UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 6, 2001
COMMISSION FILE NUMBER: 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State of incorporation) (I.R.S. Employer
Identification No.)
1945 LAKEPOINTE DRIVE, BOX 299013
LEWISVILLE, TEXAS 75029
(Address of principal executive offices)
(972) 906-8000
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At the close of business on November 2, 2001, 44,360,000 shares of the
registrant's common stock, par value $2.50 per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
12 Weeks Ended October 6, 2001,
and September 30, 2000
Consolidated Condensed Statements of Operations -
40 Weeks Ended October 6, 2001,
and September 30, 2000
Consolidated Condensed Balance Sheets -
October 6, 2001, and December 30, 2000
Consolidated Condensed Statements of Cash Flows -
40 Weeks Ended October 6, 2001,
and September 30, 2000
Notes to Consolidated Condensed Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 12 WEEKS ENDED OCTOBER 6, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
----------- -----------
Net sales $ 4,022,085 $ 3,197,655
Costs and expenses:
Cost of sales 3,748,895 2,894,341
Selling and administrative 209,928 260,019
Interest expense 35,370 40,111
Interest income (5,494) (6,322)
Equity investment results 689 2,097
Impairment/restructuring charge 1,415 83,356
Litigation credit -- (1,916)
----------- -----------
Total costs and expenses 3,990,803 3,271,686
----------- -----------
Income (loss) before taxes 31,282 (74,031)
Taxes on income (loss) 12,207 (28,472)
----------- -----------
Net income (loss) $ 19,075 $ (45,559)
----------- -----------
Basic net income (loss) per share $ 0.44 $ (1.17)
Diluted net income (loss) per share $ 0.40 $ (1.17)
Dividends paid per share $ 0.02 $ 0.02
Weighted average shares outstanding:
Basic 43,728 38,902
Diluted 51,032 38,902
----------- -----------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 40 WEEKS ENDED OCTOBER 6, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
------------ ------------
Net sales $ 11,640,555 $ 10,819,031
Costs and expenses:
Cost of sales 10,737,764 9,807,789
Selling and administrative 736,305 893,700
Interest expense 127,307 131,659
Interest income (20,554) (25,167)
Equity investment results 761 5,682
Impairment/restructuring charge (credit) (25,561) 146,514
Litigation charge (credit) 48,628 (1,916)
------------ ------------
Total costs and expenses 11,604,650 10,958,261
------------ ------------
Income (loss) before taxes 35,905 (139,230)
Taxes on income (loss) 14,822 (54,449)
------------ ------------
Income (loss) before extraordinary charge 21,083 (84,781)
Extraordinary charge from early retirement of
debt (net of taxes) (3,469) --
------------ ------------
Net income (loss) $ 17,614 $ (84,781)
------------ ------------
Basic net income (loss) per share:
Income (loss) before extraordinary charge $ 0.50 $ (2.19)
Extraordinary charge from early retirement of
debt (net of taxes) (0.08) --
------------ ------------
Net income (loss) $ 0.42 $ (2.19)
Diluted net income (loss) per share:
Income (loss) before extraordinary charge $ 0.47 $ (2.19)
Extraordinary charge from early retirement of
debt (net of taxes) (0.08) --
------------ ------------
Net income (loss) $ 0.39 $ (2.19)
Dividends paid per share $ 0.06 $ 0.06
Weighted average shares outstanding:
Basic 42,177 38,651
Diluted 44,670 38,651
------------ ------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
OCTOBER 6, DECEMBER 30,
ASSETS 2001 2000
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 43,491 $ 30,380
Receivables, net 571,503 509,045
Inventories 1,094,935 831,265
Assets held for sale 26,853 165,800
Other current assets 126,229 86,583
----------- -----------
Total current assets 1,863,011 1,623,073
Investments and notes receivable, net 103,338 104,467
Investment in direct financing leases 85,668 102,011
Property and equipment 1,424,451 1,370,430
Less accumulated depreciation
and amortization (686,578) (653,973)
----------- -----------
Net property and equipment 737,873 716,457
Deferred income taxes 96,499 139,852
Other assets 303,220 172,632
Goodwill, net 558,168 544,319
----------- -----------
Total assets $ 3,747,777 $ 3,402,811
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,016,877 $ 943,279
Current maturities of long-term debt 39,737 38,171
Current obligations under capital leases 20,847 21,666
Other current liabilities 199,846 229,272
----------- -----------
Total current liabilities 1,277,307 1,232,388
Long-term debt 1,517,875 1,232,400
Long-term obligations under capital leases 333,980 377,239
Other liabilities 109,685 133,592
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 110,934 99,044
Capital in excess of par value 565,879 513,645
Reinvested earnings (deficit) (126,854) (144,468)
Accumulated other comprehensive income -
additional minimum pension liability (41,029) (41,029)
----------- -----------
Total shareholders' equity 508,930 427,192
----------- -----------
Total liabilities and shareholders' equity $ 3,747,777 $ 3,402,811
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 40 WEEKS ENDED OCTOBER 6, 2001, AND SEPTEMBER 30, 2000
2001 2000
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) $ 17,614 $ (84,781)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 126,127 130,074
Amortization costs in interest expense 4,929 3,734
Credit losses 20,462 19,380
Deferred income taxes 38,045 (9,328)
Equity investment results 761 5,682
Gain on sale of business (3,273) --
Impairment/restructuring and related charges,
net of impairment credit (not in other lines) 14,637 202,932
Cash payments on impairment/restructuring
and related charges (58,450) (107,227)
Cost of early debt retirement 5,787 --
Change in assets and liabilities:
Receivables (63,321) 24,461
Inventories (217,352) 105,329
Accounts payable 65,898 (134,368)
Other assets and liabilities (102,473) (128,220)
Other adjustments, net 5,892 (260)
--------- ---------
Net cash provided by (used in) operating activities (144,717) 27,408
--------- ---------
Cash flows from investing activities:
Collections on notes receivable 24,375 25,367
Notes receivable funded (20,704) (20,923)
Purchases of businesses (120,670) (2,279)
Purchases of property and equipment (168,504) (107,623)
Proceeds from sale of property and equipment 13,286 39,071
Investments in customers -- (969)
Proceeds from sale of investment 5,115 3,293
Proceeds from sale of businesses 120,947 45,280
Other investing activities 8,482 11,928
--------- ---------
Net cash used in investing activities (137,673) (6,855)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 620,602 107,000
Principal payments on long-term debt (342,755) (70,707)
Payments on cost of debt issuance and debt retirement (23,976) --
Principal payments on capital lease obligations (15,092) (15,175)
Proceeds from sale of common stock 59,252 3,653
Dividends paid (2,530) (2,334)
--------- ---------
Net cash provided by financing activities 295,501 22,437
--------- ---------
Net change in cash and cash equivalents 13,111 42,990
Cash and cash equivalents, beginning of period 30,380 6,683
--------- ---------
Cash and cash equivalents, end of period $ 43,491 $ 49,673
========= =========
Supplemental information:
Cash paid for interest $ 122,484 $ 124,813
Cash refunded for income taxes $ 17,894 $ 63,872
--------- ---------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated condensed financial statements of Fleming
Companies, Inc. have been prepared without audit. In our opinion, all
adjustments necessary to present fairly our financial position at October 6,
2001, and the results of operations and cash flows for the periods presented
have been made. All such adjustments are of a normal, recurring nature except as
disclosed. Both basic and diluted income (loss) per share are computed based on
net income (loss) divided by weighted average shares as appropriate for each
calculation.
The preparation of the consolidated condensed financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain prior period amounts have been reclassified to conform to the current
period classifications, including the reclassification of net sales and cost of
goods due to the adoption of SAB No. 101 and EITF 99-19 in the fourth quarter of
2000.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and related notes included in our 2000
annual report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining the cost of
most grocery and certain perishable inventories. The excess of current cost of
LIFO inventories over their stated value was $55 million at October 6, 2001 and
$58 million at December 30, 2000 ($13 million of which was recorded in assets
held for sale in current assets).
7
4. Sales and operating earnings for our distribution and retail segments are
presented below.
