UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 15, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
(405) 840-7200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's
classes of common stock, as of August 11, 1995 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 37,597,000
FLEMING COMPANIES, INC.
INDEX
Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings -
12 weeks ended July 15, 1995, and July 9, 1994
Consolidated Condensed Statements of Earnings -
28 Weeks Ended July 15, 1995, and July 9, 1994
Consolidated Condensed Balance Sheets -
July 15, 1995, and December 31, 1994
Consolidated Condensed Statements of Cash Flows -
28 Weeks Ended July 15, 1995, and July 9, 1994
Notes to Consolidated Condensed Financial
Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Part II. OTHER INFORMATION:
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Consolidated Condensed Statements of Earnings
For the 12 weeks ended July 15, 1995, and July 9, 1994
(In thousands, except per share amounts)
Second Interim Period 1995 1994
Net sales $4,020,202 $2,883,648
Costs and expenses:
Cost of sales 3,696,528 2,699,029
Selling and administrative 266,543 144,157
Interest expense 40,046 16,365
Interest income (16,124) (11,811)
Equity investment results 3,074 2,640
Total costs and expenses 3,990,067 2,850,380
Earnings before taxes 30,135 33,268
Taxes on income 15,399 14,671
Net earnings $ 14,736 $ 18,597
Net earnings per share $.39 $.50
Dividends paid per share $.30 $.30
Weighted average shares outstanding 37,546 37,247
See notes to consolidated condensed financial statements.
Consolidated Condensed Statements of Earnings
For the 28 weeks ended July 15, 1995, and July 9, 1994
(In thousands, except per share amounts)
Year to Date 1995 1994
Net sales $9,505,605 $6,915,629
Costs and expenses:
Cost of sales 8,745,892 6,476,997
Selling and administrative 630,487 345,692
Interest expense 96,443 38,194
Interest income (37,893) (28,064)
Equity investment results 9,547 5,897
Facilities consolidation (8,982) ---
Total costs and expenses 9,435,494 6,838,716
Earnings before taxes 70,111 76,913
Taxes on income 35,827 33,919
Net earnings $ 34,284 $ 42,994
Net earnings per share $.91 $1.16
Dividends paid per share $.60 $.60
Weighted average shares outstanding 37,518 37,149
See notes to consolidated condensed financial statements.
Consolidated Condensed Balance Sheets
(In thousands)
July 15, December 31,
Assets 1995 1994
Current assets:
Cash and cash equivalents $ 2,254 $ 28,352
Receivables 386,453 364,884
Inventories 1,102,534 1,301,980
Other current assets 81,528 124,865
Total current assets 1,572,769 1,820,081
Investments and notes receivable 287,275 402,603
Investment in direct financing leases 229,657 230,357
Property and equipment 1,484,104 1,455,954
Less accumulated depreciation
and amortization (510,549) (467,830)
Property and equipment, net 973,555 988,124
Other assets 156,576 179,332
Goodwill 985,982 987,832
Total assets $4,205,814 $4,608,329
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 885,306 $ 960,333
Current maturities of
long-term debt 97,731 110,321
Current obligations under
capital leases 17,555 15,780
Other current liabilities 217,914 237,197
Total current liabilities 1,218,506 1,323,631
Long-term debt 1,341,525 1,641,390
Long-term obligations under
capital leases 364,328 353,403
Deferred income taxes 35,790 51,279
Other liabilities 149,749 160,071
Shareholders' equity:
Common stock, $2.50
par value per share 94,129 93,705
Capital in excess of par value 498,524 494,966
Reinvested earnings 515,918 503,962
Cumulative currency
translation adjustment (2,926) (2,972)
1,105,645 1,089,661
Less guarantee of ESOP debt (9,729) (11,106)
Total shareholders' equity 1,095,916 1,078,555
Total liabilities and
shareholders' equity $4,205,814 $4,608,329
See notes to consolidated condensed financial statements.
