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PROSPECTUS Filed Pursuant to Rule 424(b)(3)
File No. 333-60184
FLEMING COMPANIES, INC.
OFFER TO EXCHANGE
$355,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS
10 1/8% SENIOR NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 10 1/8% SENIOR NOTES DUE 2008
MATERIAL TERMS OF THE EXCHANGE OFFER
- The exchange offer expires at 5:00 p.m., New York City time, on August 16,
2001, unless extended.
- We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of a new series of notes which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 of notes are substantially identical to the
outstanding 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 13 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 July 17, 2001.
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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 to 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 AUGUST 9, 2001, WHICH IS
FIVE BUSINESS DAYS BEFORE THE DATE THE EXCHANGE OFFER EXPIRES.
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TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 13
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.................................................. 58
Principal and Management Shareholders....................... 62
Description of Other Indebtedness........................... 65
Description of Notes........................................ 66
Book-Entry; Delivery and Form............................... 98
Plan of Distribution........................................ 102
Material United States Federal Income Tax Considerations.... 102
Legal Matters............................................... 103
Independent Auditors........................................ 103
Available Information....................................... 103
Incorporation by Reference.................................. 104
Index to Consolidated Financial Statements.................. F-1
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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 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 in this prospectus. 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.
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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 offering of the private notes as the "private
offering." Unless indicated otherwise, the term "notes" refers to both the
private notes and the exchange notes. The following summary contains basic
information about us and this offering. It likely does not contain all the
information that is important to you. For a more complete understanding of this
offering, we encourage you to read this entire document and the documents we
have referred you to.
THE EXCHANGE OFFER
The Exchange Offer............ We are offering to exchange our exchange notes
for our outstanding private notes that are
properly tendered and accepted. You may tender
outstanding 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. As of the date of this
prospectus, $355,000,000 principal amount of
private notes is outstanding.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, on August 16, 2001, 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 private notes being tendered for
exchange.
Procedures for Tendering
Private Notes................. If you wish to tender your private notes for
exchange notes pursuant to the exchange offer
you must transmit to Bankers 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 private 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."
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Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose private
notes are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender your private
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 private 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 private notes.
Guaranteed Delivery
Procedures.................... If you wish to tender your private 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 private notes according to the guaranteed
delivery procedures described in this
prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures."
Acceptance of Private 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 private 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 private
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."
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................ Bankers Trust Company, the trustee under the
indenture governing the private notes, is
serving as the exchange agent.
Consequences of Failure to
Exchange Notes................ If you do not exchange your private notes for
exchange notes, you will continue to be subject
to the restrictions on transfer provided in the
private notes and in the indenture governing
the private notes. In general, the private
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 private notes
under the Securities Act.
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Registration Rights
Agreement..................... You are entitled to exchange your private 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
private notes.
We explain the exchange offer in greater detail beginning on page 20.
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THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the private notes, except that 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 private notes. The exchange
notes will evidence the same debt as the private notes and both the private
notes and the exchange notes, which we will collectively refer to as the
"notes," are governed by the same indenture.
Securities Offered............ $355,000,000 principal amount of 10 1/8% senior
subordinated notes due 2008.
Issuer........................ Fleming Companies, Inc.
Maturity Date................. April 1, 2008.
Interest...................... The exchange notes will bear interest at the
rate of 10 1/8% per year (calculated using a
360-day year), payable every six months on
April 1 and October 1, beginning October 1,
2001. Interest on the exchange notes will
accrue from the last interest payment date on
which interest was paid on the private notes
or, if no interest was paid on the private
notes, from the date of issuance of the private
notes, which was March 15, 2001. Holders whose
private notes are accepted for exchange will be
deemed to have waived the right to receive any
interest accrued on the private notes.
Ranking....................... The notes are our unsecured senior obligations
and rank senior to all of our subordinated debt
and pari passu with all of our other senior
debt except to the extent of collateral. The
guarantees of the notes by our subsidiaries are
unsecured senior obligations of such
subsidiaries and rank senior to all
subordinated debt and pari passu with all other
senior debt of such subsidiaries except to the
extent of collateral. As of April 21, 2001, we
and our subsidiaries had $987 million of senior
debt (including capital leases), of which $636
million was secured, excluding approximately
$425 million that we had available to borrow
under our credit facility.
Guarantees.................... Our wholly-owned domestic subsidiaries as of
March 15, 2001 are unconditionally guaranteeing
the notes.
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 April 1, 2005, 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.
Optional Redemption After
Equity Offerings.............. At any time (which may be more than once) on or
prior to April 1, 2004, we can choose to redeem
up to 35% of the
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original principal amount of the notes with
money that we raise in one or more equity
offerings, as long as:
- we pay 110.125% of the face amount of the
notes, plus interest;
- we redeem the notes within 90 days of
completing the equity offering; and
- at least 65% of the aggregate principal
amount of the notes issued remains
outstanding afterwards.
Change of Control Offer....... If a change of control of our company occurs,
we must give holders of the notes the
opportunity to sell to us their notes at 101%
of their face amount, plus accrued 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, 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.
Asset Sale Proceeds........... If we or our subsidiaries engage in asset
sales, we generally must either invest the net
cash proceeds from such sales in our business
within a period of time, prepay the debt under
our credit facility or make an offer to
purchase a principal amount of the notes equal
to the excess net cash proceeds. The purchase
price of the notes will be 100% of their
principal amount, plus accrued interest.
Certain Indenture
Provisions.................... The indenture governing the 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
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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 66.
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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, 5,000 convenience stores and nearly 1,000
supercenters, discount stores, limited assortment stores, drug stores, specialty
stores and other stores across the U.S. We expect to substantially increase our
distribution volume in connection with, among other things, our recently
announced ten-year, $4.5 billion per year strategic alliance with our largest
customer, Kmart Corporation. In addition, as of April 23, 2001, our retail group
operated 103 supermarkets. In the fiscal year ended December 30, 2000, we
generated total net sales of $14.4 billion.
Our distribution group net sales were $11.2 billion for 2000, a 5.8%
increase over the prior year, and represented approximately 77% of total net
sales in 2000. To supply our customers, we have a network of 32 distribution
centers that have a total of approximately 19 million square feet of warehouse
space. To support our new business from Kmart, we expect to add up to four new
distribution centers over the next several months. Once that infrastructure is
in place, we believe that we will be the only distributor of consumable goods
serving customers in all 50 states. In addition to product storage, handling and
distribution functions, we also provide our customers with an offering of
advertising, store development, accounting, pricing and retail technology
services.
Our retail group net sales were $3.3 billion for 2000, which represented
approximately 23% of total net sales. Of that amount, $1.9 billion was
attributable to continuing chains, which represents a 4.8% increase over the
prior year. As of April 23, 2001, our continuing chains included 38 price impact
supermarkets under the Food 4 Less banner and ten additional supermarkets which
we intend to convert to the price impact format. Price impact supermarkets offer
deep-discount, everyday low prices in a warehouse-style format. These stores
typically cost less to build, maintain and operate than conventional
supermarkets. We also operated 44 supermarkets that are adopting certain
elements of the price impact format under the Rainbow Foods banner. In addition,
we operated 11 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.
In recent years, consumers have been shifting their purchases of food and
other consumable goods away from conventional full-service grocery stores
towards 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, and 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, so we
have repositioned our retail group to expand our presence in the price impact
format.
REPOSITIONING OF FLEMING
In late 1998, Mark Hansen joined Fleming as our Chairman and Chief
Executive Officer. Together with other new members of senior management, he
established the following strategic initiatives in order to reposition us for
growth:
- lower the cost of goods sold and the cost of our distribution services in
order to increase sales to existing customers and attract new customers;
- diversify our customer base by appealing to retailers beyond our
traditional conventional supermarket customers; and
- reposition our retail group by selling or closing most of our
conventional format supermarkets and opening additional price impact
supermarkets.
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In the course of implementing our strategic initiatives, since 1998, 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 the majority 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 207 conventional supermarkets through the end of the first
quarter of 2001, with 31 more to be sold or closed in the next few
months;
- opened 22 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 five
consecutive quarters (year-over-year comparisons). In 2000, we added
approximately $1.2 billion in gross annualized distribution group sales from
both new channel retailers and our traditional supermarket customers.
COMPETITIVE STRENGTHS
Low-Cost, High-Volume National Distribution System: We have consolidated
our smaller distribution centers into high-volume distribution centers. Our
distribution centers produce average annual sales that are among the highest in
the consumable goods distribution industry. Our procurement and logistics
capabilities, combined with the scale of our distribution centers, have enhanced
our ability to provide customers with lower-cost merchandise and services that
improve customer acquisition and retention. Our larger, super-regional
distribution centers are able to conduct profitable operations at an extended
range, thereby increasing our potential market reach.
Efficient Centralized Purchasing: Category management decisions and vendor
negotiations for the majority of our merchandise procurement are conducted in
one location. Our customer support center is one of the largest buyer locations
of consumable goods in the U.S. 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 2,500
companies that operate almost 7,000 retail store locations under a wide variety
of formats across the U.S. 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
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number of product selections, focus on high-turnover products and product
categories, employ flow-through distribution methods which reduce product
storage and handling expense, and minimize store operating costs through a
warehouse-style operation.
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. Our recent efforts in
these markets include distribution agreements with significant customers such as
Clark Retail Enterprises. 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 second
largest distributor in the $110 billion wholesale grocery industry, we account
for approximately 10% of this traditional core market, representing substantial
room for additional growth. 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. 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. 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.
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 April 23, 2001, we owned and operated 38 price
impact supermarkets, and we intend to add up to 17 price impact supermarkets in
2001 through a combination of construction of new stores, conversion of existing
stores and acquisitions.
Leverage Efficiencies Created by Our Kmart Distribution Agreement: We
believe our new distribution agreement with Kmart and the resulting substantial
increase in our distribution volume will provide us with increased economic and
purchasing leverage that will benefit 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 will distribute as a result of the Kmart distribution
agreement will enable 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.
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RECENT DEVELOPMENTS
New Kmart Strategic Alliance
On February 7, 2001, we announced a ten-year strategic alliance under which
we will supply to Kmart substantially all of the food and consumable products in
all current and future Kmart and Kmart supercenter stores in the U.S. 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. This strategic alliance may be further expanded to include an
agreement on health and beauty products and related categories. It is planned
that certain aspects of our price impact retail format could be incorporated
into Kmart's merchandising programs, which could extend our combined procurement
leverage. In addition, Kmart will offer us access to its strengths in general
merchandise and seasonal goods. Kmart will adopt our "BestYet" private label
program and pay fees to us based on brand management.
Yucaipa Investment
On March 22, 2001, an affiliate of The Yucaipa Companies, an investment
group controlled by Ron Burkle, completed a $50 million investment in our common
stock. Through this investment, Yucaipa acquired approximately 3.8 million newly
issued shares, representing approximately 8.7% of our outstanding common stock.
Yucaipa has substantial experience in the retailing and distribution sectors,
including past investments in such food retailers as Food 4 Less Supermarkets,
Inc., Ralph's Grocery Company, Dominick's Finer Foods and Fred Meyer, Inc.
Yucaipa also acquired a 12-month option to invest an additional $50 million in
our common stock at the then-current average market price.
Furrs Asset Purchase
On June 27, 2001, we bid $57 million to purchase certain assets of 66 Furrs
Supermarkets stores in New Mexico and Texas and approximately $43 million for
related inventory. Our bid was accepted by Furrs' board of directors on June 27,
2001 and was approved by a U.S. Bankruptcy Court on June 29, 2001. We anticipate
that the majority of these stores will be purchased directly from Furrs by
independent supermarkets and chain supermarket retailers, most of whom we would
serve as their supplier.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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 and incorporated by
reference into this prospectus.
FISCAL YEAR ENDED(1) 16 WEEKS ENDED
------------------------------------------ ---------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30, APRIL 15, APRIL 21,
1998(2) 1999(3) 2000(4) 2000(5) 2001(6)
------------ ------------ ------------ --------- ---------
(UNAUDITED)
INCOME STATEMENT DATA:
Net sales(7).............................. $14,678 $14,272 $14,444 $4,331 $4,161
Costs and expenses:
Cost of sales(7)........................ 13,228 12,835 13,097 3,915 3,795
Selling and administrative.............. 1,251 1,262 1,185 372 317
Interest expense........................ 161 165 175 53 58
Interest income......................... (37) (40) (33) (10) (9)
Equity investment results............... 12 10 8 2 --
Litigation charges...................... 8 -- -- -- --
Impairment/restructuring charge......... 653 103 213 42 (27)
------- ------- ------- ------ ------
Total costs and expenses............. 15,276 14,335 14,645 4,374 4,134
------- ------- ------- ------ ------
Earnings (loss) before taxes.............. (598) (63) (201) (43) 27
Taxes on income (loss).................... (87) (18) (79) (17) 12
------- ------- ------- ------ ------
Earnings (loss) before extraordinary
charge.................................. (511) (45) (122) (26) 15
Extraordinary charge from early retirement
of debt (net of taxes).................. -- -- -- -- (3)
------- ------- ------- ------ ------
Net earnings (loss).................. $ (511) $ (45) $ (122) $ (26) $ 12
======= ======= ======= ====== ======
Diluted earnings (loss) per share......... $(13.48) $ (1.17) $ (3.15) $(0.67) $ 0.29
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............... $ 6 $ 7 $ 30 $ 21 $ 27
Total assets............................ 3,491 3,573 3,403 3,313 3,176
Total debt (including current maturities
and capital leases).................. 1,566 1,694 1,669 1,647 1,636
Shareholders' equity.................... 570 561 427 535 494
OTHER FINANCIAL DATA:
EBITDA(8)............................... $ (237) $ 281 $ 154 $ 69 $ 137
Depreciation and amortization(9)........ 180 158 169 54 51
Capital expenditures.................... 200 166 151 38 48
-------------------------
(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 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
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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 16 weeks ended April 15, 2000, reflect an
impairment/restructuring charge with related costs totaling $64 million ($38
million after-tax) relating to our strategic plan. There were no one-time
adjustments for such period.
(6) The results for the 16 weeks ended April 21, 2001, reflect pre-tax income of
$1 million (less than $1 million after-tax) relating to our strategic plan,
primarily resulting from the recovery of previously recorded asset
impairment charges. Such period also reflects one-time items (approximately
$2 million in charges from litigation settlements, net additional interest
expense of approximately $2 million due to early retirement of debt, and
approximately $1 million in income from the sale of retail facilities)
netting to $3 million of expense ($2 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 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.
(9) Depreciation and amortization expense includes goodwill amortization and
excludes amortization of debt cost which is reflected in interest expense.
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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 private 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 private 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 NOTES PURSUANT TO THIS EXCHANGE, YOU MAY NEVER BE
ABLE TO SELL YOUR NOTES.
It may be difficult for you to sell 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 private notes arise because we issued the private 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
private notes under the Securities Act.
If you do not tender your private notes or if we do not accept some of your
private notes, those notes will continue to be subject to the transfer and
exchange restrictions in:
- the indenture;
- the legend on the private notes; and
- the offering memorandum relating to the private notes.
Moreover, to the extent private notes are tendered and accepted in the
exchange offer, the trading market, if any, for the private notes would be
adversely affected.
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 April 21, 2001.
AS OF APRIL 21, 2001
---------------------
Total debt (including capital leases)............. $1,636 million
Shareholders' equity.............................. $ 494 million
Debt to equity ratio.............................. 3.3x
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.
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We and our subsidiaries may be able to incur substantial additional debt in
the future, including secured debt. The terms of the indenture do not fully
prohibit us or our subsidiaries from doing so. As of April 21, 2001, our credit
facility would have permitted additional borrowings of up to $425 million and
all of those borrowings would be effectively senior to the notes to the extent
of any collateral securing those borrowings. 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, including the
notes, 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 and 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, WHICH COULD
JEOPARDIZE OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.
Kmart is our largest customer, accounting for 9.8% of our net sales in
2000. On February 7, 2001, we announced a ten-year agreement with Kmart
Corporation, 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 U.S. 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. Accordingly, we now depend on Kmart for a
substantial portion of our business.
We will be required to commit substantial capital expenditures 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, which
could jeopardize our ability to fulfill our obligations under the notes. More
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 also elect to terminate
the agreement if we materially breach our obligations under 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 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.
THE INDENTURE, OUR CREDIT FACILITY AND OUR OTHER EXISTING INDEBTEDNESS CONTAIN
PROVISIONS THAT COULD MATERIALLY RESTRICT OUR BUSINESS.
The indenture, 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;
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- 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, the indenture or 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.
NOT ALL OF OUR SUBSIDIARIES ARE GUARANTEEING 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 are guaranteeing 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.
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. Our loans to our customers are generally not investment grade
and, along with our equity investments in our customers, are highly illiquid. We
also make investments in our customers through direct financing leases, lease
guarantees, operating leases, credit extensions for inventory purchases and the
recourse portion of notes sold evidencing such loans. 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.
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-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.
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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 the prices of consumable
goods 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.
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 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
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.
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WE ARE CURRENTLY SUBJECT TO A NUMBER OF MATERIAL LITIGATION PROCEEDINGS. IF ANY
OF THESE PROCEEDINGS IS RESOLVED AGAINST US, IT COULD HARM OUR FINANCIAL
CONDITION AND BUSINESS PROSPECTS.
We are currently subject to a number of material litigation proceedings,
the costs and other effects of which are impossible to predict with any
certainty. An unfavorable outcome in any one of these cases could have a
material adverse effect on our financial condition and prospects. From time to
time, we are also party to or threatened with litigation in which claims against
us are made, or are threatened to be made, by present and former customers,
sometimes in situations involving financially troubled or failed customers. We
are a party to 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 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. 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. For more information regarding the legal
proceedings to which we are currently subject, see the section "Business" under
the subheading "Legal Proceedings."
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.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN INTEGRATING NEWLY ACQUIRED
STORES AND DISTRIBUTION CENTERS. IF WE DO NOT ACHIEVE THE BENEFITS WE EXPECT
FROM ANY OF THESE ACQUISITIONS, IT COULD HARM OUR BUSINESS AND FINANCIAL
CONDITION.
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. 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 the acquired business. 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.
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WE OPERATE IN A COMPETITIVE LABOR MARKET, AND THE MAJORITY 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. The labor market is currently tight and we expect the tight
labor market to continue. 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 half 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 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.
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 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.
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WE MAY NOT HAVE THE ABILITY TO RAISE THE 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.
Upon the occurrence of a change of control of Fleming, we will be required
to offer to repurchase all outstanding notes and other outstanding debt. If a
change of control 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 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
"Repurchase of Notes at the Option of Holders Upon a Change of Control."
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 private
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 or in the
prospects for companies in our industry generally. As a result, you cannot be
sure that an active trading market will develop for these notes.
VOLATILE TRADING PRICES MAY REQUIRE YOU TO HOLD 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 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.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We issued the private notes on March 15, 2001 to Deutsche Banc Alex. Brown
Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc., Chase Securities Inc. and
UBS Warburg LLC, the initial purchasers, pursuant to a purchase agreement. The
initial purchasers subsequently sold the private 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 private notes, we entered into
a registration rights agreement with the initial purchasers on March 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 June 13, 2001;
(2) use all reasonable efforts to cause the registration statement to
be declared effective by the SEC on or before September 11, 2001;
(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 notes; and
(5) use our best efforts to consummate the exchange offer on or before
October 26, 2001.
Upon the effectiveness of the registration statement, we will offer the
exchange notes in exchange for the private notes. We filed a copy of the
registration rights agreement as an exhibit to the registration statement.
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 private 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
- you are an "affiliate" of Fleming 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.
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Each broker-dealer that receives exchange notes for its own account in
exchange for private 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 private 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 private 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 private notes surrendered pursuant to the exchange offer.
