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 APRIL 20, 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, BOX 299013
LEWISVILLE, TEXAS 75029
(Address of principal executive offices)
(972) 906-8000
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At the close of business on May 13, 2002, 44,605,000 shares of the registrant's
common stock, par value $2.50 per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
16 Weeks Ended April 20, 2002,
and April 21, 2001
Consolidated Condensed Balance Sheets -
April 20, 2002, and December 29, 2001
Consolidated Condensed Statements of Cash Flows -
16 Weeks Ended April 20, 2002,
and April 21, 2001
Notes to Consolidated Condensed Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 4. Results of Votes of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 16 WEEKS ENDED APRIL 20, 2002 AND APRIL 21, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
------------ ------------
Net sales $ 4,686,139 $ 4,137,359
Costs and expenses:
Cost of sales 4,346,460 3,771,115
Selling and administrative 255,012 317,313
Interest expense 50,413 57,502
Interest income and other (6,966) (8,921)
Impairment/restructuring credit -- (26,859)
------------ ------------
Total costs and expenses 4,644,919 4,110,150
------------ ------------
Income before taxes 41,220 27,209
Taxes on income 16,611 11,743
------------ ------------
Income before extraordinary charge 24,609 15,466
Extraordinary charge from early retirement
of debt, net of taxes -- (3,469)
------------ ------------
Net income $ 24,609 $ 11,997
============ ============
Basic income per share:
Income before extraordinary charge $ 0.56 $ 0.39
Extraordinary charge from early retirement
of debt, net of taxes -- (0.09)
------------ ------------
Net income $ 0.56 $ 0.30
============ ============
Diluted income per share:
Income before extraordinary charge $ 0.52 $ 0.37
Extraordinary charge from early retirement
of debt, net of taxes -- (0.08)
------------ ------------
Net income $ 0.52 $ 0.29
============ ============
Dividends paid per share $ 0.02 $ 0.02
Weighted average shares outstanding:
Basic 44,175 40,190
Diluted 50,601 42,245
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
CONSOLIDATED CONDENSED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
APRIL 20, DECEMBER 29,
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 3,974 $ 17,325
Cash held by Trustee for refinancing 263,125 --
Receivables, net 588,321 588,269
Inventories 954,174 1,014,695
Assets held for sale 28,666 30,066
Other current assets 76,169 89,716
------------ ------------
Total current assets 1,914,429 1,740,071
Investments and notes receivable, net 102,073 105,651
Investment in direct financing leases 76,941 83,118
Property and equipment 1,676,372 1,624,499
Less accumulated depreciation
and amortization (734,388) (704,844)
------------ ------------
Net property and equipment 941,984 919,655
Deferred income taxes 75,001 105,453
Other assets 158,692 146,555
Goodwill, net 554,388 554,190
------------ ------------
Total assets $ 3,823,508 $ 3,654,693
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 835,205 $ 971,791
Current maturities of long-term debt 39,747 29,865
Current obligations under capital leases 21,751 21,410
Debt to be refinanced 263,125 --
Other current liabilities 183,711 242,061
------------ ------------
Total current liabilities 1,343,539 1,265,127
Long-term debt 1,527,016 1,427,929
Long-term obligations under capital leases 328,295 331,836
Other liabilities 106,749 131,582
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 111,661 111,095
Capital in excess of par value 562,235 567,720
Reinvested earnings (deficit) (96,551) (121,160)
Accumulated other comprehensive income -
additional minimum pension liability (59,436) (59,436)
------------ ------------
Total shareholders' equity 517,909 498,219
------------ ------------
Total liabilities and shareholders' equity $ 3,823,508 $ 3,654,693
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 16 WEEKS ENDED APRIL 20, 2002, AND APRIL 21, 2001
(IN THOUSANDS)
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 24,609 $ 11,997
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 46,326 50,667
Amortization costs in interest expense 2,499 2,180
Credit losses 371 4,517
Deferred income taxes 42,038 10,996
Impairment/restructuring and related charges,
net of impairment credit (not in other lines) -- (1,899)
Cash payments on impairment/restructuring
and related charges (8,580) (22,904)
Cost of early debt retirement -- 5,787
Change in assets and liabilities:
Receivables 1,757 12,556
Inventories 62,408 (2,572)
Accounts payable (136,586) (213,201)
Other assets and liabilities (79,201) 24,826
Other adjustments, net 1,266 977
------------ ------------
Net cash used in operating activities (43,093) (116,073)
------------ ------------
Cash flows from investing activities:
Collections on notes receivable 10,658 9,127
Notes receivable funded (12,100) (7,585)
Purchases of property and equipment (61,270) (48,173)
Proceeds from sale of property and equipment 9,863 15,968
Proceeds from sale of businesses -- 111,088
Other investing activities 3,373 3,373
------------ ------------
Net cash provided by (used in) investing activities (49,476) 83,798
------------ ------------
Cash flows from financing activities:
Change in revolver 110,000 (170,000)
Proceeds from long-term borrowings 255,940 500,602
Principal payments on long-term debt (9,880) (325,575)
Payments on capital issuance and retirement (9,144) (21,050)
Principal payments on capital lease obligations (4,943) (5,416)
Proceeds from sale of common stock 1,252 51,392
Dividends paid (882) (785)
------------ ------------
Net cash provided by financing activities 342,343 29,168
------------ ------------
Net change in cash and cash equivalents 249,774 (3,107)
Cash and cash equivalents, beginning of period 17,325 30,380
------------ ------------
Cash and cash equivalents, end of period $ 267,099 $ 27,273
============ ============
Supplemental information:
Cash paid for interest $ 57,264 $ 43,422
Cash refunded for income taxes $ (26,865) $ (5,949)
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated condensed financial statements of Fleming
Companies, Inc. have been prepared without audit. In our opinion, all
adjustments necessary to present fairly our financial position at April 20,
2002, and the results of operations and cash flows for the periods presented
have been made. All such adjustments are of a normal, recurring nature except as
disclosed. Both basic and diluted income per share are computed based on net
income (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.