12 WEEKS ENDED
OCTOBER 6, SEPTEMBER 30,
($ IN MILLIONS) 2001 2000
--------------- ---------- -------------
Sales:
Distribution $ 3,799 $ 2,882
Intersegment elimination (261) (378)
-------- --------
Net distribution 3,538 2,504
Retail 484 694
-------- --------
Total sales $ 4,022 $ 3,198
======== ========
Operating earnings:
Distribution $ 100 $ 79
Retail 15 6
Support services (52) (42)
-------- --------
Total operating earnings 63 43
Interest expense (35) (40)
Interest income 5 6
Equity investment results (1) (2)
Impairment/restructuring charge (1) (83)
Litigation credit -- 2
-------- --------
Income (loss) before taxes $ 31 $ (74)
======== ========
40 WEEKS ENDED
OCTOBER 6, SEPTEMBER 30,
($ IN MILLIONS) 2001 2000
--------------- ---------- -------------
Sales:
Distribution $ 10,749 $ 9,647
Intersegment elimination (949) (1,344)
-------- --------
Net distribution 9,800 8,303
Retail 1,841 2,516
-------- --------
Total sales $ 11,641 $ 10,819
======== ========
Operating earnings:
Distribution 309 224
Retail 42 36
Support services (185) (142)
-------- --------
Total operating earnings 166 118
Interest expense (127) (132)
Interest income 21 25
Equity investment results (1) (6)
Impairment/restructuring (charge) credit 26 (146)
Litigation (charge) credit (49) 2
-------- --------
Income(loss)before taxes $ 36 $ (139)
======== ========
General support services expenses are not allocated to distribution and retail
segments. The transfer pricing between segments is at cost.
8
Kmart Corporation, our largest customer, represented 27% and 10% of our total
net sales during the third quarter of 2001 and 2000, respectively. Year to date,
sales to Kmart represented 18% and 10% of our total net sales for 2001 and 2000,
respectively.
5. Our comprehensive income for the 12 and 40 weeks ended October 6, 2001,
totaled $19 million and $18 million, respectively, and our comprehensive loss
for the 12 and 40 weeks ended September 30, 2000, totaled $46 million and $85
million, respectively. The comprehensive income and loss for these periods was
comprised only of the reported net income and loss, respectively.
6. In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities (including those associated with litigation
matters) when we determine that a material loss is "probable" and either
"quantifiable" or "reasonably estimable." Additionally, we disclose material
loss contingencies when the likelihood of a material loss is deemed to be
greater than "remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, we and certain of our present and former officers
and directors were named as defendants in nine purported class action suits
filed by certain stockholders. All cases were filed in the United States
District Court for the Western District of Oklahoma and in 1997 were
consolidated. The plaintiffs in the consolidated cases sought undetermined but
significant damages, and asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products. The plaintiffs claimed that these alleged practices led to the David's
case and to other material contingent liabilities, caused us to change our
manner of doing business at great cost and loss of profit, and materially
inflated the trading price of our common stock.
During 1999, the court dismissed the consolidated stockholder case without
prejudice but gave the plaintiffs the opportunity to restate their claims, and
they did so in amended complaints. We again filed motions to dismiss all claims.
On February 4, 2000, the court dismissed the amended complaint with prejudice.
The plaintiffs filed a notice of appeal, and on September 7, 2001 the Tenth
Circuit affirmed the district court decision. On September 21, 2001, the
plaintiffs filed a petition for a full bench rehearing with the Tenth Circuit
and such petition was denied by the court in October.
The class action noteholder case previously reported in our second quarter Form
10-Q was settled pursuant to a settlement agreement dated May 25, 2001 and such
settlement became final on September 5, 2001.
Don's United Super (and related cases). On September 6, 2001, the parties
executed a final 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 us from
liability to the plaintiffs in these cases; payments by us to the plaintiffs
over a 16 month period; the transfer to us of a minority interest in several
price-impact stores in
9
Arizona; and lease concessions by us to certain plaintiffs. 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, we executed a definitive 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. We recorded an accrual for
our portion of the payment in the second quarter of 2001.
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 alleges product overcharges, breach of contract, fraud, conversion,
breach of fiduciary duty, negligent misrepresentation and breach of the Texas
Deceptive Trade Practices Act. The amended complaint seeks unspecified actual
damages, punitive damages, attorneys' fees and pre-judgment and post-judgment
interest. Pursuant to the order of the Judicial Panel on Multidistrict
Litigation, this case has been transferred to the Western District of Missouri
for pre-trial proceedings. No trial date has been set in this case. We will
continue to vigorously defend against this claim, but we cannot predict its
outcome.
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; owners of financially troubled
or failed customers; suppliers; landlords; employees regarding labor conditions,
wages, workers' compensation matters and alleged discriminatory practices;
insurance carriers; and tax assessors. Some of the disputes involve substantial
amounts. Except as noted above, we do not presently believe that any such claim
will have a material adverse effect on us.
10
7. Long-term debt consists of the following:
OCTOBER 6, DECEMBER 30,
2001 2000
----------------------------
(IN THOUSANDS)
----------- -----------
10 1/8% senior notes due 2008 $ 355,000 $ --
10 5/8% senior notes due 2001 -- 300,000
10 1/2% senior subordinated notes due 2004 250,000 250,000
10 5/8% senior subordinated notes due 2007 259,194 250,000
5 1/4% convertible senior subordinated notes due 2009 150,000 --
Revolving credit, average interest rates of 5.5%
for 2001 and 7.7% for 2000, due 2003 420,000 300,000
Term loans, due 2001 to 2004, average interest
rate of 6.4% for 2001 and 7.8% for 2000 128,517 154,421
Other debt (including discounts) (5,099) 16,150
----------- -----------
1,557,612 1,270,571
Less current maturities (39,737) (38,171)
----------- -----------
Long-term debt $ 1,517,875 $ 1,232,400
=========== ===========
Five-year maturities: Aggregate maturities of long-term debt for the next five
years are approximately as follows: in the remainder of 2001, $0; in 2002, $40
million; in 2003, $460 million; in 2004, $299 million; and in 2005, $0.
The 10 5/8% $300 million senior notes due 2001 were issued in 1994. During the
first quarter of 2001, we redeemed these notes with the proceeds from the
issuance of $355 million of senior notes, as described below. In connection with
this redemption, we recognized a $3.5 million after-tax extraordinary charge
from early retirement of debt during the first quarter of 2001.
On March 15, 2001, we issued $355 million of 10 1/8% senior notes that mature on
March 15, 2008. Most of the net proceeds were used to redeem all of the 10 5/8%
senior notes due 2001, including an amount to cover accrued interest and the
redemption premium. The balance of the net proceeds was used to pay down
outstanding revolver loans. The new senior notes are unsecured senior
obligations, ranking the same as all other existing and future senior
indebtedness and senior in right of payment to our senior subordinated notes.
The senior notes are effectively subordinated to secured senior indebtedness
with respect to assets securing such indebtedness, including loans under our
senior secured credit facility. The 10 1/8% senior notes are guaranteed by
substantially all of our subsidiaries (see Subsidiary Guarantee of Senior Notes
and Senior Subordinated Notes below).
11
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.
Subsequent to the end of the quarter, 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.
In early July 2001, we entered into two interest rate swap agreements with a
combined notional amount of $150 million. In late July 2001, we entered into an
additional swap agreement with a notional amount of $50 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 rate reset quarterly beginning July
31, 2001. We documented and designated these swaps to qualify as fair value
hedges. At the end of the third quarter of 2001, in accordance with Statement of
Financial Accounting Standards No. 133 (SFAS 133), the mark-to-market value of
these swaps was recorded as a $9 million long-term asset offset by a change in
fair value to the senior subordinated notes due 2007.
Subsequent to the end of the quarter, on October 26, 2001, we unwound all
outstanding swap agreements and in turn received $9 million in cash.
Simultaneously, we recorded an $8 million deferred gain that will be amortized
to reduce interest expense over the remaining life of the related subordinated
notes.
In early November 2001, we entered into an interest rate swap agreement with a
notional amount of $100 million. The swap is tied to our 10 1/8% senior notes
due 2008. The maturity, call dates, and call premiums mirror those of the notes.
The swap is 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 rate resets
quarterly beginning January 1, 2002. We have documented and designated this swap
to qualify as a fair value hedge.
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.
12
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 period ended October 6, 2001, there was no net earnings impact relating to
our fair value hedges.
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.
