-----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, FAA1EBrchg4s3R42G37EOqZxenZ3aftc5SF3dsygBAl8cO3yY1BD7jc3lZTcb5md Ut3l3IluYaQP4NcG1QFv0A== 0000909334-98-000069.txt : 19980819 0000909334-98-000069.hdr.sgml : 19980819 ACCESSION NUMBER: 0000909334-98-000069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980711 FILED AS OF DATE: 19980818 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEMING COMPANIES INC /OK/ CENTRAL INDEX KEY: 0000352949 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 480222760 STATE OF INCORPORATION: OK FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08140 FILM NUMBER: 98693622 BUSINESS ADDRESS: STREET 1: 6301 WATERFORD BLVD STREET 2: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73126 BUSINESS PHONE: 4058407200 MAIL ADDRESS: STREET 1: P O BOX 26647 CITY: OKLAHOMA CITY STATE: OK ZIP: 73216-0647 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 11, 1998 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number 1-8140 FLEMING COMPANIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 48-0222760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6301 Waterford Boulevard, Box 26647 Oklahoma City, Oklahoma 73126 (Address of principal executive offices) (Zip Code) (405) 840-7200 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ The number of shares outstanding of each of the issuer's classes of common stock, as of August 7, 1998 is as follows: Class Shares Outstanding Common stock, $2.50 par value 38,409,000 INDEX Page Number Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Earnings - 12 Weeks Ended July 11, 1998, and July 12, 1997 Consolidated Condensed Statements of Earnings - 28 Weeks Ended July 11, 1998, and July 12, 1997 Consolidated Condensed Balance Sheets - July 11, 1998, and December 27, 1997 Consolidated Condensed Statements of Cash Flows - 28 Weeks Ended July 11, 1998, and July 12, 1997 Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. OTHER INFORMATION: Item 1. Legal Proceedings Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Earnings For the 12 weeks ended July 11, 1998, and July 12, 1997 (In thousands, except per share amounts)
1998 1997 ---- ---- Net sales $3,505,943 $3,550,654 Costs and expenses: Cost of sales 3,158,295 3,219,989 Selling and administrative 290,941 274,878 Interest expense 35,861 36,223 Interest income (8,308) (10,940) Equity investment results 3,248 3,239 Litigation charge 2,216 - ---------- ---------- Total costs and expenses 3,482,253 3,523,389 ---------- ---------- Earnings before taxes 23,690 27,265 Taxes on income 10,051 14,450 ---------- ---------- Net earnings $ 13,639 $ 12,815 ========== ========== Basic and diluted net earnings per share $.36 $.34 Dividends paid per share $.02 $.02 Weighted average shares outstanding: Basic 37,859 37,804 Diluted 38,027 37,829 - ------------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Statements of Earnings For the 28 weeks ended July 11, 1998, and July 12, 1997 (In thousands, except per share amounts)
1998 1997 ---- ---- Net sales $8,073,069 $8,302,685 Costs and expenses: Cost of sales 7,276,177 7,539,338 Selling and administrative 662,370 638,594 Interest expense 87,063 85,045 Interest income (19,613) (25,294) Equity investment results 6,837 7,317 Litigation charge 5,170 19,218 ---------- ---------- Total costs and expenses 8,018,004 8,264,218 ---------- ---------- Earnings before taxes 55,065 38,467 Taxes on income 26,156 20,388 ---------- ---------- Net earnings $ 28,909 $ 18,079 ========== ========== Basic and diluted net earnings per share $.76 $.48 Dividends paid per share $.04 $.04 Weighted average shares outstanding: Basic 37,828 37,802 Diluted 37,996 37,818 - ------------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Balance Sheets (In thousands)
July 11, December 27, Assets 1998 1997 ---- ---- Current assets: Cash and cash equivalents $ 21,974 $ 30,316 Receivables 416,607 334,278 Inventories 984,644 1,018,666 Other current assets 95,383 111,730 ---------- ---------- Total current assets 1,518,608 1,494,990 Investments and notes receivable 136,751 150,221 Investment in direct financing leases 197,101 201,588 Property and equipment 1,627,055 1,598,786 Less accumulated depreciation and amortization (697,146) (648,943) ---------- ---------- Net property and equipment 929,909 949,843 Other assets 193,209 164,295 Goodwill 945,679 963,034 ---------- ---------- Total assets $3,921,257 $3,923,971 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 860,185 $ 831,339 Current maturities of long-term debt 41,418 47,608 Current obligations under capital leases 22,183 21,196 Other current liabilities 240,521 254,454 ---------- ---------- Total current liabilities 1,164,307 1,154,597 Long-term debt 1,092,473 1,127,311 Long-term obligations under capital leases 366,965 367,068 Deferred income taxes 65,646 61,425 Other liabilities 103,384 123,898 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share 96,313 95,660 Capital in excess of par value 509,063 504,451 Reinvested earnings 564,168 536,792 Accumulated other comprehensive income: Cumulative currency translation adjustment - (4,922) Additional minimum pension liability (37,715) (37,715) ---------- ---------- Accumulated other comprehensive income (37,715) (42,637) Less ESOP note (3,347) (4,594) ---------- ---------- Total shareholders' equity 1,128,482 1,089,672 ---------- ---------- Total liabilities and shareholders' equity $3,921,257 $3,923,971 ========== ==========
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Consolidated Condensed Statements of Cash Flows For the 28 weeks ended July 11, 1998, and July 12, 1997 (In thousands)
1998 1997 ---- ---- Cash flows from operating activities: Net earnings $ 28,909 $ 18,079 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 98,226 98,625 Credit losses 7,914 11,235 Deferred income taxes 11,331 (8,101) Equity investment results 6,837 7,317 Consolidation and restructuring reserve activity (4,623) (2,144) Change in assets and liabilities, excluding effect of acquisitions: Receivables (92,934) 5,300 Inventories 34,022 120,583 Accounts payable 28,846 (192,448) Other assets and liabilities (18,860) (925) Other adjustments, net (4,310) (2,220) -------- -------- Net cash provided by operating activities 95,358 55,301 -------- -------- Cash flows from investing activities: Collections on notes receivable 25,845 32,536 Notes receivable funded (15,280) (24,859) Purchase of property and equipment (84,474) (49,405) Proceeds from sale of property and equipment 14,055 8,665 Investments in customers (1,009) (1,405) Proceeds from sale of investment 3,483 2,196 Businesses acquired - (9,572) Other investing activities 4,430 6,189 -------- -------- Net cash used in investing activities (52,950) (35,655) -------- -------- Cash flows from financing activities: Proceeds from long-term borrowings 35,000 110,000 Principal payments on long-term debt (76,028) (177,493) Principal payments on capital lease obligations (11,929) (10,697) Sale of common stock under incentive stock and stock ownership plans 4,196 301 Dividends paid (1,541) (1,505) Other financing activities (448) (31) -------- -------- Net cash used in financing activities (50,750) (79,425) -------- -------- Net decrease in cash and cash equivalents (8,342) (59,779) Cash and cash equivalents, beginning of period 30,316 63,667 -------- -------- Cash and cash equivalents, end of period $ 21,974 $ 3,888 ======== ======== Supplemental information: Cash paid for interest $97,633 $82,145 Cash paid for taxes $11,021 $24,817 - ------------------------------------------------------------------------------
