AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 2002
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FLEMING COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OKLAHOMA 5141 48-0222760
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
1945 LAKEPOINTE DRIVE
LEWISVILLE, TEXAS 75057
(972) 906-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
FOR CO-REGISTRANTS, SEE "TABLE OF CO-REGISTRANTS" ON FOLLOWING PAGE.
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CARLOS M. HERNANDEZ, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
FLEMING COMPANIES, INC.
1945 LAKEPOINTE DRIVE
LEWISVILLE, TEXAS 75057
(972) 906-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
JOHN M. NEWELL, ESQ.
LATHAM & WATKINS
505 MONTGOMERY STREET, SUITE 1900
SAN FRANCISCO, CALIFORNIA 94111
(415) 391-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE
--------------------------- ------------ -------------- ----------------- ----------------
10-5/8% Series D Senior Subordinated Notes due 2007 ........ $ 400,000,000 100% $ 400,000,000 $ 95,600
Guarantees of 10-5/8% Series D Senior
Subordinated Notes due 2007(2) ............................. --(2) --(2) --(2) --(2)
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No separate consideration will be received with respect to these guarantees
and, therefore, no registration fee is attributable to them.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
TABLE OF CO-REGISTRANTS
STATE OF I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION PSICC
NAME ORGANIZATION NUMBER NUMBER
---- --------------- --------------- ------
ABCO Food Group, Inc. Nevada 88-0440077 5411
ABCO Markets, Inc. Arizona 86-0491500 *
ABCO Realty Corp. Arizona 86-0491499 *
AG, L.L.C. Oklahoma ** **
American Logistics Group, Inc. Delaware 13-2656567 5141
Arizona Price Impact, L.L.C. Oklahoma 73-1546576 5411
Baker's Food Group, Inc. Nevada 88-0440078 5411
Cardinal Wholesale, Inc. Minnesota 41-0969178 5194
Dunigan Fuels, Inc. Texas 52-2206478 5172
FAVAR CONCEPTS, LTD. Delaware 73-1570430 5411
Fleming Food Management Co., L.L.C. Oklahoma 73-1577381 5141
Fleming Foods of Texas, L.P. Oklahoma 73-1577380 5141
Fleming International Ltd. Oklahoma 73-1414701 5141
Fleming Supermarkets of Florida, Inc. Florida 65-0418543 5411
Fleming Transportation Service, Inc. Oklahoma 73-1126039 5141
Fleming Wholesale, Inc. Nevada 93-1175982 5141
Food 4 Less Beverage Company, Inc. Texas ** **
FuelServ, Inc. Delaware 75-2894483 5172
Gateway Insurance Agency, Inc. Wisconsin 39-1346803 5141
LAS, Inc. Oklahoma 73-1410261 5411
Minter-Weisman Co. Minnesota 41-0809931 5194
Piggly Wiggly Company Oklahoma 73-1477999 6794
Progressive Realty, Inc. Oklahoma 73-1485750 5141
Rainbow Food Group, Inc. Nevada 88-0440079 5411
Retail Investments, Inc. Nevada 86-0900985 5411
Retail Supermarkets, Inc. Texas 74-0658440 5411
RFS Marketing Services, Inc. Oklahoma 73-1489627 5141
Richmar Foods, Inc. California 68-0095094 5411
Scrivner Transportation, Inc. Oklahoma 73-1288028 *
* Inactive entity.
** No I.R.S. Employer Identification Number or PSICC Number - subsidiary
created solely for liquor license.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 9, 2002
PRELIMINARY PROSPECTUS
FLEMING COMPANIES, INC.
OFFER TO EXCHANGE
$400,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS
10-5/8% SERIES D SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 10-5/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2007
AND
ANY AND ALL OF ITS OUTSTANDING 10-5/8% SERIES C
SENIOR SUBORDINATED NOTES DUE 2007
MATERIAL TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on ,
2002, unless extended.
- We will exchange all outstanding Series B notes and Series C notes that are
validly tendered and not validly withdrawn for an equal principal amount of
Series D notes which are registered under the Securities Act.
- The exchange offer is not subject to any conditions other than that it not
violate applicable law or any applicable interpretation of the staff of the
SEC.
- You may withdraw tenders of outstanding notes at any time before the exchange
offer expires.
- The exchange of notes will not be a taxable event for U.S. federal income tax
purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the new Series D notes are substantially identical to the
outstanding Series B notes, and substantially identical to the outstanding
Series C notes except for transfer restrictions and registration rights
relating to the outstanding notes.
- You may tender outstanding notes only in denominations of $1,000 and multiples
of $1,000.
- Our affiliates may not participate in the exchange offer.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR
A DESCRIPTION OF THE RISKS YOU SHOULD CONSIDER WHEN EVALUATING THIS INVESTMENT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
We are not making this exchange offer in any state where it is not
permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 2002.
We have not authorized any dealer, salesperson or other person to give any
information or to make any representations to you other than the information
contained in this prospectus. You must not rely on any information or
representations not contained in this prospectus as if we had authorized it.
This prospectus does not offer to sell or solicit an offer to buy any securities
other than the registered notes to which it relates, nor does it offer to buy
any of these notes in any jurisdiction from any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction.
The information contained in this prospectus is current only as of the date
on the cover page of this prospectus, and may change after that date. We do not
imply that there has been no change in the information contained in this
prospectus or in our affairs since that date by delivering this prospectus.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT US THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO YOU UPON WRITTEN OR ORAL REQUEST. IF
YOU WOULD LIKE A COPY OF ANY OF THIS INFORMATION, PLEASE SUBMIT YOUR REQUEST TO
1945 LAKEPOINTE DRIVE, BOX 299013, LEWISVILLE, TEXAS 75029, ATTENTION: LEGAL
DEPARTMENT, OR CALL (972) 906-8000 AND ASK TO SPEAK TO SOMEONE IN OUR LEGAL
DEPARTMENT. IN ADDITION, TO OBTAIN TIMELY DELIVERY OF ANY INFORMATION YOU
REQUEST, YOU MUST SUBMIT YOUR REQUEST NO LATER THAN , 2002, WHICH IS
FIVE BUSINESS DAYS BEFORE THE DATE THE EXCHANGE OFFER EXPIRES.
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TABLE OF CONTENTS
Industry Data............................................... ii
Disclosure Regarding Forward-Looking Statements............. ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 11
The Exchange Offer.......................................... 20
Use of Proceeds............................................. 30
Capitalization.............................................. 30
Selected Consolidated Financial Data........................ 31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 44
Management.................................................. 55
Principal and Management Shareholders....................... 59
Description of the Other Indebtedness....................... 61
Description of Notes........................................ 63
Book-Entry; Delivery and Form............................... 91
Plan of Distribution........................................ 93
Material United States Federal Income Tax Considerations.... 94
Legal Matters............................................... 99
Independent Auditors........................................ 100
Available Information....................................... 100
Incorporation by Reference.................................. 100
Index to Consolidated Financial Statements.................. F-1
INDUSTRY DATA
In this prospectus, we rely on and refer to information regarding market
data obtained from internal surveys, market research, publicly available
information and industry publications. Although we believe the information is
reliable, we cannot guarantee the accuracy or completeness of the information
and have not independently verified it.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included or
incorporated by reference in this prospectus, including, without limitation,
statements in the sections entitled "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this prospectus regarding our future financial position, business strategy and
our management's plans and objectives for future operations, are forward-looking
statements. Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negative thereof or
variations thereon or similar terminology. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, these
expectations may not prove to be correct. Important factors that could cause
actual results to differ materially from our expectations are disclosed under
the section "Risk Factors" and elsewhere in this prospectus, including, without
limitation, in conjunction with the forward-looking statements included and
incorporated by reference in this prospectus. These forward-looking statements
and our business and prospects are subject to a number of factors that could
cause actual results to differ materially, including:
- our ability to achieve the expected synergies and anticipated cost
savings from the Kmart strategic alliance;
- our ability to obtain capital or obtain it on acceptable terms;
- unanticipated problems with product procurement;
- adverse effects of the changing industry environment and increased
competition;
- sales declines and loss of customers;
- exposure to litigation and other contingent losses;
- failure to achieve the expected results of our growth plans;
- the inability to integrate acquired companies and to achieve operating
improvements at those companies;
- increases in labor costs and disruptions in labor relations with union
bargaining units representing our employees; and
- negative effects of our substantial indebtedness and the limitations
imposed by restrictive covenants contained in our debt instruments.
All subsequent written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in their entirety
by the cautionary statements. We undertake no obligation to update
forward-looking statements to reflect developments or information obtained after
the date on the cover page of this prospectus.
ii
PROSPECTUS SUMMARY
In this prospectus, the words "Fleming," "the Company," "ours," "us" and
"we" refer to Fleming Companies, Inc., the issuer of the notes, and its
subsidiaries. We will refer to the outstanding Series B notes and Series C notes
as the "old notes," and will refer to the Series D notes as the "exchange
notes." Unless indicated otherwise, the term "notes" refers to both the old
notes and the exchange notes. The following summary contains basic information
about us and this exchange offer. It likely does not contain all the information
that is important to you. For a more complete understanding of this exchange
offer, we encourage you to read this entire document and the documents to which
we have referred you.
THE EXCHANGE OFFER
The Old Notes................. We issued our 10-5/8% Series A senior
subordinated notes due 2007 to Bear, Stearns &
Co. Inc., Chase Securities Inc., BancAmerica
Securities, Inc. and Societe Generale
Securities Corporation on July 25, 1997. These
initial purchasers subsequently resold our
Series A notes to "qualified institutional
buyers" as defined under Rule 144A of the
Securities Act. We subsequently completed an
exchange offer in which we exchanged all of our
outstanding Series A notes for our Series B
notes. Our Series B notes are registered under
the Securities Act of 1933, as amended.
We issued our Series C notes to Deutsche Banc
Alex. Brown Inc., J.P. Morgan Securities Inc.,
Lehman Brothers Inc., Bear, Stearns & Co. Inc.,
First Union Securities, Inc. and UBS Warburg
LLC on October 15, 2001. These initial
purchasers subsequently resold our Series C
notes to "qualified institutional buyers" as
defined under Rule 144A of the Securities Act.
The purchasers of our Series C notes agreed to
comply with transfer restrictions and other
conditions.
The Exchange Offer............ We are offering to exchange our exchange notes
for our outstanding old notes that are properly
tendered and accepted. The purpose of our offer
to exchange both the Series B notes and the
Series C notes is to create a single series of
debt securities having a total outstanding
principal amount that is the combination of the
Series B notes and Series C notes. As of the
date of this prospectus, $250,000,000 principal
amount of Series B notes and $150,000,000
principal amount of Series C notes are
outstanding.
You may tender outstanding old notes only in
denominations of $1,000 and multiples of
$1,000. We will issue the exchange notes on or
promptly after the exchange offer expires.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 2002, unless
extended, in which case the expiration date
will mean the latest date and time to which we
extend the exchange offer.
Conditions to the Exchange
Offer......................... The exchange offer is not subject to any
condition other than that it not violate
applicable law or any applicable interpretation
of the staff of the SEC. The exchange offer is
not conditioned upon any minimum principal
amount of old notes being tendered for
exchange.
1
Procedures for Tendering Old
Notes......................... If you wish to tender your old notes for
exchange notes pursuant to the exchange offer
you must transmit to Manufacturers and Traders
Trust Company as exchange agent, on or before
the expiration date, either:
- a computer generated message transmitted
through The Depository Trust Company's
Automated Tender Offer Program system and
received by the exchange agent and forming a
part of a confirmation of book-entry transfer
in which you acknowledge and agree to be
bound by the terms of the letter of
transmittal; or
- a properly completed and duly executed letter
of transmittal, which accompanies this
prospectus, or a facsimile of the letter of
transmittal, together with your old notes and
any other required documentation, to the
exchange agent at its address listed in this
prospectus and on the front cover of the
letter of transmittal.
If you cannot satisfy either of these
procedures on a timely basis, then you should
comply with the guaranteed delivery procedures
described below. By executing the letter of
transmittal, you will make the representations
to us described under "The Exchange
Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender your old notes in the
exchange offer, you should contact the
registered holder promptly and instruct the
registered holder to tender on your behalf. If
you wish to tender on your own behalf, you must
either (1) make appropriate arrangements to
register ownership of the old notes in your
name or (2) obtain a properly completed bond
power from the registered holder, before
completing and executing the letter of
transmittal and delivering your old notes.
Guaranteed Delivery
Procedures.................... If you wish to tender your old notes and time
will not permit the documents required by the
letter of transmittal to reach the exchange
agent before the expiration date, or the
procedure for book-entry transfer cannot be
completed on a timely basis, you must tender
your old notes according to the guaranteed
delivery procedures described in this
prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of Exchange Notes.... Subject to the satisfaction or waiver of the
conditions to the exchange offer, we will
accept for exchange any and all old notes which
are validly tendered in the exchange offer and
not withdrawn before 5:00 p.m., New York City
time, on the expiration date.
Withdrawal Rights............. You may withdraw the tender of your old notes
at any time before 5:00 p.m., New York City
time, on the expiration date, by complying with
the procedures for withdrawal described in this
prospectus under the heading "The Exchange
Offer -- Withdrawal of Tenders."
2
Material United States Federal
Income Tax Considerations..... The exchange of notes will not be a taxable
event for United States federal income tax
purposes. For a discussion of the material
federal income tax consequences relating to the
exchange of notes, see "Material United States
Federal Income Tax Considerations."
Exchange Agent................ Manufacturers and Traders Trust Company, the
trustee under the indentures governing the old
notes, is serving as the exchange agent.
Consequences of Failure to
Exchange Old Notes............ If you do not exchange your Series B notes for
exchange notes, you will continue to hold
Series B notes that have been registered under
the Securities Act. However, your Series B
notes would not be assigned a new CUSIP number
identical to the CUSIP number assigned to the
exchange notes, and the liquidity of, and the
trading market for, such Series B notes may be
greatly diminished upon completion of the
exchange offer. See "Risk Factors -- If you do
not exchange your Series B notes pursuant to
this exchange offer, you may never be able to
sell your Series B notes."
If you do not exchange your Series C notes for
exchange notes, you will continue to be subject
to the restrictions on transfer provided in the
Series C notes and in the indenture governing
the Series C notes. In general, the Series C
notes may not be offered or sold, unless
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. We do not
currently plan to register the Series C notes
under the Securities Act. See "Risk
Factors -- If you do not exchange your Series C
notes pursuant to this exchange offer, you may
never be able to sell your Series C notes.
Registration Rights
Agreement..................... If you are a holder of Series C notes, you are
entitled to exchange your Series C notes for
exchange notes with substantially identical
terms. The exchange offer satisfies this right.
After the exchange offer is completed, you will
no longer be entitled to any exchange or
registration rights with respect to your Series
C notes. We are also making the exchange offer
available to holders of our Series B notes.
WE EXPLAIN THE EXCHANGE OFFER IN GREATER DETAIL BEGINNING ON PAGE 20.
3
THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the old notes, except that, with respect to the Series C notes, the exchange
notes will be registered under the Securities Act and, therefore, the exchange
notes will not be subject to the transfer restrictions, registration rights and
provisions providing for an increase in the interest rate applicable to the
Series C notes. The exchange notes will evidence the same debt as the old notes.
The indenture governing the exchange notes is the same indenture that governs
our Series C notes and is substantially similar in all of its material terms to
the indenture governing the Series B notes. We will sometimes collectively refer
to the old notes and the exchange notes as the "notes."
Securities Offered............ $400,000,000 principal amount of 10-5/8% Series
D senior subordinated notes due 2007.
Issuer........................ Fleming Companies, Inc.
Maturity Date................. July 31, 2007.
Interest...................... The exchange notes will bear interest at the
rate of 10-5/8% per year (calculated using a
360-day year), payable every six months on
January 31 and July 31. Interest on the
exchange notes will accrue from the last
interest payment date on which interest was
paid on the old notes. Holders whose old notes
are accepted for exchange will be deemed to
have waived their right to receive any interest
accrued on the old notes from the last interest
payment date.
Ranking....................... The notes are our general unsecured obligations
subordinated in right of payment to all our
existing and future Senior Indebtedness,
including all our obligations under our credit
agreement and our 10-1/8% senior notes due
2008, rank equal with all of our existing and
future senior subordinated indebtedness,
including our 10-1/8% senior subordinated notes
due 2004 and our 5-1/4% convertible senior
subordinated notes due 2009, and senior to all
our future subordinated indebtedness. As of
October 6, 2001, as adjusted to give effect to
the application of the net proceeds from the
issuance and sale of the Series C notes on
October 15, 2001, we and our subsidiaries had a
total of $1.9 billion of indebtedness, of which
$1.1 billion was Senior Indebtedness, and were
able to borrow an additional $269 million under
our credit agreement.
Note Guarantees............... The note guarantees are the general unsecured
obligations of the Subsidiary Guarantors,
subordinated in right of payment to all such
Subsidiary Guarantors' existing and future
Senior Indebtedness, rank equal in right of
payment to all such Subsidiary Guarantors'
existing and future senior subordinated
indebtedness and senior to all future
subordinated indebtedness of such Subsidiary
Guarantors.
If we create or acquire a new wholly-owned
subsidiary or if any subsidiary guarantees
certain other debt, it will guarantee the notes
unless we designate the subsidiary as an
"unrestricted subsidiary" under the indenture.
Optional Redemption........... On and after July 31, 2002, we may redeem some
or all of the notes at the redemption prices
listed in the "Description of Notes" section
under the heading "Optional Redemption," plus
accrued interest.
4
Change of Control Offer....... Upon the occurrence of a Change of Control
Triggering Event, each holder of notes will
have the right to require us to purchase such
holder's notes at a purchase price of 101% of
the principal amount thereof, plus accrued and
unpaid interest.
We might not be able to pay you the required
price for notes you present to us at the time
of a Change of Control Triggering Event,
because:
- we might not have enough funds at that time;
- the terms of our other senior debt may
prevent us from paying; or
- our bylaws may prevent us from paying.
Certain Indenture
Provisions.................... The indenture governing the exchange notes
contains covenants limiting our (and most or
all of our subsidiaries') ability to:
- incur additional debt;
- pay dividends or distributions on our capital
stock or repurchase our capital stock;
- issue stock of subsidiaries;
- make certain investments;
- create liens on our assets to secure debt;
- enter into transactions with affiliates;
- merge or consolidate with another company; or
- transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
Form of Exchange Notes........ The exchange notes will be represented by one
or more permanent global certificates, in fully
registered form, deposited with a custodian
for, and registered in the name of a nominee
of, The Depository Trust Company, as
depositary. You will not receive exchange notes
in certificated form unless one of the events
described in the section entitled "Book-Entry;
Delivery and Form" occurs. Instead, beneficial
interests in the exchange notes will be shown
on, and transfers of these notes will be
effected only through, records maintained in
book-entry form by The Depository Trust Company
and its participants.
Use of Proceeds............... We will not receive any cash proceeds in the
exchange offer.
Risk Factors.................. Investing in the notes involves substantial
risks. See the section entitled "Risk Factors"
for a description of certain of the risks you
should consider before investing in the notes.
WE EXPLAIN THE EXCHANGE NOTES IN GREATER DETAIL BEGINNING ON PAGE 63.
5
THE COMPANY
INTRODUCTION
Fleming is an industry leader in the distribution of consumable goods, and
also has a growing presence in operating "price impact" supermarkets. Through
our distribution group, we distribute products to customers that operate
approximately 3,000 supermarkets, 6,800 convenience stores and over 2,000
supercenters, discount stores, limited assortment stores, drug stores, specialty
stores and other stores across the United States. At December 29, 2001, our
retail group operated 116 stores, predominantly supermarkets that focus on low
prices and high quality perishables. In the fiscal year ended December 30, 2000
and for the 40 weeks ended October 6, 2001, we generated total net sales of
$14.4 billion and $11.6 billion.
Our distribution group net sales were $11.2 billion for 2000 and $9.8
billion for the 40 weeks ended October 6, 2001, a 5.8% increase and an 18.0%
increase over the prior periods. Distribution represented approximately 77% of
total net sales in 2000 and approximately 84% of total net sales for the 40
weeks ended October 6, 2001. We expect to substantially increase our
distribution volume in connection with, among other things, our ten-year, $4.5
billion per year strategic alliance with our largest customer, Kmart
Corporation. To supply our customers, we have a network of 35 distribution
centers that have a total of approximately 21 million square feet of warehouse
space.
Our retail group net sales were $3.3 billion for 2000 and $1.8 billion for
the 40 weeks ended October 6, 2001, which represented approximately 23% and 16%
of total net sales. Of those amounts, $1.9 billion and $1.5 billion were
attributable to continuing operations, which represents a 4.7% increase and a
13.8% increase over the prior periods. As of December 29, 2001, we owned and
operated 94 price impact supermarkets and five additional supermarkets that we
are converting to the price impact format. Price impact supermarkets offer
everyday low prices that are typically below the prices of market-leading
conventional supermarkets. These stores typically cost less to build, maintain
and operate than conventional supermarkets. In addition, we operated 17 limited
assortment stores under the Yes!Less banner. Limited assortment stores offer a
narrow selection of low-price, private label food and other consumable goods, as
well as general merchandise at deep-discount prices.
In recent years, consumers have been shifting their purchases of food and
other consumable goods away from conventional full-service grocery stores toward
other retail channels, such as price impact supermarkets, discount stores,
supercenters, convenience stores, drug stores and ethnic food stores. Since
1998, we have repositioned our distribution group to become a highly efficient
supplier to these retail channels. As a result, our distribution group has
experienced renewed sales growth. In addition, we believe price-sensitive
consumers are underserved in the retail grocery market, and we have repositioned
our retail group to expand our presence in the price impact format.
Since 1998, in the course of implementing our strategic initiatives, we
have, among other accomplishments:
- closed or consolidated 12 distribution centers, which resulted in:
-- increased average sales per full-line distribution center by more than
40% from $390 million in 1998 to $550 million in 2000, and
-- increased average sales per full-line distribution center employee by
more than 12% from 1998 to 2000;
- centralized approximately 80% of our purchasing operations in our
customer support center near Dallas, Texas;
- centralized our accounting, human resources, information technology and
other support services in our shared services center in Oklahoma City,
Oklahoma;
- sold or closed 238 conventional supermarkets through the end of the third
quarter of 2001;
6
- opened 40 additional price impact supermarkets; and
- instituted a "culture of thrift" among our employees, in part through our
Low Cost Pursuit Program.
We believe these initiatives have lowered our cost structure, improved the
economics we can offer our traditional retail customers and strengthened our
appeal to new channel retailers. We believe these improvements have been the key
to our ability to increase distribution group sales for the last eight
consecutive quarters (year-over-year comparisons). We added approximately $1.2
billion and over $1.5 billion (pro forma for acquisitions) in gross annualized
distribution group sales from both new channel retailers and our traditional
supermarket customers in 2000 and the 40 weeks ended October 6, 2001,
respectively.
In February 2001, we announced a ten-year strategic alliance under which we
supply to Kmart substantially all of the food and consumable products in all
current and future Kmart and Kmart supercenter stores in the United States and
the Caribbean. We expect annual sales to Kmart to increase from approximately
$1.4 billion in 2000 to approximately $2.6 billion in 2001 and approximately
$4.5 billion in 2002. This new supply arrangement includes grocery, frozen,
dairy, packaged meat and seafood, produce, bakery/deli, fresh meat, cigarettes,
tobacco and candy.
COMPETITIVE STRENGTHS
Low-Cost, High-Volume National Distribution System: We have consolidated
our smaller distribution centers into high-volume distribution centers. We
believe our distribution center volumes are among the highest in the consumable
goods distribution industry. With high volume comes the opportunity to operate
more efficiently by leveraging costs. Our efficient and highly productive
operations have enhanced our ability to provide customers with lower-cost
merchandise and services that improve customer acquisition and retention.
Efficient Centralized Purchasing: Category management decisions and vendor
negotiations for approximately 80% of our merchandise procurement are conducted
in one location. We believe our customer support center is one of the largest
buying locations of consumable goods in the United States. Centralized
purchasing generates economies of scale because it enables us in one location to
purchase goods more efficiently by eliminating redundancy involved in purchasing
through multiple locations, which we believe increases our leverage with
vendors. We believe that our centralized purchasing capabilities are valuable to
national retailers such as Kmart, as well as the smaller independent retailers
that make up our traditional customer base, because we offer greater convenience
and lower cost.
Diverse Distribution Customer Base: We distribute to approximately 11,800
retail store locations under a wide variety of formats across the United States.
Other than Kmart, no customer accounted for more than 2% of our fiscal 2000 net
sales.
Successful Price Impact Retail Format: Our price impact supermarkets offer
name-brand and private label consumable goods at significantly lower prices than
conventional supermarkets. We keep prices low by leveraging our existing
distribution and procurement capabilities and maintaining a lower cost structure
associated with operating these stores. We believe this format is profitable
because we offer a reduced number of product selections, focus on high-turnover
products and product categories, employ flow-through distribution methods that
reduce product storage and handling expense, and minimize store operating costs.
BUSINESS STRATEGY
Our business strategy is to use our competitive strengths to achieve sales
and earnings growth in both our distribution group and retail group. As
principal elements of our strategy, we intend to:
Grow Sales to New Channel Retailers: We are rapidly moving beyond our
historic market position and have targeted three key growth sectors. First, we
are focusing on broad assortment/destination retailers, including supercenters
and discount stores, and have demonstrated significant penetration in this
market as evidenced by our distribution arrangements with Kmart and Target, Inc.
Second, we are concentrating on precision assortment/neighborhood retailers such
as convenience stores, drug stores and ethnic food stores. In
7
April 2001, we acquired Minter-Weisman Co., a wholesale distribution company
serving over 800 convenience stores in Minnesota, Wisconsin and surrounding
states. In September 2001, we acquired certain assets and inventory of Miller &
Hartman South, LLC, a wholesale distributor serving over 1,800 convenience
stores in Kentucky and surrounding states. Finally, we intend to focus on
precision assortment/destination retailers typified by large-store formats such
as cash-and-carries and price impact stores.
Grow Sales to Traditional Format Customers: Despite being the largest
distributor in the more than $100 billion wholesale grocery industry, we account
for approximately 6% of this traditional core market, representing substantial
room for additional growth. Many potential customers are currently served by
local or regional wholesalers that do not have the efficiencies associated with
our procurement scale and do not provide the full scope of retail services that
we provide. Our repositioned distribution group has already enabled us to
increase sales to existing and new customers, and we expect to be able to
continue this trend. During August 2001, we facilitated the third-party purchase
of 36 stores located in New Mexico and Texas from Furrs Supermarkets, most of
which were purchased by Fleming-supplied independent operators. We routinely
conduct detailed market studies to identify potential new customers in areas
contiguous to existing customers, as we have capacity in our high-volume
distribution centers to serve additional local independent stores or chains.
Expand Price Impact Format: We believe we have a substantial opportunity
to grow our retail group's price impact supermarket operations. Because price
impact stores cost less to build, maintain and operate than conventional
supermarkets, we expect to be able to grow our price impact supermarket
operations while incurring fewer capital expenditures than operators of
conventional retail stores. As of December 29, 2001, we owned and operated 94
price impact supermarkets under the Food 4 Less and Rainbow Foods banners, and
we intend to own and operate up to 174 price impact supermarkets by the end of
2003 through a combination of construction of new stores, conversion of existing
stores and acquisitions. In April 2001, we purchased seven Food 4 Less stores
located in Central California from Whitco Foods, Inc. which we continue to
operate as price impact stores under the Food 4 Less banner. In August 2001, we
purchased five Smith's Food & Drug Stores located in New Mexico and Texas from
Kroger Co. which we operate under the Rainbow Foods banner. We have completed
the conversion of five of our Sentry Foods stores to the price impact format and
have renamed the stores Rainbow Foods, and we intend to convert the remaining
five in early 2002.
Leverage Efficiencies Created by Our Kmart Distribution Agreement: We
believe our distribution agreement with Kmart and the resulting substantial
increase in our distribution volume provides us the opportunity for increased
economic and purchasing leverage that benefits all of our existing and potential
new customers. We have established a "best practices" team with Kmart based in
Troy, Michigan that focuses on reducing costs and achieving greater efficiencies
in our product supply chain. In addition, we believe that the increased volume
of candy and tobacco that we distribute as a result of the Kmart distribution
agreement enables us to compete more effectively for convenience store
distribution business.
Continue to Improve Working Capital Management and Reduce Costs: We intend
to improve our working capital management primarily by improving inventory
turns. To do this, we will continue to improve vendor inventory management
practices, further develop our central procurement operations, improve ad
forecasting with our customers, effectively manage alternative channels of
product delivery to retail locations and invest in systems enhancements. In
addition, to strengthen our position as a low-cost supplier to our customers and
increase our profitability, we have instituted a "culture of thrift" among our
employees and developed initiatives to reduce our expenses through our Low Cost
Pursuit Program.
8
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The table below includes summary historical consolidated financial
information for our company. You should read the information set forth below
together with the other financial information contained in this prospectus.
FISCAL YEAR ENDED(1) 40 WEEKS ENDED
------------------------------------------ --------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30, SEPTEMBER 30, OCTOBER 6,
1998(2) 1999(3) 2000(4) 2000(5) 2001(6)
------------ ------------ ------------ ------------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net sales(7)..................... $14,678 $14,272 $14,444 $10,819 $11,641
Costs and expenses:
Cost of sales(7)............... 13,228 12,835 13,097 9,808 10,738
Selling and administrative..... 1,251 1,262 1,185 894 736
Interest expense............... 161 165 175 131 127
Interest income................ (37) (40) (33) (25) (20)
Equity investment results...... 12 10 8 6 1
Litigation charge (credit)..... 8 -- -- (2) 49
Impairment/restructuring charge
(credit).................... 653 103 213 146 (26)
------- ------- ------- ------- -------
Total costs and expenses.... 15,276 14,335 14,645 10,958 11,605
------- ------- ------- ------- -------
Earnings (loss) before taxes..... (598) (63) (201) (139) 36
Taxes on income (loss)........... (87) (18) (79) (54) 15
------- ------- ------- ------- -------
Earnings (loss) before
extraordinary charge........... (511) (45) (122) (85) 21
Extraordinary charge from early
retirement of debt (net of
taxes)......................... -- -- -- -- (3)
------- ------- ------- ------- -------
Net earnings (loss)......... $ (511) $ (45) $ (122) $ (85) $ 18
======= ======= ======= ======= =======
Diluted earnings (loss) per
share.......................... $(13.48) $ (1.17) $ (3.15) $ (2.19) $ .39
BALANCE SHEET DATA: (AT END OF
PERIOD)
Cash and cash equivalents...... $ 6 $ 7 $ 30 $ 50 $ 43
Total assets................... 3,491 3,573 3,403 3,350 3,748
Total debt (including current
maturities and capital
leases)..................... 1,566 1,694 1,669 1,736 1,912
Shareholders' equity........... 570 561 427 480 509
OTHER FINANCIAL AND OPERATING
DATA:
EBITDA(8)...................... $ (237) $ 281 $ 154 $ 134 $ 287
Depreciation and
amortization(9)............. 180 158 169 130 126
Capital expenditures........... 200 166 151 108 169
---------------
(1) Fiscal 2000 is a 53-week year; all other years are 52 weeks.
(2) The results in 1998 reflect an impairment/restructuring charge with related
costs totaling $668 million ($543 million after-tax) related to the
strategic plan.
(3) The results in 1999 reflect an impairment/restructuring charge with related
costs totaling $137 million ($92 million after-tax) related to our strategic
plan. Such period also reflects one-time items ($31 million charge to close
ten conventional retail stores, income of $22 million from extinguishing a
portion of the self-insured workers' compensation liability, interest income
of $9 million related to refunds in federal
9
income taxes from prior years, and $6 million in gains from the sale of
distribution facilities) netting to $6 million of income ($3 million
after-tax).
(4) The results in 2000 reflect an impairment/restructuring charge with related
costs totaling $309 million ($183 million after-tax) relating to our
strategic plan. Such period also reflects one-time items ($10 million charge
related primarily to asset impairment on retail stores, income of $2 million
relating to litigation settlements, and $9 million in gains from the sale of
distribution facilities) netting to less than $1 million of income ($1
million loss after-tax).
(5) The results for the 40 weeks ended September 30, 2000 reflect an
impairment/restructuring charge with related costs totaling $211 million
($125 million after-tax) relating to our strategic plan.
(6) The results for the 40 weeks ended October 6, 2001, reflect an
impairment/restructuring charge with related costs totaling $19 million ($11
million after-tax) relating to our strategic plan. Such period also reflects
one-time items (approximately $49 million in charges from litigation
settlements and net additional interest expense of approximately $2 million
due to early retirement of debt) netting to approximately $50 million ($30
million after-tax).
(7) During the fourth quarter of 2000 we adopted EITF 99-19 and restated sales
and cost of sales for all prior periods. The adoption had no effect on gross
margins or earnings.
(8) EBITDA is earnings before extraordinary items, interest expense, income
taxes, depreciation and amortization, equity investment results and LIFO
provision. EBITDA should not be considered as an alternative measure of our
net income, operating performance, cash flow or liquidity. We provide it as
additional information related to our ability to service debt; however,
conditions may require conservation of funds for other uses. Although we
believe EBITDA enhances your understanding of our financial condition, this
measure, when viewed individually, is not necessarily a better indicator of
any trend as compared to measures (e.g., net sales, net earnings, net cash
flows, etc.) conventionally computed in accordance with GAAP. Amounts
presented may not be comparable to similar measures disclosed by other
companies.
(9) Depreciation and amortization expense includes goodwill amortization and
excludes amortization of debt cost which is reflected in interest expense.
10
RISK FACTORS
You should read and carefully consider the risks described below, together
with the other information contained in or incorporated by reference into this
prospectus, before making a decision to tender your old notes in the exchange
offer. The risk factors set forth below, other than the first risk factor set
forth below, are generally applicable to the old notes as well as the exchange
notes. If any of the following risks actually occur, our business, financial
condition, operating results and prospects could be materially adversely
affected, which in turn could adversely affect our ability to repay the notes.
IF YOU DO NOT EXCHANGE YOUR SERIES C NOTES PURSUANT TO THIS EXCHANGE OFFER, YOU
MAY NEVER BE ABLE TO SELL YOUR SERIES C NOTES.
If you are a holder of Series C notes, it may be difficult for you to sell
Series C notes that are not exchanged in the exchange offer. Those notes may not
be offered or sold unless they are registered or they are exempt from the
registration requirements under the Securities Act and applicable state
securities laws. The restrictions on transfer of your Series C notes arise
because we issued the Series C notes pursuant to an exemption from the
registration requirements of the Securities Act and applicable state securities
laws. We do not intend to register the Series C notes under the Securities Act.
If you do not tender your Series C notes or if we do not accept some of
your Series C notes, those notes will continue to be subject to the transfer and
exchange restrictions in:
- the indenture;
- the legend on the Series C notes; and
- the offering memorandum relating to the Series C notes.
Moreover, to the extent Series C notes are tendered and accepted in the
exchange offer, the trading market, if any, for the Series C notes would be
adversely affected.
IF YOU DO NOT EXCHANGE YOUR SERIES B NOTES PURSUANT TO THIS EXCHANGE OFFER, YOU
MAY NEVER BE ABLE TO SELL YOUR SERIES B NOTES.
The purpose of our offer to exchange both the Series B notes and the Series
C notes is to create a single series of debt securities having a total
outstanding principal amount that is the combination of the Series B notes and
Series C notes. However, as Series B notes are exchanged in this exchange offer,
the remaining amount of Series B notes outstanding will be equally reduced.
Thus, holders of Series B notes who do not participate in the exchange offer may
find it difficult to sell their Series B notes because the liquidity of, and
trading market for, such Series B notes may be greatly diminished upon
completion of the exchange offer.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT AND DEBT SERVICE OBLIGATIONS, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NOTES.
We have a substantial amount of debt outstanding. The following chart shows
certain important credit statistics as of October 6, 2001, as adjusted to give
effect to the application of the net proceeds from the issuance and sale of the
Series C notes on October 15, 2001.
AS OF OCTOBER 6, 2001
AS ADJUSTED
---------------------
Total debt (including capital leases)....................... $1,918 million
Shareholders' equity........................................ 509 million
Total capitalization........................................ 2,427 million
Debt to capitalization...................................... 79%
11
Our substantial amount of debt could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- require us to dedicate a substantial portion of our cash flow to payments
on our debt;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures
and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
- limit, along with the financial and other restrictive covenants in our
debt, among other things, our ability to borrow additional funds. If we
fail to comply with those covenants, it could result in an event of
default which, if not cured or waived, could have a material adverse
effect on our financial condition.
We and our subsidiaries may be able to incur substantial additional debt in
the future, including secured debt. The terms of the indentures governing our
outstanding debt do not fully prohibit us or our subsidiaries from doing so. As
of October 6, 2001, after giving effect to the application of the net proceeds
from the issuance and sale of the Series C notes on October 15, 2001, our credit
facility permitted additional borrowings of up to $269 million, all of which was
senior to the notes. If new debt is added to our and our subsidiaries' current
debt levels, the related risks that we and they now face could intensify.
Our ability to make payments on and to refinance our debt will depend on
our financial and operating performance, which may fluctuate significantly from
quarter to quarter and is subject to prevailing economic conditions and to
financial, business and other factors beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
credit facility in an amount sufficient to enable us to pay our debt, including
the notes, or to fund our other liquidity needs. We may need to refinance all or
a portion of our debt, including the notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our debt, including our
credit facility or the notes, on commercially reasonable terms or at all.
WE NOW DEPEND ON KMART FOR A SUBSTANTIAL PORTION OF OUR BUSINESS. IF WE ARE
UNABLE TO REALIZE ANTICIPATED COST SAVINGS RESULTING FROM THE ADDITIONAL VOLUME
REPRESENTED BY OUR AGREEMENT, IT COULD HARM OUR FINANCIAL CONDITION.
Kmart is our largest customer, accounting for 10% of our net sales in 2000
and 18% of our net sales for the 40 weeks ended October 6, 2001. In February
2001, we announced a ten-year agreement with Kmart, pursuant to which we agreed
to supply substantially all of the food and consumable products in all current
and future Kmart and Kmart supercenter stores in the United States and the
Caribbean. As a result of this agreement, we currently anticipate that Kmart
will account for a significantly greater percentage of our net sales in 2001 and
thereafter than it accounted for in prior periods. Accordingly, we now depend on
Kmart for a substantial portion of our business.
We have committed substantial capital and management resources in order to
perform our obligations under the Kmart agreement. If we or Kmart are unable to
successfully fulfill our respective obligations under the agreement, it will
harm our financial condition. Specifically, the bulk of the benefits that we
anticipate receiving from the Kmart agreement depend on Kmart's achievement of
certain sales projections. If Kmart fails to meet these sales projections, the
benefits that we will receive as a result of the agreement will decrease. Kmart
can terminate the agreement if we materially breach our obligations under the
agreement, including failure to maintain specified service levels. Kmart can
also elect to terminate the agreement on 12-months written notice given after
the fifth anniversary of the agreement's effective date, with the termination to
take place at the end of a transition period of up to an additional 12 months at
Kmart's discretion. Kmart can also elect to terminate the agreement if we
experience certain types of changes of control or if the volume of Kmart's
purchases under the agreement declines by certain amounts. Finally, if we are
unable to capture
12
anticipated cost savings resulting from our increased purchasing power due to
the Kmart agreement, it could adversely affect our results of operations and
financial condition.
In addition, because we depend on Kmart for a substantial portion of our
business, negative information about Kmart's performance, financial condition
and business prospects may adversely affect the market and prices of our
securities, including the market and price of the notes.
THE NOTES ARE SUBORDINATED TO ALL SENIOR INDEBTEDNESS.
The notes and the guarantees of the notes by our subsidiaries are
subordinated in right of payment to all of our existing and future Senior
Indebtedness, as defined in the "Description of Notes -- Subordination" section
of this prospectus. As a result, in the event of bankruptcy, liquidation or
reorganization or upon acceleration of the notes due to an event of default and
in specific other events, our assets will be available to pay obligations on the
notes only after all Senior Indebtedness has been paid in full in cash or other
payment satisfactory to the holders of the notes. The incurrence of additional
indebtedness and other liabilities could adversely affect our ability to pay our
obligations on the notes. As of October 6, 2001, after giving effect to the
application of the net proceeds from the issuance and sale of the Series C notes
on October 15, 2001, we and our subsidiaries had $1.9 billion of indebtedness,
of which $1.1 billion was senior to the notes. We anticipate that from time to
time we may incur additional indebtedness, including Senior Indebtedness.
THE INTERNAL REVENUE SERVICE MAY ASSERT THAT THE SERIES C NOTES (AND THEREFORE
THE EXCHANGE NOTES RECEIVED FOR THE SERIES C NOTES EXCHANGED IN THE EXCHANGE
OFFER) HAVE BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT BECAUSE OF A SPECIAL
PAYMENT MADE TO INITIAL PURCHASERS OF THE SERIES C NOTES.
We intend to take the position that the Series C notes were not issued with
original issue discount for federal income tax purposes. We cannot assure you,
however, that the Internal Revenue Service will not assert a contrary position.
The IRS may take a position that the issue price of the Series C notes equals
the offering price reduced by a special payment made to initial purchasers of
the Series C notes to compensate such purchasers for agreeing to a delayed
closing date for the initial purchase, and, accordingly, the Series C notes were
issued with original issue discount. If this position were to prevail, the
holders of the Series C notes and the holders of the exchange notes received for
the Series C notes exchanged in the exchange offer would be required to include
the amount of original issue discount in gross income over the term of such
notes based on a constant yield method and therefore holders of such notes would
be required to include amounts in gross income without a contemporaneous receipt
of cash. Accordingly, the Series C notes and the exchange notes received for
Series C notes exchanged in the exchange offer would not be fungible for federal
income tax purposes with our outstanding Series B notes and the exchange notes
received for Series B notes exchanged in the exchange offer. We have not
obtained any ruling from the IRS or any opinion of counsel on this matter.
Investors are strongly urged to consult their own advisors regarding the
determination of the issue price of the Series C notes and the exchange notes
received for the Series C notes exchanged in the exchange offer, and the
federal, state, and foreign tax consequences of holding or disposing of a debt
security issued with original issue discount.
NOT ALL OF OUR SUBSIDIARIES WILL GUARANTEE THE NOTES, AND YOUR RIGHT TO RECEIVE
PAYMENTS ON THE NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR NON-GUARANTOR
SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE OR REORGANIZE.
Not all of our subsidiaries will guarantee the notes. In the event any of
our non-guarantor subsidiaries becomes insolvent, liquidates, reorganizes,
dissolves or otherwise winds up, holders of their indebtedness and their trade
creditors will generally be entitled to payment on their claims from the assets
of those subsidiaries before any of those assets are made available to us.
Consequently, your claims in respect of the notes will be effectively
subordinated to all of the liabilities of our non-guarantor subsidiaries.
13
THE INDENTURES GOVERNING THE NOTES, OUR CREDIT FACILITY AND OUR OTHER EXISTING
INDEBTEDNESS CONTAIN PROVISIONS THAT COULD MATERIALLY RESTRICT OUR BUSINESS.
The indentures governing the notes, our credit facility and our other
existing indebtedness contain a number of significant covenants that, among
other things, restrict our ability to:
- dispose of assets;
- incur additional debt;
- guarantee third-party obligations;
- repay other debt or amend other debt instruments;
- create liens on assets;
- enter into capital leases;
- make investments, loans or advances;
- make acquisitions or engage in mergers or consolidations;
- make capital expenditures; and
- engage in certain transactions with our subsidiaries and affiliates.
In addition, under our credit facility, we are required to meet a number of
financial ratios and tests.
Our ability to comply with these covenants may be affected by events beyond
our control. If we breach any of these covenants or restrictions, it could
result in an event of default under our credit facility and the documents
governing our other existing indebtedness, which would permit our lenders to
declare all amounts borrowed thereunder to be due and payable, together with
accrued and unpaid interest, and our senior lenders could terminate their
commitments to make further extensions of credit under our credit facility. If
we were unable to repay debt to our secured lenders, they could proceed against
the collateral securing the debt.
IF THE CUSTOMERS TO WHOM WE LEND MONEY OR FOR WHOM WE GUARANTEE STORE LEASE
OBLIGATIONS FAIL TO REPAY US, IT COULD HARM OUR FINANCIAL CONDITION.
We provide subleases, extend loans to and make investments in many of our
retail store customers, often in conjunction with the establishment of long-term
supply contracts. As of October 6, 2001, we had an aggregate of $153 million in
outstanding loans to our customers. Our loans to our customers are generally not
investment grade and, along with our equity investments in our customers, are
highly illiquid. We also have investments in customers through direct financing
leases of real property and equipment, lease guarantees, operating leases or
credit extensions for inventory purchases. We also invest in real estate to
assure market access or to secure supply points.
Although we have strict credit policies and apply cost/benefit analyses to
these investment decisions, we face the risk that credit losses from existing or
future investments or commitments could adversely affect our financial
condition. Our credit loss expense from receivables as well as from investments
in customers was $29 million in 2000 and $20 million for the 40 weeks ended
October 6, 2001.
VARIOUS CHANGES IN THE DISTRIBUTION AND RETAIL MARKETS IN WHICH WE OPERATE HAVE
LED AND MAY CONTINUE TO LEAD TO REDUCED SALES AND MARGINS AND LOWER
PROFITABILITY FOR OUR CUSTOMERS AND, CONSEQUENTLY, FOR US.
The distribution and retail markets in which we operate are undergoing
accelerated change as distributors and retailers seek to lower costs and provide
additional services in an increasingly competitive environment. An example of
this is the growing trend of large self-distributing chains consolidating to
reduce costs and gain efficiencies. Eating away from home and alternative format
food stores, such as warehouse stores and supercenters, have taken market share
from traditional supermarket operators, including independent grocers, many of
whom are our customers. Vendors, seeking to ensure that more of their
promotional fees and allowances are used by retailers to increase sales volume,
increasingly direct promotional dollars to large self-
14
distributing chains. We believe that these changes have led to reduced sales,
reduced margins and lower profitability among many of our customers and,
consequently, for us. If the strategies we have developed in response to these
changing market conditions are not successful, it could harm our financial
condition and business prospects.
CONSUMABLE GOODS DISTRIBUTION IS A LOW-MARGIN BUSINESS AND IS SENSITIVE TO
ECONOMIC CONDITIONS.
We derive most of our revenues from the consumable goods distribution
industry. This industry is characterized by a high volume of sales with
relatively low profit margins. A significant portion of our sales are at prices
that are based on product cost plus a percentage markup. Consequently, our
results of operations may be negatively impacted when consumable goods prices go
down, even though our percentage markup may remain constant. The consumable
goods industry is also sensitive to national and regional economic conditions,
and the demand for our consumable goods has been adversely affected from time to
time by economic downturns. Additionally, our distribution business is sensitive
to increases in fuel and other transportation-related costs.
WE FACE INTENSE COMPETITION IN BOTH OUR DISTRIBUTION AND RETAIL MARKETS, AND IF
WE ARE UNABLE TO COMPETE EFFECTIVELY IN THESE MARKETS, IT COULD HARM OUR
BUSINESS.
Our distribution group operates in a highly competitive market. We face
competition from local, regional and national food distributors on the basis of
price, quality and assortment, schedules and reliability of deliveries and the
range and quality of services provided. We also compete with retail supermarket
chains that self-distribute, purchasing directly from vendors and distributing
products to their supermarkets for sale to the consumer. Consolidation of
self-distributing chains may produce even stronger competition for our
distribution group.
Our retail group competes with other food outlets on the basis of price,
quality and assortment, store location and format, sales promotions,
advertising, availability of parking, hours of operation and store appeal.
Traditional mass merchandisers have gained a growing foothold in food marketing
and distribution with alternative store formats, such as warehouse stores and
supercenters, which depend on concentrated buying power and low-cost
distribution technology. We expect that stores with alternative formats will
continue to increase their market share in the future. Retail consolidations not
only produce stronger competition for our retail group, but may also result in
declining sales in our distribution group if our existing customers are acquired
by self-distributing chains or if self-distributing chains are otherwise able to
increase their market share.
Some of our competitors have greater financial and other resources than we
do. In addition, consolidation in the industry, heightened competition among our
vendors, new entrants and trends toward vertical integration could create
additional competitive pressures that reduce our margins and adversely affect
our business. If we fail to successfully respond to these competitive pressures
or to implement our strategies effectively, it could have a material adverse
effect on our financial condition and business prospects.
BECAUSE WE OWN AND OPERATE REAL ESTATE, WE FACE THE RISK OF BEING HELD LIABLE
FOR ENVIRONMENTAL DAMAGES THAT MAY OCCUR ON OUR PROPERTIES.
Our facilities and operations are subject to various laws, regulations and
judicial and administrative orders concerning protection of the environment and
human health, including provisions regarding the transportation, storage,
distribution, disposal or discharge of certain materials. In conformity with
these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. Although we have established reserves that we
believe will be sufficient to satisfy the anticipated costs of all known
remediation requirements, we cannot assure you that these reserves will be
sufficient.
We and others have been designated by the U.S. Environmental Protection
Agency and by similar state agencies as potentially responsible parties under
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, or similar state laws, as applicable, with respect to EPA-designated
15
Superfund sites. While liability under CERCLA for remediation at these sites is
generally joint and several with other responsible parties, we believe that, to
the extent we are ultimately determined to be liable for the expense of
remediation at any site, such liability will not result in a material adverse
effect on our consolidated financial position or results of operations. We are
committed to maintaining the environment and protecting natural resources and
human health and to achieving full compliance with all applicable laws,
regulations and orders.
WE ARE A PARTY TO OR THREATENED WITH VARIOUS LITIGATION AND CONTINGENT LOSS
SITUATIONS ARISING IN THE ORDINARY COURSE OF OUR BUSINESS. IF ANY PROCEEDING IS
RESOLVED AGAINST US, IT COULD HARM OUR FINANCIAL CONDITION AND BUSINESS
PROSPECTS.
We are a party to or threatened with various other litigation and
contingent loss situations arising in the ordinary course of our business
including:
- disputes with customers and vendors;
- disputes with owners or creditors of financially troubled or failed
customers;
- disputes with employees regarding labor conditions, wages, workers'
compensation matters and alleged discriminatory practices;
- disputes with insurance carriers;
- disputes with landlords; and
- disputes with tax assessors;
some of which may be for substantial amounts. Further, the current environment
for litigation involving food distributors may increase the risk of litigation
being commenced against us. We would incur the costs of defending any such
litigation whether or not any claim had merit.
We intend to vigorously defend against all lawsuits, but we cannot predict
the outcome of any case. An unfavorable outcome in any case could harm our
business and financial condition.
BECAUSE WE SELL FOOD AND OTHER PRODUCTS, WE ARE SUBJECT TO PRODUCT LIABILITY
CLAIMS.