You may tender private 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 private 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 private 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 private notes and will be
issued under the same indenture, so the exchange notes and the private notes
will be treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $355,000,000 in aggregate principal
amount of the private notes are outstanding and registered in the name of Cede &
Co., as nominee for The Depository Trust Company. Only registered holders of the
private notes, or their legal representative or attorney-in-fact, as reflected
on the records of the trustee under the indenture, may participate in the
exchange offer. We will not set a fixed record date for determining registered
holders of the private 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 private 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.
If you tender private 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 private
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 August
16, 2001, 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.
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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 private 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 private 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 private notes. Consequently, the exchange notes will bear interest
at a rate equal to 10 1/8% per annum (calculated using a 360-day year). Interest
will be payable semi-annually on each April 1 and October 1, commencing October
1, 2001.
You will receive interest on October 1, 2001 from the date of initial
issuance of the exchange notes, plus an amount equal to the accrued interest on
the private notes from the date of delivery to the date of exchange. We will
deem the right to receive any interest accrued on the private notes waived by
you if we accept your private notes for exchange.
PROCEDURES FOR TENDERING
You may tender private notes in the exchange offer only if you are a
registered holder of private 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.
In addition, either:
- the exchange agent must receive certificates for the private 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;
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- the exchange agent must receive a timely confirmation of a book-entry
transfer of the private 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 private 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 private 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 private notes whose private 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 private notes you must
either:
- make appropriate arrangements to register ownership of the private 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
private 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 private 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 private notes.
If the letter of transmittal or any private 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.
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.
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We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered private notes, which determination will be final and binding. We
reserve the absolute right to reject any and all private notes not properly
tendered or any private 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 private 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 private notes within the time we determine. Although
we intend to notify you of defects or irregularities with respect to tenders of
private 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 private notes to have been made until you cure the defects
or irregularities.
While we have no present plan to acquire any private notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any private notes that are not tendered in the exchange offer, we
reserve the right in our sole discretion to purchase or make offers for any
private 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
private 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 private 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 private 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 private notes for any reason described in
the terms and conditions of the exchange offer or if you withdraw or submit
private 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 private 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
private 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 private 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 private notes by causing the depositary to transfer the
private notes into the exchange agent's account at the depositary in accordance
with the depositary's procedures for transfer. However, although delivery of
private 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 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.
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GUARANTEED DELIVERY PROCEDURES
If you wish to tender your private notes and (1) the notes are not
immediately available or (2) you cannot deliver the private 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 private
notes and the principal amount of private 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 private 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
private 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 private notes at any time before 5:00 p.m. on the expiration date.
To withdraw a tender of private 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 private notes to be
withdrawn;
- identify the private notes to be withdrawn, including the certificate
number(s) and principal amount of the private notes; and
- be signed in the same manner as the original signature on the letter of
transmittal by which the private 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 private notes to
have been validly tendered for purposes of the exchange offer, and we will not
issue exchange notes with respect to those private notes, unless you validly
retender the withdrawn private notes. You may retender properly withdrawn
private notes by following one of the procedures described above under
"-- Procedures for Tendering" at any time before the expiration date.
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 private
notes, and may terminate the exchange offer as provided
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in this prospectus before the acceptance of the private 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 private notes and return all tendered private notes
to you;
- extend the exchange offer and retain all private notes tendered before
the exchange offer expires, subject, however, to your rights to withdraw
the private notes; or
- waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered private 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 private 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
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 October
26, 2001 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 private note until the earliest date on which:
- a registration statement covering the private note has been declared
effective by the SEC and the note has been disposed of in accordance with
such effective registration statement;
- the private 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;
- such private note ceases to be outstanding; or
- the private note may be resold without restriction pursuant to Rule 144
under the Securities Act.
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ADDITIONAL INTEREST
If:
(1)(A) we do not file the registration statement with the SEC on or
before June 13, 2001, 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
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 September 11, 2001, 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 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 March 15, 2003
(unless all of the notes have already been disposed of or all of the notes
are eligible to be sold pursuant to Rule 144(k)), then we agree to pay
additional interest on the principal amount of the 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
year at the beginning of each subsequent 90-day period;
provided, however, that the additional interest rate on the 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 effective (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 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
notes.
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EXCHANGE AGENT
We have appointed Bankers 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 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:
BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust and Agency Services
P.O. Box 292737 Receipt and Delivery Window
Nashville, TN 37229-2737 123 Washington Street, 1st Floor
New York, NY 10006
Attn: Reorganization Unit
Information: (800) 735-7777
By Overnight Delivery: By Facsimile:
BT Services Tennessee, Inc. (615) 835-3701
Corporate Trust & Agency Services Attn: Reorganization Unit
648 Grassmere Park Road
Nashville, TN 37211 Confirm by Telephone:
Attn: Reorganization Unit (615) 835-3572
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 private 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.
Private notes that are not exchanged for exchange notes pursuant to the exchange
offer will remain restricted securities. Accordingly, those private 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;
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- 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 private notes may be resold only in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
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USE OF PROCEEDS
The exchange offer satisfies an obligation under the registration rights
agreement. We will not receive any cash proceeds from the exchange offer.
CAPITALIZATION
The following table sets forth our consolidated capitalization at April 21,
2001.
AT APRIL 21, 2001
----------------------
(DOLLARS IN THOUSANDS)
Current maturities of long-term debt and capital leases... $ 56,470
----------
Long-term debt:
Revolving Credit Facility(1)............................ 130,000
Term Loan Facility...................................... 110,002
10 1/8% Senior Notes due 2008........................... 355,000
Long-term obligations under capital leases.............. 339,988
10.5% Senior Subordinated Notes due 2004................ 250,000
10.625% Senior Subordinated Notes due 2007.............. 250,000
5.25% Convertible Senior Subordinated Notes due 2009.... 150,000
Other long-term debt (including discounts).............. (5,575)
----------
Total long-term debt................................. 1,579,415
----------
Total shareholders' equity........................... 493,894
----------
Total capitalization (including current
maturities)........................................ $2,129,779
==========
-------------------------
(1) The Revolving Credit Facility provides for a total commitment of $600
million. As of April 21, 2001, the Company had $45 million of outstanding
letters of credit under the Revolving Credit Facility.
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SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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, which include only normal recurring 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 condensed financial
statements included elsewhere in and incorporated by reference into this
prospectus.
FISCAL YEAR ENDED(1) 16 WEEKS ENDED
------------------------------------------------------------------------ ---------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 30, APRIL 15, APRIL 21,
1996(2) 1997(3) 1998(4) 1999(5) 2000(6) 2000(7) 2001(8)
------------ ------------ ------------ ------------ ------------ --------- ---------
(UNAUDITED)
INCOME STATEMENT DATA:
Net sales(9)................... $16,051 $14,966 $14,678 $14,272 $14,444 $4,331 $4,161
Costs and expenses:
Cost of sales(9)............. 14,594 13,558 13,228 12,835 13,097 3,915 3,795
Selling and administrative... 1,250 1,172 1,251 1,262 1,185 372 317
Interest expense............. 163 163 161 165 175 53 58
Interest income.............. (49) (47) (37) (40) (33) (10) (9)
Equity investment results.... 18 17 12 10 8 2 --
Litigation charges........... 20 21 8 -- -- -- --
Impairment/restructuring
charge..................... -- -- 653 103 213 42 (27)
------- ------- ------- ------- ------- ------ ------
Total costs and expenses... 15,996 14,884 15,276 14,335 14,645 4,374 4,134
------- ------- ------- ------- ------- ------ ------
Earnings(loss) before taxes.... 55 82 (598) (63) (201) (43) 27
Taxes on income(loss).......... 28 44 (87) (18) (79) (17) 12
------- ------- ------- ------- ------- ------ ------
Earnings(loss) before
extraordinary charge......... 27 38 (511) (45) (122) (26) 15
Extraordinary charge from early
retirement of debt(net of
taxes)....................... -- (13) -- -- -- -- (3)
------- ------- ------- ------- ------- ------ ------
Net earnings(loss)......... $ 27 $ 25 $ (511) $ (45) $ (122) $ (26) $ 12
======= ======= ======= ======= ======= ====== ======
Diluted earnings(loss) per
share........................ $ 0.71 $ 0.67 $(13.48) $ (1.17) $ (3.15) $(0.67) $ 0.29
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents.... $ 64 $ 30 $ 6 $ 7 $ 30 $ 21 $ 27
Total assets................. 4,055 3,924 3,491 3,573 3,403 3,313 3,176
Total debt(including current
maturities and capital
leases).................... 1,598 1,563 1,566 1,694 1,669 1,647 1,636
Shareholders' equity......... 1,076 1,090 570 561 427 535 494
OTHER FINANCIAL DATA:
Cash flows from operating
activities................. $ 327 $ 113 $ 141 $ 118 $ 127 $ 55 $ (116)
Cash flows from investing
activities................. (45) (54) (163) (213) (48) 14 84
Cash flows from financing
activities................. (223) (92) (2) 96 (55) (55) 29
EBITDA(10)................... 417 441 (237) 281 154 69 137
Depreciation and
amortization(11)........... 175 173 180 158 169 54 51
Capital expenditures......... 129 129 200 166 151 38 48
Ratio of earnings to fixed
charges(12)................ 1.27x 1.41x -- -- -- -- 1.43x
-------------------------
(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.
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(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 16 weeks ended April 15, 2000, reflect an
impairment/restructuring charge with related costs totaling $64 million
($38 million after-tax) relating to our strategic plan. There were no
one-time adjustments for such period.
(8) The results for the 16 weeks ended April 21, 2001, reflect pre-tax income
of $1 million (less than $1 million after-tax) relating to our strategic
plan, primarily resulting from the recovery of previously recorded asset
impairment charges. Such period also reflects one-time items (approximately
$2 million in charges from litigation settlements, net additional interest
expense of approximately $2 million due to early retirement of debt, and
approximately $1 million in income from the sale of retail facilities)
netting to $3 million of expense ($2 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 $43 million for the fiscal year
ended December 26, 1998, the fiscal year ended December 25, 1999, the
fiscal year ended December 30, 2000, and the 16 weeks ended April 15, 2000,
respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In early 1998, our board of directors and senior management began an
extensive strategic planning process that evaluated all aspects of our business.
In December 1998, the strategic plan was approved and implementation efforts
began. In the course of implementing our strategic initiatives, since 1998 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 the majority 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 207 conventional supermarkets through the end of the first
quarter of 2001, with 31 more to be sold or closed in the next few
months;
- opened 22 additional price impact supermarkets; and
- instituted a "culture of thrift" among our employees, in part through our
Low Cost Pursuit Program.
The plan, as expected, took two years to implement and is now substantially
complete. Additional charges of approximately $20 million are estimated in 2001.
The 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 are expected to be minimal.
The first quarter of 2001 included pre-tax income of approximately $1
million (less than $1 million after-tax or $.01 per share) related to the
strategic plan, including non-cash impairment adjustments of asset values,
inventory markdowns for clearance for closed operations, and cash restructuring
costs for severance related and other expenses. The first quarter of 2000
included a pre-tax charge of $64 million ($38 million after-tax or $.98 per
share) related to the strategic plan, including non-cash impairments of asset
values, inventory markdowns for clearance for closed operations, and cash
restructuring cost for severance related expenses, lease terminations, and other
expenses.
The first quarter of 2001 also included one-time adjustments, including
approximately $2 million in charges from litigation settlements and net
additional interest expense of approximately $2 million due to the early
retirement of debt, netting to a $3 million charge ($2 million after-tax or $.05
per share). There were no one-time adjustments for the first quarter of 2000.
We recorded net income of $12 million or $.29 per share for the first
quarter of 2001. Excluding the after-tax extraordinary charge of $3 million, or
$.08 per share, related to the early retirement of debt and the strategic plan
and one-time items, our net income was $17 million or $.41 per share. Net
earnings for the first quarter of 2000 after excluding strategic plan charges
was $12 million or $.30 per share.
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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:
16 WEEKS ENDED
----------------------
APRIL 15, APRIL 21,
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 9.62 8.80
Less:
Selling and administrative.......... 8.52 8.84 8.21 8.60 7.63
Interest expense.................... 1.10 1.16 1.21 1.23 1.38
Interest income..................... (.25) (.28) (.23) (.22) (.22)
Equity investment results........... .08 .07 .06 .04 .01
Litigation charges.................. .05 -- --
Impairment/restructuring charge..... 4.45 .72 1.47 .97 (.65)
------ ------ ------ ------ ------
Total expenses................... 13.95 10.51 10.72 10.62 8.15
------ ------ ------ ------ ------
Income (loss) before taxes............ (4.07) (.44) (1.39) (1.00) .65
Taxes on income (loss)................ (.59) (.13) (.54) (.40) .28
------ ------ ------ ------ ------
Earnings (loss) before extraordinary
items............................... (3.48)% (.31)% (.85)% (.60)% .37%
====== ====== ====== ====== ======
Quarters Ended April 21, 2001 and April 15, 2000
Net Sales
Sales for the first quarter (16 weeks) of 2001 decreased by $0.2 billion,
or 4%, to $4.2 billion from the same period in 2000.
Net sales for the distribution segment were $3.32 billion in 2001 compared
to $3.27 billion in 2000. The increase in sales was due to growth in sales to
both conventional food retail and new retail channel customers, offset partially
by the loss of sales to United Supermarkets during the second quarter of 2000.
In 2000, sales to United accounted for less than 3% of our total company sales.
Kmart Corporation, our largest customer, accounted for 10.2% (or $424 million)
and 9.7%(or $420 million) of our total net sales in the first quarter of 2001
and 2000, respectively. We expect annual sales to Kmart for 2001 to be
approximately $2.6 billion, with an increase to approximately $4.5 billion
annually in 2002.
Retail segment sales decreased $0.2 billion, or 20%, in 2001 to $0.8
billion from 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 quarter, we sold or closed
66 retail stores and reached agreements to sell 29 of the 31 remaining to sell
or close. This is in addition to the 70 stores sold or closed during 2000.
During the first quarter of 2001, we opened five Yes!Less stores and a Food 4
Less store with an additional seven Food 4 Less stores acquired early in the
second quarter of 2001.
Gross Margin
Gross margin for the first quarter of 2001 decreased by $50 million, or
12%, to $366 million from $417 million for the same period in 2000, and also
decreased as a percentage of net sales to 8.80% from 9.62% for the same period
in 2000. After excluding the strategic plan charges and one-time items, gross
margin for the first quarter of 2001 decreased by $45 million, or 10%, compared
to the same period in 2000, and decreased as a percentage of net sales to 9.27%
from 9.94% for the same period in 2000. The decrease in dollars was due
primarily to the overall sales decrease, but was partly offset by positive
results from centralizing procurement which leverages our buying power and
improving warehouse productivity.
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After excluding the strategic plan charges and one-time items for the
distribution segment, gross margin as a percentage of net sales improved
slightly in the first quarter of 2001 compared to the same period in 2000
reflecting the benefits of the centralization of procurement. For the retail
segment, gross margin as a percentage of net sales also improved in the first
quarter of 2001 compared to the same period in 2000 due to the divesting or
closing of underperforming stores and the centralization of procurement. The
strategic plan charges and one-time items were lower in the first quarter of
2001 compared to the same period in 2000 for the distribution segment primarily
due to additional depreciation and amortization on assets to be disposed of but
not yet held for sale in 2000, but were higher for the retail segment primarily
due to higher inventory markdowns for clearance for closed operations.
Selling and Administrative Expenses
Selling and administrative expenses for the first quarter of 2001 decreased
by $55 million, or 15%, to $317 million from $372 million for the same period in
2000 and decreased as a percentage of net sales to 7.63% for 2001 from 8.60% in
2000. After excluding the strategic plan charges and one-time items, selling and
administrative expenses for the first quarter of 2001 decreased as a percentage
of net sales to 7.43% from 8.41% for the same period in 2000. The decreases were
due to rationalization of assets, centralization of administrative functions,
and reduction of the significance of retail. The sales of the distribution
segment represent a larger portion of total company sales than the retail
segment and the distribution segment has lower operating expenses as a
percentage of sales versus the retail segment.
After excluding the strategic plan charges and one-time items for the
distribution segment, selling and administrative expenses as a percentage of net
sales improved in the first quarter of 2001 compared to the same period in 2000
due to the centralization of administrative functions and low cost pursuit
initiatives. For the retail segment, selling and administrative expenses as a
percentage of net sales decreased in the first quarter of 2001 compared to the
same period in 2000 primarily due to selling and closing higher cost retail
operations, reflecting the lower cost structure of our continuing retail
operations. The strategic plan charges and one-time items were lower in the
first quarter of 2001 compared to the same period in 2000 for the distribution
segment due primarily to moving, recruitment, and training costs incurred during
the first quarter of 2000 that were not incurred in 2001, but were higher for
the retail segment due to costs of selling and closing 66 retail stores in the
first quarter of 2001 compared to 24 retail stores in the first quarter of 2000.
Operating Earnings
Operating earnings for the distribution segment for the first quarter of
2001 increased $26 million, or 31%, to $109 million from $83 million in the same
period of 2000. After excluding the strategic plan charges and one-time items,
operating earnings increased by $21 million, or 22%, to $115 million from $94
million for the same period of 2000. Operating earnings improved primarily due
to the benefits of consolidating distribution operating units, reducing costs
partially due to warehouse productivity improvements, and centralizing certain
procurement and administrative functions in support services.
Operating earnings for the retail segment increased by $4 million to $16
million for the first quarter of 2001 from $12 million for the same period of
2000. After excluding the strategic plan charges and one-time items, operating
earnings increased by $17 million to $35 million in the first quarter of 2001
from $18 million for the same period of 2000. Operating earnings were improved
by the performance in continuing retail operations and the divesting or closing
of underperforming retail operations. Operating earnings were also improved by
centralizing certain administrative functions in support services.
Support services expenses increased in the first quarter of 2001 compared
to the same period of 2000 by approximately $26 million to $77 million from $51
million. After excluding the strategic plan charges and one-time items, support
services expenses increased by $27 million to $73 million in the first quarter
of 2001 from $46 million for the same period of 2000. The increase in expense
was primarily due to centralizing certain procurement and administrative
functions from the distribution and retail segments.
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Strategic plan charges were lower in 2001 due to moving and training expenses
associated with the centralization of the procurement and administrative
functions in 2000.
Interest Expense
Interest expense for the first quarter of 2001 increased approximately $5
million, or 8%, to $58 million for the first quarter of 2001 from $53 million
for the same period in 2000 due primarily to $3 million of additional interest
expense related to the early retirement of debt. The remaining increase was due
to higher average debt balances and slightly higher rates.
Interest Income
Interest income of $9 million for the first quarter of 2001 was slightly
lower than the same period of 2000 primarily due to lower average balances for
direct financing leases with customers.
Equity Investment Results
Our portion of operating losses from equity investments decreased to less
than $1 million for the first quarter of 2001 from $2 million for the first
quarter of 2000 primarily due to improved results of operations in certain of
the underlying equity investments.
Impairment/Restructuring Charge
The net pre-tax amount recorded in the Consolidated Condensed Statements of
Operations (associated with the implementation of our strategic plan announced
in 1998) was income of less than $1 million for the first quarter of 2001
compared to a $64 million charge for the same period of 2000. The amount in 2001
was recorded with income of $27 million reflected to the
Impairment/restructuring line and the balance reflected in other financial
statement lines. The $64 million charge in 2000 was recorded with $42 million
reflected in the Impairment/restructuring charge line and the balance reflected
in other financial statement lines. See "Overview" above, the notes to the
consolidated financial statements and Note 9 in the notes to the consolidated
condensed financial statements on page F-52 for further discussion regarding the
strategic plan.
