-----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, FyxW7P1EOtvVPB16Ixcif9jPkipGOWhH3+nkvi2f2M6Rb1hb0u108ZiNbVkOJj1M 5EAkMuD/cPWvSzMLf+aMBQ== 0000909334-95-000053.txt : 19951122 0000909334-95-000053.hdr.sgml : 19951122 ACCESSION NUMBER: 0000909334-95-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951007 FILED AS OF DATE: 19951121 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEMING COMPANIES INC /OK/ CENTRAL INDEX KEY: 0000352949 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 480222760 STATE OF INCORPORATION: OK FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08140 FILM NUMBER: 95595310 BUSINESS ADDRESS: STREET 1: 6301 WATERFORD BLVD STREET 2: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73126 BUSINESS PHONE: 4058407200 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 7, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8140 FLEMING COMPANIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 48-0222760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6301 Waterford Boulevard, Box 26647 Oklahoma City, Oklahoma 73126 (Address of principal executive offices) (Zip Code) (405) 840-7200 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of common stock, as of November 3, 1995 is as follows: Class Shares Outstanding Common stock, $2.50 par value 37,662,000 FLEMING COMPANIES, INC. INDEX Page No. Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Earnings - 12 Weeks Ended October 7, 1995, and October 1, 1994 Consolidated Condensed Statements of Earnings - 40 Weeks Ended October 7, 1995, and October 1, 1994 Consolidated Condensed Balance Sheets - October 7, 1995, and December 31, 1994 Consolidated Condensed Statements of Cash Flows - 40 Weeks Ended October 7, 1995, and October 1, 1994 Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K Signatures Consolidated Condensed Statements of Earnings For the 12 weeks ended October 7, 1995, and October 1, 1994 (In thousands, except per share amounts)
1995 1994 Net sales $3,896,272 $4,124,291 Costs and expenses: Cost of sales 3,597,568 3,806,096 Selling and administrative 259,704 281,591 Interest expense 38,603 36,929 Interest income (13,762) (15,608) Equity investment results 6,658 5,130 Total costs and expenses 3,888,771 4,114,138 Earnings before taxes 7,501 10,153 Taxes on income 3,833 7,437 Net earnings $ 3,668 $ 2,716 Net earnings per share $.10 $.07 Dividends paid per share $.30 $.30 Weighted average shares outstanding 37,619 37,332
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Statements of Earnings For the 40 weeks ended October 7, 1995, and October 1, 1994 (In thousands, except per share amounts)
1995 1994 Net sales $13,351,305 $11,038,187 Costs and expenses: Cost of sales 12,290,313 10,284,943 Selling and administrative 892,766 626,129 Interest expense 135,046 75,413 Interest income (51,655) (46,391) Equity investment results 16,205 11,027 Facilities consolidation (8,982) --- Total costs and expenses 13,273,693 10,951,121 Earnings before taxes 77,612 87,066 Taxes on income 39,660 41,356 Net earnings $ 37,952 $ 45,710 Net earnings per share $1.01 $1.23 Dividends paid per share $.90 $.90 Weighted average shares outstanding 37,548 37,211
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Balance Sheets (In thousands)
October 7, December 31, 1995 1994 Assets Current assets: Cash and cash equivalents $ 4,750 $ 28,352 Receivables 353,829 364,884 Inventories 1,153,673 1,301,980 Other current assets 85,166 124,865 Total current assets 1,597,418 1,820,081 Investments and notes receivable 301,853 402,603 Investment in direct financing leases 228,492 230,357 Property and equipment 1,473,398 1,455,954 Less accumulated depreciation and amortization (535,960) (467,830) Net property and equipment 937,438 988,124 Other assets 143,045 179,332 Goodwill 1,008,432 987,832 Total assets $4,216,678 $4,608,329 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 981,602 $ 960,333 Current maturities of long-term debt 93,896 110,321 Current obligations under capital leases 18,482 15,780 Other current liabilities 221,591 237,197 Total current liabilities 1,315,571 1,323,631 Long-term debt 1,268,745 1,641,390 Long-term obligations under capital leases 366,796 353,403 Deferred income taxes 24,708 51,279 Other liabilities 150,940 160,071 Shareholders' equity: Common stock, $2.50 par value per share 94,152 93,705 Capital in excess of par value 500,314 494,966 Reinvested earnings 508,385 503,962 Cumulative currency translation adjustment (3,891) (2,972) 1,098,960 1,089,661 Less ESOP note (9,042) (11,106) Total shareholders' equity 1,089,918 1,078,555 Total liabilities and shareholders' equity $4,216,678 $4,608,329
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Statements of Cash Flows For the 40 weeks ended October 7, 1995, and October 1, 1994 (In thousands)
