UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 30, 1995
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (405) 840-7200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $2.50 Par Value and New York Stock Exchange
Common Stock Purchase Rights Pacific Stock Exchange
Midwest Stock Exchange
9.5% Debentures New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. ____
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of February 24, 1996, 37,704,000 common shares were outstanding.
The aggregate market value of the common shares (based upon the closing
price of these shares on the New York Stock Exchange) of Fleming Companies,
Inc. held by nonaffiliates was approximately $740 million.
Documents Incorporated by Reference
A portion of Part III has been incorporated by reference from the
registrant's proxy statement dated March 12, 1996, in connection with its
annual meeting of shareholders to be held on May 1, 1996.
PART I
ITEM 1. BUSINESS
Fleming Companies, Inc. (hereinafter referred to as "Fleming," the
"registrant" or the "company") was incorporated in Kansas in 1915 and in
1981 was reincorporated as an Oklahoma corporation. Fleming is engaged
primarily in the food wholesaling and distribution industry with both
wholesale and retail operations.
The company currently serves as the principal source of supply for
approximately 3,500 supermarkets in 42 states and the District of Columbia.
These supermarkets have a total area of approximately 100 million square
feet. The company also serves several international markets. The company
serves food stores of various sizes operating in a wide variety of formats,
including conventional full-service stores, superstores, price impact
stores (including warehouse stores), combination stores (which typically
carry a higher proportion of non-food items) and convenience stores. The
company services a geographically diverse area. These are predominantly
independent stores, many of which operate and advertise under a common name
to promote greater consumer recognition. Fleming's retail customers
(hereinafter referred to as "customers") also include national and regional
corporate chains.
The company's food distribution operations offer a wide variety of national
brand and private label products, including groceries, meat, dairy and
delicatessen products, frozen foods, produce, bakery goods and a variety of
general merchandise and related items. In addition, Fleming offers a wide
range of support services to its customers to help them compete more
effectively with other food retailers in their respective market areas.
In addition, the company has a significant presence in food retailing,
owning and operating approximately 370 retail food stores with an aggregate
of approximately 13 million square feet. Company-owned stores operate
under a number of names and vary in format from super warehouse stores to
conventional supermarkets.
The company operates in two segments: food distribution and retail store
operations. Food distribution includes food and general merchandise
distribution. Segment information as required by Statement of Financial
Accounting Standards No. 14 is presented in Item 8. Financial Statements
and Supplementary Data.
Reengineering
The company has determined that its performance during the past several
years, along with the performance of a number of its retail customers, has
been unfavorably affected by a number of changes within the food marketing
and distribution industry, which has become increasingly competitive in an
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 customers of the company. Vendors,
seeking to ensure that more of their promotional dollars are used by
retailers to increase sales volume, increasingly direct promotional dollars
directly to retailers and to large self-distributing chains. Additionally,
the trend toward Every Day Low Costing has reduced margin opportunities.
The company believes that these changes have led to reduced margins and
lower profitability among many of its customers and at the company itself.
Fleming has initiated specific actions to respond to, and help its retail
customers respond to, changes in the marketplace.
The company has embarked upon a plan to restructure its organizational
alignment, reengineer its operations and consolidate its distribution
facilities. The company's objective is to lower net acquisition cost of
product to retail customers while providing the company with a fair and
adequate return for its products and services. To achieve this objective,
management has made major organizational changes, implemented the Fleming
Flexible Marketing Plan ("FFMP") in approximately 40% of its food
distribution sales base, or 17 of its 35 operating units, and increased its
investment in technology. The actions contemplated by the reengineering
plan will affect the company's food and general merchandise wholesaling
operations as well as certain retail operations. Although a significant
number of reengineering initiatives have been completed, more are planned.
The timing of the remaining initiatives has been lengthened while the
company refocuses on financial performance and refines FFMP in response to
customers and vendors. Accordingly, completion dates are not known.
The company has reorganized itself around four core business units: retail
sales and marketing, retail services, category marketing and product
supply. Retail sales and marketing, retail services and category marketing
represent the marketing functions of the company. Product supply
represents the procurement and distribution functions of the company.
Through retail sales and marketing, the company markets to customers on
FFMP primarily on the basis of customer type instead of on the basis of
geography. This enables the company to be more effective in serving its
diverse customer base. Through retail services, the company offers
services on a fee basis to retailers. In the past, Fleming has offered
many services without a direct charge but has indirectly charged all
customers for such services. Through category marketing, the company more
efficiently manages its relationships with vendors, manufacturers and other
suppliers, working to obtain the best possible promotional benefits offered
by suppliers and pass through directly to retailers on FFMP 100% of those
benefits related to grocery, frozen foods and dairy products. Through
product supply, which is comprised of all food distribution centers and
operations converted to FFMP, the company will work to lower the net
acquisition costs (i.e., the total of cost of product and all related
charges plus the company's distribution fee) to retailers.
FFMP applies to grocery, frozen foods and dairy products and is based on a
new pricing policy whereby retailers, upon conversion to FFMP, will pay the
company's actual cost of acquiring goods, receiving 100% of available
promotional benefits from the vendor arranged by the company, including
those derived from forward buying. Customers will pay all costs incurred
by the company for transportation (which in the past may have been
subsidized by the company). Instead of paying a basic distribution fee,
customers pay handling and storage charges, which is higher than the prior
distribution fee. Additionally, retail customers pay for all other retail
services purchased.
As part of the reengineering plan, the company has closed four distribution
centers and plans to close one additional facility.
Products
The company supplies its customers with a full line of national brand
products as well as an extensive range of private and controlled label
products, perishables and non-food items. Controlled labels are those
which the company controls and private labels are those which may be
offered only in stores operating under specific banners, which may or may
not be under the company's control. Among the controlled labels offered by
the company with registered trade names are TV, Hyde Park, Marquee, Bonnie
Hubbard, Best Yet, Sentry and Rainbow. Among the private labels handled by
the company are IGA and Piggly Wiggly. Controlled label and private label
products offer both the wholesaler and the retailer opportunities for
higher margins as the costs of national advertising campaigns can be
eliminated. The controlled label program is augmented with marketing and
promotional support programs developed by the company.
Certain categories of perishables also offer both the wholesaler and the
retailer opportunities for improved margins as consumers are generally
willing to pay relatively higher prices for produce and bakery goods and
high quality frozen foods. Furthermore, retailers are increasingly
competing for business through an emphasis on perishables and private label
products.
Services to Customers
The company offers value-added services to its customers. These services
include, among others, merchandising and marketing assistance, in-house
advertising, consumer education programs, retail electronic services and
employee training. See also "Capital Invested in Customers."
In addition, the company may assist its customers in the development and
expansion of retail stores, including retail site selection and market
surveys; store design, layout, and decor assistance; and equipment and
fixture planning. The company also has expertise in developing sales
promotions, including employee and customer incentive programs, such as
"continuity programs" designed to entice the customer to return regularly
to the store.
