646 $ 481,502
============ ============ ============ ============
Contingent rental income and contingent rental expense are not material.
SHAREHOLDERS' EQUITY
Fleming offers a Dividend Reinvestment and Stock Purchase Plan which provides
shareholders the opportunity to automatically reinvest their dividends in common
stock at a 5% discount from market value. Shareholders also may purchase shares
at market value by making cash payments up to $5,000 per calendar quarter. Such
programs resulted in issuing 17,000 and 31,000 new shares in 2001 and 2000,
respectively.
We primarily issue shares of restricted stock to key employees under plans
approved by the stockholders. Periods of restriction and/or performance goals
are established for each award.
The fair value of the restricted stock at the time of the grant is recorded as
unearned compensation - restricted stock which is netted against capital in
excess of par within shareholders' equity. Compensation is amortized to expense
when earned. At year-end 2001, 289,546 shares remained available for award under
all plans. Subsequent to year-end, approximately 5,000 shares were granted.
Information regarding restricted stock balances is as follows (in thousands):
2001 2000
------------ ------------
Awarded restricted shares outstanding 637 746
============ ============
Unearned compensation - restricted stock $ 2,893 $ 1,232
============ ============
We may grant stock options to key employees through stock option plans,
providing for the grant of incentive stock options and non-qualified stock
options. The stock options have a maximum term of 10 years and have time and/or
performance based vesting requirements. At year-end 2001, there were
approximately 274,325 shares available for grant under the unrestricted stock
option plans. Subsequent to year-end, approximately 7,000 stock options were
granted.
60
To induce two senior executive officers to join Fleming as associates, we
granted an aggregate of 200,000 nonqualified stock options in 2001 and 100,000
nonqualified stock options subsequent to 2001. These options are not granted
pursuant to a shareholder-approved plan, but the terms of the options are
comparable to award agreements issued under our shareholder-approved plans.
Stock option transactions for the three years ended December 29, 2001 are as
follows:
WEIGHTED AVERAGE
(SHARES IN THOUSANDS) SHARES EXERCISE PRICE PRICE RANGE
--------------------- -------------- ---------------- ----------------
Outstanding, year-end 1998 2,410 $ 19.35 $ 9.72 - 38.38
Granted 2,339 9.80 $ 7.53 - 12.25
Canceled and forfeited (968) 16.53 $ 7.53 - 38.38
-------------- -------------- --------------
Outstanding, year-end 1999 3,781 $ 14.19 $ 7.53 - 38.38
Granted 1,586 12.79 $ 8.94 - 17.22
Exercised (59) 9.69 $ 7.53 - 11.72
Canceled and forfeited (897) 18.13 $ 7.53 - 37.06
-------------- -------------- --------------
Outstanding, year-end 2000 4,411 $ 12.94 $ 7.53 - 38.38
Granted 2,135 23.80 $11.22 - 35.98
Exercised (695) 13.96 $ 7.53 - 24.94
Canceled and forfeited (753) 15.11 $ 7.53 - 28.38
-------------- -------------- --------------
Outstanding, year-end 2001 5,098 17.04 $ 7.53 - 38.38
============== ============== ==============
Information regarding options outstanding at year-end 2001 is as follows:
ALL OPTIONS
OUTSTANDING CURRENTLY
(SHARES IN THOUSANDS) OPTIONS EXERCISABLE
--------------------- ------------ ------------
Option price $28.38 - $35.98:
Number of options 137 2
Weighted average exercise price 31.22 28.38
Weighted average remaining life in years 9 --
Option price $19.55 - $26.46:
Number of options 2,227 126
Weighted average exercise price 23.53 24.33
Weighted average remaining life in years 9 --
Option price $7.53 - $17.50:
Number of options 2,733 1,299
Weighted average exercise price 11.03 10.70
Weighted average remaining life in years 8 --
In the event of a change of control, all awards will vest immediately.
61
We apply APB Opinion No. 25 - Accounting for Stock Issued to Employees, and
related Interpretations in accounting for our plans. Total compensation cost
recognized in income for stock based employee compensation awards was $5.1
million, $3.2 million and $1.4 million for 2001, 2000 and 1999, respectively. If
compensation cost had been recognized for the stock-based compensation plans
based on fair values of the awards at the grant dates consistent with the method
of SFAS No. 123 - Accounting for Stock-Based Compensation, reported net earnings
(loss) and earnings (loss) per share would have been $21.8 million and $.51 for
2001, $(124.7) million and $(3.22) for 2000 and $(46.6) million and $(1.22) for
1999, respectively. The weighted average fair value on the date of grant of the
individual options granted during 2001, 2000 and 1999 was estimated at $12.93,
$7.90 and $5.08, respectively.
Significant assumptions used to estimate the fair values of awards using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2001, 2000 and 1999 are: risk-free interest rate - 3.62% to
6.83%; expected lives of options - 10 years; expected volatility - 30% to 50%;
and expected dividend yield of 0.2% to 0.9%.