1995 1994 Net cash provided by operating activities $369,770 $ 325,027 Cash flows from investing activities: Collections on notes receivable 74,861 62,341 Notes receivable funded (67,742) (93,316) Notes receivable sold 77,063 --- Purchase of property and equipment (80,864) (85,448) Proceeds from sale of property and equipment 30,009 5,467 Investments in customers (8,867) (12,764) Proceeds from sale of investment 17,873 4,665 Businesses acquired (6,989) (387,488) Proceeds from sale of businesses --- 6,682 Other investing activities (3,083) (1,584) Net cash provided by (used in) investing activities 32,261 (501,445) Cash flows from financing activities: Proceeds from long-term borrowings --- 1,665,751 Principal payments on long-term debt (393,598) (1,425,563) Principal payments on capital lease obligations (13,872) (9,916) Sale of common stock under incentive stock and stock ownership plans 5,795 5,339 Dividends paid (33,530) (33,314) Other financing activities 9,572 (21,888) Net cash provided by (used in) financing activities (425,633) 180,409 Net increase (decrease) in cash and cash equivalents (23,602) 3,991 Cash and cash equivalents, beginning of period 28,352 1,634 Cash and cash equivalents, end of period $ 4,750 $ 5,625 Supplemental information: Cash paid for interest $129,612 $58,431 Cash paid (received) for taxes $(7,231) $36,504
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Notes to Consolidated Condensed Financial Statements 1. The consolidated condensed balance sheet as of October 7, 1995, and the consolidated condensed statements of earnings and cash flows for the 12 and 40-week periods ended October 7, 1995, and October 1, 1994, have been prepared by the company, without audit. In the opinion of management, all adjustments necessary to present fairly the company's financial position at October 7, 1995, and the results of operations and cash flows for the periods presented have been made. All such adjustments are of a normal, recurring nature. Primary earnings per share are calculated using the weighted average shares outstanding. The impact of outstanding stock options on primary earnings per share is not material. Certain reclassifications have been made to the prior year amounts to conform to current years' classification. 2. The statement of earnings for the 40 weeks ended October 7, 1995 reflects the effect of the change in management's estimate of the cost associated with the general merchandising portion of the facilities consolidation plan. The estimate reflects reduced expense and cash outflow. Accordingly, the company reversed $9 million of the provision for restructuring during the first quarter of 1995. The reversal is shown as a credit to the facilities consolidation expense line in the accompanying financial statements. 3. 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 1994 annual report on Form 10-K. 4. 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 $20 million at October 7, 1995, and $19 million at December 31, 1994. 5. The company and numerous other defendants have been named in two suits filed in U.S. District Court in Miami. The plaintiffs predicate liability on the part of the company as a consequence of an allegedly fraudulent scheme conducted by Premium Sales Corporation and others in which unspecified but large losses in the Premium-related entities occurred to the detriment of a purported class of investors which has brought one of the suits. The other suit is by the receiver/trustee of the estates of Premium and certain of its affiliated entities. Plaintiffs seek damages, treble damages, attorneys' fees, costs, expenses and other appropriate relief. While the amount of damages sought under most claims is not specified, plaintiffs allege that hundreds of millions of dollars were lost as the result of the allegations contained in the complaint. The litigation is complex and the ultimate outcome cannot presently be determined. Furthermore, management is unable to predict a potential range of monetary exposure, if any, to the company. Based on the large recovery sought, an unfavorable judgment could have a material adverse effect on the company. Management believes, however, that a material adverse effect on the company's consolidated financial position is not likely. The company is vigorously defending the actions. 