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 October 2, 1999
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 October 30, 1999 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 38,821,000
<PAGE>
INDEX
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
12 Weeks Ended October 2, 1999,
and October 3, 1998
Consolidated Condensed Statements of Operations -
40 Weeks Ended October 2, 1999,
and October 3, 1998
Consolidated Condensed Balance Sheets -
October 2, 1999, and December 26, 1998
Consolidated Condensed Statements of Cash Flows -
40 Weeks Ended October 2, 1999,
and October 3, 1998
Notes to Consolidated Condensed Financial
Statements
Independent Accountants' Review Report
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Consolidated Condensed Statements of Operations
For the 12 weeks ended October 2, 1999, and October 3, 1998
(In thousands, except per share amounts)
<CAPTION>
==============================================================================
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $3,243,192 $3,438,766
Costs and expenses:
Cost of sales 2,906,749 3,115,371
Selling and administrative 291,990 284,497
Interest expense 36,987 37,348
Interest income (7,075) (8,559)
Equity investment results 2,431 2,669
Litigation charge - 2,215
Impairment/restructuring charge 36,151 6,038
- ------------------------------------------------------------------------------
Total costs and expenses 3,267,233 3,439,579
- ------------------------------------------------------------------------------
Loss before taxes (24,041) (813)
Taxes on loss (9,695) 1,512
- ------------------------------------------------------------------------------
Net loss $ (14,346) $ (2,325)
==============================================================================
Basic and diluted net loss per share $(.37) $(.06)
Dividends paid per share $.02 $.02
Weighted average shares outstanding:
Basic 38,459 38,039
Diluted 38,459 38,039
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements and independent accountants' review report.
<TABLE>
Consolidated Condensed Statements of Operations
For the 40 weeks ended October 2, 1999, and October 3, 1998
(In thousands, except per share amounts)
<CAPTION>
==============================================================================
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $11,057,800 $11,511,835
Costs and expenses:
Cost of sales 9,965,771 10,404,403
Selling and administrative 955,550 933,363
Interest expense 127,240 124,411
Interest income (23,319) (28,172)
Equity investment results 8,402 9,506
Litigation charge - 7,385
Impairment/restructuring charge 79,356 6,687
- ------------------------------------------------------------------------------
Total costs and expenses 11,113,000 11,457,583
- ------------------------------------------------------------------------------
Earnings (loss) before taxes (55,200) 54,252
Taxes on income (loss) (14,275) 27,668
- ------------------------------------------------------------------------------
Net earnings (loss) $ (40,925) $ 26,584
==============================================================================
Basic and diluted net earnings (loss)
per share $(1.07) $.70
Dividends paid per share $.06 $.06
Weighted average shares outstanding:
Basic 38,256 37,848
Diluted 38,256 38,058
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements and independent accountants' review report.
<TABLE>
Consolidated Condensed Balance Sheets
(In thousands)
<CAPTION>
==============================================================================
October 2, December 26,
Assets 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,604 $ 5,967
Receivables 416,930 450,905
Inventories 894,169 984,287
Other current assets 216,776 146,757
- ------------------------------------------------------------------------------
Total current assets 1,567,479 1,587,916
Investments and notes receivable 114,986 119,468
Investment in direct financing leases 130,524 177,783
Property and equipment 1,584,720 1,554,884
Less accumulated depreciation
and amortization (739,012) (734,819)
- ------------------------------------------------------------------------------
Net property and equipment 845,708 820,065
Deferred income taxes 61,390 51,497
Other assets 158,273 154,524
Goodwill 575,027 579,579
- ------------------------------------------------------------------------------
Total assets $3,453,387 $3,490,832
==============================================================================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 910,531 $ 945,475
Current maturities of long-term debt 61,378 41,368
Current obligations under capital leases 21,986 21,668
Other current liabilities 255,368 272,573
- ------------------------------------------------------------------------------
Total current liabilities 1,249,263 1,281,084
Long-term debt 1,192,260 1,143,900
Long-term obligations under
capital leases 365,103 359,462
Other liabilities 114,331 136,455
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 97,091 96,356
Capital in excess of par value 513,299 509,602
Reinvested earnings (deficit) (20,827) 23,155
Accumulated other comprehensive income:
Additional minimum pension liability (57,133) (57,133)
- ------------------------------------------------------------------------------
Accumulated other comprehensive
income (57,133) (57,133)
- ------------------------------------------------------------------------------
Less ESOP note - (2,049)
- ------------------------------------------------------------------------------
Total shareholders' equity 532,430 569,931
- ------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $3,453,387 $3,490,832
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements and independent accountants' review report.
<TABLE>
Consolidated Condensed Statements of Cash Flows
For the 40 weeks ended October 2, 1999, and October 3, 1998
(In thousands)
<CAPTION>
==============================================================================
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(40,925) $ 26,584
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Depreciation and amortization 123,545 140,735
Credit losses 17,790 11,969
Deferred income taxes (31,047) 9,507
Equity investment results 8,284 9,506
Impairment/restructuring and related
charges 107,305 7,078
Cash payments on impairment/restructuring
and related charges (45,096) (4,306)
Change in assets and liabilities, excluding
effect of acquisitions:
Receivables 30,682 (106,791)
Inventories 82,540 (6,595)
Accounts payable (34,944) 79,508
Other assets and liabilities (49,943) (35,340)
Other adjustments, net (7,644) (4,888)
- ------------------------------------------------------------------------------
Net cash provided by operating
activities 160,547 126,967
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Collections on notes receivable 24,399 34,842
Notes receivable funded (34,476) (21,236)
Purchase of property and equipment (123,102) (146,275)
Proceeds from sale of
property and equipment 24,831 12,708
Investments in customers (8,006) (1,007)
Proceeds from sale of investment 2,203 3,483
Businesses acquired (78,075) (6,557)
Proceeds from sale of businesses 14,165 -
Other investing activities 3,928 5,818
- ------------------------------------------------------------------------------
Net cash used in investing activities (174,133) (118,224)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings 126,000 50,000
Principal payments on long-term debt (57,630) (53,133)
Principal payments on capital
lease obligations (22,030) (14,620)
Sale of common stock under incentive
stock and stock ownership plans 3,236 4,997
Dividends paid (2,322) (2,296)
Other financing activities (31) (468)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 47,223 (15,520)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 33,637 (6,777)
Cash and cash equivalents,
beginning of period 5,967 30,316
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 39,604 $ 23,539
==============================================================================
Supplemental information:
Cash paid for interest $122,449 $115,146
Cash paid for taxes $ 15,521 $ 12,026
==============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements and independent accountants' review report.