Sale Terms
Upon reengineering, customers are converted to FFMP and are charged the
company's actual costs of acquiring grocery, frozen food and dairy products
pursuant to FFMP while the company passes through to its FFMP customers all
promotional fees and allowances received from vendors. In addition, the
company charges FFMP customers for the costs of transportation and for
handling and storage, which charges are higher than the previous basic
distribution fee. Retailers on FFMP are also charged directly for services
for which they formerly paid indirectly. As a result, the company believes
it will lower the net acquisition cost of product to its customers.
Payment is made through electronic funds transfer the day following the
customer's statement date.
Where the company's operating units have not been reengineered, customers
are charged for products based generally on an agreed price which includes
the company's defined "cost" (which does not give effect to promotional
fees and allowances from vendors), to which is added a fee determined by
the volume of the customer's purchase. In some geographic areas, product
charges are based upon a percentage markup over cost. A delivery charge is
usually added based on order size and mileage from the distribution center
to the customer's store. Payment may be received upon delivery of the
order, or within credit terms that generally are weekly or semi-weekly.
Distribution
The company currently operates 35 distribution centers which are
responsible for the distribution of national brand and private label
groceries, meat, dairy and delicatessen products, frozen foods, produce,
bakery goods and a variety of related food and non-food items. Six general
merchandise distribution centers distribute health and beauty care items
and other non-food items. Two distribution centers serve convenience
stores. All facilities are equipped with modern material handling
equipment for receiving, storing and shipping large quantities of
merchandise. As a result of the acquisition of Scrivner in July 1994, the
company has closed nine former Scrivner distribution centers. As part of
the consolidation, reorganization and reengineering plan, the company has
closed four distribution centers and will close one additional distribution
center.
The company's food and general merchandise distribution facilities comprise
more than 20 million square feet of warehouse space. Additionally, the
company rents, on a short-term basis, approximately 5 million square feet
of off-site temporary storage space.
Many distribution divisions operate a truck fleet to deliver products to
customers. The company increases the utilization of its truck fleet by
backhauling products from many suppliers, thereby reducing the number of
empty miles traveled. To further increase its fleet utilization, the
company has made its truck fleet available to other firms on a for-hire
carriage basis. During 1994 and 1995 the company engaged dedicated
contract carriers to deliver its products from certain distribution
centers.
Retail Stores Served
The company serves retail stores ranging in size from small convenience
outlets to conventional supermarkets, combination units, price impact
stores and large supercenters. Among the stores served are approximately
3,500 supermarkets with an aggregate of approximately 100 million square
feet. Fleming's customers are geographically diverse, with operations in
42 states, the District of Columbia and several international markets. The
company's principal customers are supermarkets carrying a wide variety of
grocery, meat, produce, frozen food and dairy products. Most customers
also handle an assortment of non-food items, including health and beauty
care products and general merchandise such as housewares, soft goods and
stationery. Most supermarkets also operate one or more specialty
departments such as in-store bakeries, delicatessens, seafood departments
and floral departments.
The company believes that its focus on quality service, broad product
offerings, competitive prices and value-added services enables the company
to maintain long-term customer relationships while attracting new
customers. The company has targeted self-distributing chains and operators
of alternative format stores as sources of incremental sales. These
operations have gained increasing market share in the retail food industry
in recent years. The company currently serves 1,040 chain stores, compared
to 980 at year-end 1994. In late 1994, Fleming signed a six-year supply
agreement with Kmart to serve new Super Kmart Centers in areas where
Fleming has distribution facilities.
The company also licenses or grants franchises to retailers to use certain
registered trade names such as IGA, Piggly Wiggly, Food 4 Less, Big Star,
Big T, Buy-for-Less, Checkers, Festival Foods, Jubilee Foods, Jamboree
Foods, MEGAMARKET, Minimax, Sentry, Shop 'n Bag, Shop 'n Kart, Super 1
Foods, Super Save, Super Thrift, Thriftway, United Supers, and Value King.
There are approximately 2,000 food stores operating under company
franchises or licenses.
Company-owned Stores
The company owns and operates approximately 370 stores at December 30,
1995, including 330 supermarkets with an aggregate of approximately 12
million square feet. Company-owned stores are located in 23 states and are
all served by the company's distribution centers. Formats vary from super
warehouse stores to conventional supermarkets. Generally in the industry,
an average super warehouse store is 58,000 square feet and a conventional
supermarket is 23,000 square feet. All company-owned supermarkets are
designed and equipped to offer a broad selection of both national brands as
well as private label products at attractive prices while maintaining high
levels of service. Most supermarket formats have extensive produce
sections and complete meat departments together with one or more specialty
departments such as in-store bakeries, delicatessens, seafood departments
and floral departments. Specialty departments generally produce higher
gross margins per selling square foot than general grocery sections.
The company-owned stores provide added purchasing power as they enable the
company to commit to certain promotional efforts at the retail level. The
company, through its owned stores, is able to retain many of the
promotional savings offered by vendors in exchange for volume increases.
Technology
Fleming has played a leading role in employing technology for internal
operations as well as for its independent retail customers.
Fleming has implemented radio-frequency terminals in most of its
distribution centers to track inventory, further improve customer service
levels, reduce out-of-stock conditions and obtain other operational
improvements. Most distribution centers are managed by computerized
inventory control systems, such as the company's standardized computer
software system called FOODS (Fleming On-line Distribution System), along
with warehouse productivity monitoring and scheduling systems. The company
has begun a program to implement FOODS in all former Scrivner facilities.
Most of Fleming's truck fleet is equipped with on-board computers to
monitor the efficiency of deliveries to its customers.
Additionally, the company is marketing an advanced on-line communications
product, called Visionet, that links Fleming-served retailers with their
product supply centers, category managers and vendors. One of Visionet's
features is the Opportunity Wire, which enables Fleming to alert retailers
to special purchasing opportunities to buy products at advantageous prices
as well as assist in coordinating delivery.
Suppliers
The company purchases its products from numerous vendors and growers. As
the largest single customer of many of its suppliers, the company is able
to secure favorable terms and volume discounts on most of its purchases,
leading to lower unit costs. The company purchases products from a diverse
group of suppliers and believes it has adequate and alternative sources of
supply for substantially all of its products.
Capital Invested in Customers
As part of its services to retailers, the company provides capital to
customers in several ways. In making credit and investment decisions, the
company considers many factors, including estimated return on capital, risk
and the benefits to be derived from sustained or increased product sales.
Any equity investment or loan of $250,000 or more must be approved by the
company's business development committee. An equity investment or loan of
$10 million to $15 million must also be approved by the Chief Executive
Officer, with Board of Directors approval above $15 million. For equity
investments, the company has active representation on the customer's board
of directors. The company also conducts periodic credit reviews, receives
and analyzes customers' financial statements and visits customers'
locations regularly. On an ongoing basis, senior management reviews the
company's largest investments and credit exposures.