6. In July 1994, the company completed the acquisition of all the outstanding stock of Haniel Corporation, the parent of Scrivner Inc. ("Scrivner"). The company paid $388 million in cash and refinanced substantially all of Scrivner's existing indebtedness (approximately $670 million in aggregate principal and premium). The acquisition has been accounted for as a purchase and the results of operations of Scrivner have been included in the consolidated financial statements since the beginning of the third quarter of 1994. The purchase price was allocated based on estimated fair values at the date of the acquisition. At October 7, 1995, the excess of purchase price over assets acquired was $584 million and is being amortized on a straight-line basis over 40 years. Pro forma information for the 40 weeks ending October 1, 1994, summarizing the results of operations of the company (including the results of Scrivner since acquisition as of July 9, 1994) and Scrivner (27 weeks ended July 9, 1994) as if the acquisition had occurred at the beginning of 1994, with pro forma adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects, are as follows: net sales - $14.3 billion; net earnings - $33 million; and net earnings per share - $.89. 7. The senior notes issued in 1994 are 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 for the combined subsidiary guarantors has been prepared from the books and records maintained by the subsidiary guarantors and the company. Intercompany transactions are eliminated. The summarized financial information may not necessarily be indicative of the results of operations or financial position had the subsidiary guarantors been operated as independent entities. The summarized financial information includes allocations of material amounts of expenses such as corporate services and administration, interest expense on indebtedness and taxes on income. The allocations are generally based on proportional amounts of sales or assets, and taxes on income are allocated consistent with the asset and liability approach used for consolidated financial statement purposes. Management believes these allocation methods are reasonable. During 1995, several subsidiary guarantors have been merged into Fleming Companies, Inc., resulting in a reduction in the amounts appearing in the summarized financial information.
October 7, (In millions) 1995 Current assets $383 Noncurrent assets 603 Current liabilities 188 Noncurrent liabiilities 23
40 weeks ended October 7, (In millions) 1995 Net sales $3,575 Costs and expenses 3,565 Net earnings 5
8. The accompanying earnings statements include the following:
40 weeks 12 weeks (In thousands) 1995 1994 1995 1994 Depreciation and amortization (includes amortized financing costs) $140,543 $102,397 $42,151 $43,613 Amortized financing costs (part of interest expense) $5,096 $2,570 $1,525 $2,570
9. In October 1995, ABCO Holding, Inc., a customer of the company in which the company owns an equity interest and with whom the company has a long-term supply agreement, defaulted on its $21 million senior credit facility with its bank and on its loan and supply agreement with the company (totaling approximately $39 million). These obligations are secured by a pledge of substantially all of ABCO's assets. In November, the company purchased additional shares of ABCO's common stock for nominal consideration and now holds a majority of ABCO's common stock. The company also purchased ABCO's indebtedness to the bank, took an assignment of the bank's senior priority security interest and has agreed to cause ABCO's obligations to its other trade creditors to be brought current. The company has advised ABCO that it will commence foreclosure proceedings on the collateral held to secure the defaulted indebtedness. The company does not anticipate that the foreclosure will result in a material adverse effect on the company's financial position or results of operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In January 1994, the company announced the details of a plan to restructure its organizational alignment, reengineer its operations and consolidate its facilities. The company's objective is to lower product costs to retail customers while providing the company with a fair and adequate return for its products and services. To achieve this objective, management is making major organizational changes, introducing the Fleming Flexible Marketing Plan ("FFMP") and investing in technology. The actions contemplated by the reengineering plan will affect the company's food and general merchandise wholesaling operations as well as certain retail operations and are expected to be substantially completed by the middle of 1997. In the first quarter of 1995, management changed its estimates with respect to the general merchandising operations portion of the reengineering plan. The revised estimate reflects reduced expense and cash outflow. Accordingly, during the first quarter the company reversed $9 million of the related provision. Facilities consolidation has resulted in the closure of four distribution centers since inception and will result in the closure of one additional facility. Results have been materially