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 13, 2002
COMMISSION FILE NUMBER: 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State of incorporation) (I.R.S. Employer
Identification No.)
1945 LAKEPOINTE DRIVE
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
--- ---
On August 19, 2002, 54,300,000 shares of the registrant's common stock, par
value $2.50 per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 Weeks Ended July 13, 2002,
and July 14, 2001
Condensed Consolidated Statements of Operations -
28 Weeks Ended July 13, 2002,
and July 14, 2001
Condensed Consolidated Balance Sheets -
July 13, 2002, and December 29, 2001
Condensed Consolidated Statements of Cash Flows -
28 Weeks Ended July 13, 2002,
and July 14, 2001
Notes to Condensed Consolidated Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 12 WEEKS ENDED JULY 13, 2002 AND JULY 14, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
2002 2001
------------ ------------
Net sales $ 3,929,956 $ 3,445,731
Costs and expenses:
Cost of sales 3,650,203 3,182,374
Selling and administrative 202,153 211,092
Interest expense 42,676 34,435
Interest income and other (7,837) (6,067)
Impairment/restructuring charge (credit) 27,361 (117)
Litigation charges -- 46,600
------------ ------------
Total costs and expenses 3,914,556 3,468,317
------------ ------------
Income (loss) before taxes 15,400 (22,586)
Taxes on income (loss) 5,310 (9,128)
------------ ------------
Income (loss) before extraordinary charge 10,090 (13,458)
Extraordinary charge from early retirement
of debt, net of taxes (7,863) --
------------ ------------
Net income (loss) $ 2,227 $ (13,458)
============ ============
Basic income (loss) per share:
Income (loss) before extraordinary charge $ 0.21 $ (0.31)
Extraordinary charge from early retirement
of debt, net of taxes (0.16) --
------------ ------------
Net income (loss) $ 0.05 $ (0.31)
============ ============
Diluted income (loss) per share:
Income (loss) before extraordinary charge $ 0.21 $ (0.31)
Extraordinary charge from early retirement
of debt, net of taxes (0.16) --
------------ ------------
Net income (loss) $ 0.05 $ (0.31)
============ ============
Dividends paid per share $ 0.02 $ 0.02
Weighted average shares outstanding:
Basic 47,367 43,276
Diluted 48,848 43,276
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE 28 WEEKS ENDED JULY 13, 2002 AND JULY 14, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
2002 2001
------------ ------------
Net sales $ 8,616,095 $ 7,583,090
Costs and expenses:
Cost of sales 7,996,663 6,953,489
Selling and administrative 457,165 526,377
Interest expense 93,089 91,937
Interest income and other (14,803) (14,988)
Impairment/restructuring charge (credit) 27,361 (26,976)
Litigation charges -- 48,628
------------ ------------
Total costs and expenses 8,559,475 7,578,467
------------ ------------
Income before taxes 56,620 4,623
Taxes on income 21,921 2,615
------------ ------------
Income before extraordinary charge 34,699 2,008
Extraordinary charge from early retirement
of debt, net of taxes (7,863) (3,469)
------------ ------------
Net income (loss) $ 26,836 $ (1,461)
------------ ------------
Basic income (loss) per share:
Income before extraordinary charge $ 0.76 $ 0.05
Extraordinary charge from early retirement
of debt, net of taxes (0.17) (0.08)
------------ ------------
Net income (loss) $ 0.59 $ (0.03)
============ ============
Diluted income (loss) per share:
Income before extraordinary charge $ 0.72 $ 0.05
Extraordinary charge from early retirement
of debt, net of taxes (0.15) (0.08)
------------ ------------
Net income (loss) $ 0.57 $ (0.03)
============ ============
Dividends paid per share $ 0.04 $ 0.04
Weighted average shares outstanding:
Basic 45,542 41,512
Diluted 51,998 44,077
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
--------------------------------------------------------------------------------
JULY 13, DECEMBER 29,
2002 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 40,780 $ 17,325
Cash held for refinancing 55,105 --
Receivables, net 729,675 588,269
Inventories 1,251,525 1,014,695
Assets held for sale 37,190 30,066
Other current assets 98,066 89,716
------------ ------------
Total current assets 2,212,341 1,740,071
Investments and notes receivable, net 97,143 105,651
Investment in direct financing leases 72,398 83,118
Property and equipment 1,542,948 1,624,499
Less accumulated depreciation
and amortization (650,514) (704,844)
------------ ------------
Net property and equipment 892,434 919,655
Deferred income taxes 61,961 105,453
Other assets 188,390 146,555
Goodwill, net 837,610 554,190
------------ ------------
Total assets $ 4,362,277 $ 3,654,693
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,037,935 $ 971,791
Current maturities of long-term debt 4,358 29,865
Current obligations under capital leases 22,115 21,410
Debt to be refinanced 55,105 --
Other current liabilities 238,591 242,061
------------ ------------
Total current liabilities 1,358,104 1,265,127
Long-term debt 1,856,111 1,427,929
Long-term obligations under capital leases 325,345 331,836
Other liabilities 127,938 131,582
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 135,211 111,095
Capital in excess of par value 712,701 567,720
Reinvested earnings (deficit) (94,324) (121,160)
Accumulated other comprehensive income:
Additional minimum pension liability (59,436) (59,436)
Cumulative foreign currency translation adjustment 627 --
------------ ------------
Total shareholders' equity 694,779 498,219
------------ ------------
Total liabilities and shareholders' equity $ 4,362,277 $ 3,654,693
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 28 WEEKS ENDED JULY 13, 2002, AND JULY 14, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 26,836 $ (1,461)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 81,921 87,451
Amortization costs in interest expense 4,535 3,490
Credit losses 3,008 12,119
Deferred income taxes 41,934 35,389
Impairment/restructuring and related charges,
net of impairment credit (not in other lines) 27,361 8,898
Cash payments on impairment/restructuring
and related charges (12,430) (43,652)
Cost of early debt retirement 13,119 5,787
Change in assets and liabilities,
excluding effect of acquisitions:
Receivables (1,675) (69,454)
Inventories (72,867) (132,007)
Accounts payable (118,922) 64,039
Other assets and liabilities (121,669) (36,702)
Other adjustments, net 2,975 2,080
------------ ------------
Net cash used in operating activities (125,874) (64,023)
------------ ------------
Cash flows from investing activities:
Collections on notes receivable 26,353 17,714
Notes receivable funded (12,878) (12,277)
Purchases of businesses, net of cash received (290,442) (70,162)
Purchases of property and equipment (97,922) (111,619)
Proceeds from sale of property and equipment 141,758 12,018
Proceeds from sale of businesses -- 116,905
Other investing activities 6,057 6,013
------------ ------------
Net cash used in investing activities (227,074) (41,408)
------------ ------------
Cash flows from financing activities:
Change in revolver (125,000) (100,000)
Proceeds from long-term borrowings 880,940 715,602
Principal payments on long-term debt (443,743) (549,031)
Payments on capital issuance and debt retirement (47,276) (21,554)
Principal payments on capital lease obligations (10,160) (10,366)
Proceeds from sale of common stock 178,517 56,343
Dividends paid (1,770) (1,653)
------------ ------------
Net cash provided by financing activities 431,508 89,341
------------ ------------
Net change in cash and cash equivalents 78,560 (16,090)
Cash and cash equivalents, beginning of period 17,325 30,380
------------ ------------
Cash and cash equivalents, end of period $ 95,885 $ 14,290
============ ============
Supplemental information:
Cash paid for interest $ 81,962 $ 72,054
Cash refunded for income taxes $ (28,504) $ (17,081)
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
FLEMING COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The preceding condensed consolidated financial statements of Fleming Companies,
Inc. have been prepared by us, without audit. In our opinion, all adjustments,
which consist of normal recurring adjustments, except as disclosed, necessary to
present fairly our financial position, results of operations and cash flows for
the periods presented have been made. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in our Fiscal 2001 Annual Report on Form 10-K.
The preparation of the condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
period classifications, including the reclassification of net sales and cost of
goods due to the adoption of EITF 01-9 in the first quarter of 2002. In 2002 and
2001, the effect of the decrease to both sales and cost of sales on the 12 week
amounts was less than $20 million and the effect on the 28 week amounts was less
than $40 million.
In April 2002, the FASB issued SFAS No. 145 - Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. We
had a refinancing transaction in 2002 that resulted in an extraordinary charge
(see Footnote 8). In 2003, these amounts will be reclassified to selling and
administrative expense and taxes on income in accordance with SFAS 145.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted.
