-----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, NxvVPl2Y7pXWfygv2FtLXN1inwxykAwu91UrLRIUU/Kskx+0YGOigRseXWXvpLCw MWteR3xATMeY0eBOHIn9pw== 0000950134-01-505822.txt : 20010827 0000950134-01-505822.hdr.sgml : 20010827 ACCESSION NUMBER: 0000950134-01-505822 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010714 FILED AS OF DATE: 20010824 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: 1934 Act SEC FILE NUMBER: 001-08140 FILM NUMBER: 1722276 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 d90247e10-q.txt FORM 10-Q FOR QUARTER ENDED JULY 14, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 14, 2001 COMMISSION FILE NUMBER: 1-8140 FLEMING COMPANIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 48-0222760 (State of incorporation) (I.R.S. Employer Identification No.) 1945 LAKEPOINTE DRIVE, BOX 299013 LEWISVILLE, TEXAS 75029 (Address of principal executive offices) (972) 906-8000 (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At the close of business on August 10, 2001, 44,275,000 shares of the registrant's common stock, par value $2.50 per share, were outstanding. 2 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Operations - 12 Weeks Ended July 14, 2001, and July 8, 2000 Consolidated Condensed Statements of Operations - 28 Weeks Ended July 14, 2001, and July 8, 2000 Consolidated Condensed Balance Sheets - July 14, 2001, and December 30, 2000 Consolidated Condensed Statements of Cash Flows - 28 Weeks Ended July 14, 2001, and July 8, 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 6. Exhibits and Reports on Form 8-K SIGNATURE 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED FOR THE 12 WEEKS ENDED JULY 14, 2001 AND JULY 8, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 --------------- --------------- Net sales $ 3,457,279 $ 3,289,878 Costs and expenses: Cost of sales 3,193,922 2,998,624 Selling and administrative 211,092 261,374 Interest expense 34,435 38,447 Interest income (5,788) (9,340) Equity investment results (279) 1,694 Impairment/restructuring charge (credit) (117) 21,013 Litigation charges 46,600 -- --------------- --------------- Total costs and expenses 3,479,865 3,311,812 --------------- --------------- Loss before taxes (22,586) (21,934) Taxes on loss (9,128) (8,585) --------------- --------------- Net loss $ (13,458) $ (13,349) =============== =============== Basic and diluted net loss per share $ (0.31) $ (0.35) Dividends paid per share $ 0.02 $ 0.02 Basic and diluted weighted average shares outstanding 43,276 38,576 =============== ===============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED FOR THE 28 WEEKS ENDED JULY 14, 2001 AND JULY 8, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 -------------- -------------- Net sales $ 7,618,470 $ 7,621,376 Costs and expenses: Cost of sales 6,988,869 6,913,448 Selling and administrative 526,377 633,681 Interest expense 91,937 91,548 Interest income (15,060) (18,845) Equity investment results 72 3,585 Impairment/restructuring charge (credit) (26,976) 63,158 Litigation charges 48,628 -- -------------- -------------- Total costs and expenses 7,613,847 7,686,575 -------------- -------------- Income (loss) before taxes 4,623 (65,199) Taxes on income (loss) 2,615 (25,977) -------------- -------------- Income (loss) before extraordinary charge 2,008 (39,222) Extraordinary charge from early retirement of debt (net of taxes) (3,469) -- -------------- -------------- Net loss $ (1,461) $ (39,222) ============== ============== Basic net income (loss) per share: Income (loss) before extraordinary charge $ 0.05 $ (1.02) Extraordinary charge from early retirement of debt (net of taxes) (0.08) -- -------------- -------------- Net loss $ (0.03) $ (1.02) Diluted net income (loss) per share: Income (loss) before extraordinary charge $ 0.05 $ (1.02) Extraordinary charge from early retirement of debt (net of taxes) (0.08) -- -------------- -------------- Net loss $ (0.03) $ (1.02) Dividends paid per share $ 0.04 $ 0.04 Weighted average shares outstanding Basic 41,512 38,541 Diluted 44,077 38,541 ============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS - UNAUDITED (IN THOUSANDS)
JULY 14, DECEMBER 30, Assets 2001 2000 -------------- -------------- Current assets: Cash and cash equivalents $ 14,290 $ 30,380 Receivables, net 582,537 509,045 Inventories 997,535 831,265 Assets held for sale 24,792 165,800 Other current assets 110,037 86,583 -------------- -------------- Total current assets 1,729,191 1,623,073 Investments and notes receivable, net 113,046 104,467 Investment in direct financing leases 88,271 102,011 Property and equipment 1,390,244 1,370,430 Less accumulated depreciation and amortization (663,266) (653,973) -------------- -------------- Net property and equipment 726,978 716,457 Deferred income taxes 103,291 139,852 Other assets 245,761 172,632 Goodwill, net 539,803 544,319 -------------- -------------- Total assets $ 3,546,341 $ 3,402,811 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,015,397 $ 943,279 Current maturities of long-term debt 36,171 38,171 Current obligations under capital leases 20,178 21,666 Other current liabilities 240,753 229,272 -------------- -------------- Total current liabilities 1,312,499 1,232,388 Long-term debt 1,301,468 1,232,400 Long-term obligations under capital leases 331,171 377,239 Other liabilities 115,426 133,592 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share 110,396 99,044 Capital in excess of par value 562,338 513,645 Reinvested earnings (deficit) (145,928) (144,468) Accumulated other comprehensive income - additional minimum pension liability (41,029) (41,029) -------------- -------------- Total shareholders' equity 485,777 427,192 Total liabilities and shareholders' equity $ 3,546,341 $ 3,402,811 ============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED FOR THE 28 WEEKS ENDED JULY 14, 2001, AND JULY 8, 2000
2001 2000 ------------ ------------ Cash flows from operating activities: (IN THOUSANDS) Net loss $ (1,461) $ (39,222) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 87,451 92,004 Amortization costs in interest expense 3,490 2,618 Credit losses 12,119 12,786 Deferred income taxes 35,389 21,911 Equity investment results 72 3,585 Impairment/restructuring and related charges, net of impairment credit (not in other lines) 8,898 102,636 Cash payments on impairment/restructuring and related charges (43,652) (80,692) Cost of early debt retirement 5,787 -- Change in assets and liabilities: Receivables (69,454) 22,130 Inventories (132,007) 121,604 Accounts payable 64,039 (189,597) Other assets and liabilities (36,774) (17,503) Other adjustments, net 2,080 222 ------------ ------------ Net cash provided by (used in) operating activities (64,023) 52,482 ------------ ------------ Cash flows from investing activities: Collections on notes receivable 17,714 17,838 Notes receivable funded (12,277) (12,193) Purchases of businesses (70,162) -- Purchases of property and equipment (111,619) (62,431) Proceeds from sale of property and equipment 12,018 11,637 Investments in customers -- (1,512) Proceeds from sale of investment 97 2,693 Proceeds from sale of businesses 116,905 41,230 Other investing activities 5,916 9,158 ------------ ------------ Net cash provided by (used in) investing activities (41,408) 6,420 ------------ ------------ Cash flows from financing activities: Proceeds from long-term borrowings 615,602 60,000 Principal payments on long-term debt (549,031) (105,849) Payments on cost of debt issuance and debt retirement (21,554) -- Principal payments on capital lease obligations (10,366) (11,698) Proceeds from sale of common stock 56,343 3,535 Dividends paid (1,653) (1,551) ------------ ------------ Net cash provided by (used in) financing activities 89,341 (55,563) ------------ ------------ Net change in cash and cash equivalents (16,090) 3,339 Cash and cash equivalents, beginning of period 30,380 6,683 ------------ ------------ Cash and cash equivalents, end of period $ 14,290 $ 10,022 ============ ============ Supplemental information: Cash paid for interest $ 72,054 $ 90,792 Cash refunded for income taxes $ (17,081) $ (62,561) ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 6 7 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying consolidated condensed financial statements of Fleming Companies, Inc. have been prepared without audit. In our opinion, all adjustments necessary to present fairly our financial position at July 14, 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 prior period amounts have been reclassified to conform to the current period classifications, including the reclassification of net sales and cost of goods due to the adoption of 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 2000 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 $57 million at July 14, 2001 and $58 million at December 30, 2000 ($13 million of which was recorded in assets held for sale in current assets). 7 8 4. Sales and operating earnings for our distribution and retail segments are presented below.
