<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 19, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
(405) 840-7200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 16, 1997 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 37,775,000
<PAGE>
INDEX
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings -
16 Weeks Ended April 19, 1997,
and April 20, 1996
Consolidated Condensed Balance Sheets -
April 19, 1997, and December 28, 1996
Consolidated Condensed Statements of Cash Flows -
16 Weeks Ended April 19, 1997,
and April 20, 1996
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 4. Results of Votes of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings
For the 16 weeks ended April 19, 1997, and April 20, 1996
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Net sales $4,752,031 $5,168,234
Costs and expenses:
Cost of sales 4,319,349 4,711,114
Selling and administrative 363,716 397,743
Interest expense 48,822 52,430
Interest income (14,354) (15,424)
Equity investment results 4,078 3,165
Litigation charge 19,218 7,110
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Total costs and expenses 4,740,829 5,156,138
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Earnings before taxes 11,202 12,096
Taxes on income 5,938 6,181
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Net earnings $ 5,264 $ 5,915
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- -----------------------------------------------------------------------------
Net earnings per share $.14 $.16
Dividends paid per share $.02 $.30
Weighted average shares outstanding 37,801 37,739
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- -----------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Consolidated Condensed Balance Sheets
(In thousands)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
April 19, December 28,
Assets 1997 1996
- -----------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 58,643 $ 63,667
Receivables 320,797 329,505
Inventories 942,113 1,051,313
Other current assets 104,909 119,123
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Total current assets 1,426,462 1,563,608
Investments and notes receivable 196,806 205,683
Investment in direct financing leases 209,310 212,202
Property and equipment 1,579,230 1,562,382
Less accumulated depreciation
and amortization (637,553) (603,241)
- -----------------------------------------------------------------------------
Net property and equipment 941,677 959,141
Other assets 131,098 118,096
Goodwill 991,101 996,446
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Total assets $3,896,454 $4,055,176
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Liabilities and Shareholders' Equity
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Current liabilities:
Accounts payable $ 757,397 $ 952,769
Current maturities of long-term debt 146,798 124,613
Current obligations under capital leases 20,205 19,715
Other current liabilities 237,908 245,774
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Total current liabilities 1,162,308 1,342,871
Long-term debt 1,125,338 1,091,606
Long-term obligations under capital leases 361,617 361,685
Deferred income taxes 22,891 37,729
Other liabilities 142,966 145,327
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 94,510 94,494
Capital in excess of par value 503,874 503,595
Reinvested earnings 518,920 514,408
Cumulative currency translation adjustment (4,700) (4,700)
- -----------------------------------------------------------------------------
1,112,604 1,107,797
Less ESOP note (6,373) (6,942)
Less additional minimum pension liabilities (24,897) (24,897)
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Total shareholders' equity 1,081,334 1,075,958
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Total liabilities and shareholders' equity $3,896,454 $4,055,176
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Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Consolidated Condensed Statements of Cash Flows
For the 16 weeks ended April 19, 1997, and April 20, 1996
(In thousands)
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1997 1996
- ----------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 5,264 $ 5,915
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 56,572 55,651
Credit losses 6,444 7,751
Deferred income taxes (3,808) 2,784
Equity investment results 4,078 3,165
Gain on sale of businesses - (3,679)
Consolidation and reserve payments (8,241) (6,102)
Change in assets and liabilities, excluding
effect of acquisitions:
Receivables 8,873 (22,859)
Inventories 109,200 128,125
Accounts payable (195,372) (164,855)
Other assets and liabilities (8,549) 13,298
Other adjustments, net (762) (395)
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Net cash provided by (used in)
operating activities (26,301) 18,799
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Cash flows from investing activities:
Collections on notes receivable 14,530 22,018
Notes receivable funded (12,972) (26,534)
Purchase of property and equipment (27,698) (26,431)
Proceeds from sale of
property and equipment 4,656 3,049
Investments in customers (4,403) (141)
Proceeds from sale of investment 1,927 -
Businesses acquired (6,597) -
Proceeds from sale of businesses - 9,244
Other investing activities (554) (1,115)
- ----------------------------------------------------------------------------
Net cash used in
investing activities (31,111) (19,910)
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Cash flows from financing activities:
Proceeds from long-term borrowings 110,000 128,000
Principal payments on long-term debt (54,083) (89,458)
Principal payments on capital
lease obligations (6,141) (6,141)
Sale of common stock under incentive
stock and stock ownership plans 206 1,444
Dividends paid (758) (11,238)
Other financing activities 3,164 (1,170)
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Net cash provided by
financing activities 52,388 21,437
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Net increase (decrease)in cash
and cash equivalents (5,024) 20,326
Cash and cash equivalents,
beginning of period 63,667 4,426
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Cash and cash equivalents, end of period $ 58,643 $ 24,752
- ----------------------------------------------------------------------------
Supplemental information:
Cash paid for interest $ 39,443 $ 43,519
Cash paid for taxes $ 17,464 $ 6,953
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- ----------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial
statements.
