<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(Mark One)
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 12, 1997
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
</TABLE>
------------------------
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 48-0222760
(State of Incorporation) (I.R.S. Employer
Identification No.)
6301 WATERFORD
BOULEVARD, BOX 26647
OKLAHOMA CITY, OKLAHOMA 73126
(Address of principal (Zip code)
executive offices)
</TABLE>
Registrant's telephone number, including area code: (405) 840-7200
(Former name, former address and former fiscal year, if changed since last
report.)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 8, 1997 is as follows:
<TABLE>
<S> <C>
Class Shares Outstanding
Common stock, $2.50 par value 37,804,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Form 10-Q/A amends the previously filed Form 10-Q to reflect the
extraordinary charge for early debt retirement in the third quarter of 1997
instead of the second quarter of 1997.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings --
12 Weeks Ended July 12, 1997, and July 13, 1996................................................... 3
Consolidated Condensed Statements of Earnings --
28 Weeks Ended July 12, 1997, and July 13, 1996................................................... 4
Consolidated Condensed Balance Sheets--
July 12, 1997, and December 28, 1996.............................................................. 5
Consolidated Condensed Statements of Cash Flows--
28 Weeks Ended July 12, 1997, and July 13, 1996................................................... 6
Notes to Consolidated Condensed Financial Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 14
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................................................ 23
Item 6. Exhibits and Reports on Form 8-K............................................................. 25
Signatures.............................................................................................. 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE 12 WEEKS ENDED JULY 12, 1997, AND JULY 13, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
(AS
RESTATED,
SEE NOTE 8)
Net sales............................................................................. $3,550,654 $ 3,742,331
Costs and expenses:
Cost of sales....................................................................... 3,219,989 3,397,509
Selling and administrative.......................................................... 274,878 301,532
Interest expense.................................................................... 36,223 37,660
Interest income..................................................................... (10,940) (11,301)
Equity investment results........................................................... 3,239 4,099
Litigation charge................................................................... -- (6,460)
------------ ------------
Total costs and expenses.......................................................... 3,523,389 3,723,039
------------ ------------
Earnings before taxes................................................................. 27,265 19,292
Taxes on income....................................................................... 14,450 9,858
------------ ------------
Net earnings.......................................................................... $ 12,815 $ 9,434
------------ ------------
------------ ------------
Net earnings per share................................................................ $ .34 $ .25
------------ ------------
------------ ------------
Dividends paid per share.............................................................. $ .02 $ .02
------------ ------------
------------ ------------
Weighted average shares outstanding................................................... 37,804 37,788
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE 28 WEEKS ENDED JULY 12, 1997, AND JULY 13, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
(AS
RESTATED,
SEE NOTE 8)
Net sales............................................................................. $8,302,685 $ 8,910,565
Costs and expenses:
Cost of sales....................................................................... 7,539,338 8,108,623
Selling and administrative.......................................................... 638,594 699,275
Interest expense.................................................................... 85,045 90,090
Interest income..................................................................... (25,294) (26,725)
Equity investment results........................................................... 7,317 7,264
Litigation charge................................................................... 19,218 650
------------ ------------
Total costs and expenses.......................................................... 8,264,218 8,879,177
------------ ------------
Earnings before taxes................................................................. 38,467 31,388
Taxes on income....................................................................... 20,388 16,039
------------ ------------
Net earnings.......................................................................... $ 18,079 $ 15,349
------------ ------------
------------ ------------
Net earnings per share................................................................ $ .48 $ .41
------------ ------------
------------ ------------
Dividends paid per share.............................................................. $ .04 $ .32
------------ ------------
------------ ------------
Weighted average shares outstanding................................................... 37,802 37,760
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
(AS
RESTATED,
SEE NOTE 8)
Current assets:
Cash and cash equivalents.......................................................... $ 3,888 $ 63,667
Receivables........................................................................ 323,531 329,505
Inventories........................................................................ 930,368 1,051,313
Other current assets............................................................... 84,623 119,123
------------ ------------
Total current assets............................................................. 1,342,410 1,563,608
Investments and notes receivable..................................................... 182,501 205,683
Investment in direct financing leases................................................ 204,779 212,202
Property and equipment............................................................... 1,578,707 1,562,382
Less accumulated depreciation and amortization..................................... (659,232) (603,241)
------------ ------------
Net property and equipment........................................................... 919,475 959,141
Other assets......................................................................... 143,605 118,096
Goodwill............................................................................. 982,303 996,446
------------ ------------
Total assets......................................................................... $3,775,073 $4,055,176
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 754,794 $ 952,769
Current maturities of long-term debt............................................... 152,939 124,613
Current obligations under capital leases........................................... 20,465 19,715
Other current liabilities.......................................................... 247,196 245,774
------------ ------------
Total current liabilities........................................................ 1,175,394 1,342,871
Long-term debt....................................................................... 995,519 1,091,606
Long-term obligations under capital leases........................................... 350,584 361,685
Deferred income taxes................................................................ 26,683 37,729
Other liabilities.................................................................... 132,902 145,327
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share............................................ 94,510 94,494
Capital in excess of par value..................................................... 503,886 503,595
Reinvested earnings................................................................ 530,984 514,408
Cumulative currency translation adjustment......................................... (4,700) (4,700)
------------ ------------
1,124,680 1,107,797
Less ESOP note..................................................................... (5,792) (6,942)
Less additional minimum pension liabilities........................................ (24,897) (24,897)
------------ ------------
Total shareholders' equity..................................................... 1,093,991 1,075,958
------------ ------------
Total liabilities and shareholders' equity........................................... $3,775,073 $4,055,176
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE 28 WEEKS ENDED JULY 12, 1997, AND JULY 13, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
(AS
RESTATED,
SEE NOTE 8)
Cash flows from operating activities:
Net earnings......................................................................... $ 18,079 $ 15,349
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization...................................................... 98,625 97,681
Credit losses...................................................................... 11,235 14,953
Deferred income taxes.............................................................. (8,101) (4,277)
Equity investment results.......................................................... 7,317 7,264
Gain on sale of businesses......................................................... (1,023) (3,578)
Consolidation and restructuring reserve activity................................... (2,144) (1,447)
Change in assets and liabilities, excluding effect of acquisitions:
Receivables...................................................................... 5,300 (2,950)
Inventories...................................................................... 120,583 190,034
Accounts payable................................................................. (192,448) (137,943)
Other assets and liabilities..................................................... (925) 1,641
Other adjustments, net............................................................. (1,197) (1,779)
------------ -----------
Net cash provided by operating activities........................................ 55,301 174,948
------------ -----------
Cash flows from investing activities:
Collections on notes receivable...................................................... 32,536 37,385
Notes receivable funded.............................................................. (24,859) (35,158)
Purchase of property and equipment................................................... (49,405) (69,408)
Proceeds from sale of property and equipment......................................... 8,665 8,985
Investments in customers............................................................. (1,405) (156)
Proceeds from sale of investment..................................................... 2,196 1,665
Businesses acquired.................................................................. (9,572) --
Proceeds from sale of businesses..................................................... 1,811 9,244
Other investing activities........................................................... 4,378 4,315
------------ -----------
Net cash used in investing activities............................................ (35,655) (43,128)
------------ -----------
Cash flows from financing activities:
Proceeds from long-term borrowings................................................... 110,000 128,000
Principal payments on long-term debt................................................. (177,493) (191,641)
Principal payments on capital lease obligations...................................... (10,697) (10,879)
Sale of common stock under incentive stock and stock ownership plans................. 301 1,808
Dividends paid....................................................................... (1,505) (11,876)
Other financing activities........................................................... (31) (5,221)
------------ -----------
Net cash used in financing activities............................................ (79,425) (89,809)
------------ -----------
Net increase (decrease) in cash and cash equivalents................................... (59,779) 42,011
Cash and cash equivalents, beginning of period......................................... 63,667 4,426
------------ -----------
Cash and cash equivalents, end of period............................................... $ 3,888 $ 46,437
------------ -----------
------------ -----------
Supplemental information:
Cash paid for interest............................................................... $ 82,145 $ 84,626
Cash paid for taxes.................................................................. $ 24,817 $ 22,112
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed balance sheet as of July 12, 1997, and the
consolidated condensed statements of earnings and cash flows for the 12-week and
28-week periods ended July 12, 1997, and for the 12-week and 28-week periods
ended July 13, 1996, have been prepared by the company, without audit. In the
opinion of management, all adjustments necessary to present fairly the company's
financial position at July 12, 1997, 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. Earnings per share disclosures are
computed using 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.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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.
