-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dp0CXBH9MCmzGTysUg0zwVcuqiui0ecZ3x/LklMJpFyWrPuDo4HRuMb//y4jAVPd TDIrD+jYOiyAWCokv0HwCw== 0000909334-01-500035.txt : 20010530 0000909334-01-500035.hdr.sgml : 20010530 ACCESSION NUMBER: 0000909334-01-500035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010421 FILED AS OF DATE: 20010529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEMING COMPANIES INC /OK/ CENTRAL INDEX KEY: 0000352949 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 480222760 STATE OF INCORPORATION: OK FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08140 FILM NUMBER: 1649086 BUSINESS ADDRESS: STREET 1: 1945 LAKEPOINTE DRIVE CITY: LEWISVILLE STATE: TX ZIP: 73126 BUSINESS PHONE: 4058407200 MAIL ADDRESS: STREET 1: 1945 LAKEPOINT DRIVE CITY: LEWISVILLE STATE: TX ZIP: 75057 10-Q 1 flm1stq2001.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 April 21, 2001 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 Dr, 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 May 18, 2001 is as follows: Class Shares Outstanding Common stock, $2.50 par value 43,818,000 INDEX Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Operations - 16 Weeks Ended April 21, 2001, and April 15, 2000 Consolidated Condensed Balance Sheets - April 21, 2001, and December 30, 2000 Consolidated Condensed Statements of Cash Flows - 16 Weeks Ended April 21, 2001, and April 15, 2000 Notes to Consolidated Condensed Financial Statements Independent Accountants' Review Report Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II. OTHER INFORMATION: Item 1. Legal Proceedings Item 4. Results of Votes of Security Holders 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 16 weeks ended April 21, 2001, and April 15, 2000 (In thousands, except per share amounts)
================================================================================== 2001 2000 - ---------------------------------------------------------------------------------- Net sales $ 4,161,191 $ 4,331,498 Costs and expenses: Cost of sales 3,794,947 3,914,824 Selling and administrative 317,313 372,307 Interest expense 57,502 53,101 Interest income (9,272) (9,505) Equity investment results 351 1,891 Impairment/restructuring charge (credit) (26,859) 42,145 - ---------------------------------------------------------------------------------- Total costs and expenses 4,133,982 4,374,763 - ---------------------------------------------------------------------------------- Income (loss) before taxes 27,209 (43,265) Taxes on income (loss) 11,743 (17,392) - ---------------------------------------------------------------------------------- Income (loss) before extraordinary charge 15,466 (25,873) Extraordinary charge from early retirement of debt (net of taxes) (3,469) - - ---------------------------------------------------------------------------------- Net income(loss) $ 11,997 $ (25,873) ================================================================================== Basic net income (loss)per share: Income (loss) before extraordinary charge $ .39 $ (.67) Extraordinary charge from early retirement of debt (net of taxes) (.09) - - ---------------------------------------------------------------------------------- Net income (loss) $ .30 $ (.67) Diluted net income (loss)per share: Income (loss) before extraordinary charge $ .37 $ (.67) Extraordinary charge from early retirement of debt (net of taxes) (.08) - - ---------------------------------------------------------------------------------- Net income (loss) $ .29 $ (.67) Dividends paid per share $ .02 $ .02 Weighted average shares outstanding: Basic 40,190 38,515 Diluted 42,245 38,515 ==================================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Balance Sheets (In thousands)
================================================================================ April 21, December 30, Assets 2001 2000 - -------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 27,273 $ 30,380 Receivables, net 490,671 509,045 Inventories 779,249 831,265 Assets held for sale 58,975 165,800 Other current assets 78,497 86,583 - -------------------------------------------------------------------------------- Total current assets 1,434,665 1,623,073 Investments and notes receivable, net 102,195 104,467 Investment in direct financing leases 98,372 102,011 Property and equipment 1,387,036 1,370,430 Less accumulated depreciation and amortization (691,518) (653,973) - -------------------------------------------------------------------------------- Net property and equipment 695,518 716,457 Deferred income taxes 122,877 139,852 Other assets 212,083 172,632 Goodwill, net 510,518 544,319 - -------------------------------------------------------------------------------- Total assets $ 3,176,228 $ 3,402,811 ================================================================================ Liabilities and Shareholders' Equity - -------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 730,081 $ 943,279 Current maturities of long-term debt 36,171 38,171 Current obligations under capital leases 20,299 21,666 Other current liabilities 197,914 229,272 - -------------------------------------------------------------------------------- Total current liabilities 984,465 1,232,388 Long-term debt 1,239,427 1,232,400 Long-term obligations under capital leases 339,988 377,239 Other liabilities 118,454 133,592 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share 109,272 99,044 Capital in excess of par value 558,122 513,645 Reinvested earnings (deficit) (132,471) (144,468) Accumulated other comprehensive income - additional minimum pension liability (41,029) (41,029) - -------------------------------------------------------------------------------- Total shareholders' equity 493,894 427,192 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 3,176,228 $ 3,402,811 ================================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Cash Flows For the 16 weeks ended April 21, 2001, and April 15, 2000 (In thousands)
================================================================================ 2001 2000 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $ 11,997 $ (25,873) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 50,667 53,749 Amortization costs in interest expense 2,180 1,496 Credit losses 4,517 7,698 Deferred income taxes 10,996 8,208 Gain/loss on sale of business (1,542) - Equity investment results 351 1,891 Impairment/restructuring and related charges, net of impairment credit (not in other lines) (1,899) 59,322 Cash payments on impairment/restructuring and related charges (22,904) (41,081) Cost of early debt retirement 5,787 - Change in assets and liabilities: Receivables 12,556 47,639 Inventories (2,572) 129,927 Accounts payable (213,201) (192,306) Other assets and liabilities 24,826 3,592 Other adjustments, net 2,168 384 - -------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (116,073) 54,646 - -------------------------------------------------------------------------------- Cash flows from investing activities: Collections on notes receivable 9,127 9,021 Notes receivable funded (7,585) (5,710) Purchase of property and equipment (48,173) (38,498) Proceeds from sale of property and equipment 15,968 7,627 Investments in customers - (1,514) Proceeds from sale of investment - 2,616 Proceeds from sale of businesses 111,088 36,952 Other investing activities 3,373 3,753 - -------------------------------------------------------------------------------- Net cash provided by investing activities 83,798 14,247 - -------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from long-term borrowings 615,602 60,000 Principal payments on long-term debt (610,575) (107,251) Payments on cost of debt (21,050) - Principal payments on capital lease obligations (5,416) (6,982) Proceeds from sale of common stock 51,392 151 Dividends paid (785) (775) - -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 29,168 (54,857) - -------------------------------------------------------------------------------- Net change in cash and cash equivalents (3,107) 14,036 Cash and cash equivalents, beginning of period 30,380 6,683 Cash and cash equivalents, end of period $ 27,273 $ 20,719 ================================================================================ Supplemental information: Cash paid for interest $ 43,422 $ 41,333 Cash refunded for taxes $ (5,949) $ (50,491) ================================================================================
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 April 21, 2001, and the consolidated condensed statements of operations and cash flows for the 16 weeks ended April 21, 2001 and April 15, 2000, have been prepared by Fleming without audit. In our opinion, all adjustments necessary to present fairly the financial position at April 21, 2001, and the results of operations and cash flows for the periods presented have been made. All such adjustments are of a normal, recurring nature except as disclosed. Both basic and diluted income (loss) per share are computed based on net income (loss) divided by weighted average shares as appropriate for each calculation. The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform to current year classifications, including the reclassification of net sales and cost of goods due to the adoption of SAB No. 101 and EITF 99-19 in the fourth quarter of 2000. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 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 $59 million at April 21, 2001 ($4 million of which is recorded in assets held for sale in current assets), and $58 million at December 30, 2000 ($13 million of which is recorded in assets held for sale in current assets). 4. Sales and operating earnings for our distribution and retail segments are presented below.
================================================================================ For the 16 weeks ended April 21, April 15, ($ in millions) 2001 2000 - -------------------------------------------------------------------------------- Sales: Distribution $ 3,743 $ 3,842 Intersegment elimination (426) (572) - -------------------------------------------------------------------------------- Net distribution 3,317 3,270 Retail 844 1,061 - -------------------------------------------------------------------------------- Total sales $ 4,161 $ 4,331 ================================================================================ Operating earnings: Distribution $ 109 $ 83 Retail 16 12 Support services (76) (51) - -------------------------------------------------------------------------------- Total operating earnings 49 44 Interest expense (58) (53) Interest income 9 10 Equity investment results - (2) Impairment/restructuring (charge)credit 27 (42) - -------------------------------------------------------------------------------- Income (loss) before taxes $ 27 $ (43) ================================================================================
General support services expenses are not allocated to distribution and retail segments. The transfer pricing between segments is at cost. Kmart Corporation, our largest customer, represented 10% of our total net sales during the first quarter of 2001, and just under 10% in the first quarter of 2000. 5. Our comprehensive income for the 16 weeks ended April 21, 2001, totaled $12.0 million and our comprehensive loss for the 16 weeks ended April 15, 2000, totaled $25.9 million. The comprehensive income and loss in 2001 and 2000, respectively, were comprised only of the reported net income and loss. 6. In accordance with applicable accounting standards, we record a charge reflecting contingent liabilities (including those associated with litigation matters) when we determine that a material loss is "probable" and either "quantifiable" or "reasonably estimable." Additionally, we disclose material loss contingencies when the likelihood of a material loss is deemed to be greater than "remote" but less than "probable." Set forth below is information regarding certain material loss contingencies: Class Action Suits. In 1996, we and certain of our present and former officers and directors were named as defendants in nine purported class action suits filed by certain stockholders 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 our alleged "deceptive business practices," and our alleged failure to properly account for and disclose the contingent liability created by the David's Supermarkets case, a lawsuit we settled in April 1997 in which David's sued us for allegedly overcharging for products. The plaintiffs claimed that these alleged practices led to the David's case and to other material contingent liabilities, caused us to change our manner of doing business at great cost and loss of profit and materially inflated the trading price of our common stock. During 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. We 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. Briefing is complete in the Court of Appeals for the Tenth Circuit, and oral argument was conducted on May 15, 2001. The Tenth Circuit has not yet issued an opinion. 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 had 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. That motion was denied on January 8, 2001. The case was set for a status and scheduling conference on January 30, 2001. The court has entered an order setting this case for trial in October 2001. On April 30, 2001, a Memorandum of Understanding was signed which provides, among other things, for the parties in the noteholder case to proceed to agree on a Settlement Agreement which will include a payment by defendants and our insurer of $2.5 million in full satisfaction of the claim. The settlement will require court and class approval. In 1997, we won a declaratory judgment against certain of our insurance carriers regarding policies issued to us for the benefit of our officers and directors. On motion for summary judgment, the court ruled that our 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 apply 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. We intend to vigorously defend any remaining claims in these class action suits and pursue the issue of insurance discussed above, but we cannot predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. Don's United Super (and related cases). We and two of our 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 of our current and former customers (Don's United Super, et al. v. Fleming, et al.). The 19 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 years before the filing of the litigation are barred by limitations, and that plaintiffs' fraud claims based upon fraudulent inducement that occurred more than 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, we 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 case (Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, 16 plaintiffs are asserting claims in the Coddington case, all but one of which have arbitration agreements with us. The plaintiffs assert claims virtually identical to those set forth in the Don's case, 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 case. 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. We have appealed the court's denial of arbitration to the United States Court of Appeals for the Eighth Circuit. The two plaintiffs that were ordered to arbitration have filed motions asking the court to reconsider the arbitration ruling. Two other cases had been filed before the Don's case in the same court (R&D Foods, Inc., et al. v. Fleming, et al.; and Robandee United Super, Inc., et al. v. Fleming, et al.) by 10 customers, some of whom are also plaintiffs in the Don's case. The earlier two cases, which principally seek an accounting of our 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 us. In March 2000, we and one former executive were named in a suit filed in the United States District Court for the Western 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, we anticipate that substantial damages will be claimed. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our motion and ordered the related Missouri cases (Don's United Super, Coddington Enterprises, Inc. and J&A Foods, Inc.) and the Storehouse Markets case (described below) transferred to the United States District Court for the Western District of Missouri for coordinated or consolidated pre-trial proceedings. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case (described below)to mediate their claims within 45 days of the order. On April 9 -- 11, 2001, the parties to the related Missouri cases participated in a mediation process held in Kansas City, Missouri pursuant to the court's order. Although the precise details of the mediation are subject to a confidentiality agreement among the parties and may not be disclosed, the mediation confirmed our expectation that the plaintiffs in the Don's and related cases will claim substantial damages. In addition, based on discussions with plaintiffs' counsel during the mediation, it appears unlikely that these related cases will be resolved before trial. We intend to vigorously defend against the claims in these related cases, but we are currently unable to predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. Storehouse Markets. In 1998, we and one of our former division officers were named in a suit filed in the United States District Court for the District of Utah by several of our current and former customers (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. Damages have not been quantified by the plaintiffs; however, we anticipate that substantial damages will be claimed. The plaintiffs have made these claims on behalf of a class that would purportedly include current and former customers of our 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 our request for a discretionary appeal of the class certification order, and we are pursuing that appeal on an expedited basis. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our motion and ordered the Storehouse Markets case and the related Missouri cases (described above) transferred to the United States District Court for the Western District of Missouri for coordinated or consolidated pre-trial proceedings. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case to mediate their claims within 45 days of the order. On April 9 -- 11, 2001, the parties to the Storehouse case participated in a mediation process held in Kansas City, Missouri pursuant to the court's order. Although the precise details of the mediation are subject to a confidentiality agreement among the parties and may not be disclosed, the mediation confirmed our expectation that the plaintiffs in Storehouse will claim substantial damages. We intend to vigorously defend against these claims, but we cannot predict the outcome of the case. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. 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 pre-judgment 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. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case to mediate their claims within 45 days of the order. The parties in the Welsh case have not yet mediated their claims. Other. Our facilities and operations are subject to various laws, regulations and judicial and administrative orders concerning protection of the environment and human health, including provisions regarding the transportation, storage, distribution, disposal or discharge of certain materials. In conformity with these provisions, we have a comprehensive program for testing, removal, replacement or repair of our underground fuel storage tanks and for site remediation where necessary. We have established reserves that we believe will be sufficient to satisfy the anticipated costs of all known remediation requirements. We and others have been designated by the U.S. Environmental Protection Agency and by similar state agencies as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, or similar state laws, as applicable, with respect to EPA-designated Superfund sites. While liability under CERCLA for remediation at these sites is generally joint and several with other responsible parties, we believe that, to the extent we are ultimately determined to be liable for the expense of remediation at any site, such liability will not result in a material adverse effect on our consolidated financial position or results of operations. We are committed to maintaining the environment and protecting natural resources and human health and to achieving full compliance with all applicable laws, regulations and orders. We are a party to or threatened with various other litigation and contingent loss situations arising in the ordinary course of our business including: disputes with customers and former customers; disputes with owners and former owners of financially troubled or failed customers; disputes with landlords and former landlords; 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. Except as noted above, we do not believe that any such claim will have a material adverse effect on us. 7. Long-term debt consists of the following:
April 21, December 30, (In thousands) 2001 2000 - -------------- ---- ---- 10 1/8% senior notes due 2008 $ 355,000 $ - 5 1/4% convertible senior subordinated notes due 2009 150,000 - 10 5/8% senior notes due 2001 - 300,000 10 1/2% senior subordinated notes due 2004 250,000 250,000 10 5/8% senior subordinated notes due 2007 250,000 250,000 Revolving credit, average interest rates of 7.4% for 2001 and 7.3% for 2000, due 2003 130,000 300,000 Term loans, due 2001 to 2004, average interest rate of 8.1% for 2001 and 7.2% for 2000 145,786 154,421 Other debt (including discounts) (5,188) 16,150 ----------- ----------- 1,275,598 1,270,571 Less current maturities (36,171) (38,171) ----------- ----------- Long-term debt $ 1,239,427 $ 1,232,400 =========== ===========
Five-year Maturities: Aggregate maturities of long-term debt for the next five years are as follows: 2001-$28 million; 2002-$40 million; 2003-$172 million; 2004-$287 million; and 2005-$0. The 10 5/8% $300 million senior notes due 2001 were issued in 1994. During the first quarter of 2001, we redeemed these notes with the proceeds from the issuance of $355 million of senior notes, as described below. In connection with the redemption of $300 million of 10 5/8% senior notes due 2001, we recognized a $3.5 million after-tax extraordinary charge from early retirement of debt. On March 15, 2001, we issued $355 million of 10 1/8% senior notes that mature on March 15, 2008. Most of the net proceeds were used to redeem all of the 10 5/8% senior notes due 2001, including an amount to cover accrued interest and the redemption premium. The balance of the net proceeds was used to pay down outstanding revolver loans. The new senior notes are unsecured senior obligations, ranking the same as all other existing and future senior indebtedness and senior in right of payment to the subordinated notes. The senior notes are effectively subordinated to secured senior indebtedness with respect to assets securing such indebtedness, including loans under our senior secured credit facility. The 10 1/8% senior notes are guaranteed by substantially all of our subsidiaries (see -Subsidiary Guarantee of Senior Notes and Senior Subordinated Notes below). On March 15, 2001, we issued $150 million of 5.25% convertible senior subordinated notes that mature on March 15, 2009 and have a conversion price of $30.27 per share. The net proceeds were used to pay down outstanding revolver loans. The convertible notes are callable after 2004, and are general unsecured obligations, subordinated in right of payment to all existing and future senior indebtedness, and rank senior to or of equal rank with all of our existing and future subordinated indebtedness. Subsidiary Guarantee of Senior Notes and Senior Subordinated Notes: The senior notes, convertible senior subordinated notes, and senior subordinated notes are guaranteed by substantially all of Fleming's wholly-owned direct and indirect subsidiaries. The guarantees are joint and several, full, complete and unconditional. There are currently no restrictions on the ability of the subsidiary guarantors to transfer funds to Fleming (the parent) in the form of cash dividends, loans or advances. The following condensed consolidating financial information depicts, in separate columns, the parent company, those subsidiaries which are guarantors, those subsidiaries which are non-guarantors, elimination adjustments and the consolidated total. The financial information may not necessarily be indicative of the results of operations or financial position had the subsidiaries been operated as independent entities. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
April 21, 2001 ------------------------------------------------------------------ Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) ASSETS Current assets: Cash and cash equivalents.................. $ 23,637 $ 1,951 $ 1,685 $ - $ 27,273 Receivables, net........................... 410,955 77,886 1,830 - 490,671 Inventories................................ 626,569 149,141 3,539 - 779,249 Other current assets....................... 129,521 7,909 42 - 137,472 ----------- ----------- ---------- ----------- ---------- Total current assets.................. 1,190,682 236,887 7,096 - 1,434,665 Investment in subsidiaries.................. 53,381 - - (53,381) - Intercompany receivables.................... 290,888 - - (290,888) - Property and equipment, net................. 452,722 235,768 7,028 - 695,518 Goodwill, net............................... 410,434 96,392 3,692 - 510,518 Other assets................................ 491,744 25,129 18,654 - 535,527 ----------- ----------- ---------- ----------- ---------- $ 2,889,851 $ 594,176 $ 36,470 $ (344,269) $3,176,228 =========== =========== ========== =========== ========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable........................... $ 637,242 $ 90,335 $ 2,504 $ - $ 730,081 Intercompany payables...................... - 244,564 46,324 (290,888) - Other current liabilities.................. 216,805 34,583 2,996 - 254,384 ----------- ----------- ---------- ----------- ---------- Total current liabilities.............. 854,047 369,482 51,824 (290,888) 984,465 Obligations under capital leases............ 209,342 130,646 - - 339,988 Long-term debt and other liabilities........ 1,332,568 25,265 48 - 1,357,881 Equity (deficit)............................ 493,894 68,783 (15,402) (53,381) 493,894 ----------- ----------- ---------- ----------- ---------- $ 2,889,851 $ 594,176 $ 36,470 $ (344,269) $3,176,228 =========== =========== ========== =========== ==========
December 30, 2000 ------------------------------------------------------------------ Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) ASSETS Current assets: Cash and cash equivalents.................. $ 22,487 $ 6,753 $ 1,140 $ - $ 30,380 Receivables, net........................... 406,203 101,884 958 - 509,045 Inventories................................ 635,227 192,499 3,539 - 831,265 Other current assets....................... 247,400 4,943 40 - 252,383 ----------- ----------- ---------- ----------- ---------- Total current assets.................. 1,311,317 306,079 5,677 - 1,623,073 Investment in subsidiaries.................. 53,381 - - (53,381) - Intercompany receivables.................... 384,450 - - (384,450) - Property and equipment, net................. 424,321 285,117 7,019 - 716,457 Goodwill, net............................... 411,094 129,440 3,785 - 544,319 Other assets................................ 463,008 42,918 13,036 - 518,962 ----------- ----------- ---------- ----------- ---------- $ 3,047,571 $ 763,554 $ 29,517 $ (437,831) $3,402,811 =========== =========== ========== =========== ========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable........................... $ 821,407 $ 120,145 $ 1,727 $ - $ 943,279 Intercompany payables...................... - 342,627 41,823 (384,450) - Other current liabilities.................. 244,524 43,275 1,310 - 289,109 ----------- ----------- ---------- ----------- ---------- Total current liabilities.............. 1,065,931 506,047 44,860 (384,450) 1,232,388 Obligations under capital leases............ 214,611 162,628 - - 377,239 Long-term debt and other liabilities........ 1,339,837 26,096 59 - 1,365,992 Equity (deficit)............................ 427,192 68,783 (15,402) (53,381) 427,192 ----------- ----------- ---------- ----------- ---------- $ 3,047,571 $ 763,554 $ 29,517 $ (437,831) $3,402,811 =========== =========== ========== =========== ==========
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
16 Weeks Ended April 21, 2001 -------------------------------------------------------------------- Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) Net sales................................... $ 3,465,166 $ 1,035,055 $ 22,210 $ (361,240) $ 4,161,191 Costs and expenses: Cost of sales............................. 3,280,265 859,049 16,873 (361,240) 3,794,947 Selling and administrative................ 150,323 161,907 5,083 - 317,313 Other..................................... 16,457 28,605 3,519 - 48,581 Impairment/restructuring charge (credit).. 6,255 (33,114) - - (26,859) Equity loss from subsidiaries............. (3,598) - - 3,598 - ----------- ----------- ---------- ---------- ----------- Total costs and expenses................ 3,449,702 1,016,447 25,475 (357,642) 4,133,982 ----------- ----------- ---------- ---------- ----------- Income (loss) before taxes................. 15,464 18,608 (3,265) (3,598) 27,209 Taxes on income (loss)..................... (2) 13,117 (1,372) - 11,743 ----------- ----------- ---------- ---------- ----------- Income (loss) before extraordinary charge $ 15,466 $ 5,491 $ (1,893) $ (3,598) $ 15,466 =========== =========== ========== ========== ===========