The company provides capital to certain customers by becoming primarily or
secondarily liable for store leases, by extending credit for inventory
purchases, and by guaranteeing loans and making secured loans to and equity
investments in customers.
Store leases. The company leases stores for sublease to certain customers.
Sublease rentals are generally higher than the base rental to the company.
As of December 30, 1995, the company was the primary lessee of
approximately 900 retail store locations subleased to and operated by
customers. In certain circumstances, the company also guarantees the lease
obligations of certain customers.
Extension of credit for inventory purchases. The company has supply
agreements with customers in which it invests and, in connection with
supplying such customers, will, in certain circumstances, extend credit for
inventory purchases. Customary trade credit terms are the day following
statement date for customers on FFMP and up to seven days for non-FFMP
customers; the company has extended credit for additional periods under
certain circumstances.
Guarantees and secured loans. The company guarantees the obligations of
certain of its customers. Loans are also made to customers primarily for
store expansions or improvements. These loans are typically secured by
inventory and store fixtures, bear interest at rates at or above the prime
rate, and are for terms of up to ten years. During fiscal year 1995, the
company sold, with limited recourse, $77 million of notes evidencing
similar loans. The company believes its loans to customers are illiquid
and would not be investment grade if rated.
Equity investments. The company has made equity investments in strategic
multi-store customers, which it refers to as Business Development Ventures,
and in smaller operators, referred to as Equity Stores. Equity Store
participants typically retain the right to purchase the company's
investment over a five to ten-year period. Many of the customers in which
the company has made equity investments are highly leveraged, and the
company believes its equity investments are highly illiquid.
The following table sets forth the components of Fleming's portfolio of
loans to and investments in customers at year-end 1995 and 1994. Amounts
are in millions.
Business Stores Customers
Development Equity Held Sub- With No Equity
Ventures Stores For Resale total Investment Total
1995
Loans (a) $27 $34 $ - $ 61 $177 $238
Equity Investments 28 (2) 23 49 - 49
Total $55 $32 $23 $110 $177 $287
1994
Loans (a) $52 $55 $ 1 $108 $267 $375
Equity Investments 45 6 25 76 - 76
Total $97 $61 $26 $184 $267 $451
(a) Includes current portion of loans, which amounts are recorded as
receivables on the company's balance sheet. See Notes to Consolidated
Financial Statements.
The table does not include the company's investments in customers through
direct financing leases, lease guarantees, operating leases, loan
guarantees or credit extensions for inventory purchases. As of December
30, 1995, the present value of the company's obligations under direct
financing leases and lease guarantees were $223 million and $90 million,
respectively.
The company has implemented tighter credit policies and reduced emphasis on
credit extensions to and investments in customers. Additionally, credit
associates conduct post-financing reviews more frequently and in more
depth. Fleming's credit loss expense, including from receivables as well as
from investments in customers, was $31 million in the year ended December
31, 1995 and $61 million and $52 million in 1994 and 1993, respectively.
Competition
Competition in the food marketing and distribution industry is intense.
The company's primary competitors are national chains who perform their own
distribution (such as The Kroger Co. and Albertson's, Inc.), national food
distributors (such as SUPERVALU Inc.) and regional and local food
distributors.
The principal competitive factors include price, quality and assortment of
product lines, schedules and reliability of delivery, and the range and
quality of customer services. The sales volume of wholesale food
distributors is dependent on the level of sales achieved by the retail food
stores they serve. Retail stores served by the company compete with other
retail food outlets in their geographic areas on the basis of price,
quality and assortment, store location and format, sales promotions,
advertising, availability of parking, hours of operation and store appeal.
The primary competitors of the company-owned stores are national, regional
and local chains, as well as independent supermarkets and convenience
stores. The principal competitive factors include product price, quality
and assortment, store location and format, sales promotions, advertising,
availability of parking, hours of operation and store appeal.
Employees
At year-end 1995, the company had approximately 44,000 full-time and
part-time associates. Approximately half of the company's associates are
covered by collective bargaining agreements with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America,
the United Food and Commercial Workers, the International Longshoremen's
and Warehousemen's Union and the Retail Warehouse and Department Store
Union. Most of such agreements expire at various times throughout the next
five years. The company believes it has satisfactory relationships with
its unions.
ITEM 2. PROPERTIES
The following table sets forth information with respect to Fleming's major
distribution facilities.
Size, in
Food Thousands of Owned or
Distribution (1) Square Feet Leased
Altoona, PA 172 Leased
Buffalo, NY 417 Leased
El Paso, TX (2) 465 Leased
Ewa Beach, HI 196 Leased
Fresno, CA 380 Owned
Garland, TX 1,176 Owned
Geneva, AL 345 Leased
Houston, TX 663 Leased
Huntingdon, PA 246 Leased
Johnson City, TN 287 Owned
Kansas City, KS 909 Leased
La Crosse, WI 913 Owned
Lafayette, LA 430 Owned
Laurens, IA 368 Owned
Lincoln, NE 298 Leased
Lubbock, TX (2) 378 Owned
Marshfield, WI 157 Owned
Massillon, OH 775 Owned
Memphis, TN 780 Owned
Miami, FL 763 Owned
Milwaukee, WI 595 Owned
Minneapolis, MN (3) 480 Owned
Nashville, TN 734 Leased
North East, MD (4) 107 Owned
Oklahoma City, OK (5) 669 Owned
Oklahoma City, OK (5) 410 Leased
Peoria, KS 325 Owned
Philadelphia, PA (4) 830 Leased
Phoenix, AZ 912 Owned
Portland, OR 323 Owned
Sacramento, CA 683 Owned
Salt Lake City, UT 429 Owned
San Antonio, TX 514 Leased
Sikeston, MO 481 Owned
Superior, WI (3) 371 Owned
Warsaw, NC 681 Owned/Leased
York, PA 450 Owned
------
19,112
General Merchandise
Dallas, TX 270 Owned/Leased
King of Prussia, PA 377 Leased
La Crosse, WI 163 Owned
Memphis, TN 339 Owned/Leased
Sacramento, CA 294 Leased
Topeka, KS 179 Leased
------
1,622
Outside Storage
Outside storage facilities -
typically rented on a
short-term basis. 5,334
------
Total square feet 26,068
======
(1) Food distribution includes two convenience store divisions.
(2) Comprise the Lubbock distribution operation.
(3) Comprise the Minneapolis distribution operation.
(4) Comprise the Philadelphia distribution operation.
(5) The company operates two distribution operations in Oklahoma City. The
administrative functions of these two distribution operations are
consolidated.
At the end of 1995, Fleming operated a delivery fleet consisting of
approximately 1,400 power units and 3,100 trailers. Most of this equipment
is owned by the company.