2. 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 1996 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 $32 million at July 12, 1997,
and $28 million at December 28, 1996.
4. In accordance with applicable accounting standards, the company records
a charge reflecting contingent liabilities (including those associated with
litigation matters) when management determines that a material loss is
"probable" and either "quantifiable" or "reasonably estimable". Additionally,
the company discloses material loss contingencies when the likelihood of a
material loss is deemed to be greater than "remote" but less than "probable".
Set forth below is information regarding certain material loss contingencies:
PREMIUM
The company and several other defendants were named in two suits filed in
U.S. District Court in Miami, Florida in 1993. The suits involved an allegedly
fraudulent scheme conducted by a failed grocery diverter--Premium Sales
Corporation ("Premium")--and others in which large losses in the Premium-related
entities occurred to the detriment of a class of investors which brought one of
the suits. The other suit was brought by the receiver/trustee of the estates of
Premium and certain of its affiliated entities (the "Trustee"). Plaintiffs
sought actual damages of approximately $300 million, treble damages, punitive
damages, attorneys' fees, costs, expenses and other appropriate relief.
The company denied plaintiffs' accusations; however, to avoid future expense
and eliminate uncertainty, the company entered into a settlement agreement in
December 1996. Under the agreement, the plaintiffs will dismiss their actions
against the company, with prejudice, in exchange for a $19.5 million payment
plus $500,000 for costs and expenses.
The company recorded a charge of $20 million during the third quarter of
1996 in anticipation of the settlement and deposited that amount into an escrow
account in December 1996 pending finalization of the settlement. The settlement
remains subject to, among other conditions, receipt by the company of releases
from Premium investors, including those who might not be bound by the
settlement.
7
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Plaintiffs failed to deliver to the company releases sufficient to meet the
requirements of the settlement agreement in a timely manner. If no satisfactory
resolution is reached, the company will be entitled to terminate the settlement
and withdraw its $20 million deposit. If a settlement is not consummated, the
company expects the litigation will resume. In that event, while management is
unable to predict the potential range of monetary exposure to the company, an
unfavorable outcome could have a material adverse effect on the company.
DAVID'S
The company and certain of its affiliates were named in a lawsuit filed by
David's Supermarkets, Inc. ("David's") in the District Court of Johnson County,
Texas in 1993 alleging product overcharges during a three year period. In April
1996, judgment in excess of $210 million was entered against the company and the
company recorded a $7.1 million liability. During the second quarter of 1996,
the judgment was vacated, a new trial granted and the accrual was reduced to
$650,000.
The company denied the plaintiff's allegations; however, to eliminate the
uncertainty and expense of protracted litigation, the company paid $19.9 million
to the plaintiff in April 1997 in exchange for dismissal, with prejudice, of all
of plaintiff's claims against the company, resulting in a charge to first
quarter earnings of $19.2 million.
FURR'S
Furr's Supermarkets, Inc. ("Furr's"), which purchased approximately $545
million of products from the company in 1996 under a supply agreement expiring
in 2001, filed a lawsuit in the District Court of Bernalillo County, New Mexico,
in February 1997 naming as defendants the company, certain company officers and
a company employee. Furr's claims it has been overcharged for products under the
supply agreement and alleges various causes of action including breach of
contract, misrepresentation, fraud and violation of certain of New Mexico's
trade practices statutes. Furr's seeks an award of actual, consequential,
incidental and punitive damages, treble damages, interest, attorneys' fees and
court costs. The company has removed the case to the United States District
Court for New Mexico. In June 1997, Furr's sought court approval to amend its
complaint against Fleming; the complaint, if amended, will contain allegations
of violations of the federal Racketeering Influenced and Corrupt Organizations
Act ("RICO"), and other claims, and seek damages in excess of $75 million under
RICO, prior to trebling. The company believes it has substantially complied with
its obligations to Furr's in good faith.
Prior to filing the lawsuit, Furr's sought to exercise the supply
agreement's competitiveness clause and was seeking to audit the company's
pricing under the contract. Furr's submitted what it asserted is a "qualified
competitive bid" as defined in the supply agreement. If a qualifying bid is
submitted and found to be competitive (as defined in the supply agreement)
Fleming may either match the bid (within an established range) or Furr's may
accept the competitor's bid. Fleming has rejected the bid as not qualifying
under the contract and invoked the arbitration clause of the supply agreement.
All issues regarding the competitiveness clause are pending in arbitration in
New Mexico.
Management is unable to predict the potential range of monetary exposure to
the company resulting from this litigation. However, the effect of an
unfavorable outcome or the loss of Furr's business, for any reason, could have a
material adverse effect on the company.
8
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MEGAFOODS
In August 1994, a former customer, Megafoods Stores, Inc. ("Megafoods" or
the "debtor"), and certain of its affiliates filed chapter 11 bankruptcy
proceedings in Arizona. The company filed claims, including a claim for
indebtedness for goods sold on open account, equipment leases and secured loans,
totaling approximately $28 million (including claims for future payments and
other non-recorded assets). Additionally, the debtor was liable or contingently
liable to the company under store subleases and lease guarantees extended by the
company for the debtor's benefit. The debtor objected to the company's claims
and filed an adversary proceeding against the company seeking subordination of
the company's claims, return of an approximate $12 million deposit and
affirmative relief for damages which was subsequently amended to include
allegations of overcharges for products.
In August 1996, the court approved a settlement of both the debtor's
adversary proceeding against the company and the company's disputed claims in
the bankruptcy. The settlement, which is subject to approval by the creditors of
a revised plan which encompasses the settlement, provides that the company will
retain the $12 million deposit, relinquish its secured and unsecured claims in
exchange for the right to receive 10% of distributions, if any, made to the
unsecured creditors and pay the debtor $2.5 million in exchange for the
furniture, fixtures and equipment from 17 stores and two storage facilities. The
company agreed to lease to the reorganized debtor the furniture, fixtures and
equipment in fourteen of the stores for nine years (or until, in each case, the
expiration of the store lease) at an annual rental of $18 thousand per store.
During the fourth quarter of 1996, the debtor sold its 16 Phoenix stores; no
distribution was made to the unsecured creditors. In January 1997, the debtor
filed a joint liquidating plan which incorporates the settlement agreement. The
confirmation hearing for the debtor's plan has been postponed and no new date
set. During the second quarter of 1997, the debtor sold its Texas assets and the
purchaser agreed to assume the debtor's obligation to lease furniture, fixtures
and equipment from the company. The consummation of this sale resulted in the
disposition of substantially all of the debtor's remaining physical assets. The
company did not receive any distribution from the sale of the debtor's Texas
assets.
The company recorded charges relating to Megafoods of approximately $6.5
million in 1994, $3.5 million in 1995, $5.8 million in 1996 and has not recorded
any charges in 1997. At July 12, 1997, approximately $3.1 million of recorded
net assets relating to Megafoods remained on the company's books.