12 WEEKS ENDED JULY 14, JULY 8, ($ IN MILLIONS) 2001 2000 -------------- -------------- Sales: Distribution $ 3,208 $ 2,923 Intersegment elimination (263) (394) -------------- -------------- Net distribution 2,945 2,529 Retail 512 761 -------------- -------------- Total sales $ 3,457 $ 3,290 ============== ============== Operating earnings: Distribution $ 100 $ 61 Retail 10 17 Support services (58) (48) -------------- -------------- Total operating earnings 52 30 Interest expense (34) (38) Interest income 6 9 Equity investment results -- (2) Impairment/restructuring charge -- (21) Litigation charges (47) -- -------------- -------------- Loss before taxes $ (23) $ (22) =============== ==============
28 WEEKS ENDED JULY 14, JULY 8, ($ IN MILLIONS) 2001 2000 -------------- -------------- Sales: Distribution $ 6,950 $ 6,765 Intersegment elimination (688) (966) -------------- -------------- Net distribution 6,262 5,799 Retail 1,356 1,822 -------------- -------------- Total sales $ 7,618 $ 7,621 ============== ============== Operating earnings: Distribution 210 145 Retail 27 29 Support services (133) (100) -------------- -------------- Total operating earnings 104 74 Interest expense (92) (91) Interest income 15 19 Equity investment results -- (4) Impairment/restructuring (charge) credit 27 (63) Litigation charges (49) -- -------------- -------------- Income(loss)before taxes $ 5 $ (65) ============== ==============
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 15% and 9% of our total net sales during the second quarter of 2001 and 2000, respectively. Year to date, sales to Kmart represented 12% and 10% of our total net sales for 2001 and 2000, respectively. 8 9 5. Our comprehensive loss for the 12 and 28 weeks ended July 14, 2001, totaled $13.5 million and $1.5 million, respectively, and our comprehensive loss for the 12 and 28 weeks ended July 8, 2000, totaled $13.3 million and $39.2 million, respectively. The comprehensive loss for these periods was comprised only of the reported net 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 was completed in the United States 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. That Settlement Agreement was executed and filed on May 25, 2001. Preliminary approval by the court was entered May 30, 2001. The parties will seek final approval of the settlement following notice and hearing. Notice of the proposed settlement has been published and mailed to class members, with the final hearing to approve the settlement scheduled for September 5, 2001. 9 10 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 were 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 1999, plaintiffs produced reports of their expert witnesses calculating alleged actual damages of approximately $112 million. During 2000, plaintiffs revised these damage calculations, and although it is not clear what their precise damage claim will ultimately be, it appears that plaintiffs will claim damages (together with interest on those damages) of about $120 million, exclusive of any punitive or treble damages. 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 appealed the court's denial of arbitration to the United States Court of Appeals for the Eighth Circuit. In June 2001, the Eighth Circuit ruled that all of the claims made by each plaintiff in Coddington which has an arbitration agreement with us are subject to arbitration. The plaintiffs filed a motion for rehearing by the Eighth Circuit which was denied on July 20, 2001. 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 10 11 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. On August 16, 2001, we announced that an agreement in principle had been reached to settle all claims related to the Don's United Super, Coddington Enterprises, Inc., J&A Foods, Inc., R&D Foods, Inc., and Robandee United Super, Inc., cases. The settlement, which is contingent on the preparation and execution of a definitive agreement, includes a full release of us from liability to the plaintiffs in these cases; payments by us to the plaintiffs over a 16 month period; the transfer of a minority interest in several price-impact stores in Arizona to us; and lease concessions by us to certain plaintiffs. As a result of this agreement in principle, we recorded a $21 million after-tax charge in the second quarter to reflect the total estimated cost of the settlement and other related expenses. We expect to execute this definitive agreement in the next few weeks. If a definitive agreement is not reached, we intend to vigorously defend against the claims in these related cases, but we cannot predict the outcome. 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 executives 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. 11 12 The plaintiffs have made these claims on behalf of a class that would purportedly include approximately 250 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 Markets case participated in a mediation process held in Kansas City, Missouri pursuant to the court's order. In June 2001, counsel for the parties in the Storehouse Markets case informed the court that they had reached an agreement in principle to settle all claims for a total payment of $16 million. The settlement is subject to a number of conditions, including final court approval. On July 9, 2001, the parties executed a definitive agreement and the court preliminarily approved the settlement subject to final court approval at a hearing scheduled for September 10, 2001. The U.S. Court of Appeals for the Tenth Circuit has abated defendants' appeal of the trial court order certifying the Storehouse plaintiff class until the final approval or disapproval of the proposed settlement. If the settlement is not approved by the district court, or if the Storehouse Markets case otherwise goes forward, 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 12 13 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:
JULY 14, DECEMBER 30, 2001 2000 ----------- ----------- (IN THOUSANDS) 10 1/8 % senior notes due 2008 $ 355,000 $ -- 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 250,496 250,000 5 1/4 % convertible senior subordinated notes due 2009 150,000 -- Revolving credit, average interest rates of 6.2% for 2001 and 7.7% for 2000, due 2003 200,000 300,000 Term loans, due 2001 to 2004, average interest rate of 7.6% for 2001 and 8.0% for 2000 137,151 154,421 Other debt (including discounts) (5,008) 16,150 ----------- ----------- 1,337,639 1,270,571 Less current maturities (36,171) (38,171) ----------- ----------- Long-term debt $ 1,301,468 $ 1,232,400 =========== ===========
Five-year maturities: Aggregate maturities of long-term debt for the next five years are approximately as follows: in 2001, $9 million; in 2002, $40 million; in 2003, $240 million; in 2004, $299 million; and in 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 13 14 this redemption, we recognized a $3.5 million after-tax extraordinary charge from early retirement of debt during the first quarter of 2001. 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 our senior 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 1/4% 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 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. During July 2001, we entered into two interest rate swap agreements. The swaps are tied to our 10 5/8% senior subordinated notes due 2007, and have a combined notional amount of $150 million. The maturity, call dates, and call premiums mirror those of the notes. The swaps are designed for us to receive a fixed rate of 10 5/8% and pay a floating rate based on a spread plus the 3-month LIBOR. The floating rate resets quarterly beginning July 31, 2001. We have documented and designated these swaps to qualify as fair value hedges. We adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended, on December 31, 2000. In accordance with SFAS 133, on the date we enter into a derivative contract, management designates the derivative as a hedge of the identified exposure (fair value, cash flow, foreign currency, or net investment in foreign operations). If a derivative does not qualify in a hedging relationship, the derivative is recorded at fair value and changes in its fair value are reported currently in earnings. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. For all qualifying and highly effective fair value hedges, the changes in the fair value of a derivative and the loss or gain on the hedged asset or liability relating to the risk being hedged are recorded currently in earnings. These amounts are recorded to interest income and provide offset of one another. For the periods ended July 14, 2001, we recorded no ineffectiveness relating to fair value. 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. 14 15 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. 15 16 CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
JULY 14, 2001 ----------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ----------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 15,394 $ (1,934) $ 830 $ -- $ 14,290 Receivables, net 483,356 97,770 1,411 -- 582,537 Inventories 819,975 182,939 3,905 -- 1,006,819 Other current assets 119,472 6,029 44 -- 125,545 ----------- ----------- ----------- ----------- ----------- Total current assets 1,438,197 284,804 6,190 -- 1,729,191 Investment in subsidiaries 93,241 5,356 -- (98,597) -- Intercompany receivables 336,032 -- -- (336,032) -- Property and equipment, net 479,114 236,105 11,759 -- 726,978 Goodwill,net 403,533 132,647 3,623 -- 539,803 Other assets 490,137 47,473 12,759 -- 550,369 ----------- ----------- ----------- ----------- ----------- $ 3,240,254 $ 706,385 $ 34,331 $ (434,629) $ 3,546,341 =========== =========== =========== =========== =========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable $ 896,820 $ 116,633 $ 1,944 $ -- $ 1,015,397 Intercompany payables -- 299,298 36,734 (336,032) -- Other current liabilities 268,452 26,795 1,855 -- 297,102 ----------- ----------- ----------- ----------- ----------- Total current liabilities 1,165,272 442,726 40,533 (336,032) 1,312,499 Obligations under capital leases 196,482 134,689 -- 331,171 Long-term debt and other liabilities 1,392,723 24,126 45 -- 1,416,894 Equity (deficit) 485,777 104,844 (6,247) (98,597) 485,777 ----------- ----------- ----------- ----------- ----------- $ 3,240,254 $ 706,385 $ 34,331 $ (434,629) $ 3,546,341 =========== =========== =========== =========== ===========
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 65,475 5,356 -- (70,831) -- Intercompany receivables 372,356 -- -- (372,356) -- 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 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811 =========== =========== =========== =========== =========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable $ 821,407 $ 120,145 $ 1,727 $ -- $ 943,279 Intercompany payables -- 339,688 32,668 (372,356) -- Other current liabilities 244,524 43,275 1,310 -- 289,109 ----------- ----------- ----------- ----------- ----------- Total current liabilities 1,065,931 503,108 35,705 (372,356) 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 77,078 (6,247) (70,831) 427,192 ----------- ----------- ----------- ----------- ----------- $ 3,047,571 $ 768,910 $ 29,517 $ (443,187) $ 3,402,811 =========== =========== =========== =========== ===========
16 17 CONDENSED CONSOLIDATED OPERATING STATEMENT INFORMATION