<PAGE>
Notes to Consolidated Condensed Financial Statements
1. The consolidated condensed balance sheet as of April 19, 1997, and the
consolidated condensed statements of earnings and cash flows for the 16-week
periods ended April 19, 1997, and April 20, 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 April 19, 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. Earnings per share are
computed based on net earnings divided by the weighted average shares
outstanding. The impact of common stock options on earnings per share is
immaterial. Certain reclassifications have been made to the prior year amounts
to conform to the current year's classification.
2. 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 $30 million at April 19, 1997, and
$28 million at December 28, 1996.
4. In accordance with applicable accounting standards, the company records a
charge reflecting contingent liabilities (including litigation matters) when
management determines that a loss is "probable" and either "quantifiable" or
"reasonably estimable". Additionally, the company discloses material loss
contingencies when the likelihood of a material loss is greater than "remote"
but less than "probable". Set forth below is information regarding material
loss contingencies:
Premium
The company and several other defendants were named in two suits filed in U.S.
District Court in Miami, Florida, in 1993. The suits involved an allegedly
fraudulent scheme conducted by a failed grocery diverter - Premium Sales
Corporation ("Premium") - and others in which large losses in the Premium-
related entities occurred to the detriment of a class of investors which brought
one of the suits. The other suit was brought by the receiver/trustee of the
estates of Premium and certain of its affiliated entities (the "Trustee").
Plaintiffs sought actual damages of approximately $300 million, treble damages,
punitive damages, attorneys' fees, costs, expenses and other appropriate relief.
The company denied plaintiffs' accusations and allegations, and denied all
wrongdoing, liability, fault or responsibility for loss, if any, with respect to
the claims made against it in the Premium litigation. However, to avoid future
costs and eliminate uncertainty, the company entered into a settlement agreement
in December 1996. Under the agreement, the plaintiffs (excluding certain non-
releasing investors) will dismiss their actions against the company in exchange
for a $19.5 million payment plus $500,000 for costs and expenses, and all
related claims involving the company will be dismissed.
The company recorded a charge of $20 million during the third quarter of 1996 in
anticipation of the settlement and deposited that amount into an escrow account
in December 1996 pending finalization of the settlement. The settlement remains
subject to, among other conditions, court approval and receipt by the company of
releases from Premium investors, including those who might not be bound by the
settlement.
<PAGE>
In April 1997, plaintiffs failed to deliver to the company releases sufficient
to meet the requirements of the settlement agreement. Plaintiffs have until
June 15, 1997 to submit a proposal to protect the company from exposure to non-
releasing investors and the company will have 60 days from the date of
submission to accept or reject the proposal. If no proposal is submitted or if
the proposal is rejected, the company may terminate the settlement and withdraw
its $20 million escrow deposit. If a settlement is not consummated, the company
expects the litigation will resume. In that event, while management is unable
to predict the potential range of monetary exposure to the company, if any, an
unfavorable outcome could have a material adverse effect on the company and its
financial statements.
David's
The company, a subsidiary subsequently merged with the company, and a retired
executive officer 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. On April 12, 1996, judgment was
entered against the company in the amount of $207.5 million plus pre-judgment
interest of $3.7 million and post-judgment interest at the rate of 10% per
annum. The retired executive was held jointly and severally liable for $72.6
million plus pre-judgment and post-judgment interest. In the first quarter of
1996 the company accrued $7.1 million as the result of the judgment. During the
second quarter, the trial judge recused himself and a new judge was assigned to
the case who vacated the judgment and granted a new trial. The initial accrual
was reversed and a new accrual for $650,000 was established.
The company denies 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 of all of plaintiff's
claims against the company, with prejudice, resulting in a charge to earnings of
$19.2 million.
Furr's
Furr's Supermarkets, Inc. ("Furr's"), who purchased $546 million of products
from the company in 1996 under a supply agreement expiring in 2001, filed a
lawsuit in the District Court of Bernalillo County, New Mexico, in February
1997 naming as defendants the company, certain company officers and a company
employee. Furr's claims it has been overcharged for products under the
supply agreement and alleges various causes of action, among them breach of
contract, misrepresentation, fraud and violation of certain of New Mexico's
trade practices statutes. Furr's seeks an unspecified monetary award of
actual, consequential, incidental and punitive damages, treble damages,
interest, attorneys' fees and court costs, and also seeks a declaratory
judgment terminating the supply agreement. The company has removed the case
to the United States District Court for New Mexico. The company believes it
has substantially complied with its obligations to Furr's in good faith.