<PAGE>
Notes to Consolidated Condensed Financial Statements (See
independent accountants' review report)
1. The consolidated condensed balance sheet as of October 2,
1999, and the consolidated condensed statements of operations and
cash flows for the 12-week and 40-week periods ended October 2,
1999, and for the 12-week and 40-week periods ended October 3,
1998, 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 2, 1999, and
the results of operations and cash flows for the periods
presented have been made. All such adjustments are of a normal,
recurring nature except as disclosed. Both basic and diluted
earnings or loss per share are computed based on net earnings or
loss divided by weighted average shares as appropriate for each
calculation subject to antidilution limitations.
The preparation of the consolidated condensed 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.
Certain reclassifications have been made to prior year amounts to
conform to current year classifications.
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 1998 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 $53 million at October 2, 1999, and $44 million at
December 26, 1998. The LIFO charges for the 12 weeks ended
October 2, 1999 and October 3, 1998 were $3 million and $2
million, respectively. The LIFO charges for the 40 weeks ended
October 2, 1999 and October 3, 1998 were $9 million and $5
million, respectively.
4. Sales and operating earnings for the company's wholesale and
retail segments are presented below.
<TABLE>
<CAPTION>
==============================================================================
For the 12 weeks ended
Oct 2, Oct 3,
($ in millions) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Wholesale $2,896 $3,126
Intersegment elimination (489) (495)
- ------------------------------------------------------------------------------
Net wholesale 2,407 2,631
Retail 836 808
- ------------------------------------------------------------------------------
Total sales $3,243 $3,439
==============================================================================
Operating earnings:
Wholesale $ 69 $ 53
Retail 4 11
Corporate (28) (26)
- ------------------------------------------------------------------------------
Total operating earnings 45 38
Interest expense (37) (37)
Interest income 7 9
Equity investment results (3) (3)
Litigation charge - (2)
Impairment/restructuring charge (36) (6)
- ------------------------------------------------------------------------------
Loss before taxes $ (24) $ (1)
==============================================================================
For the 40 weeks ended
Oct 2, Oct 3,
($ in millions) 1999 1998
- ------------------------------------------------------------------------------
Sales:
Wholesale $9,881 $10,361
Intersegment elimination (1,671) (1,556)
- ------------------------------------------------------------------------------
Net wholesale 8,210 8,805
Retail 2,848 2,707
- ------------------------------------------------------------------------------
Total sales $11,058 $11,512
==============================================================================
Operating earnings:
Wholesale $214 $207
Retail 21 51
Corporate (98) (84)
- ------------------------------------------------------------------------------
Total operating earnings 137 174
Interest expense (127) (124)
Interest income 23 28
Equity investment results (9) (10)
Litigation charge - (7)
Impairment/restructuring charge (79) (7)
- ------------------------------------------------------------------------------
Earnings (loss) before taxes $(55) $ 54
==============================================================================
</TABLE>
General corporate expenses are not allocated to wholesale and
retail segments. The transfer pricing between segments is at cost.
5. The company's comprehensive loss for the 12 weeks ended
October 2, 1999 and October 3, 1998 totaled $14.3 million and
$2.3 million, respectively. The company's comprehensive loss for
the 40 weeks ended October 2, 1999 totaled $40.9 million compared
to comprehensive income for the 40 weeks ended October 3, 1998
which totaled $31.5 million. The comprehensive amounts for both
periods in 1999 and the 12 week period in 1998 were comprised
only of the reported net loss, whereas the comprehensive income
for the 40 week period in 1998 was comprised of the reported net
income plus changes in foreign currency translation adjustments.
6. 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:
Class Action Suits.
In 1996, certain stockholders and two noteholders filed purported
class action suits against the company and certain of its present
and former officers and directors, each in the U.S. District
Court for the Western District of Oklahoma. In 1997, the court
consolidated the 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. During 1998,
the consolidated noteholder case was dismissed and during the
first quarter of 1999, the consolidated stockholder case was also
dismissed, each without prejudice. Amended complaints were filed
in both cases during the first quarter of 1999. In May 1999, the
company filed motions to dismiss in both cases, and in July 1999,
the plaintiffs responded. The court has not yet ruled on the
motions.
Tru Discount Foods.
Fleming brought suit in 1994 on a note and an open account
against its former customer, Tru Discount Foods. The case was
initially referred to arbitration but later restored to the trial
court; Fleming appealed. In 1997, the defendant amended its
counter claim against the company alleging fraud, overcharges for
products and violations of the Oklahoma Deceptive Trade Practices
Act. In 1998, the appellate court reversed the trial court and
directed that the matter be sent again to arbitration. The
arbitration hearing resumed and was concluded in July, 1999.
During this hearing, the respondents, Tru Discount and its former
operators, claimed that they were entitled to recover damages of
approximately $13 million on their counterclaims.
On September 28, 1999, the arbitration panel entered its award in
favor of Fleming against Tru Discount Foods and its principals in
the net amount of $579,443 plus interest at the rate of six
percent per annum from October 29, 1999. In addition, Tru
Discount Foods and its principals were ordered to pay Fleming
$4,679 in satisfaction of outstanding fees and expenses, each
party to bear its own attorney fees. All of their counterclaims,
with the exception of one, were denied. Under the Uniform
Arbitration Act, they have until December 27, 1999 to seek an
order modifying or vacating the award from the Creek County,
Oklahoma district court. Fleming will seek confirmation from the
court of the award which will not be final until confirmed by the
court.
Don's United Super (and related cases).
In 1998, the company and two retired executives were named in a
suit filed by approximately 20 current and former customers of
the company (Don's United Super, et al. v. Fleming, et al.).
Plaintiffs operate retail grocery stores in the St. Joseph and
Kansas City metropolitan areas. Six plaintiffs who were parties
to supply contracts containing arbitration clauses were permitted
to withdraw from the case.
Previously, two cases had been filed in the same court (R&D
Foods, Inc. et al. v. Fleming, et al. and Robandee United Super,
Inc. et al. v. Fleming, et al.) by 10 customers, some of whom are
plaintiffs in the Don's case. The earlier two cases, which
principally seek an accounting of the company's expenditure of
certain joint advertising funds, have been consolidated. All
causes of action in these cases have been stayed pending the
arbitration of the causes of action relating to supply contracts
containing arbitration clauses.
The Don's suit alleges product overcharges, breach of contract,
breach of fiduciary duty, misrepresentation, fraud, and RICO
violations and seeks recovery of actual, punitive and treble
damages and a declaration that certain contracts are voidable at
the option of the plaintiffs. During the third quarter of 1999,
plaintiffs asserted approximately $109 million in damages.
