SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 10, 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 require-
ments for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 6, 1999 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 38,810,000
<PAGE>
This amended filing primarily reflects additions to qualitative disclosures.
There were no restatements to the financial statements.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
12 Weeks Ended July 10, 1999,
and July 11, 1998
Consolidated Condensed Statements of Operations -
28 Weeks Ended July 10, 1999,
and July 11, 1998
Consolidated Condensed Balance Sheets -
July 10, 1999, and December 26, 1998
Consolidated Condensed Statements of Cash Flows -
28 Weeks Ended July 10, 1999,
and July 11, 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
Part II. OTHER INFORMATION:
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 July 10, 1999, and July 11, 1998
(In thousands, except per share amounts)
<CAPTION>
============================================================================
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $3,349,362 $3,505,943
Costs and expenses:
Cost of sales 3,022,154 3,164,174
Selling and administrative 286,565 284,146
Interest expense 38,647 35,861
Interest income (6,894) (8,308)
Equity investment results 2,415 3,248
Litigation charge - 2,216
Impairment/restructuring charge 6,169 916
- ----------------------------------------------------------------------------
Total costs and expenses 3,349,056 3,482,253
- ----------------------------------------------------------------------------
Earnings before taxes 306 23,690
Taxes on income 2,644 10,051
- ----------------------------------------------------------------------------
Net earnings (loss) $ (2,338) $ 13,639
- ----------------------------------------------------------------------------
Basic and diluted net earnings (loss) per share $(.06) $.36
Dividends paid per share $.02 $.02
Weighted average shares outstanding:
Basic 38,204 37,859
Diluted 38,204 38,027
- ----------------------------------------------------------------------------
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial
statements and independent accountants' review report.
<TABLE>
Consolidated Condensed Statements of Operations
For the 28 weeks ended July 10, 1999, and July 11, 1998
(In thousands, except per share amounts)
<CAPTION>
============================================================================
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $7,814,608 $8,073,069
Costs and expenses:
Cost of sales 7,059,022 7,289,032
Selling and administrative 663,560 648,866
Interest expense 90,253 87,063
Interest income (16,244) (19,613)
Equity investment results 5,971 6,837
Litigation charge - 5,170
Impairment/restructuring charge 43,205 649
- ----------------------------------------------------------------------------
Total costs and expenses 7,845,767 8,018,004
- ----------------------------------------------------------------------------
Earnings (loss) before taxes (31,159) 55,065
Taxes on income (loss) (4,580) 26,156
- ----------------------------------------------------------------------------
Net earnings (loss) $ (26,579) $ 28,909
============================================================================
Basic and diluted net earnings (loss) per share $(.70) $.76
Dividends paid per share $.04 $.04
Weighted average shares outstanding:
Basic 38,169 37,828
Diluted 38,169 37,996
============================================================================
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed financial statements
and independent accountants' review report.
<TABLE>
Consolidated Condensed Balance Sheets
(In thousands)
<CAPTION>
============================================================================
July 10, December 26,
Assets 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,585 $ 5,967
Receivables 400,168 450,905
Inventories 852,486 984,287
Other current assets 174,196 146,757
- ----------------------------------------------------------------------------
Total current assets 1,430,435 1,587,916
Investments and notes receivable 118,829 119,468
Investment in direct financing leases 133,841 177,783
Property and equipment 1,652,512 1,554,884
Less accumulated depreciation
and amortization (779,597) (734,819)
- ----------------------------------------------------------------------------
Net property and equipment 872,915 820,065
Deferred income taxes 33,148 51,497
Other assets 184,679 154,524
Goodwill 593,323 579,579
- ----------------------------------------------------------------------------
Total assets $3,367,170 $3,490,832
============================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 876,603 $ 945,475
Current maturities of long-term debt 40,368 41,368
Current obligations under capital leases 22,567 21,668
Other current liabilities 251,255 272,573
- ----------------------------------------------------------------------------
Total current liabilities 1,190,793 1,281,084
Long-term debt 1,139,439 1,143,900
Long-term obligations under capital leases 363,690 359,462
Other liabilities 126,294 136,455
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value per share 97,092 96,356
Capital in excess of par value 512,633 509,602
Reinvested earnings (deficit) (4,941) 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 (697) (2,049)
- ----------------------------------------------------------------------------