RANDALL'S
On July 30, 1997, Randall's Food Markets, Inc. ("Randall's") initiated
arbitration proceedings against Fleming before the American Arbitration
Association in Dallas, Texas. Randall's alleges that Fleming conspired with a
group of manufacturers and vendors to defraud Randall's by cooperating to
inflate prices charged to Randall's. Randall's alleges breach of contract, fraud
and RICO violations, and seeks actual damages, punitive damages, treble damages
under RICO, termination of its supply agreement and attorneys' fees and court
costs. The contract on which Randall's bases its claim prohibits either party
from recovering any amount other than actual damages; recovery of consequential
damages, punitive damages and all similar forms of damages are expressly
prohibited. Randall's asserts that such provision is contrary to public policy
and therefore not binding on it.
Randall's has been a Fleming customer for over 30 years. In 1996 Randall's
purchased approximately $485 million of products from Fleming under an eight
year supply agreement entered into in 1993 in connection with Fleming's purchase
of certain distribution assets from Randall's. Prior to initiating the
arbitration proceeding and making allegations against Fleming for overcharges,
Randall's had sought unsuccessfully to terminate the supply agreement.
9
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The company believes it has complied with its obligations to Randall's in
good faith and that punitive and consequential damages are not recoverable under
the supply agreement; the company will vigorously defend its interests in the
arbitration. While management is unable to predict the potential range of
monetary exposure to Randall's, if any, the effect of an unfavorable outcome or
the loss of Randall's business could have a material adverse effect on the
company.
CLASS ACTION SUITS
In 1996, the company and certain of its present and former officers and
directors, including the chief executive officer, were named as defendants in
nine purported class action lawsuits filed by certain stockholders and one
purported class action lawsuit filed by a noteholder. In April 1997, the court
consolidated the nine stockholder cases as City of Philadelphia, et al. v.
Fleming Companies, Inc., et al.; the noteholder case was also consolidated, but
only for pre-trial purposes. A complaint has been filed in the consolidated
cases alleging liability for the company's failure to properly account for and
disclose the contingent liability created by the David's litigation and the
company's "deceptive business practices" which allegedly led to the David's
litigation and to other material contingent liabilities, caused the company to
change its manner of doing business at great cost and loss of profit, and
materially inflated the trading price of the company's common stock. The company
denies each of these allegations.
Plaintiffs seek undetermined but significant damages. Management is unable
to predict the ultimate outcome of these cases or the potential range of
monetary exposure, if any, to the company. However, an unfavorable outcome in
this litigation could have a material adverse effect on the company.
OTHER
The company supplies goods and services to some of its customers
(particularly to its large customers) pursuant to supply agreements containing a
"competitiveness" clause. Under this clause, a customer may submit a "qualified
bid" from a third-party supplier to provide the customer with a range of goods
and services comparable to those goods and services offered by Fleming. If the
prices to be charged under the qualifying bid are lower than those charged by
the company by more than an agreed percentage, the company may lower its prices
to come within the agreed percentage or, if the company chooses not to lower its
prices, the customer may accept the competitor's bid. The competitiveness clause
is not exercised frequently and disputes regarding the clause must generally be
submitted to binding arbitration. Additionally, the company believes that most
of its supply agreements prohibit recovery of both punitive and consequential
damages if any dispute ever arises.
From time to time, customers may seek to renegotiate the terms of their
supply agreements, or exercise the competitiveness clause of such agreements or
otherwise alter the terms of their contractual obligations to the company to
obtain financial concessions. The company does not believe such efforts have had
a material adverse effect on its operations or financial condition to date.
The company utilizes numerous computer systems which were developed
employing six digit date structures (i.e., two digits each for the month, day
and year). Where date logic requires the year 2000 or beyond, such date
structures may produce inaccurate results. Management has implemented a program
to comply with year 2000 requirements on a system-by-system basis. Fleming's
plan includes extensive systems testing and is expected to be completed by the
first quarter of 1999. The solution for each system is potentially unique and
may be dependent on third-party software providers and developers. A failure on
the part of the company to ensure that its computer systems are year 2000
compliant could have a material adverse effect on the company's operations.
10
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The company has purchased insurance to secure its obligations to indemnify
its officers and directors against certain liabilities which may result from
actions taken on behalf of the company. The company believes this insurance
covers some of the allegations made in the David's litigation, as well as
allegations made in other lawsuits. The company is pursuing a declaratory
judgment action against certain of its insurance carriers to resolve certain
coverage issues. While the company intends to vigorously assert its rights under
the policies, there can be no assurance as to the amount of coverage which may
ultimately be available.
The company's facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of the
environment and human health, including provisions regarding the transportation,
storage, distribution, disposal or discharge of materials. In conformity with
these provisions, the company has a comprehensive program for testing and
removal, replacement or repair of its underground fuel storage tanks and for
site remediation where necessary. The company has established reserves that it
believes will be sufficient to satisfy anticipated costs of all known
remediation requirements. In addition, the company is addressing several other
environmental cleanup matters involving its properties, all of which the company
believes are immaterial.
The company and others have been designated by the U.S. Environmental
Protection Agency ("EPA") and by similar state agencies as potentially
responsible parties under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") or similar state laws, as applicable, with respect
to EPA or state-designated Superfund sites. While liability under such laws for
remediation at such sites is generally joint and several with other potential
responsible parties, the company believes that, to the extent it is ultimately
determined to be liable for the expense of remediation at any site, such
liability will not result in a material adverse effect on its consolidated
financial position or results of operations. The company is committed to
maintaining the environment and protecting natural resources and human health
and to achieving full compliance with all applicable laws, regulations and
orders.
The company is a party to various other litigation and contingent loss
situations arising in the ordinary course of its business including: disputes
with customers and former customers; disputes with owners and former owners of
financially troubled or failed customers; disputes with employees regarding
wages, workers' compensation and alleged discriminatory practices; tax
assessment and other matters, some of which are for substantial amounts.
However, as of the date of this filing, the company does not believe any such
action will result in a material adverse effect on the company.
5. Certain company indebtedness is guaranteed by all direct and indirect
subsidiaries of the company (except for certain inconsequential subsidiaries),
all of which are wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no restrictions on the ability of the
subsidiary guarantors to transfer funds to the company in the form of cash
dividends, loans or advances. Full financial statements for the subsidiary
guarantors are not presented herein because management does not believe such
information would be material.
11
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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>
JULY 12, JULY 13,
1997 1996
----------- -----------
<S> <C> <C>
(IN MILLIONS)
Current assets............................................................. $ 20 $ 25
Noncurrent assets.......................................................... $ 55 $ 50
Current liabilities........................................................ $ 13 $ 10
Noncurrent liabilities..................................................... $ 6 $ 9
<CAPTION>
28 WEEKS ENDED
------------------------
JULY 12, JULY 13,
1997 1996
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Net sales.................................................................. $ 179 $ 183
Costs and expenses......................................................... $ 181 $ 187
Net earnings (loss)........................................................ -- $ (2)
</TABLE>
During the last three years, a significant number of subsidiary guarantors
have been merged into the parent company, resulting in a substantial reduction
in the amounts appearing in the summarized financial information.
6. The accompanying earnings statements include the following:
<TABLE>
<CAPTION>
28 WEEKS 12 WEEKS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Depreciation and amortization (includes amortized costs in
interest expense)......................................... $ 98,625 $ 97,681 $ 42,053 $ 42,030
Amortized costs in interest expense......................... $ 5,497 $ 6,927 $ 2,452 $ 3,044
</TABLE>
7. The following events took place subsequent to the end of the quarter.
EXTRAORDINARY CHARGE ON DEBT RECAPITALIZATION.