Like any other seller of food and other products, we face the risk of
exposure to product liability claims in the event that people who purchase
products we sell become injured or experience illness as a result. We believe
that we have sufficient primary and excess umbrella liability insurance to
protect us against any product liability claims that may arise. However, this
insurance may not continue to be available at a reasonable cost, or, even if it
is available, it may not be adequate to cover our liabilities. We generally seek
contractual indemnification and insurance coverage from parties supplying our
products, but this indemnification or insurance coverage is limited, as a
practical matter, to the creditworthiness of the indemnifying party and the
policy limits of any insurance provided by suppliers. If we do not have adequate
insurance or contractual indemnification to cover our liabilities, product
liability claims relating to defective food and other products could materially
reduce our earnings.
OUR CURRENT STRATEGY INVOLVES GROWTH THROUGH ACQUISITIONS, WHICH REQUIRES US TO
INCUR SUBSTANTIAL COSTS AND POTENTIAL LIABILITIES FOR WHICH WE MAY NEVER REALIZE
THE ANTICIPATED BENEFITS.
Part of our growth strategy for our retail group involves selective
strategic acquisitions of stores operated by others. In addition, our
distribution group intends to seek strategic acquisitions of other distribution
centers on a limited basis. Since the beginning of 2000, we have acquired four
different businesses. In April 2001, we acquired Minter-Weisman Co., a wholesale
distribution company serving over 800 convenience stores in Minnesota, Wisconsin
and surrounding states. In April 2001, we also purchased seven Food 4 Less
stores located in Central California from Whitco Foods, Inc. which we continue
to operate as price impact stores under the Food 4 Less banner. During August
2001, we facilitated the third-party purchase of 36 stores located in New Mexico
and Texas from Furrs Supermarkets, most of which were purchased by Fleming-
16
supplied independent operators. In September 2001, we purchased five Smith's
Food & Drug Stores located in New Mexico and Texas from Kroger Co. which we
operate under our price impact format. Also in September 2001, we purchased
certain assets and inventory of Miller & Hartman South, LLC, a wholesale
distributor serving over 1,800 convenience stores in Kentucky and surrounding
states.
We cannot assure you that we will be able to continue to implement our
growth strategy, or that this strategy will ultimately be successful. We
regularly engage in evaluations of potential acquisitions and are in various
stages of discussion regarding possible acquisitions, certain of which, if
consummated, could be significant to us. Any potential acquisitions may result
in significant transaction expenses, increased interest and amortization
expense, increased depreciation expense and increased operating expense, any of
which could have a material adverse effect on our operating results.
Achieving the benefits of these acquisitions will depend in part on our
ability to integrate those businesses with our business in an efficient manner.
We cannot assure you that this will happen or that it will happen in an
efficient manner. Our consolidation of operations following these acquisitions
may require substantial attention from our management. The diversion of
management attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on our ability to
achieve expected net sales, operating expenses and operating results for these
acquired businesses. We cannot assure you that we will realize any of the
anticipated benefits of any acquisition, and if we fail to realize these
anticipated benefits, our operating performance could suffer.
Furthermore, we may not be able to identify suitable acquisition candidates
in the future, obtain acceptable financing or consummate any future
acquisitions.
WE OPERATE IN A COMPETITIVE LABOR MARKET, AND A SUBSTANTIAL NUMBER OF OUR
EMPLOYEES ARE COVERED BY COLLECTIVE BARGAINING AGREEMENTS.
Our continued success will depend on our ability to attract and retain
qualified personnel in both our distribution and retail groups. We compete with
other businesses in our markets with respect to attracting and retaining
qualified employees. A shortage of qualified employees would require us to
enhance our wage and benefits packages in order to compete effectively in the
hiring and retention of qualified employees or to hire more expensive temporary
employees. In addition, about 42% of our employees are covered by collective
bargaining agreements, most of which expire at various times over the course of
the next five years. We cannot assure you that we will be able to renew our
collective bargaining agreements, that our labor costs will not increase, that
we will be able to recover any increases through increased prices charged to
customers or that we will not suffer business interruptions as a result of
strikes or other work stoppages. If we fail to attract and retain qualified
employees, to control our labor costs, or to recover any increased labor costs
through increased prices charged to our customers, it could harm our business.
UNDER CERTAIN CIRCUMSTANCES, FEDERAL AND STATE LAWS MAY ALLOW COURTS TO VOID THE
NOTES AND THE GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS THEY RECEIVE
FROM US.
Under the federal Bankruptcy Code and comparable provisions of state
fraudulent transfer laws, a court could void the notes and guarantees or
subordinate claims in respect of the notes and guarantees to all of our other
debts if, among other things, we or any of the Subsidiary Guarantors, at the
time we incurred the indebtedness evidenced by the notes or guarantees:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such notes or guarantees; and
- were insolvent or rendered insolvent by reason of the incurrence; or
- were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they became due.
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In addition, a court could void any payment by us or a guarantor or require
a noteholder to return the payment to us or a guarantor, or to a fund for the
benefit of our creditors.
The measures of insolvency for purposes of these fraudulent transfer laws
vary depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, we or a guarantor would be
considered insolvent if:
- the sum of our debts, including contingent liabilities, were greater than
the fair saleable value of all of our assets; or
- the present fair saleable value of our assets was less than the amount
that would be required to pay our probable liability on our existing
debts, including contingent liabilities, as they become absolute and
mature; or
- we could not pay our debts as they become due.
On the basis of our historical financial information, recent operating
history and other factors, we believe that after giving effect to the issuance
of the notes and the guarantees, neither we nor any of the Subsidiary Guarantors
will be insolvent, have unreasonably small capital for the respective businesses
in which we are engaged or have incurred debts beyond our respective abilities
to pay debts as they mature. However, we cannot assure you that a court making
these determinations would agree with our conclusions in this regard.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURES. IN ADDITION, OUR BYLAWS MAY NOT
PERMIT US TO MAKE THE CHANGE OF CONTROL PAYMENT EVEN IF WE DO HAVE THE FUNDS.
Upon the occurrence of a Change of Control Triggering Event of Fleming, we
will be required to offer to repurchase all outstanding notes and other
outstanding debt. If a Change of Control Triggering Event were to occur, we
cannot assure you that we would have sufficient funds to pay the repurchase
price for all the notes tendered by the holders. Our existing credit agreement
and indentures contain, and any future other agreements relating to other
indebtedness to which we become a party may contain, restrictions or
prohibitions on our ability to repurchase notes or may provide that an
occurrence of a change of control constitutes an event of default under, or
otherwise requires payment of amounts borrowed under those agreements. If a
Change of Control Triggering Event occurs at a time when we are prohibited from
repurchasing the notes, we could seek the consent of our then existing lenders
and note holders to the repurchase of the notes or could attempt to refinance
the borrowings that contain the prohibition. If we do not obtain such a consent
or repay the borrowings, we would remain prohibited from repurchasing the notes.
In that case, our failure to repurchase tendered notes would constitute an event
of default under the Indenture and may constitute a default under the terms of
other indebtedness that we may enter into from time to time. In addition, our
bylaws contain a provision that prohibits us from adopting a shareholder rights
plan or any other form of "poison pill" without the prior approval of holders of
at least a majority of the shares of our outstanding capital stock. It is
unclear whether this provision of our bylaws would prohibit us from repurchasing
the notes in the event of a change of control. If a court concluded that the
change of control provisions of the Indenture were inconsistent with or
prohibited by our bylaws, we may not be able to repurchase the notes.
For more details, see the section "Description of Notes" under the heading
"Purchase of Notes Upon a Change of Control Triggering Event."
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
Before this exchange offer, there was no established trading market for the
exchange notes. We have been informed by the initial purchasers of the old notes
that they intend to make a market in the exchange notes. However, they may cease
their market-making at any time. In addition, the liquidity of the trading
market in the exchange notes, and the market price quoted for the exchange
notes, may be adversely affected by changes in the overall market for high yield
securities and by changes in our financial performance or prospects for
companies in our industry generally. As a result, you cannot be sure that an
active trading market will develop for these notes.
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VOLATILE TRADING PRICES MAY REQUIRE YOU TO BEAR THE FINANCIAL RISK OF AN
INVESTMENT IN THE NOTES FOR AN INDEFINITE PERIOD OF TIME.
If a market develops for the notes, the notes might trade at prices higher
or lower than their initial offering price. The trading price would depend on
many factors, such as prevailing interest rates, the market for similar
securities, general economic conditions, and our financial condition,
performance and business prospects. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
fluctuation in the prices of these securities. The market for the notes may be
subject to such disruptions, which could have an adverse effect on the price of
the notes. You should be aware that you may be required to bear the financial
risk of an investment in the notes for an indefinite period of time.
In addition, because we depend on Kmart for a substantial portion of our
business, negative information about Kmart's performance, financial condition
and business prospects may adversely affect the market and prices of our
securities, including the market and price of the notes.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
DC ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT THE
MARKETS ON WHICH THE NOTES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR
OPERATIONS AND OUR PROFITABILITY.
Terrorist attacks may negatively affect our operations and your investment.
There can be no assurance that there will not be further terrorist attacks
against the United States or U.S. businesses. These attacks or armed conflicts
may directly impact our physical facilities or those of our suppliers or
customers. Furthermore, these attacks may make travel and the transportation of
our supplies and products more difficult and more expensive and ultimately
affect our sales.
Also as a result of terrorism, the United States has entered into an armed
conflict which could have a further impact on our sales, our supply chain, and
our ability to deliver product to our customers. Political and economic
instability in some regions of the world may also result and could negatively
impact our business. The consequences of any of these armed conflicts are
unpredictable, and we may not be able to foresee events that could have an
adverse effect on our business or your investment.
More generally, any of these events could cause consumer confidence and
spending to decrease or result in increased volatility in the United States and
worldwide financial markets and economy. They also could result in economic
recession in the United States or abroad. Any of these occurrences could have a
significant impact on our operating results, revenues and costs and may result
in the volatility of the market price for our securities and on the future price
of our securities.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We issued our 10-5/8% Series A senior subordinated notes due 2007 on July
25, 1997 to Bear, Stearns & Co. Inc., Chase Securities Inc., BancAmerica
Securities, Inc. and Societe Generale Securities Corporation pursuant to a
purchase agreement. These initial purchasers subsequently resold our Series A
notes to "qualified institutional buyers" as defined under Rule 144A of the
Securities Act, in reliance on Rule 144A, and outside the United States under
Regulation S of the Securities Act. We subsequently completed an exchange offer
in which we exchanged all of our outstanding Series A notes for our Series B
notes. Our Series B notes are registered under the Securities Act.
We issued the Series C notes on October 15, 2001 to Deutsche Banc Alex.
Brown Inc., J.P. Morgan Securities Inc., Lehman Brothers Inc., Bear, Stearns &
Co. Inc., First Union Securities, Inc. and UBS Warburg LLC, the initial
purchasers, pursuant to a purchase agreement. The initial purchasers
subsequently sold the Series C notes to "qualified institutional buyers," as
defined in Rule 144A under the Securities Act, in reliance on Rule 144A, and
outside the United States under Regulation S of the Securities Act. As a
condition to the sale of the Series C notes, we entered into a registration
rights agreement with the initial purchasers on October 15, 2001. Pursuant to
the registration rights agreement, we agreed that we would:
(1) file a registration statement with the SEC with respect to the
exchange notes on or before January 13, 2002;
(2) use all reasonable efforts to cause the registration statement to
be declared effective by the SEC on or before April 13, 2002;
(3) use all reasonable efforts to keep the registration statement
effective until the closing of the exchange offer;
(4) use all reasonable efforts to keep the exchange offer open for not
less than 30 days (or longer if required by applicable law) after the date
that notice of the exchange offer is mailed to holders of the Series C
notes; and
(5) use our best efforts to consummate the exchange offer on or before
May 28, 2002.
We filed a copy of the registration rights agreement as an exhibit to the
registration statement.
We are also making the exchange offer available to holders of our Series B
notes. The purpose of our offer to exchange both the Series B notes and the
Series C notes is to create a single series of debt securities having a total
outstanding principal amount that is the combination of the Series B notes and
Series C notes. As of the date of this prospectus, $250,000,000 principal amount
of Series B notes and $150,000,000 principal amount of Series C notes are
outstanding. Upon the effectiveness of the registration statement, we will offer
the exchange notes in exchange for the old notes.
RESALE OF THE EXCHANGE NOTES
Based upon an interpretation by the staff of the SEC contained in no-action
letters issued to third parties, we believe that you may exchange old notes for
exchange notes in the ordinary course of business. For further information on
the SEC's position, see Exxon Capital Holdings Corporation, available May 13,
1988, Morgan Stanley & Co. Incorporated, available June 5, 1991 and Shearman &
Sterling, available July 2, 1993, and other interpretive letters to similar
effect. You will be allowed to resell exchange notes to the public without
further registration under the Securities Act and without delivering to
purchasers of the exchange notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act so long as you do not participate, do not
intend to participate, and have no arrangement with any person to participate,
in a distribution of the exchange notes. However, the foregoing does not apply
to you if you are:
- a broker-dealer who purchased the exchange notes directly from us to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act; or
20
- you are an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act.
In addition, if:
- you are a broker-dealer; or
- you acquire exchange notes in the exchange offer for the purpose of
distributing or participating in the distribution of the exchange notes,
you cannot rely on the position of the staff of the SEC contained in the
no-action letters mentioned above and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, which the broker-dealer acquired as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
The letter of transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may use
this prospectus, as it may be amended or supplemented from time to time, in
connection with resales of exchange notes received in exchange for old notes
which the broker-dealer acquired as a result of market-making or other trading
activities.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn before the expiration date. We will issue $1,000
principal amount of exchange notes in exchange for each $1,000 principal amount
of outstanding old notes surrendered pursuant to the exchange offer. You may
tender old notes only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the Series C notes except that:
- we will register the exchange notes under the Securities Act and,
therefore, the exchange notes will not bear legends restricting their
transfer; and
- holders of the exchange notes will not be entitled to any of the rights
of holders of Series C notes under the registration rights agreement,
which rights will terminate upon the completion of the exchange offer.
The exchange notes will evidence the same debt as the old notes. The indenture
governing the exchange notes is the same indenture that governs the Series C
notes and is substantially similar in all of its material terms to the indenture
governing the Series B notes.
As of the date of this prospectus, $250,000,000 in aggregate principal
amount of the Series B notes and $150,000,000 in aggregate principal amount of
the Series C notes are outstanding and registered in the name of Cede & Co., as
nominee for The Depository Trust Company. Only registered holders of the old
notes, or their legal representative or attorney-in-fact, as reflected on the
records of the trustee under the indentures, may participate in the exchange
offer. We will not set a fixed record date for determining registered holders of
the old notes entitled to participate in the exchange offer.
You do not have any appraisal or dissenters' rights under the indenture in
connection with the exchange offer. We intend to conduct the exchange offer in
accordance with the provisions of the registration rights agreement and the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the SEC.
We will be deemed to have accepted validly tendered old notes when, as and
if we had given oral or written notice of acceptance to the exchange agent. The
exchange agent will act as your agent for the purposes of receiving the exchange
notes from us.
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If you tender old notes in the exchange offer you will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
the applicable taxes described below, in connection with the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term expiration date will mean 5:00 p.m., New York City time on
, 2002, unless we, in our sole discretion, extend the exchange offer,
in which case the term expiration date will mean the latest date and time to
which we extend the exchange offer.
To extend the exchange offer, we will:
- notify the exchange agent of any extension orally or in writing; and
- mail to each registered holder an announcement that will include
disclosure of the approximate number of old notes deposited to date,
each before 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We reserve the right, in our reasonable discretion:
- to delay accepting any old notes:
- to extend the exchange offer; or
- if any conditions listed below under "-- Conditions" are not satisfied,
to terminate the exchange offer by giving oral or written notice of the
delay, extension or termination to the exchange agent.
We will follow any delay in acceptance, extension or termination as
promptly as practicable by oral or written notice to the registered holders. If
we amend the exchange offer in a manner we determine constitutes a material
change, we will promptly disclose the amendment in a prospectus supplement that
we will distribute to the registered holders. We will also extend the exchange
offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of disclosure, if the exchange offer would
otherwise expire during the five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at the same rate and on the same
terms as the old notes. Consequently, the exchange notes will bear interest at a
rate equal to 10-5/8% per annum (calculated using a 360-day year). Interest will
be payable semi-annually on each January 31 and July 31.
You will receive interest on July 31, 2002 in an amount equal to the
accrued interest on the old notes from the last interest payment date on which
interest was paid on the old notes. We will deem the right to receive any
interest on the old notes accrued from the last interest payment date waived by
you if we accept your old notes for exchange.
PROCEDURES FOR TENDERING
You may tender old notes in the exchange offer only if you are a registered
holder of old notes. To tender in the exchange offer, you must:
- complete, sign and date the letter of transmittal or a facsimile of the
letter of transmittal;
- have the signatures guaranteed if required by the letter of transmittal;
and
- mail or otherwise deliver the letter of transmittal or the facsimile to
the exchange agent at the address listed below under "-- Exchange Agent"
for receipt before the expiration date.
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In addition, either:
- the exchange agent must receive certificates for the old notes along with
the letter of transmittal into its account at the depositary pursuant to
the procedure for book-entry transfer described below before the
expiration date;
- the exchange agent must receive a timely confirmation of a book-entry
transfer of the old notes, if the procedure is available, into its
account at the depositary pursuant to the procedure for book-entry
transfer described below before the expiration date; or
- you must comply with the guaranteed delivery procedures described below.
Your tender, if not withdrawn before the expiration date, will constitute
an agreement between you and us in accordance with the terms and subject to the
conditions described in this prospectus and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk. We
recommend that instead of delivery by mail, you use an overnight or hand
delivery service, properly insured. In all cases, you should allow sufficient
time to assure delivery to the exchange agent before the expiration date. You
should not send letters of transmittal or old notes to us. You may request your
respective brokers, dealers, commercial banks, trust companies or nominees to
effect the transactions described above for you.
If you are a beneficial owner of old notes whose old notes are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your notes, you should contact the registered holder
promptly and instruct the registered holder to tender on your behalf. If you
wish to tender on your own behalf, before completing and executing the letter of
transmittal and delivering the old notes you must either:
- make appropriate arrangements to register ownership of the old notes in
your name; or
- obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time. Unless the
old notes are tendered:
(1) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on the letter of transmittal; or
(2) for the account of:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent
in the United States; or
- an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act that is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal,
an eligible guarantor institution must guarantee the signatures on a letter of
transmittal or a notice of withdrawal described below under "-- Withdrawal of
Tenders."
If the letter of transmittal is signed by a person other than the
registered holder, the old notes must be endorsed or accompanied by a properly
completed bond power, signed by the registered holder as the registered holder's
name appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, they
should so indicate when signing, and unless waived by us, they must submit
evidence satisfactory to us of their authority to so act with the letter of
transmittal.
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The exchange agent and the depositary have confirmed that any financial
institution that is a participant in the depositary's system may utilize the
depositary's Automated Tender Offer Program to tender notes.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered old notes, which determination will be final and binding. We reserve
the absolute right to reject any and all old notes not properly tendered or any
old notes our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, you
must cure any defects or irregularities in connection with tenders of old notes
within the time we determine. Although we intend to notify you of defects or
irregularities with respect to tenders of old notes, neither we, the exchange
agent nor any other person will incur any liability for failure to give you that
notification. Unless waived, we will not deem tenders of old notes to have been
made until you cure the defects or irregularities.
While we have no present plan to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any old notes that are not tendered in the exchange offer, we reserve
the right in our sole discretion to purchase or make offers for any old notes
that remain outstanding after the expiration date. We also reserve the right to
terminate the exchange offer, as described below under "-- Conditions," and, to
the extent permitted by applicable law, purchase old notes in the open market,
in privately negotiated transactions or otherwise. The terms of any of those
purchases or offers could differ from the terms of the exchange offer.
If you wish to tender old notes in exchange for exchange notes in the
exchange offer, we will require you to represent that:
- you are not an affiliate of ours;
- you will acquire any exchange notes in the ordinary course of your
business; and
- at the time of completion of the exchange offer, you have no arrangement
with any person to participate in the distribution of the exchange notes.
In addition, in connection with the resale of exchange notes, any
participating broker-dealer who acquired the old notes for its own account as a
result of market-making or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act. The SEC has taken the position
that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the exchange notes, other than a resale of an
unsold allotment from the original sale of the notes, with this prospectus.
RETURN OF NOTES
If we do not accept any tendered old notes for any reason described in the
terms and conditions of the exchange offer or if you withdraw or submit old
notes for a greater principal amount than you desire to exchange, we will return
the unaccepted, withdrawn or non-exchanged notes without expense to you as
promptly as practicable. In the case of old notes tendered by book-entry
transfer into the exchange agent's account at the depositary pursuant to the
book-entry transfer procedures described below, we will credit the old notes to
an account maintained with the depositary as promptly as practicable.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at the depositary for purposes of the exchange offer within two
business days after the date of this prospectus, and any financial institution
that is a participant in the depositary's systems may make book-entry delivery
of old notes by causing the depositary to transfer the old notes into the
exchange agent's account at the depositary in accordance with the depositary's
procedures for transfer. However, although delivery of old notes may be effected
through book-entry transfer at the depositary, you must transmit and the
exchange agent must receive, the letter of transmittal or a facsimile of the
letter of transmittal, with any required signature
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guarantees and any other required documents, at the address below under
"-- Exchange Agent" on or before the expiration date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes and (1) the notes are not immediately
available or (2) you cannot deliver the old notes, the letter of transmittal or
any other required documents to the exchange agent before the expiration date,
you may effect a tender if:
(a) the tender is made through an eligible guarantor institution;
(b) before the expiration date, the exchange agent receives from the
eligible guarantor institution a properly completed and duly executed
notice of guaranteed delivery, substantially in the form provided by us,
that:
- states your name and address, the certificate number(s) of the old
notes and the principal amount of old notes tendered,
- states that the tender is being made by that notice of guaranteed
delivery, and
- guarantees that, within three New York Stock Exchange trading days
after the expiration date, the eligible guarantor institution will
deposit with the exchange agent the letter of transmittal, together
with the certificate(s) representing the old notes in proper form for
transfer or a confirmation of a book-entry transfer, as the case may
be, and any other documents required by the letter of transmittal; and
(c) within five New York Stock Exchange trading days after the
expiration date, the exchange agent receives a properly executed letter of
transmittal, as well as the certificate(s) representing all tendered old
notes in proper form for transfer and all other documents required by the
letter of transmittal.
Upon request, the exchange agent will send to you a notice of guaranteed
delivery if you wish to tender your notes according to the guaranteed delivery
procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders
of old notes at any time before 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of old notes in the exchange offer, the exchange agent
must receive a written or facsimile transmission notice of withdrawal at its
address listed in this prospectus before the expiration date. Any notice of
withdrawal must:
- specify the name of the person who deposited the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the certificate
number(s) and principal amount of the old notes; and
- be signed in the same manner as the original signature on the letter of
transmittal by which the old notes were tendered, including any required
signature guarantees.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of the notices, and our determination will be final and
binding on all parties. We will not deem any properly withdrawn old notes to
have been validly tendered for purposes of the exchange offer, and we will not
issue exchange notes with respect to those old notes, unless you validly
retender the withdrawn old notes. You may retender properly withdrawn old notes
by following one of the procedures described above under "-- Procedures for
Tendering" at any time before the expiration date.
25
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange the exchange notes for, any old
notes, and may terminate the exchange offer as provided in this prospectus
before the acceptance of the old notes, if, in our reasonable judgment, the
exchange offer violates applicable law, rules or regulations or an applicable
interpretation of the staff of the SEC.
If we determine in our reasonable discretion that any of these conditions
are not satisfied, we may:
- refuse to accept any old notes and return all tendered old notes to you;
- extend the exchange offer and retain all old notes tendered before the
exchange offer expires, subject, however, to your rights to withdraw the
old notes; or
- waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes that have not been withdrawn.
If the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that we will
distribute to the registered holders of the old notes, and we will extend the
exchange offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during the five to ten
business day period.
TERMINATION OF RIGHTS
If you are a holder of Series C notes, all of your rights under the
registration rights agreement will terminate upon consummation of the exchange
offer except with respect to our continuing obligations:
- to indemnify you and parties related to you against liabilities,
including liabilities under the Securities Act; and
- to provide, upon your request, the information required by Rule
144A(d)(4) under the Securities Act to permit resales of the notes
pursuant to Rule 144A.
SHELF REGISTRATION
If (1) applicable law or SEC policy does not permit us to consummate the
exchange offer, (2) we do not consummate the exchange offer on or before May 28,
2002 or (3) you notify us before the 60th day following the completion of the
exchange offer that:
- you are prohibited by law or SEC policy from participating in the
exchange offer;
- you may not resell the exchange notes acquired by you in the exchange
offer to the public without delivering a prospectus, and the prospectus
contained in the registration statement is not appropriate or available
for resales by you; or
- you are a broker-dealer and hold notes acquired directly from us,
we will file with the SEC a shelf registration statement to register for public
resale the registrable notes held by you if you provide us with the necessary
information for inclusion in the shelf registration statement.
For the purposes of the registration rights agreement, "registrable notes"
means each Series C note until the earliest date on which:
- a registration statement covering the Series C note has been declared
effective by the SEC and the note has been disposed of in accordance with
such effective registration statement;
- the Series C note has been exchanged pursuant to the exchange offer for
an exchange note or exchange notes that may be resold without restriction
under state and federal securities laws;
26
- such Series C note ceases to be outstanding; or
- the Series C note may be resold without restriction pursuant to Rule 144
under the Securities Act.
ADDITIONAL INTEREST ON SERIES C NOTES
If:
(1)(A) we do not file the registration statement with the SEC on or
before January 13, 2002 or (B) we are obligated to file a shelf
registration statement and we fail to file the shelf registration statement
with the SEC on or before the 90th day after the obligation to file a shelf
registration statement arises, then, commencing on the day after either
required filing date, we agree to pay additional interest on the principal
amount of the Series C notes at a rate of 0.50% per annum for the first 90
days immediately following the required filing date, with the additional
interest increasing by an additional 0.50% per annum at the beginning of
each subsequent 90-day period; or
(2)(A) the SEC does not declare the registration statement effective
on or before April 13, 2002, or (B) we are obligated to file a shelf
registration statement and the SEC does not declare the shelf registration
statement effective on or before the 180th day after the obligation to file
a shelf registration statement arises, then, commencing on the day after
either required effective date, we agree to pay additional interest on the
principal amount of the Series C notes at a rate of 0.50% per annum for the
first 90 days immediately following the required effective date, with the
additional interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; or
(3)(A) we do not complete the exchange offer on or before the 45th day
after the SEC declares the registration statement effective, or (B) if
applicable, a shelf registration statement has been declared effective but
thereafter ceases to be effective at any time prior to October 15, 2003
(unless all of the Series C notes have already been disposed of or all of
the Series C notes are eligible to be sold pursuant to Rule 144(k)), then
we agree to pay additional interest on the principal amount of the Series C
notes at a rate of 0.50% per annum for the first 90 days commencing on (x)
the 46th day after the effective date, in the case of (A) above, or (y) the
day the shelf registration statement ceases to be effective, in the case of
(B) above, with the additional interest rate increasing by an additional
0.50% per annum at the beginning of each subsequent 90-day period;
provided, however, that the additional interest rate on the Series C notes may
not accrue under more than one of the foregoing clauses (1) through (3) at any
one time and at no time will the aggregate amount of additional interest
accruing exceed in the aggregate 1.00% per annum; provided, further,
however,that when (i) we file the registration statement or the shelf
registration statement (in the case of clause (1) above), (ii) the SEC declares
the registration statement or the shelf registration statement (in the case of
clause (2) above), or (iii) we complete the exchange offer (in the case of
clause (3)(A) above), or upon the effectiveness of the shelf registration
statement which had ceased to remain effective (in the case of clause (3)(B)
above), additional interest on the Series C notes as a result of such clause (or
the relevant subclause thereof), as the case may be, shall cease to accrue.
We agree to pay any amount of additional interest due pursuant to clause
(1), (2) or (3) above in cash on the same original interest payment dates as the
Series C notes.
EXCHANGE AGENT
We have appointed Manufacturers and Traders Trust Company as exchange agent
for the exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or the
27
letter of transmittal and requests for a notice of guaranteed delivery to the
exchange agent addressed as follows:
By Registered or Certified Mail: By Hand Delivery:
Manufacturers and Traders Trust Company Manufacturers and Traders Trust Company
One M&T Plaza One M&T Plaza
Buffalo, New York 14203 Buffalo, New York 14203
Attention: Russell T. Whitley Attention: Russell T. Whitley
By Overnight Delivery: By Facsimile:
Manufacturers and Traders Trust Company (716) 842-4474
One M&T Plaza Attn: Russell T. Whitley
Buffalo, New York 14203 Confirm by Telephone: (716) 842-5602
Attention: Russell T. Whitley
Delivery to an address other than the one stated above or transmission via
a facsimile number other than the one stated above will not constitute a valid
delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are making the
principal solicitation by mail; however, our officers and regular employees may
make additional solicitations by facsimile, telephone or in person.
We have not retained any dealer manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer which we estimate to be approximately $250,000. These expenses include
registration fees, fees and expenses of the exchange agent and the trustee,
accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of notes
pursuant to the exchange offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the old notes pursuant to the exchange offer,
then you must pay the amount of the transfer taxes. If you do not submit
satisfactory evidence of payment of the taxes or exemption from payment with the
letter of transmittal, we will bill the amount of the transfer taxes directly to
you.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the exchange offer is voluntary. We urge you to consult
your financial and tax advisors in making your decisions on what action to take.
Series B notes that are not exchanged for exchange notes pursuant to the
exchange offer will remain securities registered under the Securities Act.
However, such Series B notes would not be assigned a new CUSIP number identical
to the CUSIP number assigned to the exchange notes, and the liquidity of, and
the trading market for, such Series B notes may be greatly diminished upon
completion of the exchange offer. Series C notes that are not exchanged for
exchange notes pursuant to the exchange offer will remain restricted securities.
Accordingly, those Series C notes may be resold only:
- to a person whom the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of Rule
144A;
- in a transaction meeting the requirements of Rule 144 under the
Securities Act;
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 903 or 904 of Regulation S under the Securities
Act;
28
- in accordance with another exemption from the registration requirements
of the Securities Act and based upon an opinion of counsel if we so
request;
- to us; or
- pursuant to an effective registration statement.
In each case, the Series C notes may be resold only in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
29
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. The exchange
offer satisfies an obligation to Series C noteholders under the registration
rights agreement. The net proceeds from the $150 million Series C notes
offering, after deducting estimated fees and expenses, were approximately $142
million. We used the net proceeds from the Series C notes offering to repay a
portion of indebtedness outstanding under the revolving portion of our credit
facility.
CAPITALIZATION
The following table sets forth our current maturities of long-term debt and
capital leases and our consolidated capitalization at October 6, 2001 and as
adjusted to give effect to the application of the net proceeds from the issuance
and sale of the Series C notes on October 15, 2001.
AT OCTOBER 6, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Current maturities of long-term debt and capital leases..... $ 60,584 $ 60,584
Long-term debt:
Revolving Credit Facility, average interest rate of 5.5%
for 2001(1)............................................ 420,000 277,641
Term Loan Facility, average interest rate of 6.4% for
2001................................................... 88,998 88,998
Long-term obligations under capital leases................ 333,980 333,980
10-1/8% Senior Notes due 2008............................. 355,000 355,000
10-1/2% Senior Subordinated Notes due 2004................ 250,000 250,000
10-5/8% Series B Senior Subordinated Notes due 2007....... 259,194 259,194
10-5/8% Series C Senior Subordinated Notes due 2007....... -- 150,000
5-1/4% Convertible Senior Subordinated Notes due 2009..... 150,000 150,000
Other debt (including discounts).......................... (5,317) (7,177)
---------- ----------
Total long-term debt (including current maturities).... 1,912,439 1,918,220
Total shareholders' equity............................. 508,930 508,930
---------- ----------
Total capitalization (including current maturities).... $2,421,369 $2,427,150
========== ==========
---------------
(1) The Revolving Credit Facility provides for a total commitment of $600
million. On October 6, 2001, after applying the net proceeds from the
issuance and sale of the Series C notes, we could have borrowed an
additional $269 million under the Revolving Credit Facility. As of October
6, 2001, we had $53 million of outstanding letters of credit under the
Revolving Credit Facility.
30
SELECTED CONSOLIDATED FINANCIAL DATA
The information presented below for, and as of the end of, each of the
fiscal years in the five-year period ended December 30, 2000 is derived from our
audited consolidated financial statements. In the opinion of our management, the
unaudited consolidated interim financial data presented below provides all
adjustments necessary for a fair presentation of the results of operations for
the periods specified. Such results, however, are not necessarily indicative of
the results which may be expected for the full fiscal year. The following
information should be read in conjunction with the section "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements included elsewhere in this prospectus.
FISCAL YEAR ENDED(1) 40 WEEKS ENDED
------------------------------------------------------------------------ --------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 30, SEPTEMBER 30, OCTOBER 6,
1996(2) 1997(3) 1998(4) 1999(5) 2000(6) 2000(7) 2001(8)
------------ ------------ ------------ ------------ ------------ ------------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net sales(9).............. $16,051 $14,966 $14,678 $14,272 $14,444 $10,819 $11,641
Costs and expenses:
Cost of sales(9)......... 14,594 13,558 13,228 12,835 13,097 9,808 10,738
Selling and
administrative......... 1,250 1,172 1,251 1,262 1,185 894 736
Interest expense......... 163 163 161 165 175 131 127
Interest income.......... (49) (47) (37) (40) (33) (25) (20)
Equity investment
results................ 18 17 12 10 8 6 1
Litigation charge
(credit)............... 20 21 8 -- -- (2) 49
Impairment/restructuring
charge (credit)........ -- -- 653 103 213 146 (26)
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 15,996 14,884 15,276 14,335 14,645 10,958 11,605
------- ------- ------- ------- ------- ------- -------
Earnings(loss) before
taxes.................... 55 82 (598) (63) (201) (139) 36
Taxes on income(loss)..... 28 44 (87) (18) (79) (54) 15
------- ------- ------- ------- ------- ------- -------
Earnings(loss) before
extraordinary charge..... 27 38 (511) (45) (122) (85) 21
Extraordinary charge from
early retirement of
debt(net of taxes)....... -- (13) -- -- -- -- (3)
------- ------- ------- ------- ------- ------- -------
Net earnings(loss)..... $ 27 $ 25 $ (511) $ (45) $ (122) $ (85) $ 18
======= ======= ======= ======= ======= ======= =======
Diluted earnings(loss) per
share.................... $ 0.71 $ 0.67 $(13.48) $ (1.17) $ (3.15) $ (2.19) $ .39
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash
equivalents............ $ 64 $ 30 $ 6 $ 7 $ 30 $ 50 $ 43
Total assets............. 4,055 3,924 3,491 3,573 3,403 3,350 3,748
Total debt (including
current maturities and
capital leases)........ 1,598 1,563 1,566 1,694 1,669 1,736 1,912
Shareholders' equity..... 1,076 1,090 570 561 427 480 509
OTHER FINANCIAL AND
OPERATING DATA:
Cash flows from operating
activities............. $ 327 $ 113 $ 141 $ 118 $ 127 $ 27 $ (145)
Cash flows from investing
activities............. (45) (54) (163) (213) (48) (7) (138)
Cash flows from financing
activities............. (223) (92) (2) 96 (55) 22 296
EBITDA(10)............... 417 441 (237) 281 154 134 287
Depreciation and
amortization(11)....... 175 173 180 158 169 130 126
Capital expenditures..... 129 129 200 166 151 108 169
Ratio of earnings to
fixed charges(12)...... 1.27x 1.41x -- -- -- -- 1.21x
31
---------------
(1) Fiscal 2000 is a 53-week year; all other years are 52 weeks.
(2) Results in 1996 include a charge of $20 million ($10 million after-tax)
related to the settlement of two related lawsuits against us.
(3) The results in 1997 reflect a charge of $19 million ($9 million after-tax)
related to the settlement of a lawsuit against us. Such period also
reflects an extraordinary charge of $22 million ($13 million after-tax)
related to a recapitalization.
(4) The results in 1998 reflect an impairment/restructuring charge with related
costs totaling $668 million ($543 million after-tax) related to the
strategic plan.
(5) The results in 1999 reflect an impairment/restructuring charge with related
costs totaling $137 million ($92 million after-tax) related to our
strategic plan. Such period also reflects one-time items ($31 million
charge to close 10 conventional retail stores, income of $22 million from
extinguishing a portion of the self-insured workers' compensation
liability, interest income of $9 million related to refunds in federal
income taxes from prior years, and $6 million in gains from the sale of
distribution facilities) netting to $6 million of income ($3 million
after-tax).
(6) The results in 2000 reflect an impairment/restructuring charge with related
costs totaling $309 million ($183 million after-tax) relating to our
strategic plan. Such period also reflects one-time items ($10 million
charge related primarily to asset impairment on retail stores, income of $2
million relating to litigation settlements, and $9 million in gains from
the sale of distribution facilities) netting to less than $1 million of
income ($1 million loss after-tax).
(7) The results for the 40 weeks ended September 30, 2000, reflect an
impairment/restructuring charge with related costs totaling $211 million
($125 million after-tax) relating to our strategic plan.
(8) The results for the 40 weeks ended October 6, 2001, reflect an
impairment/restructuring charge with related costs totaling $19 million
($11 million after-tax) relating to our strategic plan. Such period also
reflects one-time items (approximately $49 million in charges from
litigation settlements and net additional interest expense of approximately
$2 million due to early retirement of debt) netting to approximately $50
million ($30 million after-tax).
(9) During the fourth quarter of 2000 we adopted EITF 99-19 and restated sales
and cost of sales for all prior periods. The adoption had no effect on
gross margins or earnings.
(10) EBITDA is earnings before extraordinary items, interest expense, income
taxes, depreciation and amortization, equity investment results and LIFO
provision. EBITDA should not be considered as an alternative measure of our
net income, operating performance, cash flow or liquidity. We provide it as
additional information related to our ability to service debt; however,
conditions may require conservation of funds for other uses. Although we
believe EBITDA enhances your understanding of our financial condition, this
measure, when viewed individually, is not necessarily a better indicator of
any trend as compared to conventionally computed measures (e.g., net sales,
net earnings, net cash flows, etc.). Amounts presented may not be
comparable to similar measures disclosed by other companies.
(11) Depreciation and amortization expense includes goodwill amortization and
excludes amortization of debt cost which is reflected in interest expense.
(12) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist primarily of interest
expense, including amortization of deferred debt issuance costs and
one-third of rental expense (the portion considered representative of the
interest factor). Earnings were insufficient to cover fixed charges by $598
million, $62 million, $202 million and $139 million for the fiscal years
ended December 26, 1998, December 25, 1999, December 30, 2000 and the 40
weeks ended September 30, 2000, respectively.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We have substantially completed the strategic plan that we initiated in
December 1998. In the course of doing so, we have, among other accomplishments:
- closed or consolidated 12 of our distribution centers, which resulted in:
-- increased average sales per full-line distribution center by more than
40% from $390 million in 1998 to $550 million in 2000, and
-- increased average sales per full-line distribution center employee by
more than 12% from 1998 to 2000;
- centralized approximately 80% of our purchasing operations in our
customer support center near Dallas, Texas;
- centralized our accounting, human resources, information technology and
other support services in our shared services center in Oklahoma City,
Oklahoma;
- sold or closed 238 conventional supermarkets through the end of the third
quarter of 2001;
- opened 40 additional price impact supermarkets; and
- instituted a "culture of thrift" among our employees, in part through our
Low Cost Pursuit Program.
RESULTS OF OPERATIONS
Set forth in the following table is information regarding our net sales and
certain components of earnings expressed as a percent of sales which are
referred to in the accompanying discussion:
40 WEEKS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 6,
1998 1999 2000 2000 2001
------ ------ ------ ------------- ----------
Net sales......................... 100.00% 100.00% 100.00% 100.00% 100.00%
Gross margin...................... 9.88 10.07 9.33 9.35 7.76
Less:
Selling and administrative...... 8.52 8.84 8.21 8.26 6.33
Interest expense................ 1.10 1.16 1.21 1.22 1.09
Interest income................. (.25) (.28) (.23) (.23) (.18)
Equity investment results....... .08 .07 .06 .05 .01
Litigation charge (credit)...... .05 -- -- (.02) .42
Impairment/restructuring charge
(credit)..................... 4.45 .72 1.47 1.35 (.22)
------ ------ ------ ------ ------
Total expenses............... 13.95 10.51 10.72 10.63 7.45
------ ------ ------ ------ ------
Income (loss) before taxes........ (4.07) (.44) (1.39) (1.28) .31
Taxes on income (loss)............ (.59) (.13) (.54) (.50) .13
------ ------ ------ ------ ------
Earnings (loss) before
extraordinary items............. (3.48)% (.31)% (.85)% (.78)% .18%
====== ====== ====== ====== ======
33
40 WEEKS ENDED OCTOBER 6, 2001 AND SEPTEMBER 30, 2000
Net Sales
Net sales for the 40 weeks ended October 6, 2001 increased by $822 million,
or 7.6%, to $11.6 billion from the same period in 2000.
Net sales for the distribution segment increased by 18.0% to $9.8 billion
compared to $8.3 billion in 2000. This increase was in part attributable to
growth in distribution sales from a wide variety of new channel and conventional
customers. New channel customers, including convenience stores, supercenters,
limited assortment stores, drug stores, and self-distributing chains, are an
important part of our strategic growth plan and collectively represent
approximately one-half of our distribution customer base. The remainder of the
sales growth was attributable to the implementation of new business resulting
from the recently announced Kmart alliance.
Kmart Corporation, our largest customer, accounted for 18% and 10% of our
total net sales for the year-to-date periods ended October 6, 2001, and
September 30, 2000, respectively. We expect annual sales to Kmart for 2001 to be
approximately $2.6 billion, with an increase to approximately $4.5 billion in
2002.
Retail segment sales for the 40 weeks ended October 6, 2001 decreased $675
million, or 26.8%, to $1.8 billion as compared to the same period in 2000. The
decrease in sales was due to the continued disposition of conventional retail
stores in order to increase focus on our price impact retail stores. During the
first three quarters of 2001, we sold or closed our remaining 96 conventional
retail stores and opened ten Yes!Less stores and ten price impact stores,
including four remodeled former Sentry stores.
Gross margin
Gross margin for the 40 weeks ended October 6, 2001 decreased by $108
million, or 10.7%, to $.9 billion from $1.0 billion for the same period in 2000,
and also decreased as a percentage of net sales to 7.76% from 9.35% for the same
period in 2000. After excluding the strategic plan charges, gross margin for the
40 weeks ended October 6, 2001 decreased by $118 million, or 11.2%, compared to
the same period in 2000, and decreased as a percentage of net sales to 8.01%
from 9.72% for the same period in 2000. The decrease in gross margin rate was an
expected result of the change in sales mix. The sales of the distribution
segment represent a larger portion of total company sales than the retail
segment and the distribution segment has lower margins as a percentage of sales
versus the retail segment.
For the distribution segment, after excluding strategic plan charges, gross
margin as a percentage of gross distribution sales improved by 3 basis points
for the year-to-date period compared to the same period in 2000, reflecting the
benefits of centralizing procurement and increasing warehouse productivity. For
the retail segment, after excluding strategic plan charges, gross margin as a
percentage of net retail sales for the 40 weeks ended October 6, 2001 decreased
by 29 basis points, compared to the same period in 2000. The decreasing margin
reflects our transition out of conventional retail and into price impact retail
which has lower shelf prices and gross margins.
For the distribution segment, the strategic plan charges decreased in 2001
for the year-to-date period compared to the same period in 2000 primarily due to
reduced recruiting and training expenses in 2001 after completing most of the
centralization of procurement in 2000, and additional depreciation and
amortization in 2000 of assets to be disposed of but not yet held for sale.
Strategic plan charges for the retail segment increased for the year-to-date
period comparison primarily due to inventory markdowns for clearance for closed
operations.
Selling and administrative expenses
Selling and administrative expenses for the 40 weeks ended October 6, 2001
decreased by approximately $158 million, or 17.6%, to $736 million in 2001 from
$894 million for the same period in 2000 and decreased as a percentage of net
sales to 6.33% for 2001 from 8.26% in 2000. After excluding the strategic plan
charges and a $10 million charge related to closing certain company-owned retail
stores, selling and administrative
34
expenses decreased in 2001 by $146 million, or 16.8%, compared to the same
period in 2000, and decreased as a percentage of net sales to 6.20% from 8.03%
for the same period in 2000. The sales of the distribution segment represent a
larger portion of total company sales than the retail segment, and the
distribution segment has lower operating expenses as a percentage of sales than
the retail segment.
For the distribution segment, after excluding strategic plan charges,
selling and administrative expenses as a percentage of gross sales for 40 weeks
ended October 6, 2001 improved by 19 basis points, compared to the same period
in 2000, due to leveraging the effect of sales growth and low cost pursuit
initiatives. For the retail segment, after excluding strategic plan charges and
a $10 million charge relating to closing certain company-owned retail stores,
selling and administrative expenses as a percentage of retail sales also
improved for the 40 weeks ended October 6, 2001 by 194 basis points, compared to
the same period in 2000, due to our shift in focus from conventional retail to
price impact retail, a format that has lower operating expense levels than
conventional retail. The strategic plan charges for distribution were relatively
flat. The strategic plan charges for retail were higher for the year-to-date
period of 2001 compared to the same period in 2000 due to costs associated with
closing conventional retail stores.
Support services expense increased in the year-to-date period of 2001
compared to the same period of 2000 primarily due to centralizing certain
administrative functions from the distribution and retail segments. Strategic
plan charges were lower in 2001 due to reduced severance related expenses,
moving costs, and professional fees in connection with carrying out our
strategic plan.
Operating earnings
Operating earnings for the distribution segment increased to $310 million
in the 40 weeks ended October 6, 2001 from $224 million for the same period in
2000. After excluding strategic plan charges and one-time items, operating
earnings increased by $71 million, or 28.5%, to $319 million in 2001 from $248
million for the same period of 2000.
Operating earnings for the retail segment increased by $7 million to $42
million in the 40 weeks ended October 6, 2001 from $35 million for the same
period in 2000. After excluding the strategic plan charges and one-time items,
operating earnings increased by $15 million to $73 million for the 40 weeks
ended October 6, 2001 from $58 million for the same period in 2000.
Support services expenses increased by $43 million to $185 million in the
40 weeks ended October 6, 2001 from $142 million for the same period in 2000.
After excluding strategic plan charges, support services expenses increased by
approximately $58 million to $181 million in the 40 weeks ended October 6, 2001
from $123 million for the same period in 2000.
Operating earnings net improvement is described in detail by segment in Net
sales, Gross margin, and Selling and administrative expenses sections above.
Interest expense
Interest expense decreased approximately $5 million to $127 million in the
40 weeks ended October 6, 2001 from $132 million for the same period in 2000,
resulting from lower average interest rates. The $127 million in 2001 included
$3 million of interest expense related to the early retirement of debt which was
recorded during the first quarter of 2001.
Interest income
Interest income of $21 million in the 40 weeks ended October 6, 2001 was $5
million lower than the same period in 2000. The reduction was primarily due to
reduced customer and other interest-bearing receivable balances. The $21 million
in 2001 included $1 million of interest income related to the early retirement
of debt which was recorded during the first quarter of 2001.
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Equity investment results
Our portion of results from equity investments improved by $5 million to
reflect a loss less than $1 million in the 40 weeks ended October 6, 2001
compared to a $6 million loss for the same period in 2000.
Impairment/restructuring charge
The pre-tax charge recorded in the Consolidated Condensed Statements of
Operations (associated with the implementation of our strategic plan announced
in 1998) was $19 million for the 40 weeks ended October 6, 2001 compared to $211
million for the same period of 2000. The $19 million charge in 2001 was recorded
with $26 million of income reflected in the impairment/restructuring line and
the balance reflected in other financial statement lines. The $211 million
charge in 2000 was recorded with $147 million reflected in the
impairment/restructuring line and the balance reflected in other financial
statement lines. See "Overview" above and Note 8 in the notes to the
consolidated condensed financial statements for further discussion regarding the
strategic plan.
Litigation charges
During the 40 weeks ended October 6, 2001, we recorded litigation
settlements and other related pre-tax expenses totaling $49 million related to
agreements in principle to settle the Storehouse Markets, Inc., et al., Don's
United Super, et al., Coddington Enterprises, Inc., et al., J&A Foods, Inc. et
al., R&D Foods, Inc. et al., and Robandee United Super, Inc. et al., and other
cases. During the same period of 2000, we recorded $2 million of net income in
settlements relating to other cases. See Note 6 in the notes to the consolidated
condensed financial statements and Legal Proceedings for further discussion
regarding these litigation charges.
Taxes on income
The effective tax rates for the 40 weeks ended October 6, 2001 and
September 30, 2000 were 41.3% (before extraordinary charge) and 39.1%,
respectively. These were both blended rates taking into account operations
activity, strategic plan activity, write-offs of non-deductible goodwill and the
timing of these items during the year.
Extraordinary charge
We reflected an extraordinary after-tax charge of $3 million ($6 million
pre-tax) in the first quarter of 2001 due to the early retirement of debt. See
Note 7 in the notes to the consolidated condensed financial statements for
further discussion regarding the debt retirement.
Certain accounting matters
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
142 -- Goodwill and Other Intangible Assets. One of the provisions of this
standard is to require use of a non-amortization approach to account for
purchased goodwill. Under that approach, goodwill and intangible assets with
indefinite lives would not be amortized to earnings over a period of time.
Instead, these amounts would be reviewed for impairment and expensed against
earnings only in the periods in which the recorded values are more than implied
fair value. We are studying the impact that SFAS 142 will have on our financial
statements and planning to implement it in fiscal year 2002, as required. Year
to date in 2001, goodwill amortization impacted the diluted per share amount,
excluding the strategic plan charges, litigation charges, and net additional
interest expense due to the early retirement of debt, by $0.31 per share.
The FASB Emerging Issues Task Force (EITF) reached a consensus on EITF
00-25 -- Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products. EITF 00-25 provides guidance on income
statement classification on consideration paid to a reseller of a vendor's
products. EITF 00-25 will be implemented by the end of 2001, as required. We
anticipate EITF 00-25 will provide for certain reclassifications of revenues and
cost of sales within our financial statements with no effect on gross margin or
earnings.
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The FASB recently issued SFAS No. 141 -- Business Combinations. We are
planning to apply SFAS 141 to all business combinations initiated after June 30,
2001.
The FASB recently issued SFAS No. 143 -- Accounting for Asset Retirement
Obligations. We are studying the impact that SFAS 143 has on our financial
statements and planning to implement it in the fiscal year after June 15, 2002,
as required. The FASB recently issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. We are studying, and have not yet
determined, the impact of these new standards on our financial statements.