affected by the acquisition of Scrivner at the beginning of the third quarter of 1994. Sales have increased dramatically and gross margin and selling and administrative expenses as a percent of sales are significantly higher due to the higher percentage of retail food operations in Scrivner. Due to the acquisition, interest expense increased materially as a result of both increased borrowing levels and higher interest rates, and expense for the amortization of goodwill increased significantly. Since the acquisition, the company has closed nine Scrivner distribution centers. Management has identified certain on-going expenses to be incurred during the transitional phases of the company's consolidation, reorganization and reengineering plan and the integration of Scrivner. These expenses include travel and training costs, additional expenditures associated with maintaining two operational systems during the integration of Scrivner and the roll-out of FFMP, software installation costs and other miscellaneous costs associated with facilities consolidations (including costs relating to operational inefficiencies during the change-over, deferred sales growth and lost business opportunities). These costs are difficult to isolate, quantify or predict, and the timing of various components is erratic. Nevertheless, management believes that such expenses have been incurred at a significant rate since the end of the second quarter of 1994 and that consolidation, reorganization and reengineering expenses will continue to negatively impact earnings until sometime in 1997. Results of Operations Set forth in the following table is information for the third interim and year to date periods of 1995 and 1994 regarding certain components of the company's earnings expressed as a percentage of net sales.
Third Interim Period 1995 1994 Net sales 100.00% 100.00% Gross margin 7.67 7.72 Less: Selling and administrative expense 6.67 6.82 Interest expense .99 .90 Interest income (.35) (.37) Equity investment results .17 .12 Total expenses 7.48 7.47 Earnings before taxes .19 .25 Taxes on income .10 .18 Net earnings .09% .07% Year to Date 1995 1994 Net sales 100.00% 100.00% Gross margin 7.95 6.82 Less: Selling and administrative expense 6.69 5.67 Interest expense 1.01 .68 Interest income (.38) (.42) Equity investment results .12 .10 Facilities consolidation (.07) --- Total expenses 7.37 6.03 Earnings before taxes .58 .79 Taxes on income .30 .38 Net earnings .28% .41%
Net sales. Sales for the third quarter (12 weeks) of 1995 decreased by $.2 billion, or 6%, to $3.9 billion from $4.1 billion for the same period in 1994. Year to date, sales increased by $2.4 billion, or 21%, to $13.4 billion from $11.0 billion for the 40 weeks in 1994. Net sales for both the quarter and year-to-date period were adversely impacted by sales lost through normal attrition which were not replaced as marketing efforts were directed toward training existing customers on implementing FFMP. In response to the situation, management is establishing a sales organization that will be dedicated to prospecting for new accounts. The company's tighter credit policies, which result in credit extensions being limited to new customers that meet certain minimum financial standards, has also had a dampening effect on generating replacement sales. The increase in year to date net sales was due to the Scrivner acquisition as Scrivner's sales were not included in 28 of the 40 weeks in 1994. Without the acquisition, net sales for the year-to-date periods would have declined slightly. Several other factors, none of which are individually material, adversely affected net sales including: the loss of certain customers at three different distribution centers, the loss of business due to the bankruptcy of Megafoods Stores, Inc. ("Megafoods"), the closing or sale of certain corporate stores, the sale of a distribution center and the expiration of a temporary agreement with Albertson's, Inc. as its Florida distribution center came on line. In August 1994, Megafoods and certain of its affiliates filed Chapter 11 bankruptcy proceedings. At such date, Megafoods' total indebtedness to Fleming for goods sold on open account, equipment leases and loans aggregated approximately $20 million. The company holds collateral with respect to a substantial portion of these obligations. Megafoods is also liable to the company under store sublease agreements for approximately $37 million, and the company is contingently liable on certain lease guarantees given on behalf of Megafoods. The company is partially secured as to these obligations. The company took a charge to earnings of $6.5 million in the third quarter of 1994 to cover its estimated net credit exposure. However, the exact amount of the ultimate