Fleming Companies, Inc. See notes to consolidated condensed financial statements. Notes to Consolidated Condensed Financial Statements 1. The consolidated condensed balance sheet as of July 11, 1998, and the consolidated condensed statements of earnings and cash flows for the 12-week and 28-week periods ended July 11, 1998, and for the 12-week and 28-week periods ended July 12, 1997, have been prepared by the company, without audit. In the opinion of management, all adjustments necessary to present fairly the company's financial position at July 11, 1998, and the results of operations and cash flows for the periods presented have been made. All such adjustments are of a normal, recurring nature except as disclosed. Both basic and diluted earnings per share are computed based on net earnings divided by weighted average shares as appropriate for each calculation. The preparation of the consolidated condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company's 1997 annual report on Form 10-K. 3. The LIFO method of inventory valuation is used for determining the cost of most grocery and certain perishable inventories. The excess of current cost of LIFO inventories over their stated value was $40 million at July 11, 1998, and $36 million at December 27, 1997. 4. Sales and operating earnings for the company's food distribution and retail food segments are presented below.
For the 12 weeks ended July 11, July 12, ($ in millions) 1998 1997 ------- ------- Sales: Food distribution $3,139 $3,180 Intersegment elimination (451) (419) ------ ------ Net food distribution 2,688 2,761 Retail food 818 790 ------ ------ Total sales $3,506 $3,551 ====== ====== Operating earnings: Food distribution $62 $65 Retail food 21 22 Corporate expense (26) (31) ------ ------ Total operating earnings 57 56 Interest expense (36) (36) Interest income 8 10 Equity investment results (3) (3) Litigation charge (2) - ------ ------ Earnings before taxes $24 $27 ====== ======
For the 28 weeks ended July 11, July 12, ($ in millions) 1998 1997 ------- ------- Sales: Food distribution $7,235 $7,465 Intersegment elimination (1,061) (1,016) ------ ------ Net food distribution 6,174 6,449 Retail food 1,899 1,854 ------ ------ Total sales $8,073 $8,303 ====== ====== Operating earnings: Food distribution $154 $151 Retail food 40 49 Corporate expense (59) (75) ------ ------ Total operating earnings 135 125 Interest expense (87) (85) Interest income 19 24 Equity investment results (7) (7) Litigation charge (5) (19) ------ ------ Earnings before taxes $ 55 $ 38 ====== ======
General corporate expenses are not allocated to food distribution and retail food segments. The transfer pricing between segments is at cost. Operating earnings for 1997 have been restated due to adopting SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information. 5. The company's comprehensive income totaled $13.6 million and $12.8 million for the 12 weeks ended July 11, 1998 and July 12, 1997, respectively. Comprehensive income totaled $33.8 million and $18.1 million for the 28 weeks ended July 11, 1998 and July 12, 1997, respectively. Other comprehensive income is comprised of foreign currency translation and minimum pension liability adjustments. 6. In accordance with applicable accounting standards, the company records a charge reflecting contingent liabilities (including those associated with litigation matters) when management determines that a material loss is "probable" and either "quantifiable" or "reasonably estimable." Additionally, the company discloses material loss contingencies when the likelihood of a material loss is deemed to be greater than "remote" but less than "probable." Set forth below is information regarding certain material loss contingencies and charges related to litigation matters: David's. The company was sued by David's Supermarkets, Inc. ("David's") in 1993 for allegedly overcharging for products during a three-year period. In April 1996, judgment of $211 million was entered against the company and the company recorded a $7.1 million liability. During the second quarter of 1996, the judgment was vacated, a new trial was granted and the accrual was reduced to $650,000. Although the company denied the allegations, in order to eliminate the uncertainty and expense of protracted litigation, the company paid $19.9 million to the plaintiff in April 1997 in exchange for dismissal, with prejudice, of all plaintiff's claims against the company. This settlement resulted in a charge to first quarter 1997 earnings of $19.2 million ($9 million after-tax or $.24 per share). Furr's. Furr's Supermarkets, Inc. ("Furr's"), which purchased approximately $500 million of products from the company in 1997 under a supply contract originally set to expire in 2001, filed suit against the company in February 1997 claiming it was overcharged for products. Fleming denied Furr's allegations. In October 1997, Fleming and Furr's reached an agreement dismissing all litigation between the parties. Furr's has agreed to purchase Fleming's El Paso product supply center, together with related inventory and equipment. The sale is currently scheduled to close in mid-October 1998. Under the terms of the settlement agreement, Fleming is paying Furr's $800,000 per month as a refund of fees and charges. The payments will cease upon the closing of the sale. During the first quarter of 1998, Fleming recorded a charge of $4 million ($2 million after-tax or $.05 per share) relating to this matter. Fleming does not expect to incur any additional impairment resulting from Furr's. Randall's. In July 1997, Randall's Food Markets, Inc. ("Randall's"), initiated arbitration proceedings against Fleming claiming it had been overcharged for products by approximately $54 million during a 4 1/2 year period. In 1997, Randall's purchased approximately $490 million of products from Fleming under an eight-year supply contract entered into in 1993. On July 9, 1998, the arbitration panel resolved the dispute, denied Randall's claim for significant damages and terminated the supply contract between Fleming and Randall's. The company continues to supply Randall's and expects this to be the case until Randall's commences self-distribution sometime in 1999. Although there