16 Weeks Ended April 15, 2000 --------------------------------------------------------------------- Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) Net sales................................... $ 3,569,998 $ 1,175,704 $ 22,715 $ (436,919) $ 4,331,498 Costs and expenses: Cost of sales............................. 3,360,908 973,622 17,213 (436,919) 3,914,824 Selling and administrative................ 185,768 181,648 4,891 - 372,307 Other..................................... 2,964 39,851 2,672 - 45,487 Impairment/restructuring charge........... 41,437 708 - - 42,145 Equity loss from subsidiaries............. 12,912 - - (12,912) - ----------- ----------- ---------- ----------- ----------- Total costs and expenses............... 3,603,989 1,195,829 24,776 (449,831) 4,374,763 ----------- ----------- ---------- ----------- ----------- Income (loss) before taxes.................. (33,991) (20,125) (2,061) 12,912 (43,265) Taxes on income (loss)...................... (8,118) (8,409) ( 865) - (17,392) ----------- ----------- ---------- ----------- ----------- Net income (loss)........................... $ (25,873) $ (11,716) $ (1,196) $ 12,912 $ (25,873) =========== =========== ========== =========== ===========
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
16 Weeks Ended April 21, 2001 --------------------------------------------------------------------- Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) Net cash provided by (used in) operating activities.................. $ (117,559) $ 6,588 $ (5,102) $ - $ (116,073) ----------- ----------- ---------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment..... (37,721) (9,704) (748) - (48,173) Other................................... 28,573 103,398 - - 131,971 ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) investing activities............................ (9,148) 93,694 (748) - 83,798 ----------- ----------- ---------- ----------- ----------- Cash flows from financing activities: Repayments on capital lease obligations. (3,886) (1,530) - - (5,416) Advances (to) from parent............... 97,159 (103,554) 6,395 - - Other................................... 34,584 - - - 34,584 ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) financing activities............................ 127,857 (105,084) 6,395 - 29,168 ----------- ----------- ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........................... 1,150 (4,802) 545 - (3,107) Cash and cash equivalents at beginning of year............................... 22,487 6,753 1,140 - 30,380 ----------- ----------- ---------- ----------- ----------- Cash and cash equivalents at end of year. $ 23,637 $ 1,951 $ 1,685 $ - $ 27,273 =========== =========== ========== =========== ===========
16 Weeks Ended April 15, 2000 --------------------------------------------------------------------- Parent Non- Company Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ (In thousands) Net cash provided by operating activities.. $ 48,545 $ 4,962 $ 1,139 $ - $ 54,646 ----------- ----------- ---------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment........ (11,416) (25,979) (1,103) - (38,498) Other...................................... 52,705 40 - - 52,745 ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) investing activities............................... 41,289 (25,939) (1,103) - 14,247 ----------- ----------- ---------- ----------- ----------- Cash flows from financing activities: Repayments on capital lease obligations.... (5,323) (1,659) - - (6,982) Advances (to) from parent.................. (41,545) 30,741 10,804 - - Other...................................... (47,875) - - - (47,875) ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) financing activities............................... (94,743) 29,082 10,804 - (54,857) ----------- ----------- ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.............................. (4,909) 8,105 10,840 - 14,036 Cash and cash equivalents at beginning of year.................................. (54,803) 61,307 179 - 6,683 ----------- ----------- ---------- ----------- ----------- Cash and cash equivalents at end of year... $ (59,712) $ 69,412 $ 11,019 $ - $ 20,719 =========== =========== ========== =========== ===========
8. The accompanying operating statements include the following:
16 weeks ended -------------- April 21, April 15, (In thousands) 2001 2000 ------------------------------------------------------------------- Depreciation and amortization (includes depreciation and amortization due to strategic plan) $50,667 $53,749 Excess depreciation and amortization due to the strategic plan $ - $ 4,395 Amortized costs in interest expense $ 2,180 $ 1,496
9. In December 1998, we announced the implementation of a strategic plan designed to improve the competitiveness of the retailers we serve and improve our performance by building stronger operations that can better support long-term growth. The four major initiatives of the strategic plan were to consolidate distribution operations, grow distribution sales, improve retail performance, and reduce overhead and operating expenses. Additionally, in 2000 we decided to reposition certain retail operations into our price impact format and sell or close the remaining conventional retail chains. During the first quarter of 2001, we sold or closed 66 retail stores. We plan to sell or close the remaining 31 retail stores by the end of July 2001. The plan, as expected, took two years to implement and is now substantially complete. Additional charges of approximately $20 million are estimated in 2001. The remaining charges represent severance related expenses, inventory markdowns for clearance for closed operations, and other exit costs that cannot be expensed until incurred. Charges after 2001 are expected to be minimal. The net effect of the strategic plan in the first quarter of 2001 was pre-tax income of $1 million. The after-tax effect was income of less than $1 million, or $.01 per share. The $1 million pre-tax income was included on several lines of the Consolidated Statement of Operations as follows: $3 million charge was included in net sales; $18 million charge was included in cost of sales and was primarily related to inventory markdowns for clearance for closed operations; $5 million charge was included in selling and administrative expense as disposition related costs recognized on a periodic basis. These charges were offset by $27 million of income in the Impairment/restructuring line related to the recovery of previously recorded asset impairment resulting from the planned sale of some retail stores, offset partially by severance related expenses. The first quarter charge consisted of the following components: o Net impairment recovery of $35 million. The components included recovering previously recorded goodwill impairment of $14 million and long-lived asset impairment of $24 million. Also included was impairment of $3 million related to other long-lived assets. o Restructuring charges of $8 million. The restructuring charges consisted primarily of severance related expenses for the divested or closed operating units. The restructuring charges also included professional fees incurred related to the restructuring process. o Other disposition and related costs of $26 million. These costs consisted primarily of inventory markdowns for clearance for closed operations and disposition related costs recognized on a periodic basis. The first quarter of 2001 charge relates to our business segments as follows: $7 million charge relates to the distribution segment and $12 million of income relates to the retail segment with the balance relating to support services expenses. The charges related to workforce reductions are as follows:
($'s in thousands) Amount Headcount - ------------------ ------ --------- 1998 Activity: Charge $ 25,441 1,430 Terminations (3,458) (170) -------- ------ Ending Liability 21,983 1,260 1999 Activity: Charge 12,029 1,350 Terminations (24,410) (1,950) -------- ------ Ending Liability 9,602 660 2000 Activity: Charge 53,906 5,610 Terminations (26,180) (1,860) -------- ------ Ending Liability 37,328 4,410 2001 Quarter 1 Activity: Charge 6,760 520 Terminations (10,186) (3,320) -------- ------ Ending Liability $ 33,902 1,610 ======== ======
The ending liability of approximately $34 million includes payments over time to associates already severed as well as union pension withdrawal liabilities. The breakdown of the 520 headcount reduction recorded during 2001 was: 145 from the distribution segment; 360 from the retail segment; and 15 from support services. Additionally, the strategic plan includes charges related to lease obligations which will be utilized as operating units or retail stores close, but ultimately reduced over remaining lease terms ranging from 1 to 20 years. The charges and utilization have been recorded to-date as follows:
($'s in thousands) Amount - ------------------ ------ 1998 Activity: Charge $ 28,101 Utilized (385) -------- Ending Liability 27,716 1999 Activity: Charge 15,074 Utilized (10,281) -------- Ending Liability 32,509 2000 Activity: Charge 37,149 Utilized (48,880) -------- Ending Liability 20,778 2001 Quarter 1 Activity: Charge 500 Utilized (5,263) -------- Ending Liability $ 16,015 ========
Assets held for sale included in other current assets at the end of the first quarter of 2001 were approximately $59 million, consisting of $24 million of distribution operating units and $35 million of retail stores. The pre-tax charge of the strategic plan in the first quarter of 2000 totaled $64 million. After tax, the expense for the first quarter of 2000 was $38 million or $.98 per share. The $64 million charge was included on several lines of the Consolidated Condensed Statement of Operations for the first quarter of 2000 as follows: $14 million was included in cost of sales and was primarily related to inventory markdowns for clearance for closed operations and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $8 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $42 million was included in the Impairment/restructuring charge line. The $64 million charge consisted of the following components: o Impairment of assets of $2 million. The impairment related to other long-lived assets. o Restructuring charges of $40 million. The restructuring charges consisted primarily of severance related expenses and pension withdrawal liabilities for the divested or closed operating units that were closed during the first quarter of 2000. The restructuring charges also included operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $21 million. These costs consist primarily of inventory markdowns for clearance for closed operations, additional depreciation and amortization on assets to be disposed of but not yet held for sale, disposition related costs recognized on a periodic basis. The $64 million charge relates to our business segments as follows: $37 million relates to the distribution segment and $17 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 periods 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 April 21, 2001, and the related condensed consolidated statements of operations and of cash flows for the sixteen weeks ended April 21, 2001 and April 15, 2000. These financial statements are the responsibility of the company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Fleming Companies Inc. and subsidiaries as of December 30, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 14, 2001 (except for the information under long-term debt and contingencies included in the notes to consolidated financial statements as to which the date is March 22, 2001), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 30, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Dallas, Texas May 24, 2001 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations General In early 1998, our board of directors and senior management began an extensive strategic planning process that evaluated all aspects of our business. In December 1998, the strategic plan was approved and implementation efforts began. In the course of implementing our strategic initiatives, since 1998 we have, among other accomplishments: o closed or consolidated 12 of our distribution centers, which resulted in: o increased average sales per full-line distribution center by more than 40% from $390 million in 1998 to $550 million in 2000, and o increased average sales per full-line distribution center employee by more than 12% from 1998 to 2000; o centralized the majority of our purchasing operations in our customer support center near Dallas, Texas; o centralized our accounting, human resources, information technology and other support services in our shared services center in Oklahoma City, Oklahoma; o sold or closed 207 conventional supermarkets through the end of the first quarter of 2001 with 31 more to be sold or closed in the next few months; o opened 22 additional price impact supermarkets; and o instituted a "culture of thrift" among our employees, in part through our Low Cost Pursuit Program. The plan, as expected, took two years to implement and is now substantially complete. Additional charges of approximately $20 million are estimated in 2001. The remaining charges represent severance related expenses, inventory markdowns for clearance for closed operations and other exit costs that cannot be expensed until incurred. Charges after 2001 are expected to be minimal. The first quarter of 2001 included pre-tax income of approximately $1 million (less than $1 million after-tax or $.01 per share) related to the strategic plan, including non-cash impairment adjustments of asset values, inventory markdowns for clearance for closed operations, and cash restructuring costs for severance related and other expenses. The first quarter of 2000 included a pre-tax charge of $64 million ($38 million after-tax or $.98 per share) related to the strategic plan, including non-cash impairments of asset values, inventory markdowns for clearance for closed operations, and cash restructuring cost for severance related expenses, lease terminations, and other expenses. The first quarter of 2001 also included one-time adjustments, including approximately $2 million in charges from litigation settlements and net additional interest expense of approximately $2 million due to the early retirement of debt, netting to a $3 million charge ($2 million after-tax or $.05 per share). There were no one-time adjustments for the first quarter of 2000. We recorded net income of $12 million or $.29 per share for the first quarter of 2001. Excluding the after-tax extraordinary charge of $3 million, or $.08 per share, related to the early retirement of debt and the strategic plan and one-time items, our net income was $17 million or $.41 per share. Net earnings for the first quarter of 2000 after excluding strategic plan charges was $12 million or $.30 per share. Currently, our expectations for 2001 are earnings per share of $1.96, excluding extraordinary charges, strategic plan and one-time items. Adjusted EBITDA for the first quarters of 2001 and 2000 were $136 million and $128 million, respectively. "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 non-recurring expense or income items). Adjusted EBITDA should not be considered as an alternative measure of our net income, operating performance, cash flow or liquidity. It is provided as additional information related to our ability to service debt; however, conditions may require conservation of funds for other uses. Although we believe adjusted EBITDA enhances a reader's understanding of our financial condition, this measure, when viewed individually, is not necessarily a better indicator of any trend as compared to conventionally computed measures (e.g., net sales, net earnings, net cash flows, etc.). Finally, amounts presented may not be comparable to similar measures disclosed by other companies. The following table sets forth the calculation of adjusted EBITDA for the first quarters of 2001 and 2000 (in millions):
April 21, April 15, 2001 2000 ---- ---- Net income (loss) before extraordinary charge: $ 15 $ (26) Add back: Taxes on income (loss) 12 (17) Depreciation/amortization 51 54 Interest expense 58 53 Equity investment results - 2 LIFO provision 1 3 ----- ----- EBITDA 137 69 Add back noncash strategic plan and one-time items* (18) 8 ----- ----- EBITDA excluding noncash strategic plan and one-time items 119 77 Add back strategic plan and one-time items ultimately requiring cash 17 51 ----- ----- Adjusted EBITDA $ 136 $ 128 ===== ===== * Excludes amounts for depreciation/amortization and equity investment results already added back.
Depreciation and amortization for the first quarter of 2000 includes $4 million of strategic plan charges. The adjusted EBITDA amount represents cash flow from operations excluding unusual or infrequent items. In our opinion, adjusted EBITDA is the best starting point when evaluating our ability to service debt. In addition, we believe it is important to identify the cash flows relating to unusual or infrequent charges and strategic plan charges, which should also be considered in evaluating our ability to service debt. Results of Operations Set forth in the following table is information regarding our net sales and certain components of earnings expressed as a percent of sales which are referred to in the accompanying discussion:
================================================================================ April 21, April 15, For the 16-weeks ended 2001 2000 - -------------------------------------------------------------------------------- Net sales 100.00 % 100.00 % Gross margin 8.80 9.62 Less: Selling and administrative 7.63 8.60 Interest expense 1.38 1.23 Interest income (.22) (.22) Equity investment results .01 .04 Impairment/restructuring charge (credit) (.65) .97 - -------------------------------------------------------------------------------- Total expenses 8.15 10.62 - -------------------------------------------------------------------------------- Income (loss) before taxes .65 (1.00) Taxes on income (loss) .28 (.40) - -------------------------------------------------------------------------------- Income(loss)before extraordinary charge .37 % (.60)% ================================================================================
Net sales. Sales for the first quarter (16 weeks) of 2001 decreased by $0.2 billion, or 4%, to $4.2 billion from the same period in 2000. Net sales for the distribution segment were $3.32 billion in 2001 compared to $3.27 billion in 2000. The increase in sales was due to growth in sales to both conventional food retail and new retail channel customers, offset partially by the loss of sales to United Supermarkets during the second quarter of 2000. In 2000, sales to United accounted for less than 3% of our total company sales. Kmart Corporation, our largest customer, accounted for 10.2% (or $424 million) and 9.7%(or $420 million) of our total net sales in the first quarter of 2001 and 2000, respectively. We expect annual sales to Kmart for 2001 to be approximately $2.6 billion, with an increase to approximately $4.5 billion annually in 2002. Retail segment sales decreased $0.2 billion, or 20%, in 2001 to $0.8 billion from the same period in 2000. The decrease in sales was due to the continued disposition of conventional retail stores in order to increase focus on our price impact retail stores. During the first quarter of 2001, we sold or closed 66 retail stores and reached agreements to sell 29 of the 31 remaining to sell or close. This is in addition to the 70 stores sold or closed during 2000. During the first quarter of 2001, we opened five Yes!Less stores and a Food 4 Less store with an additional seven Food 4 Less stores acquired early in the second quarter of 2001. Gross margin. Gross margin for the first quarter of 2001 decreased by $50 million, or 12%, to $366 million from $417 million for the same period in 2000, and also decreased as a percentage of net sales to 8.80% from 9.62% for the same period in 2000. After excluding the strategic plan charges and one-time items, gross margin for the first quarter of 2001 decreased by $45 million, or 10%, compared to the same period in 2000, and decreased as a percentage of net sales to 9.27% from 9.94% for the same period in 2000. The decrease in dollars was due primarily to the overall sales decrease, but was partly offset by positive results from centralizing procurement which leverages our buying power and improving warehouse productivity. After excluding the strategic plan charges and one-time items for the distribution segment, gross margin as a percentage of net sales improved slightly in the first quarter of 2001 compared to the same period in 2000 reflecting the benefits of the centralization of procurement. For the retail segment, gross margin as a percentage of net sales also improved in the first quarter of 2001 compared to the same period in 2000 due to the divesting or closing of underperforming stores and the centralization of procurement. The strategic plan charges and one-time items were lower in the first quarter of 2001 compared to the same period in 2000 for the distribution segment primarily due to additional depreciation and amortization on assets to be disposed of but not yet held for sale in 2000, but were higher for the retail segment primarily due to higher inventory markdowns for clearance for closed operations. Selling and administrative expenses. Selling and administrative expenses for the first quarter of 2001 decreased by $55 million, or 15%, to $317 million from $372 million for the same period in 2000 and decreased as a percentage of net sales to 7.63% for 2001 from 8.60% in 2000. After excluding the strategic plan charges and one-time items, selling and administrative expenses for the first quarter of 2001 decreased as a percentage of net sales to 7.43% from 8.41% for the same period in 2000. The decreases were due to rationalization of assets, centralization of administrative functions, and reduction of the significance of retail. The sales of the distribution segment represent a larger portion of total company sales than the retail segment and the distribution segment has lower operating expenses as a percentage of sales versus the retail segment. After excluding the strategic plan charges and one-time items for the distribution segment, selling and administrative expenses as a percentage of net sales improved in the first quarter of 2001 compared to the same period in 2000 due to the centralization of administrative functions and low cost pursuit initiatives. For the retail segment, selling and administrative expenses as a percentage of net sales decreased in the first quarter of 2001 compared to the same period in 2000 primarily due to selling and closing higher cost retail operations, reflecting the lower cost structure of our continuing retail operations. The strategic plan charges and one-time items were lower in the first quarter of 2001 compared to the same period in 2000 for the distribution segment due primarily to moving, recruitment, and training costs incurred during the first quarter of 2000 that were not incurred in 2001, but were higher for the retail segment due to costs of selling and closing 66 retail stores in the first quarter of 2001 compared to 24 retail stores in the first quarter of 2000. Operating earnings. Operating earnings for the distribution segment for the first quarter of 2001 increased $26 million, or 31%, to $109 million from $83 million in the same period of 2000. After excluding the strategic plan charges and one-time items, operating earnings increased by $21 million, or 22%, to $115 million from $94 million for the same period of 2000. Operating earnings improved primarily due to the benefits of consolidating distribution operating units, reducing costs partially due to warehouse productivity improvements, and centralizing certain procurement and administrative functions in support services. Operating earnings for the retail segment increased by $4 million to $16 million for the first quarter of 2001 from $12 million for the same period of 2000. After excluding the strategic plan charges and one-time items, operating earnings increased by $17 million to $35 million in the first quarter of 2001 from $18 million for the same period of 2000. Operating earnings were improved by the performance in continuing retail operations and the divesting or closing of underperforming retail operations. Operating earnings were also improved by centralizing certain administrative functions in support services. Support services expenses increased in the first quarter of 2001 compared to the same period of 2000 by approximately $26 million to $77 million from $51 million. After excluding the strategic plan charges and one-time items, support services expenses increased by $27 million to $73 million in the first quarter of 2001 from $46 million for the same period of 2000. The increase in expense was primarily due to centralizing certain procurement and administrative functions from the distribution and retail segments. Strategic plan charges were lower in 2001 due to moving and training expenses associated with the centralization of the procurement and administrative functions in 2000. Interest expense. Interest expense for the first quarter of 2001 increased approximately $5 million, or 8%, to $58 million for the first quarter of 2001 from $53 million for the same period in 2000 due primarily to $3 million of additional interest expense related to the early retirement of debt. The remaining increase was due to higher average debt balances and slightly higher rates. Interest income. Interest income of $9 million for the first quarter of 2001 was slightly lower than the same period of 2000 primarily due to lower average balances for direct financing leases with customers. Equity investment results. Our portion of operating losses from equity investments decreased to less than $1 million for the first quarter of 2001 from $2 million for the first quarter of 2000 primarily due to improved results of operations in certain of the underlying equity investments. Impairment/restructuring charge. The net pre-tax amount recorded in the Consolidated Condensed Statements of Operations (associated with the implementation of our strategic plan announced in 1998) was income of less than $1 million for the first quarter of 2001 compared to a $64 million charge for the same period of 2000. The amount in 2001 was recorded with income of $27 million reflected in the Impairment/ restructuring line and the balance reflected in other financial statement lines. The $64 million charge in 2000 was recorded with $42 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 used for the first quarters of 2001 and 2000 were 43.2% and 40.2%, 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. Extraordinary charge. We reflected an extraordinary after-tax charge of $3 million ($6 million pre-tax) in the first quarter of 2001 due to the early retirement of debt. See Note 7 in the notes to the Consolidated Condensed Financial Statements for further discussion regarding the debt retirement. Certain Accounting Matters. The Financial Accounting Standards Board (FASB) issued an exposure draft for Business Combinations and Intangible Assets in late 2000. One of the provisions of this exposure draft is to require use of a non-amortization approach to account for purchased goodwill. Under that approach, goodwill would not be amortized to earnings over a period of time. Instead, it would be reviewed for impairment and expensed against earnings only in the periods in which the recorded value of goodwill is more than its implied fair value. Goodwill amortization impacted the basic and diluted per share amount for the quarter by $0.12 and $0.13 in 2001 and 2000, respectively. This exposure draft is not final and may change before any new accounting standard is adopted. The FASB Emerging Issues Task Force (EITF) has recently reached a consensus on EITF 00-25 - Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products. EITF 00-25 provides guidance on income statement classification on consideration paid to a reseller of a vendor's products. This consensus will be implemented by the end of 2001, as required. We anticipate this consensus will provide for reclassifications of revenues and cost of sales within our financial statements with no effect on gross margin or earnings. Liquidity and Capital Resources In the first quarter ended April 21, 2001, our principal sources of liquidity were borrowings under our credit facility and the sale of certain assets. Our principal source of capital, excluding shareholders' equity, was generated by issuing bonds in the capital markets. Net cash provided by (used in) operating activities. Net cash expended by operating activities was $116 million in the first quarter of 2001 compared to a net inflow of $55 million for the same period in 2000. The primary use of funds was for working capital. Cash requirements related to the implementation and completion of the strategic plan (on a pre-tax basis) were $23 million in the first quarter of 2001 and are currently estimated to be $73 million for the full year 2001. We believe working capital reductions, proceeds from asset sales, and continued positive earnings will provide adequate cash flows to cover all of these costs. Net cash provided by investing activities. Total investment-related activity resulted in $84 million of positive net cash flow for the first quarter ended April 21, 2001, compared to $14 million in the same period of 2000. Cash provided by asset sales, collections on notes receivable and other investing-related activities was only partially offset by capital expenditures. Net cash provided by (used in) financing activities. Financing activities generated $29 million of net cash flows for the quarter ended April 21, 2001, compared to a $55 million use of cash flows for the same period of 2000. Total debt, including capital leases, decreased slightly in the first quarter of 2001. On March 23, 2001, we received approximately $50 million of proceeds from the sale of common stock to Yucaipa Companies, a transaction which gave Yucaipa 8.7% ownership of Fleming's outstanding common stock. We believe successful access to the credit and capital markets is dependent in part on maintaining credit ratings acceptable to institutional and individual investors. On February 28, 2001, Standard & Poor's ratings group announced it was upgrading its credit rating outlook for Fleming from "stable" to "positive". On March 5, 2001, Moody's Investors Service announced it was upgrading its credit ratings for Fleming. Listed below is a summary of our credit ratings.