In October 1998, a group of 14 retailers (ten of whom had been or
are currently plaintiffs in the Don's case and/or the Robandee
case whose claims were sent to arbitration or stayed pending
arbitration) filed a new action against the company and two
former officers, one of whom was a director (Coddington
Enterprises, Inc., et al. v. Dean Werries, et al.). The
plaintiffs assert claims virtually identical to those set forth
in the Don's complaint and have not quantified damages in their
pleadings.
Plaintiffs have made a settlement demand in the Don's case for
$42 million and in the Coddington case for $44 million. In July
1999, the court in the Coddington case (i) granted the company's
motion to compel arbitration as to two of the plaintiffs and
denied it as to the other plaintiffs, (ii) denied the company's
motion to consolidate the Coddington and Robandee cases and (iii)
denied the company's motion for summary judgment as to one of the
plaintiffs. The company has appealed the ruling. Although
management is currently unable to predict the ultimate outcome of
this litigation, based upon the plaintiffs' allegations, an
unfavorable outcome could have a material adverse effect on the
company.
Storehouse Markets.
In 1998, the company and one of its associates were named in a
suit filed in the United States District Court for the District
of Utah by three current customers and one former customer of the
company (Storehouse Markets, Inc., et al. v. Fleming Companies,
Inc., et al.). The plaintiffs allege product overcharges,
fraudulent misrepresentation, fraudulent nondisclosure and
concealment, breach of contract, breach of duty of good faith and
fair dealing and RICO violations and seek declaration of class
action status and recovery of actual, punitive and treble
damages. Damages have not been quantified. However, the company
anticipates that the plaintiffs will seek substantial monetary
damages. The company intends to vigorously defend its interests
in this case but is currently unable to predict the ultimate
outcome. Based upon the plaintiffs' allegations, an unfavorable
outcome could have a material adverse effect on the company.
Y2K.
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. In 1996, management implemented a program to comply
with year-2000 requirements on a system-by-system basis, which
included extensive systems testing. As of the end of the third
quarter of 1999, the program was substantially complete.
Although the company has a high level of confidence regarding its
internal systems, year-2000 failures in the company's computer
systems could have a material adverse effect on the company's
operations. In addition, failure of the company's customers or
vendors to become year-2000 compliant could also have a material
adverse effect on the company's operations.
Program costs to comply with year-2000 requirements are being
expensed as incurred. Through the end of the third quarter of
1999, total expenditures to third parties were approximately $8
million since the beginning of 1997.
Other.
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 certain materials. In
conformity with these provisions, the company has a comprehensive
program for testing, 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 the anticipated costs of all known
remediation requirements.
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 and former employees regarding
labor conditions, wages, workers' compensation matters and
alleged discriminatory practices; disputes with insurance
carriers; tax assessments and other matters, some of which are
for substantial amounts. However, the company does not believe
any such action will result in a material adverse effect on the
company.
7. 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.
Oct 2, Oct 3,
(In millions) 1999 1998
Current assets $39 $34
Noncurrent assets $122 $70
Current liabilities $26 $12
Noncurrent liabilities $32 $7
40 weeks ended
Oct 2, Oct 3,
(In millions) 1999 1998
Net sales $416 $269
Costs and expenses $420 $277
Net loss $(2) $(4)
8. The accompanying operating statements include the following:
12 weeks ended
Oct 2, Oct 3,
(In thousands) 1999 1998
Depreciation and amortization
(includes amortized costs in
interest expense) $39,669 $42,509
Amortized costs in
interest expense $1,123 $1,083
40 weeks ended
Oct 2, Oct 3,
(In thousands) 1999 1998
Depreciation and amortization
(includes amortized costs in
interest expense) $123,545 $140,735
Amortized costs in
interest expense $3,746 $4,058
9. In December 1998, the company announced the implementation of
a strategic plan designed to improve the competitiveness of the
retailers the company serves and improve the company's
performance by building stronger operations that can better
support long-term growth. The four major initiatives of the
strategic plan are to consolidate wholesale operations, grow
wholesale sales, improve retail performance, and reduce overhead
and operating expenses.
The total pre-tax charge of the strategic plan is presently
estimated at $935 million ($246 million cash and $689 million non-
cash). The plan originally announced in December 1998 had an
estimated pre-tax charge totaling $802 million. The increase is
due primarily to closing the Peoria division, updating impairment
amounts on certain retail chains, and increasing costs associated
with initiatives to reduce overhead and complexity in business
systems. The pre-tax charge recorded to-date is $775 million
($45 million, $16 million and $46 million in the third, second
and first quarters of 1999, respectively, and $668 million
recorded in 1998). After tax, the expense for the first three
quarters of 1999 was $72 million or $1.88 per share ($28 million
or $.73 per share for quarter three, $12 million or $.31 per
share for quarter two and $32 million or $.84 per share for
quarter one). The $160 million of costs relating to the
strategic plan not yet charged against income will primarily be
recorded throughout the rest of 1999 and 2000 at the time such
costs are accruable.
The $45 million charge ($10 million cash and $35 million non-
cash) in the third quarter of 1999 (partly due to the
announcement to sell or close the New York and Pennsylvania
retail chains) was included on several lines of the Consolidated
Condensed Statements of Operations: $3 million was included in
cost of sales; $6 million was included in selling and
administrative expense; and the remaining $36 million was
included in the impairment/restructuring charge line. The $45
million charge consisted of the following components:
o Impairment of assets of $30 million. The impairment
components were $14 million for goodwill and $16 million for other
long-lived assets. The goodwill charge of $14 million
related to two retail acquisitions.
o Restructuring charges of $6 million. The restructuring
charges consisted of severance related expenses to sell
or close the New York and Pennsylvania retail chains. The
restructuring charges also consisted of operating lease
liabilities and professional fees incurred related to the
restructuring process.
o Other disposition and related costs of $9 million. These
costs consisted primarily of inventory valuation adjustments,
impairment of an investment, disposition related costs
recognized on a periodic basis and other costs.
The $45 million charge relates to the company's segments as
follows: $7 million relates to the wholesale segment and $34
million relates to the retail segment with the balance relating
to corporate overhead expenses.