is no expected impairment adjustment, downsizing costs are expected but cannot yet be quantified. Class Action Suits. In 1996, the company and certain of its present and former officers and directors were named as defendants in nine purported class action suits filed by certain stockholders and one purported class action suit filed by a noteholder. In April 1997, the court consolidated the stockholder cases as City of Philadelphia, et al. v. Fleming Companies, Inc., et al.; the noteholder case was also consolidated, but only for pre-trial purposes. A complaint has been filed in the consolidated cases asserting liability for the company's alleged failure to properly account for and disclose the contingent liability created by the David's litigation and by the company's alleged "deceptive business practices." The plaintiffs claim that these alleged failures and practices led to the David's litigation and to other material contingent liabilities, caused the company to change its manner of doing business at great cost and loss of profit, and materially inflated the trading price of the company's common stock. The company denies each of these allegations. During the first quarter of 1998, the noteholder case was dismissed, without prejudice, for failure to state a cause of action. The plaintiff has asked the court to reconsider the matter. The plaintiffs in the remaining case seek undetermined but significant damages and management is unable to predict the ultimate outcome of this litigation. However, if the court ruling described below is upheld, Fleming believes the litigation will not have a material adverse effect on the company's liquidity or consolidated financial position. In November 1997, the company won a declaratory judgment in the U.S. District Court for the Western District of Oklahoma against certain of its insurance carriers regarding directors and officers insurance policies ("D&O policies") issued to Fleming for the benefit of its officers and directors. On motion for summary judgment, the court ruled that the company's exposure, if any, under the class action suits is covered by certain D&O policies written by the insurance carriers (aggregating $60 million) and that the "larger settlement rule" will be applicable to the case. According to the trial court, under the larger settlement rule a D&O insurer is liable for the entire amount of coverage available under a policy even if there is some overlap in the liability created by the insured individuals and the uninsured corporation. If a corporation's liability is increased by uninsured parties beyond that of the insured individuals, then that portion of the liability is the sole obligation of the corporation. The court also held that allocation is not available to the insurance carriers as an affirmative defense. The insurance carriers have appealed. Century. Century Shopping Center Fund I ("Century Fund I") commenced an action in November 1988 in the Milwaukee County Circuit Court, State of Wisconsin, seeking injunctive relief and monetary damages of an unspecified amount. The plaintiff originally obtained a temporary restraining order preventing the company from closing a store at the Howell Plaza Shopping Center, for which the plaintiff was the landlord, and from opening a new store at a competing shopping center located nearby. Shortly thereafter, the order was dissolved by the court and the stores opened and closed as scheduled. Following the closure of the store, a number of shopping center tenants and Century Fund I experienced financial difficulty ultimately resulting in bankruptcy. In June 1993, three former tenants of the Howell Plaza Shopping Center filed another case in the same court and in September 1993, the trustee in bankruptcy for Howell Plaza, Inc. (the predecessor to Century Fund I and its successor as company's landlord) filed a third case. The allegations of these cases are very similar to the allegations made in the Century Fund I case. In November 1993, Century Fund I amended its complaint to allege breach of contract, tortious interference with contract, tortious interference to business, defamation, attempted monopolization, conspiracy to monopolize, conspiracy to restrain trade and monopolization. Plaintiffs claim that the company and the company's new landlord conspired to force the Howell Plaza Shopping Center out of business. The cases have been consolidated and are set for trial in October 1998. Plaintiffs seek actual, consequential, treble and punitive damages, attorneys' fees, court costs and other relief. In March 1997, plaintiffs supplied the company with an analysis of damages alleging actual damages, after trebling but excluding any punitive damages, of approximately $18 million. In July 1997, the trial court granted plaintiffs' motion for summary judgment with respect to their breach of contract claim against Fleming (as to liability only, not as to damages). During June 1998, on Fleming's motion to reconsider, the trial court modified its earlier ruling and found Fleming had breached the contract's implied covenant of good faith and fair dealing for failing to return the leased premises to the shopping center for re-leasing after the new store was opened. Management is unable to predict the ultimate outcome of this matter. However, an unfavorable outcome in the litigation could have a material adverse effect on the company. Tru Discount Foods. Fleming brought suit on a note and an open account against its former customer, Tru Discount Foods. In December 1997, the defendant amended its counter claim against the company alleging fraud, overcharges for products and violations of the Oklahoma Deceptive Trade Practices Act. Although Tru Discount Foods has not quantified damages, it has made demand in the amount of $8 million. Management is unable to predict the ultimate outcome of this matter. However, an unfavorable outcome in the litigation could have a material adverse effect on the company. Don's United Super. On March 18, 1998 the company and two retired executives were named in a suit filed in the United States District Court for the Western District of Missouri by approximately 20 current and former customers of the company (Don's United Super, et al. v. Fleming, et al.). Plaintiffs operate 24 retail grocery stores in the St. Joseph and Kansas City metropolitan areas. Previously, two cases had been filed in the same court (R&D Foods, Inc. et al. v. Fleming, et al. and Robandee United Super, Inc. et al. v. Fleming, et al.) by 10 customers, some of whom are plaintiffs in the Don's case. The earlier two cases, which principally seek an accounting of the company's expenditure of certain joint advertising funds, have been consolidated. Causes of action in these cases relating to supply contracts containing arbitration clauses have been sent to arbitration and all remaining causes of action have been stayed pending the arbitration. The Don's