2. INVENTORY VALUATION
We use the LIFO method of inventory valuation for determining the cost of most
grocery and certain perishable inventories. The excess of current cost of LIFO
inventories over their stated value was $45.9 million and $46.4 million at July
13, 2002 and December 29, 2001, respectively.
7
3. EARNINGS PER SHARE
Both basic and diluted income per share are computed based on net income
(adjusted for the after-tax effect of interest expense relating to the 5 1/4%
convertible senior subordinated notes, if applicable) divided by weighted
average shares as appropriate for each calculation.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12 WEEKS ENDED 28 WEEKS ENDED
--------------------- ---------------------
JULY 13, JULY 14, JULY 13, JULY 14,
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Basic earnings (loss) before
extraordinary charge $ 10,090 $(13,458) $ 34,699 $ 2,008
After-tax interest expense related to
convertible debt -- -- 2,855 --
-------- -------- -------- --------
Diluted earnings (loss) before
extraordinary charge $ 10,090 $(13,458) $ 37,554 $ 2,008
======== ======== ======== ========
Denominator:
Weighted average shares for
basic earnings per share 47,367 43,276 45,542 41,512
Effect of dilutive securities:
Employee stock options 1,311 -- 1,260 2,147
Restricted stock compensation 170 -- 241 418
Convertible debt securities -- -- 4,955 --
-------- -------- -------- --------
Dilutive potential common shares 1,481 -- 6,456 2,565
-------- -------- -------- --------
Weighted average shares for
diluted earnings per share 48,848 43,276 51,998 44,077
======== ======== ======== ========
For the 12 weeks ended July 13, 2002, we did not reflect 5.0 million of weighted
average shares or add back after-tax interest expense of $1.3 million related to
convertible debt due to antidilution. For the 12 weeks ended July 14, 2001, we
did not reflect 2.8 million and 0.4 million of weighted average shares for
employee stock options and restricted stock compensation, respectively, due to
antidilution. For the 28 weeks ended July 13, 2002, we have added back after-tax
interest expense of $2.9 million. For the 28 weeks ended July 14, 2001, we did
not reflect 3.1 million of weighted average shares or add back after-tax
interest expense of $1.7 million related to convertible debt due to
antidilution.
8
4. BUSINESS SEGMENT INFORMATION
Sales and operating earnings for our distribution and retail segments are
presented below.
12 WEEKS ENDED
JULY 13, JULY 14,
($ IN MILLIONS) 2002 2001
---------- ----------
Sales:
Distribution $ 3,712 $ 3,196
Intersegment elimination (299) (262)
---------- ----------
Net distribution 3,413 2,934
Retail 517 512
---------- ----------
Total sales $ 3,930 $ 3,446
========== ==========
Operating earnings:
Distribution $ 129 $ 100
Retail 9 10
Support services (60) (58)
---------- ----------
Total operating earnings 78 52
Interest expense (43) (34)
Interest income and other 7 6
Impairment/restructuring charge (27) --
Litigation charges -- (47)
---------- ----------
Income (loss) before taxes $ 15 $ (23)
========== ==========
28 WEEKS ENDED
JULY 13, JULY 14,
($ IN MILLIONS) 2002 2001
---------- ----------
Sales:
Distribution $ 8,101 $ 6,915
Intersegment elimination (671) (688)
---------- ----------
Net distribution 7,430 6,227
Retail 1,186 1,356
---------- ----------
Total sales $ 8,616 $ 7,583
========== ==========
Operating earnings:
Distribution $ 267 $ 210
Retail 24 27
Support services (129) (133)
---------- ----------
Total operating earnings 162 104
Interest expense (93) (92)
Interest income and other 15 15
Impairment/restructuring credit (charge) (27) 27
Litigation charges -- (49)
---------- ----------
Income before taxes $ 57 $ 5
========== ==========
General support services expenses are not allocated to distribution and retail
segments. The transfer pricing between segments is at cost.
9
Kmart Corporation, our largest customer, represented 20% and 15% of our total
net sales during the second quarter of 2002 and 2001, respectively, and 21% and
13% year-to-date, respectively.
5. COMPREHENSIVE INCOME
Our comprehensive income for the 12 and 28 weeks ended July 13, 2002, totaled
$2.9 million and $27.5 million, respectively, and was comprised of reported net
income and foreign currency translation adjustment. Our comprehensive loss for
the 12 and 28 weeks ended July 14, 2001, totaled $13.5 million and $1.5 million,
respectively, and was comprised only of reported net loss.
6. ACQUISITION OF CORE-MARK INTERNATIONAL, INC.
On June 18, 2002, we acquired Core-Mark International, Inc., a leading
piece-pick distributor to convenience stores and other retail customers in the
western United States and Canada, for $216 million in cash (net of cash
acquired) and assumed its debt ($77 million of 11 3/8% senior subordinated notes
due 2003 and a $55 million accounts receivable securitization facility).
Core-Mark's 11 3/8% senior subordinated notes were paid immediately upon our
acquisition. The $55 million accounts receivable securitization facility was
paid and terminated after quarter-end.
The acquisition was financed through our $975 million credit agreement along
with the sale of $200 million of 9 1/4% senior notes due 2010 and 9.2 million
shares of common stock (which grossed $178 million at $19.40 per share, and
netted approximately $170 million after the underwriting discount and other
issuance costs). The acquisition was accounted for under the purchase method,
and the results of Core-Mark have been included in our consolidated results from
the date of acquisition.
We have not finalized the allocation of the purchase price as of July 13, 2002.
An estimation of this allocation, which is included as part of these financial
statements, is as follows: $31 million to property, plant and equipment, $49
million to working capital, $268 million to goodwill and other intangible assets
offset by $132 million of debt assumed.
10
The unaudited proforma combined historical results, as if Core-Mark had been
acquired at the beginning of fiscal 2002 and 2001, respectively, are estimated
in the following table:
(IN MILLIONS, EXCEPT PER SHARE DATA) 12 WEEKS ENDED 28 WEEKS ENDED
--------------------- ---------------------
JULY 13, JULY 14, JULY 13, JULY 14,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 4,711 $ 4,324 $ 10,222 $ 9,216
Income (loss) before extraordinary item 16 (11) 41 3
Net income (loss) 8 (11) 33 (1)
Basic earnings per share:
Income (loss) before extraordinary item $ 0.32 $ (0.21) $ 0.78 $ 0.06
Net income (loss) $ 0.17 $ (0.21) $ 0.63 $ (0.01)
Diluted earnings per share:
Income (loss) before extraordinary item $ 0.30 $ (0.21) $ 0.74 $ 0.05
Net income (loss) $ 0.17 $ (0.21) $ 0.61 $ (0.01)
The proforma results include amortization of other intangibles related to the
purchase for fiscal 2001 amounts and interest expense on debt incurred to
finance the purchase price. The proforma results are not necessarily indicative
of what actually would have occurred if the acquisition had been completed as of
the beginning of each fiscal period presented, nor are they necessarily
indicative of future consolidated results.
7. CONTINGENCIES
We are engaged in various legal proceedings which have arisen but have not been
fully adjudicated. These proceedings, in the opinion of management, will not
have a material adverse effect upon our consolidated financial position, cash
flows or results of operations when ultimately concluded.
11
8. DEBT
Long-term debt consists of the following:
JULY 13, DECEMBER 29,
2002 2001
------------ ------------
(IN THOUSANDS)
10 5/8 % senior subordinated notes due 2007 $ 400,000 $ 400,000
10 1/8 % senior notes due 2008 357,228 345,870
5 1/4 % convertible senior subordinated notes due 2009 150,000 150,000
9 1/4 % senior notes due 2010 200,240 --
9 7/8 % senior subordinated notes due 2012 262,764 --
10 1/2 % senior subordinated notes due 2004 -- 250,000
Revolving credit, average interest rates of 3.7%
for 2002 and 5.8% for 2001, due 2007 75,000 200,000
Term loan, due 2008, average interest
rate of 4.9% for 2002 and 6.7% for 2001 425,000 118,637
Core-Mark's accounts receivable securitization 55,000 --
Debt discounts (9,763) (6,713)
------------ ------------
1,915,469 1,457,794
Less Core-Mark accounts receivable securitization extinguished (55,000) --
Less current maturities (4,358) (29,865)
------------ ------------
Long-term debt $ 1,856,111 $ 1,427,929
============ ============
Aggregate maturities of long-term debt for the next five years are approximately
as follows: in the remainder of 2002, $56 million (including $55 million held in
a trust account that redeemed Core-Mark's $55 million accounts receivable
securitization); in 2003, $4 million; in 2004, $4 million; in 2005, $4 million;
and in 2006, $4 million.