loss may vary depending upon future developments in the bankruptcy proceedings, including those related to collateral values, priority issues, the company's ultimate expense, if any, related to certain customer store leases and the outcome of the litigation described below. In October 1995, Megafoods filed suit in the bankruptcy proceedings against the company alleging intentional interference with business relationship, intentional misrepresentation, negligent misrepresentation, conversion of a $12 million cash security deposit, breach of contract and for equitable subordination of the company's claims. The company denies these allegations and will vigorously defend the action. The company estimates that its annualized sales to Megafoods prior to the bankruptcy were approximately $335 million. Shortly after the commencement of the bankruptcy proceedings, Megafoods moved its business in the Texas market (approximately $100 million of annualized sales) to a new supplier and in June 1995, Megafoods moved the majority of its business in the Arizona market (approximately $150 million of annualized sales) to another supplier. In November 1995, at the company's request, Megafoods will move the balance of its business. Fleming has a substantial business base in its Phoenix division which services more than 400 locations. In response to the lost Megafoods business, the company has adjusted its Phoenix operation's overhead costs and has pursued new business opportunities. Fleming measures inflation using data derived from the average cost of a ton of product sold by the company. For the year-to-date period in 1995, food price inflation was not significant. Gross margin. Gross margin for the third quarter of 1995 decreased by $19 million, or 6%, to $299 million from $318 million for the same period of 1994 and decreased slightly as a percentage of net sales to 7.67% from 7.72% for the same period in 1994. Year to date, gross margin increased by $308 million, or 41%, to $1.1 billion from $753 million for the same period of 1994. As a percentage of net sales, gross margin was 7.95% versus 6.82% in 1994. The increase in gross margin for year to date was due to the addition of retail operations, principally the Scrivner retail operations, which were not in 28 of the 40 weeks of the 1994 period. Retail operations typically have a higher gross margin and higher selling expenses than food distribution operations. Product handling expenses, consisting of warehouse, truck and building expenses, were essentially unchanged as a percentage of net sales in 1995 when compared to the 1994 periods. Selling and administrative expenses. Selling and administrative expenses for the third quarter of 1995 decreased by $22 million, or 8%, to $260 million from $282 million for the same period in 1994 and decreased as a percentage of net sales to 6.67% for 1995 from 6.82% in 1994. For the year-to-date period, selling and administrative expenses increased by $267 million, or 43%, to $893 million from $626 million in the 1994 period. The decrease in the quarter was due in part to the reduction in credit loss expense, described below, and to a reduction in the estimate of liabilities required for various obligations, partially offset by an increase in retail expenses. The 1994 period did not include a full quarter of activity for Scrivner retail and other retail operations acquired. The increase in year to date was due primarily to the acquisition of Scrivner and other retail operations which were not in the 1994 period for most of the 40 weeks. Selling and administrative expenses also have increased due to additional goodwill amortization related to the acquisition. As more fully described in its 1994 Annual Report on Form 10-K, the company has a significant amount of credit extended to its customers through various methods. These methods include customary and extended credit terms for inventory purchases, secured loans with terms generally up to ten years, and equity investments in and secured and unsecured loans to certain customers. In addition, the company guarantees debt and lease obligations of certain customers. Usually, these capital investments are made in and guarantees extended to customers with whom the company enjoys long-term supply agreements. Credit loss expense is included in selling and administrative expenses and for the third quarter decreased by $13 million to $9 million from $22 million for the comparable period in 1994. Year to date, credit losses decreased by $25 million to $24 million from $49 million for the 40 weeks in 1994. The more stringent credit practices and reduced emphasis on credit extensions to and investments in customers are resulting in lower losses. While there can be no assurance that credit losses from