suit alleges product overcharges, breach of contract, misrepresentation, fraud, and RICO violations and seeks recovery of actual, punitive and treble damages and a declaration that certain contracts are voidable at the option of the plaintiffs. Damages have not been quantified. However, the time period during which the alleged overcharges took place exceeds 25 years with respect to some plaintiffs, and the company anticipates that the plaintiffs will allege substantial monetary damages. The company intends to vigorously defend its interests. Management is currently unable to predict the ultimate outcome of this litigation. However, based upon the plaintiffs' allegations, an unfavorable outcome in this litigation could have a material adverse effect on the company. Other. The company utilizes numerous computer systems which were developed employing six digit date structures (i.e., two digits each for the month, day and year). Where date logic requires the year 2000 or beyond, such date structures may produce inaccurate results. Management has implemented a program to comply with year 2000 requirements on a system-by-system basis. Fleming's plan includes extensive systems testing and is expected to be substantially completed by the first quarter of 1999. Program costs to comply with year 2000 requirements are being expensed as incurred. Failure to ensure that the company's computer systems are year 2000 compliant could have a material adverse effect on the company's operations. The company is also assessing the status of its vendors' and customers' year 2000 readiness through meetings, discussions, notices and questionaires. Vendor and customer responses and feedback are not conclusive. Failure of the company's suppliers or its customers to become year 2000 compliant might also have a material adverse impact on the company's operations. The company's facilities and operations are subject to various laws, regulations and judicial and administrative orders concerning protection of the environment and human health, including provisions regarding the transportation, storage, distribution, disposal or discharge of certain materials. In conformity with these provisions, the company has a comprehensive program for testing 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 the anticipated costs of all known remediation requirements. The company and others have been designated by the U.S. Environmental Protection Agency ("EPA") and by similar state agencies as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state laws, as applicable, with respect to EPA-designated Superfund sites. While liability under CERCLA for remediation at such sites is generally joint and several with other responsible parties, the company believes that, to the extent it is ultimately determined to be liable for the expense of remediation at any site, such liability will not result in a material adverse effect on its consolidated financial position or results of operations. The company is committed to maintaining the environment and protecting natural resources and human health and to achieving full compliance with all applicable laws, regulations and orders. The company is a party to various other litigation and contingent loss situations arising in the ordinary course of its business including: disputes with customers and former customers; disputes with owners and former owners of financially troubled or failed customers; disputes with employees and former employees regarding labor conditions, wages, workers' compensation matters and alleged discriminatory practices; tax assessments and other matters, some of which are for substantial amounts. However, the company does not believe any such action will result in a material adverse effect on the company. 7. Certain indebtedness is guaranteed by all direct and indirect subsidiaries of the company (except for certain inconsequential subsidiaries), all of which are wholly owned. The guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of the subsidiary guarantors to transfer funds to the company in the form of cash dividends, loans or advances. Full financial statements for the subsidiary guarantors are not presented herein because management does not believe such information would be material. The following summarized financial information, which includes allocations of material corporate-related expenses, for the combined subsidiary guarantors may not necessarily be indicative of the results of operations or financial position had the subsidiary guarantors been operated as independent entities.
July 11, July 12, (In millions) 1998 1997 - ------------------------------------------------------------ Current assets $29 $20 Noncurrent assets $70 $55 Current liabilities $15 $13 Noncurrent liabilities $7 $6
28 weeks ended July 11, July 12, (In millions) 1998 1997 - ------------------------------------------------------------ Net sales $191 $179 Costs and expenses $195 $181 Net earnings (loss) $(3) -
8. The accompanying earnings statements include the following:
12 weeks --------------- (In thousands) 1998 1997 - ------------------------------------------------ Depreciation and amortization (includes amortized costs in interest expense) $41,847 $42,053 Amortized costs in interest expense $1,136 $2,452
28 weeks --------------- (In thousands) 1998 1997 - ------------------------------------------------ Depreciation and amortization (includes amortized costs in interest expense) $98,226 $98,625 Amortized costs in interest expense $2,975 $5,497
9. On July 18, 1998, Robert E. Stauth retired from the positions of Chairman and Chief Executive Officer and resigned from the Board of Directors. The company estimates that approximately $2.5 million pre-tax will be expensed during the third quarter of 1998 relating to the severance package. Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations Results of Operations Management believes that the company's ultimate success will depend on its ability to expand profitable operations while continuing to cut costs. The company has revised its marketing plans and is taking other steps to reverse sales declines. These initiatives include increased marketing emphasis and expanded offerings of Fleming Retail Services, streamlining and expanding Fleming Brands, developing and marketing additional foodservice products and growing retail food operations through remodels, new store development and selective acquisitions. While the company believes considerable progress has been made to date, no assurance can be given that the company will be successful in continuing to cut costs, in reversing sales declines or in increasing higher margin activities. Set forth in the following table is information for the 12-weeks ended July 11, 1998 and July 12, 1997 and the 28-weeks ended July 11, 1998 and July 12, 1997 regarding components of the company's earnings expressed as a percentage of net sales.