13
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
OCTOBER 6, 2001
------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 40,448 $ 2,785 $ 258 $ -- $ 43,491
Receivables, net 480,052 91,086 365 -- 571,503
Inventories 900,454 194,481 -- -- 1,094,935
Other current assets 122,579 6,290 213 -- 129,082
----------- ----------- ----------- ----------- -----------
Total current assets 1,543,533 294,642 836 -- 1,839,011
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 383,194 -- -- (383,194) --
Property and equipment, net 478,224 251,512 8,137 -- 737,873
Goodwill,net 424,433 133,735 -- -- 558,168
Other assets 531,320 65,119 16,286 -- 612,725
----------- ----------- ----------- ----------- -----------
$ 3,453,945 $ 750,364 $ 25,259 $ (481,791) $ 3,747,777
=========== =========== =========== =========== ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 905,440 $ 110,941 $ 496 $ -- $ 1,016,877
Intercompany payables (31,755) 385,047 29,902 (383,194) --
Other current liabilities 236,021 23,301 1,108 -- 260,430
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,109,706 519,289 31,506 (383,194) 1,277,307
Obligations under capital leases 213,843 120,137 -- -- 333,980
Long-term debt and other
liabilities 1,621,466 6,094 -- -- 1,627,560
Equity (deficit) 508,930 104,844 (6,247) (98,597) 508,930
----------- ----------- ----------- ----------- -----------
$ 3,453,945 $ 750,364 $ 25,259 $ (481,791) $ 3,747,777
=========== =========== =========== =========== ===========
DECEMBER 30, 2000
------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 22,487 $ 6,753 $ 1,140 $ -- $ 30,380
Receivables, net 406,203 101,884 958 -- 509,045
Inventories 635,227 192,499 3,539 -- 831,265
Other current assets 247,400 4,943 40 -- 252,383
----------- ----------- ----------- ----------- -----------
Total current assets 1,311,317 306,079 5,677 -- 1,623,073
Investment in subsidiaries 65,475 5,356 -- (70,831) --
Intercompany receivables 372,356 -- -- (372,356) --
Property and equipment, net 424,321 285,117 7,019 -- 716,457
Goodwill,net 411,094 129,440 3,785 -- 544,319
Other assets 463,008 42,918 13,036 -- 518,962
----------- ----------- ----------- ----------- -----------
$ 3,047,571 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811
=========== =========== =========== =========== ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 821,407 $ 120,145 $ 1,727 $ -- $ 943,279
Intercompany payables -- 339,688 32,668 (372,356) --
Other current liabilities 244,524 43,275 1,310 -- 289,109
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,065,931 503,108 35,705 (372,356) 1,232,388
Obligations under capital leases 214,611 162,628 -- -- 377,239
Long-term debt and other
liabilities 1,339,837 26,096 59 -- 1,365,992
Equity (deficit) 427,192 77,078 (6,247) (70,831) 427,192
----------- ----------- ----------- ----------- -----------
$ 3,047,571 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811
=========== =========== =========== =========== ===========
14
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
12 WEEKS ENDED OCTOBER 6, 2001
-----------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 3,393,147 $ 849,946 $ 9,965 $ (230,973) $ 4,022,085
Costs and expenses:
Cost of sales 3,239,001 733,892 6,975 (230,973) 3,748,895
Selling and administrative 108,323 97,849 3,756 -- 209,928
Other 29,084 6,763 (5,282) -- 30,565
Impairment/restructuring charge (credit) 1,308 107 -- -- 1,415
Equity loss from subsidiaries (9,280) -- -- 9,280 --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 3,368,436 838,611 5,449 (221,693) 3,990,803
----------- ----------- ----------- ----------- -----------
Income before taxes 24,711 11,335 4,516 (9,280) 31,282
Taxes on income 5,636 4,710 1,861 -- 12,207
----------- ----------- ----------- ----------- -----------
Net income $ 19,075 $ 6,625 $ 2,655 $ (9,280) $ 19,075
=========== =========== =========== =========== ===========
12 WEEKS ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 2,730,581 $ 753,190 $ 14,849 $ (300,965) $ 3,197,655
Costs and expenses:
Cost of sales 2,581,787 602,693 10,826 (300,965) 2,894,341
Selling and administrative 114,356 141,296 4,367 -- 260,019
Other 31,035 3,046 (111) -- 33,970
Impairment/restructuring charge (credit) 82,958 398 -- -- 83,356
Equity loss from subsidiaries (2,909) -- -- 2,909 --
----------- ----------- ----------- ----------- -----------
Total costs and expenses 2,807,227 747,433 15,082 (298,056) 3,271,686
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (76,646) 5,757 (233) (2,909) (74,031)
Taxes on income (loss) (31,087) 2,713 (98) -- (28,472)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (45,559) $ 3,044 $ (135) $ (2,909) $ (45,559)
=========== =========== =========== =========== ===========
15
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION (CONTINUED)
40 WEEKS ENDED OCTOBER 6, 2001
--------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 9,700,857 $ 2,712,624 $ 48,047 $ (820,973) $ 11,640,555
Costs and expenses:
Cost of sales 9,214,813 2,308,316 35,608 (820,973) 10,737,764
Selling and administrative 364,171 358,559 13,575 -- 736,305
Other 118,012 40,647 (2,517) -- 156,142
Impairment/restructuring charge (credit) 10,132 (35,693) -- -- (25,561)
Equity results from subsidiaries (24,897) -- -- 24,897 --
----------- ----------- ----------- ----------- ------------
Total costs and expenses 9,682,231 2,671,829 46,666 (796,076) 11,604,650
----------- ----------- ----------- ----------- ------------
Income before taxes 18,626 40,795 1,381 (24,897) 35,905
Taxes on income (2,457) 16,710 569 -- 14,822
----------- ----------- ----------- ----------- ------------
Income before extraordinary charge $ 21,083 $ 24,085 $ 812 $ (24,897) $ 21,083
=========== =========== =========== =========== ============
40 WEEKS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net sales $ 9,022,936 $ 2,796,251 $ 54,161 $(1,054,317) $ 10,819,031
Costs and expenses:
Cost of sales 8,523,242 2,298,178 40,686 (1,054,317) 9,807,789
Selling and administrative 424,644 455,148 13,908 -- 893,700
Other 64,852 43,062 2,344 -- 110,258
Impairment/restructuring charge 145,268 1,185 61 -- 146,514
Equity results from subsidiaries 2,597 -- -- (2,597) --
----------- ----------- ----------- ----------- ------------
Total costs and expenses 9,160,603 2,797,573 56,999 (1,056,914) 10,958,261
----------- ----------- ----------- ----------- ------------
Loss before taxes (137,667) (1,322) (2,838) 2,597 (139,230)
Taxes on loss (52,886) (372) (1,191) -- (54,449)
----------- ----------- ----------- ----------- ------------
Net loss $ (84,781) $ (950) $ (1,647) $ 2,597 $ (84,781)
=========== =========== =========== =========== ============
16
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
40 WEEKS ENDED OCTOBER 6, 2001
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash used in operating activities $ (88,061) $ (56,633) $ (23) $ -- $(144,717)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (136,669) (25,258) (6,577) -- (168,504)
Other 24,615 6,136 80 -- 30,831
--------- --------- --------- --------- ---------
Net cash used in investing activites (112,054) (19,122) (6,497) -- (137,673)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments on capital lease obligations (10,449) (4,643) -- -- (15,092)
Advance to (from) parent (82,068) 76,430 5,638 -- --
Other 310,593 -- -- -- 310,593
--------- --------- --------- --------- ---------
Net cash provided by financing activities 218,076 71,787 5,638 -- 295,501
--------- --------- --------- --------- ---------
Net increase (decrease) in cash & cash equivalents 17,961 (3,968) (882) -- 13,111
Cash and cash equivalents at beginning of period 22,487 6,753 1,140 -- 30,380
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 40,448 $ 2,785 $ 258 $ -- $ 43,491
========= ========= ========= ========= =========
40 WEEKS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities $ (14,684) $ 48,659 $ (6,567) $ -- $ 27,408
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (61,606) (43,309) (2,708) -- (107,623)
Other 96,673 4,086 9 -- 100,768
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities 35,067 (39,223) (2,699) -- (6,855)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments on capital lease obligations (11,248) (3,927) -- -- (15,175)
Advance to (from) parent 56,480 (75,852) 19,372 -- --
Other 37,612 -- -- -- 37,612
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 82,844 (79,779) 19,372 -- 22,437
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 103,227 (70,343) 10,106 -- 42,990
Cash and cash equivalents at beginning of period (54,803) 61,307 179 -- 6,683
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 48,424 $ (9,036) $ 10,285 $ -- $ 49,673
========= ========= ========= ========= =========
17
8. In December 1998, we announced the implementation of a strategic plan
designed to improve the competitiveness of the retailers we serve and improve
our performance by building stronger operations that can better support
long-term growth. The four major initiatives of the strategic plan were to
consolidate distribution operations, grow distribution sales, improve retail
performance, and reduce overhead and operating expenses, in part by centralizing
the procurement and other functions in the Dallas, Texas area. Additionally, in
2000, we decided to reposition certain retail operations into our price-impact
format and sell or close the remaining conventional retail chains. During the
first and second quarters of 2001, we sold or closed our remaining conventional
retail stores.