Moody's Standard & Poor's ------- ----------------- From: To: From: To: ----- --- ----- --- Credit agreement loans Ba3 Ba2 BB BB Senior implied debt B1 Ba3 BB- BB- Senior unsecured debt B1 Ba3 B+ B+ Senior subordinated notes B3 B2 B B Outlook Positive Stable Stable Positive
On March 15, 2001, we sold $355 million of new 10 1/8% senior notes due 2008, and we deposited $315 million with the trustee to redeem all of the 10 5/8% senior notes due 2001, including an amount to cover accrued interest and the redemption premium. On April 16, 2001, our obligations under the indenture were discharged. The balance of the net proceeds was used to pay down our revolver loans. An extraordinary after-tax charge of approximately $3 million was recorded in connection with the early redemption. On March 15, 2001, we also sold $150 million of new 5.25% convertible senior subordinated notes due 2009 with a conversion price of $30.27 per share. The net proceeds of $146 million were used to pay down our revolver loans. At the end of the first quarter of 2001, outstanding loans and letters of credit under the credit facility totaled $175 million of term loans, consisting of $130 million of revolver loans, and $45 million of letters of credit. As of April 21, 2001, we could have borrowed an additional $425 million under the revolver. For the foreseeable future, our principal sources of liquidity and capital are expected to be cash flows from operating activities, our ability to borrow under our credit facility, and asset sale proceeds. In addition, lease financing may be employed for new retail stores and certain equipment. We believe these sources will be adequate to meet working capital needs, capital expenditures, strategic plan costs and other capital needs in the normal course of business for the next 12 months. Contingencies From time to time we face litigation or other contingent loss situations resulting from owning and operating our assets, conducting our business or complying (or allegedly failing to comply) with federal, state and local laws, rules and regulations which may subject us to material contingent liabilities. In accordance with applicable accounting standards, we record as a liability amounts reflecting such exposure when a material loss is deemed to be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, we disclose material loss contingencies in the notes to our financial statements when the likelihood of a material loss has been determined to be greater than "remote" but less than "probable." Such contingent matters are discussed in Note 6 in the notes to the consolidated condensed financial statements. An adverse outcome experienced in one or more of such matters, or an increase in the likelihood of such an outcome, could have a material adverse effect. 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 2001 and beyond regarding (i) our ability to successfully sustain the goals of our strategic plan and continue to reverse sales declines, cut costs and improve earnings; (ii) our assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; (iii) our ability to expand portions of our business or enter new facets of our business; and (iv) our expectations regarding the proceeds from asset sales and adequacy of capital and liquidity. We have 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 our knowledge and belief, the expected course of action and the expected future financial performance of Fleming. 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 our business and prospects are subject to a number of factors which could cause actual results to differ materially including the ability to achieve the expected synergies and anticipated cost savings from the Kmart alliance; unanticipated transition and start-up costs associated with the Kmart alliance; unanticipated problems in the supply chain due to the increased volumes resulting from the Kmart alliance; the ability to successfully generate new business; the risks associated with the successful execution of our strategic business plan; adverse effects of labor disruptions; adverse effects of the changing industry environment and increased competition; continuing sales declines and loss of customers; adverse results in pending or threatened litigation and legal proceedings, and exposure to other contingent losses; failure to achieve necessary cost savings; and the negative effects of our substantial indebtedness and the limitations imposed by restrictive covenants contained in our debt instruments. These and other items are described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2000 and in other periodic reports available from the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures about Market Risk In order to help maintain liquidity and finance business operations, we obtain long-term credit commitments from banks and other financial institutional lenders under which term loans and revolving loans are made. Such loans carry variable interest rates based on the London interbank offered interest rate ("LIBOR") plus a borrowing margin for different interest periods, such as one week, one month, and other periods up to one year. To assist in managing our debt maturities and diversify our sources of debt capital, we also use long-term debt which carries fixed interest rates. Changes in interest rates in the credit and capital markets and our improved credit ratings had a material impact on the fair values for our outstanding debt obligations. The table below presents a summary of certain categories of our financial instruments according to their respective interest rate profiles. For debt obligations, the table shows the principal amount of cash we expect to pay each year according to the scheduled maturities, as well as the average interest rates applicable to such maturities. SUMMARY OF FINANCIAL INSTRUMENTS
Maturities of Principal by Fiscal Year ------------------------------------------------------ (In millions, Fair Value Fair Value except rates) at 12/30/00 at 4/21/01 2001 2002 2003 2004 2005 Thereafter - ------------- ----------- ---------- ---- ---- ---- ---- ---- ---------- Debt with Variable Interest Rates - --------------------------------- Principal payable $ 427 $ 270 $ 28 $ 40 $ 172 $ 37 $ - $ - Average variable rate payable 8.1% 7.7% Based on LIBOR plus a margin Debt with Fixed Interest Rates - ------------------------------ Principal payable $ 668 $1,060 $ - $ - $ - $ 250 $ - $ 755 Average fixed rate payable 10.6% 9.6% 5.9% 6.5% 5.1% 10.5% - 9.3%
PART II. OTHER INFORMATION Item 1. Legal Proceedings Set forth below and in Note 6 in the notes to the consolidated condensed financial statements, which information is incorporated herein by reference, is information regarding litigation which became reportable or as to which a material development has occurred since the date of our Annual Report on Form 10-K for the fiscal year ended December 30, 2000: (1) Class Action Suits. In 1996, we and certain of our present and former officers and directors were named as defendants in nine purported class action suits filed by certain stockholders 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 our alleged "deceptive business practices," and our alleged failure to properly account for and disclose the contingent liability created by the David's Supermarkets case, a lawsuit we settled in April 1997 in which David's sued us for allegedly overcharging for products. The plaintiffs claimed that these alleged practices led to the David's case and to other material contingent liabilities, caused us to change our manner of doing business at great cost and loss of profit and materially inflated the trading price of our common stock. During 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. We 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. Briefing is complete in the Court of Appeals for the Tenth Circuit, and oral argument was conducted on May 15, 2001. The Tenth Circuit has not yet issued an opinion. 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 had 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. That motion was denied on January 8, 2001. The case was set for a status and scheduling conference on January 30, 2001. The court has entered an order setting this case for trial in October 2001. On April 30, 2001, a Memorandum of Understanding was signed which provides, among other things, for the parties in the noteholder case to proceed to agree on a Settlement Agreement which will include a payment by defendants and our insurer of $2.5 million in full satisfaction of the claim. The settlement will require court and class approval. In 1997, we won a declaratory judgment against certain of our insurance carriers regarding policies issued to us for the benefit of our officers and directors. On motion for summary judgment, the court ruled that our 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 apply 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. We intend to vigorously defend any remaining claims in these class action suits and pursue the issue of insurance discussed above, but we cannot predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. (2) Don's United Super (and related cases). We and two of our 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 of our current and former customers (Don's United Super, et al. v. Fleming, et al.). The 19 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 years before the filing of the litigation are barred by limitations, and that plaintiffs' fraud claims based upon fraudulent inducement that occurred more than 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, we 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 case (Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, 16 plaintiffs are asserting claims in the Coddington case, all but one of which have arbitration agreements with us. The plaintiffs assert claims virtually identical to those set forth in the Don's case, 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 case. 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. We have appealed the court's denial of arbitration to the United States Court of Appeals for the Eighth Circuit. The two plaintiffs that were ordered to arbitration have filed motions asking the court to reconsider the arbitration ruling. Two other cases had been filed before the Don's case in the same court (R&D Foods, Inc., et al. v. Fleming, et al.; and Robandee United Super, Inc., et al. v. Fleming, et al.) by 10 customers, some of whom are also plaintiffs in the Don's case. The earlier two cases, which principally seek an accounting of our 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 us. In March 2000, we and one former executive were named in a suit filed in the United States District Court for the Western 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, we anticipate that substantial damages will be claimed. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our motion and ordered the related Missouri cases (Don's United Super, Coddington Enterprises, Inc. and J&A Foods, Inc.) and the Storehouse Markets case (described below) transferred to the United States District Court for the Western District of Missouri for coordinated or consolidated pre-trial proceedings. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case (described below) to mediate their claims within 45 days of the order. On April 9 -- 11, 2001, the parties to the related Missouri cases participated in a mediation process held in Kansas City, Missouri pursuant to the court's order. Although the precise details of the mediation are subject to a confidentiality agreement among the parties and may not be disclosed, the mediation confirmed our expectation that the plaintiffs in the Don's and related cases will claim substantial damages. In addition, based on discussions with plaintiffs' counsel during the mediation, it appears unlikely that these related cases will be resolved before trial. We intend to vigorously defend against the claims in these related cases, but we are currently unable to predict the outcome of the cases. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. (3) Storehouse Markets. In 1998, we and one of our former division officers were named in a suit filed in the United States District Court for the District of Utah by several of our current and former customers (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. Damages have not been quantified by the plaintiffs; however, we anticipate that substantial damages will be claimed. The plaintiffs have made these claims on behalf of a class that would purportedly include current and former customers of our 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 our request for a discretionary appeal of the class certification order, and we are pursuing that appeal on an expedited basis. On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted our motion and ordered the Storehouse Markets case and the related Missouri cases (described above) transferred to the United States District Court for the Western District of Missouri for coordinated or consolidated pre-trial proceedings. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case (described below)to mediate their claims within 45 days of the order. On April 9 -- 11, 2001, the parties to the Storehouse case participated in a mediation process held in Kansas City, Missouri pursuant to the court's order. Although the precise details of the mediation are subject to a confidentiality agreement among the parties and may not be disclosed, the mediation confirmed our expectation that the plaintiffs in Storehouse will claim substantial damages. We intend to vigorously defend against these claims but we cannot predict the outcome of the case. An unfavorable outcome could have a material adverse effect on our financial condition and prospects. (4) 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 pre-judgment 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. On March 2, 2001, the court ordered the parties in the related Missouri cases, the Storehouse Markets case and the Welsh case to mediate their claims within 45 days of the order. The parties in the Welsh case have not yet mediated their claims. (5) Other. Our facilities and operations are subject to various laws, regulations and judicial and administrative orders concerning protection of the environment and human health, including provisions regarding the transportation, storage, distribution, disposal or discharge of certain materials. In conformity with these provisions, we have a comprehensive program for testing, removal, replacement or repair of our underground fuel storage tanks and for site remediation where necessary. We have established reserves that we believe will be sufficient to satisfy the anticipated costs of all known remediation requirements. We and others have been designated by the U.S. Environmental Protection Agency and by similar state agencies as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, or similar state laws, as applicable, with respect to EPA-designated Superfund sites. While liability under CERCLA for remediation at these sites is generally joint and several with other responsible parties, we believe that, to the extent we are ultimately determined to be liable for the expense of remediation at any site, such liability will not result in a material adverse effect on our consolidated financial position or results of operations. We are committed to maintaining the environment and protecting natural resources and human health and to achieving full compliance with all applicable laws, regulations and orders. We are a party to or threatened with various other litigation and contingent loss situations arising in the ordinary course of our business including: disputes with customers and former customers; disputes with owners and former owners of financially troubled or failed customers; disputes with landlords and former landlords; 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. Except as noted above, we do not believe that any such claim will have a material adverse effect on us. Item 4. Results of Votes of Security Holders The company held its annual meeting on May 15, 2001. Matters voted on were as follows: Election of directors - Carol B. Hallett, Guy A. Osborn, Herbert M. Baum, Kenneth M. Duberstein, Archie R. Dykes, Robert S. Hamada, and Mark S. Hansen were each elected members of the Board of Directors for terms expiring in 2002. Key Executive Retention Plan - Shareholders approved the proposed key executive retention plan pursuant to the terms of the plan. Ratification of independent auditors - Shareholders ratified the appointment of Deloitte & Touche LLP as independent auditors for 2001. The number of votes cast is as follows (votes in thousands):
For Withheld --- -------- Election of directors Carol B. Hallett 35,443 143 Guy A. Osborn 35,446 140 Herbert M. Baum 35,444 142 Kenneth M. Duberstein 35,444 142 Archie R. Dykes 35,439 147 Robert S. Hamada 35,437 149 Mark S. Hansen 35,435 151
For Against Abstain --- ------- ------- Key executive retention plan 32,838 2,326 422 Ratification of independent auditors 35,488 71 27
No other business came before the meeting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number - -------------- 4.10 Stock and Warrant Purchase Agreement by and between the Registrant and U.S. Transportation, LLC dated February 6, 2001,filed as Exhibit 4.1 to Form S-3 (Registration No.333-60176) filed on May 3, 2001 and incorporated herein by reference. 4.11 Registration Rights Agreement by and between the Registrant and U.S. Transportation, LLC dated March 22, 2001, filed as Exhibit 4.2 to Form S-3 (Registration No. 333-60176)filed on May 3, 2001 and incorporated herein by reference. 4.12 Indenture, dated as of March 15, 2001, among Fleming Companies, Inc., the Subsidiary Guarantors named therein and Bankers Trust Company, as Trustee, regarding the 10 1/8% Senior Notes due 2008, filed as Exhibit 4.9 to Form S-3(Registration No. 333-60184) filed on May 3, 2001 and incorporated herein by reference. 4.13 Indenture, dated as of March 15, 2001, among Fleming Companies, Inc., the Subsidiary Guarantors named therein and Bank One, N.A., as Trustee, regarding the 5.25% Convertible Senior Subordinated Notes due 2009, filed as Exhibit 4.3 to Form S-3 (Registration No. 333-60178) filed on May 3, 2001 and incorporated herein by reference. 4.14 Registration Rights Agreement, dated as of March 15, 2001,among Fleming Companies, Inc., the Subsidiary Guarantors named therein, Deutsche Banc Alex. Brown Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Chase Securities Inc. and UBS Warburg LLC., filed as Exhibit 4.11 to Form S-3 (Registration No. 333-60184) filed on May 3, 2001 and incorporated herein by reference. 4.15 Registration Rights Agreement, dated as of March 15, 2001, among Fleming Companies, Inc., the Subsidiary Guarantors named therein, Deutsche Banc Alex. Brown Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., JPMorgan Securities Inc. and UBS Warburg LLC, filed as Exhibit 4.4 to Form S-3 (Registration No. 333-60178) filed on May 3, 2001 and incorporated herein by reference. 10.76* Fleming Companies, Inc. 2001 Corporate Officer Long-Term Incentive Plan. 10.77* Fleming Companies, Inc. Key Executive Retention Plan, incorporated by reference to Exhibit A to Registrant's Proxy Statement dated April 3, 2001. 10.78* Second Amendment to Fleming Companies, Inc. 1999 Stock Incentive Plan. 10.79* Amendment No. 1 to the Fleming Companies, Inc. Executive Deferred Compensation Plan. 10.80** Agreement dated as of February 2, 2001 by Fleming Companies, Inc. and Kmart Corporation. 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter from Independent Accountants as to Unaudited Interim Financial Information - --------------- * Management contract, compensatory plan or arrangement. ** Information from this agreement has been omitted because the Registrant has requested confidential treatment. The information has been filed separately with the Securities and Exchange Commission. (b) Reports on Form 8-K: (1) On March 13, 2001, pursuant to Item 5, Registrant reported the execution of purchase agreements for the sale of up to $150,000,000 of 5.25% convertible Senior Subordinated Notes Due 2009 and $355,000,000 of 10 1/8% Senior Notes due 2008. (2) On March 16, 2001, pursuant to Item 5, Registrant announced the sale of the Notes referred to in (b)(1) above. 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: May 25, 2001 NEAL RIDER Neal Rider Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) INDEX TO EXHIBITS 4.10 Stock and Warrant Purchase Agreement Incorporated herein by reference by and between the Registrant and U.S. Transportation, LLC dated February 6, 2001 4.11 Registration Rights Agreement by and Incorporated herein by reference between the Registrant and U.S. Transportation, LLC dated March 22, 2001 4.12 Indenture, dated as of March 15, 2001, Incorporated herein by reference among Fleming Companies, Inc., the Subsidiary Guarantors named therein and Bankers Trust Company, as Trustee, regarding the 10 1/8% Senior Notes due 2008 4.13 Indenture, dated as of March 15, 2001, Incorporated herein by reference among Fleming Companies, Inc., the Subsidiary Guarantors named therein and Bank One, N.A., as Trustee, regarding the 5.25% Convertible Senior Subordinated Notes due 2009 4.14 Registration Rights Agreement, dated Incorporated herein by reference as of March 15, 2001,among Fleming Companies, Inc., the Subsidiary Guarantors named therein, Deutsche Banc Alex. Brown Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Chase Securities Inc. and UBS Warburg LLC 4.15 Registration Rights Agreement, dated Incorporated herein by reference as of March 15, 2001, among Fleming Companies, Inc., the Subsidiary Guarantors named therein, Deutsche Banc Alex. Brown Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., JPMorgan Securities Inc. and UBS Warburg LLC 10.76 Fleming Companies, Inc. 2001 Corporate Filed herewith electronically Officer Long-Term Incentive Plan 10.77 Fleming Companies, Inc. Key Executive Incorporated herein by reference Retention Plan 10.78 Second Amendment to Fleming Companies, Filed herewith electronically Inc. 1999 Stock Incentive Plan 10.79 Amendment No. 1 to the Fleming Filed herewith electronically Companies, Inc. Executive Deferred Compensation Plan 10.80 Agreement dated as of February 2, 2001 Filed herewith electronically by Fleming Companies, Inc. and Kmart Corporation 12 Computation of Ratio of Earnings to Filed herewith electronically Fixed Charges 15 Letter from Independent Accountants as Filed herewith electronically to Unaudited Interim Financial Information EX-10 2 ex1076.txt Exhibit 10.76 FLEMING COMPANIES, INC. 2001 CORPORATE OFFICER LONG-TERM INCENTIVE PLAN FLEMING COMPANIES, INC. 2001 CORPORATE OFFICER LONG-TERM INCENTIVE PLAN Table of Contents Page ---- ARTICLE I. Purpose .................................................... 1 1.1 Purpose ...................................................... 1 1.2 Establishment ................................................ 1 1.3 Stock Units Subject to the Plan .............................. 1 ARTICLE II. Definitions ............................................... 1 2.1 "Account" .................................................... 1 2.2 "Affiliated Entity" .......................................... 1 2.3 "Award" ...................................................... 1 2.4 "Award Agreement" ............................................ 1 2.5 "Award Period" ............................................... 1 2.6 "Base Amount" ................................................ 2 2.7 "Beneficiary" ................................................ 2 2.8 "Board" ...................................................... 2 2.9 "Change of Control Event" .................................... 2 2.10 "Code" ....................................................... 3 2.11 "Committee" .................................................. 3 2.12 "Common Stock" ............................................... 3 2.13 "Company" .................................................... 3 2.14 "Date of Grant" .............................................. 4 2.15 "Earnings" ................................................... 4 2.16 "Earnings Per Share" ......................................... 4 2.17 "Eligible Associate" ......................................... 4 2.18 "Exercise Date" .............................................. 4 2.19 "Expiration Date" ............................................ 4 2.20 "Extraordinary Charge Items" ................................. 4 2.21 "Extraordinary Revenue Items" ................................ 4 2.22 "Fair Market Value" .......................................... 4 2.23 "Participant" ................................................ 4 2.24 "Plan" ....................................................... 5 2.25 "Stock Appreciation" ......................................... 5 2.26 "Stock Units" ................................................ 5 2.27 "Subsidiary" ................................................. 5 2.28 "Target" ..................................................... 5 2.29 "Vesting Date" ............................................... 5 2.30 "Year" ....................................................... 5 ARTICLE III. Administration ........................................... 5 3.1 Administration of the Plan ................................... 5 3.2 Committee to Make Rules and Interpret Plan ................... 6 ARTICLE IV. Grant of Awards ........................................... 6 4.1 Committee to Grant Awards to Eligible Associates ............. 6 ARTICLE V. Eligibility ................................................ 6 ARTICLE VI. Awards .................................................... 6 6.1 Grant of Awards .............................................. 6 6.2 Conditions of Awards ......................................... 6 ARTICLE VII. Stock Adjustments ........................................ 8 ARTICLE VIII. General ................................................. 8 8.1 Amendment or Termination of Plan ............................. 8 8.2 Termination of Employment .................................... 8 8.3 No Transferability ........................................... 9 8.4 No Trust ..................................................... 9 8.5 Withholding Taxes ............................................ 9 8.6 Change of Control ............................................ 9 8.7 Amendments to Awards ......................................... 9 8.8 Regulatory Approval and Listings .............................10 8.9 No Part of Other Plans .......................................10 8.10 Right to Continued Employment ................................10 8.11 Reliance on Reports ..........................................10 8.12 Obligations Binding Upon Successors ..........................10 8.13 Construction .................................................10 8.14 Governing Law; Severability ..................................10 8.15 Consent to Plan Terms ........................................10 8.16 Information Required of Participants .........................10 8.17 Benefits Payable to Incompetents .............................10 FLEMING COMPANIES, INC. 2001 CORPORATE OFFICER LONG-TERM INCENTIVE PLAN ARTICLE I. Purpose 1.1 Purpose. This 2001 Corporate Officer Long-Term Incentive Plan (the "Plan") is established by Fleming Companies, Inc. (the "Company") to create incentives which are designed to motivate Participants to put forth maximum effort toward the success and growth of the Company and to enable the Company to attract and retain experienced individuals who by their position, ability and diligence are able to make important contributions to the Company's success. Toward these objectives, the Plan provides for granting Awards of Stock Units to Eligible Associates subject to the conditions set forth in the Plan. 1.2 Establishment. The Plan is effective as of February 27, 2001 and for a period of ten years thereafter. The Plan shall continue in effect until all matters relating to the payment of Awards and administration of the Plan have been settled. 1.3 Stock Units Subject to the Plan. Subject to the limitations set forth in the Plan, Awards may be made under this Plan for a total of Four Million (4,000,000) Stock Units. ARTICLE II. Definitions 2.1 "Account" means the which will be credited the Participant's Award of Stock Units as well as any appreciation or depreciation attributable to the Common Stock represented by the Stock Units and any equivalent dividends declared on the Common Stock. 