-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BFBazCNf2yeP3P2w4RVggvy+qlmNBq9EGYy3x1nzTtrFn0BUjgTvmq1Zwuwd20qX +mICC++YxLdYB0fnx7E/vQ== /in/edgar/work/20000818/0000909334-00-000108/0000909334-00-000108.txt : 20000922 0000909334-00-000108.hdr.sgml : 20000922 ACCESSION NUMBER: 0000909334-00-000108 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000708 FILED AS OF DATE: 20000818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEMING COMPANIES INC /OK/ CENTRAL INDEX KEY: 0000352949 STANDARD INDUSTRIAL CLASSIFICATION: [5141 ] IRS NUMBER: 480222760 STATE OF INCORPORATION: OK FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08140 FILM NUMBER: 705258 BUSINESS ADDRESS: STREET 1: 6301 WATERFORD BLVD STREET 2: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73126 BUSINESS PHONE: 4058407200 MAIL ADDRESS: STREET 1: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73216-0647 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 8, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8140 FLEMING COMPANIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 48-0222760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1945 Lakepointe Drive, Box 299013 Lewisville, Texas 75029 (Address of principal executive offices) (Zip Code) (972) 906-8000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) 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 The number of shares outstanding of each of the issuer's classes of common stock, as of August 4, 2000 is as follows: Class Shares Outstanding Common stock, $2.50 par value 39,593,000 INDEX Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Operations - 12 Weeks Ended July 8, 2000, and July 10, 1999 Consolidated Condensed Statements of Operations - 28 Weeks Ended July 8, 2000, and July 10, 1999 Consolidated Condensed Balance Sheets - July 8, 2000, and December 25, 1999 Consolidated Condensed Statements of Cash Flows - 28 Weeks Ended July 8, 2000, and July 10, 1999 Notes to Consolidated Condensed Financial Statements Independent Accountants' Review Report Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II. OTHER INFORMATION: Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Operations For the 12 weeks ended July 8, 2000, and July 10, 1999 (In thousands, except per share amounts)
============================================================================== 2000 1999 - ------------------------------------------------------------------------------ Net sales $3,386,053 $3,349,362 Costs and expenses: Cost of sales 3,094,799 3,022,154 Selling and administrative 261,374 286,565 Interest expense 38,447 38,647 Interest income (9,340) (6,894) Equity investment results 1,694 2,415 Impairment/restructuring charge 21,013 6,169 - ------------------------------------------------------------------------------ Total costs and expenses 3,407,987 3,349,056 - ------------------------------------------------------------------------------ Income (loss) before taxes (21,934) 306 Taxes on income (loss) (8,585) 2,644 - ------------------------------------------------------------------------------ Net loss $ (13,349) $ (2,338) ============================================================================== Basic and diluted net loss per share $(.35) $(.06) Dividends paid per share $.02 $.02 Weighted average shares outstanding: Basic 38,576 38,204 Diluted 38,576 38,204 ==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Operations For the 28 weeks ended July 8, 2000, and July 10, 1999 (In thousands, except per share amounts)
============================================================================== 2000 1999 - ------------------------------------------------------------------------------ Net sales $7,830,857 $7,814,608 Costs and expenses: Cost of sales 7,122,929 7,059,022 Selling and administrative 633,681 663,560 Interest expense 91,548 90,253 Interest income (18,845) (16,244) Equity investment results 3,585 5,971 Impairment/restructuring charge 63,158 43,205 - ------------------------------------------------------------------------------ Total costs and expenses 7,896,056 7,845,767 - ------------------------------------------------------------------------------ Loss before taxes (65,199) (31,159) Taxes on loss (25,977) (4,580) - ------------------------------------------------------------------------------ Net loss $ (39,222) $ (26,579) ============================================================================== Basic and diluted net loss per share $(1.02) $(.70) Dividends paid per share $.04 $.04 Weighted average shares outstanding: Basic 38,541 38,169 Diluted 38,541 38,169 ==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Balance Sheets (In thousands)
============================================================================== July 8, December 25, Assets 2000 1999 - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 10,022 $ 6,683 Receivables 462,649 496,159 Inventories 860,514 997,805 Other current assets 193,501 228,103 - ------------------------------------------------------------------------------ Total current assets 1,526,686 1,728,750 Investments and notes receivable 91,324 108,895 Investment in direct financing leases 116,076 126,309 Property and equipment 1,564,105 1,539,465 Less accumulated depreciation and amortization (726,595) (701,289) - ------------------------------------------------------------------------------ Net property and equipment 837,510 838,176 Deferred income taxes 30,378 54,754 Other assets 142,932 150,214 Goodwill 555,047 566,120 - ------------------------------------------------------------------------------ Total assets $3,299,953 $3,573,218 ============================================================================== Liabilities and Shareholders' Equity - ------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 791,622 $ 981,219 Current maturities of long-term debt 67,905 70,905 Current obligations under capital leases 21,692 21,375 Other current liabilities 199,958 210,220 - ------------------------------------------------------------------------------ Total current liabilities 1,081,177 1,283,719 Long-term debt 1,191,336 1,234,185 Long-term obligations under capital leases 378,783 367,960 Other liabilities 123,437 126,652 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share 98,973 97,141 Capital in excess of par value 513,355 511,447 Accumulated deficit (61,548) (22,326) Accumulated other comprehensive income: Additional minimum pension liability (25,560) (25,560) - ------------------------------------------------------------------------------ Accumulated other comprehensive income (25,560) (25,560) - ------------------------------------------------------------------------------ Total shareholders' equity 525,220 560,702 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $3,299,953 $3,573,218 ==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Cash Flows For the 28 weeks ended July 8, 2000, and July 10, 1999 (In thousands)
============================================================================== 2000 1999 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $ (39,222) $ (26,579) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 94,622 83,876 Credit losses 12,786 12,981 Deferred income taxes 21,911 5,427 Equity investment results 3,585 5,971 Impairment/restructuring and related charges (not classified elsewhere) 102,636 60,909 Cash payments on impairment/restructuring and related charges (87,004) (32,104) Change in assets and liabilities, excluding effect of acquisitions: Receivables 22,130 45,847 Inventories 121,604 128,881 Accounts payable (189,597) (68,872) Other assets and liabilities (11,191) (46,504) Other adjustments, net 222 (1,126) - ------------------------------------------------------------------------------ Net cash provided by operating activities 52,482 168,707 - ------------------------------------------------------------------------------ Cash flows from investing activities: Collections on notes receivable 17,838 19,764 Notes receivable funded (12,193) (23,445) Purchase of property and equipment (62,431) (82,504) Proceeds from sale of property and equipment 11,637 6,089 Investments in customers (1,512) (8,037) Proceeds from sale of investment 2,693 2,203 Businesses acquired - (78,075) Proceeds from sale of businesses 41,230 7,496 Other investing activities 9,158 2,441 - ------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 6,420 (154,068) - ------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term borrowings 60,000 101,000 Principal payments on long-term debt (105,849) (106,461) Principal payments on capital lease obligations (11,698) (13,107) Sale of common stock under incentive stock and stock ownership plans 3,535 3,130 Dividends paid (1,551) (1,552) Other financing activities - (31) - ------------------------------------------------------------------------------ Net cash used in financing activities (55,563) (17,021) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 3,339 (2,382) Cash and cash equivalents, beginning of period 6,683 5,967 - ------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 10,022 $ 3,585 ============================================================================== Supplemental information: Cash paid for interest $ 90,792 $ 89,572 Cash paid (refunded) for taxes $ (62,561) $ 8,730 ==============================================================================
Fleming Companies,Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Notes to Consolidated Condensed Financial Statements (See independent accountants' review report) 1. The consolidated condensed balance sheet as of July 8, 2000, the consolidated condensed statements of operations for the 12 weeks ended July 8, 2000 and July 10, 1999, and the consolidated condensed statements of operations and cash flows for the 28 weeks ended July 8, 2000 and July 10, 1999 have been prepared by the company, without audit. In the opinion of management, all adjustments necessary to present fairly the company's financial position at July 8, 2000, 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 loss per share are computed based on net loss divided by weighted average shares as appropriate for each calculation. The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform to current year classifications. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company's 1999 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 $60 million at July 8, 2000 (none of which was recorded in assets held for sale which is included in other current assets) and $54 million at December 25, 1999 ($4 million of which was recorded in assets held for sale which is included in other current assets). 4. Sales and operating earnings for the company's distribution and retail segments are presented below.
