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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
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<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to to
Commission file number 1-8140
</TABLE>
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FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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 (Zip Code)
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 October 31, 1997 is as follows:
<TABLE>
<S> <C>
Class Shares Outstanding
Common stock, $2.50 par value 37,804,000
</TABLE>
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings--
12 Weeks Ended October 4, 1997, and October 5, 1996............................................... 3
Consolidated Condensed Statements of Earnings--
40 Weeks Ended October 4, 1997, and October 5, 1996............................................... 4
Consolidated Condensed Balance Sheets--
October 4, 1997, and December 28, 1996............................................................ 5
Consolidated Condensed Statements of Cash Flows--
40 Weeks Ended October 4, 1997, and October 5, 1996............................................... 6
Notes to Consolidated Condensed Financial Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................................. 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................................................ 27
Item 6. Exhibits and Reports on Form 8-K............................................................. 30
Signatures.............................................................................................. 31
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE 12 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales............................................................................. $ 3,453,261 $ 3,705,970
Costs and expenses:
Cost of sales....................................................................... 3,131,023 3,373,525
Selling and administrative.......................................................... 272,826 281,316
Interest expense.................................................................... 39,084 34,955
Interest income..................................................................... (11,116) (11,610)
Equity investment results........................................................... 3,710 5,708
Litigation charge................................................................... -- 20,000
------------ ------------
Total costs and expenses.......................................................... 3,435,527 3,703,894
------------ ------------
Earnings before taxes................................................................. 17,734 2,076
Taxes on income....................................................................... 10,286 1,061
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Net earnings.......................................................................... $ 7,448 $ 1,015
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------------ ------------
Net earnings per share................................................................ $ .20 $ .03
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Dividends paid per share.............................................................. $ .02 $ .02
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Weighted average shares outstanding................................................... 37,804 37,788
------------ ------------
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</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE 40 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net sales.......................................................................... $ 11,755,946 $ 12,616,535
Costs and expenses:
Cost of sales.................................................................... 10,670,361 11,482,148
Selling and administrative....................................................... 911,420 980,591
Interest expense................................................................. 124,129 125,045
Interest income.................................................................. (36,410) (38,335)
Equity investment results........................................................ 11,027 12,972
Litigation charge................................................................ 19,218 20,650
------------- -------------
Total costs and expenses....................................................... 11,699,745 12,583,071
------------- -------------
Earnings before taxes.............................................................. 56,201 33,464
Taxes on income.................................................................... 28,602 17,100
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Earnings before extraordinary charge............................................... 27,599 16,364
Extraordinary charge from early retirement of debt (net of taxes).................. 13,330 --
------------- -------------
Net earnings....................................................................... $ 14,269 $ 16,364
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------------- -------------
Net earnings per share:
Earnings before extraordinary charge............................................. $ .73 $ .43
Extraordinary charge............................................................. .35 --
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Net earnings..................................................................... $ .38 $ .43
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Dividends paid per share........................................................... $ .06 $ .34
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Weighted average shares outstanding................................................ 37,803 37,768
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</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 4, DECEMBER 28,
1997 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 27,019 $ 63,667
Receivables........................................................................ 309,813 329,505
Inventories........................................................................ 997,219 1,051,313
Other current assets............................................................... 95,140 119,123
------------ ------------
Total current assets............................................................. 1,429,191 1,563,608
Investments and notes receivable..................................................... 183,214 205,683
Investment in direct financing leases................................................ 202,358 212,202
Property and equipment............................................................... 1,595,454 1,562,382
Less accumulated depreciation and amortization..................................... (673,326) (603,241)
------------ ------------
Net property and equipment........................................................... 922,128 959,141
Other assets......................................................................... 162,142 118,096
Goodwill............................................................................. 970,602 996,446
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Total assets......................................................................... $ 3,869,635 $4,055,176
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------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 814,933 $ 952,769
Current maturities of long-term debt............................................... 47,601 124,613
Current obligations under capital leases........................................... 20,916 19,715
Other current liabilities.......................................................... 234,288 245,774
------------ ------------
Total current liabilities........................................................ 1,117,738 1,342,871
Long-term debt....................................................................... 1,137,684 1,091,606
Long-term obligations under capital leases........................................... 359,162 361,685
Deferred income taxes................................................................ 28,626 37,729
Other liabilities.................................................................... 136,057 145,327
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share............................................ 94,510 94,494
Capital in excess of par value..................................................... 504,232 503,595
Reinvested earnings................................................................ 526,422 514,408
Cumulative currency translation adjustment......................................... (4,700) (4,700)
------------ ------------
1,120,464 1,107,797
Less ESOP note..................................................................... (5,199) (6,942)
Less additional minimum pension liability.......................................... (24,897) (24,897)
------------ ------------
Total shareholders' equity..................................................... 1,090,368 1,075,958
------------ ------------
Total liabilities and shareholders' equity........................................... $ 3,869,635 $4,055,176
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE 40 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................................... $ 14,269 $ 16,364
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization........................................................ 139,738 145,082
Credit losses........................................................................ 14,840 21,550
Deferred income taxes................................................................ (577) (7,574)
Equity investment results............................................................ 11,027 12,973
Gain on sale of businesses........................................................... (2,586) (3,666)
Litigation charge.................................................................... -- 20,650
Cost of early debt retirement........................................................ 22,227 --
Consolidation and restructuring reserve activity..................................... (1,987) (713)
Change in assets and liabilities, excluding effect of acquisitions:
Receivables........................................................................ 1,036 (22,698)
Inventories........................................................................ 52,762 120,411
Accounts payable................................................................... (133,626) (45,204)
Other assets and liabilities....................................................... (32,197) (34,061)
Other adjustments, net............................................................... (2,894) 77
---------- ----------
Net cash provided by operating activities.......................................... 82,032 223,191
---------- ----------
Cash flows from investing activities:
Collections on notes receivable........................................................ 47,829 45,480
Notes receivable funded................................................................ (29,725) (48,876)
Notes receivable sold.................................................................. -- 34,980
Purchase of property and equipment..................................................... (82,348) (100,602)
Proceeds from sale of property and equipment........................................... 11,859 12,283
Investments in customers............................................................... (1,963) (356)
Proceeds from sale of investment....................................................... 2,196 3,506
Businesses acquired.................................................................... (9,572) --
Proceeds from sale of businesses....................................................... 13,093 9,244
Other investing activities............................................................. 6,255 5,683
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Net cash used in investing activities.............................................. (42,376) (38,658)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings..................................................... 896,950 128,000
Principal payments on long-term debt................................................... (927,616) (279,544)
Principal payments on capital lease obligations........................................ (15,362) (16,342)
Sale of common stock under incentive stock and stock ownership plans................... 491 2,002
Dividends paid......................................................................... (2,260) (12,700)
Other financing activities............................................................. (28,507) (5,229)
---------- ----------
Net cash used in financing activities.............................................. (76,304) (183,813)
---------- ----------
Net increase (decrease)in cash and cash equivalents...................................... (36,648) 720
Cash and cash equivalents, beginning of period........................................... 63,667 4,426
---------- ----------
Cash and cash equivalents, end of period................................................. $ 27,019 $ 5,146
---------- ----------
---------- ----------
Supplemental information:
Cash paid for interest................................................................. $ 119,529 $ 117,133
Cash paid for income taxes............................................................. $ 33,361 $ 32,118
---------- ----------
---------- ----------
</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 October 4, 1997, and the
consolidated condensed statements of earnings and cash flows for the 12-week and
40-week periods ended October 4, 1997, and for the 12-week and 40-week periods
ended October 5, 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 October 4, 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 $34 million at October 4, 1997,
and $29 million at December 28, 1996.
4. 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 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, was used to redeem the company's $200 million of floating rate
senior notes.
The recapitalization program 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 second quarter ended July 12, 1997. Almost all of the charge
represented 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 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. See Note 6. 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 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
7
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
of principal, interest and premium, if any, payable on the Notes is guaranteed
by substantially all of the company's subsidiaries. See Note 6.
The new credit facility currently contains the following more significant
financial covenants: maintenance of a fixed charge coverage ratio of at least
1.7 to 1, based on 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.
5. 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 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. 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. 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. On
September 23, 1997, the deposited funds were released from escrow and on October
17, 1997, the claimants dismissed their actions against the company with
prejudice.
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
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 contract 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
8
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
officers and a company employee. Furr's claimed it was overcharged for products
under the supply contract and alleged various causes of action including breach
of contract, misrepresentation, fraud and violation of certain of New Mexico's
trade practices statutes. Furr's sought an award of unspecified monetary damages
including actual, consequential, incidental, punitive and treble damages
together with interest, attorneys' fees and court costs.
Fleming denied each of Furr's allegations and filed suit against Furr's
seeking to enforce an indemnification agreement entered into by Furr's in 1993.
Fleming also filed a shareholder derivative suit alleging malfeasance against
certain of Furr's officers and directors.
Prior to filing the lawsuit, Furr's sought to exercise the supply contract's
competitiveness clause and sought to audit the company's pricing. Furr's
submitted what it asserted was a "qualified competitive bid" as defined in the
contract. Fleming rejected the bid as not qualifying under the contract and
invoked the arbitration clause of the supply contract.
On October 23, 1997, Fleming and Furr's Supermarkets, Inc. ("Furr's")
reached an agreement of their business dispute.
Pursuant to the terms of the agreement, neither Furr's nor Fleming admitted
liability or wrongdoing. Until the end of April 1998, Furr's will be offered for
sale (including Fleming's equity investment of approximately 30%). Offerees will
have the opportunity to buy Furr's either with or without Fleming's El Paso
product supply center, together with the related equipment and inventory. If the
product supply center is not sold, Furr's (or Furr's purchaser) is obligated to
pay certain liquidation costs to Fleming and Fleming will liquidate the
inventory in the ordinary course. If Furr's is not sold, Furr's will have 30
days during which to elect to purchase the El Paso product supply center (and
close within 120 days) or to pay Fleming liquidation costs (after a nine month
transition period). Under the agreement, Fleming's supply contract with Furr's
will terminate in nineteen months, or earlier, and Fleming will pay Furr's
$800,000 per month until the contract terminates. Other Fleming customers
currently being served by the El Paso product supply center will continue to be
served by other Fleming units.
As the result of the agreement, Furr's dismissed its lawsuit against Fleming
and certain members of its management and Fleming dismissed its lawsuits against
Furr's and certain of its officers and directors, each with prejudice. The
arbitration proceedings were also dismissed. Furr's has agreed that Fleming's
past pricing practices were consistent with its supply contract and has agreed
that Fleming's FlexPro-SM- marketing plan will be applicable until the supply
contract terminates.
While Fleming will cooperate in the sale of Furr's, the ultimate outcome of
these efforts cannot be predicted. However, Fleming believes that by June 1999,
or earlier, Fleming will cease to supply Furr's, Fleming's distribution assets
serving Furr's will be liquidated and Fleming's substantial equity investment in
Furr's may be sold. The settlement does not cause an impairment in value of any
recorded asset 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.
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
9
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 has been approved by the creditors but
awaits confirmation by the court of a plan of liquidation, 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 the furniture, fixtures and equipment in
14 of the stores to the reorganized debtor for nine years (or until, in each
case, the expiration of the store lease) at an annual rental of $18,000 per
store.
During the fourth quarter of 1996, the debtor sold its Phoenix stores. In
January 1997, the debtor filed a joint liquidating plan which incorporates the
settlement agreement. 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 assets. The hearing for confirmation of the debtor's plan of
liquidation is scheduled for November 20, 1997.
The company recorded charges relating to Megafoods of approximately $6.5
million in 1994, $3.5 million in 1995 and $5.8 million in 1996. Approximately $3
million of recorded net assets relating to Megafoods (consisting of equipment)
remain 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 also alleges that Fleming
impermissably modified the pricing mechanism of the supply contract. Randall's
alleges breach of contract, fraud and RICO violations, and seeks actual damages,
punitive damages, treble damages under RICO, termination of its supply contract
and attorneys' fees and court costs. Randall's alleges it suffered substantial
but unquantified damages. 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 contract 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 contract.
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 contract. 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.
10
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 by the
company's alleged "deceptive business practices." The plaintiffs claim that
these alleged failures and practices 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.
On November 12, 1997, the company won a declaratory judgment action against
certain of its insurance carriers regarding a directors and officers ("D&O")
insurance policy issued to Fleming for the benefit of its officers and
directors. On motion for summary judgment, the U.S. District Court for the
Western District of Oklahoma ruled that the company's exposure, if any, under
the class action suits is covered by the D&O policies (aggregating $60 million)
written by the insurance carriers, and that the "larger settlement rule" will be
applicable to the case. According to the trial court, under the larger
settlement rule, a D&O insurer would be liable for the entire amount of coverage
available under a policy even if there were some overlap in the liability
created by the insured individuals and the uninsured corporation. If a
corporation's liability were increased by uninsured parties beyond that of the
insured individuals, then that portion of the liability would be the sole
obligation of that corporation. The court also held that allocation was not
available to the insurance carriers as an affirmative defense. The insurance
carriers have 30 days within which to appeal.
The plaintiffs seek undetermined but significant damages and management is
unable to predict the ultimate outcome of these cases. However, while management
believes that the cases could have a material adverse impact on interim or
annual results of operations, based upon the ruling of the court described
above, the cases will not have a material adverse effect on the company's
liquidity or consolidated financial position.
CENTURY
Century Shopping Center Fund I ("Century Fund I") commenced an action in
November 1988 in the Milwaukee County Circuit Court, State of Wisconsin, seeking
injunctive relief and monetary damages of an unspecified amount against a
subsidiary which was subsequently merged into the company. The plaintiff
originally obtained a temporary restraining order preventing the subsidiary from
closing a store at the Howell Plaza Shopping Center, for which the plaintiff was
the landlord, and from opening a new store at a competing shopping center
located nearby. Shortly thereafter, the order was dissolved by the court and the
stores opened and closed as scheduled. Following the closure of the store, a
number of shopping center tenants and the center itself experienced financial
difficulty ultimately resulting in bankruptcy.
In November 1993, the court granted Century Fund I leave to amend its
complaint to allege breach of contract, tortious interference with contract,
tortious interference to business, defamation, attempted monopolization,
conspiracy to monopolize, conspiracy to restrain trade, and monopolization.
Plaintiff claims that defendant and defendant's new landlord conspired to force
the Howell Plaza Shopping Center out of business.
11
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FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In June 1993, three former tenants of the Howell Plaza Shopping Center filed
another case in the same court and in September 1993, the trustee in bankruptcy
for Howell Plaza, Inc. (the predecessor to Century Fund I and its successor as
defendant's landlord) filed a third case. The allegations of these cases are
very similar to the allegations made in the Century Fund I case.
