-----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, AgUmcKKU5vqsXLquyt3QlHFmxXSQOZybwUOf9c7IiWmw0FV1o8tgWP74Y6MxR+Hx 8nDLuyjU8V970dNYDNIDYg== 0000909334-96-000038.txt : 19960416 0000909334-96-000038.hdr.sgml : 19960416 ACCESSION NUMBER: 0000909334-96-000038 CONFORMED SUBMISSION TYPE: NT 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960415 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: NT 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08140 FILM NUMBER: 96547300 BUSINESS ADDRESS: STREET 1: 6301 WATERFORD BLVD STREET 2: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73126 BUSINESS PHONE: 4058407200 NT 10-K/A 1 THE FOLLOWING ITEMS WERE THE SUBJECT OF A FORM 12B-25 FILED ON MARCH 29, 1996, RELATED TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995. THESE ITEMS ARE NOW AVAILABLE AND INCLUDED HEREIN: PART I. ITEM 3. LEGAL PROCEEDINGS; PART II. ITEM 6. SELECTED FINANCIAL DATA; PART II. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; PART II. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA; AND PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (WITH RESPECT TO THE FINANCIAL STATEMENTS, INDEPENDENT AUDITORS' REPORT, UNAUDITED QUARTERLY FINANCIAL INFORMATION, FINANCIAL STATEMENT SCHEDULE AND EXHIBIT NUMBER 23 - CONSENT OF INDEPENDENT AUDITORS). UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 30, 1995 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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) Registrant's telephone number, including area code (405) 840-7200 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED Common Stock, $2.50 Par Value and New York Stock Exchange Common Stock Purchase Rights Pacific Stock Exchange Midwest Stock Exchange 9.5% Debentures New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ____ 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 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 As of February 24, 1996, 37,704,000 common shares were outstanding. The aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) of Fleming Companies, Inc. held by not affiliates was approximately $740 million. Documents Incorporated by Reference A portion of Part III has been incorporated by reference from the registrant's proxy statement dated March 12, 1996, in connection with its annual meeting of shareholders to be held on May 1, 1996. PART I ITEM 3. LEGAL PROCEEDINGS (1) David's Supermarkets, Inc. vs. Fleming Companies, Inc., et al. Case No. 246-93, In the District Court of Johnson County, Texas. David's Supermarkets, Inc. ("David's") filed suit against the company and a former officer in August, 1993 alleging that the company charged excessive prices under two selling plan arrangements from 1989 through 1991. Plaintiff asserted breach of contract, fraud and violation of the Texas Deceptive Trade Practices Act ("DTPA"). Following a four-week trial the jury found the com- pany's disputed overcharges amounted to $2.8 million and rendered verdicts against the company for $72.5 million for breach of contract, $200.9 million for fraud and $207.5 million for violation of the DTPA and against the former officer, jointly and severally with the company, for $51 million for fraud and $53.8 million for violation of the DTPA. On March 22, 1996, the plaintiff filed a motion for judgment on its claim under the DTPA reserving the right to recover under any alternative theory supported by the verdict in the event the judgment on the DTPA verdict is in any way modified or reversed by any court. On April 4, 1996, the company and its banks amended the company's bank credit agreement increasing the letter of credit subfacility to permit the company to post a supersedeas bond necessary to perfect its appeal and waiving certain effects of the judgment or certain potential liens which may arise thereunder. On April 12, 1996, plaintiff's motion for judgment was granted in the amount of $207.5 million plus pre-judgment interest of $3.7 million and post-judgment interest at the rate of 10% per annum. The company posted the bond immediately after the judgment was granted and will appeal the judgment. (2) Kenneth Steiner and Charles Miller, et al. vs. Fleming Companies, Inc. et al., Case No. CIV 96-0480, United States District Court for the Western District of Oklahoma. Lawrence B. Hollin, et al. vs. Fleming Companies, Inc., et al., Case No. CIV 96- 0484, United States District Court for the Western District of Oklahoma. Ronald T. Goldstein, et al. vs. Fleming Companies, Inc., et al., Case No. CIV 96-0510, United States District Court for the Western District of Oklahoma. These cases were filed in the United States District Court for the Western District of Oklahoma on or prior to April 12, 1996, as purported class actions by certain company stockholders against the company and certain company officers, including the chief executive officer, for alleged breach of the securities laws for alleged failure to properly disclose and account for the David's litigation described above as well as the allegedly pervasive and wrongful conduct of the defendants which gave rise to the David's litigation. The plaintiffs seek damages in undetermined but significant amounts as the results of the alleged wrongdoing of the defendants, costs and expenses including attorneys' and expert fees. The company denies these allegations and intends to vigorously defend the actions. (3) Robert Mark, et al. vs. Fleming Companies, Inc., et al., Case No. CIV 96- 0506, United States District Court for the Western District of Oklahoma. The lawsuit was filed April 4, 1996 as a purported class action by plaintiff and other holders of the company's 10 5/8% fixed rate ($300 million) and floating rate ($200 million) senior notes due 2001 (the "Notes") against the com- pany and certain officers of the company, including the chief executive officer, alleging unlawful failure to disclose the existence of the David's litigation described above in the December, 1994 registration statement and prospectus under which the Notes were sold. In addition, the company and the officer defendants are alleged to have failed to accrue an appropriate reserve as the result of the lawsuit in violation of securities laws. The plaintiffs seek damages of an undetermined but significant amount, costs and expenses, including reasonable attorney's fees and expert fees and other costs and disbursements. Registrant denies the allegations and intends to vigorously defend the suit. (4) Tropin v. Thenen, et al., Case No. 93-2502-Civ-Moreno, United States District Court, Southern District of Florida. Walco Investments, Inc., et al. v. Thenen, et al., Case No. 93-2534-CIV-Moreno, United States District Court, Southern District of Florida. On December 21, 1993, these cases were filed in the United States District Court for the Southern District of Florida. Both cases name numerous defendants, including a former subsidiary of the registrant and four former employees of former subsidiaries of registrant. The cases contain similar factual allegations. Plaintiffs allege, among other things, that former employees of subsidiaries participated in fraudulent activities by taking money for con- firming diverting transactions which had not occurred and that, in so doing, they acted within the scope of their employment. Plaintiffs also allege that a former subsidiary allowed its name to be used in furtherance of the alleged fraud. The allegations against registrant's former subsidiary include common law fraud, breach of contract and negligence, conversion, and civil theft. In addition, allegations were made against the former subsidiary claiming it violated the federal Racketeer Influenced and Corrupt Organizations Act and comparable state law. 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 matters complained of. Registrant denies the allegations and is vigorously defending the actions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to Consolidated Financial Statements. (5) Richard E. Ieyoub, Attorney General ex rel., State of Louisiana v. The American Tobacco Company, et al., Case No. 96-1209, 14th Judicial District Court, Parish of Calcasieu, State of Louisiana In March, 1996 the Attorney General of the State of Louisiana brought this action against numerous named tobacco companies and distributors (including Malone & Hyde, a former subsidiary of registrant), claiming that the defendants' products and conduct were the cause of thousands of Louisiana deaths, injuries and illnesses and millions of dollars of state health-care and related expenditures. Further, that defendants' products are unreasonably dangerous, hazardous and toxic. Plaintiff prays for an injunction, compensatory damages in an amount sufficient to repay the state for the sums it has expended and will expend in the future on account of the defendant's wrongful conduct, punitive damages, interest and attorney fees. Although Registrant has not been served it has been indemnified by one of the tobacco companies and will vigorously defend the action. ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share amounts) 1995 1994(a) 1993 1992 1991 ______________________________________________________________________________ Net sales $17,502 $15,724 $13,096 $12,894 $12,851 Earnings before extraordinary loss and cumulative effect(b) 42 56 37 119 64 Net earnings per common share(b) 1.12 1.51 1.02 3.33 1.82 Total assets 4,297 4,608 3,103 3,118 2,958 Long-term debt and capital leases 1,717 1,995 1,004 1,038 952 Cash dividends paid per common share 1.20 1.20 1.20 1.20 1.14 ______________________________________________________________________________
See Item 3. Legal proceedings, notes to consolidated financial statements, including Subsequent Events, and the financial review included in Items 7 and 8. (a) The results in 1994 reflect the July 1994 acquisition of Scrivner Inc. (b) In 1993 and 1992, the company recorded an after-tax loss of $2.3 million and $5.9 million, respectively, for early retirement of debt. In 1991, the company changed its method of accounting for postretirement health care benefits, resulting in a charge to net earnings of $9.3 million. The results in 1993 include an after-tax charge of approximately $62 million for additional facilities consolidations, re-engineering, impairment of retail-related assets and elimination of regional operations. In 1995 management changed its estimates with respect to the general merchandising portion of the reengineering plan and reversed $4 million, after tax benefits, of the related provision. The company instituted a plan late in 1991 to reduce costs and increase operating efficiency by consolidating four distribution centers into larger, higher volume and more efficient facilities. The after-tax charge was $41.4 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In 1994, the company embarked upon a plan to restructure its organizational alignment, reengineer its operations and consolidate its distribution facilities. The company's objective is to lower net acquisition cost of product to retail customers while providing the company with a fair and adequate return for its products and services. To achieve this objective, management has made major organizational changes, implemented the Fleming Flexible Marketing Plan ("FFMP") in approximately 40% of its food distribution sales base, or 17 of its 35 operating units, and increased its investment 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. Although a significant number of reengineering initiatives have been completed, more are planned. The timing of the remaining initiatives has been lengthened while the company refocuses on financial performance and refines FFMP in response to customers and vendors. Accordingly, completion dates are not known. Beginning in the third quarter of 1994, results were materially affected by the acquisition of Scrivner. Sales 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. Interest expense increased materially as a result of both increased borrowing levels and higher interest rates due to the acquisition of Scrivner. In addition, expense for the amortization of goodwill also increased significantly. As part of the reengineering plan, the company has closed four distribution centers and plans to close one additional facility. In addition, since the Scrivner acquisition, the company has closed nine former Scrivner distribution centers. 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:
_____________________________________________________________________________ 1995 1994 1993 Net sales 100.00% 100.00% 100.00% Gross margin 8.06 7.14 5.84 Less: Selling and administrative 6.79 5.93 4.23 Interest expense 1.00 .77 .60 Interest income (.33) (.36) (.45) Equity investment results .16 .09 .09 Facilities consolidation and restructuring (.05) - .82 _____________________________________________________________________________ Total 7.57 6.43 5.29 _____________________________________________________________________________ Earnings before taxes .49 .71 .55 Taxes on income .25 .35 .26 _____________________________________________________________________________ Net earnings .24% .36% .29% _____________________________________________________________________________ 1994 was a 53-week year. Certain reclassifications have been made to prior years' amounts to conform to the current year's classification. The results of Scrivner are included since the acquisition. Net earnings in 1993 are before the extraordinary loss. 1995 and 1994 Net Sales. Net sales for 1995 increased by $1.78 billion, or 11%, to $17.50 billion from $15.72 billion for 1994. Notwithstanding the positive effects of the Scrivner acquisition, net sales in 1995 were adversely impacted by the following, none of which was individually material to sales: sales lost due to normal attrition which were not replaced as marketing efforts were directed toward implementing FFMP; the loss of business of Megafoods Stores, Inc. ("Megafoods"); the closing or sale of certain corporate stores; the sale of a distribution center and consolidation of others; and the expiration of a temporary agreement with Albertson's, Inc. as its Florida distribution center came on line. The company's tighter credit policies also had a negative effect on generating replacement sales. Management established a sales organization late in 1995 which is dedicated to prospecting for new accounts. Fleming measures inflation using data derived from the average cost of a ton of product sold by the company. Food price inflation was approximately 1% in 1995 compared to a negligible rate in 1994. Gross Margin. Gross margin for 1995 increased by $288 million, or 26%, to $1.41 billion from $1.12 billion for 1994 and increased as a percentage of net sales to 8.06% for 1995 from 7.14% for 1994. The primary reason for the increase is more retail operations, principally related to the Scrivner acquisition. Retail operations typically have a higher gross margin than wholesale operations. Product handling expenses, which consist of warehouse, truck and building expenses, were approximately the same as a percentage of net sales in 1995 as in 1994. In food distribution, reduced vendor income due to the accelerated trend to Every Day Low Costing ("EDLC") negatively impacted gross margin. Further, certain margin items that are passed through to customers under FFMP were only partially offset by increases in FFMP-related charges to customers. In 1996, the company is implementing increases in certain charges to its customers under FFMP and also developing programs to charge vendors for services which are no longer subsidized under EDLC. Selling and Administrative Expense. Selling and administrative expense for 1995 increased by $257 million, or 28%, to $1.19 billion from $933 million for 1994 and increased as a percentage of net sales to 6.79% for 1995 from 5.93% in 1994. Retail operations typically have higher selling expenses than wholesale operations and the full year of retail acquired from Scrivner was the primary reason for the increase. Goodwill amortization also increased as a result of the acquisition. In addition, the technology-related aspects of the various reengineering initiatives resulted in an increase in expense. The increase in the Corporate line under Operating Earnings shown in "Segment Information" in the Notes to Consolidated Financial Statements is the result of this reengi- neering initiative. The slower-paced nature of the remaining reengineering initiatives along with the January 1996 reduction in headquarters headcount should mitigate expense increases in 1996. Credit loss expense included in selling and administrative expenses decreased in 1995 by $30 million to $31 million from $61 million for 1994. Tighter credit practices and reduced emphasis on credit extensions to and investments in customers have resulted in less exposure and a decrease in credit loss expense. 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, the results thus far of these new practices and emphasis have been very positive. Additional credit loss, if any, related to the bankruptcy of Megafoods could result in a loss of up to $20 million in excess of the credit loss accrued to date. See "Litigation and Contingencies" in the Notes to Consolidated Financial Statements for further discussion. Interest Expense. Interest expense for 1995 increased $55 million to $175 million from $120 million for 1994. The increase was due principally to higher borrowing resulting from the Scrivner acquisition, higher interest rates in the capital and credit markets, and an increase in the interest rates for the com- pany due to changes in the company's credit rating brought about by the acquisi- tion and performance. Interest expense was expected to be lower in 1996 due to the substantial amount of debt repaid in 1995. However, increases in interest expense related to the David's litigation will offset the savings from reduced borrowings. See "Subsequent Events" in the Notes to Consolidated Financial Statements. The majority of the company's debt has fixed rates as a result of the hedge agreements. See "Liquidity and Capital Resources." The company enters into interest rate hedge agreements to manage interest costs and exposure to changing interest rates. See "Long-Term Debt" in the Notes to Consolidated Financial Statements for further discussion of the company's derivative agreements, which consist of simple interest rate caps and swaps. For 1995, the interest rate hedge agreements contributed $7 million of interest expense, compared to $6 million in 1994. Interest Income. Interest income for 1995 increased by $1 million to $58 mil- lion from $57 million for 1994. Increases in interest income resulting from earnings on the notes receivable acquired in the Scrivner loan portfolio were nearly offset by the June 1995 sale of $77 million of notes receivable with limited recourse. The sale reduced the amount of notes receivable available to produce interest income during 1995 and will continue to do so in 1996. Equity Investment Results. The company's portion of operating losses from equity investments for 1995 increased by $12 million to $27 million from $15 million for 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 when compared to 1994. Management expects improved results for such investments in 1996. 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 late 1995, the company consolidated the results of operations and financial position of ABCO Markets, Inc. ("ABCO"), a 71-store supermarket chain located in Arizona, as a result of the company's majority equity position. In early 1996, the company acquired all the assets of ABCO through a UCC foreclosure in cancellation of $66 million of ABCO indebtedness to the company. Certain of ABCO minority shareholders have challenged this action seeking recision and/or damages. Facilities consolidation. 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. Taxes on Income. The company's effective tax rate for 1995 increased to 51.1% from 50.0% for 1994. The increase was primarily due to increased goodwill amortization with no related tax deduction and the significance of certain other nondeductible expenses to pretax earnings. Other. Several factors negatively affecting earnings in 1995 are likely to continue. Management believes that these factors include: lower sales; little or no food price inflation; and operating losses in certain company-owned retail stores. In February, 1996, trial commenced in the David's litigation in Johnson County, Texas (see Item 3., Legal Proceedings, and "Litigation and Contingencies" and "Subsequent Events" in Notes to Consolidated Financial Statements included elsewhere herein). On March 14 and 15, 1996, the jury found against Fleming for $2.8 million of disputed overcharges and returned alternative verdicts against the company of $72.5 million (breach of contract), $200.9 million (fraud) and $207.5 million (violation of the Texas Deceptive Trade Practices Act, or DTPA). Plaintiff elected to pursue the DTPA verdict and on April 12, 1996, the court granted judgment against the defendants in the amount of $207.5 million plus pre-judgment interest of $3.7 million and post-judgment interest at the rate of 10% per annum. Immediately after the judgment was granted, Fleming posted a supersedeas bond in the amount of $230 million (which includes interest for one year) to stay enforcement of the judgment while pursuing an appeal. As collateral for the bond, Fleming provided its sureties with letters of credit obtained under its recently amended bank credit amendment (see "Liquidity and Capital Resources - Recent Developments" herein.) Based on management's present assessment of the ultimate outcome, a charge of approximately $7 million is expected in the first quarter of 1996. However, the failure to substantially reduce the amount of the judgment through the appeal would have a material adverse effect on the company. The cost of the bond and letter of credit requirements, as well as attorney's fees, is expected to be approximately $3 million annually which will negatively impact future earnings. The appellate process may take up to three years, or longer. In view of the large award in the David's litigation, assertions of similar allegations could occur in future or continuing litigation. Management is unable to predict a potential range of monetary exposure, if any, to the company. However, if successfully asserted, any unfavorable outcome could have a material adverse effect on the company. Moody's and Standard & Poor's have placed the company's rated debt under review for possible downgrade and CreditWatch with negative implications, respectively, due in part to the uncertainties created by the judgment. A downgrade in the company's rated debt is likely to result in increased borrowing costs under the bank credit agreement. Additionally, the costs of amending the bank credit agreement will be amortized over the remaining term of the bank credit agreement. The amendment also calls for increased facility fees and commitment fees, but such increased charges are not expected to be material in 1996. From the date of the jury verdict through April 12, 1996, the company and certain officers, including the chief executive officer, were named as defendants in three class action lawsuits filed by certain of its stockholders and one class action lawsuit filed by certain noteholders, each in the U. S. District Court for the Western District of Oklahoma, alleging that the company failed to properly disclose the David's litigation as well as for the allegedly pervasive and wrongful conduct of the defendants which gave rise to the David's litigation. The plaintiffs seek undetermined but significant damages. The company denies these allegations and intends to vigorously defend the actions. Management is unable to predict a potential range of monetary exposure, if any, to the company. However, an unfavorable outcome could have a material adverse effect on the company. See Item 3., Legal Proceedings, and "Litigation and Contingencies" and "Subsequent Events" in Notes to Consolidated Financial Statements. The company has been named in two related legal actions filed in the U.S. District Court in Miami. 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. Certain Accounting Matters. See Notes to Consolidated Financial Statements for a discussion of new accounting standards adopted in 1995, or issued in 1995 that will be effective for 1996, none of which is expected to have a material effect on results of operations or financial position. 1994 and 1993 Net Sales. Net sales for 1994 increased by $2.63 billion, or 20%, to $15.72 billion from $13.10 billion for 1993. The increase in net sales was attrib- utable to the $2.76 billion of net sales generated by Scrivner operations since the acquisition. Without Scrivner, net sales would have declined by $100 mil- lion, or .8%, due to several factors, none of which was individually material to net sales, including: the expiration of the temporary agreement with Albertson's, Inc., as its distribution center came on line; the sale of a dis- tribution center; and the loss of business due to the bankruptcy of Megafoods. These losses were partially offset by the addition of business from Kmart, Florida retail operations acquired in the fourth quarter of 1993 ("Hyde Park") and Randall's Food Markets, Inc. Food price inflation in 1994 was negligible. Gross Margin. Gross margin for 1994 increased by $358 million, or 47%, to $1.12 billion from $765 million for 1993 and increased as a percentage of net sales to 7.14% for 1994 from 5.84% for 1993. The increase in gross margin was due to additional retail stores, principally the 179 stores acquired with Scrivner in mid-1994 as well as 21 Hyde Park stores acquired in late 1993 and 24 Consumers stores acquired in mid-1994. In addition, product handling expenses decreased as a percentage of net sales for 1994 from 1993 due in part to the positive impact of the company's facilities consolidation program and to higher fees charged to certain customers. These gross margin increases were partially off- set by charges to income of $6 million resulting from the LIFO method of in- ventory valuation in 1994 compared to credits to income of $7 million in 1993. Selling and Administrative Expense. Selling and administrative expense for 1994 increased by $378 million, or 68%, to $933 million from $554 million for 1993 and increased as a percentage of net sales to 5.93% for 1994 from 4.23% in 1993. This increase was due primarily to the mid-1994 acquisition of Scrivner, particularly its retail operations, as well as the acquisition of 21 Hyde Park stores in late 1993 and 24 Consumers stores in mid-1994. Selling and administrative expenses also increased due to additional goodwill amortization, principally related to the Scrivner acquisition, and the absence of several non-recurring items that occurred in 1993. The increase in the Corporate line under Operating earnings shown in "Segment Information" in the Notes to Consolidated Financial Statements is the result of the aforementioned absence of non-recurring items and the increase in staff expense. Credit loss expense included in selling and administrative expense for 1994 increased by $9 million to $61 million from $52 million in 1993. This increase, including the $6.5 million credit loss attributable to the bankruptcy of Megafoods (see "Litigation and Contingencies" in the Notes to Consolidated Financial Statements), was primarily due to the continued difficult retail environment and low levels of food price inflation. Interest Expense. Interest expense for 1994 increased $42 million to $120 million from $78 million for 1993. The increase was due to the indebtedness incurred to finance the Scrivner acquisition and higher interest rates imposed on the company as a result thereof. Without these factors, interest expense for 1994 is estimated to have been approximately the same as 1993. For 1994, the interest rate hedge agreements described above contributed $6 million to inter- est expense. Interest Income. Interest income for 1994 decreased by $2 million to $57 mil- lion from $59 million for 1993. There were no note sales in 1994. Equity Investment Results. The company's portion of operating losses from equity investments for 1994 increased by $3 million to $15 million from $12 mil- lion for 1993. The increase resulted primarily from losses related to the com- pany's investments in small retail operators under the company's equity store program, offset in part by improved results from investments in strategic multi- store customers under the company's business development venture program. Taxes on Income. The company's effective tax rate for 1994 increased to 50.0% from 48.0% for 1993 primarily as a result of the lower-than-expected earnings for 1994, Scrivner's operations in states with higher tax rates and increased goodwill amortization with no related tax deduction. Early Debt Retirement. In 1993, the company recorded an extraordinary loss related to the early retirement of debt. The company retired $63 million of 9.5% debentures at a cost of $2 million, net of tax benefits of $2 million.
