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 5, 2002
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
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
--- ---
On October 31, 2002, 54,501,000 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
Condensed Consolidated Statements of Operations - 12 Weeks
Ended October 5, 2002, and October 6, 2001
Condensed Consolidated Statements of Operations - 40 Weeks
Ended October 5, 2002, and October 6, 2001
Condensed Consolidated Balance Sheets -
October 5, 2002, and December 29, 2001
Condensed Consolidated Statements of Cash Flows -
40 Weeks Ended October 5, 2002, and October 6, 2001
Notes to Condensed Consolidated 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
Item 4. Controls and Procedures
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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 12 WEEKS ENDED OCTOBER 5, 2002 AND OCTOBER 6, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
2002 2001
------------ ------------
Net sales $ 3,972,649 $ 3,531,640
Costs and expenses:
Cost of sales 3,832,189 3,375,247
Selling and administrative 114,042 107,614
Interest expense 34,267 27,110
Interest income and other (5,451) (4,795)
Impairment/restructuring credit -- (609)
------------ ------------
Total costs and expenses 3,975,047 3,504,567
------------ ------------
Income (loss) before income taxes (2,398) 27,073
Taxes on income (loss) (928) 10,565
------------ ------------
Income (loss) from continuing operations (1,470) 16,508
------------ ------------
Discontinued operations:
Income (loss) before income taxes (31,624) 4,209
Taxes on income (loss) (12,238) 1,642
------------ ------------
Income (loss) from discontinued operations (19,386) 2,567
------------ ------------
Net income (loss) $ (20,856) $ 19,075
============ ============
Basic income (loss) per share:
Continuing operations (net of taxes) $ (0.03) $ 0.38
Discontinued operations (net of taxes) (0.36) 0.06
------------ ------------
Net income (loss) $ (0.39) $ 0.44
------------ ------------
Diluted income (loss) per share:
Continuing operations (net of taxes) $ (0.03) $ 0.35
Discontinued operations (net of taxes) (0.36) 0.05
------------ ------------
Net income (loss) $ (0.39) $ 0.40
------------ ------------
Dividends paid per share $ 0.02 $ 0.02
Weighted average shares outstanding:
Basic 53,950 43,728
Diluted 53,950 51,032
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 40 WEEKS ENDED OCTOBER 5, 2002 AND OCTOBER 6, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
2002 2001
------------ ------------
Net sales $ 11,425,643 $ 9,767,863
Costs and expenses:
Cost of sales 10,939,960 9,301,171
Selling and administrative 312,270 329,937
Interest expense 110,501 96,893
Interest income and other (20,254) (19,768)
Impairment/restructuring charges 27,361 10,411
Litigation charges -- 48,628
------------ ------------
Total costs and expenses 11,369,838 9,767,272
------------ ------------
Income before income taxes 55,805 591
Taxes on income 21,456 236
------------ ------------
Income from continuing operations 34,349 355
------------ ------------
Discontinued operations:
Income (loss) before income taxes (33,207) 35,314
Taxes on income (loss) (12,701) 14,586
------------ ------------
Income (loss) from discontinued operations (20,506) 20,728
------------ ------------
Income before extraordinary charge 13,843 21,083
Extraordinary charge from early retirement
of debt, net of taxes (7,863) (3,469)
------------ ------------
Net income $ 5,980 $ 17,614
============ ============
Basic income (loss) per share:
Continuing operations (net of taxes) $ 0.71 $ 0.01
Discontinued operations (net of taxes) (0.43) 0.49
------------ ------------
Income before extraordinary charge 0.28 0.50
Extraordinary charge from early retirement
of debt, net of taxes (0.16) (0.08)
------------ ------------
Net income $ 0.12 $ 0.42
============ ============
Diluted income (loss) per share:
Continuing operations (net of taxes) $ 0.70 $ 0.01
Discontinued operations (net of taxes) (0.42) 0.46
------------ ------------
Income before extraordinary charge 0.28 0.47
Extraordinary charge from early retirement
of debt, net of taxes (0.16) (0.08)
------------ ------------
Net income $ 0.12 $ 0.39
============ ============
Dividends paid per share $ 0.06 $ 0.06
Weighted average shares outstanding:
Basic 48,065 42,177
Diluted 49,240 44,670
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
--------------------------------------------------------------------------------
OCTOBER 5, DECEMBER 29,
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 20,694 $ 17,325
Receivables, net 701,247 568,197
Inventories 1,110,843 902,933
Assets held for sale 615,782 571,352
Other current assets 79,681 88,133
------------ ------------
Total current assets 2,528,247 2,147,940
Investments and notes receivable, net 81,502 105,651
Investment in direct financing leases 69,029 83,118
Property and equipment 1,078,555 1,213,188
Less accumulated depreciation
and amortization (490,208) (559,669)
------------ ------------
Net property and equipment 588,347 653,519
Deferred income taxes 68,528 105,453
Other assets 187,991 143,240
Goodwill, net 696,830 415,772
------------ ------------
Total assets $ 4,220,474 $ 3,654,693
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 985,272 $ 952,037
Current maturities of long-term debt 4,326 29,865
Current obligations under capital leases 15,866 15,913
Liabilities held for sale 146,740 157,001
Other current liabilities 230,642 228,949
------------ ------------
Total current liabilities 1,382,846 1,383,765
Long-term debt 1,839,175 1,427,929
Long-term obligations under capital leases 196,173 217,427
Other liabilities 129,718 127,353
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 136,270 111,095
Capital in excess of par value 711,574 567,720
Reinvested earnings (deficit) (115,180) (121,160)
Accumulated other comprehensive income:
Additional minimum pension liability (59,436) (59,436)
Cumulative foreign currency translation adjustment (666) --
------------ ------------
Total shareholders' equity 672,562 498,219
------------ ------------
Total liabilities and shareholders' equity $ 4,220,474 $ 3,654,693
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 40 WEEKS ENDED OCTOBER 5, 2002, AND OCTOBER 6, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 5,980 $ 17,614
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 123,926 126,127
Amortization costs in interest expense 6,598 4,929
Credit losses 8,797 20,462
Impairment/restructuring and related charges,
net of impairment credit (not in other lines) 27,361 14,637
Cash payments on impairment/restructuring
and related charges (21,669) (58,450)
Cost of early debt retirement 13,119 5,787
Change in assets and liabilities,
excluding effect of acquisitions:
Receivables 11,000 (63,321)
Inventories (69,962) (217,352)
Accounts payable (104,882) 65,898
Other assets and liabilities (117,873) (61,048)
---------- ----------
Net cash used in operating activities (117,605) (144,717)
---------- ----------
Cash flows from investing activities:
Collections on notes receivable 32,127 24,375
Notes receivable funded (14,225) (20,704)
Purchases of businesses, net of cash received (295,058) (120,670)
Purchases of property and equipment (150,779) (168,504)
Proceeds from sale of property and equipment 164,268 13,286
Proceeds from sale of businesses -- 120,947
Other investing activities 18,277 13,597
---------- ----------
Net cash used in investing activities (245,390) (137,673)
---------- ----------
Cash flows from financing activities:
Change in revolver (140,000) 120,000
Proceeds from long-term borrowings 880,940 500,602
Payments on long-term debt (489,047) (342,755)
Payments on capital issuance and debt retirement (45,976) (23,976)
Principal payments on capital lease obligations (15,408) (15,092)
Proceeds from sale of common stock 178,703 59,252
Dividends paid (2,848) (2,530)
---------- ----------
Net cash provided by financing activities 366,364 295,501
---------- ----------
Net change in cash and cash equivalents 3,369 13,111
Cash and cash equivalents, beginning of period 17,325 30,380
---------- ----------
Cash and cash equivalents, end of period $ 20,694 $ 43,491
========== ==========
Supplemental information:
Cash paid for interest $ 139,462 $ 122,484
Cash refunded for income taxes $ (29,448) $ (17,894)
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
FLEMING COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The preceding condensed consolidated financial statements of Fleming Companies,
Inc. have been prepared by us, without audit. In our opinion, all adjustments,
which consist of normal recurring adjustments, except as disclosed, necessary to
present fairly our financial position, results of operations and cash flows for
the periods presented have been made. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in our Fiscal 2001 Annual Report on Form 10-K and Form 10-K/A.
The preparation of the condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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 EITF 01-9 in the first quarter of 2002. In 2002 and
2001, the effect of the decrease to both sales and cost of sales on the 12 week
amounts was less than $21 million and the effect on the 40 week amounts was less
than $63 million. This reclassification had no effect on gross margin or net
income. Prior period amounts have been reclassified for comparability.