On April 15, 2002, we issued $260 million of 9 7/8% senior subordinated notes
that mature on May 1, 2012. The net proceeds from this private placement were
used to redeem the 10 1/2% senior subordinated notes due 2004. These notes are
unsecured senior subordinated obligations, ranking the same as all other
existing and future senior subordinated indebtedness. The notes are effectively
subordinated to senior secured and senior unsecured indebtedness, including
loans under our senior secured credit facility. The 9 7/8% notes are guaranteed
by substantially all of our subsidiaries (see Footnote 9).
On June 18, 2002, we entered into a $975 million senior secured credit facility
to refinance our then existing $850 million senior secured credit facility. The
credit facility consists of a $550 million revolving facility maturing June 18,
12
2007 and a $425 million tranche B term loan maturing June 18, 2008. The new
credit facility is secured by all of our inventory and receivables, except for
the portion of receivables related to Core-Mark until the accounts receivable
securitization was paid on July 18, 2002. If we had terminated Core-Mark's
accounts receivable securitization on or before July 13, 2002, then we would
have had $330 million available to borrow under this facility.
In connection with the retirement of the 10 1/2% senior subordinated notes due
2004 and the refinancing of our $850 million senior secured credit facility, we
recognized an $8 million after-tax extraordinary charge ($13 million pre-tax and
$5 million of tax benefit) from the early retirement of debt during the second
quarter of 2002. The charge consisted of debt premium of $6.5 million on our
2004 notes, $3.4 million of unamortized debt issuance costs on our 2004 notes
and $3.2 million of unamortized debt issuance costs on our $850 million credit
agreement.
Also, on June 18, 2002, we issued $200 million of 9 1/4% senior notes that
mature June 15, 2010, ranking equal in right of payment with all other existing
and future senior unsecured debt. The notes are effectively subordinated to any
secured debt, including our senior secured credit facility, but rank senior to
all our existing and future subordinated debt. The notes were issued
simultaneously with the execution of our senior secured credit facility. The
9 1/4% notes are guaranteed by substantially all of our subsidiaries (see
Footnote 9).
In June 2002 and July 2002, we entered into two interest rate swap agreements
with a combined notional amount of $50 million. These swaps are tied to our
9 1/4% senior notes due 2010. The maturity, call dates, and call premiums mirror
those of the notes. The swaps are designed for us to receive a fixed rate of
9 1/4% per annum and pay a floating rate based on a spread plus the 3-month
LIBOR. The floating rate resets quarterly beginning September 15, 2002. We
documented and designated these swaps to qualify as a fair value hedge. At the
end of the second quarter of 2002, in accordance with SFAS No. 133 (SFAS 133),
the mark-to-market value of the swaps was recorded on our consolidated balance
sheet as a $240 thousand long-term asset (offset by a change in fair value to
the senior notes due 2010).
In April 2002, we entered into an interest rate swap agreement with a notional
amount of $50 million. This swap is tied to our 9 7/8% senior subordinated notes
due 2012. The maturity, call dates, and call premiums mirror those of the notes.
The swap is designed for us to receive a fixed rate of 9 7/8% per annum and pay
a floating rate based on a spread plus the 3-month LIBOR. The floating rate
resets quarterly beginning May 1, 2002. We documented and designated this swap
to qualify as a fair value hedge. At the end of the second quarter of 2002, in
accordance with SFAS 133, the mark-to-market value of this swap was recorded on
our consolidated balance sheet as a $2.8 million long-term asset (offset by a
change in fair value to the senior subordinated notes due 2012).
In 2001, we entered into interest rate swap agreements with a combined notional
amount of $210 million. The swaps are tied to our 10 1/8% senior notes due 2008.
The maturity, call dates, and call premiums mirror those of the notes. The swaps
are designed for us to receive a fixed rate of 10 1/8% per annum and pay a
floating rate based on a spread plus the 3-month LIBOR. The floating rates
13
reset quarterly. We have documented and designated these swaps to qualify as
fair value hedges. At the end of the second quarter of 2002, in accordance with
SFAS 133, the mark-to-market value of these swaps was recorded on our
consolidated balance sheet as a $2.7 million long-term asset and $0.5 million
long-term liability (all of which was offset by a change in fair value to the
senior notes due 2008).
For all qualifying and highly effective fair value hedges, the changes in the
fair value of a derivative and the loss or gain on the hedged asset or liability
relating to the risk being hedged are recorded currently in earnings. These
amounts are recorded to interest income and provide offset of one another. There
was no net earnings impact relating to our fair value hedges.
9. SUBSIDIARY GUARANTEE OF SENIOR NOTES AND SENIOR SUBORDINATED NOTES
The senior notes, convertible senior subordinated notes, and senior subordinated
notes are guaranteed by substantially all of Fleming's wholly-owned direct and
indirect subsidiaries. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to Fleming (the parent) in the form of
cash dividends, loans or advances.
The following condensed consolidating financial information depicts, in separate
columns, the parent company, those subsidiaries which are guarantors, those
subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. The financial information may not necessarily be indicative
of the results of operations or financial position had the subsidiaries been
operated as independent entities.
14
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
JULY 13, 2002
----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 26,156 $ 69,474 $ 255 $ -- $ 95,885
Receivables, net 470,308 255,432 3,935 -- 729,675
Inventories 837,161 414,364 -- -- 1,251,525
Other current assets 127,806 6,893 557 -- 135,256
------------ ------------ ------------ ------------ ------------
Total current assets 1,461,431 746,163 4,747 -- 2,212,341
Investment in subsidiaries 446,078 5,356 -- (451,434) --
Intercompany receivables 532,085 -- -- (532,085) --
Property and equipment, net 521,095 361,620 9,719 -- 892,434
Goodwill,net 402,464 435,146 -- -- 837,610
Other assets 389,953 29,939 -- -- 419,892
------------ ------------ ------------ ------------ ------------
$ 3,753,106 $ 1,578,224 $ 14,466 $ (983,519) $ 4,362,277
============ ============ ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 659,884 $ 377,805 $ 246 $ -- $ 1,037,935
Intercompany payables -- 512,345 19,740 (532,085) --
Other current liabilities 226,251 93,191 727 -- 320,169
------------ ------------ ------------ ------------ ------------
Total current liabilities 886,135 983,341 20,713 (532,085) 1,358,104
Obligations under capital leases 203,522 121,823 -- -- 325,345
Long-term debt and other
liabilities 1,968,670 15,379 -- -- 1,984,049
Equity (deficit) 694,779 457,681 (6,247) (451,434) 694,779
------------ ------------ ------------ ------------ ------------
$ 3,753,106 $ 1,578,224 $ 14,466 $ (983,519) $ 4,362,277
============ ============ ============ ============ ============
DECEMBER 29, 2001
----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 10,175 $ 6,876 $ 274 $ -- $ 17,325
Receivables, net 483,007 105,250 12 -- 588,269
Inventories 816,309 198,386 -- -- 1,014,695
Other current assets 114,733 4,950 99 -- 119,782
------------ ------------ ------------ ------------ ------------
Total current assets 1,424,224 315,462 385 -- 1,740,071
Investment in subsidiaries 93,241 5,356 -- (98,597) --
Intercompany receivables 470,545 -- -- (470,545) --
Property and equipment, net 622,647 287,826 9,182 -- 919,655
Goodwill,net 401,180 153,010 -- -- 554,190
Other assets 379,503 47,861 13,413 -- 440,777
------------ ------------ ------------ ------------ ------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
============ ============ ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 861,445 $ 109,311 $ 1,035 $ -- $ 971,791
Intercompany payables -- 443,066 27,479 (470,545) --
Other current liabilities 264,743 27,880 713 -- 293,336
------------ ------------ ------------ ------------ ------------
Total current liabilities 1,126,188 580,257 29,227 (470,545) 1,265,127
Obligations under capital leases 213,293 118,543 -- -- 331,836
Long-term debt and other
liabilities 1,553,640 5,871 -- -- 1,559,511
Equity (deficit) 498,219 104,844 (6,247) (98,597) 498,219
------------ ------------ ------------ ------------ ------------
$ 3,391,340 $ 809,515 $ 22,980 $ (569,142) $ 3,654,693
============ ============ ============ ============ ============
15
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
12 WEEKS ENDED JULY 13, 2002
---------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 2,941,658 $ 1,295,916 $ 461 $ (308,079) $ 3,929,956
Costs and expenses:
Cost of sales 2,802,165 1,156,117 -- (308,079) 3,650,203
Selling and administrative 73,338 128,928 (113) -- 202,153
Other (1,918) 36,663 94 -- 34,839
Impairment/restructuring charge 27,361 -- -- -- 27,361
Equity loss from subsidiaries 14,883 -- -- (14,883) --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 2,915,829 1,321,708 (19) (322,962) 3,914,556