Liquidity and Capital Resources
_____________________________________________________________________________ Capital Structure ($ in millions) 1995 1994 _____________________________________________________________________________ Long-term debt $1,402 48.8% $1,752 54.8% Capital lease obligations 388 13.5 369 11.5 _____________________________________________________________________________ Total debt 1,790 62.3 2,121 66.3 Shareholders' equity 1,083 37.7 1,079 33.7 _____________________________________________________________________________ Total capital $2,873 100.0% $3,200 100.0% _____________________________________________________________________________
Includes current maturities of long-term debt and current obligations under capital leases. Fleming reduced long-term debt levels incurred in connection with the 1994 acquisition of Scrivner by $350 million and reduced commitments under the company's revolving credit and term loan agreement from $1.7 billion to $1.25 billion during 1995. The company's principal sources of liquidity are cash flows from operating activities and borrowings under the bank credit agreement. Borrowings under the bank credit agreement totaled $735 million at the end of 1995 and averaged $861 million during the year. At year end, the amortizing term loan balance was $659 million and $76 million was drawn on the $595 million revolving credit facility. Final maturities are July 1999 for the revolving credit facility and June 2000 for the term loan. Borrowings under the bank credit agreement are guaranteed by substantially all of the company's subsidiaries and are secured by the company's accounts re- ceivable, inventories and a pledge of the stock of the subsidiary guarantors. The company was also required to pledge intercompany receivables as security for its medium-term notes and its 9.5% debentures and to provide guarantees from the subsidiary guarantors. Additionally, the company has provided guarantees from the subsidiary guarantors in favor of the $500 million seven-year senior notes issued in December 1994, the proceeds of which were used to prepay a $500 million two-year tranche of the credit agreement. The bank credit agreement and the indentures for the senior notes contain customary covenants associated with similar facilities. At year end 1995 the credit agreement contained the following more significant covenants: consolidated-debt-to-net-worth ratio of not more than 2.45 to 1; minimum consolidated net worth of at least $883 million; fixed charge coverage ratio of at least 1.25 to 1; a limitation on restricted payments (including dividends and company stock repurchases) and additional indebtedness; and limitations on capital expenditures. The fixed charge coverage ratio was amended in February 1996 to a minimum requirement of 1.1 to 1 beginning in the first quarter of 1996. Covenants associated with the senior notes are generally less restrictive than those of the credit agreement. At year-end 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. See "Recent develop- ments" below. Pricing under the bank credit agreement automatically increases with respect to certain credit rating declines. Despite the effect of reduced earnings and action by Standard & Poor's in June 1995 to reduce its rating of the company's debt, the company believes that appropriate means are available to maintain adequate liquidity for the foreseeable future at acceptable rates. The com- pany's credit ratings for its senior unsecured long-term debt are Ba1 and BB- by Moody's and Standard & Poor's, respectively. See "Recent developments" below. The bank credit agreement may be terminated in the event of a defined change of control. Under the indentures for the senior notes, the note holders may re- quire the company to repurchase the notes in the event of a defined change of control coupled with a defined decline in credit ratings. At year-end 1995, the company had $146 million of contingent obligations under undrawn letters of credit, primarily related to insurance reserves associated with its 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 bank credit agreement. Operating activities generated $399 million of net cash flows for 1995 compared to $333 million in 1994. The increase is principally due to lower working capital requirements partially offset by lower deferred taxes. Working capital was $364 million at year end, a decrease from $496 million at year-end 1994. The current ratio decreased to 1.28 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 bank credit agreement will be adequate to meet working capital needs, capital expenditures and other cash needs. Capital expenditures for 1995 were approximately $114 million compared to approximately $140 million in 1994. The decrease from the prior year is due to a reduced level of expansion projects in 1995 as compared to 1994. Management expects that 1996 capital expenditures, excluding acquisitions, if any, will approximate $130 million. During 1995, borrowings under uncommitted bank lines averaged $10 million and ranged up to $120 million. Borrowings outstanding at year-end 1995 were $50 million. Fleming makes investments in and loans to its retail customers, primarily in conjunction with the establishment of long-term supply agreements. Net investments and loans decreased $157 million, from $471 million to $314 million due primarily to the sale of notes and more restrictive credit policies. There was a $77 million sale of notes in 1995, compared to no sale in 1994. The com- pany may sell additional notes in the future. Long-term debt and capital lease obligations decreased $331 million to $1.79 billion during 1995 as a result of: increased cash flow; reduced working capital requirements, capital expenditures and retailer financing; increased sale of notes and other assets; and other financing activities, all of which were partially offset by increased cash outflows related to facilities consolidation actions and reengineering activities. Shareholders' equity at the end of 1995 was $1.08 billion. The year-end 1995 debt-to-capital ratio decreased to 62.3%, below last year's ratio of 66.3%. The company's long-term target ratio is approximately 50%. Total capital was $2.87 billion at year end, down from $3.2 billion the prior year. The composite interest rate for total funded debt (excluding capital lease obligations) before the effect of interest rate hedges was 7.8% at year-end 1995, versus 7.6% a year earlier. Including the effect of interest rate hedges, the composite interest rate of debt was 8.4% at the end of both 1995 and 1994. The dividend payments of $1.20 per share in 1995 and 1994 were 107% and 79% of net earnings per share in 1995 and 1994, respectively. Recent developments. In connection with the David's litigation described above (also see Item 3. Legal Proceedings and "Subsequent Events" in the Notes to Consolidated Financial Statements), in order to obtain the letters of credit necessary to collateralize the supersedeas bond, the company obtained an amendment to the bank credit agreement dated April 4, 1996. The amendment also waived the effects of the judgment and any liens resulting therefrom so long as the appeals process is proceeding. Letters of credit support the supersedeas bond and are considered a use of the company's borrowing capacity under the bank credit agreement. Moody's and Standard & Poor's have placed the company's rated debt under review for possible downgrade and CreditWatch with negative implications, respectively, due in part to the uncertainties created by the judgment. On March 28, 1996, the Board of Directors cut the quarterly cash dividend from $.30 per share to $.02 per share for the second quarter of 1996. The amended bank credit agreement limits dividend payments to $.08 per share, per quarter beginning in the second quarter of 1996. After considering the effect of the recently issued letters of credit related to the supersedeas bond, which are considered a use of the company's borrowing capacity, and the related bank credit agreement amendment, at year-end 1995 the company would have been allowed to borrow an additional $190 million. Management believes that the cash flows from operating activities and the company's ability to borrow under the amended bank credit agreement will be adequate to meet working capital needs, capital expenditures and other cash needs for the next twelve months. The company is currently in compliance with all covenants under the amended bank credit agreement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 14(a) 1. Financial Statements. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Page Number o Consolidated Statements of Earnings - For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 o Consolidated Balance Sheets - At December 30, 1995, and December 31, 1994 o Consolidated Statements of Shareholders' Equity - For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 o Consolidated Statements of Cash Flows - For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 o Notes to Consolidated Financial Statements - For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 o Independent Auditors' Report o Quarterly Financial Information (Unaudited) (a) 2. Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts (a) 3., (c) Exhibits: Page Number or Exhibit Incorporation by Number Description Reference to 4.14 Waiver to Credit Agreement dated as of April 1, 1996 4.15 Amendment No. 5 to Credit Agreement dated as of April 4, 1996 23 Consent of Deloitte & Touche LLP SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Fleming has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of April 1996. FLEMING COMPANIES, INC. ROBERT E. STAUTH By: Robert E. Stauth Chairman and Chief Executive Officer (Principal executive officer) HARRY L. WINN, JR. By: Harry L. Winn, Jr. Executive Vice President and Chief Financial Officer (Principal financial officer) KEVIN J. TWOMEY By: Kevin J. Twomey Vice President - Controller (Principal accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 15th day of April 1996. ROBERT E. STAUTH ARCHIE R. DYKES * CAROL B. HALLETT * Robert E. Stauth Archie R. Dykes Carol B. Hallett (Chairman of the Board) (Director) (Director) JAMES G. HARLOW, JR. * LAWRENCE M. JONES * EDWARD C. JOULLIAN III * James G. Harlow, Jr. Lawrence M. Jones Edward C. Joullian III (Director) (Director) (Director) HOWARD H. LEACH * GUY O. OSBORN * Howard H. Leach Guy O. Osborn (Director) (Director) HARRY L. WINN, JR. Harry L. Winn, Jr. (Attorney-in-fact) *A Power of Attorney authorizing Harry L. Winn, Jr. to sign the Annual Report on Form 10-K on behalf of each of the indicated directors of Fleming Companies, Inc. has been filed herein as Exhibit 24. CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 (In thousands, except per share amounts)
1995 1994 1993 Net sales $17,501,572 $15,723,691 $13,096,124 Costs and expenses: Cost of sales 16,091,039 14,601,050 12,331,099 Selling and administrative 1,189,199 932,588 554,149 Interest expense 175,390 120,071 78,029 Interest income (58,206) (57,148) (58,923) Equity investment results 27,240 14,793 11,865 Facilities consolidation and (8,982) --- 107,827 restructuring Total costs and expenses 17,415,680 15,611,354 13,024,046 Earnings before taxes 85,892 112,337 72,078 Taxes on income 43,891 56,168 34,598 Earnings before extraordinary 42,001 56,169 37,480 loss Extraordinary loss from early --- --- 2,308 retirement of debt Net earnings $42,001 $ 56,169 $ 35,172 Net earnings per share: Earnings before extraordinary $1.12 $1.51 $1.02 loss Extraordinary loss --- --- .06 Net earnings per share $1.12 $1.51 $ .96 Weighted average shares out- 37,577 37,254 36,801 standing
Sales to customers accounted for under the equity method were approximately $1.5 billion in 1995 and $1.6 billion each year for 1994 and 1993. See notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS At December 30, 1995, and December 31, 1994 (In thousands)
Assets 1995 1994 Current assets: Cash and cash equivalents $4,426 $ 28,352 Receivables 340,215 364,884 Inventories 1,207,329 1,301,980 Other current assets 98,801 124,865 Total current assets 1,650,771 1,820,081 Investments and notes receivable 271,763 402,603 Investment in direct financing leases 225,552 230,357 Property and equipment: Land 59,364 66,702 Buildings 406,302 366,109 Fixtures and equipment 667,087 656,068 Leasehold improvements 202,751 199,713 Leased assets under capital leases 192,022 167,362 1,527,526 1,455,954 Less accumulated depreciation (532,364) (467,830) and amortization Net property and equipment 995,162 988,124 Other assets 132,338 179,332 Goodwill 1,021,099 987,832 Total assets $4,296,685 $4,608,329 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $1,001,123 $ 960,333 Current maturities of long-term debt 53,917 110,321 Current obligations under capital leases 19,452 15,780 Other current liabilities 211,863 237,197 Total current liabilities 1,286,355 1,323,631 Long-term debt 1,347,987 1,641,390 Long-term obligations under capital leases 368,876 353,403 Deferred income taxes 40,179 51,279 Other liabilities 169,966 160,071 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value, authorized - 100,000 shares, issued and outstanding - 37,716 and 37,480 shares 94,291 93,705 Capital in excess of par value 501,474 494,966 Reinvested earnings 501,214 503,962 Cumulative currency translation adjustment (4,549) (2,972) 1,092,430 1,089,661 Less ESOP note (9,108) (11,106) Total shareholders' equity 1,083,322 1,078,555 Total liabilities and shareholders' equity $4,296,685 $4,608,329
Receivables include $27 million and $37 million in 1995 and 1994, respectively, due from customers accounted for under the equity method. See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 (In thousands)
1995 1994 1993 Shares Amount Shares Amount Shares Amount Common stock: Beginning of year 37,480 $ 93,705 36,940 $ 92,350 36,698 $ 91,746 Incentive stock and stock ownership plans 236 586 540 1,355 242 604 End of year 37,716 94,291 37,480 93,705 36,940 92,350 Capital in excess of par value: Beginning of year 494,966 489,044 482,107 Incentive stock and stock ownership plans 6,508 5,922 6,937 End of year 501,474 494,966 489,044 Reinvested earnings: Beginning of year 503,962 492,250 501,231 Net earnings 42,001 56,169 35,172 Cash dividends, $1.20 per share (44,749) (44,457) (44,153) End of year 501,214 503,962 492,250 Cumulative currency translation adjustment: Beginning of year (2,972) (288) --- Currency translation adjustments (1,577) (2,684) (288) End of year (4,549) (2,972) (288) ESOP note: Beginning of year (11,106) (12,950) (14,650) Payments 1,998 1,844 1,700 End of year (9,108) (11,106) (12,950) Total shareholders' equity, end of year $1,083,322 $1,078,555 $1,060,406
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 (In thousands)
1995 1994 1993 Cash flows from operating activities: Net earnings $ 42,001 $ 56,169 $ 35,172 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 180,796 145,910 101,103 Credit losses 30,513 61,218 52,018 Deferred income taxes 12,052 30,430 (24,471) Equity investment results 27,240 14,793 11,865 Consolidation and reserve activities, net (44,375) (29,304) 87,211 Change in assets and liabilities, excluding effect of acquisitions: Receivables 7,156 1,964 (16,420) Inventories 149,676 57,689 58,625 Other assets 38,995 13,346 (48,984) Accounts payable 6,390 30,691 (38,472) Other liabilities (46,489) (50,083) (10,883) Other adjustments, net (4,956) 39 1,779 Net cash provided by operating activities 398,999 332,862 208,543 Cash flows from investing activities: Collections on notes receivable 88,441 111,149 82,497 Notes receivable funded (103,771) (122,206) (130,846) Notes receivable sold 77,063 --- 67,554 Businesses acquired (10,654) (387,488) (51,110) Proceeds from sale of businesses - 6,682 --- Purchase of property and equipment (116,769) (150,057) (55,554) Proceeds from sale of property and equipment 29,907 14,917 2,955 Investments in customers (11,298) (12,764) (37,196) Proceeds from sale of investments 17,649 4,933 7,077 Other investing activities (4,169) (2,793) 197 Net cash used in investing activities (33,601) (537,627) (114,426) Cash flows from financing activities: Proceeds from long-term borrowings 93,000 2,225,751 331,502 Principal payments on long-term debt (452,690) (1,912,717) (373,693) Principal payments on capital lease obligations (17,269) (13,990) (11,316) Sale of common stock under incentive stock and stock ownership plans 7,094 7,277 7,541 Dividends paid (44,749) (44,457) (44,153) Other financing activities 25,290 (30,381) (7,076) Net cash provided by (used in) financing activities (389,324) 231,483 (97,195) Net increase (decrease) in cash and cash equivalents (23,926) 26,718 (3,078) Cash and cash equivalents, beginning of year 28,352 1,634 4,712 Cash and cash equivalents, end of year $ 4,426 $ 28,352 $ 1,634
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 30, 1995, December 31, 1994, and December 25, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: The company markets food and food-related products to supermarkets in 42 states, the District of Columbia and several foreign countries. The company also operates approximately 370 company-owned stores in several geographic areas. The company's operation encompasses two major businesses: food and general merchandise distribution, and company-owned retail operations. FISCAL YEAR: The company's fiscal year ends on the last Saturday in December. Fiscal years 1995 and 1993 were 52 weeks; 1994 was 53 weeks. The impact of the additional week in 1994 is not material to the results of operations or financial position. BASIS OF PRESENTATION: The preparation of the consolidated 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. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include all material subsidiaries. Material intercompany items have been eliminated. The equity method of accounting is used for investments in certain entities in which the company has an investment in common stock of between 20% and 50%. Under the equity method, original investments are recorded at cost and adjusted by the company's share of earnings or losses of these entities and for declines in estimated realizable values deemed to be other than temporary. CASH AND CASH EQUIVALENTS: Cash equivalents consist of liquid investments readily convertible to cash with a maturity of three months or less. The carrying amount for cash equivalents is a reasonable estimate of fair value. RECEIVABLES: Receivables include the current portion of customer notes receivable of $42 million in 1995 and $68 million in 1994. Receivables are shown net of allowance for credit losses of $35 million in 1995 and $40 million in 1994. The company extends credit to its retail customers located over a broad geographic base. Regional concentrations of credit risk are limited. The company measures its estimates of impaired loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114 - Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118 - Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. The 1995 adoption of SFAS No. 114 and No. 118 did not materially impact amounts previously reported. Interest income on impaired loans is recognized only when payments are received. INVENTORIES: Inventories are valued at the lower of cost or market. Most grocery and certain perishable inventories, aggregating approximately 80% of total inventories in both 1995 and 1994, are valued on a last-in, first-out (LIFO) method. The cost for the remaining inventories was determined by the first-in, first-out (FIFO) method. Current replacement cost of LIFO inventories was greater than the carrying amounts by approximately $22 million and $19 million at year-end 1995 and 1994, respectively. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost or, for leased assets under capital leases, at the present value of minimum lease payments. Depreciation, as well as amortization of assets under capital leases, are based on the estimated useful asset lives using the straight-line method. Asset impairments are recorded when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such impairment losses are measured by the excess of the carrying amount of the asset over its fair value. In 1995, SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of was issued. The company will adopt SFAS No. 121 in 1996 and does not expect a material impact on the company's financial position or results of operations. The estimated useful lives used in computing depreciation and amortization are: buildings and major improvements - 20 to 40 years; warehouse, transportation and other equipment - 3 to 10 years; and data processing equipment - 5 to 7 years. GOODWILL: The excess of purchase price over the value of net assets of businesses acquired is amortized on the straight-line method over periods not exceeding 40 years. Goodwill is shown net of accumulated amortization of $127 million and $97 million in 1995 and 1994, respectively. Goodwill is written down if it is probable that estimated undiscounted operating income generated by the related assets will be less than the carrying amount. FINANCIAL INSTRUMENTS: Interest rate hedge transactions and other financial instruments are utilized to manage interest rate exposure. The difference between amounts to be paid or received is accrued and recognized over the life of the contracts. The methods and assumptions used to estimate the fair value of significant financial instruments are discussed in the Investments and Notes Receivable and Long-Term Debt notes. TAXES ON INCOME: Deferred income taxes arise from temporary differences between financial and tax bases of certain assets and liabilities. FOREIGN CURRENCY TRANSLATION: Net exchange gains or losses resulting from the translation of assets and liabilities of an international investment are included in shareholders' equity. NET EARNINGS PER SHARE: Earnings per share are computed based on net earnings divided by the weighted average shares outstanding. The impact of common stock options on earnings per share is immaterial. RECLASSIFICATIONS: Certain reclassifications have been made to prior years' amounts to conform to the current year's classification. ACQUISITIONS In July 1994, the company acquired 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 $670 million indebtedness. The acquisition was accounted for as a purchase and the results of operations of Scrivner are 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. The excess of purchase price over assets acquired of $583 million is being amortized on a straight-line basis over 40 years. The following unaudited pro forma information presents a summary of consolidated results of operations of the company and Scrivner as if the acquisition had occurred at the beginning of 1993, 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.