existing or future investments or commitments will not have a material adverse effect on results of operations or financial position, management expects that credit losses for fiscal year 1995 will be lower than those experienced in 1994. Interest expense. Interest expense for the third quarter of 1995 increased $2 million to $39 million from $37 million for the same period in 1994. Year to date, interest expense increased $60 million to $135 million from $75 million for the comparable period in 1994. The increase for the third quarter was due to the acquisition indebtedness (which was outstanding for all of the 1995 quarter compared to ten fewer days in the 1994 quarter) coupled with higher rates. Year to date, the increase was due principally to higher borrowing due to the Scrivner acquisition, higher interest rates in the capital and credit markets, and higher borrowing margins resulting from changes in the company's credit rating resulting from the Scrivner acquisition and the 1995 credit rating downgrade. The company enters into interest rate hedge agreements to manage interest costs and exposure to changing interest rates. The credit agreement with the company's banks requires the company to provide interest rate protection on a substantial portion of the indebtedness outstanding thereunder. The company has entered into interest rate swaps and caps covering $850 million aggregate principal amount of floating rate indebtedness. The company's hedged position exceeds the hedge requirements set forth in the company's bank credit agreement. The interest rate on the company's floating rate indebtedness is equal to the London interbank offered interest rate ("LIBOR") plus a margin. The average fixed interest rate paid by the company on the interest rate swaps is 6.95%, covering $600 million of floating rate indebtedness. The interest rate swap agreements, which were implemented through seven counterparty banks, and which have an average remaining life of 4.1 years, provide for the company to receive substantially the same LIBOR that the company pays on its floating rate indebtedness. For the remaining $250 million, the company has purchased interest rate cap agreements from two counterparty banks covering $250 million of its floating rate indebtedness. The agreements cap LIBOR at 7.33% over the next 3.9 years. The company's net payment obligations and receivables under the interest rate swap and cap agreements meet the criteria for hedge accounting treatment. Accordingly, the company's payment obligations and receivables are accounted for as interest expense. For the year to date period in 1995, the interest rate hedge agreements added $5.4 million to interest expense. With respect to the interest rate hedging agreements, the company believes its exposure to potential credit loss is minimized primarily due to the relatively strong credit ratings of the counterparties for their unsecured long-term debt (A+ or higher from Standard & Poor's Ratings Group and A2 or higher from Moody's Investors Service, Inc.) and the size and diversity of the counterparty banks. The hedge agreements are subject to market risk to the extent that market interest rates for similar instruments decrease, and the company terminates the hedges prior to their maturity. Interest income. Interest income for the 1995 quarter decreased by $2 million to $14 million from $16 million for the same period in 1994. Year to date, interest income increased by $6 million to $52 million compared to $46 million for the 40 weeks in 1994. The decrease in the quarter is primarily due to the notes receivable sale in the second quarter of 1995. At the end of June 1995, the company sold $77 million of notes receivable with limited recourse. The sale reduced the amount of notes receivable available to produce interest income and resulted in lower interest income. The year to date increase is primarily due to earnings on the notes receivable acquired in the Scrivner loan portfolio, partially offset by the note sale. Equity investment results. The company's portion of operating losses from equity investments for the third quarter of 1995 increased by less than $2 million to $7 million compared to the same period in 1994. Year to date, such operating losses have increased by $5 million to $16 million compared to the same period in 1994. Certain of the strategic multi-store customers in which the company has made equity investments under its business development venture program experienced increased losses during both the third quarter and the year to date period; such losses are expected to continue during the fourth quarter. Additionally, losses from retail stores which are part of the company's equity store program and are accounted for under the equity method