Company-owned retail stores are located in 23 states and occupy
approximately 13 million square feet which is primarily leased.
ITEM 3. LEGAL PROCEEDINGS
(1) David's Supermarkets, Inc. vs. Fleming Companies, Inc., et al. Case
No. 246-93, In the District Court of Johnson County, Texas.
David's Supermarkets, Inc. ("David's") filed suit against the company and a
former officer in August, 1993 alleging that the company charged excessive
prices under two selling plan arrangements from 1989 through 1991.
Plaintiff asserted breach of contract, fraud and violation of the Texas
Deceptive Trade Practices Act ("DTPA"). Following a four-week trial the
jury found the company's disputed overcharges amounted to $2.8 million and
rendered verdicts against the company for $72.5 million for breach of
contract, $200.9 million for fraud and $207.5 million for violation of the
DTPA and against the former officer, jointly and severally with the
company, for $51 million for fraud and $53.8 million for violation of the
DTPA.
On March 22, 1996, the plaintiff filed a motion for judgment on its claim
under the DTPA reserving the right to recover under any alternative theory
supported by the verdict in the event the judgment on the DTPA verdict is
in any way modified or reversed by any court.
On April 4, 1996, the company and its banks amended the company's bank
credit agreement increasing the letter of credit subfacility to permit the
company to post a supersedeas bond necessary to perfect its appeal and
waiving certain effects of the judgment or certain potential liens which
may arise thereunder.
On April 12, 1996, plaintiff's motion for judgment was granted in the
amount of $207.5 million plus pre-judgment interest of $3.7 million and
post-judgment interest at the rate of 10% per annum. The company posted
the bond immediately after the judgment was granted and will appeal the
judgment.
(2) Kenneth Steiner and Charles Miller, et al. vs. Fleming Companies, Inc.
et al., Case No. CIV 96-0480, United States District Court for the Western
District of Oklahoma.
Lawrence B. Hollin, et al. vs. Fleming Companies, Inc., et al., Case No.
CIV 96-0484, United States District Court for the Western District of
Oklahoma.
Ronald T. Goldstein, et al. vs. Fleming Companies, Inc., et al., Case No.
CIV 96-0510, United States District Court for the Western District of
Oklahoma.
These cases were filed in the United States District Court for the Western
District of Oklahoma on or prior to April 12, 1996, as purported class
actions by certain company stockholders against the company and certain
company officers, including the chief executive officer, for alleged breach
of the securities laws for alleged failure to properly disclose and account
for the David's litigation described above as well as the allegedly
pervasive and wrongful conduct of the defendants which gave rise to the
David's litigation. The plaintiffs seek damages in undetermined but
significant amounts as the results of the alleged wrongdoing of the
defendants, costs and expenses including attorneys' and expert fees. The
company denies these allegations and intends to vigorously defend the
actions.
(3) Robert Mark, et al. vs. Fleming Companies, Inc., et al., Case No. CIV
96-0506, United States District Court for the Western District of Oklahoma.
The lawsuit was filed April 4, 1996 as a purported class action by
plaintiff and other holders of the company's 10 5/8% fixed rate ($300
million) and floating rate ($200 million) senior notes due 2001 (the
"Notes") against the company and certain officers of the company, including
the chief executive officer, alleging unlawful failure to disclose the
existence of the David's litigation described above in the December, 1994
registration statement and prospectus under which the Notes were sold. In
addition, the company and the officer defendants are alleged to have failed
to accrue an appropriate reserve as the result of the lawsuit in violation
of securities laws.
The plaintiffs seek damages of an undetermined but significant amount,
costs and expenses, including reasonable attorney's fees and expert fees
and other costs and disbursements. Registrant denies the allegations and
intends to vigorously defend the suit.
(4) Tropin v. Thenen, et al., Case No. 93-2502-Civ-Moreno, United States
District Court, Southern District of Florida.
Walco Investments, Inc., et al. v. Thenen, et al., Case No.
93-2534-CIV-Moreno, United States District Court, Southern District of
Florida.
On December 21, 1993, these cases were filed in the United States District
Court for the Southern District of Florida. Both cases name numerous
defendants, including a former subsidiary of the registrant and four former
employees of former subsidiaries of registrant. The cases contain similar
factual allegations. Plaintiffs allege, among other things, that former
employees of subsidiaries participated in fraudulent activities by taking
money for confirming diverting transactions which had not occurred and
that, in so doing, they acted within the scope of their employment.
Plaintiffs also allege that a former subsidiary allowed its name to be used
in furtherance of the alleged fraud. The allegations against registrant's
former subsidiary include common law fraud, breach of contract and
negligence, conversion, and civil theft. In addition, allegations were
made against the former subsidiary claiming it violated the federal
Racketeer Influenced and Corrupt Organizations Act and comparable state
law. Plaintiffs seek damages, treble damages, attorneys' fees, costs,
expenses and other appropriate relief. While the amount of damages sought
under most claims is not specified, plaintiffs allege that hundreds of
millions of dollars were lost as the result of the matters complained of.
Registrant denies the allegations and is vigorously defending the actions.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Consolidated Financial Statements.
(5) Richard E. Ieyoub, Attorney General ex rel., State of Louisiana v. The
American Tobacco Company, et al., Case No. 96-1209, 14th Judicial District
Court, Parish of Calcasieu, State of Louisiana
In March, 1996 the Attorney General of the State of Louisiana brought this
action against numerous named tobacco companies and distributors (including
Malone & Hyde, a former subsidiary of registrant), claiming that the
defendants' products and conduct were the cause of thousands of Louisiana
deaths, injuries and illnesses and millions of dollars of state health-care
and related expenditures. Further, that defendants' products are
unreasonably dangerous, hazardous and toxic. Plaintiff prays for an
injunction, compensatory damages in an amount sufficient to repay the state
for the sums it has expended and will expend in the future on account of
the defendant's wrongful conduct, punitive damages, interest and attorney
fees. Although Registrant has not been served it has been indemnified by
one of the tobacco companies and will vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the company as of March 12, 1996:
Year
First Became
Name (age) Present Position An Officer
Robert E. Stauth (51) Chairman and
Chief Executive Officer 1987
William J. Dowd (53) President and Chief Operating
Officer 1995
E. Stephen Davis (55) Executive Vice President-
Distribution 1981
Harry L. Winn, Jr. (51) Executive Vice President
and Chief Financial Officer 1994
David R. Almond (56) Senior Vice President-
General Counsel and Secretary 1989
Ronald C. Anderson (53) Senior Vice President-General
Merchandise 1993
Mark K. Batenic (47) Senior Vice President-Retail Sales
& Marketing 1994
Darreld R. Easter (59) Senior Vice President-
Category Marketing 1988
William M. Lawson, Jr. (45) Senior Vice President-Corporate
Development/International
Operations 1994
Dixon E. Simpson (53) Senior Vice President-Retail
Services 1994
Larry A. Wagner (49) Senior Vice President-
Associate Support 1989
Thomas L. Zaricki (51) Senior Vice President-Retail
Operations 1993
Kevin J. Twomey (45) Vice President-Controller 1995
No family relationship exists among any of the executive officers listed
above.