Taxes on Income
The effective tax rates used for the first quarters of 2001 and 2000 were
43.2% and 40.2%, 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 on page
F-46 for further discussion regarding the debt retirement.
Certain Accounting Matters
The Financial Accounting Standards Board (FASB) issued an exposure draft
for Business Combinations and Intangible Assets in late 2000. One of the
provisions of this exposure draft is to require use of a non-amortization
approach to account for purchased goodwill. Under that approach, goodwill would
not be amortized to earnings over a period of time. Instead, it would be
reviewed for impairment and expensed against earnings only in the periods in
which the recorded value of goodwill is more than its implied fair value.
Goodwill amortization impacted the basic and diluted per share amount for the
quarter by $0.12 and $0.13 in 2001 and 2000, respectively. This exposure draft
is not final and may change before any new accounting standard is adopted.
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The FASB Emerging Issues Task Force (EITF) has recently 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. We anticipate this statement will provide for reclassifications of
revenues and cost of sales within our financial statements with no effect on
gross margin or earnings.
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 loss of previously announced 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. Recently, we announced a 10-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 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.
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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 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 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.
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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 charge line with the balance of the
charges reflected in other financial statement lines.
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.
Certain Accounting Matters
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.
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
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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
prior periods presented.
The Financial Accounting Standards Board has recently issued an exposure
draft for Business Combinations and Intangible Assets. One of the provisions of
this exposure draft is to require use of a non-amortization approach to account
for purchased goodwill. Under that approach, goodwill would not be amortized to
earnings over a period of time. Instead, it would be reviewed for impairment and
expensed against earnings only in the periods in which the recorded value of
goodwill is more that its implied fair value. Goodwill amortization increased
the basic and diluted net loss per share by $0.47 and $0.54 in 2000 and 1999,
respectively. This exposure draft is not final and may change before any new
accounting standard is adopted.
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 Furr's (in 1998) and Randall's (in 1999) and the
disposition of the Portland division (in 1999). These sales losses were
partially offset by the increase in sales to Kmart Corporation. Sales during
1999 were also impacted by the planned closing and consolidation of certain
distribution operating units. These sales losses plus the loss of sales to
United in 2000 were partially offset by the increase in sales to Kmart
Corporation. In 1999 and 1998, sales to Furr's, 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
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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.
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.
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Litigation Charges
In October 1997, we began paying Furr's $800,000 per month as part of a
settlement agreement which ceased in October 1998. Payments to Furr's 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 charge line with the balance of the
charges reflected in other financial statement lines.
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.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter ended April 21, 2001, our principal sources of
liquidity were borrowings under our credit facility and the sale of certain
assets. Our principal sources of capital, excluding shareholders' equity, was
generated by issuing bonds in the capital markets.
Net cash provided by (used in) operating activities
Net cash expended by operating activities was $116 million in the first
quarter of 2001 compared to a net inflow of $55 million for the same period in
2000. The primary use of funds was for working capital.
Operating activities generated $127 million of net cash flows for fiscal
year 2000, compared to the $118 million for the same period in 1999. Included in
fiscal year 2000 net operating cash flows were $312 million in gross cash flows
from operations, which were reduced by a $67 million increase primarily in
working capital and $118 million in payments for strategic plan-related cash
expenditures.
Cash requirements related to the implementation and completion of the
strategic plan (on a pre-tax basis) were $23 million in the first quarter of
2001 and are currently estimated to be $73 million for the full year 2001. We
believe working capital reductions, proceeds from asset sales, and continued
positive earnings will provide adequate cash flows to cover all of these costs.
Net cash provided by investing activities
Total investment-related activity resulted in $84 million of positive net
cash flow for the first quarter ended April 21, 2001, compared to $14 million in
the same period of 2000. Cash provided by asset sales, collections on notes
receivable and other investing-related activities was only partially offset by
capital expenditures.
Net cash used in investing activities totaled $48 million in fiscal year
2000 compared to $213 million for fiscal year 1999. Included in fiscal year 2000
net investment expenditures were $151 million for capital expenditures and $7
million for acquisition of retail stores. Offsetting these expenditures in part
were sales of assets and investments totaling $100 million.
Net cash provided by (used in) financing activities
Financing activities generated $29 million of net cash flows for the
quarter ended April 21, 2001, compared to a $55 million use of cash flows for
the same period of 2000. Total debt, including capital leases, decreased
slightly in the first quarter of 2001.
For fiscal year 2000, net cash used in financing activities was $55
million, compared to fiscal year 1999 when our financing activities resulted in
a $96 million net source of cash. Included in fiscal year 2000
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net cash used in financing activities was a net decrease in long-term debt of
$35 million since the end of 1999.
On March 22, 2001, we received approximately $50 million of proceeds from
the sale of common stock to Yucaipa Companies, a transaction which gave Yucaipa
8.7% ownership of Fleming's outstanding common stock.
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 new 5.25% 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 first quarter of
2001, outstanding loans and letters of credit under the credit facility totaled
$146 million of term loans, $130 million of revolver loans, and $45 million of
letters of credit. As of April 21, 2001, we could have borrowed an additional
$425 million under the revolver.
For the foreseeable future, 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 asset sale proceeds. 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 costs and other capital needs in the normal course of business
for the next 12 months.
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 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
"Legal Proceedings" starting on page 54. 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.
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BUSINESS
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, 5,000 convenience stores and nearly 1,000
supercenters, discount stores, limited assortment stores, drug stores, specialty
stores and other stores across the U.S. We expect to substantially increase our
distribution volume in connection with, among other things, our recently
announced ten-year, $4.5 billion per year strategic alliance with our largest
customer, Kmart Corporation. In addition, as of April 23, 2001, our retail group
operated 103 supermarkets. In the fiscal year ended December 30, 2000, we
generated total net sales of $14.4 billion.
Our distribution group net sales were $11.2 billion for 2000, a 5.8%
increase over the prior year, and represented approximately 77% of total net
sales in 2000. To supply our customers, we have a network of 32 distribution
centers that have a total of approximately 19 million square feet of warehouse
space. To support our new business from Kmart, we expect to add up to four new
distribution centers over the next several months. Once that infrastructure is
in place, we believe that we will be the only distributor of consumable goods
serving customers in all 50 states. In addition to product storage, handling and
distribution functions, we also provide our customers with an offering of
advertising, store development, accounting, pricing and retail technology
services.
Our retail group net sales were $3.3 billion for 2000, which represented
approximately 23% of total net sales. Of that amount, $1.9 billion was
attributable to continuing chains, which represents a 4.8% increase over the
prior year. As of April 23, 2001, our continuing chains included 38 price impact
supermarkets under the Food 4 Less banner and ten additional supermarkets which
we intend to convert to the price impact format. Price impact supermarkets offer
deep-discount, everyday low prices in a warehouse-style format. These stores
typically cost less to build, maintain and operate than conventional
supermarkets. We also operated 44 supermarkets that are adopting certain
elements of the price impact format under the Rainbow Foods banner. In addition,
we also operated 11 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.
In recent years, consumers have been shifting their purchases of food and
other consumable goods away from conventional full-service grocery stores
towards 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, and 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, so we
have repositioned our retail group to expand our presence in the price impact
format.
REPOSITIONING OF FLEMING
In late 1998, Mark Hansen joined Fleming as our Chairman and Chief
Executive Officer. Together with other new members of senior management, he
established the following strategic initiatives in order to reposition us for
growth:
- lower the cost of goods sold and the cost of our distribution services in
order to increase sales to existing customers and attract new customers;
- diversify our customer base by appealing to retailers beyond our
traditional conventional supermarket customers; and
- reposition our retail group by selling or closing most of our
conventional format supermarkets and opening additional price impact
supermarkets.
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In the course of implementing our strategic initiatives, since 1998, 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 group employee by
more than 12% from 1998 to 2000;
- centralized the majority 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 207 conventional supermarkets through the end of the first
quarter of 2001, with 31 more to be sold or closed in the next few
months;
- opened 22 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 five
consecutive quarters (year-over-year comparisons). In 2000, we added
approximately $1.2 billion in gross annualized distribution group sales from
both new channel retailers and our traditional supermarket customers.
COMPETITIVE STRENGTHS
Low-Cost, High-Volume National Distribution System: We have consolidated
our smaller distribution centers into high-volume distribution centers. Our
distribution centers produce average annual sales that are among the highest in
the consumable goods distribution industry. Our procurement and logistics
capabilities, combined with the scale of our distribution centers, have enhanced
our ability to provide customers with lower-cost merchandise and services that
improve customer acquisition and retention. Our larger, super-regional
distribution centers are able to conduct profitable operations at an extended
range, thereby increasing our potential market reach.
Efficient Centralized Purchasing: Category management decisions and vendor
negotiations for the majority of our merchandise procurement are conducted in
one location. Our customer support center is one of the largest buyer locations
of consumable goods in the U.S. 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 2,500
companies that operate almost 9,000 retail store locations under a wide variety
of formats across the U.S. 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 format 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
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reduced number of product selections, focus on high-turnover products and
product categories, employ flow-through distribution methods which reduce
product storage and handling expense, and minimize store operating costs through
a warehouse-style operation.
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. Our recent efforts in
these markets include distribution agreements with significant customers such as
Clark Retail Enterprises. 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 second
largest distributor in the $110 billion wholesale grocery industry, we account
for approximately 10% of this traditional core market, representing substantial
room for additional growth. 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. 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. 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.
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 April 23, 2001, we owned and operated 38 price
impact supermarkets, and we intend to add up to 17 price impact supermarkets in
2001 through a combination of construction of new stores, conversion of existing
stores and acquisitions.
Leverage Efficiencies Created by Our Kmart Distribution Agreement: We
believe our new distribution agreement with Kmart and the resulting substantial
increase in our distribution volume will provide us with increased economic and
purchasing leverage that will benefit 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 will distribute as a result of the Kmart distribution
agreement will enable 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.
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RECENT DEVELOPMENTS
New Kmart Strategic Alliance
On February 7, 2001, we announced a ten-year strategic alliance under which
we will supply to Kmart substantially all of the food and consumable products in
all current and future Kmart and Kmart supercenter stores in the U.S. 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. This strategic alliance may be further expanded to include an
agreement on health and beauty products and related categories. It is planned
that certain aspects of our price impact retail format could be incorporated
into Kmart's merchandising programs, which could extend our combined procurement
leverage. In addition, Kmart will offer us access to its strengths in general
merchandise and seasonal goods. Kmart will adopt our "BestYet" private label
program and pay fees to us based on brand management.
Yucaipa Investment
On March 22, 2001, an affiliate of The Yucaipa Companies, an investment
group controlled by Ron Burkle, completed a $50 million investment in our common
stock. Through this investment, Yucaipa acquired approximately 3.8 million newly
issued shares, representing approximately 8.7% of our outstanding common stock.
Yucaipa has substantial experience in the retailing and distribution sectors,
including past investments in such food retailers as Food 4 Less Supermarkets,
Inc., Ralph's Grocery Company, Dominick's Finer Foods and Fred Meyer, Inc.
Yucaipa also acquired a 12-month option to invest an additional $50 million in
our common stock at the then-current average market price.
Furrs Asset Purchase
On June 27, 2001, we bid $57 million to purchase certain assets of 66 Furrs
Supermarkets stores in New Mexico and Texas and approximately $43 million for
related warehouse inventory. Our bid was accepted by Furrs' board of directors
on June 27, 2001 and was approved by a U.S. Bankruptcy Court on June 29, 2001.
We anticipate that the majority of these stores will be purchased directly from
Furrs by independent supermarkets and chain supermarket retailers, most of whom
we would serve as their supplier.
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 U.S. We also offer a
variety of retail support services to independently-owned and company-owned
retail stores. Net sales for our distribution segment were $11.2 billion for
fiscal 2000, excluding sales to our own retail stores. Sales to our own retail
stores totaled $1.8 billion during fiscal 2000.
In the course of implementing our strategic plan, since 1998 we have closed
or consolidated 12 of our distribution centers, which has increased volumes at
our remaining 32 distribution centers. As a result, we now have four
distribution divisions with net sales for 2001 expected to be over $1 billion
each. We have a total of 26 distribution divisions, some of which encompass
multiple distribution centers that have common management.
Customers Served. During 2000, our distribution group served a wide variety
of retail operations located in 41 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 ("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. Kmart Corporation, our largest customer, represented
approximately 10% of our total net sales in 2000, which we
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project will increase to a significantly greater percentage of our total net
sales in 2001. No other single customer represented more than 2% of our fiscal
2000 net sales.
Pricing. The distribution group uses market research and cost analyses as a
basis for pricing its products and services. In all operating units, retail
services 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 may include a mark-up. The
FlexMate marketing program is available as an option in all operating units for
grocery, frozen and dairy products. In all operating units, a quoted sell price
method is used 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, freight charges are also added
to offset in whole or in part our cost of delivery services provided. Any cash
discounts, certain allowances, and service income earned from vendors may be
retained by the distribution group. This has generally been referred to 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 cost 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 certain 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, package meat,
bakery and deli products will follow the FlexPro/FlexStar pricing methodology,
priced at their net acquisition value, with vendor allowances passed through.
Random weight meat and deli products will be priced at our last received cost.
Certain other items will be priced at net acquisition value plus a negotiated
fee. In addition, Kmart will pay us a logistics fee equal to a percentage of
purchases based on volume, and a negotiated fixed annual procurement fee.
Fleming Brands. Fleming Brands are Fleming-owned brands that we offer
exclusively to our customers. Fleming Brands, which include BestYet, Nature's
Finest, SuperTru, Marquee, Rainbow and Exceptional Value, are positioned to
compete with national brand products and value brand products. As part of our
recent Kmart strategic alliance, Kmart has agreed to adopt our BestYet private
label program in its Kmart and Kmart supercenter stores.
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 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 the majority of our merchandise
procurement. This makes more efficient use of our procurement staff, improves
buying efficiency and reduces the cost of goods. Our customer support center
near Dallas is one of the largest buyer locations of consumable goods in the
U.S. 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.
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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
recently established 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. As of April 23, 2001 our distribution group
operated 22 full-line distribution centers which are responsible for the
distribution of national brands and 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 distributed health and beauty care items and
other items of general merchandise and specialty foods. Four warehouse
facilities served 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 19 million
square feet of warehouse space. Additionally, the distribution group rents, on a
short-term basis, approximately 432,000 square feet of off-site temporary
storage space. To support our new business from Kmart, we expect to add up to
four new distribution centers over the next few months.
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, by making secured loans and by making equity
investments in 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.
- Store and Equipment Leases. We lease stores for sublease to certain
customers. At year-end 2000, 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 make loans to customers primarily
for store expansions or improvements. These loans are typically secured
by inventory and store fixtures, bear interest at rates above the prime
rate, and are for terms of up to ten 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.
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 year-end 2000, we had loans outstanding to customers totaling $110
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. The present values of our obligations under
such direct financing leases and lease guarantees were $182 million and $14
million, respectively, at year-
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end 2000. Our credit loss expense from receivables as well as from investments
in customers was $29 million in 2000 which is comparable to prior years.
Franchising. We also license 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 now one of the largest procurement locations in the
U.S. 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 April 23, 2001, our retail group operated 103 supermarkets under a
variety of formats. Our continuing chains included 38 price impact supermarkets
under the Food 4 Less banner, and ten additional supermarkets which we intend to
convert to the price impact format in 2001 and 2002. We also operated 44
supermarkets that are adopting certain elements of the price impact format under
the Rainbow Foods banner. Price impact supermarkets offer deep-discount,
everyday low prices in a warehouse-style format. In addition, we operated 11
limited assortment stores under the Yes!Less banner, five 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.
Price Impact Supermarkets. As of April 23, 2001, our retail group owned and
operated 38 Food 4 Less price impact supermarkets, of which 26 are located in
Northern California, seven in the Salt Lake City, Utah area, four in the
Phoenix, Arizona area and one in Wisconsin. Of these 38 stores, 22 have opened
since the beginning of 1999. These stores offer deep-discount, everyday low
prices well below those offered by conventional supermarkets and carry prices
for grocery products which are also generally lower than supercenters. Our price
impact supermarkets are also known for their quality meat and produce offerings.
These supermarkets average 55,000 square feet in size, generate average weekly
sales of more than $450,000.
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.
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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 by presenting a warehouse-style operation.
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
on-site service departments such as a bakery or butcher shop.
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 fewer 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. Consequently, we believe the typical
advertising and marketing expenditure requirements do not apply.
In 2001, we intend to convert seven of our conventional format supermarkets
located in the greater Milwaukee, Wisconsin area to the price impact format, and
an additional three in early 2002. We also plan to open an additional ten price
impact stores in 2001 through new store construction and acquisitions. New price
impact stores that our retail group opens may be opened under trade names other
than Food 4 Less.
Conventional Supermarkets with Price Impact Elements. As of April 23, 2001,
we also operated 44 Rainbow Foods supermarkets, with 42 stores in Minnesota and
two in Wisconsin. Our Rainbow Foods stores are conventional supermarkets which
we are beginning the process of retrofitting with an increasing degree of price
impact elements. As part of this repositioning process, labor-intensive service
departments will be reduced or eliminated, and some of the merchandising
strategies of our price impact format will be implemented. Purchasing decisions
will be coordinated with our price impact stores, which should also help to
increase operating margins. We expect that the repositioning of the Rainbow
Foods chain will be complete by the end of 2002.
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 points. With five stores opened in
2001, as of April 23, 2001 there were 11 Yes!Less retail stores open, ten in
Texas and one in Louisiana. We are currently evaluating the concept with a view
toward appropriate expansion.
Divestiture of Conventional Format Supermarkets. In addition to the 103
supermarkets described above, as of April 23, 2001 we also owned and operated 31
conventional format supermarkets. As part of our strategic repositioning, we
decided to sell or close these 31 conventional format supermarkets in order to
focus resources on growing our price impact stores and improving financial
results.
Since 1998, we have divested 207 conventional supermarkets and we are in
the process of selling or closing the remaining 31 stores. These conventional
format supermarkets are operating primarily under the ABCO Desert Market trade
name, and are in various stages of divestiture.
As of April 23, 2001, we have sold or closed 66 stores, including the sale
of the assets of 11 ABCO Desert Market stores located in Arizona to Safeway,
Inc. and the assets of a 16-store chain of Baker's Supermarkets located in the
Omaha, Nebraska area to Kroger Co. Of the remaining 31 stores to be divested, we
are in various stages of discussions with numerous parties with respect to the
sale of the majority of these stores, and we currently expect that all of these
stores will either be sold or closed by the
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end of 2001. We expect to retain a substantial level of the distribution
business for the majority of stores that are sold.
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, 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
The distribution segment operates in a competitive market. Our primary
competitors are regional and local food distributors, national chains which
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 segment supermarkets and distribution
segment 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 have many trade names registered at either the
federal or state level or a combination of both, such as Piggly Wiggly, Super 1
Foods, Festival Foods, Jubilee Foods, Jamboree Foods, MEGAMARKET, Shop 'N Kart,
ABCO Desert Market, American Family, Big Star, Big T, 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.
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EMPLOYEES
At December 30, 2000, we had 29,567 full-time and part-time employees, with
9,667 employed by the distribution group, 17,829 by the retail group and 2,071
employed in shared services, customer support and other functions.