During the third quarter of 2002, our Board approved a plan to divest our price
impact retail stores and we have reflected the operating results of the
component as discontinued operations in accordance with SFAS No. 144 -
Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, we
will no longer be reporting multiple segments as our continuing operations are
all within one reportable segment. Prior period amounts have been reclassified
for comparability (see Footnote 4). Beginning with the third quarter of 2002,
our transfer pricing from distribution to retail will be recorded at market;
historically it has been recorded at cost.
In April 2002, the FASB issued SFAS No. 145 - Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. We
had a refinancing transaction in the second quarter of 2002 that resulted in an
extraordinary charge (see Footnote 8). In 2003, this amount will be reclassified
to selling and administrative expense and taxes on income in accordance with
SFAS 145.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted.
7
2. INVENTORY VALUATION
We use the LIFO method of inventory valuation for determining the cost of most
grocery and certain perishable inventories. The excess of current cost of LIFO
inventories over their stated value was $49.8 million ($14.8 million of which is
recorded in assets held for sale in current assets on the balance sheet) and
$46.4 million ($13.1 million of which is recorded in assets held for sale in
current assets on the balance sheet) at October 5, 2002 and December 29, 2001,
respectively.
3. EARNINGS PER SHARE
Both basic and diluted income (loss) per share from continuing operations are
computed based on income (loss) from continuing operations (adjusted for the
after-tax effect of interest expense relating to the 5 1/4% convertible senior
subordinated notes, if applicable) divided by weighted average shares as
appropriate for each calculation. Both basic and diluted income (loss) per share
from discontinued operations are based on income (loss) from discontinued
operations divided by weighted average shares as appropriate for each
calculation.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12 WEEKS ENDED 40 WEEKS ENDED
-------------------------- --------------------------
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Basic earnings (loss) from continuing
operations before extraordinary charge $ (1,470) $ 16,508 $ 34,349 $ 355
Basic earnings (loss) from discontinued
operations before extraordinary charge (19,386) 2,567 (20,506) 20,728
After-tax interest expense related to
convertible debt -- 1,180 -- --
---------- ---------- ---------- ----------
Diluted earnings (loss) before
extraordinary charge $ (20,856) $ 20,255 $ 13,843 $ 21,083
========== ========== ========== ==========
Denominator:
Weighted average shares for
basic earnings per share 53,950 43,728 48,065 42,177
Effect of dilutive securities:
Employee stock options -- 1,908 882 1,877
Restricted stock compensation -- 441 293 616
Convertible debt securities -- 4,955 -- --
---------- ---------- ---------- ----------
Dilutive potential common shares -- 7,304 1,175 2,493
---------- ---------- ---------- ----------
Weighted average shares for
diluted earnings per share 53,950 51,032 49,240 44,670
========== ========== ========== ==========
For the 12 weeks ended October 5, 2002, we did not reflect 5.0 million of
weighted average shares or add back after-tax interest expense of $1.2 million
related to convertible debt due to
8
antidilution. We also did not reflect 0.2 million of weighted average shares for
both employee stock options and restricted stock compensation due to
antidilution. For the 40 weeks ended October 5, 2002 and October 6, 2001, we did
not reflect 5.0 million and 3.6 million, respectively, of weighted average
shares or add back after-tax interest expense of $4.0 million and $2.3 million,
respectively, related to convertible debt due to antidilution.
4. DISCONTINUED OPERATIONS
On September 24, 2002, the Board of Directors approved a plan to sell our price
impact retail grocery stores operating under the Rainbow and Food 4 Less
banners. The plan is based in part on our decision to focus on our core
distribution business. Results of operations of these stores represent a
component of our company and have been previously included in the retail
segment. The disposition of the retail stores is expected to occur in a series
of sales to multiple buyers beginning in the fourth quarter of 2002 and
completed in 2003. Expenses associated with support services that directly
support the retail operations have been reflected in discontinued operations.
As a result of the expected disposition, we have presented the associated assets
and liabilities of the component as held for sale in the accompanying
consolidated condensed balance sheets. We also have reflected the operating
results of the component as discontinued operations in the accompanying
consolidated condensed statements of operations.
The component's assets and liabilities classified as held for sale related to
discontinued operations as of October 5, 2002 and December 29, 2001 are as
follows:
(In thousands)
October 5, December 29,
Assets held for sale: 2002 2001
---------- ------------
Current assets $ 150,387 $ 133,417
Property and equipment, net 288,901 266,136
Other assets 144,307 141,733
---------- ------------
Assets held for sale from discontinued operations 583,595 541,286
Assets held for sale from impairment/restructuring
charges (see Footnote 12) 32,187 30,066
---------- ------------
Total assets held for sale $ 615,782 $ 571,352
========== ============
Liabilities held for sale from discontinued operations:
Current portion of capital lease obligations $ 6,240 $ 5,497
Accounts payable and accrued liabilities 24,362 37,096
Capital lease obligations 116,138 114,408
---------- ------------
Total liabilities held for sale $ 146,740 $ 157,001
========== ============
9
Summary operating results for the component classified as discontinued
operations for the periods indicated below are as follows:
(In thousands) 12 Weeks Ended 40 Weeks Ended
------------------------------ ------------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 458,346 $ 475,355 $ 1,621,447 $ 1,822,222
Income (loss) from
discontinued operations $ (19,386) $ 2,567 $ (20,506) $ 20,728
5. COMPREHENSIVE INCOME
Our comprehensive income (loss) for the 12 and 40 weeks ended October 5, 2002,
totaled a loss of $22.2 million and income of $5.3 million, respectively, and
was comprised of reported net income (loss) and foreign currency translation
adjustment. Our comprehensive income for the 12 and 40 weeks ended October 6,
2001, totaled $19.1 million and $17.6 million, respectively, and was comprised
only of reported net income.
6. ACQUISITION OF CORE-MARK INTERNATIONAL, INC.
On June 18, 2002, we acquired Core-Mark International, Inc., a leading
piece-pick distributor to convenience stores and other retail customers in the
Western United States and Canada, for $217 million in cash (net of cash
acquired) and assumed its debt ($77 million of 11 3/8% senior subordinated notes
due 2003 and a $55 million accounts receivable securitization facility).
Core-Mark's 11 3/8% senior subordinated notes were called for redemption
immediately upon our acquisition. The $55 million accounts receivable
securitization facility was paid and terminated on July 18, 2002.
The acquisition was financed through our credit agreement along with the sale of
$200 million of 9 1/4% senior notes due 2010 and 9.2 million shares of common
stock (which grossed $178 million at $19.40 per share, and netted approximately
$170 million after the underwriting discount and other issuance costs). The
acquisition was accounted for under the purchase method, and the results of
Core-Mark have been included in our consolidated results from the date of
acquisition.
We have not finalized the allocation of the purchase price as of October 5,
2002. We have engaged a valuation firm to assist us in this process. Upon
completion of their work, we will adjust the preliminary purchase price
allocation in accordance with SFAS No. 141 - Business Combinations. The
estimation of this allocation, which is included as part of these financial
statements, is as follows: $31 million to property, plant and equipment, $49
million to working capital, $269 million to goodwill and other intangible assets
offset by $132 million of debt assumed.
10
The unaudited proforma combined historical results, as if Core-Mark had been
acquired at the beginning of fiscal 2002 and 2001, respectively, are estimated
in the following table:
(IN MILLIONS, EXCEPT PER SHARE DATA) 12 WEEKS ENDED 40 WEEKS ENDED
-------------------------- --------------------------
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales from continuing operations $ 3,973 $ 4,436 $ 13,032 $ 12,305
Income (loss) from continuing operations $ (2) $ 19 $ 41 $ 4
Income (loss) from discontinued operations (19) 3 (20) 21
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge $ (21) $ 22 $ 21 $ 25
Net income (loss) $ (21) $ 22 $ 13 $ 22
Basic earnings per share:
Income (loss) from continuing operations $ (0.03) $ 0.45 $ 0.86 $ 0.10
Income (loss) from discontinued operations (0.36) 0.06 (0.43) 0.49
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge $ (0.39) $ 0.51 $ 0.43 $ 0.59
Net income (loss) $ (0.39) $ 0.51 $ 0.27 $ 0.51
Diluted earnings per share:
Income (loss) from continuing operations $ (0.03) $ 0.41 $ 0.84 $ 0.10
Income (loss) from discontinued operations (0.36) 0.05 (0.38) 0.46
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge $ (0.39) $ 0.46 $ 0.46 $ 0.56
Net income (loss) $ (0.39) $ 0.46 $ 0.31 $ 0.48
The proforma results include amortization of other intangibles related to the
purchase for fiscal 2001 amounts and interest expense on debt incurred to
finance the acquisition. The proforma results are not necessarily indicative of
what actually would have occurred if the acquisition had been completed as of
the beginning of each fiscal period presented, nor are they necessarily
indicative of future consolidated results.