Executive officers are elected by the board of directors for a term of one
year beginning with the annual meeting of shareholders held in April or May
of each year.
Each of the executive officers has been employed by the company or its
subsidiaries for the preceding five years except for Messrs. Anderson,
Dowd, Lawson, Winn and Zaricki.
Mr. Anderson joined the company as Vice President-General Merchandise in
July 1993. In March 1994, he was named Senior Vice President-General
Merchandise. Since 1986, until joining the company, he was vice president
of McKesson Corporation, a distributor of pharmaceutical and related
products, where he was responsible for its service merchandising division.
Mr. Dowd joined the company in his present position in July 1995. From
1994 until joining the company, he was Senior Vice President - Operations
at Cott Corporation, a producer of retailer-branded soft drinks. From 1991
to 1994, Mr. Dowd was executive vice president for Kraft General Foods' KGF
Service Company.
Mr. Lawson joined the company in his present position in June 1994. Prior
to that, Mr. Lawson was a practicing attorney in Phoenix for 18 years.
Mr. Winn joined the company in his present position in May 1994. He was
with UtiliCorp United in Kansas City, an energy company, where he was
managing senior vice president and chief financial officer from 1990 to
1993.
Mr. Zaricki joined the company in his present position in October 1993.
Since 1987, until joining the company, Mr. Zaricki was president of Arizona
Supermarkets, Inc., a regional supermarket chain headquartered in Phoenix.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Fleming common stock is traded on the New York, Midwest and Pacific stock
exchanges. The ticker symbol is FLM. As of December 30, 1995, the 37.7
million outstanding shares were owned by 13,300 shareholders of record and
approximately 20,500 beneficial owners whose shares are held in street name
by brokerage firms and financial institutions. According to the New York
Stock Exchange Composite Transactions tables, the high and low prices of
Fleming common stock during each calendar quarter of the past two years are
shown below.
1995 1994
Quarter High Low High Low
First $24.88 $19.13 $26.13 $24.25
Second 27.13 22.75 29.25 23.50
Third 29.88 22.63 30.00 22.88
Fourth 25.75 20.00 24.50 22.63
Cash dividends on Fleming common stock have been paid for 79 consecutive
years. Dividends are generally declared on a quarterly basis with holders
as of the record date being entitled to receive the cash dividend on the
payment date. Record and payment dates are normally as shown below:
Record Dates: Payment Dates:
February 20 March 8
May 20 June 10
August 20 September 10
November 20 December 10
Cash dividends of $.30 per share were paid on or near each of the above
four payment dates in 1994 and 1995. The company paid a cash dividend of
$.30 per share for the first quarter of 1996.
On March 28, 1996, the Board of Directors of the company declared a cash
dividend of $.02 per share for the second quarter of 1996 payable on June
10, 1996, to shareholders of record on May 20, 1996. This dividend is
lower than the previous quarterly dividend to allow the company to meet its
banks' requirements to support the posting of an appeal bond in the David's
Supermarkets lawsuit. See Item 3. Legal Proceedings, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Litigation and Contingencies and
Subsequent Events.
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except
per share amounts) 1995 1994(a) 1993 1992 1991
______________________________________________________________________________
Net sales $17,502 $15,724 $13,096 $12,894 $12,851
Earnings before
extraordinary
loss and
cumulative
effect(b) 42 56 37 119 64
Net earnings per
common share(b) 1.12 1.51 1.02 3.33 1.82
Total assets 4,297 4,608 3,103 3,118 2,958
Long-term debt
and capital
leases 1,717 1,995 1,004 1,038 952
Cash dividends paid
per common share 1.20 1.20 1.20 1.20 1.14
______________________________________________________________________________
See Item 3. Legal proceedings, notes to consolidated financial statements,
including Subsequent Events, and the financial review included in Items 7
and 8.
(a) The results in 1994 reflect the July 1994 acquisition of Scrivner Inc.
(b) In 1993 and 1992, the company recorded an after-tax loss of $2.3
million and $5.9 million, respectively, for early retirement of debt.
In 1991, the company changed its method of accounting for
postretirement health care benefits, resulting in a charge to net
earnings of $9.3 million.
The results in 1993 include an after-tax charge of approximately $62
million for additional facilities consolidations, re-engineering,
impairment of retail-related assets and elimination of regional
operations. In 1995 management changed its estimates with respect to
the general merchandising portion of the reengineering plan and
reversed $4 million, after tax benefits, of the related provision.
The company instituted a plan late in 1991 to reduce costs and
increase operating efficiency by consolidating four distribution
centers into larger, higher volume and more efficient facilities. The
after-tax charge was $41.4 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
In 1994, the company embarked upon a plan to restructure its organizational
alignment, reengineer its operations and consolidate its distribution
facilities. The company's objective is to lower net acquisition cost of
product to retail customers while providing the company with a fair and
adequate return for its products and services. To achieve this objective,
management has made major organizational changes, implemented the Fleming
Flexible Marketing Plan ("FFMP") in approximately 40% of its food
distribution sales base, or 17 of its 35 operating units, and increased its
investment in technology. The actions contemplated by the reengineering
plan will affect the company's food and general merchandise wholesaling
operations as well as certain retail operations. Although a significant
number of reengineering initiatives have been completed, more are planned.
The timing of the remaining initiatives has been lengthened while the
company refocuses on financial performance and refines FFMP in response to
customers and vendors. Accordingly, completion dates are not known.
Beginning in the third quarter of 1994, results were materially affected by
the acquisition of Scrivner. Sales increased dramatically and gross margin
and selling and administrative expenses as a percent of sales are
significantly higher due to the higher percentage of retail food operations
in Scrivner. Interest expense increased materially as a result of both
increased borrowing levels and higher interest rates due to the acquisition
of Scrivner. In addition, expense for the amortization of goodwill also
increased significantly.
As part of the reengineering plan, the company has closed four distribution
centers and plans to close one additional facility. In addition, since the
Scrivner acquisition, the company has closed nine former Scrivner
distribution centers.
Results of Operations
Set forth in the following table is information regarding the company's net
sales and certain components of earnings expressed as a percent of sales:
_____________________________________________________________________________
1995 1994 1993
Net sales 100.00% 100.00% 100.00%
Gross margin 8.06 7.14 5.84
Less:
Selling and administrative 6.79 5.93 4.23
Interest expense 1.00 .77 .60
Interest income (.33) (.36) (.45)
Equity investment results .16 .09 .09
Facilities consolidation
and restructuring (.05) - .82
_____________________________________________________________________________
Total 7.57 6.43 5.29
_____________________________________________________________________________
Earnings before taxes .49 .71 .55
Taxes on income .25 .35 .26
_____________________________________________________________________________
Net earnings .24% .36% .29%
_____________________________________________________________________________
1994 was a 53-week year. Certain reclassifications have been made to prior
years' amounts to conform to the current year's classification. The
results of Scrivner are included since the acquisition. Net earnings in
1993 are before the extraordinary loss.