12 WEEKS ENDED JULY 14, 2001 ------------------------------------------------------------------------ PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ------------ (IN THOUSANDS) Net sales $ 2,842,544 $ 827,623 $ 15,872 $ (228,760) $ 3,457,279 Costs and expenses: Cost of sales 2,695,547 715,375 11,760 (228,760) 3,193,922 Selling and administrative 107,553 98,803 4,736 -- 211,092 Other 70,443 5,279 (754) -- 74,968 Impairment/restructuring charge (credit) 2,569 (2,686) -- -- (117) Equity results from subsidiaries (12,010) -- -- 12,010 -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses 2,864,102 816,771 15,742 (216,750) 3,479,865 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes (21,558) 10,852 130 (12,010) (22,586) Taxes on income (loss) (8,100) (1,108) 80 -- (9,128) ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary charge $ (13,458) $ 11,960 $ 50 $ (12,010) $ (13,458) =========== =========== =========== =========== ===========
12 WEEKS ENDED JULY 8, 2000 ----------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ------------ (IN THOUSANDS) Net sales $ 2,722,357 $ 867,357 $ 16,597 $ (316,433) $ 3,289,878 Costs and expenses: Cost of sales 2,580,547 721,863 12,647 (316,433) 2,998,624 Selling and administrative 124,520 132,204 4,650 -- 261,374 Other 30,853 165 (217) -- 30,801 Impairment/restructuring charge 20,873 79 61 -- 21,013 Equity results from subsidiaries (7,406) -- -- 7,406 -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses 2,749,387 854,311 17,141 (309,027) 3,311,812 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes (27,030) 13,046 (544) (7,406) (21,934) Taxes on income (loss) (13,681) 5,324 (228) -- (8,585) ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary charge $ (13,349) $ 7,722 $ (316) $ (7,406) $ (13,349) =========== =========== =========== =========== ===========
17 18 CONDENSED CONSOLIDATED OPERATING STATEMENT INFORMATION (CONTINUED)
28 WEEKS ENDED JULY 14, 2001 ------------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ------------ (IN THOUSANDS) Net sales $ 6,307,710 $ 1,862,678 $ 38,082 $ (590,000) $ 7,618,470 Costs and expenses: Cost of sales 5,975,812 1,574,424 28,633 (590,000) 6,988,869 Selling and administrative 255,848 260,710 9,819 -- 526,377 Other 88,928 33,884 2,765 -- 125,577 Impairment/restructuring charge (credit) 8,824 (35,800) -- -- (26,976) Equity results from subsidiaries (15,608) -- -- 15,608 -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses 6,313,804 1,833,218 41,217 (574,392) 7,613,847 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes (6,094) 29,460 (3,135) (15,608) 4,623 Taxes on income (loss) (8,102) 12,009 (1,292) -- 2,615 ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary charge $ 2,008 $ 17,451 $ (1,843) $ (15,608) $ 2,008 =========== =========== =========== =========== ===========
28 WEEKS ENDED JULY 8, 2000 ------------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ------------ ------------ (IN THOUSANDS) Net sales $ 6,292,355 $ 2,043,061 $ 39,312 $ (753,352) $ 7,621,376 Costs and expenses: Cost of sales 5,941,455 1,695,485 29,860 (753,352) 6,913,448 Selling and administrative 310,288 313,852 9,541 -- 633,681 Other 33,817 40,016 2,455 -- 76,288 Impairment/restructuring charge 62,310 787 61 -- 63,158 Equity results from subsidiaries 5,506 -- -- (5,506) -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses 6,353,376 2,050,140 41,917 (758,858) 7,686,575 ----------- ----------- ----------- ----------- ----------- Loss before taxes (61,021) (7,079) (2,605) 5,506 (65,199) Taxes on loss (21,799) (3,085) (1,093) -- (25,977) ----------- ----------- ----------- ----------- ----------- Net loss before extraordinary charge $ (39,222) $ (3,994) $ (1,512) $ 5,506 $ (39,222) =========== =========== =========== =========== ===========
18 19 CONDENSED CONSOLIDATING CASH FLOW INFORMATION
28 WEEKS ENDED JULY 14, 2001 -------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ---------- ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities $ (42,546) $ (21,739) $ 262 $ -- $ (64,023) --------- --------- --------- -------- --------- Cash flows from investing activities: Purchases of property and equipment (91,262) (13,796) (6,561) -- (111,619) Other 50,583 19,548 80 -- 70,211 --------- --------- --------- -------- --------- Net cash provided by (used in) investing activities (40,679) 5,752 (6,481) -- (41,408) --------- --------- --------- -------- --------- Cash flows from financing activities: Repayments on capital lease obligations (7,044) (3,322) -- -- (10,366) Advance to (from) parent (16,531) 10,622 5,909 -- -- Other 99,707 -- -- -- 99,707 --------- --------- --------- -------- --------- Net cash provided by financing activities: 76,132 7,300 5,909 -- 89,341 --------- --------- --------- -------- --------- Net decrease in cash and cash equivalents (7,093) (8,687) (310) -- (16,090) Cash and cash equivalents at beginning of year 22,487 6,753 1,140 -- 30,380 --------- --------- --------- -------- --------- Cash and cash equivalents at end of year $ 15,394 $ (1,934) $ 830 $ -- $ 14,290 ========= ========= ========= ======== =========
28 WEEKS ENDED JULY 8, 2000 ------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ---------- ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities $ (274) $ 57,746 $ (4,990) $ -- $ 52,482 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment (19,834) (40,528) (2,069) -- (62,431) Other 68,725 126 -- -- 68,851 -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities 48,891 (40,402) (2,069) -- 6,420 -------- -------- -------- -------- -------- Cash flows from financing activities: Repayments on capital lease obligations (8,886) (2,812) -- -- (11,698) Advance to (from) parent 48,902 (66,722) 17,820 -- -- Other (43,865) -- -- -- (43,865) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities: (3,849) (69,534) 17,820 -- (55,563) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 44,768 (52,190) 10,761 -- 3,339 Cash and cash equivalents at beginning of year (54,803) 61,307 179 -- 6,683 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year $(10,035) $ 9,117 $ 10,940 $ -- $ 10,022 ======== ======== ======== ======== ========
19 20 8. In December 1998, we announced the implementation of a strategic plan designed to improve the competitiveness of the retailers we serve and improve our performance by building stronger operations that can better support long-term growth. The four major initiatives of the strategic plan were to consolidate distribution operations, grow distribution sales, improve retail performance, and reduce overhead and operating expenses, in part by centralizing the procurement and other functions in the Dallas, Texas area. Additionally, in 2000, we decided to reposition certain retail operations into our price-impact format and sell or close the remaining conventional retail chains. During the first and second quarters of 2001, we sold or closed our remaining conventional retail stores. The plan, as expected, took two years to implement and is now substantially complete. Total charges of approximately $20 million are estimated in 2001. The remaining charges represent severance related expenses, and other exit costs that cannot be expensed until incurred. Charges after 2001 are expected to be minimal. We recorded a pre-tax charge of $14 million ($8 million after-tax) in the second quarter of 2001 as a result of the strategic plan. The charge was included on several lines of the Consolidated Condensed Statements of Operations: $3 million of income was included in net sales relating primarily to gains on the sale of conventional retail stores; $12 million of charges was included in cost of sales and was primarily related to inventory markdowns for clearance for closed operations; $5 million of charges was included in selling and administrative expense as disposition related costs recognized on a periodic basis; and less than $1 million of income included in the impairment/restructuring line related to net impairment recovery and restructuring charges as described below. The second quarter charge consisted of the following components: o Net impairment recovery of $5 million. The components included recovering, through sales of the related operations, previously recorded goodwill impairment of $2 million and long-lived asset impairment of $5 million. Also included was impairment of $2 million related to other long-lived assets. o Restructuring charges of $5 million. The restructuring charges consisted primarily of severance related expenses for the sold or closed operating units, adjustments to pension withdrawal liabilities, and professional fees incurred related to the restructuring process. o Other disposition and related costs of $14 million. These costs consisted primarily of inventory markdowns for clearance for closed operations, disposition related costs recognized on a periodic basis and other costs, offset partially by gains on sales of conventional retail stores. The second quarter of 2001 charge relates to our business segments as follows: $9 million relates to the distribution segment and $4 million relates to the retail segment with the balance relating to support services expenses. The pre-tax charge for the first two quarters of 2001 totaled $12 million ($7 million after-tax), and was included on several lines of the Consolidated Condensed Statements of Operations: $1 million of income was included in net sales relating primarily to gains on the sale of conventional retail stores; $29 million charge included in cost of sales, primarily related to inventory markdowns for clearance for closed operations; and $11 million included in selling and administrative as disposition related costs recognized on a periodic basis. These charges were offset by $27 million of income included in the impairment/restructuring line related primarily to the recovery of previously 20 21 recorded asset impairment resulting from the sale of some retail stores. The charge for the first two quarters consisted of the following components: o Net impairment recovery of $40 million. The components included recovering, through sales of the related operations, previously recorded goodwill impairment of $15 million and long-lived asset impairment of $28 million. Also included was impairment of $3 million related to other long-lived assets. o Restructuring charges of $13 million. The restructuring charges consisted primarily of severance related expenses for the sold or closed operating units, adjustments to pension withdrawal liabilities, and professional fees incurred related to the restructuring process. o Other disposition and related costs of $39 million. These costs consisted primarily of inventory markdowns for clearance for closed operations, disposition related costs recognized on a periodic basis and other costs, offset partially by gains on sales of conventional retail stores. The charge for the first two quarters of 2001 relates to the company's segments as follows: a $16 million charge relates to the distribution segment and income of $9 million relates to the retail segment. The balance relates to support services expenses. The charges related to workforce reductions are as follows:
AMOUNT ($ IN THOUSANDS) HEADCOUNT --------- --------- 1998 Ending Liability $ 21,983 1,260 1999 Activity: Charge 12,029 1,350 Terminations (24,410) (1,950) -------- -------- Ending Liability 9,602 660 2000 Activity: Charge 53,906 5,610 Terminations (26,180) (1,860) -------- -------- Ending Liability 37,328 4,410 2001 Quarter 1 Activity: Charge 6,760 180 Terminations (10,186) (3,350) -------- -------- Ending Liability 33,902 1,240 2001 Quarter 2 Activity: Charge 4,853 40 Terminations (13,350) (1,260) -------- -------- Ending Liability $ 25,405 20 ======== ========
The ending liability of approximately $25 million is primarily comprised of union pension withdrawal liabilities, but also includes accruals for payments over time to associates already severed as well as accruals for associates still to be severed. The breakdown of the 220 headcount reduction recorded for the first two quarters of 2001 is: 185 from the distribution segment; 25 from the retail segment; and 10 from support services. 21 22 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:
AMOUNT (IN THOUSANDS) ------------- 1998 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 2001 Quarter 2 Activity Charge -- Utilized (9,090) -------- Ending Liability $ 6,925 ========
Assets held for sale included in current assets at the end of the second quarter of 2001 were approximately $25 million, consisting of $16 million of distribution operating units and $9 million of retail stores. We recorded a $46 million pre-tax charge in the second quarter of 2000 as a result of the strategic plan. The charge was included on several lines of the Consolidated Condensed Statements of Operations: $1 million was included in net sales related to rent income impairment due to division closings; $22 million was included in cost of sales and was primarily related to inventory valuation adjustments, moving and training costs, and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $2 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $21 million was included in the impairment/restructuring line. The second quarter charge consisted of the following components: o Impairment of assets of $1 million. The impairment related to other long-lived assets. o Restructuring charges of $20 million. The restructuring charges consisted primarily of severance related expenses due to the consolidation of certain administrative departments announced during the second quarter of 2000. The 22 23 restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $25 million. These costs consisted primarily of inventory valuation adjustments, additional depreciation and amortization on assets to be disposed of but not yet held for sale, disposition related costs recognized on a periodic basis and other costs. The charge for the second quarter of 2000 relates to the company's segments as follows: $20 million relates to the distribution segment and $10 million relates to the retail segment with the balance relating to support services expenses. We recorded a pre-tax charge of $110 million in the first two quarters of 2000 as a result of the strategic plan. The charge was included on several lines of the Consolidated Condensed Statements of Operations: $2 million was included in net sales related primarily to rent income impairment due to division closings; $35 million was included in cost of sales and was primarily related to inventory valuation adjustments, moving and training costs, and additional depreciation and amortization on assets to be disposed of but not yet held for sale; $10 million was included in selling and administrative expense and equity investment results as disposition related costs recognized on a periodic basis; and the remaining $63 million was included in the impairment/restructuring line. The charge for the first two quarters consisted of the following components: o Impairment of assets of $3 million. The impairment related to other long-lived assets. o Restructuring charges of $61 million. The restructuring charges consisted of severance related expenses and pension withdrawal liabilities for the closings of the York and Philadelphia distribution facilities which were announced during the first quarter of 2000 as part of an effort to grow in the northeast by consolidating distribution operations and expanding the Maryland facility. Additionally, the charge consisted of severance related expenses due to the consolidation of certain administrative departments announced during the second quarter of 2000. The restructuring charges also consisted of operating lease liabilities and professional fees incurred related to the restructuring process. o Other disposition and related costs of $46 million. These costs consisted primarily of inventory 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 and other costs. The charge for the first two quarters of 2000 relates to the company's segments as follows: $57 million relates to the distribution segment and $27 million relates to the retail segment with the balance relating to support services expenses. Asset impairments were recognized in accordance with SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and such assets were written down to their estimated fair values based on estimated proceeds of operating units to be sold or discounted cash flow projections. The operating costs of operating units to be sold or closed are treated as normal operations during the period they remain in use. Salaries, wages and benefits of employees at these operating units are charged to operations during the time such employees are actively employed. Depreciation expense is continued for assets that the company is unable to remove from operations. 23 24 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Shareholders Fleming Companies, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Fleming Companies, Inc. and subsidiaries as of July 14, 2001, and the related condensed consolidated statements of operations for the 12 and 28 weeks ended July 14, 2001 and July 8, 2000 and condensed consolidated statements of cash flows for the 28 weeks ended July 14, 2001 and July 8, 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 August 20, 2001 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We have substantially completed our strategic plan. Total 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 second quarter of 2001 included a pre-tax charge related to the strategic plan of $14 million ($8 million after-tax or $.17 per share). The charge included non-cash impairment adjustments of asset values, inventory markdowns for clearance for closed operations, and cash restructuring costs for severance related and other expenses. We also recorded in the second quarter of 2001 litigation settlement charges of $47 million ($28 million after-tax or $.65 per share). The full impact of the strategic plan charges and litigation charges was approximately $60 million ($36 million after-tax or $.83 per share) which includes a $.01 per share impact due to the increase in diluted weighted average shares from the first quarter to the second quarter. The second quarter of 2000 included a pre-tax charge of $46 million ($27 million after-tax or $.70 per share which includes a $.01 per share impact due to converting from basic to diluted weighted average shares). The charge included severance related expenses due to consolidation of certain administrative departments, operating lease liabilities, inventory markdowns for clearance for closed operations, additional depreciation and amortization on assets to be disposed of but not yet held for sale, and impairment of asset values. The first two quarters of 2001 included a pre-tax charge of $12 million ($7 million after-tax or $.17 per share). The charge included non-cash impairment adjustments of asset values, inventory markdowns for clearance for closed operations, and cash restructuring costs for severance related and other expenses. We also recorded approximately $49 million in litigation settlement charges ($30 million after-tax or $.66 per share) and net additional interest expense of approximately $2 million due to the early retirement of debt ($1 million after-tax or $.02 per share). The full impact of the strategic plan charges, litigation charges and additional interest expense was $63 million ($38 million after-tax or $.85 per share). An extraordinary charge from the early retirement of debt of $6 million ($3 million after-tax or $.07 per share) was also recorded. The first two quarters of 2000 included a pre-tax charge of $110 million ($65 million after-tax or $1.67 per share). The charge included severance related expenses due to consolidation of certain administrative departments, operating lease liabilities, inventory markdowns for clearance for closed operations, additional depreciation and amortization on assets to be disposed of but not yet held for sale, and impairment of asset values. We recorded a net loss for the second quarter of 2001 of $13 million and a net loss for the first two quarters, after an extraordinary charge of $3 million related to the early retirement of debt, of $1 million. Adjusted EBITDA for the second quarter of 2001 was $107 million and $243 million for the first two quarters of 2001. That represents a 4% increase in the second quarter and a 5% increase in the first two quarters of 2001 compared to the same time periods in 2000. "Adjusted EBITDA" is earnings before extraordinary items, interest expense, income taxes, depreciation and amortization, equity investment results, 25 26 LIFO adjustments and one-time adjustments (e.g., strategic plan charges and specific litigation charges). 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:
12 WEEKS ENDED 28 WEEKS ENDED JULY 14, JULY 8, JULY 14, JULY 8, 2001 2000 2001 2000 ------- ------ ------- ------- Net income (loss) before extraordinary charge $ (13) $ (13) $ 2 $ (39) Add back: Taxes on income (loss) (9) (9) 3 (26) Depreciation/amortization 37 38 87 92 Interest expense 34 38 92 92 Equity investment results -- 2 -- 3 LIFO adjustments (2) 2 (1) 5 ----- ----- ----- ----- EBITDA 47 58 183 127 Add back non-cash strategic plan and one-time items * 6 5 (12) 12 ----- ----- ----- ----- EBITDA excluding non-cash strategic plan charges 53 63 171 139 Add back strategic plan and one-time items requiring cash 54 40 72 92 ----- ----- ----- ----- Adjusted EBITDA $ 107 $ 103 $ 243 $ 231 ===== ===== ===== =====
* Excludes amounts already added back for depreciation/amortization for 2000 of $2 million and $6 million for the 12 and 28 weeks, respectively; interest expense of $3 million for the 28 weeks of 2001; and immaterial amounts for equity investment results. 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 the company's ability to service debt. 26 27 RESULTS OF OPERATIONS Set forth in the following table is information regarding the company's net sales and certain components of earnings expressed as a percent of sales which are referred to in the accompanying discussion:
JULY 14, JULY 8, FOR THE 12 WEEKS ENDED 2001 2000 -------- ------- Net sales 100.00% 100.00% Gross margin 7.62 8.85 Less: Selling and administrative 6.11 7.94 Interest expense 0.99 1.17 Interest income (0.17) (0.28) Equity investment results (0.01) 0.05 Impairment/restructuring charge -- 0.64 Litigation charges 1.35 -- ---- ---- Total expenses 8.27 9.52 ---- ---- Income (loss) before taxes (0.65) (0.67) Taxes on income (loss) (0.26) (0.26) ---- ---- Income (loss) before extraordinary charge (0.39)% (0.41)% ===== =====
JULY 14, JULY 8, FOR THE 28 WEEKS ENDED 2001 2000 -------- ------- Net sales 100.00 %100.00 % Gross margin 8.26 9.29 Less: Selling and administrative 6.90 8.31 Interest expense 1.21 1.20 Interest income (0.20) (0.25) Equity investment results -- 0.05 Impairment/restructuring charge (0.35) 0.83 Litigation charges 0.64 -- ----- ----- Total expenses 8.20 10.14 ----- ----- Income (loss) before taxes 0.06 (0.85) Taxes on income (loss) 0.03 (0.34) ----- ----- Income (loss) before extraordinary charge 0.03 % (0.51)% ===== =====