2.2 "Affiliated Entity" means any partnership or limited liability company in which a majority of the partnership or other similar interest thereof is owned or controlled, directly or indirectly, by the Company or one or more of its Subsidiaries or Affiliated Entities or a combination thereof. For purposes hereof, the Company, a Subsidiary or an Affiliated Entity shall be deemed to have a majority ownership interest in a partnership or limited liability company if the Company, such Subsidiary or Affiliated Entity shall be allocated a majority of partnership or limited liability company gains or losses or shall be or control a managing director or a general partner of such partnership or limited liability company. 2.3 "Award" means, individually or collectively, any Award granted under the Plan to an Eligible Associate by the Committee pursuant to such terms, conditions, restrictions, and/or limitations, if any, as the Committee may establish by the Award Agreement or otherwise. For the purpose of this Plan, the term "Award" shall only mean the amount of Stock Appreciation attributable to the Stock Units subject to the Award at the applicable Exercise Date. 2.4 "Award Agreement" means any written instrument that establishes the terms, conditions, restrictions, and/or limitations applicable to an Award in addition to those established by this Plan and by the Committee's exercise of its administrative powers. 2.5 "Award Period" shall mean a fixed period of time commencing with the Date of Grant and ending on the first to occur of (i) the Exercise Date or (ii) Expiration Date of the Award as provided in the Award Agreement. 2.6 "Base Amount" means the Fair Market Value of each Stock Unit on the Date of Grant of the Award. 2.7 "Beneficiary" means the person or entity designated by the Participant to receive his vested Award in the event of the death of the Participant. 2.8 "Board" means the Board of Directors of the Company. 2.9 "Change of Control Event" means each of the following: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more (the "Triggering Percentage") of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, in the event the "Incumbent Board" (as such term is hereinafter defined) pursuant to authority granted in any rights agreement to which the Company is a party (the "Rights Agreement") lowers the acquisition threshold percentages set forth in such Rights Agreement, the Triggering Percentage shall be automatically reduced to equal the threshold percentages set pursuant to authority granted to the board in the Rights Agreement; and provided, further, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (x), (y), and (z) of subsection (c) of this Section 2.9; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, appointment or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for purposes of this definition, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, share exchange, merger or consolidation or acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (x) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction will own the Company through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (y) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (z) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of (x) a complete liquidation or dissolution of the Company or, (y) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of the Company or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition, and (C) at least a majority of the members of the board of directors of such corporation will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of the Company. 2.10 "Code" means the Internal Revenue Code of 1986, as amended. References in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. 2.11 "Committee" means the Compensation & Organization Committee of the Board. 2.12 "Common Stock" means the common stock, par value $2.50 per share, of the Company, and after substitution, such other stock as shall be substituted therefor as provided in Article VII. 2.13 "Company" means Fleming Companies, Inc., an Oklahoma corporation. 2.14 "Date of Grant" means the date on which the granting of an Award to an Eligible Associate is authorized by the Committee or such later date as may be specified by the Committee in such authorization. 2.15 "Earnings" shall mean, for the Year of determination of an Award, the consolidated gross revenues of the Company (excluding Extraordinary Revenue Items) computed in accordance with GAAP, consistently applied, from which shall be deducted an amount for such period equal to the aggregate of all consolidated costs, expenses and other charges for such period (excluding Extraordinary Charge Items) and income taxes for such period computed in accordance with GAAP, consistently applied. 2.16 "Earnings Per Share" shall mean, for the applicable Year of determination of an Award, Earnings divided by the weighted average shares outstanding for a fully diluted earnings per share calculation as determined in accordance with GAAP consistently applied. 2.17 "Eligible Associate" means any key associate of the Company, a Subsidiary, or an Affiliated Entity who is classified as an officer of any such entities, in accordance with the Company's policies. 2.18 "Exercise Date" means the date on which the Participant elects to exercise his Stock Units as provided in Article VI hereof. 2.19 "Expiration Date"means the date the Award will expire and be cancelled as provided in the Award Agreement. 2.20 "Extraordinary Charge Items" means for the Year of determination of an Award: (i) expense items and other charges as determined extraordinary in accordance with GAAP, consistently applied, as shall appear on the consolidated earnings statements of the Company for such Year; and (ii) expense items and other charges the Committee considers non-operating and by nature unusual or infrequent. 2.21 "Extraordinary Revenue Items"means for the Year of determination of an Award: (i) revenue items determined as extraordinary in accordance with GAAP, consistently applied, as shall appear on the consolidated earnings statements of the Company, and (ii) revenue items the Committee considers non-operating and by nature unusual or infrequent. 2.22 "Fair Market Value" means (A) during such time as the Common Stock is listed upon the New York Stock Exchange or other exchanges or the Nasdaq/ National Market System, the average of the highest and lowest sales prices of the Common Stock as reported by such stock exchange or exchanges or the Nasdaq/National Market System on the day for which such value is to be determined, or if no sale of the Common Stock shall have been made on any such stock exchange or the Nasdaq/National Market System that day, on the next preceding day on which there was a sale of such Common Stock or (B) during any such time as the Common Stock is not listed upon an established stock exchange or the Nasdaq/National Market System, the mean between dealer "bid" and "ask" prices of the Common Stock in the over-the-counter market on the day for which such value is to be determined, as reported by the National Association of Securities Dealers, Inc. 2.23 "Participant" means an Eligible Associate of the Company, a Subsidiary, or an Affiliated Entity to whom an Award has been granted by the Committee under the Plan. 2.24 "Plan" means Fleming Companies, Inc. 2001 Corporate Officer Long-Term Incentive Plan. 2.25 "Stock Appreciation" means the difference between the Fair Market Value of each Stock Unit and the Base Amount for each Stock Unit on the Exercise Date. 2.26 "Stock Units" means those monetary units which may be granted to Participants pursuant to Article IV hereof, which represent a like number of shares of Common Stock. 2.27 "Subsidiary" shall have the same meaning set forth in Section 424 of the Code. 2.28 "Target" means the Earnings Per Share goal established by the Committee which must be attained or exceeded in the Year immediately prior to the applicable Vesting Date. 2.29 "Vesting Date" means the date on which the Participant satisfies all the requirements to earn/vest in a non-forfeitable right to the Stock Appreciation attributable to the Stock Units subject to the Award which may be paid to the Participant on the Exercise Date. 2.30 "Year" means the fiscal Year of the Company. ARTICLE III. Administration 3.1 Administration of the Plan. The Plan shall be administered by the Committee. Unless otherwise provided in the by-laws of the Company or the resolutions adopted from time to time by the Board establishing the Committee, the Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The Committee shall hold meetings at such times and places as it may determine. A majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present or acts reduced to or approved in writing by a majority of the members of the Committee shall be the valid acts of the Committee. Subject to the provisions of the Plan, the Committee shall have exclusive power to: (a) Select the Eligible Associates to participate in the Plan. (b) Determine the time or times when Awards will be made. (c) Determine the number of Stock Units subject to the Award, all the terms, conditions (including performance requirements), restrictions and/or limitations, if any, of an Award, including the time and conditions of exercise or vesting, and the terms of any Award Agreement, which may include the waiver or amendment of prior terms and conditions or acceleration or early vesting or payment of an Award under certain circumstances determined by the Committee in its sole discretion. (d) Accelerate the vesting, exercise or payment of an Award or the performance requirements or period of an Award. (e) Take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan. 3.2 Committee to Make Rules and Interpret Plan. The Committee in its sole discretion shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee's interpretation of the Plan or any Awards and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties. ARTICLE IV. Grant of Awards 4.1 Committee to Grant Awards to Eligible Associates. The Committee may, from time to time, grant Awards to one or more Eligible Associates. Provided, however, the aggregate number of Stock Units (and/or shares of Common Stock to which the Stock Units relate) made subject to an Award to any Eligible Associate in any calendar year may not exceed 300,000. Any Stock Units related to Awards which terminate by expiration, forfeiture, cancellation or otherwise without the payment of the Stock Appreciation shall be available again for grant under the Plan. The Committee shall from time to time establish guidelines for the grant of Awards to Eligible Associates. ARTICLE V. Eligibility Subject to the provisions of the Plan, the Committee shall, from time to time, select from the Eligible Associates those to whom Awards shall be granted and shall determine the type or types of Awards to be made and shall establish in the related Award Agreements the terms, conditions, restrictions and/or limitations, if any, applicable to the Awards in addition to those set forth in the Plan and the administrative rules and regulations issued by the Committee. ARTICLE VI. Awards 6.1 Grant of Awards. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Awards to Eligible Associates. Each grant of an Award shall be evidenced by an Award Agreement executed by the Company and the Eligible Associate, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 6.2. 6.2 Conditions of Awards. Each Award so granted shall be subject to the following conditions: (a) Minimum Vesting Requirements. Except as otherwise specifically provided in the Plan, Awards granted will vest on the applicable Vesting Date based upon the Participant's continued employment to such date and attainment of specified performance objective(s) established by the Committee which objective(s) may include attainment of a specified threshold level of Earnings Per Share of Common Stock (Target) for the Year immediately prior to the applicable Vesting Date. Vesting shall be limited in such a way that (i) no portion of the Award will vest until one year after the Date of Grant, (ii) no more than one-third of the shares subject to the Award is eligible to vest until one year after Date of Grant; (iii) no more than two-thirds of the shares subject to the Award is eligible to vest until at least two years after Date of Grant and (iv) the entire Award cannot vest until at least three years after Date of Grant. (b) Forfeiture of Award. Until occurrence of the applicable Vesting Date, and except as provided in the Plan, a Participant's Award will be forfeited upon the failure to (i) remain in the employ of the Company, Subsidiary or Affiliated Entity and (ii) attain the required performance goals such as Earnings Per Share (Target) for the applicable Year. (c) Base Amount. Each Award shall state the Base Amount which shall be set by the Committee at the Date of Grant; provided, however, no Award shall be granted at a Base Amount which is less than the Fair Market Value of the Common Stock on the Date of Grant. (d) Stock Units. Stock Units are granted in the form of Stock Units equivalent to the Fair Market Value of the shares of Common Stock represented by the Award. No stock certificates shall be issued with respect to such Stock Units, but the Company shall maintain an Account in the name of the Participant to which such Stock Unit shall relate. No voting rights or other stock ownership rights shall apply to such Stock Units. Each such Stock Unit shall represent the right to receive on the Exercise Date a cash payment equal to the Stock Appreciation. (e) Exercise of Award. Awards granted under the Plan (and which become exercisable only after attainment of the requirements for vesting) shall be exercisable, in whole or in such installments and at such times, and shall expire at such time, as provided in the Award Agreement. Exercise of an Award shall be by written notice to Scott Northcutt, Senior Vice President - Human Resources at least two business days in advance of such exercise stating the election to exercise in the form and manner determined by the Committee. Upon the exercise of an Award, the same number of the underlying Stock Units which are exercised shall be surrendered and cancelled, and the Participant shall have no further right or interest (including future Stock Appreciation or dividend equivalents) in such exercised Stock Units of any nature whatsoever. (f) Dividends and Dividend Equivalents. If during the Award Period cash dividends or other cash distributions are paid with respect to shares of Common Stock, the Committee may provide Agreement that a similar amount shall be credited to the Participant's Account, and the Participant shall be entitled to receive on the Exercise Date a cash payment equal to the cash dividends or cash distributions that he would have received if the Stock Units had been granted in the form of shares of Common Stock rather than Stock Units equivalent thereto. If, during the Award Period, shares of Common Stock or other securities or property are distributed with respect to Common Stock, the Committee may provide in the Award Agreement that additional Stock Units equivalent to such shares, securities or property shall be added to the Participant's Account as additional Stock Units and shall be subject to all other limitations and restrictions imposed upon the underlying Stock Units. (g) Term of Award. The term of each Award shall not exceed five years from the Vesting Date. If a Participant fails to exercise an Award within five years from the Vesting Date which is the Expiration Date, the Award will be deemed exercised on such Expiration Date, and will result in the automatic payment of the Award and any cash dividends or distributions attributable to such Award on the applicable Expiration Date. (h) Beneficiary Designation. In the event of the death of a Participant during the Award Period, then, the portion of the Participant's Award with respect to which Vesting Dates have occurred together with any cash payments allocated to his Account by Section (f) above shall be paid to the then surviving Beneficiary designated by the Participant, and if there is no Beneficiary then surviving, then such benefits will automatically be paid to the estate of the Participant. (i) Other Terms and Conditions. Among other conditions that may be imposed by the Committee, if deemed appropriate, are those relating to (i) the period or periods and the conditions of exercisability of any Award; (ii) the minimum periods during which Participants must be employed by the Company, its Subsidiaries, or an Affiliated Entity, or must hold Awards before they may be exercised; (iii) conditions under which such Awards may be subject to forfeiture; (iv) the frequency of exercise of the Award; (v) the achievement by the Company of specified performance criteria; and (vi) non-compete and protection of business matters. (j) Shareholder Rights. No Participant shall have a right as a shareholder prior to or after the exercise of the Award. ARTICLE VII. Stock Adjustments In the event of any change in the outstanding shares of Common Stock of the Company by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Committee shall proportionately adjust, in an equitable manner, the number of Stock Units held in the Participants' Accounts under the Plan. The foregoing adjustment shall be made in a manner that will cause the relationship between the aggregate appreciation in outstanding Common Stock and earnings per share of the Company and the increase in value of each Stock Unit granted hereunder to remain unchanged as a result of the applicable transaction. ARTICLE VIII. General 8.1 Amendment or Termination of Plan. The Committee may alter, suspend or terminate the Plan at any time. In addition, the Committee may, from time to time, amend the Plan in any manner. However, no such termination or amendment shall adversely affect a Participant's rights under the Plan with respect to any Award which has been made without the affected Participant's written consent. Any such alteration, amendment, suspension or termination of the Plan shall be prospective only. 8.2 Termination of Employment. Except as provided herein, upon termination of employment, all vested/earned amounts of Stock Appreciation attributable to the Stock Units in an Award (including any unpaid dividend equivalents accrued on the foregoing) shall be paid to the Participant (or his Beneficiary in the case of death) as soon as administratively practical. If an Eligible Associate's employment with the Company, a Subsidiary, or an Affiliated Entity terminates for a reason other than death, disability, retirement, or any approved reason, all unearned and nonvested Awards, including, but not by way of limitation, all unpaid dividend equivalents accrued on the foregoing, shall be cancelled and forfeited, as the case may be, unless the Eligible Associate's Award Agreement provides otherwise. The Committee shall determine what events constitute disability, retirement, or termination for an approved reason for purposes of the Plan. The Committee may, at is discretion, provide for the acceleration of the vesting of an unvested Award in the event of an Eligible Associate's death, disability, retirement, or termination for an approved reason. 8.3 No Transferability. No right or benefit under this Plan shall be subject in any manner to garnishment, attachment, anticipation, alienation, sale, transfer, assignment, gift, pledge, encumbrance, or disposition, hypothecation, levy, execution or the claim to creditors, either voluntarily or involuntarily of the Participant, and any attempt to so garnish, attach, anticipate, alienate, sell, transfer, assign, gift, pledge, encumber, dispose, hypothecate, levy or execute on the same shall be null and void, and neither shall such benefits or beneficial interest be liable or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such funds are payable. 8.4 No Trust. No action under this Plan by the Company, a Subsidiary, or an Affiliated Entity shall be construed as creating a trust, escrow or other secured or segregated fund in favor of the Participant, his Beneficiary, or any other persons otherwise entitled to his/her Award. The status of the Participant and his Beneficiary with respect to any liabilities assumed by the Company, a Subsidiary or an Affiliated Entity hereunder shall be solely those of unsecured creditors of the Company, Subsidiary or Affiliated Entity (if such entity is the employer of the Participant). Any asset acquired or held by the Company, Subsidiary or Affiliated Entity in connection with the liabilities assumed hereunder, shall not be deemed to held under any trust, escrow or other secured or segregated fund for the benefit of the Participant or his Beneficiaries, or to be security for the performances or obligations of the Company, any Subsidiary or Affiliated Entity, but shall be, and remain a general, unpledged, unrestricted asset of the Company, the Subsidiary, or the Affiliated Entity (whichever is the employer of the Participant) at all times subject to the claims of the general creditors of the Company, any Subsidiary, or Affiliated Entity (whichever is the employer of the Participant). 8.5 Withholding Taxes. Unless otherwise paid by the Participant, the Company shall be entitled to deduct from any payment under the Plan (including Stock Appreciation or dividend equivalents, if any), the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment or may require the Participant to pay to it such tax prior to and as a condition of the making of such payment. 8.6 Change of Control. Awards granted under the Plan to any Eligible Associate may, in the discretion of the Committee, provide that such Awards shall be immediately vested, fully earned and exercisable upon the occurrence of a Change of Control Event. 8.7 Amendments to Awards. The Committee may at any time unilaterally amend the terms of any Award Agreement, whether or not presently exercisable or vested, to the extent it deems appropriate; provided, however, that any such amendment which is adverse to the Participant shall require the Participant's consent. 8.8 Regulatory Approval and Listings. The Company shall use its best efforts to comply with all applicable laws and regulations with regard to the establishment and operation of the Plan. 8.9 No Part of Other Plans. The benefits provided under this Plan shall not be deemed to be a part of or considered in the calculation of any other benefit provided by the Company, any Subsidiary or Affiliated Entity to its Eligible Associates. The Company assumes and shall have no obligation to Eligible Associates except as expressly provided in the Plan. This Plan is a complete statement of the terms and conditions of the Plan. 8.10 Right to Continued Employment. Participation in the Plan shall not give any Eligible Associate any right to remain in the employ of the Company, any Subsidiary, or any Affiliated Entity. The Company or, in the case of employment with a Subsidiary or an Affiliated Entity, the Subsidiary or Affiliated Entity, reserves the right to terminate any Eligible Associate at any time. Further, the adoption of this Plan shall not be deemed to give any Eligible Associate or any other individual any right to be selected as a Participant or to be granted an Award. 8.11 Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than himself or herself. In no event shall any person who is or shall have been a member of the Committee or of the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith. 8.12 Obligations Binding Upon Successors. The obligations of the Company under this Plan shall not be binding upon successors of the Company, its assigns and transferees. 8.13 Construction. Masculine pronouns and other words of masculine gender shall refer to both men and women. The titles and headings of the sections in the Plan are for the convenience of reference only, and in the event of any conflict, the text of the Plan rather than such title or heading shall control. 8.14 Governing Law; Severability. The validity of the Plan or any of its provisions shall be construed, administered and governed in all respects under the laws of the State of Texas. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions shall continue to be fully effective. 8.15 Consent to Plan Terms. By electing to participate in this Plan, a Participant shall be deemed conclusively to accept and consent to all the terms of this Plan and to all actions and decisions of the Company and/or Board. Such terms and consent shall apply to and be binding upon each Participant's Beneficiary or Beneficiaries, personal representative's and other successors in interest. 8.16 Information Required of Participants. Payment of Awards shall be made as provided in this Plan and no formal claim shall be required therefor. 