In 2001, we issued a warrant for the purchase of additional common stock in
connection with a private placement sale. The warrant represents the right to
purchase up to $50 million worth of additional shares of our common stock, based
on a per share exercise price equal to the average closing price of our common
stock on the New York Stock Exchange for the 30 consecutive trading days
immediately preceding the applicable exercise date. The warrant expires on March
22, 2002 and has been included in our diluted weighted average shares
calculation.
ASSOCIATE RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
Fleming sponsors pension and postretirement benefit plans for substantially all
non-union and some union associates.
Benefit calculations for our defined benefit pension plans are primarily a
function of years of service and final average earnings at the time of
retirement. Final average earnings are the average of the highest five years of
compensation during the last 10 years of employment. We fund these plans by
contributing the actuarially computed amounts that meet funding requirements.
Substantially all the plans' assets are invested in listed securities,
short-term investments, bonds and real estate.
We also have unfunded nonqualified supplemental retirement plans for selected
associates.
We offer a comprehensive major medical plan to eligible retired associates who
meet certain age and years of service requirements. This unfunded defined
benefit plan generally provides medical benefits until Medicare insurance
commences.
62
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans mentioned above.
OTHER
(IN THOUSANDS) PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------- ----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Change in benefit obligation:
Balance at beginning of year $ 405,404 $ 375,603 $ 13,093 $ 15,213
Service cost 9,021 9,940 114 124
Interest cost 30,400 28,924 877 964
Plan participants' contributions -- -- 889 773
Actuarial gain/loss 6,075 20,118 1,516 604
Amendments 224 -- -- --
Benefits paid (29,830) (29,181) (4,577) (4,585)
------------ ------------ ------------ ------------
Balance at end of year $ 421,294 $ 405,404 $ 11,912 $ 13,093
============ ============ ============ ============
Change in plan assets:
Fair value at beginning of year $ 320,248 $ 331,862 $ -- $ --
Actual return on assets (6,365) (10,968) -- --
Employer contribution 24,448 28,535 4,577 4,585
Benefits paid (29,830) (29,181) (4,577) (4,585)
------------ ------------ ------------ ------------
Fair value at end of year $ 308,501 $ 320,248 $ -- $ --
============ ============ ============ ============
Funded status $ (112,793) $ (85,156) $ (11,912) $ (13,093)
Unrecognized actuarial loss 139,984 109,585 7,104 5,937
Unrecognized prior service cost 912 899 -- --
Unrecognized net transition asset 60 (53) -- --
------------ ------------ ------------ ------------
Net amount recognized $ 28,163 $ 25,275 $ (4,808) $ (7,156)
============ ============ ============ ============
Amounts recognized in the consolidated balance sheet:
Prepaid benefit cost $ 9,331 $ 8,302 $ -- $ --
Accrued benefit liability (81,039) (52,181) (4,808) (7,156)
Intangible asset 812 773 -- --
Accumulated other
comprehensive income 99,059 68,381 -- --
------------ ------------ ------------ ------------
Net amount recognized $ 28,163 $ 25,275 $ (4,808) $ (7,156)
============ ============ ============ ============
The following assumptions were used for the plans mentioned above.
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Discount rate 7.50% 7.50% 7.50% 7.50%
Expected return on plan assets 9.00% 9.00% -- --
Rate of compensation increase 4.00% 4.50% -- --
63
Net periodic pension and other postretirement benefit costs include the
following components:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------- -----------------------------------------
(IN THOUSANDS) 2001 2000 1999 2001 2000 1999
-------------- ----------- ----------- ----------- ----------- ----------- -----------
Service cost $ 9,021 $ 9,940 $ 14,163 $ 113 $ 124 $ 177
Interest cost 30,400 28,924 26,511 877 964 1,020
Expected return
on plan assets (28,259) (29,527) (29,257) -- -- --
Amortization of
actuarial loss 10,301 4,429 11,134 349 231 222
Amortization of
prior service
cost 210 292 291 -- -- --
Amortization of
net transition
asset (113) (268) (268) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net periodic
benefit cost $ 21,560 $ 13,790 $ 22,574 $ 1,339 $ 1,319 $ 1,419
=========== =========== =========== =========== =========== ===========
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $421 million, $387 million and $309 million,
respectively, as of December 29, 2001 and $405 million, $370 million, and $320
million, respectively, as of December 30, 2000.
For measurement purposes in 2001 and 2000, a 9.0% annual rate of increase in the
per capita cost of covered medical care benefits was assumed. For the year 2000,
the rate was assumed to remain constant for both the measurement year and
following year, then grade down by 0.5% per year until reaching 5.0%, then
remain constant thereafter. For the 2001 and 2000 measurement years, the
ultimate trend rate was realized at the year 2009.
The effect of a one-percentage point increase in assumed medical cost trend
rates would have increased the accumulated postretirement benefit obligation as
of December 31, 2001 from $11.9 to $12.6 million, and increased the total of the
service cost and interest cost components of the net periodic cost from $0.99
million to $1.04 million. The effect of a one-percentage point decrease in
assumed medical cost trend rates would have decreased the accumulated
postretirement benefit obligation as of December 31, 2001 from $11.9 to $11.3
million, and decreased the total of the service cost and interest cost
components of the net periodic cost from $0.99 million to $0.95 million.