July 11, July 12, For the 12-weeks ended 1998 1997 - ----------------------------------------------------------------------------- Net sales 100.00% 100.00% Gross margin 9.92 9.31 Less: Selling and administrative 8.30 7.74 Interest expense 1.02 1.02 Interest income (.23) (.31) Equity investment results .09 .09 Litigation charge .06 - ------ ------ Total expenses 9.24 8.54 ------ ------ Earnings before taxes .68 .77 Taxes on income .29 .41 ------ ------ Net earnings .39% .36% ====== ======
July 11, July 12, For the 28-weeks ended 1998 1997 - ------------------------------------------------------------------------------ Net sales 100.00% 100.00% Gross margin 9.87 9.19 Less: Selling and administrative 8.21 7.69 Interest expense 1.08 1.02 Interest income (.24) (.30) Equity investment results .08 .09 Litigation charge .06 .23 ------ ------ Total expenses 9.19 8.73 ------ ------ Earnings before taxes .68 .46 Taxes on income .32 .24 ------ ------ Net earnings .36% .22% ====== ======
Net sales. Sales for the second quarter (12 weeks) of 1998 decreased by $45 million, or 1%, to $3.5 billion from the same period in 1997. Year to date, sales decreased by $230 million, or 3%, to $8.1 billion from the same period in 1997. Several factors, none of which are individually material, adversely affected net sales including: lower sales to continuing customers due to competitive pressures, lower sales at certain company-owned retail stores and the closing or sale of certain other company-owned retail stores, offset in part by new business added primarily in the second quarter. Although the company expects to continue to add new business, the loss of sales for the near term from Furr's and Randall's going to self-distribution will result in sales comparisons to prior periods being negative for some time. Retail sales generated by the same stores for the second quarter and year-to- date periods in 1998 compared to the same periods in 1997 decreased 3.9% and 4.4%, respectively. The decrease was attributable, in part, to new stores opened by competitors in some markets and aggressive marketing initiatives by certain competitors. Fleming measures inflation using data derived from the average cost of a ton of product sold by the company. Food price inflation year-to-date was 1.9% compared to 1.2% for the same period in 1997. Gross margin. Gross margin for the second quarter of 1998 increased by approximately $17 million, or 5%, to $348 million from $331 million for the same period in 1997, and also increased as a percentage of net sales to 9.92% from 9.31% for the same period in 1997. Year to date, gross margin increased by $34 million, or 4%, to $797 million from $763 million for the same period in 1997, and also increased as a percentage of net sales to 9.87% from 9.19% for the same period in 1997. The increase was due, in part, to an overall increase in the retail food segment, which has the better margins of the two segments, and favorable adjustments for closed stores due to better-than-expected lease buyouts and property dispositions. In addition, product handling expenses, consisting of warehouse, transportation and building expenses, were lower as a percentage of net sales in 1998 compared to 1997, reflecting productivity improvements. Selling and administrative expenses. Selling and administrative expenses for the second quarter of 1998 increased by $16 million, or 6%, to $291 million from $275 million for the same period in 1997 and increased as a percentage of net sales to 8.30% for 1998 from 7.74% in 1997. Year to date, selling and administrative expenses increased by approximately $23 million, or 4%, to $662 million from $639 million in 1997 and increased as a percentage of net sales to 8.21% for 1998 from 7.69% in 1997. The increase was principally due to increased operating expense in the retail food segment. Selling expense was higher than the previous year as the company continues to work at reversing recent sales declines. A charge for $4 million related to the expected outcome of the Furr's agreement was recorded in the first quarter of 1998. See Note 6 in the notes to the consolidated condensed financial statements. A $3.7 million facility consolidation reversal was also recorded during the first quarter. As more fully described in the 1997 Annual Report on Form 10-K, the company has a significant amount of credit extended to its customers through various methods. These methods include customary and extended credit terms for inventory purchases and equity investments in and secured and unsecured loans to certain customers. Secured loans generally have terms up to ten years. Credit loss expense is included in selling and administrative expenses and was $5 million for the second quarter of 1998 which was unchanged from the comparable period in 1997. Year to date, credit loss expense was $8 million in 1998 compared to $11 million in 1997. Credit loss expense has consistently improved over the last few years due to tighter credit practices and reduced emphasis on credit extensions to and investments in customers. Although the company plans to continue these ongoing credit practices, it is not expected that the credit loss expense will remain at current levels. Interest expense. Interest expense of $36 million for the second quarter of 1998 was slightly lower than the same period in 1997. This resulted from a decrease associated with the reduction of interest accruals relating to the favorable settlement of tax assessments, offset substantially by higher average interest rates. Year- to-date interest expense of $87 million was $2 million higher than the same period in 1997 as higher average interest rates were offset in part by lower average debt balances and the reduction of interest accruals relating to the favorable settlement of tax assessments. The company's derivative agreements have consisted of simple "floating-to-fixed rate" interest rate caps and swaps. For the second quarter of 1998, interest rate hedge agreements contributed $0.9 million of net interest expense compared to $1.7 million in the same period of 1997. Year to date, interest rate hedge agreements contributed $2.4 million of net interest expense compared to $4.4 million of net interest expense in 1997. In 1998, hedge agreements covered a lower amount of floating rate debt versus 1997. Interest income. Interest income for the second quarter of 1998 decreased by $3 million