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 July 8, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1945 Lakepointe Drive, Box 299013
Lewisville, Texas 75029
(Address of principal executive offices) (Zip Code)
(972) 906-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes
of common stock, as of August 4, 2000 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 39,593,000
<PAGE>
INDEX
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
12 Weeks Ended July 8, 2000,
and July 10, 1999
Consolidated Condensed Statements of Operations -
28 Weeks Ended July 8, 2000,
and July 10, 1999
Consolidated Condensed Balance Sheets -
July 8, 2000, and December 25, 1999
Consolidated Condensed Statements of Cash Flows -
28 Weeks Ended July 8, 2000,
and July 10, 1999
Notes to Consolidated Condensed Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Consolidated Condensed Statements of Operations
For the 12 weeks ended July 8, 2000, and July 10, 1999
(In thousands, except per share amounts)
<CAPTION>
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales $3,386,053 $3,349,362
Costs and expenses:
Cost of sales 3,094,799 3,022,154
Selling and administrative 261,374 286,565
Interest expense 38,447 38,647
Interest income (9,340) (6,894)
Equity investment results 1,694 2,415
Impairment/restructuring charge 21,013 6,169
------------------------------------------------------------------------------
Total costs and expenses 3,407,987 3,349,056
------------------------------------------------------------------------------
Income (loss) before taxes (21,934) 306
Taxes on income (loss) (8,585) 2,644
------------------------------------------------------------------------------
Net loss $ (13,349) $ (2,338)
==============================================================================
Basic and diluted net loss per share $(.35) $(.06)
Dividends paid per share $.02 $.02
Weighted average shares outstanding:
Basic 38,576 38,204
Diluted 38,576 38,204
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
<PAGE>
<TABLE>
Consolidated Condensed Statements of Operations
For the 28 weeks ended July 8, 2000, and July 10, 1999
(In thousands, except per share amounts)
<CAPTION>
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales $7,830,857 $7,814,608
Costs and expenses:
Cost of sales 7,122,929 7,059,022
Selling and administrative 633,681 663,560
Interest expense 91,548 90,253
Interest income (18,845) (16,244)
Equity investment results 3,585 5,971
Impairment/restructuring charge 63,158 43,205
------------------------------------------------------------------------------
Total costs and expenses 7,896,056 7,845,767
------------------------------------------------------------------------------
Loss before taxes (65,199) (31,159)
Taxes on loss (25,977) (4,580)
------------------------------------------------------------------------------
Net loss $ (39,222) $ (26,579)
==============================================================================
Basic and diluted net loss per share $(1.02) $(.70)
Dividends paid per share $.04 $.04
Weighted average shares outstanding:
Basic 38,541 38,169
Diluted 38,541 38,169
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
<PAGE>
<TABLE>
Consolidated Condensed Balance Sheets
(In thousands)
<CAPTION>
==============================================================================
July 8, December 25,
Assets 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,022 $ 6,683
Receivables 462,649 496,159
Inventories 860,514 997,805
Other current assets 193,501 228,103
------------------------------------------------------------------------------
Total current assets 1,526,686 1,728,750
Investments and notes receivable 91,324 108,895
Investment in direct financing leases 116,076 126,309
Property and equipment 1,564,105 1,539,465
Less accumulated depreciation
and amortization (726,595) (701,289)
------------------------------------------------------------------------------
Net property and equipment 837,510 838,176
Deferred income taxes 30,378 54,754
Other assets 142,932 150,214
Goodwill 555,047 566,120
------------------------------------------------------------------------------
Total assets $3,299,953 $3,573,218
==============================================================================
Liabilities and Shareholders' Equity
------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 791,622 $ 981,219
Current maturities of long-term debt 67,905 70,905
Current obligations under capital leases 21,692 21,375
Other current liabilities 199,958 210,220
------------------------------------------------------------------------------
Total current liabilities 1,081,177 1,283,719
Long-term debt 1,191,336 1,234,185
Long-term obligations under
capital leases 378,783 367,960
Other liabilities 123,437 126,652
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 98,973 97,141
Capital in excess of par value 513,355 511,447
Accumulated deficit (61,548) (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 525,220 560,702
------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $3,299,953 $3,573,218
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
<PAGE>
<TABLE>
Consolidated Condensed Statements of Cash Flows
For the 28 weeks ended July 8, 2000, and July 10, 1999
(In thousands)
<CAPTION>
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (39,222) $ (26,579)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 94,622 83,876
Credit losses 12,786 12,981
Deferred income taxes 21,911 5,427
Equity investment results 3,585 5,971
Impairment/restructuring and related charges
(not classified elsewhere) 102,636 60,909
Cash payments on impairment/restructuring
and related charges (87,004) (32,104)
Change in assets and liabilities, excluding
effect of acquisitions:
Receivables 22,130 45,847
Inventories 121,604 128,881
Accounts payable (189,597) (68,872)
Other assets and liabilities (11,191) (46,504)
Other adjustments, net 222 (1,126)
------------------------------------------------------------------------------
Net cash provided by operating
activities 52,482 168,707
------------------------------------------------------------------------------
Cash flows from investing activities:
Collections on notes receivable 17,838 19,764
Notes receivable funded (12,193) (23,445)
Purchase of property and equipment (62,431) (82,504)
Proceeds from sale of property and
equipment 11,637 6,089
Investments in customers (1,512) (8,037)
Proceeds from sale of investment 2,693 2,203
Businesses acquired - (78,075)
Proceeds from sale of businesses 41,230 7,496
Other investing activities 9,158 2,441
------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 6,420 (154,068)
------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings 60,000 101,000
Principal payments on long-term debt (105,849) (106,461)
Principal payments on capital lease
obligations (11,698) (13,107)
Sale of common stock under incentive
stock and stock ownership plans 3,535 3,130
Dividends paid (1,551) (1,552)
Other financing activities - (31)
------------------------------------------------------------------------------
Net cash used in financing activities (55,563) (17,021)
------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 3,339 (2,382)
Cash and cash equivalents, beginning
of period 6,683 5,967
------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10,022 $ 3,585
==============================================================================
Supplemental information:
Cash paid for interest $ 90,792 $ 89,572
Cash paid (refunded) for taxes $ (62,561) $ 8,730
==============================================================================
</TABLE>
Fleming Companies,Inc. See notes to consolidated condensed
financial statements and independent accountants' review report.