Total shareholders' equity 546,954 569,931
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,367,170 $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 28 weeks ended July 10, 1999, and July 11, 1998
(In thousands)
<CAPTION>
============================================================================
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(26,579) $ 28,909
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 83,876 98,226
Credit losses 12,558 7,914
Deferred income taxes 5,427 11,331
Equity investment results 5,882 6,837
Impairment/restructuring and related charges 61,420 934
Cash payments on impairment/restructuring
and related charges (34,104) (1,347)
Change in assets and liabilities, excluding
effect of acquisitions:
Receivables 45,847 (92,934)
Inventories 128,881 34,022
Accounts payable (68,872) 28,846
Other assets and liabilities (44,503) (22,147)
Other adjustments, net (1,126) (5,233)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 168,707 95,358
- ----------------------------------------------------------------------------
Cash flows from investing activities:
Collections on notes receivable 19,764 25,845
Notes receivable funded (23,445) (15,280)
Purchase of property and equipment (82,504) (84,474)
Proceeds from sale of property and equipment 6,089 14,055
Investments in customers (8,037) (1,009)
Proceeds from sale of investment 2,203 3,483
Businesses acquired (78,075) -
Proceeds from sale of businesses 7,496 -
Other investing activities 2,441 4,430
- ----------------------------------------------------------------------------
Net cash used in investing activities (154,068) (52,950)
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings 101,000 35,000
Principal payments on long-term debt (106,461) (76,028)
Principal payments on capital lease obligations (13,107) (11,929)
Sale of common stock under incentive
stock and stock ownership plans 3,130 4,196
Dividends paid (1,552) (1,541)
Other financing activities (31) (448)
- ----------------------------------------------------------------------------
Net cash used in financing activities (17,021) (50,750)
- ----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,382) (8,342)
Cash and cash equivalents, beginning of period 5,967 30,316
- ----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,585 $ 21,974
============================================================================
Supplemental information:
Cash paid for interest $ 89,572 $ 97,633
Cash paid for taxes $8,730 $11,021
============================================================================
</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 July 10, 1999, and the
consolidated condensed statements of operations and cash flows for the 12-week
and 28-week periods ended July 10, 1999, and for the 12-week and 28-week
periods ended July 11, 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 July 10, 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 $50 million at July 10, 1999,
and $44 million at December 26, 1998.
4. Sales and operating earnings for the company's food distribution and retail
food segments are presented below.
<TABLE>
<CAPTION>
============================================================================
For the 12 weeks ended
July 10, July 11,
($ in millions) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Food distribution $2,983 $3,139
Intersegment elimination (507) (451)
- ----------------------------------------------------------------------------
Net food distribution 2,476 2,688
Retail food 874 818
- ----------------------------------------------------------------------------
Total sales $3,350 $3,506
============================================================================
Operating earnings:
Food distribution $62 $62
Retail food 4 21
Corporate (25) (25)
- ----------------------------------------------------------------------------
Total operating earnings 41 58
Interest expense (39) (36)
Interest income 6 8
Equity investment results (2) (3)
Litigation charge - (2)
Impairment/restructuring charge (6) (1)
- ----------------------------------------------------------------------------
Earnings (loss) before taxes $ - $24
============================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================================
For the 28 weeks ended
July 10, July 11,
($ in millions) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Food distribution $6,985 $7,235
Intersegment elimination (1,182) (1,061)
- ----------------------------------------------------------------------------
Net food distribution 5,803 6,174
Retail food 2,012 1,899
- ----------------------------------------------------------------------------
Total sales $7,815 $8,073
============================================================================
Operating earnings:
Food distribution $145 $154
Retail food 17 40
Corporate (70) (58)
- ----------------------------------------------------------------------------
Total operating earnings 92 136
Interest expense (90) (87)
Interest income 16 19
Equity investment results (6) (7)
Litigation charge - (5)
Impairment/restructuring charge (43) (1)
- ----------------------------------------------------------------------------
Earnings (loss) before taxes $(31) $ 55
============================================================================
</TABLE>
General corporate expenses are not allocated to food distribution and retail
food segments. The transfer pricing between segments is at cost.