NET SALES. Net sales for the second quarter (12 weeks) of 2001 increased by $167 million, or 5.1%, to $3.5 billion from the same period in 2000. Year to date, net sales decreased by approximately $3 million, or less than 0.1%, to $7.6 billion from the same period in 2000. Net sales for the distribution segment increased by 16.5% for the second quarter of 2001 to $2.9 billion compared to $2.5 billion in 2000. Year to date, net sales 27 28 increased by 8.0% to $6.3 billion compared to $5.8 billion in 2000. Approximately one-half of the 16.5% sales growth in the second quarter was attributable to the implementation of new business resulting from the recently-announced Kmart alliance. The remainder of the sales growth was attributable to growth in distribution sales from a wide variety of conventional and new-channel customers. New-channel customers, including convenience stores, supercenters, limited assortments stores, drug stores, and self-distributing chains, are an important part of the our strategic growth plan and collectively represent approximately one-half of our distribution customer base. Kmart Corporation, our largest customer, accounted for 15% and 9% of our total net sales in the second quarter of 2001 and 2000, respectively. Sales to Kmart accounted for 12% and 10% of our total net sales for the year-to-date period ended July 14, 2001, and July 8, 2000, respectively. We expect annual sales to Kmart for 2001 to be approximately $2.6 billion, with an increase to approximately $4.5 billion in 2002. Retail segment sales for the second quarter of 2001 decreased $249 million, or 32.7%, to $512 million from the same period in 2000. Year to date, retail segment sales decreased $466 million, or 25.6%, in 2001 to $1.4 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 and second quarters of 2001, we sold or closed our remaining 96 conventional retail stores and opened 6 Yes!Less stores and 8 Food4Less stores. Comparable store sales for the continuing operations were up 1.3 percent for the quarter. GROSS MARGIN. Gross margin for the second quarter of 2001 decreased by $28 million, or 9.6%, to $263 million from $291 million for the same period in 2000, and also decreased as a percentage of net sales to 7.62% from 8.85% for the same period in 2000. Year to date, gross margin decreased by $78 million, or 11.1%, to $630 million from $708 million for the same period in 2000, and also decreased as a percentage of net sales to 8.26% from 9.29% for the same period in 2000. After excluding the strategic plan charges, gross margin for the second quarter of 2001 decreased by $42 million, or 13.4%, compared to the same period in 2000, and decreased as a percentage of net sales to 7.88% from 9.55% for the same period in 2000. Year to date, gross margin, after excluding the strategic plan charges, decreased by $87 million, or 11.7%, compared to the same period in 2000, and decreased as a percentage of net sales to 8.64% from 9.77% for the same period in 2000. The decrease in percentage of net sales was due to a change in mix. The sales of the distribution segment represent a larger portion of total company sales than the retail segment and the distribution segment has lower margins as a percentage of sales versus the retail segment. For the distribution segment, after excluding strategic plan charges, gross margin as a percentage of gross distribution sales improved by 34 basis points for both the second quarter and year-to-date periods of 2001 compared to the same periods in 2000, reflecting the benefits of centralizing procurement and increasing warehouse productivity. For the retail segment, after excluding strategic plan charges, gross margin as a percentage of net retail sales decreased for the second quarter of 2001 by 104 basis points and increased for the year-to-date period of 2001 by 7 basis points, compared to the same periods in 2000. The decreasing margin for the second quarter reflects our transition out of conventional retail and into price-impact retail which has lower shelf prices and gross margins. The increase in margin year to date reflects improvement due to the divesting or closing of underperforming stores and the centralization of procurement, offset partially by the transition out of conventional retail and into price-impact retail which is described above. 28 29 For the distribution segment, the strategic plan charges decreased in 2001 for both the second quarter and year-to-date periods compared to the same periods in 2000 primarily due to reduced recruiting and training expenses from 2000 to 2001, and additional depreciation and amortization of assets to be disposed of but not yet held for sale in 2000. Strategic plan charges for the retail segment increased in 2001 for both the second quarter and year-to-date periods compared to 2000 primarily due to inventory markdowns for clearance for closed operations. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses for the second quarter of 2001 decreased by approximately $50 million, or 19.2%, to $211 million from $261 million for the same period in 2000 and decreased as a percentage of net sales to 6.11% for 2001 from 7.94% in 2000. Year to date, selling and administrative expenses decreased by approximately $108 million, or 16.9%, to $526 million in 2001 from $634 million for the same period in 2000 and decreased as a percentage of net sales to 6.90% for 2001 from 8.31% in 2000. After excluding the strategic plan charges, selling and administrative expenses for the second quarter of 2001 decreased by $53 million, or 20.6%, compared to the same period in 2000, and decreased as a percentage of net sales to 5.97% from 7.88% for the same period in 2000. Year to date, selling and administrative expenses, after excluding the strategic plan charges, decreased in 2001 by $109 million, or 17.4%, compared to the same period in 2000, and decreased as a percentage of net sales to 6.77% from 8.19% for the same period in 2000. The sales of the distribution segment represent a larger portion of total company sales than the retail segment, and the distribution segment has lower operating expenses as a percentage of sales than the retail segment. For the distribution segment, after excluding strategic plan charges, selling and administrative expenses as a percentage of net sales improved for both the second quarter and year-to-date periods of 2001 compared to the same periods in 2000 due to leveraging the effect of sales growth and low cost pursuit initiatives. For the retail segment, after excluding strategic plan charges, selling and administrative expenses as a percentage of retail sales also improved for both the second quarter and year-to-date periods of 2001 compared to the same periods in 2000, due to our shift in focus from conventional retail to price-impact retail, a format that has lower operating expense levels than conventional retail. The strategic plan charges were higher in the second quarter and year to date for 2001 compared to the same periods in 2000 due to costs associated with closing conventional retail stores. Support services expense increased in the quarter and year-to-date periods of 2001 compared to the same periods of 2000 primarily due to centralizing certain procurement and administrative functions from the distribution and retail segments. Strategic plan charges were lower in 2001 due to reduced severance related expenses, moving costs, and professional fees in connection with carrying out our strategic plan. OPERATING EARNINGS. Operating earnings for the distribution segment increased significantly for the second quarter of 2001 to $100 million from $61 million for the same period of 2000. Year to date, operating earnings also increased from the same period in 2000, to $210 million in 2001 from $145 million in 2000. After excluding the strategic plan charges, operating earnings for the second quarter of 2001 increased by $27 million, or 36.6%, to $102 million from $75 million for the same period of 2000. Year to date, operating earnings, after excluding the strategic plan charges, increased by $48 million, or 28.4%, to $217 million in 2001 from $169 million for the same period of 2000. 29 30 Operating earnings for the retail segment decreased by $7 million to $10 million for the second quarter of 2001 from $17 million for the same period of 2000. Year to date, operating earnings decreased $2 million to $27 million in 2001 from $29 million in 2000. After excluding the strategic plan charges, operating earnings increased by less than $1 million to $22 million in the second quarter of 2001 from $21 million for the same period of 2000 and increased by $17 million year to date to $56 million in 2001 from $39 million in 2000. Support services expenses increased in the second quarter of 2001 compared to the same period of 2000 by $10 million to $58 million from $48 million. Year to date, support services expenses increased by $33 million to $133 million in 2001 from $100 million in 2000. After excluding the strategic plan charges and one-time items, support services expenses increased by $17 million to $58 million in the second quarter of 2001 from $41 million for the same period of 2000 and increased by approximately $43 million year to date to $130 million in 2001 from $87 million in 2000. Operating earnings improvement is described in detail by segment in Net sales, Gross margin, and Selling and administrative expenses sections above. INTEREST EXPENSE. Interest expense for the second quarter of 2001 of $34 million decreased $4 million compared to the same period in 2000, primarily resulting from lower average interest rates. Year to date, interest expense was $92 million in 2001, which was unchanged compared to the same period in 2000, although 2001 included $3 million of additional interest expense related to the early retirement of debt, which was offset by lower average interest rates. INTEREST INCOME. Interest income of $6 million for the second quarter of 2001 was $3 million lower than the same period of 2000, and year to date, interest income of $15 million in 2001 was $4 million lower than the same period in 2000. The reductions were primarily due to reduced customer and other interest-bearing receivable balances. EQUITY INVESTMENT RESULTS. Our portion of results from equity investments improved by $2 million for the second quarter of 2001 reflecting a slight income from operations compared to the same period of 2000. Year to date, equity investment results improved by approximately $4 million to reflect a slight loss in 2001 compared to a $4 million loss in 2000. IMPAIRMENT/RESTRUCTURING CHARGE. The pre-tax charge recorded in the Consolidated Condensed Statements of Operations (associated with the implementation of our strategic plan announced in 1998) was $14 million for the second quarter of 2001 compared to $46 million for the same period of 2000. The $14 million charge in 2001 was recorded with less than $1 million of income reflected in the impairment/restructuring line and the balance reflected in other financial statement lines. The $46 million charge in 2000 was recorded with $21 million reflected in the impairment/restructuring line and the balance reflected in other financial statement lines. Year to date, the pre-tax charge was $12 million for 2001 compared to $110 million for the same period of 2000. The $12 million charge in 2001 was recorded with $27 million of income reflected in the impairment/restructuring line and the balance reflected in other financial statement lines. The $110 million charge in 2000 was recorded with $63 million reflected in the impairment/restructuring line and the balance reflected in other financial statement lines. See "General" above and Note 8 in the notes to the consolidated condensed financial statements for further discussion regarding the strategic plan. 30 31 LITIGATION CHARGES. During the second quarter of 2001, we recorded litigation settlements and other related expenses totaling $47 million related to agreements in principle to settle the Storehouse Markets, Inc., et al., Don's United Super, et.al., Coddington Enterprises, Inc., et.al, J&A Foods, Inc. et. al., R&D Foods, Inc. et.al., and Robandee United Super, Inc., et.al., cases. Year to date, we recorded $2 million in settlements relating to other cases in addition to the $47 million above for a total of $49 million. See Note 6 in the notes to the consolidated condensed financial statements and Legal Proceedings for further discussion regarding these litigation charges. TAXES ON INCOME. The effective tax rates for the 28 weeks of 2001 and 2000 were 56.6% (before extraordinary charge) and 39.8%, respectively. These were both blended rates taking into account operations activity, strategic plan activity, write-offs of non-deductible goodwill and the timing of these items during the year. The tax amount for the second quarter of both years was derived using the 28 week tax amount with that year's estimated effective tax rate compared to the tax amount recorded for the first 16 weeks of the year. 