8.17 Benefits Payable to Incompetents. Any benefits payable hereunder to a minor or other person under legal disability may be made, at the discretion of the Committee, (i) directly to such person, or (ii) to a parent, spouse, relative by blood or marriage, or the legal representative of such person. The Committee shall not be required to see to the application of any such payment, and the payee's receipt shall be a full and final discharge of the Committee's responsibility hereunder. EX-10 3 ex1078.txt Exhibit 10.78 SECOND AMENDMENT TO FLEMING COMPANIES, INC. 1999 STOCK INCENTIVE PLAN Pursuant to the authority granted to the Board of Directors of Fleming Companies, Inc. in Section 11.1 of the Fleming Companies, Inc. 1999 Stock Incentive Plan (the "Plan"), the Plan is hereby amended as follows: Subsection 8.2(c) of the Plan is hereby amended by deleting said Subsection in its entirety and substituting therefor the following: "(c) Vesting - Deferral of Payment. Except as otherwise provided in this Subsection, with respect to each Eligible Director, shares of Directors' Restricted Stock held by the Escrow Agent shall fully vest and be nonforfeitable on the date that is one year from the date of the Award if the Company's Net Earnings From Operations for the 13 full Periods preceding the date of such determination exceed the Company's Net Earnings From Operations for Fiscal Year prior to the date of the Award by at least 5%, such date being herein sometimes referred to as the date the shares of Directors' Restricted Stock 'Vest' or 'Vesting' occurs or shares of Directors' Restricted Stock become 'Vested.' Provided, however, with the consent of the Committee, following a request by an Eligible Director, the Vesting of shares of Directors' Restricted Stock may be accelerated in whole or in part to the date of an Eligible Director's Termination of Service if the Company's Net Earnings From Operations for the 13 full Periods preceding Termination of Service of the Eligible Director exceed the Company's Net Earnings from Operations for the Fiscal Year prior to the date of the Award by at least 5%. (i) Except as otherwise provided in Subsection (ii) below, as such Directors' Restricted Stock Vests in accordance with this Plan, the Escrow Agent shall deliver to such Participant or respective Beneficiary (in the case of an Eligible Director's death), certificates representing such Vested shares of Directors' Restricted Stock as provided in Section 9.2. As a condition precedent to delivering a certificate representing shares of Directors' Restricted Stock to the Escrow Agent, the Committee may require each Eligible Director to deliver to the Escrow Agent a duly executed irrevocable stock power or powers (in blank) covering the Director's Restricted Stock represented by such certificate. (ii) At the time of or prior to the Award of the Directors' Restricted Stock, the Eligible Director may elect to (1) have his Directors' Restricted Stock Award controlled by the provisions of Subsection (i) above, or (2) defer the payment of such shares of Directors' Restricted Stock that may Vest in accordance with this Plan to the trustee of a grantor trust established by the Company (the 'Trust'). The Eligible Director must make such election prior to March 15, 2001 for the Directors' Restricted Stock Awards that will be made with respect to 2001 and prior to January 1 of the year in which any subsequent Directors' Restricted Stock Award made after 2001. If the Eligible Director makes the election to defer the Directors' Restricted Stock Award, then, such shares of Directors' Restricted Stock subject to the Award shall be issued in the name of the trustee of the Trust and a separate recordkeeping account (the `Account') will be established in the Trust for the benefit of the Eligible Director. During the period that these shares of Directors' Restricted Stock are held by the trustee, any cash dividends paid with respect to such shares as provided in Subsection 8.2(b) above, shall be credited to the Eligible Director's Account. Until the date such shares Vest as provided in the Plan, such shares of Directors' Restricted Stock shall be subject to the risk of forfeiture in the event that the performance requirements as contained in Subsection (i) above have not been attained. After the date of Vesting, the Eligible Director will be Vested in his Account in the Trust, and such shares shall continue to be held by the trustee and thereafter any future appreciation or depreciation with respect to the shares of Directors' Restricted Stock, as well as any distributions (cash or otherwise that are made with respect to such shares of Directors' Restricted Stock), shall be allocated on a reasonable and consistent basis to each such Account; and, the Accounts shall be valued at least on a quarterly basis. Distributions from the Trust will only be made upon the Eligible Director's Termination of Service unless the Board elects to effect distribution of shares of Directors' Restricted Stock following a Change of Control. It is intended by the Company that the distributions from the Trust will be made in shares of the Directors' Restricted Stock represented by the Eligible Director's beneficial interest in the Trust equal to his Account. However, the trustee of the Trust has the discretion to invest and reinvest the assets in the Trust as it determines. Therefore, while it is not intended, it is possible that distributions will be made in cash of a value equivalent to the Eligible Director's Account in the Trust determined at the applicable point in time rather than in Directors' Restricted Stock. While shares of Directors' Restricted Stock are held in the Trust, the Eligible Director shall neither have the right to vote such shares (but such shares will be voted by the trustee), nor will the Eligible Director have any other incidents of ownership or rights as a shareholder with respect to such shares held in the Trust. The Company is authorized to cause the Trust to be established which will include such additional terms and provisions as the Company deems necessary to carry out the intent of this Subsection 8.2(c)(ii). As long as the Directors' Restricted Stock is held by the Trust, it will be subject to the provisions of Section 8.4 and such other restrictions contained in this Plan. To the extent that an Eligible Director elects to have shares of Directors' Restricted Stock subject to the provisions of this Subsection 8.2(c)(ii)(2), any provisions of the Plan which would otherwise cause the payment of the shares of Directors' Restricted Stock or his Account to occur prior to the Eligible Director's Termination of Service shall not be applicable." Except as otherwise provided in this Second Amendment, the Fleming Companies, Inc. 1999 Stock Incentive Plan is ratified and confirmed in all respects. Executed this 27th day of February, 2001 FLEMING COMPANIES, INC., an Oklahoma corporation ATTEST: BY SCOTT M. NORTHCUTT Scott M. Northcutt, Executive Vice LENORE T. GRAHAM President - Human Resources Lenore T. Graham, Senior Vice President, General Counsel and Secretary EX-10 4 ex1079.txt Exhibit 10.79 AMENDMENT NO. 1 TO THE FLEMING COMPANIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN Pursuant to the authority vested in the undersigned, the Fleming Companies, Inc. Executive Deferred Compensation Plan (the "Plan") is hereby amended as follows: Subsection 2.1(mm) of the Plan is hereby amended by adding to said Subsection the following: "Provided, in addition to `Years of Credited Service' being credited as provided under the Qualified Plan, with respect to any Participant who has been selected for participation in the Fleming Companies, Inc. Key Executive Retention Plan (the `Retention Plan') then, for each completed `year' (as defined in the Retention Plan), that the Participant participates in the Retention Plan, such Participant will be credited with an additional two Years of Credited Service under this Plan. With respect to any additional Years of Credited Service credited to the Participant for participation in the Retention Plan, such years will be considered for purposes of calculating such Participant's Supplemental Normal Retirement Income as provided in Section 5.1(a) herein, assuming such additional Years of Credited Service were earned under the Qualified Plan for purposes of calculating the Participant's Qualified Plan Benefit and for vesting, but such additional service will not be considered for purposes of calculating the actual Qualified Plan Benefit earned at any point in time as provided in Section 5.1(b) herein. In addition, such additional Years of Credited Service will be considered for purposes of calculating the Participant's Supplemental Normal Retirement Income in the event of a Change of Control as provided in Section 9.2 herein, and such additional benefit shall be part of the Participant's Supplemental Normal Retirement Income which will become 100% vested and nonforfeitable upon the occurrence of Change of Control, as provided in Section 9.2 hereof. Further, payments under the Fleming Companies, Inc. 2001 Corporate Officer Long-Term Incentive Plan, the Retention Plan or any other plan or agreement sponsored by the Company under which payments are designated to be for retention of the Participant to remain in the employ of the Company will not be considered as `compensation,' Annual Final Compensation or for any other purpose under the Plan." Except as otherwise provided in this Amendment No. 1, the Fleming Companies, Inc. Executive Deferred Compensation Plan is hereby ratified and confirmed in all respects. Executed this 27th day of February, 2001. FLEMING COMPANIES, INC., an Oklahoma corporation ATTEST: BY SCOTT M. NORTHCUTT Scott M. Northcutt, Executive Vice President - Human Resources CARLOS HERNANDEZ Carlos Hernandez, Senior Vice President, General Counsel and Secretary EX-10 5 ex416.txt Exhibit 10.80 CONFIDENTIAL Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Secretary of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Such portions are marked with the word "(CONFIDENTIAL)". AGREEMENT THIS AGREEMENT is made as of February 2, 2001 (the "Effective Date"), by FLEMING COMPANIES, INC., an Oklahoma corporation ("Fleming"), and KMART CORPORATION, a Michigan corporation ("Kmart"), with reference to the following circumstances: A. The parties desire to provide for the supply by Fleming of certain products to all the "Big K" and "Super K" stores currently open and that will be opened by Kmart or any subsidiary or affiliate of Kmart during the term of this Agreement in the United States and the Caribbean (collectively, the "Stores"). The Stores open on the Effective Date are listed by number on Schedule A to this Agreement. The Fleming Distribution Centers (the "Distribution Centers") initially designated to service primarily each of the Stores are opposite the Store served by such Distribution Center listed on Schedule A. B. The objective of this Agreement is to create a strategic alliance between Fleming and Kmart to merchandise, procure and distribute pantry and supermarket products in the most cost efficient manner. The parties desire to provide for the joint exploration, evaluation, and implementation of practices and procedures to reduce total supply chain costs and allow each party to equitably share the benefits of such practices and procedures. The parties agree as follows: 1. Product Procurement and Pricing. 1.1 Procurement Services. Subject to the terms and conditions of this Agreement, Fleming will be the sole provider to the Stores of certain categories of warehouse delivered products listed on Schedule 1.1 (collectively, the "Products"), except for the following: (i) typical direct to Store shipments, (ii) all existing contractual arrangements of Kmart with Supervalu Inc., TriCorp and Grocers Supply Company (the "Kmart Existing Arrangements"), and other arrangements with third parties relating to the procurement and supply of Products (the "Kmart Additional Arrangements"), (iii) Products that Fleming decides not to source or carry, (iv) local orders that Fleming decides not to source or carry, (v) annually, a basket of up to 5% of annual purchases of Products under this Agreement for each year after the Transition Period, and with respect to the Transition Period, a reasonable estimate by the parties of 5% of purchases under this Agreement during the Transition Period, (vi) Products used or offered by Kmart in the restaurants in the Stores, and (vii) as contemplated by Section 1.5. Kmart will be permitted to procure large block buys of Products for the Stores and the Joint Venture Stores for the "Wall of Values," in and out, or spot buys on perishable Products which purchases shall count against the 5% basket contemplated in the immediately preceding sentence. Because the intent of the parties is to work together to further reduce the cost of goods, for so long as this Agreement remains in effect, Fleming's central procurement organization will be in a position to negotiate the price of Products for the total volume of the Stores and the Joint Venture Stores. Subject to the terms and conditions of this Agreement, Kmart will carry Fleming private label brands as the exclusive private label brand in the Stores for Product categories covered by this Agreement, to the extent consistent with Store format. Fleming shall maintain and operate in accordance with prudent business practices its central procurement organization for procurement under this Agreement and shall procure and pay for all Products acquired to meet the anticipated needs of Kmart for the Stores. Such needs shall be estimated based upon (a) historic and forecasted Product turn information and (b) advance estimates of promotional volumes, as provided by Kmart to Fleming from time to time during the term of this Agreement. The procurement services to be provided hereunder shall include purchasing (and paying for) Products procured hereunder, and owning the inventory of Products. With respect to consignment Products, the procurement services hereunder shall include the right of Fleming to transfer title thereto to Kmart. 1.2 Future Procurement; Fuel. 1.2.1 Within ninety (90) days after the Effective Date, the parties shall conduct good faith negotiations to expand the categories of Products covered by this Agreement to include health and beauty aids and cosmetics ("HBC"), and general merchandise ("GMD") described on Schedule 1.2A (collectively, the "Additional Products"). The parties shall also conduct good faith negotiations with respect to the potential expansion of the categories of Products covered by this Agreement to cover Store supplies within 180 days following the Effective Date. Fleming shall cause its wholly owned subsidiary, Dunigan Fuels, Inc. ("Dunigan") to enter into a Supply Agreement for the sale of fuel and other services to Kmart owned or operated fuel centers in accordance with terms set forth on Schedule 1.2B and such other terms as are usual and customary for fuel supply agreements of this nature within ninety (90) days after the Effective Date. Fleming shall guarantee Dunigan's performance of its obligations under such Supply Agreement. If Fleming fails to cause Dunigan to enter into a Supply Agreement upon the terms set forth herein within the ninety (90) day period following the Effective Date, then, at Kmart's option, the provisions of Schedule 1.2B shall constitute a binding agreement between Kmart and Fleming, whereby Fleming shall have all the rights, duties and obligations of Dunigan pursuant to the terms of Schedule 1.2B; provided, however, that in addition to the foregoing, Kmart shall be entitled to be indemnified and held harmless by Fleming on terms usual and customary for fuel supply agreements. 1.2.2 (CONFIDENTIAL) The parties acknowledge that the realization of such benefits may require, among other things, implementing programs for the purchase of Additional Products for Kmart and the Joint Venture Stores, the Fleming Stores and independent contractors serviced by Fleming (any such programs, an "Additional Program"). The parties agree that if Fleming unreasonably refuses to implement any Additional Program proposed by Kmart, Fleming shall not be entitled to any adjustment of the Logistics Fee under this Section 1.2.2. (CONFIDENTIAL) 1.3 Product Pricing. Fleming, with input, participation and strategic direction from Kmart, will have primary responsibility for the negotiation with vendors of Products with respect to the costs therefor to meet the anticipated needs of Kmart based upon historic and forecasted turn movement and Kmart provided advance estimates of promotional volumes. Kmart will be given reasonable notice of all major program negotiations with any vendors and will be permitted to participate in such negotiations. If Kmart so elects, it may provide input and strategic direction whether or not it actually participates in such negotiations. No pricing arrangement with respect to any major program with vendors for Products procured exclusively for Kmart or the Joint Venture Stores shall apply to the procurement of Products hereunder unless Kmart expressly agrees thereto. No pricing arrangement with respect to any program (other than major programs) with vendors for Products procured exclusively for Kmart or the Joint Venture Stores shall apply to the procurement of Products hereunder unless such pricing arrangements fall within the general parameters and benchmarks set forth therefor by Kmart. Kmart shall not engage in any unilateral negotiations with vendors regarding the procurement of Products hereunder without Fleming's consent, except to the extent Kmart is permitted hereunder to procure Products directly. If a national program (the "National Cost"), a regional program (the "Regional Cost") or a local program (the "Local Cost") is negotiated in accordance with the terms hereof or if Fleming commits to a cost for one or more Products or program for all of the Stores with respect to such Products, and in the case of negotiated costs with vendors such negotiations include floor stock protection, Fleming will bill Kmart the respective National Cost, Regional Cost, Local Cost or the cost to which Fleming committed, as the case may be, or the actual cost paid by Fleming for such Products, whichever is less. If the parties are unable to secure floor stock protection with respect to a Product, Fleming will bill Kmart the actual cost paid by Fleming for such Product for a maximum of four weeks from the date the Product cost is reduced and thereafter Fleming will bill Kmart the respective National Cost, Regional Cost or Local Cost. Product pricing for Products purchased pursuant to this Agreement (other than the pricing arrangements specified in this Section 1.3) shall be as described on Schedule 1.3. 1.4 Third Party Supply. If Fleming fails to procure and supply any advertised Products, Products to be specially displayed in Stores and Joint Venture Stores and high velocity Products (which as of the Effective Date are those specified on Schedule 1.4) ordered by Kmart hereunder, Kmart shall be permitted to purchase any such Products that Fleming has failed to deliver from any third parties. In addition, except where Fleming's failure is a result of a condition beyond its control as described in Section 22.5, or where Fleming's failure is due to product unavailability or materially inaccurate forecasting of needed volume by Kmart, Fleming shall reimburse Kmart on demand any fees and direct costs reasonably incurred by Kmart in excess of the costs that would have been incurred by Kmart had Fleming procured and delivered such Products. If Kmart purchases Products from any third party in the circumstances specified in this Section 1.4, such purchases from third parties shall count toward fulfilling volume requirements necessary to achieve graduated reductions in fees based on purchase volume. 1.5 Excluded Stores. Nothing in this Agreement shall require Fleming to supply Products to any Store the supply of which by Fleming would cause Fleming to violate the Non-Compete Agreement dated June 20, 1994, between Fleming and Di Giorgio Corporation, as amended, or the noncompete covenants in the Asset Purchase Agreement between Fleming and Associated Grocers, Incorporated dated as of September 10, 1998 ("Excluded Stores"). When the supply of Products to any Excluded Stores would no longer violate either of such agreements such Excluded Stores shall be deemed Stores for all purposes hereunder and Fleming and Kmart shall cooperate in transitioning to Fleming's supply of such Excluded Store as soon as reasonably practicable. Prior to the time that the supply of an Excluded Store by Fleming would not violate either of the agreements, if Kmart purchases any Products for such Excluded Store from a third party, Fleming shall reimburse Kmart on demand for any fees and direct costs reasonably incurred by Kmart over the costs that would have been incurred had Fleming procured and delivered such Products, and such purchases shall count toward fulfilling volume requirements necessary to achieve graduated reductions in fees based on purchase volume. Fleming shall use commercially reasonable efforts to cause the non-compete covenants described in this section to be terminated or to obtain a consent or waiver, at Fleming's expense, necessary to permit Fleming to supply Products to any Excluded Stores. Fleming shall give Kmart notice of any such termination, consent, or waiver as soon as practicable following such termination, consent or waiver. 2. Logistics Services. Fleming shall provide to Kmart the logistics services described on Schedule 2 (the "Logistics Services"). Fleming reserves the right to utilize third-party logistics providers, reasonably acceptable to Kmart, as a part of its service package. To the extent that Fleming selects and retains third party providers, Fleming shall bear all costs associated therewith and shall remain liable for the acts and omissions of said third party providers irrespective of any approval therefor by Kmart. 3. Transportation and Title. Kmart shall be directly responsible for all direct costs associated with the delivery of Products from all Distribution Centers (including GMD, if any) to the Stores and for the cost of the return of pallets and totes to the Distribution Centers. In addition to the services which relate to the transportation of Products and which are part of the Logistics Services, Fleming shall arrange for transportation for Products from the Distribution Centers to the Stores and select third party carriers for the Products, unless Kmart elects to do so. All carriers shall be reasonably acceptable to Fleming and Kmart. In cases where Fleming selects the carrier, title and risk of loss to Products shall pass to Kmart upon receipt of Products at the Stores, and Fleming shall be responsible for all shortages and damage to Products until such time as such Products are actually received at the Stores. In cases where Kmart selects the carrier, title and risk of loss shall pass to Kmart upon loading of the Products at Fleming's dock at the Distribution Center assigned to the applicable Store, and Fleming shall not be responsible for any claims for shortages or damages to Products after the carrier leaves Fleming's dock, subject to the shrink allowance described in Schedule 4C. Fleming shall be responsible for all packaging and loading costs, provided that Kmart will be responsible for the cost of packaging and shipping all Products shipped from a Distribution Center to the Stores by a third-party parcel delivery service (e.g., UPS, FedEx) at Kmart's request. However, if the third-party parcel delivery service must be used because of Fleming's inability to deliver the Products, Fleming will be responsible for the cost of packaging and shipping. Kmart will store all pallets and totes in designated areas of the Stores. Kmart shall be entitled to all revenues, net of Fleming unloading costs, resulting from back-haul generated from Kmart contracted carriers on Kmart exclusive routes. Fleming shall arrange for the return of pallets and totes in a manner that seeks to minimize, to the extent reasonably practicable, Kmart's costs associated therewith. 4. Service Requirements. The service requirements and the consequences of achieving or not achieving the service levels are set forth on Schedule 4A. These service requirements will be the key performance indicators applicable to Fleming. The parties shall establish the quality program described on Schedule 4B, including provision for quality control inspectors and reporting procedures. The parties shall establish a shrink audit procedure as described on Schedule 4C. The parties shall establish a mechanism for the conduct of audits of the parties' performance under this Agreement as provided in Schedule 4D. Fleming shall provide to Kmart from time to time during the term of this Agreement the management reports of key performance indicators set forth on Schedule 4E. 5. Ordering, Fees and Payment. For services provided by Fleming under this Agreement, Fleming will accumulate by Distribution Center all weekly billings by Store (described in Schedule 5), in accordance with Kmart's fiscal week (Thursday to Wednesday). The weekly accumulated billings will be in the form of a single hard copy Kmart "chain statement" for each servicing Distribution Center, and will summarize all charges, whether for Product, fees, drop shipments or any other miscellaneous charges, by Store. Kmart shall pay in full the aggregated total of all chain statements each week as to all items that are not subject to a good faith dispute by Kmart. Kmart shall give Fleming prompt written notice of items that are disputed in good faith, in which case such items shall be addressed promptly by the parties in accordance with the dispute resolution procedures of this Agreement. Fleming will also endeavor to provide Kmart throughout each week, electronic transmissions, including both advance shipment notifications (ASN's) and EDI invoices, containing all amounts included in the weekly chain statements. Kmart shall provide Fleming weekly, a file of pending claims with the specific reason for each, in which case such items shall be addressed promptly (within fourteen (14) days) by the parties in accordance with the dispute resolution procedures of this Agreement. Payments under this Agreement shall be made by automated clearing house transfer on Friday for invoices billed during Kmart's immediately preceding fiscal week, as summarized on the Kmart chain statements. The parties shall, within a reasonable period of time after the Effective Date, address and use commercially reasonable efforts to resolve any disputes under the Existing Agreement, process bottlenecks and inefficiencies regarding account receivable in accordance with the terms of Schedule 5B. Initially and until the parties change the ordering procedure, Kmart shall order Products under this Agreement in the same manner as under the Existing Agreement. 6. Best Practices. Fleming and Kmart shall establish a "best practices team" consisting initially of two members, of which Kmart and Fleming shall each designate a senior executive as its designated member (the "BPT"). The BPT may consist of the same individuals appointed to the Account Management Team described in Section 11.1. Among other things, the BPT will focus on reducing costs and achieving greater efficiencies in the product supply chain in accordance with the strategies and goals of management of the parties. The members of the BPT shall be subject to approval of both parties and shall be vested with authority within their respective organizations to engage the appropriate officers and employees in achieving the strategies and goals agreed upon by the parties. The following terms shall govern the operation and responsibilities of the BPT. 6.1 Employment. The BPT shall be based in Troy, Michigan, but each member of the BPT shall continue to be employed by the party appointing such member who shall be responsible for all compensation and benefits for its team members serving on the BPT. 6.2 Replacement. Either party may replace its designated member of the BPT at any time, provided that any replacement shall require the prior approval of the other party. 6.3 Compensation Incentive. A portion of the compensation payable to members of the BPT by the employer of such members shall be linked to the achievement of lower costs and greater efficiencies in the product supply chain under this Agreement. 6.4 Priorities. Among the priority matters for the BPT shall be the following, in order of initial priority: (i) Uniform common item codes; (ii) Accurate advance shipment notices ("ASN"); (iii) Joint procurement contracts; (iv) Paperless payment process; (v) Transportation services; (vi) Plant direct shipment; and (vii) Distribution flow. 6.5 Costs and Expenses. Each party shall bear the costs and expenses associated with the implementation by such party of the recommendations of the BPT. 7. Delivery of Products. Each Super K Store will receive at least three grocery, frozen, and dairy deliveries per week. Each Pantry Store with average orders of at least 1,000 cases per week over a thirty (30) day period immediately preceding the delivery will receive two deliveries per week; otherwise the Pantry Stores will receive at least one delivery per week. The foregoing notwithstanding, for all Stores, perishable Products will be delivered a minimum of three times per week, fresh meat and produce will be delivered four times per week, and bakery/deli will be delivered two times per week. If there are increases in average order size resulting in the number of deliveries specified in this Section 7 being insufficient to deliver the increased orders, the parties will adjust the number of deliveries per week so that such orders are properly sourced in a cost efficient manner. 8. Labor Disputes. To the extent permitted under applicable law, with respect to labor disputes involving Distribution Centers whose volume is more than 40% but that are not Dedicated Distribution Centers, Fleming will consult with Kmart regarding actions taken to mitigate the effect of any labor dispute. With respect to any Dedicated Distribution Centers, Fleming and Kmart shall consult and agree on any actions to be taken to mitigate such disputes. If the parties fail to reach agreement within a reasonable period of time, Fleming can take such actions as it deems appropriate in the exercise of its reasonable business judgment so as to minimize detriment to both parties. 9. Term and Early Termination. 9.1 Term. The term of this Agreement will be ten (10) years commencing on the Effective Date. 9.2 Termination for Cause. Each party may provide the other party with a notice of intent to terminate this Agreement (a "Notice of Intent to Terminate") in the event of: 9.2.1 A default by the other party of an obligation to pay an amount exceeding, in the aggregate, $1 million due under this Agreement within seven (7) days following written notice to the other party of non-payment; 9.2.2 A material breach of any covenant or agreement, representation, or warranty of the other party set forth herein other than as a result of a breach of 9.2.1; 9.2.3 A material failure of the other party to be in compliance with all applicable federal, state, and local laws and regulations relating to the performance of this Agreement; 9.2.4 The insolvency of, or the institution of proceedings by or against, the other party under any federal or state bankruptcy or insolvency law; 9.2.5 An assignment by the other party for the benefit of all or substantially all of its creditors or the appointment of a receiver for all or a substantial part of the party's assets; or 9.2.6 A cessation of all or substantially all operations by the other party. Except with respect to Sections 9.2.1, 9.2.4, 9.2.5, and 9.2.6 as to which no cure period shall apply, if the breaching party fails to cure or provide evidence of cure to the non-breaching party within ninety (90) days of receipt of the related Notice of Intent to Terminate or, if the event giving rise to the right to terminate is not reasonably capable of being cured within such ninety (90) days, and the breaching party fails to promptly and diligently commence to cure such event within such ninety (90) days, the non-breaching party may provide the breaching party a written notice of termination (a "Notice of Termination") effective as of the expiration of the applicable Termination Period as provided in Section 9.5. However, the non-breaching party in the case of a breach that cannot reasonably be cured within ninety (90) days after receipt of the related Notice of Intent to Terminate may in any event provide the breaching party with a Notice of Termination effective as of the expiration of the applicable Termination Period as provided in Section 9.5 if the breaching party fails to cure its breach or to provide evidence of cure to the non-breaching party within one hundred eighty (180) days of receipt of the Notice of Intent to Terminate. 