<PAGE>
Notes to Consolidated Condensed Financial Statements
(See independent accountants' review report)
1. The consolidated condensed balance sheet as of July 8, 2000,
the consolidated condensed statements of operations for the 12
weeks ended July 8, 2000 and July 10, 1999, and the consolidated
condensed statements of operations and cash flows for the 28
weeks ended July 8, 2000 and July 10, 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 July 8, 2000, and the results of operations and cash
flows for the periods presented have been made. All such
adjustments are of a normal, recurring nature except as
disclosed. Both basic and diluted loss per share are computed
based on net loss divided by weighted average shares as
appropriate for each calculation.
The preparation of the consolidated condensed financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to
conform to current year classifications.
2. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the
consolidated financial statements and related notes included in
the company's 1999 annual report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining
the cost of most grocery and certain perishable inventories. The
excess of current cost of LIFO inventories over their stated
value was $60 million at July 8, 2000 (none of which was recorded
in assets held for sale which is included in other current
assets) and $54 million at December 25, 1999 ($4 million of which
was recorded in assets held for sale which is included in other
current assets).
4. Sales and operating earnings for the company's distribution
and retail segments are presented below.
<TABLE>
<CAPTION>
==============================================================================
For the 12 weeks ended
July 8, July 10,
($ in millions) 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Distribution $3,026 $2,983
Intersegment elimination (401) (507)
------------------------------------------------------------------------------
Net distribution 2,625 2,476
Retail 761 874
------------------------------------------------------------------------------
Total sales $3,386 $3,350
==============================================================================
Operating earnings:
Distribution $ 61 $ 62
Retail 17 4
Support services (48) (25)
------------------------------------------------------------------------------
Total operating earnings 30 41
Interest expense (38) (39)
Interest income 9 6
Equity investment results (2) (2)
Impairment/restructuring charge (21) (6)
------------------------------------------------------------------------------
Loss before taxes $(22) $ -
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
==============================================================================
For the 28 weeks ended
July 8, July 10,
($ in millions) 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Distribution $6,993 $6,985
Intersegment elimination (984) (1,182)
------------------------------------------------------------------------------
Net distribution 6,009 5,803
Retail 1,822 2,012
------------------------------------------------------------------------------
Total sales $7,831 $7,815
==============================================================================
Operating earnings:
Distribution $145 $145
Retail 29 17
Support services (100) (70)
------------------------------------------------------------------------------
Total operating earnings 74 92
Interest expense (91) (90)
Interest income 19 16
Equity investment results (4) (6)
Impairment/restructuring charge (63) (43)
------------------------------------------------------------------------------
Loss before taxes $ (65) $ (31)
==============================================================================
</TABLE>
General support services expenses are not allocated to
distribution and retail segments. The transfer pricing between
segments is at cost.
5. The comprehensive loss in both years was comprised only of the
reported net loss.
6. In accordance with applicable accounting standards, the
company records a charge reflecting contingent liabilities
(including those associated with litigation matters) when
management determines that a material loss is "probable" and
either "quantifiable" or "reasonably estimable." Additionally,
the company discloses material loss contingencies when the
likelihood of a material loss is deemed to be greater than
"remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, the company and certain of its
present and former officers and directors were named as
defendants in nine purported class action suits filed by certain
stockholders and one purported class action suit filed by two
noteholders. All cases were filed in the United States District
Court for the Western District of Oklahoma. In 1997, the court
consolidated the stockholder cases (the noteholder case was also
consolidated, but only for pre-trial purposes). The plaintiffs
in the consolidated cases sought undetermined but significant
damages, and asserted liability for the company's alleged failure
to properly account for and disclose the contingent liability
created by the David's litigation and by the company's alleged
"deceptive business practices." The plaintiffs claimed that these
alleged practices led to the David's litigation and to other
material contingent liabilities, caused the company to change its
manner of doing business at great cost and loss of profit, and
materially inflated the trading price of the company's common
stock.
During 1998 the noteholder case complaint was dismissed and
during 1999 the consolidated stockholder case complaint was also
dismissed, each without prejudice. The court gave the plaintiffs
the opportunity to restate their claims in each case, and they
did so with amended complaints. On February 4, 2000 the
stockholder case was dismissed with prejudice by the district
court. The stockholder plaintiffs filed an appeal on March 3,
2000. The motion to dismiss in the noteholder case was decided
August 1, 2000. The court again dismissed the count alleging
violation of the Securities Exchange Act of 1934, but in this
ruling determined that plaintiffs have stated a claim under the
Securities Act of 1933, Section 11.
In 1997, the company won a declaratory judgment against certain
of its insurance carriers regarding policies issued to Fleming
for the benefit of its officers and directors ("D&O policies").
On motion for summary judgment, the court ruled that the
company's exposure, if any, under the class action suits is
covered by D&O policies written by the insurance carriers
(aggregating $60 million in coverage) and that the "larger
settlement rule" will be applicable to the case. According to
the trial court, under the larger settlement rule a D&O insurer
is liable for the entire amount of coverage available under a
policy even if there is some overlap in the liability created by
the insured individuals and the uninsured corporation. If a
corporation's liability is increased by uninsured parties beyond
that of the insured individuals, then that portion of the
liability is the sole obligation of the corporation. The court
also held that allocation is not available to the insurance
carriers as an affirmative defense. The insurance carriers
appealed. In 1999, the appellate court affirmed the decision
that the class actions were covered by D&O policies aggregating
$60 million in coverage but reversed the trial court's decision
as to allocation as being premature.