Prior to filing the lawsuit, Furr's sought to exercise the supply agreement's
competitiveness clause and was seeking to audit the company's pricing under
the contract. Furr's submitted what it asserted is a "qualified competitive
bid" as defined in the supply agreement. If a qualifying bid is submitted
and found to be competitive (as defined in the supply agreement) Fleming
could either match the bid (within an established range) or permit Furr's to
accept the competitor's bid. Fleming has rejected the bid as not qualifying
under the contract and invoked the arbitration clause of the supply
agreement. All issues regarding the competitiveness clause are pending in
arbitration in New Mexico.
Management is unable to predict the potential range of monetary exposure, if
any, to the company. However, the effect of an unfavorable outcome or the loss
of Furr's business, for any reason, could have a material adverse effect on the
company and its financial statements.
<PAGE>
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 is liable or contingently liable to
the company under store subleases and lease guarantees extended by the company
for the debtor's benefit. The debtor objected to the company's claims and filed
an adversary proceeding against the company seeking subordination of the
company's claims, return of an approximate $12 million deposit and affirmative
relief for damages which was subsequently amended to include allegations of
overcharges for products.
In August 1996, the court approved a settlement of both the debtor's adversary
proceeding against the company and the company's disputed claims in the
bankruptcy. The settlement, which is subject to approval by the creditors of a
revised plan which encompasses the settlement, provides that the company will
retain the $12 million deposit, relinquish its secured and unsecured claims in
exchange for the right to receive 10% of distributions, if any, made to the
unsecured creditors and pay the debtor $2.5 million in exchange for the
furniture, fixtures and equipment from 17 stores and two storage facilities.
The company agreed to lease to the reorganized debtor the furniture, fixtures
and equipment in fourteen of the stores for nine years (or until, in each case,
the expiration of the store lease) at an annual rental of $18 thousand per
store.
During the fourth quarter of 1996, the debtor sold its 16 Phoenix stores to a
local retail grocery chain; no distribution was made to the unsecured creditors.
In January 1997, the debtor filed a joint liquidating plan which incorporates
the settlement agreement. The confirmation hearing for the debtor's plan is set
for June 30, 1997. On May 13, 1997 the court accepted a bid to purchase the
debtor's Texas assets and the purchaser agreed to assume the debtor's obligation
to lease furniture, fixtures and equipment from the company. Upon consummation
of this sale, the debtor will have disposed of substantially all of its material
physical assets. The company does not anticipate receiving any distribution
from the sale of the Texas assets.
The company recorded charges relating to Megafoods of approximately $6.5 million
in 1994, $3.5 million in 1995, $5.8 million in 1996 and has not recorded a
charge to date in 1997. At April 19, 1997 approximately $3.1 million of
recorded net assets relating to Megafoods remained on the company's books. If
the settlement is consummated, the company will remain contingently liable for
stores subleased by the company to Megafoods and for certain leasehold
guarantees extended by the company to third parties on Megafoods' behalf.
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 under the City of Philadelphia, et al.
v. Fleming Companies, Inc., et al. case; the noteholder case was also
consolidated, but only for pre-trial purpose. A consolidated complaint has been
filed in the City of Philadelphia case alleging liability for the company's
failure to properly account for and disclose (i) the contingent liability
created by the David's litigation (the David's case has been settled; see above)
and (ii) the company's "deceptive business practices," which 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 the allegations.
The plaintiffs seek undetermined but significant damages. Management is unable
to predict the ultimate outcome of the cases or a potential range of monetary
exposure, if any, to the company. However, an unfavorable outcome in this
litigation could have a material adverse effect on the company and its financial
statements.
<PAGE>
Other
The company is a party to various other litigation, tax assessments and other
matters, some of which are for substantial amounts, arising in the ordinary
course of business. The ultimate effect of such actions cannot be predicted
with certainty. Although the result of any of these matters may have a material
adverse impact on interim or annual results of operations, the company does not
expect that the outcome of any of these matters will result in a material
adverse effect on liquidity or consolidated financial position.
5. Certain 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.
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.
April 19, April 20,
(In millions) 1997 1996
---------------------------------------------------------
Current assets $19 $22
Noncurrent assets $63 $59
Current liabilities $10 $ 9
Noncurrent liabilities - -
16 weeks ended
April 19, April 20,
(In millions) 1997 1996
---------------------------------------------------------
Net sales $89 $109
Costs and expenses $92 $115
Net earnings (loss) $(1) $ (3)
During the last three years, a significant number of subsidiary guarantors
merged into the parent company, resulting in a substantial reduction in the
amounts appearing in the summarized financial information.