In some of the retail operations, contributory profit sharing plans were
maintained for associates who meet certain types of employment and length of
service requirements. These plans were discontinued at the beginning of 2000.
Contributions under these defined contribution plans were made at the discretion
of the Board of Directors and totaled $3 million in 1999.
Beginning in 2000, we changed our benefit plans to offer a matching 401(k) plan
to associates in addition to the pension plan previously offered. The pension
plan was continued, but with a reduced benefit formula. The new plan was also
offered to an increased number of associates. Under the plan, we annually commit
to a minimum funding into the plan, match 100% of the first 2% of the employee's
contribution, and match 25% of the next 4% of the employee's contribution for a
maximum match contribution of 3% of the employee's base salary.
64
At the end of 2001, associates participating in the Fleming Pension Plan were
given a one-time choice between two retirement programs. Option one offered the
current retirement program, where employees continue to earn benefits in the
Fleming Pension Plan and have the Fleming Matching Contribution in the 401(k)
Plan. Option two offered a new retirement program where the employees' pension
benefit is frozen as of the end of 2001, begin receiving a Fleming Retirement
Contribution to the 401(k) Plan, and continue to receive the Fleming Matching
Contribution to the 401(k) Plan. The future benefits between option one and
option two will vary among associates based on pay, current and future service
with Fleming, participation rate in the 401(k) Plan, and age. Balances at
retirement may be different depending on future service with Fleming, pay
increases, and investment returns. Associates hired after December 1, 2000
automatically receive option two, thus, there will be no new associates
participating in the Fleming Pension Plan.
Certain associates have pension and health care benefits provided under
collectively bargained multi-employer agreements. Expenses for these benefits
were $60 million, $76 million and $77 million for 2001, 2000 and 1999,
respectively.
SUPPLEMENTAL CASH FLOWS INFORMATION
(IN THOUSANDS) 2001 2000 1999
-------------- ------------ ------------ ------------
Acquisitions:
Fair value of assets acquired $ 141,143 $ 18,529 $ 78,607
Less:
Liabilities assumed or created 19,512 11,181 --
Cash acquired 258 28 167
------------ ------------ ------------
Cash paid, net of cash acquired $ 121,373 $ 7,320 $ 78,440
============ ============ ============
Cash paid during the year for:
Interest, net of amounts capitalized $ 149,332 $ 175,246 $ 165,676
============ ============ ============
Income taxes, net of refunds $ (18,378) $ (71,529) $ 14,863
============ ============ ============
Property and equipment additions
by capital leases $ 14,721 $ 47,010 $ 45,220
============ ============ ============
CONTINGENCIES
In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities 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 litigation loss contingencies that were
settled in 2001.
Stockholder Class Action Suit. In February 2000, the court dismissed the
plaintiffs' amended complaint with prejudice and in September 2001 the Tenth
Circuit affirmed the district court decision. In October 2001, the Tenth Circuit
denied the plaintiffs' petition for a full bench rehearing. The plaintiffs did
not
65
request a review of the judgment of the lower courts to the United States
Supreme Court. As a result, all appeals by the plaintiffs are exhausted and the
judgment of the courts, as outlined above, will stand unchanged.
Noteholder Class Action Suit. On May 25, 2001, the noteholder plaintiffs and we
executed a settlement agreement and such settlement became final on September 5,
2001. The settlement agreement includes a full release of Fleming from liability
to the plaintiffs in this case and Fleming and its insurer paid $2.5 million.
Don's United Super (and related cases). On September 6, 2001, the parties
executed a settlement agreement in the Don's United Super, Coddington
Enterprises, Inc., J&A Foods, Inc., R&D Foods, Inc., and Robandee United Super,
Inc. cases. The settlement agreement includes a full release of Fleming from
liability to the plaintiffs in these cases and we recorded a $21 million
after-tax charge in the second quarter of 2001 to reflect the total estimated
cost of the settlement and other related expenses.
Storehouse Markets. On July 9, 2001, the parties executed a settlement agreement
that was subsequently approved by the court on September 10, 2001. The
settlement agreement resolved all claims between the parties in exchange for a
total payment of $16 million by us and our insurer.
Welsh. On December 31, 2001, the parties executed a settlement agreement that
resolved all claims in this case between the parties. Fleming is not required to
pay any amounts to the plaintiffs pursuant to this settlement.
In the ordinary course of our business, various legal actions, governmental
proceedings and other claims are pending or threatened or may be instituted or
asserted in the future against Fleming and its subsidiaries. For some of these
matters, Fleming has indemnifications from its vendors. Litigation is subject to
many uncertainties, the outcome of individual litigated matters is not
predictable with assurance, and it is reasonably possible that some of the
matters could be decided unfavorably to Fleming or the subsidiary involved.
Although the amount of liability, if any, at December 29, 2001 with respect to
these matters cannot be ascertained, Fleming believes that any resulting
liability should not materially affect the consolidated financial position or
results of operations for Fleming and its subsidiaries.
66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Fleming Companies, Inc.