5. The company's comprehensive loss for the 12 weeks ended July 10, 1999
totaled $2.3 million compared to comprehensive income for the 12 weeks ended
July 11, 1998 which totaled $13.6 million. The company's comprehensive loss
for the 28 weeks ended July 10, 1999 totaled $26.6 million compared to
comprehensive income for the 28 weeks ended July 11, 1998 which totaled $33.8
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 28 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 one noteholder 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
noteholder case was dismissed and during the first quarter of 1999, the
consolidated case was also dismissed, each without prejudice. The court gave
the plaintiffs the opportunity to restate their claims without prejudice and
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. The arbitration panel is expected to rule by late September
1999. Management is unable to predict the ultimate outcome of this matter.
However, an unfavorable outcome could have a material adverse effect on the
company.
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. Damages have not been
quantified. However, with respect to some plaintiffs, the time period during
which the alleged overcharges took place exceeds 25 years and the company
anticipates that the plaintiffs will allege substantial monetary 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 and
former customers 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. Management has implemented a program to comply
with year-2000 requirements on a system-by-system basis. Fleming's plan
includes extensive systems testing and is expected to be substantially
completed by the third quarter of 1999. Although the company is developing
greater levels of confidence regarding its internal systems, failure to ensure
that the company's computer systems are year-2000 compliant 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 second 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.
July 10, July 11,
(In millions) 1999 1998
Current assets $39 $29
Noncurrent assets $125 $70
Current liabilities $30 $15
Noncurrent liabilities $35 $7
28 weeks ended
July 10, July 11,
(In millions) 1999 1998
Net sales $253 $191
Costs and expenses $255 $195
Net loss $(1) $(3)
8. The accompanying operating statements include the following:
12 weeks ended
(In thousands) July 10, July 11,
1999 1998
Depreciation and
amortization (includes
amortized costs in
interest expense) $37,559 $41,847
Amortized costs in
interest expense $1,125 $1,136
28 weeks ended
(In thousands) July 10, July 11,
1999 1998
Depreciation and
amortization (includes
amortized costs in
interest expense) $83,876 $98,226
Amortized costs in
interest expense $2,623 $2,975
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 food distribution operations, grow food
distribution sales, improve retail food performance, and reduce overhead and
operating expenses.
The total pre-tax charge of the strategic plan is presently estimated at $820
million. The pre-tax charge recorded to-date is $730 million ($16 million in
the second quarter of 1999, $46 million in the first quarter of 1999 and $668
million recorded in 1998). After tax, the expense for the first two quarters
of 1999 was $44 million or $1.15 per share ($12 million or $.31 per share for
quarter two and $32 million or $.84 per share for quarter one). The $90
million of costs relating to the strategic plan not yet charged against income
will be recorded throughout the rest of 1999 and 2000 at the time such costs
are accruable.
The $16 million charge in the second quarter of 1999 (partly due to the
announcement to sell or close the Boogaarts retail chain) was included on
several lines of the Consolidated Condensed Statements of Operations: $7
million was included in cost of sales and was primarily related to inventory
valuation adjustments; $3 million was included in selling and administrative
expense as disposition related costs recognized on a periodic basis; and the
remaining $6 million was included in the impairment/restructuring charge line.
The $16 million charge consisted of the following components:
o Impairment of assets of $1 million.
o Restructuring charges of $5 million. The restructuring charges
consisted of severance related expenses to sell or close the
Boogaarts retail chain. The restructuring charges also consisted
of professional fees incurred related to the restructuring process.
o Other disposition and related costs of $10 million. These costs
consisted primarily of inventory valuation adjustments, disposition
related costs recognized on a periodic basis and other costs.
The $16 million charge relates to the company's segments as follows: $4
million relates to the food distribution segment and $7 million relates to the
retail food segment with the balance relating to corporate overhead expenses.
The $62 million year-to-date charge was included in the following lines of the
Consolidated Condensed Statements of Operations: $13 million was included in
cost of sales and was primarily related to inventory valuation adjustments; $6
million was included in selling and administrative expense as disposition
related costs recognized on a periodic basis; and the remaining $43 million
was included in the impairment/restructuring charge line. The $62 million
charge consisted of the following components:
o Impairment of assets of $25 million. The impairment components were
$22 million for goodwill and $3 million for other long-lived assets.
All of the goodwill charge of $22 million was related to the 1994
"Scrivner" acquisition.
o Restructuring charges of $18 million. The restructuring charges
consisted of severance related expenses and pension withdrawal
liabilities for the Peoria food distribution operating unit and
Consumers and Boogaarts retail chains which were announced in 1999.