also increased. In October 1995, ABCO Holding, Inc., a customer of the company in which the company owns an equity interest and with whom the company has a long-term supply agreement, defaulted on its $21 million senior credit facility with its bank and on its loan and supply agreement with the company (totaling approximately $39 million). These obligations are secured by a pledge of substantially all of ABCO's assets. In November, the company purchased additional shares of ABCO's common stock for nominal consideration and now holds a majority of ABCO's common stock. The company also purchased ABCO's indebtedness to the bank, took an assignment of the bank's senior priority security interest and has agreed to cause ABCO's obligations to its other trade creditors to be brought current. The company has advised ABCO that it will commence foreclosure proceedings on the collateral held to secure the defaulted indebtedness. The company does not anticipate that the foreclosure will result in a material adverse effect on the company's financial position or results of operations. Taxes on income. The estimated effective tax rate for the third quarter 1995 was 51.1%, down from 73.2% recorded in the third quarter 1994. The high third quarter 1994 rate resulted principally from recording the effects during the quarter of the higher estimated annual rate due to the Scrivner acquisition. The increase was primarily due to increased goodwill amortization with no related tax deduction, operations in higher tax rate states and the significance of certain nondeductible expenses to pretax earnings. The company's estimated annual effective tax rate year to date in 1995 was 51.1%, up from 47.5% recorded in the comparable period in 1994. The 1994 annual rate was 50.0%. Other. Several factors negatively affecting earnings year to date in 1995 are likely to continue. Management believes that these factors include: lower sales; increased interest expense and goodwill amortization; little or no food price inflation; and operating losses in certain company-owned retail stores. Additionally, costs associated with the transitional phases of the company's consolidation, reorganization and reengineering plan are expected to continue until sometime in 1997. The company has been named in two related legal actions filed in the U.S. District Court in Miami in December 1993. The litigation is complex and the ultimate outcome cannot presently be determined. Furthermore, the company is unable to predict a potential range of monetary exposure, if any, to the company. Based on the recovery sought, an unfavorable judgment could have a material adverse effect on the company. Segment information. Sales and operating earnings for the company's food distribution and retail food segments are presented below.
Third Interim Period Year to Date 1995 1994 1995 1994 Sales ($ in billions) Food distribution $ 3.2 $ 3.4 $ 10.9 $ 9.7 Retail food .7 .7 2.5 1.3 Total Sales $ 3.9 $ 4.1 $ 13.4 $ 11.0 Operating earnings ($ in millions) Food distribution $59 $54 $217 $183 Retail food 9 10 43 19 Corporate (29) (27) (92) (75) Total $39 $37 $168 $127
Operating earnings for industry segments consist of net sales less related operating expenses. Operating expenses exclude interest expense, interest income, equity investment results, income taxes and general corporate expenses. The transfer pricing between segments is at cost. Liquidity and Capital Resources Set forth below is certain information regarding the company's capital position at the end of the third quarter of 1995 and at the end of fiscal 1994:
Capital Structure October 7, December 31, (In millions) 1995 % 1994 % Long-term debt $1,363 48.0 $1,752 54.8 Capital lease obligations 385 13.6 369 11.5 Total debt 1,748 61.6 2,121 66.3 Shareholders' equity 1,090 38.4 1,079 33.7 Total capital $2,838 100.0 $3,200 100.0
(Current maturities of long-term debt and current obligations under capital leases are included in the respective captions.) The company's current debt capital structure includes an $800 million six-year amortizing term loan which matures June 2000, a $596 million five-year revolving credit facility which matures July 1999, $300 million of 10.625% seven-year senior notes maturing December 2001, $200 million of floating rate seven-year senior notes, and $139 million of medium-term notes. Presently the company's senior unsecured debt is rated Ba1 by Moody's Investors Service and BB- by Standard & Poor's Ratings Group. Pricing under the bank credit agreement automatically increases or decreases with respect to certain credit rating declines or improvements, respectively, based upon the higher of Moody's or Standard & Poor's ratings. The company's principal sources of liquidity are cash flows from operating activities