UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 20, 2002
COMMISSION FILE NUMBER: 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State of incorporation) (I.R.S. Employer
Identification No.)
1945 LAKEPOINTE DRIVE, BOX 299013
LEWISVILLE, TEXAS 75029
(Address of principal executive offices)
(972) 906-8000
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At the close of business on May 13, 2002, 44,605,000 shares of the registrant's
common stock, par value $2.50 per share, were outstanding.
EXPLANATORY NOTE
Following the review of the Registration Statement on Form S-4 (File No.
333-92262) of Fleming Companies, Inc. (the "Company") by the Staff of the
Securities and Exchange Commission, this Amendment (the "Amendment") to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended April 20,
2002 (the "Form 10-Q") is being filed solely to make certain textual changes to
the Company's presentation of EBITDAL under Item 2 of Part I ("Management's
Discussion and Analysis of Financial Condition and Results of Operations") on
pages 19 and 20 of the Form 10-Q. The Amendment contains no other changes to the
Form 10-Q.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
SIGNATURE
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In April 2002, we announced the pending acquisition of Core-Mark International,
Inc. and the completed acquisition of Head Distributing Company for an aggregate
of approximately $430 million, which includes the payment of cash and the
assumption of debt of these two companies.
Core-Mark, a leading piece-pick distributor to convenience stores and other
retail customers in western United States and Canada, had 2001 sales of $3.4
billion. It serves nearly 30,000 locations from its network of 19 distribution
centers. This acquisition is expected to close in June 2002.
Head, a Georgia-based distributor, operates two piece-pick distribution centers
and serves 3,000 retail locations in six southeastern states. Head's fiscal 2001
sales were approximately $350 million. This acquisition closed April 23, 2002.
2
We have entered into an agreement with Albertson's to acquire its distribution
center in Tulsa, Oklahoma and supply its stores in Oklahoma and Nebraska. This
arrangement is expected to close in June 2002.
We anticipate issuing a combination of debt securities and common stock in
public offerings in order to fund these acquisitions.
We recorded net income for the first quarter of 2002 of $25 million and EBITDAL
of $137 million. Excluding $27 million generated in the first quarter of 2001 by
our divested conventional retail stores, EBITDAL increased 24.5% to $137 million
from $110 million. EBITDAL is earnings before extraordinary items, interest
expense, income taxes, depreciation and amortization, equity investment results
and LIFO provision. We present EBITDAL to help us describe our ability to
generate cash flows that can be used to service our debt; however, conditions
may require conservation of funds for other uses. EBITDAL is a non-GAAP
liquidity measure commonly used in our industry and should not be considered as
an alternative measure of our net income or cash flows from operations as
computed in accordance with GAAP. Amounts presented may not be comparable to
similar measures disclosed by other companies.
The following table sets forth the calculation of EBITDAL (in millions):
APRIL 20, APRIL 21,
2002 2001
------------ ------------
Income before
extraordinary charge $ 25 $ 15
Add back:
Taxes on income 17 12
Depreciation/amortization 46 51
Interest expense 50 58
LIFO adjustments (1) 1
------------ ------------
EBITDAL $ 137 $ 137(1)
============ ============
(1) Includes $27 million generated in the first quarter of 2001 by our divested
conventional retail stores.
In our opinion, EBITDAL is the best starting point when evaluating our ability
to service debt.
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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:
APRIL 20, APRIL 21,
FOR THE 16 WEEKS ENDED 2002 2001
------------ ------------
Net sales 100.00% 100.00%
Gross margin 7.25 8.85
Less:
Selling and administrative 5.44 7.67
Interest expense 1.08 1.39
Interest income and other (0.15) (0.22)
Impairment/restructuring credit -- (0.65)
------------ ------------
Total expenses 6.37 8.19
------------ ------------
Income before taxes and extraordinary charge 0.88 0.66
Taxes on income 0.35 0.29
------------ ------------
Income before extraordinary charge 0.53 0.37
Extraordinary charge from early retirement
of debt, net of taxes -- (0.08)
------------ ------------
Net income 0.53% 0.29%
============ ============
Included in amounts reported under generally accepted accounting principles
(GAAP) for 2001 are charges (credits) related to our strategic plan and certain
other unusual items that affect the year-to-year comparisons of operating
results. 2002 amounts are reported in accordance with GAAP. The comparisons
below are shown on a GAAP vs. GAAP basis.