The restructuring charges also consisted of operating lease
liabilities for the Peoria food distribution operating unit and
professional fees incurred related to the restructuring process.
o Other disposition and related costs of $19 million. These costs
consisted primarily of inventory valuation adjustments, disposition
related costs recognized on a periodic basis and other costs.
The $62 million year-to-date charge relates to the company's segments as
follows: $36 million relates to the food distribution segment and $15 million
relates to the retail food segment with the balance relating to corporate
overhead expenses.
The strategic plan includes workforce reductions which have been recorded to-
date as follows:
($'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 $12,988 460
The breakdown of the 1,080 headcount reduction recorded during 1999 is:
68 from the food distribution segment; 865 from the retail food segment;
and 147 from corporate.
Additionally, the strategic plan includes charges related to lease obligations
which will be utilized as operating units or retail stores close, but
ultimately reduced over remaining lease terms ranging from 1 to 20 years.
The charges and utilization have been recorded to-date as follows:
($'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
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 July 10, 1999, and the related
condensed consolidated statements of income for the 12 and 28 weeks ended July
10, 1999 and July 11, 1998 and condensed consolidated statements of cash flows
for the 28 weeks ended July 10, 1999 and July 11, 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
July 29, 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 involves three key
strategies to restore sales and earnings growth: focus resources to improve
performance, build sales more aggressively in our wholesale business and
company-owned retail stores, and reduce overhead and operating costs to
improve profitability system-wide.
The three strategies are further defined in the following four major
initiatives:
o Consolidate food distribution 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. Although the
divestiture of an additional four operating units was planned, the
increased business with Kmart Corporation has caused a change in the
strategic plan with one of the scheduled closings being taken off of
the list due to increased cash flows now expected at that operating
unit. The closing of another operating unit has been delayed to
allow the receiving operating unit to adapt to new Kmart business.
The company anticipates that a significant amount of the 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. The closings are expected to result in savings
due to reduced depreciation, payroll, lease and other operating
costs, and we expect to begin recognizing these savings upon closure.
Although the divestiture 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 food distribution sales. Higher volume, better-utilized food
distribution operations and the dynamics of the market place
represent an opportunity for sales growth. During the first two
quarters of 1999, significant new customers were added in the food
distribution segment. Just after the second quarter end, increased
business with Kmart Corporation was announced which is expected to
result in approximately $1 billion in annualized new sales.
o Improve retail food 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 second quarter of
1999, the selling or closing of a third under-performing company-
owned retail chain (Boogaarts Food Stores) was announced per the
strategic plan. Boogaarts sales totaled $80 million in 1998. The
selling or closing of the first two chains is almost finished and
the third chain should be completed by the end of the fourth quarter.
The divestiture of two more retail chains is still planned. Also
during the first two 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 have also been completed during the quarter.
o Reduce overhead and operating expenses. Overhead will be reduced at
both the corporate and operating unit levels through organization and
process changes, such as a reduction in workforce through
productivity improvements and elimination of work, centralization
of administrative and procurement functions, and reduction in the
number of management layers. In addition, several initiatives are
underway to reduce complexity in business systems and remove
non-value-added costs from operations, such as reducing the number
of SKU's, creating a single point of contact with customers, reducing
the number of decision points within the company, and centralizing
vendor negotiations. During the first quarter of 1999, the company
worked with specialists in supply chain management on plans to begin
implementing cost reductions. In the second quarter of 1999, the
company finalized some of those plans and began implementation.
During the first two quarters of 1999, the company eliminated over
200 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 $820
million. The pre-tax charge recorded to-date is $730 million ($16 million in
the second quarter of 1999, $46 million in the first quarter of 1999 and $668
million recorded in 1998). Of the $16 million charge in the second quarter of
1999, $10 million is expected to require cash expenditures. The remaining $6
million consisted of noncash items. The $16 million charge consisted of the
following components:
o Impairment of assets of $1 million related to assets to be sold
or closed.
o Restructuring charges of $5 million. The restructuring charges
consisted of severance related expenses to sell or close the
Boogaarts retail chain which was announced in the second quarter.
The restructuring charges also consisted of professional fees
incurred related to the restructuring process.
o Other disposition and related costs of $10 million. These costs
consisted primarily of inventory valuation adjustments, disposition
related costs recognized on a periodic basis and other costs.