7. CONTINGENCIES
Since August 29, 2002, several securities lawsuits have been filed against us
and certain of our officers in the United States District Court for the Eastern
District of Texas seeking court certification as a class action. In addition,
one related shareholders' derivative lawsuit has been filed against certain of
our officers and the members of our Board of Directors in the United States
District Court for the Eastern District of Texas.
We are engaged in other various legal proceedings which have arisen but have not
been fully adjudicated. These proceedings, in the opinion of management, will
not have a material adverse effect upon our consolidated financial position,
cash flows or results of operations when ultimately concluded.
11
8. DEBT
Long-term debt consists of the following:
OCTOBER 5, DECEMBER 29,
2002 2001
------------ ------------
(IN THOUSANDS)
10 5/8 % senior subordinated notes due 2007 $ 400,000 $ 400,000
10 1/8 % senior notes due 2008 359,029 345,870
5 1/4 % convertible senior subordinated notes due 2009 150,000 150,000
9 1/4 % senior notes due 2010 200,000 --
9 7/8 % senior subordinated notes due 2012 260,000 --
10 1/2 % senior subordinated notes due 2004 -- 250,000
Revolving credit, average interest rates of 3.9%
for 2002 and 5.5% for 2001, due 2007 60,000 200,000
Term loan, due 2002 to 2008, average interest
rate of 4.1% for 2002 and 6.4% for 2001 423,938 118,637
Debt discounts (9,466) (6,713)
------------ ------------
1,843,501 1,457,794
Less current maturities (4,326) (29,865)
------------ ------------
Long-term debt $ 1,839,175 $ 1,427,929
============ ============
Aggregate maturities of long-term debt for the next five years are approximately
as follows: in the remainder of 2002, $0 million; in 2003, $4 million; in 2004,
$4 million; in 2005, $4 million; and in 2006, $4 million.
On April 15, 2002, we issued $260 million of 9 7/8% senior subordinated notes
that mature on May 1, 2012. The net proceeds from this private placement were
used to redeem the 10 1/2% senior subordinated notes due 2004. These notes are
unsecured senior subordinated obligations, ranking the same as all other
existing and future senior subordinated indebtedness. The notes are effectively
subordinated to senior secured and senior unsecured indebtedness, including
loans under our senior secured credit facility. The 9 7/8% notes are guaranteed
by substantially all of our subsidiaries (see Footnote 9).
On June 18, 2002, we entered into a $975 million senior secured credit facility
to refinance our then existing $850 million senior secured credit facility. The
credit facility consists of a $550 million revolving facility maturing June 18,
2007 and a $424 million tranche B term loan maturing June 18, 2008. The new
credit facility is secured by all of our inventory and receivables, except for
the portion of receivables related to Core-Mark until the accounts receivable
securitization was paid on July 18, 2002. As of October 5, 2002, based upon the
most restrictive covenant, we had $285 million available to borrow under the
revolving facility. We amended our new credit agreement on October 18, 2002
primarily to facilitate the sale of our retail price impact stores.
12
In connection with the retirement of the 10 1/2% senior subordinated notes due
2004 and the refinancing of our $850 million senior secured credit facility, we
recognized an $8 million after-tax extraordinary charge ($13 million pre-tax and
$5 million of tax benefit) from the early retirement of debt during the second
quarter of 2002. The charge consisted of debt premium of $6.5 million on our
2004 notes, $3.4 million of unamortized debt issuance costs on our 2004 notes
and $3.2 million of unamortized debt issuance costs on our $850 million credit
agreement.
Also, on June 18, 2002, we issued $200 million of 9 1/4% senior notes that
mature June 15, 2010, ranking equal in right of payment with all other existing
and future senior unsecured debt. The notes are effectively subordinated to any
secured debt, including our senior secured credit facility, but rank senior to
all our existing and future subordinated debt. The notes were issued
simultaneously with the execution of our senior secured credit facility. The
9 1/4% notes are guaranteed by substantially all of our subsidiaries (see
Footnote 9).
In June 2002 and July 2002, we entered into two interest rate swap agreements
with a combined notional amount of $50 million. These swaps were tied to our
9 1/4% senior notes due 2010. The maturity, call dates, and call premiums
mirrored those of the notes. The swaps were designed for us to receive a fixed
rate of 9 1/4% per annum and pay a floating rate based on a spread plus the
3-month LIBOR. The floating rate reset quarterly beginning September 15, 2002.
We documented and designated these swaps to qualify as a fair value hedge.
During the third quarter, we unwound these swap agreements and received and
recorded $2 million as a deferred gain that is being amortized to reduce
interest expense over the remaining life of the related senior notes.
In April 2002, we entered into an interest rate swap agreement with a notional
amount of $50 million. This swap was tied to our 9 7/8% senior subordinated
notes due 2012. The maturity, call dates, and call premiums mirrored those of
the notes. The swap was designed for us to receive a fixed rate of 9 7/8% per
annum and pay a floating rate based on a spread plus the 3-month LIBOR. The
floating rate reset quarterly beginning May 1, 2002. We documented and
designated this swap to qualify as a fair value hedge. During the third quarter,
we unwound this swap agreement and received and recorded $4 million as a
deferred gain that is being amortized to reduce interest expense over the
remaining life of the related subordinated notes.
In 2001, we entered into interest rate swap agreements with a combined notional
amount of $210 million. The swaps are tied to our 10 1/8% senior notes due 2008.
The maturity, call dates, and call premiums mirror those of the notes. The swaps
are designed for us to receive a fixed rate of 10 1/8% per annum and pay a
floating rate based on a spread plus the 3-month LIBOR. The floating rates reset
quarterly. We have documented and designated these swaps to qualify as fair
value hedges. During the third quarter of 2002, we unwound all but one swap
agreement and received and recorded $4 million as a deferred gain that is being
amortized to reduce interest expense over the remaining life of the related
senior notes. At the end of the third quarter of 2002, in accordance with SFAS
133, the mark-to-market value of the remaining swap, with a notional value of
$50 million was recorded on our consolidated balance sheet as a $4 million
long-term asset offset by a change in fair value to the senior notes due 2008.
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
13
recorded currently in earnings. These amounts are recorded to interest income
and provide offset of one another. There was no net earnings impact relating to
our fair value hedges.
9. 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 and reclassification
adjustments and the consolidated total. The financial information may not
necessarily be indicative of the results of operations or financial position had
the subsidiaries been operated as independent entities.