Consolidated Condensed Statements of Cash Flows
For the 28 weeks ended July 15, 1995, and July 9, 1994
(In thousands)
1995 1994
Net cash provided by operating activities $263,184 $277,710
Cash flows from investing activities:
Collections on notes receivable 57,452 41,319
Notes receivable funded (53,822) (66,677)
Notes receivable sold 77,063 ---
Proceeds from sale of businesses --- 6,682
Purchase of property and equipment (59,148) (38,164)
Proceeds from sale of property
and equipment 21,056 4,535
Investments in customers (8,761) (12,764)
Proceeds from sale of investments 16,331 4,082
Other investing activities (1,069) (2,992)
Net cash provided (used) in
investing activities 49,102 (63,979)
Cash flows from financing activities:
Proceeds from long-term borrowings --- 155,000
Principal payments on long-term debt (315,066) (331,938)
Principal payments on capital
lease obligations (8,904) (6,629)
Sale of common stock under
incentive stock and
stock ownership plans 3,982 3,388
Dividends paid (22,329) (22,192)
Other financing activities 3,933 (6,305)
Net cash used in
financing activities (338,384) (208,676)
Net increase (decrease)in cash and
cash equivalents (26,098) 5,055
Cash and cash equivalents,
beginning of period 28,352 1,634
Cash and cash equivalents,
end of period $ 2,254 $ 6,689
Supplemental information:
Cash paid for interest $96,459 $38,553
Cash paid for income taxes $ 2,668 $28,123
See notes to consolidated condensed financial statements.
Notes to Consolidated Condensed Financial Statements
1. The consolidated condensed balance sheet as of July 15,
1995, and the consolidated condensed statements of earnings
and cash flows for the 12 and 28-week periods ended July 15,
1995, and July 9, 1994, have been prepared by the company,
without audit. In the opinion of management, all
adjustments necessary to present fairly the company's
financial position at July 15, 1995, and the results of
operations and cash flows for the periods presented have
been made. All such adjustments are of a normal, recurring
nature. Primary earnings per share are calculated using the
weighted average shares outstanding. The impact of
outstanding stock options on primary earnings per share is
not material.
2. The statement of earnings for the 28 weeks ended July 15,
1995 reflects the effect of the change in management's
estimate of the cost associated with the general
merchandising portion of the facilities consolidation plan.
The estimate reflects reduced expense and cash outflow.
Accordingly, the company reversed $9 million of the
provision for restructuring during the first quarter of
1995. The reversal is shown as a credit to the facilities
consolidation expense line in the accompanying financial
statements.
3. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted. These consolidated condensed financial
statements should be read in conjunction with the
consolidated financial statements and related notes included
in the company's 1994 annual report on Form 10-K.
4. The LIFO method of inventory valuation is used for
determining the cost of most grocery and certain perishable
inventories. The excess of current cost of LIFO inventories
over their stated value was $18 million at July 15, 1995,
and $19 million at December 31, 1994.
5. The company and numerous other defendants have been named in
two suits filed in U.S. District Court in Miami. The
plaintiffs predicate liability on the part of the company as
a consequence of an allegedly fraudulent scheme conducted by
Premium Sales Corporation and others in which unspecified
but large losses in the Premium-related entities occurred to
the detriment of a purported class of investors which has
brought one of the suits. The other suit is by the
receiver/trustee of the estates of Premium and certain of
its affiliated entities. Plaintiffs seek damages, treble
damages, attorneys' fees, costs, expenses and other
appropriate relief. While the amount of damages sought
under most claims is not specified, plaintiffs allege that
hundreds of millions of dollars were lost as the result of
the allegations contained in the complaint.
The litigation is complex and the ultimate outcome cannot
presently be determined. Furthermore, management is unable
to predict a potential range of monetary exposure, if any,
to the company. Based on the large recovery sought, an
unfavorable judgment could have a material adverse effect on
the company. Management believes, however, that a material
adverse effect on the company's consolidated financial
position is not likely. The company is vigorously defending
the actions.
