-----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, CZxMBhRr880FLoO9HQcd4jFNYr3pgGoFmH6Pwe/m8Ow3mAP2cFS8JxQTsL4Ci7C5 SsXlVunCjWFxqDD3ubZjbg== 0001047469-97-005264.txt : 19971119 0001047469-97-005264.hdr.sgml : 19971119 ACCESSION NUMBER: 0001047469-97-005264 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971004 FILED AS OF DATE: 19971118 SROS: CSE 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: 97723267 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 FORM 10Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 4, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 (Zip Code) offices)
Registrant's telephone number, including area code: (405) 840-7200 (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 October 31, 1997 is as follows: Class Shares Outstanding Common stock, $2.50 par value 37,804,000
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PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statements of Earnings-- 12 Weeks Ended October 4, 1997, and October 5, 1996............................................... 3 Consolidated Condensed Statements of Earnings-- 40 Weeks Ended October 4, 1997, and October 5, 1996............................................... 4 Consolidated Condensed Balance Sheets-- October 4, 1997, and December 28, 1996............................................................ 5 Consolidated Condensed Statements of Cash Flows-- 40 Weeks Ended October 4, 1997, and October 5, 1996............................................... 6 Notes to Consolidated Condensed Financial Statements................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................. 15 PART II. OTHER INFORMATION: Item 1. Legal Proceedings............................................................................ 27 Item 6. Exhibits and Reports on Form 8-K............................................................. 30 Signatures.............................................................................................. 31
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE 12 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ------------ ------------ Net sales............................................................................. $ 3,453,261 $ 3,705,970 Costs and expenses: Cost of sales....................................................................... 3,131,023 3,373,525 Selling and administrative.......................................................... 272,826 281,316 Interest expense.................................................................... 39,084 34,955 Interest income..................................................................... (11,116) (11,610) Equity investment results........................................................... 3,710 5,708 Litigation charge................................................................... -- 20,000 ------------ ------------ Total costs and expenses.......................................................... 3,435,527 3,703,894 ------------ ------------ Earnings before taxes................................................................. 17,734 2,076 Taxes on income....................................................................... 10,286 1,061 ------------ ------------ Net earnings.......................................................................... $ 7,448 $ 1,015 ------------ ------------ ------------ ------------ Net earnings per share................................................................ $ .20 $ .03 ------------ ------------ ------------ ------------ Dividends paid per share.............................................................. $ .02 $ .02 ------------ ------------ ------------ ------------ Weighted average shares outstanding................................................... 37,804 37,788 ------------ ------------ ------------ ------------
See notes to consolidated condensed financial statements. 3 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE 40 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ------------- ------------- Net sales.......................................................................... $ 11,755,946 $ 12,616,535 Costs and expenses: Cost of sales.................................................................... 10,670,361 11,482,148 Selling and administrative....................................................... 911,420 980,591 Interest expense................................................................. 124,129 125,045 Interest income.................................................................. (36,410) (38,335) Equity investment results........................................................ 11,027 12,972 Litigation charge................................................................ 19,218 20,650 ------------- ------------- Total costs and expenses....................................................... 11,699,745 12,583,071 ------------- ------------- Earnings before taxes.............................................................. 56,201 33,464 Taxes on income.................................................................... 28,602 17,100 ------------- ------------- Earnings before extraordinary charge............................................... 27,599 16,364 Extraordinary charge from early retirement of debt (net of taxes).................. 13,330 -- ------------- ------------- Net earnings....................................................................... $ 14,269 $ 16,364 ------------- ------------- ------------- ------------- Net earnings per share: Earnings before extraordinary charge............................................. $ .73 $ .43 Extraordinary charge............................................................. .35 -- ------------- ------------- Net earnings..................................................................... $ .38 $ .43 ------------- ------------- ------------- ------------- Dividends paid per share........................................................... $ .06 $ .34 ------------- ------------- ------------- ------------- Weighted average shares outstanding................................................ 37,803 37,768 ------------- ------------- ------------- -------------
See notes to consolidated condensed financial statements. 4 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS) ASSETS
OCTOBER 4, DECEMBER 28, 1997 1996 ------------ ------------ Current assets: Cash and cash equivalents.......................................................... $ 27,019 $ 63,667 Receivables........................................................................ 309,813 329,505 Inventories........................................................................ 997,219 1,051,313 Other current assets............................................................... 95,140 119,123 ------------ ------------ Total current assets............................................................. 1,429,191 1,563,608 Investments and notes receivable..................................................... 183,214 205,683 Investment in direct financing leases................................................ 202,358 212,202 Property and equipment............................................................... 1,595,454 1,562,382 Less accumulated depreciation and amortization..................................... (673,326) (603,241) ------------ ------------ Net property and equipment........................................................... 922,128 959,141 Other assets......................................................................... 162,142 118,096 Goodwill............................................................................. 970,602 996,446 ------------ ------------ Total assets......................................................................... $ 3,869,635 $4,055,176 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 814,933 $ 952,769 Current maturities of long-term debt............................................... 47,601 124,613 Current obligations under capital leases........................................... 20,916 19,715 Other current liabilities.......................................................... 234,288 245,774 ------------ ------------ Total current liabilities........................................................ 1,117,738 1,342,871 Long-term debt....................................................................... 1,137,684 1,091,606 Long-term obligations under capital leases........................................... 359,162 361,685 Deferred income taxes................................................................ 28,626 37,729 Other liabilities.................................................................... 136,057 145,327 Commitments and contingencies Shareholders' equity: Common stock, $2.50 par value per share............................................ 94,510 94,494 Capital in excess of par value..................................................... 504,232 503,595 Reinvested earnings................................................................ 526,422 514,408 Cumulative currency translation adjustment......................................... (4,700) (4,700) ------------ ------------ 1,120,464 1,107,797 Less ESOP note..................................................................... (5,199) (6,942) Less additional minimum pension liability.......................................... (24,897) (24,897) ------------ ------------ Total shareholders' equity..................................................... 1,090,368 1,075,958 ------------ ------------ Total liabilities and shareholders' equity........................................... $ 3,869,635 $4,055,176 ------------ ------------ ------------ ------------
See notes to consolidated condensed financial statements. 5 FLEMING COMPANIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE 40 WEEKS ENDED OCTOBER 4, 1997, AND OCTOBER 5, 1996 (IN THOUSANDS)
1997 1996 ---------- ---------- Cash flows from operating activities: Net earnings........................................................................... $ 14,269 $ 16,364 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................................................ 139,738 145,082 Credit losses........................................................................ 14,840 21,550 Deferred income taxes................................................................ (577) (7,574) Equity investment results............................................................ 11,027 12,973 Gain on sale of businesses........................................................... (2,586) (3,666) Litigation charge.................................................................... -- 20,650 Cost of early debt retirement........................................................ 22,227 -- Consolidation and restructuring reserve activity..................................... (1,987) (713) Change in assets and liabilities, excluding effect of acquisitions: Receivables........................................................................ 1,036 (22,698) Inventories........................................................................ 52,762 120,411 Accounts payable................................................................... (133,626) (45,204) Other assets and liabilities....................................................... (32,197) (34,061) Other adjustments, net............................................................... (2,894) 77 ---------- ---------- Net cash provided by operating activities.......................................... 82,032 223,191 ---------- ---------- Cash flows from investing activities: Collections on notes receivable........................................................ 47,829 45,480 Notes receivable funded................................................................ (29,725) (48,876) Notes receivable sold.................................................................. -- 34,980 Purchase of property and equipment..................................................... (82,348) (100,602) Proceeds from sale of property and equipment........................................... 11,859 12,283 Investments in customers............................................................... (1,963) (356) Proceeds from sale of investment....................................................... 2,196 3,506 Businesses acquired.................................................................... (9,572) -- Proceeds from sale of businesses....................................................... 13,093 9,244 Other investing activities............................................................. 6,255 5,683 ---------- ---------- Net cash used in investing activities.............................................. (42,376) (38,658) ---------- ---------- Cash flows from financing activities: Proceeds from long-term borrowings..................................................... 896,950 128,000 Principal payments on long-term debt................................................... (927,616) (279,544) Principal payments on capital lease obligations........................................ (15,362) (16,342) Sale of common stock under incentive stock and stock ownership plans................... 491 2,002 Dividends paid......................................................................... (2,260) (12,700) Other financing activities............................................................. (28,507) (5,229) ---------- ---------- Net cash used in financing activities.............................................. (76,304) (183,813) ---------- ---------- Net increase (decrease)in cash and cash equivalents...................................... (36,648) 720 Cash and cash equivalents, beginning of period........................................... 63,667 4,426 ---------- ---------- Cash and cash equivalents, end of period................................................. $ 27,019 $ 5,146 ---------- ---------- ---------- ---------- Supplemental information: Cash paid for interest................................................................. $ 119,529 $ 117,133 Cash paid for income taxes............................................................. $ 33,361 $ 32,118 ---------- ---------- ---------- ----------
See notes to consolidated condensed financial statements. 6 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The consolidated condensed balance sheet as of October 4, 1997, and the consolidated condensed statements of earnings and cash flows for the 12-week and 40-week periods ended October 4, 1997, and for the 12-week and 40-week periods ended October 5, 1996, have been prepared by the company, without audit. In the opinion of management, all adjustments necessary to present fairly the company's financial position at October 4, 1997, 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. Earnings per share disclosures are computed using weighted average shares outstanding. The impact of common stock options on earnings per share is immaterial. Certain reclassifications have been made to the prior year amounts to conform to the current year's classification. 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. 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 1996 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 $34 million at October 4, 1997, and $29 million at December 28, 1996. 4. During the first and second quarters of 1997, the company undertook various activities and received a series of commitments which culminated in the implementation of an $850 million senior secured credit facility and the sale of $500 million of senior subordinated notes on July 25, 1997. Proceeds from the senior subordinated notes plus initial borrowings under the senior secured credit facility were used to repay all outstanding bank debt (which totaled approximately $550 million) and the balance, together with additional revolver borrowings, was used to redeem the company's $200 million of floating rate senior notes. The recapitalization program resulted in an extraordinary charge of $13.3 million, after income tax benefits of $8.9 million, or $.35 per share, in the company's second quarter ended July 12, 1997. Almost all of the charge represented a non-cash write-off of unamortized financing costs related to the debt which was prepaid. The new $850 million senior secured credit facility consists of a $600 million revolving credit facility with a maturity date of July 25, 2003, and a $250 million amortizing term loan with a maturity date of July 25, 2004. The new credit facility is secured by the inventory and accounts receivable of the company and its subsidiaries and is guaranteed by substantially all of the company's subsidiaries. See Note 6. The stated interest rate on borrowings under the new credit agreement is equal to the London interbank offered interest rate ("LIBOR") plus a margin. The level of the margin is dependent on credit ratings on the company's senior secured bank debt. The $500 million of senior subordinated notes ("Notes") consists of two issues: $250 million of 10 1/2% Notes due December 1, 2004 and $250 million of 10 5/8% Notes due July 31, 2007. The Notes are general unsecured obligations of the company, subordinated in right of payment to all existing and future senior indebtedness of the company, and senior to or of equal rank with all future subordinated indebtedness of the company (the company currently has no other subordinated indebtedness outstanding). The payment 7 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) of principal, interest and premium, if any, payable on the Notes is guaranteed by substantially all of the company's subsidiaries. See Note 6. The new credit facility currently contains the following more significant financial covenants: maintenance of a fixed charge coverage ratio of at least 1.7 to 1, based on 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. 5. 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: PREMIUM The company and several other defendants were named in two suits filed in U.S. District Court in Miami, Florida in 1993. The suits involved an allegedly fraudulent scheme conducted by a failed grocery diverter--Premium Sales Corporation ("Premium")--and others in which large losses occurred to the detriment of a class of investors which brought one of the suits. The other suit was brought by the receiver/ trustee of the estates of Premium and certain of its affiliated entities. Plaintiffs sought actual damages of approximately $300 million, treble damages, punitive damages, attorneys' fees, costs, expenses and other appropriate relief. The company denied plaintiffs' accusations; however, to avoid future expense and eliminate uncertainty, the company entered into a settlement agreement in December 1996. The company recorded a charge of $20 million during the third quarter of 1996 in anticipation of the settlement and deposited that amount into an escrow account in December 1996 pending finalization of the settlement. On September 23, 1997, the deposited funds were released from escrow and on October 17, 1997, the claimants dismissed their actions against the company with prejudice. DAVID'S The company and certain of its affiliates were named in a lawsuit filed by David's Supermarkets, Inc. ("David's") in the District Court of Johnson County, Texas in 1993 alleging product overcharges during a three year period. In April 1996, judgment in excess of $210 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 granted and the accrual was reduced to $650,000. The company denied the plaintiff's allegations; however, 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, resulting in a charge to first quarter earnings of $19.2 million. FURR'S Furr's Supermarkets, Inc. ("Furr's"), which purchased approximately $545 million of products from the company in 1996 under a supply contract expiring in 2001, filed a lawsuit in the District Court of Bernalillo County, New Mexico, in February 1997 naming as defendants the company, certain company 8 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) officers and a company employee. Furr's claimed it was overcharged for products under the supply contract and alleged various causes of action including breach of contract, misrepresentation, fraud and violation of certain of New Mexico's trade practices statutes. Furr's sought an award of unspecified monetary damages including actual, consequential, incidental, punitive and treble damages together with interest, attorneys' fees and court costs. Fleming denied each of Furr's allegations and filed suit against Furr's seeking to enforce an indemnification agreement entered into by Furr's in 1993. Fleming also filed a shareholder derivative suit alleging malfeasance against certain of Furr's officers and directors. Prior to filing the lawsuit, Furr's sought to exercise the supply contract's competitiveness clause and sought to audit the company's pricing. Furr's submitted what it asserted was a "qualified competitive bid" as defined in the contract. Fleming rejected the bid as not qualifying under the contract and invoked the arbitration clause of the supply contract. On October 23, 1997, Fleming and Furr's Supermarkets, Inc. ("Furr's") reached an agreement of their business dispute. Pursuant to the terms of the agreement, neither Furr's nor Fleming admitted liability or wrongdoing. Until the end of April 1998, Furr's will be offered for sale (including Fleming's equity investment of approximately 30%). Offerees will have the opportunity to buy Furr's either with or without Fleming's El Paso product supply center, together with the related equipment and inventory. If the product supply center is not sold, Furr's (or Furr's purchaser) is obligated to pay certain liquidation costs to Fleming and Fleming will liquidate the inventory in the ordinary course. If Furr's is not sold, Furr's will have 30 days during which to elect to purchase the El Paso product supply center (and close within 120 days) or to pay Fleming liquidation costs (after a nine month transition period). Under the agreement, Fleming's supply contract with Furr's will terminate in nineteen months, or earlier, and Fleming will pay Furr's $800,000 per month until the contract terminates. Other Fleming customers currently being served by the El Paso product supply center will continue to be served by other Fleming units. As the result of the agreement, Furr's dismissed its lawsuit against Fleming and certain members of its management and Fleming dismissed its lawsuits against Furr's and certain of its officers and directors, each with prejudice. The arbitration proceedings were also dismissed. Furr's has agreed that Fleming's past pricing practices were consistent with its supply contract and has agreed that Fleming's FlexPro-SM- marketing plan will be applicable until the supply contract terminates. While Fleming will cooperate in the sale of Furr's, the ultimate outcome of these efforts cannot be predicted. However, Fleming believes that by June 1999, or earlier, Fleming will cease to supply Furr's, Fleming's distribution assets serving Furr's will be liquidated and Fleming's substantial equity investment in Furr's may be sold. The settlement does not cause an impairment in value of any recorded asset balances. While the loss of Furr's business will be significant in the near term, Fleming believes that the reinvestment of its employed capital in other profitable operations will offset the lost business. MEGAFOODS In August 1994, a former customer, Megafoods Stores, Inc. ("Megafoods" or the "debtor"), and certain of its affiliates filed chapter 11 bankruptcy proceedings in Arizona. The company filed claims, including a claim for indebtedness for goods sold on open account, equipment leases and secured loans, totaling approximately $28 million (including claims for future payments and other non-recorded assets). Additionally, the debtor was liable or contingently liable to the company under store subleases and lease guarantees extended by the company for the debtor's benefit. The debtor objected to the company's claims 9 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) and filed an adversary proceeding against the company seeking subordination of the company's claims, return of an approximate $12 million deposit and affirmative relief for damages which was subsequently amended to include allegations of