NET SALES.
Net sales for the first quarter (16 weeks) of 2002 increased by $549 million, or
13.3%, to $4.7 billion from the same period in 2001.
Net sales for the distribution segment increased by 22.0% for the first quarter
of 2002. The net growth in 2002 was mainly a result of increased activity with
Kmart, our largest customer. Kmart accounted for 23% and 10% of our total net
sales during the first quarter of 2002 and 2001, respectively. Additionally,
growth in distribution sales from a wide variety of new-channel and conventional
customers attributed to the increased first quarter sales. New-channel
customers, including convenience stores, supercenters, limited assortment
stores, drug stores, and self-distributing chains, are an important part of our
strategic growth plan and collectively represent approximately one-half of our
distribution customer sales base.
4
Retail segment sales for the first quarter of 2002 decreased 20.7%. The decrease
in sales was anticipated due to the disposition of 97 non-strategic conventional
retail stores in the first two quarters of 2001 in order to increase focus on
our price impact retail stores. First quarter sales in our continuing price
impact retail operations increased 24.7% over 2001. Comparable store sales for
the continuing operations were flat for the quarter.
GROSS MARGIN.
Gross margin for the first quarter of 2002 decreased as a percentage of net
sales to 7.25% from 8.85% for the same period in 2001. The decrease in gross
margin rate was an expected result of the change in sales mix. The sales of the
distribution segment represent a larger portion of total company sales than the
retail segment and the distribution segment has lower margins as a percentage of
sales versus the retail segment.
For the distribution segment, gross margin as a percentage of gross distribution
sales declined by 42 basis points for the first quarter of 2002, compared to the
same period in 2001. This reflects the increase in Kmart business, which is
lower margin, offset by the benefits of centralizing procurement. For the retail
segment, gross margin as a percentage of net retail sales decreased for the
first quarter of 2002 by 96 basis points, compared to the same period in 2001.
As expected, the decreasing margin reflects our transition out of non-strategic
conventional retail and into price impact retail which has lower shelf prices
and gross margins but also lower operating costs.
SELLING AND ADMINISTRATIVE EXPENSES.
Selling and administrative expenses for the first quarter of 2002 decreased as a
percentage of net sales to 5.44% for 2002 from 7.67% in 2001. The sales of the
distribution segment represent a larger portion of total company sales than the
retail segment, and the distribution segment has lower operating expenses as a
percentage of sales than the retail segment.
For the distribution segment, selling and administrative expenses as a
percentage of gross sales improved for the first quarter of 2002 by 53 basis
points, compared to the same period in 2001, due to leveraging the effect of
sales growth and company-wide cost savings initiatives. For the retail segment,
selling and administrative expenses as a percentage of retail sales also
improved for the first quarter of 2002 by 100 basis points, compared to the same
period in 2001, due to our shift in focus from conventional retail to price
impact retail, a format that has lower operating expense levels than
conventional retail.
OPERATING EARNINGS.
For distribution and retail segments, we measure operating earnings as sales
less cost of sales less selling and administrative expenses. The change in
operating earnings is a combination of the explanations included in net sales,
gross margin and selling and administrative expenses described above.
5
Operating earnings as a percentage of net sales for the first quarter of 2002
were 1.81%, up from 1.18% for the same period in 2001. Operating earnings for
the distribution segment as a percentage of net sales increased to 3.44% from
3.32% in 2001. Retail segment operating earnings as a percentage of net sales
increased to 2.30% from 1.93% in 2001.
INTEREST EXPENSE.
Interest expense for the first quarter of 2002 decreased approximately $7
million to $50 million compared to the same period in 2001. This was a result of
lower average interest rates in the first quarter of 2002. The first quarters of
2002 and 2001 included $0.5 million and $3 million, respectively, related to the
early retirement of debt.
INTEREST INCOME AND OTHER.
Interest income of approximately $7 million for the first quarter of 2002 was $2
million lower than the same period of 2001. The reductions were primarily due to
lower interest rates. Interest income in the first quarter of 2002 and 2001
included $0.1 million and $1 million, respectively, related to the early
retirement of debt.