In June 1994, the trial court granted defendant's motion to dismiss all
three cases. That decision was reversed in August 1995 by the Wisconsin Court of
Appeals. The matter was remanded to the trial court. The cases have been
consolidated but are not currently set for trial.
Plaintiffs seek actual damages, consequential damages, treble damages,
punitive damages, attorneys' fees, court costs and other appropriate relief. In
March 1997, plaintiffs supplied the company with an analysis of damages; alleged
actual damages, after trebling but excluding any estimated punitive damages,
amounted to approximately $18 million.
In July 1997, the trial court granted plaintiffs' motion for summary
judgment with respect to their breach of contract claim against Fleming (as to
liability only, not as to damages). The company has petitioned 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. Management is unable to predict the ultimate outcome of
this matter. However, an unfavorable outcome in the 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 contracts 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 contracts 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 contracts, or exercise the competitiveness clause of such agreements or
otherwise alter the terms of their contractual obligations to the company to
obtain financial concessions. Based on its historical experience, 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. Program costs
are being expensed as incurred, but to compensate for the dilutive effect on
results of operations, the company has delayed other non-critical development
and support initiatives. 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. Additionally, failure of the company's
suppliers or, more importantly, its
12
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
customers, to become year 2000 compliant might have a material adverse impact on
the company's operations.
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-designated Superfund sites. While liability under CERCLA for remediation
at such sites is generally joint and several with other 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
assessments and other matters. The ultimate effect of such actions, some of
which are for substantial amounts, cannot be predicted with certainty. Although
the resolution of any of these matters could have a material adverse impact on
interim or annual results of operations, the company expects that the outcome of
these matters will not have a material adverse effect on the company's liquidity
or consolidated financial position.
6. 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.
13
<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>
OCTOBER 4, OCTOBER 5,
1997 1996
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Current assets........................................................ $ 23 $ 22
Noncurrent assets..................................................... $ 53 $ 49
Current liabilities................................................... $ 16 $ 10
Noncurrent liabilities................................................ $ 7 $ 9
</TABLE>
<TABLE>
<CAPTION>
40 WEEKS ENDED
----------------------------
OCTOBER 4, OCTOBER 5,
1997 1996
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Net sales............................................................. $ 256 $ 265
Costs and expenses.................................................... $ 256 $ 269
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.
7. The accompanying earnings statements include the following:
<TABLE>
<CAPTION>
40 WEEKS 12 WEEKS
---------------------- --------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Depreciation and amortization (includes amortized costs
in interest expense)................................... $ 139,738 $ 145,082 $ 41,113 $ 47,401
Amortized costs in interest expense...................... $ 7,165 $ 9,967 $ 1,668 $ 3,040
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Several events have shaped Fleming's results of operations and capital and
liquidity position during each of the past three fiscal years and the first
three quarters of 1997. Since 1993, changes in the food marketing and
distribution industry have reduced sales and increased competitive pressures for
the company and many of its customers. In January 1994, the company announced a
strategic plan to transform its operations to better serve its customers and
achieve higher profitability. As part of this plan, the company consolidated
food distribution facilities, reorganized its management group and reengineered
the way it prices and sells grocery, frozen and dairy products and retail
services. In July 1994, the company acquired Scrivner Inc. ("Scrivner"), adding
$6 billion in annual food distribution sales and more than 175 retail stores.
The company also dealt with business and litigation challenges during this
period: the bankruptcy of a major customer in 1994, the addition by foreclosure
in early 1996 of a 71-store customer in Arizona and several litigation
developments in 1996 and 1997. Each of these events is discussed in more detail
below.
CHANGING INDUSTRY ENVIRONMENT. The food marketing and distribution
industry is undergoing accelerated change as producers, manufacturers,
distributors and retailers seek to lower costs and increase services in
an increasingly competitive environment of relatively static overall
demand. Alternative format food stores (such as warehouse stores and
supercenters) have gained retail food market share at the expense of
traditional supermarket operators, including independent grocers, many of
whom are Fleming customers. Vendors, seeking to ensure that more of their
promotional fees and allowances are used by retailers to increase sales
volume, increasingly direct promotional dollars to large
self-distributing chains, alternative formats and other channels of
distribution. The company believes that these changes have led to reduced
sales, reduced margins and lower profitability among many of its
customers and at the company itself.
CONSOLIDATIONS, REORGANIZATION AND REENGINEERING. Throughout 1994 and
1995, the company consolidated 13 food distribution centers, including
nine centers acquired in the Scrivner acquisition, into other operations.
Smaller, less efficiently located facilities were closed and their
operations transferred to larger facilities seeking economies of scale in
operations. These consolidations were costly and resulted in loss of
sales because of the reluctance of certain customers to change and
because of increased distances from new centers.
In 1994, the company eliminated its regional food distribution
organization, centralizing these staff functions and several others. It
also established the Retail Food Segment following the acquisition of
Scrivner and its significant retail food operations.
The design of reengineering, which includes several programs, began in
1994 and implementation commenced in 1995. The most significant of these
programs was the introduction of an innovative marketing plan which
altered the way food products and distribution services are marketed to
customers. Activity-based pricing analyses and marketing research are
used to establish prices of grocery, frozen and dairy products and
charges for handling, storage and delivery services. Other significant
reengineering programs include the development and implementation of
VISIONET-TM-, a proprietary interactive electronic communication network
for retail customers, transportation outsourcing and the installation of
FOODS, a standard food distribution computer operating system.
Some of the costs of the plan have not been charged to the results of
operations but to reserves established at the end of 1993. The recorded
reserves cover severance, facility consolidation expenses and asset
impairment adjustments. All other costs of the plan not covered by
recorded reserves are included in the results of operations. However, the
costs of the plan cannot be
15
<PAGE>
separately quantified because actions implementing the plan often are not
unique to consolidation, reorganization and reengineering. Normal,
on-going business development activities are usually performed at the
same time and by the same associates which makes isolating costs related
to the plan impractical. Although the consolidation and reorganization
are complete, and many of the reengineering initiatives have been
completed, more initiatives are in-process or planned but completion
dates are not yet known because of the dependency on customer acceptance,
labor relations and the need to balance benefits and costs.
SCRIVNER. In July 1994, Fleming purchased Scrivner for approximately $390
million in cash and the assumption of $670 million of indebtedness while
refinancing approximately $340 million of its own debt. To finance the
transaction, the company entered into a $2.2 billion bank credit
agreement, $500 million of which was refinanced with fixed and floating
rate senior notes prior to the end of 1994. On July 25, 1997, as part of
the recapitalization program, the company replaced its former bank credit
agreement with the new credit agreement in the aggregate principal amount
of $850 million and called for redemption of all $200 million of the
floating rate senior notes placed in 1994. The floating rate senior notes
were redeemed on September 15, 1997.
Because the company quickly integrated Scrivner's operations, it is
difficult to estimate the impact Scrivner had on sales, gross margins or
earnings. However, Scrivner's significant retail food presence
substantially increased Fleming's corporate-owned retail stores from 139
before the acquisition to approximately 345 (including 283 supermarkets)
immediately following the acquisition. This substantial increase in
retail food operations not only added to total sales, but also raised
both gross margin and selling and administrative expenses as retail food
operations typically operate at higher levels in these areas than do food
distribution operations. Interest expense increased as a result of
increased borrowing levels due to the acquisition and to higher interest
rates attributable in substantial part to lower credit ratings for the
company's long-term debt. Interest expense rose from $78 million in 1993
to $120 million in 1994 and $175 million in 1995 before falling to $163
million in 1996. Goodwill amortization was $23.1 million in 1994, $30.1
million in 1995 and $32.0 million in 1996; the increase from 1994 was
principally due to Scrivner.
MEGAFOODS. In August 1994, Megafoods, Inc. and certain of its affiliates
("Megafoods" or the "debtor"), filed Chapter 11 bankruptcy proceedings in
Phoenix, Arizona. The company estimates that prior to bankruptcy,
annualized sales to Megafoods approximated $335 million. By 1995, sales
to Megafoods were approximately $87 million and by 1996, there were no
sales. The company filed claims for indebtedness for goods sold on open
account, equipment leases and secured loans totaling approximately $28
million and for substantial contingent claims for store subleases and
lease guarantees extended by the company for the debtor's benefit.
Megafoods brought an adversary proceeding seeking, among other things,
damages against the company. The company recorded losses resulting from
deteriorating collateral values of $6.5 million in 1994 and $3.5 million
in 1995, and in 1996 recorded $5.8 million to reflect continuing
deterioration and the effects of a proposed settlement of the company's
claim and the debtor's allegations.
ABCO. At year-end 1994, the company was the largest single shareholder
(approximately 48% of stock outstanding), the major supplier and the
second largest creditor of ABCO Markets, Inc. ("ABCO"), a supermarket
chain located in Arizona. By the fall of 1995, the company's investments
in, and loans to, ABCO totaled approximately $39 million. In September
1995, ABCO defaulted on both its bank debt and its debt to the company.
The company exercised a warrant to gain an additional 3% of ABCO's
capital stock and purchased the bank's preferred position for $21
million. In January 1996, the company foreclosed and acquired all of
ABCO's assets consisting of approximately 71 stores at the time of
foreclosure. Certain of ABCO's minority shareholders have challenged this
action and are seeking rescission and/or damages.
16
<PAGE>
LITIGATION. In March 1996, a jury in central Texas returned verdicts in
David's Supermarkets, Inc. v. Fleming ("David's") which resulted in a
judgment of $211 million against Fleming. In response, the company
established a reserve of $7.1 million and amended its former bank credit
agreement to facilitate posting a partially collateralized supersedeas
bond. Pursuant to the amendment, pricing for borrowing under the former
credit agreement was increased. The judgment was vacated in June 1996,
and the company's reserve was reduced to $650,000. During the first
quarter of 1997, Fleming entered into court-sanctioned mediation and, as
a result of a settlement reached with the plaintiff, paid $19.9 million
to settle the litigation.
During the third quarter of 1996, the company recorded a charge of $20
million to reflect an announced settlement agreement reached in lawsuits
involving a failed grocery diverter, Premium Sales Corporation. In
February 1997, the company's largest customer filed suit against it
alleging product overcharges and in July 1997, another large customer
commenced arbitration proceedings against the company also alleging
product overcharges. See Note 5 to the company's financial statements and
Part II, Item 1--Legal Proceedings for a further discussion of certain
litigation and contingent liability issues.
CREDIT POLICIES. In 1995, Fleming began imposing stricter credit policies
and applying cost/benefit analyses to loans to and investments made in
its distribution customers. Traditionally, food distributors have used
availability of financial assistance as a competitive tool. Fleming
believes that its stricter credit policies have resulted in decreased
sales.
Management believes that the combination of these events has negatively
affected the company's financial performance during the past three years and the
first three quarters of 1997. Additionally, the continuing commitments under the
recent Furr's agreement may negatively impact earnings through May 1999 and
lower sales and operating losses in certain company-owned retail stores are
likely to continue to negatively impact results for the near term. See
"--Litigation and Other Contingencies--Furr's."
However, management also believes that the company's 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 recapitalization program will provide the
company with greater financial flexibility to redeploy assets and seek 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 Fleming Retail Services, streamlining and expanding
Fleming Brands, developing and marketing additional foodservice products and
growing 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.
After taking into consideration one-time adjustments (recapitalization
charge in 1997, litigation charges in 1996 and 1997, a facilities consolidation
and restructuring adjustment in 1995 and $3 million in other charges in 1996 due
primarily to divested stores), adjusted earnings per share and adjusted EBITDA
(in millions) for the past eleven quarters were as follows:
<TABLE>
<CAPTION>
1995 ADJUSTED 1996 ADJUSTED 1997 ADJUSTED
---------------------- ---------------------- ----------------------
EPS EBITDA EPS EBITDA EPS EBITDA
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
First quarter........................ $ 0.40 $ 146 $ 0.25 $ 126 $ 0.39 $ 137
Second quarter....................... 0.39 113 0.30 104 0.35 106
Third quarter........................ 0.10 92 0.19 100 0.23 100
Fourth quarter....................... 0.11 97 0.27 105
--------- ----- --------- -----
$ 1.00 $ 448 $ 1.01 $ 435
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
Set forth in the following table is information for the third 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>
THIRD INTERIM PERIOD 1997 1996
---------- ----------
<S> <C> <C>
Net sales............................................... 100.00% 100.00%
Gross margin............................................ 9.33 8.97
Less:
Selling and administrative............................ 7.90 7.59
Interest expense...................................... 1.13 .94
Interest income....................................... (.32) (.31)
Equity investment results............................. .11 .15
Litigation charge..................................... -- .54
---------- ----------
Total expenses...................................... 8.82 8.91
---------- ----------
Earnings before taxes................................... .51 .06
Taxes on income......................................... .30 .03
---------- ----------
Net earnings............................................ .22% .03%
---------- ----------
---------- ----------
<CAPTION>
YEAR TO DATE 1997 1996
---------- ----------
<S> <C> <C>
Net sales............................................... 100.00% 100.00%
Gross margin............................................ 9.23 8.99
Less:
Selling and administrative............................ 7.75 7.77
Interest expense...................................... 1.06 .99
Interest income....................................... (.31) (.30)
Equity investment results............................. .09 .10
Litigation charge..................................... .16 .16
---------- ----------
Total expenses...................................... 8.76 8.73
Earnings before taxes................................... .48 .27
Taxes on income......................................... .24 .14
---------- ----------
Earnings before extraordinary charge.................... .23 .13
Extraordinary charge from early retirement of debt...... .11 --
---------- ----------
Net earnings............................................ .12% .13%
---------- ----------
---------- ----------
</TABLE>
NET SALES
Sales for the third quarter (12 weeks) of 1997 decreased by $.3 billion, or
7%, to $3.5 billion from $3.7 billion for the same period in 1996. Year to date,
sales decreased by $.9 billion, or 7%, to $11.8 billion from $12.6 billion in
1996. Several trends and events adversely impacted sales as described in the
General section above. Additionally, the closing or sale of certain
company-owned retail stores negatively impacted sales.
Retail sales generated by the same stores for the third quarter and
year-to-date periods in 1997 compared to the same periods in 1996 decreased 5.2%
and 3.2%, respectively. The decrease was attributable, in part, to new stores
opened by competitors in some markets and aggressive marketing initiatives by
certain competitors.
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 1.4%
compared to 2.3% for the same period in 1996.
