SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 15, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
(405) 840-7200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes
of common stock, as of May 12, 2000 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 39,255,000
INDEX
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
16 Weeks Ended April 15, 2000,
and April 17, 1999
Consolidated Condensed Balance Sheets -
April 15, 2000, and December 25, 1999
Consolidated Condensed Statements of Cash Flows -
16 Weeks Ended April 15, 2000,
and April 17, 1999
Notes to Consolidated Condensed Financial Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 4. Results of Votes of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
For the 16 weeks ended April 15, 2000, and April 17, 1999
(In thousands, except per share amounts)
==============================================================================
2000 1999
- ------------------------------------------------------------------------------
Net sales $4,444,804 $4,465,246
Costs and expenses:
Cost of sales 4,028,130 4,036,868
Selling and administrative 372,307 376,995
Interest expense 53,101 51,606
Interest income (9,505) (9,350)
Equity investment results 1,891 3,556
Impairment/restructuring charge 42,145 37,036
- ------------------------------------------------------------------------------
Total costs and expenses 4,488,069 4,496,711
- ------------------------------------------------------------------------------
Loss before taxes (43,265) (31,465)
Taxes on loss (17,392) (7,224)
- ------------------------------------------------------------------------------
Net loss $ (25,873) $ (24,241)
==============================================================================
Basic and diluted net loss per share $(.67) $(.64)
Dividends paid per share $.02 $.02
Weighted average shares outstanding:
Basic 38,515 38,143
Diluted 38,515 38,143
==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
Consolidated Condensed Balance Sheets
(In thousands)
==============================================================================
April 15, December 25,
Assets 2000 1999
- ------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 20,719 $ 6,683
Receivables 442,452 496,159
Inventories 860,926 997,805
Other current assets 199,431 228,103
- ------------------------------------------------------------------------------
Total current assets 1,523,528 1,728,750
Investments and notes receivable 97,817 108,895
Investment in direct financing leases 119,492 126,309
Property and equipment 1,507,958 1,539,465
Less accumulated depreciation
and amortization (700,413) (701,289)
- ------------------------------------------------------------------------------
Net property and equipment 807,545 838,176
Deferred income taxes 49,047 54,754
Other assets 155,818 150,214
Goodwill 559,819 566,120
- ------------------------------------------------------------------------------
Total assets $3,313,066 $3,573,218
==============================================================================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 788,913 $ 981,219
Current maturities of long-term debt 67,905 70,905
Current obligations under capital leases 21,096 21,375
Other current liabilities 212,316 210,220
- ------------------------------------------------------------------------------
Total current liabilities 1,090,230 1,283,719
Long-term debt 1,189,934 1,234,185
Long-term obligations under
capital leases 368,124 367,960
Other liabilities 129,738 126,652
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 98,113 97,141
Capital in excess of par value 510,686 511,447
Accumulated deficit (48,199) (22,326)
Accumulated other comprehensive income:
Additional minimum pension liability (25,560) (25,560)
- ------------------------------------------------------------------------------
Accumulated other comprehensive income (25,560) (25,560)
- ------------------------------------------------------------------------------
Total shareholders' equity 535,040 560,702
- ------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $3,313,066 $3,573,218
==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
Consolidated Condensed Statements of Cash Flows
For the 16 weeks ended April 15, 2000, and April 17, 1999
(In thousands)
==============================================================================
2000 1999
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(25,873) $(24,241)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 55,245 46,317
Credit losses 7,698 7,942
Deferred income taxes 8,208 (12,641)
Equity investment results 1,891 3,556
Impairment/restructuring and related charges
(not in other lines) 59,322 45,123
Cash payments on impairment/restructuring
and related charges (41,081) (16,474)
Change in assets and liabilities, excluding
effect of acquisitions:
Receivables 47,639 49,145
Inventories 129,927 111,128
Accounts payable (192,306) (141,788)
Other assets and liabilities 3,592 (36,911)
Other adjustments, net 384 428
- ------------------------------------------------------------------------------
Net cash provided by operating
activities 54,646 31,584
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Collections on notes receivable 9,021 8,031
Notes receivable funded (5,710) (4,541)
Purchase of property and equipment (38,498) (50,041)
Proceeds from sale of property and equipment 7,627 3,465
Investments in customers (1,514) (1,935)
Proceeds from sale of investment 2,616 2,084
Businesses acquired - (10,704)
Proceeds from sale of businesses 36,952 -
Other investing activities 3,753 (51)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 14,247 (53,692)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings 60,000 101,000
Principal payments on long-term debt (107,251) (38,593)
Principal payments on capital
lease obligations (6,982) (3,614)
Sale of common stock under incentive
stock and stock ownership plans 151 178
Dividends paid (775) (787)
Other financing activities - (31)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (54,857) 58,153
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 14,036 36,045
Cash and cash equivalents, beginning
of period 6,683 5,967
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 20,719 $ 42,012
==============================================================================
Supplemental information:
Cash paid for interest $41,333 $41,070
Cash paid (refunded) for taxes $(50,491) $11,301
==============================================================================
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
Notes to Consolidated Condensed Financial Statements (See
independent accountants' review report)
1. The consolidated condensed balance sheet as of April 15, 2000,
and the consolidated condensed statements of operations and cash
flows for the 16 weeks ended April 15, 2000 and April 17, 1999,
have been prepared by the company, without audit. In the opinion
of management, all adjustments necessary to present fairly the
company's financial position at April 15, 2000, and the results
of operations and cash flows for the periods presented have been
made. All such adjustments are of a normal, recurring nature
except as disclosed. Both basic and diluted loss per share are
computed based on net loss divided by weighted average shares as
appropriate for each calculation.
The preparation of the consolidated condensed financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to
conform to current year classifications.
2. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the
consolidated financial statements and related notes included in
the company's 1999 annual report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining
the cost of most grocery and certain perishable inventories. The
excess of current cost of LIFO inventories over their stated
value was $58 million at April 15, 2000 ($5 million of which is
recorded in assets held for sale in other current assets) and $54
million at December 25, 1999 ($4 million of which is recorded in
assets held for sale in other current assets).
4. Sales and operating earnings for the company's distribution
and retail segments are presented below.
==============================================================================
For the 16 weeks ended
April 15, April 17,
($ in millions) 2000 1999
- ------------------------------------------------------------------------------
Sales:
Distribution $3,966 $4,002
Intersegment elimination (582) (675)
- ------------------------------------------------------------------------------
Net distribution 3,384 3,327
Retail 1,061 1,138
- ------------------------------------------------------------------------------
Total sales $4,445 $4,465
==============================================================================
Operating earnings:
Distribution $ 83 $ 83
Retail 12 13
Support services (51) (45)
- ------------------------------------------------------------------------------
Total operating earnings 44 51
Interest expense (53) (51)
Interest income 10 9
Equity investment results (2) (3)
Impairment/restructuring charge (42) (37)
- ------------------------------------------------------------------------------
Loss before taxes $(43) $(31)
==============================================================================
General support services expenses are not allocated to
distribution and retail segments. The transfer pricing between
segments is at cost.