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 25,829 (25,792) 480 14,883 15,400
Taxes on income (loss) 15,739 (10,627) 198 -- 5,310
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charge $ 10,090 $ (15,165) $ 282 $ 14,883 $ 10,090
============ ============ ============ ============ ============
12 WEEKS ENDED JULY 14, 2002
----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 2,830,996 $ 827,623 $ 15,872 $ (228,760) $ 3,445,731
Costs and expenses:
Cost of sales 2,683,999 715,375 11,760 (228,760) 3,182,374
Selling and administrative 107,553 98,803 4,736 -- 211,092
Other 23,843 5,279 (754) -- 28,368
Impairment/restructuring charge (credit) 2,569 (2,686) -- -- (117)
Litigation charges 46,600 -- -- -- 46,600
Equity income from subsidiaries (12,010) -- -- 12,010 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 2,852,554 816,771 15,742 (216,750) 3,468,317
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes (21,558) 10,852 130 (12,010) (22,586)
Taxes on income (loss) (8,100) (1,108) 80 -- (9,128)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (13,458) $ 11,960 $ 50 $ (12,010) $ (13,458)
============ ============ ============ ============ ============
16
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
28 WEEKS ENDED JULY 13, 2002
----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 6,863,476 $ 2,443,231 $ 76 $ (690,688) $ 8,616,095
Costs and expenses:
Cost of sales 6,538,793 2,148,558 -- (690,688) 7,996,663
Selling and administrative 179,696 277,445 24 -- 457,165
Other 42,340 35,506 440 -- 78,286
Impairment/restructuring charge 27,361 -- -- -- 27,361
Equity loss from subsidiaries 10,975 -- -- (10,975) --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 6,799,165 2,461,509 464 (701,663) 8,559,475
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 64,311 (18,278) (388) 10,975 56,620
Taxes on income (loss) 29,612 (7,531) (160) -- 21,921
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charge $ 34,699 $ (10,747) $ (228) $ 10,975 $ 34,699
============ ============ ============ ============ ============
28 WEEKS ENDED JULY 14, 2001
----------------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales $ 6,272,330 $ 1,862,678 $ 38,082 $ (590,000) $ 7,583,090
Costs and expenses:
Cost of sales 5,940,432 1,574,424 28,633 (590,000) 6,953,489
Selling and administrative 255,848 260,710 9,819 -- 526,377
Other 40,300 33,884 2,765 -- 76,949
Impairment/restructuring charge (credit) 8,824 (35,800) -- -- (26,976)
Litigation charges 48,628 -- -- -- 48,628
Equity income from subsidiaries (15,608) -- -- 15,608 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 6,278,424 1,833,218 41,217 (574,392) 7,578,467
------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============
17
CONDENSED CONSOLIDATING CASH FLOWS INFORMATION
28 WEEKS ENDED JULY 13, 2002
-------------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in) operating activities $ 239,459 $ (373,449) $ 8,116 $ -- $ (125,874)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (19,318) (63,751) (14,853) -- (97,922)
Other (157,949) 14,568 14,229 -- (129,152)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activites (177,267) (49,183) (624) -- (227,074)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayments on capital lease obligations (7,527) (2,633) -- -- (10,160)
Advance to (from) parent (425,352) 432,863 (7,511) -- --
Other 386,668 55,000 -- -- 441,668
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (46,211) 485,230 (7,511) -- 431,508
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash & cash equivalents 15,981 62,598 (19) -- 78,560
Cash and cash equivalents at beginning of period 10,175 6,876 274 -- 17,325
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 26,156 $ 69,474 $ 255 $ -- $ 95,885
============ ============ ============ ============ ============
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 period 22,487 6,753 1,140 -- 30,380
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 15,394 $ (1,934) $ 830 $ -- $ 14,290
============ ============ ============ ============ ============
18
10. SALE-LEASEBACK OF REAL PROPERTY
During the second quarter of 2002, gross proceeds from sale-leaseback
transactions totaled $130 million and are included in the proceeds from sale of
property and equipment on the condensed consolidated statements of cash flows.
These transactions resulted in a gain that is being deferred over the remaining
life of the operating leases. Future minimum lease payments required from these
sale-leaseback transactions that have noncancelable lease terms exceeding one
year are presented in the following table (in thousands):
FISCAL YEAR AMOUNT
---------------------- --------
Remaining in 2002 $ 6,399
2003 12,799
2004 12,799
2005 12,799
2006 12,799
11. SECOND QUARTER CHARGE
In July 2002, before quarter-end, we recorded a $27 million pre-tax charge
related to the closure of distribution facilities in Oklahoma City and Dallas
and certain integration costs related to recent acquisitions. The after-tax
effect was a charge of $16 million, or $0.34 per share. Certain other costs
associated with the closures will be expensed in the future as incurred.
The charge is comprised primarily of long-lived asset impairments, lease
obligations and severance related expenses for the closed distribution
facilities. The entire charge is reflected on the impairment/restructuring
charge (credit) line on the consolidated statement of operations and only
affects the distribution segment. The assets related to these closures are
included in assets held for sale.
The portion of the charge relating to workforce reductions totals approximately
$4 million with a headcount of 410. Additionally, $5 million of the charge
relates to lease obligations which will be reduced over the remaining lease
terms as the facilities are no longer operating. The remainder of the charge
relates to asset impairments.
12. HISTORICAL STRATEGIC PLAN CHARGES
In December 1998, we announced the implementation of a strategic plan designed
to improve the competitiveness of the retailers we serve and improve our
performance by building stronger operations that can better support long-term
growth. The four major initiatives of the strategic plan were to consolidate
distribution operations, grow distribution sales, improve retail performance,
and reduce overhead and operating expenses, in part by centralizing procurement
and other functions.
19
Additionally, in 2000, we decided to reposition certain retail operations into
our price impact format and sell or close the remaining conventional retail
chains. By mid-2001, we had sold or closed all of our conventional retail
stores, and the plan was completed by the end of 2001.
The charges related to workforce reductions are as follows:
AMOUNT
($ IN
THOUSANDS)
----------
2001 Ending Liability $ 18,091
2002 Quarter 1 Terminations (4,008)
----------
Ending Liability 14,083
2002 Quarter 2 Terminations (2,567)
----------
Ending Liability $ 11,516
==========
The ending liability of approximately $12 million is primarily comprised of
estimated union pension withdrawal liabilities, but also includes accruals for
payments over time to associates whose employment is already severed. The
headcount related to severance was approximately 80 at the end of 2001. By the
end of the first quarter of 2002, headcount related to severance was
approximately 30 and by the end of the second quarter of 2002, essentially all
impacted employees' employment had been severed. All of the severed employees in
2002 related to the distribution segment.
Additionally, the strategic plan included charges related to lease obligations.
Stores with remaining lease obligations as of year-end 2001 of approximately
$2.3 million were closed during the first quarter of 2002.
Assets held for sale included in current assets at the end of the second quarter
of 2002 were approximately $37 million, consisting of $29 million of
distribution operating units and $8 million of retail stores. Included in assets
held for sale are amounts related to the 2002 closure of the distribution
facilities in Oklahoma City and Dallas (see Footnote 11) and divisions that have
closed related to the strategic plan but are not yet sold.
The net effect of the strategic plan in the second quarter of 2001 was a pre-tax
charge of $14 million. The after-tax effect was a charge of $8 million, or $0.19
per share. The second quarter pre-tax 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
20
long-lived assets. These costs are included in the impairment/restructuring
line on our Condensed Consolidated Statement of Operations.
o Restructuring charges of $5 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional fees
expensed as incurred related to the restructuring process. These costs are
included in the impairment/restructuring line on our Condensed Consolidated
Statement of Operations.
o Other disposition and related costs of $14 million. These costs are
included on several lines of the Condensed Consolidated Statement of
Operations as follows: $3 million of income was included in net sales
related 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 which were expensed as incurred.
The second quarter of 2001 charge relates to our business segments as follows:
$9 million charge relates to the distribution segment and $4 million of income
relates to the retail segment with the balance relating to support services
expenses.