The preparation of the consolidated condensed 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 assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
period classifications, including the reclassification of net sales and cost of
goods due to the adoption of EITF 01-9 in the first quarter of 2002. The effect
on the first quarter of 2002 and 2001 was less than $25 million.
2. 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. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our 2001 annual
report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining the cost of
most grocery and certain perishable inventories. The excess of current cost of
LIFO inventories over their stated value was $45.9 million and $46.4 million at
April 20, 2002 and December 29, 2001, respectively.
6
4. Sales and operating earnings for our distribution and retail segments are
presented below.
16 WEEKS ENDED
APRIL 20, APRIL 21,
($ IN MILLIONS) 2002 2001
--------------- ------------ ------------
Sales:
Distribution $ 4,389 $ 3,719
Intersegment elimination (372) (426)
------------ ------------
Net distribution 4,017 3,293
Retail 669 844
------------ ------------
Total sales $ 4,686 $ 4,137
============ ============
Operating earnings:
Distribution $ 138 $ 109
Retail 16 16
Support services (69) (76)
------------ ------------
Total operating earnings 85 49
Interest expense (51) (58)
Interest income and other 7 9
Impairment/restructuring credit -- 27
------------ ------------
Income before taxes $ 41 $ 27
============ ============
General support services expenses are not allocated to distribution and retail
segments. The transfer pricing between segments is at cost.
Kmart Corporation, our largest customer, represented 23% and 10% of our total
net sales during the first quarter of 2002 and 2001, respectively.
5. Our comprehensive income for the 16 weeks ended April 20, 2002, and April 21,
2001, totaled $24.6 million and $12.0 million, respectively. The comprehensive
income for these periods was comprised only of the reported net income.
6. In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities (including those associated with litigation
matters) when we determine that a material loss is "probable" and either
"quantifiable" or "reasonably estimable." Additionally, we disclose material
loss contingencies when the likelihood of a material loss is deemed to be
greater than "remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
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, vendors, owners or creditors of financially troubled or failed
customers, suppliers, landlords and lessees, employees,
7
insurance carriers, and tax assessors. In this regard, we are currently in
binding arbitration with one of our 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 seek to rescind the
supply agreement and to recover our damages, and Clark seeks to terminate the
supply agreement and recover its damages. The parties are currently involved in
settlement discussions. An unfavorable or a favorable outcome could have an
effect on our financial statements.
In addition, our facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of certain materials. In conformity
with these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection Agency
and by similar state agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
or similar state laws, as applicable, with respect to EPA-designated Superfund
sites. While liability under CERCLA for remediation at these sites is generally
joint and several with other responsible parties, we believe that, to the extent
we are ultimately determined to be liable for the expense of remediation at any
site, such liability will not result in a material adverse effect on our
consolidated financial position or results of operations. We are committed to
maintaining the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws, regulations and
orders.
8
7. Long-term debt consists of the following:
APRIL 20, DECEMBER 29,
2002 2001
------------ ------------
(IN THOUSANDS)
10 1/8% senior notes due 2008 $ 348,225 $ 345,870
10 1/2% senior subordinated notes due 2004 250,000 250,000
10 5/8% senior subordinated notes due 2007 400,000 400,000
5 1/4% convertible senior subordinated notes due 2009 150,000 150,000
9 7/8% senior subordinated notes due 2012 260,260 --
Revolving credit, average interest rates of 3.6%
for 2002 and 5.8% for 2001, due 2003 310,000 200,000
Term loans, due 2002 to 2004, average interest
rate of 4.3% for 2002 and 6.7% for 2001 108,757 118,637
Other debt (including discounts) (10,479) (6,713)
------------ ------------
1,816,763 1,457,794
Less 10 1/2% senior subordinated notes due 2004
being refinanced (250,000) --
Less current maturities (39,747) (29,865)
------------ ------------
Long-term debt $ 1,527,016 $ 1,427,929
============ ============
Five-year maturities: Aggregate maturities of long-term debt for the next five
years are approximately as follows: in the remainder of 2002, $270 million
(includes $250 million currently held in trust to redeem the 10 1/2% senior
subordinated notes due 2004); in 2003, $350 million; in 2004, $50 million; in
2005, $0; and in 2006, $0.
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
placed into a trust and will be used to redeem all of the 10 1/2% senior
subordinated notes due 2004 as well as accrued interest and the redemption
premium. The total placed in trust was approximately $263 million. The
redemption of the 2004 notes will take place in the second quarter of this year.
The new 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 Subsidiary Guarantee of
Senior Notes and Senior Subordinated Notes below).
9
In April 2002, we entered into an interest rate swap agreement with a notional
amount of $50 million. The swap is tied to our 9 7/8% senior subordinated notes
due 2012. The maturity, call dates, and call premiums mirror those of the notes.
