SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 20, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
(405) 840-7200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 17, 1996 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 37,788,000
<PAGE>
INDEX
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings -
16 Weeks Ended April 20, 1996,
and April 22, 1995
Consolidated Condensed Balance Sheets -
April 20, 1996, and December 30, 1995
Consolidated Condensed Statements of Cash Flows -
16 Weeks Ended April 20, 1996,
and April 22, 1995
Notes to Consolidated Condensed Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 4. Results of Votes of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings
For the 16 weeks ended April 20, 1996, and April 22, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net sales $5,168,234 $5,458,982
Costs and expenses:
Cost of sales 4,711,114 5,020,518
Selling and administrative 401,523 364,081
Interest expense 55,760 56,397
Interest income (15,424) (19,481)
Equity investment results 3,165 6,473
Facilities consolidation - (8,982)
---------- ----------
Total costs and expenses 5,156,138 5,419,006
---------- ----------
Earnings before taxes 12,096 39,976
Taxes on income 6,181 20,428
---------- ----------
Net earnings $ 5,915 $ 19,548
========== ==========
Net earnings per share $.16 $.52
Dividends paid per share $.30 $.30
Weighted average shares outstanding 37,739 37,497
========== ==========
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Consolidated Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
April 20, December 30,
1996 1995
---------- -----------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 24,752 $ 4,426
Receivables 350,963 340,215
Inventories 1,080,705 1,207,329
Other current assets 99,331 98,801
---------- ----------
Total current assets 1,555,751 1,650,771
Investments and notes receivable 279,671 271,763
Investment in direct financing leases 221,897 225,552
Property and equipment 1,535,168 1,527,526
Less accumulated depreciation
and amortization (567,277) (532,364)
---------- ----------
Net property and equipment 967,891 995,162
Other assets 137,628 132,338
Goodwill 1,011,216 1,021,099
---------- ----------
Total assets $4,174,054 $4,296,685
========== ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 836,901 $1,001,123
Current maturities of long-term debt 70,731 53,917
Current obligations under capital leases 19,923 19,452
Other current liabilities 226,132 211,863
---------- ----------
Total current liabilities 1,153,687 1,286,355
Long-term debt 1,369,715 1,347,987
Long-term obligations under
capital leases 363,240 368,876
Deferred income taxes 46,917 40,179
Other liabilities 161,277 169,966
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 94,468 94,291
Capital in excess of par value 502,741 501,474
Reinvested earnings 495,141 501,214
Cumulative currency
translation adjustment (4,549) (4,549)
---------- ----------
1,087,801 1,092,430
Less ESOP note (8,583) (9,108)
---------- ----------
Total shareholders' equity 1,079,218 1,083,322
---------- ----------
Total liabilities and shareholders' equity $4,174,054 $4,296,685
========== ==========
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Consolidated Condensed Statements of Cash Flows
For the 16 weeks ended April 20, 1996, and April 22, 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 18,799 $145,748
Cash flows from investing activities:
Collections on notes receivable 22,018 42,916
Notes receivable funded (26,534) (25,682)
Purchase of property and equipment (26,431) (29,586)
Proceeds from sale of
property and equipment 3,049 9,158
Investments in customers (141) (1,234)
Proceeds from sale of investment - 15,901
Proceeds from sale of businesses 9,244 -
Other investing activities (1,115) (709)
-------- --------
Net cash provided by (used in)
investing activities (19,910) 10,764
-------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 128,000 -
Principal payments on long-term debt (89,458) (167,962)
Principal payments on capital
lease obligations (6,141) (4,970)
Sale of common stock under incentive
stock and stock ownership plans 1,444 2,073
Dividends paid (11,238) (11,150)
Other financing activities (1,170) 1,761
-------- --------
Net cash provided by (used in)
financing activities 21,437 (180,248)
-------- --------
Net increase (decrease) in cash
and cash equivalents 20,326 (23,736)
Cash and cash equivalents,
beginning of period 4,426 28,352
-------- --------
Cash and cash equivalents, end of period $ 24,752 $ 4,616
======== ========
Supplemental information:
Cash paid for interest $43,519 $44,860
Cash paid for taxes $6,953 $19,770
======== ========
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Notes to Consolidated Condensed Financial Statements
1. The consolidated condensed balance sheet as of April 20, 1996, and the
consolidated condensed statements of earnings and cash flows for the 16-week
periods ended April 20, 1996, and April 22, 1995, have been prepared by the
company, without audit. In the opinion of management, all adjustments
necessary to present fairly the company's financial position at April 20,
1996, and the results of operations and cash flows for the periods presented
have been made. All such adjustments are of a normal, recurring nature.