We have audited the accompanying consolidated balance sheets of Fleming
Companies, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000,
and the related consolidated statements of operations, cash flows, and
shareholders' equity for each of the three years in the period ended December
29, 2001. Our audits also included the financial statement schedule listed in
the index at item 14. These financial statements and financial statement
schedule are the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Fleming Companies,
Inc. and subsidiaries at December 29, 2001, and December 30, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 29, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 13, 2002
67
QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share amounts)
(Unaudited)
2001 FIRST SECOND THIRD FOURTH YEAR
---- ------------ ------------ ------------ ------------ ------------
Net sales $ 4,161,191 $ 3,457,279 $ 4,022,085 $ 3,987,189 $ 15,627,744
Costs and expenses (income):
Cost of sales 3,794,947 3,193,922 3,748,895 3,700,077 14,437,841
Selling and administrative 315,285 211,092 209,928 224,285 960,590
Interest expense 57,502 34,435 35,370 38,227 165,534
Interest income (9,272) (5,788) (5,494) (5,032) (25,586)
Equity investment results 351 (279) 689 772 1,533
Impair/restruct charge (credit) (26,859) (117) 1,415 1,966 (23,595)
Litigation charge (credit) 2,028 46,600 -- -- 48,628
------------ ------------ ------------ ------------ ------------
Total costs and expenses 4,133,982 3,479,865 3,990,803 3,960,295 15,564,945
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and extraordinary charge 27,209 (22,586) 31,282 26,894 62,799
Taxes on income (loss) 11,743 (9,128) 12,207 21,200 36,022
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes and
extraordinary charge 15,466 (13,458) 19,075 5,694 26,777
Extraordinary charge, net of tax (3,469) -- -- -- (3,469)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 11,997 $ (13,458) $ 19,075 $ 5,694 $ 23,308
============ ============ ============ ============ ============
Basic net income (loss) per share:
Before extraordinary charge $ 0.38 $ (0.31) $ 0.44 $ 0.13 $ 0.63
Extraordinary charge, net of tax (0.09) -- -- -- (0.08)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.30 $ (0.31) $ 0.44 $ 0.13 $ 0.55
============ ============ ============ ============ ============
Diluted net income (loss) per share:
Before extraordinary charge $ 0.37 $ (0.31) $ 0.40 $ 0.12 $ 0.60
Extraordinary charge, net of tax (0.08) -- -- -- (0.08)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.29 $ (0.31) $ 0.40 $ 0.12 $ 0.52
============ ============ ============ ============ ============
Dividends paid per share $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.08
============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 40,190 43,276 43,728 43,907 42,588
============ ============ ============ ============ ============
Diluted 42,245 43,276 51,032 50,733 44,924
============ ============ ============ ============ ============
2000 FIRST SECOND THIRD FOURTH YEAR
---- ------------ ------------ ------------ ------------ ------------
Net sales $ 4,331,498 $ 3,289,878 $ 3,197,655 $ 3,624,784 $ 14,443,815
Costs and expenses (income):
Cost of sales 3,914,824 2,998,624 2,894,341 3,289,126 13,096,915
Selling and administrative 372,307 261,374 260,019 293,219 1,186,919
Interest expense 53,101 38,447 40,111 42,910 174,569
Interest income (9,505) (9,340) (6,322) (7,495) (32,662)
Equity investment results 1,891 1,694 2,097 2,352 8,034
Impair/restruct charge (credit) 42,145 21,013 83,356 66,331 212,845
Litigation charge (credit) -- -- (1,916) -- (1,916)
------------ ------------ ------------ ------------ ------------
Total costs and expenses 4,374,763 3,311,812 3,271,686 3,686,443 14,644,704
------------ ------------ ------------ ------------ ------------
Loss before taxes (43,265) (21,934) (74,031) (61,659) (200,889)
Taxes on loss (17,392) (8,585) (28,472) (24,298) (78,747)
------------ ------------ ------------ ------------ ------------
Net loss $ (25,873) $ (13,349) $ (45,559) $ (37,361) $ (122,142)
============ ============ ============ ============ ============
Basic and diluted net
loss per share $ (0.67) $ (0.35) $ (1.17) $ (0.96) $ (3.15)
============ ============ ============ ============ ============
Dividends paid per share $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.08
============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 38,515 38,576 38,902 38,934 38,716
============ ============ ============ ============ ============
Diluted 38,515 38,576 38,902 38,934 38,716
============ ============ ============ ============ ============
68
Each quarter of 2001 included charges related to our strategic plan: quarter 1 -
$1 million of income pre-tax, $.01 per share; quarter 2 - $14 million pre-tax,
$8 million after-tax, $.17 per share; quarter 3 - $6 million pre-tax, $4 million
after-tax, $.07 per share; quarter 4 - $5 million pre-tax, $14 million
after-tax, $.27 per share; full year - $24 million pre-tax, $25 million
after-tax (due to the impact of goodwill permanent differences from the sale of
certain retail stores), $.55 per share. The first quarter also included unusual
items ($2 million in charges from litigation settlements and net additional
interest expense of approximately $2 million due to the early retirement of
debt) netting to $3 million ($2 million after-tax or $.05 per share). The second
quarter included an unusual item charge for litigation settlements of $47
million ($28 million after-tax or $.65 per share). The fourth quarter included
an unusual item charge related to the Kmart reorganization of $20 million ($12
million after-tax or $.23 per share). The full year impact of the strategic plan
charge and unusual items is $94 million pre-tax, $67 million after-tax or $1.49
per share (includes a $.01 per share impact due to converting from basic to
diluted weighted average shares).