The company intends to vigorously defend against the claims in
these class action suits and pursue the issue of insurance
discussed above, but is currently unable to predict the outcome
of the cases. An unfavorable outcome could have a material
adverse effect on the financial condition and prospects of the
company.
Don's United Super (and related cases). The company and two
retired executives have been named in a suit filed in 1998 in the
United States District Court for the Western District of Missouri
by several current and former customers of the company (Don's
United Super, et al. v. Fleming, et al.). The eighteen
plaintiffs operate retail grocery stores in the St. Joseph and
Kansas City metropolitan areas. The plaintiffs in this suit
allege product overcharges, breach of contract, breach of
fiduciary duty, misrepresentation, fraud, and RICO violations,
and they are seeking actual, punitive and treble damages, as well
as a declaration that certain contracts are voidable at the
option of the plaintiffs.
During the fourth quarter of 1999, plaintiffs produced reports of
their expert witnesses calculating alleged actual damages of
approximately $112 million. During the first quarter of 2000,
plaintiffs revised a portion of these damage calculations, and
although 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. 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 procein these cases have been
stayed pending the arbitration of the claims of those plaintiffs
who have arbitration agreements with the company.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation
granted the company's motion and ordered the related Missouri
cases and the Storehouse Markets case (described below)
transferred to the Western District of Missouri for coordinated
or consolidated pretrial proceedings.
The company intends to vigorously defend against the claims in
these related cases but is currently unable to predict the
outcome of the cases. An unfavorable outcome could have a
material adverse effect on the financial condition and prospects
of the company.
Storehouse Markets. In 1998, the company and one of its former
division officers were named in a suit filed in the United States
District Court for the District of Utah by several current and
former customers of the company (Storehouse Markets, Inc., et al.
v. Fleming Companies, Inc., et al.). The plaintiffs have alleged
product overcharges, fraudulent misrepresentation, fraudulent
nondisclosure and concealment, breach of contract, breach of duty
of good faith and fair dealing, and RICO violations, and they are
seeking actual, punitive and treble damages. The plaintiffs have
made these claims on behalf of a class that would purportedly
include current and former customers of Fleming's Salt Lake City
division covering a four state region. On June 12, 2000, the
court entered an order certifying the case as a class action. On
July 11, 2000, the United States Court of Appeals for the Tenth
Circuit granted the company's request for permission to appeal
the class certification order, and the company is pursuing that
appeal.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation
granted the company's motion and ordered the related Missouri
cases (described above) and the Storehouse Markets case
transferred to the Western District of Missouri for coordinated
or consolidated pretrial proceedings.
Damages have not been quantified by the plaintiffs; however, the
company anticipates that substantial damages will be claimed.
The company intends to vigorously defend against these claims but
is currently unable to predict the outcome of the case. An
unfavorable outcome could have a material adverse effect on the
financial condition and prospects of the company.
Allen's IGA. On August 1, 2000, the United States District Court
for the Eastern District of Oklahoma entered an order dismissing
with prejudice Allen's IGA, Inc., et al. v. Fleming Companies,
Inc., et al.
That lawsuit had been filed by several former customers against
the company and two of its former executives, alleging product
overcharges, fraud, breach of contract, negligence, RICO
violations, and seeking actual, punitive and treble damages, an
accounting, and other equitable relief. Damages had not been
quantified by the plaintiffs; however, the company anticipated
that substantial damages would be claimed and had previously
disclosed that an unfavorable outcome in that case could have had
a material adverse effect on the financial condition and
prospects of the company.
The case was dismissed pursuant to a settlement agreement that
contains a confidentiality provision. In connection with the
settlement, the company accrued an amount in the second quarter
of 2000 that was not material to its financial condition or
results of operations. Subsequent to the end of the second
quarter the plaintiffs were paid.
Other. The company's facilities and operations are subject to
various laws, regulations and judicial and administrative orders
concerning protection of the environment and human health,
including provisions regarding the transportation, storage,
distribution, disposal or discharge of certain materials. In
conformity with these provisions, the company has a comprehensive
program for testing, removal, replacement or repair of its
underground fuel storage tanks and for site remediation where
necessary. The company has established reserves that it believes
will be sufficient to satisfy the anticipated costs of all known
remediation requirements.
The company and others have been designated by the U.S.
Environmental Protection Agency ("EPA") and by similar state
agencies as potentially responsible parties under the
Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") or similar state laws, as applicable, with respect
to EPA-designated Superfund sites. While liability under CERCLA
for remediation at such sites is generally joint and several with
other responsible parties, the company believes that, to the
extent it is ultimately determined to be liable for the expense
of remediation at any site, such liability will not result in a
material adverse effect on its consolidated financial position or
results of operations. The company is committed to maintaining
the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws,
regulations and orders.
The company is a party to various other litigation and contingent
loss situations arising in the ordinary course of its business
including: disputes with customers and former customers; disputes
with owners and former owners of financially troubled or failed
customers; disputes with employees and former employees regarding
labor conditions, wages, workers' compensation matters and
alleged discriminatory practices; disputes with insurance
carriers; tax assessments and other matters, some of which are
for substantial amounts. However, the company does not believe
any such action will 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.