During the first and second quarters of 1997, the company undertook various
activities and received a series of commitments which culminated in the
implementation of an $850 million senior secured credit facility and the sale of
$500 million of privately placed senior subordinated notes on July 25, 1997.
Proceeds from the senior subordinated notes plus initial borrowings under the
senior secured credit facility were used to repay all outstanding bank debt
(which totaled approximately $550 million) and the balance, together with
additional revolver borrowings, were used to redeem the company's $200 million
of floating rate senior notes which were redeemed on September 15, 1997.
The recapitalization resulted in an extraordinary charge of $13.3 million,
after income tax benefits of $8.9 million, or $.35 per share, in the company's
third quarter ended October 4, 1997. Most of the charge represents a non-cash
write-off of unamortized financing costs related to the debt which was prepaid.
The new $850 million senior secured credit facility consists of a $600
million revolving credit facility with a maturity date of July 25, 2003, and a
$250 million amortizing term loan with a maturity date of
12
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
July 25, 2004. The new credit facility is secured by the inventory and accounts
receivable of the company and its subsidiaries and is guaranteed by
substantially all of the company's subsidiaries. The stated interest rate on
borrowings under the new credit agreement is equal to the London interbank
offered interest rate ("LIBOR") plus a margin. The level of the margin is
dependent on credit ratings on the company's senior secured bank debt.
The $500 million of privately placed senior subordinated notes ("Notes")
consists 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 Notes are general unsecured
obligations of the company, subordinated in right of payment to all existing and
future senior indebtedness of the company, and senior to or of equal rank with
all future subordinated indebtedness of the company (the company currently has
no other subordinated indebtedness outstanding). The payment of principal,
interest and premium, if any, payable on the Notes is guaranteed by
substantially all of the company's subsidiaries. See Note 5.
FURR'S SETTLEMENT AGREEMENT
On October 23, 1997, Fleming and Furr's entered into an agreement providing
for the settlement of all of Furr's claims against the company and certain
members of its management and all of the company's claims against Furr's and
certain members of its board of directors.
The agreement requires Furr's board to offer Furr's for sale through an
auction process to occur over a six-month period which began on October 29,
1997. Fleming's El Paso product supply center (the "El Paso PSC"), together with
related equipment and inventory, will be offered for sale together with Furr's.
As of November 24, 1997, several entities, including Fleming, have submitted
indications of interest to Furr's. Upon the sale of Furr's (if other than to
Fleming), Fleming would receive approximately 30% of the net proceeds.
Prospective purchasers will be asked to bid either including or excluding
the El Paso PSC. If the successful bidder has offered to purchase the El Paso
PSC, Fleming will enter into an acquisition agreement for the El Paso PSC with
such purchaser, together with the related equipment and the inventory. If the
successful bidder does not purchase the El Paso PSC, Fleming will receive
payment of certain liquidation costs for the orderly liquidation of the El Paso
PSC. If Furr's is not sold during the six-month period, Furr's will have 30 days
within which to elect to purchase the El Paso PSC (and close the transaction
within 120 days) or to pay the liquidation costs (after a nine-month transition
period). Other Fleming customers currently being served by the El Paso PSC will
continue to be served by other Fleming units.
Under the agreement, Fleming will pay Furr's $800,000 per month, not to
exceed 19 months from October 23, 1997, as a refund of fees and charges. The
term of such payments are to coincide with the expiration of the supply
contracts which will occur upon either (i) the sale of the El Paso PSC or (ii)
the completion of the orderly liquidation of the El Paso PSC on or before June
1, 1999.
While Fleming and Furr's have agreed to cooperate in order to sell Furr's,
the ultimate outcome of their joint efforts cannot be predicted. However, if
Fleming is not the successful bidder, Fleming expects that on or before June 1,
1999, the company will cease to supply Furr's, the El Paso PSC will be sold or
liquated and Fleming's substantial equity investment in Furr's will be sold and
a gain realized. The agreement does not cause an impairment in value of any
recorded balances.
While the loss of Furr's business will be significant in the near term,
Fleming believes that the reinvestment of its employed capital in other
profitable operations will offset the lost business.
13
<PAGE>
RESTATEMENT
Subsequent to the issuance of the company's quarterly report of Form 10-Q
for the period ended July 12, 1997, management determined that the extraordinary
charge from early retirement of debt should be recorded in the quarter ended
October 4, 1997. Accordingly, the accompanying consolidated condensed financial
statements have been restated to reverse the extraordinary charge previously
reported. The extraordinary charge was recorded in the quarterly period ended
October 4, 1997.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
For the 28 weeks ended July 12, 1997:
Net earnings (in thousands)......................................................... $ 6,821 $ 18,079
Net earnings per share.............................................................. $ .18 $ .48
For the 12 weeks ended July 12, 1997:
Net earnings (in thousands)......................................................... $ 1,557 $ 12,815
Net earnings per share.............................................................. $ .04 $ .34
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The food marketing and distribution industry is undergoing accelerated
changes as producers, manufacturers, distributors and retailers seek to lower
costs and increase services in an increasingly competitive environment of
relatively static overall demand. The company believes these changes have led to
reduced sales, reduced margins and lower profitability among many of the
company's customers as well as at Fleming itself.
Traditionally, food wholesalers have competed through their willingness to
invest capital in their customers. Beginning in 1995, the company imposed
stricter credit policies and applied more stringent cost/benefit analysis before
making loans to or investments in its customers. The company believes these
credit practices have caused the company to lose business to competitors.
Furthermore, the company has been subjected to considerable unfavorable
media coverage stemming from the jury verdict announced in the David's
litigation in early 1996. Although the David's verdict was subsequently set
aside and the matter ultimately settled, other customers have made similar
allegations in an attempt to alter their contractual arrangements with the
company. See Note 4 to the company's financial statements. The company believes
that perceptions generated by such legal proceedings have also negatively
impacted sales.
However, the company believes that its ultimate success will depend on its
ability to continue to cut costs while expanding profitable operations. The
company has revised its marketing plans and is taking other steps to reverse
sales declines. The company has also recently completed a $1.35 billion
recapitalization program to provide it with greater financial flexibility to
redeploy assets and to increase the more profitable facets of both its food
distribution and retail food segments. These initiatives include increased
marketing emphasis and expanded offerings of retail services, streamlining and
expanding the company's store brands offerings, developing and marketing of
additional foodservice products and growth of retail food operations through
remodels, new store development and selective acquisitions.
While the company believes considerable progress has been made to date, no
assurance can be given that the company will be successful in continuing to cut
costs, in reversing sales declines or in increasing higher margin activities.
14
<PAGE>
RESULTS OF OPERATIONS
Set forth in the following table is information for the second interim and
year-to-date periods of 1997 and 1996 regarding components of the company's
earnings expressed as a percentage of net sales.
<TABLE>
<CAPTION>
SECOND INTERIM PERIOD 1997 1996
------------- ----------
<S> <C> <C>
(AS RESTATED)
Net sales............................................ 100.00% 100.00%
Gross margin......................................... 9.31 9.21
Less:
Selling and administrative......................... 7.74 8.05
Interest expense................................... 1.02 1.01
Interest income.................................... (.31) (.30)
Equity investment results.......................... .09 .11
Litigation charge.................................. (.17)
------ ----------
Total expenses................................... 8.54 8.70
------ ----------
Earnings before taxes................................ .77 .51
Taxes on income...................................... .41 .26
------ ----------
Net earnings......................................... .36% .25%
------ ----------
------ ----------
<CAPTION>
YEAR TO DATE 1997 1996
------------- ----------
<S> <C> <C>
Net sales............................................ 100.00% 100.00%
Gross margin......................................... 9.19 9.00
Less:
Selling and administrative......................... 7.69 7.85
Interest expense................................... 1.02 1.01
Interest income.................................... (.30) (.30)
Equity investment results.......................... .09 .08
Litigation charge.................................. .23 .01
------ ----------
Total expenses................................... 8.73 8.65
------ ----------
Earnings before taxes................................ .46 .35
Taxes on income...................................... .24 .18
------ ----------
Net earnings......................................... .22% .17%
------ ----------
------ ----------
</TABLE>
NET SALES
Sales for the second quarter (12 weeks) of 1997 decreased by $.2 billion, or
5%, to $3.6 billion from $3.7 billion for the same period in 1996. Year to date,
sales decreased by $.6 billion, or 7%, to $8.3 billion from $8.9 billion for the
28 weeks in 1996. Several trends and events adversely impacted sales as
described above. Additionally, the closing or sale of certain company-owned
retail stores negatively impacted sales.