to $8 million from $11 million for the same period in 1997. Year to date, interest income decreased by approximately $5 million to $20 million from $25 million in 1997. The decrease is partly due to the sale of notes receivable in the fourth quarter of 1997 when the company sold $29 million of notes receivable with limited recourse and a reduced amount of notes receivable funded. The decrease is also due to a lower balance in investments in direct financing leases. These items reduced the amount available to produce interest income. Equity investment results. The company's portion of operating losses from equity investments for the second quarter of 1998 remained virtually unchanged at $3 million compared to the same period in 1997. Year to date, operating losses from equity investments was also unchanged at $7 million compared to the same period in 1997. Litigation charge. In October 1997, the company began paying Furr's $800,000 per month as part of a settlement agreement. The payments will cease upon the closing of the sale on or around October 19, 1998. In 1998, the $2 million charge in the second quarter and the $5 million charge year-to-date represent this payment. In the first quarter of 1997, the company expensed $19.2 million in settlement of the David's litigation. See Note 6 in the notes to the consolidated condensed financial statements. Taxes on income. The effective tax rate for 1998 is presently estimated at 47.5% which was used to calculate the 1998 year-to-date income tax amount. The tax rate used for the second quarter of 1998 was 42.4% to adjust for the first quarter 1998 rate used of 51.3%. The tax rate used for the second quarter and year to date in 1997 was 53.0%. The lower rates in 1998 were primarily due to the favorable settlement of a tax assessment in the second quarter and anticipated higher earnings in 1998 with basically no change in nondeductible dollar amounts. Litigation and contingencies. From time to time the company faces litigation or other contingent loss situations resulting from owning and operating its assets, conducting its business or complying (or allegedly failing to comply) with federal, state and local laws, rules and regulations which may subject the company to material contingent liabilities. In accordance with applicable accounting standards, the company records as a liability amounts reflecting such exposure when a material loss is deemed by management to be both "probable" and "quantifiable" or "reasonably estimable." Furthermore, the company discloses material loss contingencies in the notes to its financial statements when the likelihood of a material loss has been determined to be greater than "remote" but less than "probable." Such contingent matters are discussed in Note 6 in the notes to the consolidated condensed financial statements. An adverse outcome experienced in one or more of such matters, or an increase in the likelihood of such an outcome, could have a material adverse effect on the company. Also see "Legal Proceedings." Fleming has numerous computer systems which were developed employing six digit date structures (i.e., two digits each for month, day and year). Where date logic requires the year 2000 or beyond, such date structures may produce inaccurate results. Management has implemented a program to comply with year 2000 requirements on a system-by-system basis including both information technology (IT) and non-IT systems (e.g., microcontrollers). Fleming's plan includes extensive systems testing and is expected to be substantially completed by the first quarter of 1999. As of the date of this report, the Company's testing and remediation efforts were on schedule. Based on progress to date, there is no need for a contingency plan and such a plan has not been developed. Failure to ensure that the company's computer systems are year 2000 compliant could have a material adverse effect on the company's operations. The company is also assessing the status of its vendors' and customers' year 2000 readiness through meetings, discussions, and questionnaires. Although responses have not been conclusive, they have been encouraging. Based partially upon these efforts, and the number and diversity of the company's vendors and customers, no contingency plans will be developed regarding the purchase of products from vendors or the sale and delivery of products to customers. Management believes the company's greatest exposure lies in potential transaction disruptions at the consumer level. While the company offers various services and technological products to assist retailers in complying with year 2000 issues, no contingency plans are being developed to deal with lost sales due to problems arising from retailer and consumer interactions. Failure of the company's suppliers or its customers to become year 2000 compliant could have a material adverse impact on the company's operations, sales and earnings. Program costs to comply with year 2000 requirements are being expensed as incurred. Expenditures with third parties are not expected to exceed $10 million. To compensate for the dilutive effect on results of operations, the company has delayed other non-critical development and support initiatives. Accordingly, the company expects that annual information technology expenses will not differ significantly from prior years. Other. Several factors negatively affecting earnings in the first 28-weeks of 1998 are likely to continue for the near term. Management believes that these factors include lower sales, operating losses in certain company-owned retail stores, continuing commitments under the Furr's settlement agreement and legal fees and expenses related to litigation. The company is in the process of strategic planning and has engaged a consulting firm to assist it in identifying the best strategies for the future. The strategic planning process is expected to be complete late this year or early next year. The final plan upon implementation could alter the future cash flows of certain business units such that long-lived asset impairment or dispositions are possible. Management is unable to predict the ultimate outcome of the planning process or any related impairments or dispositions, although such impairments or dispositions could be material. Segment information. Sales and operating earnings for the company's food distribution and retail food segments are presented below.