July 8, July 10,
(In millions) 2000 1999
--------------------------------------------------
Current assets $295 $39
Noncurrent assets $480 $125
Current liabilities $151 $30
Noncurrent liabilities $158 $35
28 weeks ended
--------------------------
July 8, July 10,
(In millions) 2000 1999
-------------------------------------------------
Net sales $2,022 $253
Costs and expenses $2,036 $255
Net loss $(8) $(1)
8. The accompanying operating statements include the following:
12 weeks ended
------------------------
July 8, July 10,
(In thousands) 2000 1999
------------------------------------------------------
Depreciation and amortization
(includes amounts below) $39,377 $37,559
Amortized costs in interest
expense $1,122 $1,125
Excess depreciation and
amortization due to the
strategic plan $1,917 $-
28 weeks ended
------------------------
July 8, July 10,
(In thousands) 2000 1999
------------------------------------------------------
Depreciation and amortization
(includes amounts below) $94,622 $83,876
Amortized costs in interest
expense $2,618 $2,623
Excess depreciation and
amortization due to the
strategic plan $6,312 $-
9. In December 1998, the company announced the implementation of
a strategic plan designed to improve the competitiveness of the
retailers the company serves and improve the company's
performance by building stronger operations that can better
support long-term growth. The four major initiatives of the
strategic plan are to consolidate wholesale operations, grow
wholesale sales, improve retail performance, and reduce overhead
and operating expenses. On April 25, 2000, the company announced
the evaluation of strategic alternatives for the remaining
conventional retail chains, including the potential sale of these
operations. The evaluation is nearing conclusion and an announcement
of the results should be made by the end of the third quarter. The
company expects that the evaluation will result in certain stores
converted to the Food-4-Less format, certain chains being retained
or sold, and the sale of a significant number of stores in other
chains with any residual stores being closed.
The total pre-tax charge of the strategic plan is presently
estimated at $959 million ($267 million cash and $692 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 ($88 million), updating impairment amounts on the five
retail chains in the original plan ($18 million), the divestiture
or closing of the two chains not in the original plan ($38
million), decreasing costs related to a scheduled closing no
longer planned ($18 million), and other costs including those
related to the company's low cost pursuit program and
centralization of administrative functions ($51 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 $915 million ($46 million in the second
quarter of 2000, $64 million in the first quarter of 2000, $137
million in 1999, and $668 million recorded in 1998). After tax,
the expense for the first two quarters of 2000 was $65 million or
$1.69 per share ($27 million or $.71 per share for quarter two
and $38 million or $.98 per share for quarter one). The $44
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 $46 million charge in the second quarter of 2000 was included
on several lines of the Consolidated Condensed Statements of
Operations as follows: $1 million was included in net sales
related to rent income impairment due to division closings; $22
million was included in cost of sales and was primarily related
to inventory valuation adjustments, moving and training costs,
and additional depreciation and amortization on assets to be
disposed of but not yet held for sale; $2 million was included in
selling and administrative expense and equity investment results
as disposition related costs recognized on a periodic basis; and
the remaining $21 million was included in the Impairment/
restructuring charge line. The second quarter charge consisted of
the following components:
o Impairment of assets of $1 million. The impairment related
to other long-lived assets.
o Restructuring charges of $20 million. The restructuring
charges consisted primarily of severance related expenses due to
the consolidation of certain administrative departments announced
during the second quarter of 2000. The restructuring charges
also consisted of operating lease liabilities and professional
fees incurred related to the restructuring process.
o Other disposition and related costs of $25 million. These
costs consisted primarily of inventory valuation adjustments,
additional depreciation and amortization on assets to be disposed
of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The charge for the second quarter of 2000 relates to the
company's segments as follows: $20 million relates to the
distribution segment and $10 million relates to the retail
segment with the balance relating to support services expenses.
The $110 million charge in the first two quarters of 2000 was
included on several lines of the Consolidated Condensed Statements
of Operations as follows: $2 million was included in net sales
related primarily to rent income impairment due to division
closings; $35 million was included in cost of sales and was
primarily related to inventory valuation adjustments, moving and
training costs, and additional depreciation and amortization on
assets to be disposed of but not yet held for sale; $10 million
was included in selling and administrative expense and equity
investment results as disposition related costs recognized on a
periodic basis; and the remaining $63 million was included in the
Impairment/restructuring charge line. The charge for the first
two quarters consisted of the following components:
o Impairment of assets of $3 million. The impairment related
to other long-lived assets.
o Restructuring charges of $61 million. The restructuring
charges consisted of severance related expenses and pension
withdrawal liabilities for the closings of York and Philadelphia
which were announced during the first quarter of 2000 as part of
an effort to grow in the northeast by consolidating distribution
operations and expanding the Maryland facility. Additionally, the
charge consisted of severance related expenses due to the
consolidation of certain administrative departments announced
during the second quarter of 2000. The restructuring charges also
consisted of operating lease liabilities and professional fees
incurred related to the restructuring process.
o Other disposition and related costs of $46 million. These
costs consisted primarily of inventory valuation adjustments,
additional depreciation and amortization on assets to be disposed
of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The charge for the first two quarters of 2000 relates to the
company's segments as follows: $57 million relates to the
distribution segment and $27 million relates to the retail
segment with the balance relating to support services expenses.
The charges related to workforce reductions are as follows:
($'s in thousands) Amount Headcount
------------------ ------ ---------
1998 Ending Liability $21,983 1,260
1999 Activity:
Charge 12,029 1,350
Terminations (24,410) (1,950)
------- ------
Ending Liability 9,602 660
2000 Quarter 1 Activity:
Charge 25,509 1,020
Terminations (4,250) (560)
------- ------
Ending Liability 30,861 1,120
2000 Quarter 2 Activity:
Charge 3,799 130
Terminations (7,807) (670)
------- ------
Ending Liability $26,853 580
======= ======
The breakdown of the 1,150 headcount reduction recorded for the
first two quarters of 2000 is: 990 from the distribution segment;
130 from the retail segment; and 30 from support services.
Additionally, the strategic plan includes charges related to
lease obligations which will be utilized as operating units or
retail stores close, but ultimately reduced over remaining lease
terms ranging from 1 to 20 years. The charges and utilization
have been recorded to-date as follows:
($'s in thousands) Amount
------------------ ------
1998 Ending Liability $27,716
1999 Activity:
Charge 15,074
Utilized (10,281)
-------
Ending Liability 32,509
2000 Quarter 1 Activity:
Charge 9,062
Utilized (9,957)
-------
Ending Liability 31,614
2000 Quarter 2 Activity:
Charge 1,903
Utilized (6,376)
-------
Ending Liability $27,141
=======
Assets held for sale included in other current assets at the end
of the second quarter of 2000 were approximately $58 million,
consisting of $26 million of distribution operating units and $32
million of retail stores.