IMPAIRMENT/RESTRUCTURING CHARGE.
The strategic plan was fully implemented by the end of 2001 and thus there was
no charge in the first quarter of 2002. See Note 8 in the notes to the
consolidated condensed financial statements and the Strategic plan charge and
unusual items note below for further discussion regarding the strategic plan.
TAXES ON INCOME.
The effective tax rates for the 16 weeks of 2002 and 2001 were 40.3% and 43.2%
(before extraordinary charge), respectively. These rates take into account
operations activity as well as various permanent and timing differences.
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.
RECENT DEVELOPMENTS.
In the second quarter of 2002, we announced an expected charge of approximately
$25 million after-tax related to the closure of a full-line distribution center
in Oklahoma City and a general merchandise distribution center in Dallas due to
the Albertson's agreement, along with certain merger and integration costs
associated with the acquisitions of Core-Mark and Head. Approximately one-half
of the charge is expected to be non-cash related costs.
PRIOR YEAR STRATEGIC PLAN CHARGES AND UNUSUAL ITEMS.
The following table shows which income statement captions were affected by our
strategic plan charges and unusual items and reconcile our reported GAAP amounts
to adjusted amounts as discussed in our 10-Q for the first quarter of 2001. The
adjusted amounts are not presentations
6
made in accordance with GAAP and are not a better indicator of our operating
performance.
(IN THOUSANDS) ADJUSTMENTS
-------------- ------------------------------
STRATEGIC UNUSUAL
QUARTER 1, 2001 GAAP PLAN ITEMS (1) ADJUSTED
------------------------------- ------------ ------------ ------------ ------------
Net sales $ 4,137,359 $ 1,661 $ -- $ 4,139,020
Costs and expenses:
Cost of sales 3,771,115 (17,856) -- 3,753,259
Selling and administrative 317,313 (6,028) (2,028) 309,257
Interest expense 57,502 -- (2,833) 54,669
Interest income and other (8,921) -- 1,102 (7,819)
Impairment/restructuring credit (26,859) 26,859 -- --
------------ ------------ ------------ ------------
Total costs and expenses 4,110,150 2,975 (3,759) 4,109,366
------------ ------------ ------------ ------------
Income before taxes $ 27,209 $ (1,314) $ 3,759 $ 29,654
============ ============ ============ ============
(1) Includes net additional interest expense of $1.7 million due to early
retirement of debt ($2.8 million in interest expense and $1.1 million in
interest income and other) and $2.0 million in charges from litigation
settlements (in selling and administrative).
CERTAIN ACCOUNTING MATTERS.
The FASB issued SFAS No. 143 - Accounting for Asset Retirement Obligations. We
are studying the impact that SFAS 143 has on our financial statements and
planning to implement it in fiscal year 2003, as required. The FASB issued SFAS
No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. We
implemented SFAS 144 as of the beginning of fiscal year 2002, as required. It
had no significant impact on our financial statements. In April 2002, the FASB
issued SFAS No. 145 - Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. We anticipate additional
refinancing transactions in 2002 that will result in extraordinary charges. In
2003 these amounts will be reclassed to selling and administrative expense in
accordance with SFAS 145. In December 2001, the AICPA's Accounting Standards
Executive Committee issued Statement of Position (SOP) 01-6, Accounting by
Certain Entities (Including Entities With Trade Receivables) That Lend to or
Finance the Activities of Others. We implemented SOP 01-6 as of the beginning of
fiscal year 2002, as required. This SOP provides guidance on the accounting for
and disclosure of amounts due to us from customers included in our accounts and
notes receivable. We do not expect the adoption of these new standards to have a
significant effect on our results of operations or financial position.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on an on-going basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to, customer receivables,
inventories, assets held for sale, fixed asset lives, intangible assets, income
taxes, self-insurance reserves, retirement benefits, and contingencies and
litigation. There have been no significant changes to these estimates and
assumptions since the issuance of our 2001 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended April 20, 2002, our principal source of liquidity
was borrowings under our credit facility. Our principal source of capital,
excluding shareholders' equity, was the issuance of long-term debt in the
capital markets.
NET CASH USED IN OPERATING ACTIVITIES.
Net cash used in operating activities was $43 million for the first quarter
ended April 20, 2002 compared to a $116 million use of cash for the same period
in 2001. The primary use of cash was for working capital.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.