The company recorded a net loss of $2 million or $.06 per share for the second
quarter of 1999. The after-tax effect of the strategic plan charge on the
company's second quarter of 1999 was $12 million or $.31 per share. Excluding
the strategic plan charge, the company would have recorded net income of $10
million or $.25 per share. Adjusted EBITDA for the second quarter of 1999
was $96 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. The following table sets forth the calculation of adjusted
EBITDA for the second quarter of 1999 (in millions):
Net Loss $ (2)
Add back:
Taxes on Loss 3
Depreciation/Amortization 36
Interest Expense 39
Equity Investment Results 2
LIFO Provision 2
-----
EBITDA 80
Add back Noncash Strategic Plan Charges 6
-----
EBITDA excluding Noncash Strategic
Plan Charges 86
Add back Strategic Plan Charges
requiring Cash 10
-----
Adjusted EBITDA $ 96
=====
The adjusted EBITDA amount represents cash flow from operations excluding
unusual or infrequent items. In the company's opinion, adjusted EBITDA is
the best starting point when evaluating the company's ability to service
debt. In addition, the company believes it is important to identify the
cash flows relating to unusual or infrequent charges and strategic plan
charges, which should also be considered in evaluating the company's ability
to service debt.
Additional pre-tax expense of approximately $90 million is expected throughout
the rest of 1999 and 2000 relating to the continuing implementation of the
strategic plan. Approximately $61 million of these future expenses are
expected to require cash expenditures. The remaining $29 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 company has assessed the strategic significance of all operating units.
Under the plan, the selling or closing of certain operating units has been
announced and is planned as described above. The company anticipates the
improved performance of several strategic operating units. However, in
the event that performance is not improved, the strategic plan will be
revised and 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>
<CAPTION>
=============================================================================
July 10, July 11,
For the 12 weeks ended 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.00 % 100.00 %
Gross margin 9.77 9.75
Less:
Selling and administrative 8.57 8.11
Interest expense 1.15 1.02
Interest income (.21) (.24)
Equity investment results .07 .09
Litigation charge - .06
Impairment/restructuring charge .18 .03
- -----------------------------------------------------------------------------
Total expenses 9.76 9.07
- -----------------------------------------------------------------------------
Earnings before taxes .01 .68
Taxes on income .08 .29
- -----------------------------------------------------------------------------
Net income (loss) (.07)% .39 %
=============================================================================
July 10, July 11,
For the 28 weeks ended 1999 1998
- -----------------------------------------------------------------------------
Net sales 100.00 % 100.00 %
Gross margin 9.67 9.71
Less:
Selling and administrative 8.50 8.04
Interest expense 1.15 1.08
Interest income (.21) (.24)
Equity investment results .08 .08
Litigation charge - .06
Impairment/restructuring charge .55 .01
- -----------------------------------------------------------------------------
Total expenses 10.07 9.03
- -----------------------------------------------------------------------------
Earnings (loss) before taxes (.40) .68
Taxes on income (loss) (.06) .32
- -----------------------------------------------------------------------------
Net income (loss) (.34)% .36 %
=============================================================================
</TABLE>
Net sales.
Sales for the second quarter (12 weeks) of 1999 decreased by $157 million, or
5%, to $3.3 billion from the same period in 1998. Year to date, sales
decreased by $258 million, or 3%, to $7.8 billion from the same period in
1998.
Net sales for the food distribution segment were $2.5 billion for the second
quarter of 1999 compared to $2.7 billion from the same period in 1998. Year
to date, sales decreased to $5.8 billion in 1999 compared to $6.2 million in
1998. The sales decreases were primarily due to the previously announced loss
of sales to Furr's and Randall's and the disposition of the Portland division.
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.
Retail food segment sales increased $56 million, or 7%, in the second quarter
of 1999 to $874 million from the same period in 1998. Year to date, retail
food segment sales increased $113 million, or 6%, to $2.0 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 2.9% and 1.5% for the
second 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 1.7% compared to 1.9% for the same period in 1998.
Gross margin.
Gross margin for the second quarter of 1999 decreased by $15 million, or 4%,
to $327 million from $342 million for the same period in 1998, but increased
as a percentage of net sales to 9.77% from 9.75% for the same period in 1998.