The pre-tax charge of the strategic plan in the second quarter of
1999 totaled $16 million. After tax, the expense for the second
quarter of 1999 was $12 million or $.31 per share. The $16
million charge was included on several lines of the Consolidated
Condensed Statements of Operations for the second quarter of 1999
as follows: $7 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
$6 million was included in the Impairment/restructuring charge
line. The $16 million charge consisted of the following components:
o Impairment of assets of $1 million.
o Restructuring charges of $5 million. The restructuring
charges consisted of severance related expenses to sell or close
the Boogaarts retail chain. The restructuring charges also
consisted of professional fees incurred related to the
restructuring process.
o Other disposition and related costs of $10 million. These
costs consist primarily of inventory valuation adjustments,
disposition related costs recognized on a periodic basis and
other costs.
The $16 million charge relates to the company's segments as
follows: $4 million relates to the distribution segment and $7
million relates to the retail segment with the balance relating
to support services expenses.
The pre-tax charge of the strategic plan for the first two
quarters of 1999 totaled $62 million. After tax, the expense for
the first two quarters of 1999 was $44 million or $1.15 per
share. The $62 million charge was included on several lines of
the Consolidated Condensed Statements of Operations for the
second quarter of 1999 as follows: $13 million was included in
cost of sales and was primarily related to inventory valuation
adjustments; $6 million was included in selling and
administrative expense as disposition related costs recognized on
a periodic basis; and the remaining $43 million was included in
the Impairment/restructuring charge line. The $62 million charge
consisted of the following components:
o Impairment of assets of $25 million. The impairment
components were $22 million for goodwill and $3 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 $18 million. The restructuring
charges consisted of severance related expenses and pension
withdrawal liabilities for the Peoria distribution operating unit
and Consumers and Boogaarts retail chains. The restructuring
charges also consisted of operating lease liabilities for the
Peoria distribution operating unit and professional fees incurred
related to the restructuring process.
o Other disposition and related costs of $19 million. These
costs consist primarily of inventory valuation adjustments,
disposition related costs recognized on a periodic basis and
other costs.
The $62 million charge relates to the company's segments as
follows: $36 million relates to the distribution segment and $15
million relates to the retail segment with the balance relating
to support services expenses.
Asset impairments were recognized in accordance with SFAS No. 121
- Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and such assets were written down
to their estimated fair values based on estimated proceeds of
operating units to be sold or discounted cash flow projections.
The operating costs of operating units to be sold or closed are
treated as normal operations during the period they remain in
use. Salaries, wages and benefits of employees at these
operating units are charged to operations during the time such
employees are actively employed. Depreciation expense is
continued for assets that the company is unable to remove from
operations.
<PAGE>
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 8,
2000, and the related condensed consolidated statements of
operations for the 12 and 28 weeks ended July 8, 2000 and July
10, 1999 and condensed consolidated statements of cash flows for
the 28 weeks ended July 8, 2000 and July 10, 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
July 26, 2000
<PAGE>
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 third 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 1999,
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 substantially complete.
On April 25, 2000, the company announced the evaluation 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.
The evaluation is nearing conclusion and an announcement of
the results should be made by the end of the third quarter.
The company expects that the evaluation will result in certain
stores converted to the Food-4-Less format, certain chains
being retained or sold, and the sale or closure of a significant
number of stores in other chains with any residual stores being
closed. The sale or closure is not expected to be dilutive to
future adjusted earnings. The review of strategic alternatives
for the conventional business, which is nearing completion, could
result in additional charges that are significant. However,
the additional charges, if any, would primarily be non-cash.
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 $959 million ($267 million cash and $692 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 ($88 million), updating impairment amounts on the five
retail chains in the original plan ($18 million), the divestiture
or closing of the two chains not in the original plan ($38
million), decreasing costs related to a scheduled closing no
longer planned ($18 million), and other costs including those
related to the company's low cost pursuit program and
centralization of administrative functions ($51 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 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. The pre-
tax charge recorded to-date is $915 million ($46 million in the
second quarter of 2000, $64 million in the first quarter of 2000,
$137 million in 1999, and $668 million recorded in 1998). After
tax, the expense for the first two quarters of 2000 was $65
million or $1.69 per share ($27 million or $.71 per share for
quarter two and $38 million or $.98 million per share for quarter
one).
Of the $46 million charge in the second quarter of 2000, $40
million is expected to require cash expenditures. The remaining
$6 million charge consisted of non-cash items. The $46 million
charge consisted of the following components:
o Impairment of assets of $1 million. The impairment related
to other long-lived assets.
o Restructuring charges of $20 million. The restructuring
charges consisted primarily of severance related expenses due to
the consolidation of certain administrative departments announced
during the second quarter of 2000. The restructuring charges
also consisted of operating lease liabilities and professional
fees incurred related to the restructuring process.
o Other disposition and related costs of $25 million. These
costs consisted primarily of inventory valuation adjustments,
additional depreciation and amortization on assets to be disposed
of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The company recorded a net loss of $13 million, or $.35 per
share, for the second quarter of 2000 and a net loss of $39
million, or $1.02 per share, for the first two quarters of 2000.
The after-tax effect of the strategic plan charge on the
company's second quarter of 2000 was $27 million, or $.71 per
share, and $65 million, or $1.69 per share for the first two
quarters of 2000. Excluding the strategic plan charge, the
company would have recorded net income of $14 million, or $.35
per share, for the second quarter of 2000 and net income of $26
million, or $.65 per share, for the first two quarters of 2000.