6. In July 1994, the company completed the acquisition of all
the outstanding stock of Haniel Corporation, the parent of
Scrivner Inc. ("Scrivner"). The company paid $388 million
in cash and refinanced substantially all of Scrivner's
existing indebtedness (approximately $670 million in
aggregate principal and premium).
The acquisition has been accounted for as a purchase and the
results of operations of Scrivner have been included in the
consolidated financial statements since the beginning of the
third quarter of 1994. The purchase price was allocated
based on estimated fair values at the date of the
acquisition. At July 15, 1995, the excess of purchase price
over assets acquired was $555 million and is being amortized
on a straight-line basis over 40 years. Pro forma
information for the 28 weeks ending July 9, 1994,
summarizing the results of operations of the company (28
weeks) and Scrivner (24 weeks) as if the acquisition had
occurred at the beginning of 1994, with pro forma
adjustments to give effect to amortization of goodwill,
interest expense on acquisition debt and certain other
adjustments, together with related income tax effects, are
as follows: net sales - $10.1 billion; net earnings - $34
million; and net earnings per share - $.92.
7. The senior notes issued in 1994 are guaranteed by all direct
and indirect subsidiaries of the company (except for certain
inconsequential subsidiaries), all of which are wholly
owned. The guarantees are joint and several, full, complete
and unconditional. There are no restrictions on the ability
of the subsidiary guarantors to transfer funds to the
company in the form of cash dividends, loans or advances.
Full financial statements for the subsidiary guarantors are
not presented herein because management does not believe
such information would be material.
The following summarized financial information for the
combined subsidiary guarantors has been prepared from the
books and records maintained by the subsidiary guarantors
and the company. Intercompany transactions are eliminated.
The summarized financial information may not necessarily be
indicative of the results of operations or financial
position had the subsidiary guarantors been operated as
independent entities. The summarized financial information
includes allocations of material amounts of expenses such as
corporate services and administration, interest expense on
indebtedness and taxes on income. The allocations are
generally based on proportional amounts of sales or assets,
and taxes on income are allocated consistent with the asset
and liability approach used for consolidated financial
statement purposes. Management believes these allocation
methods are reasonable. During 1995, several subsidiary
guarantors have been merged into Fleming Companies, Inc.,
resulting in a reduction in the amounts appearing in the
summarized financial information.
July 15,
(In millions) 1995
Current assets $664
Noncurrent assets 521
Current liabilities 949
Noncurrent liabilities 20
28 weeks ended
July 15,
(In millions) 1995
Net sales $1,944
Costs and expenses 1,920
Earnings (loss) before
extraordinary items 12
Net earnings (loss) 12
8. The accompanying earnings statements include the following:
28 weeks 12 weeks
1995 1994 1995 1994
(in thousands)
Depreciation and amortization
(includes amortized
financing costs) $98,392 $58,784 $42,803 $24,939
Amortized financing costs
(part of interest expense) 3,571 564 1,526 242
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
In January 1994, the company announced the details of a plan
to restructure its organizational alignment, re-engineer its
operations and consolidate its facilities. The company's
objective is to lower product costs to retail customers while
providing the company with a fair and adequate return for product
and services. To achieve this objective, management is making
major organizational changes, introducing a new Fleming Flexible
Marketing Plan and investing in technology. The actions
contemplated by the plan will affect the company's food and
general merchandise wholesaling operations as well as certain
retail operations and are expected to be substantially completed
by the end of 1996. The acquisition of Scrivner, described more
fully below, has not changed the plan's design but has delayed
full completion.
In the first quarter of 1995, management changed its
estimates with respect to the general merchandising operations
portion of the facilities consolidation plan. The revised
estimate reflects reduced expense and cash outflow. Accordingly,
during the first quarter the company reversed $9 million of the related
provision.
Facilities consolidation has resulted in the closure of four
distribution centers and will result in the closure of one
additional facility.