Approximately half 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
-------- -------------- ---------------
(IN THOUSANDS)
FULL-LINE FOOD DISTRIBUTION CENTERS:
Ewa Beach, HI.......................................... 361 Leased
Fresno, CA............................................. 828 Owned/Leased
Garland, TX............................................ 1,190 Owned
Geneva, AL............................................. 643 Leased
Kansas City, KS........................................ 1,136 Leased
La Crosse, WI.......................................... 907 Owned
Lafayette, LA.......................................... 437 Owned
Lincoln, NE............................................ 515 Leased
Lubbock, TX............................................ 763 Owned/Leased
Massillon, OH.......................................... 874 Owned
Memphis, TN............................................ 1,071 Owned/Leased
Miami, FL.............................................. 764 Owned
Milwaukee, WI.......................................... 600 Owned
Minneapolis, MN........................................ 480 Owned
Nashville, TN.......................................... 941 Leased
North East, MD......................................... 591 Owned/Leased
Oklahoma City, OK...................................... 529 Leased
Phoenix, AZ............................................ 1,642 Owned/Leased
Sacramento, CA......................................... 787 Owned/Leased
Salt Lake City, UT..................................... 555 Owned/Leased
Superior, WI........................................... 371 Owned
Warsaw, NC............................................. 672 Owned/Leased
------
Total................................................ 16,657
GENERAL MERCHANDISE DISTRIBUTION CENTERS:
Dallas, TX............................................. 262 Owned/Leased
King of Prussia, PA.................................... 377 Leased
La Crosse, WI.......................................... 163 Owned
Memphis, TN............................................ 495 Owned/Leased
Sacramento, CA......................................... 438 Leased
Topeka, KS............................................. 223 Leased
------
Total................................................ 1,958
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APPROXIMATE
LOCATION SQUARE FEET OWNED OR LEASED
-------- -------------- ---------------
(IN THOUSANDS)
CONVENIENCE STORES:
Altoona, PA............................................ 172 Owned
Marshfield, WI......................................... 157 Owned
Plymouth, MN........................................... 239 Leased
Romeoville, IL......................................... 124 Leased
------
Total................................................ 692
OUTSIDE STORAGE:
Outside storage facilities -- Typically rented on a
short-term basis..................................... 432
------
Total for Distribution............................... 19,739
======
To support our new business from Kmart, recently we leased a warehouse
facility in Fort Wayne, Indiana. Pursuant to our repositioning strategy, we have
five closed facilities in various states and we are actively marketing them.
As of April 23, 2001, our retail group operated 103 supermarkets in a
variety of formats in California, Utah, Arizona, Wisconsin, Minnesota, Texas and
Louisiana. Our continuing chains included 38 price impact supermarkets, ten
supermarkets to be converted to the price impact format, 11 limited assortment
stores and 44 conventional supermarkets which are adopting certain elements of
the price impact format. In addition, we are in the process of selling or
closing an additional 31 conventional supermarkets that our retail segment owns
and operates in Arizona and Illinois. 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
232,000 square feet. Our customer support center near Dallas, Texas occupies
leased office space totaling approximately 136,000 square feet.
We own and lease other significant assets, such as inventories, fixtures
and equipment and capital leases.
LEGAL PROCEEDINGS
The following describes various pending legal proceedings to which we are
subject:
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 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 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
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. Briefing is
complete in the Court of Appeals for the Tenth Circuit, and oral argument was
conducted on May 15, 2001. The Tenth Circuit has not yet issued an opinion.
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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.
On April 30, 2001, a Memorandum of Understanding was signed which provides,
among other things, for the parties in the noteholder case to proceed to agree
on a Settlement Agreement which will include a payment by defendants and our
insurer of $2.5 million in full satisfaction of the claim. The settlement will
require court and class approval.
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 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 of our current and former
customers (Don's United Super, et al. v. Fleming, et al.). The 19 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 case
(Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, 16
plaintiffs are asserting claims in the Coddington case, all but one of which
have arbitration agreements with us. The plaintiffs assert claims virtually
identical to those set forth in the Don's case, 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 case.
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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 appealed the court's denial of arbitration to the United States
Court of Appeals for the Eighth Circuit.
In June 2001, the Eighth Circuit ruled that all of the claims made by each
plaintiff in Coddington that has an arbitration agreement with us are subject to
arbitration. The Eighth Circuit remanded the case to the district court for
entry of an order compelling arbitration of such claims. The plaintiffs have
filed a motion for rehearing by the Eighth Circuit.
Two other cases had been filed before the Don's case in the same 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 Western 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 United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
On March 2, 2001, the court ordered the parties in the related Missouri
cases, the Storehouse Markets case and the Welsh case (described below) to
mediate their claims within 45 days of the order. On April 9 - 11, 2001, the
parties to the related Missouri cases participated in a mediation process held
in Kansas City, Missouri pursuant to the court's order. Although the precise
details of the mediation are subject to a confidentiality agreement among the
parties and may not be disclosed, the mediation confirmed our expectation that
the plaintiffs in the related Missouri cases will claim substantial damages. In
addition, based on discussions with plaintiffs' counsel during the mediation, it
appears unlikely that these cases will be resolved before trial.
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
prospects.
Storehouse Markets. In 1998, we and one of our former executives 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 approximately 250 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 a
discretionary appeal of the class certification order, and we are pursuing that
appeal on an expedited basis.
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 United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
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On March 2, 2001, the court ordered the parties in the related Missouri
cases, the Storehouse Markets case and the Welsh case to mediate their claims
within 45 days of the order. On April 9 - 11, 2001, the parties to the
Storehouse Markets case participated in mediation process held in Kansas City,
Missouri pursuant to the court's order. Although the precise details of the
mediation remain subject to a confidentiality agreement among the parties and
may not be disclosed, the mediation confirmed our expectation that the
plaintiffs in Storehouse Markets would claim substantial damages.
In June 2001, counsel for the parties in the Storehouse Markets case
informed the court that they had reached an agreement in principle to settle all
claims for a total payment of $16 million. The settlement is subject to a number
of conditions, including the final court approval. On July 9, 2001, the parties
executed a definitive settlement agreement and the court preliminarily approved
the settlement subject to final court approval at a hearing scheduled for
September 10, 2001.
If the settlement is not approved by the district court or if the
Storehouse Markets case otherwise goes forward, we intend to vigorously defend
against these claims but we cannot predict the outcome of the case. An
unfavorable outcome could have a material adverse effect on our financial
condition and prospects.
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 related Missouri
cases, the Storehouse Markets case and the Welsh case to mediate their claims
within 45 days of the order. The parties in the Welsh case have not yet mediated
their claims.
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 in
this prospectus, we do not believe that any such claim will have a material
adverse effect on us.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our Executive Officers and Directors are as follows:
NAME AGE PRESENT POSITION
---- --- ----------------
Executive Officers:
Mark S. Hansen................... 46 Chairman and Chief Executive Officer
Thomas G. Dahlen................. 47 Executive Vice President and President, Retail and
Corporate Marketing
E. Stephen Davis................. 60 Executive Vice President and President, Wholesale
Dennis C. Lucas.................. 54 Executive Vice President and President, Retail
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.................... 39 Executive Vice President and Chief Financial Officer
Ronald C. Anderson............... 58 Senior Vice President, Central Operations
Mark K. Batenic.................. 52 Senior Vice President, Northeast Operations
Michael J. Carey................. 54 Senior Vice President, Western Operations
Charles L. Hall.................. 51 Senior Vice President, Real Estate and Store Development
Carlos M. Hernandez.............. 46 Senior Vice President, General Counsel and Secretary
Matthew H. Hildreth.............. 35 Senior Vice President, Finance and Treasurer
Leonard Kaye..................... 62 Senior Vice President, Eastern Operations
William A. Merrigan.............. 56 Senior Vice President, Logistics
Philip B. Murphy................. 52 Senior Vice President, Procurement
Mark D. Shapiro.................. 41 Senior Vice President, Finance and Operations Control
Thomas A. Zatina................. 49 Senior Vice President, Northern Operations
Directors:
Mark S. Hansen................... 46 Chairman and Chief Executive Officer
Herbert M. Baum.................. 64 Director
Kenneth M. Duberstein............ 57 Director
Archie R. Dykes.................. 70 Director
Carol B. Hallett................. 63 Director
Robert S. Hamada................. 63 Director
Edward C. Joullian III........... 71 Director
Guy A. Osborn.................... 65 Director
Alice M. Peterson................ 48 Director
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.
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.
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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.
Dennis C. Lucas joined us as Executive Vice President and President, Retail
in July 1999. From 1992 until joining us, Mr. Lucas served in multiple
capacities at Albertson's, including Regional President from 1998 to July 1999,
Senior Vice President and Regional Manager from 1996 to 1998, and various Vice
President positions from 1992 to 1996.
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.
Ronald C. Anderson joined us in 1995 and has served as our Senior Vice
President, Central Operations since June 2000. Prior to that, Mr. Anderson
served as our Senior Vice President, Operating Group President from 1998 to June
2000, and our Senior Vice President, General Merchandise from 1995 to 1998.
Mark K. Batenic joined us in 1973 and has served as our Senior Vice
President, Northeast Operations since December 2000. Prior to that, Mr. Batenic
has served us in various Senior Vice President positions since 1994, including
Senior Vice President, Sales and Business Development Food Distribution, Senior
Vice President, Customer Management, and Senior Vice President, Operations.
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.
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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.
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.
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 CEO 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
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legislature and as minority leader in the State Assembly. Mrs. Hallett is a
director of Litton Industries, Inc. and Mutual of Omaha 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 is
Dean of the University of Chicago Graduate School of Business where he also
serves as the Edward Eagle Brown Distinguished Service Professor of Finance. 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 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 has been President
of RIM Finance, LLC (a wholly-owned subsidiary of the Canadian company, Research
In Motion Limited, the maker of BlackBerry wireless handheld devices), since
December 2000. 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.
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PRINCIPAL AND MANAGEMENT SHAREHOLDERS
This table indicates how much of our common stock was beneficially owned as
of May 18, 2001, by our directors and each of our five most highly compensated
executive officers and by beneficial owners of more than 5% as of the dates
indicated in the footnotes. Beneficial ownership of directors and executive
officers as a group (25 persons) represents 3.01% of the total outstanding
shares. No director or executive officer beneficially owns in excess of 1% of
the outstanding shares except for Mr. Hansen who beneficially owns 1.07% of the
outstanding shares. As of May 18, 2001, 43,817,882 shares of our common stock
were issued and outstanding.
SHARES OF COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED(1) CLASS
---- ---------------------- ----------
Mark S. Hansen(2)(3)................................. 474,998 1.07%
Herbert M. Baum(3)(4)................................ 6,250 --
Kenneth M. Duberstein(3)............................. -- --
Archie R. Dykes(4)(5)................................ 14,967 --
Carol B. Hallett(3)(4)............................... 8,422 --
Robert S. Hamada(3).................................. 4,000 --
Edward C. Joullian III(4)(5)......................... 29,105 --
Guy A. Osborn(3)(4).................................. 23,450 --
Alice M. Peterson(4)................................. 12,750 --
E. Stephen Davis(2)(3)(4)(5)......................... 140,708 --
Dennis C. Lucas(2)(4)................................ 108,450 --
William H. Marquard(2)(4)............................ 96,625 --
Neal J. Rider(2)(3)(5)............................... 121,423 --
All directors and executive officers
As a group(2)(3)(4)(5)............................. 1,345,728 3.01%
Dimensional Fund Advisors, Inc.(6)................... 2,432,997 5.55%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
FMR Corp.(7)......................................... 4,957,114 11.31%
82 Devonshire Street
Boston, Massachusetts 02109
Mellon Financial Corporation(8)...................... 2,218,167 5.06%
One Mellon Center
Pittsburgh, Pennsylvania 15258
Southeastern Asset Management, Inc.(9)............... 5,819,400 13.28%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
U.S. Transportation, LLC(10)......................... 5,911,307 13.49%
c/o The Yucaipa Companies
9130 West Sunset Boulevard
Los Angeles, California 90069
-------------------------
(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 May 18, 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.
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(2) The amounts shown include shares which the following persons have the right
to acquire within 60 days of May 18, 2001 under our stock option and stock
incentive plans:
Hansen...................................................... 399,998 shares
Davis....................................................... 56,500 shares
Lucas....................................................... 81,250 shares
Marquard.................................................... 53,125 shares
Rider....................................................... 87,500 shares
All directors and officers as a group (including those named above):
882,823
(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
Hallett............................................. 3,500 shares of restricted stock
Hamada.............................................. 3,500 shares of restricted stock
Osborn.............................................. 3,500 shares of restricted stock
Duberstein.......................................... 3,500 shares of restricted stock
All directors and officers as a group (including those named above):
482,500 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....................................................... 68,000 shares
Lucas....................................................... 10,000 shares
Marquard.................................................... 10,000 shares
All directors and officers as a group (including those named above):
169,400 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
Dykes....................................................... 643 shares
Joullian.................................................... 20,355 shares
Rider....................................................... 32,500 shares
All directors and officers as a group (including those named above):
69,498 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.
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(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.
(10) In a Schedule 13D dated March 26, 2001, U.S. Transportation, LLC, The
Yucaipa Companies and Ronald W. Burkle disclosed that they held jointly
5,911,307 shares of our common stock and that each entity had sole power to
vote and dispose of all shares. Pursuant to a Stock and Warrant Purchase
Agreement dated February 6, 2001, between the Company and U.S.
Transportation, LLC, the 5,911,307 shares of common stock consist of
3,850,301 shares issued to and purchased by U.S. Transportation, LLC on
March 22, 2001, and 2,061,006 shares that would have been issued to and
purchased by U.S. Transportation, LLC had it exercised its warrant to
purchase $50 million of additional shares on March 22, 2001, based on an
exercise price of $24.26 per share, which in accordance with the agreement,
is the average closing price of the common stock on the New York Stock
Exchange for the 30 consecutive trading days immediately preceding the date
of exercise. As of May 18, 2001, U.S. Transportation, LLC has not exercised
the warrant.
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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 $154 million at year end 2000, 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 April 21, 2001, borrowings under the credit facility totaled $146
million of term loans, $130 million of revolver loans, and $45 million of
letters of credit. 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.
10.5% SENIOR SUBORDINATED NOTES DUE 2004 AND 10.625% SENIOR SUBORDINATED NOTES
DUE 2007
Our senior subordinated notes consist of two issues: $250 million of 10.5%
Senior Subordinated Notes due December 1, 2004 and $250 million of 10.625%
Senior Subordinated Notes due July 31, 2007. These senior subordinated notes 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 private
notes and that will guarantee the exchange notes. The senior subordinated notes
contain negative covenants substantially similar to those that govern the
private notes and that will govern the exchange notes. The indenture governing
the senior subordinated notes contains a change of control provision
substantially similar to the Notes, except that any such change of control must
be accompanied by a decline in credit ratings.
5.25% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2009
Our $150 million 5.25% 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. The indenture governing the
Convertible Senior Subordinated Notes includes a change of control provision
substantially similar to the notes, except that the offer price is 100%.
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DESCRIPTION OF NOTES
We issued the private notes, and will issue the exchange notes, under an
indenture (the "Indenture"), among us, the Subsidiary Guarantors and Bankers
Trust Company, as Trustee (the "Trustee"). 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 (the "TIA"). 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
The notes are unsecured obligations of the Company, ranking pari passu in
right of payment with all other senior unsecured obligations of the Company.
Principal of, premium, if any, and interest on the notes and any additional
interest payable pursuant to the Registration Rights Agreement ("Additional
Interest"), if any, is payable, and the notes are exchangeable and transferable,
at the office or agency of the Paying Agent in The City of New York maintained
for such purposes; provided, however, that payment of interest may be made, at
the option of the Company, by check or by wire transfer to Holders of at least
$5,000,000 aggregate principal amount of notes. The Company may change any
Paying Agent without notice to holders of the notes (the "Holders"). 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.
The Company may issue up to $550 million aggregate principal amount of
notes, $355 million of which were issued as private notes to which this exchange
offer relates. Any offering of additional notes is subject to, among other
things, the covenant described under the caption "Description of
Notes -- Certain Covenants -- Limitation on Indebtedness." The notes subject to
this exchange offer and any additional notes subsequently issued under the
Indenture will be treated as a single class for all purposes under the
Indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase.
MATURITY, INTEREST AND PRINCIPAL
The notes will mature on April 1, 2008, and are unsecured senior
obligations of the Company. The notes bear interest at an annual rate of
10 1/8%, payable semiannually on April 1 and October 1 of each year commencing
October 1, 2001, to the Person in whose name the notes were registered at the
close of business on the March 15 or September 15 next preceding such interest
payment date. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. Interest on the exchange notes will accrue from the
last interest payment date on which interest was paid on the private notes or,
if no interest was paid on the private notes, from the date of issuance of the
private notes, which was March 15, 2001. Holders whose private notes are
accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the private notes.
The notes will not be 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), are
guaranteed, jointly and
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severally, on a senior basis by all of the Wholly Owned Restricted Subsidiaries
of the Company and by Restricted Subsidiaries that guarantee certain other
Indebtedness (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.
REDEMPTION
Optional Redemption. Except as described below, the notes are not
redeemable before April 1, 2005. Thereafter, the Company may redeem the notes at
its option, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve month period commencing
on April 1 of the year set forth below.
YEAR PERCENTAGE
---- ----------
2005...................................................... 105.063%
2006...................................................... 102.531%
2007 and thereafter....................................... 100.000%
In addition, the Company must pay all accrued and unpaid interest on the
notes redeemed.
Optional Redemption upon Equity Offerings. In addition, up to 35% of the
initial aggregate principal amount of the notes may be redeemed on or prior to
April 1, 2004, at the option of the Company, within 90 days of an Equity
Offering with the net proceeds of such offering at a redemption price equal to
110.125% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of redemption (subject to the right of holders of
record on relevant record dates to receive interest due on relevant interest
payment dates); provided, that after giving effect to such redemption at least
65% of the notes originally issued under the Indenture remains outstanding.
As used in the preceding paragraph, "Equity Offering" means a public or
private offering of Qualified Capital Stock of the Company generating gross
proceeds to the Company of at least $50 million.
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.
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PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control 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 Issue Date, 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.
Within 30 days following the occurrence of any Change of Control, the
Company shall notify the Trustee and give written notice of such Change of
Control 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 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.
The Company will not be required to make a Change of Control Purchase Offer
upon a Change of Control if a third party makes the Change of Control Purchase
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control
Purchase Offer made by the Company and purchases all notes properly tendered and
not withdrawn under the Change of Control Purchase Offer.
If a Change of Control 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 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 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 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
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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.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Indebtedness. (a) 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 indirectly liable for the
payment of, or otherwise incur (collectively, "incur"), any Indebtedness
(including any Acquired Indebtedness) other than Permitted Indebtedness.
Notwithstanding the foregoing sentence, 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:
(1) the incurrence of such Indebtedness and (if applicable) the
application of the proceeds therefrom, including to refinance other
Indebtedness;
(2) 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
(3) 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.
(b) The Company will not, and will not permit any Subsidiary Guarantor to,
directly or indirectly, incur any Indebtedness which by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated to any other
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be,
unless such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the notes or the Note
Guarantee of such Subsidiary Guarantor to the same extent and in the same manner
as such Indebtedness is subordinated to other Indebtedness of the Company or
such Subsidiary Guarantor, as the case may be.
(c) The Company will not, and will not permit any of its Restricted
Subsidiaries to, incur any Indebtedness (other than Subordinated Indebtedness),
whether pursuant to clause (a) above or pursuant to one or more items of
Permitted Indebtedness, the proceeds of which will be used to repay in whole or
in part any Subordinated Notes. Notwithstanding the foregoing sentence, the
Company and the Restricted Subsidiaries (to the extent the Company and/or such
Restricted Subsidiary is permitted to incur such
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Indebtedness pursuant to clause (a) above or pursuant to one or more items of
Permitted Indebtedness) may incur such Indebtedness if, at the time of such
event (and after giving effect on a pro forma basis to:
(1) the incurrence of such Indebtedness and the application of the
proceeds therefrom, including to refinance the Subordinated Notes; and
(2) 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 the four-quarter
period referred to in the definition of "Consolidated Senior Debt Leverage
Ratio" as if such acquisition or disposition had occurred at the beginning
of such four-quarter period),
the Consolidated Senior Debt Leverage Ratio of the Company would have been less
than to 2.75 to 1.