Retail sales generated by the same stores for the second quarter and
year-to-date periods in 1997 compared to the same periods in 1996 decreased 3.0%
and 2.5%, respectively. The decrease was attributable, in part, to certain
promotions absent in the current period; to triple coupons offered by certain
competitors; and to new stores opened by competitors in some markets, all of
which negatively affected sales.
Fleming measures inflation using data derived from the average cost of a ton
of product sold by the company. Food price inflation year-to-date 1997 was 1.2%
compared to 2.3% for the same period in 1996.
15
<PAGE>
GROSS MARGIN
Gross margin for the second quarter of 1997 decreased by $14 million, or 4%,
to $331 million from $345 million for the same period of 1996, but increased as
a percentage of net sales to 9.31% from 9.21% for the same period in 1996. Year
to date, gross margin decreased by $39 million, or 5%, to $763 million from $802
million, but also increased as a percentage of net sales to 9.19% from 9.00% for
the same period in 1996. The increase in gross margin percentage was primarily
due to improved gross margins at company-owned retail stores. Food price
inflation resulted in a LIFO charge in 1997 of $1.7 million for the second
quarter and $4.1 million year to date compared to charges of $.7 million for the
quarter and $1.5 million year to date in 1996.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the second quarter of 1997 decreased
by $27 million, or 9%, to $275 million from $302 million for the same period in
1996 and decreased as a percentage of net sales to 7.74% for 1997 from 8.05% in
1996. Year to date, selling and administrative expenses decreased by $61
million, or 9%, to $639 million from $699 million for the same period in 1996
and decreased as a percentage of net sales to 7.69% for 1997 from 7.85% in 1996.
The percentage decrease was principally due to reduced operating expenses of
company-owned retail stores. The year-to-date percentage decrease was also due
to reduced corporate expenses in 1997 in the information technology area. The
decrease was partially offset by an increase in incentive compensation expense
in 1997 compared to 1996.
As more fully described in the 1996 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.
Credit loss expense is included in selling and administrative expenses and
for the second quarter of 1997 decreased by $2 million to $5 million from $7
million for the comparable period in 1996. Year to date, credit loss expense was
$11 million in 1997 compared to $15 million in 1996 for a decrease of $4
million. Since 1994, 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. Further material reductions are not expected.
INTEREST EXPENSE
Interest expense for the second quarter of 1997 decreased to $36 million
from $38 million for the same period in 1996. Year to date, interest expense
decreased to $85 million from $90 million in 1996. Lower average borrowing
levels in 1997 compared to 1996 primarily accounted for the improvement. If
current levels of debt and interest rates prevail in the future, interest
expense will increase because the interest rates on the new senior subordinated
notes are higher than the rates on debt which was repaid. See Note 7 to the
company's financial statements.
The stated interest rate on the company's floating rate indebtedness is
equal to the London interbank offered interest rate ("LIBOR") plus a margin. The
company employs interest rate swaps and caps from time to time to manage
exposure to changing interest rates and interest expense. In the second quarter
of 1997, interest rate swaps and caps covering $650 million aggregate principal
amount of floating rate indebtedness were employed. Interest rate hedge
agreements contributed $1.7 million of net interest expense in the 1997 second
quarter compared to $1.8 million of net interest expense for the same period of
1996. Year to date, interest rate hedge agreements contributed $4.4 million of
net interest expense in 1997 compared to $4.9 million in 1996.
16
<PAGE>
In conjunction with the recapitalization program (see "Liquidity and Capital
Resources"), the company terminated interest rate swaps and caps covering $400
million aggregate principal amount of floating rate indebtedness. The
extraordinary charge from the early retirement of debt of $13 million recorded
in the third quarter of 1997 included $1.2 million after-tax in hedge
termination costs for interest rate swaps and caps covering $200 million of debt
to be retired with the proceeds from the recapitalization program. The cost to
terminate the interest rate swaps and caps covering the remaining $200 million
of debt was immaterial.
INTEREST INCOME
Interest income for the second quarter of 1997 decreased nominally to remain
at $11 million which is consistent with the same period in 1996. Year to date,
interest income decreased to $25 million in 1997 from $27 million in 1996. The
decrease is primarily due to the company's sale in the third quarter of 1996 of
$35 million of notes receivable with limited recourse. The decrease is partly
offset by new notes funded since the note sale.
EQUITY INVESTMENT RESULTS
The company's portion of operating losses from equity investments for the
second quarter of 1997 decreased to $3 million from $4 million for the same
period in 1996. Year to date, operating losses from equity investments were
relatively unchanged from $7 million in 1996. The reduction in losses is due to
improved results of operations in certain of the underlying equity investments.
LITIGATION CHARGE
In the first quarter of 1997, the company paid $19.9 million in complete
settlement of the David's litigation. In the first quarter of 1996, the company
accrued $7.1 million as the result of a jury verdict regarding the case. In the
second quarter of 1996, the accrual was reversed following the vacation of the
judgment resulting from the jury verdict, and a new accrual for $650,000 was
established. See Note 4 to the company's financial statements.
TAXES ON INCOME
The effective tax rate for 1997 is presently estimated at 53.0%. The 53.0%
rate was used in calculating both the second quarter and year-to-date income tax
amounts. The rate used for the second quarter and year to date for 1996 was
51.1%. The increase is primarily due to lower earnings in 1997 compared to 1996
(primarily due to the litigation charge) with basically no change in
nondeductible dollar amounts (permanent differences) from 1996.
OTHER
Several factors negatively affecting earnings in the second quarter of 1997
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
legal fees and expenses related to litigation.
17
<PAGE>
SEGMENT INFORMATION
Sales and operating earnings for the company's food distribution and retail
food segments are presented below.
<TABLE>
<CAPTION>
28 WEEKS 12 WEEKS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Sales:
Food distribution.............................................. $ 6,449 $ 6,873 $ 2,761 $ 2,892
Retail food.................................................... 1,854 2,038 790 851
--------- --------- --------- ---------
Total sales...................................................... $ 8,303 $ 8,911 $ 3,551 $ 3,743
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating earnings:
Food distribution.............................................. $ 149 $ 162 $ 64 $ 73
Retail food.................................................... 47 20 21 5
Corporate expense.............................................. (71) (79) (29) (34)
--------- --------- --------- ---------
Total operating earnings......................................... $ 125 $ 103 $ 56 $ 44
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Operating earnings for industry segments consist of net sales less related
operating expenses. Operating expenses exclude interest expense, interest
income, equity investment results, litigation charge and taxes on income.
General corporate expenses are not allocated to food distribution and retail
food segments. The transfer pricing between segments is at cost. 1996 corporate
expense has been restated to exclude litigation charge which is a separate line
on the earnings statements.