9.3 Other Termination. 9.3.1 By Kmart. Kmart may terminate this Agreement upon twelve (12) months written notice if any of the following events have occurred: (a) A Change in Control of Fleming; or (b) The fifth anniversary of the Effective Date. 9.3.2 By Fleming. Fleming may terminate this Agreement upon twelve (12) months written notice if any of the following events have occurred: (a) A Change in Control of Kmart; or (b) The fifth anniversary of the Effective Date. 9.3.3 By Either Party. Either party may terminate this Agreement upon twelve (12) months written notice if any of the following events have occurred: (a) If during the term of this Agreement, the volume of Products purchased by Kmart hereunder, on an aggregate basis, declines by more than thirty percent (30%) for any consecutive 180 day period as compared to the corresponding period from the prior year; or (b) If Kmart makes a public announcement of its intention to close thirty percent (30%) or more of its Stores open at the time of such announcement, or its intention to discontinue or significantly reduce the sale of all or a substantial portion of the Products in the Stores. 9.4 Change of Control. 9.4.1 Fleming. For purposes of Section 9.3.1(a), "Change of Control of Fleming" shall mean the acquisition of a majority or controlling interest in, or the acquisition of all or substantially all the assets of, Fleming by a Competitor; and the term "Competitor" shall mean a discount mass merchandiser or any affiliate thereof with average annual sales during the immediately preceding two years of at least $(CONFIDENTIAL), such as, as of the Effective Date (CONFIDENTIAL). 9.4.2 Kmart. For purposes of Section 9.3.2(a), "Change of Control of Kmart" shall mean the acquisition of a majority or controlling interest in, or the acquisition of all or substantially all the assets of, Kmart by a Competitor; and the term "Competitor" shall mean a company or any affiliate thereof engaged in the wholesale business of selling or distributing food, grocery or related products, with average annual sales during the immediately preceding two years of at least $(CONFIDENTIAL) such as, as of the Effective Date, (CONFIDENTIAL). 9.5 Termination Transition. Upon delivery of a Notice of Termination pursuant to Section 9.2 (except as a result of an event specified in Section 9.2.6) or a written notice pursuant to Section 9.3.1 or 9.3.2, at Kmart's option, a termination transition period (the "Termination Period") shall begin. Upon delivery of a written notice pursuant to Section 9.3.3, a 12-month Termination Period shall begin. The Termination Period shall extend for the period reasonably determined by Kmart, such period not to exceed twenty (24) months following delivery of a Notice of Termination or a written notice pursuant to Section 9.3.1 or 9.3.2. In the case of a termination pursuant to Section 9.3 (except a termination pursuant to 9.3.3), the Termination Period shall be the twelve (12) month notice period contemplated by Sections 9.3.1 and 9.3.2 and an additional wind down period reasonably determined by Kmart, such additional wind down period not to exceed twelve (12) months. In the case of a material breach of this Agreement giving rise to a cure period pursuant to Section 9.2, the Termination Period shall extend for up to a maximum of twenty-one (21) months following expiration of any ninety (90) day cure period, or eighteen (18) months following the expiration of any 180-day cure period rather than twenty-four (24) months. During the Termination Period, the parties shall cooperate with each other in terminating and winding down the business relationship contemplated by this Agreement, subject to the service level requirements set forth on Schedule 4A. In connection therewith, the parties shall take the following additional actions: 9.5.1 Kmart shall purchase and take delivery from Fleming of the Products identified in Section 19 in accordance with the terms thereof. 9.5.2 If Fleming gives Kmart a Notice of Termination pursuant to Section 9.2.1, the obligation of Fleming to cooperate with Kmart in terminating and winding down the business relationship contemplated by this Agreement during the Termination Period pursuant to Section 9.5 (including without limitation, the continued extension of credit to Kmart) shall be conditioned upon Fleming's receipt of adequate assurances of future performance by Kmart failing which Fleming shall be entitled to condition its continued support on C.O.D. payments, letters of credit, or other assurances of payment satisfactory to Fleming. The foregoing shall not apply: (i) with respect to unpaid amounts by Kmart that are the subject of a good faith dispute if reasonable steps are being taken in good faith to resolve such dispute and (ii) if Kmart is contesting in good faith the grounds for the termination hereof pursuant to Section 9.2.1. Nothing set forth in this Section 9.5.2 shall limit, restrict or otherwise affect in any manner the right of either party to demand adequate assurance of future performance in accordance with applicable law. 9.5.3 Fleming shall discontinue all diverting and forward buying for Kmart during the Termination Period. 9.6 Additional Obligations on Termination. 9.6.1 If the termination is a result of a material breach of this Agreement by Fleming, a Change of Control of Fleming, or pursuant to Section 9.3.2(b), Fleming shall reimburse Kmart for the Start-Up Costs incurred under this Agreement. The reimbursement shall be an amount equal to the product of (a) the total Start-Up Costs paid to Fleming by Kmart multiplied by (b) a fraction, the numerator of which is the sum of (x) the number of full years remaining in the term of this Agreement and (y) any partial year remaining in the term of this Agreement, and the denominator of which is ten. 9.6.2 Upon a termination or expiration of this Agreement, Kmart, directly or through any affiliate thereof, shall have the right to purchase from Fleming, and Fleming shall be obligated to sell to Kmart, any Distribution Center from which at least 80% of the annual sales are attributable to Kmart business (a "Dedicated Distribution Center"). Upon a termination of this Agreement by Fleming, Fleming may require Kmart to purchase any Dedicated Distribution Center. The purchase price for any Dedicated Distribution Center shall be the then current fair market value. The purchase of any Distribution Center will include (i) the acquisition of the real property and improvements of an owned Distribution Center, (ii) the acquisition of all furniture, fixtures, equipment (including racking) and other personal property used in the operation of the Distribution Center, (iii) the assignment and assumption of the lease of any leased Distribution Center, (iv) to the extent legally assignable, and subject to the last sentence of this Section 9.6.2, the assignment and assumption of any lease of any personal property or license of any software used exclusively in the operation of the Distribution Center, (v) a transfer free of all liens, claims, and encumbrances, and (vi) a warranty of title to the transferred assets. Any such purchase shall be without any warranty as to the physical condition of the transferred assets, except that Fleming shall remain liable for any release of any hazardous substance in, on, or under the Distribution Center caused by Fleming. Fleming shall use commercially reasonable efforts to obtain the consent of any third party (e.g., landlords, software licensors and equipment lessors) necessary for the transfer of any Distribution Center to Kmart. 10. Transition Period. The first year of this Agreement commencing on the Effective Date shall be a transition period (the "Transition Period"). During the Transition Period, Fleming and Kmart will take the actions specified on Schedule 10. 10.1 Transition Team. Each party will designate a team to coordinate all actions taken by the parties during the Transition Period (the "Transition Team"). The Transition Team shall establish or modify milestones to achieve a complete transition to this Agreement such milestones to be consistent with the actions specified on Schedule 10 (the "Transition Milestones"). The leaders of the Transition Team shall consist of designated officers of each party and shall include senior executive officers with expertise and responsibility for procurement, logistics and administration functions within their respective organizations. 10.2 Transition Milestones. If the parties fail to achieve the Transition Milestones (which shall be deemed to include Fleming's obligations under Section 10.3) within agreed upon time frames and such failure by Fleming is not attributable to Kmart or any of Kmart's existing suppliers, Fleming shall reimburse Kmart on demand for any fees and direct costs reasonably incurred by Kmart over the costs that would have been incurred had the Transition Milestones been met on time. If Kmart purchases products from any third party due to Fleming's failure to achieve the Transition Milestones, such purchases from third parties shall count toward fulfilling volume requirements necessary to achieve graduated reductions in fees based on purchase volumes under this Agreement. 10.3 Distribution Centers. Within 149 days following the Effective Date, Fleming will make investments in existing Distribution Centers and establish new Distribution Centers both as required to service the Stores commencing as promptly as practicable and in no event later than the expiration of the 149-day period referred to above and continuing during the term of this Agreement; provided, however, that with respect to the Distribution Center located in Massillon, Ohio, such investments shall be made in 2002. At Kmart's request, Fleming shall make its general plans for implementation of the Start-Up Costs (as defined in Schedule 5) available to Kmart for review. 10.4 Commencement of Fees. For each Distribution Center currently servicing Stores, the fees for services and costs of goods described in this Agreement will commence to apply with respect to all Products when Kmart begins to transfer the procurement of any such Products from current Kmart wholesale suppliers to Fleming for such Distribution Center. For each Distribution Center currently servicing Stores and which is not expected to receive additional volume of Products, the fees for services and costs of Products described in this Agreement will commence to apply with respect to all Products when such fees are applied for the first time pursuant to the immediately preceding sentence. Prior to the time for which the fee for services and prices for Products contemplated in this Agreement commence to apply in the manner contemplated in the two immediately proceeding sentences, product pricing and fees for Products being supplied to Kmart shall be the same as are charged to Kmart under the existing Supply Agreement between the parties dated October 11, 1999 (the "Existing Agreement"). For all new Distribution Centers, the fees for services and price of Products contemplated in this Agreement shall apply immediately. 10.5 Termination of Existing Agreement. Pricing and fees charged for Products in the circumstances contemplated in the first sentence of Section 10.4 shall be those set forth in the Existing Agreement, which to that effect are hereby incorporated by reference. On the Effective Date, the Existing Agreement shall be terminated without further action by either party and neither party shall have any obligations to the other thereunder, except for the first two sentences of Section 5(d). On June 1, 2001, Kmart shall repay to Fleming an amount equal to a proportionate part of the unamortized portion of the Conversion Allowance (as defined in the Existing Agreement) as of such date calculated pursuant to Exhibit E.2 thereof. As soon as practicable after the Effective Date, Kmart and Fleming shall attempt to resolve any disputes regarding unpaid charges for product purchases under the Existing Agreement, resolution of all outstanding accounts receivable, pallet reconciliation, and other claims and disputed charges in accordance with the terms of Schedule 5B hereof. Kmart shall not be required to purchase any inventory maintained by Fleming pursuant to Section 5(d) of the Existing Agreement. 11. The Account Team. 11.1 The Account Management Team. Within fifteen (15) days after the Effective Date, the parties shall create an account management team (the "Account Management Team"). The Account Management Team shall have responsibility for the overall operational implementation of the provisions hereof and the recommendations of the BPT. 11.2 Meetings. The Account Management Team shall conduct weekly video conferences, and participate in the weekly operations meetings of each party pertaining to the implementation of the provisions of this Agreement. The Account Management Team shall conduct monthly meetings in Troy, Michigan and in Dallas, Texas, on an alternating basis. On a quarterly basis, the Account Management Team shall meet at locations to be determined from time to time, to (a) evaluate the parties activities under this Agreement, (b) discuss real estate opportunities and issues pertinent to the Agreement, (c) develop, implement and monitor future supply chain efficiencies and improvements, and (d) develop six month promotional planning. 11.3 Resolution of Operational and Performance Issues. The Account Management Team shall be responsible for addressing and resolving operational issues that arise during the term of the Agreement, including without limitation the parties failure to meet the minimum or target service level requirements as described on Schedule 4A, as well as other issues regarding the parties performance or non-performance under this Agreement. If the Account Management Team is unable to resolve the issues within thirty (30) days, such issues shall be referred to the BPT for further consideration. If the BPT is unable to resolve the issues within thirty (30) days, such issues shall be referred to a designated group of senior executive officers of each party. If the parties are unable resolve the issues, either party shall be entitled to pursue its rights and remedies under this Agreement, including the right to pursue arbitration of the dispute in accordance with Section 16 hereof. 12. Joint Venture. 12.1 Formation. Following the Effective Date, Fleming and Kmart shall explore in good faith the possibility of establishing a limited liability company or other mutually agreeable form of business organization (the "Joint Venture") to develop and operate a chain of price impact retail stores (the "Joint Venture Stores") which may include, if the parties so agree, some or all of the price impact stores currently operated by Fleming under the Food 4 Less(R) banner or any successor banner, if such stores continue to be owned by Fleming (the "Fleming Stores"), subject to any existing contractual agreements with respect to such stores. This Agreement contains references to the Joint Venture Stores and the Fleming Stores in respect of cumulative volumes of purchases, merchandising and other matters. If the Joint Venture contemplated in this Section is not formed and the Joint Venture Stores are not created, then all provisions in this Agreement regarding the Joint Venture Stores, the Joint Venture and the Fleming Stores shall be deemed to be deleted, except with respect to the references to the Fleming Stores contained in the proviso in the last sentence of Section 12.2. 12.2 Merchandising. Kmart will be responsible for the merchandising functions relating to Products supplied to the Stores and the Joint Venture Stores, including pricing, promotional planning, assortment planning, and display planning. If the product assortment for other parties sourced by Fleming differs from that requested by Kmart, the parties will try to coordinate product selection and will review in good faith the Product assortment that is most cost effective at a given quality level. If Kmart and Fleming cannot agree upon the Product assortment, they shall refer the matter to the BPT for a recommendation. In any event, Kmart shall have the ultimate discretion regarding the merchandise assortment for the Stores, and the Joint Venture Stores. Fleming shall have the ultimate discretion as to the merchandise assortment for the Fleming Stores and its independent customers; provided, however, until such time as the Joint Venture is formed Fleming shall be responsible for the merchandising functions for the Fleming Stores but Fleming shall coordinate with Kmart and cooperate in merchandising for the Fleming Stores and shall align strategies to achieve the benefits contemplated by this Agreement. 13. Confidentiality. 13.1 As used in this Agreement, the term "Confidential Information" means any non-public and/or proprietary information that is disclosed by one party to this Agreement (the "Disclosing Party") to the other party ("Recipient") or otherwise learned by Recipient as a result of this Agreement. The Confidential Information will include all information derived from the foregoing Confidential Information. The provisions of this Agreement and all information relating to the prices charged to Kmart, Products, services, fees and allowances is deemed Confidential Information. 13.2 Recipient agrees to hold Confidential Information it receives from the Disclosing Party in confidence, treating such Confidential Information as if it were Recipient's own confidential information. However, Recipient must at a minimum take commercially reasonable steps to ensure that the Disclosing Party Confidential Information is not disclosed to, or used by any person, firm or entity except Recipient's own employees and agents and then only to the extent necessary for performance of this Agreement. The confidentiality obligations set forth above do not apply to information (a) available to the public through no fault of Recipient; (b) released by Disclosing Party on a non-confidential basis without restrictions on disclosure; and (c) to the extent disclosure of information is required by law, including under any valid court or governmental order, and Recipient provides Disclosing Party immediate notice thereof so that Disclosing Party will have an opportunity to contest disclosure or seek an appropriate protective order. Notwithstanding the foregoing, the parties shall be entitled to disclose this Agreement, including the Exhibits and Schedules hereto to the Securities and Exchange Commission and any securities exchange on which the securities of either party are listed; provided however, the parties shall use commercially reasonable efforts to secure permission not to disclose the commercial or economic terms of this Agreement and will cooperate with each other in good faith to prevent such disclosure if legally permitted to do so. The confidentiality and non-disclosure obligations in this Agreement survive and continue for three years following termination of this Agreement for any reason and bind Recipient's legal representatives, successors and assigns. 13.3 The parties will consult with each other prior to making any press release or similar public announcements regarding this Agreement. 13.4 This Section 13 supersedes the terms of any previous confidentiality agreements between the parties, including, without limitation, the letter agreement dated November 28, 2000. 14. Representations and Warranties. 14.1 Both Parties. Each party represents and warrants to the other party that: 14.1.1 it is a duly organized, validly existing and in good standing in each jurisdiction where necessary to perform this Agreement; 14.1.2 it has the full legal right, power and authority to execute, deliver, and perform this Agreement; 14.1.3 to its knowledge, no litigation or governmental, regulatory, or administrative agency investigation or proceeding is pending or threatened against it that might adversely affect its ability to perform this Agreement; 14.1.4 the signing and delivery of this Agreement by the person signing for the party and the performance of this and any agreement relating to this Agreement by the party have been duly authorized by all necessary action of its board of directors and do not conflict with (a) any law, order, writ, injunction, decree, rule, or regulation of any court, administrative agency, or any other governmental authority, (b) any agreement to which it is a party or by which it is otherwise bound, or (c) any provision of its certificate of incorporation or bylaws, and does not result in any breach of, constitute a default under or result in the creation of any lien, charge, security interest, or other encumbrance upon the Products; 14.1.5 no approval, consent, or withholding of objection is required from any governmental authority or any other party with respect to the entering into or performing this Agreement; and 14.1.6 this Agreement has been authorized, executed, and delivered by the party and constitutes a legal, valid, and binding obligation of the party, enforceable against the party in accordance with its terms. 14.2 Kmart. Kmart represents and warrants that not later than the expiration date of the Transition Period, all Kmart Additional Arrangements shall have been terminated and that not later than July 1, 2001, all Kmart Existing Arrangements shall have been terminated and that such arrangements shall not have been extended or renewed. To the best of its knowledge, Kmart has no material existing contractual relationship with suppliers of products comparable to the products to be supplied under this Agreement other than the Kmart Existing Arrangements. 15. No Implied Covenants/Reliance. Each party has relied solely and exclusively on its own judgment and the advice of its own attorneys in entering into this Agreement. No representative or agent of a party has made any statement or representation to the other beyond those in this Agreement that have induced signing of this Agreement. There are no implied or otherwise unstated covenants, rights, or obligations by, of, or against either party. The parties expressly disclaim the existence of any implied covenant of good faith and/or fair dealing. 16. Applicable Law/Arbitration. THIS AGREEMENT, AND ALL OTHER ASPECTS OF THE BUSINESS RELATIONSHIP BETWEEN THE PARTIES, SHALL BE CONSTRUED, INTERPRETED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN WITHOUT REGARD TO CHOICE OF LAW PROVISIONS. Any controversy, claim or dispute of whatever nature arising out of or in connection with this Agreement or the breach, termination, performance or enforceability hereof or out of the relationship created by this Agreement (a "Dispute") in which the amount in controversy exceeds One Million Dollars ($1,000,000), shall be resolved by mediation and, if mediation fails to settle the Dispute, by binding arbitration. Any such binding arbitration will be held in Detroit, Michigan. The procedures to be followed by the parties are as follows: 16.1 Mediation. Neither party shall commence an arbitration proceeding unless such party shall first give a written notice (a "Dispute Notice") to the other party setting forth the nature of the Dispute. The parties shall attempt in good faith to resolve the Dispute by mediation under the CPR Institute for Dispute Resolution ("CPR") Model Mediation Procedure for Business Disputes in effect at the time of this Agreement. If the parties cannot agree on the selection of a mediator within twenty (20) days after receipt of the Dispute Notice, the mediator will be selected in accordance with the CPR Procedure. 16.2 Arbitration. If the Dispute has not been resolved by mediation as provided above within sixty (60) days after receipt of the Dispute Notice, or if a party fails to participate in a mediation, then the Dispute shall be determined by binding arbitration in Detroit, Michigan. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") in effect on the Effective Date, subject to any modifications in this Agreement. 16.2.1 Three arbitrators will be employed to hear disputes under this provision. Persons eligible to serve as arbitrators shall be members of the AAA Large, Complex Case Panel or any person mutually acceptable to all parties. The arbitrators shall base the award on the applicable law and judicial precedent that would apply if the Dispute were decided by a United States District Court, and the arbitrators shall have no authority to render an award that is inconsistent therewith. The award shall be in writing and include the findings of fact and conclusions of law upon which is it based if so requested by either party. Absent of showing a good cause, the hearing shall be conducted within ninety (90) days from the service of the statement of claim. Except as contemplated in Section 16.6, each party shall bear the expense of its own attorneys, experts, and out of pocket costs as well as 50% of the expense of administration and arbitrators' fees. 16.2.2 Depositions, other than those taken in lieu of live testimony, shall not be taken except under the arbitrators' finding of special need. The parties shall be entitled to conduct document discovery in accordance with a procedure where responses to information requests shall be made within twenty (20) days from their receipt. The parties knowingly and voluntarily waive their rights to have any Dispute tried and adjudicated by a judge or a jury. 16.2.3 The arbitration shall be governed by the laws of the State of Michigan, without regard to conflicts-of-law rules, and by the arbitration law of the Federal Arbitration Act (Title 9, U.S. Code). Judgment upon the award rendered may be entered in any court having jurisdiction. Notwithstanding the foregoing, upon the application by either party to a court for an order confirming, modifying, or vacating the award, the court shall have the power to review whether, as a matter of law based on the findings of fact determined by the arbitrator(s), the award should be confirmed, modified or vacated in order to correct any errors of law made by the arbitrator(s). In order to effectuate such judicial review limited to issues of law, the parties agree (and shall stipulate to the court) that the findings of fact made by the arbitrator(s) shall be final and binding on the parties and shall serve as the facts to be submitted to and relied upon by the court in determining the extent to which the award should be confirmed, modified or vacated. 16.2.4 Except as otherwise required by law, the parties and the arbitrator(s) shall keep confidential and not disclose to third parties any information or documents obtained in connection with arbitration process, including the resolution of the Dispute. If either party fails to proceed with arbitration as provided in this Agreement, or unsuccessfully seeks to stay the arbitration, or fails to comply with the arbitration award, or is unsuccessful in vacating or modifying the award pursuant to a petition or application for judicial review, the other party may be entitled to be awarded costs, including reasonable attorneys' fees, paid or incurred in successfully compelling such arbitration or defending against the attempt to stay, vacate, or modify such arbitration award and/or successfully defending or enforcing the award, the determination of awarding costs to be made by the arbitrator(s). 