YEARS ENDED DECEMBER 30, 2000 AND DECEMBER 25, 1999
Net Sales
Our net sales for 2000 increased by 1% to $14.44 billion from $14.27
billion for 1999. 2000 was a 53-week year; 1999 was a 52-week year.
Net sales for the distribution segment were $11.2 billion in 2000 compared
to $10.6 billion in 1999, an increase of 5.8%. The sales increase was primarily
due to new business added from independent retailers, convenience stores,
e-tailers, and supercenter customers, including such customers as Clark Retail
Enterprises, Inc. and additional Super Target stores. This increase was
partially offset by a previously announced loss of sales from Randall's (in
1999) and United (in 2000). Sales have also been impacted by the planned closing
and consolidation of certain distribution operating units. In 1999, sales to
Randall's and United accounted for less than 4% of our total sales. The
distribution segment had strategic plan charges and one-time items (e.g., gain
on sale of facilities) that affected sales for both years with no significant
effect on total distribution sales. In February 2001, we announced a ten-year
agreement to become the sole supplier of food and consumable products to Kmart
Corporation's more that 2,100 stores and supercenters. We expect annual sales to
Kmart to increase from approximately $1.4 billion in 2000 to approximately $2.6
billion in 2001 and approximately $4.5 billion in 2002.
Retail segment sales were $3.3 billion in 2000 compared to $3.7 billion in
1999. The decrease in sales was due primarily to the divestiture of
under-performing and non-strategic stores. Decreases in same-store sales also
contributed to the sales decline. The decrease was offset partially by sales
from new stores opened during 1999 and 2000. As additional conventional retail
stores are sold or closed, sales will continue to decrease in the retail
segment.
Food price inflation for our product mix was not significant in 2000 or
1999.
Gross Margin
Gross margin for 2000 decreased to $1.35 billion from $1.44 billion for
1999, and decreased as a percentage of net sales to 9.33% in 2000 from 10.07%
for 1999. After excluding the strategic plan charges and one-time items, gross
margin dollars in 2000 decreased to $1.40 billion from $1.45 billion for 1999
and gross margin as a percentage of net sales decreased to 9.68% in 2000 from
10.16% in 1999. The decrease in dollars was due partly to the sales decrease in
the retail segment, but was offset by positive results from leveraging our
buying power and cutting costs. The decrease in percentage of net sales was due
to a change in mix between the distribution and retail segments. The sales of
the distribution segment represented a larger portion of total company sales in
2000 compared to 1999 and the distribution segment has lower margins as a
percentage of sales versus the retail segment.
For the distribution segment, gross margin as a percentage of gross
distribution sales was down in 2000 compared to 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, gross margin as a percentage of net retail sales
improved for 2000 compared to 1999 due to the divesting or closing of
under-performing stores. The strategic plan charges and one-time items increased
in 2000 compared to the same periods in 1999. The increased charges were
primarily due to
37
inventory markdowns for clearance for closed operations, additional depreciation
and amortization of 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 2000 decreased by 6% to $1.19
billion from $1.26 billion for 1999, and decreased as a percentage of net sales
to 8.21% for 2000 from 8.84% for 1999. Excluding the strategic plan charges and
one-time items, selling and administrative expenses for 2000 decreased by 8% to
$1.14 billion from $1.24 billion for 1999. The decreases were due to asset
rationalization, our low cost pursuit program, and centralizing administrative
functions, but also due to a reduction in the volume of the retail segment. The
sales of the distribution segment represented a larger portion of total company
sales in 2000 compared to 1999 and the distribution segment has lower selling
and administrative expenses as a percentage of sales versus the retail segment.
The strategic plan charges and one-time items were significantly higher in
2000 compared to 1999. The strategic plan charges were primarily made up of
moving and training costs incurred in connection with the consolidation of the
accounting and human resource functions. The one-time items in both years
included costs relating to the closing of certain retail stores. An additional
one-time item in 2000 was income from net litigation settlements. An additional
one-time item recorded in 1999 was income from extinguishing a portion of our
self-insured workers' compensation liability.
For the distribution segment on an adjusted basis, selling and
administrative expenses as a percentage of net sales improved for 2000 compared
to 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 improved for 2000
compared to 1999 due to the divestiture or closing of under-performing stores,
the centralization of administrative functions, and operating cost reductions.
This was offset by costs associated with closing certain retail stores.
We have extended credit to certain 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 10 years. Credit loss expense is
included in selling and administrative expenses and for 2000 increased to $29
million from $25 million for 1999.
Operating Earnings
Operating earnings for 2000 decreased to $162 million from $176 million in
1999. Excluding the strategic plan charges and one-time items, operating
earnings increased by 22% to $257 million from $212 million in 1999. We measure
operating earnings for segment reporting as sales less cost of sales less
selling and administrative expenses.
Operating earnings for the distribution segment increased to $297 million
in 2000 from $290 million for 1999. Excluding the costs relating to the
strategic plan and one-time items, operating earnings increased by approximately
$44 million, or 14%, to $346 million in 2000 from $302 million for the same
period of 1999. Operating earnings improved primarily due to the benefits of
consolidating distribution operating units, reducing costs, centralizing certain
procurement and administrative functions in support services and improving
sales. The strategic plan charges were primarily due to inventory markdowns for
clearance for closed operations, moving and training costs associated with the
consolidation of the accounting and human resource functions, and additional
depreciation and amortization on assets to be disposed of but not yet held for
sale. The one-time items were gains on sales of facilities in both years.
Operating earnings for the retail segment increased by approximately $64
million to an income of $62 million in 2000 from a loss of $2 million for 1999.
Excluding the costs relating to the strategic plan and one-time items, operating
earnings increased by $47 million to $89 million from $42 million for the same
period of 1999. The increase was due to divesting or closing under-performing
chains and centralizing certain administrative functions in support services.
The strategic charges were primarily made up of inventory
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markdowns for clearance for closed operations and moving costs in both years.
The one-time items in both years included costs relating to the closing of
certain retail stores.
Support services increased in 2000 to $197 million compared to $113 million
for 1999. Excluding the costs relating to the strategic plan and one-time items,
support services increased in 2000 to $177 million compared to $133 million for
1999. The increase was due primarily 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.
One-time items included income from net litigation settlements in 2000 and
income from extinguishing a portion of our self-insured workers' compensation
liability in 1999.
Interest Expense
Interest expense of $175 million in 2000 was $9 million higher than 1999
due primarily to higher average debt balances for revolver loans and capitalized
lease obligations and higher average interest rates for revolver and term loans.
For 2000, interest rate hedge agreements contributed $0.9 million of net
interest expense compared to $4.8 million in 1999. The decrease occurred because
the hedge agreements matured by mid-year 2000 and were not renewed or replaced.
These derivative agreements consisted of simple "floating-to-fixed rate"
interest rate swaps. In these transactions, we paid to the hedge counterparty a
cash flow stream equal to a designated fixed interest rate times a notional
principal amount as a proxy for a portion of our debt which carries variable
interest rates. In exchange, the hedge counterparty paid us a cash flow stream
equal to a variable or floating interest rate times the same notional principal
amount. These kind of interest rate swap transactions are designed to provide a
hedge against variable interest rates.
Interest Income
Interest income of $33 million for 2000 was $8 million lower than 1999 due
to a one-time item in 1999 related to interest on refunds of federal income
taxes from prior years. This was partially offset by lower average balances for
our investment in direct financing leases with customers.
Equity Investment Results
Our portion of net operating losses from equity investments for 2000
decreased by $2 million to $8 million from $10 million for 1999. The reduction
in losses is due to improved results of operations in certain of the underlying
equity investments.
Impairment/Restructuring Charge
The pre-tax charge for our strategic plan totaled $309 million for 2000 and
$137 million for 1999. Of these totals, $213 million and $103 million were
reflected in the impairment/restructuring line with the balance of the charges
reflected in other financial statement lines. For more information, see the
Notes to the Consolidated Financial Statements for the year ended December 30,
2000.
Taxes on Income
The effective tax rates used for 2000 and 1999 were 39.2% and 28.5%,
respectively, both representing a tax benefit. These are blended rates taking
into account operations activity, strategic plan activity, write-offs of
non-deductible goodwill and the timing of these transactions during the year.
39
YEARS ENDED DECEMBER 25, 1999 AND DECEMBER 26, 1998
Net Sales
Our net sales for 1999 decreased by 3% to $14.27 billion from $14.68
billion for 1998.
Net sales for the distribution segment were $10.6 billion in 1999 compared
to $11.1 billion in 1998. The sales decrease was primarily due to the previously
announced loss of sales to Furrs (in 1998) and Randall's (in 1999) and the
disposition of the Portland division (in 1999). Sales during 1999 were also
impacted by the planned closing and consolidation of certain distribution
operating units. These sales losses were partially offset by the increase in
sales to Kmart Corporation. In 1999 and 1998, sales to Furrs, Randall's and
United accounted for approximately 4% and 8%, respectively, of our total sales.
Retail segment sales were $3.7 billion in 1999 compared to $3.6 billion in
1998. The increase in sales was due primarily to new stores added in 1999. This
was offset partially by a decrease in same-store sales and the closing of
non-performing stores.
We measure inflation using data derived from the average cost of a ton of
product we sell. For 1999, food price inflation was 1.0%, compared to 2.1% in
1998.
Gross Margin
Gross margin for 1999 decreased by 1% to $1.44 billion from $1.45 billion
for 1998, and increased as a percentage of net sales to 10.07% from 9.88% for
1998. After excluding the strategic plan charges and one-time items, gross
margin dollars still decreased compared to the same period in 1998 and gross
margin as a percentage of net sales still increased compared to the same period
in 1998. The decrease in dollars was due primarily to the overall sales
decrease, but was partly offset by positive results from leveraging our buying
power and cutting costs. The increase in percentage of net sales was due to the
impact of the growing retail segment compared to the distribution segment. The
retail segment has the higher margins of the two segments. This increase was
partly offset by lower margins in the retail segment due to competitive pricing
at company-owned new stores.
Selling and Administrative Expenses
Selling and administrative expenses for 1999 increased by 1% to $1.26
billion from $1.25 billion for 1998, and increased as a percentage of net sales
to 8.84% for 1999 from 8.52% for 1998. The increase in both dollars and
percentage of net sales was primarily due to one-time items recorded in 1999: a
charge to close conventional retail stores which was partially offset by income
from extinguishing a portion of our self-insured workers' compensation liability
at a discount. The increase in percentage to net sales was also partly due to
the impact of the growing retail segment compared to the distribution
segment -- the retail segment has higher operating expenses as a percent to
sales compared to the distribution segment.
We have extended a significant amount of credit to certain 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
10 years. Credit loss expense is included in selling and administrative expenses
and for 1999 increased to $25 million from $23 million for 1998.
Operating Earnings
Operating earnings for 1999 decreased to $176 million from $199 million in
1998. Excluding the strategic plan charges and one-time items, operating
earnings decreased to $212 million from $214 million in 1998.
Operating earnings for the distribution segment increased by 12% to $290
million from $259 million for 1998, and increased as a percentage of
distribution net sales to 2.75% for 1999 from 2.34% for 1998. Excluding the
costs relating to the strategic plan and one-time items, operating earnings
still increased by $29 million to $302 million from $273 million for the same
period of 1998. Operating earnings improved primarily due to the benefits of the
consolidation of distribution operating units and cost reduction.
40
Operating earnings for the retail segment decreased by $64 million to a
loss of $2 million from earnings of $62 million for 1998. Excluding the costs
relating to the strategic plan and one-time items (primarily a charge to close
conventional retail stores), operating earnings still decreased by $20 million
to $42 million from $62 million for the same period of 1998. The decrease was
due to the impact of new store start-up expenses plus expenses related to the
divestiture and closing of stores. Operating earnings for the retail segment
were also adversely affected by a 1.9% decrease in same-store sales.
Support services decreased in 1999 to $112 million compared to $122 million
for 1998. Excluding the costs relating to the strategic plan and one-time items
(primarily income from extinguishing a portion of our self-insured workers'
compensation liability at a discount), support services increased in 1999 to
$132 million compared to $121 million for 1998. The increase was due primarily
to an increase in lease termination and real estate disposition expenses and
higher incentive compensation.
Interest Expense
Interest expense in 1999 was $4 million higher than 1998 due primarily to
1998's low interest expense as a consequence of a favorable settlement of tax
assessments. The higher 1999 expense was also due to higher average debt
balances.
Our derivative agreements consisted of simple "floating-to-fixed rate"
interest rate swaps. For 1999, interest rate hedge agreements contributed $4.8
million of net interest expense compared to $4.3 million in 1998, or $0.5
million higher. This was due to slightly higher average net interest rates
underlying the hedge agreements.
Interest Income
Interest income for 1999 was $4 million higher than 1998 due to a one-time
item related to interest on refunds of federal income taxes from prior years.
This was partially offset by lower average balances for our investment in direct
financing leases.
Equity Investment Results
Our portion of net operating losses from equity investments for 1999
decreased by approximately $2 million to $10 million from $12 million for 1998.
The reduction in losses is due to improved results of operations in certain of
the underlying equity investments.
Litigation Charges
In October 1997, we began paying Furrs $800,000 per month as part of a
settlement agreement which ceased in October 1998. Payments to Furrs totaled
$7.8 million in 1998.
Impairment/Restructuring Charge
The pre-tax charge for our strategic plan totaled $137 million for 1999 and
$668 million for 1998. Of these totals, $103 million and $653 million were
reflected in the impairment/restructuring line with the balance of the charges
reflected in other financial statement lines. For more information, see the
Notes to the Consolidated Financial Statements for the year ended December 30,
2000.
Taxes on Income
The effective tax rates used for 1999 and 1998 were 28.5% and 14.6%,
respectively, both representing a tax benefit. These are blended rates taking
into account operations activity, strategic plan activity, write-offs of
non-deductible goodwill and the timing of these transactions during the year.
41
LIQUIDITY AND CAPITAL RESOURCES
For the year-to-date period ended October 6, 2001, our principal sources of
liquidity were borrowings under our credit facility and the proceeds from the
sale of certain assets. Our principal source of capital, excluding shareholders'
equity, was the issuance of bonds in the capital markets.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash expended by operating activities was $145 million for the three
quarters ended October 6, 2001 compared to a $27 million source of cash for the
same period in 2000. The use of cash was for working capital primarily due to a
planned increase of approximately $150 million in inventory related to the
additional Kmart business, as well as the investment in trade receivables for
new and acquired customers.
Cash requirements related to the implementation and completion of the
strategic plan (on a pre-tax basis) were $58 million for the three quarters
ended October 6, 2001 and are currently expected to be $71 million for the full
year 2001. We believe working capital reductions and increased earnings related
to the successful implementation of the strategic plan will provide more than
adequate cash flows to cover all of these costs.
NET CASH USED IN INVESTING ACTIVITIES
Total investment-related activity resulted in a $138 million use of cash
for the three quarters ended October 6, 2001 compared to a $7 million use of
cash in the same period of 2000. Cash expended for the purchases of businesses
totaled $121 million in the first three quarters of 2001 compared to $2 million
in the same period of 2000 and cash expended for property and equipment totaled
$169 million in the first three quarters of 2001 compared to $108 million in the
same period of 2000. Capital expenditures of property and equipment are
projected to be $225 million for the full year of 2001. The cash expenditures
were partially offset by proceeds from asset sales.
NET CASH PROVIDED BY FINANCING ACTIVITIES
Net cash generated by financing activities was $296 million for the first
three quarters of 2001 compared to $22 million for the same period last year.
On March 23, 2001, we received approximately $50 million in proceeds from
the sale of common stock to an affiliate of the Yucaipa Companies, which at the
time represented an 8.7% ownership of Fleming's outstanding common stock. At
that time we also issued a warrant to purchase additional shares of common stock
to this entity.
On March 15, 2001, we sold $355 million of new 10-1/8% senior notes due
2008, and we deposited $315 million with the trustee to redeem all of the
10-5/8% senior notes due 2001, including an amount to cover accrued interest and
the redemption premium. On April 16, 2001, our obligations under the indenture
were discharged. The balance of the net proceeds was used to pay down our
revolver loans. An extraordinary after-tax charge of approximately $3 million
was recorded in connection with the early redemption. On March 15, 2001, we also
sold $150 million of 5-1/4% convertible senior subordinated notes due 2009 with
a conversion price of $30.27 per share. The net proceeds of $146 million were
used to pay down our revolver loans. At the end of the 40 weeks ended October 6,
2001, outstanding borrowings under the credit facility totaled $129 million of
term loans, $420 million of revolver loans, and $53 million of letters of
credit.
On October 15, 2001, we sold an additional $150 million of our existing
10-5/8% senior subordinated notes due 2007. The proceeds were used to pay down
our revolver loans. Pro forma for this sale, we would have had $269 million of
additional borrowing capacity under the revolver as of October 6, 2001.
For the foreseeable future, our principal sources of liquidity and capital
are expected to be cash flows from operating activities and our ability to
borrow under our credit facility. In addition, lease financing may be employed
for new retail stores and certain equipment. We believe these sources will be
adequate to meet working capital needs, capital expenditures, strategic plan
implementation costs and other capital needs in the
42
normal course of business for the next 12 months. In the future, as part of our
growth strategy, we may need to raise additional funds through public or private
debt or equity financings in order to acquire additional retail stores or other
third party businesses or to expand our services more rapidly. In addition, we
may access such resources to refinance existing indebtedness.
CONTINGENCIES
From time to time we face litigation or other contingent loss situations
resulting from owning and operating our assets, conducting our business or
complying (or allegedly failing to comply) with federal, state and local laws,
rules and regulations which may subject us to material contingent liabilities.
In accordance with applicable accounting standards, we record as a liability
amounts reflecting such exposure when a material loss is deemed by management to
be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, we
disclose material loss contingencies in the notes to our financial statements
when the likelihood of a material loss has been determined to be greater than
"remote" but less than "probable." Such contingent matters are discussed in Note
6 in the notes to the consolidated condensed financial statements for the 40
weeks ended October 6, 2001. 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.
43
BUSINESS
Fleming is an industry leader in the distribution of consumable goods, and
also has a growing presence in operating "price impact" supermarkets. Through
our distribution group, we distribute products to customers that operate
approximately 3,000 supermarkets, 6,800 convenience stores and over 2,000
supercenters, discount stores, limited assortment stores, drug stores, specialty
stores and other stores across the United States. At December 29, 2001, our
retail group operated 116 stores, predominantly supermarkets that focus on low
prices and high quality perishables. In the fiscal year ended December 30, 2000
and for the 40 weeks ended October 6, 2001, we generated total net sales of
$14.4 billion and $11.6 billion.
Our distribution group net sales were $11.2 billion for 2000 and $9.8
billion for the 40 weeks ended October 6, 2001, a 5.8% increase and an 18.0%
increase over the prior periods. Distribution represented approximately 77% of
total net sales in 2000 and approximately 84% of total net sales for the 40
weeks ended October 6, 2001. We expect to substantially increase our
distribution volume in connection with, among other things, our ten-year, $4.5
billion per year strategic alliance with our largest customer, Kmart
Corporation. To supply our customers, we have a network of 35 distribution
centers that have a total of approximately 21 million square feet of warehouse
space.
Our retail group net sales were $3.3 billion for 2000 and $1.8 billion for
the 40 weeks ended October 6, 2001, which represented approximately 23% and 16%
of total net sales. Of those amounts, $1.9 billion and $1.5 billion were
attributable to continuing operations, which represents a 4.7% increase and a
13.8% increase over the prior periods. As of December 29, 2001, we owned and
operated 94 price impact supermarkets and five additional supermarkets that we
are converting to the price impact format. Price impact supermarkets offer
everyday low prices that are typically below the prices of market-leading
conventional supermarkets. These stores typically cost less to build, maintain
and operate than conventional supermarkets. In addition, we operated 17 limited
assortment stores under the Yes!Less banner. Limited assortment stores offer a
narrow selection of low-price, private label food and other consumable goods, as
well as general merchandise at deep-discount prices.
In recent years, consumers have been shifting their purchases of food and
other consumable goods away from conventional full-service grocery stores toward
other retail channels, such as price impact supermarkets, discount stores,
supercenters, convenience stores, drug stores and ethnic food stores. Since
1998, we have repositioned our distribution group to become a highly efficient
supplier to these retail channels. As a result, our distribution group has
experienced renewed sales growth. In addition, we believe price-sensitive
consumers are underserved in the retail grocery market, and we have repositioned
our retail group to expand our presence in the price impact format.
Since 1998, in the course of implementing our strategic initiatives, we
have, among other accomplishments:
- closed or consolidated 12 distribution centers, which resulted in:
-- increased average sales per full-line distribution center by more than
40% from $390 million in 1998 to $550 million in 2000, and
-- increased average sales per full-line distribution center employee by
more than 12% from 1998 to 2000;
- centralized approximately 80% of our purchasing operations in our
customer support center near Dallas, Texas;
- centralized our accounting, human resources, information technology and
other support services in our shared services center in Oklahoma City,
Oklahoma;
- sold or closed 238 conventional supermarkets through the end of the third
quarter of 2001;
- opened 40 additional price impact supermarkets; and
- instituted a "culture of thrift" among our employees, in part through our
Low Cost Pursuit Program.
44
We believe these initiatives have lowered our cost structure, improved the
economics we can offer our traditional retail customers and strengthened our
appeal to new channel retailers. We believe these improvements have been the key
to our ability to increase distribution group sales for the last eight
consecutive quarters (year-over-year comparisons). We added approximately $1.2
billion and over $1.5 billion (pro forma for acquisitions) in gross annualized
distribution group sales from both new channel retailers and our traditional
supermarket customers in 2000 and the 40 weeks ended October 6, 2001,
respectively.
In February 2001, we announced a ten-year strategic alliance under which we
supply to Kmart substantially all of the food and consumable products in all
current and future Kmart and Kmart supercenter stores in the United States and
the Caribbean. We expect annual sales to Kmart to increase from approximately
$1.4 billion in 2000 to approximately $2.6 billion in 2001 and approximately
$4.5 billion in 2002. This new supply arrangement includes grocery, frozen,
dairy, packaged meat and seafood, produce, bakery/deli, fresh meat, cigarettes,
tobacco and candy.
COMPETITIVE STRENGTHS
Low-Cost, High-Volume National Distribution System: We have consolidated
our smaller distribution centers into high-volume distribution centers. We
believe our distribution center volumes are among the highest in the consumable
goods distribution industry. With high volume comes the opportunity to operate
more efficiently by leveraging costs. Our efficient and highly productive
operations have enhanced our ability to provide customers with lower-cost
merchandise and services that improve customer acquisition and retention.
Efficient Centralized Purchasing: Category management decisions and vendor
negotiations for approximately 80% of our merchandise procurement are conducted
in one location. We believe our customer support center is one of the largest
buying locations of consumable goods in the United States. Centralized
purchasing generates economies of scale because it enables us in one location to
purchase goods more efficiently by eliminating redundancy involved in purchasing
through multiple locations, which we believe increases our leverage with
vendors. We believe that our centralized purchasing capabilities are valuable to
national retailers such as Kmart, as well as the smaller independent retailers
that make up our traditional customer base, because we offer greater convenience
and lower cost.
Diverse Distribution Customer Base: We distribute to approximately 11,800
retail store locations under a wide variety of formats across the United States.
Other than Kmart, no customer accounted for more than 2% of our fiscal 2000 net
sales.
Successful Price Impact Retail Format: Our price impact supermarkets offer
name-brand and private label consumable goods at significantly lower prices than
conventional supermarkets. We keep prices low by leveraging our existing
distribution and procurement capabilities and maintaining a lower cost structure
associated with operating these stores. We believe this format is profitable
because we offer a reduced number of product selections, focus on high-turnover
products and product categories, employ flow-through distribution methods that
reduce product storage and handling expense, and minimize store operating costs.
BUSINESS STRATEGY
Our business strategy is to use our competitive strengths to achieve sales
and earnings growth in both our distribution group and retail group. As
principal elements of our strategy, we intend to:
Grow Sales to New Channel Retailers: We are rapidly moving beyond our
historic market position and have targeted three key growth sectors. First, we
are focusing on broad assortment/destination retailers, including supercenters
and discount stores, and have demonstrated significant penetration in this
market as evidenced by our distribution arrangements with Kmart and Target, Inc.
Second, we are concentrating on precision assortment/neighborhood retailers such
as convenience stores, drug stores and ethnic food stores. In April 2001, we
acquired Minter-Weisman Co., a wholesale distribution company serving over 800
convenience stores in Minnesota, Wisconsin and surrounding states. In September
2001, we acquired certain assets and inventory of Miller & Hartman South, LLC, a
wholesale distributor serving over 1,800 convenience stores in
45
Kentucky and surrounding states. Finally, we intend to focus on precision
assortment/destination retailers typified by large-store formats such as
cash-and-carries and price impact stores.
Grow Sales to Traditional Format Customers: Despite being the largest
distributor in the more than $100 billion wholesale grocery industry, we account
for approximately 6% of this traditional core market, representing substantial
room for additional growth. Many potential customers are currently served by
local or regional wholesalers that do not have the efficiencies associated with
our procurement scale and do not provide the full scope of retail services that
we provide. Our repositioned distribution group has already enabled us to
increase sales to existing and new customers, and we expect to be able to
continue this trend. During August 2001, we facilitated the third-party purchase
of 36 stores located in New Mexico and Texas from Furrs Supermarkets, most of
which were purchased by Fleming-supplied independent operators. We routinely
conduct detailed market studies to identify potential new customers in areas
contiguous to existing customers, as we have capacity in our high-volume
distribution centers to serve additional local independent stores or chains.
Expand Price Impact Format: We believe we have a substantial opportunity
to grow our retail group's price impact supermarket operations. Because price
impact stores cost less to build, maintain and operate than conventional
supermarkets, we expect to be able to grow our price impact supermarket
operations while incurring fewer capital expenditures than operators of
conventional retail stores. As of December 29, 2001, we owned and operated 94
price impact supermarkets under the Food 4 Less and Rainbow Foods banners, and
we intend to own and operate up to 174 price impact supermarkets by the end of
2003 through a combination of construction of new stores, conversion of existing
stores and acquisitions. In April 2001, we purchased seven Food 4 Less stores
located in Central California from Whitco Foods, Inc. which we continue to
operate as price impact stores under the Food 4 Less banner. In August 2001, we
purchased five Smith's Food & Drug Stores located in New Mexico and Texas from
Kroger Co. which we operate under the Rainbow Foods banner. We have completed
the conversion of five of our Sentry Foods stores to the price impact format and
have renamed the stores Rainbow Foods, and we intend to convert the remaining
five in early 2002.
Leverage Efficiencies Created by Our Kmart Distribution Agreement: We
believe our distribution agreement with Kmart and the resulting substantial
increase in our distribution volume provides us the opportunity for increased
economic and purchasing leverage that benefits all of our existing and potential
new customers. We have established a "best practices" team with Kmart based in
Troy, Michigan that focuses on reducing costs and achieving greater efficiencies
in our product supply chain. In addition, we believe that the increased volume
of candy and tobacco that we distribute as a result of the Kmart distribution
agreement enables us to compete more effectively for convenience store
distribution business.
Continue to Improve Working Capital Management and Reduce Costs: We intend
to improve our working capital management primarily by improving inventory
turns. To do this, we will continue to improve vendor inventory management
practices, further develop our central procurement operations, improve ad
forecasting with our customers, effectively manage alternative channels of
product delivery to retail locations and invest in systems enhancements. In
addition, to strengthen our position as a low-cost supplier to our customers and
increase our profitability, we have instituted a "culture of thrift" among our
employees and developed initiatives to reduce our expenses through our Low Cost
Pursuit Program.
OUR DISTRIBUTION GROUP
Our distribution group sells food and non-food products to supermarkets,
convenience stores, supercenters, discount stores, limited assortment stores,
drug stores, specialty stores and other stores across the United States. Net
sales for our distribution segment were $11.2 billion for fiscal 2000 and $9.8
billion for the 40 weeks ended October 6, 2001, excluding sales to our own
retail stores. Sales to our own retail stores totaled $1.8 billion during fiscal
2000 and $949 million for the 40 weeks ended October 6, 2001.
Customers Served. Our distribution group serves a wide variety of retail
operations located in all 50 states. The group serves customers operating as
conventional supermarkets (averaging approximately 23,000 total square feet),
superstores (supermarkets of 30,000 square feet or more), supercenters (a
combination of discount store and supermarket encompassing 110,000 square feet
or more), warehouse stores
46
("no-frills" operations of various large sizes), combination stores (which have
a high percentage of non-food offerings) and convenience stores (generally under
4,000 square feet and offering only a limited assortment of products).
Our top ten customers accounted for approximately 17% of our total net
sales during 2000 and approximately 29% of our total net sales for the 40 weeks
ended October 6, 2001. Kmart Corporation, our largest customer, represented
approximately 10% of our total net sales in 2000 and approximately 18% of our
total net sales for the 40 weeks ended October 6, 2001, which we project will
increase to a significantly greater percentage of our total net sales for fiscal
2001 and thereafter. No other single customer represented more than 2% of our
fiscal 2000 net sales or more than 3% of our total net sales for the 40 weeks
ended October 6, 2001.
Pricing. The distribution group uses market research and cost analyses as
a basis for pricing its products and services. The retail services we offer in
connection with our distribution business are individually and competitively
priced. We have three basic marketing programs for our distribution business:
FlexMate, FlexPro and FlexStar.
The FlexMate marketing program prices product to customers at a quoted sell
price, a selling price established by us that might include a mark-up. The
FlexMate marketing program is available as an option for grocery, frozen and
dairy products. We generally use a quoted sell price method for meat, produce,
bakery goods, delicatessen products, tobacco supplies, general merchandise and
health and beauty care products. A distribution fee is usually added to the
quoted sell price based upon the product category. Under some marketing
programs, we also add freight charges to offset in whole or in part our cost of
delivery services provided. The distribution group may retain any cash
discounts, allowances, and service income earned from vendors. We generally
refer to this practice as the "traditional pricing" method.
Under FlexPro, grocery, frozen and dairy products are priced at their net
acquisition value which is generally comparable to the net cash price paid by
the distribution group. Vendor allowances and service income are passed through
to the customer. Service charges are established using the principles of
activity-based pricing modified by marketing considerations. Activity-based
pricing attempts to identify our costs of providing certain services in
connection with the sale of products such as transportation, storage and
handling. Based on these identified costs, and with a view to market responses,
we establish charges for these activities designed to recover our cost and
provide us with a reasonable profit. These charges are then added to the net
product price. We also charge a fee for administrative services provided to
arrange and manage allowances and service income offered by vendors and earned
by the distribution group and its customers.
FlexStar uses the same product pricing as FlexPro, but generally uses a
less complex presentation for distribution service charges. FlexStar averages
the charges across items and orders and provides the customer a more consistent
percentage base charge by department.
Kmart product pricing for grocery, frozen, dairy, produce, packaged meat,
bakery and deli products follows the FlexPro/FlexStar pricing methodology, using
net acquisition value and passing through vendor allowances. Random weight meat
and deli products are priced at our last received cost. Certain other items are
priced at net acquisition value plus a negotiated fee. In addition, Kmart pays
us a logistics fee equal to a percentage of purchases based on volume, and a
negotiated fixed annual procurement fee.
Private Labels. Fleming's private label brands are Fleming-owned brands
that we offer exclusively to our customers. These private label brands include
BestYet, Nature's Finest, SuperTru, Marquee, Rainbow, Exceptional Value and
Comida Sabrosa. Private label lines are designed to offer quality products that
are equal or superior in quality to comparable nationally advertised brands and
value brand products at more competitive prices. As part of our recent Kmart
strategic alliance, Kmart has adopted our BestYet private label program in its
Kmart and Kmart supercenter stores and pay fees to us based on brand management.
We believe our private label brands generate higher margins for us and for our
customers than nationally advertised brands and other value brand products
because we are able to acquire them at lower costs.
Controlled labels are offered only in stores operating under specific
banners (which may or may not be controlled by us). Controlled labels are
products to which we have exclusive distribution rights to a particular
47
customer or in a specific region. We offer two controlled labels, IGA and Piggly
Wiggly brands, which are national quality brands.
Procurement. We have centralized approximately 80% of our merchandise
procurement in our customer support center near Dallas, Texas. This makes more
efficient use of our procurement staff, improves buying efficiency and reduces
the cost of goods. We believe our customer support center near Dallas is one of
the largest buying locations of consumable goods in the United States. We
believe that our centralized purchasing capabilities and the volume discount
pricing we have achieved are valuable to national retailers such as Kmart as
well as the smaller, independent retailers that make up our traditional customer
base. We make a small percentage of our procurement decisions at the
distribution center level where local market needs and trends can best be
addressed, such as decisions regarding ethnic products, and where transportation
costs may be minimized.
Retail Services. Retail services are marketed, priced and delivered
separately from other distribution operations. Our retail services marketing and
sales personnel look for opportunities to cross-sell additional retail services
as well as other distribution group products to their customers. Through our
retail account executive, or RAE, programs, we offer consulting, strategic
planning, administrative and information technology services to customers to
assist them in improving store performance. Incentive compensation for our RAEs
is based on the performance of the customers they serve.
Facilities and Transportation. Our distribution group operates 24
full-line distribution centers which are responsible for the distribution of
national brands and private label Fleming brands, including groceries, meat,
dairy and delicatessen products, frozen foods, produce, bakery goods and a
variety of related food and non-food items. Six general merchandise and
specialty food operating units distribute health and beauty care items and other
items of general merchandise and specialty foods. Five warehouse facilities
serve convenience stores. All facilities are equipped with modern material
handling equipment for receiving, storing and shipping large quantities of
merchandise. Our distribution centers comprise approximately 21 million square
feet of warehouse space. Additionally, the distribution group rents, on a
short-term basis, approximately 904,000 square feet of off-site temporary
storage space.
Transportation arrangements and operations vary by distribution center and
may vary by customer. Some customers prefer to handle product delivery
themselves, others prefer us to deliver products, and still others ask us to
coordinate delivery with a third party. Accordingly, many of our distribution
centers maintain a truck fleet to deliver products to customers, and several of
our distribution centers also engage dedicated contract carriers to deliver
products. We increase the utilization of our truck fleet by back-hauling
products from suppliers and others, thereby reducing the number of empty miles
traveled. To further increase our fleet utilization, we have made our truck
fleet available to other firms on a for-hire carriage basis.
Capital Invested in Customers. As part of our services to retailers, we
provide capital to certain customers by extending credit for inventory
purchases, by becoming primarily or secondarily liable for store leases, by
leasing equipment to retailers and by making secured loans to customers:
- Extension of Credit for Inventory Purchases. Customary trade credit
terms are usually the day following statement date for customers on
FlexPro or FlexStar and up to seven days for other marketing plan
customers. Convenience store trade credit terms average approximately 14
days.
- Store and Equipment Leases. We lease stores for sublease to certain
customers. At December 29, 2001, we were the primary lessee of
approximately 600 retail store locations subleased to and operated by
customers. We also lease a substantial amount of equipment to retailers.
- Secured Loans and Lease Guarantees. We selectively make loans to
customers primarily for store expansions or improvements. These loans are
typically secured by inventory and store fixtures, have personal
guarantees, bear interest at rates above the prime rate, and are for
terms of five to seven years. Loans are approved by our business
development committee following written approval standards. We believe
our loans to customers are illiquid and would not be investment grade if
rated. From time to time, we also guarantee the lease obligations of
certain of our customers.
48
In making credit and investment decisions, we consider many factors,
including estimated return on capital, assumed risks and benefits (including our
ability to secure long-term supply contracts with these customers).
At October 6, 2001, we had loans outstanding to customers totaling $153
million. We also have investments in customers through direct financing leases
of real property and equipment, lease guarantees, operating leases or credit
extensions for inventory purchases. Our credit loss expense from receivables as
well as from investments in customers was $29 million in 2000 and $20 million
for the 40 weeks ended October 6, 2001, which is comparable to prior periods.
Franchising. We also license from third parties for our own use or grant
franchises to retailers to use certain registered trade names such as Piggly
Wiggly, Food 4 Less (a registered servicemark and trademark that we are
authorized to use pursuant to a restricted license granted by Ralph's Grocery
Company, a subsidiary of Kroger Co.), Sentry, Super 1 Foods, Festival Foods,
Jubilee Foods, Jamboree Foods, MEGAMARKET, Shop 'N Kart, American Family, Big
Star, Big T, Buy for Less, County Pride Markets, Red Fox, Shop N Bag, Super
Duper, Super Foods, Super Thrift, Thriftway and Value King.
We encourage independents and small chains to join one of the Fleming
Banner Groups to receive many of the same marketing and procurement efficiencies
available to larger chains. The Fleming Banner Groups are retail stores
operating under one of a number of banners representing either a conventional or
price impact retail format.
Cost-Reduction Initiatives. To strengthen our position as a low-cost
supplier to our retail customers and increase our profitability, we instituted a
"culture of thrift" among our employees and developed initiatives to reduce our
expenses through our Low Cost Pursuit Program. This program focuses on five
areas: merchandising and procurement, logistics and distribution, shared
services and finance, retail operations, and customer relations. In the
merchandising and procurement functions, we have lowered cost of goods and
administrative costs by centralizing most of our procurement functions, which
were conducted in individual distribution centers, into one national procurement
center near Dallas, which is one of the largest buyer locations of consumable
goods in the United States. The logistics and distribution functions have
removed costs associated with back-haul, in-bound transportation and other
logistics functions. In addition, we established a new shared services center in
Oklahoma City where we have centralized the management of our accounting, human
resources, information technology and other support services. Retail operations
have implemented best demonstrated practices to reduce labor costs and reduce
store operating costs, and certain administrative functions have also been
centralized for retail operations. Finally, customer relations has established a
single point of contact for each customer to eliminate many paper-based
processes and improve customer communications.
OUR RETAIL GROUP
As of December 29, 2001, our retail group operated 116 supermarkets,
including 94 price impact supermarkets under the Food 4 Less and Rainbow Foods
banner and five Sentry Food stores which we are converting to the price impact
format under the Rainbow Foods banner in early 2002. Price impact supermarkets
offer deep-discount, everyday low prices. In addition, we operated 17 limited
assortment stores under the Yes!Less banner, 11 of which we opened in 2001. Our
limited assortment stores offer a narrow selection of low-price, private label
food and other consumable goods, as well as general merchandise.
49
As part of our strategic plan, we sold or closed 238 of our conventional
format supermarkets in order to focus resources on growing our price impact
stores and improving financial results. The following chart illustrates the
number of supermarkets and limited assortment stores we operated as of the dates
indicated:
DECEMBER 26, DECEMBER 25, DECEMBER 30, DECEMBER 29,
1998 1999 2000 2001
------------ ------------ ------------ ------------
CONTINUING STORES
Price Impact(1).................... 57 71 74 99
Limited Assortment(1).............. -- -- 6 17
--- --- --- ---
Subtotal......................... 57 71 80 116
Non-Strategic Stores............... 228 171 107 --
--- --- --- ---
TOTAL............................ 285 242 187 116
=== === === ===
---------------
(1) The number of price impact stores at December 29, 2001 includes five Sentry
Foods stores that we are converting to the price impact format in early
2002.
Price Impact Supermarkets. As of December 29, 2001, our retail group owned
and operated 94 price impact supermarkets, of which 42 are located in Minnesota,
26 in Northern California, eight in Wisconsin, seven in the Salt Lake City, Utah
area, six in Texas, four in the Phoenix, Arizona area, and one in Las Cruces,
New Mexico. We also owned and operated five Sentry Food Stores in Wisconsin that
we are converting to the price impact format in early 2002. These stores average
approximately 55,000 square feet and offer deep-discount, everyday low prices
well below those offered by conventional supermarkets and carry prices for
grocery products that are also generally lower than supercenters. Our price
impact supermarkets are also known for their quality meat and produce offerings.
Our price impact supermarkets that have been open at least one year generated
average weekly sales of approximately $450,000 for the 40 weeks ended October 6,
2001.
Our price impact supermarkets serve price-sensitive middle-income consumers
who may have larger-than-average families. These stores have a wider trade area
than conventional supermarkets yet are generally more convenient to shop than
supercenters. Our price impact supermarkets offer name-brand food and consumable
goods at significantly lower prices than conventional format retail store
operators because of the many low-cost features of our stores. These features
include: offering a reduced number of product selections, focusing on popular,
name-brand products and product categories; employing flow-through distribution
methods which reduce product storage and handling expense; and minimizing store
operating costs.
These stores do not cost as much as conventional stores to construct and
maintain, as price impact stores typically feature cement floors, cinder block
walls, exposed ceiling and walk-in freezers and coolers which combine the
typically separate storage and display areas. In addition, price impact stores
produce lower operating expenses, primarily as a result of less labor content
due to pallet or case-loading display racks, fewer product categories offered
due to focusing on the more popular items, self bagging, and elimination of
staffed service departments.
We believe price-sensitive consumers are underserved on a nationwide basis.
Because price impact stores cost less to build and maintain than conventional
supermarkets, we expect to be able to grow our price impact supermarket
operations while incurring lower capital expenditures. We believe the success of
our price impact stores is based on an underserved trade area and does not
require significant market share. As a result, we spend less on advertising and
marketing for these stores compared to conventional format stores.
We plan to own and operate up to 174 price impact stores by the end of 2003
through a combination of construction of new stores, conversion of existing
stores and acquisitions.
Limited Assortment Stores. In 2000, we began to develop our limited
assortment retail concept operating under the Yes!Less trade name, operating
stores averaging 12,000 to 15,000 square feet of selling space. Our Yes!Less
concept is designed to appeal to a needs-based consumer, primarily with low
price private label food and other consumables and an attractive selection of
general merchandise products at opening price
50
points. With 11 stores opened in 2001, as of December 29, 2001, there were 17
Yes!Less retail stores open, 16 in Texas and one in Louisiana.
PRODUCTS
We supply a full line of national brands and Fleming brands, including
groceries, meat, dairy and delicatessen products, frozen foods, produce, bakery
goods and a variety of general merchandise, health and beauty care and other
related items. During 2000, the average number of stock keeping units, or SKUs,
carried in full-line distribution centers was approximately 15,000. General
merchandise and specialty food operating units carried an average of
approximately 17,500 SKUs. Product sales account for over 97% of our
consolidated sales. During 2000, our product mix as a percentage of product
sales was approximately 54% groceries, 39% perishables and 7% general
merchandise.
SUPPLIERS
We purchase our products from numerous vendors and growers. As a large
customer with centralized procurement, we are able to secure favorable terms and
volume discounts on many of our purchases, leading to lower unit costs. We
purchase products from a diverse group of suppliers and believe we have adequate
sources of supply for substantially all of our products.
COMPETITION
Our distribution group operates in a competitive market. Our primary
competitors are regional and local food distributors, national chains that
perform their own distribution and national food distributors. The principal
factors on which we compete include price, quality and assortment of product
lines, schedules and reliability of delivery and the range and quality of
customer services.
The primary competitors of our retail group supermarkets and distribution
group customers are national, regional and local grocery chains, as well as
supercenters, independent supermarkets, convenience stores, drug stores,
restaurants and fast food outlets. Principal competitive factors include price,
quality and assortment, store location and format, sales promotions,
advertising, availability of parking, hours of operation and store appeal.
INTELLECTUAL PROPERTY
We or our subsidiaries use many trade names registered either by us or by
third parties from whom we license the rights to use such trade names at either
the federal or state level or a combination of both, such as Piggly Wiggly,
PWPETRO, Piggly Wiggly xpress, Super 1 Foods, Festival Foods, Jubilee Foods,
Jamboree Foods, MEGAMARKET, Shop 'N Kart, ABCO Desert Market, American Family,
Big Star, Big T, Big Bear, Big Dollar, Buy for Less, County Pride Markets,
Rainbow Foods, Red Fox, Sentry, Shop N Bag, Super Duper, Super Foods, Super
Thrift, Thriftway and Value King.
We license the Food 4 Less service mark and trade name from Ralph's Grocery
Company, a subsidiary of Kroger Co., and have the exclusive right to use and
sublicense the name in certain areas of California. We also have the exclusive
license to use and sublicense the name in all other states, excluding certain
areas of Southern California and certain areas in various other states
previously licensed to others by Ralph's or its predecessors. Additionally,
should the rights to such a previously licensed area terminate, we would
automatically obtain the exclusive license for that area. The Food 4 Less
license agreement generally provides for protected trade area status for five
years after the date that we, our franchisees or Ralph's commit to entering a
new market area under the Food 4 Less banner. However, we are not prohibited by
the licensing agreement from opening stores under a different trade name in any
of these areas.
51
EMPLOYEES
At December 29, 2001, we had 22,813 full-time and part-time employees, with
10,233 employed by the distribution group, 10,319 by the retail group and 2,261
employed in shared services, customer support and other functions.
Approximately 42% of our employees are covered by collective bargaining
agreements with the International Brotherhood of Teamsters; Chauffeurs,
Warehousemen and Helpers of America; the United Food and Commercial Workers; the
International Longshoremen's and Warehousemen's Union; the Retail, Wholesale and
Department Store Union; and the International Union of Operating Engineers. Most
of these agreements expire at various times throughout the next five years. We
consider our employee relations in general to be satisfactory.
PROPERTIES
The following table sets forth facilities information with respect to our
distribution group.
APPROXIMATE
LOCATION SQUARE FEET OWNED OR LEASED
-------- ----------- ---------------
FULL-LINE FOOD DISTRIBUTION CENTERS:
Ewa Beach, HI............................................ 361,000 Leased
Ft. Wayne, IN............................................ 1,043,000 Leased
Fresno, CA............................................... 828,000 Owned/Leased
Garland, TX.............................................. 1,175,000 Owned
Geneva, AL............................................... 793,000 Leased
Kansas City, KS.......................................... 937,000 Leased
LaCrosse, WI............................................. 907,000 Owned
Lafayette, LA............................................ 443,000 Owned
Lincoln, NE.............................................. 516,000 Leased
Lubbock, TX.............................................. 762,000 Owned/Leased
Massillon, OH............................................ 874,000 Owned
Memphis, TN.............................................. 1,071,000 Owned/Leased
Miami, FL................................................ 764,000 Owned
Milwaukee, WI............................................ 600,000 Owned
Minneapolis, MN.......................................... 480,000 Owned
Nashville, TN............................................ 941,000 Leased
North East, MD........................................... 591,000 Owned/Leased
Oklahoma City, OK........................................ 671,000 Leased
Phoenix, AZ.............................................. 1,033,000 Owned/Leased
Sacramento, CA........................................... 787,000 Owned/Leased
Salt Lake City, UT....................................... 555,000 Owned/Leased
South Brunswick, NJ...................................... 526,000 Leased
Superior, WI............................................. 371,000 Owned
Warsaw, NC............................................... 672,000 Owned/Leased
----------
Total.................................................. 17,700,000
GENERAL MERCHANDISE DISTRIBUTION CENTERS:
Dallas, TX............................................... 262,000 Owned/Leased
King of Prussia, PA...................................... 377,000 Leased
LaCrosse, WI............................................. 163,000 Owned
Memphis, TN.............................................. 495,000 Owned/Leased
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APPROXIMATE
LOCATION SQUARE FEET OWNED OR LEASED
-------- ----------- ---------------
Sacramento, CA........................................... 439,000 Leased
Topeka, KS............................................... 223,000 Leased
----------
Total.................................................. 1,959,000
CONVENIENCE STORE DISTRIBUTION CENTERS:
Altoona, PA.............................................. 172,000 Owned
Leitchfield, KY.......................................... 169,000 Owned/Leased
Marshfield, WI........................................... 157,000 Owned
Plymouth, MN............................................. 239,000 Leased
Romeoville, IL........................................... 125,000 Leased
----------
Total.................................................. 862,000
OUTSIDE STORAGE FACILITIES:
Outside storage facilities -- Typically rented on a
short-term basis....................................... 904,000 Leased
----------
Total Distribution Centers............................. 21,424,000
==========
In addition, we have five closed facilities in various states and we are
actively marketing them.
As of December 29, 2001, our retail group operated 116 supermarkets in a
variety of formats in Arizona, California, Minnesota, New Mexico, Louisiana,
Texas, Utah and Wisconsin. Our continuing chains included 94 price impact
supermarkets, five supermarkets which we are converting to the price impact
format in early 2002, and 17 limited assortment stores. For more information,
see the subsection "Our Retail Group."
Our shared service center office is located in Oklahoma City, Oklahoma. The
shared service center occupies leased office space totaling approximately
229,000 square feet. Our customer support center near Dallas, Texas occupies
leased office space totaling approximately 153,000 square feet.
We own and lease other significant assets, such as inventories, fixtures
and equipment and capital leases.
LEGAL PROCEEDINGS
Class Action Suits. In 1996, we and certain of our present and former
officers and directors were named as defendants in nine purported class action
suits filed by certain stockholders. All cases were filed in the United States
District Court for the Western District of Oklahoma and in 1997 were
consolidated. The plaintiffs in the consolidated cases sought undetermined but
significant damages, and asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products. The plaintiffs claimed that these alleged practices led to the David's
case and to other material contingent liabilities, caused us to change our
manner of doing business at great cost and loss of profit, and materially
inflated the trading price of our common stock.
During 1999, the court dismissed the consolidated stockholder case without
prejudice but gave the plaintiffs the opportunity to restate their claims, and
they did so in amended complaints. We again filed motions to dismiss all claims.
On February 4, 2000, the court dismissed the amended complaint with prejudice.
The plaintiffs filed a notice of appeal and on September 7, 2001 the Tenth
Circuit affirmed the district court decision. On September 21, 2001, the
plaintiffs filed a petition for a full bench rehearing with the Tenth Circuit
and such petition was denied by the court in October. If necessary, we will
continue to vigorously defend against the claims in the class action suit, but
we cannot predict its outcome. An unfavorable outcome could have a material
adverse effect on our financial condition and business prospects.
Welsh. In April 2000, the operators of two grocery stores in 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,
53
breach of fiduciary duty, negligent misrepresentation and breach of the Texas
Deceptive Trade Practices Act. The amended complaint seeks unspecified actual
damages, punitive damages, attorneys' fees and pre-judgment and post-judgment
interest. The parties have recently agreed in principal to a settlement of this
case which will not involve any cash payment by Fleming.
Other. Our facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of certain materials. In conformity
with these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection
Agency and by similar state agencies as potentially responsible parties under
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, or similar state laws, as applicable, with respect to EPA-designated
Superfund sites. While liability under CERCLA for remediation at these sites is
generally joint and several with other responsible parties, we believe that, to
the extent we are ultimately determined to be liable for the expense of
remediation at any site, such liability will not result in a material adverse
effect on our consolidated financial position or results of operations. We are
committed to maintaining the environment and protecting natural resources and
human health and to achieving full compliance with all applicable laws,
regulations and orders.
We are a party to or threatened with various other litigation and
contingent loss situations arising in the ordinary course of our business
including disputes with the following parties: customers and vendors; owners or
creditors of financially troubled or failed customers; suppliers; landlords;
employees regarding labor conditions, wages, workers' compensation matters and
alleged discriminatory practices; insurance carriers; and tax assessors. Some of
the disputes involve substantial amounts.