LIQUIDITY AND CAPITAL RESOURCES
Set forth below is certain information regarding the company's capital
structure at the end of the second quarter of 1997 and at the end of fiscal
1996:
<TABLE>
<CAPTION>
CAPITAL STRUCTURE (IN MILLIONS) JULY 12, 1997 DECEMBER 28, 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
(AS RESTATED)
Long-term debt.................................... $ 1,148 43.9% $ 1,216 45.5%
Capital lease obligations......................... 371 14.2 381 14.2
--------- ----- --------- -----
Total debt........................................ 1,519 58.1 1,597 59.7
Shareholders' equity.............................. 1,094 41.9 1,076 40.3
--------- ----- --------- -----
Total capital................................... $ 2,613 100.0% $ 2,673 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
- ------------------------
Note: The above table includes current maturities of long-term debt and current
obligations under capital leases.
Operating activities generated positive net cash flows of $55 million for
the 28 weeks ended July 12, 1997 compared to positive net cash flows of $175
million for the same period in 1996. The variance is explained primarily by a
lower reduction in inventories and higher decrease in accounts payable and the
David's litigation settlement, offset in part by higher earnings and a higher
decrease in accounts receivable. Working capital was $167 million at the end of
the second quarter of 1997, a decrease from $221 million at year-end 1996. The
current ratio decreased to 1.14 to 1 at the end of the second quarter 1997 from
1.16 to 1 at year-end 1996.
18
<PAGE>
Capital expenditures were $49 million for the 28 weeks ended July 12, 1997
compared to $69 million for the same period in 1996. Management expects total
capital expenditures for 1997, excluding acquisitions, will approximate $145
million compared to $129 million actual expenditures in 1996. Completion of the
company's recapitalization program permits the company to increase its total
investment spending for capital expenditures and acquisitions. The company
intends to increase its retail segment operations by increasing investments in
new and remodeled stores in the company's existing retail chains and by making
selective acquisitions of supermarket chains or groups as opportunities arise.
The debt-to-capital ratio at the end of the second quarter of 1997 was
58.1%, down from 59.7% at year-end 1996. The company's long-term target ratio is
between 50% and 55%.
On July 29, 1997, the board of directors approved a quarterly cash dividend
of $.02 per share for the third quarter of 1997 payable September 10, 1997. For
the previous five fiscal quarters the board of directors has approved a $.02 per
share quarterly dividend.
The company's principal sources of liquidity and capital have been cash
flows from operating activities, borrowings under its credit facility and the
public and private debt capital markets.
On July 25, 1997, the company entered into a new $850 million senior secured
credit facility and sold $500 million of privately placed senior subordinated
notes. Proceeds from the initial borrowings under the new credit facility and
the sale of the senior subordinated notes were used to repay all outstanding
bank debt under the previous credit facility and the balance, together with
additional revolver borrowings, were used to redeem the company's $200 million
floating rate senior notes due 2001 to redeem them on September 15, 1997. Until
then, $145 million of such proceeds remained in escrow and were invested
(directly or indirectly) in U.S. government securities. The recapitalization
program provides the company with increased flexibility to re-deploy assets and
pursue new business investment, such as the expansion of the company's retail
food operations, strengthens Fleming's capital structure by reducing senior
secured bank loans and repaying the floating rate senior notes, extends the
average life of total debt outstanding, and reduces annual scheduled debt
maturities.
The new $850 million senior secured credit facility consists of a $600
million revolving credit facility, with a final maturity of July 25, 2003, and a
$250 million amortizing term loan, with a maturity of July 25, 2004. Up to $300
million of the revolving credit portion 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 the company and
its subsidiaries and in the capital stock or other equity interests owned by the
company in its subsidiaries. In addition, the new credit facility is guaranteed
by substantially all company subsidiaries (see Note 5 to the company's financial
statements). The stated interest rate on borrowings under the new credit
agreement is equal to the London interbank offered interest rate ("LIBOR") plus
a margin. The level of the margin is dependent on credit ratings on the
company's senior secured bank debt.
At the end of the second quarter of 1997, borrowings under the previous bank
credit facility totaled $504 million in term loans and $40 million of revolver
borrowings; and $90 million of letters of credit had been issued. At July 25,
1997, borrowings under the new $850 million credit facility totaled $250 million
in term loans, with no borrowings under the revolving facility and with $90
million of letters of credit issued (reducing the capacity of the revolving
portion on a dollar-for-dollar basis).
The $500 million of privately placed senior subordinated notes ("Notes")
consists 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 Notes are general unsecured
obligations of the company, subordinated in right of payment to all existing and
future senior indebtedness of the company, and senior to or pari passu with all
future subordinated indebtedness of the company (the company currently has no
other subordinated indebtedness outstanding).
19
<PAGE>
The company's total debt outstanding at the end of the second quarter of
1997 and at July 25, 1997 is as follows (in millions).
<TABLE>
<CAPTION>
ACTUAL AT
ACTUAL AT JULY 25,
JULY 12, 1997 1997
------------- -------------
<S> <C> <C>
(AS RESTATED)
Previous credit agreement:
Revolving credit............................................... $ 40 $ --
Term loans..................................................... 504 --
10 5/8% Senior notes due 2001.................................... 300 300
Floating rate senior notes due 2001.............................. 200 200
Medium-term notes................................................ 99 99
Other debt....................................................... 5 5
New credit agreement:
Revolving credit............................................... -- --
Term loans..................................................... -- 250
10 5/8% Subordinated notes due 2004.............................. -- 250
10 1/2% Subordinated notes due 2007.............................. -- 250
------ ------
Total long-term funded debt...................................... 1,148 1,354
Capitalized lease obligations.................................... 371 371
------ ------
Total debt....................................................... 1,519 1,725
Less current maturities, long-term debt.......................... 153 38
Less current maturities, capital leases.......................... 20 20
Less funds held in escrow........................................ -- 145
------ ------
Total debt, net long-term portion................................ $ 1,346 $ 1,522
------ ------
------ ------
</TABLE>
Until September 15, 1997, $145 million had been set aside in escrow for the
redemption of the floating rate senior notes. On September 15, 1997, these notes
were redeemed with the funds held in escrow plus borrowings under the new credit
facility. Current maturities of long-term funded debt at July 25, 1997 have been
presented based on the scheduled debt maturities resulting from the
recapitalization. The company's annual scheduled amortization for long-term
funded debt obligations now requires principal reductions of approximately $48
million in 1998, $44 million in 1999, $72 million in 2000, $339 million in 2001,
and $51 million in 2002.
The composite interest rate for total debt before the effect of interest
rate hedges was 8.8% at July 12, 1997, versus 8.9% at July 13, 1996. Including
the effect of the interest rate hedges, the composite interest rate was 9.2% and
9.4% at the respective quarter ends. The composite interest rate for total debt
at July 25, 1997 before the effect of interest rate hedges was 9.5% and after
the effect of such hedges was 9.6%.
The new credit agreement and the indentures under which other company 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 earnings 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. Covenants contained in the company's indentures under which other
company debt instruments were issued are generally less restrictive than those
of the new credit agreement.
The new credit agreement may be terminated in the event of a defined change
of control. Under the company's indentures, noteholders may require the company
to repurchase notes in the event of a defined change of control coupled with a
defined decline in credit ratings.
20
<PAGE>
At the end of the second quarter of 1997, the company would have been
allowed to borrow an additional $470 million under the revolving credit facility
contained in the new credit agreement based on the actual borrowings and letters
of credits outstanding. Under the company's most restrictive borrowing covenant,
which is the new fixed charges coverage ratio contained in the new credit
agreement, $36 million of additional fixed charges could have been incurred. The
company is in compliance with all financial covenants under the new credit
agreement and its indentures.
On June 27, 1997, Moody's Investors Service (Moody's) announced it had
revised its credit ratings for Fleming. Moody's downgraded its rating for the
company's senior secured credit facility with banks and other lenders to Ba3
from Ba2, senior unsecured notes to B1 from Ba3, and counterparty ratings to B1
from Ba3. Moody's assigned a Ba3 rating to the company's new $850 million credit
agreement, and a B3 rating for the new $500 million of senior subordinated
notes.