5. The company's comprehensive loss totaled $25.9 million for the
16 weeks ended April 15, 2000 and $24.2 million for the 16 weeks
ended April 17, 1999. The comprehensive loss in both years was
comprised only of the reported net loss.
6. In accordance with applicable accounting standards, the
company records a charge reflecting contingent liabilities
(including those associated with litigation matters) when
management determines that a material loss is "probable" and
either "quantifiable" or "reasonably estimable." Additionally,
the company discloses material loss contingencies when the
likelihood of a material loss is deemed to be greater than
"remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, the company and certain of its
present and former officers and directors were named as
defendants in nine purported class action suits filed by certain
stockholders and one purported class action suit filed by a
noteholder. In 1997, the court consolidated the stockholder
cases (the noteholder case was also consolidated, but only for
pre-trial purposes). During 1998 the noteholder case was
dismissed and during 1999 the consolidated case was also
dismissed, each without prejudice. The court gave the plaintiffs
the opportunity to restate their claims in each case.
The complaint filed in the consolidated cases asserted liability
for the company's alleged failure to properly account for and
disclose the contingent liability created by the David's
litigation and by the company's alleged "deceptive business
practices." The plaintiffs claim that these alleged practices led
to the David's litigation and to other material contingent
liabilities, caused the company to change its manner of doing
business at great cost and loss of profit, and materially
inflated the trading price of the company's common stock. The
company denied each of these allegations. On February 4, 2000 the
stockholder case was dismissed with prejudice by the district
court. The plaintiffs filed an appeal on March 3, 2000. The
motion to dismiss in the noteholder case has not yet been
decided. The plaintiffs seek undetermined but significant
damages. However, if the district court ruling described below
is upheld, Fleming believes the litigation will not have a
material adverse effect on the company.
In 1997, the company won a declaratory judgment against certain
of its insurance carriers regarding policies issued to Fleming
for the benefit of its officers and directors ("D&O policies").
On motion for summary judgment, the court ruled that the
company's exposure, if any, under the class action suits is
covered by D&O policies written by the insurance carriers
(aggregating $60 million in coverage) and that the "larger
settlement rule" will be applicable to the case. According to
the trial court, under the larger settlement rule a D&O insurer
is liable for the entire amount of coverage available under a
policy even if there is some overlap in the liability created by
the insured individuals and the uninsured corporation. If a
corporation's liability is increased by uninsured parties beyond
that of the insured individuals, then that portion of the
liability is the sole obligation of the corporation. The court
also held that allocation is not available to the insurance
carriers as an affirmative defense. The insurance carriers
appealed. In 1999, the appellate court affirmed the decision
that the class actions were covered by D&O policies aggregating
$60 million in coverage but reversed the trial court's decision
as to allocation as being premature.
Tru Discount Foods. Fleming brought suit in 1994 on a note and
an open account against its former customer, Tru Discount Foods.
The case was initially referred to arbitration but later restored
to the trial court; Fleming appealed. In 1997, the defendant
amended its counter claim against the company alleging fraud,
overcharges for products and violations of the Oklahoma Deceptive
Trade Practices Act. In 1998, the appellate court reversed the
trial court and directed that the matter be sent again to
arbitration. On September 28, 1999, the arbitration panel
entered its award in favor of Fleming against Tru Discount Foods
and its principals in the net amount of $579,443 plus interest at
the rate of six percent per annum from October 29, 1999, and fees
and expenses. On December 27, 1999, Tru Discount Foods and its
principals filed a motion in the trial court to vacate the
arbitration award, on the grounds, among others, that the
arbitration panel prevented them from asserting a RICO
counterclaim for treble damages, and refused to admit alleged new
evidence relating thereto. The company objected to the motion
and moved to confirm the arbitration award. On February 28,
2000, the trial court confirmed the award and entered judgment
against the defendants. The time for appeal by the defendants
has expired.
Don's United Super (and related cases). The company and two
retired executives have been named in a suit filed in 1998 in the
United States District Court for the Western District of Missouri
by several current and former customers of the company (Don's
United Super, et al. v. Fleming, et al.). The eighteen
plaintiffs operate retail grocery stores in the St. Joseph and
Kansas City metropolitan areas. The plaintiffs in this suit
allege product overcharges, breach of contract, breach of
fiduciary duty, misrepresentation, fraud, and RICO violations,
and they are seeking actual, punitive and treble damages, as well
as a declaration that certain contracts are voidable at the
option of the plaintiffs.
During the fourth quarter of 1999, plaintiffs produced reports of
their expert witnesses calculating alleged actual damages of
approximately $112 million. During the first quarter of 2000,
plaintiffs revised a portion of these damage calculations, and
although plaintiffs have not finalized these calculations, it
appears that their revised damage calculations will result in a
claim of approximately $120 million, exclusive of any punitive or
treble damages.
On May 2, 2000, the court granted partial summary judgment to the
defendants, holding that plaintiffs' breach of contract claims
that relate to events that occurred more than four (4) years
before the filing of the litigation are barred by limitations,
and that plaintiffs' fraud claims based upon fraudulent
inducement that occurred more than fifteen (15) years before the
filing of the lawsuit likewise are barred by limitations. The
company is in the process of evaluating what impact, if any,
these rulings are likely to have on the damage calculations of
the plaintiffs' expert witnesses.
In October 1998, the company and the same two retired executives
were named in a suit filed by another group of retailers in the
same court as the Don's suit. (Coddington Enterprises, Inc., et
al. v. Fleming, et al.). Currently, sixteen plaintiffs are
asserting claims in the Coddington suit. All of the plaintiffs
except for one have arbitration agreements with Fleming. The
plaintiffs assert claims virtually identical to those set forth
in the Don's suit, and although plaintiffs have not yet
quantified the damages in their pleadings, it is anticipated that
they will claim actual damages approximating the damages claimed
in the Don's suit.
In July 1999, the court ordered two of the plaintiffs in the
Coddington case to arbitration, and otherwise denied arbitration
as to the remaining plaintiffs. The company has appealed the
district court's denial of arbitration to the Eighth Circuit
Court of Appeals. The two plaintiffs that were ordered to
arbitration have filed motions asking the district court to
reconsider the arbitration ruling.
Two other cases had been filed before the Don's case in the same
district court (R&D Foods, Inc., et al. v. Fleming, et al.; and
Robandee United Super, Inc., et al. v. Fleming, et al.) by ten
customers, some of whom are also plaintiffs in the Don's case.
The earlier two cases, which principally seek an accounting of
the company's expenditure of certain joint advertising funds,
have been consolidated. All proceedings in these cases have been
stayed pending the arbitration of the claims of those plaintiffs
who have arbitration agreements with the company.
The company intends to vigorously defend against the claims in
these related cases but is currently unable to predict the
outcome of the cases. An unfavorable outcome could have a
material adverse effect on the financial condition and prospects
of the company.
Storehouse Markets. In 1998, the company and one of its division
officers were named in a suit filed in the United States District
Court for the District of Utah by several current and former
customers of the company (Storehouse Markets, Inc., et al. v.