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
OCTOBER 5, 2002
--------------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 13,411 $ 7,023 $ 260 $ -- $ 20,694
Receivables, net 458,413 250,700 4,139 (12,005) 701,247
Inventories 814,819 433,805 -- (137,781) 1,110,843
Assets held for sale -- -- -- 615,782 615,782
Other current assets 65,975 14,800 566 (1,660) 79,681
----------- ----------- ------------ ------------ ------------
Total current assets 1,352,618 706,328 4,965 464,336 2,528,247
Investment in subsidiaries 446,078 5,356 -- (451,434) --
Intercompany receivables 616,733 -- -- (616,733) --
Property and equipment, net 536,666 361,894 9,662 (319,875) 588,347
Goodwill,net 401,941 436,672 -- (141,783) 696,830
Other assets 377,851 31,877 -- (2,678) 407,050
----------- ----------- ------------ ------------ ------------
$ 3,731,887 $ 1,542,127 $ 14,627 $ (1,068,167) $ 4,220,474
=========== =========== ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 748,225 $ 252,350 $ 89 $ (15,392) $ 985,272
Intercompany payables -- 596,751 19,982 (616,733) --
Liabilities held for sale -- -- -- 146,740 146,740
Other current liabilities 165,862 98,823 803 (14,654) 250,834
----------- ----------- ------------ ------------ ------------
Total current liabilities 914,087 947,924 20,874 (500,039) 1,382,846
Obligations under capital leases 193,638 118,673 -- (116,138) 196,173
Long-term debt and other
liabilities 1,951,600 17,849 -- (556) 1,968,893
Equity (deficit) 672,562 457,681 (6,247) (451,434) 672,562
----------- ----------- ------------ ------------ ------------
$ 3,731,887 $ 1,542,127 $ 14,627 $ (1,068,167) $ 4,220,474
=========== =========== ============ ============ ============
14
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION (CONTINUING)
DECEMBER 29, 2001
-------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
----------- ----------- ----------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 10,175 $ 6,876 $ 274 $ -- $ 17,325
Receivables, net 483,007 105,250 12 (20,072) 568,197
Inventories 817,012 198,386 -- (112,465) 902,933
Assets held for sale -- -- -- 571,352 571,352
Other current assets 84,676 4,950 99 (1,592) 88,133
----------- ----------- ----------- ------------- -------------
Total current assets 1,394,870 315,462 385 437,223 2,147,940
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 470,545 -- -- (470,545) --
Property and equipment, net 651,846 287,826 9,182 (295,335) 653,519
Goodwill,net 401,180 153,010 -- (138,418) 415,772
Other assets 379,658 47,861 13,413 (3,470) 437,462
----------- ----------- ----------- ------------- -------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
=========== =========== =========== ============= =============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 861,445 $ 109,311 $ 1,035 $ (19,754) $ 952,037
Intercompany payables -- 443,066 27,479 (470,545) --
Liabilities held for sale -- -- -- 157,001 157,001
Other current liabilities 264,744 27,880 713 (18,610) 274,727
----------- ----------- ----------- ------------- -------------
Total current liabilities 1,126,189 580,257 29,227 (351,908) 1,383,765
Obligations under capital leases 213,292 118,543 -- (114,408) 217,427
Long-term debt and other
liabilities 1,553,640 5,871 -- (4,229) 1,555,282
Equity (deficit) 498,219 104,844 (6,247) (98,597) 498,219
----------- ----------- ----------- ------------- -------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
=========== =========== =========== ============= =============
15
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
12 WEEKS ENDED OCTOBER 5, 2002
----------------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 3,469,439 $ 512,913 $ 87 $ (9,790) $ 3,972,649
Costs and expenses:
Cost of sales 3,341,447 500,532 -- (9,790) 3,832,189
Selling and administrative 97,648 16,177 217 -- 114,042
Other 43,426 (14,449) (161) -- 28,816
Impairment/restructuring charge -- -- -- -- --
Equity income from subsidiaries (6,282) -- -- 6,282 --
----------- ----------- ------------ ------------ ------------
Total costs and expenses 3,476,239 502,260 56 (3,508) 3,975,047
----------- ----------- ------------ ------------ ------------
Income (loss) before taxes (6,800) 10,653 31 (6,282) (2,398)
Taxes on income (loss) (5,330) 4,389 13 -- (928)
----------- ----------- ------------ ------------ ------------
Income (loss) from continuing operations (1,470) 6,264 18 (6,282) (1,470)
Discontinued operations:
Income (loss) before taxes (31,624) 10,170 -- (10,170) (31,624)
Taxes on income (loss) (12,238) 4,191 -- (4,191) (12,238)
----------- ----------- ------------ ------------ ------------
Income (loss) from discontinued operations (19,386) 5,979 -- (5,979) (19,386)
----------- ----------- ------------ ------------ ------------
Income (loss) before extraordinary charge $ (20,856) $ 12,243 $ 18 $ (12,261) $ (20,856)
=========== =========== ============ ============ ============
12 WEEKS ENDED OCTOBER 6, 2001
----------------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 3,119,770 $ 411,451 $ 9,965 $ (9,546) $ 3,531,640
Costs and expenses:
Cost of sales 2,980,656 397,162 6,975 (9,546) 3,375,247
Selling and administrative 93,116 10,742 3,756 -- 107,614
Other 23,642 3,955 (5,282) -- 22,315
Impairment/restructuring charge (credit) (716) 107 -- -- (609)
Litigation charges -- -- -- -- --
Equity income from subsidiaries (2,354) -- -- 2,354 --
----------- ----------- ------------ ------------ ------------
Total costs and expenses 3,094,344 411,966 5,449 (7,192) 3,504,567
----------- ----------- ------------ ------------ ------------
Income (loss) before taxes 25,426 (515) 4,516 (2,354) 27,073
Taxes on income (loss) 8,918 (214) 1,861 -- 10,565
----------- ----------- ------------ ------------ ------------
Income (loss) from continuing operations 16,508 (301) 2,655 (2,354) 16,508
Discontinued operations:
Income before taxes 4,209 11,850 -- (11,850) 4,209
Taxes on income 1,642 4,924 -- (4,924) 1,642
----------- ----------- ------------ ------------ ------------
Income from discontinued operations 2,567 6,926 -- (6,926) 2,567
----------- ----------- ------------ ------------ ------------
Income before extraordinary charge $ 19,075 $ 6,625 $ 2,655 $ (9,280) $ 19,075
=========== =========== ============ ============ ============
16
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
40 WEEKS ENDED OCTOBER 5, 2002
------------------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 9,655,890 $ 1,801,654 $ 163 $ (32,064) $ 11,425,643
Costs and expenses:
Cost of sales 9,234,299 1,737,725 -- (32,064) 10,939,960
Selling and administrative 265,775 46,254 241 -- 312,270
Other 91,172 (1,204) 279 -- 90,247
Impairment/restructuring charge 27,361 -- -- -- 27,361
Equity income from subsidiaries (10,891) -- -- 10,891 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 9,607,716 1,782,775 520 (21,173) 11,369,838
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 48,174 18,879 (357) (10,891) 55,805
Taxes on income (loss) 13,825 7,778 (147) -- 21,456
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations 34,349 11,101 (210) (10,891) 34,349
Discontinued operations:
Loss before taxes (33,207) (16,334) -- 16,334 (33,207)
Taxes on loss (12,701) (6,729) -- 6,729 (12,701)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (20,506) (9,605) -- 9,605 (20,506)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charge $ 13,843 $ 1,496 $ (210) $ (1,286) $ 13,843
============ ============ ============ ============ ============
40 WEEKS ENDED OCTOBER 6, 2001
------------------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 8,419,264 $ 1,319,707 $ 48,047 $ (19,155) $ 9,767,863
Costs and expenses:
Cost of sales 8,048,743 1,235,975 35,608 (19,155) 9,301,171
Selling and administrative 230,159 86,203 13,575 -- 329,937
Other 48,126 31,516 (2,517) -- 77,125
Impairment/restructuring charge (credit) 46,267 (35,856) -- -- 10,411
Litigation charges 48,628 -- -- -- 48,628
Equity income from subsidiaries (1,915) -- -- 1,915 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 8,420,008 1,317,838 46,666 (17,240) 9,767,272
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes (744) 1,869 1,381 (1,915) 591
Taxes on income (loss) (1,099) 766 569 -- 236
------------ ------------ ------------ ------------ ------------
Income from continuing operations 355 1,103 812 (1,915) 355
Discontinued operations:
Income before taxes 35,314 38,926 -- (38,926) 35,314
Taxes on income 14,586 15,944 -- (15,944) 14,586
------------ ------------ ------------ ------------ ------------
Income from continuing operations 20,728 22,982 -- (22,982) 20,728
------------ ------------ ------------ ------------ ------------
Income before extraordinary charge $ 21,083 $ 24,085 $ 812 $ (24,897) $ 21,083
============ ============ ============ ============ ============
17
CONDENSED CONSOLIDATING CASH FLOWS INFORMATION
40 WEEKS ENDED OCTOBER 5, 2002
-----------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS CONSOLIDATED
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities $ 321,759 $ (447,257) $ 7,893 $ -- $ (117,605)
---------- ---------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (65,651) (70,274) (14,854) -- (150,779)
Other (125,752) 16,907 14,234 -- (94,611)
---------- ---------- ------------ ------------ ------------
Net cash used in investing activites (191,403) (53,367) (620) -- (245,390)
---------- ---------- ------------ ------------ ------------
Cash flows from financing activities:
Repayments on capital lease obligations (11,154) (4,254) -- -- (15,408)
Advance to (from) parent (497,738) 505,025 (7,287) -- --
Other 381,772 -- -- -- 381,772
---------- ---------- ------------ ------------ ------------
Net cash provided by (used in) financing activities (127,120) 500,771 (7,287) -- 366,364
---------- ---------- ------------ ------------ ------------
Net increase (decrease) in cash & cash equivalents 3,236 147 (14) -- 3,369
Cash and cash equivalents at beginning of period 10,175 6,876 274 -- 17,325
---------- ---------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 13,411 $ 7,023 $ 260 $ -- $ 20,694
========== ========== ============ ============ ============
40 WEEKS ENDED OCTOBER 6, 2001
-----------------------------------------------------------------------------
ELIMINATIONS
PARENT NON- AND RECLASS-
COMPANY GUARANTORS GUARANTORS IFICATIONS 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 activities (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 and
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
========== ========== ============ ============ ============
18
10. SALE-LEASEBACK OF REAL PROPERTY
During the second and third quarters of 2002, gross proceeds from sale-leaseback
transactions totaled $144 million and are included in the proceeds from sale of
property and equipment on the condensed consolidated statemets of cash flows.
These transactions resulted in a gain of $24 million that is being deferred over
the remaining life of the operating leases which range from 10 to 15 years.