The $107 million year-to-date charge was included in the
following lines of the Consolidated Condensed Statements of
Operations: $16 million was included in cost of sales; $12
million was included in selling and administrative expense; and
the remaining $79 million was included in the impairment/
restructuring charge line. The $107 million charge consisted
of the following components:
o Impairment of assets of $55 million. The impairment
components were $36 million for goodwill and $19 million
for other long-lived assets. Of the goodwill charge of
$36 million, $22 million related to the 1994 "Scrivner"
acquisition with the remaining amount related to two
retail acquisitions.
o Restructuring charges of $24 million. The restructuring
charges consisted of severance related expenses and
pension withdrawal liabilities for the Peoria division and the
Consumers, Boogaarts, New York and Pennsylvania retail
chains. The restructuring charges also consisted of
operating lease liabilities and professional fees incurred
related to the restructuring process.
o Other disposition and related costs of $28 million. These
costs consisted primarily of inventory valuation
adjustments, impairment of an investment, disposition
related costs recognized on a periodic basis and other costs.
The $107 million year-to-date charge ($37 million cash and $70
million non-cash) relates to the company's segments as follows:
$43 million relates to the wholesale segment and $49 million
relates to the retail segment with the balance relating to
corporate overhead expenses.
The strategic plan includes workforce reductions which have been
recorded to-date as follows:
($'s in thousands) Amount Headcount
1998 Activity:
Charge $25,441 1,430
Terminations (3,458) (170)
1998 Ending Liability $21,983 1,260
1999 Quarter 1 Activity:
Charge 8,565 910
Terminations (12,039) (900)
Qtr 1 Ending Liability $18,509 1,270
1999 Quarter 2 Activity:
Charge 1,912 170
Terminations (7,433) (980)
Qtr 2 Ending Liability $12,988 460
1999 Quarter 3 Activity:
Charge 2,177 80
Terminations (3,537) (70)
Qtr 3 Ending Liability $11,628 470
The breakdown of the 1,160 headcount reduction recorded during
1999 is: 95 from the wholesale segment; 915 from the retail
segment; and 150 from corporate.
Additionally, the strategic plan includes charges related to
lease obligations which will be utilized as operating units or
retail stores close, but ultimately reduced over the expected
remaining lease terms. The charges and utilization have been
recorded to-date as follows:
($'s in thousands) Amount
1998 Activity:
Charge $28,101
Utilized (385)
1998 Ending Liability $27,716
1999 Quarter 1 Activity:
Charge 2,337
Utilized (3,870)
Qtr 1 Ending Liability $26,183
1999 Quarter 2 Activity:
Charge 39
Utilized (7,323)
Qtr 2 Ending Liability $18,899
1999 Quarter 3 Activity:
Charge 1,525
Utilized (615)
Qtr 3 Ending Liability $19,809
The total pre-tax charge relating to the strategic plan for the
third quarter and year-to-date periods in 1998 was $6 million and
$7 million, respectively, and were only in the impairment/
restructuring charge line. The charge consisted of $3
million impairment of long-lived assets from the wholesale
segment with the remainder made up primarily of corporate severance.
Asset impairments were recognized in accordance with SFAS No. 121
- - Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and such assets were written down
to their estimated fair values based on estimated proceeds of
operating units to be sold or discounted cash flow projections.
The operating costs of operating units to be sold or closed are
treated as normal operations during the period they remain in
use. Salaries, wages and benefits of employees at these
operating units are charged to operations during the time such
employees are actively employed. Depreciation expense is continued
for assets that the company is unable to remove from operations.
Independent Accountants' Review Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
FLEMING COMPANIES, INC.
We have reviewed the accompanying condensed consolidated balance
sheet of Fleming Companies, Inc. and subsidiaries as of October
2, 1999, and the related condensed consolidated statements of
operations for the 12 and 40 weeks ended October 2, 1999 and
October 3, 1998 and condensed consolidated statements of cash
flows for the 40 weeks ended October 2, 1999 and October 3, 1998.
These financial statements are the responsibility of the
company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Fleming
Companies Inc. and subsidiaries as of December 26, 1998, and the
related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 18, 1999, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December
26, 1998 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
October 19, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations
General
In early 1998 the Board of Directors and senior management began
an extensive strategic planning process that evaluated all
aspects of Fleming's business. With the help of a consulting
firm, the evaluation and planning process was completed late in
1998. In December 1998, the strategic plan was approved and
implementation efforts began.
The strategic plan consists of the following four major
initiatives:
o Consolidate wholesale operations. The strategic plan
initially included closing seven operating units - two in 1998
and five in 1999. Of the five in 1999, all but one have been
completed. An additional closing has taken place in 1999 which
was not originally part of the strategic plan, but was added to
the plan when costs associated with continuing to service
customers during a strike coupled with costs of reopening the
operating unit made closing the operating unit an economically
sound decision. The company anticipates that a significant
amount of these sales will be retained by transferring customer
business to its higher volume, better utilized facilities. The
company believes that this will benefit customers with better
product variety and improved buying opportunities. The company
will also benefit with better coverage of fixed expenses. These
closings are expected to result in savings due to reduced
depreciation, payroll, lease and other operating costs, which the
company should begin recognizing upon closure. Although the
divestitures will proceed as quickly as practical, the company is
very sensitive to customer requirements and will pace the
divestitures to meet those requirements. The capital returned
from the divestitures will be reinvested in the business.
o Grow wholesale sales. Higher volume, better-utilized
wholesale operations and the dynamics of the market place
represent an opportunity for sales growth. During the first
three quarters of 1999, significant new customers were added in
the wholesale segment, including increased business with Kmart
Corporation which is expected to result in approximately $1
billion in annualized new sales.
o Improve retail performance. The strategic plan not only
requires selling or closing under-performing company-owned retail
chains or groups, but also calls for increased investments in
market leading company-owned chains or groups. During the third
quarter of 1999, the sale or closing of the New York and
Pennsylvania retail chains was announced. The combined 1998
sales of the two chains totaled $377 million. The sale or
closing of the three previously announced under-performing
company-owned retail chains is well under way. The sale or
closing of all five chains is expected to be substantially
completed by the end of the fourth quarter. Also during the
first three quarters of 1999, the company built or acquired more
than 25 retail stores that are expected to fit in well
strategically with its existing chains. A number of remodels of
existing retail stores were also completed during the first three
quarters of 1999.
o Reduce overhead and operating expenses. Overhead will be
reduced at both the corporate and operating unit levels through
organization and process changes. In addition, several
initiatives are underway to reduce complexity in business systems
and remove non-value-added costs from operations. Early in 1999,
the company worked with specialists in supply chain management on
plans to begin implementing cost reductions. Over the last two
quarters, the company has been finalizing those plans and
implementing them. During 1999, the company has eliminated
approximately 150 corporate positions.
Implementation of the strategic plan is expected to continue
through the year 2000. This time frame accommodates the
company's limited resources and customers' seasonal marketing
requirements. Additional expenses will continue for some time
beyond the year 2000 because certain disposition related costs
can only be expensed when incurred.