============================================================================== For the 12 weeks ended July 8, July 10, ($ in millions) 2000 1999 - ------------------------------------------------------------------------------ Sales: Distribution $3,026 $2,983 Intersegment elimination (401) (507) - ------------------------------------------------------------------------------ Net distribution 2,625 2,476 Retail 761 874 - ------------------------------------------------------------------------------ Total sales $3,386 $3,350 ============================================================================== Operating earnings: Distribution $ 61 $ 62 Retail 17 4 Support services (48) (25) - ------------------------------------------------------------------------------ Total operating earnings 30 41 Interest expense (38) (39) Interest income 9 6 Equity investment results (2) (2) Impairment/restructuring charge (21) (6) - ------------------------------------------------------------------------------ Loss before taxes $(22) $ - ==============================================================================
============================================================================== For the 28 weeks ended July 8, July 10, ($ in millions) 2000 1999 - ------------------------------------------------------------------------------ Sales: Distribution $6,993 $6,985 Intersegment elimination (984) (1,182) - ------------------------------------------------------------------------------ Net distribution 6,009 5,803 Retail 1,822 2,012 - ------------------------------------------------------------------------------ Total sales $7,831 $7,815 ============================================================================== Operating earnings: Distribution $145 $145 Retail 29 17 Support services (100) (70) - ------------------------------------------------------------------------------ Total operating earnings 74 92 Interest expense (91) (90) Interest income 19 16 Equity investment results (4) (6) Impairment/restructuring charge (63) (43) - ------------------------------------------------------------------------------ Loss before taxes $ (65) $ (31) ==============================================================================
General support services expenses are not allocated to distribution and retail segments. The transfer pricing between segments is at cost. 5. The comprehensive loss in both years was comprised only of the reported net loss. 6. In accordance with applicable accounting standards, the company records a charge reflecting contingent liabilities (including those associated with litigation matters) when management determines that a material loss is "probable" and either "quantifiable" or "reasonably estimable." Additionally, the company discloses material loss contingencies when the likelihood of a material loss is deemed to be greater than "remote" but less than "probable." Set forth below is information regarding certain material loss contingencies: Class Action Suits. In 1996, the company and certain of its present and former officers and directors were named as defendants in nine purported class action suits filed by certain stockholders and one purported class action suit filed by two noteholders. All cases were filed in the United States District Court for the Western District of Oklahoma. In 1997, the court consolidated the stockholder cases (the noteholder case was also consolidated, but only for pre-trial purposes). The plaintiffs in the consolidated cases sought undetermined but significant damages, and asserted liability for the company's alleged failure to properly account for and disclose the contingent liability created by the David's litigation and by the company's alleged "deceptive business practices." The plaintiffs claimed that these alleged practices led to the David's litigation and to other material contingent liabilities, caused the company to change its manner of doing business at great cost and loss of profit, and materially inflated the trading price of the company's common stock. During 1998 the noteholder case complaint was dismissed and during 1999 the consolidated stockholder case complaint was also dismissed, each without prejudice. The court gave the plaintiffs the opportunity to restate their claims in each case, and they did so with amended complaints. On February 4, 2000 the stockholder case was dismissed with prejudice by the district court. The stockholder plaintiffs filed an appeal on March 3, 2000. The motion to dismiss in the noteholder case was decided August 1, 2000. The court again dismissed the count alleging violation of the Securities Exchange Act of 1934, but in this ruling determined that plaintiffs have stated a claim under the Securities Act of 1933, Section 11. In 1997, the company won a declaratory judgment against certain of its insurance carriers regarding policies issued to Fleming for the benefit of its officers and directors ("D&O policies"). On motion for summary judgment, the court ruled that the company's exposure, if any, under the class action suits is covered by D&O policies written by the insurance carriers (aggregating $60 million in coverage) and that the "larger settlement rule" will be applicable to the case. According to the trial court, under the larger settlement rule a D&O insurer is liable for the entire amount of coverage available under a policy even if there is some overlap in the liability created by the insured individuals and the uninsured corporation. If a corporation's liability is increased by uninsured parties beyond that of the insured individuals, then that portion of the liability is the sole obligation of the corporation. The court also held that allocation is not available to the insurance carriers as an affirmative defense. The insurance carriers appealed. In 1999, the appellate court affirmed the decision that the class actions were covered by D&O policies aggregating $60 million in coverage but reversed the trial court's decision as to allocation as being premature. The company intends to vigorously defend against the claims in these class action suits and pursue the issue of insurance discussed above, but is currently unable to predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on the financial condition and prospects of the company. Don's United Super (and related cases). The company and two retired executives have been named in a suit filed in 1998 in the United States District Court for the Western District of Missouri by several current and former customers of the company (Don's United Super, et al. v. Fleming, et al.). The eighteen plaintiffs operate retail grocery stores in the St. Joseph and Kansas City metropolitan areas. The plaintiffs in this suit allege product overcharges, breach of contract, breach of fiduciary duty, misrepresentation, fraud, and RICO violations, and they are seeking actual, punitive and treble damages, as well as a declaration that certain contracts are voidable at the option of the plaintiffs. During the fourth quarter of 1999, plaintiffs produced reports of their expert witnesses calculating alleged actual damages of approximately $112 million. During the first quarter of 2000, plaintiffs revised a portion of these damage calculations, and although plaintiffs have not finalized these calculations, it appears that their revised damage calculations will result in a claim of approximately $120 million, exclusive of any punitive or treble damages. On May 2, 2000, the court granted partial summary judgment to the defendants, holding that plaintiffs' breach of contract claims that relate to events that occurred more than four (4) years before the filing of the litigation are barred by limitations, and that plaintiffs' fraud claims based upon fraudulent inducement that occurred more than fifteen (15) years before the filing of the lawsuit likewise are barred. The company is in the process of evaluating what impact, if any, these rulings are likely to have on the damage calculations of the plaintiffs' expert witnesses. In October 1998, the company and the same two retired executives were named in a suit filed by another group of retailers in the same court as the Don's suit. (Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, sixteen plaintiffs are asserting claims in the Coddington suit. All of the plaintiffs except for one have arbitration agreements with Fleming. The plaintiffs assert claims virtually identical to those set forth in the Don's suit, and although plaintiffs have not yet quantified the damages in their pleadings, it is anticipated that they will claim actual damages approximating the damages claimed in the Don's suit. In July 1999, the court ordered two of the plaintiffs in the Coddington case to arbitration, and otherwise denied arbitration as to the remaining plaintiffs. The company has appealed the district court's denial of arbitration to the Eighth Circuit Court of Appeals. The two plaintiffs that were ordered to arbitration have filed motions asking the district court to reconsider the arbitration ruling. Two other cases had been filed before the Don's case in the same district court (R&D Foods, Inc., et al. v. Fleming, et al.; and Robandee United Super, Inc., et al. v. Fleming, et al.) by ten customers, some of whom are also plaintiffs in the Don's case. The earlier two cases, which principally seek an accounting of the company's expenditure of certain joint advertising funds, have been consolidated. All procein these cases have been stayed pending the arbitration of the claims of those plaintiffs who have arbitration agreements with the company. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted the company's motion and ordered the related Missouri cases and the Storehouse Markets case (described below) transferred to the Western District of Missouri for coordinated or consolidated pretrial proceedings. The company intends to vigorously defend against the claims in these related cases but is currently unable to predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on the financial condition and prospects of the company. Storehouse Markets. In 1998, the company and one of its former division officers were named in a suit filed in the United States District Court for the District of Utah by several current and former customers of the company (Storehouse Markets, Inc., et al. v. Fleming Companies, Inc., et al.). The plaintiffs have alleged product overcharges, fraudulent misrepresentation, fraudulent nondisclosure and concealment, breach of contract, breach of duty of good faith and fair dealing, and RICO violations, and they are seeking actual, punitive and treble damages. The plaintiffs have made these claims on behalf of a class that would purportedly include current and former customers of Fleming's Salt Lake City division covering a four state region. On June 12, 2000, the court entered an order certifying the case as a class action. On July 11, 2000, the United States Court of Appeals for the Tenth Circuit granted the company's request for permission to appeal the class certification order, and the company is pursuing that appeal. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted the company's motion and ordered the related Missouri cases (described above) and the Storehouse Markets case transferred to the Western District of Missouri for coordinated or consolidated pretrial proceedings. Damages have not been quantified by the plaintiffs; however, the company anticipates that substantial damages will be claimed. The company intends to vigorously defend against these claims but is currently unable to predict the outcome of the case. An unfavorable outcome could have a material adverse effect on the financial condition and prospects of the company. Allen's IGA. On August 1, 2000, the United States District Court for the Eastern District of Oklahoma entered an order dismissing with prejudice Allen's IGA, Inc., et al. v. Fleming Companies, Inc., et al. That lawsuit had been filed by several former customers against the company and two of its former executives, alleging product overcharges, fraud, breach of contract, negligence, RICO violations, and seeking actual, punitive and treble damages, an accounting, and other equitable relief. Damages had not been quantified by the plaintiffs; however, the company anticipated that substantial damages would be claimed and had previously disclosed that an unfavorable outcome in that case could have had a material adverse effect on the financial condition and prospects of the company. The case was dismissed pursuant to a settlement agreement that contains a confidentiality provision. In connection with the settlement, the company accrued an amount in the second quarter of 2000 that was not material to its financial condition or results of operations. Subsequent to the end of the second quarter the plaintiffs were paid. Other. The company's 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, the company has a comprehensive program for testing, removal, replacement or repair of its underground fuel storage tanks and for site remediation where necessary. The company has established reserves that it believes will be sufficient to satisfy the anticipated costs of all known remediation requirements. The company and others have been designated by the U.S. Environmental Protection Agency ("EPA") and by similar state agencies as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state laws, as applicable, with respect to EPA-designated Superfund sites. While liability under CERCLA for remediation at such sites is generally joint and several with other responsible parties, the company believes that, to the extent it is ultimately determined to be liable for the expense of remediation at any site, such liability will not result in a material adverse effect on its consolidated financial position or results of operations. The company is committed to maintaining the environment and protecting natural resources and human health and to achieving full compliance with all applicable laws, regulations and orders. The company is a party to various other litigation and contingent loss situations arising in the ordinary course of its business including: disputes with customers and former customers; disputes with owners and former owners of financially troubled or failed customers; disputes with employees and former employees regarding labor conditions, wages, workers' compensation matters and alleged discriminatory practices; disputes with insurance carriers; tax assessments and other matters, some of which are for substantial amounts. However, the company does not believe any such action will result in a material adverse effect on the company. 7. Certain indebtedness is guaranteed by all direct and indirect subsidiaries of the company (except for certain inconsequential subsidiaries), all of which are wholly owned. The guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of the subsidiary guarantors to transfer funds to the company in the form of cash dividends, loans or advances. Full financial statements for the subsidiary guarantors are not presented herein because management does not believe such information would be material. The following summarized financial information, which includes allocations of material corporate-related expenses, for the combined subsidiary guarantors may not necessarily be indicative of the results of operations or financial position had the subsidiary guarantors been operated as independent entities. July 8, July 10, (In millions) 2000 1999 -------------------------------------------------- Current assets $295 $39 Noncurrent assets $480 $125 Current liabilities $151 $30 Noncurrent liabilities $158 $35 28 weeks ended -------------------------- July 8, July 10, (In millions) 2000 1999 ------------------------------------------------- Net sales $2,022 $253 Costs and expenses $2,036 $255 Net loss $(8) $(1) 8. The accompanying operating statements include the following: 12 weeks ended ------------------------ July 8, July 10, (In thousands) 2000 1999 ------------------------------------------------------ Depreciation and amortization (includes amounts below) $39,377 $37,559 Amortized costs in interest expense $1,122 $1,125 Excess depreciation and amortization due to the strategic plan $1,917 $- 28 weeks ended ------------------------ July 8, July 10, (In thousands) 2000 1999 ------------------------------------------------------ Depreciation and amortization (includes amounts below) $94,622 $83,876 Amortized costs in interest expense $2,618 $2,623 Excess depreciation and amortization due to the strategic plan $6,312 $- 9. In December 1998, the company announced the implementation of a strategic plan designed to improve the competitiveness of the retailers the company serves and improve the company's performance by building stronger operations that can better support long-term growth. The four major initiatives of the strategic plan are to consolidate wholesale operations, grow wholesale sales, improve retail performance, and reduce overhead and operating expenses. On April 25, 2000, the company announced the evaluation of strategic alternatives for the remaining conventional retail chains, including the potential sale of these operations. The evaluation is nearing conclusion and an announcement of the results should be made by the end of the third quarter. The company expects that the evaluation will result in certain stores converted to the Food-4-Less format, certain chains being retained or sold, and the sale of a significant number of stores in other chains with any residual stores being closed. The total pre-tax charge of the strategic plan is presently estimated at $959 million ($267 million cash and $692 million non- cash). The plan originally announced in December 1998 had an estimated pre-tax charge totaling $782 million. The increase is due primarily to closing the Peoria, York and Philadelphia divisions ($88 million), updating impairment amounts on the five retail chains in the original plan ($18 million), the divestiture or closing of the two chains not in the original plan ($38 million), decreasing costs related to a scheduled closing no longer planned ($18 million), and other costs including those related to the company's low cost pursuit program and centralization of administrative functions ($51 million). Updating the impairment amounts was necessary as decisions to close additional operating units were made. Additionally, sales negotiations provided more current information regarding the fair value on certain chains. There were changes in the list of operating units to be divested or closed since they no longer fit into the current business strategy. Also, the cost of severance, relocation and other periodic expenses related to the company's low cost pursuit program and centralization of administrative functions has been accrued as incurred. The pre-tax charge recorded to-date is $915 million ($46 million in the second quarter of 2000, $64 million in the first quarter of 2000, $137 million in 1999, and $668 million recorded in 1998). After tax, the expense for the first two quarters of 2000 was $65 million or $1.69 per share ($27 million or $.71 per share for quarter two and $38 million or $.98 per share for quarter one). The $44 million of costs relating to the strategic plan not yet charged against income will primarily be recorded throughout 2000 at the time such costs are accruable. The $46 million charge in the second quarter of 2000 was included on several lines of the Consolidated Condensed Statements of Operations as follows: $1 million was included in net sales related to rent income impairment due to division closings; $22 million was included in cost of sales and was primarily related to inventory valuation adjustments, moving and training costs, and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $2 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $21 million was included in the Impairment/ restructuring charge line. The second quarter charge consisted of the following components: o Impairment of assets of $1 million. The impairment related to other long-lived assets. o Restructuring charges of $20 million. The restructuring charges consisted primarily of severance related expenses due to the consolidation of certain administrative departments announced during the second quarter of 2000. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $25 million. These costs consisted primarily of inventory valuation adjustments, additional depreciation and amortization on assets to be disposed of but not yet held for sale, disposition related costs recognized on a periodic basis and other costs. The charge for the second quarter of 2000 relates to the company's segments as follows: $20 million relates to the distribution segment and $10 million relates to the retail segment with the balance relating to support services expenses. The $110 million charge in the first two quarters of 2000 was included on several lines of the Consolidated Condensed Statements of Operations as follows: $2 million was included in net sales related primarily to rent income impairment due to division closings; $35 million was included in cost of sales and was primarily related to inventory valuation adjustments, moving and training costs, and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $10 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $63 million was included in the Impairment/restructuring charge line. The charge for the first two quarters consisted of the following components: o Impairment of assets of $3 million. The impairment related to other long-lived assets. o Restructuring charges of $61 million. The restructuring charges consisted of severance related expenses and pension withdrawal liabilities for the closings of York and Philadelphia which were announced during the first quarter of 2000 as part of an effort to grow in the northeast by consolidating distribution operations and expanding the Maryland facility. Additionally, the charge consisted of severance related expenses due to the consolidation of certain administrative departments announced during the second quarter of 2000. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $46 million. These costs consisted primarily of inventory valuation adjustments, additional depreciation and amortization on assets to be disposed of but not yet held for sale, disposition related costs recognized on a periodic basis and other costs. The charge for the first two quarters of 2000 relates to the company's segments as follows: $57 million relates to the distribution segment and $27 million relates to the retail segment with the balance relating to support services expenses. The charges related to workforce reductions are as follows: ($'s in thousands) Amount Headcount ------------------ ------ --------- 1998 Ending Liability $21,983 1,260 1999 Activity: Charge 12,029 1,350 Terminations (24,410) (1,950) ------- ------ Ending Liability 9,602 660 2000 Quarter 1 Activity: Charge 25,509 1,020 Terminations (4,250) (560) ------- ------ Ending Liability 30,861 1,120 2000 Quarter 2 Activity: Charge 3,799 130 Terminations (7,807) (670) ------- ------ Ending Liability $26,853 580 ======= ====== The breakdown of the 1,150 headcount reduction recorded for the first two quarters of 2000 is: 990 from the distribution segment; 130 from the retail segment; and 30 from support services. Additionally, the strategic plan includes charges related to lease obligations which will be utilized as operating units or retail stores close, but ultimately reduced over remaining lease terms ranging from 1 to 20 years. The charges and utilization have been recorded to-date as follows: ($'s in thousands) Amount ------------------ ------ 1998 Ending Liability $27,716 1999 Activity: Charge 15,074 Utilized (10,281) ------- Ending Liability 32,509 2000 Quarter 1 Activity: Charge 9,062 Utilized (9,957) ------- Ending Liability 31,614 2000 Quarter 2 Activity: Charge 1,903 Utilized (6,376) ------- Ending Liability $27,141 ======= Assets held for sale included in other current assets at the end of the second quarter of 2000 were approximately $58 million, consisting of $26 million of distribution operating units and $32 million of retail stores. The pre-tax charge of the strategic plan in the second quarter of 1999 totaled $16 million. After tax, the expense for the second quarter of 1999 was $12 million or $.31 per share. The $16 million charge was included on several lines of the Consolidated Condensed Statements of Operations for the second quarter of 1999 as follows: $7 million was included in cost of sales and was primarily related to inventory valuation adjustments; $3 million was included in selling and administrative expense as disposition related costs recognized on a periodic basis; and the remaining $6 million was included in the Impairment/restructuring charge line. The $16 million charge consisted of the following components: o Impairment of assets of $1 million. o Restructuring charges of $5 million. The restructuring charges consisted of severance related expenses to sell or close the Boogaarts retail chain. The restructuring charges also consisted of professional fees incurred related to the restructuring process. o Other disposition and related costs of $10 million. These costs consist primarily of inventory valuation adjustments, disposition related costs recognized on a periodic basis and other costs. The $16 million charge relates to the company's segments as follows: $4 million relates to the distribution segment and $7 million relates to the retail segment with the balance relating to support services expenses. The pre-tax charge of the strategic plan for the first two quarters of 1999 totaled $62 million. After tax, the expense for the first two quarters of 1999 was $44 million or $1.15 per share. The $62 million charge was included on several lines of the Consolidated Condensed Statements of Operations for the second quarter of 1999 as follows: $13 million was included in cost of sales and was primarily related to inventory valuation adjustments; $6 million was included in selling and administrative expense as disposition related costs recognized on a periodic basis; and the remaining $43 million was included in the Impairment/restructuring charge line. The $62 million charge consisted of the following components: o Impairment of assets of $25 million. The impairment components were $22 million for goodwill and $3 million for other long-lived assets. All of the goodwill charge of $22 million was related to the 1994 "Scrivner" acquisition. o Restructuring charges of $18 million. The restructuring charges consisted of severance related expenses and pension withdrawal liabilities for the Peoria distribution operating unit and Consumers and Boogaarts retail chains. The restructuring charges also consisted of operating lease liabilities for the Peoria distribution operating unit and professional fees incurred related to the restructuring process. o Other disposition and related costs of $19 million. These costs consist primarily of inventory valuation adjustments, disposition related costs recognized on a periodic basis and other costs. The $62 million charge relates to the company's segments as follows: $36 million relates to the distribution segment and $15 million relates to the retail segment with the balance relating to support services expenses. Asset impairments were recognized in accordance with SFAS No. 121 - - Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of, and such assets were written down to their estimated fair values based on estimated proceeds of operating units to be sold or discounted cash flow projections. The operating costs of operating units to be sold or closed are treated as normal operations during the period they remain in use. Salaries, wages and benefits of employees at these operating units are charged to operations during the time such employees are actively employed. Depreciation expense is continued for assets that the company is unable to remove from operations. Independent Accountants' Review Report TO THE BOARD OF DIRECTORS AND SHAREHOLDERS FLEMING COMPANIES, INC. We have reviewed the accompanying condensed consolidated balance sheet of Fleming Companies, Inc. and subsidiaries as of July 8, 2000, and the related condensed consolidated statements of operations for the 12 and 28 weeks ended July 8, 2000 and July 10, 1999 and condensed consolidated statements of cash flows for the 28 weeks ended July 8, 2000 and July 10, 1999. 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 25, 1999, 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 18, 2000, 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 25, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Oklahoma City, Oklahoma July 26, 2000 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations General In early 1998, the Board of Directors and senior management began an extensive strategic planning process that evaluated all aspects of Fleming's business. With the help of a consulting firm, the evaluation and planning process was completed late in 1998. In December 1998, the strategic plan was approved and implementation efforts began. The strategic plan consists of the following four major initiatives: o Consolidate distribution operations. The strategic plan initially included closing eleven operating units (El Paso, TX; Portland, OR; Houston, TX; Huntingdon, PA; Laurens, IA; Johnson City, TN; Sikeston, MO; San Antonio, TX; Buffalo, NY; an unannounced operating unit still to be closed; and an unannounced operating unit scheduled for 1999 closure, but due to increased cash flows from new business it will not be closed). Of the nine closings announced, all have been completed. Three additional closings were announced which were not originally part of the strategic plan bringing the total operating units to be closed to thirteen. The closing of Peoria was added to the plan in the first quarter of 1999 when costs associated with continuing to service customers during a strike coupled with costs of reopening the operating unit made closing the operating unit an economically sound decision. During the first quarter of 2000, the closings of York and Philadelphia were announced as part of an effort to grow in the northeast by consolidating distribution operations and expanding the Maryland facility. The York and Philadelphia closings are expected to be complete by the end of the third quarter of 2000. The last full year of operations for the 13 operating units closed or to be closed was in 1998 with sales totaling approximately $3.1 billion. Most of these sales have been or are expected to be retained by transferring customer business to the company's higher volume, better utilized facilities. The company believes that this consolidation process benefits customers with better product variety and improved buying opportunities. The company has also benefited with better coverage of fixed expenses. The closings result in savings due to reduced depreciation, payroll, lease and other operating costs, and the company begins recognizing these savings immediately upon closure. The capital returned from the divestitures and closings has been and will continue to be reinvested in the business. o Grow distribution sales. Higher volume, better-utilized distribution operations and the dynamics of the market place represent an opportunity for sales growth. The improved efficiency