Adjusted EBITDA for the second quarter of 2000 was $103 million
and $231 million for the first two quarters of 2000. That
represents a 6.5% increase in the second quarter and a 8.0%
increase in the first two quarters of 2000 compared to the same
time periods in 1999. "Adjusted EBITDA" is earnings before
extraordinary items, interest expense, income taxes, depreciation
and amortization, equity investment results, LIFO provision and
one-time adjustments (e.g., strategic plan charges and specific
litigation charges). Adjusted EBITDA should not be considered as
an alternative measure of the company's net income, operating
performance, cash flow or liquidity. It is provided as
additional information related to the company's ability to
service debt; however, conditions may require conservation of
funds for other uses. Although the company believes adjusted
EBITDA enhances a reader's understanding of the company's
financial condition, this measure, when viewed individually, is
not necessarily a better indicator of any trend as compared to
conventionally computed measures (e.g., net sales, net earnings,
net cash flows, etc.). Finally, amounts presented may not be
comparable to similar measures disclosed by other companies. The
following table sets forth the calculation of adjusted EBITDA:
<TABLE>
<CAPTION>
For the 12 weeks ended For the 28 weeks ended
July 8, July 10, July 8, July 10,
(In millions) 2000 1999 2000 1999
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(13) $ (2) $(39) $(27)
Add back:
Taxes on loss (9) 2 (26) (4)
Depreciation/amortization 38 36 92 81
Interest expense 38 39 92 90
Equity investment results 2 2 3 6
LIFO provision 2 3 5 6
---- ---- ---- ----
EBITDA 58 80 127 152
Add back non-cash strategic
plan charges * 5 6 12 35
---- ---- ---- ----
EBITDA excluding non-cash
strategic plan charges 63 86 139 187
Add back strategic plan charges
requiring cash 40 10 92 27
---- ---- ---- ----
Adjusted EBITDA $103 $ 96 $231 $214
==== ==== ==== ====
</TABLE>
------------
* 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 $44 million is expected throughout the rest of 2000
as implementation of the strategic plan continues. Approximately
$43 million of these future expenses are expected to require cash
expenditures. The remaining $1 million of the future expense
relates to non-cash 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 for 1999 and the Form 10-K and Form 10-
K/A for 1998.
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 second and first quarters of
2000 was $14 million or $.35 per share and $12 million or $.30
per share with earnings per share of $.35 expected for the third
quarter and total adjusted earnings per share of $1.52 expected
for 2000. The company continues to expect annual earnings per
share to exceed $3.00 by the year 2003. Sales in the distribution
segment are also expected to increase. Sales in the retail
segment will decrease due to the evaluation of strategic
alternatives for the conventional retail chains.
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:
<TABLE>
<CAPTION>
==============================================================================
July 8, July 10,
For the 12-weeks ended 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.00 % 100.00 %
Gross margin 8.60 9.77
Less:
Selling and administrative 7.72 8.57
Interest expense 1.14 1.15
Interest income (.28) (.21)
Equity investment results .05 .07
Impairment/restructuring charge .62 .18
------------------------------------------------------------------------------
Total expenses 9.25 9.76
------------------------------------------------------------------------------
Income (loss) before taxes (.65) .01
Taxes on income (loss) (.25) .08
------------------------------------------------------------------------------
Net loss (.40)% (.07)%
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
==============================================================================
July 8, July 10,
For the 28-weeks ended 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.00 % 100.00 %
Gross margin 9.04 9.67
Less:
Selling and administrative 8.08 8.50
Interest expense 1.17 1.15
Interest income (.24) (.21)
Equity investment results .05 .08
Impairment/restructuring charge .81 .55
------------------------------------------------------------------------------
Total expenses 9.87 10.07
------------------------------------------------------------------------------
Loss before taxes (.83) (.40)
Taxes on loss (.33) (.06)
------------------------------------------------------------------------------
Net loss (.50)% (.34)%
==============================================================================
</TABLE>
Net sales.
---------
Net sales for the second quarter (12 weeks) of 2000 increased by
$37 million, or more than 1%, to $3.4 billion from the same
period in 1999. Year to date, net sales increased by $16
million, or less than 1%, to $7.8 billion from the same period in
1999.
Net sales for the distribution segment increased by 6.1% for the
second quarter of 2000 to $2.6 billion compared to $2.5 billion
in 1999. Year to date, net sales increased by 3.6% to $6.0
billion compared to $5.8 billion in 1999. The 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). Sales have also been
impacted by the planned closing and consolidation of certain
distribution operating units. Additionally, sales comparisons
were affected by the previously announced loss of sales to
United, which began during the second quarter of 2000. In 1999,
sales to Randall's and United accounted for less than 4% of the
company's sales. The net increase in the distribution segment
sales is the largest in five years.
Retail segment sales for the second quarter of 2000 decreased
$113 million, or 13%, to $761 million from the same period in
1999. Year to date, retail segment sales decreased $190 million,
or 9%, in 2000 to $1.8 billion from the same period in 1999. The
decrease in sales was primarily due to the divestiture of under-
performing and non-strategic stores. Decreases in same-store
sales of 3.2% for the second quarter and 4.4% year to date also
contributed to the sales decline. The decrease was offset
partially by sales from new stores opened since the second
quarter of 1999. Because of the strategic alternatives being
evaluated for the conventional chains, sales will decrease in
the retail segment.
The difference in food price inflation for the company's product
mix was not significant in 2000 or 1999.
Gross margin.
------------
Gross margin for the second quarter of 2000 decreased by $36
million, or 11%, to $291 million from $327 million for the same
period in 1999, and also decreased as a percentage of net sales
to 8.60% from 9.77% for the same period in 1999. Year to date,
gross margin decreased by $48 million, or 6%, to $708 million
from $756 million for the same period in 1999, and also decreased
as a percentage of net sales to 9.04% from 9.67% for the same
period in 1999. After excluding the strategic plan charges, gross
margin for the second quarter of 2000 decreased by $20 million,
or 6%, compared to the same period in 1999, and decreased as a
percentage of net sales to 9.28% from 9.98% for the same period
in 1999. Year to date, gross margin, after excluding the
strategic plan charges, decreased by $23 million, or 3%, compared
to the same period in 1999, and decreased as a percentage of net
sales to 9.51% from 9.83% for the same period in 1999. The
decrease in percentage to net sales was due to a change in mix.