Results, beginning with the third quarter of 1994, have been
materially affected by the acquisition of Scrivner. Sales have
increased dramatically and gross margin and selling and
administrative expenses as a percent of sales are significantly
higher due to the higher percentage of retail food operations in
Scrivner. Due to the acquisition, interest expense increased
materially as a result of both increased borrowing levels and
higher interest rates, and expense for the amortization of
goodwill increased significantly. The company has closed six
Scrivner distribution centers and has announced plans and begun
closing actions on three additional facilities.
Management has identified certain on-going expenses to be
incurred during the transitional phases of the company's
consolidation, reorganization and re-engineering plan and the
integration of Scrivner. These expenses include travel and
training costs, additional expenditures associated with
maintaining two operational systems during the integration of
Scrivner and the roll-out of the new flexible marketing plan,
software installation costs and other miscellaneous costs
associated with facilities consolidations (including costs
relating to operational inefficiencies during the change-over,
deferred sales growth and lost business opportunities). These
costs are difficult to isolate, quantify or predict, and the
timing of various components is erratic. Nevertheless,
management believes that such expenses have been incurred at a
significant rate since the end of the second quarter of 1994 and
that consolidation, reorganization and reengineering expenses will
continue to negatively impact earnings until sometime in 1997.
Results of Operations
Set forth in the following table is information for the second
interim and year to date periods of 1995 and 1994 regarding
certain components of the company's earnings expressed as a
percentage of net sales.
1995 1994
Second Interim Period
Net sales 100.00% 100.00%
Gross margin 8.05 6.40
Less:
Selling and administrative expense 6.63 5.00
Interest expense .99 .57
Interest income (.40) (.41)
Equity investment results .08 .09
Total 7.30 5.25
Earnings before taxes .75 1.15
Taxes on income .38 .51
Net earnings .37% .64%
Year to Date
Net sales 100.00% 100.00%
Gross margin 7.99 6.34
Less:
Selling and administrative expense 6.63 5.00
Interest expense 1.01 .55
Interest income (.40) (.41)
Equity investment results .10 .09
Facilities consolidation (.09) ---
Total 7.25 5.23
Earnings before taxes .74 1.11
Taxes on income .38 .49
Net earnings .36% .62%
Net sales. Sales for the second quarter (12 weeks) of 1995
increased by $1.1 billion, or 39%, to $4 billion from $2.9
billion for the same period in 1994. Year to date, sales
increased by $2.6 billion, or 37%, to $9.5 billion from $6.9
billion for the 28 weeks in 1994. The increases in net sales
were due to the Scrivner acquisition as Scrivner's sales were not
included in the comparable periods in 1994. Without the
acquisition, net sales for the quarter and year-to-date periods
would have declined slightly due to several factors, none of
which are individually material to net sales, including: the
expiration of a temporary agreement with Albertson s, Inc. as its
Florida distribution center came on line, the sale of a
distribution center, the loss of certain customers at three
different distribution centers, the loss of business due to the
bankruptcy of Megafoods Stores, Inc. ("Megafoods") and the
closing or sale of certain corporate stores. Sales comparisons
for the third quarter of 1995 will be comparable to 1994 since
the acquisition occurred at the beginning of the third quarter of
1994. Third and fourth quarter year-to-date comparisons will
continue to be affected by the Scrivner acquisition.
In August 1994, Megafoods and certain of its affiliates
filed Chapter 11 bankruptcy proceedings. At such date,
Megafoods' total indebtedness to Fleming for goods sold on open
account, equipment leases and loans aggregated approximately $20
million. The company holds collateral with respect to a
substantial portion of these obligations. Megafoods is also
liable to the company under store sublease agreements for
approximately $37 million, and the company is contingently liable
on certain lease guarantees given on behalf of Megafoods.
The company is partially secured as to these obligations.
Megafoods has alleged claims against the company
arising from breach of contract, tortious interference with
contracts and business relationships and wrongful set-off of a
$12 million cash security deposit and has threatened to seek
equitable subordination of the company's claims. The company
denies these allegations and will vigorously protect its
interests.