Earnings per share are computed based on net earnings divided by the weighted
average shares outstanding. The impact of common stock options on earnings
per share is immaterial. Certain reclassifications have been made to the
prior year amounts to conform to the current year's classification.
2. The statement of earnings for the 16 weeks ended April 22, 1995 reflects
the effect of the change in management's estimate of the cost associated with
the general merchandising portion of the facilities consolidation plan. The
estimate reflects reduced expense and cash outflow. Accordingly, the company
reversed $9 million of the provision for restructuring during the first
quarter of 1995. The reversal is shown as a credit to the facilities
consolidation expense line in the accompanying financial statements.
3. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the company's 1995 annual
report on Form 10-K.
4. 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 $23 million at April 20, 1996,
and $22 million at December 30, 1995.
5. The company and several other defendants have been named in two suits filed
in U.S. District Court in Miami, Florida. The plaintiffs predicate liability
on the part of the company as a consequence of an allegedly fraudulent scheme
conducted by Premium Sales Corporation and others in which unspecified but
large losses in the Premium-related entities occurred to the detriment of a
purported class of investors which has brought one of the suits. The other
suit is by the receiver/trustee of the estates of Premium and certain of its
affiliated entities. Plaintiffs seek actual damages, treble damages,
attorneys' fees, costs, expenses and other appropriate relief. While the
amount of damages sought in the complaints is not specified, plaintiffs claim
approximately $300 million in actual losses as the result of the
allegations contained in the complaints.
The litigation is complex and the ultimate outcome, which is not expected to
be known for over one year, cannot presently be determined. Furthermore,
management is unable to predict a potential range of monetary exposure, if
any, to the company. Based on the large recovery sought, an unfavorable
result could have a material adverse effect on the company. The company is
vigorously defending the actions. Trial is currently scheduled to begin in
August 1996.
The company, one of its former subsidiaries, and a retired executive officer
were named in a lawsuit filed in District Court in Johnson County, Texas
(David's Supermarkets, Inc. v. Fleming Companies, Inc. ("David's")) which went
to trial on February 19, 1996. The company considered the claims to be
without merit. However, following a four-week trial the jury found the
company's disputed overcharges amounted to $2.8 million and rendered a verdict
against the company. David's filed a motion for judgment on its verdict for
$207.5 million for violation of the Texas Deceptive Trade Practices Act
("DTPA") reserving the right to recover under any alternative theory supported
by the verdict in the event the judgment on the DTPA theory is in any way
modified or reversed on appeal.
On April 4, 1996, the company and its banks amended the company's credit
agreement to increase the letter of credit subfacility in order for the
company to obtain a supersedeas bond and to exclude from financial covenant
calculations any charges recorded with respect to David's.
On April 12, 1996, David's motion for judgment was granted in the amount of
$207.5 million plus pre-judgment interest of $3.7 million and post-judgment
interest at the rate of 10% per annum. The company posted a $230 million bond
immediately after the judgment was granted and will appeal the judgment.
The company posted the bond through arrangements with several sureties. The
bond is partially secured by letters of credit in the amount of $135 million
which are supported by the bank credit agreement. The cost of the bond and
letter of credit requirements, as well as attorney's fees, is expected to be
approximately $3 million annually which will negatively impact future
earnings.
On May 10, 1996, the company filed a motion for a new trial on grounds, among
others, that the trial judge had failed to disclose certain financial
relationships with David's controlling stockholder and others associated with
the controlling stockholder as required by the Texas Code of Judicial Conduct.
Other grounds for a new trial include David's failure to prove lost profits;
that David's claims, if any, are governed by contract law and are not tort
or DTPA violations; the admission of hearsay evidence; and the allowance of
inflammatory and prejudicial arguments by David's counsel. The company
also filed a motion for recusal of the judge from all further proceedings
in the case.
On May 13, 1996, the judge recused himself from hearing any further matters on
the case and asked the presiding judge of the administrative judicial region
to assign another judge to hear the motion for new trial. In addition, the
trial judge endorsed Fleming's request for a new trial. A new judge has been
appointed and a hearing date on the company's motion for a new trial is set
for June 24, 1996.
Based on management's present assessment of the ultimate outcome, a charge of
approximately $7 million was recorded in the accompanying statement of
earnings during the first quarter of 1996. In view of the large judgment,
an unfavorable result from the appellate process would have a material
adverse effect on the company. The appellate process may take up to three
years or longer.
In view of the large judgment in the David's litigation, assertions of
similar allegations could occur in future or currently pending litigation.
Management is unable to predict the potential range of monetary exposure, if
any, to the company. However, if successfully asserted, any unfavorable
outcome could have a material adverse effect on the company.