Year to date, gross margin decreased by $28 million, or 4%, to $756 million in
1999 from $784 million in 1998, and decreased as a percentage of net sales to
9.67% from 9.71% for the same period in 1998. Gross margin in 1999 was
adversely affected by costs relating to the strategic plan, primarily
inventory valuation adjustments. Excluding strategic plan charges, the
quarter and year-to-date comparisons to the prior year reflect a decrease in
gross margin dollars and an increase in gross margin as a percentage of net
sales. The decrease in dollars was due primarily to the overall sales
decrease. The increase in percentage to net sales was due to the impact of
the growing retail food segment compared to the food distribution segment.
The retail food segment has the better margins of the two segments. This
increase was partly offset by lower margins in the retail food segment due to
competitive pricing at company-owned new stores.
Selling and administrative expenses.
Selling and administrative expenses for the second quarter of 1999 increased
by approximately $3 million, or 1%, to $287 million from $284 million for the
same period in 1998 and increased as a percentage of net sales to 8.57% for
1999 from 8.11% in 1998. Year to date, selling and administrative expenses
increased $15 million, or 2%, to $664 million in 1999 from $649 million in
1998 and increased as a percentage of net sales to 8.50% for 1999 from 8.04%
in 1998. The increase in dollars was partly due to costs relating to the
strategic plan. The increase in percentage to net sales was due to the impact
of the growing retail food segment compared to the food distribution segment.
The retail food segment has higher operating expenses as a percent to sales
compared to the food distribution segment. Credit loss expense is included in
selling and administrative expenses and was flat for the second quarter of
1999 compared to the same period in 1998 at $5 million. Year to date, credit
loss expense was $13 million in 1999 compared to $8 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 food distribution segment were flat for the second
quarter of 1999 compared to the same period of 1998 at $62 million. Year to
date, operating earnings decreased for the food distribution segment by $9
million, or 6%, to $145 million in 1999 from $154 million in 1998. Excluding
the costs relating to the strategic plan, operating earnings improved slightly
in the second quarter of 1999 and were almost flat year-to-date compared to
the same periods in 1998.
Operating earnings for the retail food segment decreased by $17 million to $4
million for the second quarter of 1999 from $21 million for the same period of
1998. Year to date, operating earnings decreased for the retail food segment
by $23 million to $17 million in 1999 from $40 million in 1998. Operating
earnings were affected primarily by costs relating to the strategic plan and
negative same-store sales. Start-up costs of new stores also had an effect on
operating earnings.
Corporate expenses were flat in the second quarter of 1999 compared to the
same period of 1998 at $25 million. Year to date, corporate expenses were $12
million higher at $70 million in 1999 compared to $58 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 second quarter of 1999 was $3 million higher than
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. Year to date, interest expense was $3
million higher for the same reasons.
The company's derivative agreements consist of simple "floating-to-fixed rate"
interest rate swaps. For the second quarter of 1999, interest rate hedge
agreements contributed $1.3 million of interest expense compared to the $0.9
million contribution made in the same period of 1998. Year to date, interest
rate hedge agreements contributed $2.8 million to interest expense compared to
$2.4 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 second quarter of 1999 was $1 million lower than 1998
due to lower average balances for the company's investment in direct financing
leases. Year to date, interest income was $3 million lower 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 second 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 second quarter and the $5 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 $16 million for the second quarter
of 1999 and $62 million for 1999 year-to-date. Of these totals, $6 million
and $43 million were reflected in the Impairment/restructuring charge line for
the second quarter and year-to-date periods, respectively, with the balance of
the charges reflected in other financial statement lines. Amounts recorded
for the first two quarters in 1998 for the strategic plan were insignificant.
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 28 weeks ended July 10, 1999 was 14.7%,
representing a tax benefit. This is a blended rate taking into account
operat and the timing of these transactions during the year. The effective
tax rate for the 28 weeks ended July 11, 1998 was 47.5%, representing a tax
expense. The tax amount for the second quarter of both years was derived
using the 28 week tax amount with that year's estimated effective tax rate
compared to the tax amount recorded for the first 16 weeks of the year.
Other.
Several factors negatively affecting earnings in the first 28 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
Set forth below is certain information regarding the company's capital
structure at the end of the second quarter of 1999 and at the end of fiscal
1998:
<TABLE>
<CAPTION>
============================================================================
Capital Structure (In millions) July 10, 1999 December 26, 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $1,180 55.8% $1,185 55.5%
Capital lease obligations 386 18.3 381 17.8
- ----------------------------------------------------------------------------
Total debt 1,566 74.1 1,566 73.3
Shareholders' equity 547 25.9 570 26.7
- ----------------------------------------------------------------------------
Total capital $2,113 100.0% $2,136 100.0%
============================================================================
</TABLE>
Note: The above table includes current maturities of long-term debt and
current obligations under capital leases.