Limitation on Restricted Payments. The Company will not, and will not
permit any Restricted Subsidiary of the Company to, directly or indirectly:
(1) 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 (a) 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 (b) by a Restricted Subsidiary to the Company or
any Wholly Owned Restricted Subsidiary);
(2) 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);
(3) 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
(4) make any Investment (other than any Permitted Investment) in any
Person (such payments described in clauses (1) through (4) 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, being the Fair Market Value thereof as determined by the Board of
Directors of the Company, whose determination shall be conclusive and evidenced
by a Board Resolution):
(i) no Default or Event of Default shall have occurred and be
continuing;
(ii) the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in accordance with the provisions described
under "-- Limitation on Indebtedness"; and
(iii) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries on or after the Issue Date, is less than the sum of, without
duplication:
(w) 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 the Issue Date 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
(x) 100% of the aggregate net cash proceeds received by the Company
as capital contributions or from the issue or sale after the Issue Date
of Equity Interests of the Company or of debt securities of the Company
that have been converted into such Equity Interests (other
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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 Redeemable
Capital Stock and other than the initial $50 million equity investment
made by an affiliate of The Yucaipa Companies); plus
(y) any cash received by the Company after the date of initial
issuance of the notes 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
(z) $55 million.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions so long as (with respect to clauses (2), (3), (4)
and (6) below) at the time of and immediately after giving effect thereto no
Default or Event of Default shall have occurred and be continuing:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if such dividend would have been permitted on the date
of declaration;
(2) 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);
(3) the purchase, redemption, defeasance or other acquisition or
retirement for value of any 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);
(4) the purchase, redemption, defeasance or other acquisition or
retirement for value of any 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 Subordinated Indebtedness of the Company or
a Subsidiary Guarantor, as the case may be, so long as:
(a) the principal amount of such new Subordinated Indebtedness does
not exceed the principal amount (or, if such 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
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
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 or
such Subsidiary Guarantor, as the case may be, incurred in connection
with such refinancing;
(b) such new Subordinated Indebtedness is subordinated to the notes
or the Note Guarantee of such Subsidiary Guarantor, as the case may be,
to the same extent as such Subordinated Indebtedness so purchased,
redeemed, defeased, acquired or retired; and
(c) such new 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;
(5) 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);
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(6) the purchase, redemption or other acquisition or retirement for
value of shares of Capital Stock of the Company issued pursuant to 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:
(a) 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
(b) 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;
(7) the repurchase of Capital Stock of the Company deemed to occur
upon the exercise of stock options if such Capital Stock represents a
portion of the exercise price thereof; and
(8) in addition to clause (4) above, the purchase, redemption,
defeasance or other acquisition or retirement for value of the Subordinated
Notes in exchange for, or out of the net cash proceeds of a substantially
concurrent incurrence or sale (other than to a Restricted Subsidiary) of,
Indebtedness of the Company or a Restricted Subsidiary, as the case may be,
so long as such Indebtedness is incurred in accordance with the provisions
described in clause (c) under "-- Limitation on Indebtedness".
The actions described in clauses (2), (3), (5) and (6) of this paragraph
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (iii) of the preceding paragraph.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
permit or suffer to exist any Lien of any nature whatsoever against any asset of
the Company or any Restricted Subsidiary (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired,
or any proceeds therefrom, or assign or otherwise convey any right to receive
income or profits therefrom, except for Permitted Liens, unless
contemporaneously therewith:
(1) in the case of any Lien securing Subordinated Indebtedness,
effective provision is made to secure the notes or such Note Guarantee, as
the case may be, with a Lien on the same collateral that is prior to the
Lien securing such Subordinated Indebtedness; and
(2) in all other cases, the notes or such Note Guarantee, as the case
may be, are secured on an equal and ratable basis.
Limitation on Transactions With Affiliates. 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 a Restricted Subsidiary that is a
Subsidiary Guarantor) (each of the foregoing, an "Affiliate Transaction"),
unless:
(1) 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
(2) 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 (1) 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
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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 (i) 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 and (ii) transactions in the ordinary
course of business with customers, vendors and suppliers, the terms of which
have been approved in good faith by an officer of the Company.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. 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:
(1)(a) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (x) on its Capital Stock or (y) 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;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries;
(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries;
(4) grant Liens in favor of Holders of notes; or
(5) 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 Issue Date;
(b) the Credit Agreement as in effect as of the Issue Date, 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 Issue Date;
(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 (3) above on the property so acquired; and
(h) restrictions incurred by the Company or any Restricted Subsidiary
in connection with any Permitted Receivables Financing.
Limitation on Sale of Assets. 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 of the
assets or Equity Interests issued or sold or otherwise disposed of.
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Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary must apply such Net Proceeds:
(1) to permanently reduce Indebtedness of the Company or one or more
Restricted Subsidiaries under the Credit Agreement (and to correspondingly
reduce commitments with respect thereto) or to repay the Medium-Term Notes
outstanding under the Medium-Term Notes Indenture on the Issue Date; or
(2) 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 Issue Date.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce the revolving credit portion of the Credit Agreement 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
(an "Asset Sale Offer") to purchase the maximum principal amount of notes that
may be purchased out of the Excess Proceeds, 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. To the extent that
the aggregate amount of notes tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes (subject to the restrictions of the Indenture). If
the aggregate principal amount of notes surrendered by Holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall select the notes to be
purchased on a pro rata basis. 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
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:
(1) 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
(2) such transaction is made in accordance with the provisions of
"-- 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:
(1) 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
(2) 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.
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Additional Guarantees. If the Company or any of its Restricted Subsidiaries
shall acquire or form a Wholly Owned Restricted Subsidiary or any existing or
future majority-owned Restricted Subsidiary shall, after the Issue Date,
guarantee any 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 Indebtedness of any other Person) to:
(1) execute and deliver to the Trustee a supplemental indenture in
form and substance reasonably satisfactory to the Trustee pursuant to which
such Restricted Subsidiary shall guarantee all of the obligations of the
Company with respect to the notes on a senior basis; and
(2) deliver to the Trustee an Opinion of Counsel reasonably
satisfactory to the Trustee to the effect 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. 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:
(1) 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
(2) 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 Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, pay or cause 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 of the
Company 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 Consolidated Net Worth requirement set forth in clause (3) 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 Consolidated Net Worth requirement shall
be reinstituted as and from the date of such rating decline.
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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:
(1) 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 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;
(2) 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;
(3) 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;
(4) 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;
(5) 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 Guarantee with respect
to the notes shall apply to such Person's obligations under the Indenture
and the notes;
(6) 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" are complied
with; and
(7) the Company shall have delivered, or caused to be delivered, to
the Trustee, in form and substance satisfactory to the 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 (1) through (6) of this
paragraph and that all conditions precedent herein provided for relating to
such transaction have been complied with.
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The foregoing shall not prohibit a merger of any Restricted Subsidiary of the
Company with and into the Company or a merger effected solely for the purpose of
reincorporating the Company in another jurisdiction. 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
The following events are defined in the Indenture as "Events of Default":
(1) 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;
(2) there shall be a default in the payment of the principal of (or
premium, if any, on) any notes at Maturity;
(3)(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 (1) or (2) or in clauses (b) or (c) of this clause (3)),
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
"-- Purchase of Notes upon a Change of Control" for any reason, including
the inconsistency of such covenant with the Company's Bylaws as in effect
on the Issue Date;
(4)(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 (4) shall
have occurred and the Indebtedness thereunder, if not already matured at
its final maturity in accordance with its terms, shall have been
accelerated;
(5) any Person entitled to take the actions described below in this
clause (5), 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
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deposit or held pursuant to lock-box and other similar arrangements),
pursuant to the terms of such Indebtedness or in accordance with applicable
law;
(6) any Note Guarantee of any Significant Subsidiary individually or
any other Subsidiaries if such Restricted Subsidiaries in the aggregate
represent 15% or more of Consolidated Total Assets with respect to the
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;
(7) 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;
(8) 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
(9)(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 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 (9).
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If an Event of Default (other than as specified in clause (8) or (9) 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 (8) or
(9) 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 the Trustee, may annul such declaration if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(a) all sums paid or advanced by the Trustee under the notes and
the reasonable compensation, expenses, disbursements, and advances of
the Trustee, its agents and counsel;
(b) all overdue interest on all of the notes; and
(c) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the notes; and
(2) 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.
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 the notes, except for:
(1) the rights of Holders of such outstanding notes to receive
payments in respect of the principal of, premium, if any, and interest on
the notes when such payments are due or on the redemption date;
(2) the Company's obligations with respect to the 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;
(3) the rights, powers, trusts, duties and immunities of the
applicable Trustee; and
(4) 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.
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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.
In order to exercise either defeasance or covenant defeasance with respect
to the notes:
(1) 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;
(2) 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 Issue Date, 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;
(3) 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;
(4) 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;
(5) 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
(6) the Company shall have delivered to the Trustee an Officers'
Certificate stating that all conditions precedent relating to either the
defeasance or the covenant defeasance, as the case may be, have been
complied with.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a defeasance need not be delivered if all notes not
theretofore delivered to the Trustee for cancellation (1) have become due and
payable or (2) will become due and payable on the maturity date within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company.
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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) as to all
outstanding notes when:
(1) 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 or
pursuant to an optional redemption within one year, and either the
Company or any Subsidiary Guarantor has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient
to pay and discharge the entire Indebtedness in respect of the notes,
for principal of, premium and Additional Interest, if any, and
interest to the date of redemption or Stated Maturity, as the case
may be;
(2) the Company or any Subsidiary Guarantor has paid all other sums
payable by the Company and any Subsidiary Guarantor under the Indenture;
and
(3) 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.
MODIFICATION AND AMENDMENTS
From time to time, the Company, the Subsidiary Guarantors and the Trustee,
without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not adversely affect the rights of any of the Holders
in any material respect. Other 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:
(1) 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;
(2) after a Change of Control has occurred, amend, change or modify
the obligation of the Company to make and consummate a Change of Control
Purchase Offer with respect to such Change of Control or modify any of the
provisions or definitions with respect thereto;
(3) 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;
(4) 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
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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 each Holder; or
(5) 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.
The Holders of a majority in aggregate principal amount of the notes issued
and outstanding may waive compliance with certain restrictive covenants and
provisions of such Indenture.
GOVERNING LAW
The Indenture provides that it, the notes and the Note Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person:
(1) existing at the time such Person becomes a Restricted Subsidiary
of the Company; or
(2) 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, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with 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:
(1) 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 "-- Purchase of Notes upon a
Change of Control" and/or the provisions described above under the caption
"Certain Covenants -- Consolidation, Merger, Sale of Assets" and not by the
provisions of "-- Certain Covenants -- Limitation on Sale of Assets"); and
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(2) 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 non-Wholly
Owned Restricted Subsidiary to any other Restricted Subsidiary 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:
(1) 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
(2) 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 of any date, an amount equal to the sum
of:
(1) 85% of the aggregate book value of all accounts receivable of the
Company and its Restricted Subsidiaries; and
(2) 60% of the aggregate book value of all inventory owned by the
Company and its Restricted Subsidiaries,
all calculated on a consolidated basis and in accordance with GAAP.
To the extent the information is not available as to the amount of accounts
receivable or inventory as of a specific date, the Company shall use the most
recent available information for purposes of calculating the Borrowing Base.
"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 Issue
Date, including, without limitation, all common stock and Preferred Stock.
"Change of Control" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the
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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;
(2) 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;
(3) 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 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
(4) 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."
"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 EBITDA" means 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
definition for such period or any prior
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period) 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.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of:
(1) Consolidated EBITDA for such period to:
(2) Consolidated Interest Expense for such period; provided that:
(a) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma
basis; and
(x) 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
(y) 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
(b) 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:
(1) 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;
(a) amortization of debt discount;
(b) the net cost under Interest Rate Agreements (including
amortization of discount);
(c) the interest portion of any deferred payment obligation; and
(d) accrued interest; plus
(2) the aggregate amount for such period of dividends on any
Redeemable Capital Stock or Preferred Stock of the Company and its
Restricted Subsidiaries;
(3) 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
(4) all capitalized interest of the Company and its Restricted
Subsidiaries in each case under each of (1) through (4) 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:
(1) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto);
(2) solely with respect to fiscal 2001, 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 (1) of the definition of "Consolidated Fixed
Charge Coverage Ratio");
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(3) 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;
(4) 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;
(5) 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
(6) 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 Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common equity holders of such
Person and its Restricted Subsidiaries as of such date; plus
(2) 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 Issue Date 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 Senior Debt Leverage Ratio" of the Company means the ratio of
(1) Consolidated Indebtedness of the Company and its Restricted Subsidiaries
(other than Subordinated Indebtedness) as of the date of the transaction giving
rise to the need to calculate such Consolidated Senior Debt Leverage Ratio to
(2) Consolidated EBITDA for the four full fiscal quarters immediately preceding
the date of the transaction giving rise to the need to calculate such
Consolidated Senior Debt Leverage Ratio, taken as one period.
"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:
(1) intangible assets including, without limitation, items such as
goodwill, trademarks, trade names, patents and unamortized debt discount;
and
(2) appropriate adjustments on account of minority interests of other
persons holding stock in any majority-owned Restricted Subsidiary of the
Company.
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"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 Note Guarantees" means any guarantee by a
subsidiary guarantor of the Company's obligations under Convertible Senior
Subordinated Indenture.
"Convertible Senior Subordinated Notes" means the 5.25% Convertible Senior
Subordinated Notes due 2009 of the Company.
"Convertible Senior Subordinated Indenture" means the Indenture dated as of
March 15, 2001 among the Company, as issuer, each of the subsidiary guarantors
named therein, as guarantors, and Bank One, N.A. as trustee.
"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, 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.
"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:
(1) 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 otherwise in accordance
with GAAP; or
(2) other consolidation and restructuring of facilities and
operations.
"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 officers of
the Company acting in good faith, provided, that any transaction that results in
a price in excess of $10.0 million shall be determined by the Board of Directors
of the Company acting in good faith and shall be evidenced by a Board Resolution
attached to an Officers' Certificate delivered to the Trustee.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect on the Issue
Date.
"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
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in any manner by such Person, or in effect guaranteed directly or indirectly by
such Person through an agreement:
(1) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness;
(2) 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;
(3) 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);
(4) to maintain working capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the
debtor; or
(5) 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:
(1) 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;
(2) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments;
(3) all indebtedness of such Person created or arising under any
conditional sale or other title 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;
(4) all Capital Lease Obligations of such Person;
(5) all obligations under Interest Rate Agreements or Currency
Agreements of such Person;
(6) Indebtedness referred to in clauses (1) through (5) above 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;
(7) all Guaranteed Debt of such Person;
(8) all Redeemable Capital Stock valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends; and
(9) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types referred
to in clauses (1) through (8) 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
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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).
"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:
(1) 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
(2) 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
(3) any purchase, acquisition 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.
"Issue Date" means March 15, 2001, the date of original issuance of the
private notes.
"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).
"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, 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.
"Medium-Term Notes" means the Medium-Term Notes, due 1997 to 2003, of the
Company.
"Medium-Term Notes Indenture" means the Indenture dated as of December 1,
1989 between the Company and First Trust of New York National Association, as
trustee.
"Moody's" means Moody's Investors Service, Inc. or any successor rating
agency.
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"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 permanent 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.
"Non-Recourse Debt" means Indebtedness:
(1) 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;
(2) 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 notes being offered hereby) 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
(3) 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.
"Permitted Consideration" means consideration consisting of any combination
of the following:
(1) cash or Temporary Cash Investments;
(2) assets used or intended for use in the Company's business as
conducted on the Issue Date;
(3) 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
(4) any securities, notes or other obligations received by the Company
or any such Restricted Subsidiary; provided that the aggregate amount of
such securities, notes or other obligations received by the Company and its
Restricted Subsidiaries pursuant to this clause (4) after the Issue Date
and held or carried at any date of determination shall not exceed $75
million.
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"Permitted Indebtedness" means any of the following Indebtedness of the
Company or any Restricted Subsidiary, as the case may be:
(1) 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:
(a) $1.0 billion, less
(x) the amount of mandatory repayments actually made by the
Company or any such Restricted Subsidiary since the Issue Date with
Net Proceeds of an Asset Sale in respect of term Indebtedness under
the Credit Agreement; and
(y) further reduced by the amount of mandatory repayments of
revolving credit Indebtedness thereunder (accompanied by a
corresponding commitment reduction thereunder) actually made by the
Company or any such Restricted Subsidiary since the Issue Date with
Net Proceeds of an Asset Sale; or
(b) the Borrowing Base Amount.
(2) Indebtedness of the Company and guarantees of the Subsidiary
Guarantors under uncommitted bank lines of credit (including any
refinancings of such Indebtedness); provided, however, that the aggregate
principal amount of Indebtedness incurred pursuant to clauses (1), (2) and
(11) of this definition does not exceed the maximum amount of Indebtedness
permitted under clause (1) of this definition;
(3) Indebtedness of the Company and the Subsidiary Guarantors
evidenced by the notes and the Note Guarantees with respect thereto under
the Indenture;
(4) Indebtedness of the Company and the Subsidiary Guarantors
evidenced by the Convertible Senior Subordinated Notes and the Convertible
Senior Subordinated Note Guarantees with respect thereto under the
Convertible Senior Subordinated Indenture;
(5) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the Issue Date;
(6) 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;
(7) 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 (7);
(8) Indebtedness in respect of letters of credit, surety bonds and
performance bonds provided in the ordinary course of business;
(9) 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;
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(10) 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;
(11) Indebtedness of the Company evidenced by commercial paper issued
by the Company (including any refinancings of such Indebtedness); provided,
however, that the aggregate principal amount of Indebtedness incurred
pursuant to clauses (1), (2) and (11) of this definition does not exceed
the maximum amount of Indebtedness permitted under clause (1) of this
definition;
(12) 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 at the time such
Transferred Receivables are sold or in the case of receivables arising from
direct financing leases, 30% of the book value thereof;
(13) Indebtedness of the Company and its Restricted Subsidiaries in
addition to that described in clauses (1) through (12) of this definition
of "Permitted Indebtedness," together with any other outstanding
Indebtedness incurred pursuant to this clause (13) (including any
refinancings of such Indebtedness), not to exceed $100 million at any time
outstanding in the aggregate; and
(14) any renewals, extensions, substitutions, refunding, refinancings
or replacements (each, a "refinancing") of any Indebtedness described in
clauses (3), (4) and (5) 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 Restricted Subsidiary, as the
case may be, incurred in connection with such refinancing;
(b) in the case of any refinancing of Subordinated Indebtedness,
such new Indebtedness is subordinated to the notes or the applicable
Note Guarantee, as the case may be, 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; provided that with
respect to the Medium-Term Notes, a refinancing shall be deemed to
include a repayment of any such Medium-Term Notes and subsequent
incurrence of Indebtedness so long as (x) after giving effect to such
repayment and subsequent incurrence of new Indebtedness, the aggregate
principal amount of Medium-Term Notes and such new Indebtedness does not
exceed the principal amount of Medium-Term Notes outstanding on the
Issue Date and (y) clauses (a) and (b) of this clause (14) are complied
with.