From the date of the jury verdict through May 30, 1996, the company and
certain officers, including the chief executive officer, were named as
defendants in six purported class action lawsuits filed by certain of its
stockholders and one purported class action lawsuit filed by certain
noteholders, each in the U. S. District Court for the Western District of
Oklahoma, alleging the company failed to properly disclose and account for the
David's litigation. The plaintiff in four of the stockholder cases also
claims the company failed to disclose that it was engaged in a deceptive
course of business with its customers that exposes it to substantial legal
liability which would severely impair the financial condition, performance and
value of the company. The plaintiffs seek undetermined but significant
damages. The company denies these allegations and intends to vigorously
defend the actions. Management is unable to predict a potential range of
monetary exposure, if any, to the company from these actions. However, an
unfavorable outcome in any of them could have a material adverse effect on
the company.
Megafoods Stores, Inc. and certain of its affiliates filed Chapter 11
bankruptcy proceedings in the U.S. Bankruptcy Court in Arizona in August 1994.
As of the date of filing, the debtors' total indebtedness to the company for
goods sold on open account, equipment leases and loans aggregated
approximately $28 million, for which claims have been filed in the bankruptcy
proceedings. The company holds collateral with respect to a substantial
portion of these obligations and will continue to pursue collection of its
claims through the reorganization proceeding. The debtor is also liable or
contingently liable to the company under store sublease or lease guarantee
agreements. The company is partially secured as to these obligations. The
debtor has also filed an adversary proceeding against the company seeking
subordination of the company's claims, return of a $12 million deposit and
affirmative relief for damages. The trial is expected to begin in August
1996. On May 14, 1996, the company's motion to convert the Chapter 11
bankruptcy proceedings into a Chapter 7 liquidation proceeding was denied.
The company is considering an appeal. Also, the bankruptcy judge granted
the debtor leave to amend its adversary proceedings complaint to include
allegations similar to those contained in the David's litigation described
above. On May 16, 1996, the debtor filed its second amended complaint
which included similar allegations to the David's litigation. The company
does not believe that the debtor has a cause of action based upon the
David's litigation claims and intends to vigorously defend. An unfavorable
result, however, could have a material adverse effect on the company. Absent
appeal, the ultimate outcome of these proceedings are expected within one year.
The company took charges of $6.5 million in 1994, approximately $3.5
million in 1995 and $.8 million in the first quarter of 1996 for the
difference between the amount owed by the debtor and the related
collateral values. Financial exposure, if any, with respect to continued
deterioration in the collateral value or the subordination of the company's
claims and the $12 million deposit could result in a loss of up to $20 million
in excess of the amount accrued.
6. The senior notes issued in 1994 are guaranteed by all direct and indirect
subsidiaries of the company (except for certain inconsequential subsidiaries),
all of which are wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no restrictions on the ability of the
subsidiary guarantors to transfer funds to the company in the form of cash
dividends, loans or advances. Full financial statements for the subsidiary
guarantors are not presented herein because management does not believe such
information would be material.
The following summarized financial information, which includes allocations of
material corporate-related expenses, for the combined subsidiary guarantors
may not necessarily be indicative of the results of operations or financial
position had the subsidiary guarantors been operated as independent entities.
<TABLE>
<CAPTION>
April 20, April 22,
(In millions) 1996 1995
----------------------------------------------------
<S> <C> <C>
Current assets $22 $754
Noncurrent assets $59 $1,405
Current liabilities $9 $501
Noncurrent liabilities - $875
</TABLE>
<TABLE>
<CAPTION>
16 weeks ended
April 20, April 22,
(In millions) 1996 1995
----------------------------------------------------
<S> <C> <C>
Net sales $109 $2,215
Costs and expenses $115 $2,230
Net earnings (loss) $(3) $(8)
</TABLE>
During 1996 and 1995, a significant number of subsidiaries were merged into
the parent company, resulting in a substantial reduction in the amounts
appearing in the summarized financial information.
7. The accompanying earnings statements include the following:
<TABLE>
<CAPTION>
16 weeks
---------------------
(In thousands) 1996 1995
------------------------------------------------------------
<S> <C> <C>
Depreciation and
amortization
(includes amortized
financing costs) $55,651 $55,589
Amortized financing
costs (part of
interest expense) $2,075 $2,045
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition And
Results of Operations
General
- -------
In 1994, the company embarked upon a plan to restructure its organizational
alignment, reengineer its operations and consolidate its distribution
facilities. The company's objective is to lower the net acquisition cost of
product to retail customers while providing the company with a fair and
adequate return for its products and services. To achieve this objective,
management has made major organizational changes, implemented the Fleming
Flexible Marketing Plan ("FFMP") in approximately 40% of its food distribution
sales base, or 17 of its 35 operating units, and increased its investment in
technology. The actions contemplated by the reengineering plan will affect
the company's food and general merchandise wholesaling operations as well as
certain retail operations. Although a significant number of reengineering
initiatives have been completed, more are planned. The timing of the
remaining initiatives has been lengthened while the company refocuses on
financial performance and refines FFMP, as a consequence of responses from
customers and vendors. Accordingly, completion dates are not known.