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) recently issued SFAS No. 142 -- Goodwill and Other Intangible Assets. One of the provisions of this standard is to require use of a non-amortization approach to account for purchased goodwill. Under that approach, goodwill and intangible assets with indefinite lives would not be amortized to earnings over a period of time. Instead, these amounts would be reviewed for impairment and expensed against earnings only in the periods in which the recorded values are more than implied fair value. We are studying the impact that SFAS 142 will have on our financial statements and planning to implement it in fiscal year 2002, as required. Goodwill amortization impacted the diluted per share amount for the second quarter of 2001, excluding the strategic plan charges and litigation charges, by $0.08 per share. Year to date in 2001, goodwill amortization impacted the diluted per share amount, excluding the strategic plan charges, litigation charges, and net additional interest expense due to the early retirement of debt, by $0.20 per share. The FASB Emerging Issues Task Force (EITF) 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 certain reclassifications of revenues and cost of sales within our financial statements with no effect on gross margin or earnings. The FASB recently issued SFAS No. 141 -- Business Combinations. We are planning to apply SFAS 141 to all business combinations initiated after June 30, 2001. The FASB recently issued SFAS No. 143 - Accounting for Asset Retirement Obligations. We are studying the impact that SFAS 143 has on our financial statements and planning to implement it in the fiscal year after June 15, 2002, as required. We have not determined the impact on our financial statements from adopting these new standards. 31 32 LIQUIDITY AND CAPITAL RESOURCES In the two quarters ended July 14, 2001, our principal sources of liquidity were borrowings under our credit facility and the proceeds from the sale of certain assets. Our principal source of capital, excluding shareholders' equity, was the issuance of bonds in the capital markets. NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash expended by operating activities was $64 million in the first two quarters of 2001 compared to a $52 million source of cash for the same period in 2000. The primary use of cash was for working capital. Cash requirements related to the implementation and completion of the strategic plan (on a pre-tax basis) were $44 million for the first two quarters of 2001 and are currently expected to be $68 million for the full year 2001. We believe working capital reductions and increased earnings related to the successful implementation of the strategic plan will provide more than adequate cash flows to cover all of these costs. NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Total investment-related activity resulted in a $41 million use of cash for the two quarters ended July 14, 2001 compared to a $6 million source of cash in the same period of 2000. Cash expended for the purchases of businesses and property and equipment was partially offset by the proceeds from asset sales. NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash generated by financing activities was $89 million for the first two quarters of 2001 compared to $56 million net cash required for the same period last year. On March 23, 2001, we received approximately $50 million in proceeds from the sale of common stock to an affiliate of the Yucaipa Companies, which at the time represented an 8.7% ownership of Fleming's outstanding common stock. At that time we also issued a warrant to purchase additional shares of common stock to this entity. 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 5 1/4% 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 second quarter of 2001, outstanding borrowings under the credit facility totaled $137 million of term loans, $200 million of revolver loans, and $55 million of letters of credit. As of July 14, 2001, we have additional borrowing capacity of $345 million under the revolver. Our borrowing capacity is subject to covenants in the senior subordinated notes. For the foreseeable future, our principal sources of liquidity and capital are expected to be cash flows from operating activities and our ability to borrow under our credit facility. In addition, lease financing may be employed for new retail stores and certain equipment. We believe these sources will be adequate to meet working capital needs, capital expenditures, strategic plan implementation costs and other capital needs in the normal course of business for the next 12 months. Capital expenditures for the first two quarters of 2000 32 33 totaled $112 million with $225 million projected for the full year of 2001. In the future, as part of our growth strategy, we may need to raise additional funds through public or private debt or equity financings in order to acquire additional retail stores or other third party businesses or to expand our services more rapidly. In addition, we may access such resources to refinance existing indebtedness. 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 by management 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 on the company. Also see Legal Proceedings. FORWARD-LOOKING INFORMATION This report includes forward-looking statements that (a) project or offer guidance regarding earnings, revenues, or other financial results, (b) depend on future events for their accuracy, or (c) rely upon projections and assumptions which may prove to be inaccurate. These forward-looking statements and our business and prospects are subject to a number of factors that 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 costs related to the Kmart alliance; the ability to obtain capital or obtain it on acceptable terms; unanticipated problems with product procurement; adverse effects of the changing industry environment and increased competition; sales declines and loss of customers; exposure to litigation and other contingent losses; unanticipated charges related to the strategic initiatives plan or failure to achieve the expected results of such plan; the inability to integrate acquired companies and to achieve operating improvements at those companies; increases in labor costs and disruptions in labor relations with union bargaining units representing our associates; and negative effects of our substantial indebtedness and the limitations imposed by restrictive covenants contained in our debt instruments. These and other risk factors are described in our Securities and Exchange Commission reports, including but not limited to the 10-K Report for the 2000 fiscal year. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof. 33 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In order to help maintain liquidity and finance business operations, we obtain long-term credit commitments from banks and other financial institution lenders under which term loans and revolving loans are made. Such loans carry variable interest rates based on the London interbank offered interest rate ("LIBOR") plus a borrowing margin for different interest periods, such as one week, one month, and other periods up to one year. To assist in managing our debt maturities and diversify our sources of debt capital, we also use long-term debt which carries fixed interest rates. Additionally, we use interest rate swap agreements to manage our ratio of fixed-to-floating rate debt in a cost effective manner. Changes in interest rates in the credit and capital markets and our improved credit ratings had a material impact on the fair values of our outstanding debt obligations. The table below presents a summary of our 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 DEBT OBLIGATIONS
VALUE AT VALUE AT THERE 12/30/00 7/14/01 2001 2002 2003 2004 2005 AFTER -------- ------- ------- ------ ------- ------ ------ -------- Debt with variable interest rates Principal payable $ 427 $ 332 $ 9 $ 40 $ 240 $ 49 $ -- $ -- Average variable rate payable 8.1% Based on LIBOR plus a margin Debt with fixed interest rates Principal payable $ 668 $1,095 $ -- $ -- $ -- $ 250 $ -- $ 755 Average fixed rate payable 10.6% 9.6% 5.9% 6.5% 5.1% 10.5% -- 9.3%
34 35 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Set forth below and further explained above in Note 6 to the consolidated condensed financial statements is a description of our material pending litigation: 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 (City of Philadelphia, et al. v. Fleming Companies, Inc., et al.) and one purported class action suit filed by two noteholders (Robert Mark and Jerry Schoenbaum, et al v. Fleming Companies, Inc., et al.). These plaintiffs 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. 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 was completed in the United States 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 May 25, 2001, we and the noteholder plaintiffs executed a settlement agreement and preliminary approval by the court of this settlement agreement was entered on May 30, 2001. The parties will seek final approval of the settlement agreement following notice and hearing. Notice of the proposed settlement has been published and mailed to class members, with the final hearing to approve the settlement scheduled for September 5, 2001. We intend to vigorously defend any remaining claims in these class action suits and pursue the issue of insurance discussed in Note 6, 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 were 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. 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.). These plaintiffs assert claims virtually identical to those set forth in the Don's case. 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. 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.). These 35 36 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. On August 16, 2001, we announced that an agreement in principle had been reached to settle all claims related to the Don's United Super, Coddington Enterprises, Inc., R&D Foods, Inc., Robandee United Super, Inc., and J&A Foods, Inc., cases. The settlement, which is contingent on the preparation and execution of a definitive agreement, includes a full release of us from liability to the plaintiffs in these cases; payments by us to the plaintiffs over a 16 month period; the transfer of a minority interest in several price-impact stores in Arizona to us; and lease concessions by us to certain plaintiffs. As a result of this agreement in principle, we recorded a $21 million after-tax charge in the second quarter to reflect the total estimated cost of the settlement and other related expenses. We expect to execute this definitive agreement in the next few weeks. If a definitive agreement is not reached, we intend to vigorously defend against the claims in these related cases, but we cannot predict the outcome. 