The plan, as expected, took two years to implement and is now substantially
complete. Total net charges of approximately $20 million are estimated for the
full year 2001. The remaining charges represent anticipated exit costs that
cannot be expensed until incurred. Charges after 2001 are expected to be
minimal.
We recorded a pre-tax charge of $6 million ($4 million after-tax) in the third
quarter of 2001 as a result of the strategic plan. The charge was included on
several lines of the Consolidated Condensed Statements of Operations: less than
$1 million of charges was included in net sales, adjusting previously recorded
gains on the sale of conventional retail stores; $1 million of charges was
included in cost of sales and $3 million of charges was included in selling and
administrative expense, both amounts related to disposition costs recognized on
a periodic basis; and $1 million of charges included in the
impairment/restructuring line related to net impairment recovery and
restructuring charges as described below. The third quarter charge consisted of
the following components:
o Recovery of $2 million through sales of operations against which we had
previously recorded long-lived asset impairments.
o Restructuring charges of $3 million. The restructuring charges consisted
primarily of severance related expense adjustments for the sold or closed
operating units and professional fees.
o Other disposition and related costs of $5 million. These costs consisted
primarily of disposition related costs recognized on a periodic basis and
other costs.
The third quarter of 2001 charge relates to our business segments as follows: $1
million relates to the distribution segment and $4 million relates to the retail
segment with the balance relating to support services expenses.
The pre-tax charge for the first three quarters of 2001 totaled $19 million ($11
million after-tax), and was included on several lines of the Consolidated
Condensed Statements of Operations: less than $1 million of income was included
in net sales relating primarily to gains on the sale of conventional retail
stores; $31 million charge included in cost of sales, primarily related to
18
inventory markdowns for clearance for closed operations; and $14 million
included in selling and administrative as disposition related costs recognized
on a periodic basis. These charges were offset by $26 million of income included
in the impairment/restructuring line related primarily to the recovery of
previously recorded asset impairment resulting from the sale of some retail
stores. The charge for the first three quarters consisted of the following
components:
o Net impairment recovery of $42 million. The components included recovering,
through sales of the related operations, previously recorded goodwill
impairment of $15 million and long-lived asset impairment of approximately
$34 million. Also included was impairment of $7 million related to other
long-lived assets.
o Restructuring charges of $16 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 $45 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations,
disposition related costs recognized on a periodic basis and other costs,
offset partially by gains on sales of conventional retail stores.
The charge for the first three quarters of 2001 relates to our business segments
as follows: a $17 million charge relates to the distribution segment and income
of $5 million relates to the retail segment. The balance relates to support
services expenses.
The charges related to workforce reductions are as follows:
AMOUNT
($ IN
THOUSANDS) HEADCOUNT
---------- ---------
1999 Ending Liability $ 9,602 660
2000 Activity
Charge 53,906 5,610
Terminations (26,180) (1,860)
-------- --------
Ending Liability 37,328 4,410
2001 Quarter 1 thru 3 Activity
Charge 12,632 260
Terminations (30,003) (4,650)
-------- --------
Ending Liability $ 19,957 20
======== ========
The ending liability of approximately $20 million is primarily comprised of
union pension withdrawal liabilities, but also includes accruals for payments
over time to associates already severed as well as accruals for associates still
to be severed. The breakdown of the 260 headcount reduction recorded for the
first three quarters of 2001 is: 215 from the distribution segment; 30 from the
retail segment; and 15 from support services.
19
Additionally, the strategic plan includes charges related to lease obligations
which will be utilized as operating units or retail stores close, but ultimately
reduced over remaining lease terms ranging from 1 to 20 years. The charges and
utilization have been recorded to-date as follows:
AMOUNT
(IN THOUSANDS)
--------------
1999 Ending liability $ 32,509
2000 Activity
Charge 37,149
Utilized (48,880)
--------
Ending Liability 20,778
2001 Quarter 1 thru 3 Activity
Charge 1,714
Utilized (19,392)
--------
Ending Liability $ 3,100
========
Assets held for sale included in current assets at the end of the third quarter
of 2001 were approximately $27 million, consisting of $17 million of
distribution operating units and $10 million of retail stores.
We recorded a $101 million pre-tax charge in the third quarter of 2000 as a
result of the strategic plan. The charge was included on several lines of the
Consolidated Condensed Statements of Operations: $1 million was included in net
sales related to rent income impairment due to division closings; $11 million
was included in cost of sales and was primarily related to inventory markdowns
for clearance for closed operating units and moving and training costs; $6
million was included in selling and administrative expense and equity investment
results as disposition related costs recognized on a periodic basis; and the
remaining $83 million was included in the impairment/restructuring line. The
third quarter charge consisted of the following components:
o Impairment of assets of $81 million. The impairment components were $3
million for goodwill and $78 million for other long-lived assets. All of
the goodwill charge was related to a conventional retail store acquisition
in May of 1999.
o Restructuring charges of $2 million. The restructuring charges consisted
primarily of severance related expenses due to the consolidation of certain
administrative departments. 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 $18 million. These costs consisted
primarily of inventory markdowns for clearance for closed operating units,
disposition related costs recognized on a periodic basis and other costs.
20
The charge for the third quarter of 2000 relates to our business segments as
follows: $8 million relates to the distribution segment and $77 million relates
to the retail segment with the balance relating to support services expenses.
We recorded a pre-tax charge of $211 million in the first three quarters of 2000
as a result of the strategic plan. The charge was included on several lines of
the Consolidated Condensed Statements of Operations: $2 million was included in
net sales related primarily to rent income impairment due to division closings;
$46 million was included in cost of sales and was primarily related to inventory
markdowns for clearance for closed operating units, moving and training costs,
and additional depreciation and amortization on assets to be disposed of but not
yet held for sale; $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 $146 million was included in the
impairment/restructuring line related to impairment and restructuring charges as
described below. The charge for the first three quarters consisted of the
following components:
o Impairment of assets of $84 million. The impairment components were $3
million for goodwill and $81 million for other long-lived assets. All of
the goodwill charge was related to an acquisition in May of 1999.
o Restructuring charges of $63 million. The restructuring charges consisted
of severance related expenses and pension withdrawal liabilities for the
closings of the York and Philadelphia distribution facilities which were
announced during the first quarter of 2000 as part of an effort to grow in
the northeast by consolidating distribution operations and expanding the
Maryland facility. Additionally, the charge consisted of severance related
expenses due to the consolidation of certain administrative departments
announced during the second quarter of 2000. The restructuring charges also
consisted of operating lease liabilities and professional fees incurred
related to the restructuring process.
o Other disposition and related costs of $64 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations,
additional depreciation and amortization on assets to be disposed of but
not yet held for sale, disposition related costs recognized on a periodic
basis and other costs.
The charge for the first three quarters of 2000 relates to our business segments
as follows: $66 million relates to the distribution segment and $104 million
relates to the retail segment with the balance relating to support services
expenses.
Asset impairments were recognized in accordance with SFAS No. 121 - Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and such assets were written down to their estimated fair values based on
estimated proceeds of operating units to be sold or discounted cash flow
projections. The operating costs of operating units to be sold or closed are
treated as normal operations during the period they remain in use. Salaries,
wages and benefits of employees at these operating units are charged to
operations during the time such
21
employees are actively employed. Depreciation expense is continued for assets
that the company is unable to remove from operations.
9. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 142
-- Goodwill and Other Intangible Assets. One of the provisions of this standard
is to require use of a non-amortization approach to account for purchased
goodwill. Under that approach, goodwill and intangible assets with indefinite
lives would not be amortized to earnings over a period of time. Instead, these
amounts would be reviewed for impairment and expensed against earnings only in
the periods in which the recorded values are more than implied fair value. We
are studying the impact that SFAS 142 will have on our financial statements and
planning to implement it in fiscal year 2002, as required.