(In millions, except per share amounts) 1994 1993 Net sales $ 18,947 $19,113 Net earnings $43 $19 Net earnings per share $1.15 $.53
In late 1995, the company consolidated the results of operations and financial position of a 71-store supermarket chain with operations in Arizona, and acquired all of the assets of the operations in January 1996. In 1994, the company acquired the remaining common stock of a supermarket operator of a 24-store chain with locations in Missouri and Kansas. In 1993, the company acquired the assets or common stock of three businesses: distribution center assets located in Garland, Texas, and certain assets and common stock of two supermarket operators in southern Florida. These acquisitions were accounted for as purchases. The results of these entities are not material to the company in the respective years. INVESTMENTS AND NOTES RECEIVABLE Investments and notes receivable consist of the following:
(In thousands) 1995 1994 Investments in and advances to customers $103,941 $163,090 Notes receivable from customers 142,015 219,852 Other investments and receivables 25,807 19,661 Investments and notes receivable $271,763 $402,603
The company extends long-term credit to certain retail customers. Loans are primarily collateralized by inventory and fixtures. Interest rates are above prime with terms up to 10 years. The carrying amount of notes receivable approximates fair value because of the variable interest rates charged on the notes. The company's recorded investment in notes receivable with no related credit loss allowance is $233 million. Impaired notes, including current portion, total $28 million, with related allowances of $17 million. There were no impaired loans without reserves. The average recorded investment in impaired loans during 1995 was $30 million, with $1 million of related interest income recognized during the year. Investments in and advances to customers are shown net of reserves of $14 million and $9 million in 1995 and 1994, respectively. The company has sold certain notes receivable at face value with limited recourse. The outstanding balance at year-end 1995 on all notes sold is $95 million, of which the company is contingently liable for $15 million should all the notes become uncollectible. LONG-TERM DEBT Long-term debt consists of the following:
(In thousands) 1995 1994 Term bank loans, due 1996 to 2000, average interest rates of 6.7% and 6.6% $ 659,497 $ 800,000 10.625% senior notes due 2001 300,000 300,000 Floating rate senior notes due 2001, annual payments of $1,000 in 1999 and 2000, interest rates of 8.1% and 8.7% 200,000 200,000 Medium-term notes, due 1997 to 2003, average interest rates of 7.1% and 6.9% 99,000 155,950 Revolving bank credit, average interest rate of 6.6% for both years 76,000 280,000 Uncommitted credit lines, average interest rates of 6.4% 50,000 - Mortgaged real estate notes and other debt, varying interest rates from 4% to 14.4%, due 1996 to 2003 17,407 15,761 1,401,904 1,751,711 Less current maturities 53,917 110,321 Long-term debt $1,347,987 $1,641,390
FIVE-YEAR MATURITIES: Aggregate maturities of long-term debt for the next five years are as follows: 1996-$54 million; 1997-$126 million; 1998-$177 million; 1999-$216 million; and 2000-$186 million. REVOLVING CREDIT AND TERM LOAN AGREEMENT: The company has a $1.25 billion committed revolving credit and term loan agreement with a group of banks. The bank credit agreement carries an annual facility fee on the total revolving credit portion and a commitment fee on the unused amount of the revolving credit portion. Interest rates are based on various money market rate options selected by the company at the time of borrowing. Borrowings under the revolving credit portion of the bank credit agreement mature in 1999 and the amortizing term bank loan matures in 2000. The bank credit agreement and senior note indentures contain customary covenants associated with similar facilities. The bank credit agreement contains the following financial covenants: consolidated-debt-to-net-worth ratio of not more than 2.45 to 1; minimum consolidated net worth of at least $883 million; and fixed charge coverage ratio of at least 1.25 to 1. The company is in compliance with all financial covenants under the bank credit agreement and senior note indentures. At year-end 1995, the restricted payments test would have allowed the company to pay dividends or repurchase capital stock in the aggregate amount of $51 million. The consolidated- debt-to-net-worth test would have allowed the company to borrow an additional $837 million. The fixed charge coverage test would have allowed the company to incur an additional $12 million of annual interest or net rental expense. The fixed charge coverage ratio was amended in February 1996 to a minimum requirement of 1.1 to 1 beginning in the first quarter of 1996. The bank credit agreement and the senior note indentures also place significant restrictions on the company's ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, an unaffiliated entity. The bank credit agreement contains a provision that, in the event of a defined change of control, the agreement may be terminated. The indentures for the senior notes provide an option for the note holders to require the company to repurchase the notes in the event of a defined change of control and defined decline in credit ratings. MEDIUM-TERM NOTES: The company has registered $565 million in medium-term notes. Of this, $290 million may be issued from time to time, at fixed or floating rates, as determined at the time of issuance. Under the bank credit agreement, new issues of certain kinds of debt must have a maturity after December 2000. The security provisions for the bank credit agreement required the company to equitably and ratably secure the medium-term notes. Security for the medium-term notes consists of guarantees from most of the company's subsidiaries and a pledge of intercompany receivables. INTEREST EXPENSE: Components of interest expense are as follows:
(In thousands) 1995 1994 1993 Interest costs incurred: Long-term debt $135,254 $ 83,748 $ 44,628 Capital lease obligations 36,132 33,718 31,355 Other 4,712 2,969 2,046 Total incurred 176,098 120,435 78,029 Less interest capitalized 708 364 --- Interest expense $175,390 $120,071 $ 78,029
EARLY RETIREMENT OF DEBT: In 1993 the company recorded extraordinary losses for early retirement of $63 million of 9.5% debentures. The loss was $2 million, after income tax benefits of $2 million, or $.06 per share. The funding source for the early redemption was the sale of notes receivable. DERIVATIVES: The company enters into interest rate hedge agreements with the objective of managing interest costs and exposure to changing interest rates. The classes of derivative financial instruments used include interest rate swaps and caps. The bank credit agreement requires the company to provide interest rate protection on a substantial portion of the related outstanding indebtedness. Strategies for achieving the company's objectives have resulted in the company maintaining interest rate swaps and caps covering $850 million and $1 billion aggregate principal amount of floating rate indebtedness at year-end 1995 and 1994, respectively. These amounts exceed the requirements set forth in the bank credit agreement. The maturities for hedge agreements range from 1997 to 2000. The counterparties to these agreements are major national and international financial institutions. The interest rate employed on most of the company's floating rate indebtedness is equal to the London interbank offered 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 six counterparty banks, and which have an average remaining life of 2.9 years, provide for the company to receive substantially the same LIBOR that the company pays on its floating rate indebtedness. The company has purchased interest rate cap agreements from an additional two counterparty banks for an additional $250 million of its floating rate indebtedness. The agreements cap LIBOR at 7.33% over the next three years. The notional amounts of interest rate swaps and caps do not represent amounts exchanged by the parties and are not a measure of the company's exposure to credit or market risks. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the hedge agreements. Notional amounts are not included in the consolidated balance sheet. The company believes its exposure to potential loss due to counterparty nonperformance is minimized primarily due to the relatively strong credit ratings of the counterparty banks for their unsecured long-term debt (A- or higher from Standard & Poor's Ratings Group or A2 or higher from Moody's Investor 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 maturity. Changes in the fair value of the hedge agreements offset changes in the fair value of the referenced debt. In 1995, the company terminated $150 million notional principal of interest rate swaps at an immaterial cost. These terminations occurred because the company repaid more referenced debt than scheduled. Derivative financial instruments are reported in the balance sheet where the company has made a cash payment upon entering into or terminating the transaction. The carrying amount is amortized over the initial life of the hedge agreement. The company had a financial basis of $5 million and $7 million in the interest rate cap agreements at year-end 1995 and 1994, respectively. In addition, accrued interest payable or receivable for the interest rate agreements is included in the balance sheet. Payments made under obligations or received for receivables are accounted for as interest expense. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of long-term debt was determined using valuation techniques that considered cash flows discounted at current market rates and management's best estimate for instruments without quoted market prices. At year-end 1995 and 1994, the carrying value of debt exceeded the fair value by $38 million and $14 million, respectively. For derivatives, the fair value was estimated using termination cash values. At year-end 1995, interest rate hedge agreement values would represent an obligation of $27 million, and at year-end 1994, an asset of $32 million. SUBSIDIARY GUARANTEE OF SENIOR NOTES: The senior notes 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 currently 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 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.