As part of the reengineering plan, the company closed four distribution
centers and plans to close one additional facility. In addition, since the
Scrivner acquisition, the company has closed nine former Scrivner distribution
centers.
Results of Operations
- ---------------------
Set forth in the following table is information for the first interim periods
of 1996 and 1995 regarding components of the company's earnings expressed
as a percentage of net sales.
<TABLE>
<CAPTION>
First Interim Period 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.00% 100.00%
Gross margin 8.84 8.03
Less:
Selling and administrative expense 7.77 6.67
Interest expense 1.08 1.03
Interest income (.30) (.36)
Equity investment results .06 .12
Facilities consolidation .00 (.16)
- ---------------------------------------------------------------------------
Total expenses 8.61 7.30
- ---------------------------------------------------------------------------
Earnings before taxes .23 .73
Taxes on income .12 .37
- ---------------------------------------------------------------------------
Net earnings .11% .36%
- ---------------------------------------------------------------------------
</TABLE>
Net sales. Sales for the first quarter (16 weeks) of 1996 decreased by $.3
billion, or 5%, to $5.2 billion from $5.5 billion for the same period in 1995.
Several factors, none of which are individually material, adversely
affected net sales including: sales lost through normal attrition which were
not replaced, the loss of business of Megafoods Stores, Inc. ("Megafoods"),
stricter credit policies and the closing or sale of certain corporate stores.
Net sales have trended downwards since 1994 which, if not corrected, will
adversely affect earnings. The company, however, has developed a national
sales force which is focusing on developing prospects for new business.
In June 1995, Megafoods moved the majority of its business in the Arizona
market (approximately $150 million of annualized sales) to another supplier.
In November 1995, at the company's request, Megafoods moved the balance of its
business. See note 5. to the Notes to Condensed Consolidated Financial
Statements for further discussion of Megafoods.
Retail sales generated by the same stores for the first quarter of 1996
compared to the same period in 1995 increased slightly. The net gains and
losses resulting from the disposition of retail stores during the first
quarter was a pretax loss of $4 million and were classified as a component of
net sales.
Fleming measures inflation using data derived from the average cost of a ton
of product sold by the company. For the first quarter of 1996, food price
inflation was 2.3%, significantly higher than in 1995.
Gross margin. Gross margin for the first quarter of 1996 increased by $19
million, or 4%, to $457 million from $438 million for the same period of 1995
and increased as a percentage of net sales to 8.84% from 8.03% for the same
period in 1995. The increase in gross margin was due to the addition of retail
operations, including ABCO Markets, a 71-store supermarket chain with
operations in Arizona, which were not consolidated in the 1995 period. Retail
operations typically have a higher gross margin and higher selling expenses
than food distribution operations. During the first quarter of 1996, the
company implemented increases in certain charges to its customers under FFMP,
increasing gross margin. Product handling expenses, consisting of warehouse,
transportation and building expenses, were lower as a percentage of net sales
in 1996 compared to 1995, reflecting the cost controls and the benefits of the
company's consolidations occurring in 1995. The food price inflation
discussed above resulted in a $.8 million LIFO charge for the quarter,
compared to $1.2 million of income for the 1995 period.
Selling and administrative expenses. Selling and administrative expenses for
the first quarter of 1996 increased by $37 million, or 10%, to $402 million
from $364 million for the same period in 1995 and increased as a percentage of
net sales to 7.77% for 1996 from 6.67% in 1995. The increase was principally
due to higher retail expenses resulting from additional retail operations,
primarily ABCO Markets. The increase is also due in part to the charge
related to the David's judgment which was recorded in the first quarter of
1996. Approximately $7 million was recorded, $4 million of which was included
in selling and administrative expenses. The remaining $3 million was
classified as interest expense. See "Legal Proceedings." Higher legal
expenses compared to the 1995 period also contributed to the increase.
Partially offsetting the increases was a reduction during the 1996 quarter in
the estimate of liabilities required for various obligations.
As more fully described in the 1995 Annual Report on Form 10-K, the company
has a significant amount of credit extended to its customers through various
methods. These methods include customary and extended credit terms for
inventory purchases, secured loans with terms generally up to ten years, and
equity investments in and secured and unsecured loans to certain customers.