The net effect of the strategic plan for the first two quarters of 2001 was a
pre-tax charge of $12 million. The after-tax effect was a charge of $7 million,
or $0.17 per share. 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. These costs are included in the impairment/restructuring line on
our Condensed Consolidated Statement of Operations.
o Restructuring charges of $13 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional fees
expensed as incurred related to the restructuring process. These costs are
included in the impairment/restructuring line on our Condensed Consolidated
Statement of Operations.
o Other disposition and related costs of $39 million. These costs are
included on several lines of the Condensed Consolidated Statement of
Operations as follows: $1 million of income was included in net sales
related primarily to gains on the sale of conventional retail stores; $29
million of charges was included in cost of sales and was primarily related
to inventory markdowns for clearance for closed operations; $11 million of
charges was included in selling and administrative expense as disposition
related costs which were expensed as incurred.
21
The charge for the first two quarters of 2001 relates to our business segments
as follows: $16 million charge relates to the distribution segment and $9
million of income relates to the retail segment with the balance relating to
support services expenses.
Assets held for sale included in other current assets at the end of the second
quarter of 2001 were approximately $25 million, consisting of $16 million of
distribution operating units and $9 million of retail stores.
13. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, we adopted SFAS No. 142 - Goodwill and Other
Intangible Assets. This standard requires a non-amortization approach to account
for purchased goodwill and other indefinite life intangibles. Under that
approach, goodwill and intangible assets with indefinite lives are not amortized
to earnings over a period of time. Instead, these amounts are reviewed for
impairment and expensed against earnings only in the periods in which the
recorded values are more than implied fair value.
SFAS 142 prescribes a two-phase process for impairment testing of goodwill. The
first phase screens for impairment and was completed prior to June 30, 2002. As
no impairment was detected, the second phase, which measures the impairment, was
not necessary. As required, we will perform subsequent evaluations on an annual
basis during the second quarter, or more frequently if circumstances indicate a
possible impairment. We have allocated all unamortized goodwill to our segments
in the following amounts: $699 million to distribution and $138 million to
retail.
In accordance with SFAS 142, the effect of this accounting change is reflected
prospectively. Supplemental comparative disclosure, as if the change had been
retroactively applied to the 12 and 28 weeks ended July 14, 2001, is as follows
(in thousands, except per share amounts):
12 WEEKS ENDED 28 WEEKS ENDED
------------------------ --------------------------
July 13, July 14, July 13, July 14,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income (loss):
Reported net income (loss) $ 2,227 $ (13,458) $ 26,836 $ (1,461)
Goodwill amortization, net of tax -- 4,443 -- 10,068
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 2,227 $ (9,015) $ 26,836 $ 8,607
========== ========== ========== ==========
Basic net income (loss) per share:
Reported net income (loss) $ 0.05 $ (0.31) $ 0.59 $ (0.03)
Goodwill amortization, net of tax -- 0.10 -- 0.24
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 0.05 $ (0.21) $ 0.59 $ 0.21
========== ========== ========== ==========
Diluted net income (loss) per share:
Reported net income (loss) $ 0.05 $ (0.31) $ 0.57 $ (0.03)
Goodwill amortization, net of tax -- 0.08 -- 0.21
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 0.05 $ (0.23) $ 0.57 $ 0.18
========== ========== ========== ==========
22
For the 12 and 28 weeks ended July 13, 2002, we recorded additional goodwill and
other intangible assets of $283 million, primarily related to the acquisition of
Core-Mark (see Footnote 6). Other intangibles, excluding debt issuance costs,
included in other assets on our consolidated balance sheet consisted of the
following (in thousands):
JULY 13, 2002 DECEMBER 29, 2001
------------------------------------- -------------------------------------
GROSS OTHER GROSS OTHER
CARRYING ACCUMULATED INTANGIBLES, CARRYING ACCUMULATED INTANGIBLES,
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ------------ -------- ------------ ------------
Customer incentives $118,560 $ (41,855) $ 76,705 $111,605 $ (33,463) $ 78,142
Tradenames 5,800 (3,792) 2,008 5,800 (3,480) 2,320
Other 7,732 (5,258) 2,474 6,390 (3,455) 2,935
-------- ------------ ------------ -------- ------------ ------------
Other intangibles $132,092 $ (50,905) $ 81,187 $123,795 $ (40,398) $ 83,397
Amortization expense of other intangibles disclosed above for the 12 and 28
weeks ended July 13, 2002 was $7.2 million and $16.9 million, respectively.
Estimated amortization expense, excluding any future acquisitions, for each of
the next five fiscal years is as follows (in thousands):
FISCAL YEAR: AMOUNT
----------------------- --------
2002 $ 27,245
2003 20,076
2004 17,116
2005 14,040
2006 7,851
14. RECENT DEVELOPMENTS
We determined that starting in Fiscal 2003, we will begin recording expense for
stock options in accordance with the fair value model under SFAS No. 123 -
Accounting for Stock-Based Compensation. The Financial Accounting Standards
Board is currently addressing the transition rules related to SFAS No. 123. The
current rules provide that recognition of expense would apply to grants of
stock-based awards made after adopting the fair value method.
23
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 13, 2002, and the related
condensed consolidated statements of operations for the 12 and 28 weeks ended
July 13, 2002 and July 14, 2001 and condensed consolidated statements of cash
flows for the 28 weeks ended July 13, 2002 and July 14, 2001. These financial
statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Fleming Companies Inc. and subsidiaries as of December 29, 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 13,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 29, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
July 30, 2002
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Concurrent with the completion of the Core-Mark International, Inc. acquisition
on June 18, 2002, we entered into a $975 million credit agreement consisting of
a $425 million tranche B term loan and a $550 million revolving credit facility.
We also sold $200 million aggregate principal amount of 9 1/4% senior notes due
2010 and 9.2 million shares of common stock at $19.40 per share. In connection
with the consummation of these transactions, we repaid all borrowings
outstanding under our $850 million credit agreement. Our results of operations
included the results of Core-Mark from the date of acquisition.
In April 2002, we acquired Head Distributing Company, an Atlanta, Georgia based
piece-pick distributor. Our results of operations included the results of Head
Distributing from the date of acquisition. Also, in June 2002, we purchased
inventory and other personal property from Albertson's Inc. located at its
Tulsa, Oklahoma distribution center and entered into an operating lease of this
distribution center.
We recorded net income for the 12 and 28 weeks ended July 13, 2002 of $2 million
and $27 million, respectively. EBITDA for the 12 and 28 weeks ended July 13,
2002 was $94 million and $231 million, respectively.
The following table sets forth the calculation of EBITDA (in millions):
12 WEEKS ENDED 28 WEEKS ENDED
JULY 13, JULY 14, JULY 13, JULY 14,
2002 2001 2002 2001
-------- -------- -------- --------
Income before
extraordinary charge $ 10 $ (13) $ 35 $ 2
Add back:
Taxes on income 5 (9) 22 3
Depreciation/amortization 36 37 82 87
Interest expense 43 34 93 92
LIFO adjustments -- (2) (1) (1)
-------- -------- -------- --------
EBITDA $ 94(a) $ 47 $ 231(a) $ 183(b)
======== ======== ======== ========
(a) Includes a $27 million charge in the second quarter of 2002 related to the
closure of two distribution facilities and integration costs related to
recent acquisitions.
(b) Includes $27 million generated in the first quarter of 2001 by our divested
conventional retail stores.
25
EBITDA is earnings before extraordinary items, interest expense, income taxes,
depreciation and amortization, equity investment results and LIFO adjustments.
EBITDA is a non-GAAP amount and should not be considered as an alternative
measure of our net income, operating performance, cash flow or liquidity. It is
provided as additional information related to our ability to service debt;
however, conditions may require conservation of funds for other uses. Although
we believe EBITDA enhances a reader's understanding of our financial condition,
this measure, when viewed individually, is not necessarily a better indicator of
any trend as compared to conventionally computed measures (e.g., net sales, net
earnings, net cash flows, etc.). Finally, amounts presented may not be
comparable to similar measures disclosed by other companies.