Total investment-related activity resulted in a $49 million use of cash for the
first quarter ended April 20, 2002 compared to a $84 million source of cash in
the same period of 2001. Cash expended for the purchase of property and
equipment totaled $61 million in the first quarter of 2002 compared to $48
million in the same period of 2001. We intend to spend a total of approximately
$200 million on capital programs in 2002, with $150 million for distribution and
$50 million for retail. There were no cash proceeds from the sale of businesses
compared to $111 million in the same period 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 $342 million for the first
quarter of 2002 compared to $29 million for the same period last year.
On April 15, 2002, we sold $260 million of new 9 7/8% senior notes due 2012. The
net proceeds were placed into a trust to be used to redeem all of the 10 1/2%
senior subordinated notes due 2004, including an amount to cover accrued
interest and the redemption premium. The total placed in trust was approximately
$263 million. The redemption of the 2004 notes will take place in the second
quarter of this year. At the end of the first quarter of 2002, outstanding
borrowings under the credit facility totaled $109 million of term loans, $310
million of revolver loans, and $53 million of letters of credit.
Our principal sources of liquidity and capital are expected to be cash flows
from operating activities, our ability to borrow under our credit facility and
the issuance of new debt and
8
equity securities. In addition, lease financing may be employed for our
distribution facilities, new retail stores and certain equipment. We believe
these sources will be adequate to meet working capital needs, capital
expenditures and other capital needs in the normal course of business for the
next 12 months. As part of our growth strategy, we will need to raise additional
funds through public or private debt or equity financings in order to complete
pending acquisitions, acquire additional retail stores or third party businesses
or to expand our services more rapidly.
CONTINGENCIES
In accordance with applicable accounting standards, we record a charge
reflecting contingent liabilities 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."
In the ordinary course of our business, various legal actions, governmental
proceedings and other claims are pending or threatened or may be instituted or
asserted in the future against us and our subsidiaries. Litigation is subject to
many uncertainties, the outcome of individual litigated matters is
unpredictable, and it is reasonably possible that some of the matters could be
decided unfavorably to us or the subsidiary involved. Although the amount of
such liability cannot be ascertained, we believe that any resulting liability
should not materially affect the consolidated financial position or results of
operations for us and our subsidiaries. See Note 6 in the notes to the
consolidated financial statements for further discussion.
FORWARD-LOOKING INFORMATION
This report includes forward-looking statements regarding future events and the
future financial performance of Fleming. These forward-looking statements and
our business are subject to a number of factors that could cause actual results
to differ materially from those stated in this report, including without
limitation: the ability to obtain financing or obtain it on acceptable terms;
unanticipated problems with product procurement; adverse effects of the changing
industry and increased competition; sales declines and loss of customers;
exposure to litigation and other contingent losses; failure to consummate the
Albertson's or Core-Mark transactions; the ability of Kmart to continue as a
going concern, to operate pursuant to the terms of its debtor-in-possession
financing, or to complete its reorganization according to its plan; the
inability to integrate acquired companies and to achieve operating improvements
at those companies; increases in labor costs and disruptions in labor relations
with union bargaining units representing our associates; and negative effects of
our substantial indebtedness and the limitations imposed by restrictive
covenants contained in our debt instruments. These and other risk factors are
described in our Securities and Exchange Commission reports, including but not
limited to the 10-K Report for the 2001 fiscal year. We undertake no obligation
to update forward-looking statements to reflect developments or information
obtained after the date hereof.
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLEMING COMPANIES, INC.
October 11, 2002 /s/ MARK D. SHAPIRO
--------------------------------------------------
Mark D. Shapiro
Senior Vice President
Finance and Operations Control
(Duly Authorized Officer of Registrant
and Chief Accounting Officer)
10
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Mark S. Hansen, Chairman and Chief Executive Officer of Fleming Companies,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleming Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 10, 2002
/s/ MARK S. HANSEN
------------------------------------
Mark S. Hansen
Chairman and Chief Executive Officer
11
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Neal J. Rider, Executive Vice President and Chief Financial Officer of
Fleming Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleming Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 10, 2002
/s/ NEAL J. RIDER
------------------------------------
Neal J. Rider
Executive Vice President and
Chief Financial Officer
12