1995 and 1994
Net Sales. Net sales for 1995 increased by $1.78 billion, or 11%, to
$17.50 billion from $15.72 billion for 1994. Notwithstanding the positive
effects of the Scrivner acquisition, net sales in 1995 were adversely
impacted by the following, none of which was individually material to
sales: sales lost due to normal attrition which were not replaced as
marketing efforts were directed toward implementing FFMP; the loss of
business of Megafoods Stores, Inc. ("Megafoods"); the closing or sale of
certain corporate stores; the sale of a distribution center and
consolidation of others; and the expiration of a temporary agreement with
Albertson's, Inc. as its Florida distribution center came on line. The
company's tighter credit policies also had a negative effect on generating
replacement sales. Management established a sales organization late in
1995 which is dedicated to prospecting for new accounts.
Fleming measures inflation using data derived from the average cost of a
ton of product sold by the company. Food price inflation was approximately
1% in 1995 compared to a negligible rate in 1994.
Gross Margin. Gross margin for 1995 increased by $288 million, or 26%, to
$1.41 billion from $1.12 billion for 1994 and increased as a percentage of
net sales to 8.06% for 1995 from 7.14% for 1994. The primary reason for
the increase is more retail operations, principally related to the Scrivner
acquisition. Retail operations typically have a higher gross margin than
wholesale operations. Product handling expenses, which consist of
warehouse, truck and building expenses, were approximately the same as a
percentage of net sales in 1995 as in 1994. In food distribution, reduced
vendor income due to the accelerated trend to Every Day Low Costing
("EDLC") negatively impacted gross margin. Further, certain margin items
that are passed through to customers under FFMP were only partially offset
by increases in FFMP-related charges to customers. In 1996, the company is
implementing increases in certain charges to its customers under FFMP and
also developing programs to charge vendors for services which are no longer
subsidized under EDLC.
Selling and Administrative Expense. Selling and administrative expense for
1995 increased by $257 million, or 28%, to $1.19 billion from $933 million
for 1994 and increased as a percentage of net sales to 6.79% for 1995 from
5.93% in 1994. Retail operations typically have higher selling expenses
than wholesale operations and the full year of retail acquired from
Scrivner was the primary reason for the increase. Goodwill amortization
also increased as a result of the acquisition. In addition, the
technology-related aspects of the various reengineering initiatives
resulted in an increase in expense. The increase in the Corporate line
under Operating Earnings shown in "Segment Information" in the Notes to
Consolidated Financial Statements is the result of this reengineering
initiative. The slower-paced nature of the remaining reengineering
initiatives along with the January 1996 reduction in headquarters headcount
should mitigate expense increases in 1996.
Credit loss expense included in selling and administrative expenses
decreased in 1995 by $30 million to $31 million from $61 million for 1994.
Tighter credit practices and reduced emphasis on credit extensions to and
investments in customers have resulted in less exposure and a decrease in
credit loss expense. While there can be no assurance that credit losses
from existing or future investments or commitments will not have a material
adverse effect on results of operations or financial position, the results
thus far of these new practices and emphasis have been very positive.
Additional credit loss, if any, related to the bankruptcy of Megafoods
could result in a loss of up to $20 million in excess of the credit loss
accrued to date. See "Litigation and Contingencies" in the Notes to
Consolidated Financial Statements for further discussion.
Interest Expense. Interest expense for 1995 increased $55 million to $175
million from $120 million for 1994. The increase was due principally to
higher borrowing resulting from the Scrivner acquisition, higher interest
rates in the capital and credit markets, and an increase in the interest
rates for the company due to changes in the company's credit rating brought
about by the acquisition and performance. Interest expense was expected to
be lower in 1996 due to the substantial amount of debt repaid in 1995.
However, increases in interest expense related to the David's litigation
will offset the savings from reduced borrowings. See "Subsequent Events"
in the Notes to Consolidated Financial Statements. The majority of the
company's debt has fixed rates as a result of the hedge agreements. See
"Liquidity and Capital Resources."
The company enters into interest rate hedge agreements to manage interest
costs and exposure to changing interest rates. See "Long-Term Debt" in
the Notes to Consolidated Financial Statements for further discussion of
the company's derivative agreements, which consist of simple interest rate
caps and swaps. For 1995, the interest rate hedge agreements contributed
$7 million of interest expense, compared to $6 million in 1994.
Interest Income. Interest income for 1995 increased by $1 million to $58
million from $57 million for 1994. Increases in interest income resulting
from earnings on the notes receivable acquired in the Scrivner loan
portfolio were nearly offset by the June 1995 sale of $77 million of notes
receivable with limited recourse. The sale reduced the amount of notes
receivable available to produce interest income during 1995 and will
continue to do so in 1996.
Equity Investment Results. The company's portion of operating losses from
equity investments for 1995 increased by $12 million to $27 million from
$15 million for 1994. Certain of the strategic multi-store customers in
which the company has made equity investments under its business
development venture program experienced increased losses when compared to
1994. Management expects improved results for such investments in 1996.
Additionally, losses from retail stores, which are part of the company's
equity store program and are accounted for under the equity method, also
increased.
In late 1995, the company consolidated the results of operations and
financial position of ABCO Markets, Inc. ("ABCO"), a 71-store supermarket
chain located in Arizona, as a result of the company's majority equity
position. In early 1996, the company acquired all the assets of ABCO
through a UCC foreclosure in cancellation of $66 million of ABCO
indebtedness to the company. Certain of ABCO minority shareholders have
challenged this action seeking recision and/or damages.
Facilities consolidation. In the first quarter of 1995, management changed
its estimates with respect to the general merchandising operations portion
of the reengineering plan. The revised estimate reflects reduced expense
and cash outflow. Accordingly, during the first quarter the company
reversed $9 million of the related provision.
Taxes on Income. The company's effective tax rate for 1995 increased to
51.1% from 50.0% for 1994. The increase was primarily due to increased
goodwill amortization with no related tax deduction and the significance of
certain other nondeductible expenses to pretax earnings.
Other. Several factors negatively affecting earnings in 1995 are likely to
continue. Management believes that these factors include: lower sales;
little or no food price inflation; and operating losses in certain
company-owned retail stores.