54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
NAME AGE PRESENT POSITION
---- --- ----------------
EXECUTIVE OFFICERS:
Mark S. Hansen....................... 47 Chairman and Chief Executive Officer
J.R. Campbell........................ 57 Executive Vice President, Merchandising and
Supply
Thomas G. Dahlen..................... 47 Executive Vice President and President, Retail
and Corporate Marketing
E. Stephen Davis..................... 61 Executive Vice President and President,
Wholesale
Ron Griffin.......................... 48 Executive Vice President and Chief Information
Officer
William H. Marquard.................. 41 Executive Vice President, Business Development
and Chief Knowledge Officer
Scott M. Northcutt................... 39 Executive Vice President, Human Resources
Neal J. Rider........................ 40 Executive Vice President and Chief Financial
Officer
Michael J. Carey..................... 54 Senior Vice President, Western Operations
Charles L. Hall...................... 51 Senior Vice President, Real Estate and Store
Development
Carlos M. Hernandez.................. 47 Senior Vice President, General Counsel and
Secretary
Matthew H. Hildreth.................. 36 Senior Vice President, Finance and Treasurer
Leonard Kaye......................... 63 Senior Vice President, Eastern Operations
William A. Merrigan.................. 56 Senior Vice President, Logistics
Philip B. Murphy..................... 53 Senior Vice President, Procurement
Mark D. Shapiro...................... 42 Senior Vice President, Finance and Operations
Control
Thomas A. Zatina..................... 50 Senior Vice President, Northern Operations
DIRECTORS:
Mark S. Hansen....................... 47 Chairman and Chief Executive Officer
Herbert M. Baum...................... 65 Director
Kenneth M. Duberstein................ 57 Director
Archie R. Dykes...................... 70 Director
Carol B. Hallett..................... 64 Director
Robert S. Hamada..................... 64 Director
Edward C. Joullian III............... 72 Director
Guy A. Osborn........................ 65 Director
Alice M. Peterson.................... 49 Director
EXECUTIVE OFFICERS
Mark S. Hansen joined us as Chairman and Chief Executive Officer in
November 1998. Prior to joining us, Mr. Hansen served as President and Chief
Executive Officer of SAM'S Club, a division of Wal-Mart Stores, Inc., from 1997
through 1998. Prior to joining Wal-Mart, Mr. Hansen served in multiple
capacities at PETsMART, Inc., a retailer of pet food, pet supplies and related
products, including as President and Chief Executive Officer from 1989 to 1997.
Prior to 1989, Mr. Hansen served in various management capacities in the
supermarket industry. He serves as an executive advisory board member of Swander
Pace Capital and is a director of Applebee's Restaurants and Amazon.com.
55
J.R. Campbell joined us as our Executive Vice President, Merchandising and
Supply in January 2002. Prior to joining us, Mr. Campbell served for over 20
years in various capacities at Wal-Mart Stores, Inc., including Senior Vice
President and General Merchandise Manager of Wal-Mart Stores, Senior Vice
President of Merchandising for Sam's Club, and most recently as President,
Global Sourcing Division of Wal-Mart Stores.
Thomas G. Dahlen joined us as our Executive Vice President and President,
Retail and Corporate Marketing in April 2001. From 1999 until joining us, Mr.
Dahlen served as President and Chief Executive Officer of Furrs Supermarkets,
Inc. From 1994 until 1999, Mr. Dahlen served in multiple capacities at Ralph's
Supermarkets Division of the Yucaipa Companies, including Executive Vice
President from 1998 to 1999, and Senior Vice President, Sales and Marketing from
1994 to 1998.
E. Stephen Davis joined us in 1960 and has served as our Executive Vice
President and President, Wholesale since February 2000. Prior to that, Mr. Davis
has served us in various positions, including Executive Vice President, Food
Distribution from 1998 to February 2000, Executive Vice President, Operations
from 1997 to 1998, Executive Vice President, Food Operations from 1996 to 1997
and Executive Vice President, Distribution from 1995 to 1996.
Ron Griffin joined us as Executive Vice President and Chief Information
Officer in January 2002. Prior to joining us, Mr. Griffin served for over 10
years in various capacities at The Home Depot, Inc., including most recently as
Senior Vice President and Chief Information Officer.
William H. Marquard joined us as Executive Vice President, Business
Development and Chief Knowledge Officer in June 1999. From 1991 until joining
us, Mr. Marquard was a partner in the consulting practice of Ernst & Young.
Scott M. Northcutt joined us as Senior Vice President, Human Resources in
January 1999 and he became Executive Vice President, Human Resources in February
2000. From 1997 until joining us, Mr. Northcutt was Vice President-People Group
at SAM's Club, a division of Wal-Mart Stores, Inc. From 1988 to 1995, he served
as Vice President-Human Resources and from 1995 to 1996, he served as Vice
President-Store Operations at Dollar General Corporation.
Neal J. Rider joined us as Executive Vice President and Chief Financial
Officer in January 2000. From 1999 until joining us, Mr. Rider was Executive
Vice President and Chief Financial Officer at Regal Cinemas, Inc. From 1980 to
1999, Mr. Rider served in multiple capacities at American Stores Company,
including Treasurer and Controller responsibilities from 1994 to 1997 before
becoming Chief Financial Officer in 1998.
Michael J. Carey joined us in 1983 and has served as our Senior Vice
President, Western Operations since June 2000. Prior to that, Mr. Carey served
as our Operating Group President from 1998 to June 2000, our President, LaCrosse
Division from 1996 to 1998, and our Director of IGA Marketing from 1994 to 1996.
Charles L. Hall joined us as Senior Vice President, Real Estate and Store
Development in June 1999. From 1998 until joining us, he was Senior Vice
President-Real Estate and Store Development at Eagle Hardware and Garden, Inc.
From 1992 to 1998, he served as Vice President of Real Estate Development at
PETsMART, Inc.
Carlos M. Hernandez joined us in March 2000 as Associate General Counsel
and Assistant Secretary and has served as our Senior Vice President, General
Counsel and Secretary since February 2001. Prior to joining us, Mr. Hernandez
was employed in various capacities at Armco Inc. from 1981 to 1999, and then as
an attorney at AK Steel Holding Corporation from October to December 1999.
Matthew H. Hildreth joined us as Senior Vice President, Finance and
Treasurer in May 2001. Prior to joining us, Mr. Hildreth served in various
positions at JPMorgan since 1989, including most recently as Vice President and
Sector Head of North American Trucking for JPMorgan's Transportation and
Logistics Group.
Leonard Kaye joined us in 1963 and has served as our Senior Vice President,
Eastern Operations since June 2000. Prior to that, Mr. Kaye served us in various
positions, including Operating Group President, President, Memphis Division and
Operations Manager.
56
William A. Merrigan joined us in November 2000 and has served as our Senior
Vice President, Logistics since May 2001. Prior to joining us, Mr. Merrigan
served as Senior Vice President of Logistics at Nash Finch Company from 1998 to
November 2000. Prior to that, Mr. Merrigan served in various senior positions at
Wakefern Food Corporation from 1986 to 1998, including most recently as Vice
President of Logistics and Transportation.
Philip B. Murphy joined us in October 2000 as Vice President of Grocery,
and has served as our Senior Vice President, Procurement since May 2001. Prior
to that, Mr. Murphy served as Senior Vice President and General Manager of
Services at PETsMART, Inc. from 1995 to 2000.
Mark D. Shapiro joined us in June 2001 as Senior Vice President, Finance.
Prior to joining us, Mr. Shapiro served in various positions at Big Lots, Inc.
since 1992, including most recently as Senior Vice President and Chief Financial
Officer.
Thomas A. Zatina joined us in June 2001 as Senior Vice President, Northern
Operations. Prior to joining us, Mr. Zatina served in various positions at
Bozzuto's, Inc., a Connecticut-based wholesale distributor, since 1986,
including most recently as Executive Vice President and Chief Operating Officer.
DIRECTORS
Herbert M. Baum joined us as a director in 1998. He is Chairman, president
and chief executive officer of The Dial Corporation (a consumer products
company). Prior to joining The Dial Corporation in August 2000, Mr. Baum served
as president and chief operating officer of Hasbro, Inc. from January 1999. From
1993 to 1998, Mr. Baum served as chairman and chief executive officer of Quaker
State Corporation. From 1978 to 1993, Mr. Baum served in a variety of positions
for Campbell Soup Company where his last position held was President Campbell
North and South America. Mr. Baum is a director of Grocery Manufacturers of
America, The Dial Corporation, Midas, Inc., Meredith Corporation, and
PepsiAmerica, Inc. (formerly Whitman Corporation).
Kenneth M. Duberstein joined us as a director in May 2001. He is chairman
and Chief Executive Officer of The Duberstein Group, Inc., an independent
strategic planning and consulting company. Prior to that, Mr. Duberstein served
President Reagan in various capacities, including Chief of Staff from 1988 to
1989, Deputy Chief of Staff from 1987 to 1988 and Assistant and Deputy Assistant
to the President for Legislative Affairs from 1981 to 1983. Mr. Duberstein is a
director of The Boeing Company, Conoco, Inc., Fannie Mae, GVG, The St. Paul
Companies, Inc., and serves on the Board of Governors for the American Stock
Exchange and the National Association of Securities Dealers. He also serves as
Vice Chairman of the Kennedy Center for Performing Arts, Chairman of Ethics
Oversight Committee for the U.S. Olympics Committee, Trustee of Franklin &
Marshall College and Johns Hopkins University, and serves on the Council on
Foreign Relations, the Institute of Politics at the John F. Kennedy School of
Government at Harvard University and the National Alliance to End Homelessness.
Archie R. Dykes joined us as a director in 1981. He is chairman and chief
executive officer of Capital City Holdings, Inc. (a venture capital
organization). He is nonexecutive chairman and a director of PepsiAmerica, Inc.
(formerly Whitman Corporation), Midas, Inc. and the Employment Corporation. A
former chancellor of the University of Kansas and of the University of
Tennessee, Mr. Dykes also serves as a trustee of the Kansas University Endowment
Association and of the William Allen White Foundation.
Carol B. Hallett joined us as a director in 1993. She is president and
chief executive officer of the Air Transport Association of America, Washington,
D.C. (the nation's oldest and largest airline trade organization). Prior to
joining the Air Transport Association in April 1995, Mrs. Hallett served as
senior government relations advisor with Collier, Shannon, Rill & Scott from
February 1993 to March 1995. From November 1989 through January 1993, Mrs.
Hallett served as the Commissioner of the United States Customs Service. From
September 1986 to May 1989, she served as the U.S. Ambassador to The
Commonwealth of the Bahamas. From July 1983 to August 1986, Mrs. Hallett served
as the national vice chairman and field director of Citizens for America. Mrs.
Hallett also served three terms in the California legislature and as minority
leader in the State Assembly. Mrs. Hallett is a director of Litton Industries,
Inc. and Mutual of Omaha
57
Insurance Company. She is a trustee for the Junior Statesmen of America. Mrs.
Hallett also serves on the President's Cabinet of California Polytechnic State
University.
Robert S. Hamada joined us as a director in February 2001. Mr. Hamada
serves as the Edward Eagle Brown Distinguished Service Professor of Finance at
the University of Chicago Graduate School of Business. An internationally known
authority in finance, Mr. Hamada has been a member of the faculty of the
University of Chicago since 1966, during which time he has served as Dean from
1993 to June 2001, director of the Center for International Business and
Research from 1992 to 1993, as deputy dean for the faculty at the Graduate
School of Business from 1985 to 1990, and as director of the Center for Research
in Security Prices from 1980 to 1985. Mr. Hamada is a director of Northern Trust
Corporation, A.M. Castle & Co., Flying Food Fare, Window to the World
Communications, Inc., and the National Bureau of Economic Research.
Edward C. Joullian III joined us as a director in 1984. He has been
chairman of Mustang Fuel Corp. (energy development and services) since 1964. He
also served as chief executive officer of that company until his retirement in
1998. Mr. Joullian also served Fleming as interim chairman of the board of
directors from July 18, 1998 until November 30, 1998. He is a director of The
LTV Corp.
Guy A. Osborn joined us as a director in 1992. He retired as chairman of
Universal Foods Corp. in April 1997. He joined that company in 1971, became
president in 1984 and chairman in 1990. He serves on the boards of Boys and
Girls Club of Greater Milwaukee and Alverno College and is a trustee of
Northwestern Mutual Life Insurance Company.
Alice M. Peterson joined us as a director in 1998. She served as President
of RIM Finance, LLC (a wholly-owned subsidiary of the Canadian company, Research
In Motion Limited, the maker of BlackBerry wireless handheld devices), from
December 2000 to September 2001. From April 2000 to September 2000, Ms. Peterson
served as Chief Executive Officer of GuidanceResources.com (an Internet-based
service that employers provide as a value-added benefit to enhance employee
productivity). From October 1998 to February 2000, Ms. Peterson served as vice
president and general manager of Sears Online, the unit of Sears, Roebuck and
Co. where all business-to-consumer Internet activities are conducted, including
interactive marketing. Ms. Peterson was vice president and treasurer of Sears,
Roebuck and Co. from 1993 to 1998. She joined that company in 1989 as corporate
director of finance, became managing director -- corporate finance in 1992, and
vice president -- treasurer in 1993. Prior to joining Sears, Ms. Peterson served
as assistant treasurer of Kraft, Inc. from 1988 to 1989. From 1984 to 1988, Ms.
Peterson served in a variety of financial positions for PepsiCo, Inc. where her
last position held was director of capital markets. Ms. Peterson is a director
of RIM Finance, LLC and she serves on the Ravinia Festival Board of Trustees.
58
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
This table indicates how much of our common stock was beneficially owned as
of December 29, 2001 by our directors and each of our four most highly
compensated executive officers in fiscal 2001 and by beneficial owners of more
than 5% as of the dates indicated in the footnotes. As of December 29, 2001,
44,438,041 shares of our common stock were issued and outstanding.
SHARES OF COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED(1) OUTSTANDING SHARES
---- ---------------------- ------------------
Mark S. Hansen(2)(3)........................... 775,999 1.75%
Herbert M. Baum(3)(4).......................... 6,250 *
Kenneth M. Duberstein(3)....................... -- --
Archie R. Dykes(4)............................. 14,980 *
Carol B. Hallett(3)(4)......................... 8,439 *
Robert S. Hamada(3)............................ 4,000 *
Edward C. Joullian III(4)(5)................... 29,105 *
Guy A. Osborn(3)(4)(5)......................... 48,450 *
Alice M. Peterson(4)........................... 13,750 *
E. Stephen Davis(2)(3)(4)(5)................... 192,341 *
William H. Marquard(2)(4)...................... 106,250 *
Neal J. Rider(2)(3)(5)......................... 275,931 *
All directors and executive officers as a
group(2)(3)(4)(5)............................ 1,968,152 4.28%
Dimensional Fund Advisors, Inc.(6)............. 2,432,997 5.48%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
FMR Corp.(7)................................... 4,957,114 11.16%
82 Devonshire Street
Boston, Massachusetts 02109
Mellon Financial Corporation(8)................ 2,218,167 5.00%
One Mellon Center
Pittsburgh, Pennsylvania 15258
Southeastern Asset Management, Inc.(9)......... 5,819,400 13.10%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
---------------
* Less than 1% of the issued and outstanding shares.
(1) This column includes our common stock held by directors and officers or by
certain members of their families (for which the directors and executive
officers have sole or shared voting or investment power), our common stock
which the officers have the right to acquire within 60 days of December 29,
2001 under our stock option and stock incentive plans and shares of our
restricted common stock, subject to forfeiture, awarded under our stock
incentive plans.
(2) The amounts shown include shares which the following persons have the right
to acquire within 60 days of December 29, 2001 under our stock option and
stock incentive plans:
Hansen...................................................... 699,979 shares
Davis....................................................... 125,500 shares
Marquard.................................................... 106,250 shares
Rider....................................................... 242,000 shares
All directors and officers as a group (including those named above):
1,556,849
59
(3) The following shares have been excluded from the share totals for the
individuals and group named in the table as they do not have voting or
investment power with respect to such shares:
Hansen............................................ 300,000 shares of restricted stock
Davis............................................. 100,000 shares of restricted stock
Rider............................................. 12,500 shares of restricted stock
Baum.............................................. 3,500 shares of restricted stock
Duberstein........................................ 3,500 shares of restricted stock
Hallett........................................... 3,500 shares of restricted stock
Hamada............................................ 3,500 shares of restricted stock
Osborn............................................ 3,500 shares of restricted stock
All directors and officers as a group (including those named above): 514,166
shares of restricted stock
(4) The individuals and group named in the table have sole voting power with
respect to the following shares of restricted stock:
Baum........................................................ 5,250 shares
Dykes....................................................... 8,750 shares
Hallett..................................................... 5,250 shares
Joullian.................................................... 8,750 shares
Osborn...................................................... 5,250 shares
Peterson.................................................... 8,750 shares
Davis....................................................... 8,000 shares
Marquard.................................................... 10,000 shares
All directors and officers as a group (including those named above): 54,800
shares
(5) The individuals and group named in the table have shared voting and
investment power with respect to the following shares of common stock:
Davis....................................................... 9,000 shares
Joullian.................................................... 20,355 shares
Osborn...................................................... 25,000 shares
Rider....................................................... 32,500 shares
All directors and officers as a group (including those named above): 98,855
shares
(6) In a Schedule 13G dated February 2, 2001, Dimensional Fund Advisors, Inc.
disclosed it held 2,432,997 shares of our common stock and had sole power to
vote and dispose of all shares. Dimensional disclaims beneficial ownership
of all of the shares.
(7) In a Schedule 13G filed May 10, 2001, FMR Corp. disclosed that it held
4,957,114 shares of our common stock, had sole power to vote 5,900 shares
and the sole power to dispose of, or direct the disposition of, all shares.
(8) In a Schedule 13G dated January 17, 2001, Mellon Financial Corporation
disclosed that it held 2,218,167 shares of our common stock, shared voting
power with respect to 199,600 shares, had sole voting power with respect to
1,936,497 shares, and had the sole power to dispose of all shares.
(9) In a Schedule 13G dated June 8, 2001, Southeastern Asset Management, Inc.
disclosed that it held 5,819,400 shares of our common stock and that it
shared voting and investment power with respect to 4,738,500 of the held
shares with Longleaf Partners Small-Cap Fund. In the same Schedule 13G,
Southeastern Asset Management disclosed that it had sole power to vote
476,900 shares, had sole power to dispose of 1,080,900 shares, and had no
voting power with regard to 604,000 shares. The Schedule 13G identifies Mr.
O. Mason Hawkins as Chairman of the Board and Chief Executive Officer of
Southeastern Asset Management, but Mr. Hawkins does not claim any voting or
dispositive power with regard to the shares of our common stock held by
Southeastern.
60
DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
Our senior secured credit facility consists of a $600 million revolving
credit facility, with a final maturity of July 25, 2003, and an amortizing term
loan with a balance of $89 million at October 6, 2001 (adjusted to give effect
to the application of net proceeds from the issuance and sale of the Series C
notes on October 15, 2001), and with a maturity of July 25, 2004. Up to $300
million of the revolver may be used for issuing letters of credit. Borrowings
and letters of credit issued under this credit facility may be used for general
corporate purposes and are secured by a first priority security interest in our
accounts receivable and inventories and those of our subsidiaries, and in the
capital stock or other equity interests owned by us or our subsidiaries. In
addition, this credit facility is guaranteed by substantially all of our
subsidiaries. The stated interest rate on borrowings under our credit facility
is equal to a referenced index interest rate, normally the London interbank
offered interest rate, or LIBOR, plus a margin. The level of the margin is
dependent upon credit ratings on our senior secured bank debt.
Our credit facility contains customary covenants associated with similar
facilities. Our credit facility currently contains the following more
significant financial covenants:
- maintenance of a fixed charge coverage ratio of at least 1.7 to 1, based
on adjusted earnings (as defined in the credit facility agreement) before
interest, taxes, depreciation and amortization and net rent expense;
- maintenance of a ratio of inventory-plus-accounts receivable to funded
bank debt (including letters of credit) of at least 1.4 to 1;
- a limitation on restricted payments, including dividends, based on a
formula tied to net earnings and equity issuances; and
- a limitation on incurrence of indebtedness.
We are in compliance with all financial covenants under our credit facility.
Our credit facility may be terminated in the event of a defined change of
control.
At October 6, 2001 (as adjusted), borrowings under the credit facility
totaled $89 million in term loans and $278 million of revolver borrowings, and
$53 million of letters of credit had been issued. Letters of credit are needed
primarily for insurance reserves associated with our normal risk management
activities. To the extent that any of these letters of credit would be drawn,
payments would be financed by borrowings under our credit facility.
10-1/8% SENIOR NOTES DUE 2008
Our $355 million of 10-1/8% senior notes due 2008 are general unsecured
obligations, equal in right of payment to all of our existing and future Senior
Indebtedness and are guaranteed on a senior unsecured basis by each guarantor of
the Notes. The indenture governing the Senior Notes contains various covenants,
including, without limitation, limitations on the incurrence of indebtedness,
the granting of certain liens, the making of certain dividends and investments
and the transfer and sale of certain assets.
10-1/2% SENIOR SUBORDINATED NOTES DUE 2004
Our $250 million of 10-1/2% senior subordinated notes due 2004 are general
unsecured obligations, subordinated in right of payment to all of our existing
and future senior indebtedness and are guaranteed on a senior subordinated basis
by each of the same subsidiaries that guarantee the notes. These 10-1/2% senior
subordinated notes due 2004 are governed by an indenture and contain negative
covenants substantially similar to those that govern the notes.
61
5-1/4% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2009
Our $150 million of 5-1/4% convertible senior subordinated notes due 2009
are general unsecured obligations, subordinated in right of payment to all of
our existing and future senior indebtedness and are guaranteed on a senior
subordinated basis by each guarantor of the notes.
62
DESCRIPTION OF NOTES
We issued the Series C notes, and will issue the exchange notes, under an
indenture dated October 15, 2001 (the "Indenture"), among Fleming, as issuer,
each of the Subsidiary Guarantors, as guarantors, and Manufacturers and Traders
Trust Company, as trustee (the "Trustee"). The form and terms of the exchange
notes are the same as the form and terms of the Series C notes except that:
- the exchange notes will have been registered under the Securities Act of
1933, as amended (the "Securities Act") and therefore will not bear
restrictive legends restricting their transfer pursuant to the Securities
Act; and
- holders of exchange notes will not be entitled to rights of holders of
the Series C notes under the registration rights agreement which
terminate upon completion of the exchange offer.
We issued the Series B notes under an indenture dated July 25, 1997 and
amended as of September 20, 2001, among us, each of the Subsidiary Guarantors
and Manufacturers and Traders Trust Company that is substantially similar in all
material respects with the Indenture. The form and terms of the exchange notes
are the same as the form and terms of the Series B notes in all material
respects.
The following is a summary of the material provisions of the Indenture. It
does not include all of the provisions of the Indenture. We urge you to read the
Indenture because it defines your rights. The terms of the notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended. A copy of the Indenture may be obtained
from the Company. You can find definitions of certain capitalized terms used in
this description under "-- Certain Definitions." For purposes of this section,
references to the "Company" include only Fleming Companies, Inc. and not its
subsidiaries.
GENERAL
Principal of, premium, if any, and interest on the notes and Additional
Interest, if any, is payable, and the notes are exchangeable and transferable,
at the office or agency of the Paying Agent maintained for such purposes (which
initially is the office of the Trustee maintained at One M&T Plaza, 7th Floor,
Corporate Trust Department, Buffalo, New York 14203); provided, however, that
payment of interest may be made, at the option of the Company, by check mailed
to the Person entitled thereto as shown on the security register. The notes will
be issued only in fully registered form without coupons in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for any
registration of transfer, exchange or redemption of notes or, except in certain
circumstances, for any tax or other governmental charge that may be imposed in
connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The notes will mature on July 31, 2007, and are unsecured senior
subordinated obligations of the Company. Additional Series D notes may be issued
under the Indenture from time to time, subject to the limitations set forth
under "-- Certain Covenants -- Limitation on Indebtedness." Any additional
Series D notes will be part of the same series as the exchange notes offered
hereby and will vote on all matters with the exchange notes offered in this
exchange offer. The notes will bear interest at an annual rate of 10-5/8% from
October 15, 2001 or from the most recent interest payment date to which interest
has been paid on the old notes, payable semiannually on January 31 and July 31
of each year, to the Person in whose name the notes were registered at the close
of business on January 15 or July 15 next preceding such interest payment date.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
OPTIONAL REDEMPTION
The notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after July 31, 2002, at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued and
unpaid interest, if any, to the date of redemption, if redeemed during the
12-month
63
period beginning on July 31 of the years indicated below (subject to the right
of holders of record on relevant record dates to receive interest due on an
interest payment date):
YEAR
----
2002........................................................ 105.313%
2003........................................................ 103.542%
2004........................................................ 101.771%
2005 and thereafter......................................... 100.000%
SELECTION AND NOTICE
In the event that less than all of the notes are to be redeemed at any
time, selection of the notes for redemption will be made by the Trustee on a pro
rata basis, by lot or by such other method as the Trustee shall deem fair and
appropriate; provided, however, that no note of a principal amount of $1,000 or
less shall be redeemed in part. Notice of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of notes to be redeemed at its registered address. If any note is to
be redeemed in part only, the notice of redemption that relates to such note
shall state the portion of the principal amount thereof to be redeemed. A new
note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original note.
On or after the redemption date, interest will cease to accrue on notes or
portions thereof called for redemption and accepted for payment.
SINKING FUND
The notes are not entitled to the benefit of any sinking fund.
GUARANTEES
Payment of the principal of, premium, if any, interest on and any
Additional Interest in respect of the notes, when and as the same become due and
payable (whether at Stated Maturity or on a redemption date, or pursuant to a
Change of Control Purchase Offer or an Asset Sale Offer, and whether by
declaration of acceleration, call for redemption, purchase or otherwise), is
guaranteed, jointly and severally, on a senior subordinated basis by all of the
Wholly Owned Restricted Subsidiaries of the Company (the "Subsidiary
Guarantors").
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor or all or substantially all of its
assets to an entity which is not a Subsidiary Guarantor (and a Restricted
Subsidiary) or the designation of a Restricted Subsidiary to become an
Unrestricted Subsidiary, which transaction is otherwise in compliance with the
Indenture (including, without limitation, the provisions of "-- Certain
Covenants -- Limitation on Sale of Assets" and "-- Limitation on Issuances and
Sales of Capital Stock of Subsidiaries"), such Subsidiary Guarantor will be
deemed released from its obligations under its Note Guarantee; provided,
however, that any such termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure, any
Indebtedness of the Company or any other Restricted Subsidiary shall also
terminate upon such release, sale or transfer. In addition, any Subsidiary
Guarantor shall automatically be released from and relieved of its obligations
under its Note Guarantee upon the sale or transfer of the Capital Stock of such
Subsidiary Guarantor pursuant to or in lieu of foreclosure of any lien on the
Capital Stock of such Subsidiary Guarantor existing in favor of any holder of
Senior Indebtedness and, upon the request of any holder of Senior Indebtedness
(or of any purchaser or transferee pursuant to or in lieu of such foreclosure),
the Trustee shall execute any documents reasonably required to evidence the
release of such Subsidiary Guarantor.
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SUBORDINATION
The payment (by set-off or otherwise) of principal of, premium, if any,
interest and Additional Interest, if any, on the notes (including with respect
to any repurchases of the notes) will be subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full in cash or, at the
option of the holders of Senior Indebtedness, in Temporary Cash Investments, of
all obligations in respect of Senior Indebtedness, whether outstanding on the
date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company or any Subsidiary
Guarantor upon any total or partial liquidation, dissolution or winding up of
the Company or such Subsidiary Guarantor or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or such
Subsidiary Guarantor or its property, whether voluntary or involuntary, an
assignment for the benefit of creditors or any marshalling of the Company's or
such Subsidiary Guarantor's assets and liabilities, the holders of Senior
Indebtedness of the Company or such Subsidiary Guarantor will be entitled to
receive payment in full in cash, or at the option of the holders of such Senior
Indebtedness, in Temporary Cash Investments, of all Obligations due or to become
due in respect of such Senior Indebtedness (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness) before the holders of notes will be entitled to receive any
payment of any kind or character with respect to the notes, and until all
obligations with respect to such Senior Indebtedness are paid in full in cash,
or at the option of the holders of such Senior Indebtedness, in Temporary Cash
Investments, any distribution of any kind or character to which the holders of
notes would be entitled shall be made to the holders of such Senior Indebtedness
(except that holders of notes may receive Permitted Junior Securities and
payments made from the trust described under "-- Defeasance or Covenant
Defeasance of Indenture").
Neither the Company nor any Subsidiary Guarantor shall make, directly or
indirectly, (x) any payment upon or in respect of the notes (except in Permitted
Junior Securities or from the trust described under "-- Defeasance or Covenant
Defeasance of Indenture") or (y) acquire any of the notes for cash or property
or otherwise or make any other distribution with respect to the notes if (i) any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any amount of any
Designated Senior Indebtedness (a "Payment Default") or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness (a
"Non-Payment Default") that permits holders of, or the trustee or agent on
behalf of the holders of, the Designated Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the trustee or agent on behalf
of holders of any Designated Senior Indebtedness. Payments on the notes may and
shall be resumed (a) in the case of a Payment Default, upon the date on which
such default is cured or waived and (b) in case of a Non-Payment Default, the
earlier of the date on which such Non-Payment Default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received,
unless a Payment Default has occurred and is continuing, including as a result
of the acceleration of the maturity of any Designated Senior Indebtedness. After
a Payment Blockage Notice is given for a Non-Payment Default, no new period of
payment blockage for a Non-Payment Default may be commenced unless and until (i)
360 days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if any,
and interest and Additional Interest, if any, on the notes that have come due
have been paid in full in cash. No Non-Payment Default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such Non-Payment Default shall have been cured or waived for a period of not
less than 90 days (it being acknowledged that any subsequent action, or any
breach of any financial covenants for a period commencing after the date of
delivery of any Payment Blockage Notice which, in either case, would give rise
to a default pursuant to any provision under which a default previously existed
or was continuing shall constitute a new default for this purpose). Each holder
by its acceptance of a note irrevocably agrees that if any payment or payments
shall be made pursuant to the Indenture by the Company or a Subsidiary Guarantor
and the amount or total amount of such payment or payments exceeds the amount,
if any, that such holder would be entitled to receive upon the proper
application of the subordination provisions of the Indenture, the payment of
such excess amount shall be deemed null and void, and the holder agrees that it
will be obligated to return the amount of the excess
65
payment to the Trustee, as instructed in a written notice of such excess
payment, within ten days of receiving such notice.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of notes may recover less ratably than
creditors of the Company or a Subsidiary Guarantor who are holders of Senior
Indebtedness. The principal amount of consolidated Senior Indebtedness
outstanding at October 6, 2001 (as adjusted to give effect to the application of
net proceeds from the issuance and sale of the Series C notes on October 15,
2001) was approximately $1.1 billion (excluding $53 million of obligations under
undrawn letters of credit). In addition, at October 6, 2001, the Company had
outstanding Capital Lease Obligations of approximately $355 million. At October
6, 2001, the Company also had outstanding approximately $659 million of
consolidated Pari Passu Indebtedness. The Indenture limits through certain
financial tests the amount of additional Indebtedness, including Senior
Indebtedness and Pari Passu Indebtedness, that the Company and its Subsidiary
Guarantors can incur. See "-- Certain Covenants -- Limitation on Indebtedness."
"Designated Senior Indebtedness" means (i) any Senior Indebtedness
outstanding under the Credit Agreement; (ii) any Senior Indebtedness in respect
of the Senior Notes; and (iii) any other Senior Indebtedness, the principal
amount of which is $50 million or more and that has been designated by the
Company as "Designated Senior Indebtedness."
"Permitted Junior Securities" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to substantially the same
extent as, or to a greater extent than, the notes are subordinated to Senior
Indebtedness.
"Senior Indebtedness" of the Company or any Subsidiary Guarantor means (i)
all Indebtedness of the Company or such Subsidiary Guarantor under the Credit
Agreement or any related loan documentation, including, without limitation,
obligations to pay principal and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law), premium, if any, reimbursement obligations
under letters of credit, fees, expenses and indemnities, and all obligations
under Interest Rate Agreements or Currency Agreements with respect thereto,
whether outstanding on the date of the Indenture or thereafter incurred, (ii)
the principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on, and all other Obligations with respect
to, any other Indebtedness of the Company or such Subsidiary Guarantor permitted
to be incurred by the Company or such Subsidiary Guarantor under the terms of
the Indenture (including, without limitation, the Senior Notes), whether
outstanding on the date of the Indenture or thereafter incurred, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the notes and (iii)
all Obligations of the Company or such Subsidiary Guarantor with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include (A) any liability for federal, state, local or
other taxes owed or owing by the Company or any Subsidiary Guarantor, (B) the
Existing Senior Subordinated Notes or the Convertible Senior Subordinated Notes,
(C) any Indebtedness of the Company or any Subsidiary Guarantor to any of its
Restricted Subsidiaries or other Affiliates, (D) any trade payables or (E) any
Indebtedness that is incurred in violation of the Indenture.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Indebtedness. The Company will not, and will not permit any
of its Restricted Subsidiaries to, create, assume, or directly or indirectly
guarantee or in any other manner become directly or
66
indirectly liable for the payment of, or otherwise incur (collectively,
"incur"), any Indebtedness (including any Acquired Indebtedness) other than
Permitted Indebtedness. Notwithstanding the foregoing, the Company and the
Subsidiary Guarantors may incur Indebtedness if, at the time of such event (and
after giving effect on a pro forma basis to (i) the incurrence of such
Indebtedness and (if applicable) the application of the proceeds therefrom,
including to refinance other Indebtedness; (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company or its Restricted
Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such four-
quarter period; and (iii) the acquisition (whether by purchase, merger or
otherwise) or disposition (whether by sale, merger or otherwise) of any company,
entity or business acquired or disposed of by the Company or its Restricted
Subsidiaries, as the case may be, since the first day of such four-quarter
period as if such acquisition or disposition had occurred at the beginning of
such four-quarter period), the Consolidated Fixed Charge Coverage Ratio of the
Company for the four full fiscal quarters immediately preceding such event,
taken as one period and calculated on the assumption that such Indebtedness had
been incurred on the first day of such four-quarter period and, in the case of
Acquired Indebtedness, on the assumption that the related acquisition (whether
by means of purchase, merger or otherwise) also had occurred on such date, with
such pro forma adjustments as may be determined in accordance with GAAP and the
rules, regulations and guidelines of the Commission (including without
limitation Article 11 of Regulation S-X), would have been at least equal to 2.25
to 1.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary of the Company to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to, the
holders of, any Capital Stock of the Company or of any Restricted
Subsidiary (other than dividends or distributions payable (x) solely in
shares of Qualified Capital Stock of the Company or such Restricted
Subsidiary or in options, warrants or other rights to purchase such
Qualified Capital Stock or (y) by a Restricted Subsidiary to the Company or
any Wholly Owned Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Company or any Restricted
Subsidiary or any options, warrants or other rights to acquire such Capital
Stock held by any Person (other than the Company or any Wholly Owned
Restricted Subsidiary of the Company);
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment,
sinking fund payment or maturity, any Subordinated Indebtedness or Pari
Passu Indebtedness of the Company or any Subsidiary Guarantor; or
(iv) make any Investment (other than any Permitted Investment) in any
Person
(such payments described in clauses (i) through (iv) and not excepted therefrom
are collectively referred to herein as "Restricted Payments") unless at the time
of and immediately after giving effect to the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, as determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall have
occurred and be continuing, (2) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in accordance with the
provisions described under "-- Certain Covenants -- Limitation on Indebtedness"
and (3) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries on or
after July 25, 1997, is less than the sum of (a) 50% of the aggregate cumulative
Consolidated Net Income of the Company for the period (taken as one accounting
period) from the first day of the quarter beginning after July 25, 1997 to the
end of the Company's most recently ended fiscal quarter for which financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (b) 100% of the aggregate net cash proceeds received by the
Company as capital contributions or from the issue or sale since July 25, 1997
of Equity Interests of the Company or of debt securities of the Company that
have been converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Restricted Subsidiary of the Company and
other than Redeemable Capital Stock or debt securities that have been converted
into
67
Redeemable Capital Stock), plus (c) any cash received by the Company after July
25, 1997 as a dividend or distribution from any of its Unrestricted Subsidiaries
less the cost of disposition and taxes, if any (but in each case excluding any
such amounts included in Consolidated Net Income); plus (d) $50 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (with respect to clauses
(ii), (iii), (iv) and (vi) below) at the time of and immediately after giving
effect thereto no Default or Event of Default shall have occurred and be
continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such declaration complied
with the provisions of paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the net cash proceeds of, a substantially concurrent issuance and
sale (other than to a Restricted Subsidiary) of shares of Capital Stock of
the Company (other than Redeemable Capital Stock, unless the redemption
provisions of such Redeemable Capital Stock prohibit the redemption thereof
prior to the date on which the Capital Stock to be acquired or retired was,
by its terms, required to be redeemed);
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Pari Passu Indebtedness or Subordinated
Indebtedness (other than Redeemable Capital Stock) in exchange for or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of shares of Capital Stock of the
Company (other than Redeemable Capital Stock, unless the redemption
provisions of such Redeemable Capital Stock prohibit the redemption thereof
prior to the Stated Maturity of the Subordinated Indebtedness to be
acquired or retired);
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Pari Passu Indebtedness or Subordinated
Indebtedness (other than Redeemable Capital Stock) in exchange for, or out
of the net cash proceeds of a substantially concurrent incurrence or sale
(other than to a Restricted Subsidiary) of, new Pari Passu Indebtedness or
Subordinated Indebtedness of the Company so long as (A) the principal
amount of such new Pari Passu Indebtedness or Subordinated Indebtedness
does not exceed the principal amount (or, if such Pari Passu Indebtedness
or Subordinated Indebtedness being refinanced provides for an amount less
than the principal amount thereof to be due and payable upon a declaration
of acceleration thereof, such lesser amount as of the date of
determination) of the Pari Passu Indebtedness or Subordinated Indebtedness
being so purchased, redeemed, defeased, acquired or retired, plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Pari Passu Indebtedness or
Subordinated Indebtedness refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing, plus the amount of reasonable expenses of the Company incurred
in connection with such refinancing, (B) such new Pari Passu Indebtedness
or Subordinated Indebtedness is pari passu or subordinated to the notes to
the same extent as such Pari Passu Indebtedness or Subordinated
Indebtedness so purchased, redeemed, defeased, acquired or retired and (C)
such new Pari Passu Indebtedness or Subordinated Indebtedness has an
Average Life longer than the Average Life of the notes and a final Stated
Maturity of principal later than the final Stated Maturity of principal of
the notes;
(v) the payment of a dividend on the Company's Capital Stock (other
than Redeemable Capital Stock) of up to $0.08 per quarter per share (or up
to $0.32 per annum per share, provided that dividend payments may not be
cumulated for more than four consecutive quarters); and
(vi) the purchase, redemption or other acquisition or retirement for
value of shares of Common Stock of the Company issued pursuant to
non-qualified options granted under stock option plans of the Company, in
order to pay withholding taxes due as a result of income recognized upon
the exercise of such options; provided that (1) the Company is permitted,
by the terms of such plans, to effect such purchase, redemption or other
acquisition or retirement for value of such shares and (2) the aggregate
consideration paid by the Company for such shares so purchased, redeemed or
otherwise acquired or retired for value does not exceed $2 million during
any fiscal year of the Company.
68
The actions described in clauses (ii), (iii), (v) and (vi) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph
(a).
Limitation on Layering Indebtedness. The Indenture provides that neither
the Company nor any of its Restricted Subsidiaries will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness of the
Company or such Restricted Subsidiary, as the case may be, and senior in any
respect in right of payment to the notes or such Restricted Subsidiary's Note
Guarantee.
Limitation on Liens Securing Pari Passu Indebtedness or Subordinated
Indebtedness. (a) The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) securing Pari Passu Indebtedness or
Subordinated Indebtedness of the Company on or with respect to any of its
property or assets, including any shares of stock or indebtedness of any
Restricted Subsidiary, whether owned at the date of the Indenture or thereafter
acquired, or any income, profits or proceeds therefrom, or assign or otherwise
convey any right to receive income thereon, unless (x) in the case of any Lien
securing Pari Passu Indebtedness of the Company, the notes are secured by a Lien
on such property, assets or proceeds that is senior in priority to or pari passu
with such Lien and (y) in the case of any Lien securing Subordinated
Indebtedness of the Company, the notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien.
(b) The Company will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) securing Indebtedness of such Restricted Subsidiary that is
pari passu or subordinate in right of payment to the Note Guarantee of such
Restricted Subsidiary, on or with respect to any such Restricted Subsidiary's
properties or assets, including any shares of stock or Indebtedness of any
Subsidiary of such Restricted Subsidiary, whether owned at the date of the
Indenture or thereafter acquired, or any income, profits or proceeds therefrom,
or assign or otherwise convey any right to receive income thereon, unless (x) in
the case of any Lien securing Indebtedness of the Restricted Subsidiary that is
pari passu in right of payment to the Note Guarantee of such Restricted
Subsidiary, such Note Guarantee is secured by a Lien on such property, assets or
proceeds that is senior in priority to or pari passu with such Lien and (y) in
the case of any Lien securing Indebtedness of the Restricted Subsidiary that is
subordinate in right of payment to the Note Guarantee of such Restricted
Subsidiary, such Note Guarantee is secured by a Lien on such property, assets or
proceeds that is senior in priority to such Lien.
Limitation on Transactions With Affiliates. The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (other than the Company, a Wholly Owned Restricted Subsidiary or (in
connection with a Qualified TIPS Transaction) a Qualified Finance Subsidiary)
(each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that could have been obtained in a
comparable transaction with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5
million, an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the Disinterested Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10 million, both an Officers' Certificate
referred to in clause (a) and an opinion as to the fairness of such Affiliate
Transaction to the Company or the relevant Restricted Subsidiary from a
financial point of view issued by an investment banking firm of national
standing with total assets in excess of $1.0 billion; provided, however, that
this covenant shall not apply to fees, compensation and employee benefits,
including bonuses, retirement plans and stock options, paid to or established
for directors and officers of the Company or any Restricted Subsidiary in the
ordinary course of business and approved by a majority of the Disinterested
Directors.
69
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries, (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, (iv) grant Liens in favor of holders of notes or (v) guarantee the
notes, except in each case for such encumbrances or restrictions existing under
or by reason of (a) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Indenture, (b) the Credit Agreement as in effect
as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increase, supplements, refunding, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increase, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Agreement in effect on
the date of the Indenture, (c) the Indenture and the notes, (d) applicable law,
(e) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the property or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, (f) by reason of customary non-assignment provisions in existing and
future leases entered into in the ordinary course of business and consistent
with past practices, (g) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired and (h) restrictions incurred by
the Company or any Restricted Subsidiary in connection with any Permitted
Receivables Financing.
Purchase of Notes upon a Change of Control Triggering Event. If a Change
of Control Triggering Event shall occur at any time, then each holder of notes
shall have the right, to the extent not inconsistent with the Company's bylaws
as in effect on the date of the Indenture, to require the Company to purchase
such holder's notes in whole or in part in integral multiples of $1,000 at a
purchase price (the "Change of Control Purchase Price") in cash in an amount
equal to 101% of the principal amount of such notes, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date"), pursuant to the offer described below (the "Change of Control Purchase
Offer") and the other procedures set forth in the Indenture. Reference is made
to "-- Certain Definitions" for the definitions of "Change of Control," "Change
of Control Triggering Event," "Rating Agencies," "Rating Decline" and
"Investment Grade." The foregoing rights under the notes are triggered only upon
the occurrence of both a Change of Control and a Rating Decline.
Upon the occurrence of a Change of Control Triggering Event and prior to
the mailing of the notice to holders provided for in the Indenture, the Company
covenants to either (x) repay in full all Indebtedness under the Credit
Agreement or offer to repay in full all such Indebtedness and to repay the
Indebtedness of each of the Banks that has accepted such offer or (y) obtain any
requisite consent under the Credit Agreement to permit the purchase of the notes
pursuant to a Change of Control Purchase Offer as provided for in the Indenture
or take any other action as may be required under the Credit Agreement to permit
such purchase. The Company shall first comply with such covenants before it
shall be required to purchase the notes pursuant to the Indenture.
Within 30 days following the occurrence of any Change of Control Triggering
Event, the Company shall notify the Trustee and give written notice of such
Change of Control Triggering Event to each holder of notes, by first-class mail,
postage prepaid, at the address appearing in the security register, stating,
among other things, the Change of Control Purchase Price and the Change of
Control Purchase Date, which shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any note not
tendered will continue to accrue interest; that, unless the Company defaults in
the payment of the Change of Control
70
Purchase Price, any notes accepted for payment of the Change of Control Purchase
Price pursuant to the Change of Control Purchase Offer shall cease to accrue
interest after the Change of Control Purchase Date; and certain other procedures
that a holder of notes must follow to accept a Change of Control Purchase Offer
or to withdraw such acceptance.
If a Change of Control Triggering Event were to occur, we cannot assure you
that the Company would have sufficient funds to pay the Change of Control
Purchase Price for all the notes tendered by the holders. The Company's Credit
Agreement and indentures contain, and any future other agreements relating to
other indebtedness to which we become a party may contain, restrictions or
prohibitions on the Company's ability to repurchase notes or may provide that an
occurrence of a Change of Control constitutes an event of default under, or
otherwise requires payment of amounts borrowed under those agreements. If a
Change of Control Triggering Event occurs at a time when the Company is
prohibited from repurchasing the notes, we could seek the consent of our then
existing lenders and note holders to the repurchase of the notes or could
attempt to refinance the borrowings that contain the prohibition. If the Company
does not obtain such a consent or repay the borrowings, it would remain
prohibited from repurchasing the notes. In that case, failure to repurchase
tendered notes would constitute an Event of Default under the Indenture and may
constitute a default under the terms of other indebtedness that we may enter
into from time to time.
Our bylaws contain a provision which limits the Company's ability to "adopt
or maintain a poison pill, shareholder rights plan, rights agreement or any
other form of 'poison pill' which is designed to or which has the effect of
making acquisitions of large holdings of the Corporation's shares of stock more
difficult or expensive . . . unless such a plan is first approved by a majority
shareholder vote" and prohibits the amendment, alteration, deletion or
modification of such bylaw by the Board of Directors without prior shareholder
approval. This bylaw provision raises a question as to whether the provisions of
the Indenture described above (the "Change of Control Provisions") constitute a
"poison pill," "shareholder rights plan, rights agreement or any other form of
'poison pill' (collectively, a "Poison Pill") within the meaning of this
provision. See "Risk Factors -- We may not have the ability to raise funds
necessary to finance the change of control offer required by the Indenture. In
addition, our bylaws may not permit us to make the change of control payment
even if we do have the funds." Although the matter is not free from doubt, the
Company believes that a court, properly presented with the facts, should
conclude that the Change of Control Provisions of the Indenture do not
constitute a Poison Pill within the meaning of the bylaw provision, and
accordingly are not inconsistent therewith. If the Change of Control Provisions
were found to be inconsistent with the bylaw provision, the Company would not be
able to make or consummate the Change of Control Purchase Offer or pay the
Change of Control Purchase Price when due.
One of the events which constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event holders of the notes elect to require the Company to purchase the
notes and the Company elects to contest such election, there can be no assurance
as to how a court interpreting New York law would interpret the phrase.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Purchase Offer.
Limitation on Sale of Assets. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, engage in an
Asset Sale unless the Company or such Restricted Subsidiary, as the case may be,
receives Permitted Consideration at the time of such Asset Sale at least equal
to the Fair Market Value (as evidenced by a resolution of the Board of Directors
set forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of.
Within 370 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary must apply such Net Proceeds (i) to
permanently reduce Senior Indebtedness of the Company or one or more Restricted
Subsidiaries (and to correspondingly reduce commitments with respect thereto),
(ii) to offer to repurchase and repurchase the Existing Senior Subordinated
Notes to the extent
71
required by the indentures governing such Existing Senior Subordinated Notes, or
(iii) to make capital expenditures or acquire long-term assets used or useful in
its businesses or in businesses similar or related to the businesses of the
Company immediately prior to the date of the Indenture. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Indebtedness or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $15 million, the Company will be required to make an offer to
all holders of notes and holders of other Pari Passu Indebtedness (other than
holders of the Existing Senior Subordinated Notes) containing provisions similar
to those set forth in the Indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the
maximum principal amount of notes that may be purchased out of the Excess
Proceeds (on a pro rata basis if the amount available for such repayment,
purchase or redemption is less than the aggregate amount of (x) the principal
amount of the notes tendered in such Asset Sale Offer and (y) the principal
amount of such Pari Passu Indebtedness tendered in such Asset Sale Offer), at an
offer price in cash in an amount equal to 100% of the principal amount thereof,
plus accrued and unpaid interest and Additional Interest, if any, thereon to the
date of purchase, in accordance with the procedures set forth in the Indenture.
The Company may use any remaining Excess Proceeds for general corporate purposes
(subject to the restrictions of the Indenture). Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
Notwithstanding the foregoing provisions of the prior paragraph, the
Company and its Restricted Subsidiaries may sell or dispose of property, whether
in the form of assets or capital stock of a Restricted Subsidiary, in the
aggregate amount not exceeding $15 million in any year and any notes received by
the Company or its Restricted Subsidiaries as consideration in any disposition
made pursuant to such $15 million exclusion from the provisions of this covenant
shall not be taken into account in determining whether the $75 million
limitation set forth in the definition of "Permitted Consideration" has been
met.
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, transfer, convey, sell or otherwise dispose of any
Capital Stock of any Restricted Subsidiary of the Company to any Person (other
than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless
(a) such transfer, conveyance, sale or other disposition is of all of the
Capital Stock of such Restricted Subsidiary owned by the Company and its
Restricted Subsidiaries and (b) such transaction is made in accordance with the
provisions of "-- Certain Covenants -- Limitation on Sale of Assets," provided
that 85% of the proceeds from such a sale of Capital Stock of any Restricted
Subsidiary that is a Significant Subsidiary shall consist of cash or Temporary
Cash Investments. Notwithstanding the foregoing or the provisions of any other
covenant, the Company or any Restricted Subsidiary may sell Qualified Capital
Stock of any Restricted Subsidiary in a Public Equity Offering, provided that
(i) 100% of the Net Proceeds from such Public Equity Offering shall be in cash
and shall be applied as provided in the provisions of "Certain
Covenants -- Limitation on Sale of Assets" and (ii) the Tangible Assets of such
Restricted Subsidiary do not exceed 10% of the Consolidated Tangible Assets of
the Company, determined as of the last day of the quarter ending immediately
before the commencement of such Public Equity Offering.