6. The accompanying earnings statements include the following:
16 weeks
---------------------
(In thousands) 1997 1996
---------------------------------------------------------
Depreciation and amortization
(includes amortized costs in
interest expense) $56,572 $55,651
Amortized costs in interest expense $ 3,045 $ 2,627
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Results of Operations
Set forth in the following table is information for the first interim periods
of 1997 and 1996 regarding components of the company's earnings expressed as
a percentage of net sales.
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- ------------------------------------------------------------------------------
First Interim Period 1997 1996
- ------------------------------------------------------------------------------
Net sales 100.00% 100.00%
Gross margin 9.11 8.84
Less:
Selling and administrative 7.66 7.70
Interest expense 1.03 1.01
Interest income (.30) (.30)
Equity investment results .09 .06
Litigation charge .40 .14
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Total expenses 8.88 8.61
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Earnings before taxes .23 .23
Taxes on income .12 .12
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Net earnings .11% .11%
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Net sales
Sales for the first quarter (16 weeks) of 1997 decreased by $.4 billion, or 8%,
to $4.8 billion from $5.2 billion for the same period in 1996. Several factors,
none of which are individually material, adversely affected net sales including:
lower sales at certain company-owned retail stores, the closing or sale of
certain other company-owned retail stores and a reduced amount of new business
which, the company believes, was caused, in part, by the adverse publicity
surrounding various litigation matters. See Note 4. to the financial
statements.
Retail sales generated by the same stores for the first quarter of 1997 compared
to the same period in 1996 decreased 2.3%. The decrease was attributable, in
part, to severe weather and new stores opened by competitors in some markets
which negatively affected sales. Additionally, because Easter was earlier in
1997, the post-Easter week, which typically has lower sales volume, occurred in
the first quarter of 1997 versus the second quarter of 1996.
Fleming measures inflation using data derived from the average cost of a ton of
product sold by the company. For the first quarter of 1997, food price
inflation was less than 1% compared to approximately 2% in the first quarter of
1996.
Gross margin
Gross margin for the first quarter of 1997 decreased by $24 million, or 5%, to
$433 million from $457 million for the same period of 1996, but increased as a
percentage of net sales to 9.11% from 8.84% for the same period in 1996. The
increase in gross margin percentage was primarily due to improved gross margins
at retail stores. Product handling expenses, consisting of warehouse,
transportation and building expenses, were lower as a percentage of net sales in
1997 compared to 1996, reflecting productivity improvements. The food price
inflation discussed above resulted in a $2.4 million LIFO charge for the
quarter, compared to a $.8 million charge for the 1996 period.
Selling and administrative expenses
Selling and administrative expenses for the first quarter of 1997 decreased by
$34 million, or 9%, to $364 million from $398 million for the same period in
1996 and decreased as a percentage of net sales to 7.66% for 1997 from 7.70% in
1996. The percentage decrease was principally due to reduced corporate expenses
in 1997 in the information technology area. The decrease was partially offset
by an increase in incentive compensation expense in 1997 compared to 1996.
<PAGE>
As more fully described in the 1996 Annual Report on Form 10-K, the company has
a significant amount of credit extended to its customers through various
methods. These methods include customary and extended credit terms for
inventory purchases, secured loans with terms generally up to ten years, and
equity investments in and secured and unsecured loans to certain customers. In
addition, the company guarantees debt and lease obligations of certain
customers.
Credit loss expense is included in selling and administrative expenses and for
the first quarter of 1997 decreased by $2 million to $6 million from $8 million
for the comparable period in 1996. 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.
Interest expense
Interest expense for the first quarter of 1997 decreased $3 million to $49
million from $52 million for the same period in 1996. Lower borrowing levels
offset in part by higher borrowing costs for bank debt in 1997 compared to 1996
primarily accounted for the improvement.
The company's derivative agreements consist of simple "floating-to-fixed rate"
interest rate caps and swaps. For 1997, interest rate hedge agreements
contributed $2.7 million of net interest expense, compared to $3.1 million in
1996, due to lower average floating interest rates.
The company enters into interest rate hedge agreements to manage interest costs
and exposure to changing interest rates. The company's bank credit agreement
requires the company to provide interest rate protection on a substantial
portion of the indebtedness outstanding thereunder. The company has entered
into interest rate swaps and caps covering $650 million aggregate principal
amount of floating rate indebtedness. In the first fiscal quarter of 1997, the
company terminated certain hedge transactions covering $200 million aggregate
principal amount of floating rate indebtedness. The cost of the termination was
immaterial.