On June 30, 1997, Standard & Poor's Rating Group (S&P) announced it had
revised its outlook on Fleming to stable from negative and had affirmed the
company's BB corporate credit rating. Additionally, S&P raised its rating on the
company's senior unsecured notes to BB- from B+. It also assigned a B+ rating to
the company's new $500 million senior subordinated notes. On July 2, 1997, S&P
announced it had assigned a BB+ rating to the company's new $850 million credit
facility.
At the end of the second quarter of 1997, the company had a total of $90
million of contingent obligations outstanding under undrawn letters of credit,
primarily related to insurance reserves associated with the company's 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.
During the second quarter of 1997, the company employed interest rate swaps
and hedges covering a total of $650 million of floating rate indebtedness (see
"Results of Operations--Interest expense"). On July 25, 1997, the company
terminated interest rate swaps and caps covering $400 million of floating rate
indebtedness. The company now has outstanding interest rate swaps covering $250
million of its floating rate indebtedness, with an average fixed interest rate
of 7.2% and an average remaining term of 2.8 years. Payments made or received
under interest rate swaps are included in interest expense.
Management believes that the cash flows from operating activities and the
company's ability to borrow under the new credit agreement (which will be the
company's principal sources of liquidity and capital for the foreseeable future)
will be adequate to meet working capital needs, capital expenditures (including
expenditures for acquisitions, if any) and other cash needs for the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128--Earnings Per
Share, which is effective for the company's fiscal year ending December 27,
1997. The statement establishes standards for computing and presenting earnings
per share. Adoption of SFAS No. 128 is not expected to have a material impact on
earnings per share.
Also in February 1997, the FASB issued SFAS No. 129--Disclosure of
Information about Capital Structure, which is effective for the company's fiscal
year ending December 27, 1997. The statement establishes standards for
disclosing information about a reporting company's capital structure. Adoption
of SFAS No. 129 relates to disclosure within the financial statements and will
not have a material effect on the company's financial statements.
In June 1997, the FASB issued SFAS No. 130--Reporting Comprehensive Income
which is effective for the company's fiscal year ending December 26, 1998. The
statement addresses the reporting and displaying of comprehensive income and its
components. Earnings per share will only be reported for net income and not for
comprehensive income. The company has not had adequate time to determine the
differences between comprehensive income and net income.
Also in June 1997, the FASB issued SFAS No. 131--Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 modifies current segment
reporting requirements and establishes, for
21
<PAGE>
public companies, criteria for reporting disclosures about a company's products
and services, geographic areas and major customers in annual and interim
financial statements. The company will adopt SFAS No. 131 for the fiscal year
ending December 26, 1998.
LITIGATION AND OTHER CONTINGENCIES
From time to time the company faces litigation or other contingent loss
situations resulting from owning and operating its assets, conducting its
business or complying (or allegedly failing to comply) with federal, state and
local laws, rules and regulations which may subject the company to material
contingent liabilities. In accordance with applicable accounting standards, the
company records as a liability amounts reflecting such exposure when a material
loss is deemed by management to be both "probable" and "quantifiable" or
"reasonably estimable."
In addition, the company discloses material loss contingencies in the notes
to its financial statements when the likelihood of a material loss is deemed to
be greater than "remote" but less than "probable." Such material contingent
matters are discussed in Note 4 to the company's financial statements and others
are discussed in Part II--Item 1 of this report ("Legal Proceedings"), both of
which are incorporated herein by reference. An adverse outcome experienced in
one or more of such matters, or an increase in the likelihood of such an
outcome, could have a material adverse effect on the company's business, results
of operations, cash flow, capital, access to capital or financial condition.
Fleming has numerous computer systems which were developed employing six
digit date structures (i.e., two digits each for month, day and year). Where
date logic requires the year 2000 or beyond, such date structures may produce
inaccurate results. Management has implemented a program to comply with year
2000 requirements on a system-by-system basis. Fleming's plan includes extensive
systems testing and is expected to be completed by the first quarter of 1999.
The solution for each system is potentially unique and may be dependent on
third-party software providers and developers. A failure on the part of the
company to ensure that its computer systems are year 2000-compliant could have a
material adverse effect on the company's operations.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements of expected future
developments. The company wishes to ensure that such statements are accompanied
by meaningful cautionary statements pursuant to the safe harbor established in
the Private Securities Litigation Reform Act of 1995. The forward-looking
statements herein refer to, among other matters, the company's ability to
implement measures to reverse sales declines, cut costs and improve earnings;
the company's assessment of the probability and materiality of losses associated
with litigation and other contingent liabilities; the company's ability to
develop and implement year-2000 systems solutions; the company's ability to
expand portions of its business or enter new facets of its business; the
company's expectations regarding the adequacy of capital and liquidity; and the
receptiveness of the company's customers to its alternative marketing plans.
These forward-looking statements reflect management's expectations and are based
upon currently available data; however, actual results are subject to future
events and uncertainties which could materially impact actual performance.
The company's future performance also involves a number of risks and
uncertainties which may cause actual performance to differ materially. Among
these factors are: the continuation of changes in the food distribution industry
which have increased competitive pressures and reduced operating margins in both
food distribution and retail food operations; the potential negative effects of
the company's substantial indebtedness; limitations on management's discretion
with respect to certain business matters imposed by restrictive covenants
contained in the company's credit facility and indentured debt instruments;
failure of the company to successfully implement its alternative marketing
plans; an inability to achieve cost savings due to unexpected developments or
changed plans regarding capital expenditures; potential adverse developments
with respect to litigation and other contingency matters; general economic
conditions and the impact of such conditions, or any of the factors listed
above, on consumer spending.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Set forth below is information regarding litigation which became reportable,
or as to which a material development has occurred, since the date of the
company's Quarterly Report on Form 10-Q for the 16-week period ended April 19,
1997:
(1) Tropin v. Thenen, et al.(U.S. District Court, Southern District of
Florida); Walco Investments, Inc., et al. v. Thenen, et al. (U.S. District
Court, Southern District of Florida)
Plaintiffs failed to deliver releases sufficient to meet the requirements of
the settlement agreement in a timely manner or to submit an acceptable proposal
to protect the company from exposure to non-releasing investors. If adequate
releases are not obtained and no acceptable proposal is submitted, the company
has the right to terminate the settlement and withdraw its $20 million escrow
deposit. If a settlement is not consummated, the company expects that the
litigation will resume. See "Premium" in Note 4 to the company's financial
statements included elsewhere herein for a further description of these cases.
(2) Furr's Supermarkets, Inc. v. Fleming Companies, Inc. (Second Judicial
District Court, Bernalillo County, New Mexico)
Furr's has sought the court's permission to amend its complaint to include
allegations of violations of the federal Racketeer Influenced and Corrupt
Organizations Act ("RICO") and other claims and to seek damages in excess of $75
million under RICO, before trebling. See "Furr's" in Note 4 to the company's
financial statements included elsewhere herein for a further description of this
case. The company has filed a shareholder's derivative suit in the Delaware
Court of Chancery alleging certain directors and shareholders of Furr's,
including its majority shareholder, have engaged in mismanagement of Furr's and
waste of corporate assets.
(3) In re: Megafoods Stores, Inc. (U.S. Bankruptcy Court for the District of
Arizona)
The hearing date for confirmation of the debtor's plan of liquidation has
been postponed and no new hearing date scheduled. During the second quarter of
1997, the debtor sold its Texas assets and the purchaser agreed to assume the
debtor's obligation to lease furniture, fixtures and equipment from the company.