Additional Guarantees. If (x) the Company or any of its Restricted
Subsidiaries shall acquire or form a Restricted Subsidiary or (y) any existing
majority-owned Restricted Subsidiary shall, after the date of the Indenture,
guarantee any Pari Passu Indebtedness or Subordinated Indebtedness of the
Company or any Subsidiary Guarantor, the Company will cause any such Restricted
Subsidiary (other than an Investee Store or Joint Venture, provided that such
Investee Store or Joint Venture does not guarantee the Pari Passu Indebtedness
of any other Person) that is or becomes a Wholly Owned Restricted Subsidiary or
that guarantees any Pari Passu Indebtedness or Subordinated Indebtedness of the
Company or any Subsidiary Guarantor to (i) execute and deliver to the Trustee a
supplemental indenture in form and substance reasonably satisfactory to such
Trustee pursuant to which such Restricted Subsidiary shall guarantee all of the
obligations of the Company with respect to the notes issued under the Indenture
on a senior subordinated basis and (ii) deliver to such Trustee an Opinion of
Counsel reasonably satisfactory to such Trustee to the effect
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that a supplemental indenture has been duly executed and delivered by such
Restricted Subsidiary and is in compliance with the terms of the Indenture.
Rule 144A Information Requirement. The Company has agreed to furnish to
the holders or beneficial holders of notes and prospective purchasers of notes
designated by the holders of notes, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act until such
time as the Company either exchanges all of the notes for the exchange notes or
has registered all of the notes for resale under the Securities Act.
Reports. The Indenture provides that whether or not required by the rules
and regulations of the Commission, including the reporting requirements of
Section 13 or 15(d) of the Exchange Act, so long as any notes are outstanding,
the Company will furnish to the holders of notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Subsidiaries and, with respect to the annual
information only, a report on the consolidated financial statements required by
Form 10-K by the Company's independent certified public accountants and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to investors or prospective investors who request it in writing.
Payments for Consent. The Indenture prevents the Company and any of its
Restricted Subsidiaries from, directly or indirectly, paying or causing to be
paid any consideration, whether by way of interest, fee or otherwise, to any
holder of any notes for or as an inducement to any consent, waiver or amendment
of any terms or provisions of the notes unless such consideration is offered to
be paid or agreed to be paid to all holders of the notes which so consent, waive
or agree to amend in the time frame set forth in solicitation documents relating
to such consent, waiver or agreement.
Termination of Certain Covenants In Event of Investment Grade Rating. In
the event that each of the Rating Categories assigned to the notes by the Rating
Agencies is Investment Grade, the provisions of "-- Limitation on Indebtedness,"
"-- Limitation on Restricted Payments," "-- Limitation on Issuances and Sales of
Capital Stock of Subsidiaries," "-- Limitation on Transactions With Affiliates"
and "-- Limitation on Sale of Assets" and the net worth requirement set forth in
clause (iii) of "-- Consolidation, Merger, Sale of Assets" shall cease to apply
to the Company and its Restricted Subsidiaries from and after the date on which
the second of the Rating Agencies notifies the Company of the assignment of such
Rating Category. Notwithstanding the foregoing, if the Rating Category assigned
by either Rating Agency to the notes should subsequently decline below
Investment Grade, the foregoing covenants and such maintenance of net worth
requirement shall be reinstituted as and from the date of such rating decline.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer or lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such transaction
or transactions if such transaction or transactions, in the aggregate, would
result in a sale, assignment, transfer, lease or disposal of all or
substantially all of the properties and assets of the Company and its Restricted
Subsidiaries on a Consolidated basis to any other Person or group of affiliated
Persons, unless at the time and after giving effect thereto (i) either (A) the
Company shall be the surviving or continuing corporation, or (B) the Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or the Person which acquires by sale, assignment, conveyance,
transfer, lease or disposition the properties and assets of the Company
substantially as an entirety (the "Surviving Entity") shall be a corporation
duly organized and validly existing under the laws of the United States, any
state thereof or the District of Columbia and shall, in any case, expressly
73
assume, by a supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company, under the
notes and the Indenture, and the Indenture shall remain in full force and
effect; (ii) immediately before and immediately after giving effect to such
transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or any of its Restricted Subsidiaries which becomes
an obligation of the Company or any of its Restricted Subsidiaries in connection
with or as a result of such transaction as having been incurred at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, except in
the case of a merger of the Company with or into a Wholly Owned Restricted
Subsidiary, the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) will have a Consolidated Net Worth equal
to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction; (iv) immediately after giving effect to such
transaction on a pro forma basis (on the assumption that the transaction
occurred on the first day of the four-quarter period immediately prior to the
consummation of such transaction with the appropriate adjustments with respect
to the transaction being included in such pro forma calculation), the Company
(or the Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "-- Certain Covenants -- Limitation on
Indebtedness" above; (v) each Subsidiary Guarantor, unless it is the other party
to the transactions described above, shall have confirmed, by supplemental
indenture to the Indenture, that its respective Note Guarantees with respect to
the notes shall apply to such Person's obligations under the Indenture and the
notes; (vi) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of "-- Certain Covenants -- Limitation on Liens Securing Pari Passu
Indebtedness or Subordinated Indebtedness" are complied with; and (vii) the
Company shall have delivered, or caused to be delivered, to the Trustee with
respect to the Indenture, in form and substance satisfactory to such Trustee, an
Officers' Certificate and an opinion of counsel, each to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
transaction and the supplemental indenture in respect thereto, if required,
comply with the provisions in clauses (i) through (vii) of this paragraph and
that all conditions precedent herein provided for relating to such transaction
have been complied with.
In the event of any consolidation, merger, sale, assignment, conveyance,
transfer, lease or other transaction described in, and complying with, the
conditions listed in the immediately preceding paragraph in which the Company is
not the continuing corporation, the successor Person formed or remaining shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, as the case may be, and the Company shall be discharged from all
obligations and covenants under the Indenture and the notes; provided that, in
the case of a transfer by lease, the predecessor shall not be released from its
obligations with respect to the payment of principal (premium, if any) and
interest on the notes.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if any of the following
events occurs:
(i) there shall be a default in the payment of any interest on the
notes when such interest becomes due and payable, and continuance of such
default for a period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any notes at its Maturity;
(iii) (A) there shall be a default in the performance, or breach, of
any covenant or agreement of the Company or any Subsidiary Guarantor under
the Indenture (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in the immediately
preceding clauses (i) or (ii) or in clauses (B) or (C) of this clause
(iii)), and such default or breach shall continue for a period of 60 days
after written notice has been given, by certified mail, (x) to the Company
by the Trustee or (y) to the Company and the Trustee by the holders of at
least 25% in aggregate principal amount of the outstanding notes; (B) there
shall be a default in the performance or breach of the provisions described
in "-- Consolidation, Merger, Sale of Assets" or "-- Certain
Covenants -- Limitation on Asset Sales"; or (C) the Company shall have
failed to comply with the provisions of "-- Certain
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Covenants -- Purchase of Notes Upon a Change of Control Triggering Event"
for any reason, including the inconsistency of such covenant with the
Company's bylaws as in effect on the date of the Indenture;
(iv)(A) any default in the payment of the principal of any
Indebtedness shall have occurred under any agreements, indentures or
instruments under which the Company or any Restricted Subsidiary of the
Company then has outstanding Indebtedness in excess of $50 million when the
same shall become due and payable in full and such default shall have
continued after any applicable grace period and shall not have been cured
or waived or (B) an event of default as defined in any of the agreements,
indentures or instruments described in clause (A) of this clause (iv) shall
have occurred and the Indebtedness thereunder, if not already matured at
its final maturity in accordance with its terms, shall have been
accelerated;
(v) any Person entitled to take the actions described below in this
clause (v), after the occurrence of any event of default on Indebtedness in
excess of $50 million in the aggregate of the Company or any Restricted
Subsidiary, shall notify the Trustee of the intended sale or disposition of
any assets of the Company or any Restricted Subsidiary that have been
pledged to or for the benefit of such Person to secure such Indebtedness or
shall commence proceedings, or take any action (including by way of set-
off) to retain in satisfaction of any Indebtedness, or to collect on,
seize, dispose of or apply, any such assets of the Company or any
Restricted Subsidiary (including funds on deposit or held pursuant to lock-
box and other similar arrangements), pursuant to the terms of such
Indebtedness or in accordance with applicable law;
(vi) any Note Guarantee of any Significant Subsidiary individually or
any other Subsidiaries if such Restricted Subsidiaries in the aggregate
represent 15% or more of the assets of the Company and its Restricted
Subsidiaries on a consolidated basis with respect to such notes shall for
any reason cease to be, or be asserted in writing by the Company, any
Subsidiary Guarantor or any other Restricted Subsidiary of the Company, as
applicable, not to be, in full force and effect, enforceable in accordance
with its terms, except pursuant to the release of any such Note Guarantee
in accordance with the Indenture;
(vii) one or more judgments, orders or decrees for the payment of
money in excess of $50 million (net of amounts covered by insurance, bond
or similar instrument), either individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary of the Company or
any of their respective properties and shall not be discharged and either
(A) any creditor shall have commenced an enforcement proceeding upon such
judgment, order or decree or (B) there shall have been a period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(viii) there shall have been the entry by a court of competent
jurisdiction of (A) a decree or order for relief in respect of the Company
or any Significant Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or (B) a decree or order adjudging the
Company or any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under any applicable federal or
state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Significant Subsidiary or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such decree
or order for relief shall continue to be in effect, or any such other
decree or order shall be unstayed and in effect, for a period of 60
consecutive days; or
(ix) (A) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (B) the
Company or any Significant Subsidiary consents to the entry of a decree or
order for relief in respect of the Company or such Significant Subsidiary
in an involuntary case or proceeding under any applicable Bankruptcy Law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, (C) the Company or any Significant Subsidiary files a petition
or answer or consent seeking reorganization or relief under any applicable
federal or state law, (D) the Company or any Significant Subsidiary (x)
consents to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the
75
Company or such Significant Subsidiary or of any substantial part of its
property, (y) makes an assignment for the benefit of creditors or (z)
admits in writing its inability to pay its debts generally as they become
due or (E) the Company or any Significant Subsidiary takes any corporate
action in furtherance of any such actions in this clause (ix).
If an Event of Default (other than as specified in clauses (viii) or (ix)
of the immediately preceding paragraph) shall occur and be continuing with
respect to the notes, the Trustee, by notice to the Company, or the holders of
at least 25% in aggregate principal amount then outstanding of such notes, by
notice to the Trustee and to the Company, may declare such notes due and payable
immediately. Upon such declaration, all amounts payable in respect of such notes
shall be immediately due and payable. If an Event of Default specified in clause
(viii) or (ix) of the immediately preceding paragraph occurs and is continuing,
then all of the outstanding notes under the Indenture shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee thereunder or any holder of such notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount outstanding of notes, by written notice
to the Company and such Trustee, may annul such declaration if (a) the Company
has paid or deposited with such Trustee a sum sufficient to pay (i) all sums
paid or advanced by such Trustee under the Indenture and the reasonable
compensation, expenses, disbursements, and advances of such Trustee, its agents
and counsel, (ii) all overdue interest on all of the notes, and (iii) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate borne by the notes; and (b) all Events of Default, other than the
non-payment of principal of such notes which have become due solely by such
declaration of acceleration, have been cured or waived.
The holders of a majority in aggregate principal amount of the notes
outstanding may, on behalf of the holders of all of such notes, waive any past
defaults under the Indenture, except a default in the payment of the principal
of, premium, if any, or interest on any such note, or in respect of a covenant
or provision which under the Indenture cannot be modified or amended without the
consent of the holder of each such outstanding note.
The Company is also required to notify the Trustee within ten days of the
occurrence of any Default.
The Trust Indenture Act contains limitations on the rights of the Trustee,
acting as trustee with respect to the notes, should it become a creditor of the
Company or any Subsidiary Guarantor, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claims, as security or otherwise. Such Trustee is permitted to engage in other
transactions, provided that if it acquires any conflicting interest, it must
eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and any Subsidiary Guarantor discharged with respect
to any notes issued under the Indenture ("defeasance"). Such defeasance means
that the Company shall be deemed to have paid and discharged all obligations
represented by such notes, except for (i) the rights of holders of such
outstanding notes to receive payments in respect of the principal of, premium,
if any, and interest on such notes when such payments are due or on the
redemption date with respect to the notes, as the case may be, (ii) the
Company's obligations with respect to such notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes, and
the maintenance of an office or agency for payment and money for note payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and (iv) the defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Indenture ("covenant defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or an Event of Default with
respect to such notes. In the event covenant defeasance occurs, certain events
(not including non-payment, enforceability of any Note Guarantee, bankruptcy and
insolvency events) described under "-- Events of Default" will no longer
constitute an Event of Default with respect to such notes.
76
In order to exercise either defeasance or covenant defeasance with respect
to the notes under the Indenture (i) the Company must irrevocably deposit with
the Trustee, in trust, for the benefit of the holders of such notes, cash in
United States dollars, U.S. Government Obligations (as defined in the
Indenture), or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay and discharge the principal of, premium, if any, and interest on the
notes outstanding on the Stated Maturity thereof or on an optional redemption
date (such date being referred to as the "Defeasance Redemption Date"), as the
case may be, if in the case of a Defeasance Redemption Date prior to electing to
exercise either defeasance or covenant defeasance, the Company has delivered to
the Trustee an irrevocable notice to redeem all of the outstanding notes on such
Defeasance Redemption Date; (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States stating that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel in the
United States shall confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (iii) in the case of covenant defeasance, the
Company shall have delivered to the Trustee an opinion of independent counsel in
the United States to the effect that the holders of the outstanding notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such covenant defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as clause (viii) and (ix) under the first paragraph under "-- Events of
Default" are concerned, at any time during the period ending on the 91st day
after the date of deposit; (v) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a Default under, the Indenture
or any other material agreement or instrument to which the Company or any
Subsidiary Guarantor is a party or by which it is bound; (vi) the Company shall
have delivered to the Trustee an Officers' Certificate stating that the deposit
was not made by the Company with the intent of preferring the holders of the
notes or any Subsidiary Guarantor over the other creditors of the Company or any
Subsidiary Guarantor or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company, any Subsidiary Guarantor or others; and
(vii) the Company shall have delivered to the Trustee an Officers' Certificate
stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture shall cease to be of further effect (except for surviving
rights of registration of transfer or exchange of the notes issued thereunder,
as expressly provided for in the Indenture) as to all outstanding notes issued
thereunder when (i) either (A) all notes issued under the Indenture and
theretofore authenticated and delivered (except lost, stolen or destroyed notes
which have been replaced or paid and notes for whose payment funds have been
deposited in trust by the Company and thereafter repaid to the Company or
discharged from such trust) have been delivered to the Trustee for cancellation
or (B) all notes issued under the Indenture and not theretofore delivered to the
Trustee for cancellation (x) have become due and payable or (y) will become due
and payable at their Stated Maturity within one year, and either the Company or
any Subsidiary Guarantor has irrevocably deposited or caused to be deposited
with such Trustee funds in an amount sufficient to pay and discharge the entire
Indebtedness in respect of such notes, for principal of, premium and Additional
Interest, if any, and interest to the date of deposit; (ii) the Company or any
Subsidiary Guarantor has paid all other sums payable by the Company and any
Subsidiary Guarantor under the Indenture; and (iii) the Company has delivered to
the Trustee an Officers' Certificate and an opinion of counsel each stating that
all conditions precedent to the satisfaction and discharge of the Indenture, as
specified therein, have been complied with and that such satisfaction and
discharge will not result in a breach or violation of, or constitute a default
under, the Indenture or any other material agreement or instrument to which the
Company or any Subsidiary Guarantor is a party or by which it is bound.
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MODIFICATION AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
the Subsidiary Guarantors and the Trustee with the consent of the holders of a
majority in aggregate outstanding principal amount of the notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding note affected thereby (i) change the Stated Maturity
or the principal of, or any installment of interest on, any note or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the coin or currency in which any note or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof;
(ii) amend, change or modify the obligation of the Company to make and
consummate a Change of Control Purchase Offer in the event of a Change of
Control Triggering Event or modify any of the provisions or definitions with
respect thereto; (iii) reduce the percentage in principal amount of outstanding
notes, the consent of whose holders is required for any modification or
amendment to the Indenture, or the consent of whose holders is required for any
waiver thereof; (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase the
percentage of outstanding notes required for such actions or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the holder of each note affected thereby; (v) except as otherwise
permitted under "-- Consolidation, Merger, Sale of Assets," consent to the
assignment or transfer by the Company or any Subsidiary Guarantor of any of its
rights and obligations under the Indenture; or (vi) amend or modify any of the
provisions of the Indenture in any manner which subordinates the notes in right
of payment to other Indebtedness of the Company or which subordinates any Note
Guarantee in right of payment to other Indebtedness of the Subsidiary Guarantor
issuing such Note Guarantee.
The holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary of the Company or (ii) assumed
in connection with the acquisition of assets from such Person, in each case,
other than Indebtedness incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary of the Company or such acquisition.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person that
owns, directly or indirectly, 5% or more of such Person's Capital Stock or any
executive officer or director of any such specified Person. For the purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback),
other than sales of inventory in the ordinary course of business consistent with
past practices (provided that the sale, lease, conveyance or other disposition
of all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "Certain Covenants -- Purchase of
Notes Upon a Change of Control Triggering Event" and/or the provisions described
above under the caption "Certain Covenants -- Consolidation, Merger or Sale of
Assets" and not by the provisions of "-- Certain Covenants -- Limitation on Sale
of Assets"), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, whether in a single transaction or a series of related
transactions, in either case, (a) that have a fair market value in excess of
$1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding
the foregoing, a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary, or by a Restricted Subsidiary
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to any other Restricted Subsidiary in which the Company holds a larger
proportionate Equity Interest, will not be deemed to be an Asset Sale.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (A) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (B) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Banks" means the banks and other financial institutions from time to time
that are lenders under the Credit Agreement.
"Borrowing Base Amount" means, as to the Company, 90% of Net Property and
Equipment, determined on a consolidated basis in accordance with GAAP.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in the City of New York are
authorized or obligated by law or executive order to close.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interest,
partnership interests, participations or other equivalents (however designated)
of such Person's capital stock whether now outstanding or issued after the date
of the Indenture, including, without limitation, all common stock and preferred
stock.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
Board of Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of such Board of Directors then in office; (iii) the
Company consolidates with or merges with or into any Person or conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates with or merges into or with the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where the outstanding Voting
Stock of the Company is not changed or exchanged at all (except to the extent
necessary to reflect a change in the jurisdiction of incorporation of the
Company) or where (A) the outstanding Voting Stock of the Company is changed
into or exchanged for (x) Voting Stock of the surviving corporation which is not
Redeemable Capital Stock or (y) cash, securities or other property (other than
Capital Stock of the surviving corporation) in an amount which could be paid by
the Company as a Restricted Payment as described under "-- Certain
Covenants -- Limitation on Restricted Payments" (and such amount shall be
treated as a Restricted Payment subject to the provisions in the Indenture
described under "-- Certain Covenants -- Limitation on Restricted Payments") and
(B) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act) is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is
79
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total outstanding Voting Stock of the
surviving corporation; or (iv) the Company is liquidated or dissolved or adopts
a plan of liquidation or dissolution other than in a transaction which complies
with the provisions described under "-- Consolidation, Merger, Sale of Assets."
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Consolidated" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP consistently
applied.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) Consolidated Net Income, plus, without duplication,
Consolidated Interest Expense, Consolidated Income Tax Expense, Consolidated
Non-Cash Charges and Excluded Non-Cash Charges (less the amount of all cash
payments made by the Company or any of its Restricted Subsidiaries during such
period to the extent such payments relate to Excluded Non-Cash Charges that were
added back in determining the sum contemplated by this clause (a) for such
period or any prior period; provided that this parenthetical shall not apply
with respect to each fiscal quarter in the four quarter period ended July 14,
2001) deducted in computing Consolidated Net Income, in each case, for such
period, of the Company and its Restricted Subsidiaries on a Consolidated basis,
all determined in accordance with GAAP to (b) Consolidated Interest Expense for
such period; provided that (i) in making such computation, the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a pro
forma basis and (A) bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Company, either the fixed or floating rate and (ii) in making such
computation, Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period.
"Consolidated Income Tax Expense" means for any period the provision for
federal, state, local and foreign income taxes of the Company and its Restricted
Subsidiaries for such period as determined on a Consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, without duplication, for any period,
the sum of (A) the interest expense of the Company and its Restricted
Subsidiaries for such period, as determined on a Consolidated basis in
accordance with GAAP including, without limitation, (i) amortization of debt
discount, (ii) the net cost under Interest Rate Agreements (including
amortization of discount), (iii) the interest portion of any deferred payment
obligation and (iv) accrued interest, plus (B) the aggregate amount for such
period of dividends on any Redeemable Capital Stock or Preferred Stock of the
Company and its Restricted Subsidiaries, (C) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid, or accrued
by such Person during such period and (D) all capitalized interest of the
Company and its Restricted Subsidiaries in each case under each of (A) through
(D) determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the Consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
as determined on a Consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such net income (loss), by excluding, without
duplication, (i) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto), (ii) up to $20 million of any charges taken with
respect to the "Premium Sales" litigation matters, which are
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described under (4) in Item 3 (Legal Proceedings) of the Company's Annual Report
on Form 10-K for fiscal year 1996 plus up to an additional $2,500,000 with
respect to fees and expenses of the Company's counsel in connection with such
litigation matters, (iii) Excluded Non-Cash Charges (less the amount of all cash
payments made by the Company or any of its Restricted Subsidiaries during such
period to the extent such payments relate to Excluded Non-Cash Charges that were
added back in determining the sum contemplated by clause (A) of the definition
of "Consolidated Fixed Charge Coverage Ratio"), (iv) the portion of net income
(or loss) of the Company and its Restricted Subsidiaries determined on a
Consolidated basis allocable to minority interests in unconsolidated Persons to
the extent that cash dividends or distributions have not actually been received
by the Company or any Restricted Subsidiary; (v) net income (or loss) of any
Person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(vi) net gains or losses (less all fees and expenses relating thereto) in
respect of dispositions of assets other than in the ordinary course of business
and (vii) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its shareholders.
"Consolidated Net Sales" means, for any period, the consolidated net sales
of the Company and its Restricted Subsidiaries for such period, as determined in
accordance with GAAP.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common equity holders of such
Person and its Restricted Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Redeemable Capital Stock) that by its
terms is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (a) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Restricted Subsidiary of such
Person, (b) all investments as of such date in unconsolidated Restricted
Subsidiaries and in Persons that are not Subsidiaries (except, in each case,
Permitted Investments), and (c) all unamortized debt discount and expense and
unamortized deferred charges as of such date, all of the foregoing determined in
accordance with GAAP.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash charges of the Company and its
Restricted Subsidiaries for such period, as determined on a Consolidated basis
in accordance with GAAP (excluding any non-cash charges which require an accrual
or reserve for any future period and any Excluded Non-Cash Charges).
"Consolidated Tangible Assets" means the total of all the assets appearing
on the Consolidated balance sheet of the Company and its majority-owned or
Wholly Owned Restricted Subsidiaries less (i) intangible assets including,
without limitation, items such as goodwill, trademarks, trade names, patents and
unamortized debt discount and (ii) appropriate adjustments on account of
minority interests of other persons holding stock in any majority-owned
Restricted Subsidiary of the Company.
"Consolidated Total Assets" means, with respect to the Company, the total
of all assets appearing on the Consolidated balance sheet of the Company and its
majority-owned or Wholly Owned Restricted Subsidiaries, as determined on a
Consolidated basis in accordance with GAAP.
"Convertible Senior Subordinated Notes" means the 5- 1/4% Convertible
Senior Subordinated Notes due 2009 of the Company.
"Credit Agreement" means the credit agreement dated as of July 25, 1997
among the Company, the Banks, the Agents listed therein and The Chase Manhattan
Bank, as Administrative Agent, as such agreement may be amended, renewed,
extended, substituted, refinanced, restructured, replaced, supplemented or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions,
81
substitutions, refinancings, restructurings, replacements, supplementations or
other modifications of the foregoing).
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business and designed to protect against or manage
exposure to fluctuations in foreign currency exchange rates.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Non-Cash Charges" means all non-cash charges with respect to (A)
write-downs of the carrying value in the Company's financial statements of
certain retail and distribution facilities and related assets in connection with
the proposed or actual disposition of such facilities or discontinuance of
operations at such facilities or (B) other consolidation and restructuring of
facilities and operations.
"Existing Senior Subordinated Notes" means (A) the 10- 1/2% Senior
Subordinated Notes due 2004 of the Company and (B) the 10- 5/8 Series B Senior
Subordinated Notes due 2007 of the Company.
"Fair Market Value" means, with respect to any asset or property, a price
which could be negotiated in an arm's length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under undue pressure to
complete the transaction. Fair Market Value shall be determined by the Board of
Directors of the Company acting in good faith and shall be evidenced by a Board
Resolution.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect on July 25,
1997.
"Guaranteed Debt" means, with respect to any Person, without duplication,
all Indebtedness of any other Person referred to in the definition of
Indebtedness contained herein guaranteed directly or indirectly in any manner by
such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a creditor
against loss, provided that the term "guarantee" shall not include endorsements
for collection or deposit, in either case in the ordinary course of business.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all liabilities of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities arising in the ordinary course of
business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (ii) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness of
such Person created or arising under any conditional sale or other title
82
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
Capital Lease Obligations of such Person, (v) all obligations under Interest
Rate Agreements or Currency Agreements of such Person, (vi) Indebtedness
referred to in clauses (i) through (v) above of other Persons, and all dividends
of other Persons the payment of which is secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Guaranteed Debt of such Person (other than guarantees of preferred trust
securities or similar securities issued by a Qualified Finance Subsidiary),
(viii) all Redeemable Capital Stock valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends,
(ix) Qualified Subordinated Indebtedness and (x) any amendment, supplement,
modification, deferral, renewal, extension, refunding or refinancing of any
liability of the types referred to in clauses (i) through (ix) above. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair
Market Value is to be determined in good faith by the Board of Directors of the
issuer of such Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
designed to protect against or manage exposure to fluctuations in interest rates
in respect of Indebtedness.
"Investee Store" means a Person in which the Company or any of its
Restricted Subsidiaries has invested equity capital, to which it has made loans
or for which it has guaranteed loans, in accordance with the business practice
of the Company and its Restricted Subsidiaries of making equity investments in,
making loans to or guaranteeing loans made to Persons for the purpose of
assisting any such Person in acquiring, remodeling, refurbishing, expanding or
operating one or more retail grocery stores.
"Investment" means, with respect to any Person, directly or indirectly, any
advance (other than advances to customers in the ordinary course of business,
which are recorded as accounts receivable on the balance sheet of the Company
and its Restricted Subsidiaries), loan or other extension of credit (including
by way of guarantee) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase, acquisitions or ownership by such
Person of any Capital Stock, bonds, notes, debentures or other securities or
assets issued or owned by any other Person. The Company shall be deemed to make
an Investment in an amount equal to the greater of the book value (as determined
in accordance with GAAP) and Fair Market Value of the net assets of any
Restricted Subsidiary (or, if neither the Company nor any of its Restricted
Subsidiaries has theretofore made an Investment in such Restricted Subsidiary,
in an amount equal to the Investments being made) at the time such Restricted
Subsidiary is designated an Unrestricted Subsidiary, and any property
transferred to an Unrestricted Subsidiary from the Company or any Restricted
Subsidiary shall be deemed an Investment valued at the greater of its book value
(as determined in accordance with GAAP) and its Fair Market Value at the time of
such transfer.
"Investment Grade" means BBB or higher by S&P or Baa3 or higher by Moody's
or the equivalent of such ratings by S&P or Moody's or in the event S&P or
Moody's shall cease rating the notes and the Company shall select any other
Rating Agency, the equivalent of such ratings by such other Rating Agency.
"Joint Venture" means any Person in which the Company or any of its
Restricted Subsidiaries owns 30% or more of the Voting Stock (other than as a
result of a Public Equity Offering).
83
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Maturity" when used with respect to the notes means the date on which the
principal of the notes becomes due and payable as therein provided or as
provided in the Indenture pursuant to which such notes were issued, whether at
Stated Maturity or on a redemption date or pursuant to a Change of Control
Purchase Offer or an Asset Sale Offer, and whether by declaration of
acceleration, call for redemption, purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. or any successor rating
agency.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions), any relocation expenses
incurred as a result thereof, any taxes paid or payable by the Company or any of
its Restricted Subsidiaries as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
required to be applied to the repayment of Indebtedness secured by a Lien on the
assets or assets that were the subject of such Asset Sale and any reserve for
adjustment or indemnity in respect of the sale price of such asset or assets in
each case established in accordance with GAAP.
"Net Property and Equipment" means, with respect to the Company, the
Consolidated property and equipment of the Company, net of accumulated
depreciation, determined in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the Series C
notes) of the Company or any of its Restricted Subsidiaries to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or assets
of the Company or any of its Restricted Subsidiaries.
"Note Guarantee" means any guarantee by a Subsidiary Guarantor of the
Company's obligations under the Indenture.
"Obligations" means any principal, premium, interest (including
post-petition interest), penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation governing any
Indebtedness.
"Pari Passu Indebtedness" means (a) with respect to the notes, Indebtedness
which ranks pari passu in right of payment to the notes, and (b) with respect to
any Note Guarantee, Indebtedness which ranks pari passu in right of payment to
such Note Guarantee.
"Permitted Consideration" means consideration consisting of any combination
of the following: (i) cash or Temporary Cash Investments, (ii) assets used or
intended for use in the Company's business as conducted on the date of the
Indenture, (iii) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the notes or any guarantee thereof) that are assumed by
the transferee of any such assets pursuant to a customary novation agreement
that releases the Company or such Restricted Subsidiary from further liability
and (iv) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received); provided that the
84
aggregate amount of such notes or other obligations received by the Company and
its Restricted Subsidiaries pursuant to (ii) through (iv) above after July 25,
1997 and held or carried at any date of determination shall not exceed $75
million.
"Permitted Indebtedness" means any of the following Indebtedness of the
Company or any Restricted Subsidiary, as the case may be:
(i) Indebtedness of the Company and guarantees of the Subsidiary
Guarantors under the Credit Agreement in an aggregate principal amount at
any one time outstanding not to exceed the greater of (x) $850 million less
mandatory repayments actually made in respect of any term Indebtedness
thereunder after the date of the Indenture (other than amounts refinanced
as permitted under the definition of the Credit Agreement) or (y) the
Borrowing Base Amount less mandatory repayments (other than amounts
refinanced as permitted under the definition of the Credit Agreement)
actually made in respect of any term Indebtedness thereunder after July 25,
1997;
(ii) Indebtedness of the Company under uncommitted bank lines of
credit; provided, however, that the aggregate principal amount of
Indebtedness incurred pursuant to clauses (i), (ii) and (x) of this
definition of "Permitted Indebtedness" does not exceed the greater of (x)
$850 million less mandatory repayments actually made in respect of any term
Indebtedness under the Credit Agreement after the date of the Indenture
(other than amounts refinanced as permitted under clause (xii) hereof) or
(y) the Borrowing Base Amount less mandatory repayments actually made in
respect of any term Indebtedness under the Credit Agreement after July 25,
1997 (other than amounts refinanced as permitted under clause (xii)
hereof);
(iii) Indebtedness of the Company evidenced by the notes and the Note
Guarantees with respect thereto under the Indenture;
(iv) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Indenture;
(v) obligations of the Company or any Restricted Subsidiary entered
into in the ordinary course of business (a) pursuant to Interest Rate
Agreements designed to protect against or manage exposure to fluctuations
in interest rates in respect of Indebtedness or retailer notes receivables,
which, if related to Indebtedness or such retailer notes receivables, do
not exceed the aggregate notional principal amount of such Indebtedness to
which such Interest Rate Agreements relate, or (b) under any Currency
Agreements in the ordinary course of business and designed to protect
against or manage exposure to fluctuations in foreign currency exchange
rates which, if related to Indebtedness, do not increase the amount of such
Indebtedness other than as a result of foreign exchange fluctuations;
(vi) Indebtedness of the Company owing to a Wholly Owned Restricted
Subsidiary or of any Restricted Subsidiary owing to the Company or any
Wholly Owned Restricted Subsidiary; provided that any disposition, pledge
or transfer of any such Indebtedness to a Person (other than the Company or
another Wholly Owned Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by the Company or Restricted Subsidiary, as
the case may be, not permitted by this clause (vi);
(vii) Indebtedness in respect of letters of credit, surety bonds and
performance bonds provided in the ordinary course of business;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business;
provided that such Indebtedness is extinguished within ten business days of
its incurrence;
(ix) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets;
(x) Indebtedness of the Company evidenced by commercial paper issued
by the Company; provided, however, that the aggregate principal amount of
Indebtedness incurred pursuant to clauses (i),
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(ii) and (x) of this definition of "Permitted Indebtedness" does not exceed
the greater of (x) $850 million less mandatory repayments actually made in
respect of any term Indebtedness under the Credit Agreement after the date
of the Indenture (other than amounts refinanced as permitted under clause
(xii) hereof) or (y) the Borrowing Base Amount less mandatory repayments
actually made in respect of any term Indebtedness under the Credit
Agreement after July 25, 1997 (other than amounts refinanced as permitted
under clause (xii) hereof);
(xi) Indebtedness of the Company pursuant to guarantees by the Company
or any Subsidiary Guarantor in connection with any Permitted Receivables
Financing; provided, however, that such Indebtedness shall not exceed 20%
of the book value of the Transferred Receivables or in the case of
receivables arising from direct financing leases, 30% of the book value
thereof;
(xii) any renewals, extensions, substitutions, refunding, refinancings
or replacements (each, a "refinancing") of any Indebtedness described in
clauses (ii), (iii), (iv) and (x) of this definition of "Permitted
Indebtedness," including any successive refinancings, so long as (A) the
aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing to an amount greater than such principal
amount plus the lesser of (x) the stated amount of any premium or other
payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced or (y) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of reasonable expenses of
the Company or any Subsidiary, as the case may be, incurred in connection
with such refinancing, (B) in the case of any refinancing of Pari Passu
Indebtedness or Subordinated Indebtedness, such new Indebtedness is made
pari passu with or subordinated to the notes to the same extent as the
Indebtedness being refinanced and (C) such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such
Indebtedness.
"Permitted Investment" means (i) Investment in any Wholly Owned Restricted
Subsidiary or any Investment in any Person by the Company or any Wholly Owned
Restricted Subsidiary as a result of which such Person becomes a Wholly Owned
Restricted Subsidiary or any Investment in the Company by a Wholly Owned
Restricted Subsidiary; (ii) intercompany Indebtedness to the extent permitted
under clause (vi) of the definition of "Permitted Indebtedness"; (iii) Temporary
Cash Investments; (iv) sales of goods and services on trade credit terms
consistent with the Company's past practices or otherwise consistent with trade
credit terms in common use in the industry; (v) Investments in direct financing
leases for equipment and real estate owned or leased by the Company and leased
to its customers in the ordinary course of business consistent with past
practice; (vi) Investments in Joint Ventures related to the Company's expansion
of its retail operations, not to exceed $50 million at any one time outstanding;
(vii) Investments in Investee Stores either in the form of equity, loans or
other extensions of credit; provided that any such Investment may only be made
if the amount thereof, when added to the aggregate outstanding amount of
Permitted Investments in Investee Stores (excluding for purposes of this clause
(vii) any Investments made pursuant to clause (v)), after giving effect to any
loan repayments or returns of capital in respect of any Permitted Investment in
Investee Stores, does not exceed 12.5% of Consolidated Total Assets at the time
of determination; (viii) Investments in a Qualified Finance Subsidiary in
connection with a Qualified TIPS Transaction; (ix) other Investments made since
July 25, 1997, in addition to those permitted under (i) through (viii) above, in
an aggregate amount not to exceed $10 million and (x) any substitutions or
replacements of any Investment so long as the aggregate amount of such
Investment is not increased by such substitution or replacement.
"Permitted Liens" means, with respect to any Person:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes, assessments, governmental charges or levies not yet
delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance; (4) security for the
performance of tenders, leases
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(including, without limitation, statutory and common law landlord's liens)
and contracts (other than contracts for the payment of money); (5) zoning
restrictions, easements, licenses, reservations, title defects, rights of
others for rights of way, utilities, sewers, electric lines, telephone or
telegraph lines, and other similar purposes, provisions, covenants,
conditions, waivers and restrictions on the use of property or minor
irregularities of title (and, with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created,
assumed or permitted to exist and arising by, through or under a landlord
or owner of the leased property, with or without consent of the lessee),
none of which materially impairs the use of any parcel of property material
to the operation of the business of the Company or any Restricted
Subsidiary or the value of such property for the purpose of such business;
(6) deposits to secure public or statutory obligations; (7) operation of
law in favor of growers, dealers and suppliers of fresh fruits and
vegetables, carriers, mechanics, materialmen, laborers, employees or
suppliers, incurred in the ordinary course of business for sums which are
not yet delinquent or are being contested in good faith by negotiations or
by appropriate proceedings which suspend the collection thereof; (8) the
grant by the Company to licensees, pursuant to security agreements, of
security interests in trademarks and goodwill, patents and trade secrets of
the Company to secure the damages, if any, of such licensees, resulting
from the rejection of the license of such licensees in a bankruptcy,
reorganization or similar proceeding with respect to the Company; or (9)
security for surety or appeal bonds;
(c) any Lien on any property or assets of a Restricted Subsidiary in
favor of the Company or any Wholly Owned Restricted Subsidiary;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Restricted Subsidiary; provided that
such Lien does not extend to any assets of the Company or any Restricted
Subsidiary other than the assets acquired in the transaction resulting in
such Acquired Indebtedness being incurred by the Company or Restricted
Subsidiary, as the case may be;
(e) any Lien to secure the performance of bids, trade contracts,
letters of credit and other obligations of a like nature and incurred in
the ordinary course of business of the Company or any Restricted
Subsidiary;
(f) any Lien securing any Interest Rate Agreements or Currency
Agreements permitted to be incurred pursuant to clause (v) of the
definition of "Permitted Indebtedness" or any collateral for the
Indebtedness to which such Interest Rate Agreements or Currency Agreements
relate;
(g) any Lien securing the notes;
(h) any Lien on an asset securing Indebtedness (including Capital
Lease Obligations) incurred or assumed for the purpose of financing all or
any part of the cost of acquiring or constructing such asset; provided that
such Lien covers only such asset and attaches concurrently or within 180
days after the acquisition or completion of construction thereof;
(i) any Lien on real or personal property securing Capital Lease
obligations of the Company or any Restricted Subsidiary as lessee with
respect to such real or personal property to the extent such Indebtedness
can be incurred pursuant to "Certain Covenants -- Limitation on
Indebtedness" other than as Permitted Indebtedness;
(j) any Lien on a Financing Receivable or other receivable that is
transferred in a Permitted Receivables Financing;
(k) any Lien consisting of any pledge to any Person of Indebtedness
owed by any Restricted Subsidiary to the Company or to any Wholly Owned
Restricted Subsidiary; provided, that (i) such Restricted Subsidiary is a
Subsidiary Guarantor and (ii) the principal amount pledged does not exceed
the Indebtedness secured by such pledge;
(l) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clause (a) so long as no
additional collateral is granted as security thereby.
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"Permitted Receivables Financing" means any transaction involving the
transfer (by way of sale, pledge or otherwise) by the Company or any of its
Restricted Subsidiaries of receivables to any other Person, provided that after
giving effect to such transaction the sum of (i) the aggregate uncollected
balances of the receivables so transferred ("Transferred Receivables") plus (ii)
the aggregate amount of all collections on Transferred Receivables theretofore
received by the seller but not yet remitted to the purchaser, in each case at
the date of determination, would not exceed $600 million.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the date of
the Indenture, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means a primary or secondary public offering of
equity securities of the Company or any Restricted Subsidiary of the Company, in
each case pursuant to an effective registration statement under the Securities
Act with net cash proceeds of at least $50 million.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Qualified Finance Subsidiary" means a Subsidiary of the Company
constituting a "finance subsidiary," within the meaning of Rule 3a-5 under the
Investment Company Act of 1940, as amended, formed for the purpose of engaging
in a Qualified TIPS Transaction.
"Qualified TIPS Transaction" means an issuance by a Qualified Finance
Subsidiary of preferred trust securities or similar securities in respect of
which any dividends, liquidation preference or other obligations under such
securities are guaranteed by the Company to the extent required by the
Investment Company Act of 1940, as amended, or customary transactions of such
type.
"Qualified Subordinated Indebtedness" means Subordinated Indebtedness of
the Company to a Qualified Finance Subsidiary incurred in connection with a
Qualified TIPS Transaction.
"Rating Agency" means any of (i) S&P, (ii) Moody's or (iii) if S&P or
Moody's or both shall not make a rating of the notes publicly available, a
security rating agency or agencies, as the case may be, nationally recognized in
the United States, selected by the Company, which shall be substituted for S&P
or Moody's or both, as the case may be, and, in each case, any successors
thereto.
"Rating Category" means (i) with respect to S&P, any of the following
categories: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or equivalent successor
categories); (ii) with respect to Moody's, any of the following categories: Aaa,
Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and
(iii) the equivalent of any such category of S&P or Moody's used by another
Rating Agency. In determining whether the rating of the notes has decreased by
one or more gradation, gradations within Rating Categories (+ and - for S&P; 1,
2 and 3 for Moody's; or the equivalent gradations for another Rating Agency)
shall be taken into account (e.g., with respect to S&P, a decline in rating from
BB+ to BB, as well as from BB- to B+, will constitute a decrease of one
gradation).
"Rating Decline" means the occurrence on, or within 90 days after, the date
of public notice of the occurrence of a Change of Control or of the intention of
the Company or Persons controlling the Company to effect a Change of Control
(which period shall be extended so long as the rating of the notes is under
publicly announced consideration for possible downgrade by any of the Rating
Agencies) of the following: (i) if the notes are rated by either Rating Agency
as Investment Grade immediately prior to the beginning of such period, the
rating of the notes by both Rating Agencies shall be below Investment Grade; or
(ii) if the notes are rated below Investment Grade by both Rating Agencies
immediately prior to the beginning of such period,
88
the rating of the notes by either Rating Agency shall be decreased by one or
more gradations (including gradations within Rating Categories as well as
between Rating Categories).
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the notes or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
"Restricted Subsidiary" means any Subsidiary of the Company that is not (x)
an Unrestricted Subsidiary or (y) a Qualified Finance Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Notes" means the 10- 1/8% Senior Notes, due April 1, 2008, of the
Company.
"Significant Subsidiary" of the Company means any Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1.02(w) of Regulation S-X
under the Securities Act.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill
Inc., a New York corporation, or any successor rating agency.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon means the dates specified in such Indebtedness
as the fixed date on which the principal of or premiums on such Indebtedness or
such installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the notes.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Restricted Subsidiaries, or by the Company and
one or more other Restricted Subsidiaries.
"Subsidiary Guarantor" means, in each case as applicable, each Wholly Owned
Restricted Subsidiary of the Company and each such subsidiary's Wholly Owned
Restricted Subsidiaries as of the date of the Indenture and any Wholly Owned
Restricted Subsidiary that is required pursuant to the "Additional Guarantees"
covenant, on or after the date of the Indenture, to execute a Note Guarantee
pursuant to the Indenture until a successor replaces any such party pursuant to
the applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Tangible Assets" means the total of all the assets appearing on the
Consolidated balance sheet of a majority-owned or Wholly Owned Restricted
Subsidiary of the Company less the following: (1) intangible assets including,
without limitation, items such as goodwill, trademarks, trade names, patents and
unamortized debt discount and expense; and (2) appropriate adjustments on
account of minority interests of other Persons holding stock in any such
majority-owned Restricted Subsidiary of the Company.
"Temporary Cash Investments" means (i) any evidence of Indebtedness issued
by the United States, or an instrumentality or agency thereof, and guaranteed
fully as to principal, premium, if any, and interest by the United States; (ii)
any certificate of deposit issued by, or time deposit of, a financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million, whose
debt has a rating, at the time of which any investment therein is made, of "A"
(or higher) according to Moody's or "A" (or higher) according to S&P; (iii)
commercial paper issued by a corporation (other than an Affiliate or Restricted
Subsidiary of the Company) organized and existing under the laws of the United
States with a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's or "A-1 (or higher) according to S&P;
(iv) any money market deposit accounts issued or offered by a financial
institution that is a member of the Federal Reserve System having capital and
surplus in excess of $500 million; (v) short term tax-exempt bonds with a
rating, at the time as of which any investment is made therein, of "Aa3" (or
higher) according to Moody's or "AA-" (or higher)
89
according to S&P, (vi) shares in a mutual fund, the investment objectives and
policies of which require it to invest substantially in the investments of the
type described in clause (i) through (v); and (vii) repurchase and reverse
repurchase obligations with the term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) entered into with any
financial institution meeting the qualifications specified in clause (ii);
provided that in the case of clauses (i), (ii), (iii) and (v), such investment
matures within one year from the date of acquisition thereof.
"Transferred Receivables" has the meaning specified in the definition of
"Permitted Receivables Financing" set forth herein.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary (i) has no Indebtedness other than
Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any of its Restricted Subsidiaries unless the
terms of any such agreement, contract, arrangement or understanding are no less
favorable to the Company or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company; (iii)
is a Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (a) to subscribe for
additional Equity Interests or (b) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; (iv) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries; (v) has at least one member of its board of directors
who is not a director or executive officer of the Company or any of its
Restricted Subsidiaries and has at least one executive officer who is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries; and (vi) does not directly or through any of its Subsidiaries own
any Capital Stock of, or own or hold any Lien on any property of, the Company or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Limitations on Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Certain
Covenants -- Limitations on Indebtedness," the Company shall be in default of
such covenant). The Board of Directors may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption "Certain
Covenants -- Limitation on Indebtedness" and (ii) no Default or Event of Default
would be in existence following such designation.
"Voting Stock" means stock or securities of the class or classes pursuant
to which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a Person (irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock (other than directors, qualifying shares) of which is owned by the
Company or another Wholly Owned Restricted Subsidiary.
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BOOK-ENTRY; DELIVERY AND FORM
We will issue the exchange notes in the form of a Global Note. The Global
Note will be deposited with, or on behalf of, the clearing agency registered
under the Exchange Act that is designated to act as depositary for the notes and
registered in the name of the depositary or its nominee. The DTC will be the
initial depositary.
Except as set forth below, a Global Note may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee.
DTC has advised us that DTC is:
- a limited-purpose trust company organized under the laws of the State of
New York;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include:
- securities brokers and dealers;
- banks;
- trust companies;
- clearing corporations; and
- certain other organizations.
Access to DTC's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
We expect that pursuant to the procedures established by DTC (1) upon the
issuance of a Global Note, DTC will credit, on its book-entry registration and
transfer system, the respective principal amount of the individual beneficial
interests represented by the Global Note to the accounts of participants and (2)
ownership of beneficial interests in a Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by DTC (with respect to participants' interests) and the participants
(with respect to the owners of beneficial interests in the Global Note other
than participants). The accounts to be credited will be designated by the
initial purchasers of the beneficial interests. Ownership of beneficial
interests in a Global Note is limited to participants or persons that may hold
interests through participants.
So long as DTC or its nominee is the registered holder and owner of a
Global Note, DTC or its nominee, as the case may be, will be considered the sole
legal owner of the notes represented by the Global Note for all purposes under
the indenture and the notes. Except as set forth below, owners of beneficial
interests in a Global Note will not be entitled to receive definitive notes and
will not be considered to be the owners or holders of any notes under the Global
Note. We understand that under existing industry practice, in the event an owner
of a beneficial interest in a Global Note desires to take any action that DTC,
as the holder of the Global Note, is entitled to take, DTC would authorize the
participants to take the action, and that participants would authorize
beneficial owners owning through the participants to take the action or would
otherwise act upon the instructions of beneficial owners owning through them. No
beneficial owner of an interest in a Global Note will be able to transfer the
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the indenture and, if applicable, those of Euroclear
and Clearstream Banking.
91
We will make payments of the principal of, and interest on, the notes
represented by a Global Note registered in the name of and held by DTC or its
nominee to DTC or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the Global Note as shown on the records of DTC or its
nominee. We also expect that payments by participants and indirect participants
to owners of beneficial interests in a Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for accounts of customers registered in
the names of nominees for these customers. The payments, however, will be the
responsibility of the participants and indirect participants, and neither we,
the Trustee nor any paying agent will have any responsibility or liability for:
- any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in a Global Note;
- maintaining, supervising or reviewing any records relating to the
beneficial ownership interests;
- any other aspect of the relationship between DTC and its participants; or
- the relationship between the participants and indirect participants and
the owners of beneficial interests in a Global Note.
Unless and until it is exchanged in whole or in part for definitive notes,
a Global Note may not be transferred except as a whole by DTC to a nominee of
DTC or by a nominee of DTC to DTC or another nominee of DTC.
Participants in DTC will effect transfers with other participants in the
ordinary way in accordance with DTC rules and will settle transfers in same-day
funds. Participants in Euroclear and Clearstream Banking will effect transfers
with other participants in the ordinary way in accordance with the rules and
operating procedures of Euroclear and Clearstream Banking, as applicable. If a
holder requires physical delivery of a definitive note for any reason, including
to sell notes to persons in jurisdictions which require physical delivery or to
pledge notes, the holder must transfer its interest in a Global Note in
accordance with the normal procedures of DTC and the procedures set forth in the
indenture.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream Banking participants, on the other,
will be effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream Banking, as the case may be, by its respective depositary; however,
these cross-market transactions will require delivery of instructions to
Euroclear or Clearstream Banking, as the case may be, by the counterparty in the
system in accordance with its rules and procedures and within its established
deadlines (Brussels time). Euroclear or Clearstream Banking, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in a Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream Banking
participants may not deliver instructions directly to the depositories for
Euroclear or Clearstream Banking.
Because of time zone differences, the securities account of a Euroclear or
Clearstream Banking participant purchasing an interest in a Global Note from a
DTC participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream Banking, as the case
may be) immediately following the DTC settlement date, and the credit of any
transactions interests in a Global Note settled during the processing day will
be reported to the relevant Euroclear or Clearstream Banking participant on that
day. Cash received in Euroclear or Clearstream Banking as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream Banking
participant to a DTC participant will be received with value on the DTC
settlement date, but will be available in the relevant Euroclear or Clearstream
Banking cash account only as of the business day following settlement in DTC.