(In millions) 1995 1994 Current assets $251 $754 Noncurrent assets $487 $1,405 Current liabilities $104 $501 Noncurrent liabilities $1 $875
(In millions) 1995 1994 1993 Net sales $2,842 $3,318 $11,759 Costs and expenses $2,787 $3,341 $11,674 Earnings (loss) before extraordinary loss $27 $(12) $44 Net earnings (loss) $27 $(12) $42
During 1995 and 1994, a significant number of subsidiaries were merged into the parent company, resulting in a substantial reduction in the amounts appearing in the summarized financial information. LEASE AGREEMENTS CAPITAL AND OPERATING LEASES: The company leases certain distribution facilities with terms generally ranging from 20 to 30 years, while lease terms for other operating facilities range from 1 to 15 years. The leases normally provide for minimum annual rentals plus executory costs and usually include provisions for one to five renewal options of five years. The company leases company-owned retail store facilities with terms generally ranging from 3 to 20 years. These agreements normally provide for contingent rentals based on sales performance in excess of specified minimums. The leases usually include provisions for one to three renewal options of two to five years. Certain other equipment is leased under agreements ranging from two to eight years with no renewal options. Accumulated amortization related to leased assets under capital leases was $53 million and $45 million at year-end 1995 and 1994, respectively. Future minimum lease payment obligations for leased assets under capital leases as of year-end 1995 are set forth below:
(In thousands) Lease Years Obligations 1996 $ 24,864 1997 23,676 1998 23,228 1999 22,893 2000 21,582 Later 181,187 Total minimum lease payments 297,430 Less estimated executory costs 226 Net minimum lease payments 297,204 Less interest 131,706 Present value of net minimum lease payments 165,498 Less current obligations 9,246 Long-term obligations $156,252
Future minimum lease payments required at year-end 1995 under operating leases that have initial noncancelable lease terms exceeding one year are presented in the following table:
(In thousands) Facility Facilities Equipment Equipment Net Years Rentals Subleased Rentals Subleased Rentals 1996 $ 176,027 $ 75,682 $31,402 $2,667 $ 129,080 1997 158,496 69,213 20,180 2,328 107,135 1998 147,072 60,393 13,031 1,546 98,164 1999 131,934 48,469 8,169 839 90,795 2000 119,134 38,699 2,895 570 82,760 Later 792,339 170,536 261 61 622,003 Total lease payments $1,525,002 $462,992 $75,938 $8,011 $1,129,937
The following table shows the composition of total annual rental expense under noncancelable operating leases and subleases with initial terms of one year or greater:
(In thousands) 1995 1994 1993 Minimum rentals $199,834 $160,065 $126,040 Contingent rentals 1,654 866 182 Less sublease income 92,108 77,684 57,308 Rental expense $109,380 $ 83,247 $ 68,914
DIRECT FINANCING LEASES: The company leases retail store facilities for sublease to customers with terms generally ranging from 5 to 25 years. Most leases provide for a contingent rental based on sales performance in excess of specified minimums. The leases and subleases usually contain provisions for one to four renewal options of two to five years. The following table shows the future minimum rentals receivable under direct financing leases and future minimum lease payment obligations under capital leases in effect at year-end 1995:
(In thousands) Lease Rentals Lease Years Receivable Obligations 1996 $ 43,332 $ 30,782 1997 40,560 30,936 1998 38,848 30,912 1999 35,563 30,817 2000 32,088 29,503 Later 247,768 233,744 Total minimum lease payments 438,159 386,694 Less estimated executory costs 1,727 1,719 Net minimum lease payments 436,432 384,975 Less unearned income 193,454 --- Less interest --- 162,145 Present value of net minimum lease payments 242,978 222,830 Less current portion 17,426 10,206 Long-term portion $225,552 $212,624
Contingent rental income and contingent rental expense is not material. FACILITIES CONSOLIDATION AND RESTRUCTURING The results in 1993 included a charge of $108 million for facilities consolidations, reengineering, impairment of retail-related assets and elimination of regional operations. Components of the charge provided for severance costs, impaired property and equipment, product handling and damage, and impaired other assets. Four distribution centers have been closed and one additional facility will be closed as part of the facilities consolidation plan. Reengineering has occurred at 17 of the company's operating units. Most impaired retail-related assets have been disposed or subleased. Regional operations have been eliminated. In 1995 management changed its estimates with respect to the general merchandising operations portion of the reengineering plan and reversed $9 million of the related provision. Facilities consolidation and restructuring reserve activities are:
Reengineering/ Consolidation Severance Costs/Asset (In thousands) Total Costs Impairments Balance, year-end 1992 $ 29,892 $ 8,148 $21,744 Charged to costs and expenses 107,827 25,136 82,691 Expenditures and write-offs (52,198) (8,148) (44,050) Balance, year-end 1993 85,521 25,136 60,385 Expenditures and write-offs (31,142) (2,686) (28,456) Balance, year-end 1994 54,379 22,450 31,929 Credited to income (8,982) - (8,982) Expenditures and write-offs (24,080) (6,690) (17,390) Balance, year-end 1995 $ 21,317 $15,760 $ 5,557
TAXES ON INCOME Components of taxes on income (tax benefit) are as follows:
(In thousands) 1995 1994 1993 Current: Federal $24,817 $18,536 $48,742 State 7,022 7,202 10,327 Total current 31,839 25,738 59,069 Deferred: Federal 9,850 22,188 (20,160) State 2,202 8,242 (4,311) Total deferred 12,052 30,430 (24,471) Taxes on income $43,891 $56,168 $34,598
Deferred tax expense (benefit) relating to temporary differences includes the following components:
(In thousands) 1995 1994 1993 Depreciation and amortization $(23,398) $ (4,967) $ 516 Asset valuations and reserves 26,040 20,396 (28,849) Equity investment results (312) 6,255 (6,767) Credit losses 2,897 11,728 (5,417) Prepaid expenses (71) 374 3,200 Lease transactions (1,170) (1,448) (2,307) Noncompete agreements (100) 388 2,170 Associate benefits 2,249 (4,215) 10,800 Note sales (144) (2,547) 1,880 Acquired loss carryforwards 1,639 1,616 - Other 4,422 2,850 303 Deferred tax expense (benefit) $12,052 $30,430 $(24,471)
Temporary differences that give rise to deferred tax assets and liabilities as of year-end 1995 and 1994 are as follows:
(In thousands) 1995 1994 DEFERRED TAX ASSETS: Depreciation and amortization $ 8,709 $ 6,028 Asset valuations and reserve activities 75,215 78,622 Associate benefits 68,783 68,595 Credit losses 23,885 26,775 Equity investment results 9,440 10,969 Lease transactions 11,840 11,009 Inventory 15,954 14,993 Acquired loss carryforwards 6,198 10,690 Other 19,183 18,533 Gross deferred tax assets 239,207 246,214 Less valuation allowance (4,514) (4,514) Total deferred tax assets 234,693 241,700 DEFERRED TAX LIABILITIES: Depreciation and amortization 128,924 154,688 Equity investment results 2,166 4,036 Lease transactions 1,825 1,743 Inventory 59,113 63,666 Associate benefits 23,402 19,060 Asset valuations and reserve activities 8,025 7,379 Note sales 3,495 3,373 Prepaid expenses 3,578 3,799 Other 17,620 13,876 Total deferred tax liabilities 248,148 271,620 Net deferred tax liability $ (13,455) $ (29,920)
The valuation allowance relates to $4 million of acquired loss carryforwards that, if utilized, will be reversed to goodwill in future years. Management believes it is more likely than not that all other deferred tax assets will be realized. The effective income tax rates are different from the statutory federal income tax rates for the following reasons:
1995 1994 1993 Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 7.0 8.9 5.4 Acquisition-related differences 8.4 6.9 6.9 Other .7 (.8) .7 Effective rate 51.1% 50.0% 48.0%
SEGMENT INFORMATION The following table sets forth the composition of the company's net sales, operating earnings, depreciation and amortization, capital expenditures and identifiable assets. Food distribution includes food and general merchandise distribution.
(In millions) 1995 1994 1993 NET SALES Food distribution $16,665 $15,543 $13,109 Less sales elimination 2,529 1,953 957 Net food distribution 14,136 13,590 12,152 Retail food 3,366 2,134 944 Total $17,502 $15,724 $13,096 OPERATING EARNINGS Food distribution $282 $263 $245 Retail food 52 27 19 Corporate (113) (100) (53) Total operating earnings 221 190 211 Interest expense 175 120 78 Interest income (58) (57) (59) Equity investment results 27 15 12 Facilities consolidation and restructuring (9) --- 108 Earnings before taxes $86 $112 $ 72 DEPRECIATION AND AMORTIZATION Food distribution $115 $ 99 $ 80 Retail food 43 33 15 Corporate 23 14 6 Total $181 $146 $101 CAPITAL EXPENDITURES Food distribution $66 $107 $ 42 Retail food 30 26 8 Corporate 18 7 3 Total $114 $140 $53 IDENTIFIABLE ASSETS Food distribution $3,021 $3,262 Retail food 588 547 Corporate 688 799 Total $4,297 $4,608
SHAREHOLDERS' EQUITY The company offers a Dividend Reinvestment and Stock Purchase Plan which offers shareholders the opportunity to automatically reinvest their dividends in common stock at a 5% discount from market value. Shareholders also may purchase shares at market value by making cash payments up to $5,000 per calendar quarter. Such programs resulted in 283,000 and 270,000 new shares in 1995 and 1994, respectively. The company has a rights plan designed to protect stockholders should the company become the target of coercive and unfair takeover tactics. Stockholders have one right for each share of common stock held. When exercisable, each right entitles stockholders (other than any defined acquiror) to buy one share of common stock at an exercise price of $150 (the "Exercise Price") in the event of certain defined events that constitute a change of control or to exchange the right upon the payment of the Exercise Price for that number of shares of company common stock determined by dividing twice the Exercise Price ($300) by the then current market price of the common stock. Furthermore, if the company is involved in a merger or other business combination or sale of a specified percentage of assets or earning power, the rights (other than those held by the acquiror) may be used to purchase, for the Exercise Price, that number of shares of the acquiror's common stock determined by dividing twice the Exercise Price by the then current market price of the acquiror's common stock. The rights expire on July 6, 1996. In February 1996, the company adopted a new rights plan to replace the current plan upon its expiration. The new plan operates in a manner substantially identical to the existing plan except that each right initially entitles the stockholder (other than the acquiror) to purchase 1/100 of a share of new preferred stock and the Exercise Price is $75. The new rights plan expires on July 6, 2006. The company has severance agreements with certain management associates. The agreements generally provide two years' salary to these associates if the associate's employment terminates within two years after a change of control. In the event of a change of control, a supplemental trust will be funded to provide these salary obligations. The company's employee stock ownership plan (ESOP) established in 1990 allows substantially all associates to participate. In 1990, the ESOP entered into a note with a bank to finance purchase of the shares. In 1994, the company paid off the note and entered into a note from the ESOP. The ESOP will repay to the company the remaining loan balance with proceeds from company contributions. The receivable from the ESOP is presented as a reduction of shareholders' equity. The company makes contributions based on fixed debt service requirements of the ESOP note. Such contributions were approximately $2 million per year in 1995, 1994 and 1993. Dividends used by the ESOP for debt service and interest and compensation expense recognized by the company were not material. The company's stock option plans allow the granting of nonqualified stock options and incentive stock options, with or without stock appreciation rights (SARs), to key associates. In 1995 and 1994, options with SARs were exercisable for 14,000 and 20,000 shares, respectively. Options without SARs were exercisable for 1,865,000 shares in 1995 and 790,000 shares in 1994. At year-end 1995, there were 208,000 shares available for grant under the stock option plans. The company has a stock incentive plan that allows awards to key associates of up to 400,000 restricted shares of common stock and phantom stock units. At year-end 1995, 81,000 shares were available for grant under the stock incentive plan. Shares granted are recorded at the market value when issued and amortized to expense as earned. The unamortized portion was $4 million at year-end 1995 and is netted against capital in excess of par value within shareholders' equity. Stock option and stock incentive transactions are as follows:
(Shares in thousands) Options Price Range Outstanding, year-end 1993 983 $ 4.72 - 42.13 Granted 1,782 $24.81 - 29.75 Exercised (7) $ 4.72 - 25.19 Canceled and forfeited (288) --- Outstanding, year-end 1994 2,470 $10.29 - 42.13 Granted 118 $19.44 - 26.44 Exercised (10) $10.29 - 24.94 Canceled and forfeited (457) --- Outstanding, year-end 1995 2,121 $19.44 - 42.13
In the event of a change of control, the company may accelerate the vesting and payment of any award or make a payment in lieu of an award. In 1995, SFAS No. 123 - Accounting for Stock-Based Compensation was issued which establishes a fair value method and disclosure standards for stock-based employee compensation arrangements such as stock purchase plans and stock options. The company will continue to follow the provisions of Accounting Principles Board Opinion No. 25 for such stock-based compensation arrangements and disclose the effects of applying SFAS No. 123 in the notes to the 1996 financial statements. ASSOCIATE RETIREMENT PLANS The company sponsors retirement and profit sharing plans for substantially all non-union and some union associates. The major plans are funded and have plan assets that exceed the accumulated benefit obligation. Contributory profit sharing plans maintained by the company are for associates who meet certain types of employment and length of service requirements. Company contributions under these defined contribution plans are made at the discretion of the board of directors. Expenses for these plans were $3 million, $6 million and $2 million in 1995, 1994 and 1993, respectively. Benefit calculations for the company's defined benefit pension plans are primarily a function of years of service and final average earnings at the time of retirement. Final average earnings are the average of the highest five years of compensation during the last 10 years of employment. The company funds these plans by contributing the actuarially computed amounts that meet funding requirements. The following table sets forth the company's major defined benefit pension plans' funded status and the amounts recognized in the statements of earnings. Substantially all the plans' assets are invested in listed stocks, short-term investments and bonds. The significant actuarial assumptions used in the calculation of funded status for 1995 and 1994, respectively are: discount rate - 7.25% and 8.75%; compensation increases - 4.0% and 4.5%; and return on assets - 9.5% for both years.