For purposes of determining compliance with the "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the categories of Permitted Indebtedness described
in clauses (1) through (14) above or is permitted to be incurred pursuant to the
Consolidated Fixed Charge Coverage Ratio provisions of such covenant, the
Company shall, in its sole discretion, classify (or later reclassify) such item
of Indebtedness in any manner that complies with such covenant. Accrual of
interest, accretion or amortization of original issue discount and the payment
of interest on any Indebtedness in the form of additional Indebtedness with the
same terms will not be deemed to be an incurrence of Indebtedness for purposes
of the "Limitation on Indebtedness" covenant.
"Permitted Investment" means
(1) Investments in any Wholly Owned Restricted Subsidiary or any
Restricted Subsidiary that is a Subsidiary Guarantor or any Investment in
any Person by the Company or any Restricted
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Subsidiary as a result of which such Person becomes a Wholly Owned
Restricted Subsidiary or a Restricted Subsidiary that is a Subsidiary
Guarantor or any Investment in the Company by a Restricted Subsidiary;
(2) intercompany Indebtedness to the extent permitted under clause (7)
of the definition of "Permitted Indebtedness" and Indebtedness in
connection with a Permitted Receivables Financing permitted under clause
(12) of the definition of "Permitted Indebtedness";
(3) Temporary Cash Investments;
(4) 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;
(5) 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;
(6) Investments in Joint Ventures related to the Company's operations,
not to exceed $50 million at any one time outstanding;
(7) 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 (7) any Investments made pursuant to clause (5)), 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;
(8) Investments as a result of non-cash consideration received by the
Company or a Restricted Subsidiary in connection with an Asset Sale made in
compliance with the "-- Certain Covenants -- Limitation on Sale of Assets"
covenant;
(9) other Investments, in addition to those permitted under (1)
through (8) above, in an aggregate amount not to exceed $25 million; and
(10) 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:
(1) Liens existing as of the Issue Date;
(2) Liens securing Indebtedness permitted to be incurred pursuant to
clauses (1), (2) and (11) of the definition of "Permitted Indebtedness";
(3) Liens securing the notes and the Note Guarantees;
(4) any Lien arising by reason of:
(a) 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;
(b) taxes, assessments, governmental charges or levies not yet
delinquent or which are being contested in good faith;
(c) security for payment of workers' compensation or other
insurance;
(d) security for the performance of tenders, leases (including,
without limitation, statutory and common law landlord's liens) and
contracts (other than contracts for the payment of money);
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(e) 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;
(f) deposits to secure public or statutory obligations;
(g) 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;
(h) 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
(i) security for surety or appeal bonds;
(5) any Lien on any property or assets of a Restricted Subsidiary in
favor of the Company or any Wholly Owned Restricted Subsidiary;
(6) 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;
(7) 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;
(8) any Lien securing any Interest Rate Agreements or Currency
Agreements permitted to be incurred pursuant to clause (6) of the
definition of "Permitted Indebtedness" or any collateral for the
Indebtedness to which such Interest Rate Agreements or Currency Agreements
relate;
(9) 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;
(10) 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:
(a) to the extent that the Company or such Restricted Subsidiary
has entered into (and not terminated), or has a binding commitment for,
subleases on terms which, to the Company or such Restricted Subsidiary,
are at least as favorable, on a current basis, as the terms of the
corresponding capital lease; or
(b) under which the aggregate principal component of the annual
rent payable does not exceed $5 million;
(11) any Lien on a Transferred Receivable or other receivable that is
transferred in a Permitted Receivables Financing; and
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(12) 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:
(a) such Restricted Subsidiary is a Subsidiary Guarantor; and
(b) the principal amount pledged does not exceed the Indebtedness
secured by such pledge;
(13) Liens securing Indebtedness which is incurred to refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture
and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens:
(a) are no less favorable to the Holders and are not more favorable
to the lienholders with respect to such Liens than the Liens in respect
of the Indebtedness being refinanced; and
(b) do not extend to or cover any property or assets of the Company
or any of the Restricted Subsidiaries not securing the Indebtedness so
refinanced; and
(14) any extension, renewal, substitution or replacement, in whole or
in part, of any Lien described in the foregoing clauses (4) through (12);
provided, that the Lien so extended, renewed, substituted or replaced does
not extend to any additional property or assets.
"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:
(1) the aggregate uncollected balances of the receivables so
transferred ("Transferred Receivables"); plus
(2) 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 Issue
Date, and including, without limitation, all classes and series of preferred or
preference stock of such Person.
"Public Equity Offering" means with respect to the last sentence of
"Certain Covenants -- Limitation On Issuances and Sales of Capital Stock of
Subsidiaries," a primary or secondary public offering of equity securities of
any Restricted Subsidiary of the Company pursuant to an effective registration
statement under the Securities Act.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Rating Agency" means any of:
(1) S&P;
(2) Moody's; or
(3) 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.
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"Rating Category" means:
(1) 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);
(2) 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
(3) 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).
"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 an
Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" of the Company means any Subsidiary of the Company
that is a "significant subsidiary" as defined in Regulation S-X under the
Exchange 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 or the
Subsidiary Guarantors that is subordinate or junior in right of payment to the
notes or the Note Guarantees, as the case may be.
"Subordinated Note Indentures" means:
(1) the Indenture dated as of December 15, 1994 among the Company, as
issuer, each of the subsidiary guarantors named therein as guarantors, and
Manufacturers and Traders Trust Company, as trustee, in respect of the
Subordinated Notes due 2004; and
(2) the Indenture dated as of December 15, 1994 among the Company, as
issuer, each of the subsidiary guarantors named therein as guarantors, and
Manufacturers and Traders Trust Company, as trustee, in respect of the
Subordinated Notes due 2007.
"Subordinated Notes" means:
(1) the 10 1/2% Senior Subordinated Notes due 2004 of the Company; and
(2) the 10 5/8% Senior Subordinated Notes due 2007 of the Company.
"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 each Wholly Owned Restricted Subsidiary of the
Company and each such subsidiary's Wholly Owned Restricted Subsidiaries as of
the Issue Date and any Restricted Subsidiary that is required pursuant to the
"Additional Guarantees" covenant, on or after the Issue Date,
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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:
(1) 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;
(2) 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;
(3) 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;
(4) 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;
(5) 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) according to S&P;
(6) 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 (1) through (5); and
(7) repurchase and reverse repurchase obligations with the term of not
more than seven days for underlying securities of the types described in
clauses (1) and (2) entered into with any financial institution meeting the
qualifications specified in clause (2); provided that in the case of
clauses (1), (2), (3) and (5), 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:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) 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;
(3) 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;
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(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(5) 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:
(1) such Indebtedness is permitted under the covenant described under
the caption "Certain Covenants -- Limitation on Indebtedness"; and
(2) 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.
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
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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.
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;
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- 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.
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.
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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.
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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 private
notes where the broker-dealer acquired the private 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 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 the material United States federal income tax
considerations relating to the exchange your private notes for exchange notes in
the exchange offer, but does not purport to be a complete analysis of all the
potential tax considerations relating thereto. This summary is based on laws,
regulations, rulings and decisions now in effect, all of which are subject to
change or differing interpretation possibly with retroactive effect. 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 discussion only applies to you if you exchange your private notes for
exchange notes in the exchange offer. This discussion does not address the tax
considerations arising under the laws of any foreign, state or local
jurisdiction. This discussion also does not address tax considerations
applicable to
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your particular circumstances or if you are subject to special tax rules,
including, without limitation, if you are:
- a bank;
- a holder subject to the alternative minimum tax;
- a tax-exempt organization;
- an insurance company;
- a foreign person or entity;
- a dealer in securities or currencies;
- a person that will hold notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes; or
- a person deemed to sell notes under the constructive sale provisions of
the Internal Revenue Code.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION
OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE 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 of private notes for exchange notes will be treated as a
"non-event" for federal income tax purposes because the exchange notes will not
be considered to differ materially in kind or extent from the private notes. As
a result, no material federal income tax consequences will result to you from
exchanging private notes for exchange notes.
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.
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 (File No. 001-08140). 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. 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 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.
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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 separately 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 Proxy Statement for our 2001 Annual Meeting of
Shareholders, filed with the SEC on March 28, 2001)....... March 23, 2001
Amended Annual Report on Form 10-K/A........................ March 23, 2001
Quarterly Report on Form 10-Q for the 16 weeks ended April
21, 2001.................................................. May 29, 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" and "Value King." This prospectus
also contains trademarks, service marks, copyrights and trade names of other
companies.
104
108
FLEMING COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for the years ended
December 30, 2000, December 25, 1999, and December 26,
1998...................................................... F-3
Consolidated Balance Sheets at December 30, 2000 and
December 25, 1999......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 30, 2000, December 25, 1999, and December 26,
1998...................................................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 30, 2000, December 25, 1999, and
December 26, 1998......................................... F-6
Notes to Consolidated Financial Statements for the years
ended December 30, 2000, December 25, 1999, and December
26, 1998.................................................. F-7
Consolidated Condensed Statements of Operations -- 16 Weeks
Ended April 21, 2001, and April 15, 2000.................. F-38
Consolidated Condensed Balance Sheets -- April 21, 2001, and
December 30, 2000......................................... F-39
Consolidated Condensed Statements of Cash Flows -- 16 Weeks
Ended April 21, 2001, and April 15, 2000.................. F-40
Notes to Consolidated Condensed Financial Statements........ F-41
Independent Accountants' Review Report...................... F-55
F-1
109
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 30, 2000 and December 25, 1999,
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 30, 2000, and December 25, 1999, 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
110
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999 AND
DECEMBER 26, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
----------- ----------- -----------
Net sales........................................... $14,443,815 $14,272,036 $14,677,904
Costs and expenses (income):
Cost of sales..................................... 13,096,915 12,834,869 13,227,530
Selling and administrative........................ 1,185,003 1,261,631 1,251,592
Interest expense.................................. 174,569 165,180 161,581
Interest income................................... (32,662) (40,318) (36,736)
Equity investment results......................... 8,034 10,243 11,622
Litigation charges................................ -- -- 7,780
Impairment/restructuring charge................... 212,845 103,012 652,737
----------- ----------- -----------
Total costs and expenses....................... 14,644,704 14,334,617 15,276,106
----------- ----------- -----------
Loss before taxes................................... (200,889) (62,581) (598,202)
Taxes on loss....................................... (78,747) (17,853) (87,607)
----------- ----------- -----------
Net loss............................................ $ (122,142) $ (44,728) $ (510,595)
=========== =========== ===========
Basic and diluted net loss per share................ $ (3.15) $ (1.17) $ (13.48)
=========== =========== ===========
Basic and diluted weighted average shares
outstanding....................................... 38,716 38,305 37,887
=========== =========== ===========
See notes to consolidated financial statements.
F-3
111
FLEMING COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 30, 2000 AND DECEMBER 25, 1999
(IN THOUSANDS)
ASSETS
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 30,380 $ 6,683
Receivables, net.......................................... 509,045 496,159
Inventories............................................... 831,265 997,805
Assets held for sale...................................... 165,800 68,615
Other current assets...................................... 86,583 159,488
---------- ----------
Total current assets................................... 1,623,073 1,728,750
Investments and notes receivable, net....................... 104,467 108,895
Investment in direct financing leases....................... 102,011 126,309
Property and equipment:
Land...................................................... 40,242 45,507
Buildings................................................. 356,376 389,651
Fixtures and equipment.................................... 565,472 636,501
Leasehold improvements.................................... 210,970 236,570
Leased assets under capital leases..................... 197,370 231,236
---------- ----------
1,370,430 1,539,465
Less accumulated depreciation and amortization.............. (653,973) (701,289)
---------- ----------
Net property and equipment............................. 716,457 838,176
Deferred income taxes....................................... 139,852 54,754
Other assets................................................ 172,632 150,214
Goodwill, net............................................... 544,319 566,120
---------- ----------
Total Assets........................................... $3,402,811 $3,573,218
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 943,279 $ 981,219
Current maturities of long-term debt...................... 38,171 70,905
Current obligations under capital leases.................. 21,666 21,375
Other current liabilities................................. 229,272 210,220
---------- ----------
Total current liabilities.............................. 1,232,388 1,283,719
Long-term debt.............................................. 1,232,400 1,234,185
Long-term obligations under capital leases.................. 377,239 367,960
Other liabilities........................................... 133,592 126,652
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value, authorized -- 100,000
shares, issued and outstanding -- 39,618 and 38,856
shares................................................. 99,044 97,141
Capital in excess of par value............................ 513,645 511,447
Reinvested earnings (deficit)............................. (144,468) (22,326)
Accumulated other comprehensive income -- additional
minimum pension liability.............................. (41,029) (25,560)
---------- ----------
Total shareholders' equity............................. 427,192 560,702
---------- ----------
Total Liabilities and Shareholders' Equity............. $3,402,811 $3,573,218
========== ==========
See notes to consolidated financial statements.
F-4
112
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 2000,
DECEMBER 25, 1999, AND DECEMBER 26, 1998
(IN THOUSANDS)
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net loss.................................................. $(122,142) $ (44,728) $(510,595)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 174,107 162,379 185,368
Credit losses.......................................... 28,872 25,394 23,498
Deferred income taxes.................................. (65,538) 3,357 (117,239)
Equity investment results.............................. 8,034 10,243 11,622
Impairment/restructuring and related charges........... 288,408 135,346 668,028
Cash payments on impairment/restructuring and related
charges.............................................. (118,190) (57,340) (10,408)
Consolidation and restructuring reserve activity....... -- 423 (1,008)
Change in assets and liabilities, excluding effect of
acquisitions:
Receivables.......................................... (26,005) (55,692) (156,822)
Inventories.......................................... 65,639 (22,049) 6,922
Accounts payable..................................... (49,121) 35,744 114,136
Other assets and liabilities......................... (63,198) (70,112) (68,058)
Other adjustments, net................................. 5,779 (5,348) (4,365)
--------- --------- ---------
Net cash provided by operating activities................... 126,645 117,617 141,079
--------- --------- ---------
Cash flows from investing activities:
Collections on notes receivable........................... 32,943 34,798 38,076
Notes receivable funded................................... (35,841) (43,859) (28,946)
Businesses acquired....................................... (7,320) (78,440) (30,225)
Proceeds from sale of businesses.......................... 45,693 7,042 32,277
Purchase of property and equipment........................ (150,837) (166,339) (200,211)
Proceeds from sale of property and equipment.............. 50,957 35,487 17,056
Investments in customers.................................. -- (8,115) (1,009)
Proceeds from sale of investments......................... 3,552 2,745 3,529
Other investing activities................................ 12,949 3,337 6,141
--------- --------- ---------
Net cash used in investing activities....................... (47,904) (213,344) (163,312)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings........................ 185,000 191,000 170,000
Principal payments on long-term debt...................... (219,519) (71,178) (159,651)
Principal payments on capital lease obligations........... (20,888) (21,533) (13,356)
Sale of common stock under incentive stock and stock
ownership plans........................................ 4,051 1,267 4,830
Dividends paid............................................ (3,117) (3,082) (3,048)
Other financing activities................................ (571) (31) (891)
--------- --------- ---------
Net cash provided by (used in) financing activities......... (55,044) 96,443 (2,116)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 23,697 716 (24,349)
Cash and cash equivalents, beginning of year................ 6,683 5,967 30,316
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 30,380 $ 6,683 $ 5,967
========= ========= =========
See notes to consolidated financial statements.
F-5
113
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999 AND DECEMBER 26, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK CAPITAL REINVESTED OTHER
---------------- IN EXCESS OF EARNINGS COMPREHENSIVE COMPREHENSIVE ESOP
TOTAL SHARES AMOUNT PAR VALUE (DEFICIT) INCOME INCOME NOTE
---------- ------ ------- ------------ ---------- ------------- ------------- -------
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 32,573
---------
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
114
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
2000 was 53 weeks; 1999 and 1998 were 52 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 $27 million in 2000 and $25 million in 1999. Receivables are shown
net of allowance for doubtful accounts of $34 million in 2000 and $32 million in
1999. We extend credit to our retail customers which are located over a broad
F-7
115
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
geographic base. Regional concentrations of credit risk are limited. Interest
income on impaired loans is recognized only when payments are received.
Inventories: Inventories are valued at the lower of cost or market. Grocery
and certain perishable inventories, aggregating approximately 70% of total
inventories in 2000 and 1999 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 $58 million at year-end 2000 ($13 million of
which is recorded in assets held for sale in current assets) and $54 million at
year-end 1999 ($4 million of which is recorded in assets held for sale in
current assets). In 2000 and 1999, the liquidation of certain LIFO layers
related to business closings decreased cost of products sold by approximately $7
million and $2 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 $193
million and $184 million in 2000 and 1999, 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,
F-8
116
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
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(TM) Oklahoma, and Thompson Food Basket(R)).
The sale of Baker's(TM) Oklahoma as well as the divestiture or closing of
Thompson Food Basket(R) 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(R), Baker's(TM)
Nebraska, Sentry(R) Foods, and ABCO Foods(TM)). 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(R)
chain reflected significant improvements in sales and earnings and
consequently, was retained. The Minneapolis distribution center has been
dedicated to supply the Rainbow Foods(R) 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(TM) 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(R) Foods stores to the value retail 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(TM), Baker's(TM) Nebraska and Sentry(R) 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
F-9
117
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
remove non-value-added costs from operations, such as reducing the number
of SKU's, creating a single point of contact with customers, reducing the
number of decision points within 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 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 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 charge 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.
F-10
118
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
- 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.
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 charge 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 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 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 charge
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.
F-11
119
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
- 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 $153 million relates to the retail food
segment with the balance relating to support services expenses.
The charges related to workforce reductions are as follows:
AMOUNT HEADCOUNT
-------- ---------
($ 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
F-12
120
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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 we are unable to remove from
operations.
Assets held for sale, reflected on the balance sheet, consisted of $22
million of distribution operating units and $144 million of retail stores as of
year-end 2000 and $8 million of distribution operating units and $61 million of
retail stores as of year-end 1999. Gains on the sale of facilities for 2000 and
1999 totaled approximately $9 million and $6 million, respectively, and were
included in net sales. Also during 2000 and 1999, we recorded charges of
approximately $10 million and $31 million, respectively, related to the closing
of certain retail stores which were included in selling and administrative
expense.
LITIGATION CHARGES
Furr's Supermarkets filed suit against us in 1997 claiming they were
overcharged for products. During 1997, Fleming and Furr's reached an agreement
dismissing all litigation between them. Pursuant to the settlement, Furr's
purchased our El Paso product supply center in 1998, together with related
inventory and equipment. As part of the settlement, we paid Furr's $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 1,220,000 weighted average potential shares for the 2000
diluted calculation or 364,000 weighted average potential shares for the 1999
diluted calculation because they would be antidilutive. Other options with
exercise prices exceeding market prices consisted of 4.4 million shares in 2000
and 3.8 million shares in 1999 of common stock at a weighted average exercise
price of $12.94 and $14.19 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
U.S. 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
F-13
121
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
are not allocated to the business segments. Intersegment transactions are
reflected at cost. The following table sets forth the composition of the
segments' and total company's net sales, operating earnings, depreciation and
amortization, capital expenditures and identifiable assets.