18
<PAGE>
GROSS MARGIN
Gross margin for the third quarter of 1997 decreased by $10 million, or 3%,
to $322 million from $332 million for the same period of 1996, but increased as
a percentage of net sales to 9.33% from 8.97% for the same period in 1996. Year
to date, gross margin decreased by $49 million, or 4%, to just under $1.1
billion from just over $1.1 billion, but also increased as a percentage of net
sales to 9.23% from 8.99% 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 $.5
million for the third quarter and $4.6 million year to date compared to charges
of $.5 million for the quarter and $2.0 million year to date in 1996.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the third quarter of 1997 decreased
by $8 million, or 3%, to $273 million from $281 million for the same period in
1996 and increased as a percentage of net sales to 7.90% for 1997 from 7.59% in
1996. Year to date, selling and administrative expenses decreased by $69
million, or 7%, to $911 million from $981 million for the same period in 1996
and decreased as a percentage of net sales to 7.75% for 1997 from 7.77% in 1996.
The year-to-date percentage decrease was principally due to improvements in
operating efficiencies for company-owned retail stores. The increase in the
third quarter was due primarily to increased corporate expenses in 1997 in the
information technology area and the absence in 1997 of a favorable retail
divestiture accrual adjustment.
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.
Credit loss expense is included in selling and administrative expenses and
for the third quarter of 1997 decreased by $3 million to $4 million from $7
million for the comparable period in 1996. Year to date, credit loss expense was
$15 million in 1997 compared to $22 million in 1996 for a decrease of $7
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 third quarter of 1997 increased to $39 million from
$35 million for the same period in 1996. Year to date, interest expense
decreased to $124 million from $125 million in 1996. Lower average debt levels
in 1997 compared to 1996 primarily accounted for the year-to-date improvement.
Interest expense increased in the third quarter of 1997 compared to the same
period in 1996 primarily because the interest rates on the new senior
subordinated notes are higher than the rates on debt which was repaid. See Note
4 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 third quarter
of 1997, interest rate swaps covering $250 million aggregate principal amount of
floating rate indebtedness were employed. Interest rate hedge agreements
contributed $1.4 million of net interest expense in the 1997 third quarter
compared to $2.1 million of net interest expense for the same period of 1996.
Year to date, interest rate hedge agreements contributed $5.9 million of net
interest expense in 1997 compared to $7.0 million in 1996.
19
<PAGE>
INTEREST INCOME
Interest income for the third quarter of 1997 decreased to $11 million from
$12 million in the same period in 1996. Year to date, interest income decreased
to $36 million in 1997 from $38 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
third quarter of 1997 decreased to $4 million from $6 million for the same
period in 1996. Year to date, operating losses from equity investments decreased
to $11 million from $13 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. In the third quarter of 1996, the company accrued $20 million
related to an agreement reached to settle the Premium lawsuits. See Note 5 to
the company's financial statements and Part II, Item 1--Legal Proceedings.
TAXES ON INCOME
The effective tax rate for 1997 is presently estimated at 58.0%. The 58.0%
rate was used in calculating both the third quarter and year-to-date income tax
amounts. The presentation of the year-to-date tax is split by reflecting a tax
benefit at the statutory rate of 40% for the extraordinary charge and reflecting
the balance of the tax amount on the taxes on income line. The rate used for the
third 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 and write-off of costs associated with the early retirement of debt) with
basically no change in the blended statutory rate or nondeductible dollar
amounts (permanent differences) from 1996.
OTHER
Several factors negatively affecting earnings in the third quarter of 1997
are likely to continue for the near term. Management believes that these factors
include lower sales and operating losses in certain company-owned retail stores.
Additionally, the continuing commitments under the recent Furr's agreement may
negatively impact earnings through May 1999. See "--Litigation and Other
Contingencies-- Furr's."
20
<PAGE>
SEGMENT INFORMATION
Sales and operating earnings for the company's food distribution and retail
food segments are presented below.
<TABLE>
<CAPTION>
40 WEEKS 12 WEEKS
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Sales:
Food distribution........................................... $ 9,127 $ 9,780 $ 2,678 $ 2,907
Retail food................................................. 2,629 2,837 775 799
--------- --------- --------- ---------
Total sales................................................... $ 11,756 $ 12,617 $ 3,453 $ 3,706
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating earnings:
Food distribution........................................... $ 212 $ 226 $ 63 $ 64
Retail food................................................. 58 35 11 15
Corporate expense........................................... (96) (107) (25) (28)
--------- --------- --------- ---------
Total operating earnings...................................... $ 174 $ 154 $ 49 $ 51
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 third quarter of 1997 and at the end of fiscal 1996:
<TABLE>
<CAPTION>
CAPITAL STRUCTURE OCTOBER 4, 1997 DECEMBER 28, 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Long-term debt.................................... $ 1,185 44.6% $ 1,216 45.5%
Capital lease obligations......................... 380 14.3 381 14.2
--------- ----- --------- -----
Total debt........................................ 1,565 58.9 1,597 59.7
Shareholders' equity.............................. 1,090 41.1 1,076 40.3
--------- ----- --------- -----
Total capital................................... $ 2,655 100.0% $ 2,673 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
- ------------------------
Note: The above table includes current maturities of long-term debt and current
obligations under capital leases.
During the 40 weeks ended October 4, 1997, total debt was reduced by $32
million primarily because net cash provided by operating activities exceeded net
cash used in investing activities by $40 million.
Operating activities generated positive net cash flows of $82 million for
the 40 weeks ended October 4, 1997 compared to positive net cash flows of $223
million for the same period in 1996. The variance is explained primarily by a
higher decrease in accounts payable, a lower reduction in inventories and lower
cash earnings, offset in part by a reduction in accounts receivable in 1997
versus an increase in 1996. Working capital was $311 million at the end of the
third quarter of 1997, an increase from $221 million at year-end 1996. The
current ratio increased to 1.28 to 1 at the end of the third quarter 1997 from
1.16 to 1 at year-end 1996.
21
<PAGE>
Capital expenditures were $82 million for the 40 weeks ended October 4, 1997
compared to $101 million for the same period in 1996. Management budgeted total
capital expenditures for 1997, excluding acquisitions, of approximately $155
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.
Total capital expenditures for 1998 are expected to be $231 million.
The debt-to-capital ratio at the end of the third quarter of 1997 was 58.9%,
down from 59.7% at year-end 1996. The company's long-term target ratio is
between 50% and 55%.
On October 20, 1997, the board of directors approved a quarterly cash
dividend of $.02 per share for the fourth quarter of 1997 payable December 10,
1997. For the previous six 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 with banks
and other lenders 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 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. The recapitalization program provides the company with increased
flexibility to redeploy assets and pursue increased 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 revolver may be used for issuing letters of credit. Borrowings
and letters of credit issued under the new credit facility may be used for
general corporate purposes and are secured by a first priority security interest
in the accounts receivable and inventories of 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 6 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 third quarter of 1997, borrowings under the credit
facility totaled $250 million in term loans and $40 million of revolver
borrowings, and $85 million of letters of credit had been issued.
The $500 million of 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 composite average interest rate for total debt before the effect of
interest rate hedges was 9.5% at October 4, 1997, versus 8.9% at October 5,
1996. Including the effect of the interest rate hedges, the composite average
interest rate was 9.9% and 9.5% at the respective quarter ends.
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The 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 credit agreement.
In addition, the credit facility 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.
At the end of the third quarter of 1997, the company would have been allowed
to borrow an additional $475 million under the revolving credit facility
contained in the credit agreement based on the actual borrowings and letters of
credit outstanding. Under the company's most restrictive borrowing covenant,
which is the fixed charges coverage ratio contained in the credit agreement, $43
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 third quarter of 1997, the company had a total of $85
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 third quarter of 1997, the company employed interest rate swaps
covering a total of $250 million of floating rate indebtedness with three
counterparty banks possessing investment grade credit ratings (see "--Results of
Operations-Interest expense"). The swaps have an average fixed interest rate of
7.2% and an average remaining term of 2.5 years. Net interest payments made or
received under interest rate swaps are included in interest expense.
Cash flows from operating activities and the company's ability to borrow
under its credit agreement are expected to be the company's principal sources of
liquidity and capital for the foreseeable future. In addition, lease financing
may be employed for new stores. Management believes these sources will be
adequate to meet working capital needs, capital expenditures (including
expenditures for acquisitions, if any) and other capital 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
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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 presently believes that comprehensive income
will not be significantly different from reported 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 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 and does not
expect any change in defined segments.
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." Certain losses associated with litigation matters
(excluding legal fees and other costs) were recorded as follows (see Note 5 to
the company's financial statements and Part II, Item 1--Legal Proceedings):
PREMIUM. In the third quarter of 1996, an agreement was reached to
settle two related lawsuits pending against the company, and others, in the
U.S. District Court in Miami related to a failed grocery diverter, Premium
Sales Corporation. The company recorded a charge of $20 million during the
third quarter of 1996 in anticipation of the settlement. On October 17,
1997, all claims were dismissed in exchange for a payment of $19.5 million
plus $500,000 for costs and expenses.
DAVID'S. Based on the vacation of the judgment entered against the
company in the David's litigation, the charge recorded during the first
quarter of 1996 of approximately $7 million was reduced during the second
quarter of 1996 to $650,000. During the third and fourth quarters, an
additional $14,000 per quarter was recorded as additional interest. On March
21, 1997, the company reached a settlement with the plaintiff and paid $19.9
million in April 1997 in exchange for dismissal of all claims against the
company, with prejudice, resulting in a charge to earnings of $19.2 million.
Since the announcement of the initial judgment in the David's
litigation, other customers involved in disputes with the company have made
allegations of overcharges purporting to be similar to those made in the
David's case and such allegations may be made by others in the future.
Management is unable to predict the potential range of monetary exposure to
the company from such allegations, if any. However, if the plaintiff in any
such cases were to be successful in these assertions, the outcome could have
a material adverse effect on the company.
MEGAFOODS. 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 proceedings of
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a former customer and certain of its affiliates ("Megafoods"). The
settlement has been approved by the creditors and is subject to court
approval of a plan of liquidation. Under the terms of the settlement, the
company will retain a $12 million working capital 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
of its stores (located primarily in Texas) and two Texas storage facilities.
The company agreed to lease the furniture, fixtures and equipment in 14 of
the stores for nine years (or until, in each case, the expiration of the
store lease) to the reorganized debtor at an annual rental of $18,000 per
store.
During the fourth quarter of 1996, the debtor sold its Phoenix stores;
no distributions were made to the unsecured creditors. In January 1997, the
debtor filed a joint liquidating plan which incorporated the settlement
agreement. 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 debtor has now
disposed of substantially all of its physical assets. The company has not
received any distribution from the debtor's estate. The hearing on
confirmation of the debtor's plan is scheduled for November 20, 1997.
The company recorded charges of $6.5 million in 1994, $3.5 million in
1995 and $5.8 million in 1996. If the settlement is consummated, the company
will make an additional payment of $2.5 million to the debtor's estate. Net
assets recorded related to Megafoods (consisting of equipment) approximate
$3 million.
FURR'S On October 23, 1997, Fleming and Furr's Supermarkets, Inc.
("Furr's") reached an agreement of their business dispute.
Pursuant to the terms of the agreement, neither Furr's nor Fleming
admitted liability or wrongdoing. Until the end of April 1998, Furr's will
be offered for sale (including Fleming's equity investment of approximately
30%). Offerees will have the opportunity to buy Furr's either with or
without Fleming's El Paso product supply center, together with the related
equipment and inventory. If the product supply center is not sold, Furr's
(or Furr's purchaser) is obligated to pay certain liquidation costs to
Fleming and Fleming will liquidate the inventory in the ordinary course. If
Furr's is not sold, Furr's will have 30 days during which to elect to
purchase the El Paso product supply center (and close within 120 days) or to
pay Fleming liquidation costs (after a nine month transition period). Under
the agreement, Fleming's supply contract with Furr's will terminate in
nineteen months, or earlier, and Fleming will pay Furr's $800,000 per month
until the contract terminates. Other Fleming customers currently being
served by the El Paso product supply center will continue to be served by
other Fleming units.
As the result of the agreement, Furr's dismissed its lawsuit against
Fleming and certain members of its management and Fleming dismissed its
lawsuits against Furr's and certain of its officers and directors, each with
prejudice. The arbitration proceedings were also dismissed. Furr's has
agreed that Fleming's past pricing practices were consistent with its supply
contract and has agreed that Fleming's FlexPro-SM- marketing plans will be
applicable until the supply contract terminates.
While Fleming will cooperate in the sale of Furr's, the ultimate outcome
of these efforts cannot be predicted. However, Fleming believes that by June
1999, or earlier, Fleming will cease to supply Furr's, Fleming's
distribution assets serving Furr's will be liquidated and Fleming's
substantial equity investment in Furr's may be sold. The settlement does not
cause an impairment in value of any recorded asset 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.
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In addition, the company discloses material loss contingencies in the notes
to its financial statements when the likelihood of a material loss has been
determined to be greater than "remote" but less than "probable." These and other
such contingent matters are discussed in Note 5 to the company's financial
statements, which appear elsewhere herein. Also see Part II, Item 1 -- Legal
Proceedings. 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. Program costs are being expensed
as incurred but to compensate for the dilutive effect on results of operations,
the company has delayed other non-critical development and support initiatives.
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. Failure to ensure that the company's computer systems are year
2000-compliant could have a material adverse effect on the company's operations.
Additionally, failure of the company's suppliers or, more importantly, its
customers, to become year 2000 compliant might have a material adverse impact 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 and its
customers' 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following describes developments in various pending legal proceedings to
which Fleming is subject. For additional information, see "Management's
Discussion and Analysis--Litigation and Other Contingencies" and Note 5 to the
company's financial statements appearing elsewhere herein. See also the
company's Form 10-Q for the periods ended April 19, 1997 and July 12, 1997.
PREMIUM. Fleming entered into a settlement agreement with respect to the
Premium cases in December 1996. 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 pending
finalization. On September 23, 1997, the deposited funds were released from
escrow and on October 17, 1997 the claimants dismissed their actions against
the company with prejudice.
FURR'S. Furr's Supermarkets, Inc. ("Furr's") filed suit in February 1997 in
the Second Judicial District Court of Bernalillo County, New Mexico naming
as defendants the company, certain company officers and an employee. On
October 23, 1997, Fleming and Furr's reached an agreement of their business
dispute.
Pursuant to the terms of the agreement, neither Furr's nor Fleming admitted
liability or wrongdoing. Until the end of April 1998, Furr's will be offered
for sale (including Fleming's equity investment of approximately 30%).