RESULTS OF OPERATIONS
Set forth in the following table is information regarding our net sales and
certain components of earnings expressed as a percent of sales which are
referred to in the accompanying discussion:
JULY 13, JULY 14,
FOR THE 12 WEEKS ENDED 2002 2001
-------- --------
Net sales 100.00% 100.00%
Gross margin 7.12 7.64
Less:
Selling and administrative 5.14 6.13
Interest expense 1.09 1.00
Interest income and other (0.20) (0.18)
Impairment/restructuring credit 0.70 --
Litigation charges -- 1.35
-------- --------
Total expenses 6.73 8.30
-------- --------
Income (loss) before taxes 0.39 (0.66)
Taxes on income (loss) 0.13 (0.27)
-------- --------
Income (loss) before extraordinary charge 0.26 (0.39)
Extraordinary charge from early retirement
of debt, net of taxes (0.20) --
-------- --------
Net income (loss) 0.06% (0.39)%
26
JULY 13, JULY 14,
FOR THE 28 WEEKS ENDED 2002 2001
-------- --------
Net sales 100.00% 100.00%
Gross margin 7.19 8.30
Less:
Selling and administrative 5.31 6.94
Interest expense 1.08 1.21
Interest income and other (0.17) (0.20)
Impairment/restructuring credit 0.32 (0.35)
Litigation charges -- 0.64
-------- --------
Total expenses 6.54 8.24
-------- --------
Income before taxes 0.65 0.06
Taxes on income 0.25 0.03
-------- --------
Income before extraordinary charge 0.40 0.03
Extraordinary charge from early retirement
of debt, net of taxes (0.09) (0.05)
-------- --------
Net income (loss) 0.31% (0.02)%
Included in amounts reported under generally accepted accounting principles
(GAAP) for 2001 are charges (credits) related to our strategic plan and certain
other unusual items that affect the year-to-year comparisons of operating
results (see Impairment/restructuring charge). 2002 amounts are reported in
accordance with GAAP. The comparisons below are shown on a GAAP versus GAAP
basis.
NET SALES.
Net sales for the 12 weeks ended July 13, 2002, increased by $484 million, or
14.1%, to $3.9 billion from the same period in 2001. Year to date, net sales
increased by $1.03 billion, or 13.6%, to $8.6 billion from the same period in
2001.
Net sales for the distribution segment increased by 16.4% for the second quarter
of 2002 and 19.3% year to date. The net growth in 2002 was mainly a result of
increased activity with Kmart, our largest customer. Kmart accounted for 20% and
15% of our total net sales during the second quarter of 2002 and 2001,
respectively, and 21% and 13% for the first two quarters of 2002 and 2001,
respectively. Furthermore, Kmart accounted for 51% and 73% of the growth in net
sales for the distribution segment for the 12 and 28 weeks ended July 13, 2002,
respectively. Additionally, growth in distribution sales from a wide variety of
new-channel and conventional customers attributed to the increased second
quarter sales. New-channel customers, including convenience stores,
supercenters, limited assortment stores, drug stores, and self-distributing
chains, are an important part of our strategic growth plan and collectively
represent approximately one-half of our distribution customer sales base.
Core-Mark had approximately four weeks of sales included in distribution
results.
27
Retail segment sales for the second quarter of 2002 increased 0.8% and decreased
year to date by 12.6% compared to the same periods in 2001. The decrease year to
date was due to the disposition of non-strategic conventional retail stores in
the first two quarters of 2001 in order to increase focus on our price impact
retail stores. Relatively flat sales for the second quarter were also affected
by the disposition of conventional retail stores in the first two quarters of
2001, but the loss of sales from those stores was more than offset by new price
impact stores added in the first two quarters of 2002. Comparable store sales
decreased 4.7% for the quarter. The decline in comparable store sales reflects a
number of factors, including stores undergoing remodels, deflationary prices in
the meat category and heightened competition. As such, we are evaluating our
strategic alternatives related to our price-impact retail stores and anticipate
this evaluation to conclude during the third quarter of 2002.
GROSS MARGIN.
Gross margin for the 12 and 28 weeks ended July 13, 2002 decreased as a
percentage of net sales to 7.12% and 7.19%, respectively, from 7.64% and 8.30%,
respectively, for the same periods in 2001. The decrease in gross margin rate
was an expected result of the change in sales mix. The sales of the distribution
segment represent a larger portion of total company sales than the retail
segment and the distribution segment has lower margins as a percentage of sales
versus the retail segment.
For the distribution segment, gross margin as a percentage of gross distribution
sales declined by 20 and 32 basis points for the 12 and 28 weeks ended July 13,
2002, respectively, compared to the same periods in 2001. This reflects the
increase in Kmart business, which is lower margin, offset by the benefits of
centralizing procurement. For the retail segment, gross margin as a percentage
of net retail sales increased for the second quarter of 2002 by 65 basis points,
compared to the same period in 2001 but decreased year to date by 34 basis
points compared to the same period in 2001. Consistent with the sales variances,
the decreasing margin year to date reflects our transition out of non-strategic
conventional retail and into price impact retail which has lower shelf prices
and gross margins but also lower operating costs. The increasing margin for the
second quarter of 2002 reflects improved operations.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses for the 12 and 28 weeks ended July 13, 2002
decreased as a percentage of net sales to 5.14% and 5.31%, respectively, for
2002 from 6.13% and 6.94%, respectively, in 2001. The sales of the distribution
segment represent a larger portion of total company sales than the retail
segment, and the distribution segment has lower operating expenses as a
percentage of sales than the retail segment.
For the distribution segment, selling and administrative expenses as a
percentage of gross sales improved for the 12 and 28 weeks ended July 13, 2002
by 59 and 56 basis points, respectively, compared to the same periods in 2001,
due to sales growth without a corresponding increase in fixed operating costs
and company-wide cost savings initiatives. For the retail segment, selling and
28
administrative expenses as a percentage of retail sales increased for the 12 and
28 weeks ended July 13, 2002 by 162 and 5 basis points, respectively, compared
to the same periods in 2001. The increase for the 12 week periods was primarily
related to a lower sales base as same store sales decreased by 4.7%. The change
year to date was minimal due to flat same store sales in first quarter of 2002
and lower operating expenses for our price impact format versus the conventional
retail we operated for part of 2001.
OPERATING EARNINGS.
For distribution and retail segments, we measure operating earnings as sales
less cost of sales less selling and administrative expenses. The change in
operating earnings is a combination of the explanations included in net sales,
gross margin and selling and administrative expenses described above.
Operating earnings as a percentage of net sales for the 12 and 28 weeks ended
July 13, 2002 were 1.97% and 1.88%, respectively, up from 1.52% and 1.36%,
respectively, for the same periods in 2001. Operating earnings for the
distribution segment as a percentage of net sales increased to 3.78% and 3.60%
for the 12 and 28 weeks ended July 13, 2002 from 3.41% and 3.37% in 2001. Retail
segment operating earnings as a percentage of net sales decreased to 1.72% from
2.04% for the second quarter but increased to 2.05% from 1.97% year to date.
INTEREST EXPENSE.
Interest expense for the second quarter of 2002 increased $8 million to $43
million compared to the same period in 2001 and increased $1 million year to
date. The increase in the second quarter was a result of higher debt balances
compared to the prior year quarter. Year to date also increased due to higher
debt balances but was partially offset by lower average interest rates in the
first two quarters of 2002. The second quarter of 2002 and the first quarter of
2001 each included $3 million of interest expense incurred on debt during the
call period for the early retirement of debt.
INTEREST INCOME AND OTHER.
Interest income of $8 million for the second quarter of 2002 was $2 million
higher than the same period of 2001 and relatively flat on a year to date
comparison. Interest income in the second quarter of 2002 and the first quarter
of 2001 each included approximately $1 million of interest income from cash
deposited with a trustee during the call period for the early retirement of
debt.
IMPAIRMENT/RESTRUCTURING CHARGE.
In the second quarter of 2002, we incurred a $27 million pre-tax charge related
to the closure of two distribution facilities and certain integration costs
related to recent acquisitions. See Note 11 in the notes to the condensed
consolidated financial statements for further discussion of the charge.
The strategic plan was fully implemented by the end of 2001 and thus there was
no charge in 2002. See Note 12 in the notes to the condensed consolidated
financial statements for further discussion regarding the strategic plan. The
following table shows which income statement captions were affected by our
strategic plan charges and unusual items and reconcile our reported GAAP amounts
29
to adjusted amounts as discussed in our 10-Q for the second quarter of 2001. The
adjusted amounts are not presentations made in accordance with GAAP and are not
a better indicator of our operating performance.