overcharges for products. In August 1996, the court approved a settlement of both the debtor's adversary proceeding against the company and the company's disputed claims in the bankruptcy. The settlement, which has been approved by the creditors but awaits confirmation by the court of a plan of liquidation, provides that the company will retain the $12 million deposit, relinquish its secured and unsecured claims in exchange for the right to receive 10% of distributions, if any, made to the unsecured creditors and pay the debtor $2.5 million in exchange for the furniture, fixtures and equipment from 17 stores and two storage facilities. The company agreed to lease the furniture, fixtures and equipment in 14 of the stores to the reorganized debtor for nine years (or until, in each case, the expiration of the store lease) at an annual rental of $18,000 per store. During the fourth quarter of 1996, the debtor sold its Phoenix stores. In January 1997, the debtor filed a joint liquidating plan which incorporates the settlement agreement. During the second quarter of 1997, the debtor sold its Texas assets and the purchaser agreed to assume the debtor's obligation to lease furniture, fixtures and equipment from the company. The consummation of this sale resulted in the disposition of substantially all of the debtor's remaining physical assets. The company did not receive any distribution from the sale of the debtor's assets. The hearing for confirmation of the debtor's plan of liquidation is scheduled for November 20, 1997. The company recorded charges relating to Megafoods of approximately $6.5 million in 1994, $3.5 million in 1995 and $5.8 million in 1996. Approximately $3 million of recorded net assets relating to Megafoods (consisting of equipment) remain on the company's books. RANDALL'S On July 30, 1997, Randall's Food Markets, Inc. ("Randall's"), initiated arbitration proceedings against Fleming before the American Arbitration Association in Dallas, Texas. Randall's alleges that Fleming conspired with a group of manufacturers and vendors to defraud Randall's by cooperating to inflate prices charged to Randall's. Randall's also alleges that Fleming impermissably modified the pricing mechanism of the supply contract. Randall's alleges breach of contract, fraud and RICO violations, and seeks actual damages, punitive damages, treble damages under RICO, termination of its supply contract and attorneys' fees and court costs. Randall's alleges it suffered substantial but unquantified damages. The contract on which Randall's bases its claim prohibits either party from recovering any amount other than actual damages; recovery of consequential damages, punitive damages and all similar forms of damages are expressly prohibited. Randall's asserts that such provision is contrary to public policy and therefore not binding on it. Randall's has been a Fleming customer for over 30 years. In 1996 Randall's purchased approximately $485 million of products from Fleming under an eight year supply contract entered into in 1993 in connection with Fleming's purchase of certain distribution assets from Randall's. Prior to initiating the arbitration proceeding and making allegations against Fleming for overcharges, Randall's had sought unsuccessfully to terminate the supply contract. The company believes it has complied with its obligations to Randall's in good faith and that punitive and consequential damages are not recoverable under the supply contract. The company will vigorously defend its interests in the arbitration. While management is unable to predict the potential range of monetary exposure to Randall's, if any, the effect of an unfavorable outcome or the loss of Randall's business could have a material adverse effect on the company. 10 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) CLASS ACTION SUITS In 1996, the company and certain of its present and former officers and directors, including the chief executive officer, were named as defendants in nine purported class action lawsuits filed by certain stockholders and one purported class action lawsuit filed by a noteholder. In April 1997, the court consolidated the nine 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 alleging liability for the company's 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. On November 12, 1997, the company won a declaratory judgment action against certain of its insurance carriers regarding a directors and officers ("D&O") insurance policy issued to Fleming for the benefit of its officers and directors. On motion for summary judgment, the U.S. District Court for the Western District of Oklahoma ruled that the company's exposure, if any, under the class action suits is covered by the D&O policies (aggregating $60 million) written by the insurance carriers, 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 would be liable for the entire amount of coverage available under a policy even if there were some overlap in the liability created by the insured individuals and the uninsured corporation. If a corporation's liability were increased by uninsured parties beyond that of the insured individuals, then that portion of the liability would be the sole obligation of that corporation. The court also held that allocation was not available to the insurance carriers as an affirmative defense. The insurance carriers have 30 days within which to appeal. The plaintiffs seek undetermined but significant damages and management is unable to predict the ultimate outcome of these cases. However, while management believes that the cases could have a material adverse impact on interim or annual results of operations, based upon the ruling of the court described above, the cases will not have a material adverse effect on the company's liquidity or consolidated financial position. 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 against a subsidiary which was subsequently merged into the company. The plaintiff originally obtained a temporary restraining order preventing the subsidiary 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 the center itself experienced financial difficulty ultimately resulting in bankruptcy. In November 1993, the court granted Century Fund I leave to amend 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. Plaintiff claims that defendant and defendant's new landlord conspired to force the Howell Plaza Shopping Center out of business. 11 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 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 defendant'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 June 1994, the trial court granted defendant's motion to dismiss all three cases. That decision was reversed in August 1995 by the Wisconsin Court of Appeals. The matter was remanded to the trial court. The cases have been consolidated but are not currently set for trial. Plaintiffs seek actual damages, consequential damages, treble damages, punitive damages, attorneys' fees, court costs and other appropriate relief. In March 1997, plaintiffs supplied the company with an analysis of damages; alleged actual damages, after trebling but excluding any estimated punitive damages, amounted to 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). The company has petitioned the Wisconsin Court of Appeals for a certification of an interlocutory appeal of that decision. Plaintiffs have alleged $1.7 million of actual damages resulted from the breach of contract. 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. OTHER The company supplies goods and services to some of its customers (particularly to its large customers) pursuant to supply contracts containing a "competitiveness" clause. Under this clause, a customer may submit a "qualified bid" from a third-party supplier to provide the customer with a range of goods and services comparable to those goods and services offered by Fleming. If the prices to be charged under the qualifying bid are lower than those charged by the company by more than an agreed percentage, the company may lower its prices to come within the agreed percentage or, if the company chooses not to lower its prices, the customer may accept the competitor's bid. The competitiveness clause is not exercised frequently and disputes regarding the clause must generally be submitted to binding arbitration. Additionally, the company believes that most of its supply contracts prohibit recovery of both punitive and consequential damages if any dispute ever arises. From time to time, customers may seek to renegotiate the terms of their supply contracts, or exercise the competitiveness clause of such agreements or otherwise alter the terms of their contractual obligations to the company to obtain financial concessions. Based on its historical experience, the company does not believe such efforts have had a material adverse effect on its operations or financial condition to date. 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. Program costs are being expensed as incurred, but to compensate for the dilutive effect on results of operations, the company has delayed other non-critical development and support initiatives. Fleming's plan includes extensive systems testing and is expected to be completed by the first quarter of 1999. The solution for each system is potentially unique and may be dependent on third-party software providers and developers. A failure on the part of the company to ensure that its computer systems are year 2000 compliant could have a material adverse effect on the company's operations. Additionally, failure of the company's suppliers or, more importantly, its 12 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) customers, to become year 2000 compliant might 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 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 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 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 regarding wages, workers' compensation and alleged discriminatory practices; tax assessments and other matters. The ultimate effect of such actions, some of which are for substantial amounts, cannot be predicted with certainty. Although the resolution of any of these matters could have a material adverse impact on interim or annual results of operations, the company expects that the outcome of these matters will not have a material adverse effect on the company's liquidity or consolidated financial position. 6. Certain company 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. 13 FLEMING COMPANIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 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.
OCTOBER 4, OCTOBER 5, 1997 1996 ------------- ------------- (IN MILLIONS) Current assets........................................................ $ 23 $ 22 Noncurrent assets..................................................... $ 53 $ 49 Current liabilities................................................... $ 16 $ 10 Noncurrent liabilities................................................ $ 7 $ 9
40 WEEKS ENDED ---------------------------- OCTOBER 4, OCTOBER 5, 1997 1996 ------------- ------------- (IN MILLIONS) Net sales............................................................. $ 256 $ 265 Costs and expenses.................................................... $ 256 $ 269 Net earnings (loss)................................................... -- $ (2)
During the last three years, a significant number of subsidiary guarantors have been merged into the parent company, resulting in a substantial reduction in the amounts appearing in the summarized financial information. 7. The accompanying earnings statements include the following:
40 WEEKS 12 WEEKS ---------------------- -------------------- 1997 1996 1997 1996 ---------- ---------- --------- --------- (IN THOUSANDS) Depreciation and amortization (includes amortized costs in interest expense)................................... $ 139,738 $ 145,082 $ 41,113 $ 47,401 Amortized costs in interest expense...................... $ 7,165 $ 9,967 $ 1,668 $ 3,040
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Several events have shaped Fleming's results of operations and capital and liquidity position during each of the past three fiscal years and the first three quarters of 1997. Since 1993, changes in the food marketing and distribution industry have reduced sales and increased competitive pressures for the company and many of its customers. In January 1994, the company announced a strategic plan to transform its operations to better serve its customers and achieve higher profitability. As part of this plan, the company consolidated food distribution facilities, reorganized its management group and reengineered the way it prices and sells grocery, frozen and dairy products and retail services. In July 1994, the company acquired Scrivner Inc. ("Scrivner"), adding $6 billion in annual food distribution sales and more than 175 retail stores. The company also dealt with business and litigation challenges during this period: the bankruptcy of a major customer in 1994, the addition by foreclosure in early 1996 of a 71-store customer in Arizona and several litigation developments in 1996 and 1997. Each of these events is discussed in more detail below. CHANGING INDUSTRY ENVIRONMENT. The food marketing and distribution industry is undergoing accelerated change as producers, manufacturers, distributors and retailers seek to lower costs and increase services in an increasingly competitive environment of relatively static overall demand. Alternative format food stores (such as warehouse stores and supercenters) have gained retail food market share at the expense of traditional supermarket operators, including independent grocers, many of whom are Fleming customers. Vendors, seeking to ensure that more of their promotional fees and allowances are used by retailers to increase sales volume, increasingly direct promotional dollars to large self-distributing chains, alternative formats and other channels of distribution. The company believes that these changes have led to reduced sales, reduced margins and lower profitability among many of its customers and at the company itself. CONSOLIDATIONS, REORGANIZATION AND REENGINEERING. Throughout 1994 and 1995, the company consolidated 13 food distribution centers, including nine centers acquired in the Scrivner acquisition, into other operations. Smaller, less efficiently located facilities were closed and their operations transferred to larger facilities seeking economies of scale in operations. These consolidations were costly and resulted in loss of sales because of the reluctance of certain customers to change and because of increased distances from new centers. In 1994, the company eliminated its regional food distribution organization, centralizing these staff functions and several others. It also established the Retail Food Segment following the acquisition of Scrivner and its significant retail food operations. The design of reengineering, which includes several programs, began in 1994 and implementation commenced in 1995. The most significant of these programs was the introduction of an innovative marketing plan which altered the way food products and distribution services are marketed to customers. Activity-based pricing analyses and marketing research are used to establish prices of grocery, frozen and dairy products and charges for handling, storage and delivery services. Other significant reengineering programs include the development and implementation of VISIONET-TM-, a proprietary interactive electronic communication network for retail customers, transportation outsourcing and the installation of FOODS, a standard food distribution computer operating system. Some of the costs of the plan have not been charged to the results of operations but to reserves established at the end of 1993. The recorded reserves cover severance, facility consolidation expenses and asset impairment adjustments. All other costs of the plan not covered by recorded reserves are included in the results of operations. However, the costs of the plan cannot be 15 separately quantified because actions implementing the plan often are not unique to consolidation, reorganization and reengineering. Normal, on-going business development activities are usually performed at the same time and by the same associates which makes isolating costs related to the plan impractical. Although the consolidation and reorganization are complete, and many of the reengineering initiatives have been completed, more initiatives are in-process or planned but completion dates are not yet known because of the dependency on customer acceptance, labor relations and the need to balance benefits and costs. SCRIVNER. In July 1994, Fleming purchased Scrivner for approximately $390 million in cash and the assumption of $670 million of indebtedness while refinancing approximately $340 million of its own debt. To finance the transaction, the company entered into a $2.2 billion bank credit agreement, $500 million of which was refinanced with fixed and floating rate senior notes prior to the end of 1994. On July 25, 1997, as part of the recapitalization program, the company replaced its former bank credit agreement with the new credit agreement in the aggregate principal amount of $850 million and called for redemption of all $200 million of the floating rate senior notes placed in 1994. The floating rate senior notes were redeemed on September 15, 1997. Because the company quickly integrated Scrivner's operations, it is difficult to estimate the impact Scrivner had on sales, gross margins or earnings. However, Scrivner's significant retail food presence substantially increased Fleming's corporate-owned retail stores from 139 before the acquisition to approximately 345 (including 283 supermarkets) immediately following the acquisition. This substantial increase in retail food operations not only added to total sales, but also raised both gross margin and selling and administrative expenses as retail food operations typically operate at higher levels in these areas than do food distribution operations. Interest expense increased as a result of increased borrowing levels due to the acquisition and to higher interest rates attributable in substantial part to lower credit ratings for the company's long-term debt. Interest expense rose from $78 million in 1993 to $120 million in 1994 and $175 million in 1995 before falling to $163 million in 1996. Goodwill amortization was $23.1 million in 1994, $30.1 million in 1995 and $32.0 million in 1996; the increase from 1994 was principally due to Scrivner. MEGAFOODS. In August 1994, Megafoods, Inc. and certain of its affiliates ("Megafoods" or the "debtor"), filed Chapter 11 bankruptcy proceedings in Phoenix, Arizona. The company estimates that prior to bankruptcy, annualized sales to Megafoods approximated $335 million. By 1995, sales to Megafoods were approximately $87 million and by 1996, there were no sales. The company filed claims for indebtedness for goods sold on open account, equipment leases and secured loans totaling approximately $28 million and for substantial contingent claims for store subleases and lease guarantees extended by the company for the debtor's benefit. Megafoods brought an adversary proceeding seeking, among other things, damages against the company. The company recorded losses resulting from deteriorating collateral values of $6.5 million in 1994 and $3.5 million in 1995, and in 1996 recorded $5.8 million to reflect continuing deterioration and the effects of a proposed settlement of the company's claim and the debtor's allegations. ABCO. At year-end 1994, the company was the largest single shareholder (approximately 48% of stock outstanding), the major supplier and the second largest creditor of ABCO Markets, Inc. ("ABCO"), a supermarket chain located in Arizona. By the fall of 1995, the company's investments in, and loans to, ABCO totaled approximately $39 million. In September 1995, ABCO defaulted on both its bank debt and its debt to the company. The company exercised a warrant to gain an additional 3% of ABCO's capital stock and purchased the bank's preferred position for $21 million. In January 1996, the company foreclosed and acquired all of ABCO's assets consisting of approximately 71 stores at the time of foreclosure. Certain of ABCO's minority shareholders have challenged this action and are seeking rescission and/or damages. 16 LITIGATION. In March 1996, a jury in central Texas returned verdicts in David's Supermarkets, Inc. v. Fleming ("David's") which resulted in a judgment of $211 million against Fleming. In response, the company established a reserve of $7.1 million and amended its former bank credit agreement to facilitate posting a partially collateralized supersedeas bond. Pursuant to the amendment, pricing for borrowing under the former credit agreement was increased. The judgment was vacated in June 1996, and the company's reserve was reduced to $650,000. During the first quarter of 1997, Fleming entered into court-sanctioned mediation and, as a result of a settlement reached with the plaintiff, paid $19.9 million to settle the litigation. During the third quarter of 1996, the company recorded a charge of $20 million to reflect an announced settlement agreement reached in lawsuits involving a failed grocery diverter, Premium Sales Corporation. In February 1997, the company's largest customer filed suit against it alleging product overcharges and in July 1997, another large customer commenced arbitration proceedings against the company also alleging product overcharges. See Note 5 to the company's financial statements and Part II, Item 1--Legal Proceedings for a further discussion of certain litigation and contingent liability issues. CREDIT POLICIES. In 1995, Fleming began imposing stricter credit policies and applying cost/benefit analyses to loans to and investments made in its distribution customers. Traditionally, food distributors have used availability of financial assistance as a competitive tool. Fleming believes that its stricter credit policies have resulted in decreased sales. Management believes that the combination of these events has negatively affected the company's financial performance during the past three years and the first three quarters of 1997. Additionally, the continuing commitments under the recent Furr's agreement may negatively impact earnings through May 1999 and lower sales and operating losses in certain company-owned retail stores are likely to continue to negatively impact results for the near term. See "--Litigation and Other Contingencies--Furr's." However, management also believes that the company's ultimate success will depend on its ability to continue to cut costs while expanding profitable operations. The company has revised its marketing plans and is taking other steps to reverse sales declines. The recapitalization program will provide the company with greater financial flexibility to redeploy assets and seek to increase the more profitable facets of both its Food Distribution and Retail Food Segments. 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. After taking into consideration one-time adjustments (recapitalization charge in 1997, litigation charges in 1996 and 1997, a facilities consolidation and restructuring adjustment in 1995 and $3 million in other charges in 1996 due primarily to divested stores), adjusted earnings per share and adjusted EBITDA (in millions) for the past eleven quarters were as follows:
1995 ADJUSTED 1996 ADJUSTED 1997 ADJUSTED ---------------------- ---------------------- ---------------------- EPS EBITDA EPS EBITDA EPS EBITDA --------- ----------- --------- ----------- --------- ----------- First quarter........................ $ 0.40 $ 146 $ 0.25 $ 126 $ 0.39 $ 137 Second quarter....................... 0.39 113 0.30 104 0.35 106 Third quarter........................ 0.10 92 0.19 100 0.23 100 Fourth quarter....................... 0.11 97 0.27 105 --------- ----- --------- ----- $ 1.00 $ 448 $ 1.01 $ 435 --------- ----- --------- ----- --------- ----- --------- -----
17 RESULTS OF OPERATIONS Set forth in the following table is information for the third interim and year-to-date periods of 1997 and 1996 regarding components of the company's earnings expressed as a percentage of net sales.