Offerees will have the opportunity to buy Furr's either with or without
Fleming's El Paso product supply center, together with the related equipment
and inventory. If the product supply center is not sold, Furr's (or Furr's
purchaser) is obligated to pay certain liquidation costs to Fleming and
Fleming will liquidate the inventory in the ordinary course. If Furr's is
not sold, Furr's will have 30 days during which to elect to purchase the El
Paso product supply center (and close within 120 days) or to pay Fleming
liquidation costs (after a nine month transition period). Under the
agreement, Fleming's supply contract with Furr's will terminate in nineteen
months, or earlier, and Fleming will pay Furr's $800,000 per month until the
contract terminates. Other Fleming customers currently being served by the
El Paso product supply center will continue to be served by other Fleming
units.
As the result of the agreement, Furr's dismissed its lawsuit against Fleming
and certain members of its management and Fleming dismissed its lawsuits
against Furr's and certain of its officers and directors, each with
prejudice. The arbitration proceedings were also dismissed. Furr's has
agreed that Fleming's past pricing practices were consistent with its supply
contract and has agreed that Fleming's FlexPro-SM- marketing plans will be
applicable until the supply contract terminates.
While Fleming will cooperate in the sale of Furr's, the ultimate outcome of
these efforts cannot be predicted. However, Fleming believes that by June
1999, or earlier, Fleming will cease to supply Furr's, Fleming's
distribution assets serving Furr's will be liquidated and Fleming's
substantial equity investment in Furr's may be sold. The settlement does not
cause an impairment in value of any recorded asset 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.
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
assessments and other matters, some of which are for substantial amounts. The
ultimate effects of such actions, including the matters described below, cannot
be predicted with certainty. Although the resolution of any of the matters
discussed below may have a material adverse impact on interim or annual results
of operations, based on plaintiffs'
27
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allegations and the company's defenses, the company expects that the outcome of
these matters will not result in a material adverse effect on liquidity or
consolidated financial position.
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 by the company's alleged "deceptive business
practices." The plaintiffs claim that these alleged failures and practices
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 plaintiffs seek undetermined but significant damages. The
company denies each of these allegations.
On November 12, 1997, the company won a declaratory judgment action against
certain of its insurance carriers regarding a directors and officers ("D&O")
insurance policy issued to Fleming for the benefit of its officers and
directors. On motion for summary judgment, the U.S. District Court for the
Western District of Oklahoma ruled that the company's exposure, if any,
under the class action suits is covered by D&O policies (aggregating $60
million) written by the insurance carriers and that the "larger settlement
rule" will be applicable to the case. According to the trial court, under
the larger settlement rule, a D&O insurer would be liable for the entire
amount of coverage available under a policy even if there were some overlap
in the liability created by the insured individuals and the uninsured
corporation. If a corporation's liability were increased by uninsured
parties beyond that of the insured individuals, then that portion of the
liability would be the sole obligation of that corporation. The court also
held that allocation was not available to the insurance carriers as an
affirmative defense. The insurance carriers have 30 days within which to
appeal.
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. Since
then fourteen 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; Kym Glasser;
Welton Lee Upshur; George Thompson; and Ronald Folkman) 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 alleged monetary
liability on the part of the company for the company's part in the
distribution of tobacco products.
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. Fleming was dismissed from this
case in September 1997.
The company is being indemnified and defended by substantial co-defendants
with respect to the remaining tobacco cases. Such indemnification is
unconditional and unlimited, as understood by the company. 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.
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In addition, the company is involved in the following litigation matters
which, while significant, do not expose the company to any material monetary
liability:
DERIVATIVE SUITS. In October 1996, certain of the company's present and
former officers and directors, including the chief executive officer, were
named as defendants in a purported shareholder's derivative suit in the U.S.
District Court for the Western District of Oklahoma. Plaintiff's complaint
contains allegations that the defendants breached their respective fiduciary
duties to the company and were variably responsible for causing the company
to (i) become "involved with" Premium Sales and its illegal course of
business resulting in the Premium litigation and the $20 million settlement
agreement discussed above; (ii) "systematically" misrepresent and overstate
the cost of company products sold to its customers in violation of its sale
agreements, resulting in the David's litigation and ultimately leading to
the class action suits discussed above; and (iii) fail to meet its
disclosure obligations under the Securities Exchange Act of 1934, as
amended, resulting in the class action lawsuits discussed above and
increased borrowing costs, loss of customers and loss of market value.
Plaintiff sought damages from the defendants on behalf of the company in
excess of $50,000, forfeiture by the defendants of their salaries and other
compensation for the period in which they breached their fiduciary duties,
retention of all monies held by the company as deferred compensation or
otherwise on behalf of the defendants as a constructive trust for the
benefit of the company, and attorney's fees and costs.
In another purported shareholder derivative action filed in October 1996 in
the U.S. District Court for the Western District of Oklahoma, the plaintiff
sued the same and additional officers and directors. In this case, the
plaintiff alleged the defendants caused the company to (i) violate certain
sale agreements with David's Supermarkets resulting in the David's
litigation, (ii) fail to disclose to the investing public the risks
associated with the David's litigation, (iii) violate certain sale
agreements with Megafoods in a manner similar to that alleged by David's in
the David's litigation, and (iv) defraud persons who invested in the
Premium-related entities resulting in the Premium litigation.
On September 30, 1997, both derivative suits were dismissed, without
prejudice, for failure to make demand on the company's Board of Directors
prior to instigating the litigation.
POISON PILL BYLAW AMENDMENT. Oral arguments in the company's appeal were
heard in the 10th Circuit Court of Appeals on September 9, 1997. The
appelate court certified certain questions of law to the Oklahoma Supreme
Court to determine the underlying issues of Oklahoma corporate law.
The company supplies goods and services to some of its customers
(particularly to its large customers) pursuant to supply contracts containing a
"competitiveness" clause. Under this clause, the customer may submit to the
company a qualified bid from another supplier to provide a comparable range of
goods and services at prices lower than those charged by the company by more
than an agreed percentage. The company has the right to lower its prices to come
within the agreed percentage; if it chooses not to, the customer may accept the
competitor's bid. In many contracts, the customer has the right to examine
Fleming's billing practices under its contract and customers sometimes avail
themselves of this right. 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 supply contracts
prohibit recovery of both punitive and consequential damages if any litigation
ever arises. From time to time, customers of the company may seek to renegotiate
the terms of their supply contracts, or exercise the competitiveness clause of
such agreements or otherwise alter the terms of their contractual obligations to
the company to obtain financial concessions. Based on its historical experience
the company does not believe such efforts have had a material adverse effect on
its operations or financial condition.
The company's facilities are subject to various laws and regulations
regarding the discharge of materials into the environment. 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
29
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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 has been designated by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with others, with respect to
certain EPA-designated Superfund sites. While liability under CERCLA for
remediation at such sites is joint and several with other responsible parties,
the company believes that, to the extent it is ultimately determined to be
liable for 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 to achieving full compliance with all applicable laws regulations
and orders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
EXHIBIT NUMBER NUMBER
- ----------------- -------------
<S> <C> <C>
10.25 Agreement of Settlement and Release by and between Furr's Supermarkets, Inc. and
Fleming Companies, Inc.
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None
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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: November 17, 1997
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- -------------------------------------------------------------------------------
AGREEMENT OF
SETTLEMENT AND RELEASE
BY AND BETWEEN
FURR'S SUPERMARKETS, INC.
AND
FLEMING COMPANIES, INC.
DATED AS OF OCTOBER 23, 1997
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II THE SALE. . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 The Investment Banker . . . . . . . . . . . . . . . . . . 8
2.2 The Offering. . . . . . . . . . . . . . . . . . . . . . . 9
(a) With the El Paso PSC. . . . . . . . . . . . . . . . . 9
(b) Without the El Paso PSC . . . . . . . . . . . . . . . 9
(c) The El Paso PSC Costs and the Liquidation Costs . . . 10
(d) The Acquisition Agreement . . . . . . . . . . . . . . 10
(e) Representations and Covenants . . . . . . . . . . . . 10
2.3 Minimum Bid Price . . . . . . . . . . . . . . . . . . . . 12
2.4 Stockholders Bids . . . . . . . . . . . . . . . . . . . . 13
2.5 Calculation of Amounts to be Paid to Holders of
Issued Common Stock, Options, Warrants and SARs . . . . . 14
ARTICLE III THE RELEASES. . . . . . . . . . . . . . . . . . . . . . . 14
3.1 Furr's Release. . . . . . . . . . . . . . . . . . . . . . 14
3.2 Fleming Release . . . . . . . . . . . . . . . . . . . . . 14
3.3 Arbitration . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Dissolution Action. . . . . . . . . . . . . . . . . . . . 15
ARTICLE IV THE SUPPLY AGREEMENT AND FURR'S ELECTION. . . . . . . . . 15
4.1 The Supply Agreement. . . . . . . . . . . . . . . . . . . 15
(a) Sale of Furr's. . . . . . . . . . . . . . . . . . . . 15
(b) No Sale . . . . . . . . . . . . . . . . . . . . . . . 16
4.2 Furr's Election . . . . . . . . . . . . . . . . . . . . . 16
4.3 Furr's Election to Purchase the El Paso PSC . . . . . . . 16
4.4 Furr's Elects Not to Purchase the El Paso PSC . . . . . . 16
4.5 Credit Policies . . . . . . . . . . . . . . . . . . . . . 17
4.6 Other Indebtedness. . . . . . . . . . . . . . . . . . . . 17
4.7 Payments. . . . . . . . . . . . . . . . . . . . . . . . . 17
4.8 Reduction in Charges. . . . . . . . . . . . . . . . . . . 17
4.9 Union Agreement . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE V THE STOCKHOLDERS AGREEMENT. . . . . . . . . . . . . . . . 20
5.1 The Stockholders Agreement. . . . . . . . . . . . . . . . 20
5.2 Standstill. . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 22
6.1 Other Conditions. . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
6.2 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.5 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.6 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 23
6.7 Binding On Successors . . . . . . . . . . . . . . . . . . . . . . 23
6.8 Entire Agreement; Assignment. . . . . . . . . . . . . . . . . . . 24
6.9 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.11 Modifications and Amendments. . . . . . . . . . . . . . . . . . . 24
6.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBITS
Exhibit A Definition of Minimum Bid Price
Exhibit B-1 Special Release (Furr's)
Exhibit B-2 Special Release (Windward Group)
Exhibit B-3 Special Release (Fleming)
Exhibit B-4 Special Release (Management)
Exhibit B-5 Special Release (Officers and Employees)
Exhibit C Dismissal With Prejudice - Action
Exhibit D-1 Dismissal With Prejudice - Delaware Litigation
Exhibit D-2 Dismissal With Prejudice - Texas Litigation
Exhibit E Fleming EBITDA Report
Exhibit F Form of Asset Purchase Agreement
Exhibit G Form of Escrow Agreement
Exhibit H Windward Waiver
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<PAGE>
AGREEMENT OF SETTLEMENT AND RELEASE
THIS AGREEMENT OF SETTLEMENT AND RELEASE (this "Agreement"), entered into
as of the 23rd day of October, 1997, by and between FURR'S SUPERMARKETS,
INC., a Delaware corporation ("Furr's"), and FLEMING COMPANIES, INC., an
Oklahoma corporation ("Fleming"). Fleming and Furr's are herein sometimes
referred to as the "Parties".
W I T N E S S E T H :
WHEREAS, Furr's has filed a lawsuit against Fleming, two of its officers
(the "Officers") and two other present or former employees (the "Employees")
styled FURR'S SUPERMARKETS, INC. V. FLEMING COMPANIES, INC., ET AL., Case No.
CIV-97-0410 JC/RLP, United States District Court for the District of New
Mexico seeking the termination of the ten (10) year supply agreement dated
March 11, 1991 between Furr's and Fleming (as previously amended and as
modified and amended in accordance with SECTION 4.8 hereof, the "Supply
Agreement"), claiming that it was overcharged for products under the Supply
Agreement, breach of contract, misrepresentation, fraud and violation of
certain New Mexico trade practices statutes and other claims (the "Action"),
and the Local Unions, on behalf of themselves and a class of former and
present employees of Furr's moved to intervene in the Action against Fleming
(the claims asserted in the motion to intervene, together with any related
claims which could be asserted by the Local Unions in other actions, the
"Union Claim"); and
WHEREAS, Furr's has petitioned the court to amend its complaint in the
Action to describe allegations against Fleming and the Officers under the
Racketeer Influenced Corruption and Organizations Act and other claims
seeking damages in excess of $75 million; and
WHEREAS, Fleming, in response to Furr's alleged competitive bid submitted
under paragraph 2 of the Supply Agreement, has commenced the Arbitration
Proceeding (as herein defined); and
WHEREAS, Fleming (i) has filed a derivative lawsuit against Furr's,
certain members of the Windward Group (as herein defined), members of the
Board and members of Management (as herein defined) styled FLEMING COMPANIES,
INC. V. GARY W. SWENSON, ET AL., In the Court of Chancery, State of Delaware,
Case No. 15830 alleging conspiracy, mismanagement and waste (the "Delaware
Litigation"), (ii) has advised Furr's it will file a complaint against Furr's
for appointment of a receiver to effect corporate dissolution in the Court of
Chancery, State of Delaware if the Action is not dismissed in accordance with
this Agreement (the "Dissolution Action") and (iii) has filed an action
styled FLEMING COMPANIES, INC. V. FURR'S SUPERMARKETS, INC., Case No. 3-97 CU
2271-D in the United States District Court for the Northern District of Texas
seeking indemnification from Furr's of its obligations with respect to the
Union Claim (the "Texas Action"); and
<PAGE>
WHEREAS, Fleming and Furr's are desirous of settling the Action, the
Delaware Litigation, the Texas Action and the Arbitration Proceeding and that
the Dissolution Action not be pursued; and
WHEREAS, the authorized capital stock of Furr's consists of 1,000 shares
of preferred stock, $.01 par value, none of which is issued, 4,200,000 shares
of Class A Common Stock, $.01 par value (the "Class A Common Stock"), of
which 1,581,984 shares are issued and outstanding, and 50,000 shares of Class
B Common Stock (non-voting), $.01 par value (the "Class B Common Stock"), of
which 26,494 shares are issued and outstanding (the issued and outstanding
Class A Common Stock and Class B Common Stock and the authorized but unissued
Class A Common Stock issuable upon the exercise of the Options, Warrants and
SARs are together referred to herein as the "Common Stock"); and
WHEREAS, the Windward Group, Fleming, Management and certain directors of
Furr's own the following shares of Common Stock: the Windward Group owns
927,933 shares of Class A Common Stock (which does not include 14,493 shares
beneficially owned by a Director Holder and held by the Windward Group) and
26,494 shares of Class B Common Stock; Fleming owns 550,550 shares of Class A
Common Stock; Management owns 60,240 shares of Class A Common Stock; and the
Director Holders own 43,261 shares of Class A Common Stock (which includes
14,493 shares beneficially owned by a Director Holder and held by the
Windward Group) (all such shares of issued and outstanding Common Stock are
collectively referred to herein as the "Issued Common Stock"); and
WHEREAS, the Windward Group owns warrants to purchase 496,667 shares of
Class A Common Stock (which does not include the Morrow Warrants held by the
Windward Group) at an exercise price of $.01 per share (the "Windward
Warrants"), the Morrow Warrants are owned by a Director Holder and held by
the Windward Group and Fleming owns warrants to purchase 182,176 shares of
Class A Common Stock at an exercise price of $.01 per share (the "Fleming
Warrants" and together with the Windward Warrants and the Morrow Warrants,
the "Warrants"); and
WHEREAS, Management and other employees of Furr's and the Director
Holders, prior to consummation of the sale of Furr's in accordance with
Article II hereof, will hold options (vested and unvested) to purchase shares
of Class A Common Stock as follows: Management and other employees of Furr's
hold options to purchase 251,764 shares of Class A Common Stock (and may be
granted options to purchase up to an additional 27,985 shares of Class A
Common Stock immediately prior to the execution or closing of the Acquisition
Agreement); and the Director Holders hold options to purchase 17,000 shares
of Class A Common Stock (and may be issued previously allocated options to
purchase up to an additional 3,000 shares of Class A Common Stock immediately
prior to the execution or closing of the Acquisition Agreement) (together,
all such options are referred to herein as the "Options"); and
WHEREAS, Management holds 107,900 SARs (as herein defined); and
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<PAGE>
WHEREAS, the Special Committee has engaged the services of the Banker (as
herein defined) to assist it in exploring strategic alternatives available to
Furr's.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants, agreements, representations and warranties herein contained, and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.