In February, 1996, trial commenced in the David's litigation in Johnson
County, Texas (see Item 3., Legal Proceedings, and "Litigation and
Contingencies" and "Subsequent Events" in Notes to Consolidated Financial
Statements included elsewhere herein). On March 14 and 15, 1996, the jury
found against Fleming for $2.8 million of disputed overcharges and returned
alternative verdicts against the company of $72.5 million (breach of
contract), $200.9 million (fraud) and $207.5 million (violation of the
Texas Deceptive Trade Practices Act, or DTPA). Plaintiff elected to pursue
the DTPA verdict and on April 12, 1996, the court granted judgment against
the defendants in the amount of $207.5 million plus pre-judgment interest
of $3.7 million and post-judgment interest at the rate of 10% per annum.
Immediately after the judgment was granted, Fleming posted a supersedeas
bond in the amount of $230 million (which includes interest for one year)
to stay enforcement of the judgment while pursuing an appeal. As
collateral for the bond, Fleming provided its sureties with letters of
credit obtained under its recently amended bank credit amendment (see
"Liquidity and Capital Resources - Recent Developments" herein.)
Based on management's present assessment of the ultimate outcome, a charge
of approximately $7 million is expected in the first quarter of 1996.
However, the failure to substantially reduce the amount of the judgment
through the appeal would have a material adverse effect on the company.
The cost of the bond and letter of credit requirements, as well as
attorney's fees, is expected to be approximately $3 million annually which
will negatively impact future earnings. The appellate process may take up
to three years, or longer.
In view of the large award in the David's litigation, assertions of
similar allegations could occur in future or continuing litigation.
Management is unable to predict a potential range of monetary exposure,
if any, to the company. However, if successfully asserted, any unfavorable
outcome could have a material adverse effect on the company.
Moody's and Standard & Poor's have placed the company's rated debt under
review for possible downgrade and CreditWatch with negative implications,
respectively, due in part to the uncertainties created by the judgment. A
downgrade in the company's rated debt is likely to result in increased
borrowing costs under the bank credit agreement. Additionally, the costs
of amending the bank credit agreement will be amortized over the remaining
term of the bank credit agreement. The amendment also calls for increased
facility fees and commitment fees, but such increased charges are not
expected to be material in 1996.
From the date of the jury verdict through April 12, 1996, the company and
certain officers, including the chief executive officer, were named as
defendants in three class action lawsuits filed by certain of its
stockholders and one class action lawsuit filed by certain noteholders,
each in the U. S. District Court for the Western District of Oklahoma,
alleging that the company failed to properly disclose the David's
litigation as well as for the allegedly pervasive and wrongful conduct of
the defendants which gave rise to the David's litigation. The plaintiffs
seek undetermined but significant damages. The company denies these
allegations and intends to vigorously defend the actions. Management is
unable to predict a potential range of monetary exposure, if any, to the
company. However, an unfavorable outcome could have a material adverse
effect on the company. See Item 3., Legal Proceedings, and "Litigation and
Contingencies" and "Subsequent Events" in Notes to Consolidated Financial
Statements.
The company has been named in two related legal actions filed in the U.S.
District Court in Miami. The litigation is complex and the ultimate
outcome cannot presently be determined. Furthermore, the company is unable
to predict a potential range of monetary exposure, if any, to the company.
Based on the recovery sought, an unfavorable judgment could have a material
adverse effect on the company.
Certain Accounting Matters. See Notes to Consolidated Financial Statements
for a discussion of new accounting standards adopted in 1995, or issued in
1995 that will be effective for 1996, none of which is expected to have a
material effect on results of operations or financial position.
1994 and 1993
Net Sales. Net sales for 1994 increased by $2.63 billion, or 20%, to
$15.72 billion from $13.10 billion for 1993. The increase in net sales was
attributable to the $2.76 billion of net sales generated by Scrivner
operations since the acquisition. Without Scrivner, net sales would have
declined by $100 million, or .8%, due to several factors, none of which was
individually material to net sales, including: the expiration of the
temporary agreement with Albertson's, Inc., as its distribution center came
on line; the sale of a distribution center; and the loss of business due to
the bankruptcy of Megafoods. These losses were partially offset by the
addition of business from Kmart, Florida retail operations acquired in the
fourth quarter of 1993 ("Hyde Park") and Randall's Food Markets, Inc. Food
price inflation in 1994 was negligible.
Gross Margin. Gross margin for 1994 increased by $358 million, or 47%, to
$1.12 billion from $765 million for 1993 and increased as a percentage of
net sales to 7.14% for 1994 from 5.84% for 1993. The increase in gross
margin was due to additional retail stores, principally the 179 stores
acquired with Scrivner in mid-1994 as well as 21 Hyde Park stores acquired
in late 1993 and 24 Consumers stores acquired in mid-1994. In addition,
product handling expenses decreased as a percentage of net sales for 1994
from 1993 due in part to the positive impact of the company's facilities
consolidation program and to higher fees charged to certain customers.
These gross margin increases were partially off-set by charges to income of
$6 million resulting from the LIFO method of inventory valuation in 1994
compared to credits to income of $7 million in 1993.
Selling and Administrative Expense. Selling and administrative expense for
1994 increased by $378 million, or 68%, to $933 million from $554 million
for 1993 and increased as a percentage of net sales to 5.93% for 1994 from
4.23% in 1993. This increase was due primarily to the mid-1994 acquisition
of Scrivner, particularly its retail operations, as well as the acquisition
of 21 Hyde Park stores in late 1993 and 24 Consumers stores in mid-1994.
Selling and administrative expenses also increased due to additional
goodwill amortization, principally related to the Scrivner acquisition, and
the absence of several non-recurring items that occurred in 1993. The
increase in the Corporate line under Operating earnings shown in "Segment
Information" in the Notes to Consolidated Financial Statements is the
result of the aforementioned absence of non-recurring items and the
increase in staff expense.
Credit loss expense included in selling and administrative expense for 1994
increased by $9 million to $61 million from $52 million in 1993. This
increase, including the $6.5 million credit loss attributable to the
bankruptcy of Megafoods (see "Litigation and Contingencies" in the Notes to
Consolidated Financial Statements), was primarily due to the continued
difficult retail environment and low levels of food price inflation.
Interest Expense. Interest expense for 1994 increased $42 million to $120
million from $78 million for 1993. The increase was due to the
indebtedness incurred to finance the Scrivner acquisition and higher
interest rates imposed on the company as a result thereof. Without these
factors, interest expense for 1994 is estimated to have been approximately
the same as 1993. For 1994, the interest rate hedge agreements described
above contributed $6 million to interest expense.
Interest Income. Interest income for 1994 decreased by $2 million to $57
million from $59 million for 1993. There were no note sales in 1994.
Equity Investment Results. The company's portion of operating losses from
equity investments for 1994 increased by $3 million to $15 million from $12
million for 1993. The increase resulted primarily from losses related to
the company's investments in small retail operators under the company's
equity store program, offset in part by improved results from investments
in strategic multi-store customers under the company's business development
venture program.