Long-term debt at the end of the second quarter of 1999 was the same as year-
end 1998 as cash requirements for capital expenditures, acquisitions of retail
stores and other investments, plus debt service requirements, were offset by
net cash provided from operations, borrowings under the revolving credit
facility, and sales of assets. Capital lease obligations were $5 million
higher because leases added for new retail stores exceeded repayments.
The debt-to-capital ratio at the end of the second quarter of 1999 was 74.1%,
up from 73.3% at year-end 1998.
Operating activities generated $169 million of net cash flows for the first
two quarters of 1999 compared to $95 million for the same period in 1998.
Working capital was $240 million at the end of the second quarter of 1999, a
decrease from $307 million at year-end 1998. The current ratio decreased to
1.20 to 1, from 1.24 to 1 at year-end 1998.
Capital expenditures were $83 million in the first two quarters of 1999
compared to $84 million for the same period in 1998. Total capital
expenditures in 1999 are expected to be approximately $200 million. The
company's strategic plan involves the divesting of a number of food
distribution and retail food facilities and other assets, and focusing
resources on the remaining food distribution and retail food operations. The
company intends to increase its retail operations by making investments in its
existing stores and by adding approximately 20 stores per year for the
foreseeable future. Acquisitions of supermarket chains or groups or other
food distribution operations will be made only on a selective basis. The
company has recently purchased an eight-store Food 4 Less group in northern
California. Expenditures for this and other acquisitions totalled $78 million
for the first two quarters of 1999 compared to no such expenditures for the
same period in 1998. Proceeds from the sale of retail stores and other
investments totaled $16 million for the first two quarters of 1999 compared to
$18 million for the same period in 1998.
Cash requirements related to the implementation and completion of the
strategic plan (on a pre-tax basis) were $34 million in the first two quarters
of 1999, and are estimated to be a total of $51 million in 1999, $57 million
in 2000, and $63 million thereafter. 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 flow to cover these incremental costs.
The company makes investments in and loans to certain retail customers. Net
investments and loans increased $3 million in the first two quarters of 1999,
from $137 million at year-end 1998 to $140 million, due primarily to an
increased level of investment in loans to customers and stores acquired for
resale.
In the first two quarters of 1999, the company's primary 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, are banks and
other lenders and lessors.
The company's credit facility consists of a $600 million revolver, with a
final maturity of July 25, 2003, and a $250 million amortizing term loan, with
a final maturity of July 25, 2004. Up to $300 million of the revolver may be
used for issuing letters of credit, and borrowings and letters of credit
issued under the credit facility may be used for general corporate purposes.
Outstanding borrowings and letters of credit are secured by a first priority
security interest in the accounts receivable and inventories of the company
and its subsidiaries and in the capital stock of or other equity interests
owned by the company in its subsidiaries. In addition, the credit facility is
guaranteed by substantially all company subsidiaries. The stated interest
rate on borrowings under the credit agreement is equal to one of a group of
referenced index rates, normally the London interbank offered interest rate
("LIBOR"), plus a margin. The level of the margin is dependent on credit
ratings on the company's senior secured bank debt.
The credit facility and the indentures under which other company debt
instruments were issued contain customary covenants associated with similar
facilities. The credit facility currently contains the following more
significant financial covenants: maintenance of a fixed charge coverage ratio
of at least 1.7 to 1, based on adjusted earnings, as defined, before interest,
taxes, depreciation and amortization, net rent expense and non-cash impairment
and restructuring charges and their related costs; maintenance of a ratio of
inventory-plus-accounts receivable to funded bank debt (including letters of
credit) of at least 1.4 to 1; and a limitation on restricted payments,
including dividends. Covenants contained in the company's indentures under
which other company debt instruments were issued are generally less
restrictive than those of the credit facility. The company is in compliance
with all financial covenants under the credit facility and its indentures.
The credit facility may be terminated in the event of a defined change in
control. Under the company's indentures, noteholders may require the company
to repurchase notes in the event a defined change of control coupled with a
defined decline in credit ratings.