"ACTION" shall have the meaning set forth in the first "Whereas"
clause.
"ACQUISITION AGREEMENT" means that certain acquisition agreement by
and between Furr's and the Purchaser substantially in the form approved by
the Board which will provide for the acquisition of Furr's by the Purchaser
in accordance with Article II hereof.
"ADVISOR" shall mean Windward Capital Partners, L.P., a Delaware
limited partnership.
"AFFILIATE(S)" shall have the meaning as set forth in Rule 144(a)(1)
of the Securities Act of 1933, as amended.
"AGREEMENT" means this Agreement of Settlement and Release dated
October 23, 1997, by and between Furr's and Fleming.
"ARBITRATION PROCEEDING" shall mean that certain arbitration
proceeding (Case No. 71 181 0010897) commenced by Fleming on March 28, 1997
pursuant to paragraph 2(b) of the Supply Agreement.
"ASSET PURCHASE AGREEMENT" shall mean an asset purchase agreement
substantially in the form attached hereto as EXHIBIT F relating to the sale
of the El Paso PSC to the Purchaser or Furr's, as applicable.
"ASSET SALES PERIOD" shall have the meaning set forth in SECTION 4.3
hereof.
"BANKER" shall mean Merrill Lynch & Co.
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<PAGE>
"BOARD" shall mean the duly elected board of directors of Furr's.
"CLASS A COMMON STOCK" shall have the meaning set forth in the sixth
"Whereas" clause.
"CLASS B COMMON STOCK" shall have the meaning set forth in the sixth
"Whereas" clause.
"COMMON STOCK" shall have the meaning set forth in the sixth
"Whereas" clause.
"DELAWARE LITIGATION" shall have the meaning set forth in the fourth
"Whereas" clause.
"DIRECTOR HOLDERS" shall mean certain members of the Board who hold
shares of Issued Common Stock and who are not employees of Furr's, Fleming or
any member of the Windward Group.
"DISSOLUTION ACTION" shall have the meaning set forth in the fourth
"Whereas" clause.
"DISTRIBUTION DATE" shall have the meaning set forth in SECTION 2.1
hereof.
"EBITDA" means the earnings before interest, taxes, depreciation and
amortization for a twelve month period.
"EL PASO PSC" means the assets of Fleming to be conveyed to Furr's
or the Purchaser, as the case may be, pursuant to the Asset Purchase
Agreement, as more fully described in such agreement including, without
limitation, the Fleming product supply center located at 9820 Railroad Drive,
El Paso, Texas, the El Paso PSC Leases, leasehold improvements, furniture,
fixtures, equipment and Inventory.
"EL PASO PSC COSTS" shall have the meaning set forth in SECTION
2.2(a) hereof.
"EL PASO PSC LEASES" means (i) the Furr's Warehouse El Paso Lease
(9820 Railroad Drive, El Paso, Texas) dated March 1, 1973; (ii) the
Refrigeration Lease; (iii) the Railroad Drive Warehouse Lease (9601 Railroad
Drive, El Paso, Texas) dated June 15, 1996; and (iv) John Merrell Office
Lease (9730 Railroad Drive, El Paso, Texas) dated November 1, 1996.
"EMPLOYEES" shall have the meaning set forth in the first "Whereas"
clause.
"ESCROW AGREEMENT" shall mean an escrow agreement substantially in
the form attached hereto as EXHIBIT G relating to the escrow of the
Liquidation Costs.
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<PAGE>
"EQUITY CONSIDERATION" shall mean the portion of the Purchase Price
that remains after deducting (i) all amounts to repay indebtedness for
borrowed money of Furr's, including subordinated debt, and (ii) payments to
be made in respect of transaction fees, and adding the aggregate exercise
price payable to Furr's by holders upon exercise of all Options, Warrants and
SARs.
"FINANCIAL ADVISORY SERVICES AGREEMENT" shall mean that certain
Financial Advisory Services Agreement dated as of June 30, 1995, between
Furr's and the Advisor.
"FIRST PERIOD" shall have the meaning set forth in SECTION 4.1(a)
hereof.
"FLEMING" means Fleming Companies, Inc., an Oklahoma corporation.
"FLEMING WARRANTS" shall have the meaning set forth in the eighth
"Whereas" clause.
"FMP" means the Fleming Flexible Marketing Plan under which FMP
Products are being supplied to Furr's from the El Paso PSC and other
distribution centers of Fleming.
"FMP PRODUCTS" means all grocery, frozen and dairy products (other
than Perishable Products) supplied to Furr's by Fleming under the Supply
Agreement and the FMP.
"FURR'S" means Furr's Supermarkets, Inc., a Delaware corporation.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the regulations promulgated thereunder.
"INVENTORY" shall have the meaning set forth in SECTION 4.3 hereof.
"ISSUED COMMON STOCK" shall have the meaning set forth in the
seventh "Whereas" clause.
"LIQUIDATION COSTS" shall have the meaning set forth in SECTION
2.2(b) hereof.
"LOCAL NO. 745" shall mean the Teamsters Local No. 745, affiliated
with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and
Helpers of America.
"LOCAL UNIONS" shall mean United Food and Commercial Workers Union,
Local Number 1564 of New Mexico and Local Number 540.
"LOWER ACCEPTABLE BID" shall have the meaning set forth in SECTION
2.3 hereof.
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<PAGE>
"MANAGEMENT" means Jan U. Friederich, Walter R. Doyle, Gene W.
Denison and Richard M. Kaufman.
"MARKETABLE SECURITIES" means any of the following: (i) if a
security is an equity security, it must be freely tradable and (a) listed on
the New York Stock Exchange ("NYSE"), or (b) listed on the National
Association of Security Dealers Automated Quotations ("NASDAQ"), or (c)
listed on the American Stock Exchange ("ASE"); or (ii) if a security is a
debt security, it must be rated "BBB+" or better by Standard & Poor's
Corporation and/or rated "Baa1" by Moody's and listed on the NYSE or the
NASDAQ or the ASE.
"MATCH NOTICE" shall have the meaning set forth in SECTION 2.3
hereof.
"MINIMUM BID PRICE - EL PASO PSC" shall have the meaning set forth
in EXHIBIT A hereto.
"MINIMUM BID PRICE - LIQUIDATION" shall have the meaning set forth
in EXHIBIT A hereto.
"MORROW WARRANTS" shall mean 14,307 warrants to purchase 14,307
shares of Class A Common Stock beneficially owned by David Morrow, a Director
Holder and held by the Windward Group.
"OFFER NOTICE" shall have the meaning set forth in SECTION 2.3
hereof.
"OFFERING MEMORANDUM" shall have the meaning set forth in SECTION
2.1 hereof.
"OFFICERS" shall have the meaning set forth in the first "Whereas"
clause.
"OPTIONS" shall have the meaning set forth in the ninth "Whereas"
clause.
"PARTIES" shall have the meaning set forth in the first paragraph of
this Agreement.
"PAYMENT AMOUNT" means the cash refund to be made to Furr's by
Fleming in accordance with the provisions of SECTION 4.8 hereof.
"PERIOD" means one of thirteen (13) four (4) week periods of time in
any fiscal year as established by Fleming for accounting purposes.
"PERISHABLE PRODUCTS" shall mean produce, meat, bakery and deli
products sold to Furr's by Fleming from the El Paso PSC or other distribution
centers of Fleming.
"PLAN" means that certain Furr's Supermarkets, Inc. 1993 Phantom
Stock Plan, as amended.
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<PAGE>
"PRODUCT SUPPLY DOCUMENTS" shall have the meaning set forth in
SECTION 4.8(d) hereof.
"PURCHASE PRICE" shall mean the aggregate value of the consideration
(cash and/or Marketable Securities) offered or paid, as applicable, by a bona
fide bidder in connection with the sale of Furr's consisting of (i) all
amounts to repay indebtedness for borrowed money of Furr's, including
subordinated debt, (ii) all amounts in respect of the Issued Common Stock,
(iii) all amounts in respect of cancellation of SARs, Warrants and Options
equal to the excess of the Share Price over the respective exercise prices
thereof, and (iv) payments to be made in respect of transaction fees but
excluding payments in respect of El Paso PSC Costs or Liquidation Costs,
which is accepted by the Board in accordance with Article II of this
Agreement.
"PURCHASER" means the entity who is the successful bidder for Furr's
in accordance with Article II of this Agreement.
"PURCHASER TRANSITION PERIOD" shall mean an approximate nine (9)
month period, subject to adjustment by the Purchaser in accordance with
SECTION 4.1(a) hereof, commencing on the day of the consummation of the
transactions contemplated by the Acquisition Agreement if the Purchaser
elects to purchase Furr's without the El Paso PSC.
"REFRIGERATION LEASE" shall mean the El Paso Outside Refrigeration
Warehouse Lease (10500 Railroad Drive, El Paso, Texas) dated July 15, 1995.
"SALE OFFER" shall have the meaning set forth in SECTION 2.3 hereof.
"SALES PERIOD" shall have the meaning set forth in SECTION 2.2
hereof.
"SARS" means those stock appreciation rights granted under the Plan.
"SECOND PERIOD" shall have the meaning set forth in SECTION 4.1(a)
hereof.
"SHARE PRICE" shall mean the per share dollar figure obtained by
dividing (i) the Equity Consideration, by (ii) the sum of (A) the number of
shares of Issued Common Stock, and (B) the number of shares of Common Stock
that would be issued if all Options, Warrants and SARs were exercised.
"SPECIAL COMMITTEE" shall have the meaning set forth in SECTION 2.3
hereof.
"STOCKHOLDERS" means collectively the Windward Group, Fleming,
Director Holders and Management.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated June
30, 1995, by and among Furr's and the Stockholders.
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<PAGE>
"SUPPLY AGREEMENT" shall have the meaning set forth in the first
"Whereas" clause.
"TEXAS ACTION" shall have the meaning set forth in the fourth
"Whereas" clause.
"TRANSITION PERIOD" shall mean an approximate nine (9) month period
commencing on the day following Furr's' election of the option described in
SECTION 4.2(b) hereof if Furr's is not sold under the provisions of Article
II hereof.
"TRANSPORTATION AGREEMENT" shall mean that certain Transportation
Services Agreement (Dedicated Contract Carrier) made and executed on November
7, 1994, by and between Fleming Companies, Inc. and TNT Dedicated Services,
Inc., as amended.
"UNION AGREEMENT" shall mean that certain Agreement dated January
28, 1996 by and between Fleming Companies, Inc. and Local No. 745.
"UNION AGREEMENT AMENDMENT" shall have the meaning set forth in
SECTION 4.9 hereof.
"UNION CLAIM" shall have the meaning set forth in the first
"Whereas" clause.
"WARRANTS" shall have the meaning set forth in the eighth "Whereas"
clause.
"WINDWARD GROUP" shall mean WINDWARD CAPITAL ASSOCIATES, L.P., a
Delaware limited partnership, WINDWARD/MERCHANT, L.P., a Delaware limited
partnership, WINDWARD/PARK FSI, L.L.C., a Delaware limited liability company,
WINDWARD/NORTHWEST, L.P., a Delaware limited partnership and WINDWARD/MERBAN,
L.P., a Delaware limited partnership.
"WINDWARD WAIVER" shall have the meaning set forth in SECTION 5.1(b)
hereof.
"WINDWARD WARRANTS" shall have the meaning set forth in the eighth
"Whereas" clause.
ARTICLE II
THE SALE
2.1 THE INVESTMENT BANKER. The Special Committee has engaged the
services of the Banker for the purpose of advising the Special Committee in
the possible sale of Furr's. The Banker, Furr's and the Special Committee, in
conjunction with the Advisor and Fleming, have cooperated in the preparation
of an offering circular or memorandum (the "Offering Memorandum") to be sent
to prospective bidders and to be used in conducting a sale of Furr's to the
bidder which, based on the recommendation of the Special Committee (subject
to the provisions and
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<PAGE>
limitations of SECTION 2.3 below), presents the best available alternative to
Stockholders in accordance with the terms and provisions of this Agreement.
The Parties agree that they shall continue to use reasonable commercial
efforts to complete the Offering Memorandum and that the Offering Memorandum
shall begin to be distributed to prospective bidders upon the earlier to
occur of the completion of the Offering Memorandum or ten business days
following the date hereof (the date of such initial distribution, the
"Distribution Date"). Additionally, in accordance with the terms of the
Financial Advisory Services Agreement, Furr's shall continue to pay to the
Advisor fees and expenses payable to the Advisor in accordance with the terms
thereof. Except as provided in this Agreement and for consideration payable
to Stockholders in consideration for the sale or transfer of Common Stock,
Options, Warrants or SARs pursuant to the Acquisition Agreement, none of the
Stockholders nor any of their respective Affiliates shall be entitled to
receive any fees or other compensation as a result of the sale of Furr's.
