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 September 30, 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 October 27, 2000 is as follows: Class Shares Outstanding Common stock, $2.50 par value 39,601,000 INDEX Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Operations - 12 Weeks Ended September 30, 2000, and October 2, 1999 Consolidated Condensed Statements of Operations - 40 Weeks Ended September 30, 2000, and October 2, 1999 Consolidated Condensed Balance Sheets - September 30, 2000, and December 25, 1999 Consolidated Condensed Statements of Cash Flows - 40 Weeks Ended September 30, 2000, and October 2, 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 September 30, 2000, and October 2, 1999 (In thousands, except per share amounts)
============================================================================== 2000 1999 ------------------------------------------------------------------------------ Net sales $3,288,102 $3,243,192 Costs and expenses: Cost of sales 2,984,788 2,906,749 Selling and administrative 258,103 291,990 Interest expense 40,111 36,987 Interest income (6,322) (7,075) Equity investment results 2,097 2,431 Impairment/restructuring charge 83,356 36,151 ------------------------------------------------------------------------------ Total costs and expenses 3,362,133 3,267,233 ------------------------------------------------------------------------------ Loss before taxes (74,031) (24,041) Taxes on loss (28,472) (9,695) ------------------------------------------------------------------------------ Net loss $ (45,559) $ (14,346) ============================================================================== Basic and diluted net loss per share $(1.17) $(.37) Dividends paid per share $.02 $.02 Weighted average shares outstanding: Basic 38,902 38,459 Diluted 38,902 38,459 ==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Operations For the 40 weeks ended September 30, 2000, and October 2, 1999 (In thousands, except per share amounts)
============================================================================== 2000 1999 ------------------------------------------------------------------------------ Net sales $11,118,959 $11,057,800 Costs and expenses: Cost of sales 10,107,717 9,965,771 Selling and administrative 891,784 955,550 Interest expense 131,659 127,240 Interest income (25,167) (23,319) Equity investment results 5,682 8,402 Impairment/restructuring charge 146,514 79,356 ------------------------------------------------------------------------------ Total costs and expenses 11,258,189 11,113,000 ------------------------------------------------------------------------------ Loss before taxes (139,230) (55,200) Taxes on loss (54,449) (14,275) ------------------------------------------------------------------------------ Net loss $ (84,781) $ (40,925) ============================================================================== Basic and diluted net loss per share $(2.19) $(1.07) Dividends paid per share $.06 $.06 Weighted average shares outstanding: Basic 38,651 38,256 Diluted 38,651 38,256 ==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Balance Sheets (In thousands)
============================================================================== September 30, December 25, Assets 2000 1999 ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 49,673 $ 6,683 Receivables 467,995 496,159 Inventories 867,145 997,805 Assets held for sale 120,928 68,615 Other current assets 126,380 159,488 ------------------------------------------------------------------------------ Total current assets 1,632,121 1,728,750 Investments and notes receivable 101,448 108,895 Investment in direct financing leases 109,572 126,309 Property and equipment 1,404,824 1,539,465 Less accumulated depreciation and amortization (681,633) (701,289) ------------------------------------------------------------------------------ Net property and equipment 723,191 838,176 Deferred income taxes 71,390 54,754 Other assets 163,452 150,214 Goodwill 548,638 566,120 ------------------------------------------------------------------------------ Total assets $3,349,812 $3,573,218 ============================================================================== Liabilities and Shareholders' Equity ------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 846,851 $ 981,219 Current maturities of long-term debt 36,915 70,905 Current obligations under capital leases 21,747 21,375 Other current liabilities 175,146 210,220 ------------------------------------------------------------------------------ Total current liabilities 1,080,659 1,283,719 Long-term debt 1,304,468 1,234,185 Long-term obligations under capital leases 372,998 367,960 Other liabilities 111,847 126,652 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share 99,039 97,141 Capital in excess of par value 513,469 511,447 Accumulated deficit (107,108) (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 479,840 560,702 ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $3,349,812 $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 40 weeks ended September 30, 2000, and October 2, 1999 (In thousands)
============================================================================== 2000 1999 ------------------------------------------------------------------------------ Cash flows from operating activities: Net loss $(84,781) $(40,925) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 133,808 123,545 Credit losses 19,380 18,213 Deferred income taxes (9,328) (31,047) Equity investment results 5,682 8,402 Impairment/restructuring and related charges (not classified elsewhere) 202,932 106,763 Cash payments on impairment/restructuring and related charges (107,227) (42,096) Change in assets and liabilities, excluding effect of acquisitions: Receivables 24,461 30,682 Inventories 105,329 82,540 Accounts payable (134,368) (34,944) Other assets and liabilities (128,220) (52,942) Other adjustments, net (260) (7,644) ------------------------------------------------------------------------------ Net cash provided by operating activities 27,408 160,547 ------------------------------------------------------------------------------ Cash flows from investing activities: Collections on notes receivable 25,367 24,399 Notes receivable funded (20,923) (34,476) Purchase of property and equipment (107,623) (123,102) Proceeds from sale of property and equipment 39,071 24,831 Investments in customers (969) (8,006) Proceeds from sale of investment 3,293 2,203 Businesses acquired (2,279) (78,075) Proceeds from sale of businesses 45,280 14,165 Other investing activities 11,928 3,928 ------------------------------------------------------------------------------ Net cash used in investing activities (6,855) (174,133) ------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term borrowings 107,000 126,000 Principal payments on long-term debt (70,707) (57,630) Principal payments on capital lease obligations (15,175) (22,030) Sale of common stock under incentive stock and stock ownership plans 3,653 3,236 Dividends paid (2,334) (2,322) Other financing activities - (31) ------------------------------------------------------------------------------ Net cash provided by financing activities 22,437 47,223 ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 42,990 33,637 Cash and cash equivalents, beginning of period 6,683 5,967 ------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 49,673 $ 39,604 ============================================================================== Supplemental information: Cash paid for interest $124,813 $122,449 Cash paid (refunded) for taxes $(63,872) $15,521 ==============================================================================
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 September 30, 2000, the consolidated condensed statements of operations for the 12 weeks ended September 30, 2000 and October 2, 1999, and the consolidated condensed statements of operations and cash flows for the 40 weeks ended September 30, 2000 and October 2, 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 September 30, 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 September 30, 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 ($4 million of which was recorded in assets held for sale which is included in other current assets). 4. Sales and operating earnings as reported (including strategic plan charges and one-time items) for the company's distribution and retail segments are presented below.
============================================================================== For the 12 weeks ended Sept 30, Oct 2, ($ in millions) 2000 1999 ------------------------------------------------------------------------------ Sales: Distribution $2,977 $2,896 Intersegment elimination (383) (489) ------------------------------------------------------------------------------ Net distribution 2,594 2,407 Retail 694 836 ------------------------------------------------------------------------------ Total sales $3,288 $3,243 ============================================================================== Operating earnings: Distribution $ 79 $ 69 Retail 6 4 Support services (40) (28) ------------------------------------------------------------------------------ Total operating earnings 45 45 Interest expense (40) (37) Interest income 6 7 Equity investment results (2) (3) Impairment/restructuring charge (83) (36) ------------------------------------------------------------------------------ Loss before taxes $(74) $(24) ==============================================================================
============================================================================== For the 40 weeks ended Sept 30, Oct 2, ($ in millions) 2000 1999 ------------------------------------------------------------------------------ Sales: Distribution $9,970 $9,881 Intersegment elimination (1,367) (1,671) ------------------------------------------------------------------------------ Net distribution 8,603 8,210 Retail 2,516 2,848 ------------------------------------------------------------------------------ Total sales $11,119 $11,058 ============================================================================== Operating earnings: Distribution $224 $214 Retail 35 21 Support services (140) (98) ------------------------------------------------------------------------------ Total operating earnings 119 137 Interest expense (131) (127) Interest income 25 23 Equity investment results (6) (9) Impairment/restructuring charge (146) (79) ------------------------------------------------------------------------------ Loss before taxes $(139) $(55) ==============================================================================
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 complaint in the noteholder case was dismissed, and during 1999 the complaint in the consolidated stockholder case was also dismissed, each without prejudice. The court gave the plaintiffs the opportunity to restate their claims in each case, and they did so in amended complaints. The company again filed motions to dismiss all claims in both cases. On February 4, 2000 the court dismissed the amended complaint in the stockholder case with prejudice. The stockholder plaintiffs filed a notice of appeal on March 3, 2000, and briefing is presently under way in the Court of Appeals for the Tenth Circuit. On August 1, 2000, the court dismissed the claims in the noteholder complaint alleging violations of the Securities Exchange Act of 1934, but the court determined that the noteholder plaintiffs have stated a claim under Section 11 of the Securities Act of 1933. On September 15, 2000, defendants filed a motion to allow an immediate appeal of the court's denial of their motion to dismiss plaintiffs' claim under 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 it is not clear what the precise damage claim will be, it appears that plaintiffs will claim 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. It is unclear what impact, if any, these rulings may have on the damage calculations of the plaintiffs' expert witnesses. The court has set August 13, 2001 as the date on which trial of the Don's case will commence. 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 but one of which 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 proceedings in these cases have been stayed pending the arbitration of the claims of those plaintiffs who have arbitration agreements with the company. 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. 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 (described below) transferred to the Western District of Missouri for coordinated or consolidated pre-trial 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 an expedited basis. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted the company's motion and ordered the Storehouse Markets case and the Missouri cases (described above) transferred to the Western District of Missouri for coordinated or consolidated pre- trial 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 have a material adverse effect on the company. From time to time, the company is a party to or threatened with litigation in which claims against the company are made, or are threatened to be 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 have 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.