Each quarter of 2000 included charges related to our strategic plan: quarter 1 -
$64 million pre-tax, $38 million after-tax, $.98 per share; quarter 2 - $46
million pre-tax, $27 million after-tax, $.71 per share; quarter 3 - $101 million
pre-tax, $60 million after-tax, $1.53 per share; quarter 4 - $98 million
pre-tax, $58 million after-tax, $1.49 per share; full year - $309 million
pre-tax, $183 million after-tax, $4.72 per share. The third quarter also
included unusual items ($10 million charge related primarily to asset impairment
on retail stores, income of $2 million relating to litigation settlements, and
$9 million in gains from the sale of distribution facilities) netting to less
than $1 million of income ($1 million after-tax or $.04 per share). The full
year impact of the strategic plan charge and unusual items is $309 million
pre-tax, $184 million after-tax or $4.71 per share (includes a $.05 per share
impact due to converting from basic to diluted weighted average shares).
The first quarter of both years consists of 16 weeks; all other quarters are 12
weeks, except for quarter 4, 2000 which is 13 weeks.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 6th day of March,
2002.
FLEMING COMPANIES, INC.
/s/ MARK S. HANSEN
By: Mark S. Hansen
Chairman and Chief
Executive Officer
(Principal executive
officer)
/s/ NEAL J. RIDER
By: Neal J. Rider
Executive Vice President
and Chief Financial Officer
(Principal financial officer)
/s/ MARK D. SHAPIRO
By: Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 6th day of March, 2002.
/s/ MARK S. HANSEN /s/ HERBERT M. BAUM * /s/ KENNETH M. DUBERSTEIN *
Mark S. Hansen Herbert M. Baum Kenneth M. Duberstein
(Chairman of the Board) (Director) (Director)
/s/ ARCHIE R. DYKES * /s/ CAROL B. HALLETT * /s/ ROBERT HAMADA *
Archie R. Dykes Carol B. Hallett Robert Hamada
(Director) (Director) (Director)
/s/ EDWARD C. JOULLIAN III * /s/ ALICE M. PETERSON *
Edward C. Joullian III Guy A. Osborn Alice M. Peterson
(Director) (Director) (Director)
*A Power of Attorney authorizing Mark S. Hansen and Neal J. Rider to sign the
Annual Report on Form 10-K on behalf of each of the indicated directors of
Fleming Companies, Inc. has been filed herein as Exhibit 24.
70
SCHEDULE II
FLEMING COMPANIES, INC.
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 29, 2001 DECEMBER 30, 2000, AND
DECEMBER 25, 1999
(IN THOUSANDS)
ALLOWANCE
FOR
CREDIT LOSSES CURRENT NONCURRENT
------------- ------------ ------------
BALANCE, DECEMBER 26, 1998 $ 47,232 $ 19,979 $ 27,253
Charged to cost and expenses 25,394 21,024 4,370
Uncollectible accounts written-off,
less recoveries (17,098) (8,802) (8,296)
------------ ------------ ------------
BALANCE, DECEMBER 25, 1999 $ 55,528 $ 32,201 $ 23,327
Charged to cost and expenses 28,872 15,454 13,418
Uncollectible accounts written-off,
less recoveries (24,682) (13,729) (10,953)
------------ ------------ ------------
BALANCE, DECEMBER 30, 2000 $ 59,718 $ 33,926 $ 25,792
Charged to cost and expenses 37,795 28,130 9,665
Uncollectible accounts written-off,
less recoveries (25,860) (21,742) (4,118)
------------ ------------ ------------
BALANCE, DECEMBER 29, 2001 $ 71,653 $ 40,314 $ 31,339
============ ============ ============
71
INDEX TO EXHIBITS
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
------- ----------- ----------------
3.1 Certificate of Incorporation Exhibit 3.1 to Form 10-Q for
quarter ended April 17, 1999
3.2 By-Laws Exhibit 3.2 to Form 10-Q for
quarter ended April 17, 1999
4.0 Credit Agreement, dated as of July 25, 1997, among Fleming Exhibit 4.16 to Form 10-Q for
Companies, Inc., the Lenders party thereto, BancAmerica quarter ended July 12, 1997