2.2 THE OFFERING. Furr's covenants and agrees to use its reasonable
commercial efforts to market Furr's for a period of six (6) months from the
Distribution Date (herein the "Sales Period") all in accordance with the
terms of this Article II. Furr's shall be marketed and the Offering
Memorandum shall describe that prospective bidders may bid for Furr's in the
alternative, i.e., with the purchase of the El Paso PSC or without the El
Paso PSC.
(a) WITH THE EL PASO PSC. A potential purchaser may offer to
purchase Furr's with the El Paso PSC. In the event of a sale of Furr's under
such circumstances, Fleming agrees to transfer the El Paso PSC to the
Purchaser or to Furr's (as the Purchaser shall request) in accordance with
SECTION 4.1(a) hereof, and the Parties agree that Fleming shall receive the
El Paso PSC Costs in consideration for such transfer, payable in accordance
with SECTION 2.2(c) below. For purposes of this Agreement, the "El Paso PSC
Costs" shall mean an amount equal to the sum of (i) $6,586,000, (ii) $300,000
if, but only if, the obligations under the Refrigeration Lease are not
assumed by the Purchaser or Furr's, and (iii) the value of the Inventory,
valued in accordance with SECTION 4.3 hereof; PROVIDED, however that the El
Paso PSC Costs shall be increased by an amount equal to the cost of any
capital expenditures relating to purchasing new assets other than Inventory
made by Fleming after the date hereof which were approved by Furr's (which
approval shall not be unreasonably withheld) prior to the commitment by
Fleming to such capital expenditure having been made.
(b) WITHOUT THE EL PASO PSC. A potential purchaser may also offer
to purchase Furr's without the El Paso PSC. In the event of a sale of Furr's
under such circumstances, the Parties agree that Fleming shall be paid
$9,994,000, by Furr's or the Purchaser, as the case may be, in order to
defray the cost of Fleming's liquidation and disposition of the El Paso PSC
(the "Liquidation Costs"), with such amount payable in accordance with
SECTION 2.2(c) below; PROVIDED, however that in the event that neither the
Purchaser nor Furr's, as the case may be, assumes the rights and obligations
of Fleming pursuant to the Transportation Agreement, the Liquidation Costs
shall be $10,794,000.
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<PAGE>
(c) THE EL PASO PSC COSTS AND THE LIQUIDATION COSTS. The Parties
agree that Fleming shall be paid (i) the El Paso PSC Costs, if the Purchaser
or if Furr's, as the case may be, has elected to acquire the El Paso PSC,
upon consummation of the sale of the El Paso PSC to the Purchaser or to
Furr's, as the case may be, in accordance with the terms of the Asset
Purchase Agreement; or (ii) the Liquidation Costs, if the Purchaser elects to
purchase Furr's without the El Paso PSC or if Furr's elects to continue to
purchase products from Fleming during the Transition Period and terminate the
Supply Agreement in accordance with SECTION 4.2(b) hereof, in either case, on
the first day following the end of the Purchaser Transition Period or the
Transition Period, as applicable. In the event of a sale of Furr's without
the El Paso PSC in accordance with this Article II, the Acquisition Agreement
shall provide that an amount received from the Purchaser equal to the
Liquidation Costs shall be placed into escrow in accordance with the Escrow
Agreement attached hereto as EXHIBIT G in order that Furr's or the Purchaser,
as the case may be, may pay the Liquidation Costs when payable in accordance
with the foregoing clause (ii), which amount shall be escrowed before the
Stockholders receive their proportionate share of the net proceeds of the
sale in accordance with the Acquisition Agreement.
(d) THE ACQUISITION AGREEMENT. Furr's shall require and the
Offering Memorandum shall reflect that the Purchaser and Furr's will be
required to enter into the Acquisition Agreement during the Sales Period and
to close the acquisition of Furr's within one hundred twenty (120) days from
the acceptance of any prospective purchaser's bid by Furr's; PROVIDED, that
such one-hundred twenty (120) day period shall be extended such that all
waiting periods, if any, applicable to the transactions contemplated by the
Acquisition Agreement under the HSR Act shall have expired or been
terminated; PROVIDED, further that in the event any order, decree, ruling,
injunction or other action shall have been entered, promulgated, threatened
or enforced by any court or governmental authority of competent jurisdiction
which prohibits or restricts (or threatens to prohibit or restrict) such
transaction, such one hundred twenty (120) day period shall be extended until
such time as such order, decree, ruling, injunction or other action shall
become final and non-appealable. In the event of the failure of the
Purchaser to consummate the transactions contemplated by the Acquisition
Agreement, for purposes of this Agreement a sale of Furr's shall be deemed to
have been unsuccessful and Furr's shall be entitled to make an election in
accordance with SECTION 4.2 hereof. Furr's shall provide Fleming a
reasonable opportunity to review and comment on the form of the Acquisition
Agreement prior to its distribution to potential bidders; PROVIDED, however
that Furr's shall be under no obligation to revise such draft Acquisition
Agreement in any manner based on any such comments other than in respect to
agreements, covenants, representations and warranties of Fleming, contained
therein, if any, and to conform such draft to the provisions of this
Agreement.
(e) REPRESENTATIONS AND COVENANTS.
(i) FLEMING REPRESENTATION AND COVENANT. Fleming represents
that (i) the Supply Agreement EBITDA for the twelve months ended July 12,
1997 was in excess of $17 million and (ii) under the Supply Agreement,
approximately 98% of product is supplied from the El Paso PSC and
approximately 2% of product is supplied from the Fleming product supply
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center located in Lubbock, Texas. Fleming covenants with Furr's, with the
exception of the El Paso PSC Costs and the Liquidation Costs, that (i) it
will negotiate in good faith during the Sales Period with any potential
purchaser of Furr's the Asset Purchase Agreement, as provided in SECTION
4.1(a) hereof, in the case the Purchaser elects to purchase the El Paso PSC
or the termination or continuation of the Supply Agreement if the Purchaser
elects not to purchase the El Paso PSC, (ii) it will use its reasonable
commercial efforts to assist Furr's in the collection of accounts receivable
owing to Furr's from Fleming's vendors but only with respect to transactions
as to which Fleming was the supplier or otherwise a party and to assist
Furr's in researching and collecting amounts owing to Furr's from Topco
Associates, Inc. (iii) it will use its reasonable commercial efforts to
assist Furr's, the Banker and the Special Committee to market Furr's during
the Sales Period in accordance with this Article II, (iv) it will, during the
Transition Period or the Purchaser Transition Period, if any, use its
reasonable commercial efforts to cooperate with and assist Furr's in Furr's'
conversion to a new information technology system from that used by Fleming
but only to the extent permitted in accordance with applicable law and by
existing agreements governing the use of Fleming's existing information
technology system, and (v) it will use its reasonable commercial efforts to
maintain the operation of the El Paso PSC in the ordinary and usual course
consistent with past practice (other than the anticipated depletion and
replenishment of Inventory and as otherwise provided herein) through the
Purchaser Transition Period or the Transition Period, if any, or through the
sale of the El Paso PSC, if applicable, including, without limitation,
through the maintenance of the necessary workforce required to operate the El
Paso PSC other than any reduction in employees associated with the depletion
in Inventory and reduction of services and the sale of the El Paso PSC or its
liquidation, as the case may be, in accordance with this Agreement. In no
event shall Fleming be under any obligation or duty to agree to, modify or
amend the purchase price or any other significant term or condition with
respect to the sale of the El Paso PSC which would be less beneficial to
Fleming than those contained herein or in the Asset Purchase Agreement and is
under no duty to act other than in the best interest of Fleming and its
stockholders, it being understood and agreed to by the Parties that the
actions in accordance with this Agreement, including without limitation, the
rights, obligations and agreements of Fleming hereunder, are in the best
interest of Fleming and its stockholders.
(ii) FURR'S COVENANTS. Furr's covenants with Fleming that it
will negotiate in good faith during the Sales Period with any potential
purchaser of Furr's the Acquisition Agreement, as provided in SECTION 2.2(d)
hereof. In no event shall Furr's be under any obligation or duty to agree
to, modify or amend the purchase price any other significant term or
condition with respect to the sale of Furr's which would be less beneficial
to Furr's than those contained herein or in the Acquisition Agreement and is
under no duty to act other than in the best interest of Furr's and its
stockholders, it being understood and agreed to by the Parties that the
actions in accordance with this Agreement, including, without limitation, the
rights, obligations and agreements of Furr's hereunder, are in the best
interest of Furr's and its stockholders. Furr's covenants and agrees that,
subject to the caveat set forth in SECTION 2.4, it will require the Special
Committee to make interim reports to the Board with respect to the progress
of the sales process and to provide all Stockholders with such information.
Furr's further covenants and agrees that during the Sales Period and, upon
execution of the Acquisition Agreement, if applicable, through
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and until the consummation of the acquisition transactions contemplated
thereby or the termination thereof, it shall not issue any capital stock or
any securities convertible into capital stock (including, without limitation,
any additional shares of Common Stock, Options, Warrants or SARs) except as
set forth in the ninth "Whereas" clause hereof or as otherwise contemplated
by this Agreement.
2.3 MINIMUM BID PRICE. The Parties agree if a bona fide bid is received
as a result of the sale process described in this Article II that equals or
exceeds (a) the Minimum Bid Price - El Paso PSC, in case the Purchaser's bid
includes the El Paso PSC, or (b) the Minimum Bid Price - Liquidation, in case
the Purchaser's bid excludes the El Paso PSC, in either case, the Board,
based on the recommendation of the Special Committee, shall accept the bid
which it considers, in its sole judgment, to be the best available
alternative for maximizing shareholder value (without being required to take
into account any impact of the inclusion or exclusion of the El Paso PSC in
such a transaction with respect to calculating such shareholder value) so
long as the bid accepted qualifies as a Minimum Bid Price - El Paso PSC or
Minimum Bid Price -Liquidation. The Parties further agree that if only one
bid is received by Furr's under the provisions of Article II hereof that
qualifies, the Board shall accept such qualified bid. If neither a Minimum
Bid Price - El Paso PSC nor a Minimum Bid Price -Liquidation is attained
through the sale process as herein provided, the sale process shall be
terminated at the end of the Sales Period; PROVIDED, however, if there is a
bona fide bid of less than the Minimum Bid Price - El Paso PSC or the Minimum
Bid Price - Liquidation, the Board, in its sole judgement, based on the
recommendation of the Special Committee, may elect to accept such bid (a
"Lower Acceptable Bid"); PROVIDED further, however, that prior to the
acceptance of such bid, Furr's shall have complied with the provisions of the
following paragraph.
Prior to the Board's acceptance, based on the recommendation of the
Special Committee, of a Lower Acceptable Bid, Furr's shall notify Fleming in
writing of its intent to accept a Lower Acceptable Bid (the "Offer Notice")
and offer (the "Sale Offer") to sell Furr's to Fleming at a per share price
and on such terms and conditions as are specified in such Offer Notice.
Fleming shall have fifteen (15) days following the delivery to Fleming of
such Offer Notice in which to accept in writing the Sale Offer. If Fleming
does accept the Sale Offer, Fleming and Furr's shall enter into a binding
agreement in the form of the acquisition agreement representing the Lower
Acceptable Bid. If Fleming does not accept the Sale Offer, the Board shall
be free to accept, but shall not be obligated to accept, a Lower Acceptable
Bid at any price and on any terms and conditions for the remainder of the
Sales Period; PROVIDED, however that in the event a Lower Acceptable Bid
includes a per share price that is less than ninety percent (90%) of the per
share price previously set forth in the Offer Notice, Fleming shall have a
right of first refusal with respect to such Lower Acceptable Bid pursuant to
which, if Fleming desires to purchase Furr's at the same price and on the
same terms and conditions as offered in such Lower Acceptable Bid, Fleming
would have ten (10) days following notification to it by Furr's (the "Match
Notice") that the Board has made such election in which to notify Furr's of
its exercise of its right of first offer and of its binding acceptance of the
terms set forth in the Match Notice, in which case the Parties shall enter
into an agreement in the form of the Acquisition
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Agreement and thereafter close such transaction within a reasonable period.
If Fleming does not exercise such right of first refusal within such ten (10)
day period, the Board shall be free to accept, but shall not be obligated to
accept, such Lower Acceptable Bid for the remainder of the Sales Period but
only at the per share price and on the terms and conditions set forth in the
Match Notice.
The Board has designated a special committee of the Board (the
"Special Committee") consisting of the following members: Benjamin F.
Montoya, David W. Morrow, Lewis G. Schaeneman, Jr., Thomas J. Sikorski, Gary
L. Swenson and Arthur G. Typermass. The Special Committee will work with the
Banker and such other legal and financial advisors as it elects to utilize in
connection with the sale process set forth in this Article II in order to set
the procedures to be followed by parties participating in the process, to
identify and contact potential purchasers, to conduct negotiations with
potential purchasers, to make decisions relating to the sale process and to
such negotiations during the Sales Period (including with respect to the
terms and conditions of any particular transaction and the agreements
relating thereto) and to make a determination as to the best available
alternative for maximizing shareholder value. In making any such
determination, the Special Committee shall be free to consider any and all
factors reasonably relevant to such determination including without
limitation the value of consideration offered, provided that the Special
Committee may only value such consideration that is in cash and/or Marketable
Securities irrespective of whether non-Marketable Securities are offered by a
prospective purchaser as such consideration; any regulatory and governmental
approvals required; financing terms and financial credibility of bidders; the
bona fide nature of a particular bid or bidder; and any risks associated with
a particular bid. The Parties acknowledge and agree that the decisions of
the Special Committee will be final, determinative and binding on the Parties
with respect to the transactions contemplated by this Agreement, so long as
such decisions are consistent with the terms and provisions of this
Agreement. The Special Committee shall recommend to the Board the
transaction, if any, which it determines to be the best available alternative
for maximizing shareholder value (without taking into account any impact of
the inclusion or exclusion of the El Paso PSC in such a transaction with
respect to calculating such shareholder value), so long as such decisions are
consistent with the terms and provisions of this Agreement. The Parties
hereby agree and covenant that Furr's and all of the members of the Board and
the Special Committee shall be released of all claims that could be asserted
in connection with the sale process contemplated hereby including without
limitation any claim relating to its selection of the best available
alternative in the sale process or any determinations regarding valuation of
various alternative proposals (including whether a selected transaction had a
higher or lower shareholder value than any other alternative) and the
benefits and risks associated therewith, so long as such decisions are
consistent with the terms and provisions of this Agreement.