September 30, October 2, (In millions) 2000 1999 ----------------------------------------------------- Current assets $311 $39 Noncurrent assets $477 $122 Current liabilities $159 $26 Noncurrent liabilities $160 $32
40 weeks ended ------------------------------ September 30, October 2, (In millions) 2000 1999 ----------------------------------------------------- Net sales $2,812 $416 Costs and expenses $2,837 $420 Net loss $ (15) $ (2)
8. The accompanying operating statements include the following:
12 weeks ended ------------------------------ September 30, October 2, (In thousands) 2000 1999 ------------------------------------------------------ Depreciation and amortization (includes amounts below) $39,186 $39,669 Amortized costs in interest expense $1,116 $1,123 Excess depreciation and amortization due to the strategic plan $350 $-
40 weeks ended ------------------------------ September 30, October 2, (In thousands) 2000 1999 ------------------------------------------------------ Depreciation and amortization (includes amounts below) $133,808 $123,545 Amortized costs in interest expense $3,734 $3,746 Excess depreciation and amortization due to the strategic plan $6,662 $-
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 which was substantially completed in the third quarter with the decision to reposition certain retail operations into the Food 4 Less(registered mark) type value retail format. The Rainbow Foods(registered mark) division has shown significant improvements in sales and earnings. Consequently, 40 of these stores will be retained and three stores sold or closed. The Minneapolis distribution center will be dedicated to supply the Rainbow Foods(registered mark) operation, with the supply of the division's independent retailers moved to the LaCrosse and Superior divisions. The company is in discussions to sell 53 ABCO Foods(trademark) stores to other retailers and expects that three will be converted to the value retail format. The company also plans to convert ten company-owned Sentry(registered mark) Foods stores to the value retail format and steps are being taken to sell the remaining 24 to existing and new distribution customers. The company is continuing to explore alternatives for the 16 Baker's(trademark) Nebraska stores. The substantial completion of the evaluation of the company's conventional retail was the primary factor in a $72 million non-cash increase in the strategic plan charge during the third quarter of 2000. The total pre-tax charge of the strategic plan is presently esti- mated through 2000 at $1,031 million ($255 million cash and $776 mil- lion non-cash). The plan originally announced in December 1998 had an estimated pre-tax charge totaling $782 million. The result is an increase in the estimate of the strategic plan of $249 million ($106 million cash and $143 million non-cash). The net 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); impairment amounts relating to the recent evaluation of conventional retail ($76 million); and other costs including those related to the company's low cost pursuit program and centralization of administrative functions ($47 million). Updating the impairment amounts was necessary as decisions to sell, close or convert 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 $1,016 million ($101 million in the third quarter of 2000, $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 three quarters of 2000 was $125 million or $3.22 per share ($60 million or $1.53 per share for quarter three, $27 million or $.71 per share for quarter two, and $38 million or $.98 per share for quarter one). The $15 million of costs relating to the strategic plan not yet charged against income will primarily be recorded during the remainder of 2000 at the time such costs are accruable. The $101 million charge in the third 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; $11 million was included in cost of sales and was primarily related to inventory valuation adjustments and moving and training costs; $6 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $83 million was included in the Impairment/restructuring charge line. The third quarter charge consisted of the following components: - Impairment of assets of $81 million. The impairment components were $3 million for goodwill and $78 million for other long-lived assets. All of the goodwill charge was related to a conventional retail store acquisition in May of 1999. - Restructuring charges of $2 million. The restructuring charges consisted primarily of severance related expenses due to the consolidation of certain administrative departments. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. - Other disposition and related costs of $18 million. These costs consisted primarily of inventory valuation adjustments, disposition related costs recognized on a periodic basis and other costs. The charge for the third quarter of 2000 relates to the company's segments as follows: $8 million relates to the distribution segment and $77 million relates to the retail segment with the balance relating to support services expenses. The $211 million charge in the first three 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; $46 million was included in cost of sales and was primarily related to inventory valuation adjustments, moving and training costs relating to procurement and product handling associates, and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $16 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis (such as moving and training costs related to the consolidation of certain administrative functions); and the remaining $146 million was included in the Impairment/restructuring charge line. The charge for the first three quarters consisted of the following components: - Impairment of assets of $84 million. The impairment components were $3 million for goodwill and $81 million for other long-lived assets. All of the goodwill charge was related to an acquisition in May of 1999. - Restructuring charges of $63 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. - Other disposition and related costs of $64 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 three quarters of 2000 relates to the company's segments as follows: $66 million relates to the distribution segment and $104 million relates to the retail segment with the balance relating to support services expenses. The charges related to workforce reductions are as follows:
($'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 2000 Quarter 3 Activity: Charge 1,964 90 Terminations (8,838) (350) ------- ------- Ending Liability $19,979 320 ======= =======
The ending liability of approximately $20 million represents payments over time to associates already severed as well as union pension withdrawal liabilities. The breakdown of the 1,240 headcount reduction recorded for the first three quarters of 2000 is: 1,100 from the distribution segment; 120 from the retail segment; and 20 from support services. Additionally, the strategic plan includes charges related to lease obligations which will be utilized as operating units or retail stores close, but ultimately reduced over remaining lease terms ranging from 1 to 20 years. The charges and utilization have been recorded to-date as follows:
($'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 2000 Quarter 3 Activity: Charge 3,025 Utilized (2,141) ------- Ending Liability $28,025 =======
Assets held for sale included in other current assets at the end of the third quarter of 2000 were approximately $121 million, consisting of $25 million of distribution operating units and $96 million of retail stores. The pre-tax charge of the strategic plan in the third quarter of 1999 totaled $45 million. After tax, the expense for the third quarter of 1999 was $28 million or $.73 per share. The $45 million charge was included on several lines of the Consolidated Condensed Statements of Operations for the third quarter of 1999 as follows: $3 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 $36 million was included in the Impairment/restructuring charge line. The $45 million charge consisted of the following components: - Impairment of assets of $30 million. The impairment components were $14 million for goodwill and $16 million for other long-lived assets. The goodwill charge of $14 million related to two retail acquisitions. - Restructuring charges of $6 million. The restructuring charges consisted of severance related expenses to sell or close the New York and Pennsylvania retail chains. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. - Other disposition and related costs of $9 million. These costs consisted primarily of inventory valuation adjustments, impairment of an investment, disposition related costs recognized on a periodic basis and other costs. The $45 million charge relates to the company's segments as follows: $7 million relates to the distribution segment and $34 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 three quarters of 1999 totaled $107 million. After tax, the expense for the first three quarters of 1999 was $72 million or $1.88 per share. The $107 million charge was included on several lines of the Consolidated Condensed Statements of Operations for the third quarter of 1999 as follows: $16 million was included in cost of sales and was primarily related to inventory valuation adjustments; $12 million was included in selling and administrative expense as disposition related costs recognized on a periodic basis; and the remaining $79 million was included in the Impairment/restructuring charge line. The $107 million charge consisted of the following components: - Impairment of assets of $55 million. The impairment components were $36 million for goodwill and $19 million for other long-lived assets. Of the goodwill charge of $36 million, $22 million related to the 1994 "Scrivner" acquisition with the remaining amount related to two retail acquisitions. - Restructuring charges of $24 million. The restructuring charges consisted of severance related expenses and pension withdrawal liabilities for the Peoria distribution operating unit and Consumers, Boogaarts, New York and Pennsylvania retail chains. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. - Other disposition and related costs of $28 million. These costs consist primarily of inventory valuation adjustments, impairment of an investment, disposition related costs recognized on a periodic basis and other costs. The $107 million charge relates to the company's segments as follows: $43 million relates to the distribution segment and $49 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 September 30, 2000, and the related condensed consolidated statements of operations for the 12 and 40 weeks ended September 30, 2000 and October 2, 1999 and condensed consolidated statements of cash flows for the 40 weeks ended September 30, 2000 and October 2, 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 October 18, 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: - 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 closing is complete, and the Philadelphia closing is in its final stages of closing. 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. - Grow distribution sales. Higher volume, better-utilized distribution operations 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. - 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(trademark) Oklahoma, and Thompson Food Basket(registered mark)). The sale of Baker's(trademark) Oklahoma as well as the divestiture or closing of Thompson Food Basket(registered mark) 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 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(registered mark), Baker's(trademark) Nebraska, Sentry(registered mark) Foods, and ABCO Foods(trademark)), including the potential sale of these operations. The evaluation was substantially completed in the third quarter with the decision to reposition certain retail operations into the Food 4 Less(registered mark) type value retail format. The Rainbow Foods(registered mark) division has shown significant improvements in sales and earnings. Consequently, 40 of these stores will be retained and three stores sold or closed. The Minneapolis distribution center will be dedicated to supply the Rainbow Foods(registered mark) operation, with the supply of the division's independent retailers moved to the LaCrosse and Superior divisions. The company is in discussions to sell 53 ABCO Foods(trademark) stores to other retailers and expects that three will be converted to the value retail format. The company also plans to convert ten company-owned Sentry(registered mark) Foods stores to the value retail format and steps are being taken to sell the remaining 24 to existing and new distribution customers. The last full year of operations for ABCO Foods(trademark) and