(In thousands) 1995 1994 Actuarial present value of accumulated benefit obligations: Vested $207,731 $169,132 Total $213,390 $176,380 Projected benefit obligations $229,649 $191,637 Plan assets at fair value 222,434 185,180 Projected benefit obligation in excess of plan assets 7,215 6,457 Unrecognized net loss (37,330) (37,980) Unrecognized prior service cost (1,039) (1,684) Unrecognized net asset 1,391 159 Prepaid pension cost $(29,763) $(33,048)
Net pension expense includes the following components:
(In thousands) 1995 1994 1993 Service cost $ 11,348 $ 7,288 $ 5,074 Interest cost 16,367 15,258 13,432 Actual (return) loss on plan assets (45,217) 5,064 (19,103) Net amortization and deferral 29,807 (17,036) 6,756 Net pension expense $ 12,305 $ 10,574 $ 6,159
The company also has nonqualified supplemental retirement plans for selected associates. These plans are unfunded with a projected benefit obligation of $23 million and $17 million; and unrecognized prior service and actuarial losses of $11 million and $6 million at year-end 1995 and 1994, respectively, based on actuarial assumptions consistent with the funded plans. The net pension expense for the unfunded plans was $3 million, $2 million and $3 million for 1995, 1994 and 1993, respectively. Certain associates have pension and health care benefits provided under collectively bargained multiemployer agreements. Expenses for these benefits were $75 million, $56 million and $44 million for 1995, 1994 and 1993, respectively. ASSOCIATE POSTRETIREMENT HEALTH CARE BENEFITS The company offers a comprehensive major medical plan to eligible retired associates who meet certain age and years of service requirements. This unfunded defined benefit plan generally provides medical benefits until Medicare insurance commences. Components of postretirement benefits expense are as follows:
(In thousands) 1995 1994 1993 Service cost $ 137 $ 223 $ 140 Interest cost 1,642 1,542 1,628 Amortization of net loss 141 196 138 Postretirement expense $1,920 $1,961 $1,906
The composition of the accumulated postretirement benefit obligation (APBO) and the amounts recognized in the balance sheets are presented below.
(In thousands) 1995 1994 Retirees $17,197 $16,385 Fully eligible actives 811 1,046 Others 2,216 2,569 APBO 20,224 20,000 Unrecognized net loss (587) (2,010) Accrued postretirement benefit cost $19,637 $17,990
The weighted average discount rate used in determining the APBO was 7.25% and 8.75% for 1995 and 1994, respectively. For measurement purposes in 1995 and 1994, a 12% and 14%, respectively, annual rate of increase in the per capita cost of covered medical care benefits was assumed. In 1995, the rate was assumed to decrease to 6.5% by the year 2003, then remain level. In 1994, the rate was assumed to decrease to 8% by 2000, then to 7.5% in 2001 and thereafter. If the assumed health care cost increased by 1% for each future year, the current cost and the APBO would have increased by approximately 4% to 6% for all periods presented. The company also provides other benefits for certain inactive associates. Expenses related to these benefits are immaterial. SUPPLEMENTAL CASH FLOWS INFORMATION
(In thousands) 1995 1994 1993 Acquisitions: Fair value of assets acquired $142,458 $1,575,323 $111,077 Less: Liabilities assumed or created 63,873 1,198,050 9,057 Existing company investment 51,126 (15,281) 50,628 Cash acquired 16,805 5,066 282 Cash paid, net of cash acquired $ 10,654 $ 387,488 $ 51,110 Cash paid during the year for: Interest, net of amounts capitalized $171,141 $ 98,254 $ 79,634 Income taxes, net of refunds $ (9,593) $ 40,414 $ 74,320 Direct financing leases and related obligations $ 28,568 $ 15,640 $ 33,594 Property and equipment additions by capital leases $ 8,840 $ 30,606 $ 21,011
LITIGATION AND CONTINGENCIES The company and several other defendants have been named in two suits filed in U.S. District Court in Miami, Florida. 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 actual 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 complaints. The litigation is complex and the ultimate outcome, which is not expected to be known for over one year, 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 result 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 less than probable. The company is vigorously defending the actions. The company and one of its former subsidiaries were named in a lawsuit filed in District Court in Johnson County, Texas, in which the plaintiff alleges liability on the part of the company as the result of breach of contract, fraud, conspiracy and violation of the Texas Deceptive Trade Practices Act. Plaintiff seeks actual damages alleged to equal or exceed $50 million, treble damages, exemplary damages, attorneys' fees, interest and costs. The case went to trial in February 1996. Management is unable to predict a potential range of monetary exposure, if any, to the company, but believes the claims asserted are without merit and that a material adverse effect on the company's consolidated financial position is less than probable. However, based on the large recovery sought, an unfavorable result could have a material adverse effect on the company. The company is vigorously defending the litigation. A customer of the company and certain of its affiliates filed Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy Court in Arizona. As of the date of filing, the debtors' total indebtedness to the company for goods sold on open account, equipment leases and loans aggregated approximately $28 million, for which claims have been filed in the bankruptcy proceedings. The company holds collateral with respect to a substantial portion of these obligations and will continue to pursue collection of its claims through the reorganization proceeding. The debtor is also liable or contingently liable to the company under store sublease or lease guarantee agreements. The company is partially secured as to these obligations. The debtor has also filed an adversary proceeding against the company seeking subordination of the company's claims, return of a $12 million deposit and affirmative relief for damages. Absent appeal, the ultimate outcome of these proceedings are expected within one year. The company took a charge of $6.5 million in 1994 and approximately $3.5 million in 1995. Financial exposure, if any, with respect to the subordination of the company's claims and the $12 million deposit could result in a loss of up to $20 million in excess of the amount accrued. The company's facilities are subject to various laws and regulations regarding the discharge of materials into the environment. In conformity with these provisions, the company has a comprehensive program for testing and 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 anticipated costs of all known remediation requirements. In addition, the company is addressing several other environmental cleanup matters involving its properties, all of which the company believes are immaterial. The company has been designated by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with others, with respect to EPA-designated Superfund sites. While liability under CERCLA for remedia- tion at such sites is joint and several with other responsible parties, the company believes that, to the extent it is ultimately determined to be liable for clean up 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 to achieving full compliance with all applicable laws and regulations. The company is a party to various other litigation, possible tax assessments and other matters, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the company expects that the outcome of these matters will not result in a material adverse effect on its consolidated financial position or results of operations. At year-end 1995, the company has aggregate contingent liabilities for future minimum rental commitments made on behalf of customers with a present value of approximately $90 million. SUBSEQUENT EVENTS The lawsuit filed in Johnson County, Texas (David's Supermarkets, Inc. v. Fleming Companies, Inc., ("David's"); see Litigation and Contingencies note) went to trial on February 19, 1996 and on March 14 and 15, 1996 the jury reached a verdict against the company. The company considered the claims to be without merit. However, following a four-week trial the jury found the company's disputed overcharges amounted to $2.8 million and rendered a verdict against the company. David's filed a motion for judgment on its claim for $207.5 million for violation of the Texas Deceptive Trade Practices Act ("DTPA") reserving the right to recover under any alternative theory supported by the verdict in the event the judgment on the DTPA is in any way modified or reversed on appeal. On April 4, 1996, the company and its banks amended the company's credit agreement to increase the letter of credit subfacility in order for the company to obtain a supersedeas appeal bond. See Long-Term Debt note. On April 12, 1996, plaintiff's motion for judgment was granted in the amount of $207.5 million plus pre-judgment interest of $3.7 million and post-judgment interest at the rate of 10% per annum. The company posted the bond immediately after the judgment was granted and will appeal the judgment. The company posted the bond amount through arrangements with several sureties. The bond is secured by letters of credit which are supported by the bank credit agreement. The cost of the bond and letter of credit requirements, as well as attorney's fees, is expected to be approximately $3 million annually which will negatively impact future earnings. Based on management's present assessment of the ultimate outcome, a charge of approximately $7 million is expected in the first quarter of 1996. In view of the large amount of the award, an unfavorable result from the appellate process would have a material adverse effect on the company. The appellate process may take up to three years, or longer. In view of the large award in the David's litigation, assertions of similar allegations could occur in future or continuing litigation. Management is unable to predict the potential range of monetary exposure, if any, to the company. However, if successfully asserted, any unfavorable outcome could have a material adverse effect on the company. On March 28, 1996, the Board of Directors cut the quarterly cash dividend from $.30 per share to $.02 per share for the second quarter of 1996. The bank credit agreement amendment limits dividend payments beginning in the second quarter of 1996 to $.08 per share, per quarter. After considering the effect of the recently issued letters of credit related to the supersedeas bond, which are considered a use of the company's borrowing capacity, and the related bank credit agreement amendment, at year-end 1995 the company would have been allowed to borrow an additional $190 million. Management believes that the cash flows from operating activities and the company's ability to borrow under the amended bank credit agreement will be adequate to meet working capital needs, capital expenditures and other cash needs for the next twelve months. The company is currently in compliance with all covenants under the amended bank credit agreement. Moody's and Standard & Poor's have placed the company's rated debt under review for possible downgrade and CreditWatch with negative implications, respectively, due in part to the uncertainties created by the judgment. From the date of the jury verdict through April 12, 1996, the company and certain officers, including the chief executive officer, were named as defendants in three class action lawsuits filed by certain of its stock- holders and one class action lawsuit filed by certain noteholders, each in the U.S. District Court for the Western District of Oklahoma, alleging the company failed to properly disclose and account for the David's litigation. The plaintiffs seek undetermined but significant damages. The company denies these allegations and intends to vigorously defend the actions. Management is unable to predict a potential range of monetary exposure, if any, to the company. However, an unfavorable outcome would have a material adverse effect on the company. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Fleming Companies, Inc. We have audited the accompanying consolidated balance sheets of Fleming Companies, Inc. and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 30, 1995. Our audits also included the financial statement schedule listed in the index at item 14. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Fleming Companies, Inc. and subsidiaries as of December 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1995, in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Deloitte & Touche LLP Oklahoma City, Oklahoma February 22, 1996 (April 12, 1996 as to effects of a jury verdict, other resulting legal proceedings and related matters discussed in Subsequent Events note) QUARTERLY FINANCIAL INFORMATION (In thousands, except per share amounts) (Unaudited)
1995 First Second Third Fourth Year Net sales $5,458,982 $4,000,070 $3,898,361 $4,144,159 $17,501,572 Costs and expenses: Cost of sales 5,020,518 3,676,391 3,599,252 3,794,878 16,091,039 Selling and administrative 364,081 264,817 258,020 302,281 1,189,199 Interest expense 56,397 40,046 38,603 40,344 175,390 Interest income (19,481) (14,393) (11,673) (12,659) (58,206) Equity investment results 6,473 3,074 6,658 11,035 27,240 Facilities consolidation (8,982) --- --- --- (8,982) Total costs and expenses 5,419,006 3,969,935 3,890,860 4,135,879 17,415,680 Earnings before taxes 39,976 30,135 7,501 8,280 85,892 Taxes on income 20,428 15,399 3,833 4,231 43,891 Net earnings $19,548 $14,736 $3,668 $4,049 $42,001 Net earnings per share $.52 $.39 $.10 $.11 $1.12 Dividends paid per share $.30 $.30 $.30 $.30 $1.20 Weighted average shares outstanding 37,497 37,546 37,619 37,675 37,577
1994 First Second Third Fourth Year Net sales $4,032,176 $2,885,028 $4,125,774 $4,680,713 $15,723,691 Costs and expenses: Cost of sales 3,780,871 2,701,353 3,808,438 4,310,388 14,601,050 Selling and administrative 198,143 143,018 279,249 312,178 932,588 Interest expense 22,139 16,345 36,929 44,658 120,071 Interest income (15,879) (11,596) (14,125) (15,548) (57,148) Equity investment results 3,257 2,640 5,130 3,766 14,793 Total costs and expenses 3,988,531 2,851,760 4,115,621 4,655,442 15,611,354 Earnings before taxes 43,645 33,268 10,153 25,271 112,337 Taxes on income 19,248 14,671 7,437 14,812 56,168 Net earnings $ 24,397 $ 18,597 $ 2,716 $ 10,459 $ 56,169 Net earnings per share $.66 $.50 $.07 $.28 $1.51 Dividends paid per share $.30 $.30 $.30 $.30 $1.20 Weighted average shares outstanding 37,093 37,247 37,332 37,424 37,254