Future minimum lease payments required from these sale-leaseback transactions
that have noncancelable lease terms exceeding one year are presented in the
following table:
FISCAL YEAR AMOUNT
--------------------------- --------------
(In thousands)
Remaining in 2002 $ 3,772
2003 15,087
2004 15,087
2005 15,087
2006 15,087
11. SECOND QUARTER CHARGE
In the second quarter of 2002, we recorded a $27 million pre-tax charge related
to the closure of distribution facilities in Oklahoma City and Dallas and
certain integration costs related to recent acquisitions. The after-tax effect
was a charge of $16 million, or $0.34 per share. Certain other costs associated
with the closures will be expensed in the future as incurred.
The charge is comprised primarily of long-lived asset impairments, lease
obligations and severance related expenses for the closed distribution
facilities. The entire charge is reflected on the impairment/restructuring
charge (credit) line on the consolidated statement of operations and affects
continuing operations. The assets related to these closures are included in
assets held for sale.
The portion of the charge relating to workforce reductions totaled approximately
$4 million with a headcount of 410 and was fully paid during the third quarter.
Additionally, $5 million of the charge related to lease obligations which will
be reduced over the remaining lease terms as the facilities are no longer
operating. The charges and utilization have been recorded to-date as follows:
AMOUNT
--------------
(In thousands)
2002 Quarter 2 charge $ 5,022
2002 Quarter 3 terminations (508)
--------------
Ending liability $ 4,514
==============
The remainder of the charge relates to asset impairments.
19
12. HISTORICAL STRATEGIC PLAN CHARGES
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 procurement
and other functions. Additionally, in 2000, we decided to reposition certain
retail operations into our price impact format and sell or close the remaining
conventional retail chains. By mid-2001, we had sold or closed all of our
conventional retail stores, and the plan was completed by the end of 2001.
The activity related to workforce reductions is as follows:
AMOUNT
--------------
(In thousands)
2001 Ending liability $ 18,091
2002 Quarter 1 terminations (4,008)
2002 Quarter 2 terminations (2,567)
2002 Quarter 3 terminations (682)
--------------
Ending liability $ 10,834
==============
The ending liability of approximately $11 million is primarily comprised of
estimated union pension withdrawal liabilities, but also includes accruals for
payments over time to associates whose employment is already severed. The
headcount related to severance was approximately 80 at the end of 2001. By the
end of the second quarter of 2002, essentially all impacted employees'
employment had been severed. All of the employee reductions in 2002 related to
this plan were from distribution operating units.
Additionally, the strategic plan included charges related to lease obligations.
Stores with remaining lease obligations as of year-end 2001 of approximately
$2.3 million were closed during the first quarter of 2002.
Assets held for sale related to our restructuring and included in current assets
at the end of the third quarter of 2002 were approximately $32 million (not
including amounts related to discontinued operations, see Footnote 4 for more
details), consisting of $26 million of distribution operating units and $6
million of retail stores. Included in the $32 million are amounts related to the
2002 closure of the distribution facilities in Oklahoma City and Dallas (see
Footnote 11) and divisions that have closed related to the strategic plan but
are not yet sold.
20
The net effect of the strategic plan in the third quarter of 2001 was a pre-tax
charge of $6 million. The after-tax effect was a charge of $4 million, or $0.07
per share. The third quarter of 2001 pre-tax charge consisted of the following
components:
o Net impairment recovery of $2 million through sales of operations against
which we had previously recorded long-lived asset impairments. This
recovery is included in the impairment/restructuring line on our Condensed
Consolidated Statement of Operations. Of the $2 million impairment
recovery, $3 million of recovery related to continuing operations and a $1
million charge related to discontinued operations.
o Restructuring charges of $3 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional fees
expensed as incurred related to the restructuring process. These costs are
included in the impairment/restructuring line on our Condensed Consolidated
Statement of Operations. Of the $3 million in restructuring charges, $2
million related to continuing operations and $1 million related to
discontinued operations.
o Other disposition and related costs of $5 million. These costs are included
on several lines of the Condensed Consolidated Statement of Operations as
follows: $1 million of charges was included in net sales related primarily
to adjust previously recorded gains on the sale of conventional retail
stores; $1 million of charges was included in cost of sales and was
primarily related to inventory markdowns for clearance for closed
operations; $3 million of charges was included in selling and
administrative expense as disposition related costs which were expensed as
incurred. Of the $5 million in other disposition and related costs, $3
million related to continuing operations and $2 million related to
discontinued operations.
The net effect of the strategic plan for the first three quarters of 2001 was a
pre-tax charge of $19 million. The after-tax effect was a charge of $11 million,
or $0.23 per share. The charge for the first three quarters of 2001 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 $34 million.
Also included was impairment of $7 million related to other long-lived
assets. These costs are included in the impairment/restructuring line on
our Condensed Consolidated Statement of Operations. Substantially all of
the $42 million impairment recovery related to discontinued operations.
o Restructuring charges of $16 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional fees
expensed as incurred related to the restructuring process. These costs are
included in the impairment/restructuring line on our Condensed Consolidated
Statement of Operations. Of the $16 million restructuring charges, $10
million related to continuing operations and $6 million related to
discontinued operations.
21
o Other disposition and related costs of $45 million. These costs are
included on several lines of the Condensed Consolidated Statement of
Operations as follows: less than $1 million of income was included in net
sales related primarily to gains on the sale of conventional retail stores;
$31 million of charges was included in cost of sales and was primarily
related to inventory markdowns for clearance for closed operations; $14
million of charges was included in selling and administrative expense as
disposition related costs which were expensed as incurred. Of the $45
million of other disposition and related costs, $14 million related to
continuing operations and $31 million related to discontinued operations.
13. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, we adopted SFAS No. 142 - Goodwill and Other
Intangible Assets. This standard requires a non-amortization approach to account
for purchased goodwill and other indefinite life intangibles. Under that
approach, goodwill and intangible assets with indefinite lives are not amortized
to earnings over a period of time. Instead, these amounts are reviewed for
impairment and expensed against earnings only in the periods in which the
recorded values are more than implied fair value.
SFAS 142 prescribes a two-phase process for impairment testing of goodwill. The
first phase screens for impairment and was completed prior to June 30, 2002. As
no impairment was detected, the second phase, which measures the impairment, was
not necessary. As required, we will perform subsequent evaluations annually
during the second quarter of each year, or more frequently if circumstances
indicate a possible impairment. Unamortized goodwill of $697 million relates to
continuing operations and $142 million relates to discontinued operations.
22
In accordance with SFAS 142, the effect of this accounting change is reflected
prospectively. Supplemental comparative disclosure, as if the change had been
retroactively applied to the 12 and 40 weeks ended October 6, 2001, is as
follows (in thousands, except per share amounts):
12 WEEKS ENDED 40 WEEKS ENDED
2002 2001 2002 2001
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Reported income (loss) $ (1,470) $ 16,508 $ 34,349 $ 355
Goodwill amortization, net of tax -- 3,088 -- 10,026
---------- ---------- ---------- ----------
Adjusted income (loss) $ (1,470) $ 19,596 $ 34,349 $ 10,381
========== ========== ========== ==========
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Reported income (loss) $ (19,386) $ 2,567 $ (20,506) $ 20,728
Goodwill amortization, net of tax -- 1,420 -- 4,550
---------- ---------- ---------- ----------
Adjusted income (loss) $ (19,386) $ 3,987 $ (20,506) $ 25,278
========== ========== ========== ==========
BASIC INCOME (LOSS) PER SHARE:
Reported income (loss) from
continuing operations $ (0.03) $ 0.38 $ 0.71 $ 0.01
Goodwill amortization, net of tax -- 0.07 -- 0.24
---------- ---------- ---------- ----------
Adjusted income (loss) from
continuing operations $ (0.03) $ 0.45 $ 0.71 $ 0.25
========== ========== ========== ==========
Reported income (loss) from
discontinued operations $ (0.36) $ 0.06 $ (0.43) $ 0.49
Goodwill amortization, net of tax -- 0.03 -- 0.11
---------- ---------- ---------- ----------
Adjusted income (loss) from
discontinued operations $ (0.36) $ 0.09 $ (0.43) $ 0.60
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER SHARE:
Reported income (loss) from
continuing operations $ (0.03) $ 0.35 $ 0.70 $ 0.01
Goodwill amortization, net of tax -- 0.06 -- 0.21
---------- ---------- ---------- ----------
Adjusted income (loss) from
continuing operations $ (0.03) $ 0.41 $ 0.70 $ 0.22
========== ========== ========== ==========
Reported income (loss) from
discontinued operations $ (0.36) $ 0.05 $ (0.42) $ 0.46
Goodwill amortization, net of tax -- 0.03 -- 0.10
---------- ---------- ---------- ----------
Adjusted income (loss) from
discontinued operations $ (0.36) $ 0.08 $ (0.42) $ 0.56
========== ========== ========== ==========
Supplemental comparative disclosure for net income (loss) for the 12 and 40
weeks ended October 6, 2001, would be affected by the same adjustments as those
reflected above.