For the 12 weeks ended July 11, July 12, ($ in millions) 1998 1997 - ----------------------------------------------------------------------------- Sales: Food distribution $2,688 $2,761 Retail food 818 790 ------ ------ Total sales $3,506 $3,551 ====== ====== Operating earnings: Food distribution $62 $65 Retail food 21 22 Corporate expense (26) (31) ------ ------ Total operating earnings $57 $56 ====== ======
For the 28 weeks ended July 11, July 12, ($ in millions) 1998 1997 - ------------------------------------------------------------------------------ Sales: Food distribution $6,174 $6,449 Retail food 1,899 1,854 ------ ------ Total sales $8,073 $8,303 ====== ====== Operating earnings: Food distribution $154 $151 Retail food 40 49 Corporate expense (59) (75) ------ ------ Total operating earnings $135 $125 ====== ======
Operating earnings for industry segments consist of net sales less related operating expenses. Operating expenses exclude interest expense, interest income, equity investment results, litigation charge and taxes on income. General corporate expenses are not allocated to food distribution and retail food segments. The transfer pricing between segments is at cost. Operating earnings for 1997 have been restated as of year-end 1997 due to adopting SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information. Liquidity and Capital Resources Set forth below is certain information regarding the company's capital structure at the end of the second quarter of 1998 and at the end of fiscal 1997:
Capital Structure (In millions) July 11, 1998 December 27, 1997 - ----------------------------------------------------------------------------- Long-term debt $1,134 42.8% $1,175 44.3% Capital lease obligations 389 14.7 388 14.6 ------ ---- ------ ---- Total debt 1,523 57.5 1,563 58.9 Shareholders' equity 1,128 42.5 1,090 41.1 ------ ---- ------ ---- Total capital $2,651 100.0% $2,653 100.0% ====== ===== ====== =====
Note: The above table includes current maturities of long-term debt and current obligations under capital leases. Long-term debt was $41 million lower at the end of the second quarter of 1998 compared to year-end 1997 primarily because net cash provided from operations plus cash proceeds from the sale of assets and investments exceeded net cash required for investing activities and scheduled payments on funded debt and capital leases. Capital lease obligations increased $1 million in 1998 because leases added for new retail stores exceeded repayments. The debt-to-capital ratio at quarter-end 1998 was 57.5%, down from 58.9% at year-end 1997. The company's long-term target ratio is between 50% and 55%. Operating activities generated $95 million of net cash flows for the first half of 1998 compared to $55 million in the same period of 1997. The difference was principally due to changes in working capital, higher deferred taxes and higher net earnings. Working capital was $354 million at the end of the second quarter of 1998, an increase from $340 million at year-end 1997. The current ratio increased to 1.30 to 1, from 1.29 to 1 at year-end 1997. Capital expenditures were $84 million for the first half of 1998 compared to $49 million for the same period in 1997. Total capital expenditures for 1998 (excluding acquisitions, if any) are expected to be approximately $200 million to $230 million. The company intends to increase its retail operations by increasing investments in new and remodeled stores in the company's existing retail chains and by making selective acquisitions of supermarket chains or groups as opportunities arise. The company's principal sources of liquidity in the first half of 1998 have been cash flows from operating activities, the sale of certain assets and investments and, as needed, borrowings under its credit facility. The company's principal sources of capital, excluding shareholders' equity, are banks and other lenders and lessors. The company's credit agreement and the indentures under which other company debt instruments were issued contain customary covenants associated with similar facilities. The credit agreement currently contains the following more significant financial covenants: maintenance of a fixed charge coverage ratio of at least 1.7 to 1, based on earnings before interest, taxes, depreciation and amortization and net rent expense; maintenance of a ratio of inventory-plus-accounts receivable to funded bank debt (including letters of credit) of at least 1.4 to 1; and a limitation on restricted payments, including dividends. Covenants contained in the company's indentures under which other company debt instruments were issued are generally less restrictive than those of the credit agreement. The company is in compliance with all financial covenants under the credit agreement and its indentures. In addition, the credit facility may be terminated in the event of a defined change of control. Under the company's indentures, noteholders may require the company to repurchase notes in the event of a defined change of control coupled with a defined decline in credit ratings. At the end of the second quarter 1998, borrowings under the credit facility totaled $230 million in term loans and $23 million of revolver borrowings, and $88 million of letters of credit had been issued. Letters of credit are needed primarily for insurance reserves associated with the company's normal risk management activities. To the extent that any of these letters of credit would be drawn, payments would be financed by borrowings under the credit agreement. At the end of the second quarter 1998, the company would have been allowed to borrow an additional $489 million under the revolving credit facility contained in the credit agreement based on the actual borrowings and letters of credit outstanding. Under the company's most restrictive borrowing covenant, which is the fixed charges coverage ratio contained in the credit agreement, $51 million of additional fixed charges could have been incurred. The average interest rate for total debt (including capital lease obligations) before the effect of interest rate hedges was 10.3% for the second quarter of 1998, versus 9.5% for the same period in 1997. Including the effect of interest rate hedges, the average interest rate of debt was 10.6% and 10.0% for the second quarter of 1998 and the same period in 1997, respectively. At the end of the second quarter of 1998, the company employed interest rate swaps covering a total of $250 million of floating rate indebtedness with three counterparty banks possessing investment grade credit ratings. The swaps have an average fixed interest rate of 7.22% and an average remaining term of 1.9 years. Net interest payments made or received under interest rate swaps are included in interest expense. See "-Results of Operations-Interest Expense" above and Note 6 in the