The first quarter of both years consists of 16 weeks; all other quarters are 12 weeks, except for the fourth quarter of 1994 which was 13 weeks. The year 1994 was a 53-week year. The results of Scrivner are included effective at the beginning of the third quarter of 1994. Certain reclassifications have been made to conform to 1995 classifications. See notes to consolidated financial statements, including Subsequent Events. SCHEDULE II FLEMING COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994, AND DECEMBER 25, 1993 (In thousands)
Allowance for Credit Losses Current Noncurrent ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE, December 26, 1992 $ 43,531 $25,298 $18,233 Charged to costs and expenses 52,018 Uncollectible accounts written off, (32,954) less recoveries BALANCE, December 25, 1993 62,595 $44,320 $18,275 Acquired reserves, Scrivner acquisition, July 19, 1994 25,950 Charged to costs and expenses 61,218 Uncollectible accounts written off, less recoveries (101,196) BALANCE, December 31, 1994 48,567 $39,506 $9,061 Charged to costs and expenses 30,513 Uncollectible accounts written off, less recoveries (25,676) BALANCE, December 30, 1995 $ 53,404 $35,136 $18,268
EX-4.14 2 EXHIBIT 4.14 WAIVER WAIVER (this "Waiver") dated as of April 1, 1996, under the $2,200,000,000 Credit Agreement dated as of July 19, 1994 (as heretofore amended, the "Credit Agreement") among FLEMING COMPANIES, INC., the BANKS party thereto, the AGENTS party thereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Managing Agent. W I T N E S S E T H: WHEREAS, the Borrower has advised the Banks that due to the David's Supermarkets Litigation (as defined below) it needs certain waivers under the Credit Agreement and, subject to the terms and conditions hereof, the Banks party hereto are willing to grant certain waivers under the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. (a) Unless otherwise specifically defined herein, each term used herein that is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. (b) In addition, the following term shall have the following meaning: "David's Supermarkets Litigation" means David's Supermarkets, Inc. v. Fleming Companies, Inc., et al., No. 246-93 (District Court, 18th Judicial District, Johnson County, Texas), including the verdict or any judgment entered therein or any payment of such judgment or in settlement thereof. SECTION 2. Certain Waivers. (a) The Banks hereby waive the requirements of clause (c) of Section 3.01 of the Credit Agreement to the limited extent that the representations and warranties contained in Sections 4.04(c) and 4.05 of the Credit Agreement are not true solely on account of the David's Supermarkets Litigation, and any representation and warranty deemed made by the Borrower on or after the date hereof pursuant to Section 3.01 of the Credit Agreement shall be deemed qualified to such extent. (b) The Banks hereby waive any Default that may have occurred as a result of the Borrower at any time prior to the date hereof having made or been deemed to have made the representations and warranties set forth in Sections 4.04(c) and 4.05 of the Credit Agreement without qualification by reference to the David's Supermarkets Litigation. (c) The Banks hereby waive (i) any Default under any Operative Agreement that may occur as a result of any Lien existing in favor of the plaintiff in the David's Supermarkets Litigation (A) in the nature of a garnishment against Receivables from Texas customers of the Borrower or any of its Subsidiaries or (B) arising by virtue of the filing of an abstract of a judgment in the David's Supermarkets Litigation and (ii) the requirements of clause (c) of Section 3.01 of the Credit Agreement to the limited extent that any representation and warranty of the Borrower or a Subsidiary in the other Operative Agreements is not true solely on account of the existence of such Liens, and any representation and warranty deemed made by the Borrower on or after the date hereof pursuant to Section 3.01 of the Credit Agreement shall be deemed qualified to the extent set forth in clauses (i) and (ii). (d) The foregoing waivers (including the references to any representation and warranty made on or after the date hereof being deemed qualified) shall be effective solely during the period ending 5:00 P.M. (New York City time) on April 10, 1996 and, in the case of clause (c), thereafter shall not apply to any such Lien even if such Lien first arose during such period. SECTION 3. Borrowings. The Borrower agrees that during the period from the date hereof until 5:30 P.M. (New York City time) on April 10, 1996, it will not give any Notice of Borrowing for Tranche A Loans in an amount in excess of its actual cash needs in the ordinary course of business (net of other sources of funds available or expected to be available to it, including previous Borrowings, but not including any need in respect of the David's Supermarkets Litigation) during the three-day period beginning with the related date of Borrowing, determined consistent with the Borrower's historical cash management practices and in light of any failure or projected failure of the Borrower to receive payment from Texas customers on account of Liens of the character described Section 2(c), as certified in reasonable detail by the Borrower's Chief Financial Officer or Treasurer in a certificate accompanying such Notice of Borrowing, provided that the maximum amount of Borrowings that the Borrower may make the subject of a Notice of Borrowing while this Waiver is in effect may not exceed $60,000,000. SECTION 4. Representations Correct; No Default. The Borrower represents and warrants that, except as expressly waived hereby, on and as of the date hereof (i) the representations and warranties contained in the Credit Agreement and each other Operative Agreement are true as though made on and as of the date hereof and (ii) no Default has occurred and is continuing. SECTION 5. Counterparts; Effectiveness. (a) This Waiver may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (b) This Waiver shall become effective as of the date hereof when the Managing Agent shall have received duly executed counterparts hereof signed by the Borrower and the Required Banks (or, in the case of any Bank as to which an executed counterpart shall not have been received, the Managing Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such Bank). (c) Except as expressly set forth herein, the waivers contained herein shall not constitute a waiver or amendment of any term or condition of the Credit Agreement or any other Operative Agreement, and all such terms and conditions shall remain in full force and effect and are hereby ratified and confirmed in all respects. SECTION 4. Governing Law. THIS WAIVER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed by their respective authorized officers as of the day and year first above written. FLEMING COMPANIES, INC. By Title: BANKS MORGAN GUARANTY TRUST COMPANY OF NEW YORK By Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By Title: THE BANK OF NOVA SCOTIA By Title: CANADIAN IMPERIAL BANK OF COMMERCE By Title: CREDIT SUISSE By Title: By Title: DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By Title: By Title: THE FUJI BANK, LIMITED By Title: NATIONSBANK OF TEXAS, N.A. By Title: SOCIETE GENERALE, SOUTHWEST AGENCY By Title: THE SUMITOMO BANK LTD. HOUSTON AGENCY By Title: THE SUMITOMO BANK, LIMITED NEW YORK BRANCH By Title: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By Title: THE TORONTO-DOMINION BANK By Title: UNION BANK OF SWITZERLAND, HOUSTON AGENCY By Title: By Title: FIRST INTERSTATE BANK OF CALIFORNIA By Title: By Title: WACHOVIA BANK OF GEORGIA, NATIONAL ASSOCIATION By Title: CREDIT LYONNAIS NEW YORK BRANCH By Title: COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By Title: By Title: THE SANWA BANK LIMITED, DALLAS AGENCY By Title: BANQUE NATIONALE DE PARIS By Title: BOATMEN'S FIRST NATIONAL BANK OF OKLAHOMA By Title: CITIBANK N.A. By Title: DAI-ICHI KANGYO BANK, LTD. NEW YORK BRANCH By Title: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY By Title: LTCB TRUST COMPANY By Title: THE MITSUBISHI BANK, LIMITED HOUSTON AGENCY By Title: NATIONAL WESTMINSTER BANK Plc NASSAU BRANCH By Title: NATIONAL WESTMINSTER BANK Plc NEW YORK BRANCH By Title: UNITED STATES NATIONAL BANK OF OREGON By Title: BANK OF AMERICA ILLINOIS By Title: PNC BANK, NATIONAL ASSOCIATION By Title: BANK OF HAWAII By Title: THE BANK OF TOKYO, LTD., DALLAS AGENCY By Title: BANQUE PARIBAS By Title: By Title: BANQUE FRANCAISE DU COMMERCE EXTERIEUR By Title: By Title: BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY By Title: By Title: BHF-BANK AKTIENGESELLSCHAFT, NEW YORK BRANCH By Title: By Title: DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By Title: By Title: FIRST HAWAIIAN BANK By Title: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By Title: LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, N.A. By Title: MANUFACTURERS AND TRADERS TRUST COMPANY By Title: THE MITSUBISHI TRUST AND BANKING CORPORATION By Title: THE MITSUI TRUST AND BANKING COMPANY, LIMITED By Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By Title: WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch By Title: By Title: WESTDEUTSCHE LANDESBANK GIROZENTRALE, Cayman Islands Branch By Title: By Title: THE YASUDA TRUST AND BANKING COMPANY, LTD. By Title: THE FIRST NATIONAL BANK OF CHICAGO By Title: BANK HAPOALIM B.M., LOS ANGELES BRANCH By Title: By Title: THE BANK OF IRELAND By Title: KREDIETBANK N.V. By Title: By Title: MERCANTILE BANK OF ST. LOUIS NATIONAL ASSOCIATION By Title: THE SUMITOMO BANK OF CALIFORNIA By Title: THE SUMITOMO TRUST & BANKING CO., LTD. NEW YORK BRANCH By Title: EX-4.15 3 EXHIBIT 4.15 AMENDMENT NO. 5 TO CREDIT AGREEMENT AMENDMENT dated as of April 4, 1996, to the $2,200,000,000 Credit Agreement dated as of July 19, 1994 (as heretofore amended, the "Credit Agreement") among FLEMING COMPANIES, INC., the BANKS party thereto, the AGENTS party thereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Managing Agent. W I T N E S S E T H: WHEREAS, the Borrower has advised the Banks that due to the David's Supermarkets Litigation (as defined below) it needs certain amendments of and waivers under the Credit Agreement and, subject to the terms and conditions hereof, the Banks party hereto are willing to agree to such amendments and waivers; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein that is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. Each reference to "hereof," "hereunder," "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. SECTION 2. Amendments and Waivers of Sections 4.04(c) and 4.05 of the Credit Agreement. (a) Section 1.01 of the Credit Agreement is amended by adding a new definition reading as follows: "David's Supermarkets Litigation" means David's Supermarkets, Inc. v. Fleming Companies, Inc., et al., No. 246-93 (District Court, 18th Judicial District, Johnson County, Texas), including the verdict or any judgment entered therein or any payment of such judgment or in settlement thereof. (b) The Banks hereby waive the requirements of clause (c) of Section 3.01 of the Credit Agreement to the limited extent that the representations and warranties contained in Sections 4.04(c) and 4.05 of the Credit Agreement are not true solely on account of the David's Supermarkets Litigation, and any representation and warranty deemed made by the Borrower on or after the date hereof pursuant to Section 3.01 of the Credit Agreement shall be deemed qualified to such extent. (c) The Banks hereby waive any Default that may have occurred as a result of the Borrower at any time prior to the date hereof having made or been deemed to have made the representations and warranties set forth in Sections 4.04(c) and 4.05 of the Credit Agreement without qualification by reference to the David's Supermarkets Litigation. (d) The waivers set forth in Sections 2(b) and (c) (including the references to any representation and warranty made on or after the date hereof being deemed qualified) shall be effective solely during the period ending on the 30th day after the date on which a judgment on the verdict is entered in the David's Supermarkets Litigation, provided that such waivers shall thereafter be effective during any period during which the Borrower has made effective provision for a stay of enforcement of the judgment in the David's Supermarket Litigation. SECTION 3. Waivers of Certain Liens. (a) The Banks hereby waive (i) any Default under any Operative Agreement that may occur as a result of any Lien existing in favor of the plaintiff in the David's Supermarket Litigation (A) in the nature of a garnishment against Receivables from Texas customers of the Borrower or any of its Subsidiaries or (B) arising by virtue of the filing of an abstract of a judgment in the David's Supermarket Litigation and (ii) the requirements of clause (c) of Section 3.01 of the Credit Agreement to the limited extent that any representation and warranty of the Borrower or a Subsidiary in the other Operative Agreements is not true solely on account of the existence of such Liens, and any representation and warranty deemed made by the Borrower on or after the date hereof pursuant to Section 3.01 of the Credit Agreement shall be deemed qualified to the extent set forth in clauses (i) and (ii). (b) The waivers set forth in Section 3(a) (including the references to any representation and warranty made on or after the date hereof being deemed qualified) shall be effective solely during the period ending on the 30th day after the date on which a judgment on the verdict is entered in the David's Supermarkets Litigation and thereafter shall not apply to any such Lien even if such Lien first arose during such period, provided that if on or before the last day of such period the Borrower has made effective provision for a stay of enforcement of the judgment in the David's Supermarkets Litigation, such waivers shall thereafter remain in effect during any period during which stay of enforcement is in effect. SECTION 4. Borrowings. The Borrower agrees that during the period from the date hereof to the earlier of (i) the date on which it has made effective provision for a stay of enforcement of the judgment in the