Fleming Companies, Inc., et al.). The plaintiffs have alleged
product overcharges, fraudulent misrepresentation, fraudulent
nondisclosure and concealment, breach of contract, breach of duty
of good faith and fair dealing, and RICO violations, and they are
seeking actual, punitive and treble damages. The plaintiffs have
made these claims on behalf of a class that would purportedly
include current and former customers of Fleming's Salt Lake City
division covering a four state region. On March 7, 2000 the
court stated that this case would be certified as a class action,
although no formal order had been entered as of the date of this
report. The company is considering an appeal of this ruling once
the court enters its order. Damages have not been quantified by
the plaintiffs; however, the company anticipates that substantial
damages will be claimed. The company intends to vigorously
defend against these claims but is currently unable to predict
the outcome of the case. An unfavorable outcome could have a
material adverse effect on the financial condition and prospects
of the company.
Allen's IGA. In March 2000, the company and two of its former
executives were named in a suit filed in the United States
District Court for the Eastern District of Oklahoma by several
former customers in Oklahoma (Allen's IGA, Inc., et al. v.
Fleming Companies, Inc., et al.). The plaintiffs have alleged
product overcharges, fraud, breach of contract, negligence, RICO
violations, and they seek actual, punitive and treble damages, an
accounting, and other equitable relief. Damages have not been
quantified by the plaintiffs; however, the company anticipates
that substantial damages will be claimed. The court has entered a
scheduling order setting November 6, 2000 as the date on which
the trial of this case will commence.
The company intends to vigorously defend against the claims in
this case but is currently unable to predict the outcome. An
unfavorable outcome could have a material adverse effect on the
financial condition and prospects of the company.
Other. The company's facilities and operations are subject to
various laws, regulations and judicial and administrative orders
concerning protection of the environment and human health,
including provisions regarding the transportation, storage,
distribution, disposal or discharge of certain materials. In
conformity with these provisions, the company has a comprehensive
program for testing, removal, replacement or repair of its
underground fuel storage tanks and for site remediation where
necessary. The company has established reserves that it believes
will be sufficient to satisfy the anticipated costs of all known
remediation requirements.
The company and others have been designated by the U.S.
Environmental Protection Agency ("EPA") and by similar state
agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") or similar state laws, as applicable, with respect
to EPA-designated Superfund sites. While liability under CERCLA
for remediation at such sites is generally joint and several with
other responsible parties, the company believes that, to the
extent it is ultimately determined to be liable for the expense
of remediation at any site, such liability will not result in a
material adverse effect on its consolidated financial position or
results of operations. The company is committed to maintaining
the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws,
regulations and orders.
The company is a party to various other litigation and contingent
loss situations arising in the ordinary course of its business
including: disputes with customers and former customers; disputes
with owners and former owners of financially troubled or failed
customers; disputes with employees and former employees regarding
labor conditions, wages, workers' compensation matters and
alleged discriminatory practices; disputes with insurance
carriers; tax assessments and other matters, some of which are
for substantial amounts. However, the company does not believe
any such action will result in a material adverse effect on the
company.
7. Certain indebtedness is guaranteed by all direct and indirect
subsidiaries of the company (except for certain inconsequential
subsidiaries), all of which are wholly owned. The guarantees are
joint and several, full, complete and unconditional. There are
no restrictions on the ability of the subsidiary guarantors to
transfer funds to the company in the form of cash dividends,
loans or advances. Full financial statements for the subsidiary
guarantors are not presented herein because management does not
believe such information would be material.
The following summarized financial information, which includes
allocations of material corporate-related expenses, for the
combined subsidiary guarantors may not necessarily be indicative
of the results of operations or financial position had the
subsidiary guarantors been operated as independent entities.
April 15, April 17,
(In millions) 2000 1999
-------------------------------------------------
Current assets $378 $28
Noncurrent assets $493 $51
Current liabilities $164 $15
Noncurrent liabilities $147 $7
16 weeks ended
---------------------------
April 15, April 17,
(In millions) 2000 1999
------------------------------------------------
Net sales $1,163 $104
Costs and expenses $1,169 $106
Net loss $(3) $(1)
8. The accompanying operating statements include the following:
16 weeks ended
---------------------------
April 15, April 17,
(In thousands) 2000 1999
---------------------------------------------------------
Depreciation and amortization
(includes amounts below) $55,245 $46,317
Amortized costs in interest
expense $1,496 $1,498
Excess depreciation and
amortization due to the
strategic plan $4,395 $-
9. In December 1998, the company announced the implementation of
a strategic plan designed to improve the competitiveness of the
retailers the company serves and improve the company's
performance by building stronger operations that can better
support long-term growth. The four major initiatives of the
strategic plan are to consolidate wholesale operations, grow
wholesale sales, improve retail performance, and reduce overhead
and operating expenses. On April 25, 2000, the company announced
the exploration of strategic alternatives for the remaining
conventional retail chains, including the potential sale of these
operations.
The total pre-tax charge of the strategic plan is presently
estimated at $949 million ($229 million cash and $720 million non-
cash). The plan originally announced in December 1998 had an
estimated pre-tax charge totaling $782 million. The increase is
due primarily to closing the Peoria, York and Philadelphia
divisions ($73 million), updating impairment amounts on the five
retail chains in the original plan ($11 million), the divestiture
or closing of the two chains not in the original plan ($36
million), decreasing costs related to a scheduled closing no
longer planned ($18 million), and other costs including those
related to the company's low cost pursuit program and
centralization of administrative functions ($65 million).
Updating the impairment amounts was necessary as decisions to
close additional operating units were made. Additionally, sales
negotiations provided more current information regarding the fair
value on certain chains. There were changes in the list of
operating units to be divested or closed since they no longer fit
into the current business strategy. Also, the cost of severance,
relocation and other periodic expenses related to the company's
low cost pursuit program and centralization of administrative
functions has been accrued as incurred. The pre-tax charge
recorded to-date is $869 million ($64 million in 2000, $137
million in 1999, and $668 million recorded in 1998). After tax,
the expense for the first quarter of 2000 was $38 million or $.99
per share. The $80 million of costs relating to the strategic
plan not yet charged against income will primarily be recorded
throughout 2000 at the time such costs are accruable.
The $64 million charge in the first quarter of 2000 was included
on several lines of the Consolidated Statements of Operations as
follows: $13 million was included in cost of sales and was
primarily related to inventory valuation adjustments and
additional depreciation and amortization on assets to be disposed
of but not yet held for sale; $8 million was included in selling
and administrative expense and equity investment results as
disposition related costs recognized on a periodic basis; and the
remaining $43 million was included in the
impairment/restructuring charge line. The first quarter charge
consisted of the following components:
o Impairment of assets of $2 million. The impairment related
to other long-lived assets.
o Restructuring charges of $41 million. The restructuring
charges consisted primarily of severance related expenses and
pension withdrawal liabilities for the divested or closed
operating units announced during the first 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 $21 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 first quarter of 2000 charge relates to the company's
segments as follows: $37 million relates to the distribution
segment and $17 million relates to the retail segment with the
balance relating to support services expenses.