The total pre-tax charge of the strategic plan is presently
estimated at $935 million ($246 million cash and $689 million non-
cash). The plan originally announced in December 1998 had an
estimated pre-tax charge totaling $802 million. The increase is
due primarily to closing the Peoria division, updating impairment
amounts on certain retail chains, and increasing costs associated
with initiatives to reduce overhead and complexity in business
systems. The pre-tax charge recorded to-date is $775 million
($45 million, $16 million and $46 million in the third, second
and first quarters of 1999, respectively, and $668 million
recorded in 1998). Of the $45 million charge in the third
quarter of 1999, $10 million is expected to require cash
expenditures. The remaining $35 million consisted of noncash
items. The $45 million charge consisted of the following components:
o Impairment of assets of $30 million. The impairment
components were $14 million for goodwill and $16 million for other
long-lived assets.
o Restructuring charges of $6 million. The restructuring
charges consisted of severance related expenses to sell
or close the New York and Pennsylvania retail chains. The
restructuring charges also consisted of operating lease
liabilities and professional fees incurred related to the
restructuring process.
o Other disposition and related costs of $9 million. These
costs consisted primarily of inventory valuation adjustments,
impairment of an investment, disposition related costs
recognized on a periodic basis and other costs.
The company recorded a net loss of $14 million or $.37 per share
for the third quarter of 1999. The after-tax effect of the
strategic plan charge on the company's third quarter of 1999 was
$28 million or $.73 per share. Excluding the strategic plan
charge and one-time gains on the sales of distribution
facilities, the company would have recorded net income of $11
million or $.27 per share. Adjusted EBITDA for the third quarter
of 1999 was $97 million. "Adjusted EBITDA" is earnings before
extraordinary items, interest expense, income taxes, depreciation
and amortization, equity investment results, LIFO provision and
one-time adjustments (e.g., strategic plan charges and specific
litigation charges). Adjusted EBITDA should not be considered as
an alternative measure of the company's net income, operating
performance, cash flow or liquidity. It is provided as
additional information related to the company's ability to
service debt; however, conditions may require conservation of
funds for other uses. Although the company believes adjusted
EBITDA enhances a reader's understanding of the company's
financial condition, this measure, when viewed individually, is
not necessarily a better indicator of any trend as compared to
conventionally computed measures (e.g., net sales, net earnings,
net cash flows, etc.). Finally, amounts presented may not be
comparable to similar measures disclosed by other companies.
Additional pre-tax expense of approximately $160 million is
primarily expected throughout the rest of 1999 and 2000 relating
to the continuing implementation of the strategic plan.
Approximately $135 million of these future expenses are expected
to require cash expenditures. The remaining $25 million of the
future expense relates to noncash items. These future expenses
will consist primarily of severance, real estate-related
expenses, pension withdrawal liabilities and other costs expensed
when incurred.
The pre-tax charge relating to the strategic plan for the third
quarter and year-to-date periods in 1998 was entirely reflected
in the Impairment/ restructuring charge line and totaled $6
million and $7 million, respectively. The charge consisted of $3
million impairment of long-lived assets with the remainder made
up primarily of severance.
The company has assessed the strategic significance of all
operating units. Under the plan, the sale or closing of certain
operating units has been announced and is planned. The company
anticipates the improved performance of several strategic
operating units. However, in the event that performance is not
improved, additional operating units could be sold or closed.
Results of Operations
Set forth in the following table is information regarding the
company's net sales and certain components of earnings expressed
as a percent of sales which are referred to in the accompanying
discussion:
<TABLE>
==============================================================================
Oct 2, Oct 3,
For the 12 weeks ended 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.00 % 100.00 %
Gross margin 10.37 9.40
Less:
Selling and administrative 9.00 8.27
Interest expense 1.14 1.09
Interest income (.22) (.25)
Equity investment results .07 .08
Litigation charge - .06
Impairment/restructuring charge 1.12 .18
- ------------------------------------------------------------------------------
Total expenses 11.11 9.43
- ------------------------------------------------------------------------------
Loss before taxes (.74) (.03)
Taxes on loss (.30) .04
- ------------------------------------------------------------------------------
Net income (loss) (.44)% .07 %
==============================================================================
Oct 2, Oct 3,
For the 40 weeks ended 1999 1998
- ------------------------------------------------------------------------------
Net sales 100.00 % 100.00 %
Gross margin 9.88 9.62
Less:
Selling and administrative 8.64 8.11
Interest expense 1.15 1.08
Interest income (.21) (.24)
Equity investment results .08 .08
Litigation charge - .06
Impairment/restructuring charge .72 .06
- ------------------------------------------------------------------------------
Total expenses 10.38 9.15
- ------------------------------------------------------------------------------
Earnings (loss) before taxes (.50) .47
Taxes on income (loss) (.13) .24
- ------------------------------------------------------------------------------
Net income (loss) (.37)% .23 %
==============================================================================
Net sales.
Sales for the third quarter (12 weeks) of 1999 decreased by $196
million, or 6%, to $3.2 billion from the same period in 1998.
Year to date, sales decreased by $454 million, or 4%, to $11.1
billion from the same period in 1998.
Net sales for the wholesale segment were $2.4 billion for the
third quarter of 1999 compared to $2.6 billion from the same
period in 1998. Year to date, sales decreased to $8.2 billion in
1999 compared to $8.8 billion in 1998. The sales decreases were
primarily due to the previously announced loss of sales to Furr's
(in 1998) and Randall's (in 1999) and the disposition of the
Portland division (in 1999). These sales losses plus the
prospective loss of sales to United in 2000 will be partially
offset by the increase in sales to Kmart Corporation. In 1998,
sales to Furr's, Randall's and United accounted for approximately
8% of the company's sales.
Retail segment sales increased $28 million, or 3%, in the third
quarter of 1999 to $836 million from the same period in 1998.
Year to date, retail segment sales increased $141 million, or 5%,
to $2.8 billion from the same period in 1998. The increase in
sales was due primarily to new stores added since early in 1998.
This was offset partially by the closing of non-performing stores
and a decrease in same-store sales of 4.3% and 2.1% for the third
quarter and year-to-date periods in 1999 compared to the same
periods in 1998.
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 was down slightly at 1.4% compared to 1.8%
for the same period in 1998.
Gross margin.