In addition, the company guarantees debt and lease obligations of certain
customers. Usually, these capital investments are made in and guarantees
extended to customers with whom the company enjoys long-term supply
agreements.
Credit loss expense is included in selling and administrative expenses and for
the first quarter of 1996 decreased by $2 million to $8 million from $10
million for the comparable period in 1995. Tighter credit practices and
reduced emphasis on credit extensions to and investments in customers have
resulted in less exposure and a decrease in credit loss expense. While there
can be no assurance that credit losses from existing or future investments or
commitments will not have a material adverse effect on results of operations
or financial position, the results thus far of these new practices and
emphasis have been positive. See note 5. in the Notes to Consolidated
Condensed Financial Statements for further discussion related to Megafoods.
Interest expense. Interest expense for the first quarter of 1996 decreased
slightly to $56 million. Lower borrowing levels in the 1996 period compared
to the same period in 1995 were offset by the $3 million interest component of
the charge related to the David's judgment which was recorded in the first
quarter of 1996.
The company enters into interest rate hedge agreements to manage interest
costs and exposure to changing interest rates. The credit agreement with the
company's banks requires the company to provide interest rate protection on a
substantial portion of the indebtedness outstanding thereunder. The company
has entered into interest rate swaps and caps covering $850 million aggregate
principal amount of floating rate indebtedness. The company's hedged position
exceeds the hedge requirements set forth in the company's bank credit
agreement.
The interest rate on the company's floating rate indebtedness is equal to the
London interbank offered interest rate ("LIBOR") plus a margin. The average
fixed interest rate paid by the company on the interest rate swaps is 6.95%,
covering $600 million of floating rate indebtedness. The interest rate swap
agreements, which were implemented through seven counterparty banks and have
an average remaining life of 2.5 years, provide for the company to receive
substantially the same LIBOR that the company pays on its floating rate
indebtedness. For the remaining $250 million, the company has purchased
interest rate cap agreements from two counterparty banks. The agreements cap
LIBOR at 7.33% over the next 2.7 years. Payments made under obligations or
received for receivables are accounted for as interest expense. For the first
quarter of 1996, the interest rate hedge agreements added $3 million to
interest expense.
With respect to the interest rate hedging agreements, the company believes its
exposure to potential loss due to counterparty nonperformance is minimized
primarily due to the relatively strong credit ratings of the counterparty
banks for their unsecured long-term debt (A- or higher from Standard & Poor's
Ratings Group and A2 or higher from Moody's Investors Service, Inc.) and the
size and diversity of the counterparty banks. The hedge agreements are
subject to market risk to the extent that market interest rates for similar
instruments decrease and the company terminates the hedges prior to maturity.
Interest income. Interest income for the first quarter of 1996 decreased by $4
million to $15 million from $19 million for the same period in 1995. The
decrease is primarily due to the notes receivable sale in the second quarter
of 1995 when the company sold $77 million of notes receivable with limited
recourse. The sale reduced the amount of notes receivable available to
produce interest income.
Equity investment results. The company's portion of operating losses from
equity investments for the first quarter of 1996 decreased to $3 million from
$6 million for the same period in 1995. The results of operations of ABCO
Markets, accounted for under the equity method in the first quarter of 1995,
are not included in the 1996 equity investment results line due to the
acquisition described above, resulting in part of the improvement. The
remainder of the improvement is based on improved results of operations in the
underlying investees.
Facilities consolidation. In the first quarter of 1995, management changed
its restructuring estimates with respect to the general merchandising
operations portion of the restructuring plan. The revised estimate reflects
reduced expense and cash outflow. Accordingly, during the 1995 quarter the
company reversed $9 million of the provision for restructuring.
Taxes on income. The estimated effective tax rate for both periods was 51.1%.
Other. See Part I., Item 1. Financial Statements - Notes to Consolidated
Condensed Financial Statements and Part II., Item 1. Legal Proceedings for
further discussion of certain litigation.
The company has been named in two legal actions related to Premium Sales
Corporation filed in the U.S. District Court in Miami in December 1993. The
litigation is complex and the ultimate outcome cannot presently be determined.
Furthermore, the company is unable to predict a potential range of monetary
exposure, if any, to the company. Based on the recovery sought, an
unfavorable judgment could have a material adverse effect on the company.
Trial is currently scheduled for August 1996.
On April 14, 1996, a judgment against the company was granted in the David's
lawsuit in the amount of $207.5 million plus pre-judgment interest of $3.7
million and post-judgment interest of 10% per annum. The company posted the
required bond and commenced its appeal. The company filed motions seeking
a new trial and recusal of the trial judge from all further procedures. The
trial judge recused himself and the new judge has set June 24, 1996 as the
hearing date on the motion for a new trial. In view of the large judgment,
an unfavorable result from the appellate process could have a material
adverse effect on the company. The appellate process may take up to three
years or longer.