and borrowings under the bank credit agreement. Despite the effect of reduced earnings, management believes the company can maintain adequate liquidity for the foreseeable future at acceptable rates. At third quarter end 1995, $683 million was borrowed on the six-year amortizing term loan and $30 million was drawn on or supported by the $596 million five-year revolving credit facility. The bank credit agreement and the indentures for the company's senior notes issued in 1994 contain customary covenants associated with similar facilities. The bank credit agreement currently contains the following covenants: maintenance of a consolidated debt-to-net worth ratio of not more than 2.45 to 1; maintenance of a minimum consolidated net worth of at least $880 million; maintenance of a fixed charge coverage ratio of at least 1.25 to 1; a limitation on restricted payments (including dividends and company stock repurchases); prohibition of certain liens; prohibitions of certain mergers, consolidations and sales of assets; restrictions on the incurrence of debt and additional guarantees; limitations on transactions with affiliates; limitations on acquisitions and investments; limitations on capital expenditures; and a limitation on payment restrictions affecting subsidiaries. The company is permitted to pay dividends or repurchase capital stock in the aggregate amount of approximately $26 million for the remainder of fiscal 1995. At quarter-end 1995 the consolidated debt-to-net worth test would have allowed the company to borrow an additional $888 million and the fixed charge coverage test would have allowed the company to incur an additional $23 million of annual interest and rent expense. Covenants associated with the senior notes are generally less restrictive than those of the bank credit agreement. At the end of the third quarter 1995, the company was in compliance with all financial covenants under the credit agreement and the senior note indentures. Continued compliance over the near-term will depend on the company's ability to generate sufficient earnings during the implementation of its reengineering plan. Operating activities generated $370 million of net cash flows year to date in 1995 compared to $325 million in the comparable period in 1994. Working capital was $282 million at third-quarter end 1995, a decrease from $496 million at year-end 1994. The current ratio decreased to 1.21 to 1, from 1.38 to 1 at year-end 1994. Management believes that cash flows from operating activities and the company's ability to borrow under the credit agreement will be adequate to meet working capital needs, capital expenditures and cash needs for the facilities consolidation, restructuring and reengineering plan. Capital expenditures year to date in 1995 were approximately $69 million. Management expects that 1995 capital expenditures, excluding acquisitions, if any, will approximate $100 million. The debt-to-capital ratio decreased to 61.6% from 66.3% at year-end 1994. The company's long-term target ratio is approximately 50%. Total capital was $2.8 billion at quarter end, down $.4 billion from year-end 1994. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Number Page Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLEMING COMPANIES, INC. (Registrant) Date: November 20, 1995 /s/ KEVIN J. TWOMEY Kevin J. Twomey Vice President-Controller (Chief Accounting Officer) EX-12 2 Exhibit 12
40 Weeks Ended October 7, October 1, (In thousands of dollars) 1995 1994 Earnings: Pretax income $ 77,612 $ 87,066 Fixed charges, net 164,560 96,832 Total earnings $242,172 $183,898 Fixed charges: Interest expense $135,046 $ 75,413 Portion of rental charges deemed to be interest 29,239 21,169 Capitalized interest 664 254 Total fixed charges $164,949 $ 96,836 Ratio of earnings to fixed charges 1.47 1.90
"Earnings" consists of income before income taxes and fixed charges excluding capitalized interest. Capitalized interest amortized during the respective periods is added back to earnings. "Fixed charges, net" consists of interest expense, an estimated amount of rental expense which is deemed to be representative of the interest factor and amortization of capitalized interest. The pro forma ratio of earnings to fixed charges is omitted as it is not applicable. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE THIRD QUARTERLY PERIOD ENDED OCTOBER 7, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000352949 FLEMING COMPANIES, INC. 1,000 9-MOS DEC-30-1995 OCT-07-1995 4,750 0 403,326 49,497 1,153,673 1,597,418 1,473,398 535,960 4,216,678 1,315,571 1,268,745 94,152 0 0 995,766 4,216,678 13,351,305 13,351,305 12,290,313 13,114,303 0 24,344 135,046 77,612 39,660 37,952 0 0 0 37,952 1.01 1.01
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