The sales of the distribution segment represent a larger portion
of total company sales than the retail segment and the
distribution segment has lower margins as a percentage of sales
versus the retail segment.
For the distribution segment on an adjusted basis, gross margin
as a percentage of gross distribution sales was down slightly for
both the second quarter and year-to-date periods of 2000 compared
to the same periods in 1999. This was due to competitive pricing
actions and increased transportation costs which were partially
offset by the benefits of asset rationalization and the
centralization of procurement. For the retail segment on an
adjusted basis, gross margin as a percentage of net retail sales
improved significantly for both the second quarter and year-to-
date periods of 2000 compared to the same periods in 1999 due to
the divesting or closing of under-performing stores and the
centralization of procurement. The strategic plan charges
increased in 2000 for both the second quarter and year to date
compared to the same periods in 1999. The increased charges were
primarily due to inventory valuation adjustments, additional
depreciation and amortization on assets to be disposed of but not
yet held for sale, and periodic costs recorded as incurred such
as recruiting and training.
Selling and administrative expenses.
-----------------------------------
Selling and administrative expenses for the second quarter of
2000 decreased by approximately $26 million, or 9%, to $261
million from $287 million for the same period in 1999 and
decreased as a percentage of net sales to 7.72% for 2000 from
8.57% in 1999. Year to date, selling and administrative expenses
decreased by $30 million, or 5%, to $634 million in 2000 from
$664 million for the same period in 1999 and decreased as a
percentage of net sales to 8.08% for 2000 from 8.50% in 1999.
After excluding the strategic plan charges, selling and
administrative expenses for the second quarter of 2000 decreased
by $24 million, or 9%, compared to the same period in 1999, and
decreased as a percentage of net sales to 7.66% from 8.48% for
the same period in 1999. Year to date, selling and administrative
expenses, after excluding the strategic plan charges, decreased
in 2000 by $34 million, or 5%, compared to the same period in
1999, and decreased as a percentage of net sales to 7.97% from
8.42% 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 on an adjusted basis, selling and
administrative expenses as a percentage of net sales improved for
both the second quarter and year-to-date periods of 2000 compared
to the same periods in 1999 due to asset rationalization and the
centralization of administrative functions. For the retail
segment on an adjusted basis, selling and administrative expenses
as a percentage of retail sales decreased in the second quarter
of 2000 compared to the same period in 1999. Year to date,
selling and administrative expenses for 2000 were flat as a
percentage of retail sales compared to the same period in 1999.
Selling and administrative expenses were reduced in 2000 as
compared to 1999 due to the divestiture or closing of under-
performing stores and the centralization of administrative
functions. This was offset by costs associated with closing
certain retail stores in continuing retail chains. The strategic
plan charges were lower in the second quarter and higher year to
date for 2000 compared to the same periods in 1999. The
strategic charges were primarily made up of moving and training
costs associated with the consolidation of the accounting and
human resource functions.
The 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 $5 million for the second quarter
of both 2000 and 1999 and $13 million for both year-to-date
periods.
Operating earnings.
------------------
Operating earnings for the distribution segment decreased
slightly for the second quarter of 2000 to $61 million from $62
million for the same period of 1999 and reflected no change year
to date at $145 million for both years. After excluding the
strategic plan charges, operating earnings for the second quarter
of 2000 increased by $10 million, or 15%, to $75 million from $65
million for the same period of 1999. Year to date, operating
earnings, after excluding the strategic plan charges, increased
by $15 million, or 10%, to $169 million in 2000 from $154 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, centralizing of
certain procurement and administrative functions in support
services and improving sales. 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 increased by $13
million to $17 million for the second quarter of 2000 from $4
million for the same period of 1999. Year to date, operating
earnings also increased $13 million to $30 million in 2000 from
$17 million in 1999. After excluding the strategic plan charges,
operating earnings increased by $11 million to $21 million in the
second quarter of 2000 from $10 million for the same period of
1999 and increased by $13 million year to date to $39 million in
2000 and $26 million in 1999. Operating earnings were improved
primarily by divesting or closing under-performing chains and
centralizing certain administrative functions in support
services. Year to date, operating earnings were also improved by
increased benefits received from the distribution segment.
Support services expenses increased in the second quarter of 2000
compared to the same period of 1999 by $23 million to $49 million
from $26 million. Year to date, support services expenses
increased by $30 million to $100 million in 2000 from $70 million
in 1999. After excluding the strategic plan charges, support
services expenses increased by $16 million to $41 million in the
second quarter of 2000 from $25 million for the same period of
1999 and increased by approximately $18 million year to date to
$87 million in 2000 from $69 million in 1999. The increase in
expense was primarily due to centralizing certain procurement and
administrative functions from the distribution and retail
segments. Strategic plan charges were higher in 2000 due to
moving and training expenses associated with the centralization
of the procurement and administrative functions.
Interest expense.
----------------
Interest expense for the second quarter of 2000 of $38 million
was flat compared to the same period in 1999. Year to date,
interest expense was $1 million higher in 2000 compared to the
same period in 1999 due to slightly higher average debt balances
partially offset by average lower interest rates.
Interest income.
---------------
Interest income of $9 million for the second quarter of 2000 was
$2 million higher than the same period of 1999 due to a tax
refund receivable balance. Year to date, interest income of $19
million in 2000 was $3 million higher than the same period in
1999 due to the tax refund receivable and higher average interest
rates.
Equity investment results.
-------------------------
The company's portion of operating losses from equity investments
improved by less than $1 million for the second quarter of 2000
compared to the same period of 1999. Year to date, equity
investment results has improved by $2 million to $4 million in
2000 from $6 million in 1999.