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 average
fixed interest rate paid by the company on the interest rate swaps was 7.1%,
covering $400 million of floating rate indebtedness. The interest rate swap
agreements, which are implemented through five counterparty banks and at April
19, 1997 had an average remaining life of 1.6 years, provide for the company to
receive substantially the same LIBOR that the company pays on its floating rate
indebtedness. For the remaining $250 million, the company has purchased
interest rate cap agreements from two counterparty banks. The agreements cap
LIBOR at 7.33% over the next 1.7 years. Payments made or received under
interest rate swap and cap agreements are included in interest expense.
Interest income
Interest income for the first quarter of 1997 decreased by $1 million to $14
million from $15 million for the same period in 1996. The decrease is primarily
due to the notes receivable sale in the third quarter of 1996 when the company
sold $35 million of notes receivable with limited recourse. The sale (together
with decreased lending due to tighter credit policies) reduced the amount of
notes receivable available to produce interest income.
Equity investment results
The company's portion of operating losses from equity investments for the first
quarter of 1997 increased to $4 million from $3 million for the same period in
1996. The increase was primarily due to increased losses from international
investments and certain of the other underlying equity investment entities.
<PAGE>
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
had accrued $7.1 million as the result of a jury verdict regarding the case. In
the second quarter of 1996, the accrual was reversed following the vacation of
the judgment resulting from the jury verdict, and a new accrual for $650,000 was
established. See Note 4. to the financial statements.
Taxes on income
The estimated effective tax rate for the first quarter of 1997 was 53.0%
compared to 51.1% for the same period in 1996. The increase is primarily due to
lower earnings in 1997 with basically the same nondeductible dollar amounts.
Litigation and 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 rules, regulations, ordinances and laws which may subject the company to
material contingent liabilities. In accordance with applicable accounting
standards, the company records a charge reflecting such exposure when a loss is
deemed by management to be "probable" and either "quantifiable" or "reasonably
estimable." See "Litigation charge."
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." See Note 4. to
the financial statements and Part II., Item 1. Legal Proceedings, each of which
appear elsewhere in this report and are incorporated herein by reference. An
adverse outcome experienced in one or more of such matters, or an increase in
the likelihood of such an outcome, could have a material adverse effect on the
company's business, results of operations, cash flow, capital, access to capital
or financial position.
Other
Several factors negatively affecting earnings in the first quarter of 1997 are
likely to continue for the near term. Management believes that these factors
include lower sales, operating losses in certain company-owned retail stores and
legal fees and expenses related to litigation.
Segment information
Sales and operating earnings for the company's food distribution and retail food
segments are presented below.
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First Interim Period
($ in millions) 1997 1996
- ------------------------------------------------------------------------------
Sales:
Food distribution $3,688 $3,981
Retail food 1,064 1,187
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Total sales $4,752 $5,168
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- ------------------------------------------------------------------------------
Operating earnings:
Food distribution $ 85 $ 89
Retail food 26 15
Corporate expense (42) (48)
- ------------------------------------------------------------------------------
Total operating earnings $ 69 $ 56
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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.
<PAGE>
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
During the first fiscal quarter of 1997, the company experienced a temporary net
increase in total debt of $57 million due primarily to working capital
requirements. Set forth below is certain information regarding the company's
capital structure at the end of the first quarter of 1997 and at the end of
fiscal 1996:
- -----------------------------------------------------------------------------
Capital Structure (In millions) April 19, 1997 December 28, 1996
- -----------------------------------------------------------------------------
Long-term debt $1,272 46.5% $1,216 45.5%
Capital lease obligations 382 14.0 381 14.2
- -----------------------------------------------------------------------------
Total debt 1,654 60.5 1,597 59.7
Shareholders' equity 1,081 39.5 1,076 40.3
- -----------------------------------------------------------------------------
Total capital $2,735 100.0% $2,673 100.0%
- -----------------------------------------------------------------------------
Note: The above table includes current maturities of long-term debt and current
obligations under capital leases.
Operating activities generated negative net cash flows of $26 million for the
first quarter of 1997 compared to positive net cash flows in 1996 of $19
million. The decrease was due, in part, to the David's litigation settlement.
The decrease was also due to a lower level of decrease in inventories and a
higher level of decrease in accounts payable in the first quarter of 1997
compared to the same period in 1996. Working capital was $264 million at the
end of the first quarter 1997, an increase from $221 million at year-end 1996.
The current ratio increased to 1.23 to 1 at the end of the first quarter 1997
from 1.16 to 1 at year-end 1996.
In pursuit of the company's stated goal of reducing the ratio of debt to equity,
the company may seek to sell assets or equity securities and apply the proceeds
to early debt reduction. Additionally, scheduled amortization of the company's
long-term debt obligations requires principal reductions of approximately $125
million in 1997, $175 million in 1998, $233 million in 1999, $175 million in
2000 and $501 million in 2001. If anticipated net cash flows from operations
appear to be insufficient to satisfy these obligations, the company may seek to
liquidate assets, issue additional debt or equity, or otherwise refinance such
obligations.