Sentry(registered mark) Foods was in 1999 with sales totaling approximately $1,057 million. The company expects to retain a substantial level of the distribution business for the ABCO Foods(trademark) and Sentry(registered mark) Foods operations and expects to receive approximately $100 million in net cash proceeds from the sale of ABCO Foods(trademark) and Sentry(registered mark) Foods stores. The company is continuing to explore alternatives for the 16 Baker's(trademark) Nebraska stores. The substantial completion of the evaluation of the company's conventional retail was the primary factor in a $72 million non-cash increase in the strategic plan charge during the third quarter of 2000. - 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 resulted in 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. The sale or closing of certain conventional retail stores related to the recent evaluation will continue into 2001. Expenses relating to the sale, closing, or conversion of these retail stores as well as certain disposition related costs (which can only be expensed when incurred) will continue beyond 2000. The total pre-tax charge of the strategic plan is presently esti- mated through 2000 at $1,031 million ($255 million cash and $776 mil- lion non-cash). The plan originally announced in December 1998 had an estimated pre-tax charge totaling $782 million. The result is an increase in the estimate of the strategic plan of $249 million ($106 million cash and $143 million non-cash). The net 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); impairment amounts relating to the recent evaluation of conventional retail ($76 million); and other costs including those related to the company's low cost pursuit program and centralization of administrative functions ($47 million). Updating the impairment amounts was necessary as decisions to sell, close, or convert 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. 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 $1,016 million ($101 million in the third quarter of 2000, $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 three quarters of 2000 was $125 million or $3.22 per share ($60 million or $1.53 per share for quarter three, $27 million or $.71 per share for quarter two and $38 million or $.98 million per share for quarter one). Of the $101 million charge in the third quarter of 2000, $16 million will ultimately require cash expenditures. The remaining $85 million charge consisted of non-cash items. The $101 million charge consisted of the following components: - Impairment of assets of $81 million. The impairment components were $3 million for goodwill and $78 million for other long-lived assets. All of the goodwill charge was related to an acquisition in May of 1999. - Restructuring charges of $2 million. The restructuring charges consisted primarily of severance related expenses due to the consolidation of certain administrative departments. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. - Other disposition and related costs of $18 million. These costs consisted primarily of inventory valuation adjustments, disposition related costs recognized on a periodic basis and other costs. The company recorded a net loss of $46 million, or $1.17 per share, for the third quarter of 2000 and a net loss of $85 million, or $2.19 per share, for the first three quarters of 2000. The after-tax effect of the strategic plan charge and one- time items on the company's third quarter of 2000 was $61 million, or $1.56 per share, and $126 million, or $3.25 per share for the first three quarters of 2000. Excluding the strategic plan charge and one-time items, the company would have recorded net income of $15 million, or $.37 per share, for the third quarter of 2000 and net income of $41 million, or $1.03 per share, for the first three quarters of 2000. Adjusted EBITDA. Adjusted EBITDA for the third quarter of 2000 was $107 million and $338 million for the first three quarters of 2000. That represents a 10.2% increase in the third quarter and an 8.7% increase in the first three 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 40 weeks ended Sept 30, Oct 2, Sept 30, Oct 2, (In millions) 2000 1999 2000 1999 ----------------- -------- ------ -------- ------ Net loss $(46) $(14) $(85) $(41) Add back: Taxes on loss (28) (10) (54) (14) Depreciation/amortization 38 39 130 120 Interest expense 40 37 131 127 Equity investment results 2 2 6 8 LIFO provision 1 3 6 9 ---- ---- ---- ---- EBITDA 7 57 134 209 Add back non-cash strategic plan charges * 84 30 96 65 ---- ---- ---- ---- EBITDA excluding non-cash strategic plan charges 91 87 230 274 Add back strategic plan charges requiring cash 16 10 108 37 ---- ---- ---- ---- Adjusted EBITDA $107 $ 97 $338 $311 ==== ==== ==== ====
* 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 $15 million is expected throughout the rest of 2000 as implementation of the strategic plan continues. All of the $15 million is expected to require cash expenditures. These future expenses will consist primarily of severance, relocation, real estate-related expenses and other costs expensed when incurred. 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 through sales growth, cost reduction, more efficient working capital management, and investment focused on the most productive assets. Net earnings for 1999 excluding strategic plan charges and one- time items ("adjusted earnings") was $43 million or $1.12 per share. Adjusted earnings for the first three quarters of 2000 was $15 million or $.37 per share for quarter three, $14 million or $.35 per share for quarter two, and $12 million or $.30 per share for quarter one, with earnings per share of $.52 expected for the fourth quarter and total adjusted earnings per share of $1.54 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 sale or closing of certain conventional retail stores. Results of Operations Set forth in the following table is information regarding certain components of earnings expressed as a percent of sales which are referred to in the accompanying discussion:
============================================================================== Sept 30, Oct 2, For the 12-weeks ended 2000 1999 ------------------------------------------------------------------------------ Net sales 100.00 % 100.00 % Gross margin 9.22 10.37 Less: Selling and administrative 7.85 9.00 Interest expense 1.22 1.14 Interest income (.19) (.22) Equity investment results .06 .07 Impairment/restructuring charge 2.54 1.12 ------------------------------------------------------------------------------ Total expenses 11.48 11.11 ------------------------------------------------------------------------------ Loss before taxes (2.26) (.74) Taxes on loss (.87) (.30) ------------------------------------------------------------------------------ Net loss (1.39)% (.44)% ==============================================================================
============================================================================== Sept 30, Oct 2, For the 40-weeks ended 2000 1999 ------------------------------------------------------------------------------ Net sales 100.00 % 100.00 % Gross margin 9.09 9.88 Less: Selling and administrative 8.02 8.64 Interest expense 1.18 1.15 Interest income (.23) (.21) Equity investment results .05 .08 Impairment/restructuring charge 1.32 .72 ------------------------------------------------------------------------------ Total expenses 10.34 10.38 ------------------------------------------------------------------------------ Loss before taxes (1.25) (.50) Taxes on loss (.49) (.13) ------------------------------------------------------------------------------ Net loss (.76)% (.37)% ==============================================================================
Net sales. Net sales for the third quarter (12 weeks) of 2000 increased by $45 million, or more than 1%, to $3.3 billion from the same period in 1999. Year to date, net sales increased by $61 million, or less than 1%, to $11.1 billion from the same period in 1999. Net sales for the distribution segment increased by 7.8% for the third quarter of 2000 to $2.6 billion compared to $2.4 billion in 1999. Year to date, net sales increased by 4.8% to $8.6 billion compared to $8.2 billion in 1999. The increase in sales was due primarily 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. The distribution segment had strategic plan charges and one-time items (e.g., gain on sale of facilities) that affected sales for both years with no significant effect on total distribution sales. Retail segment sales for the third quarter of 2000 decreased $142 million, or 17%, to $694 million from the same period in 1999. Year to date, retail segment sales decreased $332 million, or 12%, in 2000 to $2.5 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 3.5% for the third quarter and 4.1% year to date also contributed to the sales decline. The decrease was offset partially by sales from new stores opened since the third quarter of 1999. As additional conventional retail stores are sold or closed, sales will continue to 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 third quarter of 2000 decreased by $33 million, or 10%, to $303 million from $336 million for the same period in 1999, and also decreased as a percentage of net sales to 9.22% from 10.37% for the same period in 1999. Year to date, gross margin decreased by $81 million, or 7%, to $1,011 million from $1,092 million for the same period in 1999, and also decreased as a percentage of net sales to 9.09% from 9.88% for the same period in 1999. Excluding the strategic plan charges and one-time items, gross margin for the third quarter of 2000 decreased by $28 million, or 8%, compared to the same period in 1999, and decreased as a percentage of net sales to 9.33% from 10.30% for the same period in 1999. Year to date, gross margin, excluding the strategic plan charges and one-time items, decreased by $51 million, or 5%, compared to the same period in 1999, and decreased as a percentage of net sales to 9.46% from 9.97% 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 third 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 third 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 and one- time items increased in 2000 for both the third 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 third quarter of 2000 decreased by approximately $34 million, or 12%, to $258 million from $292 million for the same period in 1999 and decreased as a percentage of net sales to 7.85% for 2000 from 9.00% in 1999. Year to date, selling and administrative expenses decreased by $64 million, or 7%, to $892 million in 2000 from $956 million for the same period in 1999 and decreased as a percentage of net sales to 8.02% for 2000 from 8.64% in 1999. Excluding the strategic plan charges and one-time items, selling and administrative expenses for the third quarter of 2000 decreased by $41 million, or 14%, compared to the same period in 1999, and decreased as a percentage of net sales to 7.43% from 8.81% for the same period in 1999. Year to date, selling and administrative expenses, excluding the strategic plan charges and one-time items, decreased in 2000 by $75 million, or 8%, compared to the same period in 1999, and decreased as a percentage of net sales to 7.81% from 8.53% for the same period in 1999. The decreases were due to asset rationalization, the company's low cost pursuit program, and centralizing administrative functions, but also due to a reduction in the significance of the retail segment. The sales of the distribution segment represent a larger portion of total company sales than the retail segment and the distribution segment has lower selling and administrative expenses as a percentage of sales versus the retail segment. The strategic plan charges and one-time items were significantly higher in both the third quarter and year-to-date periods of 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 one-time items included impairment costs primarily relating to the Rainbow Foods(registered mark) chain partly offset by net litigation settlements. For the distribution segment on an adjusted basis, selling and administrative expenses as a percentage of net sales improved for both the third 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 for both the third quarter and year-to-date periods of 2000 compared to the same periods in 1999 due to the divestiture or closing of under- performing stores, the centralization of administrative functions, and operating cost reductions. This was offset by costs associated with closing certain retail stores. 