The company has been named in six purported class action lawsuits filed by
certain of its stockholders and one purported class action lawsuit filed by
certain noteholders alleging the company failed to properly disclose and
account for the David's litigation. Plaintiffs seek undetermined but
significant damages. An unfavorable outcome in any of the actions could
have a material adverse effect on the company.
Megafoods has filed an adversary proceeding related to the company's
bankruptcy claim, return of a $12 million deposit and affirmative relief for
damages, including an amended complaint that includes allegations similar to
those contained in the David's litigation. Financial exposure, if any, with
respect to the continued deterioration in the collateral value or the
subordination of the company's claims and the $12 million deposit could
result in a loss of up to $20 million in excess of the amount accrued.
The unfavorable result in the adversary proceeding could have a material
adverse effect on the company.
Several factors negatively affecting earnings in the first quarter of 1996
are likely to continue for the near term. Management believes that these
factors include lower sales, operating losses in certain company-owned
retail stores and litigation and related bond costs.
Segment information. Sales and operating earnings for the company's food
distribution and retail food segments are presented below.
<TABLE>
<CAPTION>
First Interim Period
($ in millions) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Sales:
Food distribution $3,981 $4,451
Retail food 1,187 1,008
- --------------------------------------------------------------------
Total sales $5,168 $5,459
====================================================================
Operating earnings:
Food distribution $89 $98
Retail food 15 17
Corporate (48) (41)
- --------------------------------------------------------------------
Total operating earning $56 $74
====================================================================
Operating earnings for industry segments consist of net sales less related
operating expenses. Operating expenses exclude interest expense, interest
income, equity investment results, facilities consolidation and income taxes.
General corporate expenses are not allocated to food distribution and retail
food segments. The transfer pricing between segments is at cost.
Liquidity and Capital Resources
- -------------------------------
Set forth below is certain information regarding the company's capital
position at the end of the first quarter of 1996 and at the end of fiscal
1995:
</TABLE>
<TABLE>
<CAPTION>
Capital Structure (In millions) April 20, 1996 December 30, 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $1,440 49.6% $1,402 48.8%
Capital lease obligations 383 13.2 388 13.5
- --------------------------------------------------------------------------
Total debt 1,823 62.8 1,790 62.3
Shareholders' equity 1,079 37.2 1,083 37.7
- --------------------------------------------------------------------------
Total capital $2,902 100.0% $2,873 100.0%
==========================================================================
</TABLE>
The company's current debt capital structure includes a $800 million six-year
amortizing term loan with final maturity in June 2000, a $596 million five-
year revolving credit facility with final maturity in July 1999, $300 million
of 10.625% seven-year senior notes, $200 million of floating rate seven-year
senior notes, each of which matures December 2001 and $99 million of medium-
term notes, $7 million of 9.5% debentures and $10 million of other debt.
Presently the company's senior unsecured debt is rated Ba1 by Moody's
Investors Service and BB- by Standard & Poor's Ratings Group. Moody's and
Standard & Poor's have placed the company's rated debt under review for
possible downgrade and CreditWatch with negative implications, respectively,
due in part to uncertainties created by the David's judgment. Pricing under
the bank credit agreement automatically increases or decreases with respect to
certain credit rating declines or improvements, respectively, based upon
Moody's and Standard & Poor's ratings.
The company's principal sources of liquidity are cash flows from operating
activities and borrowings under the bank credit agreement. At first quarter
end 1996, $634 million was borrowed on the six-year amortizing term loan and
$190 million was drawn on the $596 million five-year revolving credit
facility.
The bank credit agreement was amended on February 15, 1996 and April 4, 1996
as further described in the company's Form 10-K for the fiscal year ended
December 30, 1995. The amended bank credit agreement and the indentures for
the senior notes contain customary covenants associated with similar
facilities. The bank credit agreement currently contains the following more
significant covenants: maintenance of a consolidated debt-to-net worth ratio
of not more than 2.25 to 1; maintenance of a minimum consolidated net worth of
at least $888 million; maintenance of a fixed charge coverage ratio of at
least 1.1 to 1; a limitation on dividend payments of $.08 per share, per
quarter; and limitations on capital expenditures. Covenants associated with
the senior notes are generally less restrictive than those of the bank credit
agreement.
After considering the effect of the recently issued letters of credit related
to the supersedeas bond required for the David's judgment, which are
considered a use of the company's borrowing capacity, and the related bank
credit agreement amendment, at first quarter-end 1996 the company would have
been allowed to borrow an additional $270 million under the company's
revolving credit facility contained in the bank credit agreement. The company
is currently in compliance with all covenants under the amended bank credit
agreement and senior notes.