The swap is designed for us to receive a fixed rate of 9 7/8% and pay a floating
rate based on a spread plus the 3-month LIBOR. The floating rate resets
quarterly beginning May 1, 2002. We documented and designated this swap to
qualify as a fair value hedge. At the end of the first quarter of 2002, in
accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133),
the mark-to-market value of this swap was recorded as a $260 thousand long-term
asset offset by a change in fair value to the senior subordinated notes due
2012.
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% 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. At
the end of the first quarter of 2002, in accordance with Statement of Financial
Accounting Standards No. 133 (SFAS 133), the mark-to-market value of these swaps
was recorded as a $6.8 million long-term liability offset by a change in fair
value to the senior subordinated 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 recorded currently in earnings. These
amounts are recorded to interest income and provide offset of one another. For
the period ended April 20, 2002, there was no net earnings impact relating to
our fair value hedges.
Subsidiary Guarantee of Senior Notes and Senior Subordinated Notes: The senior
notes, convertible senior subordinated notes, and senior subordinated notes are
guaranteed by substantially all of Fleming's wholly-owned direct and indirect
subsidiaries. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to Fleming (the parent) in the form of
cash dividends, loans or advances.
The following consolidating condensed financial information depicts, in separate
columns, the parent company, those subsidiaries which are guarantors, those
subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. The financial information may not necessarily be indicative
of the results of operations or financial position had the subsidiaries been
operated as independent entities.
10
CONSOLIDATING CONDENSED BALANCE SHEET INFORMATION
APRIL 20, 2002
-----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 270,586 $ (3,519) $ 32 $ -- $ 267,099
Receivables, net 476,372 108,365 3,584 -- 588,321
Inventories 742,540 211,634 -- -- 954,174
Other current assets 95,815 8,730 290 -- 104,835
------------ ------------ ------------ ------------ ------------
Total current assets 1,585,313 325,210 3,906 -- 1,914,429
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 517,128 -- -- (517,128) --
Property and equipment, net 614,853 318,211 8,920 -- 941,984
Goodwill, net 401,817 152,571 -- -- 554,388
Other assets 376,320 36,387 -- -- 412,707
------------ ------------ ------------ ------------ ------------
$ 3,588,672 $ 837,735 $ 12,826 $ (615,725) $ 3,823,508
============ ============ ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 744,184 $ 90,955 $ 66 $ -- $ 835,205
Intercompany payables -- 498,131 18,997 (517,128) --
Other current liabilities 481,259 27,065 10 -- 508,334
------------ ------------ ------------ ------------ ------------
Total current liabilities 1,225,443 616,151 19,073 (517,128) 1,343,539
Obligations under capital leases 215,012 113,283 -- -- 328,295
Long-term debt and other
liabilities 1,630,308 3,457 -- -- 1,633,765
Equity (deficit) 517,909 104,844 (6,247) (98,597) 517,909
------------ ------------ ------------ ------------ ------------
$ 3,588,672 $ 837,735 $ 12,826 $ (615,725) $ 3,823,508
============ ============ ============ ============ ============
DECEMBER 29, 2001
-----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 10,175 $ 6,876 $ 274 $ -- $ 17,325
Receivables, net 483,007 105,250 12 -- 588,269
Inventories 816,309 198,386 -- -- 1,014,695
Other current assets 114,733 4,950 99 -- 119,782
------------ ------------ ------------ ------------ ------------
Total current assets 1,424,224 315,462 385 -- 1,740,071
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 470,545 -- -- (470,545) --
Property and equipment, net 622,647 287,826 9,182 -- 919,655
Goodwill, net 401,180 153,010 -- -- 554,190
Other assets 379,503 47,861 13,413 -- 440,777
------------ ------------ ------------ ------------ ------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
============ ============ ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 861,445 $ 109,311 $ 1,035 $ -- $ 971,791
Intercompany payables -- 443,066 27,479 (470,545) --
Other current liabilities 264,743 27,880 713 -- 293,336
------------ ------------ ------------ ------------ ------------
Total current liabilities 1,126,188 580,257 29,227 (470,545) 1,265,127
Obligations under capital leases 213,293 118,543 -- -- 331,836
Long-term debt and other
liabilities 1,553,640 5,871 -- -- 1,559,511
Equity (deficit) 498,219 104,844 (6,247) (98,597) 498,219
------------ ------------ ------------ ------------ ------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
============ ============ ============ ============ ============
11
CONSOLIDATING CONDENSED OPERATING STATEMENT INFORMATION
16 WEEKS ENDED APRIL 20, 2002
-----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 3,921,818 $ 1,147,315 $ (385) $ (382,609) $ 4,686,139
Costs and expenses:
Cost of sales 3,736,628 992,441 -- (382,609) 4,346,460
Selling and administrative 106,358 148,517 137 -- 255,012
Other 44,258 (1,157) 346 -- 43,447
Equity loss from subsidiaries (3,908) -- -- 3,908 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 3,883,336 1,139,801 483 (378,701) 4,644,919
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 38,482 7,514 (868) (3,908) 41,220
Taxes on income (loss) 13,873 3,096 (358) -- 16,611
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 24,609 $ 4,418 $ (510) $ (3,908) $ 24,609
============ ============ ============ ============ ============
16 WEEKS ENDED APRIL 21, 2001
-----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 3,441,334 $ 1,035,055 $ 22,210 $ (361,240) $ 4,137,359
Costs and expenses:
Cost of sales 3,256,433 859,049 16,873 (361,240) 3,771,115
Selling and administrative 150,323 161,907 5,083 -- 317,313
Other 16,457 28,605 3,519 -- 48,581
Impairment/restructuring charge (credit) 6,255 (33,114) -- -- (26,859)
Equity loss from subsidiaries (3,598) -- -- 3,598 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 3,425,870 1,016,447 25,475 (357,642) 4,110,150