22
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
FLEMING COMPANIES, INC.
We have reviewed the accompanying condensed consolidated balance sheet of
Fleming Companies, Inc. and subsidiaries as of October 6, 2001, and the related
condensed consolidated statements of operations for the 12 and 40 weeks ended
October 6, 2001 and September 30, 2000 and condensed consolidated statements of
cash flows for the 40 weeks ended October 6, 2001 and September 30, 2000. These
financial statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Fleming Companies Inc. and subsidiaries as of December 30, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 14,
2001 (except for the information under long-term debt and contingencies included
in the notes to consolidated financial statements as to which the date is March
22, 2001), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 30, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 12, 2001
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We recorded net income for the third quarter of 2001 of $19 million and net
income for the first three quarters of 2001, after an extraordinary charge of $3
million related to the early retirement of debt, of $18 million. Adjusted EBITDA
for the third quarter of 2001 was $110 million and $354 million for the first
three quarters of 2001. That represents a 3% increase in the third quarter and a
5% increase in the first three quarters of 2001 compared to the same time
periods in 2000. Excluding the impact of retail operations divested, in
transition, or in development, adjusted EBITDA increased 14.7% to $115 million
from $101 million. "Adjusted EBITDA" is earnings before extraordinary items,
interest expense, income taxes, depreciation and amortization, equity investment
results, LIFO adjustments and one-time adjustments (e.g., strategic plan charges
and specific litigation charges). Adjusted EBITDA should not be considered as an
alternative measure of our net income, operating performance, cash flow or
liquidity. It is provided as additional information related to our ability to
service debt; however, conditions may require conservation of funds for other
uses. Although we believe adjusted EBITDA enhances a reader's understanding of
our financial condition, this measure, when viewed individually, is not
necessarily a better indicator of any trend as compared to conventionally
computed measures (e.g., net sales, net earnings, net cash flows, etc.).
Finally, amounts presented may not be comparable to similar measures disclosed
by other companies.
24
The following table sets forth the calculation of adjusted EBITDA:
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 6, SEPTEMBER 30, OCTOBER 6, SEPTEMBER 30,
2001 2000 2001 2000
---------- ------------- ---------- -------------
Net income (loss) before
extraordinary charge $ 19 $ (46) $ 21 $ (85)
Add back:
Taxes on income (loss) 12 (28) 15 (54)
Depreciation/amortization 39 38 126 130
Interest expense 35 40 127 131
Equity investment results 1 2 1 6
LIFO adjustments (2) 1 (3) 6
----- ----- ----- -----
EBITDA 104 7 287 134
Add back non-cash strategic
plan and one-time items * (1) 84 (13) 96
----- ----- ----- -----
EBITDA excluding non-cash
strategic plan charges 103 91 274 230
Add back strategic plan and
one-time items requiring cash 7 16 80 108
----- ----- ----- -----
Adjusted EBITDA 110 107 354 338
Less retail operations in transition,
in development, or discontinued (5) 6 11 32
----- ----- ----- -----
Adjusted EBITDA
from core operations $ 115 $ 101 $ 343 $ 306
===== ===== ===== =====
* Excludes amounts already added back for depreciation/amortization of $7
million for 40 weeks of 2000; interest expense of $3 million for the 40
weeks of 2001; and immaterial amounts for equity investment results.
The adjusted EBITDA amount represents cash flow from operations excluding
unusual or infrequent items. In our opinion, adjusted EBITDA is the best
starting point when evaluating our ability to service debt. In addition, we
believe it is important to identify the cash flows relating to unusual or
infrequent charges and strategic plan charges, which should also be considered
in evaluating the company's ability to service debt.
We have substantially completed our strategic plan. Total net charges of
approximately $20 million are estimated for the full year 2001. The remaining
charges represent anticipated exit costs that cannot be expensed until incurred.
Charges after 2001 are expected to be minimal.
The third quarter of 2001 included a pre-tax charge related to the strategic
plan of $6 million ($4 million after-tax or $0.07 per share). The charge
included non-cash impairment adjustments of asset values and cash costs for
severance related and other expenses.
The third quarter of 2000 included a pre-tax charge related to the strategic
plan of $101 million ($60 million after-tax or $1.53 per share). The charge
included severance related expenses due to consolidation of certain
administrative departments, operating lease liabilities, inventory
25
markdowns for clearance for closed operations, and impairment of asset values.
We also recorded a $9 million gain from the sale of a facility, $10 million in
charges relating to closing certain company-owned retail stores, and $2 million
net income from litigation settlements, netting to less than $1 million of
income ($1 million after-tax or $.02 per share). The full impact of the
strategic plan charges, gain on sale of facility, charges relating to closing
certain company-owned retail stores, and net income from litigation settlements
was $100 million expense ($61 million after-tax or $1.53 per share which
includes a $.03 per share impact due to converting from basic to diluted
weighted average shares).
The first three quarters of 2001 included a pre-tax charge related to the
strategic plan of $19 million ($11 million after-tax or $0.25 per share). The
charge included non-cash impairment adjustments of asset values, inventory
markdowns for clearance for closed operations, and cash costs for severance
related and other expenses. We also recorded approximately $49 million in
litigation settlement charges and net additional interest expense of
approximately $2 million due to the early retirement of debt, netting to $50
million ($30 million after-tax or $.67 per share). The full impact of the
strategic plan charges, litigation charges and net additional interest expense
was $69 million ($41 million after-tax or $.92 per share). An extraordinary
charge from the early retirement of debt of $6 million ($3 million after-tax or
$.08 per share) was also recorded.
The first three quarters of 2000 included a pre-tax charge related to the
strategic plan of $211 million ($125 million after-tax or $3.23 per share). The
charge included severance related expenses due to consolidation of certain
administrative departments, operating lease liabilities, inventory markdowns for
clearance for closed operations, additional depreciation and amortization on
assets to be disposed of but not yet held for sale, and impairment of asset
values. We also recorded a $9 million gain from the sale of a facility, $10
million in charges relating to closing certain company-owned retail stores, and
$2 million net income from litigation settlements, netting to less than $1
million of income ($1 million after-tax or $.02 per share). The full impact of
the strategic plan charges, gain on sale of facility, charges relating to
closing certain company-owned retail stores, and net income from litigation
settlements was $210 million expense ($126 million after-tax or $3.25 per share
which includes a $.01 per share impact due to converting from basic to diluted
weighted average shares).
Adjusted EBITDA from core operations in the above table reflects results after
excluding the impact of retail operations divested, in transition, and in
development stages.
26
RESULTS OF OPERATIONS
Set forth in the following table is information regarding the company's net
sales and certain components of earnings expressed as a percent of sales which
are referred to in the accompanying discussion:
OCTOBER 6, SEPTEMBER 30,
FOR THE 12 WEEKS ENDED 2001 2000
---------------------- ---------- -------------
Net sales 100.00 % 100.00 %
Gross margin 6.79 9.49
Less:
Selling and administrative 5.22 8.13
Interest expense 0.88 1.25
Interest income (0.14) (0.20)
Equity investment results 0.02 0.07
Impairment/restructuring charge 0.04 2.61
Litigation credit -- (0.06)
----- -----
Total expenses 6.02 11.80
----- -----
Income (loss) before taxes 0.77 (2.31)
Taxes on income (loss) 0.30 (0.89)
----- -----
Net income (loss) 0.47 % (1.42)%
OCTOBER 6, SEPTEMBER 30,
FOR THE 40 WEEKS ENDED 2001 2000
---------------------- ---------- -------------
Net sales 100.00 % 100.00 %
Gross margin 7.76 9.35
Less:
Selling and administrative 6.33 8.26
Interest expense 1.09 1.22
Interest income (0.18) (0.23)
Equity investment results 0.01 0.05
Impairment/restructuring charge (credit) (0.22) 1.35
Litigation charge (credit) 0.42 (0.02)
----- -----
Total expenses 7.45 10.63
----- -----
Income (loss) before taxes 0.31 (1.28)
Taxes on income (loss) 0.13 (0.50)
----- -----
Income (loss) before extraordinary charge 0.18 % (0.78)%
----- -----
27
NET SALES.
Net sales for the third quarter (12 weeks) of 2001 increased by $824 million, or
25.8%, to $4.0 billion from the same period in 2000. Year to date, net sales
increased by $822 million, or 7.6%, to $11.6 billion from the same period in
2000.