The charges related to workforce reductions are as follows:
($'s in thousands) Amount Headcount
------ ---------
1998 Activity:
Charge $25,441 1,430
Terminations (3,458) (170)
------- -------
Ending Liability 21,983 1,260
1999 Activity:
Charge 12,029 1,350
Terminations (24,410) (1,950)
------- -------
Ending Liability 9,602 660
2000 Quarter 1 Activity:
Charge 25,509 1,020
Terminations (4,250) (560)
------- -------
Ending Liability $30,861 1,120
======= =======
The breakdown of the 1,020 headcount reduction recorded during
2000 is: 910 from the distribution segment; 100 from the retail
segment; and 10 from support services.
Additionally, the strategic plan includes charges related to
lease obligations which will be utilized as operating units or
retail stores close, but ultimately reduced over remaining lease
terms ranging from 1 to 20 years. The charges and utilization
have been recorded to-date as follows:
($'s in thousands) Amount
------
1998 Activity:
Charge $28,101
Utilized (385)
-------
Ending Liability 27,716
1999 Activity:
Charge 15,074
Utilized (10,281)
-------
Ending Liability 32,509
2000 Quarter 1 Activity:
Charge 9,062
Utilized (9,957)
-------
Ending Liability $31,614
=======
Assets held for sale included in other current assets at the end
of the first quarter of 2000 were approximately $69 million,
consisting of $27 million of distribution operating units and $42
million of retail stores.
The pre-tax charge of the strategic plan in the first quarter of
1999 totaled $46 million. After tax, the expense for the first
quarter of 1999 was $32 million or $.84 per share. The $46
million charge was included on several lines of the Consolidated
Condensed Statements of Operations for the first quarter of 1999
as follows: $6 million was included in cost of sales and was
primarily related to inventory valuation adjustments; $3 million
was included in selling and administrative expense as disposition
related costs recognized on a periodic basis; and the remaining
$37 million was included in the impairment/restructuring charge
line. The $46 million charge consisted of the following
components:
o Impairment of assets of $24 million. The impairment
components were $22 million for goodwill and $2 million for other
long-lived assets. All of the goodwill charge of $22 million was
related to the 1994 "Scrivner" acquisition.
o Restructuring charges of $13 million. The restructuring
charges consisted of severance related expenses and pension
withdrawal liabilities for the Peoria distribution operating unit
and Consumers retail chain. The restructuring charges also
consisted of operating lease liabilities for the Peoria
distribution operating unit.
o Other disposition and related costs of $9 million. These
costs consist primarily of inventory valuation adjustments,
disposition related costs recognized on a periodic basis and
other costs.
The $46 million charge relates to the company's segments as
follows: $32 million relates to the distribution segment and $8
million relates to the retail segment with the balance relating
to corporate overhead expenses.
Asset impairments were recognized in accordance with SFAS No. 121
- - Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and such assets were written down
to their estimated fair values based on estimated proceeds of
operating units to be sold or discounted cash flow projections.
The operating costs of operating units to be sold or closed are
treated as normal operations during the period they remain in
use. Salaries, wages and benefits of employees at these
operating units are charged to operations during the time such
employees are actively employed. Depreciation expense is
continued for assets that the company is unable to remove from
operations.
Independent Accountants' Review Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
FLEMING COMPANIES, INC.
We have reviewed the accompanying condensed consolidated balance
sheet of Fleming Companies, Inc. and subsidiaries as of April 15,
2000, and the related condensed consolidated statements of
operations and of cash flows for the sixteen weeks ended April
15, 2000 and April 17, 1999. These financial statements are the
responsibility of the company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which
is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the
consolidated balance sheet of Fleming Companies Inc. and
subsidiaries as of December 25, 1999, and the related
consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in
our report dated February 18, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 25, 1999 is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
May 3, 2000
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations
General
In early 1998, the Board of Directors and senior management began
an extensive strategic planning process that evaluated all
aspects of Fleming's business. With the help of a consulting
firm, the evaluation and planning process was completed late in
1998. In December 1998, the strategic plan was approved and
implementation efforts began.
The strategic plan consists of the following four major
initiatives:
o Consolidate distribution operations. The strategic plan
initially included closing eleven operating units (El Paso, TX;
Portland, OR; Houston, TX; Huntingdon, PA; Laurens, IA; Johnson
City, TN; Sikeston, MO; San Antonio, TX; Buffalo, NY; an
unannounced operating unit still to be closed; and an unannounced
operating unit scheduled for 1999 closure, but due to increased
cash flows from new business it will not be closed). Of the nine
closings announced, all have been completed. Three additional
closings were announced which were not originally part of the
strategic plan bringing the total operating units to be closed to
thirteen. The closing of Peoria was added to the plan in the
first quarter of 1999 when costs associated with continuing to
service customers during a strike coupled with costs of reopening
the operating unit made closing the operating unit an
economically sound decision. During the first quarter of 2000,
the closings of York and Philadelphia were announced as part of
an effort to grow in the northeast by consolidating distribution
operations and expanding the Maryland facility. The York and
Philadelphia closings are expected to be complete by the end of
the second quarter of 2000. The last full year of operations for
the 13 operating units closed or to be closed was in 1998 with
sales totaling approximately $3.1 billion. Most of these sales
have been or are expected to be retained by transferring customer
business to the company's higher volume, better utilized
facilities. The company believes that this consolidation process
benefits customers with better product variety and improved
buying opportunities. The company has also benefited with better
coverage of fixed expenses. The closings result in savings due
to reduced depreciation, payroll, lease and other operating
costs, and the company begins recognizing these savings
immediately upon closure. The capital returned from the
divestitures and closings has been and will continue to be
reinvested in the business.
o Grow distribution sales. Higher volume, better-utilized
distribution operations and the dynamics of the market place
represent an opportunity for sales growth. The improved
efficiency and effectiveness of the remaining distribution
operations enhances their competitiveness, and the company
intends to capitalize on these improvements.
o Improve retail performance. This not only requires
divestiture or closing of under-performing company-owned retail
chains, but also requires increased investments in the retail
concepts on which the company is focused. As of year-end 2000,
the strategic plan included the divestiture or closing of seven
retail chains (Hyde Park, Consumers, Boogaarts, New York Retail,
Pennsylvania Retail, Baker's Oklahoma, and Thompson Food Basket).
The sale of Baker's Oklahoma as well as the divestiture or
closing of Thompson Food Basket were not in the original
strategic plan, but no longer fit into the current business
strategy. The last full year of operations for these seven
divested or closed (or to be divested or closed) chains was in
1998 with sales totaling approximately $844 million. The sale or
closing of these chains is expected to be substantially completed
by the end of the second quarter of 2000. On April 25, 2000, the
company announced the exploration of strategic alternatives for
the remaining conventional retail chains (Rainbow Foods, Baker's
Nebraska, Sentry Foods, and ABCO Foods), including the potential
sale of these operations.
o Reduce overhead and operating expenses. Overhead has been
and will continue to be reduced through the company's low cost
pursuit program which includes organization and process changes,
such as a reduction in workforce through productivity
improvements and elimination of work, centralization of
administrative and procurement functions, and reduction in the
number of management layers. The low cost pursuit program also
includes other initiatives to reduce complexity in business
systems and remove non-value-added costs from operations, such as
reducing the number of SKU's, creating a single point of contact
with customers, reducing the number of decision points within the
company, and centralizing vendor negotiations. These initiatives
are well underway and have reflected reduced costs for the
company which ultimately reflect improved profitability and
competitiveness.