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 15,464 18,608 (3,265) (3,598) 27,209
Taxes on income (loss) (2) 13,117 (1,372) -- 11,743
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charge $ 15,466 $ 5,491 $ (1,893) $ (3,598) $ 15,466
============ ============ ============ ============ ============
12
CONSOLIDATING CONDENSED CASH FLOWS INFORMATION
16 WEEKS ENDED APRIL 20, 2002
--------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in) operating activities $ (35,037) $ (15,558) $ 7,502 $ -- $ (43,093)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (12,141) (44,657) (4,472) -- (61,270)
Other 6,473 621 4,700 -- 11,794
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (5,668) (44,036) 228 -- (49,476)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayments on capital lease obligations (3,496) (1,447) -- -- (4,943)
Advance to (from) parent (42,674) 50,646 (7,972) -- --
Other 347,286 -- -- -- 347,286
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 301,116 49,199 (7,972) -- 342,343
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash & cash equivalents 260,411 (10,395) (242) -- 249,774
Cash and cash equivalents at beginning of period 10,175 6,876 274 -- 17,325
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 270,586 $ (3,519) $ 32 $ -- $ 267,099
=========== =========== =========== =========== ===========
16 WEEKS ENDED APRIL 21, 2001
--------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities $ (117,559) $ 6,588 $ (5,102) $ -- $ (116,073)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (37,721) (9,704) (748) -- (48,173)
Other 28,573 103,398 -- -- 131,971
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (9,148) 93,694 (748) -- 83,798
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayments on capital lease obligations (3,886) (1,530) -- -- (5,416)
Advance to (from) parent 97,159 (103,554) 6,395 -- --
Other 34,584 -- -- -- 34,584
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 127,857 (105,084) 6,395 -- 29,168
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,150 (4,802) 545 -- (3,107)
Cash and cash equivalents at beginning of period 22,487 6,753 1,140 -- 30,380
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 23,637 $ 1,951 $ 1,685 $ -- $ 27,273
=========== =========== =========== =========== ===========
13
8. In December 1998, we announced the implementation of a strategic plan
designed to improve the competitiveness of the retailers we serve and improve
our performance by building stronger operations that can better support
long-term growth. The four major initiatives of the strategic plan were to
consolidate distribution operations, grow distribution sales, improve retail
performance, and reduce overhead and operating expenses, in part by centralizing
the procurement and other functions in the Dallas, Texas area. Additionally, in
2000, we decided to reposition certain retail operations into our price impact
format and sell or close the remaining conventional retail chains. By mid-2001,
we had sold or closed all of our conventional retail stores.
The plan, including the decision to sell or close our conventional retail chains
in 2000, took three years to implement and is finished. Any remaining charges
represent exit costs that cannot be expensed until incurred and are expected to
be minimal.
The charges related to workforce reductions are as follows:
AMOUNT
($ IN
THOUSANDS) HEADCOUNT
----------- -----------
2001 Ending Liability $ 18,091 80
2002 Quarter 1 Terminations (4,008) (50)
----------- -----------
Ending Liability $ 14,083 30
=========== ===========
The ending liability of approximately $14 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 as well as
accruals for associates whose employment is still to be severed. The 50
headcount reduction recorded for the first quarter of 2002 is all from the
distribution segment.
Additionally, the strategic plan included charges related to lease obligations
which were utilized as operating units or retail stores closed, but ultimately
reduced over remaining lease terms. Remaining lease obligations as of year-end
2001 of approximately $2.3 million were utilized during the first quarter of
2002.
Assets held for sale included in current assets at the end of the first quarter
of 2002 were approximately $29 million, consisting of $19 million of
distribution operating units and $10 million of retail stores.
14
The net effect of the strategic plan in the first quarter of 2001 was pre-tax
income of $1 million. The after-tax effect was income of less than $1 million,
or $.01 per share. The first quarter pre-tax charge consisted of the following
components:
o Net impairment recovery of $35 million. The components included recovering
previously recorded goodwill impairment of $14 million and long-lived asset
impairment of $24 million. Also included was impairment of $3 million
related to other long-lived assets. These costs are included in the
Impairment/restructuring line on our Consolidated Statement of Operations.
o Restructuring charges of $8 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional fees
incurred related to the restructuring process. These costs are included in
the Impairment/restructuring line on our Consolidated Statement of
Operations.
o Other disposition and related costs of $26 million. These costs are
included on several lines of the Consolidated Statement of Operations as
follows: $2 million charge was included in net sales; $18 million charge
was included in cost of sales and was primarily related to inventory
markdowns for clearance for closed operations; $6 million charge was
included in selling and administrative expense as disposition related costs
recognized on a periodic basis.
The first quarter of 2001 charge relates to our business segments as follows: $7
million charge relates to the distribution segment and $12 million of income
relates to the retail segment with the balance relating to support services
expenses.
Assets held for sale included in other current assets at the end of the first
quarter of 2001 were approximately $59 million, consisting of $24 million of
distribution operating units and $35 million of retail stores.