Net sales for the distribution segment increased by 41.3% for the third quarter
of 2001 to $3.5 billion compared to $2.5 billion in 2000. Year to date, net
sales increased by 18.0% to $9.8 billion compared to $8.3 billion in 2000.
Approximately one-fourth of the 40% sales growth in the third quarter was
attributable to growth in distribution sales from a wide variety of new-channel
and conventional customers. New-channel customers, including convenience stores,
supercenters, limited assortments stores, drug stores, and self-distributing
chains, are an important part of the our strategic growth plan and collectively
represent approximately one-half of our distribution customer base. The
remainder of the sales growth was attributable to the implementation of new
business resulting from the recently announced Kmart alliance.
Kmart Corporation, our largest customer, accounted for 27% and 10% of our total
net sales in the third quarter of 2001 and 2000, respectively. Sales to Kmart
accounted for 18% and 10% of our total net sales for the year-to-date periods
ended October 6, 2001, and September 30, 2000, respectively. We expect annual
sales to Kmart for 2001 to be approximately $2.6 billion, with an increase to
approximately $4.5 billion in 2002.
Retail segment sales for the third quarter of 2001 decreased $209 million, or
30.2%, to $484 million from the same period in 2000. Year to date, retail
segment sales decreased $675 million, or 26.8%, in 2001 to $1.8 billion from the
same period in 2000. The decrease in sales was due to the continued disposition
of conventional retail stores in order to increase focus on our price-impact
retail stores. During the first three quarters of 2001, we sold or closed our
remaining 96 conventional retail stores and opened 10 Yes!Less stores and 10
price impact stores, including four remodeled former Sentry stores. Excluding
the impact of retail operations in transition or divested, sales increased by
20.7%. Comparable store sales for the continuing operations were up 1.5 percent
for the quarter.
GROSS MARGIN.
Gross margin for the third quarter of 2001 decreased by $30 million, or 9.9%, to
$273 million from $303 million for the same period in 2000, and also decreased
as a percentage of net sales to 6.79% from 9.49% for the same period in 2000.
Year to date, gross margin decreased by $108 million, or 10.7%, to $.9 billion
from $1.0 billion for the same period in 2000, and also decreased as a
percentage of net sales to 7.76% from 9.35% for the same period in 2000. After
excluding the strategic plan charges, gross margin for the third quarter of 2001
decreased by $31 million, or 10.1%, compared to the same period in 2000, and
decreased as a percentage of net sales to 6.84% from 9.59% for the same period
in 2000. Year to date, gross margin, after excluding the strategic plan charges,
decreased by $118 million, or 11.2%, compared to the same period in 2000, and
decreased as a percentage of net sales to 8.01% from 9.72% for the same period
in 2000. The decrease in gross margin rate was an expected result of the change
in sales mix. The sales of the distribution segment represent a larger portion
of total company sales than
28
the retail segment and the distribution segment has lower margins as a
percentage of sales versus the retail segment.
For the distribution segment, after excluding strategic plan charges, gross
margin as a percentage of gross distribution sales declined by 56 basis points
for the third quarter of 2001, as expected, reflecting the increase in Kmart
business, which is lower margin, but improved by 3 basis points for the year-to
date period compared to the same periods in 2000, reflecting the benefits of
centralizing procurement and increasing warehouse productivity. For the retail
segment, after excluding strategic plan charges, gross margin as a percentage of
net retail sales decreased for the third quarter of 2001 by 130 basis points and
decreased for the year-to-date period of 2001 by 29 basis points, compared to
the same periods in 2000. The decreasing margin reflects our transition out of
conventional retail and into price-impact retail which has lower shelf prices
and gross margins.
For the distribution segment, the strategic plan charges decreased in 2001 for
both the third quarter and year-to-date periods compared to the same periods in
2000 primarily due to reduced recruiting and training expenses in 2001 after
completing most of the centralization of procurement in 2000, and additional
depreciation and amortization in 2000 of assets to be disposed of but not yet
held for sale. Strategic plan charges for the retail segment decreased in the
third quarter of 2001 compared to the same period in 2000 and increased for the
year-to-date period comparison. Both changes were primarily due to inventory
markdowns for clearance for closed operations.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses for the third quarter of 2001 decreased by
$50 million, or 19.3%, to $210 million from $260 million for the same period in
2000 and decreased as a percentage of net sales to 5.22% for 2001 from 8.13% in
2000. Year to date, selling and administrative expenses decreased by
approximately $158 million, or 17.6%, to $736 million in 2001 from $894 million
for the same period in 2000 and decreased as a percentage of net sales to 6.33%
for 2001 from 8.26% in 2000. After excluding the strategic plan charges and a
$10 million charge related to closing certain company-owned retail stores,
selling and administrative expenses for the third quarter of 2001 decreased by
$37 million, or 15.1%, compared to the same period in 2000, and decreased as a
percentage of net sales to 5.14% from 7.64% for the same period in 2000. Year to
date, selling and administrative expenses, after excluding the strategic plan
charges, decreased in 2001 by $146 million, or 16.8%, compared to the same
period in 2000, and decreased as a percentage of net sales to 6.20% from 8.03%
for the same period in 2000. The sales of the distribution segment represent a
larger portion of total company sales than the retail segment, and the
distribution segment has lower operating expenses as a percentage of sales than
the retail segment.
For the distribution segment, after excluding strategic plan charges, selling
and administrative expenses as a percentage of gross sales improved for the
third quarter of 2001 by 28 basis points and year to date by 19 basis points,
both compared to the same periods in 2000, due to leveraging the effect of sales
growth and low cost pursuit initiatives. For the retail segment, after excluding
29
strategic plan charges and a $10 million charge relating to closing certain
company-owned retail stores, selling and administrative expenses as a percentage
of retail sales also improved for the third quarter of 2001 by 197 basis points
and year to date by 194 basis points, both compared to the same periods in 2000,
due to our shift in focus from conventional retail to price-impact retail, a
format that has lower operating expense levels than conventional retail. The
strategic plan charges for distribution were relatively flat. The strategic plan
charges for retail were higher in the third quarter and year-to- date periods of
2001 compared to the same periods in 2000 due to costs associated with closing
conventional retail stores.
Support services expense increased in the quarter and year-to-date periods of
2001 compared to the same periods of 2000 primarily due to centralizing certain
administrative functions from the distribution and retail segments. Strategic
plan charges were lower in 2001 due to reduced severance related expenses,
moving costs, and professional fees in connection with carrying out our
strategic plan.
OPERATING EARNINGS.
Operating earnings for the distribution segment increased significantly for the
third quarter of 2001 to $100 million from $80 million for the same period of
2000. Year to date, operating earnings also increased from the same period in
2000, to $310 million in 2001 from $224 million in 2000. After excluding
strategic plan charges and one-time items, operating earnings for the third
quarter of 2001 increased by $23 million, or 28.7%, to $102 million from $79
million for the same period of 2000. Year to date, operating earnings, after
excluding the strategic plan charges and one-time items, increased by $71
million, or 28.5%, to $319 million in 2001 from $248 million for the same period
of 2000.
Operating earnings for the retail segment increased by $9 million to $15 million
for the third quarter of 2001 from $6 million for the same period of 2000. Year
to date, operating earnings increased $7 million to $42 million in 2001 from $35
million in 2000. After excluding the strategic plan charges and one-time items,
operating earnings decreased by $2 million to $17 million in the third quarter
of 2001 from $19 million for the same period of 2000 and increased by $15
million year to date to $73 million in 2001 from $58 million in 2000.
Support services expenses increased in the third quarter of 2001 compared to the
same period of 2000 by $10 million to $52 million from $42 million. Year to
date, support services expenses increased by $43 million to $185 million in 2001
from $142 million in 2000. After excluding strategic plan charges, support
services expenses increased by approximately $14 million to $51 million in the
third quarter of 2001 from $37 million for the same period of 2000 and increased
by approximately $58 million year to date to $181 million in 2001 from $123
million in 2000.
Operating earnings net improvement is described in detail by segment in Net
sales, Gross margin, and Selling and administrative expenses sections above.
INTEREST EXPENSE.
Interest expense for the third quarter of 2001 of $35 million decreased $5
million compared to the same period in 2000, primarily resulting from lower
average interest rates. Year to date, interest
30
expense decreased approximately $5 million to $127 million in 2001 from $132
million in 2000, resulting from lower average interest rates. The $127 million
in 2001 included $3 million of interest expense related to the early retirement
of debt which was recorded during the first quarter of 2001.