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 $7 million for the third quarter of 2000 and $5 million for the same period of 1999. Year to date, credit loss expense was $19 million in 2000 and $18 million in 1999. Operating earnings. Operating earnings remained flat for the third quarter of 2000 compared to the same period of 1999 at $45 million and decreased year to date to $119 million in 2000 from $137 million in 1999. Excluding the strategic plan charges and one-time items, operating earnings for the third quarter of 2000 increased by approximately $13 million, or 28%, to $62 million from $49 million for the same period of 1999. Year to date, operating earnings, excluding the strategic plan charges and one-time items, increased by $24 million, or 15%, to $183 million in 2000 from $159 million for the same period of 1999. Operating earnings for the distribution segment increased for the third quarter of 2000 to $79 million from $69 million for the same period of 1999 and increased year to date to $224 million in 2000 from $214 million in 1999. Excluding the strategic plan charges and one-time items, operating earnings for the third quarter of 2000 increased by $9 million, or 13%, to $79 million from $70 million for the same period of 1999. Year to date, operating earnings, excluding the strategic plan charges and one- time items, increased by approximately $24 million, or 11%, to $248 million in 2000 from $224 million for the same period of 1999. Operating earnings improved primarily due to the benefits of consolidating distribution operating units, reducing costs, centralizing certain procurement and administrative functions in support services and improving sales. The strategic charges and one-time items for the third quarter were slightly lower than the prior year, but year to date were significantly higher than the prior year. The strategic charges were primarily made up of inventory valuation adjustments, moving and training costs associated with the consolidation of the accounting and human resource functions, and additional depreciation and amortization on assets to be disposed of but not yet held for sale. The one- time items were gains on sales of facilities in both years. Operating earnings for the retail segment increased by $2 million to $6 million for the third quarter of 2000 from $4 million for the same period of 1999. Year to date, operating earnings increased $14 million to $35 million in 2000 from $21 million in 1999. Excluding the strategic plan charges and one-time items, operating earnings increased by approximately $13 million to $19 million in the third quarter of 2000 from $6 million for the same period of 1999 and increased by approximately $27 million year to date to $58 million in 2000 and $31 million in 1999. Operating earnings were improved primarily by divesting or closing under- performing chains and centralizing certain administrative functions in support services. The strategic charges were primarily made up of inventory valuation adjustments and moving costs. The one-time items were primarily impairment costs relating to an on-going chain. Support services expenses increased in the third quarter of 2000 compared to the same period of 1999 by $12 million to $40 million from $28 million. Year to date, support services expenses increased by $42 million to $140 million in 2000 from $98 million in 1999. Excluding the strategic plan charges and one-time items, support services expenses increased by approximately $10 million to $37 million in the third quarter of 2000 from $27 million for the same period of 1999 and increased by $27 million year to date to $123 million in 2000 from $96 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. One-time items resulted in 2000 from net litigation settlements. Interest expense. Interest expense for the third quarter of 2000 of $40 million was $3 million higher than the same period in 1999 due primarily to higher average debt balances and higher average interest rates. Year to date, interest expense of $132 million in 2000 was $4 million higher in 2000 compared to the same period in 1999 due primarily to higher average debt balances. Interest income. Interest income of $6 million for the third quarter of 2000 was $1 million lower than the same period of 1999 due primarily to lower average balances of notes receivable and direct financing lease receivables. Year to date, interest income of $25 million in 2000 was $2 million higher than the same period in 1999 due primarily to a tax refund receivable. Equity investment results. The company's portion of operating losses from equity investments remained unchanged at $2 million for the third quarter of 2000 compared to the same period of 1999. Year to date, equity investment results has improved by approximately $2 million to $6 million in 2000 from $8 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 $101 million for the third quarter of 2000 compared to $46 million for the same period of 1999. The $101 million charge in 2000 was recorded with $83 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. The $46 million charge in 1999 was recorded with $36 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 $211 million for 2000 compared to $107 million for the same period of 1999. The $211 million charge in 2000 was recorded with $147 million reflected in the Impairment/restructuring charge line and the balance reflected in other financial statement lines. The $107 million charge in 1999 was recorded with $79 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 40 weeks of 2000 and 1999 were 39.1% and 25.9%, respectively. These were both blended rates taking into account operations activity, strategic plan activity, write-offs of non-deductible goodwill and the timing of these items during the year. The tax amount for the third quarter of both years was derived using the 40 week tax amount with that year's estimated effective tax rate compared to the tax amount recorded for the first 28 weeks of the year. 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 appointed an implementation team to study the potential impact and review written policies regarding hedge accounting within a set timeframe. The company presently believes there will not be a significant 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 of 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 affected earnings in the first 40-weeks of 2000 and are likely to continue for the near term at a reduced amount. Cash expended relating to the strategic plan is currently estimated at $129 million in 2000 and $32 million in 2001. Liquidity and Capital Resources In the three quarters ended September 30, 2000, the company's principal sources of liquidity were cash flows from operating activities, borrowings under the company's credit facility, and the sale of certain assets. 