Securities, Inc., as syndication agent, Societe Generale,
as documentation agent, and The Chase Manhattan Bank, as
administrative agent
4.1 First Amendment, dated as of October 5, 1998, to Credit Exhibit 4.8 to Form 10-Q for
Agreement dated July 25, 1997 quarter ended October 3, 1998
4.2 Second Amendment, dated as of December 21, 1999, to the Exhibit 4.9 to Form 10-Q for
Credit Agreement dated July 25, 1997 quarter ended April 15, 2000
4.3 Third Amendment dated as of February 26, 2001 to the Exhibit 4.9 to Amendment No.
Credit Agreement dated July 25, 1997 1 to Registration Statement
No. 333-60176
4.4 Fourth Amendment, dated as of September 7, 2001, to the Exhibit 4.16 to Form 10-Q for
Credit Agreement dated July 25, 1997 quarter ended October 6, 2001
4.5 Security Agreement dated as of July 25, 1997, between Exhibit 4.17 to Form 10-Q for
Fleming Companies, Inc., the company subsidiaries party quarter ended July 12, 1997
thereto and The Chase Manhattan Bank, as collateral agent
4.6 Pledge Agreement, dated as of July 25, 1997, among Fleming Exhibit 4.18 to Form 10-Q for
Companies, Inc., the company subsidiaries party thereto quarter ended July 12, 1997
and The Chase Manhattan Bank, as collateral agent
4.7 Guarantee Agreement dated as of July 25, Exhibit 4.19 to Form 10-Q
1997, among the company subsidiaries party for quarter ended July 12, 1997
thereto and The Chase Manhattan Bank,
as collateral agent
4.8 Indenture, dated as of July 25, 1997, among Fleming Exhibit 4.20 to Form 10-Q for
Companies, Inc., the Subsidiary Guarantors named therein quarter ended July 12, 1997
and Manufacturers and Traders Trust Company, as Trustee,
regarding 10-5/8% Senior Subordinated Notes due 2007
4.9 Indenture, dated as of July 25, 1997, among Fleming Exhibit 4.21 to Form 10-Q for
Companies, Inc., the Subsidiary Guarantors named therein quarter ended July 12, 1997
and Manufacturers and Traders Trust Company regarding
10-1/2% Senior Subordinated Notes due 2004
4.10 Supplement, dated as of September 20, 2001, Exhibit 4.18 to Form 10-Q for
to the Indenture dated as of July 25, 1997, quarter ended October 6, 2001
among Fleming, Subsidiary Guarantors named
therein and Manufacturers and Traders Trust
Company, as Trustee, regarding 10 5/8%
Senior Subordinated Notes due 2007
4.11 Supplement, dated as of September 20, 2001, Exhibit 4.19 to Form 10-Q for
to the Indenture dated as of July 25, 1997, quarter ended October 6, 2001
among Fleming, the Subsidiary Guarantors
named therein and Manufacturers and Traders
Trust Company, as Trustee, regarding 10 1/2%
Senior Subordinated Notes due 2004
4.12 Agreement to furnish copies of other long-term debt **
instruments
4.13 Stock and Warrant Purchase Agreement by and between the Exhibit 4.1. to Registration
Registrant and U.S. Transportation, LLC dated February 6, Statement No. 333-60176
2001
4.14 Amendment No. 1 dated as of October 17, 2001 to Stock and Exhibit 4.17 to Form 10-Q for
Warrant Purchase Agreement by and between Fleming and U.S. quarter ended October 6, 2001
Transportation, LLC dated February 6, 2001
4.15 Registration Rights Agreement by and between Fleming and Exhibit 4.2 to Registration
U.S. Transportation, LLC dated March 22, 2001 Statement No. 333-60176
4.16 Indenture, dated as of March 15, 2001, among Fleming Exhibit 4.9 to Registration
Companies, Inc., the Subsidiary Guarantors named therein Statement No. 333-60184
and Bankers Trust Company, as Trustee, regarding the
10 1/8% Senior Notes due 2008
4.17 Indenture, dated as of March 15, 2001, among Fleming Exhibit 4.3 to Registration
Companies, Inc., the Subsidiary Guarantors named therein Statement No. 333-60178
and Bank One, N.A., as Trustee, regarding the 5.25%
Convertible Senior Subordinated Notes due 2009
4.18 Registration Rights Agreement, dated as of March 15, 2001, Exhibit 4.4 to Registration
among Fleming Companies, Inc., the Subsidiary Guarantors Statement No. 333-60178
named therein, Deutsche Bank Alex. Brown Inc., Bear,
Sterns and Co. Inc, Lehman Brothers Inc., JPMorgan
Securities Inc. and UBS Warburg LLC
4.19 Indenture, dated as of October 15, 2001, Exhibit 4.20 to Form 10-Q for
among Fleming, the Subsidiary Guarantors named quarter ended October 6, 2001
therein and Manufacturers and Traders Trust
Company, as Trustee, regarding the 10 5/8%
Series C Senior Subordinated Notes due 2007
10.1* Fleming Companies, Inc. Associate Stock Purchase Plan Exhibit 10.28 to Form 10-K
for year ended December 27, 1997
10.2* Amendment to the Associate Stock Purchase Plan Exhibit 10.73 to Form 10-Q for