The company's current capital structure includes bank loans under the company's
bank credit agreement which consists of a $534 million amortizing term loan with
final maturity of June 2000 and a $596 million revolving credit facility with
final maturity of July 1999. Other components of the company's capital
structure consist of $300 million of 10.625% seven-year senior notes and $200
million of floating rate seven-year senior notes, each of which matures in
December 2001, $99 million of medium-term notes and $9 million of other debt.
The company's principal sources of liquidity are cash flows from operating
activities and borrowings under its bank credit agreement. At the end of the
first quarter of 1997, $534 million was borrowed on the amortizing term loan
facility, $96 million of letters of credit had been issued (reducing bank credit
capacity on a dollar-for-dollar basis) and $130 million was borrowed
<PAGE>
under the $596 million revolving credit facility of the bank credit agreement.
The bank credit agreement and the indentures for the senior notes contain
customary covenants associated with similar facilities. The bank credit
agreement currently contains the following more significant financial
covenants: maintenance of a consolidated debt-to-net worth ratio of not more
than 2.25 to 1; maintenance of a minimum consolidated net worth of at least
$910 million; maintenance of a fixed charge coverage ratio of at least 1.1 to
1; a limitation on dividend payments of $.08 per share, per quarter; and
limitations on capital expenditures. Covenants associated with the senior
notes are generally less restrictive than those of the bank credit agreement.
At the end of the first quarter of 1997, the company would have been allowed to
borrow an additional $370 million under the company's revolving credit facility
contained in the bank credit agreement. Under the company's most restrictive
borrowing covenant, which is the fixed charge coverage ratio, $58 million of
additional fixed charges could have been incurred. The company is currently in
compliance with all financial covenants under the bank credit agreement and
senior notes. Continued compliance will depend on the company's ability to
generate sufficient earnings and cash flow and on the outcome of certain
litigation matters. See Note 4. to the financial statements.
The company's senior unsecured debt is rated Ba3 by Moody's Investors Service
("Moody's") and B+ by Standard & Poor's Ratings Group ("Standard & Poor's"). In
addition, the company has a corporate rating of BB by Standard & Poor's. The
company's bank debt is rated Ba2 by Moody's and Moody's has assigned a
counterparty rating of Ba2. On March 25, 1997, Moody's confirmed its ratings
for the company, but changed its outlook to reflect the company's weak
positioning at its ratings levels. Moody's actions followed the company's
announcements of 1996 earnings, the settlement of the David's lawsuit and the
filing of the lawsuit by Furr's. Pricing under the bank credit agreement
automatically increases or decreases with respect to certain credit rating
declines or improvements, respectively, based upon Moody's and Standard & Poor's
ratings of the company's senior unsecured debt.
The credit agreement may be terminated in the event of a defined change of
control. Under the indentures for the senior notes, the noteholders may require
the company to repurchase the notes in the event of a defined change of control
coupled with a defined decline in credit ratings.
At the end of the first quarter of 1997, the company had a total of $96 million
of contingent obligations 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 borrowing under the credit agreement.
Capital expenditures for the first quarter of 1997 were $28 million compared to
$26 million for the same period in 1996. Management expects that total capital
expenditures for 1997, excluding acquisitions, if any, will approximate $145
million compared to $129 million actual expenditures in 1996.
The debt-to-capital ratio at the end of the first quarter of 1997 was 60.5%,
slightly higher than year-end 1996. The company's long-term target ratio is
between 50% to 55%.
The composite interest rate for total funded debt (excluding capital lease
obligations) before the effect of interest rate hedges was 8.2% at April 19,
1997, versus 7.5% at April 20, 1996. Including the effect of interest rate
hedges, the composite interest rate of debt was 9.0% and 8.4% at the quarter
ends, respectively.
<PAGE>
In March 1996, the Board of Directors declared a quarterly cash dividend of $.02
per share for the second quarter of 1996, a reduction of $.28 per share from the
first quarter. In each of the four quarters since then the Board of Directors
has declared dividends of $.02 each quarter.
Management believes that the cash flows from operating activities and the
company's ability to borrow under the bank credit agreement will be adequate to
meet working capital needs, capital expenditures and other cash needs for the
next twelve months.
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 in the report refer to, among other matters, the
company's expectations regarding the adequacy of capital and liquidity.