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 $27 million of net cash flows for the three quarters ended September 30, 2000 compared to $161 million for the same period in 1999. Included in 2000 were $267 million of gross cash flows from operations, $107 million of strategic plan related expenditures, and $5 million used for a net increase in working capital. Also included were $128 million of changes primarily related to other assets and other liabilities for timing differences for certain accrued and prepaid expenses. Cash requirements related to the implementation and completion of the strategic plan (on a pre-tax basis) are expected to be $22 million for the fourth quarter of 2000, or a total of $129 million for the full year. Cash expenditures for these charges (on a pre-tax basis) are expected to be $32 million in 2001 and $21 million in 2002. Cash requirements for the strategic plan have begun to decrease significantly compared to the first three quarters of 2000. Management believes working capital reductions, proceeds from asset sales, increased earnings related to the successful implementation of the strategic plan, and tax savings will provide more than adequate cash flows to cover all of these costs. Net cash used in investing activities. Investment-related activity resulted in $7 million of net cash investments for the three quarters ended September 30, 2000 compared to a $174 million use of funds in the same period of 1999. In 2000, capital expenditures and investment for acquired businesses were almost entirely offset by cash provided by asset sales, collections on notes receivable and other investing- related activities. Capital expenditures and investment for acquired businesses totaled $110 million for the first three quarters of 2000 compared to $201 million for the same period of 1999. Net cash provided by financing activities. Net cash provided by financing activities was $22 million for the three quarters ended September 30, 2000 compared to $47 million net cash provided for the same period last year. In 2000, long- term debt decreased by a net amount of $36 million while capital lease obligations increased by a net amount of $5 million, which included $15 million in principal payments for capital leases. At the end of the third quarter of 2000, outstanding loans and letters of credit under the credit facility totaled $163 million in term loans, $362 million in revolver loans, and $46 million in letters of credit. Based on actual borrowings and letters of credit issued, the company could have borrowed an additional $192 million under the revolver. On April 25, 2000, the company announced the evaluation of strategic alternatives for the remaining conventional retail chains which was substantially completed in the third quarter with the decision to reposition certain retail operations into the Food 4 Less(registered mark) type value format. The company is also in discussions to sell 53 ABCO Foods(trademark) stores and 24 Sentry(registered mark) Foods stores to other retailers. The company expects to retain a substantial level of the distribution business for these operations and expects to receive approximately $100 million in net cash proceeds from the sale of ABCO Foods(trademark) and Sentry(registered mark) Foods stores. Any net cash flows from such sales could be used to prepay debt or help to finance business investment. The company is continuing to explore alternatives for the 16 Baker's(trademark) Nebraska stores. 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 from banks and other lenders, 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. Management also believes these sources will be adequate to provide for the redemption of the $300 million of senior notes which mature on December 15, 2001. 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 financial condition or prospects of 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 continue to 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 proceeds from asset sales and adequacy of capital and liquidity. The management of the company has prepared the financial projections and other forward-looking statements included in this document on a reasonable basis, and such projections and statements reflect the best estimates and judgments currently available 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 or other forward-looking 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; adverse results in pending or threatened litigation and legal proceedings, and exposure to 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 in Note 6 in the notes to the consolidated condensed financial statements, which information is incorporated herein by reference, is information regarding certain litigation involving the company. 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 post- judgment interest. Pursuant to the order of the Judicial Panel on Multidistrict Litigation, the Welsh case has been transferred to the Western District of Missouri for pre-trial proceedings. No trial date has been set in this case. 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 -------------- 10.74* Form of Indemnification Agreement for Directors 10.75* Form of Indemnification Agreement for Executive Officers 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: On October 18, 2000, pursuant to Item 5, the company announced its net earnings for the third quarter 2000, which included a strategic plan pre-tax charge of $101 million, primarily related to the completion of the recent strategic evaluation of the conventional retail stores. 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: November 13, 2000 NEAL J. RIDER Neal J. Rider Executive Vice President, Chief Financial Officer EXHIBIT INDEX
Exhibit Number Description Method of Filing ------- ----------- ---------------- 10.74 Form of Indemnification Agreement Filed herewith electronically for Directors 10.75 Form of Indemnification Agreement Filed herewith electronically for Executive Officers 12 Computation of Ratio of Earnings Filed herewith electronically to Fixed Charges 15 Letter from Independent Filed herewith electronically Accountants as to Unaudited Interim Financial Information 27 Financial Data Schedule Filed herewith electronically