Based on these events, the company took a charge to earnings
of $6.5 million in the third quarter of 1994 to cover its
estimated net credit exposure. However, the exact amount of the
ultimate loss may vary depending upon future developments in the
bankruptcy proceedings including those related to collateral
values, priority issues and the company's ultimate expense, if
any, related to certain customer store leases. An estimate of
additional possible loss, or the range of additional losses, if
any, cannot be made at this stage of the proceedings. The
company estimates that its annualized sales to Megafoods prior to
the bankruptcy were approximately $335 million.
In June 1995, Megafoods moved the majority of its business
in the Arizona market (approximately $150 million annually) to a
different supplier. Although there is no formal agreement
in place, Fleming expects to continue to sell approximately $20
million of produce annually to Megafoods.
Fleming has a substantial business base in its Phoenix
division which services more than 400 locations. In response to
the lost Megafoods business, the company will adjust its Phoenix
operations' overhead costs and pursue new business opportunities.
Fleming measures inflation using data derived from the
average cost of a ton of product sold by the company. For the
year-to-date period in 1995, food price inflation was flat.
Gross margin. Gross margin for the second quarter of 1995
increased by $139 million, or 75%, to $324 million from $185
million for the same period of 1994 and increased as a percentage
of net sales to 8.05% from 6.40% for the same period in 1994.
Year to date, gross margin increased by $321 million, or 73%, to
$760 million from $439 million for the same period of 1994. As a
percentage of net sales, gross margin was 7.99% versus 6.34% in
1994. The increases in gross margin for both periods were due to
the addition of retail operations, principally the Scrivner
retail operations, which were not in the 1994 period. Retail
operations typically have a higher gross margin and higher
selling expenses than wholesale operations. Product handling
expenses, consisting of warehouse, truck and building expenses,
were essentially unchanged as a percentage of net sales in 1995
when compared to the 1994 periods.
Selling and administrative expenses. Selling and
administrative expenses for the second quarter of 1995 increased
by $122 million, or 85%, to $267 million from $144 million for
the same period in 1994 and increased as a percentage of net
sales to 6.63% for 1995 from 5.00% in 1994. For the year-to-date
period, selling and administrative expenses increased by $285
million, or 82%, to $630 million from $346 million in the 1994
period. These increases were due primarily to the acquisition of
Scrivner, and also include other retail operations which were not
in the 1994 period. Partially offsetting the increases was a $4
million gain during the second quarter of 1995 on the sale of
certain notes receivable. Selling and administrative expenses also
have increased due to additional goodwill amortization related to the
acquisition. Third and fourth quarter year-to-date comparisons
will continue to be affected by the acquisition.
As more fully described in its 1994 Annual Report on Form
10-K, the company has a significant amount of credit extended to
its customers through various methods. These methods include
customary and extended credit terms for inventory purchases,
secured loans with terms generally up to ten years, and equity
investments in and secured and unsecured loans to certain
customers. In addition, the company guarantees debt and lease
obligations of certain customers. Usually, these capital
investments are made in and guarantees extended to customers with
whom the company enjoys long-term supply agreements.
Credit loss expense, which includes the impairment of equity
investments, is included in selling and administrative expenses
and for the second quarter decreased by $7 million to $6 million
from $13 million for the comparable period in 1994. Year to
date, credit losses decreased by $12 million to $16 million from
$28 million for the 28 weeks in 1994. The more stringent credit
practices and de-emphasis of credit extensions to and investments
in customers are beginning to result in lower losses. While there
can be no assurance that credit losses from existing or future
investments or commitments will not have a material adverse
effect on results of operations or financial position, management
expects that credit losses for fiscal year 1995 will be lower
than those experienced in 1994.
Interest expense. Interest expense for the second quarter of
1995 increased $24 million to $40 million from $16 million for
the same period in 1994. Year to date, interest expense
increased $58 million to $96 million from $38 million for the
comparable period in 1994. The increase was due to the
indebtedness incurred to finance the Scrivner acquisition, higher
interest rates in the capital and credit markets and higher
borrowing margins resulting from changes in the company's credit
rating.