23
For the 12 and 40 weeks ended October 5, 2002, we recorded additional goodwill
and other intangible assets of $283 million, primarily related to the
acquisition of Core-Mark (see Footnote 6). Other intangibles, excluding debt
issuance costs, included in other assets on our consolidated balance sheet
consisted of the following:
(In thousands) OCTOBER 5, 2002 DECEMBER 29, 2001
------------------------------------- -------------------------------------
GROSS OTHER GROSS OTHER
CARRYING ACCUMULATED INTANGIBLES, CARRYING ACCUMULATED INTANGIBLES,
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ------------ -------- ------------ ------------
Customer incentives $122,963 $ (39,781) $ 83,182 $111,605 $ (33,463) $ 78,142
Tradenames 5,800 (3,926) 1,874 5,800 (3,480) 2,320
Other 8,106 (5,595) 2,511 6,390 (3,455) 2,935
-------- ------------ ------------ -------- ------------ ------------
Other intangibles $136,869 $ (49,302) $ 87,567 $123,795 $ (40,398) $ 83,397
======== ============ ============ ======== ============ ============
Amortization expense of other intangibles disclosed above for the 12 and 40
weeks ended October 5, 2002 was $10.7 million and $23.0 million, respectively.
Estimated amortization expense, excluding any future acquisitions, for each of
the next five fiscal years is as follows:
FISCAL YEAR AMOUNT
-------------------- --------------
(In thousands)
2002 $ 29,075
2003 23,412
2004 20,117
2005 15,285
2006 8,144
14. RECENT DEVELOPMENTS
In 2003, we will begin recording expense for stock options in accordance with
the fair value model under SFAS No. 123 - Accounting for Stock-Based
Compensation. The Financial Accounting Standards Board is currently addressing
the transition rules related to SFAS No. 123. The current rules provide that
recognition of expense would apply to grants of stock-based awards made after
adopting the fair value method.
24
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
FLEMING COMPANIES, INC.
We have reviewed the accompanying condensed consolidated balance sheet of
Fleming Companies, Inc. and subsidiaries as of October 5, 2002, and the related
condensed consolidated statements of operations for the 12 and 40 weeks ended
October 5, 2002 and October 6, 2001 and condensed consolidated statements of
cash flows for the 40 weeks ended October 5, 2002 and October 6, 2001. 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 29, 2001, 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 13,
2002, 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 29, 2001 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
October 23, 2002
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
After we purchased Core-Mark International, Inc. in June 2002, we began an
evaluation of strategic alternatives related to our price impact retail stores.
After completing this strategic evaluation, we announced in September of 2002
our decision to divest all 110 of our price impact supermarkets, which we
operate under the Food 4 Less and Rainbow Foods banners and focus on our core
distribution business. We have begun negotiations with potential buyers for
substantially all of these stores, including self-distributing chains and
regional and independent supermarket operators. We believe that the disposition
of these retail assets will occur through a series of sales to multiple buyers,
beginning in the fourth quarter of 2002 and be completed in 2003. The divested
stores have been presented as discontinued operations in accordance with SFAS
144.
Concurrently with the completion of the Core-Mark acquisition on June 18, 2002,
we entered into a $975 million credit agreement consisting of a $425 million
tranche B term loan and a $550 million revolving credit facility. We also sold
$200 million aggregate principal amount of 9 1/4% senior notes due 2010 and 9.2
million shares of common stock at $19.40 per share. In connection with the
consummation of these transactions, we repaid all borrowings outstanding under
our previously existing $850 million credit agreement. On October 18, 2002, we
amended our credit agreement primarily to facilitate the sale of our price
impact retail stores. Our results of operations include the results of Core-Mark
from the date of acquisition.
In April 2002, we acquired Head Distributing Company, an Atlanta, Georgia based
piece-pick distributor. Our results of operations included the results of Head
Distributing from the date of acquisition. Also, in June 2002, we purchased
inventory and other personal property from Albertson's Inc. located at its
Tulsa, Oklahoma distribution center and entered into an operating lease of this
distribution center.
We recorded net income (loss) from continuing operations for the 12 and 40 weeks
ended October 5, 2002 of a $2 million loss and a $34 million income,
respectively. Losses from discontinued operations for the 12 and 40 weeks ended
October 5, 2002 were $19 million and $21 million, respectively. EBITDAL from
continuing operations for the 12 and 40 weeks ended October 5, 2002 was $65
million and $250 million, respectively. EBITDAL from discontinued operations for
the 12 and 40 weeks ended October 5, 2002 was a loss of $12 million and income
of $34 million, respectively.
26
The following table sets forth the calculation of EBITDAL from continuing and
discontinued operations (in millions):
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary charge $ (2) $ 17 $ 34 $ 1
Add back:
Taxes on income (loss) (1) 11 21 --
Depreciation/amortization 31 26 82 83
Interest expense 34 27 110 97
LIFO adjustments 3 -- 3 --
---------- ---------- ---------- ----------
EBITDAL - continuing operations $ 65 $ 81 $ 250 $ 181
========== ========== ========== ==========
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 5, OCTOBER 6, OCTOBER 5, OCTOBER 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income (loss) from discontinued operations
before extraordinary charge $ (19) $ 3 $ (21) $ 21
Add back:
Taxes on income (loss) (12) 2 (12) 15
Depreciation/amortization 11 12 42 43
Interest expense 7 8 24 31
LIFO adjustments 1 (2) 1 (3)
---------- ---------- ---------- ----------
EBITDAL - discontinued operations $ (12) $ 23 $ 34 $ 107
========== ========== ========== ==========
EBITDAL is earnings before extraordinary items, interest expense, income taxes,
depreciation and amortization, equity investment results and LIFO provision. We
present EBITDAL to help us describe our ability to generate cash flows that can
be used to service our debt; however, conditions may require conservation of
funds for other uses. EBITDAL is a non-GAAP liquidity measure commonly used in
our industry and should not be considered as an alternative measure of our net
income or cash flows from operations as computed in accordance with GAAP.
Amounts presented may not be comparable to similar measures disclosed by other
companies.
27
RESULTS OF CONTINUING OPERATIONS
Set forth in the following table is information regarding our continuing net
sales and certain components of income (loss) from continuing operations
expressed as a percent of sales which are referred to in the accompanying
discussion:
OCTOBER 5, OCTOBER 6,
FOR THE 12 WEEKS ENDED 2002 2001
---------- ----------
Net sales 100.00% 100.00%
Gross margin 3.54 4.43
Less:
Selling and administrative 2.87 3.05
Interest expense 0.86 0.77
Interest income and other (0.13) (0.14)
Impairment/restructuring credit -- (0.02)
---------- ----------
Total expenses 3.60 3.66
---------- ----------
Income (loss) before taxes (0.06) 0.77
Taxes on income (loss) (0.02) 0.30
---------- ----------
Income (loss) from continuing operations (0.04)% 0.47%
OCTOBER 5, OCTOBER 6,
FOR THE 40 WEEKS ENDED 2002 2001
---------- ----------
Net sales 100.00% 100.00%
Gross margin 4.25 4.78
Less:
Selling and administrative 2.73 3.38
Interest expense 0.97 0.99
Interest income and other (0.18) (0.20)
Impairment/restructuring charges 0.24 0.11
Litigation charges -- 0.50
---------- ----------
Total expenses 3.76 4.78
---------- ----------
Income before taxes 0.49 --
Taxes on income 0.19 --
---------- ----------
Income from continuing operations 0.30% --%
28
NET SALES.
Net sales from continuing operations for the 12 weeks ended October 5, 2002,
increased by $441 million, or 12.5%, to $4.0 billion from the same period in
2001. Year to date, net sales increased by $1.66 billion, or 17.0% (34% of this
increase was attributable to growth in Kmart sales), to $11.4 billion from the
same period in 2001. Net growth for the 12-week period was mainly a result of
Core-Mark sales for the full 12 weeks (16 weeks year to date) along with
increased activity from our Albertson's agreement offset by decreased activity
with Kmart, our largest customer. The decline in sales to Kmart for the 12 weeks
ended October 5, 2002 compared to the same period in the prior year was due to
the closing of Kmart stores in 2002 related to its bankruptcy reorganization
compared to increased sales in the last half of 2001 due to the startup of the
Kmart contract. Kmart accounted for 20% and 31% of our net sales during the
third quarter of 2002 and 2001, respectively, and 23% and 21% for the first
three quarters of 2002 and 2001, respectively.