and effectiveness of the remaining distribution operations enhances their competitiveness, and the company intends to capitalize on these improvements. o Improve retail performance. This not only requires divestiture or closing of under-performing company-owned retail chains, but also requires increased investments in the retail concepts on which the company is focused. As of year-end 1999, the strategic plan included the divestiture or closing of seven retail chains (Hyde Park, Consumers, Boogaarts, New York Retail, Pennsylvania Retail, Baker's Oklahoma, and Thompson Food Basket). The sale of Baker's Oklahoma as well as the divestiture or closing of Thompson Food Basket were not in the original strategic plan, but no longer fit into the current business strategy. The last full year of operations for these seven divested or closed (or to be divested or closed) chains was in 1998 with sales totaling approximately $844 million. The sale or closing of these chains is substantially complete. On April 25, 2000, the company announced the evaluation of strategic alternatives for the remaining conventional retail chains (Rainbow Foods, Baker's Nebraska, Sentry Foods, and ABCO Foods), including the potential sale of these operations. The evaluation is nearing conclusion and an announcement of the results should be made by the end of the third quarter. The company expects that the evaluation will result in certain stores converted to the Food-4-Less format, certain chains being retained or sold, and the sale or closure of a significant number of stores in other chains with any residual stores being closed. The sale or closure is not expected to be dilutive to future adjusted earnings. The review of strategic alternatives for the conventional business, which is nearing completion, could result in additional charges that are significant. However, the additional charges, if any, would primarily be non-cash. o Reduce overhead and operating expenses. Overhead has been and will continue to be reduced through the company's low cost pursuit program which includes organization and process changes, such as a reduction in workforce through productivity improvements and elimination of work, centralization of administrative and procurement functions, and reduction in the number of management layers. The low cost pursuit program also includes other initiatives to reduce complexity in business systems and remove non-value-added costs from operations, such as reducing the number of SKU's, creating a single point of contact with customers, reducing the number of decision points within the company, and centralizing vendor negotiations. These initiatives are well underway and have reflected reduced costs for the company which ultimately reflect improved profitability and competitiveness. Implementation of the strategic plan is expected to continue through 2000. This time frame accommodates the company's limited resources and customers' seasonal marketing requirements. Additional expenses will continue for some time beyond 2000 because certain disposition related costs can only be expensed when incurred. The total pre-tax charge of the strategic plan is presently estimated at $959 million ($267 million cash and $692 million non- cash). The plan originally announced in December 1998 had an estimated pre-tax charge totaling $782 million. The increase is due primarily to closing the Peoria, York and Philadelphia divisions ($88 million), updating impairment amounts on the five retail chains in the original plan ($18 million), the divestiture or closing of the two chains not in the original plan ($38 million), decreasing costs related to a scheduled closing no longer planned ($18 million), and other costs including those related to the company's low cost pursuit program and centralization of administrative functions ($51 million). Updating the impairment amounts was necessary as decisions to close additional operating units were made. Additionally, sales negotiations provided more current information regarding the fair value on certain chains. There were changes in the operating units to be divested or closed since they no longer fit into the current business strategy as described above. Also, the cost of severance, relocation and other periodic expenses related to the company's low cost pursuit program and centralization of administrative functions has been accrued as incurred. The pre- tax charge recorded to-date is $915 million ($46 million in the second quarter of 2000, $64 million in the first quarter of 2000, $137 million in 1999, and $668 million recorded in 1998). After tax, the expense for the first two quarters of 2000 was $65 million or $1.69 per share ($27 million or $.71 per share for quarter two and $38 million or $.98 million per share for quarter one). Of the $46 million charge in the second quarter of 2000, $40 million is expected to require cash expenditures. The remaining $6 million charge consisted of non-cash items. The $46 million charge consisted of the following components: o Impairment of assets of $1 million. The impairment related to other long-lived assets. o Restructuring charges of $20 million. The restructuring charges consisted primarily of severance related expenses due to the consolidation of certain administrative departments announced during the second quarter of 2000. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $25 million. These costs consisted primarily of inventory valuation adjustments, additional depreciation and amortization on assets to be disposed of but not yet held for sale, disposition related costs recognized on a periodic basis and other costs. The company recorded a net loss of $13 million, or $.35 per share, for the second quarter of 2000 and a net loss of $39 million, or $1.02 per share, for the first two quarters of 2000. The after-tax effect of the strategic plan charge on the company's second quarter of 2000 was $27 million, or $.71 per share, and $65 million, or $1.69 per share for the first two quarters of 2000. Excluding the strategic plan charge, the company would have recorded net income of $14 million, or $.35 per share, for the second quarter of 2000 and net income of $26 million, or $.65 per share, for the first two quarters of 2000. Adjusted EBITDA for the second quarter of 2000 was $103 million and $231 million for the first two quarters of 2000. That represents a 6.5% increase in the second quarter and a 8.0% increase in the first two quarters of 2000 compared to the same time periods in 1999. "Adjusted EBITDA" is earnings before extraordinary items, interest expense, income taxes, depreciation and amortization, equity investment results, LIFO provision and one-time adjustments (e.g., strategic plan charges and specific litigation charges). Adjusted EBITDA should not be considered as an alternative measure of the company's net income, operating performance, cash flow or liquidity. It is provided as additional information related to the company's ability to service debt; however, conditions may require conservation of funds for other uses. Although the company believes adjusted EBITDA enhances a reader's understanding of the company's financial condition, this measure, when viewed individually, is not necessarily a better indicator of any trend as compared to conventionally computed measures (e.g., net sales, net earnings, net cash flows, etc.). Finally, amounts presented may not be comparable to similar measures disclosed by other companies. The following table sets forth the calculation of adjusted EBITDA:
For the 12 weeks ended For the 28 weeks ended July 8, July 10, July 8, July 10, (In millions) 2000 1999 2000 1999 ------------- ---- ---- ---- ---- Net loss $(13) $ (2) $(39) $(27) Add back: Taxes on loss (9) 2 (26) (4) Depreciation/amortization 38 36 92 81 Interest expense 38 39 92 90 Equity investment results 2 2 3 6 LIFO provision 2 3 5 6 ---- ---- ---- ---- EBITDA 58 80 127 152 Add back non-cash strategic plan charges * 5 6 12 35 ---- ---- ---- ---- EBITDA excluding non-cash strategic plan charges 63 86 139 187 Add back strategic plan charges requiring cash 40 10 92 27 ---- ---- ---- ---- Adjusted EBITDA $103 $ 96 $231 $214 ==== ==== ==== ====
- ------------ * Excludes amounts for depreciation/amortization and equity investment results already added back. The adjusted EBITDA amount represents cash flow from operations excluding unusual or infrequent items. In the company's opinion, adjusted EBITDA is the best starting point when evaluating the company's ability to service debt. In addition, the company believes it is important to identify the cash flows relating to unusual or infrequent charges and strategic plan charges, which should also be considered in evaluating the company's ability to service debt. Additional pre-tax expense relating to the strategic plan of approximately $44 million is expected throughout the rest of 2000 as implementation of the strategic plan continues. Approximately $43 million of these future expenses are expected to require cash expenditures. The remaining $1 million of the future expense relates to non-cash items. These future expenses will consist primarily of severance, relocation, real estate-related expenses and other costs expensed when incurred. The company does not expect any charge related to the strategic alternatives being explored for the remaining conventional retail chains. The pre-tax charges relating to the strategic plan for 1999 and 1998 totaled $137 million and $668 million, respectively, and are described in the Form 10-K for 1999 and the Form 10-K and Form 10- K/A for 1998. The expected benefit of the plan is improved earnings. Net earnings for 1999 after excluding strategic plan charges and one- time items ("adjusted earnings") was $43 million or $1.12 per share. Adjusted earnings for the second and first quarters of 2000 was $14 million or $.35 per share and $12 million or $.30 per share with earnings per share of $.35 expected for the third quarter and total adjusted earnings per share of $1.52 expected for 2000. The company continues to expect annual earnings per share to exceed $3.00 by the year 2003. Sales in the distribution segment are also expected to increase. Sales in the retail segment will decrease due to the evaluation of strategic alternatives for the conventional retail chains. Results of Operations Set forth in the following table is information regarding the company's net sales and certain components of earnings expressed as a percent of sales which are referred to in the accompanying discussion:
============================================================================== July 8, July 10, For the 12-weeks ended 2000 1999 - ------------------------------------------------------------------------------ Net sales 100.00 % 100.00 % Gross margin 8.60 9.77 Less: Selling and administrative 7.72 8.57 Interest expense 1.14 1.15 Interest income (.28) (.21) Equity investment results .05 .07 Impairment/restructuring charge .62 .18 - ------------------------------------------------------------------------------ Total expenses 9.25 9.76 - ------------------------------------------------------------------------------ Income (loss) before taxes (.65) .01 Taxes on income (loss) (.25) .08 - ------------------------------------------------------------------------------ Net loss (.40)% (.07)% ==============================================================================
============================================================================== July 8, July 10, For the 28-weeks ended 2000 1999 - ------------------------------------------------------------------------------ Net sales 100.00 % 100.00 % Gross margin 9.04 9.67 Less: Selling and administrative 8.08 8.50 Interest expense 1.17 1.15 Interest income (.24) (.21) Equity investment results .05 .08 Impairment/restructuring charge .81 .55 - ------------------------------------------------------------------------------ Total expenses 9.87 10.07 - ------------------------------------------------------------------------------ Loss before taxes (.83) (.40) Taxes on loss (.33) (.06) - ------------------------------------------------------------------------------ Net loss (.50)% (.34)% ==============================================================================
Net sales. - --------- Net sales for the second quarter (12 weeks) of 2000 increased by $37 million, or more than 1%, to $3.4 billion from the same period in 1999. Year to date, net sales increased by $16 million, or less than 1%, to $7.8 billion from the same period in 1999. Net sales for the distribution segment increased by 6.1% for the second quarter of 2000 to $2.6 billion compared to $2.5 billion in 1999. Year to date, net sales increased by 3.6% to $6.0 billion compared to $5.8 billion in 1999. The increase in sales was due to new business added from independent retailers, convenience stores, e-tailers, and supercenter customers. This increase was partially offset by a loss of sales previously announced from Randall's (in 1999). Sales have also been impacted by the planned closing and consolidation of certain distribution operating units. Additionally, sales comparisons were affected by the previously announced loss of sales to United, which began during the second quarter of 2000. In 1999, sales to Randall's and United accounted for less than 4% of the company's sales. The net increase in the distribution segment sales is the largest in five years. Retail segment sales for the second quarter of 2000 decreased $113 million, or 13%, to $761 million from the same period in 1999. Year to date, retail segment sales decreased $190 million, or 9%, in 2000 to $1.8 billion from the same period in 1999. The decrease in sales was primarily due to the divestiture of under- performing and non-strategic stores. Decreases in same-store sales of 3.2% for the second quarter and 4.4% year to date also contributed to the sales decline. The decrease was offset partially by sales from new stores opened since the second quarter of 1999. Because of the strategic alternatives being evaluated for the conventional chains, sales will decrease in the retail segment. The difference in food price inflation for the company's product mix was not significant in 2000 or 1999. Gross margin. - ------------ Gross margin for the second quarter of 2000 decreased by $36 million, or 11%, to $291 million from $327 million for the same period in 1999, and also decreased as a percentage of net sales to 8.60% from 9.77% for the same period in 1999. Year to date, gross margin decreased by $48 million, or 6%, to $708 million from $756 million for the same period in 1999, and also decreased as a percentage of net sales to 9.04% from 9.67% for the same period in 1999. After excluding the strategic plan charges, gross margin for the second quarter of 2000 decreased by $20 million, or 6%, compared to the same period in 1999, and decreased as a percentage of net sales to 9.28% from 9.98% for the same period in 1999. Year to date, gross margin, after excluding the strategic plan charges, decreased by $23 million, or 3%, compared to the same period in 1999, and decreased as a percentage of net sales to 9.51% from 9.83% for the same period in 1999. The decrease in percentage to net sales was due to a change in mix. The sales of the distribution segment represent a larger portion of total company sales than the retail segment and the distribution segment has lower margins as a percentage of sales versus the retail segment. For the distribution segment on an adjusted basis, gross margin as a percentage of gross distribution sales was down slightly for both the second quarter and year-to-date periods of 2000 compared to the same periods in 1999. This was due to competitive pricing actions and increased transportation costs which were partially offset by the benefits of asset rationalization and the centralization of procurement. For the retail segment on an adjusted basis, gross margin as a percentage of net retail sales improved significantly for both the second quarter and year-to- date periods of 2000 compared to the same periods in 1999 due to the divesting or closing of under-performing stores and the centralization of procurement. The strategic plan charges increased in 2000 for both the second quarter and year to date compared to the same periods in 1999. The increased charges were primarily due to inventory valuation adjustments, additional depreciation and amortization on assets to be disposed of but not yet held for sale, and periodic costs recorded as incurred such as recruiting and training. Selling and administrative expenses. - ----------------------------------- Selling and administrative expenses for the second quarter of 2000 decreased by approximately $26 million, or 9%, to $261 million from $287 million for the same period in 1999 and decreased as a percentage of net sales to 7.72% for 2000 from 8.57% in 1999. Year to date, selling and administrative expenses decreased by $30 million, or 5%, to $634 million in 2000 from $664 million for the same period in 1999 and decreased as a percentage of net sales to 8.08% for 2000 from 8.50% in 1999. After excluding the strategic plan charges, selling and administrative expenses for the second quarter of 2000 decreased by $24 million, or 9%, compared to the same period in 1999, and decreased as a percentage of net sales to 7.66% from 8.48% for the same period in 1999. Year to date, selling and administrative expenses, after excluding the strategic plan charges, decreased in 2000 by $34 million, or 5%, compared to the same period in 1999, and decreased as a percentage of net sales to 7.97% from 8.42% for the same period in 1999. The decreases were due to asset rationalization and centralizing administrative functions, but also due to reducing the significance of retail. 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 versus the retail segment. For the distribution segment on an adjusted basis, selling and administrative expenses as a percentage of net sales improved for both the second quarter and year-to-date periods of 2000 compared to the same periods in 1999 due to asset rationalization and the centralization of administrative functions. For the retail segment on an adjusted basis, selling and administrative expenses as a percentage of retail sales decreased in the second quarter of 2000 compared to the same period in 1999. Year to date, selling and administrative expenses for 2000 were flat as a percentage of retail sales compared to the same period in 1999. Selling and administrative expenses were reduced in 2000 as compared to 1999 due to the divestiture or closing of under- performing stores and the centralization of administrative functions. This was offset by costs associated with closing certain retail stores in continuing retail chains. The strategic plan charges were lower in the second quarter and higher year to date for 2000 compared to the same periods in 1999. The strategic charges were primarily made up of moving and training costs associated with the consolidation of the accounting and human resource functions. The company has a significant amount of credit extended to its customers through various methods. These methods include customary and extended credit terms for inventory purchases and equity investments in, and secured and unsecured loans to, certain customers. Secured loans generally have terms up to ten years. Credit loss expense is included in selling and administrative expenses and was $5 million for the second quarter of both 2000 and 1999 and $13 million for both year-to-date periods. Operating earnings. - ------------------ Operating earnings for the distribution segment decreased slightly for the second quarter of 2000 to $61 million from $62 million for the same period of 1999 and reflected no change year to date at $145 million for both years. After excluding the strategic plan charges, operating earnings for the second quarter of 2000 increased by $10 million, or 15%, to $75 million from $65 million for the same period of 1999. Year to date, operating earnings, after excluding the strategic plan charges, increased by $15 million, or 10%, to $169 million in 2000 from $154 million for the same period of 1999. Operating earnings improved primarily due to the benefits of the consolidation of distribution operating units, reduction of costs, centralizing of certain procurement and administrative functions in support services and improving sales. The improvements were offset by higher strategic plan charges in 2000 relating primarily to additional depreciation and amortization on assets to be disposed of but not yet held for sale. Operating earnings for the retail segment increased by $13 million to $17 million for the second quarter of 2000 from $4 million for the same period of 1999. Year to date, operating earnings also increased $13 million to $30 million in 2000 from $17 million in 1999. After excluding the strategic plan charges, operating earnings increased by $11 million to $21 million in the second quarter of 2000 from $10 million for the same period of 1999 and increased by $13 million year to date to $39 million in 2000 and $26 million in 1999. Operating earnings were improved primarily by divesting or closing under-performing chains and centralizing certain administrative functions in support services. Year to date, operating earnings were also improved by increased benefits received from the distribution segment. Support services expenses increased in the second quarter of 2000 compared to the same period of 1999 by $23 million to $49 million from $26 million. Year to date, support services expenses increased by $30 million to $100 million in 2000 from $70 million in 1999. After excluding the strategic plan charges, support services expenses increased by $16 million to $41 million in the second quarter of 2000 from $25 million for the same period of 1999 and increased by approximately $18 million year to date to $87 million in 2000 from $69 million in 1999. The increase in expense was primarily due to centralizing certain procurement and administrative functions from the distribution and retail segments. Strategic plan charges were higher in 2000 due to moving and training expenses associated with the centralization of the procurement and administrative functions. Interest expense. - ---------------- Interest expense for the second quarter of 2000 of $38 million was flat compared to the same period in 1999. Year to date, interest expense was $1 million higher in 2000 compared to the same period in 1999 due to slightly higher average debt balances partially offset by average lower interest rates. Interest income. - --------------- Interest income of $9 million for the second quarter of 2000 was $2 million higher than the same period of 1999 due to a tax refund receivable balance. Year to date, interest income of $19 million in 2000 was $3 million higher than the same period in 1999 due to the tax refund receivable and higher average interest rates. Equity investment results. - ------------------------- The company's portion of operating losses from equity investments improved by less than $1 million for the second quarter of 2000 compared to the same period of 1999. Year to date, equity investment results has improved by $2 million to $4 million in 2000 from $6 million in 1999. Impairment/restructuring charge. - ------------------------------- The pre-tax charge recorded in the Consolidated Condensed Statements of Operations (associated with the implementation of the company's strategic plan announced in 1998) was $46 million for the second quarter of 2000 compared to $16 million for the same period of 1999. The $46 million charge in 2000 was recorded with $21 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. The $16 million charge in 1999 was recorded with $6 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. Year to date, the pre-tax charge was $110 million for 2000 compared to $62 million for the same period of 1999. The $110 million charge in 2000 was recorded with $63 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. The $62 million charge in 1999 was recorded with $43 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. See "General" above and Note 9 in the notes to the consolidated condensed financial statements for further discussion regarding the strategic plan. Taxes on income. - --------------- The effective tax rates for the 28 weeks of 2000 and 1999 were 39.8% and 14.7%, respectively. These were both blended rates taking into account operations activity, strategic plan activity, write-offs of non-deductible goodwill and the timing of these items during the year. The tax amount for the second quarter of both years was derived using the 28 week tax amount with that year's estimated effective tax rate compared to the tax amount recorded for the first 16 weeks of the year. Certain accounting matters. - -------------------------- The Financial Accounting Standards Board issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and is effective for 2001. The company will adopt SFAS No. 133 by the required effective date. The company has begun to study the potential impact, but has not determined the impact on its financial statements from adopting the new standard. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB No. 101"). SAB No. 101 provides guidance on recognition, presentation, and disclosure of revenue in financial statements. SAB No. 101 is effective no later than the fourth quarter of 2000. The company currently believes the implementation of SAB No. 101 may have an impact on the classification on net sales and cost of goods sold, but no material impact on earnings. Other. - ----- Costs relating to the implementation of the strategic plan have negatively affecting earnings in the first 28-weeks of 2000 and are likely to continue for the near term. Additionally, the outcome of the strategic alternatives being explored for the remaining conventional retail chains could have an adverse effect on earnings. Liquidity and Capital Resources In the two quarters ended July 8, 2000, the company's principal sources of liquidity were cash flows from operating activities and the sale of certain assets and liabilities. Borrowing capacity under the company's credit facility provided a revolving source of liquidity during this period. The company's principal sources of capital, excluding shareholders' equity, during this period were banks and lessors. Net cash provided by operating activities. - ----------------------------------------- Operating activities generated $52 million of net cash flows for the two quarters ended July 8, 2000 compared to $169 million for the same period in 1999. Included in 2000 were $87 million of strategic plan related expenditures, $46 million used for increases in working capital, and an $11 million net increase in other assets and other liabilities. Cash requirements related to the implementation and completion of the strategic plan (on a pre-tax basis) are expected to be $45 million for the remainder of year 2000, or a total of $132 million for the full year. After this year, cash expenditures for these charges (on a pre-tax basis) are expected to be $22 million in 2001 and $21 million in 2002. Management believes working capital reductions, proceeds from asset sales, increased earnings related to the successful implementation of the strategic plan, and tax savings are expected to provide more than adequate cash flows to cover all of these costs. Net cash provided by investing activities. - ----------------------------------------- Total investment-related activity resulted in $6 million of positive net cash flow for the two quarters ended July 8, 2000 compared to a $154 million use of funds in the same period of 1999. Cash provided by asset sales, collections on notes receivable and other investing-related activities were only partially offset by capital expenditures. Net cash used in financing activities. - ------------------------------------- Net cash required by financing activities was $56 million for the two quarters ended July 8, 2000 compared to $17 million net cash required for the same period last year. In 2000, long-term debt decreased by a net amount of $46 million while capital lease obligations increased by a net amount of $11 million, which included $12 million in principal payments for capital leases. At the end of the second quarter of 2000, outstanding loans and letters of credit under the credit facility totaled $172 million in term loans, $240 million in revolver loans, and $54 million in letters of credit. Based on actual borrowings and letters of credit issued, the company could have borrowed an additional $306 million under the revolver. In April 2000, the company announced it was evaluating strategic alternatives with respect to its conventional retail chains, including their potential sale. The evaluation is nearing conclusion and an announcement of the results should be made by the end of the third quarter. The company expects that the evaluation will result in certain stores converted to the Food-4-Less format, certain chains being retained or sold, and the sale of a significant number of stores in other chains with any residual stores being closed. Proceeds from any sales would be used to invest in our growth businesses or to prepay debt. For the foreseeable future, the company's principal sources of liquidity and capital are expected to be cash flows from operating activities, the company's ability to borrow under its credit facility, and asset sale proceeds. In addition, lease financing may be employed for new retail stores and certain equipment. Management believes these sources will be adequate to meet working capital needs, capital expenditures, expenditures for acquisitions (if any), strategic plan implementation costs and other capital needs for the next 12 months. Contingencies From time to time the company faces litigation or other contingent loss situations resulting from owning and operating its assets, conducting its business or complying (or allegedly failing to comply) with federal, state and local laws, rules and regulations which may subject the company to material contingent liabilities. In accordance with applicable accounting standards, the company records as a liability amounts reflecting such exposure when a material loss is deemed by management to be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, the company discloses material loss contingencies in the notes to its financial statements when the likelihood of a material loss has been determined to be greater than "remote" but less than "probable." Such contingent matters are discussed in Note 6 in the notes to the consolidated condensed financial statements. An adverse outcome experienced in one or more of such matters, or an increase in the likelihood of such an outcome, could have a material adverse effect on the company. Also see Legal Proceedings. Forward-Looking Information This report includes statements that (a) predict or forecast future events or results, (b) depend on future events for their accuracy, or (c) embody projections and assumptions which may prove to have been inaccurate, including expectations for years 2000 and beyond, the company's ability to successfully achieve the goals of its strategic plan and reverse sales declines, cut costs and improve earnings; the company's assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; the company's ability to expand