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We expect that DTC will take any action permitted to be taken by a holder
of notes (including the presentation of notes for exchange as described below)
only at the direction of one or more participants to whose accounts at the DTC
interests in a Global Note are credited and only in respect of the portion of
the aggregate principal amount of the notes as to which the participant or
participants has or have given direction. However, if there is an event of
default under the notes, DTC will exchange the Global notes for definitive
notes, which it will distribute to its participants. These definitive notes are
subject to certain restrictions on registration of transfers and will bear
appropriate legends restricting their transfer. Although we expect that DTC,
Euroclear and Clearstream Banking will agree to the foregoing procedures in
order to facilitate transfers of interests in Global Notes among participants of
DTC, Euroclear, and Clearstream Banking, DTC, Euroclear and Clearstream Banking
are under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time. Neither we nor the trustee
have any responsibility for the performance by DTC, Euroclear or Clearstream
Banking or their participants or indirect participants of their obligations
under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
Global Notes or ceases to be a clearing agency registered under the Securities
Exchange Act and we do not appoint a successor depositary within 90 days, we
will issue definitive notes in exchange for the Global Notes. The definitive
notes will be subject to certain restrictions on registration of transfers and
will bear appropriate legends concerning these restrictions.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. Broker-dealers
may use this prospectus, as it may be amended or supplemented from time to time,
in connection with the resale of exchange notes received in exchange for old
notes where the broker-dealer acquired the old notes as a result of
market-making activities or other trading activities. We have agreed that for a
period of up to 180 days after the date that this registration statement is
declared effective by the SEC, we will make this prospectus, as amended or
supplemented, available to any broker-dealer that requests it in the letter of
transmittal for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other persons. Broker-dealers may sell exchange notes
received by broker-dealers for their own account pursuant to the exchange offer
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to the prevailing market prices or negotiated
prices. Broker-dealers may resell exchange notes directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any broker-dealer and/or the purchasers of the
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of the exchange notes may be deemed
to be "underwriters" within the meaning of the Securities Act and any profit on
any resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify you
against liabilities under the Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer agrees to notify us before using
the prospectus in connection with the sale or transfer of exchange notes. The
broker-dealer further acknowledges and agrees that, upon receipt of notice from
us of the happening of any event which makes any statement in the prospectus
untrue in any material respect or which requires the making of any changes in
the prospectus to make the statements in the prospectus not misleading or which
may impose upon us disclosure obligations that my have a material adverse effect
on us, which notice
93
we agree to deliver promptly to the broker-dealer, the broker-dealer will
suspend use of the prospectus until we have notified the broker-dealer that
delivery of the prospectus may resume and have furnished copies of any amendment
or supplement to the prospectus to the broker-dealer.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material United States federal income and
estate tax considerations relating to the exchange of the old notes for the
exchange notes in this exchange offer and relevant to the ownership and
disposition of the exchange notes by holders thereof, but does not purport to be
a complete analysis of all the potential tax considerations relating thereto.
This summary is based upon the provisions of the Internal Revenue Code of 1986,
as amended, Treasury Regulations promulgated under the Internal Revenue Code,
administrative rulings and judicial decisions as of the date hereof. These
authorities may be changed, perhaps retroactively, so as to result in United
States federal income and estate tax consequences different from those set forth
below. We have not sought any ruling from the Internal Revenue Service or an
opinion of counsel with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance that the
Internal Revenue Service will agree with such statements and conclusions.
This summary assumes that the notes are held as capital assets. This
summary also does not address the tax considerations arising under the laws of
any foreign, state or local jurisdiction. In addition, this discussion does not
address all tax considerations that may be applicable to holders' particular
circumstances or to holders that may be subject to special tax rules, including,
without limitation:
- holders subject to the alternative minimum tax;
- banks, insurance companies, or other financial institutions;
- tax-exempt organizations;
- dealers in securities or commodities;
- traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
- holders whose "functional currency" is not the United States dollar;
- persons that will hold the notes as a position in a hedging transaction,
"straddle", "conversion transaction" or other risk reduction transaction;
or
- persons deemed to sell the notes under the constructive sale provisions
of the Internal Revenue Code.
If a partnership holds notes, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership holding our
notes, you should consult your tax advisor regarding the tax consequences of the
ownership and disposition of the notes.
THIS SUMMARY OF CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT YOUR
TAX ADVISOR WITH RESPECT TO THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX
LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER
THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY
STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
THE EXCHANGE
The exchange of the old notes for the exchange notes will not be treated as
an "exchange" for federal income tax purposes, because the exchange notes will
not be considered to differ materially in kind or extent from the old notes.
Accordingly, the exchange of old notes for exchange notes will not be a taxable
event to
94
holders for federal income tax purposes. Moreover, the exchange notes will have
the same tax attributes as the old notes for which they were exchanged and the
same tax consequences to holders as the old notes for which they were exchanged
have to holders, including, without limitation, the same issue price, adjusted
tax basis and holding period. Therefore, references to "notes" apply equally to
the exchange notes and the old notes.
CONSEQUENCES TO U.S. HOLDERS
The following is a summary of the United States federal tax consequences
that will apply to you if you are a U.S. Holder of the notes. Certain
consequences to "non-U.S. Holders" of the notes are described under
"-- Consequences to Non-U.S. Holders" below. "U.S. Holder" means a beneficial
owner of a note that is:
- a citizen or resident of the United States, as determined for federal
income tax purposes;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust that (1) is subject to the supervision of a court within the
United States and the control of one or more United States persons or (2)
has a valid election in effect under applicable Treasury Regulations to
be treated as a United States person.
PAYMENTS OF INTEREST
Stated interest on the notes will generally be taxable to you as ordinary
income at the time it is paid or accrues in accordance with your method of
accounting for tax purposes.
We intend to take the position that the stated redemption price at maturity
of the notes did not exceed the issue price of the notes by more than a
statutorily defined de minimis amount and, therefore, that the notes were not
issued with original issue discount ("OID"). We cannot assure you, however, that
the Series C notes were not issued with OID for the reasons described below.
The "issue price" of a note is the first price at which a substantial
amount of such notes is sold for money, excluding sales to underwriters,
placement agents or wholesalers. The "stated redemption price at maturity" of a
note is the amount payable at maturity (other than qualified stated interest).
In connection with the initial issuance of the Series C notes, a delayed
draw special payment was made to compensate purchasers of such notes for
agreeing to a delayed closing date. The Internal Revenue Service may take a
position that the issue price of the Series C notes equals the initial offering
price reduced by the delayed draw special payment, and, accordingly, the Series
C notes were issued with OID. We have not obtained any ruling from the IRS or
any opinion of counsel on this matter. If the Series C notes were deemed by the
Internal Revenue Service to be issued with OID, such OID would be equal to the
difference between their issue price and their stated redemption price at
maturity.
Generally, if the Series C notes were treated as being issued with OID, a
holder of the Series C notes, or of the exchange notes received for the Series C
notes exchanged in the exchange offer, would be required to include the OID in
ordinary income for U.S. federal income tax purposes as it accrues. The OID will
accrue daily in accordance with a constant yield method based on a compounding
of interest. The OID allocable to any accrual period will equal the product of
the adjusted issue price of the Series C notes, or of the exchange notes
received for the Series C notes exchanged in the exchange offer, at the
beginning of such period and the notes' yield to maturity, less any qualified
stated interest allocable to that accrual period. The "adjusted issue price" of
the Series C notes, or of the exchange notes received for the Series C notes
exchanged in the exchange offer, as of the beginning of any accrual period will
equal the issue price of such notes increased by OID, if any, previously
includable in income and decreased by any payments under such notes (other than
qualified stated interest). Because OID will accrue and be includable in income
at least annually and no payments other than qualified stated interest will be
made under the Series C notes, or the exchange notes received for the Series C
notes exchanged in the exchange offer, the adjusted issue price of such notes
would
95
increase throughout their life if the notes were deemed issued with OID. OID
includable in income, if any, will therefore increase for each successive
accrual period.
The remainder of this summary assumes that the Series C notes were not
issued with OID.
MARKET DISCOUNT
If a U.S. Holder acquires a note at a cost that is less than its issue
price, the amount of such difference is treated as "market discount" for federal
income tax purposes, unless such difference is less than .0025 multiplied by the
stated redemption price at maturity multiplied by the number of complete years
to maturity (from the date of acquisition).
Under the market discount rules of the Internal Revenue Code, you are
required to treat any gain on the sale, retirement or other disposition of, a
note as ordinary income to the extent of the accrued market discount that has
not previously been included in income. If you dispose of a note with market
discount in certain otherwise nontaxable transactions, you must include accrued
market discount as ordinary income as if you had sold the note at its then fair
market value.
In general, the amount of market discount that has accrued is determined on
a ratable basis. A U.S. Holder may, however, elect to determine the amount of
accrued market discount on a constant yield to maturity basis. This election is
made on a note-by-note basis and is irrevocable.
With respect to notes with market discount, you may not be allowed to
deduct immediately a portion of the interest expense on any indebtedness
incurred or continued to purchase or to carry the notes. You may elect to
include market discount in income currently as it accrues, in which case the
interest deferral rule set forth in the preceding sentence will not apply. This
election will apply to all debt instruments that you acquire on or after the
first day of the first taxable year to which the election applies and is
irrevocable without the consent of the Internal Revenue Service. A U.S. Holder's
tax basis in a note will be increased by the amount of market discount included
in the holder's income under the election.
AMORTIZABLE BOND PREMIUM
If a U.S. Holder purchases a note for an amount in excess of the stated
redemption price at maturity, the holder will be considered to have purchased
the note with "amortizable bond premium" equal in amount to the excess.
Generally, a U.S. Holder may elect to amortize the premium as an offset to
interest income otherwise required to be included in income in respect of the
note during the taxable year, using a constant yield method similar to that
described above, over the remaining term of the note (where the note is not
redeemable prior to its maturity date). A U.S. Holder who elects to amortize
bond premium must reduce the holder's tax basis in the note by the amount of the
premium used to offset interest income as set forth above. An election to
amortize bond premium applies to all taxable debt obligations then owned and
thereafter acquired by the holder and may be revoked only with the consent of
the Internal Revenue Service.
DISPOSITION OF NOTES
Upon the sale, exchange, redemption or other disposition of a note, you
generally will recognize taxable gain or loss equal to the difference between
(i) the sum of cash plus the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued but unpaid interest, which is treated as interest as described above)
and (ii) your adjusted tax basis in the note. A U.S. Holder's adjusted tax basis
in a note generally will equal the cost of the note to such Holder, increased by
market discount previously included in income in respect of the note and reduced
by (a) any amortizable bond premium in respect of the note which has been taken
into account and (b) any principal payments received by such Holder.
Gain or loss recognized on the disposition of a note generally will be
capital gain or loss, except as described under "Market Discount" above, and
will be long-term capital gain or loss if, at the time of such disposition, the
U.S. Holder's holding period for the note is more than 12 months. In the case of
a non-
96
corporate U.S. holder, long-term capital gain is subject to tax at a reduced
rate. The deductibility of capital losses by U.S. Holders is subject to
limitations.
ADDITIONAL INTEREST
We intend to take the position for United States federal income tax
purposes that any payments of Additional Interest, as described above under
"Exchange Offer -- Additional Interest," should be taxable to you as Additional
Interest income when received or accrued, in accordance with your method of tax
accounting. This position is based in part on the assumption that as of the date
of issuance of the notes, the possibility that Additional Interest will have to
be paid is a "remote" or "incidental" contingency within the meaning of
applicable Treasury Regulations. Our determination that such possibility is a
remote or incidental contingency is binding on you, unless you explicitly
disclose that you are taking a different position to the Internal Revenue
Service on your tax return for the year during which you acquire the note.
However, the Internal Revenue Service may take a contrary position from that
described above, which could affect the timing and character of both your income
from the notes and our deduction with respect to the payments of Additional
Interest.
If we do fail to register the exchange notes for sale to the public, you
should consult your tax advisor concerning the appropriate tax treatment of the
payment of Additional Interest on the notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal and interest on and the proceeds of certain sales of notes
unless you are an exempt recipient. A backup withholding tax will apply to such
payments if you fail to provide your taxpayer identification number or
certification of exempt status or have been notified by the Internal Revenue
Service that payments to you are subject to backup withholding.
Any amounts withheld under the backup withholding rules will generally be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is properly furnished to the
Internal Revenue Service on a timely basis.
CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of the United States federal tax consequences
that will apply to you if you are a non-U.S. Holder of notes. The term "non-U.S.
Holder" means a beneficial owner of a note that is not a U.S. Holder.
Special rules may apply to certain non-United States holders such as
"controlled foreign corporations," "passive foreign investment companies" and
"foreign personal holding companies." Such entities should consult their own tax
advisors to determine the United States federal, state, local and other tax
consequences that may be relevant to them.
PAYMENTS OF INTEREST
United States federal income or withholding taxes will not apply to any
payment to you of interest on a note provided that:
- you do not actually or constructively own 10% or more (within the meaning
of section 871(h)(3) of the Internal Revenue Code) of the total combined
voting power of all classes of our stock that are entitled to vote;
- you are not a controlled foreign corporation that is related to us
through stock ownership;
- you are not a bank whose receipt of interest on a note is described in
section 881(c)(3)(A) of the Internal Revenue Code; and
97
- (a) you provide your name and address, and certify, under penalties of
perjury, that you are not a United States person (which certification may
be made on an Internal Revenue Service Form W-8BEN) or (b) a securities
clearing organization, bank, or other financial institution that holds
customers' securities in the ordinary course of its business holds the
note on your behalf and certifies, under penalties of perjury, that it
has received Internal Revenue Service Form W-8BEN from you or from
another qualifying financial institution intermediary, and provides a
copy of the Internal Revenue Service Form W-8BEN. If the notes are held
by or through certain foreign intermediaries or certain foreign
partnerships, such foreign intermediaries or partnerships must also
satisfy the certification requirements of applicable Treasury
Regulations.
If you cannot satisfy the requirements described above, payments of
interest will be subject to a 30% United States federal withholding tax, unless
you provide us with a properly executed (1) Internal Revenue Service Form W-8BEN
claiming an exemption from or reduction in withholding under the benefit of an
applicable tax treaty or (2) Internal Revenue Service Form W-8ECI stating that
interest paid on the note is not subject to withholding tax because it is
effectively connected with your conduct of a trade or business in the United
States.
If you are engaged in a trade or business in the United States and interest
on a note is effectively connected with the conduct of that trade or business,
you will be required to pay United States federal income tax on that interest on
a net income basis (although exempt from the 30% withholding tax provided the
certification requirement described above is met) in the same manner as if you
were a United States person as defined under the Internal Revenue Code, except
as otherwise provided by an applicable tax treaty. In addition, if you are a
foreign corporation, you may be subject to a branch profits tax equal to 30% (or
lower applicable treaty rate) of your earnings and profits for the taxable year,
subject to adjustments, that are effectively connected with your conduct of a
trade or business in the United States. For this purpose, interest will be
included in the earnings and profits of such foreign corporation.
SALE, EXCHANGE OR OTHER TAXABLE DISPOSITION OF NOTES
Any gain realized upon the sale, exchange or other taxable disposition of a
note (except with respect to accrued and unpaid interest, which would be taxable
as described above) generally will not be subject to United States federal
income tax unless:
- that gain is effectively connected with your conduct of a trade or
business in the United States;
- you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other
conditions are met; or
- you are subject to Internal Revenue Code provisions applicable to certain
United States expatriates.
A holder described in the first bullet point above will be required to pay
United States federal income tax on the net gain derived from the sale, except
as otherwise required by an applicable tax treaty, and if such holder is a
foreign corporation, it may also be required to pay a branch profits tax at a
30% rate or a lower rate if so specified by an applicable income tax treaty. A
holder described in the second bullet point above will be subject to a 30%
United States federal income tax on the gain derived from the sale, which may be
offset by United States source capital losses, even though the holder is not
considered a resident of the United States.
UNITED STATES FEDERAL ESTATE TAX
The United States federal estate tax will not apply to the notes owned by
you at the time of your death, provided that (1) you do not own actually or
constructively (within the meaning of the Internal Revenue Code and the Treasury
Regulations) 10% or more of the total combined voting power of all classes of
our voting stock and (2) interest on the note would not have been, if received
at the time of your death, effectively connected with your conduct of a trade or
business in the United States.
98
INFORMATION REPORTING AND BACKUP WITHHOLDING
The amount of interest paid to you on the note and the amount of tax
withheld, if any, will generally be reported to you and the Internal Revenue
Service. You will generally not be subject to backup withholding with respect to
payments that we make to you provided that you have made appropriate
certifications as to your foreign status, or you otherwise establish an
exemption.
You will generally not be subject to backup withholding or information
reporting with respect to any payment of the proceeds of the sale of a note
effected outside the United States by a foreign office of a foreign "broker" (as
defined in applicable Treasury Regulation), provided that such broker:
- derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States,
- is not a controlled foreign corporation for United States federal income
tax purposes, and
- is not a foreign partnership that, at any time during its taxable year,
has more than 50% of its income or capital interests owned by United
States persons or is engaged in the conduct of a United States trade or
business.
You will be subject to information reporting, but not backup withholding,
with respect to any payment of the proceeds of a sale of a note effected outside
the United States by a foreign office of any other broker unless such broker has
documentary evidence in its records that you are not a United States person and
certain other conditions are met, or you otherwise establish an exemption. You
will be subject to backup withholding and information reporting with respect to
any payment of the proceeds of a sale of a note effected by the United States
office of a broker unless you properly certify under penalties of perjury as to
your foreign status and certain other conditions are met or you otherwise
establish an exemption.
Currently applicable Treasury Regulations establish reliance standards with
regard to the certification requirements described above.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your United States federal income tax liability
provided the required information is properly furnished to the Internal Revenue
Service on a timely basis.
LEGAL MATTERS
Certain legal matters in connection with the notes offered hereby will be
passed upon for us by Latham & Watkins, San Francisco, California and McAfee &
Taft, Oklahoma City, Oklahoma.
99
INDEPENDENT AUDITORS
Our consolidated financial statements as of December 30, 2000 and December
25, 1999 and for each of the three years in the period ended December 30, 2000
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein.
AVAILABLE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended. Accordingly, we file annual, quarterly and periodic
reports, proxy statements and other information with the SEC relating to our
business, financial statements and other matters (File No. 001-08140). You may
read and copy any documents we have filed with the SEC at prescribed rates at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549.
You can obtain copies of these materials at prescribed rates by writing to the
SEC's Public Reference Section at the address set forth above, or by calling
(800) SEC-0330. Our SEC filings are also available to you free of charge at the
SEC's web site at http://www.sec.gov. Information contained in our web site is
not part of this prospectus.
INCORPORATION BY REFERENCE
We have elected to "incorporate by reference" certain information into this
prospectus. By incorporating by reference, we can disclose important information
to you by referring you to another document we have filed with the SEC. The
information incorporated by reference is deemed to be part of this prospectus,
except for information incorporated by reference that is superseded by
information contained in this prospectus. This prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC:
FLEMING SEC FILINGS (FILE NO. 001-08140) FILED ON
---------------------------------------- --------
Annual Report on Form 10-K (including information
specifically incorporated by reference into our Form 10-K
from our 2000 Annual Report to Stockholders and Proxy
Statement for our 2001 Annual Meeting of Stockholders).... March 23, 2001
Amended Annual Report on Form 10-K/A........................ March 23, 2001
Quarterly Report on Form 10-Q for the 40 weeks ended October
6, 2001................................................... November 15, 2001
Quarterly Report on Form 10-Q for the 28 weeks ended July
14, 2001.................................................. August 24, 2001
Quarterly Report on Form 10-Q for the 16 weeks ended April
21, 2001.................................................. May 29, 2001
Current Report on Form 8-K.................................. November 7, 2001
Current Report on Form 8-K.................................. October 15, 2001
Current Report on Form 8-K.................................. July 12, 2001
Current Report on Form 8-K.................................. March 16, 2001
Current Report on Form 8-K.................................. March 13, 2001
We are also incorporating by reference all other reports that we file with
the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
between the date of this prospectus and the date of the completion of the
exchange offer.
Our trademarks, service marks and trade names include "Fleming," "FlexPro,"
"FlexStar," "FlexMate," "Piggly Wiggly," "Sentry," "Super 1 Foods," "Festival
Foods," "Jubilee Foods," "Jamboree Foods," "MEGAMARKET," "Shop 'N Kart,"
"American Family," "ABCO Desert Market," "Big Star," "Big T," "Buy for Less,"
"County Pride Markets," "Rainbow Foods," "Red Fox," "Shop N Bag," "Super Duper,"
"Super Foods," "Super Thrift," "Thriftway," "Value King," "PWPETRO," "Piggly
Wiggly xpress," "Big Bear" and "Big Dollar." This prospectus also contains
trademarks, service marks, copyrights and trade names of other companies.
100
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for the years ended
December 26, 1998, December 25, 1999, and December 30,
2000...................................................... F-3
Consolidated Balance Sheets at December 25, 1999 and
December 30, 2000......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 26, 1998, December 25, 1999, and December 30,
2000...................................................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 26, 1998, December 25, 1999, and
December 30, 2000......................................... F-6
Notes to Consolidated Financial Statements for the years
ended December 26, 1998, December 25, 1999, and December
30, 2000.................................................. F-7
Independent Accountants' Review Report...................... F-39
Consolidated Condensed Statements of Operations -- 12 Weeks
ended September 30, 2000 and October 6, 2001.............. F-40
Consolidated Condensed Statements of Operations -- 40 Weeks
ended September 30, 2000 and October 6, 2001.............. F-41
Consolidated Condensed Balance Sheets -- December 30, 2000
and October 6, 2001....................................... F-42
Consolidated Condensed Statements of Cash Flows -- 40 Weeks
ended September 30, 2000 and October 6, 2001.............. F-43
Notes to Consolidated Condensed Financial Statements........ F-44
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Fleming Companies, Inc.
We have audited the accompanying consolidated balance sheets of Fleming
Companies, Inc. and subsidiaries as of December 25, 1999 and December 30, 2000,
and the related consolidated statements of operations, cash flows, and
shareholders' equity for each of the three years in the period ended December
30, 2000. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Fleming Companies,
Inc. and subsidiaries at December 25, 1999 and December 30, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 14, 2001 (except for the
information under long-term debt and contingencies
included in the notes to consolidated
financial statements as to which the date is
March 22, 2001)
F-2
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 25, 1999 AND DECEMBER 30, 2000
1998 1999 2000
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................................. $14,677,904 $14,272,036 $14,443,815
Costs and expenses (income):
Cost of sales....................................... 13,227,530 12,834,869 13,096,915
Selling and administrative.......................... 1,251,592 1,261,631 1,185,003
Interest expense.................................... 161,581 165,180 174,569
Interest income..................................... (36,736) (40,318) (32,662)
Equity investment results........................... 11,622 10,243 8,034
Litigation charge................................... 7,780 -- --
Impairment/restructuring charge..................... 652,737 103,012 212,845
----------- ----------- -----------
Total costs and expenses......................... 15,276,106 14,334,617 14,644,704
----------- ----------- -----------
Loss before taxes..................................... (598,202) (62,581) (200,889)
Taxes on loss......................................... (87,607) (17,853) (78,747)
----------- ----------- -----------
Net loss.............................................. $ (510,595) $ (44,728) $ (122,142)
=========== =========== ===========
Basic and diluted net loss per share.................. $ (13.48) $ (1.17) $ (3.15)
=========== =========== ===========
Basic and diluted weighted average shares
outstanding......................................... 37,887 38,305 38,716
=========== =========== ===========
See notes to consolidated financial statements.
F-3
FLEMING COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 25, 1999 AND DECEMBER 30, 2000
1999 2000
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,683 $ 30,380
Receivables, net.......................................... 496,159 509,045
Inventories............................................... 997,805 831,265
Assets held for sale...................................... 68,615 165,800
Other current assets...................................... 159,488 86,583
---------- ----------
Total current assets................................... 1,728,750 1,623,073
Investments and notes receivable, net....................... 108,895 104,467
Investment in direct financing leases....................... 126,309 102,011
Property and equipment:
Land...................................................... 45,507 40,242
Buildings................................................. 389,651 356,376
Fixtures and equipment.................................... 636,501 565,472
Leasehold improvements.................................... 236,570 210,970
Leased assets under capital leases........................ 231,236 197,370
---------- ----------
1,539,465 1,370,430
Less accumulated depreciation and amortization.............. (701,289) (653,973)
---------- ----------
Net property and equipment............................. 838,176 716,457
Deferred income taxes....................................... 54,754 139,852
Other assets................................................ 150,214 172,632
Goodwill, net............................................... 566,120 544,319
---------- ----------
Total Assets........................................... $3,573,218 $3,402,811
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 981,219 $ 943,279
Current maturities of long-term debt...................... 70,905 38,171
Current obligations under capital leases.................. 21,375 21,666
Other current liabilities................................. 210,220 229,272
---------- ----------
Total current liabilities.............................. 1,283,719 1,232,388
Long-term debt.............................................. 1,234,185 1,232,400
Long-term obligations under capital leases.................. 367,960 377,239
Other liabilities........................................... 126,652 133,592
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value, authorized -- 100,000
shares, issued and outstanding -- 38,856 and 39,618
shares................................................. 97,141 99,044
Capital in excess of par value............................ 511,447 513,645
Reinvested earnings (deficit)............................. (22,326) (144,468)
Accumulated other comprehensive income -- additional
minimum pension liability.............................. (25,560) (41,029)
---------- ----------
Total shareholders' equity............................. 560,702 427,192
---------- ----------
Total Liabilities and Shareholders' Equity............. $3,573,218 $3,402,811
========== ==========
See notes to consolidated financial statements.
F-4
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 25, 1999 AND DECEMBER 30, 2000
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss................................................ $(510,595) $ (44,728) $(122,142)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 185,368 162,379 174,107
Credit losses........................................ 23,498 25,394 28,872
Deferred income taxes................................ (117,239) 3,357 (65,538)
Equity investment results............................ 11,622 10,243 8,034
Impairment/restructuring and related charges......... 668,028 135,346 288,408
Cash payments on impairment/restructuring and related
charges............................................ (10,408) (57,340) (118,190)
Consolidation and restructuring reserve activity..... (1,008) 423 --
Change in assets and liabilities, excluding effect of
acquisitions:
Receivables........................................ (156,822) (55,692) (26,005)
Inventories........................................ 6,922 (22,049) 65,639
Accounts payable................................... 114,136 35,744 (49,121)
Other assets and liabilities....................... (68,058) (70,112) (63,198)
Other adjustments, net............................... (4,365) (5,348) 5,779
--------- --------- ---------
Net cash provided by operating activities................. 141,079 117,617 126,645
--------- --------- ---------
Cash flows from investing activities:
Collections on notes receivable......................... 38,076 34,798 32,943
Notes receivable funded................................. (28,946) (43,859) (35,841)
Businesses acquired..................................... (30,225) (78,440) (7,320)
Proceeds from sale of businesses........................ 32,277 7,042 45,693
Purchase of property and equipment...................... (200,211) (166,339) (150,837)
Proceeds from sale of property and equipment............ 17,056 35,487 50,957
Investments in customers................................ (1,009) (8,115) --
Proceeds from sale of investments....................... 3,529 2,745 3,552
Other investing activities.............................. 6,141 3,337 12,949
--------- --------- ---------
Net cash used in investing activities..................... (163,312) (213,344) (47,904)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings...................... 170,000 191,000 185,000
Principal payments on long-term debt.................... (159,651) (71,178) (219,519)
Principal payments on capital lease obligations......... (13,356) (21,533) (20,888)
Sale of common stock under incentive stock and stock
ownership plans...................................... 4,830 1,267 4,051
Dividends paid.......................................... (3,048) (3,082) (3,117)
Other financing activities.............................. (891) (31) (571)
--------- --------- ---------
Net cash provided by (used in) financing activities....... (2,116) 96,443 (55,044)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (24,349) 716 23,697
Cash and cash equivalents, beginning of year.............. 30,316 5,967 6,683
--------- --------- ---------
Cash and cash equivalents, end of year.................... $ 5,967 $ 6,683 $ 30,380
========= ========= =========
See notes to consolidated financial statements.
F-5
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 25, 1999 AND DECEMBER 30, 2000
ACCUMULATED
COMMON STOCK CAPITAL IN REINVESTED OTHER
---------------- EXCESS OF EARNINGS COMPREHENSIVE COMPREHENSIVE ESOP
TOTAL SHARES AMOUNT PAR VALUE (DEFICIT) INCOME INCOME NOTE
---------- ------ ------- ------------ ---------- ------------- ------------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE AT DECEMBER 27,
1997...................... $1,089,672 38,264 $95,660 $504,451 $ 536,792 $(42,637) $(4,594)
Comprehensive income
Net loss.................. (510,595) (510,595) $(510,595)
Other comprehensive
income, net of tax
Currency translation
adjustment (net of $0
taxes)................ 4,922 4,922 4,922
Minimum pension
liability adjustment
(net of $12,914 of
taxes)................ (19,418) (19,418) (19,418)
---------
Comprehensive income...... $(525,091)
=========
Incentive stock and stock
ownership plans........... 5,847 278 696 5,151
Cash dividends, $0.08 per
share..................... (3,042) (3,042)
ESOP note payments.......... 2,545 2,545
---------- ------ ------- -------- --------- -------- -------
BALANCE AT DECEMBER 26,
1998...................... 569,931 38,542 96,356 509,602 23,155 (57,133) (2,049)
Comprehensive income
Net loss.................. (44,728) (44,728) $ (44,728)
Other comprehensive
income, net of tax
Minimum pension
liability adjustment
(net of $21,049 of
taxes)................ 31,573 31,573 31,573
---------
Comprehensive income...... $ (13,155)
=========
Incentive stock and stock
ownership plans........... 4,955 314 785 4,170
Cash dividends, $0.08 per
share..................... (3,078) (2,325) (753)
ESOP note payments.......... 2,049 2,049
---------- ------ ------- -------- --------- -------- -------
BALANCE AT DECEMBER 25,
1999...................... 560,702 38,856 97,141 511,447 (22,326) (25,560) --
Comprehensive income
Net loss.................. (122,142) (122,142) $(122,142)
Other comprehensive
income, net of tax
Minimum pension
liability adjustment
(net of $10,312 of
taxes)................ (15,469) (15,469) (15,469)
---------
Comprehensive income...... $(137,611)
=========
Incentive stock and stock
ownership plans........... 7,210 762 1,903 5,307
Cash dividends, $0.08 per
share..................... (3,109) (3,109)
---------- ------ ------- -------- --------- -------- -------
BALANCE AT DECEMBER 30,
2000...................... $ 427,192 39,618 $99,044 $513,645 $(144,468) $(41,029) $ --
========== ====== ======= ======== ========= ======== =======
See notes to consolidated financial statements.
F-6
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 25, 1999 AND DECEMBER 30, 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Fleming is an industry leader in the distribution of
consumable goods, and also has a growing presence in operating "price impact"
supermarkets. Our activities encompass two major businesses: distribution and
retail operations. Food and food-related product sales account for over 97
percent of our consolidated sales. Our largest customer accounts for
approximately 10 percent of our consolidated sales with the next largest
representing less than 2 percent.
Fiscal Year: Our fiscal year ends on the last Saturday in December. Fiscal
1998 and 1999 were 52 weeks; fiscal 2000 was 53 weeks. The impact of the
additional week in 2000 is not material to the results of operations or
financial position.
Basis of Presentation: The preparation of the consolidated 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.
Principles of Consolidation: The consolidated financial statements include
all subsidiaries. Material intercompany items have been eliminated. The equity
method of accounting is usually used for investments in certain entities in
which we have an investment in common stock of between 20% and 50% or such
investment is temporary. Under the equity method, original investments are
recorded at cost and adjusted by our share of earnings or losses of these
entities and for declines in estimated realizable values deemed to be other than
temporary.
Reclassifications: Certain reclassifications have been made to prior year
amounts to conform to current year classifications.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 -- Revenue Recognition. SAB No. 101 provides
guidance on recognition, presentation and disclosure of revenue in financial
statements. In July 2000, the Financial Accounting Standards Board Emerging
Issues Task Force issued EITF 99-19 -- Reporting Revenue Gross as a Principal
versus Net as an Agent. EITF 99-19 provides further guidance on reflecting
revenue gross or net. We adopted SAB No. 101 and EITF 99-19 in the fourth
quarter of 2000. The implementation had an impact on the classification of
previously reported net sales and cost of goods sold (ranging annually from $350
million to $400 million), but had no impact on earnings. Net sales and cost of
goods sold have been restated for all periods presented.
Basic and Diluted Net Loss Per Share: Both basic and diluted per share
amounts are computed based on net loss divided by weighted average shares as
appropriate for each calculation subject to anti-dilution limitations.
Taxes on Income: Deferred income taxes arise from temporary differences
between financial and tax bases of certain assets and liabilities.
Cash and Cash Equivalents: Cash equivalents consist of liquid investments
readily convertible to cash with an original maturity of three months or less.
The carrying amount for cash equivalents is a reasonable estimate of fair value.
Receivables: Receivables include the current portion of customer notes
receivable of $25 million in 1999 and $27 million in 2000. Receivables are shown
net of allowance for doubtful accounts of $32 million in 1999 and $34 million in
2000. We extend credit to our retail customers which are located over a broad
geographic base. Regional concentrations of credit risk are limited. Interest
income on impaired loans is recognized only when payments are received.
F-7
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories: Inventories are valued at the lower of cost or market.
Grocery and certain perishable inventories, aggregating approximately 70% of
total inventories in 1999 and 2000 are valued on a last-in, first-out (LIFO)
method. The cost for the remaining inventories is determined by the first-in,
first-out (FIFO) method. Current replacement cost of LIFO inventories was
greater than the carrying amounts by approximately $54 million at year-end 1999
($4 million of which is recorded in assets held for sale in current assets) and
$58 million at year-end 2000 ($13 million of which is recorded in assets held
for sale in current assets). In 1999 and 2000, the liquidation of certain LIFO
layers related to business closings decreased cost of products sold by
approximately $2 million and $7 million, respectively.
Property and Equipment: Property and equipment are recorded at cost or,
for leased assets under capital leases, at the present value of minimum lease
payments. Depreciation, as well as amortization of assets under capital leases,
is based on the estimated useful asset lives using the straight-line method. The
estimated useful lives used in computing depreciation and amortization are:
buildings and major improvements -- 20 to 40 years; warehouse, transportation
and other equipment -- 3 to 10 years; and data processing equipment and
software -- 3 to 7 years.
Goodwill: The excess of purchase price over the fair value of net assets
of businesses acquired is amortized on the straight-line method over periods not
exceeding 40 years. Goodwill is shown net of accumulated amortization of $184
million and $193 million in 1999 and 2000, respectively.
Impairment: Asset impairments are recorded when the carrying amount of
assets are not recoverable. Impairment is assessed and measured, by asset type,
as follows: notes receivable -- fair value of the collateral for each note; and,
long-lived assets, goodwill and other intangibles -- estimate of the future cash
flows expected to result from the use of the asset and its eventual disposition
aggregated to the operating unit level for distribution and store level for
retail.
Financial Instruments: Interest rate hedge transactions and other
financial instruments have been utilized to manage interest rate exposure. The
methods and assumptions used to estimate the fair value of significant financial
instruments are discussed in the "Investments and Notes Receivable" and
"Long-term Debt" notes.
Stock-Based Compensation: We apply APB Opinion No. 25 -- Accounting for
Stock Issued to Employees and related Interpretations in accounting for our
plans.
Comprehensive Income: Comprehensive income is reflected in the
Consolidated Statements of Shareholders' Equity. Other comprehensive income is
comprised of foreign currency translation adjustments and minimum pension
liability adjustments. The cumulative effect of other comprehensive income is
reflected in the Shareholders' Equity section of the Consolidated Balance
Sheets.
IMPAIRMENT/RESTRUCTURING CHARGE AND RELATED COSTS
In December 1998, we announced the implementation of a strategic plan
designed to improve the competitiveness of the retailers we serve and improve
our performance by building stronger operations that can better support
long-term growth.
The strategic plan consisted of the following four major initiatives:
- 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; and two other operating units scheduled for
closure, but not closed due to increased cash flows). Of the nine
closings announced, all were completed by the end of 2000. Three
additional closings were announced which were not originally part of the
strategic plan bringing the total operating units closed to twelve. 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
F-8
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
complete. The last full year of operations for the 12 operating units
closed was in 1998 with sales totaling approximately $3.1 billion. Most
of these sales have been retained by transferring customer business to
our higher volume, better utilized facilities. We believe that this
consolidation process is benefiting customers with improved buying
opportunities. We have also benefited with better coverage of fixed
expenses. The closings have resulted in savings due to reduced
depreciation, payroll, lease and other operating costs, and we began to
recognize these savings immediately upon closure. The capital returned
from the divestitures and closings was reinvested in the business.
- Grow distribution sales. Higher volume, better-utilized distribution
operations represent an opportunity for sales growth. The improved
efficiency and effectiveness of the remaining distribution operations
enhances their competitiveness, and we have capitalized on these
improvements by adding $1.2 billion in annualized sales in 2000.
- Improve retail performance. This not only required divestiture or
closing of under-performing company-owned retail chains, but also
required increased investments in the retail concepts on which we are
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 was added to the strategic plan because
their format no longer fit into our business strategy. The last full year
of operations for these seven chains was in 1998 with sales totaling
approximately $844 million. The sale or closing of these chains is
substantially complete.
In April 2000, we announced the evaluation of strategic alternatives for
the remaining conventional retail chains (Rainbow Foods, Baker's
Nebraska, Sentry Foods, and ABCO Foods). The evaluation was completed by
the end of 2000 with the decision to reposition certain retail operations
into our price impact format. The Rainbow Foods chain reflected
significant improvements in sales and earnings and consequently, was
retained. The Minneapolis distribution center has been dedicated to
supply the Rainbow Foods operation, with the supply of the division's
independent retailers moved to the LaCrosse and Superior divisions. We
recently sold 11 of the ABCO Foods stores to Safeway, Inc. and we
currently have an agreement to sell the assets of the 16-store Baker's
chain to Kroger Co. We also plan to convert ten company-owned Sentry
Foods stores to the price impact format and steps are being taken to sell
the remaining stores to existing and new distribution customers. The last
full year of operations for ABCO Foods, Baker's Nebraska and Sentry Foods
was in 1999 with sales totaling approximately $1,415 million. We expect
to retain a substantial level of the distribution business for these
operations and expect to receive a total of approximately $200 million in
net proceeds from the sale of these stores.
- Reduce overhead and operating expenses. We reduced overhead through our
low cost pursuit program which includes organization and process changes,
such as reducing workforce, centralizing administrative and procurement
functions, and reducing 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 SKUs, creating a single point of contact with
customers, reducing the number of decision points within Fleming, and
centralizing vendor negotiations. These initiatives have reduced costs
which ultimately improves profitability and competitiveness.
The plan, as expected, took two years to implement. Additional charges of
approximately $20 million will be incurred in 2001 due to the time involved to
finish selling and closing certain retail stores. The
F-9
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining charges represent severance-related expenses, inventory markdowns for
clearance for closed operations and other exit costs that cannot be expensed
until incurred. Charges after 2001 will be minimal exit costs.
The total pre-tax charge for the strategic plan through 2000 was $1,114
million ($313 million cash and $801 million non-cash). The plan originally
announced in December 1998 had an estimated pre-tax charge totaling $782
million. The result was an increase in the estimate of the strategic plan of
$332 million ($164 million cash and $168 million non-cash). The net increase is
due primarily to closing the Peoria, York and Philadelphia divisions ($104
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 ($44 million); decreasing costs related to a scheduled closing no
longer planned ($18 million); impairment amounts relating to the recent
evaluation of conventional retail ($125 million); and other costs including
those related to our low cost pursuit program and centralization of
administrative functions ($59 million). Updating the impairment amounts was
necessary as decisions to sell, close or convert additional operating units were
made. 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 our low cost
pursuit program and centralization of administrative functions has been accrued
as incurred.
The pre-tax charge for 1998 was $668 million. After tax, the expense was
$543 million in 1998 or $14.33 per share. The $668 million charge was included
on several lines of the Consolidated Statements of Operations as follows: $9
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 $653 million was included in the impairment/restructuring line. The
1998 charge consisted of the following components:
- Impairment of assets of $590 million. The impairment components were
$372 million for goodwill and $218 million for other long-lived assets.
Of the goodwill charge of $372 million, approximately 87% related to the
1989 "Malone & Hyde" acquisition and the 1994 "Scrivner" acquisition. The
remaining 13% related to various other smaller acquisitions, both retail
and wholesale.
- Restructuring charges of $63 million. The restructuring charges
consisted of severance-related expenses and pension withdrawal
liabilities for the operating units and the retail chain announced during
1998. The restructuring charges also consisted of operating lease
liabilities for the distribution operating units and the retail chain
announced during 1998 plus the additional planned closings at that time.
- Other disposition and related costs of $15 million. These costs consist
primarily of professional fees, inventory valuation adjustments and other
costs.
The 1998 charge relates to our business segments as follows: $491 million
relates to the distribution segment and $153 million relates to the retail food
segment with the balance relating to support services expenses.
The pre-tax charge for 1999 was $137 million. After tax, the expense for
1999 was $92 million or $2.39 per share. The $137 million charge in 1999 was
included on several lines of the Consolidated Statements of Operations as
follows: $18 million was included in cost of sales and was primarily related to
inventory valuation adjustments; $16 million was included in selling and
administrative expense and equity investment results as disposition related
costs recognized on a periodic basis; and the remaining $103 million was
included in the impairment/restructuring line. The 1999 charge consisted of the
following components:
- Impairment of assets of $62 million. The impairment components were $36
million for goodwill and $26 million for other long-lived assets relating
to planned disposals and closures. Of the goodwill charge
F-10
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $36 million, $22 million related to the 1994 "Scrivner" acquisition
with the remaining amount related to two retail acquisitions.
- Restructuring charges of $41 million. The restructuring charges
consisted primarily of severance-related expenses and estimated pension
withdrawal liabilities for the divested or closed operating units
announced during 1999. The restructuring charges also consisted of
operating lease liabilities and professional fees incurred related to the
restructuring process.
- Other disposition and related costs of $34 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operations, impairment of an investment, disposition related costs
recognized on a periodic basis and other costs.
The 1999 charge relates to our business segments as follows: $48 million
relates to the distribution segment and $70 million relates to the retail
segment with the balance relating to support services expenses.
The pre-tax charge for 2000 was $309 million. After tax, the expense for
2000 was $183 million or $4.72 per share. The $309 million charge in 2000 was
included on several lines of the Consolidated Statements of Operations as
follows: $2 million was included in net sales related primarily to rent income
impairment due to division closings; $57 million was included in cost of sales
and was primarily related to inventory valuation adjustments, moving and
training costs relating to procurement and product handling associates, and
additional depreciation and amortization on assets to be disposed of but not yet
held for sale; $37 million was included in selling and administrative expense
and equity investment results as disposition related costs recognized on a
periodic basis (such as moving and training costs related to the consolidation
of certain administrative functions); and the remaining $213 million was
included in the impairment/restructuring line. The charge for 2000 consisted of
the following components:
- Impairment of assets of $91 million. The impairment components were $3
million for goodwill and $88 million for other long-lived assets relating
to planned disposals and closures. All of the goodwill charge was related
to a three store retail acquisition.
- Restructuring charges of $122 million. The restructuring charges
consisted partly of severance-related expenses and estimated 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. The charge included severance-related
expenses due to the consolidation of certain administrative departments
announced during the second quarter of 2000. Additionally, the charge
included severance-related expenses, estimated pension withdrawal
liabilities and operating lease liabilities for the divestiture and
closing of certain conventional retail stores evaluated during the second
and third quarters of 2000. The restructuring charges also consisted of
professional fees incurred related to the restructuring process.
- Other disposition and related costs of $96 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operations, additional depreciation and amortization on assets to be
disposed of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The charge for 2000 related to our business segments as follows: $99
million relates to the distribution segment and $164 million relates to the
retail segment with the balance relating to support services expenses.
F-11
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The charges related to workforce reductions are as follows:
AMOUNT HEADCOUNT
-------- ---------
($ IN THOUSANDS)
1998 Activity:
Charge.................................................... $ 25,441 1,430
Terminations.............................................. (3,458) (170)
-------- ------
Ending Liability.......................................... 21,983 1,260
1999 Activity:
Charge.................................................... 12,029 1,350
Terminations.............................................. (24,410) (1,950)
-------- ------
Ending Liability.......................................... 9,602 660
2000 Activity:
Charge.................................................... 53,906 5,610
Terminations.............................................. (26,180) (1,860)
-------- ------
Ending Liability.......................................... $ 37,328 4,410
======== ======
The ending liability of approximately $37 million represents payments over
time to associates already severed as well as union pension withdrawal
liabilities. The breakdown of the 5,610 headcount reduction recorded for 2000
is: 1,290 from the distribution segment; 4,260 from the retail segment; and 60
from support services.
Additionally, the strategic plan includes charges related to lease
obligations which will be utilized as operating units or retail stores close,
but ultimately reduced over remaining lease terms ranging from 1 to 20 years.
The charges and utilization have been recorded to-date as follows:
AMOUNT
----------------
($ IN THOUSANDS)
1998 Activity:
Charge.................................................... $ 28,101
Utilized.................................................. (385)
--------
Ending Liability.......................................... 27,716
1999 Activity:
Charge.................................................... 15,074
Utilized.................................................. (10,281)
--------
Ending Liability.......................................... 32,509
2000 Activity:
Charge.................................................... 37,149
Utilized.................................................. (48,880)
--------
Ending Liability.......................................... $ 20,778
========
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
F-12
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations during the time such employees are actively employed. Depreciation
expense is continued for assets that we are unable to remove from operations.
Assets held for sale, reflected on the balance sheet, consisted of $8
million of distribution operating units and $61 million of retail stores as of
year-end 1999 and $22 million of distribution operating units and $144 million
of retail stores as of year-end 2000. Gains on the sale of facilities for 1999
and 2000 totaled approximately $6 million and $9 million, respectively, and were
included in net sales. Also during 1999 and 2000, we recorded charges of
approximately $31 million and $10 million, respectively, related to the closing
of certain retail stores which were included in selling and administrative
expense.
LITIGATION CHARGES
Furrs Supermarkets filed suit against us in 1997 claiming they were
overcharged for products. During 1997, Fleming and Furrs reached an agreement
dismissing all litigation between them. Pursuant to the settlement, Furrs
purchased our El Paso product supply center in 1998, together with related
inventory and equipment. As part of the settlement, we paid Furrs $1.7 million
in 1997 and $7.8 million in 1998 as a refund of fees and charges.
PER SHARE RESULTS
We did not reflect 364,000 weighted average potential shares for the 1999
diluted calculation or 1,220,000 weighted average potential shares for the 2000
diluted calculation because they would be antidilutive. Other options with
exercise prices exceeding market prices consisted of 3.8 million shares in 1999
and 4.4 million shares in 2000 of common stock at a weighted average exercise
price of $14.19 and $12.94 per share, respectively, that were not included in
the computation of diluted earnings per share because the effect would be
antidilutive.
SEGMENT INFORMATION
Considering the customer types and the processes for meeting the needs of
customers, senior management manages the business as two reportable segments:
distribution and retail operations.
The distribution segment sells food and non-food products (e.g., food,
general merchandise, health and beauty care, and Fleming brands) to
supermarkets, convenience stores, supercenters, discount stores, limited
assortment stores, drug stores, specialty stores and other stores across the
United States. We also offer a variety of retail support services to
independently-owned and company-owned retail stores. The aggregation is based
primarily on the common customer base and the interdependent marketing and
distribution efforts.
Our senior management utilizes more than one measurement and multiple views
of data to assess segment performance and to allocate resources to the segments.
However, the dominant measurements are consistent with our consolidated
financial statements and, accordingly, are reported on the same basis herein.
Interest expense, interest income, equity investments, LIFO adjustments, support
services expenses, other unusual charges and income taxes are managed separately
by senior management and those items are not allocated to the business segments.
Intersegment transactions are reflected at cost. The following table sets
F-13
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
forth the composition of the segments' and total company's net sales, operating
earnings, depreciation and amortization, capital expenditures and identifiable
assets.
1998 1999 2000
------- ------- -------
(IN MILLIONS)
NET SALES
Distribution.......................................... $13,120 $12,718 $12,926
Intersegment elimination.............................. (2,031) (2,165) (1,757)
------- ------- -------
Net distribution...................................... 11,089 10,553 11,169
Retail................................................ 3,589 3,719 3,275
------- ------- -------
Total.............................................. $14,678 $14,272 $14,444
======= ======= =======
OPERATING EARNINGS
Distribution.......................................... $ 259 $ 290 $ 297
Retail................................................ 62 (2) 62
Support services...................................... (122) (112) (197)
------- ------- -------
Total operating earnings........................... 199 176 162
Interest expense...................................... (161) (165) (175)
Interest income....................................... 37 40 33
Equity investment results............................. (12) (10) (8)
Litigation charge..................................... (8) -- --
Impairment/restructuring charge....................... (653) (103) (213)
------- ------- -------
Loss before taxes....................................... $ (598) $ (62) $ (201)
======= ======= =======
DEPRECIATION AND AMORTIZATION
Distribution.......................................... $ 107 $ 88 $ 105
Retail................................................ 61 64 57
Support services...................................... 17 10 12
------- ------- -------
Total.............................................. $ 185 $ 162 $ 174
======= ======= =======
CAPITAL EXPENDITURES
Distribution.......................................... $ 81 $ 53 $ 99
Retail................................................ 118 112 45
Support services...................................... 1 1 7
------- ------- -------
Total.............................................. $ 200 $ 166 $ 151
======= ======= =======
IDENTIFIABLE ASSETS
Distribution.......................................... $ 2,524 $ 2,546 $ 2,499
Retail................................................ 697 848 681
Support services...................................... 270 179 223
------- ------- -------
Total.............................................. $ 3,491 $ 3,573 $ 3,403
======= ======= =======
F-14
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Components of taxes on loss are as follows:
1998 1999 2000
--------- -------- --------
(IN THOUSANDS)
Current:
Federal........................................... $ 23,896 $(17,287) $(23,291)
State............................................. 5,737 (3,924) 10,082
--------- -------- --------
Total current.................................. 29,633 (21,211) (13,209)
--------- -------- --------
Deferred:
Federal........................................... (94,254) 2,552 (41,123)
State............................................. (22,986) 806 (24,415)
--------- -------- --------
Total deferred................................. (117,240) 3,358 (65,538)
--------- -------- --------
Taxes on loss....................................... $ (87,607) $(17,853) $(78,747)
========= ======== ========
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
1998 1999 2000
--------- -------- --------
(IN THOUSANDS)
Depreciation and amortization....................... $ (64,132) $ (9,603) $(39,106)
Inventory........................................... (6,839) 7,019 4,313
Capital losses...................................... 251 (4,825) 452
Asset valuations and reserves....................... 9,302 (18,114) 29,495
Equity investment results........................... (403) (172) 8,837
Credit losses....................................... (7,825) (4,527) 1,924
Lease transactions.................................. (34,718) 7,996 (4,887)
Associate benefits.................................. 3,200 31,700 (7,187)
Note sales.......................................... (217) (139) (41)
Net operating loss carryforwards.................... -- -- (62,951)
Other............................................... (15,859) (5,977) 3,613
--------- -------- --------
Deferred tax expense (benefit)...................... $(117,240) $ 3,358 $(65,538)
========= ======== ========
F-15
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences that give rise to deferred tax assets and liabilities
as of year-end 1999 and 2000 are as follows:
1999 2000
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Depreciation and amortization............................. $ 23,002 $ 57,740
Asset valuations and reserve activities................... 48,559 21,772
Associate benefits........................................ 54,457 67,258
Credit losses............................................. 28,263 24,927
Equity investment results................................. 9,983 2,522
Lease transactions........................................ 40,325 45,208
Inventory................................................. 26,342 26,918
Acquired loss carryforwards............................... 67 0
Capital losses............................................ 9,372 8,152
Net operating loss carryforwards.......................... 0 62,951
Other..................................................... 30,847 25,999
-------- --------
Total deferred tax assets.............................. 271,217 343,447
-------- --------
Deferred tax liabilities:
Depreciation and amortization............................. 52,103 47,734
Equity investment results................................. 3,482 4,857
Lease transactions........................................ 1,532 1,528
Inventory................................................. 56,867 61,757
Associate benefits........................................ 29,424 24,725
Asset valuations and reserve activities................... 2,772 5,480
Note sales................................................ 3,387 2,253
Prepaid expenses.......................................... 3,874 3,277
Capital losses............................................ 1,088 320
Other..................................................... 28,225 27,203
-------- --------
Total deferred tax liabilities......................... 182,754 179,134
-------- --------
Net deferred tax asset................................. $ 88,463 $164,313
======== ========
The change in net deferred tax asset from 1999 to 2000 is allocated $65.5
million to deferred income tax benefit and $10.3 million benefit to
stockholders' equity.