At the end of the second quarter of 1999, borrowings under the credit facility
totaled $204 million in term loans and $110 million of revolver borrowings,
and $81 million of letters of credit had been issued. Letters of credit are
needed primarily for insurance reserves associated with the company's normal
risk management activities. To the extent that any of these letters of credit
would be drawn, payments would be financed by borrowings under the revolver.
At the end of the second quarter of 1999, the company would have been allowed
to borrow an additional $409 million under the revolver based on actual
borrowings and letters of credit outstanding. Under the company's most
restrictive borrowing covenant, which is the fixed charge coverage ratio
contained in the credit facility, $5 million of additional annualized fixed
charges could have been incurred.
On August 24, 1999, Moody's Investors Service revised its outlook on its
ratings for the company to positive and confirmed its existing ratings.
Standard & Poor's rating group is currently reviewing the company's ratings
and is expected to make an announcement in the near future.
Dividend payments in the first two quarters of 1999 were $0.02 per share per
quarter, which was the same per share payout as in the first two quarters of
1998. The credit facility and the indentures for the $500 million of senior
subordinated notes limit restricted payments, including dividends, to $70
million at the end of the first quarter of 1999, based on a formula tied to
net earnings and equity issuances.
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 (including 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) 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.
Fleming has numerous computer systems which were developed employing six digit
date structures (i.e., two digits each for month, day and year). Where date
logic requires the year 2000 or beyond, such date structures may produce
inaccurate results. Management has implemented a program to comply with
year-2000 requirements on a system-by-system basis including both information
technology (IT) and non-IT systems (e.g., microcontrollers). Fleming's plan
includes extensive systems testing and is expected to be substantially
completed by the third quarter of 1999. Code for the company's largest and
most comprehensive system, FOODS, has been completely remediated, reinstalled
and tested. Based on these tests, the company believes FOODS and the related
systems which run the company's distribution system will be year-2000 ready
and in place at all food distribution operating units. At year-end 1998, the
company was substantially complete with the replacement and upgrading
necessary to make its nearly 5,000 PCs year-2000 ready. Although the company
believes contingency plans for company systems will not be necessary based on
progress to date, contingency plans for failures outside of the company have
been or are being developed. 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. The content
of the contingency plans varies depending on the system and the assessed
probability of failure and such plans are modified periodically. The
alternatives include reallocating internal resources, obtaining additional
outside resources, implementing temporary manual processes or temporarily
rolling back internal clocks. Although the company is developing greater
levels of confidence regarding its internal systems, failures in the company's
systems or failures in the supply chain or infrastructure could have a
material adverse effect on the company's operations.
The company is also assessing the status of its vendors' and customers'
year-2000 readiness through meetings, discussions, notices and questionnaires.
Vendor and customer responses and feedback are varied and in some cases
inconclusive. Accordingly, the company believes the most likely worst case
scenario could be customers' failure to serve and retain consumers resulting
in a negative impact on the company's sales. Failure of the company's
suppliers or its customers to become year-2000 compliant 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 second 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Page Number
10.53* Severance Agreement with William **
J. Dowd effective as of June 17, 1999
10.54* Employment Agreement for William H. **
Marquard dated as of June 1, 1999
10.55* Restricted Stock Agreement for **
William H. Marquard dated as of
June 1, 1999
10.56* Employment Agreement for Dennis C. **
Lucas dated as of July 28, 1999
10.57* Restricted Stock Agreement for **
Dennis C. Lucas dated as of July
28, 1999
10.58* Restricted Stock Agreement for **
E. Stephen Davis dated as of
July 20, 1999
10.59* Form of Loan Agreement Pursuant **
to Executive Stock Ownership
Program
12 Computation of Ratio of Earnings **
to Fixed Charges
15 Letter from Independent Accountants ***
As to Unaudited Interim Financial
Information
27 Financial Data Schedule **
* Management contract, compensatory plan or arrangement.
** Exhibit filed with Form 10-Q for quarter ended July 10, 1999.
*** Exhibit filed with this amendment.
(b) Reports on Form 8-K.
None
<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: February 9, 2000 KEVIN TWOMEY
Kevin Twomey
Senior Vice President Finance
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
15 Letter from Independent Accountants Filed herewith electronically
as to Unaudited Interim Financial
Information
</TABLE>
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 28 weeks ended July 10, 1999 and July 11,
1998, as indicated in our report dated July 29, 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/A for the 12 and 28 weeks ended July
10, 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
February 9, 2000