9. 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, required to be completed by June 30, 2002, screens for impairment;
while the second phase (if necessary), required to be completed by December 31,
2002, measures the impairment. We have targeted the first phase of screening for
impairment to be completed by June 30, 2002; the second phase, if necessary,
will be measured by December 31, 2002. We have allocated all unamortized
goodwill to our segments in the following amounts: $416 million to distribution
and $138 million to retail.
15
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 first quarter of 2001, is as follows (in thousands,
except per share amounts):
QUARTER ENDED
------------------------------
APRIL 20, APRIL 21,
2002 2001
------------ ------------
Net income:
Reported net income $ 24,609 $ 11,997
Goodwill amortization, net of tax -- 5,625
------------ ------------
Comparative net income $ 24,609 $ 17,622
============ ============
Basic net income per share:
Reported net income $ 0.56 $ 0.30
Goodwill amortization, net of tax -- 0.14
------------ ------------
Comparative net income $ 0.56 $ 0.44
============ ============
Diluted net income per share:
Reported net income $ 0.52 $ 0.29
Goodwill amortization, net of tax -- 0.13
------------ ------------
Comparative net income $ 0.52 $ 0.42
============ ============
For the quarter ended April 20, 2002, no goodwill or other intangibles were
acquired, impaired or disposed. Other intangibles consisted of the following (in
thousands):
APRIL 20, 2002 DECEMBER 29, 2001
----------------------------------------------- -----------------------------------------------
GROSS OTHER GROSS OTHER
CARRYING ACCUMULATED INTANGIBLES, CARRYING ACCUMULATED INTANGIBLES,
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------ ------------ ------------ ------------ ------------ ------------
Customer incentives 118,606 (39,244) 79,362 111,605 (33,463) 78,142
Tradenames 5,800 (3,658) 2,142 5,800 (3,480) 2,320
Debt issuance costs 59,139 (21,754) 37,385 54,244 (19,255) 34,989
Other 7,696 (3,955) 3,741 6,390 (3,455) 2,935
------------ ------------ ------------ ------------ ------------ ------------
Other intangibles 191,241 (68,611) 122,630 178,039 (59,653) 118,386
16
Amortization expense for the 16 weeks ended April 20, 2002 was 9.7 million.
Estimated amortization expense, excluding any future acquisitions, for each of
the next five fiscal years is as follows (in thousands):
FISCAL YEAR: AMOUNT
------------ ------
2002 33,185
2003 27,938
2004 22,916
2005 19,950
2006 13,248
17
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 April 20, 2002, and the related
condensed consolidated statements of operations and statements of cash flows for
the 16 weeks ended April 20, 2002 and April 21, 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
May 7, 2002
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In April 2002, we announced the pending acquisition of Core-Mark International,
Inc. and the completed acquisition of Head Distributing Company for an aggregate
of approximately $430 million, which includes the payment of cash and the
assumption of debt of these two companies.
Core-Mark, a leading piece-pick distributor to convenience stores and other
retail customers in western United States and Canada, had 2001 sales of $3.4
billion. It serves nearly 30,000 locations from its network of 19 distribution
centers. This acquisition is expected to close in June 2002.
Head, a Georgia-based distributor, operates two piece-pick distribution centers
and serves 3,000 retail locations in six southeastern states. Head's fiscal 2001
sales were approximately $350 million. This acquisition closed April 23, 2002.
We have entered into an agreement with Albertson's to acquire its distribution
center in Tulsa, Oklahoma and supply its stores in Oklahoma and Nebraska. This
arrangement is expected to close in June 2002.
We anticipate issuing a combination of debt securities and common stock in
public offerings in order to fund these acquisitions.
We recorded net income for the first quarter of 2002 of $25 million and EBITDA
of $137 million. Excluding $27 million generated in the first quarter of 2001 by
our divested conventional retail stores, EBITDA increased 24.5% to $137 million
from $110 million. EBITDA is earnings before extraordinary items, interest
expense, income taxes, depreciation and amortization, equity investment results
and LIFO adjustments. EBITDA should not be considered as an alternative measure
of our net income, operating performance, cash flow or liquidity. It is provided
as additional information related to our ability to service debt; however,
conditions may require conservation of funds for other uses. Although we believe
EBITDA enhances a reader's understanding of our financial condition, this
measure, when viewed individually, is not necessarily a better indicator of any
trend as compared to conventionally computed measures (e.g., net sales, net
earnings, net cash flows, etc.). Finally, amounts presented may not be
comparable to similar measures disclosed by other companies.
19
The following table sets forth the calculation of EBITDA (in millions):
16 WEEKS ENDED
APRIL 20, APRIL 21,
2002 2001
------------ ------------
Income before
extraordinary charge $ 25 $ 15
Add back:
Taxes on income 17 12
Depreciation/amortization 46 51
Interest expense 50 58
LIFO adjustments (1) 1
------------ ------------
EBITDA $ 137 $ 137(1)
============ ============
(1) Includes $27 million generated in the first quarter of 2001 by our divested
conventional retail stores.
In our opinion, EBITDA is the best starting point when evaluating our ability to
service debt.