GROSS MARGIN.
Gross margin from continuing operations for the 12 and 40 weeks ended October 5,
2002 decreased as a percentage of net sales to 3.54% and 4.25%, respectively,
from 4.43% and 4.78%, respectively, for the same periods in 2001. The decrease
in gross margin rate was due, in part, to a change in the mix of product sales
resulting from a greater concentration on high growth, lower margin piece-pick
sales. These sales increased as a result of the Core-Mark and Head Distributing
acquisitions. In addition, a $3.0 million provision for LIFO is included in
continuing operations for the 12 and 40 weeks ended October 5, 2002. There was
no LIFO provision recorded in continuing operations in the prior year comparable
periods.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses from continuing operations for the 12 and 40
weeks ended October 5, 2002 decreased as a percentage of net sales to 2.87% and
2.73%, respectively, for 2002 from 3.05% and 3.38%, respectively, in 2001. The
improvement is a result of sales growth without a corresponding increase in
fixed operating costs and company-wide cost savings initiatives.
OPERATING EARNINGS.
We measure operating earnings as sales less cost of sales less selling and
administrative expenses. Operating earnings from continuing operations as a
percentage of net sales for the 12 and 40 weeks ended October 5, 2002 were 0.67%
and 1.52%, respectively, compared to 1.38% and 1.40%, respectively, for the same
periods in 2001. The change in operating earnings is a combination of the
explanations included in net sales, gross margin and selling and administrative
expenses described above.
INTEREST EXPENSE.
Interest expense from continuing operations for the third quarter of 2002
increased $7 million to $34 million compared to the same period in 2001 and
increased $14 million year to date compared to the same period in 2001. The
increase in the third quarter was a result of higher debt balances compared to
the prior year quarter. Year to date also increased due to higher debt balances
but was partially offset by lower average interest rates for the same time
period. The second quarter of 2002 and the first quarter of 2001 each included
$3 million of interest expense incurred on debt during the call period for the
early retirement of debt.
29
INTEREST INCOME AND OTHER.
Interest income from continuing operations of $5 million for the third quarter
of 2002 and $20 million for the first three quarters of 2002 was relatively flat
for the same periods of 2001. Interest income in the second quarter of 2002 and
the first quarter of 2001 each included approximately $1 million of interest
income from cash deposited with a trustee during the call period for the early
retirement of debt.
IMPAIRMENT/RESTRUCTURING CHARGE.
In the second quarter of 2002, we incurred a $27 million pre-tax charge in
continuing operations related to the closure of two distribution facilities and
certain integration costs related to recent acquisitions. See Note 11 in the
notes to the condensed consolidated financial statements for further discussion
of the charge.
The strategic plan was fully implemented by the end of 2001 and thus there has
been no charge in 2002. See Note 12 in the notes to the condensed consolidated
financial statements for further discussion regarding the strategic plan.
DISCONTINUED OPERATIONS.
On September 24, 2002, the Board of Directors approved a plan to sell our price
impact retail grocery stores operating under the Rainbow and Food 4 Less
banners. The plan is based in part on our decision to focus on our core
distribution business. Results of operations of these stores represent a
component of our company and have been previously included in the retail
segment. The disposition of the retail stores is expected to occur in a series
of sales to multiple buyers beginning in the fourth quarter of 2002 and
completed in 2003. Expenses associated with support services that directly
support the retail operations have been reflected in discontinued operations.
For the 12 and 40 weeks ended October 5, 2002, losses from discontinued
operations were $19.4 million and $20.5 million, respectively, compared to
income from discontinued operations of $2.6 million and $20.7, respectively, for
the same time periods in 2001. We expect to apply the proceeds from the sale of
these stores to reduce outstanding debt under our credit facility.
TAXES ON INCOME.
The effective tax rates for the total company for the 40 weeks of 2002 and 2001
were 38.7% and 41.3% (before extraordinary charges), respectively. These were
both blended rates taking into account operations activity as well as various
permanent and timing differences. The effective tax rate for 2002 was favorably
impacted as a result of a refund generated through a change in treatment by the
IRS of a closed statute relating to an earlier return year. The 2001 effective
tax rate also took into account write-offs of non-deductible goodwill. 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 extraordinary after-tax charges of $8 million ($13 million pre-tax)
in the second quarter of 2002 and $3 million ($6 million pre-tax) in the first
quarter of 2001, due to the early retirement of debt. See Footnote 8 in the
notes to the condensed consolidated financial statements for further discussion.
In 2003, these amounts will be reclassified to selling and administrative
expense and taxes on income in accordance with SFAS 145.
30
KMART DEVELOPMENTS.
On January 22, 2002, Kmart and certain of its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Kmart, our
largest customer, accounted for 23% of our net sales from continuing operations
for both the 40 weeks ended October 5, 2002 and the year ended December 29,
2001. We have a 10-year written distribution agreement with Kmart. Pursuant to
this bankruptcy, Kmart may, however, assume or reject our distribution agreement
at any time. Kmart named us as a "critical vendor" in the bankruptcy proceeding
and granted to us a second priority lien on its inventory to secure the payment
of weekly receivables to us arising after the date of the bankruptcy filing.
The impact of Kmart's bankruptcy filing on our future financial results will
depend greatly upon whether Kmart assumes or rejects our distribution agreement
and upon the success of Kmart's reorganization. If, for example, Kmart assumes
our distribution agreement and obtains bankruptcy court approval of its plan of
reorganization (which Kmart has not yet filed), then it is likely that our
future financial results will not be adversely impacted. If, however, Kmart
rejects our distribution agreement or, to the contrary, assumes our distribution
agreement but fails to obtain bankruptcy court approval of a plan of
reorganization, then we may lose our sales to Kmart, may choose to close or
consolidate certain distribution facilities, may eliminate excess inventory, and
may suffer other damages, including the loss of a portion of our pre-petition
receivable. If certain of these circumstances occur, we could assert a claim
against Kmart for damages in addition to the claim we have already filed.
CERTAIN ACCOUNTING MATTERS.
The FASB issued SFAS No. 143 - Accounting for Asset Retirement Obligations. We
are studying the impact that SFAS 143 has on our financial statements and
planning to implement it in fiscal year 2003, as required. The FASB issued SFAS
No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. We
implemented SFAS 144 as of the beginning of fiscal year 2002, as required. It
had no significant impact on our financial statements. In April 2002, the FASB
issued SFAS No. 145 - Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. We had a refinancing
transaction in 2002 that has resulted in an extraordinary charge. In 2003 these
amounts will be reclassified to selling and administrative expense in accordance
with SFAS 145. In August 2002, the FASB issued SFAS No. 146 - Accounting for
Costs Associated with Exit or Disposal Activities. The standard currently has no
impact on our financial statements, and we will implement it in fiscal year
2003, as required. In December 2001, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 01-6, Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others. We implemented SOP 01-6 as of the beginning of fiscal year
2002, as required, with no impact on our financial statements. This SOP provides
guidance on the accounting for and disclosure of amounts due to us from
customers included in our accounts and notes receivable.
31
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
There have been no significant changes to critical accounting policies and
estimates since the issuance of our 2001 Form 10-K other than the following. We
have estimated the proceeds we expect to receive upon completing the sales of
our price impact retail operations. Our estimates were based on our current
negotiations and other potential outcomes. We have not yet reached final
agreements on these sales. There could be changes in the final sales agreements
that might differ from our estimates.
LIQUIDITY AND CAPITAL RESOURCES
For the year-to-date period ended October 5, 2002, our principal source of
liquidity was borrowings under our credit facility. Our principal sources of
capital were the issuance of common stock, the issuance of long-term senior debt
and the sale-leaseback of six case-pick distribution centers.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.
Net cash used in operating activities was $118 million for the three quarters
ended October 5, 2002 compared to a $145 million use of cash for the same period
in 2001. The primary use of cash was for working capital. During the third
quarter of 2002, cash provided by operations of $8 million was primarily driven
by improvements in working capital, specifically accounts payable and inventory
in continuing operations. This compares to a use of cash of $81 million for the
12 weeks ended October 6, 2001, which was primarily driven by a build in
inventory.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.
Total investment-related activity resulted in a $245 million use of cash for the
three quarters ended October 5, 2002 compared to a $138 million use of cash in
the same period of 2001.
Cash expended for businesses acquired was $295 million for the three quarters
ended October 5, 2002 (primarily as a result of our acquisition of Core-Mark and
Head Distributing), compared to $121 million cash expended for businesses
acquired during the same period in 2001.