We have federal net operating loss carryforwards of approximately $122
million and state net operating loss carryforwards of approximately $342 million
that are due to expire at various times through the year 2021. We also have
charitable contribution carryforwards of approximately $2 million that will
begin to expire in 2005. We believe it is more likely than not that all of our
deferred tax assets will be realized.
F-16
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
1998 1999 2000
----- ---- ----
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 6.8 5.1 5.4
Acquisition-related differences............................. 12.3 0.0 (.5)
Other....................................................... (.4) (3.1) 2.5
----- ---- ----
Effective rate on operations................................ 53.7 37.0 42.4
Impairment/restructuring and related charges................ (39.1) (8.5) (3.2)
----- ---- ----
Effective rate after impairment/restructuring and related
charges................................................... 14.6% 28.5% 39.2%
===== ==== ====
During 1999, we recorded interest income of $9 million related to refunds
in federal income taxes from prior years.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
1999 2000
-------- --------
(IN THOUSANDS)
Investments in and advances to customers.................... $ 14,136 $ 7,452
Notes receivable from customers............................. 83,354 85,521
Other investments and receivables........................... 11,405 11,493
-------- --------
Investments and notes receivable............................ $108,895 $104,466
======== ========
Investments and notes receivable are shown net of reserves of $23 million
and $26 million in 1999 and 2000, respectively. Sales to customers accounted for
under the equity method were approximately $0.6 billion, $0.3 billion and $0.2
billion in 1998, 1999 and 2000, respectively. Receivables include $8 million and
$4 million in 1999 and 2000, respectively, due from customers accounted for
under the equity method.
We extend long-term credit to certain retail customers. Loans are primarily
collateralized by inventory and fixtures. Interest rates are above prime with
terms up to 10 years.
Impaired notes receivable (including current portion) are as follows:
1999 2000
-------- --------
(IN THOUSANDS)
Impaired notes with related allowances...................... $ 57,657 $ 45,711
Credit loss allowance on impaired notes..................... (25,811) (20,101)
Impaired notes with no related allowances................... 4,613 4,793
-------- --------
Net impaired notes receivable............................... $ 36,459 $ 30,403
======== ========
Average investments in impaired notes were as follows: 1998 -- $59 million;
1999 -- $65 million; and 2000 -- $52 million.
F-17
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for credit losses is as follows:
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Balance, beginning of year........................... $ 43,848 $ 47,232 $ 55,528
Charged to costs and expenses........................ 23,498 25,394 28,872
Uncollectible accounts written off, net of
recoveries......................................... (20,114) (17,098) (24,682)
-------- -------- --------
Balance, end of year................................. $ 47,232 $ 55,528 $ 59,718
======== ======== ========
We sold certain notes receivable at face value with limited recourse in
years prior to 1998. The outstanding balance at year-end 2000 on all notes sold
is $5 million, of which we are contingently liable for $3 million should all the
notes become uncollectible.
LONG-TERM DEBT
Long-term debt consists of the following:
1999 2000
---------- ----------
(IN THOUSANDS)
10- 5/8% Senior Notes due 2001.............................. $ 300,000 $ 300,000
10- 1/2% Senior Subordinated Notes due 2004................. 250,000 250,000
10- 5/8% Senior Subordinated Notes due 2007................. 250,000 250,000
Revolving credit, average interest rates of 6.5% for 1999
and 7.7% for 2000, due 2003............................... 255,000 300,000
Term loans, due 2001 to 2004, average interest rate of 7.3%
for 1999 and 7.8% for 2000................................ 197,594 154,421
Other debt.................................................. 52,496 16,150
---------- ----------
1,305,090 1,270,571
Less current maturities..................................... (70,905) (38,171)
---------- ----------
Long-term debt.............................................. $1,234,185 $1,232,400
========== ==========
Five-year Maturities: Aggregate maturities of long-term debt for the next
five years are as follows: 2001 -- $38 million; 2002 -- $50 million;
2003 -- $347 million; 2004 -- $287 million; and 2005 -- $0.
The 10- 5/8% $300 million senior notes were issued in 1994 and mature
December 15, 2001. The senior notes are unsecured senior obligations, ranking
the same as all other existing and future senior indebtedness and senior in
right of payment to the subordinated notes. The senior notes are effectively
subordinated to secured senior indebtedness with respect to assets securing such
indebtedness, including loans under our senior secured credit facility.
On March 15, 2001, $355 million of 10- 1/8% senior notes were issued and
mature on March 15, 2008. Most of the net proceeds were deposited with the
trustee for the 10- 5/8% senior notes on March 15, 2001 to redeem all of the
10- 5/8% senior notes due 2001, including an amount to cover accrued interest
and the redemption premium, on April 16, 2001 and to defease our obligations
under the indenture governing these notes. The balance of the net proceeds was
used to pay down our revolver loans. The new senior notes are unsecured senior
obligations, ranking the same as all other existing and future senior
indebtedness and senior in right of payment to the subordinated notes. The
senior notes are effectively subordinated to secured senior indebtedness with
respect to assets securing such indebtedness, including loans under our senior
secured credit facility. Both the 10- 5/8% and 10- 1/8% senior notes are
guaranteed by substantially all subsidiaries (see -- Subsidiary Guarantee of
Senior Notes below).
F-18
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The senior subordinated notes consist of two issues: $250 million of
10- 1/2% Notes due December 1, 2004 and $250 million of 10- 5/8 Notes due July
31, 2007. The subordinated notes are general unsecured obligations, subordinated
in right of payment to all existing and future senior indebtedness, and senior
to or of equal rank with all of our existing and future subordinated
indebtedness.
On March 15, 2001, $150 million of 5- 1/4% convertible senior subordinated
notes were issued and mature on March 15, 2009 and have a conversion price of
$30.27 per share. The net proceeds were used to pay down the revolving credit
facility. The convertible notes are callable after 2004, and are general
unsecured obligations, subordinated in right of payment to all existing and
future senior indebtedness, and rank senior to or of equal rank with all of our
existing and future subordinated indebtedness.
In July, 1997, we developed a senior secured credit facility which consists
of a $600 million revolving credit facility, with a final maturity of July 25,
2003, and an amortizing term loan with a maturity of July 25, 2004. The term
loan was originally $250 million but has been paid down to $154 million. Up to
$300 million of the revolver may be used for issuing letters of credit.
Borrowings and letters of credit issued under the new credit facility may be
used for general corporate purposes and are secured by a first priority security
interest in the accounts receivable and inventories of Fleming and our
subsidiaries and in the capital stock or other equity interests we own in our
subsidiaries. In addition, this credit facility is guaranteed by substantially
all subsidiaries. The stated interest rate on borrowings under the credit
agreement is equal to a referenced index interest rate, normally the London
interbank offered interest rate ("LIBOR"), plus a margin. The level of the
margin is dependent on credit ratings on our senior secured bank debt.
The credit agreement and the indentures under which other debt instruments
were issued contain customary covenants associated with similar facilities. The
credit agreement currently contains the following more significant financial
covenants: maintenance of a fixed charge coverage ratio of at least 1.7 to 1,
based on adjusted earnings, as defined, before interest, taxes, depreciation and
amortization and net rent expense; maintenance of a ratio of
inventory-plus-accounts receivable to funded bank debt (including letters of
credit) of at least 1.4 to 1; and a limitation on restricted payments, including
dividends, up to $71 million at year-end 2000, based on a formula tied to net
earnings and equity issuances. Under the credit agreement, new issues of certain
kinds of debt must have a maturity after January 2005. Covenants contained in
our indentures under which other debt instruments were issued are generally less
restrictive than those of the credit agreement. We are in compliance with all
financial covenants under the credit agreement and its indentures.
The credit facility may be terminated in the event of a defined change of
control. Under the indentures, noteholders may require us to repurchase notes in
the event of a defined change of control coupled with a defined decline in
credit ratings.
At year-end 2000, borrowings under the credit facility totaled $154 million
in term loans and $300 million of revolver borrowings, and $43 million of
letters of credit had been issued. Letters of credit are needed primarily for
insurance reserves associated with our normal risk management activities. To the
extent that any of these letters of credit would be drawn, payments would be
financed by borrowings under the credit agreement.
At year-end 2000, we would have been allowed to borrow an additional $257
million under the revolving credit facility contained in the credit agreement
based on the actual borrowings and letters of credit outstanding.
Medium-term Notes: Medium-term notes are included in other debt in the
above table. Between 1990 and 1993, we registered $565 million in medium-term
notes with a total of $275 million issued. The balances due at year-end 1999 and
2000 were $53 million and $17 million, respectively, with average interest rates
of 7.2% for 1999 and 7.8% for 2000. The notes mature from 2001 to 2003.
F-19
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Ratings: On March 5, 2001, Moody's Investors Service ("Moody's")
announced it had upgraded its ratings for our various issues of long-term debt
essentially by one notch, and that it had changed its outlook from positive to
stable. On February 28, 2001, Standard & Poor's rating group ("S&P") announced
it had revised its outlook for its ratings from stable to positive. Giving
effect to these changes, the table below summarizes our credit ratings:
MOODY'S S&P
------- --------
Credit agreement loan....................................... Ba2 BB
Senior implied debt......................................... Ba3 BB-
Senior unsecured debt....................................... Ba3 B+
Senior subordinated notes................................... B2 B
Outlook..................................................... Stable Positive
Average Interest Rates: The average interest rate for total debt
(including capital lease obligations) before the effect of interest rate hedges
was 10.2% for 1999, versus 9.5% for 2000. Including the effect of interest rate
hedges, the average interest rate for total debt was 10.5% and 9.5% for 1999 and
2000, respectively.
Interest Expense: Components of interest expense are as follows:
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Interest costs incurred:
Long-term debt..................................... $123,054 $127,271 $135,474
Capital lease obligations.......................... 37,542 36,768 39,609
Other.............................................. 1,589 2,258 1,537
-------- -------- --------
Total incurred....................................... 162,185 166,297 176,620
Less interest capitalized............................ (604) (1,117) (2,051)
-------- -------- --------
Interest expense..................................... $161,581 $165,180 $174,569
======== ======== ========
Derivatives: From time to time we may use interest rate hedge agreements
with the objective of managing interest costs and exposure to changing interest
rates. The classes of derivative financial instruments used have included
interest rate swap and cap agreements. The counterparties to these agreements
have been major U.S. and international financial institutions with credit
ratings higher than ours. Our policy regarding derivatives is to engage in a
financial risk management process to manage our defined exposures to uncertain
future changes in interest rates which impact net earnings. At fiscal year-end
2000, there were no interest rate hedge agreements outstanding.
The Financial Accounting Standards Board issued SFAS No. 133 -- Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and became
effective on January 1, 2001. We revised our written policies regarding
financial derivatives, as needed, prior to the effective date. There was no
significant impact on our financial statements upon adopting the new standard.
Fair Value of Financial Instruments: The fair value of long-term debt was
determined using valuation techniques that considered market prices for actively
traded debt, and cash flows discounted at current market rates for management's
best estimate for instruments without quoted market prices. At year-end 2000,
the carrying value of total debt (excluding capital leases) was higher than the
fair value by $175 million, or 13.8% of the carrying value. Fair value was lower
than the carrying value at year-end 2000 primarily because our credit agreement
revolver and term loans were priced at borrowing margins set in 1997 which were
F-20
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significantly below market prices in 2000. The fair value of our senior
subordinated notes was substantially below carrying value primarily because the
interest rates on this debt, which were set in 1997, were significantly below
market levels at year-end 2000. On March 7, 2001, the carrying value for our
debt was only 2.1% higher than fair value primarily because our credit agreement
borrowing margins have been increased and our perceived creditworthiness
improved due to the $50 million equity investment by an affiliate of Yucaipa
plus the anticipated economic benefits relating to the new Kmart strategic
alliance. At year-end 1999, the carrying value of debt was higher than the fair
value by $69 million, or 5.3% of the carrying value.
The fair value of notes receivable is comparable to the carrying value
because of the variable interest rates charged on certain notes and because of
the allowance for credit losses.
Subsidiary Guarantee of Senior Notes: The senior notes are guaranteed by
all of Fleming's direct and indirect subsidiaries (except for certain
inconsequential subsidiaries), all of which are wholly-owned. The guarantees are
joint and several, full, complete and unconditional. There are currently no
restrictions on the ability of the Subsidiary Guarantors to transfer funds to
Fleming (the parent) in the form of cash dividends, loans or advances.
The following condensed consolidating financial information depicts, in
separate columns, the parent company, those subsidiaries which are guarantors,
those subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. The financial information may not necessarily be indicative
of the results of operations or financial position had the subsidiaries been
operated as independent entities.
F-21
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 25, 1999
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents............ $ (54,803) $ 61,307 $ 179 $ -- $ 6,683
Receivables, net.......... 405,076 90,128 955 -- 496,159
Inventories............... 795,899 198,769 3,137 -- 997,805
Other current assets...... 222,461 5,624 18 -- 228,103
---------- -------- -------- --------- ----------
Total current assets... 1,368,633 355,828 4,289 -- 1,728,750
Investment in
subsidiaries.............. 53,381 -- -- (53,381) --
Intercompany receivables.... 463,191 -- -- (463,191) --
Property and equipment,
net....................... 559,424 273,137 5,615 -- 838,176
Goodwill, net............... 428,667 133,368 4,085 -- 566,120
Other assets................ 369,500 70,646 26 -- 440,172
---------- -------- -------- --------- ----------
$3,242,796 $832,979 $ 14,015 $(516,572) $3,573,218
========== ======== ======== ========= ==========
LIABILITIES AND EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.......... $ 859,694 $120,538 $ 987 $ -- $ 981,219
Intercompany payables..... -- 435,028 28,163 (463,191) --
Other current
liabilities............ 246,010 56,258 232 -- 302,500
---------- -------- -------- --------- ----------
Total current
liabilities.......... 1,105,704 611,824 29,382 (463,191) 1,283,719
Obligations under capital
leases.................... 230,983 136,977 -- -- 367,960
Long-term debt and other
liabilities............... 1,345,407 15,395 35 -- 1,360,837
Equity (deficit)............ 560,702 68,783 (15,402) (53,381) 560,702
---------- -------- -------- --------- ----------
$3,242,796 $832,979 $ 14,015 $(516,572) $3,573,218
========== ======== ======== ========= ==========
F-22
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 30, 2000
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents............ $ 22,487 $ 6,753 $ 1,140 $ -- $ 30,380
Receivables, net.......... 406,203 101,884 958 -- 509,045
Inventories............... 635,227 192,499 3,539 -- 831,265
Other current assets...... 247,400 4,943 40 -- 252,383
---------- -------- ------- --------- ----------
Total current assets... 1,311,317 306,079 5,677 -- 1,623,073
Investment in
subsidiaries.............. 65,475 5,356 -- (70,831) --
Intercompany receivables.... 372,356 -- -- (372,356) --
Property and equipment,
net....................... 424,321 285,117 7,019 -- 716,457
Goodwill, net............... 411,094 129,440 3,785 -- 544,319
Other assets................ 463,008 42,918 13,036 -- 518,962
---------- -------- ------- --------- ----------
$3,047,571 $768,910 $29,517 $(443,187) $3,402,811
========== ======== ======= ========= ==========
LIABILITIES AND EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.......... $ 821,407 $120,145 $ 1,727 $ -- $ 943,279
Intercompany payables..... -- 339,688 32,668 (372,356) --
Other current
liabilities............ 244,524 43,275 1,310 -- 289,109
---------- -------- ------- --------- ----------
Total current
liabilities.......... 1,065,931 503,108 35,705 (372,356) 1,232,388
Obligations under capital
leases.................... 214,611 162,628 -- -- 377,239
Long-term debt and other
liabilities............... 1,339,837 26,096 59 -- 1,365,992
Equity (deficit)............ 427,192 77,078 (6,247) (70,831) 427,192
---------- -------- ------- --------- ----------
$3,047,571 $768,910 $29,517 $(443,187) $3,402,811
========== ======== ======= ========= ==========
F-23
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
52 WEEKS ENDED DECEMBER 26, 1998
-------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales................. $14,299,725 $377,970 $203,861 $(203,652) $14,677,904
Costs and expenses:
Cost of sales........... 12,957,205 307,666 166,311 (203,652) 13,227,530
Selling and
administrative....... 1,143,656 71,250 36,686 -- 1,251,592
Other................... 139,033 1,881 3,333 -- 144,247
Impairment/restructuring
charge............... 608,378 26,495 17,864 -- 652,737
Equity loss from
subsidiaries......... 38,503 -- -- (38,503) --
----------- -------- -------- --------- -----------
Total costs and
expenses........... 14,886,775 407,292 224,194 (242,155) 15,276,106
----------- -------- -------- --------- -----------
Income (loss) before
taxes................... (587,050) (29,322) (20,333) 38,503 (598,202)
Taxes on income (loss).... (76,455) (6,480) (4,672) -- (87,607)
----------- -------- -------- --------- -----------
Net income (loss)......... $ (510,595) $(22,842) $(15,661) $ 38,503 $ (510,595)
=========== ======== ======== ========= ===========
52 WEEKS ENDED DECEMBER 25, 1999
-------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales..................... $13,624,272 $1,043,109 $141,700 $(537,045) $14,272,036
Costs and expenses:
Cost of sales............... 12,434,048 821,782 116,084 (537,045) 12,834,869
Selling and
administrative............ 1,012,393 224,572 24,666 -- 1,261,631
Other....................... 112,593 19,400 3,112 -- 135,105
Impairment/restructuring
charge.................... 101,058 1,954 -- -- 103,012
Equity loss from
subsidiaries.............. 16,896 -- -- (16,896) --
----------- ---------- -------- --------- -----------
Total costs and
expenses............... 13,676,988 1,067,708 143,862 (553,941) 14,334,617
----------- ---------- -------- --------- -----------
Income (loss) before taxes.... (52,716) (24,599) (2,162) 16,896 (62,581)
Taxes on income (loss)........ (7,988) (8,949) (916) -- (17,853)
----------- ---------- -------- --------- -----------
Net income (loss)............. $ (44,728) $ (15,650) $ (1,246) $ 16,896 $ (44,728)
=========== ========== ======== ========= ===========
F-24
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
53 WEEKS ENDED DECEMBER 30, 2000
-------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales.................... $12,013,293 $3,768,333 $70,022 $(1,407,833) $14,443,815
Costs and expenses:
Cost of sales.............. 11,349,595 3,102,660 52,493 (1,407,833) 13,096,915
Selling and
administrative........... 575,408 591,144 18,451 -- 1,185,003
Other...................... 100,721 46,796 2,424 -- 149,941
Impairment/restructuring
charge................... 155,813 56,971 61 -- 212,845
Equity loss from
subsidiaries............. 20,108 -- -- (20,108) --
----------- ---------- ------- ----------- -----------
Total costs and
expenses.............. 12,201,645 3,797,571 73,429 (1,427,941) 14,644,704
----------- ---------- ------- ----------- -----------
Income (loss) before taxes... (188,352) (29,238) (3,407) 20,108 (200,889)
Taxes on income (loss)....... (66,210) (11,095) (1,442) -- (78,747)
----------- ---------- ------- ----------- -----------
Net income (loss)............ $ (122,142) $ (18,143) $(1,965) $ 20,108 $ (122,142)
=========== ========== ======= =========== ===========
F-25
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
52 WEEKS ENDED DECEMBER 26, 1998
-----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities........... $ 148,865 $ 7,789 $(15,575) $ $ 141,079
--------- ------- -------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment.................... (191,357) (5,571) (3,283) -- (200,211)
Other.......................... 35,551 1,348 -- -- 36,899
--------- ------- -------- ---------
Net cash used in investing
activities..................... (155,806) (4,223) (3,283) -- (163,312)
--------- ------- -------- ---------
Cash flows from financing
activities:
Repayments on capital lease
obligations.................. (12,470) (589) (297) -- (13,356)
Advances to (from) parent...... (10,046) (8,181) 18,227 -- --
Other.......................... 11,240 -- -- -- 11,240
--------- ------- -------- ---------
Net cash provided by (used in)
financing activities........... (11,276) (8,770) 17,930 -- (2,116)
--------- ------- -------- ---------
Net decrease in cash and cash
equivalents.................... (18,217) (5,204) (928) -- (24,349)
Cash and cash equivalents at
beginning of year.............. 26,054 3,385 877 -- 30,316
--------- ------- -------- ---------
Cash and cash equivalents at end
of year........................ $ 7,837 $(1,819) $ (51) $ $ 5,967
========= ======= ======== ===== =========
F-26
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
52 WEEKS ENDED DECEMBER 25, 1999
-----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by operating
activities..................... $ 86,780 $ 25,659 $ 5,178 $ $ 117,617
--------- -------- ------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment.................... (121,414) (42,482) (2,443) -- (166,339)
Other.......................... (51,214) 4,209 -- -- (47,005)
--------- -------- ------- ---------
Net cash used in investing
activities..................... (172,628) (38,273) (2,443) -- (213,344)
--------- -------- ------- ---------
Cash flows from financing
activities:
Repayments on capital lease
obligations.................. (18,101) (3,112) (320) -- (21,533)
Advances (to) from parent...... (76,668) 78,853 (2,185) -- --
Other.......................... 117,976 -- -- -- 117,976
--------- -------- ------- ---------
Net cash provided by (used in)
financing activities........... 23,207 75,741 (2,505) -- 96,443
--------- -------- ------- ---------
Net increase (decrease) in cash
and cash equivalents........... (62,641) 63,127 230 -- 716
Cash and cash equivalents at
beginning of year.............. 7,838 (1,820) (51) -- 5,967
--------- -------- ------- ---------
Cash and cash equivalents at end
of year........................ $ (54,803) $ 61,307 $ 179 $ $ 6,683
========= ======== ======= ====== =========
F-27
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
53 WEEKS ENDED DECEMBER 30, 2000
----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by operating
activities...................... $ 40,039 $ 86,008 $ 598 $ $ 126,645
-------- -------- -------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment..................... (75,354) (60,221) (15,262) -- (150,837)
Other........................... 101,247 1,686 -- -- 102,933
-------- -------- -------- ---------
Net cash provided by (used
in)investing activities......... 25,893 (58,535) (15,262) -- (47,904)
-------- -------- -------- ---------
Cash flows from financing
activities:
Repayments on capital lease
obligations................... (15,398) (5,490) -- -- (20,888)
Advances (to) from parent....... 60,912 (76,537) 15,625 -- --
Other........................... (34,156) -- -- -- (34,156)
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities............ 11,358 (82,027) 15,625 -- (55,044)
-------- -------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............ 77,290 (54,554) 961 -- 23,697
Cash and cash equivalents at
beginning of year............... (54,803) 61,307 179 -- 6,683
-------- -------- -------- ---------
Cash and cash equivalents at end
of year......................... $ 22,487 $ 6,753 $ 1,140 $ $ 30,380
======== ======== ======== ====== =========
LEASE AGREEMENTS
Capital and Operating Leases: We lease certain distribution facilities
with terms generally ranging from 20 to 35 years, while lease terms for other
operating facilities range from 1 to 15 years. The leases normally provide for
minimum annual rentals plus executory costs and usually include provisions for
one to five renewal options of five years each.
We lease company-owned store facilities with terms generally ranging from
15 to 20 years. These agreements normally provide for contingent rentals based
on sales performance in excess of specified minimums. The leases usually include
provisions for one to four renewal options of two to five years each. Certain
equipment is leased under agreements ranging from two to eight years with no
renewal options.
Accumulated amortization related to leased assets under capital leases was
$59 million and $38 million at year-end 1999 and 2000, respectively.
F-28
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payment obligations for leased assets under capital
leases as of year-end 2000 are set forth below:
LEASE
YEARS OBLIGATIONS
----- --------------
(IN THOUSANDS)
2001........................................................ $ 37,889
2002........................................................ 36,995
2003........................................................ 37,187
2004........................................................ 37,066
2005........................................................ 37,628
Later....................................................... 140,308
--------
Total minimum lease payments................................ 327,073
Less estimated executory costs.............................. (50,042)
--------
Net minimum lease payments.................................. 277,031
Less interest............................................... (60,237)
--------
Present value of net minimum lease payments................. 216,794
Less current obligations.................................... (9,194)
--------
Long-term obligations....................................... $207,600
========
Future minimum lease payments required at year-end 2000 under operating
leases that have initial noncancelable lease terms exceeding one year are
presented in the following table:
FACILITY FACILITIES EQUIPMENT NET
YEARS RENTALS SUBLEASED RENTALS RENTALS
----- -------- ---------- --------- --------
(IN THOUSANDS)
2001...................................... $150,123 $ (69,768) $13,453 $ 93,808
2002...................................... 137,987 (60,986) 9,575 86,576
2003...................................... 126,293 (53,469) 4,273 77,097
2004...................................... 113,833 (45,035) 1,584 70,382
2005...................................... 99,759 (40,878) 314 59,195
Later..................................... 296,983 (116,352) -- 180,631
-------- --------- ------- --------
Total lease payments.................... $924,978 $(386,488) $29,199 $567,689
======== ========= ======= ========
The following table shows the composition of annual net rental expense
under noncancelable operating leases and subleases with initial terms of one
year or greater:
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Operating activity:
Rental expense..................................... $100,238 $ 95,760 $ 76,118
Contingent rentals................................. 1,971 1,329 902
Less sublease income............................... (7,349) (9,868) (9,014)
-------- -------- --------
94,860 87,221 68,006
-------- -------- --------
F-29
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Financing activity:
Rental expense..................................... 70,914 64,107 68,747
Less sublease income............................... (63,920) (68,442) (66,757)
-------- -------- --------
6,994 (4,335) 1,990
-------- -------- --------
Net rental expense................................... $101,854 $ 82,886 $ 69,996
======== ======== ========
We reflect net financing activity, as shown above, as a component of net
sales.
Direct Financing Leases: We lease retail store facilities with terms
generally ranging from 15 to 20 years which are subsequently subleased to
customers. Most leases provide for a percentage rental based on sales
performance in excess of specified minimum rentals. The leases usually contain
provisions for one to four renewal options of five years each. The sublease to
the customer is normally for an initial five-year term with automatic five-year
renewals at our discretion, which corresponds to the length of the initial term
of the prime lease.
The following table shows the future minimum rentals receivable under
direct financing leases and future minimum lease payment obligations under
capital leases in effect at year-end 2000:
LEASE
RENTALS LEASE
YEARS RECEIVABLE OBLIGATIONS
----- ---------- -----------
(IN THOUSANDS)
2001........................................................ $ 32,714 $ 30,004
2002........................................................ 26,181 29,877
2003........................................................ 22,420 28,757
2004........................................................ 19,532 27,938
2005........................................................ 17,300 27,231
Later....................................................... 55,123 92,109
-------- --------
Total minimum lease payments................................ 173,270 235,916
Less estimated executory costs.............................. (14,353) (20,888)
-------- --------
Net minimum lease payments.................................. 158,917 215,028
Less interest............................................... (43,420) (32,917)
-------- --------
Present value of net minimum lease payments................. 115,497 182,111
Less current portion........................................ (13,486) (12,472)
-------- --------
Long-term portion........................................... $102,011 $169,639
======== ========
Contingent rental income and contingent rental expense are not material.
SHAREHOLDERS' EQUITY
Fleming offers a Dividend Reinvestment and Stock Purchase Plan which
provides shareholders the opportunity to automatically reinvest their dividends
in common stock at a 5% discount from market value. Shareholders also may
purchase shares at market value by making cash payments up to $5,000 per
calendar quarter. Such programs resulted in issuing 54,000 and 31,000 new shares
in 1999 and 2000, respectively.
Our employee stock ownership plan (ESOP) established in 1990 allows
substantially all associates to participate. In 1990, the ESOP entered into a
note with a bank to finance the purchase of the shares. In 1994,
F-30
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
we paid off the note and received a note from the ESOP. The ESOP completed
payments of the loan balance to us in 1999.
We made contributions to the ESOP based on fixed debt service requirements
of the ESOP note. Such contributions were approximately $2 million in 1997, $2.5
million in 1998, and $2 million in 1999. The ESOP note was paid off in 1999
therefore there were no contributions in 2000. Dividends used by the ESOP for
debt service and interest and compensation expense were not material.
We issue shares of restricted stock to key employees under plans approved
by the stockholders. Periods of restriction and/or performance goals are
established for each award.
The fair value of the restricted stock at the time of the grant is recorded
as unearned compensation -- restricted stock which is netted against capital in
excess of par within shareholders' equity. Compensation is amortized to expense
when earned. At year-end 2000, 363,546 shares remained available for award under
all plans.
Information regarding restricted stock balances is as follows (in
thousands):
1999 2000
------ ------
Awarded restricted shares outstanding....................... 441 746
====== ======
Unearned compensation -- restricted stock................... $3,503 $1,232
====== ======
We may grant stock options to key employees through stock option plans,
providing for the grant of incentive stock options and non-qualified stock
options. The stock options have a maximum term of 10 years and have time and/or
performance based vesting requirements. At year-end 2000, there were
approximately 1,848,000 shares available for grant under the unrestricted stock
option plans. Subsequent to year end, approximately 61,500 stock options were
granted.
Stock option transactions for the three years ended December 30, 2000 are
as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE PRICE RANGE
------ ---------------- ------------
(SHARES IN THOUSANDS)
Outstanding, year-end 1997...................... 2,266 $22.65 $16.38-38.38
Granted....................................... 550 10.18 $ 9.72-18.19
Exercised..................................... (3) 16.38 $16.38-16.38
Canceled and forfeited........................ (403) 25.40 $16.38-37.06
----- ------ ------------
Outstanding, year-end 1998...................... 2,410 $19.35 $ 9.72-38.38
Granted....................................... 2,339 9.80 $ 7.53-12.25
Canceled and forfeited........................ (968) 16.53 $ 7.53-38.38
----- ------ ------------
Outstanding, year-end 1999...................... 3,781 $14.19 $ 7.53-38.38
Granted....................................... 1,586 12.79 $ 8.94-17.22
Exercised..................................... (59) 9.69 $ 7.53-11.72
Canceled and forfeited........................ (897) 18.13 $ 7.53-37.06
----- ------ ------------
Outstanding, year-end 2000...................... 4,411 $12.94 $ 7.53-38.38
===== ====== ============
F-31
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding options outstanding at year-end 2000 is as follows:
ALL OPTIONS
OUTSTANDING CURRENTLY
OPTIONS EXERCISABLE
----------- -----------
(SHARES IN THOUSANDS)
Option price $28.38-$37.06:
Number of options......................................... 3 1
Weighted average exercise price........................... 28.38 28.38
Weighted average remaining life in years.................. 4 --
Option price $19.75-$26.44:
Number of options......................................... 413 193
Weighted average exercise price........................... 24.76 24.54
Weighted average remaining life in years.................. 3 --
Option price $7.53-$17.50:
Number of options......................................... 3,987 1,142
Weighted average exercise price........................... 11.63 12.38
Weighted average remaining life in years.................. 8 --
In the event of a change of control, the vesting of all awards will
accelerate.
We apply APB Opinion No. 25 -- Accounting for Stock Issued to Employees,
and related Interpretations in accounting for our plans. Total compensation cost
recognized in income for stock based employee compensation awards was
$3,160,000, $1,388,000 and $3,159,000 for 1998, 1999 and 2000, respectively. If
compensation cost had been recognized for the stock-based compensation plans
based on fair values of the awards at the grant dates consistent with the method
of SFAS No. 123 -- Accounting for Stock-Based Compensation, reported net
earnings (loss) and earnings (loss) per share would have been $(511.7) million
and $(13.48) for 1998, $(46.6) million and $(1.22) for 1999, and $(124.7)
million and $(3.22) for 2000, respectively. The weighted average fair value on
the date of grant of the individual options granted during 1998, 1999 and 2000
was estimated at $4.82, $5.08 and $7.90, respectively.
Significant assumptions used to estimate the fair values of awards using
the Black-Scholes option-pricing model with the following weighted average
assumptions for 1998, 1999 and 2000 are: risk-free interest rate -- 4.50% to
7.00%; expected lives of options -- 10 years; expected volatility -- 30% to 50%;
and expected dividend yield of 0.5% to 0.9%.
ASSOCIATE RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
Fleming sponsors pension and postretirement benefit plans for substantially
all non-union and some union associates.
Benefit calculations for our defined benefit pension plans are primarily a
function of years of service and final average earnings at the time of
retirement. Final average earnings are the average of the highest five years of
compensation during the last 10 years of employment. We fund these plans by
contributing the actuarially computed amounts that meet funding requirements.
Substantially all the plans' assets are invested in listed securities,
short-term investments, bonds and real estate.
We also have unfunded nonqualified supplemental retirement plans for
selected associates.
We offer a comprehensive major medical plan to eligible retired associates
who meet certain age and years of service requirements. This unfunded defined
benefit plan generally provides medical benefits until Medicare insurance
commences.
F-32
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans mentioned above.
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------- -----------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
(IN THOUSANDS)
Change in benefit obligation:
Balance at beginning of year............. $418,604 $375,603 $ 16,503 $ 15,213
Service cost............................. 14,163 9,940 177 124
Interest cost............................ 26,511 28,924 1,020 964
Plan participants' contributions......... -- -- 837 773
Actuarial gain/loss...................... (53,098) 20,118 2,006 604
Benefits paid............................ (30,577) (29,181) (5,330) (4,585)
-------- -------- -------- --------
Balance at end of year..................... $375,603 $405,404 $ 15,213 $ 13,093
======== ======== ======== ========
Change in plan assets:
Fair value at beginning of year.......... $316,539 $331,862 $ -- $ --
Actual return on assets.................. 39,608 (10,968) -- --
Employer contribution.................... 6,292 28,535 5,330 4,585
Benefits paid............................ (30,577) (29,181) (5,330) (4,585)
-------- -------- -------- --------
Fair value at end of year.................. $331,862 $320,248 $ -- $ --
======== ======== ======== ========
Funded status.............................. $(43,741) $(85,156) $(15,213) $(13,093)
Unrecognized actuarial loss.............. 53,401 109,585 5,564 5,937
Unrecognized prior service cost.......... 1,190 899 -- --
Unrecognized net transition asset........ (320) (53) -- --
-------- -------- -------- --------
Net amount recognized...................... $ 10,530 $ 25,275 $ (9,649) $ (7,156)
======== ======== ======== ========
Amounts recognized in the consolidated
balance sheet:
Prepaid benefit cost..................... $ 26,314 $ 8,302 $ -- $ --
Accrued benefit liability................ (33,028) (52,181) (9,649) (7,156)
Intangible asset......................... 958 773 -- --
Accumulated other comprehensive income... 16,286 68,381 -- --
-------- -------- -------- --------
Net amount recognized...................... $ 10,530 $ 25,275 $ (9,649) $ (7,156)
======== ======== ======== ========
F-33
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumptions were used for the plans mentioned above.
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
1999 2000 1999 2000
---- ---- ------ ------
Discount rate.............................................. 7.50% 7.50% 7.50% 7.50%
Expected return on plan assets............................. 9.50% 9.00% -- --
Rate of compensation increase.............................. 4.00% 4.50% -- --
Net periodic pension and other postretirement benefit costs include the
following components:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------------ ------------------------
1998 1999 2000 1998 1999 2000
-------- -------- -------- ------ ------ ------
(IN THOUSANDS)
Service cost................ $ 12,981 $ 14,163 $ 9,940 $ 139 $ 177 $ 124
Interest cost............... 25,334 26,511 28,924 1,052 1,020 964
Expected return on plan
assets.................... (25,234) (29,257) (29,527) -- -- --
Amortization of actuarial
loss...................... 9,105 11,134 4,429 -- 222 231
Amortization of prior
service cost.............. 354 291 292 -- -- --
Amortization of net
transition asset.......... (268) (268) (268) -- -- --
-------- -------- -------- ------ ------ ------
Net periodic benefit cost... $ 22,272 $ 22,574 $ 13,790 $1,191 $1,419 $1,319
======== ======== ======== ====== ====== ======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $376 million, $341 million, and $332 million,
respectively, as of December 25, 1999, and $405 million, $370 million, and $320
million, respectively, as of December 30, 2000.
For measurement purposes in 1999 and 2000, a 9.0% annual rate of increase
in the per capita cost of covered medical care benefits was assumed. The rate
was assumed to remain constant for both the measurement year and following year,
then grade down by 0.5% per year until reaching 5.0%, then remain constant
thereafter. For the 1999 and 2000 measurement years, the ultimate trend rate was
realized at the year 2008 and 2009, respectively.
The effect of a one-percentage point increase in assumed medical cost trend
rates would have increased the accumulated postretirement benefit obligation as
of December 31, 2000 from $13.0 to $13.8 million, and increased the total of the
service cost and interest cost components of the net periodic cost from $1.09
million to $1.14 million. The effect of a one-percentage point decrease in
assumed medical cost trend rates would have decreased the accumulated
postretirement benefit obligation as of December 31, 2000 from $13.0 to $12.5
million, and decreased the total of the service cost and interest cost
components of the net periodic cost from $1.09 million to $1.04 million.
In some of the retail operations, contributory profit sharing plans were
maintained for associates who meet certain types of employment and length of
service requirements. These plans were discontinued at the beginning of 2000.
Contributions under these defined contribution plans were made at the discretion
of the Board of Directors and totaled $3 million in both 1998 and 1999.
Beginning in 2000, we changed our benefit plans to offer a matching 401(k)
plan to associates in addition to the pension plan previously offered. The
pension plan was continued, but with a reduced benefit formula.
F-34
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The new plan was also offered to an increased number of associates. Under the
plan, we annually commit to a minimum funding into the plan, match 100% of the
first 2% of the employee's contribution, and match 25% of the next 4% of the
employee's contribution for a maximum match contribution of 3% of the employee's
base salary.
Certain associates have pension and health care benefits provided under
collectively bargained multi-employer agreements. Expenses for these benefits
were $80 million, $77 million and $76 million for 1998, 1999 and 2000,
respectively.
SUPPLEMENTAL CASH FLOWS INFORMATION
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Acquisitions:
Fair value of assets acquired...................... $ 32,080 $ 78,607 $ 18,529
Less:
Liabilities assumed or created..................... 1,792 -- 11,181
Cash acquired...................................... 63 167 28
-------- -------- --------
Cash paid, net of cash acquired................. $ 30,225 $ 78,440 $ 7,320
======== ======== ========
Cash paid during the year for:
Interest, net of amounts capitalized............... $182,449 $165,676 $175,246
======== ======== ========
Income taxes, net of refunds....................... $ 23,822 $ 14,863 $(71,529)
======== ======== ========
Direct financing leases and related obligations...... $ 9,349 $ 45,645 $ 47,195
======== ======== ========
Property and equipment additions by capital leases... $ 70,684 $ 45,220 $ 32,660
======== ======== ========
CONTINGENCIES
In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities (including those associated with litigation
matters) when we determine that a material loss is "probable" and either
"quantifiable" or "reasonably estimable." Additionally, we disclose material
loss contingencies when the likelihood of a material loss is deemed to be
greater than "remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, we and certain of our present and former
officers and directors were named as defendants in nine purported class action
suits filed by certain stockholders and one purported class action suit filed by
two noteholders. All cases were filed in the United States District Court for
the Western District of Oklahoma. In 1997, the court consolidated the
stockholder cases; the noteholder case was also consolidated, but only for
pre-trial purposes. The plaintiffs in the consolidated cases sought undetermined
but significant damages, and asserted liability for our alleged "deceptive
business practices," and our alleged failure to properly account for and
disclose the contingent liability created by the David's Supermarkets
litigation, a lawsuit we settled in April 1997 in which David's sued us for
allegedly overcharging for products. The plaintiffs claimed that these alleged
practices led to the David's litigation and to other material contingent
liabilities, caused us to change our manner of doing business at great cost and
loss of profit and materially inflated the trading price of our common stock.
During 1998 the complaint in the noteholder case was dismissed, and during
1999 the complaint in the consolidated stockholder case was also dismissed, each
without prejudice. The court gave the plaintiffs the opportunity to restate
their claims in each case, and they did so in amended complaints. We again filed
F-35
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
motions to dismiss all claims in both cases. On February 4, 2000, the court
dismissed the amended complaint in the stockholder case with prejudice. The
stockholder plaintiffs filed a notice of appeal on March 3, 2000, and briefing
is presently under way in the Court of Appeals for the Tenth Circuit. On August
1, 2000, the court dismissed the claims in the noteholder complaint alleging
violations of the Securities Exchange Act of 1934, but the court determined that
the noteholder plaintiffs have stated a claim under Section 11 of the Securities
Act of 1933. On September 15, 2000, defendants filed a motion to allow an
immediate appeal of the court's denial of their motion to dismiss plaintiffs'
claim under Section 11. That motion was denied on January 8, 2001. The case was
set for a status and scheduling conference on January 30, 2001. The court has
entered an order setting this case for trial in October 2001.
Based upon some preliminary assumptions, plaintiffs' economic experts in
the noteholder case have estimated "baseline" damages to be approximately $10
million and pre-judgment interest of approximately $3 million.
In 1997, we won a declaratory judgment against certain of our insurance
carriers regarding policies issued to us for the benefit of our officers and
directors. On motion for summary judgment, the court ruled that our exposure, if
any, under the class action suits is covered by D&O policies written by the
insurance carriers, aggregating $60 million in coverage, and that the "larger
settlement rule" will apply to the case. According to the trial court, under the
larger settlement rule, a D&O insurer is liable for the entire amount of
coverage available under a policy even if there is some overlap in the liability
created by the insured individuals and the uninsured corporation. If a
corporation's liability is increased by uninsured parties beyond that of the
insured individuals, then that portion of the liability is the sole obligation
of the corporation. The court also held that allocation is not available to the
insurance carriers as an affirmative defense. The insurance carriers appealed.
In 1999, the appellate court affirmed the decision that the class actions were
covered by D&O policies aggregating $60 million in coverage but reversed the
trial court's decision as to allocation as being premature.
We intend to vigorously defend against the claims in these class action
suits and pursue the issue of insurance discussed above, but we cannot predict
the outcome of the cases. An unfavorable outcome could have a material adverse
effect on our financial condition and business prospects.
Don's United Super (and Related Cases). We and two of our retired
executives have been named in a suit filed in 1998 in the United States District
Court for the Western District of Missouri by several current and former
customers of the company (Don's United Super, et al. v. Fleming, et al.). The 18
plaintiffs operate retail grocery stores in the St. Joseph and Kansas City
metropolitan areas. The plaintiffs in this suit allege product overcharges,
breach of contract, breach of fiduciary duty, misrepresentation, fraud and RICO
violations, and they are seeking actual, punitive and treble damages, as well as
a declaration that certain contracts are voidable at the option of the
plaintiffs.
During the fourth quarter of 1999, plaintiffs produced reports of their
expert witnesses calculating alleged actual damages of approximately $112
million. During the first quarter of 2000, plaintiffs revised a portion of these
damage calculations, and although it is not clear what the precise damage claim
will be, it appears that plaintiffs will claim approximately $120 million,
exclusive of any punitive or treble damages.
On May 2, 2000, the court granted partial summary judgment to the
defendants, holding that plaintiffs' breach of contract claims that relate to
events that occurred more than four years before the filing of the litigation
are barred by limitations, and that plaintiffs' fraud claims based upon
fraudulent inducement that occurred more than 15 years before the filing of the
lawsuit likewise are barred. It is unclear what impact, if any, these rulings
may have on the damage calculations of the plaintiffs' expert witnesses.
The court has set August 13, 2001 as the date on which trial of the Don's
case will commence.
In October 1998, we and the same two retired executives were named in a
suit filed by another group of retailers in the same court as the Don's suit
(Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently,
F-36
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16 plaintiffs are asserting claims in the Coddington suit, all but one of which
have arbitration agreements with us. 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. We have appealed the district court's denial of arbitration to the
Eighth Circuit Court of Appeals. The two plaintiffs who 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 10 customers, some of whom are also
plaintiffs in the Don's case. The earlier two cases, which principally seek an
accounting of our expenditure of certain joint advertising funds, have been
consolidated. All proceedings in these cases have been stayed pending the
arbitration of the claims of those plaintiffs who have arbitration agreements
with us.
In March 2000, we and one former executive were named in a suit filed in
the United States District Court for the 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, we anticipate that substantial damages
will be claimed.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted
our motion and ordered the related Missouri cases (Don's United Super,
Coddington Enterprises, Inc., and J&A Foods, Inc.) and the Storehouse Markets
case (described below) transferred to the Western District of Missouri for
coordinated or consolidated pre-trial proceedings.
We intend to vigorously defend against the claims in these related cases
but we are currently unable to predict the outcome of the cases. An unfavorable
outcome could have a material adverse effect on our financial condition and
business prospects.
On March 2, 2001, the court ordered the parties in the Missouri cases, the
Storehouse Markets cases and the Welsh case to mediate the dispute within 45
days of the order.
Storehouse Markets. In 1998, we and one of our former division officers
were named in a suit filed in the United States District Court for the District
of Utah by several 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 our Salt Lake City
division covering a four-state region. On June 12, 2000, the court entered an
order certifying the case as a class action. On July 11, 2000, the United States
Court of Appeals for the Tenth Circuit granted our request for permission to
appeal the class certification order, and we are pursuing that appeal on an
expedited basis. Oral argument of the appeal is set for March 14, 2001.
On August 8, 2000, the Judicial Panel on Multidistrict Litigation granted
our motion and ordered the Storehouse Markets case and the related Missouri
cases (described above) transferred to the Western District of Missouri for
coordinated or consolidated pre-trial proceedings.
Damages have not been quantified by the plaintiffs; however, we anticipate
that substantial damages will be claimed. We intend to vigorously defend against
these claims but we cannot predict the outcome of the
F-37
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
case. An unfavorable outcome could have a material adverse effect on our
financial condition and business prospects.
On March 2, 2001, the court ordered the parties in the Missouri cases, the
Storehouse Markets cases and the Welsh case to mediate the dispute within 45
days of the order.
Welsh. In April 2000, the operators of two grocery stores in Van Horn and
Marfa, Texas filed an amended complaint in the United States District Court for
the Western District of Texas, Pecos Division (Welsh v. Fleming Foods of Texas,
L.P.). The amended complaint alleges product overcharges, breach of contract,
fraud, conversion, breach of fiduciary duty, negligent misrepresentation and
breach of the Texas Deceptive Trade Practices Act. The amended complaint seeks
unspecified actual damages, punitive damages, attorneys' fees and pre-judgment
and post-judgment interest. Pursuant to the order of the Judicial Panel on
Multidistrict Litigation, the Welsh case has been transferred to the Western
District of Missouri for pre-trial proceedings. No trial date has been set in
this case.
On March 2, 2001, the court ordered the parties in the Missouri cases, the
Storehouse Markets cases and the Welsh case to mediate the dispute within 45
days of the order.
Other. Our facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of certain materials. In conformity
with these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection
Agency and by similar state agencies as potentially responsible parties under
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, or similar state laws, as applicable, with respect to EPA-designated
Superfund sites. While liability under CERCLA for remediation at these sites is
generally joint and several with other responsible parties, we believe that, to
the extent we are ultimately determined to be liable for the expense of
remediation at any site, such liability will not result in a material adverse
effect on our consolidated financial position or results of operations. We are
committed to maintaining the environment and protecting natural resources and
human health and to achieving full compliance with all applicable laws,
regulations and orders.
We are a party to or threatened with various other litigation and
contingent loss situations arising in the ordinary course of our business
including: disputes with customers and former customers; disputes with owners
and former owners of financially troubled or failed customers; disputes with
landlords and former landlords; disputes with employees and former employees
regarding labor conditions, wages, workers' compensation matters and alleged
discriminatory practices; disputes with insurance carriers; tax assessments and
other matters, some of which are for substantial amounts. Except as noted
herein, we do not believe that any such claim will have a material adverse
effect on us.