2.4 STOCKHOLDERS BIDS. Nothing herein contained shall restrict the
Stockholders from bidding for Furr's in accordance with the sale process set
forth in this Article II; PROVIDED, that in the event a Stockholder elects to
participate in the bidding process, such Stockholder and its representatives
(including without limitation, any employee, agent or designee of such
Stockholder
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to the Board (a "Designee")) shall not be provided any information by the
Banker, the Special Committee or Furr's regarding the sale process or any
other participants in the sale process (including without limitation any
information regarding the identity of participants, terms of any offer
(including price) and status of negotiations); PROVIDED, however the Parties
recognize that Management will be involved in the sales process at the
direction of, and to the extent required by, the Special Committee, the Board
and the Banker. At such time, however, that a Stockholder who has indicated
to Furr's of its (his) intention to bid and has consequently been excluded
from the receipt of information regarding the sales process in accordance
with the foregoing sentence, either notifies Furr's in writing of its (his)
agreement to refrain from bidding or, having bid, irrevocably withdraws its
(his) bid, such Stockholder shall thereafter be entitled to all such
information regarding the sales process provided to other Stockholders and
such Stockholder's Designees shall thereafter be entitled to all such
information provided to the members of the Board by the Special Committee.
The Special Committee shall not include any member of the Board who is an
employee, agent or designee of any Stockholder who has indicated to Furr's
its intention to bid.
2.5 CALCULATION OF AMOUNTS TO BE PAID TO HOLDERS OF ISSUED COMMON STOCK,
OPTIONS, WARRANTS AND SARS. Upon consummation of the sale of Furr's in
accordance with the terms and provisions of this Article II, as of the date
of the closing of the transactions contemplated by the Acquisition Agreement,
the Acquisition Agreement shall provide that (i) holders of Issued Common
Stock shall be entitled to receive the Share Price for each share of Common
Stock they own, and (ii) holders of Options, Warrants and SARs shall be
entitled to receive the Share Price less the applicable exercise price for
each share of Common Stock they would have owned had they exercised their
right to obtain Common Stock. Furr's shall be entitled to deduct from the
amounts payable holders of Options, Warrants and SARs any amounts that Furr's
is required to withhold and to pay over such deductions to the appropriate
federal or state, local or other tax authorities under applicable law with
respect to such amounts.
ARTICLE III
THE RELEASES
3.1 FURR'S RELEASE. Concurrent with the Parties' execution of this
Agreement, Furr's shall execute and deliver to Fleming and the Windward Group
the Special Release (Furr's) in the form attached hereto as EXHIBIT B-1 and
Furr's and Fleming shall cause the dismissal with prejudice of the Action in
substantially the form attached hereto as EXHIBIT C to be filed within five
(5) business days.
3.2 FLEMING RELEASE. Concurrent with the Parties' execution of this
Agreement, Fleming shall execute and deliver to Furr's, the Windward Group
and Management the Special Release (Fleming) in the form attached hereto as
EXHIBIT B-3 and Fleming and Furr's shall cause the dismissal with prejudice
of the Delaware Litigation in substantially the form attached hereto
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as EXHIBIT D-1 and the Texas Action in substantially the form attached hereto
as EXHIBIT D-2 to be filed within five (5) business days.
3.3 ARBITRATION. Concurrent with the Parties' execution of this
Agreement, Fleming and Furr's shall dismiss the Arbitration Proceeding.
During the Sales Period, and either the Purchaser Transition Period or the
Transition Period, if any, Furr's waives any and all rights to resubmit a
competitive bid pursuant to paragraph 2(b) of the Supply Agreement.
3.4 DISSOLUTION ACTION. Fleming hereby agrees that it will not pursue
the Dissolution Action or take any action related thereto or in connection
therewith (including, without limitation, any similar proceeding regarding
the dissolution, liquidation or winding up of the affairs of Furr's, either
in the state of Delaware or otherwise) from and after the date hereof based
on any action occurring prior to the date hereof.
ARTICLE IV
THE SUPPLY AGREEMENT AND FURR'S ELECTION
4.1 THE SUPPLY AGREEMENT.
(a) SALE OF FURR'S. (i) In the event of the sale of Furr's to a
Purchaser who has elected to purchase the El Paso PSC, Fleming and Furr's (or
the Purchaser, as the case may be) shall enter into an asset purchase
agreement covering the El Paso PSC substantially in the form of the Asset
Purchase Agreement with such changes the parties thereto may agree, which
transaction shall be closed within one hundred twenty (120) days from the
acceptance of the Purchaser's bid by Furr's subject to the terms and
conditions set forth in the Asset Purchase Agreement, which agreement, among
other terms and conditions as therein contained, shall require Purchaser to
agree to the El Paso PSC Costs as the purchase price of the El Paso PSC. The
Supply Agreement shall terminate on the closing of the Asset Purchase
Agreement. Pending such closing, Fleming will sell food and related products
to the Purchaser or Furr's, as the case may be, and the Purchaser or Furr's
shall purchase from Fleming food and related products as the case may be, in
accordance with the Supply Agreement
(ii) Upon the sale of Furr's to a Purchaser who has elected
NOT to purchase the El Paso PSC, unless Fleming and the Purchaser have
previously mutually agreed otherwise, Fleming shall continue the sale and
delivery of food and related products to Furr's under the terms and
provisions and for the fees set forth in the Supply Agreement for the
duration of the Purchaser Transition Period. During the first seven (7)
months of the Purchaser Transition Period (the "First Period"), Furr's shall
continue to maintain an annualized volume of purchases pursuant to the Supply
Agreement of at least $435 million; PROVIDED, however that the Purchaser may
elect, in its sole discretion to shorten the First Period or to avoid the
First Period completely and proceed directly to the Second Period by
providing written notice to Fleming at least 5 days prior to the closing of
the sale of Furr's to such Purchaser. During the last two (2) months of the
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Purchaser Transition Period (the "Second Period"), Furr's and Fleming shall
phase down the purchase of products under the Supply Agreement; PROVIDED,
however, Fleming will sell food and related products to Furr's during the
Purchaser Transition Period in accordance with the Supply Agreement.
Following the Purchaser Transition Period, Purchaser or Furr's shall pay to
Fleming the Liquidation Costs in accordance with the provisions of the Escrow
Agreement as set forth in SECTION 2.2(c) hereof.
(b) NO SALE. In the event Furr's and the Banker are unsuccessful
in the sale of Furr's as provided in Article II hereof, the Supply Agreement
shall terminate in accordance with the provisions of either SECTION 4.3 or
SECTION 4.4, as the case may be.
4.2 FURR'S ELECTION. If there is no sale of Furr's as provided in
Article II hereof, Furr's shall elect, by delivery of written notice to
Fleming within thirty (30) days following the end of the Sales Period, to
either (a) purchase the El Paso PSC at the El Paso PSC Costs (in which case
the Supply Agreement shall terminate on the closing of such purchase) as
provided in SECTION 4.3 below or (b) continue to purchase products from
Fleming during the Transition Period and pay Fleming the Liquidation Costs at
the end of the Transition Period (at which time the Supply Agreement shall
terminate) as provided in SECTION 4.4 below.
4.3 FURR'S ELECTION TO PURCHASE THE EL PASO PSC. If Furr's elects to
purchase the El Paso PSC, as provided by the election set forth in SECTION
4.2(a) hereof, such sale shall be consummated in accordance with an asset
purchase agreement covering the El Paso PSC substantially in the form of the
Asset Purchase Agreement with such changes the parties thereto may agree,
which transaction shall be closed within one hundred twenty (120) days
following delivery of notice regarding such sale subject to the terms and
conditions set forth in the Asset Purchase Agreement, which agreement, among
other terms and conditions, shall require Furr's to agree to the El Paso PSC
Costs as the purchase price of the El Paso PSC. The period of time from the
end of the Sales Period and the closing of the sale of the El Paso PSC to
Furr's shall be known as the "Asset Sales Period." The Supply Agreement
shall terminate on the closing of the Asset Purchase Agreement. During the
Asset Sales Period, Fleming shall provide food and related products to Furr's
in accordance with the Supply Agreement.
With respect to the Inventory (as defined in the Asset Purchase
Agreement) located in the El Paso PSC, Furr's agrees to purchase such
Inventory under and in accordance with the inventory terms attached as
Exhibit A to and made a part of the Asset Purchase Agreement. The Asset
Purchase Agreement shall describe the Purchased Assets, the Assumed
Liabilities and the Excluded Assets (each as defined in the Asset Purchase
Agreement). Furr's shall not be entitled to the business of any other
customer of the El Paso PSC who shall be transferred to another Fleming
product supply center.
4.4 FURR'S ELECTS NOT TO PURCHASE THE EL PASO PSC. If Furr's elects the
option set forth in SECTION 4.2(b) hereof, Fleming shall continue the sale
and delivery of food and related products to Furr's under the terms and
provisions and for the fees set forth in the Supply Agreement for
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the duration of the Transition Period. During the first seven (7) months of
the Transition Period, Furr's shall continue to maintain an annualized volume
of purchases pursuant to the Supply Agreement of at least $435 million.
During the last two (2) months of the Transition Period, Furr's and Fleming
shall phase down the purchase of products under the Supply Agreement, each
using its best efforts working together to minimize the amount of Inventory
in the El Paso PSC at the end of the Transition Period. All Inventory
remaining in the El Paso PSC at the end of the Transition Period in excess of
$500,000 (except for Inventory held for sale to customers of Fleming other
than Furr's) shall be transferred to Furr's at Furr's sole cost and expense
which amount shall be paid for in accordance with the terms of the Supply
Agreement within ten (10) days from the end of the Transition Period. Within
such ten (10) day period, Furr's shall also pay to Fleming the Liquidation
Costs in accordance with the provisions of the Escrow Agreement as set forth
in SECTION 2.2(c) hereof.
Nothing herein contained shall require Fleming to sell food and
related products to Furr's under the Supply Agreement or otherwise following
the end of the Transition Period.
4.5 CREDIT POLICIES. Furr's and Fleming recognize and agree that as
long as the Supply Agreement shall remain in effect, Fleming shall extend to
Furr's the normal trade credit it has heretofore extended; PROVIDED, however,
if Furr's fails to make timely payment in readily available funds for
inventory and fees under, or otherwise breaches, the Supply Agreement, or
fails to make timely payment in readily available funds for general
merchandise products purchased from any Fleming GMD facility and fees in
connection therewith, Fleming shall have the right in its sole and exclusive
determination to establish stricter credit policies, including, but not
limited to, a policy of C.O.D. For calendar year 1997, Fleming's extension
to Furr's of normal trade credits includes, without limitation, a credit
policy for holiday turkeys as set forth in that certain Letter Agreement
between Furr's and Fleming dated October 7, 1997. For calendar years after
1997, Fleming will consider credit extensions for holiday turkeys based on
the then credit of Furr's. In addition and notwithstanding such credit
policies, Furr's recognizes and agrees that Fleming has the right in its sole
discretion to refrain from supplying food, grocery and related food products
or general merchandise products if, for any reason, Furr's fails to make
timely payment for such products under Fleming's credit policies established
by it from time to time.
4.6 OTHER INDEBTEDNESS. Upon the termination of the Supply Agreement
and as a condition to such termination, Furr's shall pay Fleming any and all
other indebtedness owed to it under the Supply Agreement, evidenced by
promissory note(s), open account or otherwise.
4.7 PAYMENTS. All payments to be made by Furr's to Fleming under this
Agreement shall be made by wire transfer in readily available funds to an
account to be designated by Fleming to Furr's at least three days prior to
such payment. Payments under the Supply Agreement shall continue to be made
in accordance with the provisions of the Supply Agreement.
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4.8 REDUCTION IN CHARGES. Fleming and Furr's agree, commencing as of
the date hereof, that the Supply Agreement shall be amended and modified as
follows:
(a) PAYMENT AMOUNT. For purposes of settling the Action and the
delivery of the releases pursuant to Article III hereof, Fleming will refund
to Furr's $738,500 per Period (equivalent to $800,000 per month) of its fees
and charges for the balance of the term of the Supply Agreement as modified
by the terms of this Agreement, except with respect to the last two (2)
months of the Transition Period and the Second Period, if either shall be
applicable, during which Fleming will refund to Furr's $369,250 per Period
(equivalent to $400,000 per month) of its fees and charges, herein referred
to as the "Payment Amount."
(b) PAYMENT. Fleming will pay Furr's the Payment Amount by wire
transfer within three business days of the end of each Period for the
previous Period (or portion thereof).
(c) EFFECTIVE DATE. The Payment Amount will be effective upon
signing of this Agreement and if this Agreement is executed in the middle of
a Period, the modification will be pro rated and be effective for that
portion of the Period from the date of signing hereof.
(d) COST OF GOODS. The costs of goods, fees and all other charges
to be paid by Furr's and charged by Fleming under the Supply Agreement, the
Sell Plan attached to the Supply Agreement for Perishable Products, and FMP
for FMP Products (collectively, the "Product Supply Documents"), shall be
determined, calculated and charged in accordance with Fleming's past
practices. Furr's ratifies and agrees that Fleming's past practices are
consistent with the Product Supply Documents and agrees those practices will
be employed for the remaining term of the Supply Agreement; PROVIDED,
however, Fleming will do nothing to:
(i) directly or indirectly increase the cost of goods purchased
under the Supply Agreement, except to pass on any actual net increases in
costs charged by vendors; or
(ii) directly or indirectly increase the fees it charges to
Furr's under the Supply Agreement and the Product Supply Documents,
including without limitation (a) "upcharge" fees, (b) storage, base
handling, or transportation fees, (c) corporate staff service charges, or
(d) IT service charges; or
(iii) otherwise manipulate or alter the cost of goods or the
fee structure in such a way as to reduce the benefit of the Payment Amount.
Fleming and Furr's agree that FMP as introduced to Furr's in August 1995 and
as amended to the date of this Agreement will be used to price and sell FMP
Products to Furr's.
(e) FURR'S VOLUME OF PURCHASES. Furr's will continue to purchase
substantially the same amount of all categories and mix of products it has
purchased from Fleming during the
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trailing 12 months from July 12, 1997, at a Teamwork Score as defined in the
Supply Agreement of at least 60%; PROVIDED, HOWEVER, Furr's shall be under no
obligation to discontinue buying goods from existing alternative suppliers.
Furr's agrees to make maximum use of Fleming's "bill-through" program.
(f) FLEMING PERIOD RESULTS. Fleming agrees that during the
remaining term of the Supply Agreement, as modified by this Agreement, it
will provide Furr's within ten business days after the end of each Period (or
portion thereof) commencing with the first Period (or portion of a Period)
following the execution of this Agreement, with a report of Fleming's
operational results evidencing the EBITDA Fleming realized from Furr's
business in the form reflected for the trailing 12 months from July 12, 1997
and set forth as EXHIBIT E attached hereto.