Implementation of the strategic plan is expected to continue
through 2000. This time frame accommodates the company's limited
resources and customers' seasonal marketing requirements.
Additional expenses will continue for some time beyond 2000
because certain disposition related costs can only be expensed
when incurred.
The total pre-tax charge of the strategic plan is presently
estimated at $949 million ($229 million cash and $720 million non-
cash). The plan originally announced in December 1998 had an
estimated pre-tax charge totaling $782 million. The increase is
due primarily to closing the Peoria, York and Philadelphia
divisions ($73 million), updating impairment amounts on the five
retail chains in the original plan ($11 million), the divestiture
or closing of the two chains not in the original plan ($36
million), decreasing costs related to a scheduled closing no
longer planned ($18 million), and other costs including those
related to the company's low cost pursuit program and
centralization of administrative functions ($65 million).
Updating the impairment amounts was necessary as decisions to
close additional operating units were made. Additionally, sales
negotiations provided more current information regarding the fair
value on certain chains. There were changes in the list of
operating units to be divested or closed since they no longer fit
into the current business strategy as described above. Also, the
cost of severance, relocation and other periodic expenses related
to the company's low cost pursuit program and centralization of
administrative functions has been accrued as incurred. No
additional charge has been or is expected to be added related to
the strategic alternatives being explored for the remaining
conventional retail chains. The pre-tax charge recorded to-date
is $869 million ($64 million in 2000, $137 million in 1999, and
$668 million recorded in 1998). After tax, the expense for the
first quarter of 2000 was $38 million or $.99 per share.
Of the $64 million charge in the first quarter of 2000, $19
million is expected to require cash expenditures. The remaining
$45 million charge consisted of noncash items. The $64 million
charge consisted of the following components:
o Impairment of assets of $2 million. The impairment related
to other long-lived assets.
o Restructuring charges of $41 million. The restructuring
charges consisted primarily of severance related expenses and
pension withdrawal liabilities for the divested or closed
operating units announced during the first 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 $21 million. These
costs consisted primarily of inventory valuation adjustments,
additional depreciation and amortization on assets to be disposed
of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The company recorded a net loss of $26 million or $.67 per share
for the first quarter of 2000. The after-tax effect of the
strategic plan charge on the company's first quarter of 2000 was
$38 million or $.98 per share. Excluding the strategic plan
charge, the company would have recorded net income of $12 million
or $.30 per share. Adjusted EBITDA for the first quarter of 2000
was $128 million. "Adjusted EBITDA" is earnings before
extraordinary items, interest expense, income taxes, depreciation
and amortization, equity investment results, LIFO provision and
one-time adjustments (e.g., strategic plan charges and specific
litigation charges). Adjusted EBITDA should not be considered as
an alternative measure of the company's net income, operating
performance, cash flow or liquidity. It is provided as
additional information related to the company's ability to
service debt; however, conditions may require conservation of
funds for other uses. Although the company believes adjusted
EBITDA enhances a reader's understanding of the company's
financial condition, this measure, when viewed individually, is
not necessarily a better indicator of any trend as compared to
conventionally computed measures (e.g., net sales, net earnings,
net cash flows, etc.). Finally, amounts presented may not be
comparable to similar measures disclosed by other companies. The
following table sets forth the calculation of adjusted EBITDA for
the first quarter of 2000 (in millions):
Net loss $(26)
Add back:
Taxes on loss (17)
Depreciation/amortization 54
Interest expense 53
Equity investment results 2
LIFO provision 3
----
EBITDA 69
Add back noncash strategic plan charges * 40
----
EBITDA excluding noncash
strategic plan charges 109
Add back strategic plan charges
requiring cash 19
----
Adjusted EBITDA $128
====
* Excludes amounts for depreciation/amortization and
equity investment results already added back.
The adjusted EBITDA amount represents cash flow from operations
excluding unusual or infrequent items. In the company's opinion,
adjusted EBITDA is the best starting point when evaluating the
company's ability to service debt. In addition, the company
believes it is important to identify the cash flows relating to
unusual or infrequent charges and strategic plan charges, which
should also be considered in evaluating the company's ability to
service debt.
Additional pre-tax expense relating to the strategic plan of
approximately $80 million is expected throughout the rest of 2000
as implementation of the strategic plan continues. Approximately
$78 million of these future expenses are expected to require cash
expenditures. The remaining $2 million of the future expense
relates to noncash items. These future expenses will consist
primarily of severance, relocation, real estate-related expenses
and other costs expensed when incurred. The company does not
expect any charge related to the strategic alternatives being
explored for the remaining conventional retail chains.
The pre-tax charges relating to the strategic plan for 1999 and
1998 totaled $137 million and $668 million, respectively, and are
described in the Form 10-K and Form 10-K/A for 1998 and the Form
10-K for 1999.
The expected benefit of the plan is improved earnings. Net
earnings for 1999 after excluding strategic plan charges and one-
time items ("adjusted earnings") was $43 million or $1.12 per
share. Adjusted earnings for the first quarter of 2000 was $12
million or $.30 per share with earnings per share of $1.50
expected for 2000. The company continues to expect annual
earnings per share to exceed $3.00 by the year 2003. Sales in the
distribution segment are also expected to increase, but the
growth will not be evident in 2000 because of the previously
announced loss of two significant customers. Sales in the retail
segment may decrease dramatically depending on the outcome of the
strategic alternatives being explored for the remaining
conventional retail chains.
The company has assessed the strategic significance of all
operating units. Under the plan, certain divestitures have been
announced and are planned as described above. The company
anticipates the improved performance of several strategic
operating units. However, in the event that performance is not
improved, the strategic plan will be revised and additional
operating units could be sold or closed.
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:
==============================================================================
April 15, April 17,
For the 16-weeks ended 2000 1999
- ------------------------------------------------------------------------------
Net sales 100.00 % 100.00 %
Gross margin 9.38 9.60
Less:
Selling and administrative 8.38 8.44
Interest expense 1.19 1.16
Interest income (.21) (.21)
Equity investment results .04 .08
Impairment/restructuring charge .95 .83
- ------------------------------------------------------------------------------
Total expenses 10.35 10.30
- ------------------------------------------------------------------------------
Loss before taxes (.97) (.70)
Taxes on loss (.39) (.16)
- ------------------------------------------------------------------------------
Net loss (.58)% (.54)%
==============================================================================
Net sales.
Sales for the first quarter (16 weeks) of 2000 decreased by $20
million, or less than 1%, to $4.4 billion from the same period in
1999.
Net sales for the distribution segment were $3.4 billion in 2000
compared to $3.3 billion in 1999. The 2% increase in sales was
due to new business added from independent retailers, convenience
stores, e-tailers, and supercenter customers. This increase was
partially offset by a loss of sales previously announced from
Randall's (in 1999). The increase in the distribution segment
sales is the largest in five years. Sales have also been impacted
by the planned closing and consolidation of certain distribution
operating units. Future sales comparisons in 2000 will be
affected by the previously announced prospective loss of sales to
United. In 1999, sales to Randall's and United accounted for less
than 4% of the company's sales.