Impairment/restructuring charge.
-------------------------------
The pre-tax charge recorded in the Consolidated Condensed
Statements of Operations (associated with the implementation of
the company's strategic plan announced in 1998) was $46 million
for the second quarter of 2000 compared to $16 million for the
same period of 1999. The $46 million charge in 2000 was recorded
with $21 million reflected in the Impairment/restructuring charge
line and the balance reflected in other financial statement
lines. The $16 million charge in 1999 was recorded with $6
million reflected in the Impairment/restructuring charge line and
the balance reflected in other financial statement lines.
Year to date, the pre-tax charge was $110 million for 2000
compared to $62 million for the same period of 1999. The $110
million charge in 2000 was recorded with $63 million reflected in
the Impairment/restructuring charge line and the balance
reflected in other financial statement lines. The $62 million
charge in 1999 was recorded with $43 million reflected in the
Impairment/restructuring charge line and the balance reflected in
other financial statement lines. See "General" above and Note 9
in the notes to the consolidated condensed financial statements
for further discussion regarding the strategic plan.
Taxes on income.
---------------
The effective tax rates for the 28 weeks of 2000 and 1999 were
39.8% and 14.7%, respectively. These were both blended rates
taking into account operations activity, strategic plan activity,
write-offs of non-deductible goodwill and the timing of these
items during the year. The tax amount for the second quarter of
both years was derived using the 28 week tax amount with that
year's estimated effective tax rate compared to the tax amount
recorded for the first 16 weeks of the year.
Certain accounting matters.
--------------------------
The Financial Accounting Standards Board issued SFAS No. 133 -
Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and is effective
for 2001. The company will adopt SFAS No. 133 by the required
effective date. The company has begun to study the potential
impact, but has not determined the impact on its financial
statements from adopting the new standard.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB No.
101"). SAB No. 101 provides guidance on recognition,
presentation, and disclosure of revenue in financial statements.
SAB No. 101 is effective no later than the fourth quarter of
2000. The company currently believes the implementation of SAB
No. 101 may have an impact on the classification on net sales and
cost of goods sold, but no material impact on earnings.
Other.
-----
Costs relating to the implementation of the strategic plan have
negatively affecting earnings in the first 28-weeks of 2000 and
are likely to continue for the near term. Additionally, the
outcome of the strategic alternatives being explored for the
remaining conventional retail chains could have an adverse effect
on earnings.
Liquidity and Capital Resources
In the two quarters ended July 8, 2000, the company's principal
sources of liquidity were cash flows from operating activities
and the sale of certain assets and liabilities. Borrowing
capacity under the company's credit facility provided a revolving
source of liquidity during this period. 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 $52 million of net cash flows for
the two quarters ended July 8, 2000 compared to $169 million for
the same period in 1999. Included in 2000 were $87 million of
strategic plan related expenditures, $46 million used for
increases in working capital, and an $11 million net increase in
other assets and other liabilities.
Cash requirements related to the implementation and completion of
the strategic plan (on a pre-tax basis) are expected to be $45
million for the remainder of year 2000, or a total of $132
million for the full year. After this year, cash expenditures
for these charges (on a pre-tax basis) are expected to be $22
million in 2001 and $21 million in 2002. Management believes
working capital reductions, proceeds from asset sales, increased
earnings related to the successful implementation of the
strategic plan, and tax savings are expected to provide more than
adequate cash flows to cover all of these costs.
Net cash provided by investing activities.
-----------------------------------------
Total investment-related activity resulted in $6 million of
positive net cash flow for the two quarters ended July 8, 2000
compared to a $154 million use of funds in the same period of
1999. Cash provided by asset sales, collections on notes
receivable and other investing-related activities were only
partially offset by capital expenditures.
Net cash used in financing activities.
-------------------------------------
Net cash required by financing activities was $56 million for the
two quarters ended July 8, 2000 compared to $17 million net cash
required for the same period last year. In 2000, long-term debt
decreased by a net amount of $46 million while capital lease
obligations increased by a net amount of $11 million, which
included $12 million in principal payments for capital leases.
At the end of the second quarter of 2000, outstanding loans and
letters of credit under the credit facility totaled $172 million
in term loans, $240 million in revolver loans, and $54 million in
letters of credit. Based on actual borrowings and letters of
credit issued, the company could have borrowed an additional $306
million under the revolver.
In April 2000, the company announced it was evaluating strategic
alternatives with respect to its conventional retail chains,
including their potential sale. The evaluation is nearing conclusion
and an announcement of the results should be made by the end of the
third quarter. The company expects that the evaluation will result
in certain stores converted to the Food-4-Less format, certain chains
being retained or sold, and the sale of a significant number of stores
in other chains with any residual stores being closed. Proceeds
from any sales would be used to invest in our growth businesses or to
prepay debt.
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 Quarterly Report on Form
10-Q for the quarter ended April 15, 2000:
Other Customer Cases.
--------------------
J&A Foods. 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.
Welsh. In April 2000, the operators of two grocery stores in Van
Horn and Marfa, Texas filed an amended complaint in the United
States District Court for the Western District of Texas, Pecos
Division (Welsh v. Fleming Foods of Texas, L.P.). The amended
complaint alleges product overcharges, breach of contract, fraud,
conversion, breach of fiduciary duty, negligent
misrepresentation, and breach of the Texas Deceptive Trade
Practices Act. The amended complaint seeks unspecified actual
damages, punitive damages, attorneys' fees and prejudgment and
postjudgment interest. The court has set December 4, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
10.73* Amendment to the Associate Stock
Purchase Plan
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:
None
<PAGE>
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: August 17, 2000 KEVIN TWOMEY
Kevin Twomey
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.73 Amendment to the Associate Stock
Purchase Plan Filed herewith electronically
12 Computation of Ratio of Earnings
to Fixed Charges Filed herewith electronically
15 Letter from Independent
Accountants as to Unaudited
Interim Financial Information Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