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 executives 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. In June 2001, counsel for the parties in the Storehouse Markets case informed the court that they had reached an agreement in principle to settle all claims for a total payment of $16 million. The settlement is subject to a number of conditions, including final court approval. On July 9, 2001, the parties executed a definitive agreement and the court preliminarily approved the settlement subject to final court approval at a hearing scheduled for September 10, 2001. If the settlement is not approved by the district court, or if the Storehouse Markets case otherwise goes forward, 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. 36 37 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. 37 38 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER 3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q for quarter ended April 17, 1999 3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q for quarter ended April 17, 1999 10.81* Form of Restricted Stock Award Agreement 15 Letter from Independent Accountants as to Unaudited Interim Financial Information * Management contract, compensatory plan or arrangement. (b) Reports on Form 8-K: On July 12, 2001, the company filed a report on Form 8-K announcing the execution of a definitive settlement agreement in the Storehouse Markets, Inc. et al v. Fleming Companies, Inc. case. 38 39 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLEMING COMPANIES, INC. August 23, 2001 /s/ NEAL J. RIDER -------------------------------- Neal J. Rider Executive Vice President and Chief Financial Officer (Duly Authorized Officer of Registrant and Principal Accounting and Financial Officer) 39 40 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Form 10-Q for quarter ended April 17, 1999 3.2 By-Laws, incorporated by reference to Exhibit 3.2 to Form 10-Q for quarter ended April 17, 1999 10.81* Form of Restricted Stock Award Agreement 15 Letter from Independent Accountants as to Unaudited Interim Financial Information
* Management contract, compensatory plan or arrangement. EX-10.81 3 d90247ex10-81.txt FORM OF RESTRICTED STOCK AWARD AGREEMENT 1 EXHIBIT 10.81 FORM OF RESTRICTED STOCK AWARD AGREEMENT FOR THE FLEMING COMPANIES, INC. 1996 STOCK INCENTIVE PLAN THIS RESTRICTED STOCK AWARD AGREEMENT (the "Agreement") entered into as of the ____ day of _____, _____, by and between Fleming Companies, Inc., (hereinafter referred to as the "Company"), and ____________ (hereinafter referred to as the "Participant"); WITNESSETH: WHEREAS, the Company has previously adopted the Fleming Companies, Inc. 1996 Stock Incentive Plan (the "Plan"); WHEREAS, in connection with his employment with the Company, the Company has awarded the Participant ______ shares of common stock under the Plan subject to the terms and conditions of this Agreement; and NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants herein contained, the Participant and the Company agree as follows (all capitalized terms used herein, unless otherwise defined, have the meaning ascribed to such terms as set forth in the Plan): 1. The Plan. The Plan, a copy of which is attached hereto as Exhibit A, is hereby incorporated by reference herein and made a part hereof for all purposes, and when taken with this Agreement shall govern the rights of the Participant and the Company with respect to the Award (as defined below). 2. Grant of Award. The Company hereby grants to the Participant an award (the "Award") of _______ shares of Company common stock, par value $2.50 per share (the "Stock"), on the terms and conditions set forth herein and in the Plan. 3. Terms of Award. (a) Escrow of Shares. A certificate representing the shares of Stock subject to the Award (the "Restricted Stock") shall be issued in the name of the Participant and shall be escrowed with the Secretary of the Company (the "Escrow Agent") subject to removal of the restrictions placed thereon or forfeiture pursuant to the terms of this Agreement. (b) Vesting. One-third of the shares of Restricted Stock will vest based on the Participant's continuous employment with the Company, a Subsidiary or an Affiliated Entity through _________, one-third of the shares of Restricted Stock will vest based on the Participant's continuous employment with the Company, a Subsidiary or an Affiliated Entity through _________, and the remaining one-third of the shares of Restricted Stock will vest based on the Participant's continuous employment with the Company, a Subsidiary or an Affiliated Entity through __________. In the event the Participant's employment with the 2 Company, a Subsidiary or an Affiliated Entity is terminated by reason of (i) death, (ii) disability, (iii) without "Cause" (as such term is defined in Section 3(f)(i) of this Agreement), or (iv) by the Participant for "Good Reason" (as such term is defined in Section 3(f)(ii) of this Agreement), then all remaining shares of Restricted Stock (including any "Accrued Dividends," as such term is hereafter defined) which have not yet been vested shall immediately vest. Once vested pursuant to the terms of this Agreement, the Restricted Stock shall be deemed "Vested Stock." For purposes of this Section 3(b), "Cause" and "Good Reason" shall be defined as provided in Section 3(f)(i) and 3(f)(ii) respectively unless Participant has an employment agreement with the Company, a Subsidiary or an Affiliated Entity that defines "Cause" or "Good Reason" differently, in which case, the definition contained in the employment agreement shall supercede the definitions of "Cause" or "Good Reason" contained in this Agreement. (c) Voting Rights and Dividends. The Participant shall not have the voting rights attributable to the shares of Restricted Stock issued to him. Any dividends declared and paid by the Company with respect to shares of Restricted Stock ("Accrued Dividends") shall not be paid to the Participant until such Restricted Stock becomes Vested Stock. Such Accrued Dividends shall be held by the Company as a general obligation and paid to the Participant at the time the underlying Restricted Stock becomes Vested Stock. (d) Vested Stock - Removal of Restrictions. Upon Restricted Stock becoming Vested Stock, all restrictions shall be removed from the certificates representing such Stock and the Secretary of the Company shall deliver to the Participant certificates representing such Vested Stock free and clear of all restrictions, except for any applicable securities laws restrictions, together with a check in the amount of all Accrued Dividends attributed to such Vested Stock without interest thereon. (e) Forfeiture. Restricted Stock that does not become Vested Stock pursuant to the terms of this Agreement shall be absolutely forfeited and the Participant shall have no future interest therein of any kind whatsoever. In the event the Participant's employment with the Company, a Subsidiary or an Affiliated Entity terminates prior to all shares of Restricted Stock becoming Vested Stock for any reason other than (i) death, (ii) disability, (iii) without Cause, or (iv) by the Participant for Good Reason, then all remaining shares of Restricted Stock which have not yet been vested (including any Accrued Dividends) shall be absolutely forfeited and the Participant shall have no further interest therein of any kind whatsoever. (f) Certain Definitions. (i) Cause. For purposes of this Agreement, termination of the employment by the Company for Cause shall mean termination for one of the following reasons: (A) the conviction of the Participant of a felony by a federal or state court of competent jurisdiction; (B) an act or acts of dishonesty taken by the Participant and intended to result in substantial personal enrichment of the Participant at the expense of the Company; or (C) the Participant's "willful" failure to follow a direct, reasonable and lawful written order from his supervisor, within the reasonable scope of the Participant's duties, which failure is not cured within 30 days. Further, for purposes of this Section 3(f)(i): 2 3 (1) No act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Company. (2) The Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4ths) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of conduct set forth in clauses (A), (B) or (C) above and specifying the particulars thereof in detail. (ii) Good Reason. For purposes of this Agreement, "Good Reason" means: (A) the assignment to the Participant of any duties inconsistent in any respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by the Company which results in a diminishment in such position, compensation, authority, duties or responsibilities, other than an insubstantial and inadvertent action which is remedied by the Company promptly after receipt of written notice thereof given by the Participant, or (B) the Company's requiring the Participant to be based at any office or location more than 25 miles from where the Participant was employed immediately prior to a Change of Control, except for periodic travel reasonably required in the performance of the Participant's responsibilities. 4. Change of Control. Upon the occurrence of a Change of Control Event on or prior to _________, all Restricted Stock shall become Vested Stock and the Company shall deliver to the Participant certificates representing the Vested Stock free and clear of all restrictions, except for any applicable securities law restrictions, together with any Accrued Dividends attributable to such Vested Stock without interest thereon. 5. Legends. The shares of Stock which are the subject of the Award shall be subject to the following legend: "THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND ARE TRANSFERABLE ONLY IN ACCORDANCE WITH THAT CERTAIN RESTRICTED STOCK AWARD AGREEMENT FOR THE FLEMING COMPANIES, INC. 1996 STOCK INCENTIVE PLAN DATED THE 30th DAY OF APRIL, 2001. ANY ATTEMPTED TRANSFER OF THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE IN VIOLATION OF SUCH AGREEMENT SHALL BE NULL AND VOID AND WITHOUT EFFECT. A COPY OF THE AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF FLEMING COMPANIES, INC." 3 4 6. Stock Power. The Participant hereby agrees to execute and deliver to the Secretary of the Company a stock power (endorsed in blank) in the form of Exhibit B hereto covering his Award and authorizes the Secretary to deliver to the Company any and all shares of Restricted Stock that are forfeited under the provisions of this Agreement. The Participant further authorizes the Company to hold as a general obligation of the Company any Accrued Dividends and to pay such dividends to the Participant at the time the underlying Restricted Stock becomes Vested Stock. 7. Nontransferability of Award. The Participant shall not have the right to sell, assign, transfer, convey, dispose, pledge, hypothecate, burden, encumber or charge any shares of Restricted Stock or any interest therein in any manner whatsoever. 8. Notices. All notices or other communications relating to the Plan and this Agreement as it relates to the Participant shall be in writing, shall be deemed to have been made if personally delivered in return for a receipt, or if mailed, by regular U.S. mail, postage prepaid, by the Company to the Participant at his last known address evidenced on the payroll records of the Company. 9. Binding Effect and Governing Law. This Agreement shall be (i) binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns except as may be limited by the Plan and (ii) governed and construed under the laws of the State of Texas. 