Retail segment sales decreased $77 million, or 7%, in 2000 to
$1.1 billion from the same period in 1999. The decrease in sales
was due to the divestiture of underperforming and non-strategic
stores as well as a decrease of 5.1% in same-store sales for the
first quarter of 2000 compared to the same period in 1999. The
decrease was offset partially by sales of new stores opened since
the first quarter of 1999. Depending on the outcome of the
strategic alternatives being explored for the conventional
chains, sales may dramatically decrease in the retail segment.
Fleming measures inflation using data derived from the average
cost of a ton of product sold by the company. Food price
inflation for the first quarter of 2000 was down at 1.3% compared
to 2.3% for the same period in 1999.
Gross margin.
Gross margin for the first quarter of 2000 decreased by $12
million, or 3%, to $417 million from $428 million for the same
period in 1999, and also decreased as a percentage of net sales
to 9.38% from 9.60% for the same period in 1999. After excluding
the strategic plan charges, gross margin for the first quarter of
2000 decreased by $4 million, or less than 1%, compared to the
same period in 1999, and decreased as a percentage of net sales
to 9.68% from 9.72% for the same period in 1999. The decrease in
dollars was due primarily to the overall sales decrease, but was
partly offset by positive results from leveraging the company's
buying power and cutting costs. The decrease in percentage to
net sales was due to a change in mix. The sales of the
distribution segment represent a larger portion of total company
sales than the retail segment and the distribution segment has
lower margins as a percentage of sales versus the retail segment.
For the distribution segment, gross margin as a percentage of net
sales improved slightly in the first quarter of 2000 compared to
the same period in 1999 reflecting the benefits of asset
rationalization and the centralization of procurement. This was
partially offset by competitive pricing actions. For the retail
segment, gross margin as a percentage of net sales improved
significantly in the first quarter of 2000 compared to the same
period in 1999 due to the divesting or closing of underperforming
stores and the centralization of procurement. The strategic plan
charges were higher in the first quarter of 2000 compared to the
same period in 1999 and were primarily related to inventory
valuation adjustments and additional depreciation and
amortization on assets to be disposed of but not yet held for
sale.
Selling and administrative expenses.
Selling and administrative expenses for the first quarter of 2000
decreased by $5 million, or 1%, to $372 million from $377 million
for the same period in 1999 and decreased as a percentage of net
sales to 8.38% for 2000 from 8.44% in 1999. After excluding the
strategic plan charges, selling and administrative expenses for
the first quarter of 2000 decreased by $10 million, or 3%,
compared to the same period in 1999, and decreased as a
percentage of net sales to 8.20% from 8.38% for the same period
in 1999. The decreases were due to asset rationalization and
centralizing administrative functions, but also due to reducing
the significance of retail. The sales of the distribution segment
represent a larger portion of total company sales than the retail
segment and the distribution segment has lower operating expenses
as a percentage of sales versus the retail segment.
For the distribution segment, selling and administrative expenses
as a percentage of net sales improved in the first quarter of
2000 compared to the same period in 1999 due to asset
rationalization and the centralization of administrative
functions. For the retail segment, selling and administrative
expenses as a percentage of net sales decreased in the first
quarter of 2000 compared to the same period in 1999 due to the
costs of closing certain retail stores in continuing retail
chains. The was partially offset by the divestiture or closing
of underperforming stores and the centralization of
administrative functions. The strategic plan charges were higher
in the first quarter of 2000 compared to the same period in 1999
due primarily to moving and training costs associated with the
consolidation of the accounting and human resource functions.
The company has a significant amount of credit extended to its
customers through various methods. These methods include
customary and extended credit terms for inventory purchases and
equity investments in, and secured and unsecured loans to,
certain customers. Secured loans generally have terms up to ten
years. Credit loss expense is included in selling and
administrative expenses and was $8 million for the first quarter
of both 2000 and 1999.
Operating earnings.
Operating earnings for the distribution segment remained
unchanged for the first quarter of 2000 from the same period of
1999 at $83 million. After excluding the strategic plan charges,
operating earnings increased by $6 million, or 7%, to $94 million
from $88 million for the same period of 1999. Operating earnings
improved primarily due to the benefits of the consolidation of
distribution operating units, reduction of costs and centralizing
of certain procurement and administrative functions in support
services. The improvements were offset by higher strategic plan
charges in 2000 relating primarily to additional depreciation and
amortization on assets to be disposed of but not yet held for
sale.
Operating earnings for the retail segment decreased by less than
$1 million to $12 million for the first quarter of 2000 from $13
million for the same period of 1999. After excluding the
strategic plan charges, operating earnings increased by $2
million to $18 million in the first quarter of 2000 from $16
million for the same period of 1999. Operating earnings were
improved primarily by divesting or closing underperforming chains
and increased benefits received from the distribution segment.
Operating earnings also improved due to centralizing certain
administrative functions in support services. The improvements
were partially offset by higher strategic plan charges in 2000
relating to inventory valuation adjustments.
Support services expenses increased in the first quarter of 2000
compared to the same period of 1999 by approximately $6 million
to $51 million from $45 million. After excluding the strategic
plan charges, support services expenses increased by $1 million
to $46 million in the first quarter of 2000 from $45 million for
the same period of 1999. The increase in expense was primarily
due to centralizing certain procurement and administrative
functions from the distribution and retail segments. The increase
was also due to lease termination and real estate disposition
expenses that were higher in the first quarter of 2000 than
similar costs for the same period in 1999. Strategic plan
charges were higher in 2000 due to moving and training expenses
associated with the centralization of the procurement and
administrative functions.
Interest expense.
Interest expense for the first quarter of 2000 of $53 million was
$1 million higher than the same period in 1999 due primarily to
higher average debt balances.
The company's derivative agreements consist of simple "floating-
to-fixed rate" interest rate swaps. For the first quarter of
2000, interest rate hedged agreements contributed $0.5 million of
net interest expense compared to the $1.7 million contribution
made in 1999. The amount contributed for hedges was lower in
2000 due to lower applicable notional principal balances and a
higher interest income component. For a description of these
derivatives, see Item 7A. Quantitative and Qualitative
Disclosures about Market Risk in the company's Annual Report on
Form 10-K for the fiscal year ended December 25, 1999.
Interest income.
Interest income of $10 million for the first quarter of 2000 was
slightly higher than the same period of 1999 primarily due to
higher average interest rates offset in part by lower average
balances for direct financing leases.
Equity investment results.
The company's portion of operating losses from equity investments
improved to $2 million for the first quarter of 2000 from $4
million for the same period of 1999.
Impairment/restructuring charge.
The pre-tax charge recorded in the Consolidated Condensed
Statements of Operations (associated with the implementation of
the company's strategic plan announced in 1998) was $64 million
for the first quarter of 2000 compared to $46 million for the
same period of 1999. The $64 million charge in 2000 was recorded
with $42 million reflected in the Impairment/restructuring charge
line and the balance reflected in other financial statement
lines. The $46 million charge in 1999 was recorded with $37
million reflected in the Impairment/restructuring charge line and
the balance reflected in other financial statement lines. See
"General" above and Note 9 in the notes to the consolidated
condensed financial statements for further discussion regarding
the strategic plan.