F-38
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 October 6, 2001, and the related
condensed consolidated statements of operations for the 12 and 40 weeks ended
September 30, 2000 and October 6, 2001 and condensed consolidated statements of
cash flows for the 40 weeks ended September 30, 2000 and October 6, 2001. These
financial statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Fleming Companies Inc. and subsidiaries as of December 30, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 14,
2001 (except for the information under long-term debt and contingencies included
in the notes to consolidated financial statements as to which the date is March
22, 2001), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 30, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 12, 2001
F-39
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS -- UNAUDITED
FOR THE 12 WEEKS ENDED SEPTEMBER 30, 2000 AND OCTOBER 6, 2001
2000 2001
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net sales................................................... $3,197,655 $4,022,085
Costs and expenses:
Cost of sales............................................. 2,894,341 3,748,895
Selling and administrative................................ 260,019 209,928
Interest expense.......................................... 40,111 35,370
Interest income........................................... (6,322) (5,494)
Equity investment results................................. 2,097 689
Impairment/restructuring charge........................... 83,356 1,415
Litigation credit......................................... (1,916) --
---------- ----------
Total costs and expenses............................... 3,271,686 3,990,803
(Loss) income before taxes.................................. (74,031) 31,282
Taxes on (loss) income...................................... (28,472) 12,207
---------- ----------
Net (loss) income........................................... $ (45,559) $ 19,075
========== ==========
Basic net (loss) income per share........................... $ (1.17) $ 0.44
Diluted net (loss) income per share......................... $ (1.17) $ 0.40
Dividends paid per share.................................... $ 0.02 $ 0.02
Weighted average shares outstanding:
Basic.................................................. 38,902 43,728
Diluted................................................ 38,902 51,032
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-40
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS -- UNAUDITED
FOR THE 40 WEEKS ENDED SEPTEMBER 30, 2000 AND OCTOBER 6, 2001
2000 2001
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net sales................................................... $10,819,031 $11,640,555
Costs and expenses:
Cost of sales............................................. 9,807,789 10,737,764
Selling and administrative................................ 893,700 736,305
Interest expense.......................................... 131,659 127,307
Interest income........................................... (25,167) (20,554)
Equity investment results................................. 5,682 761
Impairment/restructuring charge (credit).................. 146,514 (25,561)
Litigation (credit) charge................................ (1,916) 48,628
----------- -----------
Total costs and expenses............................... 10,958,261 11,604,650
----------- -----------
(Loss) income before taxes.................................. (139,230) 35,905
Taxes on (loss) income...................................... (54,449) 14,822
----------- -----------
(Loss) income before extraordinary charge................... (84,781) 21,083
Extraordinary charge from early retirement of debt (net of
taxes).................................................... -- (3,469)
Net (loss) income........................................... $ (84,781) $ 17,614
=========== ===========
Basic net (loss) income per share:
(Loss) income before extraordinary charge................. $ (2.19) $ 0.50
Extraordinary charge from early retirement of debt (net of
taxes)................................................. -- (0.08)
Net (loss) income......................................... $ (2.19) $ 0.42
Diluted net (loss) income per share:
(Loss) income before extraordinary charge................. $ (2.19) $ 0.47
Extraordinary charge from early retirement of debt (net of
taxes)................................................. -- (0.08)
Net (loss) income......................................... $ (2.19) $ 0.39
Dividends paid per share.................................... $ 0.06 $ 0.06
Weighted average shares outstanding:
Basic..................................................... 38,651 42,177
Diluted................................................... 38,651 44,670
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-41
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS -- UNAUDITED
AT DECEMBER 30, 2000 AND OCTOBER 6, 2001
2000 2001
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,380 $ 43,391
Receivables, net.......................................... 509,045 571,503
Inventories............................................... 831,265 1,094,935
Assets held for sale...................................... 165,800 26,853
Other current assets...................................... 86,583 126,229
---------- ----------
Total current assets................................... 1,623,073 1,863,011
Investments and notes receivable, net....................... 104,467 103,338
Investment in direct financing leases....................... 102,011 85,668
Property and equipment...................................... 1,370,430 1,424,451
Less accumulated depreciation and amortization.............. (653,973) (686,578)
---------- ----------
Net property and equipment.................................. 716,457 737,873
Deferred income taxes....................................... 139,852 96,499
Other assets................................................ 172,632 303,220
Goodwill, net............................................... 544,319 558,168
---------- ----------
Total assets................................................ $3,402,811 $3,747,777
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 943,279 $1,016,877
Current maturities of long-term debt...................... 38,171 39,737
Current obligations under capital leases.................. 21,666 20,847
Other current liabilities................................. 229,272 199,846
---------- ----------
Total current liabilities.............................. 1,232,388 1,277,307
Long-term debt.............................................. 1,232,400 1,517,875
Long-term obligations under capital leases.................. 377,239 333,980
Other liabilities........................................... 133,592 109,685
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share................... 99,044 110,934
Capital in excess of par value............................ 513,645 565,879
Reinvested earnings (deficit)............................. (144,468) (126,854)
Accumulated other comprehensive income-additional minimum
pension liability...................................... (41,029) (41,029)
---------- ----------
Total shareholders' equity............................. 427,192 508,930
---------- ----------
Total liabilities and shareholders' equity.................. $3,402,811 $3,747,777
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-42
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- UNAUDITED
FOR THE 40 WEEKS ENDED SEPTEMBER 30, 2000 AND OCTOBER 6, 2001
2000 2001
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss) income......................................... $ (84,871) $ 17,614
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 130,074 126,127
Amortization costs in interest expense.................. 3,734 4,929
Credit losses........................................... 19,380 20,462
Deferred income taxes................................... (9,328) 38,045
Equity investment results............................... 5,682 761
Gain on sale of business................................ -- (3,273)
Impairment/restructuring and related charges, net of
impairment credit (not in other lines)................. 202,932 14,637
Cash payments on impairment/restructuring and related
charges................................................ (107,227) (58,450)
Cost of early debt retirement........................... -- 5,787
Change in assets and liabilities:
Receivables............................................. 24,461 (63,321)
Inventories............................................. 105,329 (217,352)
Accounts payable........................................ (134,368) 65,898
Other assets and liabilities............................ (128,220) (102,473)
Other adjustments, net.................................... (260) 5,892
--------- ---------
Net cash provided by (used in) operating activities......... 27,408 (144,717)
--------- ---------
Cash flows from investing activities:
Collections on notes receivable........................... 25,367 24,375
Notes receivable funded................................... (20,923) (20,704)
Purchases of businesses................................... (2,279) (120,670)
Purchases of property and equipment....................... (107,623) (168,504)
Proceeds from sale of property and equipment.............. 39,071 13,286
Investments in customers.................................. (969) --
Proceeds from sale of investment.......................... 3,293 5,115
Proceeds from sale of businesses.......................... 45,280 120,947
Other investing activities................................ 11,928 8,482
--------- ---------
Net cash used in investing activities....................... (6,855) (137,673)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings........................ 107,000 620,602
Principal payments on long-term debt...................... (70,707) (342,755)
Payments on cost of debt issuance and debt retirement..... -- (23,976)
Principal payments on capital lease obligations........... (15,175) (15,092)
Proceeds from sale of common stock........................ 3,653 59,252
Dividends paid............................................ (2,334) (2,530)
--------- ---------
Net cash provided by financing activities................... 22,437 295,501
--------- ---------
Net change in cash and cash equivalents..................... 42,990 13,111
Cash and cash equivalents, beginning of period.............. 6,683 30,380
--------- ---------
Cash and cash equivalents, end of period.................... $ 49,673 $ 43,391
========= =========
Supplemental information:
Cash paid for interest.................................... $ 124,813 $ 122,484
Cash refunded for income taxes............................ $ 63,872 $ 17,894
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-43
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated condensed financial statements of Fleming
Companies, Inc. have been prepared without audit. In our opinion, all
adjustments necessary to present fairly our financial position at October 6,
2001, and the results of operations and cash flows for the periods presented
have been made. All such adjustments are of a normal, recurring nature except as
disclosed. Both basic and diluted income (loss) per share are computed based on
net income (loss) divided by weighted average shares as appropriate for each
calculation.
The preparation of the consolidated condensed financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain prior period amounts have been reclassified to conform to the
current period classifications, including the reclassification of net sales and
cost of goods due to the adoption of SAB No. 101 and EITF 99-19 in the fourth
quarter of 2000.
2. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and related notes included in our 2000
annual report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining the cost
of most grocery and certain perishable inventories. The excess of current cost
of LIFO inventories over their stated value was $58 million at December 30, 2000
($13 million of which was recorded in assets held for sale in current assets),
and $55 million at October 6, 2001.
4. Sales and operating earnings for our distribution and retail segments
are presented below.
12 WEEKS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 6,
2000 2001
------------- ----------
($ IN MILLIONS)
SALES:
Distribution.............................................. $2,882 $3,799
Intersegment elimination.................................. (378) (261)
------ ------
Net distribution.......................................... 2,504 3,538
Retail.................................................... 694 484
------ ------
Total sales................................................. $3,198 $4,022
====== ======
F-44
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
12 WEEKS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 6,
2000 2001
------------- ----------
($ IN MILLIONS)
OPERATING EARNINGS:
Distribution.............................................. $ 79 $ 100
Retail.................................................... 6 15
Support services.......................................... (42) (52)
------ ------
Total operating earnings.................................... 43 63
Interest expense............................................ (40) (35)
Interest income............................................. 6 5
Equity investment results................................... (2) (1)
Impairment/restructuring charge............................. (83) (1)
Litigation charge........................................... 2 --
------ ------
Income (loss) before taxes.................................. $ (74) $ 31
====== ======
40 WEEKS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 6,
2000 2001
------------- ----------
($ IN MILLIONS)
SALES:
Distribution.............................................. $ 9,647 $10,749
Intersegment elimination.................................. (1,344) (949)
------- -------
Net distribution.......................................... 8,303 9,800
Retail.................................................... 2,516 1,841
------- -------
Total sales................................................. $10,819 $11,641
======= =======
OPERATING EARNINGS:
Distribution.............................................. 224 309
Retail.................................................... 36 42
Support services.......................................... (142) (185)
------- -------
Total operating earnings.................................... 118 166
Interest expense............................................ (132) (127)
Interest income............................................. 25 21
Equity investment results................................... (6) (1)
Impairment/restructuring (charge) credit.................... (146) 26
Litigation (charge) credit.................................. 2 (49)
------- -------
Income (loss) before taxes.................................. $ (139) $ 36
======= =======
General support services expenses are not allocated to distribution and
retail segments. The transfer pricing between segments is at cost.
Kmart Corporation, our largest customer, represented 10% and 27% of our
total net sales during the third quarter of 2000 and 2001, respectively. Year to
date, sales to Kmart represented 10% and 18% of our total net sales for 2000 and
2001, respectively.
5. Our comprehensive loss for the 12 and 40 weeks ended September 30, 2000,
totaled $46 million and $85 million, respectively, and our comprehensive income
for the 12 and 40 weeks ended October 6, 2001,
F-45
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
totaled $19 million and $18 million, respectively. The comprehensive loss and
income for these periods was comprised only of the reported net loss and income,
respectively.
6. In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities (including those associated with litigation
matters) when we determine that a material loss is "probable" and either
"quantifiable" or "reasonably estimable." Additionally, we disclose material
loss contingencies when the likelihood of a material loss is deemed to be
greater than "remote" but less than "probable." Set forth below is information
regarding certain material loss contingencies:
Class Action Suits. In 1996, we and certain of our present and former
officers and directors were named as defendants in nine purported class action
suits filed by certain stockholders. All cases were filed in the United States
District Court for the Western District of Oklahoma and in 1997 were
consolidated. The plaintiffs in the consolidated cases sought undetermined but
significant damages, and asserted liability for our alleged "deceptive business
practices," and our alleged failure to properly account for and disclose the
contingent liability created by the David's Supermarkets case, a lawsuit we
settled in April 1997 in which David's sued us for allegedly overcharging for
products. The plaintiffs claimed that these alleged practices led to the David's
case and to other material contingent liabilities, caused us to change our
manner of doing business at great cost and loss of profit, and materially
inflated the trading price of our common stock.
During 1999, the court dismissed the consolidated stockholder case without
prejudice but gave the plaintiffs the opportunity to restate their claims, and
they did so in amended complaints. We again filed motions to dismiss all claims.
On February 4, 2000, the court dismissed the amended complaint with prejudice.
The plaintiffs filed a notice of appeal, and on September 7, 2001 the Tenth
Circuit affirmed the district court decision. On September 21, 2001, the
plaintiffs filed a petition for a full bench rehearing with the Tenth Circuit
and such petition was denied by the court in October.
The class action noteholder case previously reported in our second quarter
Form 10-Q was settled pursuant to a settlement agreement dated May 25, 2001 and
such settlement became final on September 5, 2001.
Don's United Super (and Related Cases). On September 6, 2001, the parties
executed a final settlement agreement in the Don's United Super, Coddington
Enterprises, Inc., J&A Foods, Inc., R&D Foods, Inc., and Robandee United Super,
Inc., cases. The settlement agreement includes a full release of us from
liability to the plaintiffs in these cases; payments by us to the plaintiffs
over a 16 month period; the transfer to us of a minority interest in several
price impact stores in Arizona; and lease concessions by us to certain
plaintiffs. We recorded a $21 million after-tax charge in the second quarter of
2001 to reflect the total estimated cost of the settlement and other related
expenses.
Storehouse Markets. On July 9, 2001, we executed a definitive settlement
agreement that was subsequently approved by the court on September 10, 2001. The
settlement agreement resolved all claims between the parties in exchange for a
total payment of $16 million by us and our insurer. We recorded an accrual for
our portion of the payment in the second quarter of 2001.
Welsh. In April 2000, the operators of two grocery stores in Texas filed
an amended complaint in the United States District Court for the Western
District of Texas, Pecos Division (Welsh v. Fleming Foods of Texas, L.P.). The
amended complaint alleges product overcharges, breach of contract, fraud,
conversion, breach of fiduciary duty, negligent misrepresentation and breach of
the Texas Deceptive Trade Practices Act. The amended complaint seeks unspecified
actual damages, punitive damages, attorneys' fees and pre-judgment and
post-judgment interest. Pursuant to the order of the Judicial Panel on
Multidistrict Litigation, this case has been transferred to the Western District
of Missouri for pre-trial proceedings. No trial date has been set in this case.
We will continue to vigorously defend against this claim, but we cannot predict
its outcome.
F-46
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Other. Our facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of certain materials. In conformity
with these provisions, we have a comprehensive program for testing, removal,
replacement or repair of our underground fuel storage tanks and for site
remediation where necessary. We have established reserves that we believe will
be sufficient to satisfy the anticipated costs of all known remediation
requirements.
We and others have been designated by the U.S. Environmental Protection
Agency and by similar state agencies as potentially responsible parties under
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, or similar state laws, as applicable, with respect to EPA-designated
Superfund sites. While liability under CERCLA for remediation at these sites is
generally joint and several with other responsible parties, we believe that, to
the extent we are ultimately determined to be liable for the expense of
remediation at any site, such liability will not result in a material adverse
effect on our consolidated financial position or results of operations. We are
committed to maintaining the environment and protecting natural resources and
human health and to achieving full compliance with all applicable laws,
regulations and orders.
We are a party to or threatened with various other litigation and
contingent loss situations arising in the ordinary course of our business
including disputes with the following parties: customers; owners of financially
troubled or failed customers; suppliers; landlords; employees regarding labor
conditions, wages, workers' compensation matters and alleged discriminatory
practices; insurance carriers; and tax assessors. Some of the disputes involve
substantial amounts. Except as noted above, we do not presently believe that any
such claim will have a material adverse effect on us.
7. Long-term debt consists of the following:
DECEMBER 30, OCTOBER 6,
2000 2001
------------ ----------
(IN THOUSANDS)
10- 1/8% senior notes due 2008.............................. $ -- $ 355,000
10- 5/8% senior notes due 2001.............................. 300,000 --
10- 1/2% senior subordinated notes due 2004................. 250,000 250,000
10- 5/8% senior subordinated notes due 2007................. 250,000 259,194
5- 1/4% convertible senior subordinated notes due 2009...... -- 150,000
Revolving credit, average interest rates of 6.2% for 2001
and 7.7% for 2000, due 2003............................... 300,000 420,000
Term loans, due 2001 to 2004, average interest rate of 7.6%
for 2001 and 8.0% for 2000................................ 154,421 128,517
Other debt (including discounts)............................ 16,150 (5,009)
---------- ----------
1,270,571 1,557,612
Less current maturities..................................... (38,171) (39,737)
---------- ----------
Long-term debt.............................................. $1,232,400 $1,517,875
========== ==========
Five-year maturities: Aggregate maturities of long-term debt for the next
five years are approximately as follows: in the remainder of 2001, $0; in 2002,
$40 million; in 2003, $460 million; in 2004, $299 million; and in 2005, $0.
The 10- 5/8% $300 million senior notes due 2001 were issued in 1994. During
the first quarter of 2001, we redeemed these notes with the proceeds from the
issuance of $355 million of senior notes, as described below.
F-47
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this redemption, we recognized a $3.5 million after-tax
extraordinary charge from early retirement of debt during the first quarter of
2001.
On March 15, 2001, we issued $355 million of 10- 1/8% senior notes that
mature on March 15, 2008. Most of the net proceeds were used to redeem all of
the 10- 5/8% senior notes due 2001, including an amount to cover accrued
interest and the redemption premium. The balance of the net proceeds was used to
pay down outstanding revolver loans. The new senior notes are unsecured senior
obligations, ranking the same as all other existing and future senior
indebtedness and senior in right of payment to our senior subordinated notes.
The senior notes are effectively subordinated to secured senior indebtedness
with respect to assets securing such indebtedness, including loans under our
senior secured credit facility. The 10- 1/8% senior notes are guaranteed by
substantially all of our subsidiaries (see Subsidiary Guarantee of Senior Notes
and Senior Subordinated Notes below).
On March 15, 2001, we issued $150 million of 5- 1/4% convertible senior
subordinated notes that mature on March 15, 2009 and have a conversion price of
$30.27 per share. The net proceeds were used to pay down outstanding revolver
loans. The convertible notes are general unsecured obligations, subordinated in
right of payment to all existing and future senior indebtedness, and rank senior
to or of equal rank with all of our existing and future subordinated
indebtedness.
Subsequent to the end of the quarter, on October 15, 2001, we sold an
additional $150 million of our existing 10- 5/8% senior subordinated notes due
2007. The proceeds were used to pay down our revolver loans.
In early July 2001, we entered into two interest rate swap agreements with
a combined notional amount of $150 million. In late July 2001, we entered into
an additional swap agreement with a notional amount of $50 million. The swaps
were tied to our 10- 5/8% senior subordinated notes due 2007. The maturity, call
dates, and call premiums mirrored those of the notes. The swaps were designed
for us to receive a fixed rate of 10- 5/8% and pay a floating rate based on a
spread plus the 3-month LIBOR. The floating rate reset quarterly beginning July
31, 2001. We documented and designated these swaps to qualify as fair value
hedges. At the end of the third quarter of 2001, in accordance with Statement of
Financial Accounting Standards No. 133 (SFAS 133), the mark-to-market value of
these swaps was recorded as a $9 million long-term asset offset by a change in
fair value to the senior subordinated notes due 2007.
Subsequent to the end of the quarter, on October 26, 2001, we unwound all
outstanding swap agreements and in turn received $9 million in cash.
Simultaneously, we recorded an $8 million deferred gain that will be amortized
to reduce interest expense over the remaining life of the related subordinated
notes.
In early November 2001, we entered into an interest rate swap agreement
with a notional amount of $100 million. The swap is tied to our 10- 1/8% senior
notes due 2008. The maturity, call dates, and call premiums mirror those of the
notes. The swap is designed for us to receive a fixed rate of 10- 1/8% and pay a
floating rate based on a spread plus the 3-month LIBOR. The floating rate resets
quarterly beginning January 1, 2002. We have documented and designated this swap
to qualify as a fair value hedge.
We adopted SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, on December 31, 2000. In accordance with SFAS 133, on
the date we enter into a derivative contract, management designates the
derivative as a hedge of the identified exposure (fair value, cash flow, foreign
currency, or net investment in foreign operations). If a derivative does not
qualify in a hedging relationship, the derivative is recorded at fair value and
changes in its fair value are reported currently in earnings. We formally
document all relationships between hedging instruments and hedged items, as well
as our risk-management objective and strategy for undertaking various hedge
transactions.
For all qualifying and highly effective fair value hedges, the changes in
the fair value of a derivative and the loss or gain on the hedged asset or
liability relating to the risk being hedged are recorded currently in
F-48
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
earnings. These amounts are recorded to interest income and provide offset of
one another. For the period ended October 6, 2001, there was no net earnings
impact relating to our fair value hedges.
Subsidiary Guarantee of Senior Notes and Senior Subordinated Notes: The
senior notes, convertible senior subordinated notes, and senior subordinated
notes are guaranteed by substantially all of Fleming's wholly-owned direct and
indirect subsidiaries. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to Fleming (the parent) in the form of
cash dividends, loans or advances.
The following condensed consolidating financial information depicts, in
separate columns, the parent company, those subsidiaries which are guarantors,
those subsidiaries which are non-guarantors, elimination adjustments and the
consolidated total. The financial information may not necessarily be indicative
of the results of operations or financial position had the subsidiaries been
operated as independent entities.
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
DECEMBER 30, 2000
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents......... $ 22,487 $ 6,753 $ 1,140 $ -- $ 30,380
Receivables, net.................. 406,203 101,884 958 -- 509,045
Inventories....................... 635,227 192,499 3,539 -- 831,265
Other current assets.............. 247,400 4,943 40 -- 252,383
---------- -------- ------- --------- ----------
Total current assets........... 1,311,317 306,079 5,677 -- 1,623,073
Investment in subsidiaries.......... 65,475 5,356 -- (70,831) --
Intercompany receivables............ 372,356 -- -- (372,356) --
Property and equipment, net......... 424,321 285,117 7,019 -- 716,457
Goodwill, net....................... 411,094 129,440 3,785 -- 544,319
Other assets........................ 463,008 42,918 13,036 -- 518,962
---------- -------- ------- --------- ----------
$3,047,571 $768,910 $29,517 $(443,187) $3,402,811
========== ======== ======= ========= ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................. $ 821,407 $120,145 $ 1,727 $ -- $ 943,279
Intercompany payables............. -- 339,688 32,668 (372,356) --
Other current liabilities......... 244,524 43,275 1,310 -- 289,109
---------- -------- ------- --------- ----------
Total current liabilities...... 1,065,931 503,108 35,705 (372,356) 1,232,388
Obligations under capital leases.... 214,611 162,628 -- -- 377,239
Long-term debt and other
liabilities....................... 1,339,837 26,096 59 -- 1,365,992
Equity (deficit).................... 427,192 77,078 (6,247) (70,831) 427,192
---------- -------- ------- --------- ----------
$3,047,571 $768,910 $29,517 $(443,187) $3,402,811
========== ======== ======= ========= ==========
F-49
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 6, 2001
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents......... $ 40,448 $ 2,785 $ 258 $ -- $ 43,491
Receivables, net.................. 480,052 91,086 365 -- 571,503
Inventories....................... 900,454 194,481 -- -- 1,094,935
Other current assets.............. 122,579 6,290 213 -- 129,082
---------- -------- ------- --------- ----------
Total current assets........... 1,543,533 294,642 836 -- 1,839,011
Investment in subsidiaries.......... 93,241 5,356 -- (98,597) --
Intercompany receivables............ 383,194 -- -- (383,194) --
Property and equipment, net......... 478,224 251,512 8,137 -- 737,873
Goodwill, net....................... 424,433 133,735 -- -- 558,168
Other assets........................ 531,320 65,119 16,286 -- 612,725
---------- -------- ------- --------- ----------
$3,453,945 $750,364 $25,259 $(481,791) $3,747,777
========== ======== ======= ========= ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................. $ 905,440 $110,941 $ 496 $ -- $1,016,877
Intercompany payables............. (31,755) 385,047 29,902 (383,194) --
Other current liabilities......... 236,021 23,301 1,108 -- 260,430
---------- -------- ------- --------- ----------
Total current liabilities...... 1,109,706 519,289 31,506 (383,194) 1,277,307
Obligations under capital leases.... 213,843 120,137 -- -- 333,980
Long-term debt and other
liabilities....................... 1,621,466 6,094 -- -- 1,627,560
Equity (deficit).................... 508,930 104,844 (6,247) (98,597) 508,930
---------- -------- ------- --------- ----------
$3,453,945 $750,364 $25,259 $(481,791) $3,747,777
========== ======== ======= ========= ==========
F-50
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED OPERATING STATEMENT INFORMATION
12 WEEKS ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales........................... $2,730,581 $753,190 $14,849 $(300,965) $3,197,655
Costs and expenses:
Cost of sales..................... 2,581,787 602,693 10,826 (300,965) 2,894,341
Selling and administrative........ 114,356 141,296 4,367 -- 260,019
Other............................. 31,035 3,046 (111) -- 33,970
Impairment/restructuring charge... 82,958 398 -- -- 83,356
Equity loss from subsidiaries..... (2,909) -- -- 2,909 --
---------- -------- ------- --------- ----------
Total costs and expenses....... 2,807,227 747,433 15,082 (298,056) 3,271,686
---------- -------- ------- --------- ----------
Income (loss) before taxes.......... (76,646) 5,757 (233) (2,909) (74,031)
Taxes on income (loss).............. (31,087) 2,713 (98) -- (28,472)
---------- -------- ------- --------- ----------
Income (loss) before extraordinary
charge............................ $ (45,559) $ 3,044 $ (135) $ (2,909) $ (45,559)
========== ======== ======= ========= ==========
12 WEEKS ENDED OCTOBER 6, 2001
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales........................... $3,393,147 $849,946 $ 9,965 $(230,973) $4,022,085
Costs and expenses:
Cost of sales..................... 3,239,001 733,892 6,975 (230,973) 3,748,895
Selling and administrative........ 108,323 97,849 3,756 -- 209,928
Other............................. 29,084 6,763 (5,282) -- 30,565
Impairment/restructuring charge... 1,308 107 -- -- 1,415
Equity loss from subsidiaries..... (9,280) -- -- 9,280 --
---------- -------- ------- --------- ----------
Total costs and expenses....... 3,368,436 838,611 5,449 (221,693) 3,990,803
---------- -------- ------- --------- ----------
Income (loss) before taxes.......... 24,711 11,335 4,516 ( 9,280) 31,282
Taxes on income (loss).............. 5,636 4,710 1,861 -- 12,207
---------- -------- ------- --------- ----------
Income (loss) before extraordinary
charge............................ $ 19,075 $ 6,625 $ 2,655 $ (9,280) $ 19,075
========== ======== ======= ========= ==========
F-51
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
40 WEEKS ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales....................... $9,022,936 $2,796,251 $54,161 $(1,054,317) $10,819,031
Costs and expenses:
Cost of sales................. 8,523,242 2,298,178 40,686 (1,054,317) 9,807,789
Selling and administrative.... 424,644 455,148 13,908 -- 893,700
Other......................... 64,852 43,062 2,344 -- 110,258
Impairment/restructuring
charge..................... 145,268 1,185 61 -- 146,514
Equity results from
subsidiaries............... 2,597 -- -- (2,597) --
---------- ---------- ------- ----------- -----------
Total costs and expenses... 9,160,603 2,797,573 56,999 (1,056,914) 10,958,261
---------- ---------- ------- ----------- -----------
Income (loss) before taxes...... (137,667) (1,322) (2,838) 2,597 (139,230)
Taxes on income (loss).......... (52,886) (372) (1,191) -- (54,449)
---------- ---------- ------- ----------- -----------
Income (loss) before
extraordinary charge.......... $ (84,781) $ (950) $(1,647) $ 2,597 $ (84,781)
========== ========== ======= =========== ===========
40 WEEKS ENDED OCTOBER 6, 2001
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales........................ $9,700,857 $2,712,624 $48,047 $(820,973) $11,640,555
Costs and expenses:
Cost of sales.................. 9,214,813 2,308,316 35,608 (820,973) 10,737,764
Selling and administrative..... 364,171 358,559 13,575 -- 736,305
Other.......................... 118,012 40,647 (2,517) -- 156,142
Impairment/restructuring
charge...................... 10,132 (35,693) -- -- (25,561)
Equity loss from
subsidiaries................ (24,897) -- -- 24,897 --
---------- ---------- ------- --------- -----------
Total costs and expenses.... 9,682,231 2,671,829 46,666 (796,076) 11,604,650
---------- ---------- ------- --------- -----------
Income (loss) before taxes....... 18,626 40,795 1,381 (24,897) 35,905
Taxes on income (loss)........... (2,457) 16,710 569 -- 14,822
---------- ---------- ------- --------- -----------
Income (loss) before
extraordinary charge........... $ 21,083 $ 24,085 $ 812 $ (24,897) $ 21,083
========== ========== ======= ========= ===========
F-52
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
40 WEEKS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities............... $(14,684) $ 48,659 $(6,567) $ $ 27,408
-------- -------- ------- ----- ---------
Cash flows from investing activities:
Purchases of property and
equipment....................... (61,606) (43,309) (2,708) -- (107,623)
Other.............................. 96,673 4,086 9 -- 100,768
-------- -------- ------- ----- ---------
Net cash provided by (used in)
investing activities............... 35,067 (39,223) (2,699) -- (6,855)
-------- -------- ------- ----- ---------
Cash flows from financing activities:
Repayments on capital lease
obligations..................... (11,248) (3,927) -- -- (15,175)
Advances to (from) parent.......... 56,480 (75,852) 19,372 -- --
Other.............................. 37,612 -- -- -- 37,612
-------- -------- ------- ----- ---------
Net cash provided by (used in)
financing activities............... 82,844 (79,779) 19,372 -- 22,437
-------- -------- ------- ----- ---------
Net increase (decrease) in cash and
cash equivalents................... 103,227 (70,343) 10,106 -- 42,990
Cash and cash equivalents at
beginning of year.................. (54,803) 61,307 179 -- 6,683
-------- -------- ------- ----- ---------
Cash and cash equivalents at end of
year............................... $ 48,424 $ (9,036) $10,285 $ -- $ 49,673
======== ======== ======= ===== =========
40 WEEKS ENDED OCTOBER 6, 2001
-----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash used in operating
activities........................ $ (88,061) $(56,633) $ (23) $ $(144,717)
--------- -------- ------- ----- ---------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (136,669) (25,258) (6,577) -- (168,504)
Other............................. 24,615 6,136 80 -- 30,831
--------- -------- ------- ----- ---------
Net cash used in investing
activities........................ (112,054) (19,122) (6,497) -- (137,673)
--------- -------- ------- ----- ---------
Cash flows from financing
activities:
Repayments on capital lease
obligations.................... (10,449) (4,643) -- -- (15,092)
Advances to (from) parent......... (82,068) 76,430 5,638 -- --
Other............................. 310,593 -- -- -- 310,593
--------- -------- ------- ----- ---------
Net cash provided by financing
activities........................ 218,076 71,787 5,638 -- 295,501
--------- -------- ------- ----- ---------
Net increase (decrease) in cash and
cash equivalents.................. 17,961 (3,968) (882) -- 13,111
Cash and cash equivalents at
beginning of year................. 22,487 6,753 1,140 -- 30,380
--------- -------- ------- ----- ---------
Cash and cash equivalents at end of
year.............................. $ 40,448 $ 2,785 $ 258 $ -- $ 43,491
========= ======== ======= ===== =========
F-53
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
8. In December 1998, we announced the implementation of a strategic plan
designed to improve the competitiveness of the retailers we serve and improve
our performance by building stronger operations that can better support
long-term growth. The four major initiatives of the strategic plan were to
consolidate distribution operations, grow distribution sales, improve retail
performance, and reduce overhead and operating expenses, in part by centralizing
the procurement and other functions in the Dallas, Texas area. Additionally, in
2000, we decided to reposition certain retail operations into our price impact
format and sell or close the remaining conventional retail chains. During the
first and second quarters of 2001, we sold or closed our remaining conventional
retail stores.
The plan, as expected, took two years to implement and is now substantially
complete. Total net charges of approximately $20 million are estimated for the
full year 2001. The remaining charges represent anticipated exit costs that
cannot be expensed until incurred. Charges after 2001 are expected to be
minimal.
We recorded a $101 million pre-tax charge in the third quarter of 2000 as a
result of the strategic plan. The charge was included on several lines of the
Consolidated Condensed Statements of Operations: $1 million was included in net
sales related to rent income impairment due to division closings; $11 million
was included in cost of sales and was primarily related to inventory markdowns
for clearance for closed operating units and moving and training costs; $6
million was included in selling and administrative expense and equity investment
results as disposition related costs recognized on a periodic basis; and the
remaining $83 million was included in the impairment/restructuring line. The
third quarter charge consisted of the following components:
- Impairment of assets of $81 million. The impairment components were $3
million for goodwill and $78 million for other long-lived assets. All of
the goodwill charge was related to a conventional retail store
acquisition in May of 1999.
- Restructuring charges of $2 million. The restructuring charges consisted
primarily of severance related expenses due to the consolidation of
certain administrative departments. The restructuring charges also
consisted of operating lease liabilities and professional fees incurred
related to the restructuring process.
- Other disposition and related costs of $18 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operating units, disposition related costs recognized on a periodic basis
and other costs.
The charge for the third quarter of 2000 relates to our business segments
as follows: $8 million relates to the distribution segment and $77 million
relates to the retail segment with the balance relating to support services
expenses.
We recorded a pre-tax charge of $211 million in the first three quarters of
2000 as a result of the strategic plan. The charge was included on several lines
of the Consolidated Condensed Statements of Operations: $2 million was included
in net sales related primarily to rent income impairment due to division
closings; $46 million was included in cost of sales and was primarily related to
inventory markdowns for clearance for closed operating units, moving and
training costs, and additional depreciation and amortization on assets to be
disposed of but not yet held for sale; $16 million was included in selling and
administrative expense and equity investment results as disposition related
costs recognized on a periodic basis; and the remaining $146 million was
included in the impairment/restructuring line related to impairment and
restructuring charges as described below. The charge for the first three
quarters consisted of the following components:
- Impairment of assets of $84 million. The impairment components were $3
million for goodwill and $81 million for other long-lived assets. All of
the goodwill charge was related to an acquisition in May of 1999.
- Restructuring charges of $63 million. The restructuring charges
consisted of severance related expenses and pension withdrawal
liabilities for the closings of the York and Philadelphia distribution
F-54
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
facilities which were announced during the first quarter of 2000 as part
of an effort to grow in the northeast by consolidating distribution
operations and expanding the Maryland facility. Additionally, the charge
consisted of severance related expenses due to the consolidation of
certain administrative departments announced during the second quarter of
2000. The restructuring charges also consisted of operating lease
liabilities and professional fees incurred related to the restructuring
process.
- Other disposition and related costs of $64 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operations, additional depreciation and amortization on assets to be
disposed of but not yet held for sale, disposition related costs
recognized on a periodic basis and other costs.
The charge for the first three quarters of 2000 relates to our business
segments as follows: $66 million relates to the distribution segment and $104
million relates to the retail segment with the balance relating to support
services expenses.
We recorded a pre-tax charge of $6 million ($4 million after-tax) in the
third quarter of 2001 as a result of the strategic plan. The charge was included
on several lines of the Consolidated Condensed Statements of Operations: less
than $1 million of charges was included in net sales, adjusting previously
recorded gains on the sale of conventional retail stores; $1 million of charges
was included in cost of sales and $3 million of charges was included in selling
and administrative expense, both amounts related to disposition costs recognized
on a periodic basis; and $1 million of charges included in the
impairment/restructuring line related to net impairment recovery and
restructuring charges as described below. The third quarter charge consisted of
the following components:
- Recovery of $2 million through sales of operations against which we had
previously recorded long-lived asset impairments.
- Restructuring charges of $3 million. The restructuring charges consisted
primarily of severance related expense adjustments for the sold or closed
operating units and professional fees.
- Other disposition and related costs of $5 million. These costs consisted
primarily of disposition related costs recognized on a periodic basis and
other costs.
The third quarter of 2001 charge relates to our business segments as
follows: $1 million relates to the distribution segment and $4 million relates
to the retail segment with the balance relating to support services expenses.
The pre-tax charge for the first three quarters of 2001 totaled $19 million
($11 million after-tax), and was included on several lines of the Consolidated
Condensed Statements of Operations: less than $1 million of income was included
in net sales relating primarily to gains on the sale of conventional retail
stores; $31 million charge included in cost of sales, primarily related to
inventory markdowns for clearance for closed operations; and $14 million
included in selling and administrative as disposition related costs recognized
on a periodic basis. These charges were offset by $26 million of income included
in the impairment/restructuring line related primarily to the recovery of
previously recorded asset impairment resulting from the sale of some retail
stores. The charge for the first three quarters consisted of the following
components:
- Net impairment recovery of $42 million. The components included
recovering, through sales of the related operations, previously recorded
goodwill impairment of $15 million and long-lived asset impairment of
approximately $34 million. Also included was impairment of $7 million
related to other long-lived assets.
- Restructuring charges of $16 million. The restructuring charges
consisted primarily of severance related expenses for the sold or closed
operating units, adjustments to pension withdrawal liabilities, and
professional fees incurred related to the restructuring process.
F-55
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
- Other disposition and related costs of $45 million. These costs
consisted primarily of inventory markdowns for clearance for closed
operations, disposition related costs recognized on a periodic basis and
other costs, offset partially by gains on sales of conventional retail
stores.
The charge for the first three quarters of 2001 relates to our business
segments as follows: a $17 million charge relates to the distribution segment
and income of $5 million relates to the retail segment. The balance relates to
support services expenses.
The charges related to workforce reductions are as follows:
AMOUNT HEADCOUNT
-------- ---------
($ IN THOUSANDS)
1999 Ending Liability....................................... $ 9,602 660
2000 Activity:
Charge.................................................... 53,906 5,610
Terminations.............................................. (26,180) (1,860)
-------- ------
Ending Liability.......................................... 37,328 4,410
2001 Quarter 1 thru 3 Activity
Charge.................................................... 12,632 260
Terminations.............................................. (30,003) (4,650)
-------- ------
Ending Liability.......................................... $ 19,957 20
======== ======
The ending liability of approximately $20 million is primarily comprised of
union pension withdrawal liabilities, but also includes accruals for payments
over time to associates already severed as well as accruals for associates still
to be severed. The breakdown of the 260 headcount reduction recorded for the
first three quarters of 2001 is: 215 from the distribution segment; 30 from the
retail segment; and 15 from support services.
Additionally, the strategic plan includes charges related to lease
obligations which will be utilized as operating units or retail stores close,
but ultimately reduced over remaining lease terms ranging from 1 to 20 years.
The charges and utilization have been recorded to-date as follows:
AMOUNT
--------------
(IN THOUSANDS)
1999 Ending Liability....................................... $ 32,509
2000 Activity
Charge.................................................... 37,149
Utilized.................................................. (48,880)
--------
Ending Liability.......................................... 20,778
2001 Quarter 1 thru 3 Activity
Charge.................................................... 1,714
Utilized.................................................. (19,392)
--------
Ending Liability.......................................... $ 3,100
========
Assets held for sale included in current assets at the end of the third
quarter of 2001 were approximately $27 million, consisting of $17 million of
distribution operating units and $10 million of retail stores.
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
F-56
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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.
9. The Financial Accounting Standards Board (FASB) recently issued SFAS No.
142 -- Goodwill and Other Intangible Assets. One of the provisions of this
standard is to require use of a non-amortization approach to account for
purchased goodwill. Under that approach, goodwill and intangible assets with
indefinite lives would not be amortized to earnings over a period of time.
Instead, these amounts would be reviewed for impairment and expensed against
earnings only in the periods in which the recorded values are more than implied
fair value. We are studying the impact that SFAS 142 will have on our financial
statements and planning to implement it in fiscal year 2002, as required.
F-57
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS JANUARY 9, 2002
(FLEMING LOGO)
FLEMING COMPANIES, INC.
OFFER TO EXCHANGE UP TO $400,000,000 OF ITS
10-5/8% SERIES D SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR UP TO
$250,000,000 OF ITS OUTSTANDING 10-5/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2007
AND UP TO
$150,000,000 OF ITS OUTSTANDING 10-5/8% SERIES C
SENIOR SUBORDINATED NOTES DUE 2007
-------------------------
PROSPECTUS
-------------------------
, 2002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article Thirteen of the Restated Certificate of Incorporation of
Registrant contains a provision, permitted by Section 1006B.7 of the Oklahoma
General Corporation Act (the "OGCA"), limiting the personal monetary liability
of directors for breach of fiduciary duty as a director. The OGCA and the
Restated Certificate of Incorporation of the Registrant provide that such
provision does not eliminate or limit liability, (1) for any breach of the
director's duty of loyalty to Registrant or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) for unlawful payments of dividends or unlawful stock
repurchases or redemptions, as provided in Section 1053 of the OGCA, or (4) for
any transaction from which the director derived an improper personal benefit.
Section 1031 of the OGCA permits indemnification against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with actions, suits or
proceedings in which a director, officer, employee or agent is a party by reason
of the fact that he or she is or was such a director, officer, employee or
agent, if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. However, in connection with actions by
or in the right of the corporation, such indemnification is not permitted if
such person has been adjudged liable to the corporation unless the court
determines that, under all of the circumstances, such person is nonetheless
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 1031 also permits a corporation to purchase and maintain
insurance on behalf of its directors and officers against any liability which
may be asserted against, or incurred by, such persons in their capacities as
directors or officers of the corporation whether or not Registrant would have
the power to indemnify such persons against such liabilities under the
provisions of such section.
Section 1031 further provides that the statutory provision is not
exclusive of any other right to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or independent directors, or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
Article 8 of the bylaws of Registrant contains provisions regarding
indemnification which parallel those described above.
Registrant maintains insurance policies that insure its officers and
directors against certain liabilities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of exhibits filed with this registration statement on Form S-4
is set forth on the Exhibit Index and is incorporated in this Item 21 by
reference.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement.
II-1
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(l)(i) and (a)(l)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3 and
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into this prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Lewisville,
state of Texas, on the 9th day of January, 2002.
FLEMING COMPANIES, INC.
By: /S/ CARLOS M. HERNANDEZ
-------------------------------------------
Carlos M. Hernandez
Senior Vice President, General Counsel
and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Mark S. Hansen, Neal J. Rider,
Carlos M. Hernandez to be his true and lawful attorney-in-fact and agent, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign this registration
statement and any and all amendments thereto (including without limitation any
post-effective amendments thereto and any registration statement pursuant to
Rule 462(b)), and to file each of the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, and every act and thing necessary or desirable to be done, as fully
to all intents and purposes as he might or could do in person, thereby ratifying
and confirming all that said attorney-in-fact and agent, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the 9th day of January, 2002.
SIGNATURE TITLE
--------- -----
/s/ MARK S. HANSEN Chairman and Chief Executive Officer
------------------------------------ (Principal Executive Officer)
Mark S. Hansen
/s/ NEAL J. RIDER Executive Vice President and Chief Financial Officer
------------------------------------ (Principal Financial and Accounting Officer)
Neal J. Rider
/s/ HERBERT M. BAUM
------------------------------------ Director
Herbert M. Baum
/s/ KENNETH M. DUBERSTEIN
------------------------------------ Director
Kenneth M. Duberstein
/s/ ARCHIE R. DYKES
------------------------------------ Director
Archie R. Dykes
/s/ CAROL B. HALLETT
------------------------------------ Director
Carol B. Hallett
/s/ ROBERT S. HAMADA
------------------------------------ Director
Robert S. Hamada
/s/ EDWARD C. JOULLIAN III
------------------------------------ Director
Edward C. Joullian III
/s/ GUY A. OSBORN
------------------------------------ Director
Guy A. Osborn
------------------------------------ Director
Alice M. Peterson
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants certifies that it has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Lewisville, state of Texas, on the 9th day of January, 2002.
ABCO FOOD GROUP, INC., a Nevada corporation
BAKER'S FOOD GROUP, INC., a Nevada corporation
RAINBOW FOOD GROUP, INC., a Nevada corporation
RETAIL INVESTMENTS, INC., a Nevada corporation
By: /s/ LOUIS F. MOORE
---------------------------------
Louis F. Moore
Secretary
AG, L.L.C., an Oklahoma limited liability company,
By Fleming Companies, Inc., sole member
By: /s/ CARLOS M. HERNANDEZ
---------------------------------
Carlos M. Hernandez
Senior Vice President, General Counsel
and Secretary
FOOD 4 LESS BEVERAGE COMPANY, INC.,
a Texas corporation
By: /s/ CHARLES L. HALL
---------------------------------
Charles L. Hall
President
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants certifies that it has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Lewisville, state of Texas, on the 9th day of January, 2002.
ABCO MARKETS INC., an Arizona corporation
ABCO REALTY CORP., an Arizona corporation
AMERICAN LOGISTICS GROUP, INC., a Delaware corporation
ARIZONA PRICE IMPACT, L.L.C.,
an Oklahoma limited liability company
CARDINAL WHOLESALE, INC., a Minnesota corporation
DUNIGAN FUELS, INC., a Texas corporation
FAVAR CONCEPTS, LTD., a Delaware corporation
FLEMING FOOD MANAGEMENT CO. L.L.C.,
an Oklahoma limited liability company
FLEMING FOODS OF TEXAS L.P.,
an Oklahoma limited partnership
FLEMING INTERNATIONAL LTD., an Oklahoma corporation
FLEMING SUPERMARKETS OF FLORIDA, INC.,
a Florida corporation
FLEMING TRANSPORTATION SERVICE, INC.,
an Oklahoma corporation
FLEMING WHOLESALE, INC., a Nevada corporation
FUELSERV, INC., a Delaware corporation
GATEWAY INSURANCE AGENCY, INC.,
a Wisconsin corporation
LAS, INC., an Oklahoma corporation
MINTER-WEISMAN CO., a Minnesota corporation
PIGGLY WIGGLY COMPANY, an Oklahoma corporation
PROGRESSIVE REALTY, INC., an Oklahoma corporation
RETAIL SUPERMARKETS, INC., a Texas corporation
RFS MARKETING SERVICES, INC., an Oklahoma corporation
RICHMAR FOODS, INC., a California corporation
SCRIVNER TRANSPORTATION, INC.,
an Oklahoma corporation
By /s/ CARLOS M. HERNANDEZ
----------------------------------------------------
Name: Carlos M. Hernandez
Title: Secretary
II-5
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
4.1 Credit Agreement, dated as of July 25, 1997, among Fleming Companies,
Inc. the Lenders party thereto, BancAmerica Securities, Inc., as
syndication agent, Societe Generale, as documentation agent and the
Chase Manhattan Bank, as administrative agent, filed as Exhibit 4.16
to Form 10-Q for the quarter ended July 12, 1997 and incorporated
herein by reference.
4.2 First Amendment, dated as of October 5, 1998, to Credit Agreement
dated July 25, 1997, filed as Exhibit 4.8 to Form 10-Q for the
quarter ended October 3, 1998 and incorporated herein by reference.
4.3 Second Amendment, dated as of December 21, 1999, to Credit Agreement
dated July 25, 1997, filed as Exhibit 4.9 to Form 10-Q for quarter
ended April 15, 2000 and incorporated herein by reference.
4.4 Third Amendment, dated February 26, 2001, to Credit Agreement dated
July 25, 1997, filed as Exhibit 4.9 to Amendment No. 1 to
Registration Statement on Form S-4/A (333-60176) filed on July 13,
2001 and incorporated herein by reference.
4.5 Fourth Amendment, dated September 7, 2001, to Credit Agreement dated
July 25, 1997, filed as Exhibit 4.16 to Form 10-Q for quarter ended
October 6, 2001 and incorporated herein by reference.
4.6 Security Agreement, dated as of July 25, 1997, between Fleming
Companies, Inc., the company subsidiaries party thereto and The Chase
Manhattan Bank, as collateral agent, filed as Exhibit 4.17 to Form
10-Q for the quarter ended July 12, 1997 and incorporated herein by
reference.
4.7 Pledge Agreement, dated as of July 25, 1997, among Fleming Companies,
Inc., the company subsidiaries party thereto and The Chase Manhattan
Bank, as collateral agent, filed as Exhibit 4.18 to Form 10-Q for the
quarter ended July 12, 1997 and incorporated herein by reference.
4.8 Guarantee Agreement among the company subsidiaries party thereto and
The Chase Manhattan Bank, as collateral agent, filed as Exhibit 4.19
to Form 10-Q for the quarter ended July 12, 1997 and incorporated
herein by reference.
4.9 Indenture, dated as of July 25, 1997, among Fleming Companies, Inc.,
the Subsidiary Guarantors named therein and Manufacturers and Traders
Trust Company regarding 10-1/2% Senior Subordinated Notes due 2004,
filed as Exhibit 4.21 to Form 10-Q for quarter ended July 12, 1997
and incorporated herein by reference.
4.10 Supplement, dated as of September 20, 2001, to the Indenture, dated
as of July 25, 1997, among Fleming Companies, Inc., the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust Company
regarding 10-5/8% Senior Subordinated Notes due 2004, filed as
Exhibit 4.19 to Form 10-Q for quarter ended October 6, 2001 and
incorporated herein by reference.
4.11 Indenture, dated as of July 25, 1997, among Fleming Companies, Inc.,
the Subsidiary Guarantors named therein and Manufacturers and Traders
Trust Company, as Trustee, regarding 10-5/8% Senior Subordinated
Notes due 2007, filed as Exhibit 4.20 to Form 10-Q for the quarter
ended July 12, 1997 and incorporated herein by reference.
4.12 Supplement, dated as of September 20, 2001, to the Indenture, dated
as of July 25, 1997, among Fleming Companies, Inc., the Subsidiary
Guarantors named therein and Manufacturers and Traders Trust Company
regarding 10-5/8% Senior Subordinated Notes due 2007, filed as
Exhibit 4.18 to Form 10-Q for quarter ended October 6, 2001 and
incorporated herein by reference.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
4.13 Indenture, dated as of March 15, 2001, among Fleming Companies, Inc.,
the Subsidiary Guarantors named therein and Bankers Trust Company, as
Trustee, regarding the 10-1/8% Senior Notes due 2008, filed as
Exhibit 4.9 to the Registration Statement on Form S-4 (333-60176)
filed on May 3, 2001 and incorporated herein by reference.
4.14 Indenture, dated as of March 15, 2001, among Fleming Companies, Inc.,
the Subsidiary Guarantors named therein and Bank One, N.A., as
Trustee, regarding the 5-1/4% Convertible Senior Subordinated Notes
due 2009, filed as Exhibit 4.3 to Registration Statement Form S-3
(333-60178) filed on May 3, 2001 and incorporated herein by
reference.
4.15 Indenture, dated as of October 15, 2001, among Fleming Companies,
Inc., the Subsidiary Guarantors named therein and Manufacturers and
Traders Trust Company regarding 10-5/8% Series C Senior Subordinated
Notes due 2007, filed as Exhibit 4.20 to Form 10-Q for quarter ended
October 6, 2001 and incorporated herein by reference.
4.16 Registration Rights Agreement, dated as October 15, 2001, among
Fleming Companies, the Subsidiary Guarantors named therein and the
Initial Purchasers named therein regarding the registration of the
10-5/8% Series C Senior Subordinated Notes due 2007.
5.1 Opinion of Latham & Watkins.
5.2 Opinion of McAfee & Taft.
12.1 Statement of Computation of Ratios.
15.1 Letter from Independent Accountants as to Unaudited Interim
Financial Information.
23.1 Consent of Latham & Watkins (included in Exhibit 5.1).
23.2 Consent of McAfee & Taft (included in Exhibit 5.2).
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on signature page hereto).
25.1 Statement of Eligibility under the Trust Indenture Act of 1939 of a
Corporation Designated to Act as Trustee of Manufacturers and Traders
Trust Company (Form T-1).
99.1 Letter of Transmittal with Respect to the Exchange Offer.
99.2 Notice of Guaranteed Delivery with Respect to the Exchange Offer.
99.3 Letter to DTC Participants Regarding the Exchange Offer.
99.4 Letter to Beneficial Holders Regarding the Exchange Offer.
99.5 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.