(g) FURR'S MANAGEMENT OF THE PAYMENT AMOUNT. Furr's and Fleming
recognize and agree that it is Furr's sole responsibility to manage the
disposition of the Payment Amount and if such amount fails to appear as net
income to Furr's it shall not be the responsibility of Fleming.
(h) PRODUCT SUPPLY DOCUMENTS. Except as modified herein, the
Product Supply Documents and each of the terms and conditions contained
therein shall remain in full force and effect for the balance of the term of
the Supply Agreement, as herein provided.
(i) SUPPLY AGREEMENT. The Parties recognize and agree that a
portion of the El Paso PSC Costs payable to Fleming in the event of the sale
of the El Paso PSC and a portion of the Liquidation Costs payable to Fleming
in the event El Paso PSC is not sold includes an amount representing a
portion of Fleming's unamortized cost of acquiring the right to supply Furr's
under the Supply Agreement.
4.9 UNION AGREEMENT. In the event Furr's or the Purchaser, as the case
may be, elects to purchase the El Paso PSC, Furr's or the Purchaser, as the
case may be, shall negotiate with Local No. 745 an amendment, modification,
or replacement of the Union Agreement (the "Union Agreement Amendment");
which shall provide, inter alia, that Fleming's liability and obligation
under the Union Agreement will terminate and that Fleming will no longer be
liable for any prospective obligations with respect to the Union Agreement
accruing following the date hereof or otherwise accruing in connection with
the transactions contemplated by this Agreement or the Asset Purchase
Agreement, except as follows:
(a) in the event Furr's, the Purchaser or Fleming, as the case may
be, pays severance to any union members that will not be hired by Furr's or
the Purchaser, Fleming shall be liable for the first $200,000 of such
severance obligation, and Furr's or the Purchaser, as the case may be, shall
be liable for any additional amount; and
(b) Furr's or the Purchaser, as the case may be, shall pay Fleming
$500,000 in cash at the closing of the Acquisition Agreement, and Fleming
shall be solely responsible for,
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and shall indemnify Furr's or the Purchaser, as the case may be, against, any
and all liability with respect to any multiemployer pension plans which cover
the employees of the El Paso PSC arising as of or prior to the closing of the
Asset Purchase Agreement.
Fleming agrees that it is solely responsible for any and all severance
obligations to managerial and other employees who are not covered under the
Union Agreement.
ARTICLE V
THE STOCKHOLDERS AGREEMENT
5.1 THE STOCKHOLDERS AGREEMENT. (a) With the exception of the rights
provided by and the terms and provisions of Article II of the Stockholders
Agreement, Fleming hereby covenants and agrees that it will take no action or
otherwise exercise any right pursuant to the Stockholders Agreement from and
after the date hereof until the date following the expiration of the Sales
Period. Fleming further covenants and agrees that, upon execution of the
Acquisition Agreement, if applicable, through and until the closing of the
acquisition transactions contemplated by such agreement or the termination
thereof, it hereby waives its rights under the Stockholders Agreement:
(1) in connection with the transactions contemplated thereby as
follows:
(i) the provisions of Section 3.2 of the Stockholders
Agreement regarding the right of first refusal with respect to a transfer of
Common Stock, including the notice provisions relating thereto;
(ii) the provisions of Section 5.3 of the Stockholders
Agreement requiring that in the event of the sale of assets of Furr's, the
applicable purchase agreement shall provide that the purchaser will assume
any supply agreement between Fleming and Furr's then in effect;
(iii) the provisions of clause (f) of Section 5.4 of the
Stockholders Agreement with respect to notice to Fleming regarding the terms,
provisions and documents relating to a transaction involving Furr's;
(iv) the provisions of Section 5.7 of the Stockholders
Agreement regarding the right of first offer with respect to a transfer of
Common Stock, including the notice provisions relating thereto; and
(v) the provisions of Section 6.1 of the Stockholders
Agreement regarding preemptive rights; or
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<PAGE>
(2) which are inconsistent with the provisions of this Agreement
(or the other agreements contemplated hereby), including but not limited to
the provisions of Article III (Restrictions on Transfer; Rights of First
Refusal), Article IV (Tag-Along Rights); Article V (Right to Compel Sale or
IPO Event); Article VI (Preemptive Rights); and Article VII (Put and Call
Rights on Management Stock).
(b) Concurrently with the Parties' execution of this Agreement,
each of the members of the Windward Group shall have executed and delivered
to Fleming and Furr's a waiver, in form attached hereto as EXHIBIT H (the
'Windward Waiver"), by the terms and provisions of which each member of the
Windward Group, with the exception of the rights provided by and the terms
and provisions of Article II of the Stockholders Agreement, shall covenant
and agree to take no action or otherwise exercise any right pursuant to the
Stockholders Agreement from and after the date of this Agreement until the
date following the expiration of the Sales Period. The waiver shall also
provide and each member of the Windward Group shall further covenant and
agree that, upon the execution of the Acquisition Agreement, if applicable,
through and until the closing of the acquisition transactions contemplated
thereby or the termination thereof, each of them shall waive their respective
rights under the Stockholders Agreement:
(1) in connection with the transactions contemplated thereby as
follows:
(i) the provisions of Section 3.2 of the Stockholders
Agreement regarding the right of first refusal with respect to a transfer of
Common Stock, including the notice provisions relating thereto;
(ii) the provisions of Section 5.1 of the Stockholders
Agreement regarding the right to compel sale generally;
(iii) the provisions of Section 5.2 of the Stockholders
Agreement regarding the right of compelled sale pursuant to a sale of the
Common Stock;
(iv) the provisions of Section 5.3 of the Stockholders
Agreement regarding the right of compelled sale other than pursuant to a sale
of Common Stock;
(v) the provisions of Section 5.4 of the Stockholders
Agreement regarding the cooperation of each Stockholder;
(vi) the provisions of Section 5.6 of the Stockholders
Agreement relating to the rights to compel an IPO Event, as defined in the
Stockholders Agreement; and
(vii) the provisions of Section 6.1 of the Stockholders
Agreement regarding preemptive rights; or
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<PAGE>
(2) which are inconsistent with the provisions of this Agreement
(or the other agreements contemplated hereby), including but not limited to
the provisions of Article III (Restrictions on Transfer; Rights of First
Refusal), Article IV (Tag-Along Rights); Article V (Right to Compel Sale or
IPO Event); Article VI (Preemptive Rights); and Article VII (Put and Call
Rights on Management Stock).
The waiver described herein shall also provide that each member of the
Windward Group agrees that it will not transfer, pledge or in any manner
hypothecate or dispose of its Common Stock during the Sales Period except (i)
as provided in this Agreement or (ii) to a Permitted Transferee (as defined
in the Stockholders Agreement) who agrees to take such Common Stock subject
to the provisions of this Agreement applicable to the Windward Group.
5.2 STANDSTILL. Fleming agrees that it will not transfer, pledge or in
any manner hypothecate or dispose of its Common Stock during the Sales Period
except (i) as provided in this Agreement or (ii) to a Permitted Transferee
who agrees to take such Common Stock subject to the provisions of this
Agreement applicable to Fleming. Furr's covenants and agrees that, upon the
execution of the Acquisition Agreement, if applicable, through and until the
closing of the acquisition transactions contemplated thereby or the
termination thereof, it hereby waives any and all rights it may have under
Section 3.2 of the Stockholders Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 OTHER CONDITIONS. Concurrently with the Parties' execution of this
Agreement (i) each member of the Windward Group shall have executed and
delivered (A) to Fleming and Management the Special Release (Windward Group)
in the form attached hereto as EXHIBIT B-2 and the Windward Waiver, and (B)
to Furr's an acknowledgment that Furr's shall be sold in accordance with the
provisions of Article II hereof, including without limitation the minimum bid
price provisions of, and the designation of the Special Committee's authority
contained in, SECTION 2.3 hereof as set forth in the Windward Waiver, (ii)
each of Management shall have executed and delivered to Fleming, the Windward
Group and Furr's the Special Release (Management) in the form attached hereto
as EXHIBIT B-4, and (iii) each of the Officers and Employees shall have
executed and delivered to Furr's, the Windward Group, Fleming and Management
the Special Release (Officers and Employees) in the form attached hereto as
EXHIBIT B-5.
6.2 CONFIDENTIALITY. Except as otherwise required by law, the Parties
shall not disclose any information regarding the terms and provisions of this
Agreement, the Offering Memorandum and the transactions contemplated hereby
except as specifically contemplated hereby or as mutually agreed to by the
Parties.
6.3 NOTICES. All notices that are required or may be given pursuant to
this Agreement must be in writing and delivered personally, by a recognized
courier service, by a recognized
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<PAGE>
overnight delivery service, by telecopy or by registered or certified mail,
postage prepaid, to the Parties at the following addresses (or to the
attention of such other person or such other address as any party may provide
to the other parties by notice in accordance with this SECTION 6.3):
if to Furr's: with copies to:
Furr's Supermarkets, Inc. Jacobvitz, Thuma & Matthews
1730 Montano Road, N.W. 500 Marquette N.W., Suite 650
Albuquerque, NM 87107 Albuquerque, NM 87102
Attn: Jan U. Friederich Attn: David T. Thuma, Esq.
Telecopy: (505) 344-0810 Telecopy: (505) 766-9287
with copies to:
Windward Capital Partners, L.P. Skadden, Arps, Slate, Meagher & Flom LLP
Americas Tower, 42nd floor 919 Third Avenue
1177 Avenue of the Americas
New York, NY 10022
New York, NY 10036 Attn: Eileen Nugent Simon, Esq.
Attn: Thomas J. Sikorski Telecopy: (212) 735-2000
Telecopy: (212) 382-6534
if to Fleming: with copies to:
Fleming Companies, Inc. McAfee & Taft
6301 Waterford Blvd. Two Leadership Square
Oklahoma City, OK 73126 Tenth Floor
Attn: William J. Dowd Oklahoma City, OK 73102
President and Chief Attn: John M. Mee, Esq.
Operating Officer Telecopy: (405) 235-0439
Telecopy: (405) 840-7226
6.4 GOVERNING LAW. This Agreement and the attached releases shall be
governed by the law of the State of Delaware.
6.5 ATTORNEYS' FEES. In the event of any litigation, arbitration or other
adjudicative proceeding arising out of or relating to this Agreement, or either
of the attached releases, the prevailing party shall recover its attorneys' fees
and costs against the other party or parties.
6.6 FURTHER ASSURANCES. Each of the Parties shall use reasonable and
diligent efforts to proceed promptly with the transactions contemplated herein,
to fulfill the conditions precedent, and to execute such further documents and
perform such further acts as may be reasonably required or appropriate to
effectuate the purpose and intent of this Agreement.
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<PAGE>
6.7 BINDING ON SUCCESSORS. This Agreement shall inure to the benefit of
and be binding upon the Parties hereto and their respective partners,
officers, directors, shareholders, employees, agents, independent contractors
and the affiliates, successors, assigns, heirs, executors, administrators and
representatives of each of the foregoing.
6.8 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement constitutes and is
intended to constitute the entire agreement of the Parties concerning the
subject matter hereof. No covenants, agreements, representations or
warranties of any kind whatsoever have been made by any party hereto, except
as specifically set forth herein. All prior discussions and negotiations
with respect to the subject matter hereof are superseded by this Agreement.
The Parties agree that the Purchaser or Furr's, as the case may be, may
assign its rights pursuant to SECTION 4.1(a) or SECTION 4.3, as applicable,
to purchase the El Paso PSC to a third party in connection with a sale of
Furr's in accordance with Article II hereof or pursuant to SECTION 4.2(a).
6.9 CONSTRUCTION. The Parties hereby acknowledge that they are
sophisticated commercial entities or business people. The Parties also
acknowledge that each of them has been represented by independent counsel of
their own choice throughout all negotiations preceding the execution of this
Agreement, and that they have executed the same upon the advice of their
independent counsel. The Parties and their respective counsel cooperated in
the drafting and preparation of this Agreement such that it shall be deemed
their joint work product and may not be construed against any of the Parties
by reasons of its preparation.
6.10 SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction to be invalid or unenforceable, in whole or
in part, the remaining provisions, and any partially invalid or unenforceable
provisions, to the extent valid and enforceable, shall nevertheless be
binding and valid and enforceable.
6.11 MODIFICATIONS AND AMENDMENTS. This Agreement may not be modified or
terminated orally and no modification, termination or waiver shall be valid
unless in writing and signed by all of the Parties.
6.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
the day and year first above written.
FURR'S: FURR'S SUPERMARKETS, INC., a Delaware corporation
By
--------------------------------
Jan U. Friederich
Chief Executive Officer and Chairman of
the Board
FLEMING: FLEMING COMPANIES, INC., an Oklahoma corporation
By
--------------------------------
William J. Dowd
President
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<PAGE>
EXHIBIT 12
FLEMING COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
40 WEEKS ENDED
----------------------
OCTOBER 4, OCTOBER 5,
1997 1996
---------- ----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Earnings:
Pretax income........................................................................... $ 56,201 $ 33,464
Fixed charges, net...................................................................... 153,981 159,184
---------- ----------
Total earnings........................................................................ $ 210,182 $ 192,648
---------- ----------
---------- ----------
Fixed charges:
Interest expense........................................................................ $ 124,129 $ 125,045
Portion of rental charges deemed to be interest......................................... 29,570 33,861
Capitalized interest.................................................................... -- 103
---------- ----------
Total fixed charges................................................................... $ 153,699 $ 159,009
---------- ----------
---------- ----------
Ratio of earnings to fixed charges........................................................ 1.37 1.21
---------- ----------
---------- ----------
</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>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> OCT-04-1997
<CASH> 27,019
<SECURITIES> 0
<RECEIVABLES> 332,165
<ALLOWANCES> 22,352
<INVENTORY> 997,219
<CURRENT-ASSETS> 1,429,191
<PP&E> 1,595,454
<DEPRECIATION> 673,326
<TOTAL-ASSETS> 3,869,635
<CURRENT-LIABILITIES> 1,117,738
<BONDS> 1,137,684
0
0
<COMMON> 94,510
<OTHER-SE> 995,858
<TOTAL-LIABILITY-AND-EQUITY> 3,869,635
<SALES> 11,755,946
<TOTAL-REVENUES> 11,755,946
<CGS> 10,670,361
<TOTAL-COSTS> 11,560,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,840
<INTEREST-EXPENSE> 124,129
<INCOME-PRETAX> 56,201
<INCOME-TAX> 28,602
<INCOME-CONTINUING> 27,599
<DISCONTINUED> 0
<EXTRAORDINARY> (13,330)
<CHANGES> 0
<NET-INCOME> 14,269
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