2000 1999 1998
------- ------- -------
(IN MILLIONS)
NET SALES
Distribution........................ $12,926 $12,718 $13,120
Intersegment elimination............ (1,757) (2,165) (2,031)
------- ------- -------
Net distribution.................... 11,169 10,553 11,089
Retail.............................. 3,275 3,719 3,589
------- ------- -------
Total............................ $14,444 $14,272 $14,678
======= ======= =======
OPERATING EARNINGS
Distribution........................ $ 297 $ 290 $ 259
Retail.............................. 62 (2) 62
Support services.................... (197) (112) (122)
------- ------- -------
Total operating earnings......... 162 176 199
Interest expense.................... (175) (165) (161)
Interest income..................... 33 40 37
Equity investment results........... (8) (10) (12)
Litigation charges.................. -- -- (8)
Impairment/restructuring charge..... (213) (103) (653)
------- ------- -------
Loss before taxes..................... $ (201) $ (62) $ (598)
======= ======= =======
DEPRECIATION AND AMORTIZATION
Distribution........................ $ 105 $ 88 $ 107
Retail.............................. 57 64 61
Support services.................... 12 10 17
------- ------- -------
Total............................ $ 174 $ 162 $ 185
======= ======= =======
CAPITAL EXPENDITURES
Distribution........................ $ 99 $ 53 $ 81
Retail.............................. 45 112 118
Support services.................... 7 1 1
------- ------- -------
Total............................ $ 151 $ 166 $ 200
======= ======= =======
IDENTIFIABLE ASSETS
Distribution........................ $ 2,499 $ 2,546 $ 2,524
Retail.............................. 681 848 697
Support services.................... 223 179 270
------- ------- -------
Total............................ $ 3,403 $ 3,573 $ 3,491
======= ======= =======
F-14
122
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
INCOME TAXES
Components of taxes on loss are as follows:
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Current:
Federal......................................... $(23,291) $(17,287) $ 23,896
State........................................... 10,082 (3,924) 5,737
-------- -------- ---------
Total current................................ (13,209) (21,211) 29,633
-------- -------- ---------
Deferred:
Federal......................................... (41,123) 2,552 (94,254)
State........................................... (24,415) 806 (22,986)
-------- -------- ---------
Total deferred............................... (65,538) 3,358 (117,240)
-------- -------- ---------
Taxes on loss..................................... $(78,747) $(17,853) $ (87,607)
======== ======== =========
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Depreciation and amortization..................... $(39,106) $ (9,603) $ (64,132)
Inventory......................................... 4,313 7,019 (6,839)
Capital losses.................................... 452 (4,825) 251
Asset valuations and reserves..................... 29,495 (18,114) 9,302
Equity investment results......................... 8,837 (172) (403)
Credit losses..................................... 1,924 (4,527) (7,825)
Lease transactions................................ (4,887) 7,996 (34,718)
Associate benefits................................ (7,187) 31,700 3,200
Note sales........................................ (41) (139) (217)
Net operating loss carryforwards.................. (62,951) -- --
Other............................................. 3,613 (5,977) (15,859)
-------- -------- ---------
Deferred tax expense (benefit).................... $(65,538) $ 3,358 $(117,240)
======== ======== =========
F-15
123
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
Temporary differences that give rise to deferred tax assets and liabilities
as of year-end 2000 and 1999 are as follows:
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Depreciation and amortization............................. $ 57,740 $ 23,002
Asset valuations and reserve activities................... 21,772 48,559
Associate benefits........................................ 67,258 54,457
Credit losses............................................. 24,927 28,263
Equity investment results................................. 2,522 9,983
Lease transactions........................................ 45,208 40,325
Inventory................................................. 26,918 26,342
Acquired loss carryforwards............................... 0 67
Capital losses............................................ 8,152 9,372
Net operating loss carryforwards.......................... 62,951 0
Other..................................................... 25,999 30,847
-------- --------
Total deferred tax assets.............................. 343,447 271,217
-------- --------
Deferred tax liabilities:
Depreciation and amortization............................. 47,734 52,103
Equity investment results................................. 4,857 3,482
Lease transactions........................................ 1,528 1,532
Inventory................................................. 61,757 56,867
Associate benefits........................................ 24,725 29,424
Asset valuations and reserve activities................... 5,480 2,772
Note sales................................................ 2,253 3,387
Prepaid expenses.......................................... 3,277 3,874
Capital losses............................................ 320 1,088
Other..................................................... 27,203 28,225
-------- --------
Total deferred tax liabilities......................... 179,134 182,754
-------- --------
Net deferred tax asset................................. $164,313 $ 88,463
======== ========
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
124
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
2000 1999 1998
---- ---- -----
Statutory rate.............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 5.4 5.1 6.8
Acquisition-related differences............................. (.5) 0.0 12.3
Other....................................................... 2.5 (3.1) (.4)
---- ---- -----
Effective rate on operations................................ 42.4 37.0 53.7
Impairment/restructuring and related charges................ (3.2) (8.5) (39.1)
---- ---- -----
Effective rate after impairment/restructuring and related
charges................................................... 39.2% 28.5% 14.6%
==== ==== =====
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:
2000 1999
-------- --------
(IN THOUSANDS)
Investments in and advances to customers............... $ 7,452 $ 14,136
Notes receivable from customers........................ 85,521 83,354
Other investments and receivables...................... 11,493 11,405
-------- --------
Investments and notes receivable....................... $104,466 $108,895
======== ========
Investments and notes receivable are shown net of reserves of $26 million
and $23 million in 2000 and 1999, respectively. Sales to customers accounted for
under the equity method were approximately $0.2 billion, $0.3 billion and $0.6
billion in 2000, 1999 and 1998, respectively. Receivables include $4 million and
$8 million in 2000 and 1999, 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:
2000 1999
-------- --------
(IN THOUSANDS)
Impaired notes with related allowances................. $ 45,711 $ 57,657
Credit loss allowance on impaired notes................ (20,101) (25,811)
Impaired notes with no related allowances.............. 4,793 4,613
-------- --------
Net impaired notes receivable.......................... $ 30,403 $ 36,459
======== ========
Average investments in impaired notes were as follows: 2000 -- $52 million;
1999 -- $65 million; and 1998 -- $59 million.
F-17
125
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
Activity in the allowance for credit losses is as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Balance, beginning of year......................... $ 55,528 $ 47,232 $ 43,848
Charged to costs and expenses...................... 28,872 25,394 23,498
Uncollectible accounts written off, net of
recoveries....................................... (24,682) (17,098) (20,114)
-------- -------- --------
Balance, end of year............................... $ 59,718 $ 55,528 $ 47,232
======== ======== ========
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:
2000 1999
---------- ----------
(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 7.7% for
2000 and 6.5% for 1999, due 2003.................. 300,000 255,000
Term loans, due 2001 to 2004, average interest rate
of 7.8% for 2000 and 7.3% for 1999................ 154,421 197,594
Other debt.......................................... 16,150 52,496
---------- ----------
1,270,571 1,305,090
Less current maturities............................. (38,171) (70,905)
---------- ----------
Long-term debt...................................... $1,232,400 $1,234,185
========== ==========
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
126
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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 5.25% 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
F-19
127
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
balances due at year-end 2000 and 1999 were $17 million and $53 million,
respectively, with average interest rates of 7.8% for 2000 and 7.2% for 1999.
The notes mature from 2001 to 2003.
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 9.5%
for 2000, versus 10.2% for 1999. Including the effect of interest rate hedges,
the average interest rate for total debt was 9.5% and 10.5% for 2000 and 1999,
respectively.
Interest Expense: Components of interest expense are as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Interest costs incurred:
Long-term debt........................... $135,474 $127,271 $123,054
Capital lease obligations................ 39,609 36,768 37,542
Other.................................... 1,537 2,258 1,589
-------- -------- --------
Total incurred............................. 176,620 166,297 162,185
Less interest capitalized.................. (2,051) (1,117) (604)
-------- -------- --------
Interest expense........................... $174,569 $165,180 $161,581
======== ======== ========
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
F-20
128
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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 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
129
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
CONDENSED CONSOLIDATING 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............ 53,381 -- -- (53,381) --
Intercompany receivables.............. 384,450 -- -- (384,450) --
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 $ 763,554 $29,517 $(437,831) $3,402,811
========== ========== ======= ========= ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................... $ 821,407 $ 120,145 $ 1,727 $ -- $ 943,279
Intercompany payables............... -- 342,627 41,823 (384,450) --
Other current liabilities........... 244,524 43,275 1,310 -- 289,109
---------- ---------- ------- --------- ----------
Total current liabilities........ 1,065,931 506,047 44,860 (384,450) 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 68,783 (15,402) (53,381) 427,192
---------- ---------- ------- --------- ----------
$3,047,571 $ 763,554 $29,517 $(437,831) $3,402,811
========== ========== ======= ========= ==========
F-22
130
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
========== ======== ======== ========= ==========
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
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-23
131
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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)
=========== ========== ======== ========= ===========
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)
=========== ======== ======== ========= ===========
F-24
132
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
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
======== ======== ======== == =========
52 WEEKS ENDED DECEMBER 25, 1999
-----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in) 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-25
133
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
========= ======= ======== == =========
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-26
134
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
======== ========= ======= ========
F-27
135
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Operating activity:
Rental expense................................... $ 76,118 $ 95,760 $100,238
Contingent rentals............................... 902 1,329 1,971
Less sublease income............................. (9,014) (9,868) (7,349)
-------- -------- --------
68,006 87,221 94,860
-------- -------- --------
Financing activity:
Rental expense................................... 68,747 64,107 70,914
Less sublease income............................. (66,757) (68,442) (63,920)
-------- -------- --------
1,990 (4,335) 6,994
-------- -------- --------
Net rental expense................................. $ 69,996 $ 82,886 $101,854
======== ======== ========
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.
F-28
136
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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 31,000 and 54,000 new shares
in 2000 and 1999, 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, 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 1999, $2.5
million in 1998, and $2 million in 1997. 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):
2000 1999
------ ------
Awarded restricted shares outstanding.............. 746 441
====== ======
Unearned compensation -- restricted stock.......... $1,232 $3,503
====== ======
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.
F-29
137
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
===== ====== ==============
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
$3,159,000, $1,388,000 and $3,160,000 for 2000, 1999 and 1998, 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 $(124.7) million
and $(3.22) for 2000, $(46.6) million and $(1.22) for 1999, and $(511.7) million
and $(13.48) for 1998, respectively. The weighted average fair value on the date
of grant of the individual options granted during 2000, 1999 and 1998 was
estimated at $7.90, $5.08 and $4.82, 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 2000, 1999 and 1998 are: risk-free
F-30
138
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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-31
139
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans mentioned above.
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- ------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
(IN THOUSANDS)
Change in benefit obligation:
Balance at beginning of year.................. $375,603 $418,604 $ 15,213 $ 16,503
Service cost.................................. 9,940 14,163 124 177
Interest cost................................. 28,924 26,511 964 1,020
Plan participants' contributions.............. -- -- 773 837
Actuarial gain/loss........................... 20,118 (53,098) 604 2,006
Benefits paid................................. (29,181) (30,577) (4,585) (5,330)
-------- -------- -------- --------
Balance at end of year.......................... $405,404 $375,603 $ 13,093 $ 15,213
======== ======== ======== ========
Change in plan assets:
Fair value at beginning of year............... $331,862 $316,539 $ -- $ --
Actual return on assets....................... (10,968) 39,608 -- --
Employer contribution......................... 28,535 6,292 4,585 5,330
Benefits paid................................. (29,181) (30,577) (4,585) (5,330)
-------- -------- -------- --------
Fair value at end of year....................... $320,248 $331,862 $ -- $ --
======== ======== ======== ========
Funded status................................... $(85,156) $(43,741) $(13,093) $(15,213)
Unrecognized actuarial loss................... 109,585 53,401 5,937 5,564
Unrecognized prior service cost............... 899 1,190 -- --
Unrecognized net transition asset............. (53) (320) -- --
-------- -------- -------- --------
Net amount recognized........................... $ 25,275 $ 10,530 $ (7,156) $ (9,649)
======== ======== ======== ========
Amounts recognized in the consolidated balance
sheet:
Prepaid benefit cost.......................... $ 8,302 $ 26,314 $ -- $ --
Accrued benefit liability..................... (52,181) (33,028) (7,156) (9,649)
Intangible asset.............................. 773 958 -- --
Accumulated other comprehensive income........ 68,381 16,286 -- --
-------- -------- -------- --------
Net amount recognized........................... $ 25,275 $ 10,530 $ (7,156) $ (9,649)
======== ======== ======== ========
The following assumptions were used for the plans mentioned above.
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
2000 1999 2000 1999
------ ------ ----- -----
Discount rate......................................... 7.50% 7.50% 7.50% 7.50%
Expected return on plan assets........................ 9.00% 9.50% -- --
Rate of compensation increase......................... 4.50% 4.00% -- --
F-32
140
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
Net periodic pension and other postretirement benefit costs include the
following components:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------ ------ ------
(IN THOUSANDS)
Service cost............................. $ 9,940 $ 14,163 $ 12,981 $ 124 $ 177 $ 139
Interest cost............................ 28,924 26,511 25,334 964 1,020 1,052
Expected return on plan assets........... (29,527) (29,257) (25,234) -- -- --
Amortization of actuarial loss........... 4,429 11,134 9,105 231 222 --
Amortization of prior service cost....... 292 291 354 -- -- --
Amortization of net transition asset..... (268) (268) (268) -- -- --
-------- -------- -------- ------ ------ ------
Net periodic benefit cost................ $ 13,790 $ 22,574 $ 22,272 $1,319 $1,419 $1,191
======== ======== ======== ====== ====== ======
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 $405 million, $370 million, and $320 million,
respectively, as of December 30, 2000, and $376 million, $341 million, and $332
million, respectively, as of December 25, 1999.
For measurement purposes in 2000 and 1999, 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 2000 and 1999 measurement years, the ultimate trend rate was
realized at the year 2009 and 2008, 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 1999 and 1998.
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. 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 $76 million, $77 million and $80 million for 2000, 1999 and 1998,
respectively.
F-33
141
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
SUPPLEMENTAL CASH FLOWS INFORMATION
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Acquisitions:
Fair value of assets acquired.................... $ 18,529 $ 78,607 $ 32,080
Less:
Liabilities assumed or created................... 11,181 -- 1,792
Cash acquired.................................... 28 167 63
-------- -------- --------
Cash paid, net of cash acquired............... $ 7,320 $ 78,440 $ 30,225
======== ======== ========
Cash paid during the year for:
Interest, net of amounts capitalized............. $175,246 $165,676 $182,449
======== ======== ========
Income taxes, net of refunds..................... $(71,529) $ 14,863 $ 23,822
======== ======== ========
Direct financing leases and related obligations.... $ 47,195 $ 45,645 $ 9,349
======== ======== ========
Property and equipment additions by capital
leases........................................... $ 32,660 $ 45,220 $ 70,684
======== ======== ========
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
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.
F-34
142
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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 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, 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
F-35
143
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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
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 case. An unfavorable
outcome could have a material adverse effect on our financial condition and
prospects.
F-36
144
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 25, 1999, AND DECEMBER 26, 1998
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-37
145
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE 16 WEEKS ENDED APRIL 21, 2001, AND APRIL 15, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
---------- ----------
Net sales................................................... $4,161,191 $4,331,498
Costs and expenses:
Cost of sales............................................. 3,794,947 3,914,824
Selling and administrative................................ 317,313 372,307
Interest expense.......................................... 57,502 53,101
Interest income........................................... (9,272) (9,505)
Equity investment results................................. 351 1,891
Impairment/restructuring charge (credit).................. (26,859) 42,145
---------- ----------
Total costs and expenses............................... 4,133,982 4,374,763
---------- ----------
Income (loss) before taxes.................................. 27,209 (43,265)
Taxes on income (loss)...................................... 11,743 (17,392)
---------- ----------
Income (loss) before extraordinary charge................... 15,466 (25,873)
Extraordinary charge from early retirement of debt (net of
taxes).................................................... (3,469) --
---------- ----------
Net income(loss)............................................ $ 11,997 $ (25,873)
========== ==========
Basic net income (loss) per share:
Income (loss) before extraordinary charge................. $ .39 $ (.67)
Extraordinary charge from early retirement of debt (net of
taxes)................................................. (.09) --
---------- ----------
Net income (loss)......................................... $ .30 $ (.67)
Diluted net income (loss) per share:
Income (loss) before extraordinary charge................. $ .37 $ (.67)
Extraordinary charge from early retirement of debt (net of
taxes)................................................. (.08) --
---------- ----------
Net income (loss)......................................... $ .29 $ (.67)
Dividends paid per share.................................... $ .02 $ .02
Weighted average shares outstanding:
Basic..................................................... 40,190 38,515
Diluted................................................... 42,245 38,515
========== ==========
See notes to consolidated condensed financial statements and independent
accountants' review report.
F-38
146
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
APRIL 21, DECEMBER 30,
2001 2000
---------- ------------
Current assets:
Cash and cash equivalents................................. $ 27,273 $ 30,380
Receivables, net.......................................... 490,671 509,045
Inventories............................................... 779,249 831,265
Assets held for sale...................................... 58,975 165,800
Other current assets...................................... 78,497 86,583
---------- ----------
Total current assets................................... 1,434,665 1,623,073
Investments and notes receivable, net....................... 102,195 104,467
Investment in direct financing leases....................... 98,372 102,011
Property and equipment...................................... 1,387,036 1,370,430
Less accumulated depreciation and amortization............ (691,518) (653,973)
---------- ----------
Net property and equipment.................................. 695,518 716,457
Deferred income taxes....................................... 122,877 139,852
Other assets................................................ 212,083 172,632
Goodwill, net............................................... 510,518 544,319
---------- ----------
Total assets........................................... $3,176,228 $3,402,811
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 730,081 $ 943,279
Current maturities of long-term debt...................... 36,171 38,171
Current obligations under capital leases.................. 20,299 21,666
Other current liabilities................................. 197,914 229,272
---------- ----------
Total current liabilities.............................. 984,465 1,232,388
Long-term debt.............................................. 1,239,427 1,232,400
Long-term obligations under capital leases.................. 339,988 377,239
Other liabilities........................................... 118,454 133,592
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share................... 109,272 99,044
Capital in excess of par value............................ 558,122 513,645
Reinvested earnings (deficit)............................. (132,471) (144,468)
Accumulated other comprehensive income -- additional
minimum pension liability.............................. (41,029) (41,029)
---------- ----------
Total shareholders' equity............................. 493,894 427,192
---------- ----------
Total liabilities and shareholders' equity............. $3,176,228 $3,402,811
========== ==========
See notes to consolidated condensed financial statements and independent
accountants' review report.
F-39
147
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE 16 WEEKS ENDED APRIL 21, 2001, AND APRIL 15, 2000
(IN THOUSANDS)
2001 2000
--------- ---------
Cash flows from operating activities:
Net earnings (loss)....................................... $ 11,997 $ (25,873)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 50,667 53,749
Amortization costs in interest expense................. 2,180 1,496
Credit losses.......................................... 4,517 7,698
Deferred income taxes.................................. 10,996 8,208
Gain/loss on sale of business.......................... (1,542) --
Equity investment results.............................. 351 1,891
Impairment/restructuring and related charges, net of
impairment credit (not in other lines)................ (1,899) 59,322
Cash payments on impairment/restructuring and related
charges............................................... (22,904) (41,081)
Cost of early debt retirement.......................... 5,787 --
Change in assets and liabilities:
Receivables.......................................... 12,556 47,639
Inventories.......................................... (2,572) 129,927
Accounts payable..................................... (213,201) (192,306)
Other assets and liabilities......................... 24,826 3,592
Other adjustments, net................................. 2,168 384
--------- ---------
Net cash provided by (used in) operating activities......... (116,073) 54,646
--------- ---------
Cash flows from investing activities:
Collections on notes receivable........................... 9,127 9,021
Notes receivable funded................................... (7,585) (5,710)
Purchase of property and equipment........................ (48,173) (38,498)
Proceeds from sale of property and equipment.............. 15,968 7,627
Investments in customers.................................. -- (1,514)
Proceeds from sale of investment.......................... -- 2,616
Proceeds from sale of businesses.......................... 111,088 36,952
Other investing activities................................ 3,373 3,753
--------- ---------
Net cash provided by investing activities................... 83,798 14,247
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings........................ 615,602 60,000
Principal payments on long-term debt...................... (610,575) (107,251)
Payments on cost of debt.................................. (21,050) --
Principal payments on capital lease obligations........... (5,416) (6,982)
Proceeds from sale of common stock........................ 51,392 151
Dividends paid............................................ (785) (775)
--------- ---------
Net cash provided by (used in) financing activities......... 29,168 (54,857)
--------- ---------
Net change in cash and cash equivalents..................... (3,107) 14,036
Cash and cash equivalents, beginning of period.............. 30,380 6,683
Cash and cash equivalents, end of period.................... $ 27,273 $ 20,719
========= =========
Supplemental information:
Cash paid for interest.................................... $ 43,422 $ 41,333
Cash refunded for taxes................................... $ (5,949) $ (50,491)
========= =========
See notes to consolidated condensed financial statements and independent
accountants' review report.