20
RESULTS OF OPERATIONS
Set forth in the following table is information regarding our net sales and
certain components of earnings expressed as a percent of sales which are
referred to in the accompanying discussion:
APRIL 20, APRIL 21,
FOR THE 16 WEEKS ENDED 2002 2001
---------------------- ------------ ------------
Net sales 100.00% 100.00%
Gross margin 7.25 8.85
Less:
Selling and administrative 5.44 7.67
Interest expense 1.08 1.39
Interest income and other (0.15) (0.22)
Impairment/restructuring credit -- (0.65)
------------ ------------
Total expenses 6.37 8.19
------------ ------------
Income before taxes and extraordinary charge 0.88 0.66
Taxes on income 0.35 0.29
------------ ------------
Income before extraordinary charge 0.53 0.37
Extraordinary charge from early retirement
of debt, net of taxes -- (0.08)
------------ ------------
Net income 0.53% 0.29%
============ ============
Included in amounts reported under generally accepted accounting principles
(GAAP) for 2001 are charges (credits) related to our strategic plan and certain
other unusual items that affect the year-to-year comparisons of operating
results. 2002 amounts are reported in accordance with GAAP. The comparisons
below are shown on a GAAP vs. GAAP basis.
NET SALES.
Net sales for the first quarter (16 weeks) of 2002 increased by $549 million, or
13.3%, to $4.7 billion from the same period in 2001.
Net sales for the distribution segment increased by 22.0% for the first quarter
of 2002. The net growth in 2002 was mainly a result of increased activity with
Kmart, our largest customer. Kmart accounted for 23% and 10% of our total net
sales during the first quarter of 2002 and 2001, respectively. Additionally,
growth in distribution sales from a wide variety of new-channel and conventional
customers attributed to the increased first quarter sales. New-channel
customers, including convenience stores, supercenters, limited assortment
stores, drug stores, and self-distributing chains, are an important part of our
strategic growth plan and collectively represent approximately one-half of our
distribution customer sales base.
Retail segment sales for the first quarter of 2002 decreased 20.7%. The decrease
in sales was anticipated due to the disposition of 97 non-strategic conventional
retail stores in the first two quarters of 2001 in order to increase focus on
our price impact retail stores. First quarter sales in our continuing price
impact retail operations increased 24.7% over 2001. Comparable store sales for
the continuing operations were flat for the quarter.
21
GROSS MARGIN.
Gross margin for the first quarter of 2002 decreased as a percentage of net
sales to 7.25% from 8.85% for the same period in 2001. The decrease in gross
margin rate was an expected result of the change in sales mix. The sales of the
distribution segment represent a larger portion of total company sales than the
retail segment and the distribution segment has lower margins as a percentage of
sales versus the retail segment.
For the distribution segment, gross margin as a percentage of gross distribution
sales declined by 42 basis points for the first quarter of 2002, compared to the
same period in 2001. This reflects the increase in Kmart business, which is
lower margin, offset by the benefits of centralizing procurement. For the retail
segment, gross margin as a percentage of net retail sales decreased for the
first quarter of 2002 by 96 basis points, compared to the same period in 2001.
As expected, the decreasing margin reflects our transition out of non-strategic
conventional retail and into price impact retail which has lower shelf prices
and gross margins but also lower operating costs.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses for the first quarter of 2002 decreased as a
percentage of net sales to 5.44% for 2002 from 7.67% in 2001. The sales of the
distribution segment represent a larger portion of total company sales than the
retail segment, and the distribution segment has lower operating expenses as a
percentage of sales than the retail segment.
For the distribution segment, selling and administrative expenses as a
percentage of gross sales improved for the first quarter of 2002 by 53 basis
points, compared to the same period in 2001, due to leveraging the effect of
sales growth and company-wide cost savings initiatives. For the retail segment,
selling and administrative expenses as a percentage of retail sales also
improved for the first quarter of 2002 by 100 basis points, compared to the same
period in 2001, due to our shift in focus from conventional retail to price
impact retail, a format that has lower operating expense levels than
conventional retail.
OPERATING EARNINGS.
For distribution and retail segments, we measure operating earnings as sales
less cost of sales less selling and administrative expenses. The change in
operating earnings is a combination of the explanations included in net sales,
gross margin and selling and administrative expenses described above.
Operating earnings as a percentage of net sales for the first quarter of 2002
were 1.81%, up from 1.18% for the same period in 2001. Operating earnings for
the distribution segment as a percentage of net sales increased to 3.44% from
3.32% in 2001. Retail segment operating earnings as a percentage of net sales
increased to 2.30% from 1.93% in 2001.
22
INTEREST EXPENSE.
Interest expense for the first quarter of 2002 decreased approximately $7
million to $50 million compared to the same period in 2001. This was a result of
lower average interest rates in the first quarter of 2002. The first quarters of
2002 and 2001 included $0.5 million and $3 million, respectively, related to the
early retirement of debt.
INTEREST INCOME AND OTHER.
Interest income of approximately $7 million for the first quarter of 2002 was $2
million lower than the same period of 2001. The reductions were primarily due to
lower interest rates. Interest income in the first quarter of 2002 and 2001
included $0.1 million and $1 million, respectively, related to the early
retirement of debt.
IMPAIRMENT/RESTRUCTURING CHARGE.
The strategic plan was fully implemented by the end of 2001 and thus there was
no charge in the first quarter of 2002. See Note 8 in the notes to the
consolidated condensed financial statements and the Strategic plan charge and
unusual items note below for further discussion regarding the strategic plan.
TAXES ON INCOME.
The effective tax rates for the 16 weeks of 2002 and 2001 were 40.3% and 43.2%
(before extraordinary charge), respectively. These rates take into account
operations activity as well as various permanent and timing differences.
EXTRAORDINARY CHARGE.
We reflected an extraordinary after-tax charge of $3 million ($6 million
pre-tax) in the first quarter of 2001 due to the early retirement of debt.
RECENT DEVELOPMENTS.