The company enters into interest rate hedge agreements to
manage interest costs and exposure to changing interest rates.
The credit agreement with the company's banks requires the
company to provide interest rate protection on a substantial
portion of the indebtedness outstanding thereunder. The company
has entered into interest rate swaps and caps covering $850
million aggregate principal amount of floating rate indebtedness.
This amount is after the July 1995 termination of $150 million of
certain hedges at a minimal cost. The company's hedged position
exceeds the requirements set forth in the credit agreement.
The average interest rate on the company's floating rate
indebtedness is equal to the London interbank offered interest
rate ("LIBOR") plus a margin. The average fixed interest rate
paid by the company on the interest rate swaps is 6.95%, covering
$600 million of floating rate indebtedness. The interest rate
swap agreements, which were implemented through seven
counterparty banks, and which have an average remaining life of
4.4 years, provide for the company to receive substantially the
same LIBOR that the company pays on its floating rate
indebtedness. For the remaining $250 million, the company has
purchased interest rate cap agreements from two counterparty
banks covering $250 million of its floating rate indebtedness.
The agreements cap LIBOR at 7.33% over the next 4.2 years. The
company's net payment obligations and receivables under the
interest rate swap and cap agreements meet the criteria for hedge
accounting treatment. Accordingly, the company's payment
obligations and receivables are accounted for as interest
expense. For the year to date period in 1995, the interest rate
hedge agreements added $3.3 million to interest expense.
With respect to the interest rate hedging agreements, the
company believes its exposure to potential credit loss expense is
minimized primarily due to the relatively strong credit ratings
of the counterparties for their unsecured long-term debt (A+ or
higher from Standard & Poor's Ratings Group and A1 or higher from
Moody's Investors Service, Inc.) and the size and diversity of
the counterparty banks. The hedge agreements are subject to
market risk to the extent that market interest rates for similar
instruments decrease, and the company terminates the hedges prior
to their maturity.
Interest income. Interest income for the 1995 quarter
increased by $4 million to $16 million from $12 million for the
same period in 1994. Year to date, interest income increased by
$10 million to $38 million compared to $28 million for the 28
weeks in 1994. The increase is primarily due to earnings on the
notes receivable acquired in the Scrivner loan portfolio. Near
the end of the quarter, the company sold $77 million of notes
receivable with limited recourse as described in Selling and
administrative expenses. The sale reduces the amount of notes
receivable available to produce interest income and will result
in lower interest income. Proceeds have been applied to the
repayment of long-term debt.
Equity investment results. The company's portion of
operating losses from equity investments for the second quarter
of 1995 increased by less than $1 million to $3 million compared
to the same period in 1994. Year to date, losses generated by
equity investments have increased by $4 million to $10 million
compared to the same period in 1994. Certain of the strategic
multi-store customers in which the company has made equity
investments under its business development venture program
experienced increased losses. However, losses from retail stores,
which are part of the company's equity store program and are
accounted for under the equity method, decreased.
Taxes on income. The company's effective tax rate increased
to 51.1% in both 1995 periods from 44.1% for both periods in
1994, primarily due to increased goodwill amortization with no
related tax deduction, operations in higher tax rate states and
the significance of certain nondeductible expenses to pretax
earnings.
Other. Management believes that several factors negatively
affecting earnings in 1994 and year-to-date in 1995 are
likely to continue. Such factors include: flat wholesale sales;
lack of food price inflation; operating losses in certain
company-owned retail stores; increased interest expense, goodwill
amortization and integration costs related to the acquisition;
and a higher effective tax rate. Additionally, the company will
continue to experience certain costs associated with the
transitional phases of its consolidation, reorganization and re-
engineering plan until sometime in 1997.
The company has been named in two related legal actions
filed in the U.S. District Court in Miami in December 1993. The
litigation is complex and the ultimate outcome cannot presently
be determined. Furthermore, the company is unable to predict a
potential range of monetary exposure, if any, to the company.