notes to the consolidated condensed financial statements. Dividend payments in the second quarter of 1998 were $.02 per share. The credit agreement and the indentures for the $500 million of senior subordinated notes limit restricted payments, including dividends, to $74 million at the end of the second quarter of 1998 based on a formula tied to net earnings and equity issuances. For the foreseeable future, cash flows from operating activities and the company's ability to borrow under its credit agreement are expected to be the company's principal sources of liquidity and capital. In addition, lease financing may be employed for new stores and certain equipment. Management believes these sources will be adequate to meet working capital needs, capital expenditures (including expenditures for acquisitions, if any) and other capital needs for the next 12 months. Forward-Looking Information This report includes statements that (a) predict or forecast future events or results, (b) depend on future events for their accuracy, or (c) embody assumptions which may prove to have been inaccurate including: the company's ability to reverse sales declines, cut costs and improve earnings; the company's assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; the company's ability to develop and implement year-2000 systems solutions; the company's ability to expand portions of its business or enter new facets of its business which it believes will be more profitable than its food distribution business; and the company's expectations regarding the adequacy of capital and liquidity. These forward-looking statements and the company's business and prospects are subject to a number of factors which could cause actual results to differ materially including: adverse effects of the changing industry environment and increased competition; continuing sales declines and loss of customers; exposure to litigation and other contingent losses; failure of the company to achieve necessary cost savings; failure to develop and implement year-2000 system solutions; negative effects of the company's substantial indebtedness and the limitations imposed by restrictive covenants contained in the company's debt instruments; and the finalization and implementation of the company's strategic plan. These and other factors are described in the company's periodic reports available from the Securities and Exchange Commission including the company's 1997 Form 10-K and the 1998 first quarter Form 10-Q. PART II. OTHER INFORMATION Item 1. Legal Proceedings Set forth below is information regarding litigation which became reportable or as to which a material development has occurred since the date of the company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 18, 1998: (1) Randall's. (See earlier discussions in the 1997 Form 10-K and the first quarter 1998 Form 10-Q). On July 9, 1998, the arbitration panel resolved the dispute, denied Randall's claim for significant damages and terminated the supply contract between Fleming and Randall's. (2) Tobacco Cases. (See earlier discussions in the 1997 Form 10-K and in the first quarter 1998 Form 10-Q) In May 1998, two additional cases were filed: Kathy and Michael Landry, et al. v. Louisiana Health Services and Indemnity Co., Inc. d/b/a Blue Cross Blue Shield of LA, et al. (including a former Fleming subsidiary subsequently merged into the company) (19th Judicial District Court, East Baton Rouge Parish, LA) and Mabel A. Tiscavitch and Francis Tiscavitch v. RJ Reynolds Tobacco Company, et al. (Court of Common Pleas, Philadelphia, PA). Each of these cases alleges substantial monetary liability for Fleming's participation in the distribution of tobacco products. The company is being indemnified and defended by substantial third party co-defendants with respect to the Landry case and expects to be so indemnified in the Tiscavitch case. The indemnifications are and will be unconditional and unlimited. Item 5. Other Information Discretionary Voting of Proxies at Annual Meeting. The company will exercise discretionary authority to vote proxies at the company's next annual meeting of shareholders on any shareholder proposal for which the shareholder has not requested inclusion in the company's proxy statement unless the shareholder notifies the company of the proposal and the shareholder's intention to present the proposal from the floor of the meeting not later than February 7, 1999. On July 18, 1998, Robert E. Stauth retired from the positions of Chairman and Chief Executive Officer and resigned from the Board of Directors. Edward C. Joullian III, a director, has assumed the role of interim Chairman of the Board of Directors. The Board, with the assistance of outside consultants, intends to conduct a nationwide search for a new Chief Executive Officer. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Page Number Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLEMING COMPANIES, INC. (Registrant) Date: August 18, 1998 KEVIN J. TWOMEY Kevin J. Twomey Vice President-Controller (Principal Accounting Officer) EXHIBIT INDEX
Exhibit Number Description Method of Filing - ------- ------------------- ---------------- 12 Computation of Ratio of Earnings Filed herewith electronically to Fixed Charges 27 Financial Data Schedule Filed herewith electronically
EX-12 2 Exhibit 12 Fleming Companies, Inc. Computation of Ratio of Earnings to Fixed Charges
28 Weeks Ended July 11, July 12, (In thousands of dollars) 1998 1997 - ----------------------------------------------------------------------------- Earnings: Pretax income $ 55,065 $ 38,467 Fixed charges, net 107,995 105,720 -------- -------- Total earnings $163,060 $144,187 ======== ======== Fixed charges: Interest expense $ 87,063 $ 85,045 Portion of rental charges deemed to be interest 20,702 20,477 Capitalized interest - - -------- -------- Total fixed charges $107,765 $105,522 ======== ======== Ratio of earnings to fixed charges 1.51 1.37
"Earnings" consists of income before income taxes and fixed charges excluding capitalized interest. Capitalized interest amortized during the respective periods is added back to earnings. "Fixed charges, net" consists of interest expense, an estimated amount of rental expense which is deemed to be representative of the interest factor and amortization of capitalized interest. The pro forma ratio of earnings to fixed charges is omitted as it is not applicable. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE TWO FISCAL QUARTERS ENDED JULY 11, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-26-1998 DEC-28-1997 JUL-11-1998 21,974 0 436,347 17,498 984,644 1,518,608 1,627,055 697,146 3,921,257 1,164,307 1,092,473 0 0 96,313 1,032,169 3,921,257 8,073,069 8,073,069 7,276,177 7,923,027 0 7,914 87,063 55,065 26,156 28,909 0 0 0 28,909 .76 .76
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