Gross margin for the third quarter of 1999 increased by $13
million, or 4%, to $336 million from $323 million for the same
period in 1998, and increased as a percentage of net sales to
10.37% from 9.40% for the same period in 1998. The strategic
plan charges and one-time gains on sales of distribution
facilities had little effect on these comparisons. The increase
in dollars reflects positive results from leveraging the
company's buying power and cutting costs. The increase in
percentage to net sales was also due to the impact of the growing
retail segment compared to the wholesale segment. The retail
segment has the higher margins of the two segments. This
increase was partly offset by lower margins in the retail segment
due to competitive pricing at company-owned new stores.
Year to date, gross margin decreased by $15 million, or 1%, to
$1.09 billion in 1999 from $1.11 billion in 1998, but increased
as a percentage of net sales to 9.88% from 9.62% for the same
period in 1998. After excluding the strategic plan charges and
one-time gains on sales of distribution facilities, gross margin
dollars still decreased compared to the same period in 1998 and
gross margin as a percentage of net sales still increased
compared to the same period in 1998. The decrease in dollars was
due primarily to the overall sales decrease, but was partly
offset by positive results from leveraging the company's buying
power and cutting costs. The increase in percentage to net sales
was due to the impact of the growing retail segment compared to
the wholesale segment. The retail segment has the higher margins
of the two segments. This increase was partly offset by lower
margins in the retail segment due to competitive pricing at
company-owned new stores.
Selling and administrative expenses.
Selling and administrative expenses for the third quarter of 1999
increased by approximately $8 million, or 3%, to $292 million
from $284 million for the same period in 1998 and increased as a
percentage of net sales to 9.00% for 1999 from 8.27% in 1998.
Year to date, selling and administrative expenses increased
approximately $23 million, or 2%, to $956 million in 1999 from
$933 million in 1998 and increased as a percentage of net sales
to 8.64% for 1999 from 8.11% in 1998.
For both the quarter and year-to-date periods: a)the increase in
dollars was partly due to costs relating to the strategic plan;
and b)the increase in percentage to net sales was also partly due
to costs relating to the strategic plan and to the impact of the
growing retail segment compared to the wholesale segment - the
retail segment has higher operating expenses as a percent to
sales compared to the wholesale segment. Credit loss expense is
included in selling and administrative expenses and increased
slightly for the third quarter of 1999 to $5 million compared to
the same period in 1998 at $4 million. Year to date, credit loss
expense was $18 million in 1999 compared to $12 million in 1998.
As more fully described in the 1998 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 and
equity investments in and secured and unsecured loans to certain
customers. Secured loans generally have terms up to ten years.
Operating earnings.
Operating earnings for the wholesale segment increased by
approximately $16 million to $69 million for the third quarter of
1999 from $53 million for the same period of 1998. Year to date,
operating earnings increased for the wholesale segment by
approximately $7 million to $214 million in 1999 from $207
million in 1998. Excluding the costs relating to the strategic
plan and one-time gains on sales of distribution facilities,
operating earnings would have increased by approximately $18
million to $71 million for the third quarter of 1999 from $53
million for the same period of 1998 and would have increased by
approximately $17 million year-to-date to $224 million in 1999
from $207 million in 1998.
Operating earnings for the retail segment decreased by
approximately $7 million to $4 million for the third quarter of
1999 from $11 million for the same period of 1998. Year to date,
operating earnings decreased for the retail segment by $30
million to $21 million in 1999 from $51 million in 1998.
Excluding the costs relating to the strategic plan, operating
earnings would have decreased by approximately $6 million to $5
million for the third quarter of 1999 from $11 million for the
same period of 1998 and would have decreased by approximately $20
million year-to-date to $31 million in 1999 from $51 million in
1998. Operating earnings were affected primarily by negative
same-store sales and the dilutive effect of new stores.
Corporate expenses were up slightly in the third quarter of 1999
at $28 million compared to $26 million for the same period of
1998. Year to date, corporate expenses were $14 million higher
at $98 million in 1999 compared to $84 million in 1998. Closed
store expense, the LIFO charge and incentive compensation expense
were higher in 1999 than in 1998. Costs relating to the strategic
plan had little effect on corporate expenses during these periods.
Interest expense.
Interest expense for the third quarter of 1999 was relatively
unchanged from the same period in 1998 at $37 million. Year to
date, interest expense was $3 million higher in 1999 compared to
1998 due primarily to 1998's low interest expense as a
consequence of a favorable settlement of tax assessments. The
higher 1999 expense was also due to higher average debt balances.
The company's derivative agreements consist of simple "floating-
to-fixed rate" interest rate swaps. For the third quarter of
1999, interest rate hedge agreements contributed $1.2 million of
interest expense compared to the $0.8 million contribution made
in the same period of 1998. Year to date, interest rate hedge
agreements contributed $4.1 million to interest expense compared
to $3.2 million in 1998. For a description of these derivatives,
see Item 7A. Quantitative and Qualitative Disclosures about
Market Risk in the company's Annual Report on Form 10-K for the
fiscal year ended December 26, 1998.
Interest income.
Interest income for the third quarter of 1999 was $1 million
lower than the same period in 1998 due to lower average balances
for the company's investment in direct financing leases. Year to
date, interest income was $5 million lower than the same period
in 1998 for primarily the same reason.
Equity investment results.
The company's portion of operating losses from equity investments
reflected a small improvement for both the third quarter and year-
to-date periods in 1999 compared to the same periods in 1998.
Litigation charge.
In 1998, the $2 million charge in the third quarter and the $7
million year-to-date charge represented an $800,000 per month
payment to Furr's as part of a settlement agreement. The
payments ceased upon the closing of the sale of the El Paso
product supply center to Furr's in October 1998.
Impairment/restructuring charge.
The pre-tax charge for the strategic plan recorded in the
Consolidated Condensed Statements of Operations totaled $45
million for the third quarter of 1999 and $107 million for 1999
year-to-date. Of these totals, $36 million and $79 million were
reflected in the Impairment/restructuring charge line for the
third quarter and year-to-date periods, respectively, with the
balance of the charges reflected in other financial statement
lines. Amounts recorded for the third quarter and year-to-date
periods in 1998 were entirely reflected in the Impairment/
restructuring charge line and totaled $6 million and
$7 million, respectively. See "General" above and Note 9 in the
notes to the consolidated condensed financial statements for
further discussion regarding the strategic plan.
Taxes on income.
The effective tax rate used for the 40 weeks ended October 2,
1999 was 25.9%, representing a tax benefit. This is a blended
rate taking into account operations activity, strategic plan
activity, write-offs of non-deductible goodwill and the timing of
these transactions during the year. The effective tax rate for
the 40 weeks ended October 3, 1998 was 51.0%, representing a tax
expense. The tax amount for the third quarter of both years was
derived using the 40 week tax amount with that year's estimated
effective tax rate compared to the tax amount recorded for the
first 28 weeks of the year.