10. Withholding. The Company and the Participant shall comply with all federal and state laws and regulations with respect to the withholding, deposit and payment of any income, employment or other taxes relating to the Award (including Accrued Dividends). 11. Award Subject to Claims or Creditors. The Participant shall not have any interest in any particular assets of the Company, its parent, if applicable, or any Subsidiary by reason of the right to earn an Award (including Accrued Dividends) under the Plan and this Agreement; and the Participant or any other person shall have only the rights of a general unsecured creditor of the Company, its parent, if applicable, or a Subsidiary with respect to any rights under the Plan or this Agreement. 12. Captions. The captions of specific provisions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope of this Agreement or the intent of any provision hereof. 13. Counterparts. This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one agreement. 14. PROTECTION OF COMPANY'S BUSINESS AS CONSIDERATION. AS SPECIFIC CONSIDERATION TO THE COMPANY FOR THIS AWARD, THE PARTICIPANT AGREES: (a) LIMITATIONS ON COMPETITION. SUBJECT TO SUBSECTION (g), THE PARTICIPANT WILL NOT, WITHOUT THE COMPANY'S WRITTEN CONSENT, DIRECTLY OR INDIRECTLY, BE A SHAREHOLDER, PRINCIPAL, AGENT, PARTNER, OFFICER, DIRECTOR, EMPLOYEE OR CONSULTANT OF 4 5 SUPERVALU, INC., NASH FINCH COMPANY OR ANY OTHER DIRECT COMPETITOR OF THE COMPANY, EXCLUDING NATIONAL RETAIL CHAINS, OR ANY OF THEIR RESPECTIVE SUBSIDIARIES, AFFILIATES OR SUCCESSORS (COLLECTIVELY, THE "COMPETITORS"). (b) CONFIDENTIAL INFORMATION; NO DISPARAGING STATEMENTS. THE PARTICIPANT ACKNOWLEDGES THAT DURING THE COURSE OF PARTICIPANT'S EMPLOYMENT WITH THE COMPANY, A SUBSIDIARY OR AFFILIATED ENTITY, HE WILL HAVE ACCESS TO AND GAIN KNOWLEDGE OF HIGHLY CONFIDENTIAL AND PROPRIETARY INFORMATION AND TRADE SECRETS. THE PARTICIPANT FURTHER ACKNOWLEDGES THAT THE MISUSE, MISAPPROPRIATION OR DISCLOSURE OF THIS INFORMATION COULD CAUSE IRREPARABLE HARM TO THE COMPANY, A SUBSIDIARY AND/OR AFFILIATED ENTITY, BOTH DURING AND AFTER THE TERM OF THE PARTICIPANT'S EMPLOYMENT. THEREFORE, THE PARTICIPANT AGREES THAT DURING HIS EMPLOYMENT AND AT ALL TIMES THEREAFTER HE WILL HOLD IN A FIDUCIARY CAPACITY FOR THE BENEFIT OF THE COMPANY, A SUBSIDIARY AND/OR AFFILIATED ENTITY AND WILL NOT DIVULGE OR DISCLOSE, DIRECTLY OR INDIRECTLY, TO ANY OTHER PERSON, FIRM OR BUSINESS, ALL CONFIDENTIAL OR PROPRIETARY INFORMATION, KNOWLEDGE AND DATA (INCLUDING, BUT NOT LIMITED TO, PROCESSES, PROGRAMS, TRADE "KNOW HOW," IDEAS, DETAILS OF CONTRACTS, MARKETING PLANS, STRATEGIES, BUSINESS DEVELOPMENT TECHNIQUES, BUSINESS ACQUISITION PLANS, PERSONNEL PLANS, PRICING PRACTICES AND BUSINESS METHODS AND PRACTICES) RELATING IN ANY WAY TO THE BUSINESS OF THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES, CUSTOMERS, SUPPLIERS, JOINT VENTURES, LICENSORS, LICENSEES, DISTRIBUTORS AND OTHER PERSONS AND ENTITIES WITH WHOM THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES DO BUSINESS ("CONFIDENTIAL DATA"), EXCEPT UPON THE COMPANY'S WRITTEN CONSENT OR AS REQUIRED BY HIS DUTIES WITH THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES, FOR SO LONG AS SUCH CONFIDENTIAL DATA REMAINS CONFIDENTIAL AND ALL SUCH CONFIDENTIAL DATA, TOGETHER WITH ALL COPIES THEREOF AND NOTES AND OTHER REFERENCES THERETO, SHALL REMAIN THE SOLE PROPERTY OF THE COMPANY, A SUBSIDIARY OR AFFILIATED ENTITY. THE PARTICIPANT AGREES, DURING HIS EMPLOYMENT WITH THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES AND AT ALL TIMES THEREAFTER, NOT TO MAKE DISPARAGING STATEMENTS ABOUT THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES OR THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, PRODUCTS OR SERVICES WHICH HE KNOWS, OR HAS REASON TO KNOW, ARE FALSE OR MISLEADING. (c) NO SOLICITATION OF EMPLOYEES OR BUSINESS. THE PARTICIPANT AGREES THAT HE WILL NOT, EITHER DIRECTLY OR IN CONCERT WITH OTHERS, RECRUIT, SOLICIT OR INDUCE, OR ATTEMPT TO INDUCE, ANY EMPLOYEE OF THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES TO TERMINATE EMPLOYMENT WITH THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES AND/OR BECOME ASSOCIATED WITH ANOTHER EMPLOYER. THE PARTICIPANT FURTHER AGREES THAT HE WILL NOT, EITHER DIRECTLY OR IN CONCERT WITH OTHERS, SOLICIT, DIVERT OR TAKE AWAY OR ATTEMPT TO DIVERT OR TAKE AWAY, THE BUSINESS OF ANY OF THE CUSTOMERS OR ACCOUNTS OF THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES WHICH THE COMPANY, A SUBSIDIARY OR AFFILIATED ENTITY HAD OR WAS ACTIVELY SOLICITING BEFORE AND/OR ON HIS DATE OF TERMINATION/SEPARATION. (d) TERM OF THE PARTICIPANT'S PROMISES UNDER THIS SECTION. THE PARTICIPANT AGREES THAT EXCEPT AS OTHERWISE PROVIDED IN SUBSECTION (b), HIS PROMISES CONTAINED IN THIS SECTION 14 SHALL CONTINUE IN EFFECT DURING HIS EMPLOYMENT WITH THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES AND UNTIL THE FIRST ANNIVERSARY OF HIS TERMINATION/SEPARATION. 5 6 (e) CONSEQUENCES OF BREACH OF LIMITATIONS. SUBJECT TO SUBSECTION (g), IF AT ANY TIME WITHIN (i) THE TERM OF THIS AGREEMENT OR (II) WITHIN ONE (1) YEAR FOLLOWING THE PARTICIPANT'S DATE OF TERMINATION/SEPARATION, OR (III) WITHIN ONE (1) YEAR AFTER VESTING ANY PORTION OF THE RESTRICTED STOCK, WHICHEVER IS LATEST, THE PARTICIPANT, WITHOUT THE COMPANY'S WRITTEN CONSENT, DIRECTLY OR INDIRECTLY, IS A SHAREHOLDER, PRINCIPAL, AGENT, PARTNER, OFFICER, DIRECTOR, EMPLOYEE OR CONSULTANT OF ANY OF THE COMPETITORS, THEN (x) WITH RESPECT TO ANY SHARES OF RESTRICTED STOCK, EFFECTIVE THE DATE THE PARTICIPANT ENTERS INTO SUCH ACTIVITY, ALL SUCH RESTRICTED STOCK (INCLUDING ANY ACCRUED DIVIDENDS) SHALL BE ABSOLUTELY FORFEITED AND THE PARTICIPANT SHALL HAVE NO FURTHER INTEREST THEREIN OF ANY KIND WHATSOEVER (UNLESS FORFEITED SOONER BY OPERATION OF ANOTHER TERM OR CONDITION OF THIS AGREEMENT OR THE PLAN), AND (y) WITH RESPECT TO ANY SHARES OF VESTED STOCK, THE PARTICIPANT SHALL BE REQUIRED TO RETURN TO THE COMPANY ALL OF THE ACTUAL SHARES OF VESTED STOCK, OR OTHER EQUIVALENT SHARES OF COMPANY COMMON STOCK, WITHIN THIRTY (30) DAYS AFTER THE DATE OF WRITTEN NOTICE FROM THE COMPANY THAT PURSUANT TO THE PROVISIONS OF THIS SUBSECTION DELIVERY OF SUCH SHARES IS DUE AND THE PARTICIPANT SHALL FORFEIT ALL RIGHTS TO SUCH SHARES OF VESTED STOCK. THIS SHALL BE IN ADDITION TO ANY INJUNCTIVE OR OTHER RELIEF TO WHICH THE COMPANY, ITS SUBSIDIARIES OR AFFILIATED ENTITIES MAY BE ENTITLED UNDER SUBSECTION (f). (f) CONSEQUENCES OF OTHER BREACHES OF THIS SECTION. THE PARTICIPANT ACKNOWLEDGES THAT DAMAGES WHICH MAY ARISE FROM ANY BREACH OF ANY OF HIS PROMISES CONTAINED IN THIS SECTION 14 MAY BE IMPOSSIBLE TO ASCERTAIN OR PROVE WITH CERTAINTY. THE PARTICIPANT AGREES IF PARTICIPANT BREACHES ANY OF HIS PROMISES CONTAINED IN THIS SECTION 14, IN ADDITION TO THE REMEDIES PROVIDED UNDER SUBSECTION (e), IF APPLICABLE, AND ANY OTHER LEGAL REMEDIES WHICH MAY BE AVAILABLE, THE COMPANY, A SUBSIDIARY OR AFFILIATED ENTITY (AS APPLICABLE) SHALL BE ENTITLED TO IMMEDIATE INJUNCTIVE RELIEF FROM A COURT OF COMPETENT JURISDICTION, PENDING ARBITRATION UNDER SECTION 15 OR OTHERWISE, TO END SUCH BREACH, WITHOUT FURTHER PROOF OF DAMAGE. (G) PERMITTED OWNERSHIP. NOTHING IN THIS SECTION 14 SHALL PROHIBIT THE PARTICIPANT FROM OWNING LESS THAN ONE PERCENT (1%) OF ANY COMPANY THAT IS PUBLICLY TRADED ON ANY NATIONAL SECURITIES EXCHANGE. (h) SEVERABILITY AND REASONABLENESS. IF, AT ANY TIME, THE PROVISIONS OF THIS SECTION 14 SHALL BE DETERMINED TO BE INVALID OR UNENFORCEABLE, BY REASON OF BEING VAGUE OR UNREASONABLE AS TO GEOGRAPHIC AREA, DURATION OR SCOPE OF ACTIVITY OR DUE TO ANY OTHER RESTRICTION OR LIMITATION, THIS SECTION 14 SHALL BE CONSIDERED DIVISIBLE AND SHALL BECOME AND BE IMMEDIATELY AMENDED TO ONLY SUCH GEOGRAPHIC AREA, DURATION AND SCOPE OF ACTIVITY AND/OR RESTRICTIONS OR LIMITATIONS AS SHALL BE DETERMINED TO BE REASONABLE AND ENFORCEABLE BY AN ARBITRATOR OR A COURT HAVING JURISDICTION OVER THE MATTER; AND THE PARTICIPANT AGREES THAT THIS SECTION 14 AS SO AMENDED SHALL BE VALID AND BINDING AS THOUGH ANY INVALID OR UNENFORCEABLE PORTION HAD NOT BEEN INCLUDED HEREIN. THE PARTIES AGREE THAT THE GEOGRAPHIC AREA, DURATION AND SCOPE OF THE LIMITATIONS AND THE RESTRICTIONS DESCRIBED IN SUBSECTIONS (a) THROUGH (e) ARE REASONABLE. 15. Arbitration of Disputes. Any disputes, claims or controversies between the Participant and the Company, its Subsidiaries or Affiliated Entities which may arise out of or relate to this Agreement shall be settled by arbitration. This agreement to arbitrate shall survive the 6 7 termination of this Agreement. Any arbitration shall be in accordance with the Rules of the American Arbitration Association and shall be undertaken pursuant to the Federal Arbitration Act. Arbitration will be held in Dallas, Texas unless the parties mutually agree on another location. The decision of the arbitrator(s) will be enforceable in any court of competent jurisdiction. The arbitrator(s) may, but will not be required to, award such damages or other monetary relief as either party might be entitled to receive from a court of competent jurisdiction. Nothing in this agreement to arbitrate shall preclude the Company from obtaining injunctive relief from a court of competent jurisdiction prohibiting any on-going breaches of the Agreement by the Participant pending arbitration. The arbitrator(s) may also award costs and attorneys' fees in connection with the arbitration to the prevailing party; however, in the arbitrator's(s') discretion, each party may be ordered to bear its/his own costs and attorneys' fees. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. "COMPANY" FLEMING COMPANIES, INC., an Oklahoma corporation By ------------------------------------------ Scott M. Northcutt Executive Vice President - Human Resources "PARTICIPANT" ------------------------------------------ [Name of Participant] 7 8 Exhibit A [Copy of Stock Incentive Plan] 9 Exhibit B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, ______________, an individual, hereby irrevocably assigns and conveys to ________________________, _________________________________ (_______) shares of the Common Capital Stock of Fleming Companies, Inc., an Oklahoma corporation, $2.50 par value. DATED: ---------------------------- ================================ 2 10 The following executive officers have received a restricted stock award pursuant to this form: Name of Grantee Number of Shares Matthew H. Hildreth 5,000 Mark D. Shapiro 5,000 3 EX-15 4 d90247ex15.txt LETTER FROM INDEPENDENT ACCOUNTANTS 1 EXHIBIT 15 Fleming Companies, Inc. 1945 Lakepointe Drive, Box 299013 Lewisville, Texas 75029 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Fleming Companies, Inc. and subsidiaries for the 12-week and 28-week periods ended July 14, 2001, and July 8, 2000, as indicated in our report dated August 20, 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 12 weeks ended July 14, 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. 333-28219 (Associate Stock Purchase Plan) on Form S-8; (vi) Registration Statement No. 333-80445 (1999 Stock Incentive Plan) on Form S-8; (vii) Registration Statement No. 333-89375 (Consolidated Savings Plus and Stock Ownership Plan) on Form S-8; (viii) Registration Statement No. 333-40660 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; (ix) Registration Statement No. 333-40670 (2000 Stock Incentive Plan) on Form S-8; (x) Registration Statement No. 333-60176 (Shelf Registration of Common Stock Maintained on behalf of U.S. Transportation, LLC, an affiliate of The Yucaipa Companies LLC.) on Form S-3; and (xi) Registration Statement No. 333-60178 (5.25% Convertible Senior Subordinated Notes Due 2009 and Shares of Common Stock Issuable upon Conversion of the Notes) on Form S-3. 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 August 20, 2001 -----END PRIVACY-ENHANCED MESSAGE-----