(IN THOUSANDS) ADJUSTMENTS
------------------------------
STRATEGIC UNUSUAL
12 WEEKS ENDED JULY 14, 2001 GAAP PLAN ITEMS (1) ADJUSTED
----------------------------------- ------------ ------------ ------------ ------------
Net sales $ 3,445,731 $ (2,988) $ -- $ 3,442,743
Costs and expenses:
Cost of sales 3,182,374 (11,806) -- 3,170,568
Selling and administrative 211,092 (5,038) -- 206,054
Interest expense 34,435 -- -- 34,435
Interest income and other (6,067) -- -- (6,067)
Impairment/restructuring credit (117) 117 -- --
Litigation charges 46,600 -- (46,600) --
------------ ------------ ------------ ------------
Total costs and expenses 3,468,317 (16,727) (46,600) 3,404,990
------------ ------------ ------------ ------------
Income before taxes $ (22,586) $ 13,739 $ 46,600 $ 37,753
============ ============ ============ ============
(IN THOUSANDS) ADJUSTMENTS
------------------------------
STRATEGIC UNUSUAL
28 WEEKS ENDED JULY 14, 2001 GAAP PLAN ITEMS (1) ADJUSTED
----------------------------------- ------------ ------------ ------------ ------------
Net sales $ 7,583,090 $ (1,327) $ -- $ 7,581,763
Costs and expenses:
Cost of sales 6,953,489 (29,662) -- 6,923,827
Selling and administrative 526,377 (11,066) -- 515,311
Interest expense 91,937 -- (2,833) 89,104
Interest income and other (14,988) -- 1,102 (13,886)
Impairment/restructuring credit (26,976) 26,976 -- --
Litigation charges 48,628 -- (48,628) --
------------ ------------ ------------ ------------
Total costs and expenses 7,578,467 (13,752) (50,359) 7,514,356
------------ ------------ ------------ ------------
Income before taxes $ 4,623 $ 12,425 $ 50,359 $ 67,407
============ ============ ============ ============
(1) Includes $46.6 million in charges from litigation settlements (in litigation
charges).
(2) Includes net additional interest expense of $1.7 million due to early
retirement of debt ($2.8 million in interest expense and $1.1 million in
interest income and other) and $48.6 million in charges from litigation
settlements (in litigation charges).
30
TAXES ON INCOME.
The effective tax rates for the 28 weeks of 2002 and 2001 were 38.7% and 56.6%
(before extraordinary charge), respectively. These were both blended rates
taking into account operations activity as well as various permanent and timing
differences. The effective tax rate for 2002 was favorably impacted as a result
of a refund generated through a change in treatment by the IRS of a closed
statute relating to an earlier return year. The 2001 effective tax rate also
took into account write-offs of non-deductible goodwill. 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 extraordinary after-tax charges of $8 million ($13 million pre-tax)
in the second quarter of 2002 and $3 million ($6 million pre-tax) in the first
quarter of 2001, due to the early retirement of debt. See Footnote 8 in the
notes to the condensed consolidated financial statements for further discussion.
RECENT DEVELOPMENTS.
On January 22, 2002, Kmart and certain of its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Kmart, our
largest customer, accounted for 21% of our net sales in the 28 weeks ended July
13, 2002 and 20% of our net sales for the year ended December 29, 2001. We have
a 10-year written distribution agreement with Kmart. Kmart may, however, assume
or reject our distribution agreement at any time. Kmart named us as a "critical
vendor" in the bankruptcy proceeding and granted to us a junior lien on its
inventory to secure the payment of weekly receivables to us arising after the
date of the bankruptcy filing.
The impact of Kmart's bankruptcy filing on our future financial results will
depend greatly upon whether Kmart assumes or rejects our distribution agreement
and upon the success of Kmart's reorganization. Kmart has not filed its plan of
reorganization with the bankruptcy court. If, for example, Kmart assumes our
distribution agreement and obtains bankruptcy court approval of its plan of
reorganization, then it is likely that our future financial results will not be
adversely impacted. If, however, Kmart rejects our distribution agreement or, to
the contrary, assumes our distribution agreement but fails to obtain bankruptcy
court approval of a plan of reorganization, then we may lose our sales to Kmart,
be required to close the two distribution facilities dedicated to the Kmart
business, eliminate excess inventory, and suffer other damages, including the
loss of a portion or all of our pre-petition receivable.
31
CERTAIN ACCOUNTING MATTERS.
The FASB issued SFAS No. 143 - Accounting for Asset Retirement Obligations. We
are studying the impact that SFAS 143 has on our financial statements and
planning to implement it in fiscal year 2003, as required. The FASB issued SFAS
No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. We
implemented SFAS 144 as of the beginning of fiscal year 2002, as required. It
had no significant impact on our financial statements. In April 2002, the FASB
issued SFAS No. 145 - Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. We had a refinancing
transaction in 2002 that has resulted in an extraordinary charge. In 2003 these
amounts will be reclassified to selling and administrative expense in accordance
with SFAS 145. In August 2002, the FASB issued SFAS No. 146 - Accounting for
Costs Associated with Exit or Disposal Activities. The standard currently has no
impact on our financial statements, and we will implement it in fiscal year
2003, as required. In December 2001, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 01-6, Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others. We implemented SOP 01-6 as of the beginning of fiscal year
2002, as required, with no impact on our financial statements. This SOP provides
guidance on the accounting for and disclosure of amounts due to us from
customers included in our accounts and notes receivable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
There have been no significant changes to critical accounting policies and
estimates since the issuance of our fiscal 2001 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the year-to-date period ended July 13, 2002, our principal source of
liquidity was borrowings under our credit facility. Our principal sources of
capital were the issuance of common stock, the issuance of long-term senior debt
and the sale-leaseback of five case pick distribution centers.
NET CASH USED IN OPERATING ACTIVITIES.
Net cash used in operating activities was $126 million for the two quarters
ended July 13, 2002 compared to a $64 million use of cash for the same period in
2001. The primary use of cash was for working capital.
NET CASH USED IN INVESTING ACTIVITIES.
Total investment-related activity resulted in a $227 million use of cash for the
two quarters ended July 13, 2002 compared to a $41 million use of cash in the
same period of 2001.
Cash expended for businesses acquired was $290 million for the two quarters
ended July 13, 2002 (primarily as a result of our acquisition of Core-Mark and
Head Distributing), compared to $70 million cash expended for businesses
acquired during the same period in 2001.
32
Cash expended for the purchase of property and equipment totaled $98 million for
the two quarters ended July 13, 2002 compared to $112 million for the same
period in 2001. We intend to spend a total of approximately $185 million on our
capital programs in 2002 compared to $238 million spent in 2001.
Cash proceeds from the sale of property and equipment was $142 million,
primarily related to the sale-leaseback of five case pick distribution centers
located in Phoenix, Massillon, Salt Lake City, Miami and Sacramento (see
Footnote 10 for sale-leaseback details) for the two quarters ended July 13, 2002
compared to $12 million from the sale of property and equipment during the same
period in 2001.
NET CASH PROVIDED BY FINANCING ACTIVITIES.
Net cash generated by financing activities was $432 million for the two quarters
ended July 13, 2002 compared to $89 million for the same period last year.
On April 15, 2002, we sold $260 million of 9 7/8% senior subordinated notes due
2012. The net proceeds were used to redeem the 10 1/2% senior subordinated notes
due 2004.
At the end of the second quarter of 2002, outstanding borrowings under the
credit facility totaled $425 million of term loans, $75 million of revolver
loans, and $71 million of letters of credit. If we had terminated Core-Mark's
accounts receivable securitization on or before July 13, 2002, then we would
have had $330 million available to borrow under this facility. We paid
Core-Mark's accounts receivable securitization as of July 18, 2002.
On June 18, 2002, we purchased Core-Mark International, Inc. In conjunction with
the acquisition, we refinanced our $850 million senior secured credit facility
with a $975 million senior secured credit facility, sold $200 million of 9 1/4%
senior notes due June 15, 2010 and sold 9.2 million shares of common stock at
$19.40 per share, raising $178 million of gross proceeds ($170 million net of
underwriting discount and other issuance costs).
As part of our acquisition of Core-Mark, we assumed $132 million of additional
debt, consisting of $77 million of 11 3/8% senior subordinated notes and a $55
million accounts receivable securitization. On June 18, we deposited $80 million
in a trust to be used to redeem the 11 3/8% senior subordinated notes, including
an amount to cover accrued interest and the redemption premium and received a
satisfaction and discharge to release us from this debt. Simultaneously, on June
18, we deposited $55 million in a trust which was used to redeem the accounts
receivable securitization, including an amount to cover accrued interest. The
redemption of the accounts receivable securitization took place during the third
quarter of 2002.
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 our distribution facilities,
retail stores and equipment. We believe these sources will be adequate to meet
working capital needs in the normal course of business for the next 12 months.
33
CONTINGENCIES
See Footnote 7 in our notes to the consolidated financial statements and Item 1,
Part II of this report.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements regarding future events and our
future financial performance. These forward-looking statements and our business
are subject to a number of factors that could cause actual results to differ
materially from those stated in this report, including without limitation:
unanticipated problems with product procurement; adverse effects of the changing
industry and increased competition; sales declines and loss of customers;
exposure to litigation and other contingent losses; elimination of sales to
Kmart due to their rejection of our distribution agreement; the ability of Kmart
to continue as a going concern, to operate pursuant to the terms of its
debtor-in-possession financing, or to complete its reorganization according to
its plan; the inability to integrate acquired companies and to achieve operating
improvements at those companies; increases in labor costs and disruptions in
labor relations with union bargaining units representing our associates; and
negative effects of our substantial indebtedness and the limitations imposed by
restrictive covenants contained in our debt instruments. These and other risk
factors are described in our Securities and Exchange Commission reports,
including but not limited to the 10-K Report for the 2001 fiscal year. We
undertake no obligation to update forward-looking statements to reflect
developments or information obtained after the date hereof.