INTEREST INCOME.
Interest income of approximately $5 million for the third quarter of 2001 was
less than $1 million lower than the same period of 2000, and year-to-date
interest income of $21 million in 2001 was $5 million lower than the same period
in 2000. The reductions were primarily due to reduced customer and other
interest-bearing receivable balances. The $21 million in 2001 included $1
million of interest income related to the early retirement of debt which was
recorded during the first quarter of 2001.
EQUITY INVESTMENT RESULTS.
Our portion of results from equity investments improved by $1 million for the
third quarter of 2001 to a net loss less than $1 million. Year to date, equity
investment results improved by $5 million to reflect a loss less than $1 million
in 2001 compared to a $6 million loss in 2000.
IMPAIRMENT/RESTRUCTURING CHARGE.
The pre-tax charge recorded in the Consolidated Condensed Statements of
Operations (associated with the implementation of our strategic plan announced
in 1998) was $6 million for the third quarter of 2001 compared to $101 million
for the same period of 2000. The $6 million charge in 2001 was recorded with $1
million of charges reflected in the impairment/restructuring line and the
balance reflected in other financial statement lines. The $101 million charge in
2000 was recorded with $83 million reflected in the impairment/restructuring
line and the balance reflected in other financial statement lines.
Year to date, the pre-tax charge was $19 million for 2001 compared to $211
million for the same period of 2000. The $19 million charge in 2001 was recorded
with $26 million of income reflected in the impairment/restructuring line and
the balance reflected in other financial statement lines. The $211 million
charge in 2000 was recorded with $147 million reflected in the
impairment/restructuring line and the balance reflected in other financial
statement lines. See "General" above and Note 8 in the notes to the consolidated
condensed financial statements for further discussion regarding the strategic
plan.
LITIGATION CHARGES.
During the first two quarters of 2001, we recorded litigation settlements and
other related pre-tax expenses totaling $49 million related to agreements in
principle to settle the Storehouse Markets, Inc., et al., Don's United Super,
et.al., Coddington Enterprises, Inc., et.al, J&A Foods, Inc. et. al., R&D Foods,
Inc. et.al., and Robandee United Super, Inc., et.al., and other cases. During
the third quarter of 2000, we recorded $2 million of net income in settlements
relating to other cases. See Note 6 in the notes to the consolidated condensed
financial statements and Legal Proceedings for further discussion regarding
these litigation charges.
31
TAXES ON INCOME.
The effective tax rates for the 40 weeks of 2001 and 2000 were 41.3% (before
extraordinary charge) and 39.1%, respectively. These were both blended rates
taking into account operations activity, strategic plan activity, write-offs of
non-deductible goodwill and the timing of these items during the year. The tax
amount for the third quarter of both years was derived using the 40 week tax
amount with that year's estimated effective tax rate compared to the tax amount
recorded for the first 28 weeks of the year.
EXTRAORDINARY CHARGE.
We reflected an extraordinary after-tax charge of $3 million ($6 million
pre-tax) in the first quarter of 2001 due to the early retirement of debt. See
Note 7 in the notes to the consolidated condensed financial statements for
further discussion regarding the debt retirement.
CERTAIN ACCOUNTING MATTERS.
The Financial Accounting Standards Board (FASB) recently issued SFAS No. 142 --
Goodwill and Other Intangible Assets. One of the provisions of this standard is
to require use of a non-amortization approach to account for purchased goodwill.
Under that approach, goodwill and intangible assets with indefinite lives would
not be amortized to earnings over a period of time. Instead, these amounts would
be reviewed for impairment and expensed against earnings only in the periods in
which the recorded values are more than implied fair value. We are studying the
impact that SFAS 142 will have on our financial statements and planning to
implement it in fiscal year 2002, as required. Goodwill amortization impacted
the diluted per share amount for the third quarter of 2001, excluding the
strategic plan charges, litigation charges, and net additional interest expense
due to the early retirement of debt by $0.08 per share. Year to date in 2001,
goodwill amortization impacted the diluted per share amount, excluding the
strategic plan charges, litigation charges, and net additional interest expense
due to the early retirement of debt, by $0.31 per share.
The FASB Emerging Issues Task Force (EITF) reached a consensus on EITF 00-25 -
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products. EITF 00-25 provides guidance on income statement
classification on consideration paid to a reseller of a vendor's products. EITF
00-25 will be implemented by the end of 2001, as required. We anticipate EITF
00-25 will provide for certain reclassifications of revenues and cost of sales
within our financial statements with no effect on gross margin or earnings.
The FASB recently issued SFAS No. 141 -- Business Combinations. We are planning
to apply SFAS 141 to all business combinations initiated after June 30, 2001.
The FASB recently issued SFAS No. 143 - Accounting for Asset Retirement
Obligations. We are studying the impact that SFAS 143 has on our financial
statements and planning to implement it in the fiscal year after June 15, 2002,
as required. We have not determined the impact on our financial statements from
adopting these new standards. The FASB recently issued SFAS No. 144 - Accounting
for the Impairment or Disposal of Long-Lived Assets. We are studying, and have
not yet determined, the impact of this statement on our financial statements.
32
LIQUIDITY AND CAPITAL RESOURCES
For the year-to-date period ended October 6, 2001, our principal sources of
liquidity were borrowings under our credit facility and the proceeds from the
sale of certain assets. Our principal source of capital, excluding shareholders'
equity, was the issuance of bonds in the capital markets.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.
Net cash expended by operating activities was $145 million for the three
quarters ended October 6, 2001 compared to a $27 million source of cash for the
same period in 2000. The use of cash was for working capital primarily due to a
planned increase of approximately $150 million in inventory related to the
additional Kmart business, as well as the investment in trade receivables for
new and acquired customers.
Cash requirements related to the implementation and completion of the strategic
plan (on a pre-tax basis) were $58 million for the three quarters ended October
6, 2001 and are currently expected to be $71 million for the full year 2001. We
believe working capital reductions and increased earnings related to the
successful implementation of the strategic plan will provide more than adequate
cash flows to cover all of these costs.
NET CASH USED IN INVESTING ACTIVITIES.
Total investment-related activity resulted in a $138 million use of cash for the
three quarters ended October 6, 2001 compared to a $7 million use of cash in the
same period of 2000. Cash expended for the purchases of businesses totaled $121
million in the first three quarters of 2001 compared to $2 million in the same
period of 2000 and cash expended for property and equipment totaled $169 million
in the first three quarters of 2001 compared to $108 million in the same period
of 2000. Capital expenditures of property and equipment are projected to be $225
million for the full year of 2001. The cash expenditures were partially offset
by proceeds from asset sales.
NET CASH PROVIDED BY FINANCING ACTIVITIES.
Net cash generated by financing activities was $296 million for the first three
quarters of 2001 compared to $22 million for the same period last year.
On March 23, 2001, we received approximately $50 million in proceeds from the
sale of common stock to an affiliate of the Yucaipa Companies, which at the time
represented an 8.7% ownership of Fleming's outstanding common stock. At that
time we also issued a warrant to purchase additional shares of common stock to
this entity.
On March 15, 2001, we sold $355 million of new 10 1/8% senior notes due 2008,
and we deposited $315 million with the trustee to redeem all of the 10 5/8%
senior notes due 2001, including an amount to cover accrued interest and the
redemption premium. On April 16, 2001, our obligations under the indenture were
discharged. The balance of the net proceeds was used to pay down our revolver
loans. An extraordinary after-tax charge of approximately $3 million was
recorded in connection with the early redemption. On March 15, 2001, we also
sold $150 million of 5 1/4% convertible senior subordinated notes due 2009 with
a conversion price of $30.27 per share. The net proceeds of $146 million were
used to pay down our revolver loans.
33
At the end of the third quarter of 2001, outstanding borrowings under the credit
facility totaled $129 million of term loans, $420 million of revolver loans, and
$53 million of letters of credit.
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. Pro forma for this sale, we would have had $277 million of
additional borrowing capacity under the revolver as of October 6, 2001.
For the foreseeable future, our principal sources of liquidity and capital are
expected to be cash flows from operating activities and our ability to borrow
under our credit facility. In addition, lease financing may be employed for new
retail stores and certain equipment. We believe these sources will be adequate
to meet working capital needs, capital expenditures, strategic plan
implementation costs and other capital needs in the normal course of business
for the next 12 months. In the future, as part of our growth strategy, we may
need to raise additional funds through public or private debt or equity
financings in order to acquire additional retail stores or other third party
businesses or to expand our services more rapidly. In addition, we may access
such resources to refinance existing indebtedness.