David's Supermarkets Litigation and (ii) the 30th day after the date on which a judgment on the verdict is entered in the David's Supermarkets Litigation, it will not give any Notice of Borrowing for Tranche A Loans in an amount in excess of its actual cash needs in the ordinary course of business (net of other sources of funds available or expected to be available to it, including previous Borrowings, but not including any need in respect of the David's Supermarkets Litigation other than fees and expenses in connection with this Amendment and the Waiver dated as of April 1, 1996, and defense and appeal costs in connection with such Litigation) during the three-day period beginning with the related date of Borrowing, determined consistent with the Borrower's historical cash management practices and in light of any failure or projected failure of the Borrower to receive payment from Texas customers on account of Liens of the character described in Section 3(c), as certified in reasonable detail by the Borrower's Chief Financial Officer or Treasurer in a certificate accompanying such Notice of Borrowing. SECTION 5. Amendment of Amount of Letter of Credit Commitment. Section 1.01 of the Credit Agreement is hereby amended by changing the dollar amount set forth in the definition of "Letter of Credit Commitment" from "$200,000,000" to "$450,000,000". SECTION 6. Calculation of Certain Covenants. The Banks hereby agree that for purposes of calculating compliance with the covenants contained in Sections 5.07, 5.08 and 5.09 of the Credit Agreement, Consolidated Net Worth as at any date and Consolidated Net Income for any period shall be calculated on a pro-forma basis excluding (i) any charges taken for the Borrower's actual or contingent liability to make payment of the judgment in the David's Supermarkets Litigation (but not including any amount attributable to fees and expenses of the Borrower's counsel) and (ii) expenses incurred in connection with this Amendment or the obtaining or maintaining of a supersedeas bond with respect to the David's Supermarkets Litigation. SECTION 7. Amendment to Restricted Payments Covenant. Section 5.14 of the Credit Agreement is hereby amended to read in its entirety as follows: SECTION 5.14. Restricted Payments. Neither the Borrower nor any Subsidiary will declare or make any Restricted Payment except, so long as no Default has occurred and is continuing, (i) during any fiscal quarter prior to the second fiscal quarter of 1996, cash dividends in an aggregate amount that, together with cash dividends declared or made during the three fiscal quarters immediately preceding the quarter during which such cash dividend is declared or made, do not exceed the Restricted Payments Cap, (ii) during any fiscal quarter after the first fiscal quarter of 1996 until the Rating Target Date, cash dividends on shares of common stock at a rate not in excess of $.08 per share per fiscal quarter (such rate to be adjusted from time to time to reflect any stock splits) and (iii) after the Rating Target Date, cash dividends in an aggregate amount in any fiscal year of the Borrower not exceeding the higher of the Restricted Payments Cap and an amount equal to 33 1/3% of Consolidated Net Income for the four fiscal quarters most recently ended minus the amount of any cash dividends declared or made during the three fiscal quarters immediately preceding the quarter during which such cash dividend is declared or made. Nothing in this Section shall prohibit the payment of any dividend or distribution within 45 days after the declaration thereof if such declaration was not prohibited by this Section. SECTION 8. Amendment to Capital Expenditure Limitations. Section 5.16 of the Credit Agreement is hereby amended by changing the table found therein to read in its entirety as follows: Period Amount Effective Date through December 31, 1994 155,000,000 January 1, 1995 through December 31, 1995 155,000,000 January 1, 1996 through December 31, 1996 140,000,000 January 1, 1997 through December 31, 1997 155,000,000 January 1, 1998 through December 31, 1998 160,000,000 January 1, 1999 through December 31, 1999 170,000,000 January 1, 2000 through December 31, 2000 180,000,000 SECTION 9. Amendment to Margin Levels. (a) Amendment to Definition of "Rating Level". Section 1.01 of the Credit Agreement is hereby amended by changing the definition of "Rating Level" to read in its entirety as follows: "Rating Level" means, with respect to the Borrower at any time, the category established as follows: (a) Rating Level I means that a rating of the Borrower's senior unsecured long-term debt of BBB+ or higher by S&P or Baa1 or higher by Moody's is currently in effect; (b) Rating Level II means that a rating of the Borrower's senior unsecured long-term debt of BBB by S&P or Baa2 by Moody's is currently in effect; (c) Rating Level III means that a rating of the Borrower's senior unsecured long-term debt of BBB- by S&P or Baa3 by Moody's is currently in effect; (d) Rating Level IV means that a rating of the Borrower's senior unsecured long-term debt of BB+ by S&P or Ba1 by Moody's is currently in effect; (e) Rating Level V means that a rating of the Borrower's senior unsecured long-term debt of BB by S&P or Ba2 by Moody's is currently in effect; (f) Rating Level VI means that a rating of the Borrower's senior unsecured long-term debt of BB- by S&P or Ba3 by Moody's is currently in effect; and (g) Rating Level VII means that (1) a rating of the Borrower's senior unsecured long-term debt below BB- by S&P or below Ba3 by Moody's is currently in effect or (2), subject to the provisions of Section 1.03, neither S&P nor Moody's has any rating of such debt currently in effect. If on any day the conditions for two Rating Levels are met (each such Rating Level, a "Split Rating" and together, the "Split Ratings"), then the applicable Rating Level for such day shall be the Split Rating with the lower number (i.e., based on the higher rating); provided that (i) if the numbers of the Split Ratings are two or three numbers apart, the applicable Rating Level shall be the Rating Level one number lower than the Split Rating with the higher number, (ii) if the numbers of the Split Ratings are four or five numbers apart, the applicable Rating Level shall be the Rating Level two numbers below the Split Rating with the higher number, and (iii) if the numbers of the Split Ratings are six numbers apart, Rating Level IV shall be deemed to exist. (b) Amendment to Base Rate Margin. The table set out in Section 2.05(a) is hereby amended to read in its entirety as follows: Rating Level Base Rate Margin Additional Margin I, II, III 0% 0.1250% IV 0% 0.1875% V 0% 0.2500% VI 0.1250% 0.3750% VII 0.625% 0.3750% (c) Amendment to CD Margin. The table set out in Section 2.05(b) is hereby amended to read in its entirety as follows: Rating Level CD Margin Additional Margin I 0.3750% 0.1250% II 0.4500% 0.1250% III 0.5750% 0.1250% IV 0.8125% 0.1875% V 1.1250% 0.2500% VI 1.2500% 0.3750% VII 1.7500% 0.3750% (d) Amendment to Euro-Dollar Margin. The table set out in Section 2.05(c) is amended to read in its entirety as follows: Euro-Dollar Rating Level Margin Additional Margin I 0.2500% 0.1250% II 0.3250% 0.1250% III 0.4500% 0.1250% IV 0.6875% 0.1875% V 1.0000% 0.2500% VI 1.1250% 0.3750% VII 1.6250% 0.3750% (e) Amendment to Commitment Fee Rate. The table set out in Section 2.07(a)(i) is hereby amended to read in its entirety as follows: Rating Level Commitment Fee Rate I 0.0000% II 0.0250% III 0.0625% IV 0.0875% V, VI or VII 0.1250% (f) Amendment to Facility Fee Rate. The table set out in Section 2.07(b) is hereby amended to read in its entirety as follows: Rating Level Facility Fee Rate I, II or III 0.1250% IV 0.1875% V 0.2500% VI or VII 0.3750% (g) Amendment to Letter of Credit Fee Rate. The table set out in Section 2.07(c) is hereby amended to read in its entirety as follows: Rating Level Letter of Credit Fee Rate I 0.2500% II 0.3250% III 0.4500% IV 0.6875% V 1.0000% VI 1.1250% VII 1.6250% (h) For the sake of avoidance of doubt, the parties confirm that since the Credit Watch Period is no longer relevant, no Margins or Fee Rates have been specified for it. SECTION 10. Addition of Morgan Guaranty Trust Company of New York as Issuing Bank. Section 1.01 of the Credit Agreement is hereby amended by changing the definition of "Issuing Bank" to read in its entirety as follows: "Issuing Bank" means NationsBank of Texas, N.A., Societe Generale, Southwest Agency, or Morgan Guaranty Trust Company of New York, as issuer of a Letter of Credit. SECTION 11. Representations Correct; No Default. The Borrower represents and warrants that, except as expressly waived hereby, on and as of the date hereof (i) the representations and warranties contained in the Credit Agreement and each other Operative Agreement are true as though made on and as the date hereof and (ii) no Default has occurred and is continuing. SECTION 12. Counterparts; Effectiveness; Etc. (a) This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (b) This Amendment shall become effective as of the date hereof when the Managing Agent shall have received duly executed counterparts hereof signed by the Borrower and the Required Banks (or, in the case of any Bank as to which an executed counterpart shall not have been received, the Managing Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such Bank). When the amendments contained in Section 9 become effective, interest on Fixed Rate Loans outstanding on the date of effectiveness shall accrue for each day during the applicable Interest Period on or after such date with a CD Margin or Euro-Dollar Margin giving effect to such amendments. (c) Promptly after this Amendment has become effective, the Borrower shall pay (i) to the Managing Agent for the account of each Bank in immediately available funds, an amendment fee in an amount equal to .25% of the sum (as at the opening of business on the date hereof) of (A) the Tranche A Commitment of such Bank and (B) the aggregate outstanding principal amount of the Tranche C Loans of such Bank, and (ii) to the Managing Agent for its own account in immediately available funds, an agent fee in the amount previously agreed to between the Borrower and the Managing Agent. (d) Except as expressly set forth herein, the waivers contained herein shall not constitute a waiver or amendment of any term or condition of the Credit Agreement or any other Operative Agreement, and all such terms and conditions shall remain in full force and effect and are hereby ratified and confirmed in all respects. SECTION 13. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. FLEMING COMPANIES, INC. By Title: BANKS MORGAN GUARANTY TRUST COMPANY OF NEW YORK By Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By Title: THE BANK OF NOVA SCOTIA By Title: CANADIAN IMPERIAL BANK OF COMMERCE By Title: CREDIT SUISSE By Title: By Title: DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By Title: By Title: THE FUJI BANK, LIMITED By Title: NATIONSBANK OF TEXAS, N.A. By Title: SOCIETE GENERALE, SOUTHWEST AGENCY By Title: THE SUMITOMO BANK LTD. HOUSTON AGENCY By Title: THE SUMITOMO BANK, LIMITED NEW YORK BRANCH By Title: TEXAS COMMERCE BANK NATIONAL ASSOCIATION By Title: THE TORONTO-DOMINION BANK By Title: UNION BANK OF SWITZERLAND, HOUSTON AGENCY By Title: By Title: FIRST INTERSTATE BANK OF CALIFORNIA By Title: By Title: WACHOVIA BANK OF GEORGIA, NATIONAL ASSOCIATION By Title: CREDIT LYONNAIS NEW YORK BRANCH By Title: COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By Title: By Title: THE SANWA BANK LIMITED, DALLAS AGENCY By Title: BANQUE NATIONALE DE PARIS By Title: BOATMEN'S FIRST NATIONAL BANK OF OKLAHOMA By Title: CITIBANK N.A. By Title: DAI-ICHI KANGYO BANK, LTD. NEW YORK BRANCH By Title: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY By Title: LTCB TRUST COMPANY By Title: THE MITSUBISHI BANK, LIMITED HOUSTON AGENCY By Title: NATIONAL WESTMINSTER BANK Plc NASSAU BRANCH By Title: NATIONAL WESTMINSTER BANK Plc NEW YORK BRANCH By Title: UNITED STATES NATIONAL BANK OF OREGON By Title: BANK OF AMERICA ILLINOIS By Title: PNC BANK, NATIONAL ASSOCIATION By Title: BANK OF HAWAII By Title: THE BANK OF TOKYO, LTD., DALLAS AGENCY By Title: BANQUE PARIBAS By Title: By Title: BANQUE FRANCAISE DU COMMERCE EXTERIEUR By Title: By Title: BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY By Title: By Title: BHF-BANK AKTIENGESELLSCHAFT, NEW YORK BRANCH By Title: By Title: DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By Title: By Title: FIRST HAWAIIAN BANK By Title: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By Title: LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, N.A. By Title: MANUFACTURERS AND TRADERS TRUST COMPANY By Title: THE MITSUBISHI TRUST AND BANKING CORPORATION By Title: THE MITSUI TRUST AND BANKING COMPANY, LIMITED By Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By Title: WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch By Title: By Title: WESTDEUTSCHE LANDESBANK GIROZENTRALE, Cayman Islands Branch By Title: By Title: THE YASUDA TRUST AND BANKING COMPANY, LTD. By Title: THE FIRST NATIONAL BANK OF CHICAGO By Title: BANK HAPOALIM B.M., LOS ANGELES BRANCH By Title: By Title: THE CHASE MANHATTAN BANK, N.A. By Title: KREDIETBANK N.V. By Title: By Title: MERCANTILE BANK OF ST. LOUIS NATIONAL ASSOCIATION By Title: THE SUMITOMO BANK OF CALIFORNIA By Title: THE SUMITOMO TRUST & BANKING CO., LTD. NEW YORK BRANCH By Title: BANK OF IRELAND, CAYMAN ISLANDS BRANCH By Title: EX-23 4 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in: (I) Registration Statement No. 2-98602 (1985 Stock Option Plan) on Form S-8; (ii) Registration Statement No. 33-18867 (Godfrey Company 1981 Stock Option Plan and 1984 Nonqualified Stock Option Plan) on Form S-8; (iii) Registration Statement No. 33-36586 (1990 Fleming Stock Option Plan) on Form S-8; (iv) Registration Statement No. 33-56241 (Dividend Reinvestment and Stock Purchase Plan) on Form S-3; (v) Registration Statement No. 33-61860 (Debt Securities, Series C) on Form S-3; (vi) Registration Statement No. 33-55369 (Senior Notes) on Form S-3 of our report dated February 22, 1996 (April 12, 1996 as to effects of a jury verdict, other resulting legal proceedings and related matters discussed in Subsequent Events note) appearing in this Annual Report on Form 10-K of Fleming Companies, Inc. for the year ended December 30, 1995. DELOITTE & TOUCHE LLP Oklahoma City, Oklahoma April 12, 1996 -----END PRIVACY-ENHANCED MESSAGE-----