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. Among the factors that can cause actual performance
to differ materially are the continuation of competitive pressures on
pricing, the implementation of the company's reengineering programs, the
company's inability to achieve cost savings due to unexpected developments,
changed plans regarding capital expenditures, adverse developments with
respect to litigation and other contingency matters together with world and
national economic conditions, and the impact of such conditions on consumer
spending.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Set forth below is information regarding litigation which became reportable, or
as to which a material development has occurred, since the date of the company's
Annual Report on Form 10-K for the fiscal year ended December 28, 1996.
(1) Tropin v. Thenen, et al., Case No. 93-2502-CIV-Moreno, United States
District Court, Southern District of Florida.
Walco Investments, Inc., et al. v. Thenen, et al., Case No. 93-2534-CIV-Moreno,
United States District Court, Southern District of Florida.
In April 1997, plaintiffs failed to deliver to the company releases sufficient
to meet the requirements of the settlement agreement among the parties (which
agreement also remains subject to court approval). Plaintiffs have until June
15, 1997 to submit a proposal to protect the company from exposure to non-
releasing investors, and the company will have 60 days from the date of
submission to accept or reject the proposal. If no proposal is submitted, or if
the proposal is rejected, the company has the right to terminate the settlement
and withdraw its $20 million escrow deposit. If a settlement is not
consummated, the company expects that the litigation will resume. (See
"Premium" in Note 4. to the financial statements for a further description of
these cases.)
(2) David's Supermarkets, Inc. vs. Fleming Companies, Inc., et al., Case No.
246-93, In the District Court of Johnson County, Texas.
In April 1997, the company paid $19.9 million to the plaintiff in exchange for
dismissal of all of plaintiff's claims against the company, with prejudice, in
complete settlement of this lawsuit. (See "David's" in Note 4. to the financial
statements for a further description of this case.)
(3) Furr's Supermarkets, Inc. vs. Fleming Companies, Inc., et al., Case No.
CV-97-01526, Second Judicial District Court, Bernalillo County, New Mexico.
The company has removed the case to the United States District Court for New
Mexico. The company also rejected the third-party supply proposal submitted by
Furr's as not qualifying as a "competitive bid" within the meaning of the supply
agreement and has invoked the arbitration provisions of the agreement. All
issues concerning the competitiveness clause are currently pending in
arbitration in New Mexico. (See "Furr's" in Note 4. to the financial statements
for a further description of this case.)
(4) In re: Megafoods Stores, Inc. and related proceedings, Case No. B-94-07411-
P8X-RTB, U.S. Bankruptcy Court for the district of Arizona.
The hearing date for confirmation of the debtor's plan of liquidation has
been set for June 30, 1997. On May 13, 1997, the court accepted a bid to
purchase the debtor's Texas assets and the purchaser agreed to assume the
debtor's obligation to lease certain property from the company. Upon
consummation of this sale, the debtor will have disposed of substantially
all of its physical assets. (See "Megafoods" in Note 4. to the financial
statements for a further description of this case.)
(5) Steiner, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-480-M,
United States District Court, Western District of Oklahoma.
Hollin, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-484-M, United
States District Court, Western District of Oklahoma.
Goldstein, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-510-M,
United States District Court, Western District of Oklahoma.
General Telecom Money Purchase Pension Plan & Trust, et al. v. Fleming
Companies, Inc., et al., Case No. CIV-96-593-M, United States District Court,
Western District of Oklahoma.
Bright Trading, Inc., et al. v. Fleming Companies, Inc., et al., Case No.
CIV-96-830-M, United States District Court, Western District of Oklahoma.
City of Philadelphia, et al. v. Fleming Companies, Inc., et al., Case No.
96-853-M, United States District Court, Western District of Oklahoma.
Pindus, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-869-M, United
States District Court, Western District of Oklahoma.
Hinton, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-942-C, United
States District Court, Western District of Oklahoma.
Wells, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-993-L, United
States District Court, Western District of Oklahoma.
Mark, et al. v. Fleming Companies, Inc., et al., Case No. CIV-96-506-M, United
States District Court, Western District of Oklahoma.
In April 1997, the court consolidated all nine stockholder cases under the
City of Philadelphia, et al. v. Fleming Companies, Inc., et al. case. A
purported class action brought on behalf of certain noteholders, Mark, et al.
v. Fleming Companies, Inc., et al., was also consolidated but for pre-trial
purposes only. A consolidated complaint has been filed in the City of
Philadelphia case alleging liability based upon the company's failure to
properly account for and disclose (i) the contingent liability created by the
pendency of the David's litigation (the David's case has been settled; see
above) and (ii) the company's "deceptive business practices," which led to
the David's litigation and to material liability to others, caused the
company to change its manner of conducting business at great cost and loss of
profits, and which materially inflated the trading prices of the company's
common stock. The company denies the allegations. No date has yet been set
for trial. (See "Class Action Suits" in Note 4. to the financial statements
for a further description of these cases.)