portions of its business or enter new facets of its business; and the company's expectations regarding the adequacy of capital and liquidity. The management of the company has prepared the financial projections included in this document on a reasonable basis, and such projections reflect the best currently available estimates and judgments and present, to the best of management's knowledge and belief, the expected course of action and the expected future financial performance of the company. However, this information is not fact and should not be relied upon as necessarily indicative of future results, and readers of this document are cautioned not to place undue reliance on the projected financial information. The projections were not prepared with a view to compliance with the guidelines established by the American Institute of Certified Public Accountants regarding projections. These projections, forward- looking statements and the company's business and prospects are subject to a number of factors which could cause actual results to differ materially including the risks associated with the successful execution of the company's strategic business plan; adverse effects of labor disruptions; adverse effects of the changing industry environment and increased competition; sales declines and loss of customers; disruption caused by exploration of strategic alternatives regarding conventional retail; exposure to litigation and other contingent losses; failure of the company to achieve necessary cost savings; and the negative effects of the company's substantial indebtedness and the limitations imposed by restrictive covenants contained in the company's debt instruments. These and other factors are described in the company's Annual Report on Form 10-K for the fiscal year ended December 25, 1999 and in other periodic reports available from the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures about Market Risk No material change has occurred since year-end 1999. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the company's Annual Report on Form 10-K for the fiscal year ended December 25, 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings Set forth below and in Note 6 in the notes to the consolidated condensed financial statements, which information is incorporated herein by reference, is information regarding litigation which became reportable or as to which a material development has occurred since the date of the company's Quarterly Report on Form 10-Q for the quarter ended April 15, 2000: Other Customer Cases. - -------------------- J&A Foods. In March 2000, the company and one former executive were named in a suit filed in the United States District Court for the Eastern District of Missouri by current and former customers that operated five retail grocery stores in and around Kansas City, Missouri, and four retail grocery stores in and around Phoenix, Arizona (J&A Foods, Inc., et al. v. Dean Werries and Fleming Companies, Inc.). The plaintiffs have alleged product overcharges, fraudulent misrepresentation, fraudulent nondisclosure and concealment, breach of contract, breach of duty of good faith and fair dealing, and RICO violations, and they are seeking actual, punitive and treble damages, as well as other relief. The damages have not been quantified by the plaintiffs; however, the company anticipates that substantial damages will be claimed. Welsh. In April 2000, the operators of two grocery stores in Van Horn and Marfa, Texas filed an amended complaint in the United States District Court for the Western District of Texas, Pecos Division (Welsh v. Fleming Foods of Texas, L.P.). The amended complaint alleges product overcharges, breach of contract, fraud, conversion, breach of fiduciary duty, negligent misrepresentation, and breach of the Texas Deceptive Trade Practices Act. The amended complaint seeks unspecified actual damages, punitive damages, attorneys' fees and prejudgment and postjudgment interest. The court has set December 4, 2000, as the date on which the trial of this case will commence. From time to time, the company is a party to litigation in which claims against the company are made by present and former customers, sometimes in situations involving financially troubled or failed customers. Except as noted in this report, the company does not believe that any such claim will result in a material adverse effect on the company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number 10.73* Amendment to the Associate Stock Purchase Plan 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter from Independent Accountants as to Unaudited Interim Financial Information 27 Financial Data Schedule - --------------- * Management contract, compensatory plan or arrangement. (b) Reports on Form 8-K: None SIGNATURES 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. (Registrant) Date: August 17, 2000 KEVIN TWOMEY Kevin Twomey Senior Vice President-Finance and Controller (Principal Accounting Officer) EXHIBIT INDEX
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 10.73 Amendment to the Associate Stock Purchase Plan Filed herewith electronically 12 Computation of Ratio of Earnings to Fixed Charges Filed herewith electronically 15 Letter from Independent Accountants as to Unaudited Interim Financial Information Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically
EX-10.73 2 0002.txt Exhibit 10.73 2000-1 AMENDMENT TO THE FLEMING COMPANIES, INC. ASSOCIATE STOCK PURCHASE PLAN The Fleming Companies, Inc. Associate Stock Purchase Plan (the "Plan") is hereby amended as follows: I. Section 2.1(n) of the Plan is hereby amended to read as follows: "The word 'Participant' shall mean an Associate (i) who executes with the Company an Option Agreement on or prior to a Granting Date, (ii) who on such Granting Date was employed by the Employer, and (iii) whose customary employment is more than 20 hours per week and more than five months in any calendar year. The word 'Participant' shall also include the legal representative of a deceased Participant, and a Participant who, within three months prior to the end of the applicable Purchase Period for which he is a Participant, terminates his employment with the Employer. 'Disability' for purposes of this Subsection (n) shall mean a physical or mental condition which, in the judgment of the Committee, totally and permanently prevents a Participant from engaging in any substantial gainful employment with the Employer. A determination that disability exists shall be based upon independent medical evidence satisfactory to the Committee. In the event that any Employer ceases to be a Subsidiary of the Company, the Associates of such Employer will be deemed to have terminated employment as of such date." II. The second sentence of Section 3.3 of the Plan is hereby amended to read as follows: "A legal representative of a deceased Participant and a Participant who terminates employment for any reason within three months prior to the end of the applicable Purchase Period will continue to be a Participant in the Plan until the next succeeding Exercise Date unless such Participant or his representative (in the event of the Participant's death) elects to withdraw from the Plan pursuant to this Section 3.3." Except as otherwise provided in this 2000-1 Amendment to the Fleming Companies, Inc. Associate Stock Purchase Plan ("Amendment"), the Plan is hereby ratified and confirmed in all respects. This Amendment shall be effective as of July 1, 2000. EX-12 3 0003.txt Exhibit 12 Fleming Companies, Inc. Computation of Ratio of Earnings to Fixed Charges
28 Weeks Ended July 8, July 10, (In thousands of dollars) 2000 1999 Earnings: Pretax loss $(65,199) $(31,159) Fixed charges, net 105,805 105,374 Total earnings $ 40,606 $ 74,215 Fixed charges: Interest expense $ 91,548 $ 90,253 Portion of rental charges deemed to be interest 13,981 14,876 Capitalized interest 185 178 Total fixed charges $105,714 $105,307 Deficiency $ 65,108 $ 31,092 Ratio of earnings to fixed charges .38 .70
"Earnings" consists of income before income taxes and fixed charges excluding capitalized interest. Capitalized interest amortized during the respective periods is added back to earnings. "Fixed charges, net" consists of interest expense, an estimated amount of rental expense which is deemed to be representative of the interest factor and amortization of capitalized interest. The pro forma ratio of earnings to fixed charges is omitted, as it is not applicable. Under the company's long-term debt agreements, "earnings" and "fixed charges" are defined differently and amounts and ratios differ accordingly. EX-15 4 0004.txt Exhibit 15 Fleming Companies, Inc. 1945 Lakepointe Drive, Box 299013 Lewisville, Texas 75029 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Fleming Companies, Inc. and subsidiaries for the 12-week and 28-week periods ended July 8, 2000 and July 10, 1999, as indicated in our report dated July 26, 2000; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the 12 weeks ended July 8, 2000, is incorporated by reference in the following: (i) Registration Statement No. 2-98602 (1985 Stock Option Plan) on Form S-8; (ii) Registration Statement No. 33-36586 (1990 Fleming Stock Option Plan) on Form S-8; (iii) Registration Statement No. 33-56241 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; (iv) Registration Statement No. 333-11317 (1996 Stock Incentive Plan) on Form S-8; (v) Registration Statement No. 333-35703 (Senior Subordinated Notes) on Form S-4; (vi) Registration Statement No. 333-28219 (Associate Stock Purchase Plan) on Form S-8; (vii) Registration Statement No. 333-80445 (1999 Stock Incentive Plan) on Form S-8; (viii) Registration Statement No. 333-89375 (Consolidated Savings Plus and Stock Ownership Plan) on Form S-8; (ix) Registration Statement No. 333-40660 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; and (x) Registration Statement No. 333-40670 (2000 Stock Incentive Plan) on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Oklahoma City, Oklahoma August 16, 2000 EX-27 5 0005.txt
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE 28 WEEKS ENDED JULY 8, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-30-2000 DEC-25-1999 JUL-08-2000 10,022 0 501,238 38,589 860,514 1,526,686 1,564,105 726,595 3,299,953 1,081,177 1,191,336 0 0 98,973 426,247 3,299,953 7,830,857 7,830,857 7,122,929 7,791,722 0 12,786 91,548 (65,199) (25,977) (39,222) 0 0 0 (39,222) (1.02) (1.02)
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