THIRD INTERIM PERIOD 1997 1996 ---------- ---------- Net sales............................................... 100.00% 100.00% Gross margin............................................ 9.33 8.97 Less: Selling and administrative............................ 7.90 7.59 Interest expense...................................... 1.13 .94 Interest income....................................... (.32) (.31) Equity investment results............................. .11 .15 Litigation charge..................................... -- .54 ---------- ---------- Total expenses...................................... 8.82 8.91 ---------- ---------- Earnings before taxes................................... .51 .06 Taxes on income......................................... .30 .03 ---------- ---------- Net earnings............................................ .22% .03% ---------- ---------- ---------- ---------- YEAR TO DATE 1997 1996 ---------- ---------- Net sales............................................... 100.00% 100.00% Gross margin............................................ 9.23 8.99 Less: Selling and administrative............................ 7.75 7.77 Interest expense...................................... 1.06 .99 Interest income....................................... (.31) (.30) Equity investment results............................. .09 .10 Litigation charge..................................... .16 .16 ---------- ---------- Total expenses...................................... 8.76 8.73 Earnings before taxes................................... .48 .27 Taxes on income......................................... .24 .14 ---------- ---------- Earnings before extraordinary charge.................... .23 .13 Extraordinary charge from early retirement of debt...... .11 -- ---------- ---------- Net earnings............................................ .12% .13% ---------- ---------- ---------- ----------
NET SALES Sales for the third quarter (12 weeks) of 1997 decreased by $.3 billion, or 7%, to $3.5 billion from $3.7 billion for the same period in 1996. Year to date, sales decreased by $.9 billion, or 7%, to $11.8 billion from $12.6 billion in 1996. Several trends and events adversely impacted sales as described in the General section above. Additionally, the closing or sale of certain company-owned retail stores negatively impacted sales. Retail sales generated by the same stores for the third quarter and year-to-date periods in 1997 compared to the same periods in 1996 decreased 5.2% and 3.2%, 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 1997 was 1.4% compared to 2.3% for the same period in 1996. 18 GROSS MARGIN Gross margin for the third quarter of 1997 decreased by $10 million, or 3%, to $322 million from $332 million for the same period of 1996, but increased as a percentage of net sales to 9.33% from 8.97% for the same period in 1996. Year to date, gross margin decreased by $49 million, or 4%, to just under $1.1 billion from just over $1.1 billion, but also increased as a percentage of net sales to 9.23% from 8.99% for the same period in 1996. The increase in gross margin percentage was primarily due to improved gross margins at company-owned retail stores. Food price inflation resulted in a LIFO charge in 1997 of $.5 million for the third quarter and $4.6 million year to date compared to charges of $.5 million for the quarter and $2.0 million year to date in 1996. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for the third quarter of 1997 decreased by $8 million, or 3%, to $273 million from $281 million for the same period in 1996 and increased as a percentage of net sales to 7.90% for 1997 from 7.59% in 1996. Year to date, selling and administrative expenses decreased by $69 million, or 7%, to $911 million from $981 million for the same period in 1996 and decreased as a percentage of net sales to 7.75% for 1997 from 7.77% in 1996. The year-to-date percentage decrease was principally due to improvements in operating efficiencies for company-owned retail stores. The increase in the third quarter was due primarily to increased corporate expenses in 1997 in the information technology area and the absence in 1997 of a favorable retail divestiture accrual adjustment. As more fully described in the 1996 Annual Report on Form 10-K, the company has a significant amount of credit extended to its customers through various methods. These methods include customary and extended credit terms for inventory purchases, secured loans with terms generally up to ten years, and equity investments in and secured and unsecured loans to certain customers. Credit loss expense is included in selling and administrative expenses and for the third quarter of 1997 decreased by $3 million to $4 million from $7 million for the comparable period in 1996. Year to date, credit loss expense was $15 million in 1997 compared to $22 million in 1996 for a decrease of $7 million. Since 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. Further material reductions are not expected. INTEREST EXPENSE Interest expense for the third quarter of 1997 increased to $39 million from $35 million for the same period in 1996. Year to date, interest expense decreased to $124 million from $125 million in 1996. Lower average debt levels in 1997 compared to 1996 primarily accounted for the year-to-date improvement. Interest expense increased in the third quarter of 1997 compared to the same period in 1996 primarily because the interest rates on the new senior subordinated notes are higher than the rates on debt which was repaid. See Note 4 to the company's financial statements. The stated interest rate on the company's floating rate indebtedness is equal to the London interbank offered interest rate ("LIBOR") plus a margin. The company employs interest rate swaps and caps from time to time to manage exposure to changing interest rates and interest expense. In the third quarter of 1997, interest rate swaps covering $250 million aggregate principal amount of floating rate indebtedness were employed. Interest rate hedge agreements contributed $1.4 million of net interest expense in the 1997 third quarter compared to $2.1 million of net interest expense for the same period of 1996. Year to date, interest rate hedge agreements contributed $5.9 million of net interest expense in 1997 compared to $7.0 million in 1996. 19 INTEREST INCOME Interest income for the third quarter of 1997 decreased to $11 million from $12 million in the same period in 1996. Year to date, interest income decreased to $36 million in 1997 from $38 million in 1996. The decrease is primarily due to the company's sale in the third quarter of 1996 of $35 million of notes receivable with limited recourse. The decrease is partly offset by new notes funded since the note sale. EQUITY INVESTMENT RESULTS The company's portion of operating losses from equity investments for the third quarter of 1997 decreased to $4 million from $6 million for the same period in 1996. Year to date, operating losses from equity investments decreased to $11 million from $13 million in 1996. The reduction in losses is due to improved results of operations in certain of the underlying equity investments. LITIGATION CHARGE In the first quarter of 1997, the company paid $19.9 million in complete settlement of the David's litigation. In the first quarter of 1996, the company accrued $7.1 million as the result of a jury verdict regarding the case. In the second quarter of 1996, the accrual was reversed following the vacation of the judgment resulting from the jury verdict, and a new accrual for $650,000 was established. In the third quarter of 1996, the company accrued $20 million related to an agreement reached to settle the Premium lawsuits. See Note 5 to the company's financial statements and Part II, Item 1--Legal Proceedings. TAXES ON INCOME The effective tax rate for 1997 is presently estimated at 58.0%. The 58.0% rate was used in calculating both the third quarter and year-to-date income tax amounts. The presentation of the year-to-date tax is split by reflecting a tax benefit at the statutory rate of 40% for the extraordinary charge and reflecting the balance of the tax amount on the taxes on income line. The rate used for the third quarter and year to date for 1996 was 51.1%. The increase is primarily due to lower earnings in 1997 compared to 1996 (primarily due to the litigation charge and write-off of costs associated with the early retirement of debt) with basically no change in the blended statutory rate or nondeductible dollar amounts (permanent differences) from 1996. OTHER Several factors negatively affecting earnings in the third quarter of 1997 are likely to continue for the near term. Management believes that these factors include lower sales and operating losses in certain company-owned retail stores. Additionally, the continuing commitments under the recent Furr's agreement may negatively impact earnings through May 1999. See "--Litigation and Other Contingencies-- Furr's." 20 SEGMENT INFORMATION Sales and operating earnings for the company's food distribution and retail food segments are presented below.
40 WEEKS 12 WEEKS -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- (IN MILLIONS) Sales: Food distribution........................................... $ 9,127 $ 9,780 $ 2,678 $ 2,907 Retail food................................................. 2,629 2,837 775 799 --------- --------- --------- --------- Total sales................................................... $ 11,756 $ 12,617 $ 3,453 $ 3,706 --------- --------- --------- --------- --------- --------- --------- --------- Operating earnings: Food distribution........................................... $ 212 $ 226 $ 63 $ 64 Retail food................................................. 58 35 11 15 Corporate expense........................................... (96) (107) (25) (28) --------- --------- --------- --------- Total operating earnings...................................... $ 174 $ 154 $ 49 $ 51 --------- --------- --------- --------- --------- --------- --------- ---------
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. 1996 corporate expense has been restated to exclude litigation charge which is a separate line on the earnings statements. LIQUIDITY AND CAPITAL RESOURCES Set forth below is certain information regarding the company's capital structure at the end of the third quarter of 1997 and at the end of fiscal 1996:
CAPITAL STRUCTURE OCTOBER 4, 1997 DECEMBER 28, 1996 --------------------- --------------------- (IN MILLIONS) Long-term debt.................................... $ 1,185 44.6% $ 1,216 45.5% Capital lease obligations......................... 380 14.3 381 14.2 --------- ----- --------- ----- Total debt........................................ 1,565 58.9 1,597 59.7 Shareholders' equity.............................. 1,090 41.1 1,076 40.3 --------- ----- --------- ----- Total capital................................... $ 2,655 100.0% $ 2,673 100.0% --------- ----- --------- ----- --------- ----- --------- -----
- ------------------------ Note: The above table includes current maturities of long-term debt and current obligations under capital leases. During the 40 weeks ended October 4, 1997, total debt was reduced by $32 million primarily because net cash provided by operating activities exceeded net cash used in investing activities by $40 million. Operating activities generated positive net cash flows of $82 million for the 40 weeks ended October 4, 1997 compared to positive net cash flows of $223 million for the same period in 1996. The variance is explained primarily by a higher decrease in accounts payable, a lower reduction in inventories and lower cash earnings, offset in part by a reduction in accounts receivable in 1997 versus an increase in 1996. Working capital was $311 million at the end of the third quarter of 1997, an increase from $221 million at year-end 1996. The current ratio increased to 1.28 to 1 at the end of the third quarter 1997 from 1.16 to 1 at year-end 1996. 21 Capital expenditures were $82 million for the 40 weeks ended October 4, 1997 compared to $101 million for the same period in 1996. Management budgeted total capital expenditures for 1997, excluding acquisitions, of approximately $155 million compared to $129 million actual expenditures in 1996. Completion of the company's recapitalization program permits the company to increase its total investment spending for capital expenditures and acquisitions. The company intends to increase its retail segment 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. Total capital expenditures for 1998 are expected to be $231 million. The debt-to-capital ratio at the end of the third quarter of 1997 was 58.9%, down from 59.7% at year-end 1996. The company's long-term target ratio is between 50% and 55%. On October 20, 1997, the board of directors approved a quarterly cash dividend of $.02 per share for the fourth quarter of 1997 payable December 10, 1997. For the previous six fiscal quarters the board of directors has approved a $.02 per share quarterly dividend. The company's principal sources of liquidity and capital have been cash flows from operating activities, borrowings under its credit facility with banks and other lenders and the public and private debt capital markets. On July 25, 1997, the company entered into a new $850 million senior secured credit facility and sold $500 million of senior subordinated notes. Proceeds from the initial borrowings under the new credit facility and the sale of the senior subordinated notes were used to repay all outstanding bank debt under the previous credit facility and the balance, together with additional revolver borrowings, were used to redeem the company's $200 million floating rate senior notes due 2001. The recapitalization program provides the company with increased flexibility to redeploy assets and pursue increased business investment, such as the expansion of the company's retail food operations, strengthens Fleming's capital structure by reducing senior secured bank loans and repaying the floating rate senior notes, extends the average life of total debt outstanding, and reduces annual scheduled debt maturities. The new $850 million senior secured credit facility consists of a $600 million revolving credit facility, with a final maturity of July 25, 2003, and a $250 million amortizing term loan, with a maturity of July 25, 2004. Up to $300 million of the revolver may be used for issuing letters of credit. Borrowings and letters of credit issued under the new credit facility may be used for general corporate purposes and are secured by a first priority security interest in the accounts receivable and inventories of the company and its subsidiaries and in the capital stock or other equity interests owned by the company in its subsidiaries. In addition, the new credit facility is guaranteed by substantially all company subsidiaries (see Note 6 to the company's financial statements). The stated interest rate on borrowings under the new credit agreement is equal to the London interbank offered interest rate ("LIBOR") plus a margin. The level of the margin is dependent on credit ratings on the company's senior secured bank debt. At the end of the third quarter of 1997, borrowings under the credit facility totaled $250 million in term loans and $40 million of revolver borrowings, and $85 million of letters of credit had been issued. The $500 million of senior subordinated notes ("Notes") consists of two issues: $250 million of 10 1/2% Notes due December 1, 2004 and $250 million of 10 5/8% Notes due July 31, 2007. The Notes are general unsecured obligations of the company, subordinated in right of payment to all existing and future senior indebtedness of the company, and senior to or of equal rank with all future subordinated indebtedness of the company (the company currently has no other subordinated indebtedness outstanding). The composite average interest rate for total debt before the effect of interest rate hedges was 9.5% at October 4, 1997, versus 8.9% at October 5, 1996. Including the effect of the interest rate hedges, the composite average interest rate was 9.9% and 9.5% at the respective quarter ends. 22 The 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. 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 third quarter of 1997, the company would have been allowed to borrow an additional $475 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, $43 million of additional fixed charges could have been incurred. The company is in compliance with all financial covenants under the new credit agreement and its indentures. On June 27, 1997, Moody's Investors Service (Moody's) announced it had revised its credit ratings for Fleming. Moody's downgraded its rating for the company's senior secured credit facility with banks and other lenders to Ba3 from Ba2, senior unsecured notes to B1 from Ba3, and counterparty ratings to B1 from Ba3. Moody's assigned a Ba3 rating to the company's new $850 million credit agreement, and a B3 rating for the new $500 million of senior subordinated notes. On June 30, 1997, Standard & Poor's Rating Group (S&P) announced it had revised its outlook on Fleming to stable from negative and had affirmed the company's BB corporate credit rating. Additionally, S&P raised its rating on the company's senior unsecured notes to BB- from B+. It also assigned a B+ rating to the company's new $500 million senior subordinated notes. On July 2, 1997, S&P announced it had assigned a BB+ rating to the company's new $850 million credit facility. At the end of the third quarter of 1997, the company had a total of $85 million of contingent obligations outstanding under undrawn letters of credit, primarily related to 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. During the third quarter of 1997, 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 (see "--Results of Operations-Interest expense"). The swaps have an average fixed interest rate of 7.2% and an average remaining term of 2.5 years. Net interest payments made or received under interest rate swaps are included in interest expense. 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 for the foreseeable future. In addition, lease financing may be employed for new stores. 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 twelve months. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128--Earnings Per Share, which is effective for the company's fiscal year ending December 27, 1997. The statement establishes standards for computing and presenting 23 earnings per share. Adoption of SFAS No. 128 is not expected to have a material impact on earnings per share. Also in February 1997, the FASB issued SFAS No. 129--Disclosure of Information about Capital Structure, which is effective for the company's fiscal year ending December 27, 1997. The statement establishes standards for disclosing information about a reporting company's capital structure. Adoption of SFAS No. 129 relates to disclosure within the financial statements and will not have a material effect on the company's financial statements. In June 1997, the FASB issued SFAS No. 130--Reporting Comprehensive Income which is effective for the company's fiscal year ending December 26, 1998. The statement addresses the reporting and displaying of comprehensive income and its components. Earnings per share will only be reported for net income and not for comprehensive income. The company presently believes that comprehensive income will not be significantly different from reported net income. Also in June 1997, the FASB issued SFAS No. 131--Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 modifies current segment reporting requirements and establishes, for public companies, criteria for reporting disclosures about a company's products and services, geographic areas and major customers in annual and interim financial statements. The company will adopt SFAS No. 131 for the fiscal year ending December 26, 1998 and does not expect any change in defined segments. LITIGATION AND OTHER 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." Certain losses associated with litigation matters (excluding legal fees and other costs) were recorded as follows (see Note 5 to the company's financial statements and Part II, Item 1--Legal Proceedings): PREMIUM. In the third quarter of 1996, an agreement was reached to settle two related lawsuits pending against the company, and others, in the U.S. District Court in Miami related to a failed grocery diverter, Premium Sales Corporation. The company recorded a charge of $20 million during the third quarter of 1996 in anticipation of the settlement. On October 17, 1997, all claims were dismissed in exchange for a payment of $19.5 million plus $500,000 for costs and expenses. DAVID'S. Based on the vacation of the judgment entered against the company in the David's litigation, the charge recorded during the first quarter of 1996 of approximately $7 million was reduced during the second quarter of 1996 to $650,000. During the third and fourth quarters, an additional $14,000 per quarter was recorded as additional interest. On March 21, 1997, the company reached a settlement with the plaintiff and paid $19.9 million in April 1997 in exchange for dismissal of all claims against the company, with prejudice, resulting in a charge to earnings of $19.2 million. Since the announcement of the initial judgment in the David's litigation, other customers involved in disputes with the company have made allegations of overcharges purporting to be similar to those made in the David's case and such allegations may be made by others in the future. Management is unable to predict the potential range of monetary exposure to the company from such allegations, if any. However, if the plaintiff in any such cases were to be successful in these assertions, the outcome could have a material adverse effect on the company. MEGAFOODS. In August 1996, the court approved a settlement of both the debtor's adversary proceeding against the company and the company's disputed claims in the bankruptcy proceedings of 24 a former customer and certain of its affiliates ("Megafoods"). The settlement has been approved by the creditors and is subject to court approval of a plan of liquidation. Under the terms of the settlement, the company will retain a $12 million working capital deposit, relinquish its secured and unsecured claims in exchange for the right to receive 10% of distributions, if any, made to the unsecured creditors and pay the debtor $2.5 million in exchange for the furniture, fixtures and equipment from 17 of its stores (located primarily in Texas) and two Texas storage facilities. The company agreed to lease the furniture, fixtures and equipment in 14 of the stores for nine years (or until, in each case, the expiration of the store lease) to the reorganized debtor at an annual rental of $18,000 per store. During the fourth quarter of 1996, the debtor sold its Phoenix stores; no distributions were made to the unsecured creditors. In January 1997, the debtor filed a joint liquidating plan which incorporated the settlement agreement. During the second quarter of 1997, the debtor sold its Texas assets and the purchaser agreed to assume the debtor's obligation to lease furniture, fixtures and equipment from the company. The debtor has now disposed of substantially all of its physical assets. The company has not received any distribution from the debtor's estate. The hearing on confirmation of the debtor's plan is scheduled for November 20, 1997. The company recorded charges of $6.5 million in 1994, $3.5 million in 1995 and $5.8 million in 1996. If the settlement is consummated, the company will make an additional payment of $2.5 million to the debtor's estate. Net assets recorded related to Megafoods (consisting of equipment) approximate $3 million. FURR'S On October 23, 1997, Fleming and Furr's Supermarkets, Inc. ("Furr's") reached an agreement of their business dispute. Pursuant to the terms of the agreement, neither Furr's nor Fleming admitted liability or wrongdoing. Until the end of April 1998, Furr's will be offered for sale (including Fleming's equity investment of approximately 30%). Offerees will have the opportunity to buy Furr's either with or without Fleming's El Paso product supply center, together with the related equipment and inventory. If the product supply center is not sold, Furr's (or Furr's purchaser) is obligated to pay certain liquidation costs to Fleming and Fleming will liquidate the inventory in the ordinary course. If Furr's is not sold, Furr's will have 30 days during which to elect to purchase the El Paso product supply center (and close within 120 days) or to pay Fleming liquidation costs (after a nine month transition period). Under the agreement, Fleming's supply contract with Furr's will terminate in nineteen months, or earlier, and Fleming will pay Furr's $800,000 per month until the contract terminates. Other Fleming customers currently being served by the El Paso product supply center will continue to be served by other Fleming units. As the result of the agreement, Furr's dismissed its lawsuit against Fleming and certain members of its management and Fleming dismissed its lawsuits against Furr's and certain of its officers and directors, each with prejudice. The arbitration proceedings were also dismissed. Furr's has agreed that Fleming's past pricing practices were consistent with its supply contract and has agreed that Fleming's FlexPro-SM- marketing plans will be applicable until the supply contract terminates. While Fleming will cooperate in the sale of Furr's, the ultimate outcome of these efforts cannot be predicted. However, Fleming believes that by June 1999, or earlier, Fleming will cease to supply Furr's, Fleming's distribution assets serving Furr's will be liquidated and Fleming's substantial equity investment in Furr's may be sold. The settlement does not cause an impairment in value of any recorded asset balances. While the loss of Furr's business will be significant in the near term, Fleming believes that the reinvestment of its employed capital in other profitable operations will offset the lost business. 25 In addition, 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." These and other such contingent matters are discussed in Note 5 to the company's financial statements, which appear elsewhere herein. Also see Part II, Item 1 -- Legal Proceedings. 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's business, results of operations, cash flow, capital, access to capital or financial condition. 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. Program costs are being expensed as incurred but to compensate for the dilutive effect on results of operations, the company has delayed other non-critical development and support initiatives. Fleming's plan includes extensive systems testing and is expected to be completed by the first quarter of 1999. The solution for each system is potentially unique and may be dependent on third-party software providers and developers. Failure to ensure that the company's computer systems are year 2000-compliant could have a material adverse effect on the company's operations. Additionally, failure of the company's suppliers or, more importantly, its customers, to become year 2000 compliant might have a material adverse impact on the company's operations. FORWARD-LOOKING INFORMATION This report contains forward-looking statements of expected future developments. The company wishes to ensure that such statements are accompanied by meaningful cautionary statements pursuant to the safe harbor established in the Private Securities Litigation Reform Act of 1995. The forward-looking statements herein refer to, among other matters, the company's ability to implement measures 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 and its customers' 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; the company's expectations regarding the adequacy of capital and liquidity; and the receptiveness of the company's customers to its alternative marketing plans. These forward-looking statements reflect management's expectations and are based upon currently available data; however, actual results are subject to future events and uncertainties which could materially impact actual performance. The company's future performance also involves a number of risks and uncertainties which may cause actual performance to differ materially. Among these factors are: the continuation of changes in the food distribution industry which have increased competitive pressures and reduced operating margins in both food distribution and retail food operations; the potential negative effects of the company's substantial indebtedness; limitations on management's discretion with respect to certain business matters imposed by restrictive covenants contained in the company's credit facility and indentured debt instruments; failure of the company to successfully implement its alternative marketing plans; an inability to achieve cost savings due to unexpected developments or changed plans regarding capital expenditures; potential adverse developments with respect to litigation and other contingency matters; general economic conditions and the impact of such conditions, or any of the factors listed above, on consumer spending. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following describes developments in various pending legal proceedings to which Fleming is subject. For additional information, see "Management's Discussion and Analysis--Litigation and Other Contingencies" and Note 5 to the company's financial statements appearing elsewhere herein. See also the company's Form 10-Q for the periods ended April 19, 1997 and July 12, 1997. PREMIUM. Fleming entered into a settlement agreement with respect to the Premium cases in December 1996. The company recorded a charge of $20 million during the third quarter of 1996 in anticipation of the settlement and deposited that amount into an escrow account in December pending finalization. On September 23, 1997, the deposited funds were released from escrow and on October 17, 1997 the claimants dismissed their actions against the company with prejudice. FURR'S. Furr's Supermarkets, Inc. ("Furr's") filed suit in February 1997 in the Second Judicial District Court of Bernalillo County, New Mexico naming as defendants the company, certain company officers and an employee. On October 23, 1997, Fleming and Furr's reached an agreement of their business dispute. Pursuant to the terms of the agreement, neither Furr's nor Fleming admitted liability or wrongdoing. Until the end of April 1998, Furr's will be offered for sale (including Fleming's equity investment of approximately 30%). Offerees will have the opportunity to buy Furr's either with or without Fleming's El Paso product supply center, together with the related equipment and inventory. If the product supply center is not sold, Furr's (or Furr's purchaser) is obligated to pay certain liquidation costs to Fleming and Fleming will liquidate the inventory in the ordinary course. If Furr's is not sold, Furr's will have 30 days during which to elect to purchase the El Paso product supply center (and close within 120 days) or to pay Fleming liquidation costs (after a nine month transition period). Under the agreement, Fleming's supply contract with Furr's will terminate in nineteen months, or earlier, and Fleming will pay Furr's $800,000 per month until the contract terminates. Other Fleming customers currently being served by the El Paso product supply center will continue to be served by other Fleming units. As the result of the agreement, Furr's dismissed its lawsuit against Fleming and certain members of its management and Fleming dismissed its lawsuits against Furr's and certain of its officers and directors, each with prejudice. The arbitration proceedings were also dismissed. Furr's has agreed that Fleming's past pricing practices were consistent with its supply contract and has agreed that Fleming's FlexPro-SM- marketing plans will be applicable until the supply contract terminates. While Fleming will cooperate in the sale of Furr's, the ultimate outcome of these efforts cannot be predicted. However, Fleming believes that by June 1999, or earlier, Fleming will cease to supply Furr's, Fleming's distribution assets serving Furr's will be liquidated and Fleming's substantial equity investment in Furr's may be sold. The settlement does not cause an impairment in value of any recorded asset balances. While the loss of Furr's business will be significant in the near term, Fleming believes that the reinvestment of its employed capital in other profitable operations will offset the lost business. 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 regarding wages, workers' compensation and alleged discriminatory practices; tax assessments and other matters, some of which are for substantial amounts. The ultimate effects of such actions, including the matters described below, cannot be predicted with certainty. Although the resolution of any of the matters discussed below may have a material adverse impact on interim or annual results of operations, based on plaintiffs' 27 allegations and the company's defenses, the company expects that the outcome of these matters will not result in a material adverse effect on liquidity or consolidated financial position. CLASS ACTION SUITS. In 1996, the company and certain of its present and former officers and directors, including the chief executive officer, were named as defendants in nine purported class action lawsuits filed by certain stockholders and one purported class action lawsuit filed by a noteholder. In April 1997, the court consolidated the nine 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 alleging liability for the company's 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 plaintiffs seek undetermined but significant damages. The company denies each of these allegations. On November 12, 1997, the company won a declaratory judgment action against certain of its insurance carriers regarding a directors and officers ("D&O") insurance policy issued to Fleming for the benefit of its officers and directors. On motion for summary judgment, the U.S. District Court for the Western District of Oklahoma ruled that the company's exposure, if any, under the class action suits is covered by D&O policies (aggregating $60 million) written by the insurance carriers 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 would be liable for the entire amount of coverage available under a policy even if there were some overlap in the liability created by the insured individuals and the uninsured corporation. If a corporation's liability were increased by uninsured parties beyond that of the insured individuals, then that portion of the liability would be the sole obligation of that corporation. The court also held that allocation was not available to the insurance carriers as an affirmative defense. The insurance carriers have 30 days within which to appeal. TOBACCO CASES. In August 1996, Richard E. Ieyoub, the Attorney General of the State of Louisiana, brought an action in the 14th Judicial District Court of Louisiana against numerous defendants including the company. Since then fourteen individual plaintiffs (Joseph Aezen; Najiyya El-Haddi; Victoria Lynn Katz; Robert R. Applebaum; Carla Boyce; Robert J. Ruiz; Rosalind K. Orr; Florence Ferguson; Ella Daly; Janet Anes; Kym Glasser; Welton Lee Upshur; George Thompson; and Ronald Folkman) have commenced litigation against the company (or one of its predecessors) in the Court of Common Pleas, Philadelphia County, Pennsylvania; one individual (Doyle Smith) and his spouse commenced an action in the Court of Common Pleas, Dauphin County, Pennsylvania; and one individual (Olanda Carter) has commenced action against the company in Circuit Court for Shelby County, Tennessee. Each of these cases involves substantial alleged monetary liability on the part of the company for the company's part in the distribution of tobacco products. In January 1997, a purported class action was brought in the 10th Judicial District Court of Louisiana against numerous defendants (Morgan v. U.S. Tobacco Co., et al.), including the company. Fleming was dismissed from this case in September 1997. The company is being indemnified and defended by substantial co-defendants with respect to the remaining tobacco cases. Such indemnification is unconditional and unlimited, as understood by the company. Additionally, the United States Congress is currently working toward a global settlement of tobacco related issues which could include a complete bar to future litigation against intermediate distributors such as the company. No assurance, however, can be given that such a global settlement will be successfully achieved. 