On March 28, 1996, the Board of Directors declared a quarterly cash dividend
of $.02 per share for the second quarter of 1996, a reduction of $.28 per
share.
Operating activities generated $19 million of net cash flows for the first 16
weeks in 1996 compared to $146 million in the comparable period in 1995. The
decrease is due to lower decreases in inventory and higher decreases in
accounts payable, both in 1996 as compared to the same period in 1995.
Working capital was $402 million at first-quarter end 1996, an increase from
$364 million at year-end 1995. The current ratio increased to 1.35 to 1 at
first-quarter end 1996, from 1.28 to 1 at year-end 1995.
Capital expenditures year to date in 1996 were approximately $21 million.
Management expects that 1996 capital expenditures, excluding acquisitions, if
any, will approximate $130 million.
Management believes that the cash flows from operating activities and the
company's ability to borrow under the amended bank credit agreement will be
adequate to meet working capital needs, capital expenditures and other cash
needs for the next twelve months.
The debt-to-capital ratio at the end of the first quarter of 1996 was 62.8%,
approximately the same as year-end 1995. The company's long-term target ratio
is approximately 50%. Total capital was $2.9 billion at quarter end,
approximately the same as year-end 1995.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(1) David's Supermarkets, Inc. vs. Fleming Companies, Inc., et al. Case No.
246-93, In the District Court of Johnson County, Texas.
David's Supermarkets, Inc. ("David's") filed suit against the company, one of
its former subsidiaries, and a retired executive officer in August, 1993
alleging that the company charged excessive prices under two selling plan
arrangements from 1989 through 1991. Plaintiff asserted breach of contract,
fraud and violation of the Texas Deceptive Trade Practices Act ("DTPA").
Following a four-week trial the jury found the company's disputed overcharges
amounted to $2.8 million and rendered verdicts against the company for $72.5
million for breach of contract, $200.9 million for fraud and $207.5 million
for violation of the DTPA and against the former officer, jointly and
severally with the company, for $51 million for fraud and $53.8 million for
violation of the DTPA.
On March 22, 1996, the plaintiff filed a motion for judgment on its claim
under the DTPA reserving the right to recover under any alternative theory
supported by the verdict in the event the judgment on the DTPA verdict is in
any way modified or reversed by any court.
On April 4, 1996, the company and its banks amended the company's bank credit
agreement increasing the letter of credit subfacility to permit the company to
post a supersedeas bond necessary to perfect its appeal and waiving certain
effects of the judgment or certain potential liens arising thereunder.
On April 12, 1996, plaintiff's motion for judgment was granted in the amount
of $207.5 million plus pre-judgment interest of $3.7 million and post-judgment
interest at the rate of 10% per annum. The company posted the bond
immediately after the judgment was granted and will appeal the judgment.
On May 10, 1996, the company filed a motion for a new trial on grounds, among
others, that the trial judge in the case had failed to disclose certain
financial relationships with the plaintiff's controlling stockholder and others
associated with the controlling stockholder as required by the Texas
Code of Judicial Conduct. Other grounds for a new trial include
plaintiff's failure to prove lost profits, that plaintiff's claims, if
any, are governed by contract law and are not DTPA violations, the admission
of hearsay evidence and the allowance of inflammatory and prejudicial
arguments by plaintiff's counsel. The company also filed a motion for recusal
of the judge from all further proceedings in the case.
On May 13, 1996, the judge recused himself from hearing any further matters on
the case and asked the presiding judge of the administrative judicial region
to assign another judge to hear the motion for new trial. In addition,
the trial judge endorsed Fleming's request for a new trial. A new judge
has been appointed and a hearing date on the company's motion for a new
trial is set for June 24, 1996.
(2) In re: Megafoods Stores, Inc. and related proceedings, Case No. B-94-
07411-P8X-RTB, U.S. Bankruptcy Court for the District of Arizona.
Megafoods Stores, Inc. and certain of its affiliates filed Chapter 11
bankruptcy proceedings in the U.S. Bankruptcy Court in Arizona in August 1994.