The consummation of this sale resulted in the disposition of substantially all
of the debtor's remaining physical assets. The company did not receive any
distribution from the sale of the debtor's Texas assets. See "Megafoods" in Note
4 to the company's financial statements included elsewhere herein for a further
description of this case.
(4) Century Shopping Center Fund I v. Malone & Hyde, Inc. (Milwaukee County
Circuit Court, State of Wisconsin); Marquette Pharmacy, Inc., et al. v. Malone &
Hyde, Inc. (Milwaukee County Circuit Court, State of Wisconsin); Ronald P.
Huntley, trustee v. Malone & Hyde, Inc. (Milwaukee County Circuit Court, State
of Wisconsin)
In July 1997, the trial court granted plaintiffs' motion for summary
judgment with respect to its breach of contract claim against Fleming (as to
liability only, not as to damages). The company will petition the Wisconsin
Court of Appeals for a certification of an interlocutory appeal of that
decision. Plaintiffs have alleged $1.7 million of actual damages resulted from
the breach of contract. Total damages sought, after trebling but before
consideration of any punitive damages, approximate $18 million.
(5) Randall's Food Markets, Inc. v. Fleming Companies, Inc. (Proceeding
before the American Arbitration Association, Dallas, Texas)
On July 30, 1997, Randall's initiated arbitration proceedings against
Fleming before the American Arbitration Association in Dallas, Texas. Randall's
alleges that Fleming conspired with a group of manufacturers and vendors to
defraud Randall's by cooperating to inflate prices charged to Randall's
23
<PAGE>
under a supply agreement with the company expiring in 2001. Randall's alleges
breach of contract, fraud and RICO violations, and seeks actual damages,
punitive damages, attorneys' fees, treble damages under RICO, and termination of
the supply agreement. The contract on which Randall's bases its claim prohibits
either party from recovering any amount other than actual damages; recovery of
consequential damages, punitive damages and all similar forms of damages are
expressly prohibited. Randall's asserts that such a provision is contrary to
public policy and therefore not binding on it.
The company believes it has complied with its obligations to Randall's in
good faith and that punitive and consequential damages are not recoverable under
the supply agreement; the company will vigorously defend its interests in the
arbitration. This matter has not previously been reported. See "Randall's" in
Note 4 to the company's financial statements included elsewhere herein for a
further description of this case.
(6) Tobacco Cases
In August 1996, Richard E. Ieyoub, the Attorney General of the State of
Louisiana, brought an action in the 14th Judicial District Court of Louisiana
against numerous defendants including the company. In January 1997, a purported
class action was brought in the 10th Judicial District Court of Louisiana
against numerous defendants (Morgan v. U.S. Tobacco Co., et al.), including the
company. Since then eleven individual plaintiffs (Joseph Aezen; Najiyya
El-Haddi; Victoria Lynn Katz; Robert R. Applebaum; Carla Boyce; Robert J. Ruiz;
Rosalind K. Orr; Florence Ferguson; Ella Daly; Janet Anes; and Kym Glasser) have
commenced litigation against the company (or one of its predecessors) in the
Court of Common Pleas, Philadelphia County, Pennsylvania; one individual (Doyle
Smith) and his spouse commenced an action in the Court of Common Pleas, Dauphin
County, Pennsylvania; and one individual (Olanda Carter) has commenced action
against the company in Circuit Court for Shelby County, Tennessee. Each of these
cases involves substantial monetary liability on the part of the company for the
company's part in the distribution of tobacco products.
The company is being indemnified by substantial third parties with respect
to these cases. Additionally, the United States Congress is currently working
toward a global settlement of tobacco related issues which could include a
complete bar to future litigation against intermediate distributors such as the
company. No assurance, however, can be given that such a global settlement will
be successfully achieved.
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- -----------------
<S> <C>
4.16 Credit Agreement, dated as of July 25, 1997, among the company; the Lenders party thereto;
BancAmerica Securities, Inc., as syndication agent; Societe Generale, as documentation
agent; and The Chase Manhattan Bank, as administrative agent (schedules and exhibits
omitted)
4.17 Security Agreement, dated as of July 25, 1997, among the company, each of the company
subsidiaries party thereto and The Chase Manhattan Bank, as collateral agent (schedules
and exhibits omitted)
4.18 Pledge Agreement, dated as of July 25, 1997, among the company, each of the company
subsidiaries party thereto and The Chase Manhattan Bank, as collateral agent (schedules
and exhibits omitted)
4.19 Guarantee Agreement, dated as of July 25, 1997, among each of the company subsidiaries
party thereto and The Chase Manhattan Bank, as collateral agent (schedules and exhibits
omitted)
4.20 Indenture, dated July 25, 1997 for 10 5/8% Senior Subordinated Notes due 2007
4.21 Indenture, dated July 25, 1997 for 10 1/2% Senior Subordinated Notes due 2004
4.22 Registration Rights Agreement, dated as of July 25, 1997, among the company, each of the
company subsidiaries party thereto and the Initial Purchasers party thereto (schedules
and exhibits omitted)
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
On June 16, 1997, registrant reported that its Board of Directors approved a
$1.35 billion recapitalization program for the company.
On June 23, 1997, registrant reported certain developments in the Furr's
litigation.
On July 25, 1997, registrant reported that the company had closed its
recapitalization program resulting in an extraordinary after-tax charge of $13.3
million, or $.35 per share.
25
<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)
/s/ KEVIN J. TWOMEY
--------------------------------------
Kevin J. Twomey
VICE PRESIDENT--CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Date: December 19, 1997
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- -----------------
<S> <C>
4.16 Credit Agreement, dated as of July 25, 1997, among the company; the Lenders party thereto;
BancAmerica Securities, Inc., as syndication agent; Societe Generale, as documentation
agent; and The Chase Manhattan Bank, as administrative agent (schedules and exhibits
omitted)
4.17 Security Agreement, dated as of July 25, 1997, among the company, each of the company
subsidiaries party thereto and The Chase Manhattan Bank, as collateral agent (schedules
and exhibits omitted)
4.18 Pledge Agreement, dated as of July 25, 1997, among the company, each of the company
subsidiaries party thereto and The Chase Manhattan Bank, as collateral agent (schedules
and exhibits omitted)
4.19 Guarantee Agreement, dated as of July 25, 1997, among each of the company subsidiaries
party thereto and The Chase Manhattan Bank, as collateral agent (schedules and exhibits
omitted)
4.20 Indenture, dated July 25, 1997 for 10 5/8% Senior Subordinated Notes due 2007
4.21 Indenture, dated July 25, 1997 for 10 1/2% Senior Subordinated Notes due 2004
4.22 Registration Rights Agreement, dated as of July 25, 1997, among the company, each of the
company subsidiaries party thereto and the Initial Purchasers party thereto (schedules
and exhibits omitted)
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE TWO FISCAL QUARTERS ENDED JULY 12, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUL-12-1997
<CASH> 3,888
<SECURITIES> 0
<RECEIVABLES> 344,797
<ALLOWANCES> 21,266
<INVENTORY> 930,368
<CURRENT-ASSETS> 1,342,410
<PP&E> 1,578,707
<DEPRECIATION> 659,232
<TOTAL-ASSETS> 3,775,073
<CURRENT-LIABILITIES> 1,175,394
<BONDS> 995,519
0
0
<COMMON> 94,510
<OTHER-SE> 999,481
<TOTAL-LIABILITY-AND-EQUITY> 3,775,073
<SALES> 8,302,685
<TOTAL-REVENUES> 8,302,685
<CGS> 7,539,338
<TOTAL-COSTS> 8,167,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,235
<INTEREST-EXPENSE> 85,045
<INCOME-PRETAX> 38,467
<INCOME-TAX> 20,388
<INCOME-CONTINUING> 18,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,079
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