28 In addition, the company is involved in the following litigation matters which, while significant, do not expose the company to any material monetary liability: DERIVATIVE SUITS. In October 1996, certain of the company's present and former officers and directors, including the chief executive officer, were named as defendants in a purported shareholder's derivative suit in the U.S. District Court for the Western District of Oklahoma. Plaintiff's complaint contains allegations that the defendants breached their respective fiduciary duties to the company and were variably responsible for causing the company to (i) become "involved with" Premium Sales and its illegal course of business resulting in the Premium litigation and the $20 million settlement agreement discussed above; (ii) "systematically" misrepresent and overstate the cost of company products sold to its customers in violation of its sale agreements, resulting in the David's litigation and ultimately leading to the class action suits discussed above; and (iii) fail to meet its disclosure obligations under the Securities Exchange Act of 1934, as amended, resulting in the class action lawsuits discussed above and increased borrowing costs, loss of customers and loss of market value. Plaintiff sought damages from the defendants on behalf of the company in excess of $50,000, forfeiture by the defendants of their salaries and other compensation for the period in which they breached their fiduciary duties, retention of all monies held by the company as deferred compensation or otherwise on behalf of the defendants as a constructive trust for the benefit of the company, and attorney's fees and costs. In another purported shareholder derivative action filed in October 1996 in the U.S. District Court for the Western District of Oklahoma, the plaintiff sued the same and additional officers and directors. In this case, the plaintiff alleged the defendants caused the company to (i) violate certain sale agreements with David's Supermarkets resulting in the David's litigation, (ii) fail to disclose to the investing public the risks associated with the David's litigation, (iii) violate certain sale agreements with Megafoods in a manner similar to that alleged by David's in the David's litigation, and (iv) defraud persons who invested in the Premium-related entities resulting in the Premium litigation. On September 30, 1997, both derivative suits were dismissed, without prejudice, for failure to make demand on the company's Board of Directors prior to instigating the litigation. POISON PILL BYLAW AMENDMENT. Oral arguments in the company's appeal were heard in the 10th Circuit Court of Appeals on September 9, 1997. The appelate court certified certain questions of law to the Oklahoma Supreme Court to determine the underlying issues of Oklahoma corporate law. The company supplies goods and services to some of its customers (particularly to its large customers) pursuant to supply contracts containing a "competitiveness" clause. Under this clause, the customer may submit to the company a qualified bid from another supplier to provide a comparable range of goods and services at prices lower than those charged by the company by more than an agreed percentage. The company has the right to lower its prices to come within the agreed percentage; if it chooses not to, the customer may accept the competitor's bid. In many contracts, the customer has the right to examine Fleming's billing practices under its contract and customers sometimes avail themselves of this right. The competitiveness clause is not exercised frequently and disputes regarding the clause must generally be submitted to binding arbitration. Additionally, the company believes that most supply contracts prohibit recovery of both punitive and consequential damages if any litigation ever arises. From time to time, customers of the company may seek to renegotiate the terms of their supply contracts, or exercise the competitiveness clause of such agreements or otherwise alter the terms of their contractual obligations to the company to obtain financial concessions. Based on its historical experience the company does not believe such efforts have had a material adverse effect on its operations or financial condition. 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 29 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 certain EPA-designated Superfund sites. While liability under CERCLA for remediation 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 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 to achieving full compliance with all applicable laws regulations and orders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
PAGE EXHIBIT NUMBER NUMBER - ----------------- ------------- 10.25 Agreement of Settlement and Release by and between Furr's Supermarkets, Inc. and Fleming Companies, Inc. 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule
(b) Reports on Form 8-K: None 30 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) /s/ KEVIN J. TWOMEY -------------------------------------- Kevin J. Twomey VICE PRESIDENT--CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) Date: November 17, 1997 31 EX-10.25 2 EXHIBIT 10-25 - ------------------------------------------------------------------------------- AGREEMENT OF SETTLEMENT AND RELEASE BY AND BETWEEN FURR'S SUPERMARKETS, INC. AND FLEMING COMPANIES, INC. DATED AS OF OCTOBER 23, 1997 - ------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 3 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II THE SALE. . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 The Investment Banker . . . . . . . . . . . . . . . . . . 8 2.2 The Offering. . . . . . . . . . . . . . . . . . . . . . . 9 (a) With the El Paso PSC. . . . . . . . . . . . . . . . . 9 (b) Without the El Paso PSC . . . . . . . . . . . . . . . 9 (c) The El Paso PSC Costs and the Liquidation Costs . . . 10 (d) The Acquisition Agreement . . . . . . . . . . . . . . 10 (e) Representations and Covenants . . . . . . . . . . . . 10 2.3 Minimum Bid Price . . . . . . . . . . . . . . . . . . . . 12 2.4 Stockholders Bids . . . . . . . . . . . . . . . . . . . . 13 2.5 Calculation of Amounts to be Paid to Holders of Issued Common Stock, Options, Warrants and SARs . . . . . 14 ARTICLE III THE RELEASES. . . . . . . . . . . . . . . . . . . . . . . 14 3.1 Furr's Release. . . . . . . . . . . . . . . . . . . . . . 14 3.2 Fleming Release . . . . . . . . . . . . . . . . . . . . . 14 3.3 Arbitration . . . . . . . . . . . . . . . . . . . . . . . 14 3.4 Dissolution Action. . . . . . . . . . . . . . . . . . . . 15 ARTICLE IV THE SUPPLY AGREEMENT AND FURR'S ELECTION. . . . . . . . . 15 4.1 The Supply Agreement. . . . . . . . . . . . . . . . . . . 15 (a) Sale of Furr's. . . . . . . . . . . . . . . . . . . . 15 (b) No Sale . . . . . . . . . . . . . . . . . . . . . . . 16 4.2 Furr's Election . . . . . . . . . . . . . . . . . . . . . 16 4.3 Furr's Election to Purchase the El Paso PSC . . . . . . . 16 4.4 Furr's Elects Not to Purchase the El Paso PSC . . . . . . 16 4.5 Credit Policies . . . . . . . . . . . . . . . . . . . . . 17 4.6 Other Indebtedness. . . . . . . . . . . . . . . . . . . . 17 4.7 Payments. . . . . . . . . . . . . . . . . . . . . . . . . 17 4.8 Reduction in Charges. . . . . . . . . . . . . . . . . . . 17 4.9 Union Agreement . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE V THE STOCKHOLDERS AGREEMENT. . . . . . . . . . . . . . . . 20 5.1 The Stockholders Agreement. . . . . . . . . . . . . . . . 20 5.2 Standstill. . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 22 6.1 Other Conditions. . . . . . . . . . . . . . . . . . . . . 22 6.2 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.5 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Binding On Successors . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Entire Agreement; Assignment. . . . . . . . . . . . . . . . . . . 24 6.9 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 Modifications and Amendments. . . . . . . . . . . . . . . . . . . 24 6.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 EXHIBITS Exhibit A Definition of Minimum Bid Price Exhibit B-1 Special Release (Furr's) Exhibit B-2 Special Release (Windward Group) Exhibit B-3 Special Release (Fleming) Exhibit B-4 Special Release (Management) Exhibit B-5 Special Release (Officers and Employees) Exhibit C Dismissal With Prejudice - Action Exhibit D-1 Dismissal With Prejudice - Delaware Litigation Exhibit D-2 Dismissal With Prejudice - Texas Litigation Exhibit E Fleming EBITDA Report Exhibit F Form of Asset Purchase Agreement Exhibit G Form of Escrow Agreement Exhibit H Windward Waiver -ii- AGREEMENT OF SETTLEMENT AND RELEASE THIS AGREEMENT OF SETTLEMENT AND RELEASE (this "Agreement"), entered into as of the 23rd day of October, 1997, by and between FURR'S SUPERMARKETS, INC., a Delaware corporation ("Furr's"), and FLEMING COMPANIES, INC., an Oklahoma corporation ("Fleming"). Fleming and Furr's are herein sometimes referred to as the "Parties". W I T N E S S E T H : WHEREAS, Furr's has filed a lawsuit against Fleming, two of its officers (the "Officers") and two other present or former employees (the "Employees") styled FURR'S SUPERMARKETS, INC. V. FLEMING COMPANIES, INC., ET AL., Case No. CIV-97-0410 JC/RLP, United States District Court for the District of New Mexico seeking the termination of the ten (10) year supply agreement dated March 11, 1991 between Furr's and Fleming (as previously amended and as modified and amended in accordance with SECTION 4.8 hereof, the "Supply Agreement"), claiming that it was overcharged for products under the Supply Agreement, breach of contract, misrepresentation, fraud and violation of certain New Mexico trade practices statutes and other claims (the "Action"), and the Local Unions, on behalf of themselves and a class of former and present employees of Furr's moved to intervene in the Action against Fleming (the claims asserted in the motion to intervene, together with any related claims which could be asserted by the Local Unions in other actions, the "Union Claim"); and WHEREAS, Furr's has petitioned the court to amend its complaint in the Action to describe allegations against Fleming and the Officers under the Racketeer Influenced Corruption and Organizations Act and other claims seeking damages in excess of $75 million; and WHEREAS, Fleming, in response to Furr's alleged competitive bid submitted under paragraph 2 of the Supply Agreement, has commenced the Arbitration Proceeding (as herein defined); and WHEREAS, Fleming (i) has filed a derivative lawsuit against Furr's, certain members of the Windward Group (as herein defined), members of the Board and members of Management (as herein defined) styled FLEMING COMPANIES, INC. V. GARY W. SWENSON, ET AL., In the Court of Chancery, State of Delaware, Case No. 15830 alleging conspiracy, mismanagement and waste (the "Delaware Litigation"), (ii) has advised Furr's it will file a complaint against Furr's for appointment of a receiver to effect corporate dissolution in the Court of Chancery, State of Delaware if the Action is not dismissed in accordance with this Agreement (the "Dissolution Action") and (iii) has filed an action styled FLEMING COMPANIES, INC. V. FURR'S SUPERMARKETS, INC., Case No. 3-97 CU 2271-D in the United States District Court for the Northern District of Texas seeking indemnification from Furr's of its obligations with respect to the Union Claim (the "Texas Action"); and WHEREAS, Fleming and Furr's are desirous of settling the Action, the Delaware Litigation, the Texas Action and the Arbitration Proceeding and that the Dissolution Action not be pursued; and WHEREAS, the authorized capital stock of Furr's consists of 1,000 shares of preferred stock, $.01 par value, none of which is issued, 4,200,000 shares of Class A Common Stock, $.01 par value (the "Class A Common Stock"), of which 1,581,984 shares are issued and outstanding, and 50,000 shares of Class B Common Stock (non-voting), $.01 par value (the "Class B Common Stock"), of which 26,494 shares are issued and outstanding (the issued and outstanding Class A Common Stock and Class B Common Stock and the authorized but unissued Class A Common Stock issuable upon the exercise of the Options, Warrants and SARs are together referred to herein as the "Common Stock"); and WHEREAS, the Windward Group, Fleming, Management and certain directors of Furr's own the following shares of Common Stock: the Windward Group owns 927,933 shares of Class A Common Stock (which does not include 14,493 shares beneficially owned by a Director Holder and held by the Windward Group) and 26,494 shares of Class B Common Stock; Fleming owns 550,550 shares of Class A Common Stock; Management owns 60,240 shares of Class A Common Stock; and the Director Holders own 43,261 shares of Class A Common Stock (which includes 14,493 shares beneficially owned by a Director Holder and held by the Windward Group) (all such shares of issued and outstanding Common Stock are collectively referred to herein as the "Issued Common Stock"); and WHEREAS, the Windward Group owns warrants to purchase 496,667 shares of Class A Common Stock (which does not include the Morrow Warrants held by the Windward Group) at an exercise price of $.01 per share (the "Windward Warrants"), the Morrow Warrants are owned by a Director Holder and held by the Windward Group and Fleming owns warrants to purchase 182,176 shares of Class A Common Stock at an exercise price of $.01 per share (the "Fleming Warrants" and together with the Windward Warrants and the Morrow Warrants, the "Warrants"); and WHEREAS, Management and other employees of Furr's and the Director Holders, prior to consummation of the sale of Furr's in accordance with Article II hereof, will hold options (vested and unvested) to purchase shares of Class A Common Stock as follows: Management and other employees of Furr's hold options to purchase 251,764 shares of Class A Common Stock (and may be granted options to purchase up to an additional 27,985 shares of Class A Common Stock immediately prior to the execution or closing of the Acquisition Agreement); and the Director Holders hold options to purchase 17,000 shares of Class A Common Stock (and may be issued previously allocated options to purchase up to an additional 3,000 shares of Class A Common Stock immediately prior to the execution or closing of the Acquisition Agreement) (together, all such options are referred to herein as the "Options"); and WHEREAS, Management holds 107,900 SARs (as herein defined); and -2- WHEREAS, the Special Committee has engaged the services of the Banker (as herein defined) to assist it in exploring strategic alternatives available to Furr's. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants, agreements, representations and warranties herein contained, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. "ACTION" shall have the meaning set forth in the first "Whereas" clause. "ACQUISITION AGREEMENT" means that certain acquisition agreement by and between Furr's and the Purchaser substantially in the form approved by the Board which will provide for the acquisition of Furr's by the Purchaser in accordance with Article II hereof. "ADVISOR" shall mean Windward Capital Partners, L.P., a Delaware limited partnership. "AFFILIATE(S)" shall have the meaning as set forth in Rule 144(a)(1) of the Securities Act of 1933, as amended. "AGREEMENT" means this Agreement of Settlement and Release dated October 23, 1997, by and between Furr's and Fleming. "ARBITRATION PROCEEDING" shall mean that certain arbitration proceeding (Case No. 71 181 0010897) commenced by Fleming on March 28, 1997 pursuant to paragraph 2(b) of the Supply Agreement. "ASSET PURCHASE AGREEMENT" shall mean an asset purchase agreement substantially in the form attached hereto as EXHIBIT F relating to the sale of the El Paso PSC to the Purchaser or Furr's, as applicable. "ASSET SALES PERIOD" shall have the meaning set forth in SECTION 4.3 hereof. "BANKER" shall mean Merrill Lynch & Co. -3- "BOARD" shall mean the duly elected board of directors of Furr's. "CLASS A COMMON STOCK" shall have the meaning set forth in the sixth "Whereas" clause. "CLASS B COMMON STOCK" shall have the meaning set forth in the sixth "Whereas" clause. "COMMON STOCK" shall have the meaning set forth in the sixth "Whereas" clause. "DELAWARE LITIGATION" shall have the meaning set forth in the fourth "Whereas" clause. "DIRECTOR HOLDERS" shall mean certain members of the Board who hold shares of Issued Common Stock and who are not employees of Furr's, Fleming or any member of the Windward Group. "DISSOLUTION ACTION" shall have the meaning set forth in the fourth "Whereas" clause. "DISTRIBUTION DATE" shall have the meaning set forth in SECTION 2.1 hereof. "EBITDA" means the earnings before interest, taxes, depreciation and amortization for a twelve month period. "EL PASO PSC" means the assets of Fleming to be conveyed to Furr's or the Purchaser, as the case may be, pursuant to the Asset Purchase Agreement, as more fully described in such agreement including, without limitation, the Fleming product supply center located at 9820 Railroad Drive, El Paso, Texas, the El Paso PSC Leases, leasehold improvements, furniture, fixtures, equipment and Inventory. "EL PASO PSC COSTS" shall have the meaning set forth in SECTION 2.2(a) hereof. "EL PASO PSC LEASES" means (i) the Furr's Warehouse El Paso Lease (9820 Railroad Drive, El Paso, Texas) dated March 1, 1973; (ii) the Refrigeration Lease; (iii) the Railroad Drive Warehouse Lease (9601 Railroad Drive, El Paso, Texas) dated June 15, 1996; and (iv) John Merrell Office Lease (9730 Railroad Drive, El Paso, Texas) dated November 1, 1996. "EMPLOYEES" shall have the meaning set forth in the first "Whereas" clause. "ESCROW AGREEMENT" shall mean an escrow agreement substantially in the form attached hereto as EXHIBIT G relating to the escrow of the Liquidation Costs. -4- "EQUITY CONSIDERATION" shall mean the portion of the Purchase Price that remains after deducting (i) all amounts to repay indebtedness for borrowed money of Furr's, including subordinated debt, and (ii) payments to be made in respect of transaction fees, and adding the aggregate exercise price payable to Furr's by holders upon exercise of all Options, Warrants and SARs. "FINANCIAL ADVISORY SERVICES AGREEMENT" shall mean that certain Financial Advisory Services Agreement dated as of June 30, 1995, between Furr's and the Advisor. "FIRST PERIOD" shall have the meaning set forth in SECTION 4.1(a) hereof. "FLEMING" means Fleming Companies, Inc., an Oklahoma corporation. "FLEMING WARRANTS" shall have the meaning set forth in the eighth "Whereas" clause. "FMP" means the Fleming Flexible Marketing Plan under which FMP Products are being supplied to Furr's from the El Paso PSC and other distribution centers of Fleming. "FMP PRODUCTS" means all grocery, frozen and dairy products (other than Perishable Products) supplied to Furr's by Fleming under the Supply Agreement and the FMP. "FURR'S" means Furr's Supermarkets, Inc., a Delaware corporation. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations promulgated thereunder. "INVENTORY" shall have the meaning set forth in SECTION 4.3 hereof. "ISSUED COMMON STOCK" shall have the meaning set forth in the seventh "Whereas" clause. "LIQUIDATION COSTS" shall have the meaning set forth in SECTION 2.2(b) hereof. "LOCAL NO. 745" shall mean the Teamsters Local No. 745, affiliated with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America. "LOCAL UNIONS" shall mean United Food and Commercial Workers Union, Local Number 1564 of New Mexico and Local Number 540. "LOWER ACCEPTABLE BID" shall have the meaning set forth in SECTION 2.3 hereof. -5- "MANAGEMENT" means Jan U. Friederich, Walter R. Doyle, Gene W. Denison and Richard M. Kaufman. "MARKETABLE SECURITIES" means any of the following: (i) if a security is an equity security, it must be freely tradable and (a) listed on the New York Stock Exchange ("NYSE"), or (b) listed on the National Association of Security Dealers Automated Quotations ("NASDAQ"), or (c) listed on the American Stock Exchange ("ASE"); or (ii) if a security is a debt security, it must be rated "BBB+" or better by Standard & Poor's Corporation and/or rated "Baa1" by Moody's and listed on the NYSE or the NASDAQ or the ASE. "MATCH NOTICE" shall have the meaning set forth in SECTION 2.3 hereof. "MINIMUM BID PRICE - EL PASO PSC" shall have the meaning set forth in EXHIBIT A hereto. "MINIMUM BID PRICE - LIQUIDATION" shall have the meaning set forth in EXHIBIT A hereto. "MORROW WARRANTS" shall mean 14,307 warrants to purchase 14,307 shares of Class A Common Stock beneficially owned by David Morrow, a Director Holder and held by the Windward Group. "OFFER NOTICE" shall have the meaning set forth in SECTION 2.3 hereof. "OFFERING MEMORANDUM" shall have the meaning set forth in SECTION 2.1 hereof. "OFFICERS" shall have the meaning set forth in the first "Whereas" clause. "OPTIONS" shall have the meaning set forth in the ninth "Whereas" clause. "PARTIES" shall have the meaning set forth in the first paragraph of this Agreement. "PAYMENT AMOUNT" means the cash refund to be made to Furr's by Fleming in accordance with the provisions of SECTION 4.8 hereof. "PERIOD" means one of thirteen (13) four (4) week periods of time in any fiscal year as established by Fleming for accounting purposes. "PERISHABLE PRODUCTS" shall mean produce, meat, bakery and deli products sold to Furr's by Fleming from the El Paso PSC or other distribution centers of Fleming. "PLAN" means that certain Furr's Supermarkets, Inc. 1993 Phantom Stock Plan, as amended. -6- "PRODUCT SUPPLY DOCUMENTS" shall have the meaning set forth in SECTION 4.8(d) hereof. "PURCHASE PRICE" shall mean the aggregate value of the consideration (cash and/or Marketable Securities) offered or paid, as applicable, by a bona fide bidder in connection with the sale of Furr's consisting of (i) all amounts to repay indebtedness for borrowed money of Furr's, including subordinated debt, (ii) all amounts in respect of the Issued Common Stock, (iii) all amounts in respect of cancellation of SARs, Warrants and Options equal to the excess of the Share Price over the respective exercise prices thereof, and (iv) payments to be made in respect of transaction fees but excluding payments in respect of El Paso PSC Costs or Liquidation Costs, which is accepted by the Board in accordance with Article II of this Agreement. "PURCHASER" means the entity who is the successful bidder for Furr's in accordance with Article II of this Agreement. "PURCHASER TRANSITION PERIOD" shall mean an approximate nine (9) month period, subject to adjustment by the Purchaser in accordance with SECTION 4.1(a) hereof, commencing on the day of the consummation of the transactions contemplated by the Acquisition Agreement if the Purchaser elects to purchase Furr's without the El Paso PSC. "REFRIGERATION LEASE" shall mean the El Paso Outside Refrigeration Warehouse Lease (10500 Railroad Drive, El Paso, Texas) dated July 15, 1995. "SALE OFFER" shall have the meaning set forth in SECTION 2.3 hereof. "SALES PERIOD" shall have the meaning set forth in SECTION 2.2 hereof. "SARS" means those stock appreciation rights granted under the Plan. "SECOND PERIOD" shall have the meaning set forth in SECTION 4.1(a) hereof. "SHARE PRICE" shall mean the per share dollar figure obtained by dividing (i) the Equity Consideration, by (ii) the sum of (A) the number of shares of Issued Common Stock, and (B) the number of shares of Common Stock that would be issued if all Options, Warrants and SARs were exercised. "SPECIAL COMMITTEE" shall have the meaning set forth in SECTION 2.3 hereof. "STOCKHOLDERS" means collectively the Windward Group, Fleming, Director Holders and Management. "STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated June 30, 1995, by and among Furr's and the Stockholders. -7- "SUPPLY AGREEMENT" shall have the meaning set forth in the first "Whereas" clause. "TEXAS ACTION" shall have the meaning set forth in the fourth "Whereas" clause. "TRANSITION PERIOD" shall mean an approximate nine (9) month period commencing on the day following Furr's' election of the option described in SECTION 4.2(b) hereof if Furr's is not sold under the provisions of Article II hereof. "TRANSPORTATION AGREEMENT" shall mean that certain Transportation Services Agreement (Dedicated Contract Carrier) made and executed on November 7, 1994, by and between Fleming Companies, Inc. and TNT Dedicated Services, Inc., as amended. "UNION AGREEMENT" shall mean that certain Agreement dated January 28, 1996 by and between Fleming Companies, Inc. and Local No. 745. "UNION AGREEMENT AMENDMENT" shall have the meaning set forth in SECTION 4.9 hereof. "UNION CLAIM" shall have the meaning set forth in the first "Whereas" clause. "WARRANTS" shall have the meaning set forth in the eighth "Whereas" clause. "WINDWARD GROUP" shall mean WINDWARD CAPITAL ASSOCIATES, L.P., a Delaware limited partnership, WINDWARD/MERCHANT, L.P., a Delaware limited partnership, WINDWARD/PARK FSI, L.L.C., a Delaware limited liability company, WINDWARD/NORTHWEST, L.P., a Delaware limited partnership and WINDWARD/MERBAN, L.P., a Delaware limited partnership. "WINDWARD WAIVER" shall have the meaning set forth in SECTION 5.1(b) hereof. "WINDWARD WARRANTS" shall have the meaning set forth in the eighth "Whereas" clause. ARTICLE II THE SALE 2.1 THE INVESTMENT BANKER. The Special Committee has engaged the services of the Banker for the purpose of advising the Special Committee in the possible sale of Furr's. The Banker, Furr's and the Special Committee, in conjunction with the Advisor and Fleming, have cooperated in the preparation of an offering circular or memorandum (the "Offering Memorandum") to be sent to prospective bidders and to be used in conducting a sale of Furr's to the bidder which, based on the recommendation of the Special Committee (subject to the provisions and -8- limitations of SECTION 2.3 below), presents the best available alternative to Stockholders in accordance with the terms and provisions of this Agreement. The Parties agree that they shall continue to use reasonable commercial efforts to complete the Offering Memorandum and that the Offering Memorandum shall begin to be distributed to prospective bidders upon the earlier to occur of the completion of the Offering Memorandum or ten business days following the date hereof (the date of such initial distribution, the "Distribution Date"). Additionally, in accordance with the terms of the Financial Advisory Services Agreement, Furr's shall continue to pay to the Advisor fees and expenses payable to the Advisor in accordance with the terms thereof. Except as provided in this Agreement and for consideration payable to Stockholders in consideration for the sale or transfer of Common Stock, Options, Warrants or SARs pursuant to the Acquisition Agreement, none of the Stockholders nor any of their respective Affiliates shall be entitled to receive any fees or other compensation as a result of the sale of Furr's. 2.2 THE OFFERING. Furr's covenants and agrees to use its reasonable commercial efforts to market Furr's for a period of six (6) months from the Distribution Date (herein the "Sales Period") all in accordance with the terms of this Article II. Furr's shall be marketed and the Offering Memorandum shall describe that prospective bidders may bid for Furr's in the alternative, i.e., with the purchase of the El Paso PSC or without the El Paso PSC. (a) WITH THE EL PASO PSC. A potential purchaser may offer to purchase Furr's with the El Paso PSC. In the event of a sale of Furr's under such circumstances, Fleming agrees to transfer the El Paso PSC to the Purchaser or to Furr's (as the Purchaser shall request) in accordance with SECTION 4.1(a) hereof, and the Parties agree that Fleming shall receive the El Paso PSC Costs in consideration for such transfer, payable in accordance with SECTION 2.2(c) below. For purposes of this Agreement, the "El Paso PSC Costs" shall mean an amount equal to the sum of (i) $6,586,000, (ii) $300,000 if, but only if, the obligations under the Refrigeration Lease are not assumed by the Purchaser or Furr's, and (iii) the value of the Inventory, valued in accordance with SECTION 4.3 hereof; PROVIDED, however that the El Paso PSC Costs shall be increased by an amount equal to the cost of any capital expenditures relating to purchasing new assets other than Inventory made by Fleming after the date hereof which were approved by Furr's (which approval shall not be unreasonably withheld) prior to the commitment by Fleming to such capital expenditure having been made. (b) WITHOUT THE EL PASO PSC. A potential purchaser may also offer to purchase Furr's without the El Paso PSC. In the event of a sale of Furr's under such circumstances, the Parties agree that Fleming shall be paid $9,994,000, by Furr's or the Purchaser, as the case may be, in order to defray the cost of Fleming's liquidation and disposition of the El Paso PSC (the "Liquidation Costs"), with such amount payable in accordance with SECTION 2.2(c) below; PROVIDED, however that in the event that neither the Purchaser nor Furr's, as the case may be, assumes the rights and obligations of Fleming pursuant to the Transportation Agreement, the Liquidation Costs shall be $10,794,000. -9- (c) THE EL PASO PSC COSTS AND THE LIQUIDATION COSTS. The Parties agree that Fleming shall be paid (i) the El Paso PSC Costs, if the Purchaser or if Furr's, as the case may be, has elected to acquire the El Paso PSC, upon consummation of the sale of the El Paso PSC to the Purchaser or to Furr's, as the case may be, in accordance with the terms of the Asset Purchase Agreement; or (ii) the Liquidation Costs, if the Purchaser elects to purchase Furr's without the El Paso PSC or if Furr's elects to continue to purchase products from Fleming during the Transition Period and terminate the Supply Agreement in accordance with SECTION 4.2(b) hereof, in either case, on the first day following the end of the Purchaser Transition Period or the Transition Period, as applicable. In the event of a sale of Furr's without the El Paso PSC in accordance with this Article II, the Acquisition Agreement shall provide that an amount received from the Purchaser equal to the Liquidation Costs shall be placed into escrow in accordance with the Escrow Agreement attached hereto as EXHIBIT G in order that Furr's or the Purchaser, as the case may be, may pay the Liquidation Costs when payable in accordance with the foregoing clause (ii), which amount shall be escrowed before the Stockholders receive their proportionate share of the net proceeds of the sale in accordance with the Acquisition Agreement. (d) THE ACQUISITION AGREEMENT. Furr's shall require and the Offering Memorandum shall reflect that the Purchaser and Furr's will be required to enter into the Acquisition Agreement during the Sales Period and to close the acquisition of Furr's within one hundred twenty (120) days from the acceptance of any prospective purchaser's bid by Furr's; PROVIDED, that such one-hundred twenty (120) day period shall be extended such that all waiting periods, if any, applicable to the transactions contemplated by the Acquisition Agreement under the HSR Act shall have expired or been terminated; PROVIDED, further that in the event any order, decree, ruling, injunction or other action shall have been entered, promulgated, threatened or enforced by any court or governmental authority of competent jurisdiction which prohibits or restricts (or threatens to prohibit or restrict) such transaction, such one hundred twenty (120) day period shall be extended until such time as such order, decree, ruling, injunction or other action shall become final and non-appealable. In the event of the failure of the Purchaser to consummate the transactions contemplated by the Acquisition Agreement, for purposes of this Agreement a sale of Furr's shall be deemed to have been unsuccessful and Furr's shall be entitled to make an election in accordance with SECTION 4.2 hereof. Furr's shall provide Fleming a reasonable opportunity to review and comment on the form of the Acquisition Agreement prior to its distribution to potential bidders; PROVIDED, however that Furr's shall be under no obligation to revise such draft Acquisition Agreement in any manner based on any such comments other than in respect to agreements, covenants, representations and warranties of Fleming, contained therein, if any, and to conform such draft to the provisions of this Agreement. (e) REPRESENTATIONS AND COVENANTS. (i) FLEMING REPRESENTATION AND COVENANT. Fleming represents that (i) the Supply Agreement EBITDA for the twelve months ended July 12, 1997 was in excess of $17 million and (ii) under the Supply Agreement, approximately 98% of product is supplied from the El Paso PSC and approximately 2% of product is supplied from the Fleming product supply -10- center located in Lubbock, Texas. Fleming covenants with Furr's, with the exception of the El Paso PSC Costs and the Liquidation Costs, that (i) it will negotiate in good faith during the Sales Period with any potential purchaser of Furr's the Asset Purchase Agreement, as provided in SECTION 4.1(a) hereof, in the case the Purchaser elects to purchase the El Paso PSC or the termination or continuation of the Supply Agreement if the Purchaser elects not to purchase the El Paso PSC, (ii) it will use its reasonable commercial efforts to assist Furr's in the collection of accounts receivable owing to Furr's from Fleming's vendors but only with respect to transactions as to which Fleming was the supplier or otherwise a party and to assist Furr's in researching and collecting amounts owing to Furr's from Topco Associates, Inc. (iii) it will use its reasonable commercial efforts to assist Furr's, the Banker and the Special Committee to market Furr's during the Sales Period in accordance with this Article II, (iv) it will, during the Transition Period or the Purchaser Transition Period, if any, use its reasonable commercial efforts to cooperate with and assist Furr's in Furr's' conversion to a new information technology system from that used by Fleming but only to the extent permitted in accordance with applicable law and by existing agreements governing the use of Fleming's existing information technology system, and (v) it will use its reasonable commercial efforts to maintain the operation of the El Paso PSC in the ordinary and usual course consistent with past practice (other than the anticipated depletion and replenishment of Inventory and as otherwise provided herein) through the Purchaser Transition Period or the Transition Period, if any, or through the sale of the El Paso PSC, if applicable, including, without limitation, through the maintenance of the necessary workforce required to operate the El Paso PSC other than any reduction in employees associated with the depletion in Inventory and reduction of services and the sale of the El Paso PSC or its liquidation, as the case may be, in accordance with this Agreement. In no event shall Fleming be under any obligation or duty to agree to, modify or amend the purchase price or any other significant term or condition with respect to the sale of the El Paso PSC which would be less beneficial to Fleming than those contained herein or in the Asset Purchase Agreement and is under no duty to act other than in the best interest of Fleming and its stockholders, it being understood and agreed to by the Parties that the actions in accordance with this Agreement, including without limitation, the rights, obligations and agreements of Fleming hereunder, are in the best interest of Fleming and its stockholders. (ii) FURR'S COVENANTS. Furr's covenants with Fleming that it will negotiate in good faith during the Sales Period with any potential purchaser of Furr's the Acquisition Agreement, as provided in SECTION 2.2(d) hereof. In no event shall Furr's be under any obligation or duty to agree to, modify or amend the purchase price any other significant term or condition with respect to the sale of Furr's which would be less beneficial to Furr's than those contained herein or in the Acquisition Agreement and is under no duty to act other than in the best interest of Furr's and its stockholders, it being understood and agreed to by the Parties that the actions in accordance with this Agreement, including, without limitation, the rights, obligations and agreements of Furr's hereunder, are in the best interest of Furr's and its stockholders. Furr's covenants and agrees that, subject to the caveat set forth in SECTION 2.4, it will require the Special Committee to make interim reports to the Board with respect to the progress of the sales process and to provide all Stockholders with such information. Furr's further covenants and agrees that during the Sales Period and, upon execution of the Acquisition Agreement, if applicable, through -11- and until the consummation of the acquisition transactions contemplated thereby or the termination thereof, it shall not issue any capital stock or any securities convertible into capital stock (including, without limitation, any additional shares of Common Stock, Options, Warrants or SARs) except as set forth in the ninth "Whereas" clause hereof or as otherwise contemplated by this Agreement. 