16.2.5 Notwithstanding anything to the contrary in this Agreement: (a) The parties recognize that their business relationships may give rise to the need for one or more of the parties to seek emergency, provisional, or summary judicial relief to, among other things, repossess and sell or otherwise dispose of goods, equipment and/or fixtures, to prevent the sale or transfer of goods, equipment, fixtures, and other real and personal property, to protect real or personal property from injury, to obtain possession of real property, to enforce indemnification rights, and for temporary injunctive relief. Immediately following the issuance of any such relief, the parties agree to the stay of any judicial proceedings pending mediation or arbitration of all underlying claims between the parties. (b) The parties recognize that, under applicable law, the arbitrators may not have the power to order equitable relief and the parties do not by this Agreement waive any rights they may have to seek and enforce equitable relief. Therefore, any claims for equitable relief that cannot be fully awarded by the arbitrators are outside the scope of this Agreement and the parties are free to pursue civil remedies for such claims. Any such claim(s) shall be brought in the United States District Court for the Eastern District of Michigan. (c) Nothing shall restrict the right of a party to file counterclaims, cross claims or third party claims in any litigation brought by a third party. (d) Except with respect to the confidentiality obligations contained in Section 13 that involve willful misconduct or gross negligence, EACH PARTY WAIVES THE RIGHT IN ANY ARBITRATION OR JUDICIAL PROCEEDING TO RECEIVE CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR STATUTORILY PRESCRIBED DAMAGES. THE ARBITRATORS SHALL NOT HAVE THE POWER TO AWARD CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR STATUTORILY PRESCRIBED DAMAGES, unless the arbitrator(s) or a court of competent jurisdiction determines that this limitation, under the circumstances, violates public policy. 17. Independent Contractor. Fleming is an independent contractor of Kmart in the performance of this Agreement, and nothing in this Agreement may be construed to create or constitute a joint venture, partnership, agency, franchise, lease, or any other arrangement other than as expressly described in this Agreement. Each party is responsible for its own operations. Each party must exercise control over its employees, agents, representatives, subcontractors, and suppliers and is solely responsible for the verification of identity and employment eligibility, for the payment of any wages, salaries, or other remuneration of its employees, agents, representatives, subcontractors and suppliers, and for the payment of any payroll taxes, contributions for unemployment or workers compensation, social security, pensions or annuities that are imposed as a result of the employment of its employees, agents, representatives, subcontractors, and suppliers. Neither party may pledge credit, incur any obligation or liability, hire any employee, nor purchase any products or services in the name of the other party or any subsidiary or affiliate of the other party. 18. Notices. Any notice required by this Agreement shall be written and shall be given or sent personally, by national overnight courier, by facsimile copy or by first-class certified mail, postage prepaid, return receipt requested. All notices shall be addressed as follows: 18.1 Notices to Fleming: Fleming Companies, Inc. 1945 Lakepointe Dr. Lewisville, Texas 75057-6424 Attn: Executive Vice President, President of Wholesale Fax: (972) 906-1541 With a copy to: Fleming Companies, Inc. 1945 Lakepointe Dr. Lewisville, Texas 75057-6424 Attn: General Counsel Fax: (972) 906-1530 18.2 Notices to Kmart: Kmart Corporation 3100 West Big Beaver Road Troy, Michigan 48084 Attn: Vice President, General Merchandise Manager, Food and Consumables Fax: (248) 614-0638 With a copy to: Kmart Corporation 3100 West Big Beaver Road Troy, Michigan 48084 Attn: General Counsel Fax: (248) 463-1054 A party may designate another address on fifteen (15) days prior notice to the other party in accordance with the foregoing. 19. Purchase of Store Supplies and Control Label Products. Upon the expiration of this Agreement, or the Termination Period, if any, Kmart will purchase from Fleming (a) all store supplies that Fleming has purchased or obtained as supplies for Kmart, (b) Products procured exclusively for Kmart, (c) booked promotional merchandise, and (d) any inventory in Dedicated Distribution Centers attributable to Kmart purchases. Kmart shall pay for and remove such items from Fleming's Distribution Centers within thirty (30) days after the termination of this Agreement at the purchase price otherwise provided in this Agreement. 20. Office Space; Solicitation of Employees. 20.1 Office Space. From time to time, employees of Kmart may perform tasks relating to this Agreement at Fleming's premises, and employees of Fleming may perform tasks relating to this Agreement at Kmart's premises. Each party shall make available at its expense, appropriate office space and related support services for such purposes to employees of the other party performing tasks relating to this Agreement at its premises. 20.2 Solicitation of Employees. The parties agree that, during the term of this Agreement and for a period of one year following termination of this Agreement, neither of them will, without the prior written consent of the other party directly or indirectly, solicit for employment or hire any employee (director level or above) of the other party or any of its subsidiaries with whom they have had contact or who first became known to them in connection with the Agreement, provided, however, that the foregoing provision will not prevent them from employing any such persons (i) who initiate discussions regarding such employment without any direct or indirect solicitation by them, (ii) who respond to any public advertisements placed by them, or (iii) whose employment with either party or its subsidiaries terminated prior to employment discussions with the other party. 21. Insurance and Indemnity. 21.1 Insurance Coverages. During the term of this Agreement, Fleming shall maintain the following insurance coverages: 21.1.1 Commercial general liability written on an occurrence coverage form including bodily injury and property damage liability, products and completed operations liability, contractual liability, and personal and advertising liability, with coverage limits of at least $3,000,000 per occurrence; $3,000,000 aggregate (products and completed operations); and $3,000,000 general aggregate; 21.1.2 Automobile liability for all owned, leased, or rented vehicles with property damage and bodily injury coverage with combined single limit not less than of $3,000,000 per each occurrence; 21.1.3 Workers compensation (statutory) and employers' liability with minimum limits of not less than $1,000,000 per accident, $1,000,000 disease (each employee), and $1,000,000 disease (policy limit), but in no event less than the minimum amounts required by law; and 21.1.4 Umbrella/excess liability with minimum limits of $5,000,000 each occurrence and aggregate. 21.2 Forms of Policies; Evidence. The insurance required by this section may have deductibles in such amounts as Fleming reasonably determines. Kmart shall be named as an additional insured under such insurance, except the workers compensation insurance. Fleming may fulfill these insurance obligations through blanket coverage and through any combination of primary and excess policies. Fleming will provide Kmart certificates of insurance evidencing the insurance coverage required by this section. The certificates shall provide that the issuing company will endeavor to mail 30 days prior written notice to Kmart of any cancellation of coverage before the stated expiration date. Fleming shall give Kmart thirty (30) days prior written notice of the cancellation or non-renewal of any insurance coverage before the stated expiration date. Fleming shall maintain such coverage with one or more insurance companies reasonably acceptable to Fleming and Kmart and licensed to do business in the states where such licensing is required to provide the required insurance. 21.3 Fleming Limited Warranty. Fleming warrants that (i) it will convey to Kmart good and marketable title to all Products supplied hereunder, and (ii) all Products sold to Kmart shall (a) be free and clear of all liens, claims and encumbrances, (b) properly stored, handled and transported, and (c) shall be free of defects created by the negligence or willful misconduct of Fleming. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS OR IMPLIED. FLEMING DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 21.4 Vendor Warranties. Fleming shall assist and cooperate with any effort by Kmart to avail itself of the benefits of any warranties made by any manufacturer, vendor, or supplier of Products and any services relating to Products and of any insurance relating thereto. Fleming shall use commercially reasonable efforts to obtain the written confirmation by all manufacturers, vendors, and suppliers of Products and services relating to Products that their warranties with respect to Products and such services and the related insurance coverage extend to Kmart and Kmart's customers. If Kmart is unable to avail itself directly of any such benefits, such efforts may include, upon Kmart's request, Fleming seeking indemnification or contribution from any such manufacturers, vendors, or suppliers directly and passing on any proceeds therefrom to Kmart, except and to the extent Fleming shall have paid the claim arising under the vendor's warranty. Fleming shall indemnify and hold harmless Kmart, and its affiliates, and their respective officers, directors, and employees, from all claims, liabilities, losses, damages, expenses, and costs (including reasonable attorneys' fees) arising out of matters covered by the warranties of such manufacturers, vendors, and suppliers of Products and services relating to Products. The foregoing indemnity obligation is only to the extent Fleming receives payment under or with respect to such warranties and has not paid the related claim arising under the warranty, if any. 21.5 Survival. The provisions of Sections 21.3 and 21.4 shall survive the termination of this Agreement. 22. Miscellaneous. 22.1 Assignment. The provisions of this Agreement are binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns; provided, however, neither this Agreement nor the rights and obligations of either party hereunder shall be assignable without the prior written consent of the other party, which a party may grant or withhold in its sole discretion. However, either party may assign this Agreement to a subsidiary or affiliate that is owned or controlled by, or is under common ownership or control with that party. Any prohibited assignment is void. With respect to any permitted assignment, the assigning party remains fully responsible for performance and for all acts and omissions of its assignee. 22.2 Incorporation and Integration. This Agreement, including the schedules attached hereto, is the final and complete agreement between Kmart and Fleming with respect to the subject matter hereof. No representations, inducements, promises, or understandings in relation to the subject matter hereof, whether oral or written, exist unless they are expressly set forth in this Agreement. This Agreement supersedes all prior understandings, agreements, contracts, or arrangements between the parties, whether oral or written, unless otherwise expressly incorporated in this Agreement. No agreement or other understanding purporting to add to or to modify the terms and conditions hereof is binding unless agreed to by the parties in writing. Any terms or conditions in any invoices, statements, or other forms of the parties used in the performance of this Agreement that are in addition to or conflict with the terms and conditions hereof are void. 22.3 Headings. Headings or captions of the sections in this Agreement are for convenience of reference only and in no way define or limit or describe the intent of this Agreement or any provision hereof. 22.4 Limitation of Actions. An action for breach of this Agreement must be commenced within three years after the cause of action accrued. A party shall commence an action by sending the other party a statement of claim and demand for arbitration under the provisions of this Agreement. 22.5 Force Majeure. Neither party shall be deemed in default of this Agreement if such party's non-performance is the result of a condition beyond its control, including, but not limited to, labor strikes (subject to Section 8), government rationing and acts of God. A party's financial condition is not a condition beyond its control. If any event beyond Fleming's control affects Fleming's ability to source any Store from any Distribution Center but does not otherwise affect Fleming's operations as a whole, then Fleming shall use reasonable efforts to source the affected Stores from another Distribution Center; provided, however, that any reasonable incremental cost arising from such sourcing shall be paid by Kmart. 22.6 State and Local Taxes. Kmart represents and warrants that all Products and other tangible personal property purchased from Fleming shall be purchased for resale in the ordinary course of Kmart's business and that Kmart shall comply with pertinent state and local laws regarding the collection and payment of sales, use, and other taxes applicable to all such resale transactions and furnish evidence thereof to Fleming. If any such tangible personal property is put to a taxable use by Kmart or is purchased by Kmart other than for resale, Kmart shall make timely return and payment to the proper taxing authority of all sales, use, and like taxes applicable thereto, and shall indemnify Fleming against such taxes and all penalties and interest related thereto. Kmart shall reimburse Fleming for all transaction taxes paid by Fleming (including, without limitation, bottle and other recycling taxes and service taxes) imposed on the sale of property and services contemplated by this Agreement. 22.7 Severable. If any provision of this Agreement is determined by a court of competent jurisdiction or arbitrators appointed pursuant to this Agreement to be void or unenforceable, then the remaining provisions of this Agreement shall be given effect as if such void or unenforceable provision was not a part of this Agreement. 22.8 Counterparts. This Agreement may be executed in multiple counterparts, all of which taken together will constitute one instrument and each of which will be considered an original for all purposes. 22.9 Authority to Sign. Each person signing below warrants and represents that he has full power and authority to execute this Agreement on behalf of the party he represents. Upon request, each party must provide a certified resolution or certificate of authority authorizing the undersigned to enter into and sign this Agreement. 22.10 Waivers. No waiver of any breach or default is a waiver of any subsequent breach or default. 22.11 Approval. Wherever this Agreement provides for the consent or approval of a party as a condition to an action by the other party, except as otherwise provided in Section 22.1, the party whose consent or approval is required shall not unreasonably withhold, condition or delay its consent. EXECUTED as of the day and year first written above. FLEMING COMPANIES, INC. By MARK S. HANSEN Name: Mark S. Hansen Title: Chairman and Chief Executive Officer KMART CORPORATION By CHARLES C. CONAWAY Name: Charles C. Conaway Title: Chairman and Chief Executive Officer SCHEDULES Schedule A Stores Schedule 1.1 Products Schedule 1.2A HBC and GMD Schedule 1.2B Dunigan Fuel Terms Schedule 1.3 Product Pricing Schedule 1.4 High Velocity Products Schedule 2 Logistics Services Schedule 4A Service Requirements Schedule 4B Quality Assurance and Food Safety Guidelines Schedule 4C Shrink Audit Procedure Schedule 4D Audit Procedures Schedule 4E Management Reports Schedule 5 Product and Service Fees and Charges Schedule 5A Bid Values Schedule 5B Accounts Receivable Reconciliation Schedule 10 Transition Milestones SCHEDULE A STORES The following list of Stores will be deemed to be automatically amended from time to time without further action of the parties to provide for (a) the removal of Stores from the list as a result of closure, relocation, sale, or other disposition by Kmart, and (b) the addition of Stores to the list as a result of the opening or acquisition of new Stores through the term of this Agreement, whether designated "Super K," "Big K" or by any successor names to such stores. Kmart will provide to Fleming at least sixty (60) days prior written notice of Stores to be removed or added, as the case may be, during the term of this Agreement so that Fleming may commence or terminate service. Initially, each Store shall be primarily supplied by the Distribution Center named opposite to such Store. NOTE: Super K stores with a * in the "Fres./Sac. Note" column will utilize the following supply arrangement: From Fresno: Grocery, Dairy, Frozen, Candy, Cigarettes From Sacramento: Lunch/Frozen Meat, Smoked IQF, Bakery, Deli, Seafood, Commodity Meat From Tracy: Produce, Floral Products from Tracy will be straight runs to stores or crossdocked through Fresno
BK Store 2001 SK Store Fres./Sac. 2001 Number Proposed DC Number Note Proposed DC - --------------------------------------------------------------------------------------- 3008 Allentown PA 4906 Allentown PA 3021 Allentown PA 4928 Allentown PA 3026 Allentown PA 4929 Allentown PA 3027 Allentown PA 4935 Allentown PA 3028 Allentown PA 4936 Allentown PA 3040 Allentown PA 4939 Allentown PA 3047 Allentown PA 4960 Allentown PA 3048 Allentown PA 4963 Allentown PA 3050 Allentown PA 4967 Allentown PA 3051 Allentown PA 3974 * Fresno CA 3056 Allentown PA 4957 * Fresno CA 3060 Allentown PA 4987 * Fresno CA 3071 Allentown PA 7697 * Fresno CA 3073 Allentown PA 3575 Ft Wayne IN 3077 Allentown PA 3784 Ft Wayne IN 3087 Allentown PA 3786 Ft Wayne IN 3093 Allentown PA 3910 Ft Wayne IN 3098 Allentown PA 4059 Ft Wayne IN 3102 Allentown PA 4108 Ft Wayne IN 3115 Allentown PA 4722 Ft Wayne IN 3117 Allentown PA 4745 Ft Wayne IN 3129 Allentown PA 4764 Ft Wayne IN 3131 Allentown PA 4821 Ft Wayne IN 3136 Allentown PA 4903 Ft Wayne IN 3138 Allentown PA 4910 Ft Wayne IN 3141 Allentown PA 4913 Ft Wayne IN 3146 Allentown PA 4915 Ft Wayne IN 3149 Allentown PA 4924 Ft Wayne IN 3152 Allentown PA 4937 Ft Wayne IN 3158 Allentown PA 4938 Ft Wayne IN 3160 Allentown PA 4949 Ft Wayne IN 3167 Allentown PA 4954 Ft Wayne IN 3172 Allentown PA 4964 Ft Wayne IN 3175 Allentown PA 4966 Ft Wayne IN 3183 Allentown PA 4971 Ft Wayne IN 3187 Allentown PA 4982 Ft Wayne IN 3193 Allentown PA 4984 Ft Wayne IN 3196 Allentown PA 4990 Ft Wayne IN 3201 Allentown PA 4991 Ft Wayne IN 3202 Allentown PA 4992 Ft Wayne IN 3216 Allentown PA 4994 Ft Wayne IN 3222 Allentown PA 4995 Ft Wayne IN 3225 Allentown PA 4998 Ft Wayne IN 3229 Allentown PA 7416 Ft Wayne IN 3232 Allentown PA 7525 Ft Wayne IN 3237 Allentown PA 7584 Ft Wayne IN 3244 Allentown PA 7634 Ft Wayne IN 3256 Allentown PA 7913 Ft Wayne IN 3259 Allentown PA 9817 Ft Wayne IN 3264 Allentown PA 3948 Garland TX 3266 Allentown PA 3992 Garland TX 3268 Allentown PA 4904 Garland TX 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Salt Lake City UT 7099 Salt Lake City UT 7107 Salt Lake City UT 7139 Salt Lake City UT 7303 Salt Lake City UT 7329 Salt Lake City UT 7412 Salt Lake City UT 7423 Salt Lake City UT 7425 Salt Lake City UT 7426 Salt Lake City UT 7512 Salt Lake City UT 7533 Salt Lake City UT 7538 Salt Lake City UT 7542 Salt Lake City UT 7560 Salt Lake City UT 7618 Salt Lake City UT 7624 Salt Lake City UT 7668 Salt Lake City UT 9046 Salt Lake City UT 9074 Salt Lake City UT 9225 Salt Lake City UT 9241 Salt Lake City UT 9261 Salt Lake City UT 9306 Salt Lake City UT 9515 Salt Lake City UT 9630 Salt Lake City UT 9715 Salt Lake City UT 9751 Salt Lake City UT 9759 Salt Lake City UT 9792 Salt Lake City UT 9794 Salt Lake City UT 3025 Seattle WA 3072 Seattle WA 3133 Seattle WA 3209 Seattle WA 3214 Seattle WA 3270 Seattle WA 3275 Seattle WA 3354 Seattle WA 3389 Seattle WA 3413 Seattle WA 3430 Seattle WA 3443 Seattle WA 3580 Seattle WA 3584 Seattle WA 3623 Seattle WA 3722 Seattle WA 3839 Seattle WA 3840 Seattle WA 3888 Seattle WA 3889 Seattle WA 3969 Seattle WA 4081 Seattle WA 4146 Seattle WA 4147 Seattle WA 4155 Seattle WA 4178 Seattle WA 4208 Seattle WA 4225 Seattle WA 4253 Seattle WA 4288 Seattle WA 4339 Seattle WA 4404 Seattle WA 4406 Seattle WA 4435 Seattle WA 4439 Seattle WA 4455 Seattle WA 4467 Seattle WA 4480 Seattle WA 4755 Seattle WA 4779 Seattle WA 7030 Seattle WA 7033 Seattle WA 7034 Seattle WA 7143 Seattle WA 7153 Seattle WA 7166 Seattle WA 7207 Seattle WA 7253 Seattle WA 7315 Seattle WA 7331 Seattle WA 7338 Seattle WA 7569 Seattle WA 7580 Seattle WA 7598 Seattle WA 7621 Seattle WA 7904 Seattle WA 9530 Seattle WA 9698 Seattle WA 9808 Seattle WA 3002 Warsaw NC 3080 Warsaw NC 3116 Warsaw NC 3122 Warsaw NC 3154 Warsaw NC 3168 Warsaw NC 3206 Warsaw NC 3240 Warsaw NC 3253 Warsaw NC 3294 Warsaw NC 3324 Warsaw NC 3336 Warsaw NC 3365 Warsaw NC 3428 Warsaw NC 3442 Warsaw NC 3471 Warsaw NC 3544 Warsaw NC 3560 Warsaw NC 3598 Warsaw NC 3606 Warsaw NC 3621 Warsaw NC 3625 Warsaw NC 3632 Warsaw NC 3634 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SCHEDULE 1.1 PRODUCTS Product List: Meat Department Category and Item Assumptions Beef (All Private Brands, National, Regional, and Local Brands) o All Fresh and Beef Primals and Sub-Primals o Inclusive of all Retail Ready Pre-Packaged Beef o Inclusive of all Pre-Cooked Beef Products o Inclusive of all Hotel and Case Ready Cuts and Primals o All Fresh and Frozen Ground Meat Products o Inclusive of all Bulk, Pre-Packaged and Retail Ready Products o Inclusive of all Fresh and Frozen by Products Pork (All Private Brands, National, Regional, and Local Brands) o All Fresh and Frozen Pork Primals and Sub-Primals o Inclusive of all Retail Ready Pre-Packaged Products o Inclusive of all Bone-In and Boneless Product o Inclusive of all Fresh and Frozen by Products o Inclusive of all Smoked and Country Cured Products (boneless and bone-in) Poultry (All Private Brands, National, Regional, and Local Brands) o All Fresh, Frozen, and Chill Pack Products o Bulk, Pre-Package, IQF Poultry and Breaded Poultry Products o Trayed, Bagged or Bulk (C02) o Inclusive of all Fresh and Frozen Turkeys o Whole and Parts o Ducks, Geese, Capons, and Game Hens Packaged Meat Products (All Private Brands, National , Regional, and Local Brands) o Inclusive of all items Packaged, Bulk, Cooked, Raw, Fresh or Frozen Products sold from the meat department or dairy department in the following categories: o Bacon o Fresh Sausage o Smoked Sausage o Canned Hams and All other Refrigerated Canned Meat Items o All Refrigerated Pickles and Sauerkraut o Hot Dogs, Wieners, Conies o All Cup Salads and Bulk Salad Items traditionally sold in the Meat Department or Dairy Case Packaged Meat Products (All Private Brands, National, Regional, and Local Brands) o All Prepackaged Refrigerated Process Cold Cuts o All Bulk Cold cuts that are processed and sold in the Meat Department o All Market Style - Bulk and Pre-Cut Cheese (sold in the Meat Department) o All Meals To Go - Meal Kits - Quick to Fix Items - Home Meal Replacement Items to include but not limited to: o Pizzas (market style) o Lunchables o Tyson/Oncor/Advanced Products Seafood (All Private Brands, National, Regional, and Local Brands) o All Frozen, Packaged and Bulk Seafood Inclusive of: o Whole H&G o Fillets and Steakfish o All Frozen Shell Fish o Shrimp (Raw, Cooked, Fresh, Frozen) o Imitation Seafood Products o Pre-Cooked Heat and Serve Products o All glass and plastic container product related to the category Produce In support of Kmart, Fleming will source and negotiate all Branded, Non-Branded and Private Label Produce for the following products/categories, including but not limited to: - - All Fresh Categories (Including Value Added Products) - - All Non-Fresh Manufactured Categories - - All Floral Accessories (Including Balloons, Planters, Pots, Supplies, etc.) - - All Silk Flowers and Plants - - Christmas Trees GFD Catsup & Mustard BBQ Sauce & Misc. Sauces Sauces-Ital, Cooking, Paste Salad Drsng, Mayo, Vinegar Pickles & Relishes Olives & Red Cherries Jellies, Jams, Preserves Peanut Butter & Honey Juices & Drinks Fruits - Canned & Glass Vegetables - Canned & Glass Low Cal & Health Foods Fish & Seafood Canned Meat Prepared & Nationality Fd Soup - Canned & Dry Baby Food & Formula Milk - Canned & Powdered Coffee & Creamers Tea Cocoa & Milk Modifiers Powdered Fruit Flav Drnks Cereal, Pop Trts, Ins Bkfst Cookies & Crackers Chips, Snacks & Nuts Dried Fruit Dry Beans, Veg & Grains Popcorn Spaghetti & Macaroni Prep Dinners & Box Pizza Baking Accessories Cake Mix, Frstg, Prep Mix Pancake Mix Breadings & Coatings Flour & Cake Flour Salt, Seasngs, Spices, Extr, Gravies Desserts, Toppng, Puddings Syrup & Molasses Shortening & Oil Sugar & Sugar Substitutes Candy & Gum Butter Margarine Refrig Dough Products Cheese - Retail Packaged Bulk Cheese Cultured Products Juice Products Fish/Hrsradish/Sce/Mustrd Pickles Refrigerated Salads Desserts & Topping Yeast Juice Fruit Vegetables - Frozen Potatoes Frozen Prepared Frozen Bakery & Desserts Non-Dairy Frozen Fish Frozen Meat Packaged Frozen Poultry Packaged Frozen Bake-off Other Frozen for Resale Hispanic Foods Oriental Foods Italian Foods Natural Foods Diet Foods Natural HABA Baby Diapers & Pants Dog Foods Other Pet Foods & Litter Dish Detergents Laundry Detergents Hand & Bath Soaps Laundry Supplies & Bleach All Prpose Clnr/Disinfect Household Clnrs, Compounds Household Supplies Waxes & Polish - Furniture Pesticides Paper Products Picnic Supplies & Drink Cup Wraps, Foil, Freezer Supply Sandwich, Storg, Trash Bags Cigarettes Cigars, Tobacco, Snuff, Misc. Frozen bagels and breakfast foods Charcoal and lighter fluids Rock salt, water softener salt and pellets Deli Department o All Turkey and Poultry products including smoked, browned, flavored, dark meat, pre-cooked holiday birds (fresh and frozen) o All Beef products including all roast beef, corned beef, pastrami, further processed beef products etc. o All ham products including Honey, Virginia, Cooked, Water added, Chopped, Capacola, Prosciutto, Flavored, canned etc. o All Cheese categories including domestic, imports, imitations, shreds, balls and logs, specialty o All Smoked Meats including Canadian bacon, bacon, brats, smoked sausage, metts, wieners, links etc o All Luncheon meats including bologna, braunschweiger, head cheese, liver loaf, flavor loaves o All Dry Sausage including hard, genoa, pepperoni, summer sausage o All "Lite" and "Lo-Salt" deli meats and cheeses o All Salads - fresh garden salads, coleslaw, macaroni salad, potato salads, desserts, dips, puddings, specialty, etc. (bilk and pre-packaged) o All pizza products both fresh, frozen and pre-made o All deli beverages including coffee, juice, tea, soft drinks etc. o All Deli snacks, tortilla chips, crackers and mustards o All Chicken products including fresh 8 pc and wogs, 8 pc. MRB and frozen WOGS as well as all further processed and wing products o All vegetables and fruits used in a deli operation both dry and frozen o All condiments used in a Deli operation including dry, refrigerated and frozen o All spices used in the Deli kitchen o All Hot Foods including entrees, vegetables, fish, BBQ, ribs, lamb, lasagna, pork, sausage, shrimp, egg rolls, corn dogs, steaks etc. o All Deli breads and bread board items including pita breads, lavosh etc. o All salad bar ingredients o All breakfast items including sausage patties, biscuits, pre-cooked bacon etc. o All frozen and fresh soups pre packaged or bulk o All thaw and sell prepackaged deli products including ready to serve entrees and vegetables, o All other deli products including but not limited to herring, lox, olives, pickles, cooking oils, ethnic foods, o All seasonal and promotional items for all holidays not listed including gift packs, seasonal candies. Bakery Department o All Breads and Rolls including bake off and thaw and sell o All Bread and roll mixes and bases o All Commodity flours, sugars, yeast o All Donuts including frozen dough, ready to finish, mixes and thaw and sell /ready to sell o All cream products including refrigerated or frozen ice cream cakes, eclairs, cream horns, pie shells, puffs, tart shells, ice cream tortes and all other cream products o All Sweet Goods including all frozen bake off, ready to sell or thaw and finish Danish, cinnamon rolls, coffee cakes, turnovers, puff dough, etc, o All Cakes either the mix, frozen uniced or pre-iced o All cakes ready to sell or ready to finish including angel foods, brownies, cupcakes, pound cakes, creme cakes, bundt cakes or any other product made from cake style batters o All pies either made in store from scratch, ready to bake or ready to thaw and sell including all fruit, cremes, meringues etc. o All Hispanic and other ethnic breads, pastries and desserts o All cookies either from mix, frozen pucks or ready to thaw and sell either in bulk or pre-packaged o All muffin products either from mix, or thaw and sell prepackaged or bulk o All bagel products o All Bakery ingredients including shortenings and oils, sugars, icings, toppings, fruit fillings, eggs, spices. Decorretes, flavors, emulsions, cheese for baking, sanding sugars, nuts and toppings, etc. o All cake decorating supplies o All retail cake accessories including candles, lay-ons, napkins, party plates, hats etc. o All "fat free" and "sugar free" items listed above o All seasonal and holiday items including seasonal flavors of above listed items and commodities o All other products sold today in the traditional Bakery department including shop around pallets of bakery thaw and sell products SCHEDULE 1.2A HBC AND GMD The Fleming / Kmart GM and HBC synergies teams, headed by Jeff Manning and Cecil Kearse, will identify the procurement and distribution strategies and potential benefits by category for presentation on or before May 2, 2001. The categories will be broken out as follows:
Health & Beauty Care Deodorants Hair Care Analgesics Skin Care First Aid Cough and Cold Oral Care Foot Care Eye and Ear Care Sun Care Feminine Hygiene Diet Shaving Needs Family Planning Nutrition Bath Baby Needs Vitamins and Supplements Men's Grooming Cosmetics Digestive Health Private Label Ethnic HBC
General Merchandise Household Softgoods Light Bulbs / Electrical Baby Sun / Reading Glasses Closet / Cleaning Supplies Batteries / Flashlights School Supplies Seasonal Product Bakeware / Kitchen Gadgets Photo / Audio / Video Home & Office Promotional Product Housewares / Drinkware Hardware Sewing / Shoe Care Tableware Toys Party Needs Plastic Storage Automotive Panty Hose Appliances & Clocks Gloves Direct Imports
SCHEDULE 1.2B DUNIGAN FUEL TERMS Fuel Management Services Agreement Term Sheet Purpose: To establish business guidelines for how Dunigan Fuels will provide fuel inventory and other related services for Kmart. 1. Services Provided: Dunigan Fuels will provide the following services to Kmart. A. Fuel Inventory Management - Dunigan Fuels will monitor Kmart's Fuel Center location remotely and schedule the delivery of fuel 7 days a week. Fuel will be automatically dispatched on an as needed basis. B. Help Desk - Dunigan Fuels will provide a 7 day 24 hours a day help desk. The help desk will support fuel operations only. Dunigan Fuels will dispatch fuel maintenance companies on an as needed basis per Kmart guidelines. C. Environmental Monitoring - Dunigan Fuels will provide Environmental compliance monitoring during the term of the fuel management services agreement. Environmental Monitoring will commence once Kmart and Dunigan Fuels execute an Environmental Monitoring Plan. This plan should be executed within 180 days from the commencement of this agreement. D. Accounting - Dunigan Fuels will invoice using Electronic Data Interchange. Kmart will pay all invoices using automated clearinghouse transfers ("ACH"). 2. Term: The term will be the same as this Agreement. 3. Termination: Termination of this agreement will be the same as this Agreement. (CONFIDENTIAL) 5. Payments/ Payment Terms/ Invoicing: Dunigan Fuels shall invoice Kmart for all Products sold by Dunigan Fuels to Kmart via Electronic Data Interchange (EDI), or other mutually acceptable methods. Payment of the Product will be due to Seller based on net ten (10) days from delivery of each load of Product. Payment will be made via ACH. 6. Invoice Reconciliation: Dunigan Fuels will provide all goods on a cost plus its pre-negotiated fees. Services are considered to be included in fees generated by gallons processed. From time to time there will be a need to correct a billing due to an over or under charge for a good or services provided. These billing errors will be accrued and settled on a quarterly basis. A complete accounting by store and by invoice will be kept to justify all invoice reconciliation. 7. Access to Tank Monitors: Kmart will always allow Dunigan Fuels, during the term of the fuel management services agreement, phone line access to its automatic tank monitors. This access is necessary for Dunigan Fuels to perform its duties. 8. Environmental Monitoring: Dunigan Fuels will help with the Environmental Monitoring of Kmart's locations. This monitoring will be secondary to on-site monitoring of fuel leaks and alarms. Environmental Monitoring will commence upon the signing of a mutually agreed upon Environmental Monitoring Plan. This plan will be established within 180 days of the signing of this agreement. If, in fact, on-site monitoring is unavailable by Dunigan Fuels due to lack of systems or other reasons, fees (margin) will be reduced by (CONFIDENTIAL) per gallon. 9. Federal and Local Fuel Taxes: Dunigan Fuels shall collect for Kmart all required federal, state, and local taxes, including, without limitation, any additional fees or taxes which may be levied or imposed in connection with the sale, transportation, delivery or use of the Products at the Locations. Dunigan Fuels shall pay all such taxes promptly to the appropriate authority within the time frame required and indemnify, defend and hold Kmart harmless therefrom. 10. Fuel Procurement It is the intent of Dunigan Fuels and Kmart to use whichever method necessary to procure fuel at the lowest available cost. The current methods used to procure fuel for this agreement will be having Dunigan Fuels buy the fuel on its account, Kmart buying the fuel on their account, and using Internet based auctions. In the future other methods may be identified and used. Under all methods Dunigan Fuels will still monitor and perform its services and still be entitled to the margin addressed in this agreement. Any rebates earned and received by Dunigan Fuels from a specific refiner will be prorated to Kmart based on Kmart's item percentage of Dunigan Fuels' volume with that specific refiner. If Dunigan's pricing is below OPIS Low after taking into account any such rebates, Dunigan will share the savings below OPIS Low with Kmart on the basis of (CONFIDENTIAL) of such savings to Dunigan and (CONFIDENTIAL) of such savings to Kmart. 11. Performance Reporting: Dunigan Fuels will provide to Kmart on a quarterly basis performance reporting. Performance reporting will be how well fuel was procured compared to the Oil Price Information System. The price fuel was procured at will be compared to the OPIS Average and OPIS Low price for every location. Racks to be mutually agreed upon by Kmart and Dunigan Fuels. Failure to perform at or below the OPIS Low published price over any quarter for any location will be grounds for termination of that location from the fuel management services agreement at Kmart's discretion. In times of Natural Disaster, Government Intervention, or other events out of the control of both parties that create abnormal price conditions, may affect the performance reporting, these days will be excluded from any performance reporting. Days excluded to be agreed upon by both parties. In addition, if Dunigan is buying fuel on its own account, failure to perform at OPIS Low, after taking into account all applicable rebates will result in a (CONFIDENTIAL) reduction in fees to Dunigan based on gallons purchased in that period for the specific location. Performance below OPIS Low will result in a sharing of savings with Kmart on the basis of (CONFIDENTIAL) of such savings to Dunigan and (CONFIDENTIAL) of such savings to Kmart for the location. 12. Freight: Dunigan Fuels will coordinate the delivery of fuel to Kmart's fuel centers using common carriers. Freight rates will be provided to Kmart on a cost basis. 13. Handling Credits and Float Rebates: The Handling Credits collected by Dunigan Fuels from paying taxes for the fuel sold to Kmart will be rebated to Kmart on a quarterly basis. The rebate will be payable 30 days following Kmart's quarter end. A complete accounting by fuel center of the handling credits will be kept and provided to Kmart with each payment. Float Credit - An interest float credit of $.0008 per gallon purchased will be credited on a quarterly basis. The gallons used to determine the amount rebated will be the gallons sold to Kmart that Dunigan Fuels collected and paid the federal and state taxes. Any gallons that Kmart has not paid for within the agreed upon payment term will be excluded from the rebate. 14. Margin (CONFIDENTIAL) Cumulative Number of Gallons Purchased Per Gallon Fee --------- -------------- 0 - 5,000,000 gallons (CONFIDENTIAL) per gallon 5,000,001 - 7,500,000 gallons (CONFIDENTIAL) per gallon 7,500,001 - 10,000,000 gallons (CONFIDENTIAL) per gallon 10,000,001 - 12,500,000 gallons (CONFIDENTIAL) per gallon 12,500,001 - 15,000,000 gallons (CONFIDENTIAL) per gallon 15,000,001 - 17,500,000 gallons (CONFIDENTIAL) per gallon 17,500,001 - 20,000,000 gallons (CONFIDENTIAL) per gallon 20,000,001 - 22,500,000 gallons (CONFIDENTIAL) per gallon 22,500,001 - 25,000,000 gallons (CONFIDENTIAL) per gallon 25,000,001 - 27,500,000 gallons (CONFIDENTIAL) per gallon 27,500,001 - 30,000,000 gallons (CONFIDENTIAL) per gallon 30,000,001 - 32,500,000 gallons (CONFIDENTIAL) per gallon 32,500,001 - 35,000,000 gallons (CONFIDENTIAL) per gallon 35,000,001 - 37,500,000 gallons (CONFIDENTIAL) per gallon 37,500,001 - 40,000,000 gallons (CONFIDENTIAL) per gallon 40,000,001 + gallons (CONFIDENTIAL) per gallon SCHEDULE 1.3 (CONFIDENTIAL) SCHEDULE 1.4 HIGH VELOCITY PRODUCTS (CONFIDENTIAL) SCHEDULE 2 LOGISTICS SERVICES Inbound receiving and storage of product Order selection and loading, routing and scheduling Maintaining an inventory to enable Fleming to supply products timely Inventory control and quality assurance, and stock rotation Fruit ripening Inventory management Transportation management (backhaul, consolidation, carrier selection, freight bill audit and forward to Kmart for payment, pallet and tote return pursuant to agreed procedures) - At Kmart's option, Fleming shall provide transportation services and select third party transportation providers reasonably acceptable to Kmart SCHEDULE 4A SERVICE REQUIREMENTS Fleming shall exercise commercially reasonable efforts to achieve service levels for Product categories described below:
Minimum Year 2 and Service Levels Year 1 Thereafter (Beginning on the Termination Category Target (1) Target Effective Date) Period - -------- ---------- ------ --------------- ------ Perishables 97 97 14 day rolling average greater than 96% 90 5 day rolling average greater than 95% Grocery, Frozen, Dairy 96.25 97 28 day rolling average greater than 95% 90 5 day rolling average greater than 94% HBC and GMD TBD TBD TBD TBD - -------------------- (1) The "Target" service level in Year 1 shall be effective beginning on the 90th day following the commencement of supply by Fleming to Kmart for each Distribution Center.
The failure to achieve the service level requirements set forth herein as targets does not constitute a material breach of this Agreement, except as provided below. Upon failure to achieve any minimum service level for any sixty (60) days during any 365 consecutive day period at any Distribution Center, a member of the Account Team appointed by Kmart shall present the matter to a designated committee of executive officers of each party to resolve the issue. If such officers are unable to agree on a plan to resolve the matter, or if the service level deficiencies persist after implementing the actions recommended by the executive officers, Kmart shall have the right, but not the obligation, to refer the matter to an independent third party consultant approved by Fleming (the "Consultant") to review the situation and recommend an action plan to increase service levels to an acceptable level. The recommendations of the Consultant shall not be binding on the parties, but the parties shall seek in good faith to implement any such recommendations. The fees and expenses of the Consultant shall be borne by the parties equally. A material breach of this Agreement with respect to service level requirements shall occur only if Fleming fails to achieve any minimum service level for any 120 days during any 365 consecutive day period. "Service level" shall be measured weekly by the number of full cases delivered as compared to the number of full cases ordered (net of discontinued items ordered inadvertently). The failure to deliver Products ordered by Kmart due to vendor outs or unavailable Products, if either of such conditions exist for a continuous period of thirty (30) days, except with respect to seasonal Perishables, if such conditions exist for a continuous period of seven days, or due to discontinued items, materially inaccurate forecasting of Product needs by Kmart or materially inadequate order lead time by Kmart shall not be included in the calculation of the service level. Nothing contained herein shall establish service levels for Stores in Hawaii, which shall be evaluated separately, and the parties shall, within a reasonable time, agree upon standards for service levels for Products sold to Stores in Hawaii. SCHEDULE 4B QUALITY ASSURANCE AND FOOD SAFETY GUIDELINES 1. Each Distribution Center will receive two unannounced ASI Inspections annually. Scores of 900 or above are required. Any Distribution Center receiving a score of less than 900 will require a re-inspection after corrections of the deficiencies. ASI inspection documents will be available for review by Kmart. 2. Each Distribution Center supplying perishable Products to Super K Stores will have a minimum of two Quality Control Inspectors (one for Deli/Bakery & Meat, one for Produce). 3. Kmart will provide perishable product specifications by department to Fleming for receiving and shipping of product to be shipped to Kmart stores. No product will be shipped outside of specifications without prior approval from Kmart. Dating standards as shown below will apply to these specifications. 4. All existing quality assurance guidelines will continue as shown below, including unannounced quality audits to insure processes are in place to meet specifications. 5. All inbound shipments must adhere to an incoming goods inspections process as identified by ASI. 6. Minimum dating standards for retail delivery are as follows: Cheese - 21 days from Expiration Date Margarine - 21 days from Expiration Date Cultured Product - 7 days from Expiration Date Dough Product - 7 days from Expiration Date Refrigerated Juice - 7 days from Expiration Date Packaged Meat - 14 days from Expiration Date Box Beef - 30 days from Pack Poultry - 5 days from Expiration Date Pork - 18 days from Pack Deli Meats - 14 days from Expiration Date Deli Salads - 7 days from Expiration Date Gourmet Deli Cheeses - 14 days from Expiration Date Domestic Deli Cheese - 21 days from Expiration Date Frozen Deli - 14 days from Expiration Date Fresh Poultry (cvp) - 5 days from Expiration Date All Bakery - 14 days from Expiration Date o All dry grocery Products delivered to the Stores shall have at least 45 days remaining until their expiration date (except for private label Products which will have the time remaining until their respective expiration dates. All perishable Products shall have at least the number of days remaining until the expiration date as is usual and customary in the supermarket industry for products of that kind. Other Products will be handled by the parties on a case by case basis by rejection or with appropriate consideration for price reductions. o Upon delivery, refrigerated and frozen foods will be the proper temperature and show no evidence of temperature abuse, i.e., thaw and refreeze. The Stores will reject any Product shipment that has evidence of temperature abuse. o Fleming's distribution centers, both refrigerated and dry, must comply with all federal, state and local health codes. Inspection reports, including internal Fleming reports will be made available to Kmart upon request. This includes pest control inspection reports. o All deliveries must be free of infestation or any evidence of infestation by rodents and insects, including stored product pests. The Stores will reject any Product shipment that has evidence of infestation. o Products will be shipped in a manner so as to prevent contamination and adulteration between food and chemicals. o Delivery vehicles must be clean, free of infestation, and odors, which could indicate improper cleaning and sanitizing of delivery trucks. Trailers used to ship food products may not be used to back haul garbage, chemicals, trash or any items that may impart noxious odors that could penetrate food. o Fleming must immediately notify Kmart of any product recalls from manufacturers. o Fleming will accept the return of damaged or otherwise contaminated cases and issue a full credit to Kmart for the return. o Kmart food safety personnel will be permitted to visit all Fleming's Distribution Centers supplying Products to Kmart with appropriate coordination with Fleming. SCHEDULE 4C SHRINK AUDIT PROCEDURE Fleming / Kmart Shortage Standard Fleming will develop a Shortage Standard from actual YTD 2000 shortage credits issued to Big K and Super K. The Shortage Standard will be calculated by Distribution Center. Payment will be made by check within fours week after each quarter end. Distribution Centers with no Kmart credit history will be calculated as a composite average of all Distribution Centers excluding from the calculation those Divisions with the highest and lowest shortage history. Rates will be adjusted quarterly. As soon as practicable after the Effective Date, and in any event prior to March 31, 2001, the parties shall establish an initial shortage standard rate to be applicable upon the commencement of Fleming's supply of incremental volume of Products pursuant to this Agreement. Kmart will randomly supply associates to participate in the case count audit process on Fleming's dock. Quarterly, the Shortage Standard will be based on collaborative audit team findings by Kmart and Fleming associates from these dock audits. Absent Kmart input, the rollup of Fleming internal 4% case count audit results from the preceding quarter will apply. All case count audits will be conducted on Fleming's dock during normal shipping hours. Both parties agree to minimize disruption to shipping and on time dockout. Large identifiable shortages (e.g. missing pallets) will be addressed on an individual basis. Kmart and Fleming loss control will work together at retail to address consistent claims outside the program. Fresh Meat, Frozen Shrimp, Cigarettes and Produce Nut Meats will be piece counted at time of delivery. Fleming and Kmart will enforce the current Seal Procedure and identify lapses. Seal Procedure is set forth below. Label errors (mis-picks) will be addressed as part of Fleming's retail credit policy. Kmart Seal Procedure 1. Once the trailer loading is completed, a Fleming associate will close the doors and secure the load consistent with the specific division security procedures. 2. Billing clerk will then process the necessary paperwork, and assign the security seals for the load. The seal number for each of the stops will be written directly on the delivery receipt or driver run document. An additional seal will be issued for use if the trailer has a side door. 3. Before the trailer leaves the yard, Fleming Security or the driver will attach the seal for the first stop of the load. Security will verify that the seal number(s) matches the paperwork. At this point, the trailer is sealed and ready to leave Fleming. 4. Upon arrival to the first stop, the driver will ask the store receiving personnel to break the rear door seal, verify the number and sign the Delivery Receipt or the driver run document confirming that the seal was intact at time of delivery. The driver will also ask the store personnel to confirm, but not remove the seal number for any side doors. 5. If there is more than one stop on the trailer, the driver will ask the store receiving personnel at the first stop to place a second seal on the trailer, verify the number, and note their name directly on the Delivery Receipt. This process will continue for additional stops. 6. In the event a seal is broken or does not correspond with the number recorded on the Delivery Receipt, the driver and store receiving personnel must call Fleming Customer Service immediately. Fleming will verify the seal number and confirm that Fleming Security did not make any changes. At this point, the load must be counted by the driver and verified by the store. SCHEDULE 4D AUDIT PROCEDURES Kmart has the right to audit Fleming's books and records regarding Product cost files and selling prices and charges, allowances, and freight calculations relating to Fleming's performance of and compliance with this Agreement upon reasonable advance notice to Fleming. Fleming must maintain its books and records in a manner that facilitates a full and complete review of Fleming's performance of and compliance with this Agreement. All such books and records will be available for audit by Kmart for the current prior 12 accounting periods (i.e. for a "rolling" thirteen periods). The books and records will be maintained on-site at each Distribution Center for the Stores serviced by that Distribution Center for the current and six prior accounting periods (a "rolling" seven periods), and thereafter, the books and records will be maintained off-site by Fleming and will be made available and retrieved by Fleming upon a specific request by Kmart to audit an identified issue. The audits may be conducted by Kmart or its third party designee and will be conducted at each individual Distribution Center. Kmart and Fleming will each bear their own costs associated with the audits. SCHEDULE 4E MANAGEMENT REPORTS Key Performance Indicators Service Level
Reporting Frequency Adj NonFleming Raw Fleming -------------------------- ------- --------------------------------- ------- ----------------- Reporting Levels Rolling Rolling Service Service Day Week Period Level Discon New Mfg UnAval Rstrc Level Whse Mdsr Alloc --- ---- ------ ----- ------ --- --- ------ ----- ----- ---- ---- ----- Total Company X X X Division X X X Ad Product X X X Department X X X "A" Items X X "B" Items X X "C" Items X X "D" Items X X
Delivery
Reporting Frequency ------------------- Reporting Levels Day Week Period Cube/Load % On Time % Units Damaged Pallet Balance Tote Balance - ---------------- --- ---- ------ --------- --------- --------------- -------------- ------------ Total Company X X Division X X X
Outstanding A/R Balance
Reporting Frequency ------------------- % Invoices with Past Due Reporting Levels Day Week Period Deductions Balance - ---------------- --- ---- ------ ---------- ------- Total Company X X Division X X
Ordering and Case Value
Reporting Frequency ------------------- Avg Case Avg Order Orders < Late Late "Manual" Reporting Levels Day Week Period Value Cases 800 % CSL Turn Promo Orders - ---------------- --- ---- ------ ----- ----- --- ----- ---- ----- ------ Total Company X Division X Ad Product X Department X
Reporting Frequency ------------------- Forecast % Big Lot Reporting Levels Day Week Period Accuracy Pallets - ---------------- --- ---- ------ -------- ------- Total Company X Division X Ad Product X Department X
Item Assortment & Movement
Reporting Frequency ------------------- Reporting Levels Day Week Period Item Count Mvmt/Item Item < 1/Cs/wk/Str - ---------------- --- ---- ------ ---------- --------- ------------------ Total Company X Division X Ad Product X Department X
Items with low movement Super K Going In Gross Reports as current SCHEDULE 5 (CONFIDENTIAL) Logistics Fees (CONFIDENTIAL) SCHEDULE 5A (CONFIDENTIAL) SCHEDULE 5B ACCOUNTS RECEIVABLE RECONCILIATION The parties shall commit to apply required joint Kmart / Fleming team resources to work with diligence and good faith to eliminate in next sixty (60) days current inter-company process bottlenecks and inefficiencies that lead to increased A/R balances and delivery errors. These inefficiencies include, but are not limited to: o Centralized control, setup and propagation of new items to all Kmart supplying divisions; o Develop a process to handle invoice charges not specific to one line item and miscellaneous ("hand invoice") charges; o Address processing summary drops in lieu of "line-item" drops; o ASN failures o Lack of a fully implemented ASN system; and o Lack of uniform common items codes. SCHEDULE 10 TRANSITION MILESTONES START UP TIME LINE
30 Days 60 Days 90 Days 120 Days 150 Days 180 Days ------- ------- ------- -------- -------- -------- 22-Apr Fresno XXXXXXXXXXXXXXXXXXXX 22-Apr Sacramento XXXXXXXXXXXXXXXXXXXX 6-May Memphis XXXXXXXXXXXXXXXXXXXX 6-May Nashville XXXXXXXXXXXXXXXXXXXX 6-May Miami XXXXXXXXXXXXXXXXXXXX 1-Apr Warsaw XXXXXXXXXXXXXXXXXXXX 13-May Kansas City XXXXXXXXXXXXXXXXXXXX 13-May Garland XXXXXXXXXXXXXXXXXXXX 13-May Lafayette XXXXXXXXXXXXXXXXXXXX 22-Apr Phoenix XXXXXXXXXXXXXXXXXXXX 3-Jun Salt Lake City XXXXXXXXXXXXXXXXXXXX 3-Jun Geneva XXXXXXXXXXXXXXXXXXXX 30-Jun LaCrosse XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 30-Jun Northeast XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 30-Jun Indiana XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 30-Jun Northwest XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
EX-12 6 ex12.txt Exhibit 12 Fleming Companies, Inc. Computation of Ratio of Earnings to Fixed Charges
16 Weeks Ended -------------- April 21, April 15, (Dollars in thousands) 2001 2000 - ---------------------- ---- ---- Earnings: Pretax earnings (loss) $ 27,209 $(43,265) Fixed charges, net 62,290 61,135 Total earnings $ 89,499 $ 17,870 Fixed charges: Interest expense $ 57,502 $ 53,101 Portion of rental charges deemed to be interest 4,604 7,876 Capitalized interest 409 185 Total fixed charges $ 62,515 $ 61,162 Deficiency - $ 43,292 Ratio of earnings to fixed charges 1.43 .29
"Earnings" consists of income before income taxes and fixed charges excluding capitalized interest. Capitalized interest amortized during the respective periods is added back to earnings. "Fixed charges, net" consists of interest expense, an estimated amount of rental expense which is deemed to be representative of the interest factor and amortization of capitalized interest. The pro forma ratio of earnings to fixed charges is omitted as it is not applicable. Under the company's long-term debt agreements, "earnings" and "fixed charges" are defined differently and amounts and ratios differ accordingly. Results excluding strategic plan adjustments and one-time items are as follows:
16 Weeks Ended -------------- April 21, April 15, 2001 2000 ---- ---- Total adjusted earnings $89,111 $81,703 Total adjusted fixed charges $59,682 $61,162 Adjusted ratio of earnings to fixed charges 1.49 1.34
EX-15 7 ex15.txt Exhibit 15 Fleming Companies, Inc. 1945 Lakepointe Drive, Box 299013 Lewisville, Texas 75029 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Fleming Companies, Inc. and subsidiaries for the 16-week periods ended April 21, 2001 and April 15, 2000, as indicated in our report dated May 18, 2001; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the 16 weeks ended April 21, 2001, is incorporated by reference in the following: (i) Registration Statement No. 2-98602 (1985 Stock Option Plan) on Form S-8; (ii) Registration Statement No. 33-36586 (1990 Fleming Stock Option Plan) on Form S-8; (iii) Registration Statement No. 33-56241 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; (iv) Registration Statement No. 333-11317 (1996 Stock Incentive Plan) on Form S-8; (v) Registration Statement No. 333-35703 (Senior Subordinated Notes) on Form S-4; (vi) Registration Statement No. 333-28219 (Associate Stock Purchase Plan) on Form S-8; (vii) Registration Statement No. 333-80445 (1999 Stock Incentive Plan) on Form S-8; (viii) Registration Statement No. 333-89375 (Consolidated Savings Plus and Stock Ownership Plan) on Form S-8; (ix) Registration Statement No. 333-40660 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; and (x) Registration Statement No. 333-40670 (2000 Stock Incentive Plan) on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Dallas, Texas May 24, 2001 -----END PRIVACY-ENHANCED MESSAGE-----