-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PhZDeovtSbCZhGPStRBXQFK2K4KrxPy+KFZnJl10Ve9S/1/4yzbH8jI5C5ZKtwRq GrMB9USJb+BrIeJ4CtlpSg== 0000909334-00-000012.txt : 20000210 0000909334-00-000012.hdr.sgml : 20000210 ACCESSION NUMBER: 0000909334-00-000012 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990710 FILED AS OF DATE: 20000209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEMING COMPANIES INC /OK/ CENTRAL INDEX KEY: 0000352949 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 480222760 STATE OF INCORPORATION: OK FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-08140 FILM NUMBER: 529671 BUSINESS ADDRESS: STREET 1: 6301 WATERFORD BLVD STREET 2: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73126 BUSINESS PHONE: 4058407200 MAIL ADDRESS: STREET 1: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73216-0647 10-Q/A 1 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 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 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Operations For the 12 weeks ended July 10, 1999, and July 11, 1998 (In thousands, except per share amounts)
============================================================================ 1999 1998 - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Operations For the 28 weeks ended July 10, 1999, and July 11, 1998 (In thousands, except per share amounts)
============================================================================ 1999 1998 - ---------------------------------------------------------------------------- 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 ============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Balance Sheets (In thousands)
============================================================================ July 10, December 26, Assets 1999 1998 - ---------------------------------------------------------------------------- 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 ============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. Consolidated Condensed Statements of Cash Flows For the 28 weeks ended July 10, 1999, and July 11, 1998 (In thousands)
============================================================================ 1999 1998 - ---------------------------------------------------------------------------- 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 ============================================================================
Fleming Companies, Inc. See notes to consolidated condensed financial statements and independent accountants' review report. 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 $44 million at December 26, 1998. 4. Sales and operating earnings for the company's food distribution and retail food segments are presented below.
============================================================================ For the 12 weeks ended July 10, July 11, ($ in millions) 1999 1998 - ---------------------------------------------------------------------------- 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 $ - $24 ============================================================================
============================================================================ For the 28 weeks ended July 10, July 11, ($ in millions) 1999 1998 - ---------------------------------------------------------------------------- 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 ============================================================================
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:
============================================================================= July 10, July 11, For the 12 weeks ended 1999 1998 - ----------------------------------------------------------------------------- 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 % =============================================================================
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:
============================================================================ Capital Structure (In millions) July 10, 1999 December 26, 1998 - ---------------------------------------------------------------------------- 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% ============================================================================
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 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) EXHIBIT INDEX
Exhibit No. Description Method of Filing - ------ ----------- ---------------- 15 Letter from Independent Accountants Filed herewith electronically as to Unaudited Interim Financial Information
EX-15 2 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 -----END PRIVACY-ENHANCED MESSAGE-----