In the second quarter of 2002, we announced an expected charge of approximately
$25 million after-tax related to the closure of a full-line distribution center
in Oklahoma City and a general merchandise distribution center in Dallas due to
the Albertson's agreement, along with certain merger and integration costs
associated with the acquisitions of Core-Mark and Head. Approximately one-half
of the charge is expected to be non-cash related costs.
PRIOR YEAR STRATEGIC PLAN CHARGES AND UNUSUAL ITEMS.
The following table shows which income statement captions were affected by our
strategic plan charges and unusual items and reconcile our reported GAAP amounts
to adjusted amounts as discussed in our 10-Q for the first quarter of 2001. The
adjusted amounts are not presentations made in accordance with GAAP and are not
a better indicator of our operating performance.
23
(IN THOUSANDS) ADJUSTMENTS
-------------- ------------------------------
STRATEGIC UNUSUAL
QUARTER 1, 2001 GAAP PLAN ITEMS(1) ADJUSTED
--------------- ------------ ------------ ------------ ------------
Net sales $ 4,137,359 $ 1,661 $ -- $ 4,139,020
Costs and expenses:
Cost of sales 3,771,115 (17,856) -- 3,753,259
Selling and administrative 317,313 (6,028) (2,028) 309,257
Interest expense 57,502 -- (2,833) 54,669
Interest income and other (8,921) -- 1,102 (7,819)
Impairment/restructuring credit (26,859) 26,859 -- --
------------ ------------ ------------ ------------
Total costs and expenses 4,110,150 2,975 (3,759) 4,109,366
------------ ------------ ------------ ------------
Income before taxes $ 27,209 $ (1,314) $ 3,759 $ 29,654
============ ============ ============ ============
(1) Includes net additional interest expense of $1.7 million due to early
retirement of debt ($2.8 million in interest expense and $1.1 million in
interest income and other) and $2.0 million in charges from litigation
settlements (in selling and administrative).
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 anticipate additional
refinancing transactions in 2002 that will result in extraordinary charges. In
2003 these amounts will be reclassed to selling and administrative expense in
accordance with SFAS 145. 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. This SOP provides guidance on the accounting for
and disclosure of amounts due to us from customers included in our accounts and
notes receivable. We do not expect the adoption of these new standards to have a
significant effect on our results of operations or financial position.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on an on-going basis and are based on historical
experience and on various other factors that are believed
24
to be reasonable. Estimates and assumptions include, but are not limited to,
customer receivables, inventories, assets held for sale, fixed asset lives,
intangible assets, income taxes, self-insurance reserves, retirement benefits,
and contingencies and litigation. There have been no significant changes to
these estimates and assumptions since the issuance of our 2001 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended April 20, 2002, our principal source of liquidity
was borrowings under our credit facility. Our principal source of capital,
excluding shareholders' equity, was the issuance of long-term debt in the
capital markets.
NET CASH USED IN OPERATING ACTIVITIES.
Net cash used in operating activities was $43 million for the first quarter
ended April 20, 2002 compared to a $116 million use of cash for the same period
in 2001. The primary use of cash was for working capital.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.
Total investment-related activity resulted in a $49 million use of cash for the
first quarter ended April 20, 2002 compared to a $84 million source of cash in
the same period of 2001. Cash expended for the purchase of property and
equipment totaled $61 million in the first quarter of 2002 compared to $48
million in the same period of 2001. We intend to spend a total of approximately
$200 million on capital programs in 2002, with $150 million for distribution and
$50 million for retail. There were no cash proceeds from the sale of businesses
compared to $111 million in the same period of 2001. The cash expenditures were
partially offset by proceeds from asset sales.
NET CASH PROVIDED BY FINANCING ACTIVITIES.
Net cash generated by financing activities was $342 million for the first
quarter of 2002 compared to $29 million for the same period last year.
On April 15, 2002, we sold $260 million of new 9 7/8% senior notes due 2012. The
net proceeds were placed into a trust to be used to redeem all of the 10 1/2%
senior subordinated notes due 2004, including an amount to cover accrued
interest and the redemption premium. The total placed in trust was approximately
$263 million. The redemption of the 2004 notes will take place in the second
quarter of this year. At the end of the first quarter of 2002, outstanding
borrowings under the credit facility totaled $109 million of term loans, $310
million of revolver loans, and $53 million of letters of credit.
Our principal sources of liquidity and capital are expected to be cash flows
from operating activities, our ability to borrow under our credit facility and
the issuance of new debt and equity securities. In addition, lease financing may
be employed for our distribution facilities, new retail stores and certain
equipment. We believe these sources will be adequate to meet working capital
25
needs, capital expenditures and other capital needs in the normal course of
business for the next 12 months. As part of our growth strategy, we will need to
raise additional funds through public or private debt or equity financings in
order to complete pending acquisitions, acquire additional retail stores or
third party businesses or to expand our services more rapidly.
CONTINGENCIES
In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities when we determine that a material loss is
"probable" and either "quantifiable" or "reasonably estimable." Additionally, we
disclose material loss contingencies when the likelihood of a material loss is
deemed to be greater than "remote" but less than "probable."