Taxes on income.
The effective tax rate used for the first quarters of 2000 and
1999 were 40.2% and 23.0%, 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.
Other.
Several factors negatively affecting earnings in the first 16-
weeks of 2000 are likely to continue for the near term. The
company believes that these factors include costs relating to the
strategic plan, negative same-store sales and operating losses in
certain company-owned retail stores. Additionally, although the
company cannot predict the outcome of the strategic alternatives
being explored for the remaining conventional retail chains, an
adverse affect on earnings is not expected.
Liquidity and Capital Resources
In the first quarter ended April 15, 2000, the company's
principal sources of liquidity were cash flows from operating
activities, borrowings under its credit facility, and the sale of
certain assets and liabilities. The company's principal sources
of capital, excluding shareholders' equity, during this period
were banks and lessors.
Net cash provided by operating activities.
Operating activities generated $55 million of net cash flows for
the first quarter ended April 15, 2000 compared to $32 million
for the same period in 1999. In the first quarter of 2000, $65
million provided by net cash earnings and a $5 million net
decrease in other assets and other liabilities was offset by a
$15 million increase in net working capital items.
Cash requirements related to the implementation and completion of
the strategic plan (on a pre-tax basis) are expected to be $112
million for the full year 2000. The company believes working
capital reductions, proceeds from asset sales, and increased
earnings related to the successful implementation of the
strategic plan are expected to provide adequate cash flows to
cover all of these costs. The company cannot predict the outcome
of the strategic alternatives being explored for the remaining
conventional retail chains, and no amount is included in the cash
requirements described above. The company does not anticipate any
alternative having a negative effect on cash requirements.
Net cash provided by investing activities.
Total investment-related activity resulted in $14 million of
positive net cash flow for the first quarter ended April 15, 2000
compared to a $54 million use of funds in the same period of
1999. Cash provided by asset sales, collections on notes
receivable and other investing-related activities was only
partially offset by capital expenditures.
Net cash used in financing activities.
Net cash expended by financing activities was $55 million for the
first quarter ended April 15, 2000 compared to a $58 million
source of cash flows for the same period last year. Total debt
decreased by $45 million in the first quarter of 2000 and this
included $7 million in principal payments for capital leases.
At the end of the first quarter of 2000, outstanding loans and
letters of credit under the credit facility totaled $180 million
in term loans, $230 million in revolver loans, and $39 million in
letters of credit. Based on actual borrowings and letters of
credit issued, the company could have borrowed an additional $331
million under the revolver.
On April 25, 2000, the company announced it was exploring
strategic alternatives with respect to its conventional retail
chains, including their potential sale. Any such sale could
provide substantial net cash flows which could potentially be
used to prepay debt, repurchase common stock or help to finance
business investment.
For the foreseeable future, the company's principal sources of
liquidity and capital are expected to be cash flows from
operating activities, the company's ability to borrow under its
credit facility, and asset sale proceeds. In addition, lease
financing may be employed for new retail stores and certain
equipment. Management believes these sources will be adequate to
meet working capital needs, capital expenditures, expenditures
for acquisitions (if any), strategic plan implementation costs
and other capital needs for the next 12 months.
Contingencies
From time to time the company faces litigation or other
contingent loss situations resulting from owning and operating
its assets, conducting its business or complying (or allegedly
failing to comply) with federal, state and local laws, rules and
regulations which may subject the company to material contingent
liabilities. In accordance with applicable accounting standards,
the company records as a liability amounts reflecting such
exposure when a material loss is deemed by management to be both
"probable" and "quantifiable" or "reasonably estimable."
Furthermore, the company discloses material loss contingencies in
the notes to its financial statements when the likelihood of a
material loss has been determined to be greater than "remote" but
less than "probable." Such contingent matters are discussed in
Note 6 in the notes to the consolidated condensed financial
statements. An adverse outcome experienced in one or more of
such matters, or an increase in the likelihood of such an
outcome, could have a material adverse effect on the company.
Also see Legal Proceedings.
Forward-Looking Information
This report includes statements that (a) predict or forecast
future events or results, (b) depend on future events for their
accuracy, or (c) embody projections and assumptions which may
prove to have been inaccurate, including expectations for years
2000 and beyond, the company's ability to successfully achieve
the goals of its strategic plan and reverse sales declines, cut
costs and improve earnings; the company's assessment of the
probability and materiality of losses associated with litigation
and other contingent liabilities; the company's ability to expand
portions of its business or enter new facets of its business; and
the company's expectations regarding the adequacy of capital and
liquidity. The management of the company has prepared the
financial projections included in this document on a reasonable
basis, and such projections reflect the best currently available
estimates and judgments and present, to the best of management's
knowledge and belief, the expected course of action and the
expected future financial performance of the company. However,
this information is not fact and should not be relied upon as
necessarily indicative of future results, and readers of this
document are cautioned not to place undue reliance on the
projected financial information. The projections were not
prepared with a view to compliance with the guidelines
established by the American Institute of Certified Public
Accountants regarding projections. These projections, forward-
looking statements and the company's business and prospects are
subject to a number of factors which could cause actual results
to differ materially including the risks associated with the
successful execution of the company's strategic business plan;
adverse effects of labor disruptions; adverse effects of the
changing industry environment and increased competition; sales
declines and loss of customers; disruption caused by exploration
of strategic alternatives regarding conventional retail; exposure
to litigation and other contingent losses; failure of the company
to achieve necessary cost savings; and the negative effects of
the company's substantial indebtedness and the limitations
imposed by restrictive covenants contained in the company's debt
instruments. These and other factors are described in the
company's Annual Report on Form 10-K for the fiscal year ended
December 25, 1999 and in other periodic reports available from
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
No material change has occurred since year-end 1999. See Item
7A. Quantitative and Qualitative Disclosures about Market Risk in
the company's Annual Report on Form 10-K for the fiscal year
ended December 25, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Set forth below and in Note 6 in the notes to the consolidated
condensed financial statements, which information is incorporated
herein by reference, is information regarding litigation which
became reportable or as to which a material development has
occurred since the date of the company's Annual Report on Form 10-
K for the fiscal year ended December 25, 1999:
(1) Tobacco Cases. During the first quarter of 2000, the
dismissal and tolling agreement expired which had prevented the
running of the statute of limitations and assertion of other
defenses against 30 claimants who had filed or registered claims
related to tobacco use in the Court of Common Pleas, Philadelphia
County, Pennsylvania and the Court of Common Pleas, Dauphin
County, Pennsylvania. None of these claimants has filed a
complaint since the expiration of the dismissal and tolling
agreement. During the second quarter of 2000, two cases which
were scheduled for trial in the Court of Common Pleas,
Philadelphia County, Pennsylvania in October, 2000 and January,
2001 were dismissed by the plaintiffs.
The only pending tobacco case is a case formerly pending in
Cameron Parish, Louisiana. This case was removed to the federal
district court. The district court's decision to deny a motion to
remand the case to the state court has been appealed to the
United States Court of Appeals for the Fifth Circuit, where no
decision has been rendered. The Company is being defended and
indemnified by a substantial co-defendant.