CONTINGENCIES
From time to time we face litigation or other contingent loss situations
resulting from owning and operating our assets, conducting our business or
complying (or allegedly failing to comply) with federal, state and local laws,
rules and regulations which may subject us to material contingent liabilities.
In accordance with applicable accounting standards, we record as a liability
amounts reflecting such exposure when a material loss is deemed by management to
be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, we
disclose material loss contingencies in the notes to our financial statements
when the likelihood of a material loss has been determined to be greater than
"remote" but less than "probable." Such contingent matters are discussed in Note
6 in the notes to the consolidated condensed financial statements. An adverse
outcome experienced in one or more of such matters, or an increase in the
likelihood of such an outcome, could have a material adverse effect on the
company. Also see Legal Proceedings.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that (a) project or offer
guidance regarding earnings, revenues, or other financial results, (b) depend on
future events for their accuracy, or (c) rely upon projections and assumptions
which may prove to be inaccurate. These forward-looking statements and our
business and prospects are subject to a number of factors that could cause
actual results to differ materially, including: the ability to achieve the
expected synergies and anticipated cost savings from the Kmart alliance;
unanticipated transition and costs related to the Kmart alliance; the ability to
obtain capital or obtain it on acceptable terms; unanticipated problems with
product procurement; adverse effects of the changing industry environment and
increased competition; sales declines and loss of customers; exposure to
litigation and other contingent losses; failure to achieve the expected results
of the strategic plan; the inability to integrate acquired companies and to
achieve operating
34
improvements at those companies; increases in labor costs and disruptions in
labor relations with union bargaining units representing our associates; and
negative effects of our substantial indebtedness and the limitations imposed by
restrictive covenants contained in our debt instruments. These and other risk
factors are described in our Securities and Exchange Commission reports,
including but not limited to the 10-K Report for the 2000 fiscal year. We
undertake no obligation to update forward-looking statements to reflect
developments or information obtained after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In order to help maintain liquidity and finance business operations, we obtain
long-term credit commitments from banks and other financial institution lenders
under which term loans and revolving loans are made. Such loans carry variable
interest rates based on the London interbank offered interest rate ("LIBOR")
plus a borrowing margin for different interest periods, such as one week, one
month, and other periods up to one year. To assist in managing our debt
maturities and diversify our sources of debt capital, we also use long-term debt
which carries fixed interest rates. Additionally, we use interest rate swap
agreements to manage our ratio of fixed-to-floating rate debt in a cost
effective manner.
Changes in interest rates in the credit and capital markets and our improved
credit ratings had a material impact on the fair values of our outstanding debt
obligations. The table below presents a summary of our debt obligations. The
table shows the principal amount of cash we expect to pay each year according to
the scheduled maturities, as well as the average interest rates applicable to
such maturities.
SUMMARY OF DEBT OBLIGATIONS
FAIR FAIR MATURITIES OF PRINCIPAL BY FISCAL YEAR
VALUE AT VALUE AT ---------------------------------------------- THERE
12/30/2000 10/6/2001 2001 2002 2003 2004 2005 AFTER
---------- --------- ---- ---- ---- ---- ---- -----
Debt with variable interest rates
Principal payable $ 427 $ 542 $ -- $ 40 $460 $ 50 $ -- $ --
Average variable rate payable 8.1% 5.7% Based on LIBOR plus a margin
Debt with fixed interest rates
Principal payable $ 668 $1,022 $ -- $ -- $ -- $ 250 $ -- $ 764
Average fixed rate payable 10.6% 9.7% 5.6% 6.5% 5.1% 10.5% -- 9.3%
35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 plaintiffs in the consolidated cases sought undetermined but
significant damages, and asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products. The plaintiffs claimed that these alleged practices led to the David's
case and to other material contingent liabilities, caused us to change our
manner of doing business at great cost and loss of profit, and materially
inflated the trading price of our common stock.
During 1999, the court dismissed the consolidated stockholder case without
prejudice but gave the plaintiffs the opportunity to restate their claims, and
they did so in amended complaints. We again filed motions to dismiss all claims.
On February 4, 2000, the court dismissed the amended complaint with prejudice.
The plaintiffs filed a notice of appeal and on September 7, 2001 the Tenth
Circuit affirmed the district court decision. On September 21, 2001, the
plaintiffs filed a petition for a full bench rehearing with the Tenth Circuit
and such petition was denied by the court in October.
The class action noteholder case previously reported in our second quarter Form
10-Q was settled pursuant to a settlement agreement dated May 25, 2001 and such
settlement became final on September 5, 2001.
Don's United Super (and related cases). On September 6, 2001, the parties
executed a final 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 us from
liability to the plaintiffs in these cases; payments by us to the plaintiffs
over a 16 month period; the transfer to us of a minority interest in several
price-impact stores in Arizona; and lease concessions by us to certain
plaintiffs. 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.
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 alleges product overcharges, breach of contract, fraud, conversion,
breach of fiduciary duty, negligent misrepresentation and breach of the Texas
Deceptive Trade Practices Act. The amended complaint seeks unspecified actual
damages, punitive damages, attorneys' fees and pre-judgment and post-judgment
interest. Pursuant
36
to the order of the Judicial Panel on Multidistrict Litigation, this case has
been transferred to the Western District of Missouri for pre-trial proceedings.
No trial date has been set in this case. We will continue to vigorously defend
against this claim, but we cannot predict its outcome.
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; owners of financially troubled
or failed customers; suppliers; landlords; employees regarding labor conditions,
wages, workers' compensation matters and alleged discriminatory practices;
insurance carriers; and tax assessors. Some of the disputes involve substantial
amounts.
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to Form 10-Q for quarter ended April 17, 1999
3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q
for quarter ended April 17, 1999
4.16 Fourth Amendment dated as of September 7, 2001, to Credit
Agreement dated July 25, 1997
4.17 Amendment No. 1 dated as of October 17, 2001 to Stock and
Warrant Purchase Agreement by and between Fleming and U.S.
Transportation, LLC dated February 6, 2001
4.18 Supplement, dated as of September 20, 2001, to the Indenture
dated as of July 25, 1997, among Fleming, the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust
Company, as Trustee, regarding 10-5/8% Senior Subordinated
Notes due 2007
4.19 Supplement, dated as of September 20, 2001, to the Indenture
dated as of July 25, 1997, among Fleming, the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust
Company, as Trustee, regarding 10-1/2% Senior Subordinated
Notes due 2004
4.20 Indenture, dated as of October 15, 2001, among Fleming, the
Subsidiary Guarantors named therein and Manufacturers and
Traders Trust Company, as Trustee, regarding 10-5/8% Series C
Senior Subordinated Notes due 2007
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information
(b) Reports on Form 8-K:
On October 15, 2001, we filed a Form 8-K which announced the issuance of up to
$250 million of new subordinated notes in a private placement to refinance
existing bank revolver borrowings and also announced the subsequent sale of $150
million of 10 5/8% senior subordinated notes as an add-on to our existing $250
million senior subordinated notes due 2007.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
FLEMING COMPANIES, INC.
November 14, 2001 /s/ MARK D. SHAPIRO
--------------------------------------
Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Duly Authorized Officer of Registrant
and Principal Accounting Officer)
39
INDEX TO EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to Form 10-Q for quarter ended April 17, 1999
3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q
for quarter ended April 17, 1999
4.16 Fourth Amendment dated as of September 7, 2001, to Credit
Agreement dated July 25, 1997
4.17 Amendment No. 1 dated as of October 17, 2001 to Stock and
Warrant Purchase Agreement by and between Fleming and U.S.
Transportation, LLC dated February 6, 2001
4.18 Supplement, dated as of September 20, 2001, to the Indenture
dated as of July 25, 1997, among Fleming, the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust
Company, as Trustee, regarding 10-5/8% Senior Subordinated
Notes due 2007
4.19 Supplement, dated as of September 20, 2001, to the Indenture
dated as of July 25, 1997, among Fleming, the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust
Company, as Trustee, regarding 10-1/2% Senior Subordinated
Notes due 2004
4.20 Indenture, dated as of October 15, 2001, among Fleming, the
Subsidiary Guarantors named therein and Manufacturers and
Traders Trust Company, as Trustee, regarding 10-5/8% Series C
Senior Subordinated Notes due 2007
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information