In the ordinary course of our business, various legal actions, governmental
proceedings and other claims are pending or threatened or may be instituted or
asserted in the future against us and our subsidiaries. Litigation is subject to
many uncertainties, the outcome of individual litigated matters is
unpredictable, and it is reasonably possible that some of the matters could be
decided unfavorably to us or the subsidiary involved. Although the amount of
such liability cannot be ascertained, we believe that any resulting liability
should not materially affect the consolidated financial position or results of
operations for us and our subsidiaries. See Note 6 in the notes to the
consolidated financial statements for further discussion.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements regarding future events and the
future financial performance of Fleming. 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: the ability to obtain financing or obtain it on acceptable terms;
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; failure to consummate the
Albertson's or Core-Mark transactions; 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; 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. We undertake no obligation
to update forward-looking statements to reflect developments or information
obtained after the date hereof.
26
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.
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, vendors, owners or creditors of financially troubled or failed
customers, suppliers, landlords and lessees, employees, insurance carriers, and
tax assessors. See Note 6 in the notes to the consolidated financial statements
for further discussion.
In addition, our facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of certain materials. In conformity
with these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection Agency
and by similar state agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
or similar state laws, as applicable, with respect to EPA-designated Superfund
sites. While liability under CERCLA for remediation at these sites is generally
joint and several with other responsible parties, we believe that, to the extent
we are ultimately determined to be liable for the expense of remediation at any
site, such liability will not result in a material adverse effect on our
consolidated financial position or results of operations. We are committed to
maintaining the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws, regulations and
orders.
27
ITEM 2. CHANGES IN SECURITIES
In connection with several exercises of a common stock warrant, Merrill Lynch
purchased in private transactions a total of 45,000 shares of common stock from
us. The exercise dates are as follows: January 31, 2002, February 28, 2002 and
March 29, 2002. Merrill Lynch paid us a total of approximately $427,000 to
purchase these shares. These shares of common stock were sold pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The company held its annual meeting of shareholders on May 14, 2002. Matters
voted on were as follows:
Election of Directors - Herbert M. Baum, Kenneth M. Duberstein, Archie R. Dykes,
Carol B. Hallett, Robert S. Hamada, Mark S. Hansen and Alice M. Peterson were
each elected to the Board for a term of one year.
Ratification of Independent Auditors - Shareholders ratified the appointment of
Deloitte & Touche LLP as independent auditors for 2002.
2002 Stock Incentive Plan - Shareholders approved the proposed 2002 Stock
Incentive Plan.
2002 Associate Stock Purchase Plan - Shareholders approved the proposed 2002
Associate Stock Purchase Plan.
2002 Aim High Incentive Plan - Shareholders approved the proposed 2002 Aim High
Incentive Plan.
2002 Aim High Plus Incentive Plan - Shareholders approved the proposed 2002 Aim
High Plus Incentive Plan.
28
The number of votes cast were as follows (votes in thousands):
FOR WITHHELD
--- --------
Election of Directors
Herbert M. Baum 38,462 377
Kenneth M. Duberstein 38,462 376
Archie R. Dykes 38,471 367
Carol B. Hallett 38,470 368
Robert S. Hamada 38,470 368
Mark S. Hansen 38,468 370
Alice M. Peterson 38,473 365
FOR AGAINST ABSTAIN
--- ------- -------
Ratification of Independent Auditors 37,863 902 73
2002 Stock Incentive Plan 21,174 10,573 572
2002 Associate Stock Purchase Plan 28,780 3,004 536
2002 Aim High Incentive Plan 29,359 2,381 580
2002 Aim High Plus Incentive Plan 29,041 2,697 582
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER
2.1 Agreement and Plan of Merger, dated as of April 23,
2002, among Fleming, Platform Corporation, Core-Mark
International, Inc., and the stockholders of
Core-Mark International, Inc., incorporated by
reference to Exhibit 2.1 to Form 8-K filed April 24,
2002
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
4.20 Indenture, dated as of April 15, 2002, among Fleming,
the Subsidiary Guarantors named therein and
Manufacturers and Traders Trust Company, as Trustee,
regarding the 9 7/8% Senior Subordinated Notes Due
2012
4.21 Registration Rights Agreement, dated as of April 15,
2002, among Fleming, the Subsidiary Guarantors named
therein and Initial Purchasers named therein
15 Letter from Independent Accountants as to Unaudited
Interim Financial Information
(b) Reports on Form 8-K:
On April 2, 2002, we filed a Form 8-K which announced the intention to offer for
sale in a private placement $260 million of senior subordinated notes due 2012,
the net proceeds of which were to be used to redeem $250 million of outstanding
senior subordinated notes due 2004.
On April 16, 2002, we filed a Form 8-K which announced the issuance of $260
million of senior subordinated notes due May 1, 2012 in a private placement, the
net proceeds of which are currently in escrow pending the redemption of the $250
million of outstanding senior subordinated notes due 2004.
30
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.
May 17, 2002 /s/ MARK D. SHAPIRO
----------------------------------------
Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Duly Authorized Officer of Registrant
and Chief Accounting Officer)
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of April 23,
2002, among Fleming, Platform Corporation, Core-Mark
International, Inc., and the stockholders of Core-Mark
International, Inc., incorporated by reference to
Exhibit 2.1 to Form 8-K filed April 24, 2002
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
4.20 Indenture, dated as of April 15, 2002, among Fleming,
the Subsidiary Guarantors named therein and
Manufacturers and Traders Trust Company, as Trustee,
regarding the 9 7/8% Senior Subordinated Notes Due 2012
4.21 Registration Rights Agreement, dated as of April 15,
2002, among Fleming, the Subsidiary Guarantors named
therein and Initial Purchasers named therein
15 Letter from Independent Accountants as to Unaudited
Interim Financial Information