2.3 MINIMUM BID PRICE. The Parties agree if a bona fide bid is received as a result of the sale process described in this Article II that equals or exceeds (a) the Minimum Bid Price - El Paso PSC, in case the Purchaser's bid includes the El Paso PSC, or (b) the Minimum Bid Price - Liquidation, in case the Purchaser's bid excludes the El Paso PSC, in either case, the Board, based on the recommendation of the Special Committee, shall accept the bid which it considers, in its sole judgment, to be the best available alternative for maximizing shareholder value (without being required to take into account any impact of the inclusion or exclusion of the El Paso PSC in such a transaction with respect to calculating such shareholder value) so long as the bid accepted qualifies as a Minimum Bid Price - El Paso PSC or Minimum Bid Price -Liquidation. The Parties further agree that if only one bid is received by Furr's under the provisions of Article II hereof that qualifies, the Board shall accept such qualified bid. If neither a Minimum Bid Price - El Paso PSC nor a Minimum Bid Price -Liquidation is attained through the sale process as herein provided, the sale process shall be terminated at the end of the Sales Period; PROVIDED, however, if there is a bona fide bid of less than the Minimum Bid Price - El Paso PSC or the Minimum Bid Price - Liquidation, the Board, in its sole judgement, based on the recommendation of the Special Committee, may elect to accept such bid (a "Lower Acceptable Bid"); PROVIDED further, however, that prior to the acceptance of such bid, Furr's shall have complied with the provisions of the following paragraph. Prior to the Board's acceptance, based on the recommendation of the Special Committee, of a Lower Acceptable Bid, Furr's shall notify Fleming in writing of its intent to accept a Lower Acceptable Bid (the "Offer Notice") and offer (the "Sale Offer") to sell Furr's to Fleming at a per share price and on such terms and conditions as are specified in such Offer Notice. Fleming shall have fifteen (15) days following the delivery to Fleming of such Offer Notice in which to accept in writing the Sale Offer. If Fleming does accept the Sale Offer, Fleming and Furr's shall enter into a binding agreement in the form of the acquisition agreement representing the Lower Acceptable Bid. If Fleming does not accept the Sale Offer, the Board shall be free to accept, but shall not be obligated to accept, a Lower Acceptable Bid at any price and on any terms and conditions for the remainder of the Sales Period; PROVIDED, however that in the event a Lower Acceptable Bid includes a per share price that is less than ninety percent (90%) of the per share price previously set forth in the Offer Notice, Fleming shall have a right of first refusal with respect to such Lower Acceptable Bid pursuant to which, if Fleming desires to purchase Furr's at the same price and on the same terms and conditions as offered in such Lower Acceptable Bid, Fleming would have ten (10) days following notification to it by Furr's (the "Match Notice") that the Board has made such election in which to notify Furr's of its exercise of its right of first offer and of its binding acceptance of the terms set forth in the Match Notice, in which case the Parties shall enter into an agreement in the form of the Acquisition -12- Agreement and thereafter close such transaction within a reasonable period. If Fleming does not exercise such right of first refusal within such ten (10) day period, the Board shall be free to accept, but shall not be obligated to accept, such Lower Acceptable Bid for the remainder of the Sales Period but only at the per share price and on the terms and conditions set forth in the Match Notice. The Board has designated a special committee of the Board (the "Special Committee") consisting of the following members: Benjamin F. Montoya, David W. Morrow, Lewis G. Schaeneman, Jr., Thomas J. Sikorski, Gary L. Swenson and Arthur G. Typermass. The Special Committee will work with the Banker and such other legal and financial advisors as it elects to utilize in connection with the sale process set forth in this Article II in order to set the procedures to be followed by parties participating in the process, to identify and contact potential purchasers, to conduct negotiations with potential purchasers, to make decisions relating to the sale process and to such negotiations during the Sales Period (including with respect to the terms and conditions of any particular transaction and the agreements relating thereto) and to make a determination as to the best available alternative for maximizing shareholder value. In making any such determination, the Special Committee shall be free to consider any and all factors reasonably relevant to such determination including without limitation the value of consideration offered, provided that the Special Committee may only value such consideration that is in cash and/or Marketable Securities irrespective of whether non-Marketable Securities are offered by a prospective purchaser as such consideration; any regulatory and governmental approvals required; financing terms and financial credibility of bidders; the bona fide nature of a particular bid or bidder; and any risks associated with a particular bid. The Parties acknowledge and agree that the decisions of the Special Committee will be final, determinative and binding on the Parties with respect to the transactions contemplated by this Agreement, so long as such decisions are consistent with the terms and provisions of this Agreement. The Special Committee shall recommend to the Board the transaction, if any, which it determines to be the best available alternative for maximizing shareholder value (without taking into account any impact of the inclusion or exclusion of the El Paso PSC in such a transaction with respect to calculating such shareholder value), so long as such decisions are consistent with the terms and provisions of this Agreement. The Parties hereby agree and covenant that Furr's and all of the members of the Board and the Special Committee shall be released of all claims that could be asserted in connection with the sale process contemplated hereby including without limitation any claim relating to its selection of the best available alternative in the sale process or any determinations regarding valuation of various alternative proposals (including whether a selected transaction had a higher or lower shareholder value than any other alternative) and the benefits and risks associated therewith, so long as such decisions are consistent with the terms and provisions of this Agreement. 2.4 STOCKHOLDERS BIDS. Nothing herein contained shall restrict the Stockholders from bidding for Furr's in accordance with the sale process set forth in this Article II; PROVIDED, that in the event a Stockholder elects to participate in the bidding process, such Stockholder and its representatives (including without limitation, any employee, agent or designee of such Stockholder -13- to the Board (a "Designee")) shall not be provided any information by the Banker, the Special Committee or Furr's regarding the sale process or any other participants in the sale process (including without limitation any information regarding the identity of participants, terms of any offer (including price) and status of negotiations); PROVIDED, however the Parties recognize that Management will be involved in the sales process at the direction of, and to the extent required by, the Special Committee, the Board and the Banker. At such time, however, that a Stockholder who has indicated to Furr's of its (his) intention to bid and has consequently been excluded from the receipt of information regarding the sales process in accordance with the foregoing sentence, either notifies Furr's in writing of its (his) agreement to refrain from bidding or, having bid, irrevocably withdraws its (his) bid, such Stockholder shall thereafter be entitled to all such information regarding the sales process provided to other Stockholders and such Stockholder's Designees shall thereafter be entitled to all such information provided to the members of the Board by the Special Committee. The Special Committee shall not include any member of the Board who is an employee, agent or designee of any Stockholder who has indicated to Furr's its intention to bid. 2.5 CALCULATION OF AMOUNTS TO BE PAID TO HOLDERS OF ISSUED COMMON STOCK, OPTIONS, WARRANTS AND SARS. Upon consummation of the sale of Furr's in accordance with the terms and provisions of this Article II, as of the date of the closing of the transactions contemplated by the Acquisition Agreement, the Acquisition Agreement shall provide that (i) holders of Issued Common Stock shall be entitled to receive the Share Price for each share of Common Stock they own, and (ii) holders of Options, Warrants and SARs shall be entitled to receive the Share Price less the applicable exercise price for each share of Common Stock they would have owned had they exercised their right to obtain Common Stock. Furr's shall be entitled to deduct from the amounts payable holders of Options, Warrants and SARs any amounts that Furr's is required to withhold and to pay over such deductions to the appropriate federal or state, local or other tax authorities under applicable law with respect to such amounts. ARTICLE III THE RELEASES 3.1 FURR'S RELEASE. Concurrent with the Parties' execution of this Agreement, Furr's shall execute and deliver to Fleming and the Windward Group the Special Release (Furr's) in the form attached hereto as EXHIBIT B-1 and Furr's and Fleming shall cause the dismissal with prejudice of the Action in substantially the form attached hereto as EXHIBIT C to be filed within five (5) business days. 3.2 FLEMING RELEASE. Concurrent with the Parties' execution of this Agreement, Fleming shall execute and deliver to Furr's, the Windward Group and Management the Special Release (Fleming) in the form attached hereto as EXHIBIT B-3 and Fleming and Furr's shall cause the dismissal with prejudice of the Delaware Litigation in substantially the form attached hereto -14- as EXHIBIT D-1 and the Texas Action in substantially the form attached hereto as EXHIBIT D-2 to be filed within five (5) business days. 3.3 ARBITRATION. Concurrent with the Parties' execution of this Agreement, Fleming and Furr's shall dismiss the Arbitration Proceeding. During the Sales Period, and either the Purchaser Transition Period or the Transition Period, if any, Furr's waives any and all rights to resubmit a competitive bid pursuant to paragraph 2(b) of the Supply Agreement. 3.4 DISSOLUTION ACTION. Fleming hereby agrees that it will not pursue the Dissolution Action or take any action related thereto or in connection therewith (including, without limitation, any similar proceeding regarding the dissolution, liquidation or winding up of the affairs of Furr's, either in the state of Delaware or otherwise) from and after the date hereof based on any action occurring prior to the date hereof. ARTICLE IV THE SUPPLY AGREEMENT AND FURR'S ELECTION 4.1 THE SUPPLY AGREEMENT. (a) SALE OF FURR'S. (i) In the event of the sale of Furr's to a Purchaser who has elected to purchase the El Paso PSC, Fleming and Furr's (or the Purchaser, as the case may be) shall enter into an asset purchase agreement covering the El Paso PSC substantially in the form of the Asset Purchase Agreement with such changes the parties thereto may agree, which transaction shall be closed within one hundred twenty (120) days from the acceptance of the Purchaser's bid by Furr's subject to the terms and conditions set forth in the Asset Purchase Agreement, which agreement, among other terms and conditions as therein contained, shall require Purchaser to agree to the El Paso PSC Costs as the purchase price of the El Paso PSC. The Supply Agreement shall terminate on the closing of the Asset Purchase Agreement. Pending such closing, Fleming will sell food and related products to the Purchaser or Furr's, as the case may be, and the Purchaser or Furr's shall purchase from Fleming food and related products as the case may be, in accordance with the Supply Agreement (ii) Upon the sale of Furr's to a Purchaser who has elected NOT to purchase the El Paso PSC, unless Fleming and the Purchaser have previously mutually agreed otherwise, Fleming shall continue the sale and delivery of food and related products to Furr's under the terms and provisions and for the fees set forth in the Supply Agreement for the duration of the Purchaser Transition Period. During the first seven (7) months of the Purchaser Transition Period (the "First Period"), Furr's shall continue to maintain an annualized volume of purchases pursuant to the Supply Agreement of at least $435 million; PROVIDED, however that the Purchaser may elect, in its sole discretion to shorten the First Period or to avoid the First Period completely and proceed directly to the Second Period by providing written notice to Fleming at least 5 days prior to the closing of the sale of Furr's to such Purchaser. During the last two (2) months of the -15- Purchaser Transition Period (the "Second Period"), Furr's and Fleming shall phase down the purchase of products under the Supply Agreement; PROVIDED, however, Fleming will sell food and related products to Furr's during the Purchaser Transition Period in accordance with the Supply Agreement. Following the Purchaser Transition Period, Purchaser or Furr's shall pay to Fleming the Liquidation Costs in accordance with the provisions of the Escrow Agreement as set forth in SECTION 2.2(c) hereof. (b) NO SALE. In the event Furr's and the Banker are unsuccessful in the sale of Furr's as provided in Article II hereof, the Supply Agreement shall terminate in accordance with the provisions of either SECTION 4.3 or SECTION 4.4, as the case may be. 4.2 FURR'S ELECTION. If there is no sale of Furr's as provided in Article II hereof, Furr's shall elect, by delivery of written notice to Fleming within thirty (30) days following the end of the Sales Period, to either (a) purchase the El Paso PSC at the El Paso PSC Costs (in which case the Supply Agreement shall terminate on the closing of such purchase) as provided in SECTION 4.3 below or (b) continue to purchase products from Fleming during the Transition Period and pay Fleming the Liquidation Costs at the end of the Transition Period (at which time the Supply Agreement shall terminate) as provided in SECTION 4.4 below. 4.3 FURR'S ELECTION TO PURCHASE THE EL PASO PSC. If Furr's elects to purchase the El Paso PSC, as provided by the election set forth in SECTION 4.2(a) hereof, such sale shall be consummated in accordance with an asset purchase agreement covering the El Paso PSC substantially in the form of the Asset Purchase Agreement with such changes the parties thereto may agree, which transaction shall be closed within one hundred twenty (120) days following delivery of notice regarding such sale subject to the terms and conditions set forth in the Asset Purchase Agreement, which agreement, among other terms and conditions, shall require Furr's to agree to the El Paso PSC Costs as the purchase price of the El Paso PSC. The period of time from the end of the Sales Period and the closing of the sale of the El Paso PSC to Furr's shall be known as the "Asset Sales Period." The Supply Agreement shall terminate on the closing of the Asset Purchase Agreement. During the Asset Sales Period, Fleming shall provide food and related products to Furr's in accordance with the Supply Agreement. With respect to the Inventory (as defined in the Asset Purchase Agreement) located in the El Paso PSC, Furr's agrees to purchase such Inventory under and in accordance with the inventory terms attached as Exhibit A to and made a part of the Asset Purchase Agreement. The Asset Purchase Agreement shall describe the Purchased Assets, the Assumed Liabilities and the Excluded Assets (each as defined in the Asset Purchase Agreement). Furr's shall not be entitled to the business of any other customer of the El Paso PSC who shall be transferred to another Fleming product supply center. 4.4 FURR'S ELECTS NOT TO PURCHASE THE EL PASO PSC. If Furr's elects the option set forth in SECTION 4.2(b) hereof, Fleming shall continue the sale and delivery of food and related products to Furr's under the terms and provisions and for the fees set forth in the Supply Agreement for -16- the duration of the Transition Period. During the first seven (7) months of the Transition Period, Furr's shall continue to maintain an annualized volume of purchases pursuant to the Supply Agreement of at least $435 million. During the last two (2) months of the Transition Period, Furr's and Fleming shall phase down the purchase of products under the Supply Agreement, each using its best efforts working together to minimize the amount of Inventory in the El Paso PSC at the end of the Transition Period. All Inventory remaining in the El Paso PSC at the end of the Transition Period in excess of $500,000 (except for Inventory held for sale to customers of Fleming other than Furr's) shall be transferred to Furr's at Furr's sole cost and expense which amount shall be paid for in accordance with the terms of the Supply Agreement within ten (10) days from the end of the Transition Period. Within such ten (10) day period, Furr's shall also pay to Fleming the Liquidation Costs in accordance with the provisions of the Escrow Agreement as set forth in SECTION 2.2(c) hereof. Nothing herein contained shall require Fleming to sell food and related products to Furr's under the Supply Agreement or otherwise following the end of the Transition Period. 4.5 CREDIT POLICIES. Furr's and Fleming recognize and agree that as long as the Supply Agreement shall remain in effect, Fleming shall extend to Furr's the normal trade credit it has heretofore extended; PROVIDED, however, if Furr's fails to make timely payment in readily available funds for inventory and fees under, or otherwise breaches, the Supply Agreement, or fails to make timely payment in readily available funds for general merchandise products purchased from any Fleming GMD facility and fees in connection therewith, Fleming shall have the right in its sole and exclusive determination to establish stricter credit policies, including, but not limited to, a policy of C.O.D. For calendar year 1997, Fleming's extension to Furr's of normal trade credits includes, without limitation, a credit policy for holiday turkeys as set forth in that certain Letter Agreement between Furr's and Fleming dated October 7, 1997. For calendar years after 1997, Fleming will consider credit extensions for holiday turkeys based on the then credit of Furr's. In addition and notwithstanding such credit policies, Furr's recognizes and agrees that Fleming has the right in its sole discretion to refrain from supplying food, grocery and related food products or general merchandise products if, for any reason, Furr's fails to make timely payment for such products under Fleming's credit policies established by it from time to time. 4.6 OTHER INDEBTEDNESS. Upon the termination of the Supply Agreement and as a condition to such termination, Furr's shall pay Fleming any and all other indebtedness owed to it under the Supply Agreement, evidenced by promissory note(s), open account or otherwise. 