As of the date of filing, the debtors' total indebtedness to the company for
goods sold on open account, equipment leases and loans aggregated
approximately $28 million, for which claims have been filed in the bankruptcy
proceedings. The company holds collateral with respect to a substantial
portion of these obligations and will continue to pursue collection of its
claims through the reorganization proceeding. The debtor is also liable or
contingently liable to the company under store sublease or lease guarantee
agreements. The company is partially secured as to these obligations. The
debtor has also filed an adversary proceeding against the company seeking
subordination of the company's claims, return of a $12 million deposit and
affirmative relief for damages. On May 14, 1996, the company's motion to
convert the Chapter 11 bankruptcy proceedings into a Chapter 7 liquidation
proceeding was denied. The company is considering an appeal. Also, the
bankruptcy judge granted the debtor leave to amend its adversary proceedings
complaint to include allegations similar to those contained in the David's
litigation described above. On May 16, 1996, the debtor filed its second
amended complaint which included similar allegations to the David's
litigation. The company does not believe that the debtor has a cause of
action based upon the David's litigation claims and intends to vigorously
defend. Absent appeal, the ultimate outcome of these proceedings are expected
within one year. The company took charges of $6.5 million in 1994,
approximately $3.5 million in 1995 and $.8 million in the first quarter of
1996 for the difference between the amount owed by the debtor and the related
collateral values. Financial exposure, if any, with respect to continued
deterioration in the collateral value or the subordination of the company's
claims and the $12 million deposit could result in a loss of up to $20 million
in excess of the amount accrued.
Item 4. Results of Votes of Security Holders
The company held its annual meeting on May 1, 1996. Matters voted on were as
follows:
Election of directors - Directors re-elected were James G. Harlow, Jr., Edward
C. Joullian III and Howard H. Leach. Jack W. Baker was newly elected as a
Director. Directors whose terms of office continued were Archie R. Dykes,
Carol B. Hallett, Lawrence M. Jones, John A. McMillan, Guy A. Osborn and
Robert E. Stauth.
1996 Stock Incentive Plan - Shareholders approved the 1996 Stock Incentive
Plan which is designed to create incentives to motivate participants in the
plan.
Shareholder proposal - Shareholders approved a shareholder proposal
recommending a stockholder advisory vote on the company's shareholder rights
plan.
Election of independent auditors - Shareholders ratified Deloitte & Touche LLP
as independent auditors for 1996.
The number of votes cast for the above matters is as follows (votes in
thousands):
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Election of Directors
Jack W. Baker 31,323 1,708
James G. Harlow, Jr. 31,208 1,823
Edward C. Joullian III 31,208 1,823
Howard H. Leach 31,232 1,798
Approval of 1996 Stock
Incentive Plan 29,522 3,112 396
Shareholder Proposal 18,703 10,068 783
(Broker non-votes totaled 3,477)
Independent auditors 32,292 486 254
</TABLE>
No other business came before the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Page Number
12 Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
(Registrant)
Date: May 30, 1996 KEVIN J. TWOMEY
Kevin J. Twomey
Vice President-Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
------- ----------------
<S> <C> <C>
12 Computation of Ratio of Earnings to
Fixed Charges Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
FLEMING COMPANIES, INC.
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
16 Weeks Ended
April 20, April 22,
(In thousands of dollars 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Earnings:
Pretax income $ 12,096 $ 39,976
Fixed charges, net 65,209 67,758
-------- --------
Total earnings $ 77,305 $107,734
Fixed charges:
Interest expense 55,760 56,397
Portion of rental charges
deemed to be interest 9,338 11,261
Capitalized interest - 427
- ---------------------------------------------------------------------------
Total fixed charges $ 65,098 $ 68,085
Ratio of earnings to fixed charges 1.19 1.58
</TABLE>
"Earnings" consists of income before income taxes and fixed charges excluding
capitalized interest. Capitalized interest amortized during the respective
periods is added back to earnings.
"Fixed charges, net" consists of interest expense, an estimated amount of
rental expense which is deemed to be representative of the interest factor
and amortization of capitalized interest.
The pro forma ratio of earnings to fixed charges is omitted as it is not
applicable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE FISCAL QUARTER ENDED APRIL 20, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000352949
<NAME> FLEMING COMPANIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> APR-20-1996
<CASH> 24,752
<SECURITIES> 0
<RECEIVABLES> 391,152
<ALLOWANCES> 40,189
<INVENTORY> 1,080,705
<CURRENT-ASSETS> 1,555,751
<PP&E> 1,535,168
<DEPRECIATION> 567,277
<TOTAL-ASSETS> 4,174,054
<CURRENT-LIABILITIES> 1,153,687
<BONDS> 1,369,715
0
0
<COMMON> 94,468
<OTHER-SE> 984,750
<TOTAL-LIABILITY-AND-EQUITY> 4,174,054
<SALES> 5,168,234
<TOTAL-REVENUES> 5,168,234
<CGS> 4,711,114
<TOTAL-COSTS> 5,092,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,751
<INTEREST-EXPENSE> 55,760
<INCOME-PRETAX> 12,096
<INCOME-TAX> 6,181
<INCOME-CONTINUING> 5,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,915
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