(2) Other Customer Cases. In March 2000, the company and one
former executive were named in a suit filed in the United States
District Court for the Eastern District of Missouri by current
and former customers that operated five retail grocery stores in
and around Kansas City, Missouri, and four retail grocery stores
in and around Phoenix, Arizona (J&A Foods, Inc., et al. v. Dean
Werries and Fleming Companies, Inc.). The plaintiffs have
alleged product overcharges, fraudulent misrepresentation,
fraudulent nondisclosure and concealment, breach of contract,
breach of duty of good faith and fair dealing, and RICO
violations, and they are seeking actual, punitive and treble
damages, as well as other relief. The damages have not been
quantified by the plaintiffs; however, the company anticipates
that substantial damages will be claimed.
In April 2000, the operators of two grocery stores in Van Horn
and Marfa, Texas filed an amended complaint in the United States
District Court for the Western District of Texas, Pecos Division
(Welsh v. Fleming Foods of Texas, L.P.). The amended complaint
alleges product overcharges, breach of contract, fraud,
conversion, breach of fiduciary duty, negligent
misrepresentation, and breach of the Texas Deceptive Trade
Practices Act. The amended complaint seeks unspecified actual
damages, punitive damages, attorneys' fees and prejudgment and
postjudgment interest. The court has entered a scheduling order
setting August 1, 2000 as the date on which the trial of this
case will commence.
From time to time, the company is a party to litigation in which
claims against the company are made by present and former customers,
sometimes in situations involving financially troubled or failed
customers. Except as noted in this report, the company does not
believe that any such claim will result in a material adverse effect
on the company.
Item 4. Results of Votes of Security Holders
The company held its annual meeting on May 10, 2000. Matters
voted on were as follows:
Election of directors - Carol B. Hallett, Guy A. Osborn, and
David A. Rismiller were each elected members of the Board of
Directors for terms expiring in 2001. Directors whose terms of
office continued are Herbert M. Baum, Archie R. Dykes, Edward C.
Joullian III, Alice M. Peterson and Mark S. Hansen. Jack W.
Baker, whose term expires in 2002, retired from the Board of
Directors effective May 10, 2000.
2000 stock incentive plan - Shareholders approved the proposal
authorizing the grant of stock options and award of restricted
stock pursuant to the terms of the plan.
Ratification of independent auditors - Shareholders ratified the
appointment of Deloitte & Touche LLP as independent auditors for
2000.
The number of votes cast is as follows (votes in thousands):
For Withheld
--- --------
Election of directors
Carol B. Hallett 33,319 2,391
Guy A. Osborn 33,320 2,390
David A. Rismiller 33,320 2,391
For Against Abstain
--- ------- -------
2000 stock incentive plan 27,535 8,039 137
Ratification of independent auditors 33,735 1,938 38
No other business came before the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
--------------
4.9 Second Amendment dated as of December
21, 1999 to Credit Agreement dated
July 25, 1997
10.61* Employment Agreement for Lenore T.
Graham dated as of January 18, 2000
10.62* Employment Agreement for Neal J. Rider
dated as of January 18, 2000
10.63* Restricted Stock Award Agreement for
Lenore T. Graham dated as of January
18, 2000
10.64* Restricted Stock Award Agreement for
Neal J. Rider dated as of January 18,
2000
10.65* Restricted Stock Award Agreement for
Mark S. Hansen dated as of February
29, 2000
10.66* Restricted Stock Award Agreement for
David R. Almond dated as of February
29, 2000
10.67* Amendment to the Amended and Restated
Restricted Award Agreement for David
R. Almond dated as of February 29, 2000
10.68* Amendment to Nonqualified Stock Option
Agreement for David R. Almond
dated as of February 29, 2000
10.69* Amendment to Restricted Stock Award
Agreement for E. Stephen Davis dated
as of February 29, 2000
10.70* 2000 Stock Incentive Plan for Fleming
Companies, Inc. is incorporated herein
by reference to Exhibit A to the
company's Proxy Statement dated March
27, 2000.
10.71* Form of Nonqualified Stock Option
Agreement between eMAR.net, Inc. and
each director of the registrant
(4,000 shares each) except for
Mark S. Hansen dated as of
January 18, 2000
10.72* Form of Stock Option Agreement
between eMAR.net, Inc. and
Mark S. Hansen (150,000 shares),
William H. Marquard (100,000 shares),
John M. Thompson (75,000 shares)
and the other executive officers of
the registrant (25,000 shares each)
dated as of January 18, 2000
12 Computation of Ratio of Earnings
to Fixed Charges
15 Letter from Independent Accountants
as to Unaudited Interim Financial
Information
27 Financial Data Schedule
- -----------------
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
On February 10, 2000, pursuant to Item 5, the company filed a
descriptive narrative of a presentation to the Donaldson, Lufkin
& Jenrette Retail Equity Conference scheduled that day.
On April 25, 2000, pursuant to Item 5, the company announced that
it was exploring strategic alternatives concerning its five
conventional supermarket chains, including the potential sale of
these operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
(Registrant)
Date: May 25, 2000 KEVIN TWOMEY
Kevin Twomey
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
4.9 Second Amendment dated as of December Filed herewith electronically
21, 1999 to Credit Agreement dated
July 25, 1997
10.61 Employment Agreement for Lenore T. Filed herewith electronically
Graham dated as of January 18, 2000
10.62 Employment Agreement for Neal J. Rider Filed herewith electronically
dated as of January 18, 2000
10.63 Restricted Stock Award Agreement for Filed herewith electronically
Lenore T. Graham dated as of January
18, 2000
10.64 Restricted Stock Award Agreement for Filed herewith electronically
Neal J. Rider dated as of January 18,
2000
10.65 Restricted Stock Award Agreement for Filed herewith electronically
Mark S. Hansen dated as of February
29, 2000
10.66 Restricted Stock Award Agreement for Filed herewith electronically
David R. Almond dated as of February
29, 2000
10.67 Amendment to the Amended and Restated Filed herewith electronically
Restricted Award Agreement for David
R. Almond dated as of February 29, 2000
10.68 Amendment to Nonqualified Stock Option Filed herewith electronically
Agreement for David R. Almond
dated as of February 29, 2000
10.69 Amendment to Restricted Stock Award Filed herewith electronically
Agreement for E. Stephen Davis dated
as of February 29, 2000
10.70 2000 Stock Incentive Plan for Fleming Incorporated herein by
Companies, Inc. reference
10.71 Form of Nonqualified Stock Option Filed herewith electronically
Agreement between eMAR.net, Inc. and
each director of the registrant
(4,000 shares each) except for
Mark S. Hansen dated as of
January 18, 2000
10.72 Form of Stock Option Agreement Filed herewith electronically
between eMAR.net, Inc. and
Mark S. Hansen (150,000 shares),
William H. Marquard (100,000 shares),
John M. Thompson (75,000 shares)
and the other executive officers of
the registrant (25,000 shares each)
dated as of January 18, 2000
12 Computation of Ratio of Earnings Filed herewith electronically
to Fixed Charges
15 Letter from Independent Accountants Filed herewith electronically
as to Unaudited Interim Financial
Information
27 Financial Data Schedule Filed herewith electronically