Based on the recovery sought, an unfavorable judgment could have
a material adverse effect on the company.
Segment information. Sales and operating earnings for the
company s food distribution and retail food segments are
presented below.
95 94
------------------ ------------------
1ST 2ND YTD 1ST 2ND YTD
--- --- --- --- --- ---
Sales
($ in billions)
Food distribution $4.9 $3.6 $8.5 $3.7 $2.6 $6.3
Retail food 1.0 .7 1.7 .3 .3 .6
Corporate ( .4) ( .3) ( .7) - - -
--- --- --- --- --- ---
Total $5.5 $4.0 $9.5 $4.0 $2.9 $6.9
==== ==== ==== ==== ==== ====
Operating earnings
($ in millions)
Food distribution $95 $62 $157 $77 $54 $131
Retail food 18 17 35 4 1 5
Corporate (41) (22) (63) (28) (15) (43)
--- --- ---- --- --- ----
Total $72 $57 $129 $53 $40 $93
=== === ==== === === ===
Operating earnings for industry segments consist of net
sales less related operating expenses. Operating expenses
exclude interest expense, interest income, equity investment
results, income taxes and, effective in 1995, general corporate
expenses. The transfer pricing between segments is at cost.
The comparable 1994 periods have been restated to remove
allocations of general corporate expenses.
Liquidity and Capital Resources
Set forth below is certain information regarding the
company's capital position at the end of the second quarter of
1995 and at the end of fiscal 1994:
Capital Structure July 15, December 31,
(In millions) 1995 % 1994 %
Long-term debt $1,439 49.3 1,752 54.8
Capital lease obligations 382 13.1 369 11.5
----- ---- ----- ----
Total debt 1,821 62.4 2,121 66.3
Shareholders' equity 1,096 37.6 1,079 33.7
----- ---- ----- ----
Total capital $2,917 100.0 $3,200 100.0
====== ===== ====== =====
Current maturities of long-term debt and current obligations
under capital leases are included in the respective captions.
Fleming's capital structure changed significantly as a
result of the acquisition of Scrivner. The acquisition was
financed, and a large portion of the existing debt of both
Fleming and Scrivner was refinanced, through a $2.2 billion
revolving credit and term loan agreement entered into with a
group of banks. Upon execution of the new credit agreement the
company terminated its $400 million and $200 million bank credit
agreements. In December 1994, the company sold $300 million of
10.625% seven-year senior notes and $200 million of floating rate
seven-year senior notes in a public offering and retired the $500
million two-year loan tranche of the credit agreement with the
proceeds.
In July 1994, the company's credit ratings for its senior
unsecured long-term debt were downgraded from investment grade to
Ba1 and BB+ by Moody's and Standard & Poor's, respectively, as a
result of the additional debt incurred in the acquisition.
Moreover, in late February 1995, Standard & Poor's placed its
rating of Fleming's long-term debt on CreditWatch with negative
implications. Standard & Poor's expressed concerns that lower
than expected earnings for the third and fourth quarters of 1994,
combined with re-engineering costs that are now anticipated to
reduce 1995 earnings below Standard & Poor's prior expectations,
will limit the company's ability to reduce acquisition-related
debt. In June 1995, Standard & Poor's reduced the company's
ratings to BB+ for the corporate credit rating and BB- for senior
unsecured debt.
Pricing under the credit agreement automatically increases
or decreases with respect to certain credit rating declines or
improvements, respectively, based upon the higher of Moody's or
Standard & Poor's ratings. Despite the effect of reduced
earnings and the rating action by Standard & Poor's, management
believes the company can maintain adequate liquidity for the
foreseeable future at acceptable rates.
The company's principal sources of liquidity are cash flows
from operating activities and borrowings under the bank credit
agreement. At second quarter end 1995, $694 million was borrowed
on the six-year amortizing term loan and $40 million was drawn on
the $596 million five-year revolving credit facility.