quarter ended July 8, 2000
10.3 Dividend Reinvestment and Stock Purchase Plan, as amended Exhibit 28.1 to Registration
Statement No. 33-26648 and
Exhibit 28.3 to Registration
Statement No. 33-45190
10.4* 1990 Stock Option Plan Exhibit 28.2 to Registration
Statement No. 33-36586
10.5* Amendment No. One to 1990 Stock Option Plan Exhibit 10.44 to Form 10-K
for year ended December 26, 1998
10.6* Form of Option Agreement for 1990 Stock Option Plan Exhibit 10.2 to Form 10-K for
year ended December 25, 1999
10.7* Form of Restricted Stock Award Agreement for 1990 Stock Exhibit 10.5 to Form 10-K for
Option Plan year ended December 27, 1997
10.8* 1990 Stock Incentive Plan (as amended) Exhibit 10.45 to Form 10-K
for year ended December 26, 1998
10.9* Amendment to 1990 Stock Incentive Plan Exhibit 10.49 to Form 10-Q
for quarter ended April 17, 1999
10.10* Phase III of the 1990 Stock Incentive Plan Exhibit 10.8 to Form 10-K for
year ended December 25, 1999
10.11* Corporate Officer Incentive Plan Exhibit 10.40 to Form 10-K
for year ended December 26, 1998
10.12* Executive Deferred Compensation Plan (November 1997) Exhibit 10.25 to Form 10-K
for year ended December 27, 1997
10.13* Amendment No. 1 to the Executive Deferred Compensation Plan Exhibit 10.79 to Form 10-Q
for quarter ended April 21, 2001
10.14* Form of Agreement for Executive Deferred Compensation Plan Exhibit 10.27 to Form 10-K
(November 1997) for year ended December 27, 1997
10.15* Form of Amended and Restated Agreement for the Executive Exhibit 10.31 to Form 10-Q
Deferred Compensation Plan for quarter ended October 3, 1998
10.16* Executive Deferred Compensation Trust (November 1997) Exhibit 10.26 to Form 10-K
for year ended December 17, 1997
10.17* Executive Past Service Benefit Plan (November 1997) Exhibit 10.23 to Form 10-K
for year ended December 27, 1997
10.18* Form of Agreement for Executive Past Service Benefit Plan Exhibit 10.24 to Form 10-K
(November 1997) for year ended December 27, 1997
10.19* Form of Amended and Restated Agreement for the Executive Exhibit 10.30 to Form 10-Q
Past Service Benefit Plan for quarter ended October 3, 1998
10.20* Fleming Companies, Inc. 1996 Stock Incentive Plan Exhibit A to Proxy Statement
for year ended December 30, 1995
10.21* Amendment No. 1 to the 1996 Stock Incentive Plan Exhibit 10.9 to Form 10-K for
year ended December 28, 1996
10.22* Form of Restricted Stock Award Agreement for 1996 Stock Exhibit 10.12 to Form 10-K
Incentive Plan (1997) for year ended December 27, 1997
10.23* Form of Restricted Stock Award Agreement for 1996 Stock Exhibit 10.81 to Form 10-Q
Incentive Plan for quarter ended July 14, 2001
10.24* Form of First Amendment to Restricted Stock Award Exhibit 10.39 to Form 10-Q
Agreement for the 1996 Stock Incentive Plan for quarter ended October 3, 1998
10.25* Form of Amended and Restated Restricted Stock Award Exhibit 10.33 to Form 10-Q
Agreement for the 1996 Stock Incentive Plan for quarter ended October 3, 1998
10.26* Form of Amended and Restated Non-Qualified Stock Option Exhibit 10.34 to Form 10-Q
Agreement under the 1996 Stock Incentive Plan for quarter ended October 3, 1998
10.27* Supplemental Income Trust Exhibit 10.10 to Form 10-K
for year ended December 25, 1999
10.28* First Amendment to the Supplemental Income Trust Exhibit 10.19 to Form 10-K
for year ended December 28, 1996
10.29* Amended and Restated Supplemental Retirement Income Exhibit 10.23 to Form 10-K
Agreement for Robert E. Stauth for year ended December 28, 1996
10.30 Settlement Agreement between Fleming Companies, Inc. and Exhibit 10.25 to Form 10-Q
Furr's Supermarkets, Inc. dated October 23, 1997 for quarter ended October 4, 1997
10.31* Form of Amendment to Employment Agreement Exhibit 10.43 to Form 10-K
between Registrant and certain executives dated as for year ended December 26, 1998
of March 2, 1999
10.32* Form of Amendment to Certain Employment Agreements Exhibit 10.38 to Form 10-Q
for quarter ended October 3, 1998
10.33* Form of Change of Control Employment Agreement between Exhibit 10.12 to Form 10-K
Registrant and certain of the employees for year ended December 25, 1999
10.34* Form of Amended and Restated Severance Agreement between Exhibit 10.5 to Form 10-K for
Fleming and certain of its officers year ended December 25, 1999
10.35* Fleming Companies, Inc. Amended and Restated Directors' Exhibit 10.46 to Form 10-K
Compensation and Stock Equivalent Unit Plan for year ended December 26, 1998