Other.
Several factors negatively affecting earnings in the first 40
weeks of 1999 are likely to continue for the near term.
Management believes that these factors include costs related to
the strategic plan, lower same-store sales and operating losses
in certain company-owned retail stores.
Liquidity and Capital Resources
In the three quarters ended October 2, 1999, the company's
principal sources of liquidity were cash flows from operating
activities, borrowings under its credit facility, and the sale of
certain assets and investments. The company's principal sources
of capital, excluding shareholders' equity, during this period
were banks and lessors.
Net cash provided by operating activities.
Operating activities generated $161 million of net cash flows for
the three quarters ended October 2, 1999, compared to $127
million for the same period in 1998. Included in 1999 net
operating cash flows were $113 million from a reduction in
receivables and inventories, $35 million reduction in accounts
payable, and $45 million in payments for strategic plan-related
restructuring charges.
Cash requirements related to the implementation and completion of
the strategic plan (on a pre-tax basis) are estimated to be a
total of $57 million in 1999, $114 million in 2000, and $65
million thereafter. Total expected cash requirements (pre-tax)
have increased by $65 million since the end of the second quarter
due to increasing costs associated with initiatives to reduce
overhead and complexity in business systems. Management believes
working capital reductions, proceeds from the sale of assets, and
increased earnings related to the successful implementation of
the strategic plan are expected to provide adequate cash flows to
cover all of these costs.
Net cash used in investing activities.
Total net investment expenditures were $174 million for the three
quarters ended October 2, 1999, compared to $118 million in net
investment expenditures for the same period in 1998. Included in
1999 net investment expenditures were $123 million for capital
expenditures, $78 million for acquisitions of retail stores and a
total of $42 million in loans and equity investments in
customers. Offsetting these expenditures in part were sales of
assets and investments totaling $41 million and collections on
notes receivable totaling $24 million.
Capital expenditures are estimated to be a total of $200 million
for 1999, and between $150 million and $200 million for 2000.
The company intends to increase its retail operations by making
investments in its existing stores and by adding new stores
through store construction or acquisitions for the foreseeable
future. Acquisitions of supermarket groups or chains or
wholesale operations will be made only on a selective basis. The
company's strategic plan involves the divesting of certain
wholesale and retail facilities and other assets, and focusing
resources on the remaining wholesale and retail operations.
Net cash provided by financing activities.
Net cash provided by financing activities was $47 million for the
three quarters ended October 2, 1999, compared to $16 million in
net cash used in financing activities for the same period in
1998. Included in 1999 net cash provided by financing activities
was a net increase in long-term debt of $68 million since the end
of 1998. The increase in long-term debt reflects net cash
required from external sources to finance net cash used in
investment activities and certain financing activities such as
$22 million of principal payments on capital lease obligations
and $2 million of dividends paid, offset in part by $3 million
from the sale of common stock under stock ownership plans.
Approximately $28 million in net capital value has been provided
by lessors through capital lease obligations since the end of 1998.
At the end of the third quarter of 1999, borrowings under the
credit facility totaled $198 million in term loans and $200
million of revolver borrowings, and $81 million of letters of
credit had been issued. Based on actual borrowings and letters
of credit issued, the company could have borrowed an additional
$319 million under the revolver.
For the foreseeable future, the company's principal sources of
liquidity and capital are expected to be cash flows from
operating activities, the company's ability to borrow under its
credit facility, and asset sale proceeds. In addition, lease
financing may be employed for new retail stores and certain
equipment. Management believes these sources will be adequate to
meet working capital needs, capital expenditures, expenditures
for acquisitions (if any), strategic plan implementation costs
and other capital needs for the next 12 months. Three of the
company's largest customers (Furr's, Randall's and United) have
announced they are moving or have moved to self-distribution,
which together represent approximately 8% of the company's sales
in 1998. This is expected to have no significant future impact
on the company's liquidity due to the implementation of cost
cutting measures and the new business gained so far this year,
particularly from Kmart Corporation.
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."
Furthermore, 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." Such contingent matters are discussed in
Note 6 in the notes to the consolidated condensed financial
statements. 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.
Also see Legal Proceedings.
The company 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. In
1996, management implemented a program to comply with year-2000
requirements on a system-by-system basis including both
information technology (IT) and non-IT systems (e.g.,
microcontrollers). The program included extensive systems
testing and contingency planning. As of the end of the third
quarter of 1999, the program was substantially complete. All
significant and critical computer systems and date-sensitive
equipment and business processes have been checked, replaced or
remediated, and tested for year-2000 compliance. In cases where
compliance could not be achieved or any uncertainty exists,
alternatives and contingency plans are in place. The company
will continue to work on testing and validation of the readiness
of our systems and supply chain up to and through the millennium
transition. Contingency plans are documented and published for
all corporate offices, distribution centers and retail stores. A
senior management task force is continually reviewing and
expanding contingency plans for both internal and external
failures that could disrupt the supply chain. These plans deal
with such external variables as loss of power or water, unusual
consumer buying patterns, availability of cash, and other
infrastructure issues, in addition to the potential failure of
year-2000 compliant systems. Although the company has a high
level of confidence regarding its internal systems, year-2000
failures in the company's computer systems could have a material
adverse effect on the company's operations.
The company has also assessed the status of its vendors' and
customers' year-2000 readiness through meetings, discussions,
notices and surveys. Vendor and customer responses and feedback
are varied and in some cases inconclusive. Moreover, it is
uncertain whether there is sufficient elasticity in the supply
chain and the public infrastructure to handle demand fluctuations
caused by consumer stockpiling or panic. Accordingly, the
company believes the most likely worst case scenario could be
breakdowns in the food supply chain or public infrastructure
resulting in our customers' failure to serve and retain consumers
resulting in a negative impact on the company's sales. Year-2000
failures in the systems and processes of the company's suppliers,
customers or external service providers might also have a
material adverse impact on the company's operations.
Program costs to comply with year-2000 requirements are being
expensed as incurred. Total expenditures to third parties in
1997 through completion in 1999 are not expected to exceed $10
million, none of which is incremental. Through the end of the
third quarter of 1999, these third party expenditures totaled
approximately $8 million. To compensate for the dilutive effect
on results of operations, the company has delayed other non-
critical development and support initiatives. Accordingly, the
company expects that annual information technology expenses will
not differ significantly from prior years.