The credit agreement and the indentures for the company's
senior notes issued in 1994 contain customary covenants
associated with similar facilities. The bank credit agreement
currently contains the following covenants: maintenance of a
consolidated debt-to-net worth ratio of not more than 2.45 to 1;
maintenance of a minimum consolidated net worth of at least $878
million; maintenance of a fixed charge coverage ratio of at least
1.25 to 1; a limitation on restricted payments (including
dividends and company stock repurchases); prohibition of certain
liens; prohibitions of certain mergers, consolidations and sales
of assets; restrictions on the incurrence of debt and additional
guarantees; limitations on transactions with affiliates;
limitations on acquisitions and investments; limitations on
capital expenditures; and a limitation on payment restrictions
affecting subsidiaries. The company is permitted to pay
dividends or repurchase capital stock in the aggregate amount of
approximately $36 million for the remainder of fiscal 1995. At
quarter-end 1995 the consolidated debt-to-net worth test would
have allowed the company to borrow an additional $830 million and
the fixed charge coverage test would have allowed the company to
incur an additional $27 million of annual interest and rent
expense. Covenants associated with the senior notes are
generally less restrictive than those of the bank facility.
During the second quarter of 1995, the company sought and
obtained an amendment to the credit agreement lowering the
required fixed charge coverage ratio, reducing the maximum
borrowings permissible pursuant to the credit agreement to $1.3
billion, reducing the interest rates payable under the agreement
and providing more latitude to the company in securing letters of
credit and short term debt. At the end of the second quarter
1995, the company was in compliance with all financial covenants
under the credit agreement and the senior note indentures.
Continued compliance over the near-term will depend on the
company's ability to generate sufficient earnings during the
implementation of its re-engineering plan and the integration of
Scrivner.
Operating activities generated $263 million of net cash
flows for the second quarter of 1995 compared to $278 million in
the comparable period in 1994. Working capital was $354 million
at second quarter end 1995, a decrease from $496 million at
year-end 1994. The current ratio decreased to 1.29 to 1, from
1.38 to 1 at year-end 1994. Management believes that cash flows
from operating activities and the company's ability to borrow
under the credit agreement will be adequate to meet working
capital needs, capital expenditures and cash needs for the
facilities consolidation, restructuring and re-engineering plan.
Capital expenditures for the second quarter of 1995 were
approximately $49 million. Management expects that 1995 capital
expenditures, excluding acquisitions, if any, will approximate
$100 million.
The debt-to-capital ratio decreased to 62.4% from 66.3% at
year-end 1994. The company's long-term target ratio is
approximately 50%. Total capital was $2.9 billion at quarter
end, down $.3 billion from year-end 1994.
Item 5. Other events. On July 7, William J. Dowd was named
president and chief operating officer effective July 24. Robert
E. Stauth, who formerly held the president's title, will retain
the title of chairman and chief executive officer. Mr. Dowd is a
senior food industry executive with more than 24 years of
experience with organizations such as Kraft General Foods, R. J.
Reynolds and Campbell Soup. Most recently, he was senior vice
president-operations at Cott Corporation, the world's largest
producer of retailer branded soft drinks.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Page
Number
4.0 Amendment No. 3 to Credit Agreement, among
Fleming Companies, Inc., the Banks listed
therein and Morgan Guaranty Trust Company
of New York, as Managing Agent
4.1 Amendment No. 2 to Borrower Pledge Agreement,
dated as of
4.2 Amendment No. 2 to Borrower Security Agreement,
dated as of
4.3 Amendment No. 2 to Subsidiary Pledge Agreement,
dated as of
4.4 Amendment No. 2 to Subsidiary Security Agreement,
dated as of
4.5 Amendment No. 2 to Subsidiary Guaranty Agreement,
dated as of
12 Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
FLEMING COMPANIES, INC.
(Registrant)
Date August 29, 1995 KEVIN J. TWOMEY
Kevin J. Twomey
Vice President - Controller
(Chief Accounting Officer)