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. See Footnote 8 in the notes to the condensed consolidated
financial statements for a further discussion.
With our acquisition of Core-Mark, we now conduct business in western Canada.
However, changes in the U.S./Canadian exchange historically have had no material
impact on the overall results of the Canadian operation, as virtually all
revenues and expenses of such operations are Canadian dollars.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to or threatened with various litigation and contingent loss
situations arising in the ordinary course of our business, including disputes
with customers, vendors, owners or creditors of financially troubled or failed
customers, suppliers, landlords and lessees, employees, insurance carriers, and
tax authorities. In this regard, we are currently in binding arbitration with a
former convenience store customer, Clark Retail Enterprises, Inc. We believe
that Clark failed to purchase the required mix of products as it said it would,
making the supply agreement subject to rescission and making Clark liable to us
for damages. Clark contends that we breached the supply agreement in several
respects making us liable to Clark for damages. An unfavorable outcome for us in
this arbitration could impact our financial results, but we do not expect that
such an impact would be material.
Manufacturers and distributors of cigarettes and other tobacco products are
currently facing a number of significant issues that affect the business
environment in which they operate including: proposed additional governmental
regulation; actual and proposed excise tax increases; increased litigation
involving health and other effects of cigarette smoking and other uses of
tobacco; and litigation by the U.S. Department of Justice to recover federal
Medicare costs allegedly connected to smoking. If additional legislation or
regulation is passed, it may result in a reduction in the consumption of tobacco
products in the United States, which would reduce our sales.
ITEM 2. CHANGES IN SECURITIES
In connection with several exercises of a common stock warrant, Merrill Lynch
purchased in private transactions a total of 40,000 shares of common stock from
us. The exercise dates are as follows: April 30, 2002, May 31, 2002 and June 13,
2002. Merrill Lynch paid us a total of approximately $380,000 to purchase these
shares. These shares of common stock were sold pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 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
4.22 Indenture, dated as of June 18, 2002, by and between Fleming
Companies, Inc. and Manufacturers and Traders Trust Company,
as Trustee, incorporated by reference to Exhibit 4.1 to Form
8-K filed June 25, 2002
35
4.23 First Supplemental Indenture, dated as of June 18, 2002, by
and among Fleming Companies, Inc., the Subsidiary Guarantors
party thereto and Manufacturers and Traders Trust Company, as
Trustee, incorporated by reference to Exhibit 4.2 to Form 8-K
filed June 25, 2002
4.24 Form of 9.25% Senior Note due 2010 and Notation of Guarantee,
incorporated by reference to Exhibit 4.3 to Form 8-K filed
June 25, 2002
4.25 Credit Agreement dated as of June 18, 2002 by and among
Fleming Companies, Inc., the lenders from time to time party
thereto, Deutsche Bank Trust Company Americas, as
Administrative Agent, JPMorgan Chase Bank and Citicorp North
America, Inc., as Syndication Agents, Lehman Commercial Paper
Inc. and Wachovia Bank, National Association, as Documentation
Agents, Deutsche Bank Securities Inc. and J.P. Morgan
Securities Inc., as Joint Book Managers, and Deutsche Bank
Securities Inc., J.P. Morgan Securities Inc. and Salomon Smith
Barney Inc., as Joint Lead Arrangers, incorporated by
reference to Exhibit 10.1 to Form 8-K filed June 25, 2002
4.26 Security Agreement, dated as of June 18, 2002, by and among
Fleming Companies, Inc., the Grantors party thereto and
Deutsche Bank Trust Company Americas, as Collateral Agent,
incorporated by reference to Exhibit 10.2 to Form 8-K filed
June 25, 2002
4.27 Guarantee Agreement dated as of June 18, 2002 by and among the
Guarantors party thereto and Deutsche Bank Trust Company
Americas, as Administrative Agent, incorporated by reference
to Exhibit 10.3 to Form 8-K filed June 25, 2002
4.28 Pledge Agreement dated as of June 18, 2002 by and among
Fleming Companies, Inc., the Pledgors who are parties thereto
and Deutsche Bank Trust Company Americas, as Collateral Agent,
incorporated by reference to Exhibit 10.4 to Form 8-K filed
June 25, 2002
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information, filed herewith
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
36
(b) Reports on Form 8-K:
On April 24, 2002, we disclosed that we had entered into an Agreement and Plan
of Merger, dated April 23, 2002, with Platform Corporation, a wholly owned
subsidiary of us, Core-Mark International, Inc., and the stockholders of the
Core-Mark International, Inc., pursuant to which Platform Corporation would
merge with and into Core-Mark International, Inc.
On May 20, 2002, we filed pro forma financial information relating to our
acquisition of Core-Mark International, Inc.
On May 29, 2002, we filed amended and restated pro forma financial information
relating to our acquisition of Core-Mark International, Inc.
On June 14, 2002, we filed amended and restated pro forma financial
information relating to our acquisition of Core-Mark International, Inc.
On June 25, 2002, we disclosed that on June 18, 2002, we, through our
wholly-owned subsidiary Platform Corporation, completed our acquisition of the
outstanding equity interests of Core-Mark International, Inc. for $295 million
in cash (less transaction fees) and the assumption of Core-Mark's debt. In
addition, we disclosed that on June 18, 2002, in connection with the
completion of this acquisition we entered into a $975 million Credit Agreement
with Deutsche Bank Trust Company Americas, as administrative agent, and also
completed the sale of $200 million aggregate principal amount of 9 1/4% Senior
Notes due 2010 and 9.2 million shares of common stock. Lastly, we disclosed
that in connection with the consummation of these transactions, we repaid all
borrowings outstanding under our $850 million Credit Agreement dated as of
July 25, 1997, as amended, which agreement ceased to be in effect as of June
18, 2002.
37
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 26, 2002 /s/ MARK D. SHAPIRO
---------------------------------------
Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Duly Authorized Officer of Registrant
and Principal Accounting Officer)
38
EXHIBIT INDEX
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
4.22 Indenture, dated as of June 18, 2002, by and between Fleming
Companies, Inc. and Manufacturers and Traders Trust Company,
as Trustee, incorporated by reference to Exhibit 4.1 to Form
8-K filed June 25, 2002
4.23 First Supplemental Indenture, dated as of June 18, 2002, by
and among Fleming Companies, Inc., the Subsidiary Guarantors
party thereto and Manufacturers and Traders Trust Company, as
Trustee, incorporated by reference to Exhibit 4.2 to Form 8-K
filed June 25, 2002
4.24 Form of 9.25% Senior Note due 2010 and Notation of Guarantee,
incorporated by reference to Exhibit 4.3 to Form 8-K filed
June 25, 2002
4.25 Credit Agreement dated as of June 18, 2002 by and among
Fleming Companies, Inc., the lenders from time to time party
thereto, Deutsche Bank Trust Company Americas, as
Administrative Agent, JPMorgan Chase Bank and Citicorp North
America, Inc., as Syndication Agents, Lehman Commercial Paper
Inc. and Wachovia Bank, National Association, as Documentation
Agents, Deutsche Bank Securities Inc. and J.P. Morgan
Securities Inc., as Joint Book Managers, and Deutsche Bank
Securities Inc., J.P. Morgan Securities Inc. and Salomon Smith
Barney Inc., as Joint Lead Arrangers, incorporated by
reference to Exhibit 10.1 to Form 8-K filed June 25, 2002
4.26 Security Agreement, dated as of June 18, 2002, by and among
Fleming Companies, Inc., the Grantors party thereto and
Deutsche Bank Trust Company Americas, as Collateral Agent,
incorporated by reference to Exhibit 10.2 to Form 8-K filed
June 25, 2002
4.27 Guarantee Agreement dated as of June 18, 2002 by and among the
Guarantors party thereto and Deutsche Bank Trust Company
Americas, as Administrative Agent, incorporated by reference
to Exhibit 10.3 to Form 8-K filed June 25, 2002
4.28 Pledge Agreement dated as of June 18, 2002 by and among
Fleming Companies, Inc., the Pledgors who are parties thereto
and Deutsche Bank Trust Company Americas, as Collateral Agent,
incorporated by reference to Exhibit 10.4 to Form 8-K filed
June 25, 2002
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information, filed herewith
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002