<PAGE>
(6) Century Shopping Center Fund I v. Malone & Hyde, Inc.; Case No. 88-CV-
018071; Milwaukee County Circuit Court, State of Wisconsin.
Marquette Pharmacy, Inc., et al. v. Malone & Hyde, Inc.; Case No. 93-CV-008413;
Milwaukee County Circuit Court, State of Wisconsin.
Ronald P. Huntley, as and only as trustee in bankruptcy of Howell Plaza, Inc. v.
Malone & Hyde, Inc.; Case No. 93-CV-013728; Milwaukee County Circuit Court,
State of Wisconsin
Century Shopping Center Fund I ("Century Fund I") commenced this action in
November 1988 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.
In June 1993, three former tenants of the Howell Plaza Shopping Center filed the
Marquette Pharmacy, Inc. case 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 the Huntley case. The allegations of the Marquette
Pharmacy case and the Huntley case 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 and discovery is underway.
The cases have been consolidated and are presently set for trial in September
1997.
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. This case has not previously been
reported.
Item 4. Results of Votes of Security Holders
The company held its annual meeting on April 30, 1997. Matters voted on were as
follows:
Election of directors - Carol B. Hallett and Guy A. Osborn were each elected
members of the Board of Directors for terms expiring in 2000. Directors whose
terms of office continued are Robert E. Stauth, Archie R. Dykes, Jack W. Baker,
Edward C. Joullian III, Howard H. Leach and John A. McMillan.
Approval of Associate Stock Purchase Plan - Shareholders approved the plan,
which offers eligible associates the opportunity to purchase the company's
common stock through payroll deductions at 85% of defined market value.
Election of independent auditors - Shareholders ratified Deloitte & Touche LLP
as independent auditors for 1997.
<PAGE>
Shareholder proposal regarding bylaw amendment - Shareholders approved an
amendment to the company's bylaws proposed by a shareholder which requires
shareholder approval before the company may adopt or maintain a poison pill,
shareholder rights plan, rights agreement or any other form of "poison pill."
The number of votes cast for the above matters is as follows (votes in
thousands):
For Against Abstain
Election of Directors
Carol B. Hallett 29,739 2,734
Guy A. Osborn 29,787 2,686
Associate Stock
Purchase Plan 30,858 1,409 206
Independent auditors 32,107 221 144
Shareholder proposal 17,752 10,933 647
No other business came before the meeting.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Page Number
12 Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
On February 28, 1997, registrant reported under Item 5. that Furr's
Supermarkets, Inc. ("Furr's"), the company's largest customer, filed suit in
New Mexico naming as defendants the company and certain of its officers and
an employee. Furr's claims it has been overcharged for products under its
supply agreement with the company and alleges various causes of action, among
them breach of contract, misrepresentation, fraud and violation of certain of
New Mexico's trade practice statutes.
On March 21, 1997, the registrant reported under Item 5. that the company had
agreed to pay David's Supermarkets, Inc. ("David's") $19.9 million in
complete settlement of David's lawsuit against the company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
(Registrant)
Date: May 23, 1997 /s/ KEVIN J. TWOMEY
--------------------------------------
Kevin J. Twomey
Vice President-Controller
(Principal Accounting Officer)
<PAGE>
Exhibit 12
Fleming Companies, Inc.
Computation of Ratio of Earnings to Fixed Charges
16 Weeks Ended
April 19, April 20,
(In thousands of dollars) 1997 1996
- ------------------------------------------------------------------------------
Earnings:
Pretax income $11,202 $12,096
Fixed charges, net 60,562 66,603
- ------------------------------------------------------------------------------
Total earnings $71,764 $78,699
Fixed charges:
Interest expense $48,822 $52,430
Portion of rental charges
deemed to be interest 11,627 14,062
Capitalized interest - -
- ------------------------------------------------------------------------------
Total fixed charges $60,449 $66,492
Ratio of earnings to fixed charges 1.19 1.18
"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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE FISCAL QUARTER ENDED APRIL 19, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> APR-19-1997
<CASH> 58,643
<SECURITIES> 0
<RECEIVABLES> 348,042
<ALLOWANCES> 27,245
<INVENTORY> 942,113
<CURRENT-ASSETS> 1,426,462
<PP&E> 1,579,230
<DEPRECIATION> 637,553
<TOTAL-ASSETS> 3,896,454
<CURRENT-LIABILITIES> 1,162,308
<BONDS> 1,125,338
0
0
<COMMON> 94,510
<OTHER-SE> 986,824
<TOTAL-LIABILITY-AND-EQUITY> 3,896,454
<SALES> 4,752,031
<TOTAL-REVENUES> 4,752,031
<CGS> 4,319,349
<TOTAL-COSTS> 4,685,563
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