Forward-Looking Information
This report includes statements that (a) predict or forecast
future events or results, (b) depend on future events for their
accuracy, or (c) embody assumptions which may prove to have been
inaccurate, including the company's ability to successfully
achieve the goals of its strategic plan and reverse sales
declines, cut costs and improve earnings; the company's
assessment of the probability and materiality of losses
associated with litigation and other contingent liabilities; the
company's ability to develop and implement year-2000 systems
solutions; the company's ability to expand portions of its
business or enter new facets of its business; and the company's
expectations regarding the adequacy of capital and liquidity.
These forward-looking statements and the company's business and
prospects are subject to a number of factors which could cause
actual results to differ materially including the: risks
associated with the successful execution of the company's
strategic business plan; adverse effects of the changing industry
environment and increased competition; continuing sales declines
and loss of customers; exposure to litigation and other
contingent losses; failure of the company to achieve necessary
cost savings; failure of the company, its vendors or its
customers to develop and implement year-2000 system solutions;
and the negative effects of the company's substantial
indebtedness and the limitations imposed by restrictive covenants
contained in the company's debt instruments. These and other
factors are described in the company's Annual Report on Form 10-K
for the fiscal year ended December 26, 1998 and in other periodic
reports available from the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material change has occurred since year-end 1998. See Item
7A. Quantitative and Qualitative Disclosures about Market Risk in
the company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Set forth below is information regarding litigation which became
reportable or as to which a material development has occurred
since the date of the company's Quarterly Report on Form 10-Q for
the quarter ended July 10, 1999:
(1) Tru Discount Foods. On September 28, 1999, the
arbitration panel entered its award in favor of Fleming against
Tru Discount Foods and its principals in the net amount of
$579,443 plus interest at the rate of six percent per annum from
October 29, 1999. In addition, Tru Discount Foods and its
principals were ordered to pay Fleming $4,679 in satisfaction of
outstanding fees and expenses, each party to bear its own
attorney fees. All of their counterclaims, with the exception of
one, were denied. Under the Uniform Arbitration Act, they have
until December 27, 1999 to seek an order modifying or vacating
the award from the Creek County, Oklahoma district court.
Fleming will seek confirmation from the court of the award which
will not be final until confirmed by the court.
(2) Don's United Super (and related cases). During the
third quarter of 1999, plaintiffs in the Don's case asserted
damages of approximately $109 million.
(3) Tobacco Cases. During the third quarter of 1999, a
trial date was set for March 4, 2000, for one of the cases
previously remanded to the Court of Common Pleas of Philadelphia
County, Pennsylvania. With respect to this case, the company is
being indemnified and defended by a substantial third-party co-
defendant. In addition, during the third quarter, two other
claims initially filed in the Court of Common Pleas, Philadelphia
County, which had been dismissed pursuant to a tolling agreement
among the parties, were withdrawn from the tolling agreement by
plaintiffs'counsel.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Page Number
12 Computation of Ratio of Earnings
to Fixed Charges
15 Letter from Independent Accountants
as to Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
On September 28, 1999, an arbitration panel entered its award
in favor of the company against Tru Discount Foods and its principals.
<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: November 10, 1999 KEVIN TWOMEY
Kevin Twomey
Senior Vice President-Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
12 Computation of Ratio of Earnings Filed herewith electronically
to Fixed Charges
15 Letter from Independent Accountants Filed herewith electronically
as to Unaudited Interim Financial
Information
27 Financial Data Schedule Filed herewith electronically
</TABLE>
Exhibit 12
Fleming Companies, Inc.
Computation of Ratio of Earnings to Fixed Charges
40 Weeks Ended
October 2, October 3,
(In thousands of dollars) 1999 1998
Earnings:
Pretax income (loss) $(55,200) $ 54,252
Fixed charges, net 150,098 152,380
Total earnings $ 94,898 $206,632
Fixed charges:
Interest expense $127,240 $124,411
Portion of rental charges
deemed to be interest 22,508 27,640
Capitalized interest 428 -
Total fixed charges $150,176 $152,051
Deficiency $55,278 -
Ratio of earnings to fixed charges .63 1.36
"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.
Under the company's long-term debt agreements, "earnings"
and "fixed charges" are defined differently and amounts and
ratios differ accordingly.
Exhibit 15
Fleming Companies, Inc.
6301 Waterford Boulevard, Box 26647
Oklahoma City, OK 73126
We have made a review, in accordance with standards
established by the American Institute of Certified Public
Accountants, of the unaudited interim financial information
of Fleming Companies, Inc. and subsidiaries for the 12 and
40 weeks ended October 2, 1999 and October 3, 1998, as
indicated in our report dated October 19, 1999; because we
did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the 12
and 40 weeks ended October 2, 1999, is incorporated by
reference in the following:
(i) Registration Statement No. 2-98602 (1985 Stock Option
Plan) on Form S-8;
(ii) Registration Statement No. 33-36586 (1990 Fleming Stock
Option Plan) on Form S-8;
(iii) Registration Statement No. 33-56241 (Dividend
Reinvestment and Stock Purchase Plan) on Form S-3;
(iv) Registration Statement No. 333-11317 (1996 Stock
Incentive Plan) on Form S-8;
(v) Registration Statement No. 333-35703 (Senior
Subordinated Notes) on Form S-4;
(vi) Registration Statement No. 333-28219 (Associate Stock
Purchase Plan) on Form S-8;
(vii) Registration Statement No. 333-80445 (1999 Stock
Incentive Plan) on Form S-8; and
(viii) Registration Statement No. 333-89375 (Consolidated
Savings Plus and Stock Ownership Plan) on Form S-8.
We also are aware that the aforementioned report, pursuant
to Rule 436(c) under the Securities Act of 1933, is not
considered a part of a registration statement prepared or
certified by an accountant or a report prepared or certified
by an accountant within the meaning of Sections 7 and 11 of
that Act.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 2, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> OCT-02-1999
<CASH> 39,604
<SECURITIES> 0
<RECEIVABLES> 444,273
<ALLOWANCES> 27,343
<INVENTORY> 894,169
<CURRENT-ASSETS> 1,567,479
<PP&E> 1,584,720
<DEPRECIATION> 739,012
<TOTAL-ASSETS> 3,453,387
<CURRENT-LIABILITIES> 1,249,263
<BONDS> 1,192,260
0
0
<COMMON> 97,091
<OTHER-SE> 435,339
<TOTAL-LIABILITY-AND-EQUITY> 3,453,387
<SALES> 11,057,800
<TOTAL-REVENUES> 11,057,800
<CGS> 9,965,771
<TOTAL-COSTS> 10,967,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,213
<INTEREST-EXPENSE> 127,240
<INCOME-PRETAX> (55,200)
<INCOME-TAX> (14,275)
<INCOME-CONTINUING> (40,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,925)
<EPS-BASIC> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