F-40
148
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
1. The consolidated condensed balance sheet as of April 21, 2001, and the
consolidated condensed statements of operations and cash flows for the 16 weeks
ended April 21, 2001 and April 15, 2000, have been prepared by Fleming without
audit. In our opinion, all adjustments necessary to present fairly the financial
position at April 21, 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 reclassifications have been made to prior year amounts to conform
to current year 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 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 $59 million at April 21, 2001
($4 million of which is recorded in assets held for sale in current assets), and
$58 million at December 30, 2000 ($13 million of which is recorded in assets
held for sale in current assets).
F-41
149
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
4. Sales and operating earnings for our distribution and retail segments
are presented below.
FOR THE 16 WEEKS ENDED
------------------------
APRIL 21, APRIL 15,
2001 2000
--------- ---------
($ IN MILLIONS)
Sales:
Distribution.......................................... $3,743 $3,842
Intersegment elimination.............................. (426) (572)
------ ------
Net distribution...................................... 3,317 3,270
Retail................................................ 844 1,061
------ ------
Total sales........................................ $4,161 $4,331
====== ======
Operating earnings:
Distribution.......................................... $ 109 $ 83
Retail................................................ 16 12
Support services...................................... (76) (51)
------ ------
Total operating earnings........................... 49 44
Interest expense........................................ (58) (53)
Interest income......................................... 9 10
Equity investment results............................... -- (2)
Impairment/restructuring (charge)credit................. 27 (42)
------ ------
Income (loss) before taxes.............................. $ 27 $ (43)
====== ======
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% of our total net
sales during the first quarter of 2001, and just under 10% in the first quarter
of 2000.
5. Our comprehensive income for the 16 weeks ended April 21, 2001, totaled
$12.0 million and our comprehensive loss for the 16 weeks ended April 15, 2000,
totaled $25.9 million. The comprehensive income and loss in 2001 and 2000,
respectively, were comprised only of the reported net income and loss.
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 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 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
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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
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. Briefing is
complete in the Court of Appeals for the Tenth Circuit, and oral argument was
conducted on May 15, 2001. The Tenth Circuit has not yet issued an opinion.
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 had 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.
On April 30, 2001, a Memorandum of Understanding was signed which provides,
among other things, for the parties in the noteholder case to proceed to agree
on a Settlement Agreement which will include a payment by defendants and our
insurer of $2.5 million in full satisfaction of the claim. The settlement will
require court and class approval.
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 any remaining 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 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 of our current and former
customers (Don's United Super, et al. v. Fleming, et al.). The 19 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.
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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 case
(Coddington Enterprises, Inc., et al. v. Fleming, et al.). Currently, 16
plaintiffs are asserting claims in the Coddington case, all but one of which
have arbitration agreements with us. The plaintiffs assert claims virtually
identical to those set forth in the Don's case, 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 case.
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 court's denial of arbitration to the United
States Court of Appeals for the Eighth Circuit. The two plaintiffs that were
ordered to arbitration have filed motions asking the court to reconsider the
arbitration ruling.
Two other cases had been filed before the Don's case in the same 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 Western 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 United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
On March 2, 2001, the court ordered the parties in the related Missouri
cases, the Storehouse Markets case and the Welsh case (described below)to
mediate their claims within 45 days of the order. On April 9 -- 11, 2001, the
parties to the related Missouri cases participated in a mediation process held
in Kansas City, Missouri pursuant to the court's order. Although the precise
details of the mediation are subject to a confidentiality agreement among the
parties and may not be disclosed, the mediation confirmed our expectation that
the plaintiffs in the Don's and related cases will claim substantial damages. In
addition, based on discussions with plaintiffs' counsel during the mediation, it
appears unlikely that these related cases will be resolved before trial.
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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
prospects.
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 of our current and former customers (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.
Damages have not been quantified by the plaintiffs; however, we anticipate that
substantial damages will be claimed.
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 a discretionary appeal
of the class certification order, and we are pursuing that appeal on an
expedited basis.
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 United States District Court for the
Western District of Missouri for coordinated or consolidated pre-trial
proceedings.
On March 2, 2001, the court ordered the parties in the related Missouri
cases, the Storehouse Markets case and the Welsh case to mediate their claims
within 45 days of the order. On April 9 - 11, 2001, the parties to the
Storehouse case participated in a mediation process held in Kansas City,
Missouri pursuant to the court's order. Although the precise details of the
mediation are subject to a confidentiality agreement among the parties and may
not be disclosed, the mediation confirmed our expectation that the plaintiffs in
Storehouse will claim substantial damages.
We intend to vigorously defend against these claims, but we cannot predict
the outcome of the case. An unfavorable outcome could have a material adverse
effect on our financial condition and prospects.
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 related Missouri
cases, the Storehouse Markets case and the Welsh case to mediate their claims
within 45 days of the order. The parties in the Welsh case have not yet mediated
their claims.
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.
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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 above,
we do not believe that any such claim will have a material adverse effect on us.
7. Long-term debt consists of the following:
APRIL 21, DECEMBER 30,
2001 2000
---------- ------------
(IN THOUSANDS)
10 1/8% senior notes due 2008...................... $ 355,000 $ --
5 1/4% convertible senior subordinated notes due
2009............................................. 150,000 --
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......... 250,000 250,000
Revolving credit, average interest rates of 7.4%
for 2001 and 7.3% for 2000, due 2003............. 130,000 300,000
Term loans, due 2001 to 2004, average interest rate
of 8.1% for 2001 and 7.2% for 2000............... 145,786 154,421
Other debt (including discounts)................... (5,188) 16,150
---------- ----------
1,275,598 1,270,571
Less current maturities............................ (36,171) (38,171)
---------- ----------
Long-term debt..................................... $1,239,427 $1,232,400
========== ==========
Five-year Maturities: Aggregate maturities of long-term debt for the next
five years are as follows: 2001 -- $28 million; 2002 -- $40 million;
2003 -- $172 million; 2004 -- $287 million; and 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. In connection with
the redemption of $300 million of 10 5/8% senior notes due 2001, we recognized a
$3.5 million after-tax extraordinary charge from early retirement of debt.
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 the
F-46
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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 5.25% 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 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.
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.
F-47
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
APRIL 21, 2001
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............. $ 23,637 $ 1,951 $ 1,685 $ -- $ 27,273
Receivables, net...................... 410,955 77,886 1,830 -- 490,671
Inventories........................... 626,569 149,141 3,539 -- 779,249
Other current assets.................. 129,521 7,909 42 -- 137,472
---------- -------- -------- --------- ----------
Total current assets............... 1,190,682 236,887 7,096 -- 1,434,665
Investment in subsidiaries.............. 53,381 -- -- (53,381) --
Intercompany receivables................ 290,888 -- -- (290,888) --
Property and equipment, net............. 452,722 235,768 7,028 -- 695,518
Goodwill, net........................... 410,434 96,392 3,692 -- 510,518
Other assets............................ 491,744 25,129 18,654 -- 535,527
---------- -------- -------- --------- ----------
$2,889,851 $594,176 $ 36,470 $(344,269) $3,176,228
========== ======== ======== ========= ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 637,242 $ 90,335 $ 2,504 $ -- $ 730,081
Intercompany payables................. -- 244,564 46,324 (290,888) --
Other current liabilities............. 216,805 34,583 2,996 -- 254,384
---------- -------- -------- --------- ----------
Total current liabilities.......... 854,047 369,482 51,824 (290,888) 984,465
Obligations under capital leases........ 209,342 130,646 -- -- 339,988
Long-term debt and other liabilities.... 1,332,568 25,265 48 -- 1,357,881
Equity (deficit)........................ 493,894 68,783 (15,402) (53,381) 493,894
---------- -------- -------- --------- ----------
$2,889,851 $594,176 $ 36,470 $(344,269) $3,176,228
========== ======== ======== ========= ==========
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
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.............. 53,381 -- -- (53,381) --
Intercompany receivables................ 384,450 -- -- (384,450) --
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 $763,554 $ 29,517 $(437,831) $3,402,811
========== ======== ======== ========= ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 821,407 $120,145 $ 1,727 $ -- $ 943,279
Intercompany payables................. -- 342,627 41,823 (384,450) --
Other current liabilities............. 244,524 43,275 1,310 -- 289,109
---------- -------- -------- --------- ----------
Total current liabilities.......... 1,065,931 506,047 44,860 (384,450) 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 68,783 (15,402) (53,381) 427,192
---------- -------- -------- --------- ----------
$3,047,571 $763,554 $ 29,517 $(437,831) $3,402,811
========== ======== ======== ========= ==========
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
CONDENSED CONSOLIDATING OPERATING STATEMENT INFORMATION
16 WEEKS ENDED APRIL 21, 2001
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales............................. $3,465,166 $1,035,055 $22,210 $(361,240) $4,161,191
Costs and expenses:
Cost of sales....................... 3,280,265 859,049 16,873 (361,240) 3,794,947
Selling and administrative.......... 150,323 161,907 5,083 -- 317,313
Other............................... 16,457 28,605 3,519 -- 48,581
Impairment/restructuring charge
(credit)......................... 6,255 (33,114) -- -- (26,859)
Equity loss from subsidiaries....... (3,598) -- -- 3,598 --
---------- ---------- ------- --------- ----------
Total costs and expenses......... 3,449,702 1,016,447 25,475 (357,642) 4,133,982
---------- ---------- ------- --------- ----------
Income (loss) before taxes.......... 15,464 18,608 (3,265) (3,598) 27,209
Taxes on income (loss).............. (2) 13,117 (1,372) -- 11,743
---------- ---------- ------- --------- ----------
Income (loss) before extraordinary
charge........................... $ 15,466 $ 5,491 $(1,893) $ (3,598) $ 15,466
========== ========== ======= ========= ==========
16 WEEKS ENDED APRIL 15, 2000
------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net sales............................. $3,569,998 $1,175,704 $22,715 $(436,919) $4,331,498
Costs and expenses:
Cost of sales....................... 3,360,908 973,622 17,213 (436,919) 3,914,824
Selling and administrative.......... 185,768 181,648 4,891 -- 372,307
Other............................... 2,964 39,851 2,672 -- 45,487
Impairment/restructuring charge..... 41,437 708 -- -- 42,145
Equity loss from subsidiaries....... 12,912 -- -- (12,912) --
---------- ---------- ------- --------- ----------
Total costs and expenses......... 3,603,989 1,195,829 24,776 (449,831) 4,374,763
---------- ---------- ------- --------- ----------
Income (loss) before taxes............ (33,991) (20,125) (2,061) 12,912 (43,265)
Taxes on income (loss)................ (8,118) (8,409) ( 865) -- (17,392)
---------- ---------- ------- --------- ----------
Net income (loss)..................... $ (25,873) $ (11,716) $(1,196) $ 12,912 $ (25,873)
========== ========== ======= ========= ==========
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158
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
16 WEEKS ENDED APRIL 21, 2001
-----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities................. $(117,559) $ 6,588 $(5,102) $ -- $(116,073)
--------- --------- ------- ---- ---------
Cash flows from investing activities:
Purchases of property and
equipment......................... (37,721) (9,704) (748) -- (48,173)
Other................................ 28,573 103,398 -- -- 131,971
--------- --------- ------- ---- ---------
Net cash provided by (used in)
investing activities.............. (9,148) 93,694 (748) -- 83,798
--------- --------- ------- ---- ---------
Cash flows from financing activities:
Repayments on capital lease
obligations....................... (3,886) (1,530) -- -- (5,416)
Advances (to) from parent............ 97,159 (103,554) 6,395 -- --
Other................................ 34,584 -- -- -- 34,584
--------- --------- ------- ---- ---------
Net cash provided by (used in)
financing activities.............. 127,857 (105,084) 6,395 -- 29,168
--------- --------- ------- ---- ---------
Net increase (decrease) in cash and
cash equivalents.................. 1,150 (4,802) 545 -- (3,107)
Cash and cash equivalents at
beginning of year................. 22,487 6,753 1,140 -- 30,380
--------- --------- ------- ---- ---------
Cash and cash equivalents at end of
year................................. $ 23,637 $ 1,951 $ 1,685 $ -- $ 27,273
========= ========= ======= ==== =========
16 WEEKS ENDED APRIL 15, 2000
----------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
(IN THOUSANDS)
Net cash provided by operating
activities............................. $ 48,545 $ 4,962 $ 1,139 $ -- $ 54,646
-------- -------- ------- ---- --------
Cash flows from investing activities:
Purchases of property and equipment.... (11,416) (25,979) (1,103) -- (38,498)
Other.................................. 52,705 40 -- -- 52,745
-------- -------- ------- ---- --------
Net cash provided by (used in)
investing activities................ 41,289 (25,939) (1,103) -- 14,247
-------- -------- ------- ---- --------
Cash flows from financing activities:
Repayments on capital lease
obligations......................... (5,323) (1,659) -- -- (6,982)
Advances (to) from parent.............. (41,545) 30,741 10,804 -- --
Other.................................. (47,875) -- -- -- (47,875)
-------- -------- ------- ---- --------
Net cash provided by (used in)
financing activities................ (94,743) 29,082 10,804 -- (54,857)
-------- -------- ------- ---- --------
Net increase (decrease) in cash and
cash equivalents.................... (4,909) 8,105 10,840 -- 14,036
Cash and cash equivalents at beginning
of year............................. (54,803) 61,307 179 -- 6,683
-------- -------- ------- ---- --------
Cash and cash equivalents at end of
year................................... $(59,712) $ 69,412 $11,019 $ -- $ 20,719
======== ======== ======= ==== ========
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159
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
8. The accompanying operating statements include the following:
16 WEEKS ENDED
----------------------
APRIL 21, APRIL 15,
2001 2000
--------- ---------
(IN THOUSANDS)
Depreciation and amortization (includes depreciation and
amortization due to strategic plan).................... $50,667 $53,749
Excess depreciation and amortization due to the strategic
plan................................................... $ -- $ 4,395
Amortized costs in interest expense...................... $ 2,180 $ 1,496
9. 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. 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
quarter of 2001, we sold or closed 66 retail stores. We plan to sell or close
the remaining 31 retail stores by the end of July 2001.
The plan, as expected, took two years to implement and is now substantially
complete. Additional charges of approximately $20 million are estimated in 2001.
The 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 are expected to be minimal.
The net effect of the strategic plan in the first quarter of 2001 was
pre-tax income of $1 million. The after-tax effect was income of less than $1
million, or $.01 per share. The $1 million pre-tax income was included on
several lines of the Consolidated Statement of Operations as follows: $3 million
charge was included in net sales; $18 million charge was included in cost of
sales and was primarily related to inventory markdowns for clearance for closed
operations; $5 million charge was included in selling and administrative expense
as disposition related costs recognized on a periodic basis. These charges were
offset by $27 million of income in the Impairment/restructuring line related to
the recovery of previously recorded asset impairment resulting from the planned
sale of some retail stores, offset partially by severance related expenses. The
first quarter charge consisted of the following components:
- Net impairment recovery of $35 million. The components included
recovering previously recorded goodwill impairment of $14 million and
long-lived asset impairment of $24 million. Also included was impairment
of $3 million related to other long-lived assets.
- Restructuring charges of $8 million. The restructuring charges consisted
primarily of severance related expenses for the divested or closed
operating units. The restructuring charges also included professional
fees incurred related to the restructuring process.
- Other disposition and related costs of $26 million. These costs consisted
primarily of inventory markdowns for clearance for closed operations and
disposition related costs recognized on a periodic basis.
The first quarter of 2001 charge relates to our business segments as
follows: $7 million charge relates to the distribution segment and $12 million
of income relates to the retail segment with the balance relating to support
services expenses.
F-52
160
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
The charges related to workforce reductions are as follows:
AMOUNT HEADCOUNT
-------- ---------
($'S 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
2001 Quarter 1 Activity:
Charge............................................... 6,760 520
Terminations......................................... (10,186) (3,320)
-------- ------
Ending Liability..................................... $ 33,902 1,610
======== ======
The ending liability of approximately $34 million includes payments over
time to associates already severed as well as union pension withdrawal
liabilities. The breakdown of the 520 headcount reduction recorded during 2001
was: 145 from the distribution segment; 360 from the retail segment; and 15 from
support services.
Additionally, the strategic plan includes charges related to lease
obligations which will be utilized as operating units or retail stores close,
but ultimately reduced over remaining lease terms ranging from 1 to 20 years.
The charges and utilization have been recorded to-date as follows:
AMOUNT
------------------
($'S 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
2001 Quarter 1 Activity:
Charge............................................. 500
Utilized........................................... (5,263)
--------
Ending Liability................................... $ 16,015
========
F-53
161
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(SEE INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
Assets held for sale included in other current assets at the end of the
first quarter of 2001 were approximately $59 million, consisting of $24 million
of distribution operating units and $35 million of retail stores.
The pre-tax charge of the strategic plan in the first quarter of 2000
totaled $64 million. After tax, the expense for the first quarter of 2000 was
$38 million or $.98 per share. The $64 million charge was included on several
lines of the Consolidated Condensed Statement of Operations for the first
quarter of 2000 as follows: $14 million was included in cost of sales and was
primarily related to inventory markdowns for clearance for closed operations and
additional depreciation and amortization on assets to be disposed of but not yet
held for sale; $8 million was included in selling and administrative expense and
equity investment results as disposition related costs recognized on a periodic
basis; and the remaining $42 million was included in the
Impairment/restructuring charge line. The $64 million charge consisted of the
following components:
- Impairment of assets of $2 million. The impairment related to other
long-lived assets.
- Restructuring charges of $40 million. The restructuring charges consisted
primarily of severance related expenses and pension withdrawal
liabilities for the divested or closed operating units that were closed
during the first quarter of 2000. The restructuring charges also included
operating lease liabilities and professional fees incurred related to the
restructuring process.
- Other disposition and related costs of $21 million. These costs consist
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.
The $64 million charge relates to our business segments as follows: $37
million relates to the distribution segment and $17 million relates to the
retail segment with the balance relating to support services expenses.
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 periods 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.
F-54
162
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders
Fleming Companies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Fleming Companies, Inc. and subsidiaries as of April 21, 2001, and the related
condensed consolidated statements of operations and of cash flows for the
sixteen weeks ended April 21, 2001 and April 15, 2000. 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
May 24, 2001
F-55
163
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[FLEMING COMPANIES, INC. LOGO]
FLEMING COMPANIES, INC.
OFFER TO EXCHANGE UP TO $355,000,000 OF ITS
10 1/8% SENIOR NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR UP TO $355,000,000 OF ITS OUTSTANDING
10 1/8% SENIOR NOTES DUE 2008
-------------------------
PROSPECTUS
-------------------------
JULY 17, 2001
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