10.36* 1999 Stock Incentive Plan Exhibit 10.38 to Form 10-K
for year ended December 26, 1998
10.37* Second Amendment to the 1999 Stock Incentive Plan Exhibit 10.78 to Form 10-Q
for quarter ended April 21, 2001
10.38* Form of Non-Qualified Stock Incentive Agreement for 1999 Exhibit 10.39 to Form 10-K
Stock Incentive Plan for year ended December 26, 1998
10.39* Form of Non-qualified Stock Incentive Agreement for 1999 Exhibit 10.57 to Form 10-K
Stock Incentive Plan - Corporate for year ended December 25, 1999
10.40* Form of Non-qualified Stock Incentive Agreement for 1999 Exhibit 10.58 to Form 10-K
Stock Incentive Plan - Distribution for year ended December 25, 1999
10.41* Form of Non-qualified Stock Incentive Agreement for 1999 Exhibit 10.59 to Form 10-K
Stock Incentive Plan - Retail for year ended December 25, 1999
10.42* Form of Loan Agreement Pursuant to Executive Stock Exhibit 10.59 to Form 10-Q
Ownership Program for quarter ended July 10, 1999
10.43* Letter Agreement for William H. Marquard dated as of Exhibit 10.52 to Form 10-Q
May 26, 1999 for quarter ended April 17, 1999
10.44* Employment Agreement for William H. Marquard dated as of Exhibit 10.54 to Form 10-Q
June 1, 1999 for quarter ended July 10, 1999
10.45* Restricted Stock Agreement for William H. Marquard dated Exhibit 10.55 to Form 10-Q
as of June 1, 1999 for quarter ended July 10, 1999
10.46* Restricted Stock Award Agreement for William H. Marquard Exhibit 10.55 to Form 10-K
dated as of December 21, 1999 for year ended December 25, 1999
10.47* Employment Agreement for Dennis C. Lucas dated as of July Exhibit 10.56 to Form 10-Q
28, 1999 for quarter ended July 10, 1999
10.48* Restricted Stock Agreement for Dennis C. Lucas dated as of Exhibit 10.57 to Form 10-Q
July 28, 1999 for quarter ended July 10, 1999
10.49* Restricted Stock Agreement for E. Stephen Davis dated as Exhibit 10.58 to Form 10-Q
of July 20, 1999 for quarter ended July 10, 1999
10.50* Amendment to Restricted Stock Award Exhibit 10.69 to Form 10-Q for
Agreement for E. Stephen Davis dated as quarter ended April 15, 2000
of February 29, 2000
10.51* Amended and Restated Employment Agreement for Scott M. Exhibit 10.60 to Form 10-K
Northcutt effective as of January 26, 1999 for year ended December 25, 1999
10.52* Employment Agreement for Neal J. Rider Exhibit 10.62 to Form 10-Q for
dated as of January 18, 2000 quarter ended April 15, 2000
10.53* Restricted Stock Award Agreement for Exhibit 10.64 to Form 10-Q for
Neal J. Rider dated as of January 18, 2000 quarter ended April 15, 2000
10.54* Employment Agreement for Mark Hansen dated as of Exhibit 10.41 to Form 10-K
November 30, 1998 for year ended December 26, 1998
10.55* Restricted Stock Agreement under 1990 Stock Exhibit 10.42 to Form 10-K
Incentive Plan for Mark Hansen dated as of for year ended December 26, 1998
November 30, 1998
10.56* Restricted Stock Award Agreement for Exhibit 10.65 to Form 10-Q for
Mark S. Hansen dated as of February 29, 2000 quarter ended April 15, 2000
10.57* Restricted Stock Award Agreement for Exhibit 10.66 to Form 10-Q for
David R. Almond dated as of February 29, 2000 quarter ended April 15, 2000
10.58* Amendment to the Amended and Restated Exhibit 10.67 to Form 10-Q for
RESTRICTED AWARD AGREEMENT FOR DAVID quarter ended April 15, 2000
R. Almond dated as of February 29, 2000
10.59* Amendment to Nonqualified Stock Option Exhibit 10.68 to Form 10-Q for
Agreement for David R. Almond dated as quarter ended April 15, 2000
of February 29, 2000
10.60* 2000 Stock Incentive Plan for Fleming Exhibit 10.70 to Form 10-Q for
Companies, Inc. quarter ended April 15, 2000
10.61* Form of Indemnification Agreement for Exhibit 10.74 to Form 10-Q for
Directors quarter ended September 30, 2000
10.62* Form of Indemnification Agreement for Exhibit 10.75 to Form 10-Q for
Executive Officers quarter ended September 30, 2000
10.63* Fleming Companies, Inc. Key Executive Retention Plan Exhibit A to Registrant's
Proxy Statement dated April 3, 2001
10.64* Fleming Companies, Inc. 2001 Corporate Officer Long-Term Exhibit 10.76 to Form 10-Q
Incentive Plan for quarter ended April 21, 2001
10.65* Agreement dated as of February 2, 2001 by Fleming Exhibit 10.80 to Form 10-Q
Companies, Inc. and Kmart Corporation for quarter ended April 21, 2001
12 Statement setting forth the Computation of Ratio of **
Earnings to Fixed Charges
21 Subsidiaries of Fleming **
23 Consent of Deloitte & Touche LLP **
24 Power of Attorney **
* Management contract, compensatory plan or arrangement.
** Filed with this report.