Cash expended for the purchase of property and equipment totaled $151 million
for the three quarters ended October 5, 2002 compared to $169 million for the
same period in 2001. We intend to spend a total of approximately $185 million on
our capital programs in 2002 compared to $238 million spent in 2001. We estimate
capital expenditures of $135 million in 2003. The planned reduction is primarily
related to our decision to divest our price impact retail stores.
Cash proceeds from the sale of property and equipment was $164 million,
primarily related to the sale-leaseback of six case-pick distribution centers
located in Phoenix, Massillon, Salt Lake City, Miami, Sacramento and Memphis
(see Footnote 10 for sale-leaseback details) for the three quarters ended
October 5, 2002 compared to $13 million from the sale of property and equipment
during the same period in 2001.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.
Net cash generated by financing activities was $366 million for the three
quarters ended October 5, 2002 compared to $296 million for the same period last
year.
32
On April 15, 2002, we sold $260 million of 9 7/8% senior subordinated notes due
2012. The net proceeds were used to redeem the 10 1/2% senior subordinated notes
due 2004.
At the end of the third quarter of 2002, outstanding borrowings under the credit
facility totaled $424 million of term loans and $60 million of revolver loans.
The credit facility also supports $77 million of letters of credit.
On June 18, 2002, we purchased Core-Mark International, Inc. In conjunction with
the acquisition, we refinanced our $850 million senior secured credit facility
with a $975 million senior secured credit facility, sold $200 million of 9 1/4%
senior notes due June 15, 2010 and sold 9.2 million shares of common stock at
$19.40 per share, raising $178 million of gross proceeds ($170 million net of
underwriting discount and other issuance costs).
As part of our acquisition of Core-Mark, we assumed $132 million of additional
debt, consisting of $77 million of 11 3/8% senior subordinated notes and a $55
million accounts receivable securitization. On June 18, we deposited $80 million
in a trust to be used to redeem the 11 3/8% senior subordinated notes, including
an amount to cover accrued interest and the redemption premium and received a
satisfaction and discharge to release us from this debt. Simultaneously, on June
18, we deposited $55 million in a trust which was used to redeem the accounts
receivable securitization, including an amount to cover accrued interest. The
redemption of the accounts receivable securitization took place during the third
quarter of 2002.
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 our distribution facilities and
equipment. We believe these sources will be adequate to meet working capital
needs in the normal course of business for the next 12 months.
CONTINGENCIES
See Footnote 7 in our notes to the consolidated financial statements and Item 1,
Part II of this report.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements regarding future events and our
future financial performance. These forward-looking statements and our business
are subject to a number of factors that could cause actual results to differ
materially from those stated in this report, including without limitation:
unanticipated problems with product procurement; adverse effects of the changing
industry and increased competition; sales declines and loss of customers;
exposure to litigation and other contingent losses; elimination of sales to
Kmart due to their rejection of our distribution agreement; the ability of Kmart
to continue as a going concern, to operate pursuant to the terms of its
debtor-in-possession financing, or to complete its reorganization according to
its plan; the inability to integrate acquired companies and to achieve operating
improvements at those companies; increases in labor costs and disruptions in
labor relations with union bargaining units representing our associates; our
ability to successfully sell our retail price-impact stores; 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 2001 fiscal year. The
33
forward-looking statements speak only as of the date made as we undertake no
obligation to update forward-looking statements to reflect developments or
information obtained after the date of this report.
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. See Footnote 8 in the notes to the condensed consolidated
financial statements for a further discussion.
With our acquisition of Core-Mark, we now conduct business in western Canada.
However, changes in the U.S./Canadian rate of currency exchange historically
have had no material impact on the overall results of the Canadian operation, as
virtually all revenues and expenses of such operations are Canadian dollars.
SUMMARY OF FINANCIAL INSTRUMENTS
(In millions, except rates)
MATURITIES OF PRINCIPAL BY FISCAL YEAR
-----------------------------------------------------
FAIR VALUE FAIR VALUE THERE-
AT 12/29/01 AT 10/05/02 2002 2003 2004 2005 2006 AFTER
----------- ----------- ------ ------ ------ ------ ------ ------
DEBT WITH VARIABLE INTEREST RATES
Principal payable $ 318 476 -- 4 4 4 4 467
Average variable rate payable 4.0% 4.1% Based on Libor plus a margin
DEBT WITH FIXED INTEREST RATES
Principal payable $ 1,124 815 - -- -- -- -- 1,365
Average fixed rate payable 9.7% 9.6% 5.7% 5.1% 0.0% 0.0% 0.0% 9.6%
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only
34
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We also have
investments in certain unconsolidated entities. As we do not control or manage
these entities, our disclosure controls and procedures with respect to these
entities are necessarily substantially more limited than those we maintain with
respect to our consolidated subsidiaries.
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date we completed our evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to or threatened with various litigation and contingent loss
situations arising in the ordinary course of our business including disputes
with customers and vendors, owners or creditors of financially troubled or
failed customers, suppliers, landlords and lessees, employees, insurance
carriers and tax authorities. In this regard, we have arbitration claims pending
from and against one of our former convenience store customers, Clark Retail
Enterprises, Inc., regarding the required mix of annual minimum purchases under
a supply agreement and related product service charges. We believe that Clark
failed to purchase the required mix of products as it said it would, making the
supply agreement subject to rescission and making Clark liable to us for
damages. Clark contends that we breached the supply agreement in several
respects, making us liable to Clark for damages. Clark has not yet specified in
the arbitration the amount of damages it is seeking from us. An unfavorable
outcome for us in this arbitration could impact our financial results, but we do
not expect that such an impact would be material to our financial position.
Since August 29, 2002, several securities lawsuits have been filed against us
and certain of our officers in the United States District Court for the Eastern
District of Texas seeking court certification as a class action. To date, these
complaints collectively raise various categories of claims: (a) we allegedly
issued false and misleading positive statements, including statements about our
price impact retail supermarkets; (b) we allegedly issued financial results
which improperly included certain income from vendor deductions; and (c) other
alleged accounting irregularities. In addition, one related derivative lawsuit
has been filed on behalf of Fleming against certain of our officers and the
members of our Board of Directors in the United States District Court for the
Eastern District of Texas. This complaint alleges a breach of fiduciary duty in
connection with the claims described in clause (a) above.
35
Distributors of cigarettes and other tobacco products are facing a number of
significant issues that could impact the business environment. These issues
include new government regulation that could increase our cost of business,
litigation affecting tobacco manufacturers and new or additional taxes on
cigarettes and other tobacco products that could result in a material reduction
in the consumption of such products in the United States.
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
4.29 First Amendment, dated October 18, 2002, to that certain
Credit Agreement, dated as of June 18, 2002, incorporated by
reference to Exhibit 10.1 to Form 8-K filed October 23, 2002
10.66* Letter Agreement with William H. Marquard, dated September 13,
2002
10.67* Letter Agreement with Thomas Dahlen, dated July 12, 2002
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information, filed herewith
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
On August 6, 2002, we filed a Current Report on Form 8-K pursuant to Item 9 -
Registration FD Disclosure announcing that a slide presentation made to
investors and analysts was publicly available.
On August 12, 2002, we filed a Current Report on Form 8-K pursuant to Item 9 -
Regulation FD Disclosure, attaching the written statements under oath of our
Principal Executive Officer and our Principal Financial Officer that we filed
with the SEC in accordance with the SEC's June 27, 2002 Order (File No. 4-460).
On September 25, 2002, we filed a Current Report on Form 8-K pursuant to Item 9
- Regulation FD Disclosure, announcing that we plan to divest our retail
operations and provide updated financial guidance, as well as a slide
presentation that was made available to investors.
None of these Current Reports on Form 8-K are incorporated into this report or
into any other filing of Fleming, regardless of any general incorporation
language in such filing.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
November 5, 2002 /s/ MARK D. SHAPIRO
---------------------------------------
Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Duly Authorized Officer of Registrant
and Principal Accounting Officer)
37
CERTIFICATIONS
I, Mark S. Hansen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleming Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
38
Date: November 5, 2002
/s/ MARK S. HANSEN
---------------------------------------------
Mark S. Hansen
Chairman of the Board and Chief Executive Officer
39
I, Neal J. Rider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleming Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
40
Date: November 5, 2002
/s/ NEAL J. RIDER
---------------------------------------------------
Neal J. Rider
Executive Vice President and Chief Financial Officer
41
EXHIBIT INDEX
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
4.29 First Amendment, dated October 18, 2002, to that certain
Credit Agreement, dated as of June 18, 2002, incorporated by
reference to Exhibit 10.1 to Form 8-K filed October 23, 2002
10.66* Letter Agreement with William H. Marquard, dated September 13,
2002
10.67* Letter Agreement with Thomas Dahlen, dated July 12, 2002
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information, filed herewith
* Management contract, compensatory plan or arrangement.