4.7 PAYMENTS. All payments to be made by Furr's to Fleming under this Agreement shall be made by wire transfer in readily available funds to an account to be designated by Fleming to Furr's at least three days prior to such payment. Payments under the Supply Agreement shall continue to be made in accordance with the provisions of the Supply Agreement. -17- 4.8 REDUCTION IN CHARGES. Fleming and Furr's agree, commencing as of the date hereof, that the Supply Agreement shall be amended and modified as follows: (a) PAYMENT AMOUNT. For purposes of settling the Action and the delivery of the releases pursuant to Article III hereof, Fleming will refund to Furr's $738,500 per Period (equivalent to $800,000 per month) of its fees and charges for the balance of the term of the Supply Agreement as modified by the terms of this Agreement, except with respect to the last two (2) months of the Transition Period and the Second Period, if either shall be applicable, during which Fleming will refund to Furr's $369,250 per Period (equivalent to $400,000 per month) of its fees and charges, herein referred to as the "Payment Amount." (b) PAYMENT. Fleming will pay Furr's the Payment Amount by wire transfer within three business days of the end of each Period for the previous Period (or portion thereof). (c) EFFECTIVE DATE. The Payment Amount will be effective upon signing of this Agreement and if this Agreement is executed in the middle of a Period, the modification will be pro rated and be effective for that portion of the Period from the date of signing hereof. (d) COST OF GOODS. The costs of goods, fees and all other charges to be paid by Furr's and charged by Fleming under the Supply Agreement, the Sell Plan attached to the Supply Agreement for Perishable Products, and FMP for FMP Products (collectively, the "Product Supply Documents"), shall be determined, calculated and charged in accordance with Fleming's past practices. Furr's ratifies and agrees that Fleming's past practices are consistent with the Product Supply Documents and agrees those practices will be employed for the remaining term of the Supply Agreement; PROVIDED, however, Fleming will do nothing to: (i) directly or indirectly increase the cost of goods purchased under the Supply Agreement, except to pass on any actual net increases in costs charged by vendors; or (ii) directly or indirectly increase the fees it charges to Furr's under the Supply Agreement and the Product Supply Documents, including without limitation (a) "upcharge" fees, (b) storage, base handling, or transportation fees, (c) corporate staff service charges, or (d) IT service charges; or (iii) otherwise manipulate or alter the cost of goods or the fee structure in such a way as to reduce the benefit of the Payment Amount. Fleming and Furr's agree that FMP as introduced to Furr's in August 1995 and as amended to the date of this Agreement will be used to price and sell FMP Products to Furr's. (e) FURR'S VOLUME OF PURCHASES. Furr's will continue to purchase substantially the same amount of all categories and mix of products it has purchased from Fleming during the -18- trailing 12 months from July 12, 1997, at a Teamwork Score as defined in the Supply Agreement of at least 60%; PROVIDED, HOWEVER, Furr's shall be under no obligation to discontinue buying goods from existing alternative suppliers. Furr's agrees to make maximum use of Fleming's "bill-through" program. (f) FLEMING PERIOD RESULTS. Fleming agrees that during the remaining term of the Supply Agreement, as modified by this Agreement, it will provide Furr's within ten business days after the end of each Period (or portion thereof) commencing with the first Period (or portion of a Period) following the execution of this Agreement, with a report of Fleming's operational results evidencing the EBITDA Fleming realized from Furr's business in the form reflected for the trailing 12 months from July 12, 1997 and set forth as EXHIBIT E attached hereto. (g) FURR'S MANAGEMENT OF THE PAYMENT AMOUNT. Furr's and Fleming recognize and agree that it is Furr's sole responsibility to manage the disposition of the Payment Amount and if such amount fails to appear as net income to Furr's it shall not be the responsibility of Fleming. (h) PRODUCT SUPPLY DOCUMENTS. Except as modified herein, the Product Supply Documents and each of the terms and conditions contained therein shall remain in full force and effect for the balance of the term of the Supply Agreement, as herein provided. (i) SUPPLY AGREEMENT. The Parties recognize and agree that a portion of the El Paso PSC Costs payable to Fleming in the event of the sale of the El Paso PSC and a portion of the Liquidation Costs payable to Fleming in the event El Paso PSC is not sold includes an amount representing a portion of Fleming's unamortized cost of acquiring the right to supply Furr's under the Supply Agreement. 4.9 UNION AGREEMENT. In the event Furr's or the Purchaser, as the case may be, elects to purchase the El Paso PSC, Furr's or the Purchaser, as the case may be, shall negotiate with Local No. 745 an amendment, modification, or replacement of the Union Agreement (the "Union Agreement Amendment"); which shall provide, inter alia, that Fleming's liability and obligation under the Union Agreement will terminate and that Fleming will no longer be liable for any prospective obligations with respect to the Union Agreement accruing following the date hereof or otherwise accruing in connection with the transactions contemplated by this Agreement or the Asset Purchase Agreement, except as follows: (a) in the event Furr's, the Purchaser or Fleming, as the case may be, pays severance to any union members that will not be hired by Furr's or the Purchaser, Fleming shall be liable for the first $200,000 of such severance obligation, and Furr's or the Purchaser, as the case may be, shall be liable for any additional amount; and (b) Furr's or the Purchaser, as the case may be, shall pay Fleming $500,000 in cash at the closing of the Acquisition Agreement, and Fleming shall be solely responsible for, -19- and shall indemnify Furr's or the Purchaser, as the case may be, against, any and all liability with respect to any multiemployer pension plans which cover the employees of the El Paso PSC arising as of or prior to the closing of the Asset Purchase Agreement. Fleming agrees that it is solely responsible for any and all severance obligations to managerial and other employees who are not covered under the Union Agreement. ARTICLE V THE STOCKHOLDERS AGREEMENT 5.1 THE STOCKHOLDERS AGREEMENT. (a) With the exception of the rights provided by and the terms and provisions of Article II of the Stockholders Agreement, Fleming hereby covenants and agrees that it will take no action or otherwise exercise any right pursuant to the Stockholders Agreement from and after the date hereof until the date following the expiration of the Sales Period. Fleming further covenants and agrees that, upon execution of the Acquisition Agreement, if applicable, through and until the closing of the acquisition transactions contemplated by such agreement or the termination thereof, it hereby waives its rights under the Stockholders Agreement: (1) in connection with the transactions contemplated thereby as follows: (i) the provisions of Section 3.2 of the Stockholders Agreement regarding the right of first refusal with respect to a transfer of Common Stock, including the notice provisions relating thereto; (ii) the provisions of Section 5.3 of the Stockholders Agreement requiring that in the event of the sale of assets of Furr's, the applicable purchase agreement shall provide that the purchaser will assume any supply agreement between Fleming and Furr's then in effect; (iii) the provisions of clause (f) of Section 5.4 of the Stockholders Agreement with respect to notice to Fleming regarding the terms, provisions and documents relating to a transaction involving Furr's; (iv) the provisions of Section 5.7 of the Stockholders Agreement regarding the right of first offer with respect to a transfer of Common Stock, including the notice provisions relating thereto; and (v) the provisions of Section 6.1 of the Stockholders Agreement regarding preemptive rights; or -20- (2) which are inconsistent with the provisions of this Agreement (or the other agreements contemplated hereby), including but not limited to the provisions of Article III (Restrictions on Transfer; Rights of First Refusal), Article IV (Tag-Along Rights); Article V (Right to Compel Sale or IPO Event); Article VI (Preemptive Rights); and Article VII (Put and Call Rights on Management Stock). (b) Concurrently with the Parties' execution of this Agreement, each of the members of the Windward Group shall have executed and delivered to Fleming and Furr's a waiver, in form attached hereto as EXHIBIT H (the 'Windward Waiver"), by the terms and provisions of which each member of the Windward Group, with the exception of the rights provided by and the terms and provisions of Article II of the Stockholders Agreement, shall covenant and agree to take no action or otherwise exercise any right pursuant to the Stockholders Agreement from and after the date of this Agreement until the date following the expiration of the Sales Period. The waiver shall also provide and each member of the Windward Group shall further covenant and agree that, upon the execution of the Acquisition Agreement, if applicable, through and until the closing of the acquisition transactions contemplated thereby or the termination thereof, each of them shall waive their respective rights under the Stockholders Agreement: (1) in connection with the transactions contemplated thereby as follows: (i) the provisions of Section 3.2 of the Stockholders Agreement regarding the right of first refusal with respect to a transfer of Common Stock, including the notice provisions relating thereto; (ii) the provisions of Section 5.1 of the Stockholders Agreement regarding the right to compel sale generally; (iii) the provisions of Section 5.2 of the Stockholders Agreement regarding the right of compelled sale pursuant to a sale of the Common Stock; (iv) the provisions of Section 5.3 of the Stockholders Agreement regarding the right of compelled sale other than pursuant to a sale of Common Stock; (v) the provisions of Section 5.4 of the Stockholders Agreement regarding the cooperation of each Stockholder; (vi) the provisions of Section 5.6 of the Stockholders Agreement relating to the rights to compel an IPO Event, as defined in the Stockholders Agreement; and (vii) the provisions of Section 6.1 of the Stockholders Agreement regarding preemptive rights; or -21- (2) which are inconsistent with the provisions of this Agreement (or the other agreements contemplated hereby), including but not limited to the provisions of Article III (Restrictions on Transfer; Rights of First Refusal), Article IV (Tag-Along Rights); Article V (Right to Compel Sale or IPO Event); Article VI (Preemptive Rights); and Article VII (Put and Call Rights on Management Stock). The waiver described herein shall also provide that each member of the Windward Group agrees that it will not transfer, pledge or in any manner hypothecate or dispose of its Common Stock during the Sales Period except (i) as provided in this Agreement or (ii) to a Permitted Transferee (as defined in the Stockholders Agreement) who agrees to take such Common Stock subject to the provisions of this Agreement applicable to the Windward Group. 5.2 STANDSTILL. Fleming agrees that it will not transfer, pledge or in any manner hypothecate or dispose of its Common Stock during the Sales Period except (i) as provided in this Agreement or (ii) to a Permitted Transferee who agrees to take such Common Stock subject to the provisions of this Agreement applicable to Fleming. Furr's covenants and agrees that, upon the execution of the Acquisition Agreement, if applicable, through and until the closing of the acquisition transactions contemplated thereby or the termination thereof, it hereby waives any and all rights it may have under Section 3.2 of the Stockholders Agreement. ARTICLE VI MISCELLANEOUS 6.1 OTHER CONDITIONS. Concurrently with the Parties' execution of this Agreement (i) each member of the Windward Group shall have executed and delivered (A) to Fleming and Management the Special Release (Windward Group) in the form attached hereto as EXHIBIT B-2 and the Windward Waiver, and (B) to Furr's an acknowledgment that Furr's shall be sold in accordance with the provisions of Article II hereof, including without limitation the minimum bid price provisions of, and the designation of the Special Committee's authority contained in, SECTION 2.3 hereof as set forth in the Windward Waiver, (ii) each of Management shall have executed and delivered to Fleming, the Windward Group and Furr's the Special Release (Management) in the form attached hereto as EXHIBIT B-4, and (iii) each of the Officers and Employees shall have executed and delivered to Furr's, the Windward Group, Fleming and Management the Special Release (Officers and Employees) in the form attached hereto as EXHIBIT B-5. 6.2 CONFIDENTIALITY. Except as otherwise required by law, the Parties shall not disclose any information regarding the terms and provisions of this Agreement, the Offering Memorandum and the transactions contemplated hereby except as specifically contemplated hereby or as mutually agreed to by the Parties. 6.3 NOTICES. All notices that are required or may be given pursuant to this Agreement must be in writing and delivered personally, by a recognized courier service, by a recognized -22- overnight delivery service, by telecopy or by registered or certified mail, postage prepaid, to the Parties at the following addresses (or to the attention of such other person or such other address as any party may provide to the other parties by notice in accordance with this SECTION 6.3): if to Furr's: with copies to: Furr's Supermarkets, Inc. Jacobvitz, Thuma & Matthews 1730 Montano Road, N.W. 500 Marquette N.W., Suite 650 Albuquerque, NM 87107 Albuquerque, NM 87102 Attn: Jan U. Friederich Attn: David T. Thuma, Esq. Telecopy: (505) 344-0810 Telecopy: (505) 766-9287 with copies to: Windward Capital Partners, L.P. Skadden, Arps, Slate, Meagher & Flom LLP Americas Tower, 42nd floor 919 Third Avenue 1177 Avenue of the Americas New York, NY 10022 New York, NY 10036 Attn: Eileen Nugent Simon, Esq. Attn: Thomas J. Sikorski Telecopy: (212) 735-2000 Telecopy: (212) 382-6534 if to Fleming: with copies to: Fleming Companies, Inc. McAfee & Taft 6301 Waterford Blvd. Two Leadership Square Oklahoma City, OK 73126 Tenth Floor Attn: William J. Dowd Oklahoma City, OK 73102 President and Chief Attn: John M. Mee, Esq. Operating Officer Telecopy: (405) 235-0439 Telecopy: (405) 840-7226 6.4 GOVERNING LAW. This Agreement and the attached releases shall be governed by the law of the State of Delaware. 6.5 ATTORNEYS' FEES. In the event of any litigation, arbitration or other adjudicative proceeding arising out of or relating to this Agreement, or either of the attached releases, the prevailing party shall recover its attorneys' fees and costs against the other party or parties. 6.6 FURTHER ASSURANCES. Each of the Parties shall use reasonable and diligent efforts to proceed promptly with the transactions contemplated herein, to fulfill the conditions precedent, and to execute such further documents and perform such further acts as may be reasonably required or appropriate to effectuate the purpose and intent of this Agreement. -23- 6.7 BINDING ON SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective partners, officers, directors, shareholders, employees, agents, independent contractors and the affiliates, successors, assigns, heirs, executors, administrators and representatives of each of the foregoing. 6.8 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement constitutes and is intended to constitute the entire agreement of the Parties concerning the subject matter hereof. No covenants, agreements, representations or warranties of any kind whatsoever have been made by any party hereto, except as specifically set forth herein. All prior discussions and negotiations with respect to the subject matter hereof are superseded by this Agreement. The Parties agree that the Purchaser or Furr's, as the case may be, may assign its rights pursuant to SECTION 4.1(a) or SECTION 4.3, as applicable, to purchase the El Paso PSC to a third party in connection with a sale of Furr's in accordance with Article II hereof or pursuant to SECTION 4.2(a). 6.9 CONSTRUCTION. The Parties hereby acknowledge that they are sophisticated commercial entities or business people. The Parties also acknowledge that each of them has been represented by independent counsel of their own choice throughout all negotiations preceding the execution of this Agreement, and that they have executed the same upon the advice of their independent counsel. The Parties and their respective counsel cooperated in the drafting and preparation of this Agreement such that it shall be deemed their joint work product and may not be construed against any of the Parties by reasons of its preparation. 6.10 SEVERABILITY. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, in whole or in part, the remaining provisions, and any partially invalid or unenforceable provisions, to the extent valid and enforceable, shall nevertheless be binding and valid and enforceable. 6.11 MODIFICATIONS AND AMENDMENTS. This Agreement may not be modified or terminated orally and no modification, termination or waiver shall be valid unless in writing and signed by all of the Parties. 6.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -24- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement the day and year first above written. FURR'S: FURR'S SUPERMARKETS, INC., a Delaware corporation By -------------------------------- Jan U. Friederich Chief Executive Officer and Chairman of the Board FLEMING: FLEMING COMPANIES, INC., an Oklahoma corporation By -------------------------------- William J. Dowd President -25- EX-12 3 EXHIBIT 12 EXHIBIT 12 FLEMING COMPANIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
40 WEEKS ENDED ---------------------- OCTOBER 4, OCTOBER 5, 1997 1996 ---------- ---------- (IN THOUSANDS OF DOLLARS) Earnings: Pretax income........................................................................... $ 56,201 $ 33,464 Fixed charges, net...................................................................... 153,981 159,184 ---------- ---------- Total earnings........................................................................ $ 210,182 $ 192,648 ---------- ---------- ---------- ---------- Fixed charges: Interest expense........................................................................ $ 124,129 $ 125,045 Portion of rental charges deemed to be interest......................................... 29,570 33,861 Capitalized interest.................................................................... -- 103 ---------- ---------- Total fixed charges................................................................... $ 153,699 $ 159,009 ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges........................................................ 1.37 1.21 ---------- ---------- ---------- ----------
"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 4 EXHIBIT 27 FDS
5 1,000 9-MOS DEC-27-1997 DEC-29-1996 OCT-04-1997 27,019 0 332,165 22,352 997,219 1,429,191 1,595,454 673,326 3,869,635 1,117,738 1,137,684 0 0 94,510 995,858 3,869,635 11,755,946 11,755,946 10,670,361 11,560,776 0 14,840 124,129 56,201 28,602 27,599 0 (13,330) 0 14,269 .38 .38
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