Taxes on Income. The company's effective tax rate for 1994 increased to
50.0% from 48.0% for 1993 primarily as a result of the lower-than-expected
earnings for 1994, Scrivner's operations in states with higher tax rates
and increased goodwill amortization with no related tax deduction.
Early Debt Retirement. In 1993, the company recorded an extraordinary loss
related to the early retirement of debt. The company retired $63 million
of 9.5% debentures at a cost of $2 million, net of tax benefits of $2
million.
Liquidity and Capital Resources
_____________________________________________________________________________
Capital Structure ($ in millions) 1995 1994
_____________________________________________________________________________
Long-term debt $1,402 48.8% $1,752 54.8%
Capital lease obligations 388 13.5 369 11.5
_____________________________________________________________________________
Total debt 1,790 62.3 2,121 66.3
Shareholders' equity 1,083 37.7 1,079 33.7
_____________________________________________________________________________
Total capital $2,873 100.0% $3,200 100.0%
_____________________________________________________________________________
Includes current maturities of long-term debt and current obligations under
capital leases.
Fleming reduced long-term debt levels incurred in connection with the 1994
acquisition of Scrivner by $350 million and reduced commitments under the
company's revolving credit and term loan agreement from $1.7 billion to
$1.25 billion during 1995.
The company's principal sources of liquidity are cash flows from operating
activities and borrowings under the bank credit agreement. Borrowings
under the bank credit agreement totaled $735 million at the end of 1995 and
averaged $861 million during the year. At year end, the amortizing term
loan balance was $659 million and $76 million was drawn on the $595 million
revolving credit facility. Final maturities are July 1999 for the revolving
credit facility and June 2000 for the term loan.
Borrowings under the bank credit agreement are guaranteed by substantially
all of the company's subsidiaries and are secured by the company's accounts
receivable, inventories and a pledge of the stock of the subsidiary
guarantors. The company was also required to pledge intercompany
receivables as security for its medium-term notes and its 9.5% debentures
and to provide guarantees from the subsidiary guarantors. Additionally,
the company has provided guarantees from the subsidiary guarantors in
favor of the $500 million seven-year senior notes issued in December 1994,
the proceeds of which were used to prepay a $500 million two-year tranche
of the credit agreement.
The bank credit agreement and the indentures for the senior notes contain
customary covenants associated with similar facilities. At year end 1995
the credit agreement contained the following more significant covenants:
consolidated-debt-to-net-worth ratio of not more than 2.45 to 1; minimum
consolidated net worth of at least $883 million; fixed charge coverage
ratio of at least 1.25 to 1; a limitation on restricted payments (including
dividends and company stock repurchases) and additional indebtedness; and
limitations on capital expenditures. The fixed charge coverage ratio was
amended in February 1996 to a minimum requirement of 1.1 to 1 beginning in
the first quarter of 1996. Covenants associated with the senior notes are
generally less restrictive than those of the credit agreement. At year-end
1995, the company was in compliance with all financial covenants under the
credit agreement and the senior note indentures. Continued compliance over
the near term will depend on the company's ability to generate sufficient
earnings. See "Recent developments" below.
Pricing under the bank credit agreement automatically increases with
respect to certain credit rating declines. Despite the effect of reduced
earnings and action by Standard & Poor's in June 1995 to reduce its rating
of the company's debt, the company believes that appropriate means are
available to maintain adequate liquidity for the foreseeable future at
acceptable rates. The company's credit ratings for its senior unsecured
long-term debt are Ba1 and BB- by Moody's and Standard & Poor's,
respectively. See "Recent developments" below.
The bank credit agreement may be terminated in the event of a defined
change of control. Under the indentures for the senior notes, the note
holders may require the company to repurchase the notes in the event of a
defined change of control coupled with a defined decline in credit ratings.
At year-end 1995, the company had $146 million of contingent obligations
under undrawn letters of credit, primarily related to insurance reserves
associated with its normal risk management activities. To the extent that
any of these letters of credit would be drawn, payments would be financed
by borrowings under the bank credit agreement.
Operating activities generated $399 million of net cash flows for 1995
compared to $333 million in 1994. The increase is principally due to lower
working capital requirements partially offset by lower deferred taxes.
Working capital was $364 million at year end, a decrease from $496 million
at year-end 1994. The current ratio decreased to 1.28 to 1, from 1.38 to 1
at year-end 1994. Management believes that cash flows from operating
activities and the company's ability to borrow under the bank credit
agreement will be adequate to meet working capital needs, capital
expenditures and other cash needs.
Capital expenditures for 1995 were approximately $114 million compared to
approximately $140 million in 1994. The decrease from the prior year is
due to a reduced level of expansion projects in 1995 as compared to 1994.
Management expects that 1996 capital expenditures, excluding acquisitions,
if any, will approximate $130 million.
During 1995, borrowings under uncommitted bank lines averaged $10 million
and ranged up to $120 million. Borrowings outstanding at year-end 1995
were $50 million.
Fleming makes investments in and loans to its retail customers, primarily
in conjunction with the establishment of long-term supply agreements. Net
investments and loans decreased $157 million, from $471 million to $314
million due primarily to the sale of notes and more restrictive credit
policies. There was a $77 million sale of notes in 1995, compared to no
sale in 1994. The company may sell additional notes in the future.
Long-term debt and capital lease obligations decreased $331 million to
$1.79 billion during 1995 as a result of: increased cash flow; reduced
working capital requirements, capital expenditures and retailer financing;
increased sale of notes and other assets; and other financing activities,
all of which were partially offset by increased cash outflows related to
facilities consolidation actions and reengineering activities.
Shareholders' equity at the end of 1995 was $1.08 billion.
The year-end 1995 debt-to-capital ratio decreased to 62.3%, below last
year's ratio of 66.3%. The company's long-term target ratio is
approximately 50%. Total capital was $2.87 billion at year end, down from
$3.2 billion the prior year.
The composite interest rate for total funded debt (excluding capital lease
obligations) before the effect of interest rate hedges was 7.8% at year-end
1995, versus 7.6% a year earlier. Including the effect of interest rate
hedges, the composite interest rate of debt was 8.4% at the end of both
1995 and 1994.
The dividend payments of $1.20 per share in 1995 and 1994 were 107% and 79%
of net earnings per share in 1995 and 1994, respectively.
Recent developments. In connection with the David's litigation described
above (also see Item 3. Legal Proceedings and "Subsequent Events" in the
Notes to Consolidated Financial Statements), in order to obtain the letters
of credit necessary to collateralize the supersedeas bond, the company
obtained an amendment to the bank credit agreement dated April 4, 1996.
The amendment also waived the effects of the judgment and any liens
resulting therefrom so long as the appeals process is proceeding. Letters
of credit support the supersedeas bond and are considered a use of the
company's borrowing capacity under the bank credit agreement.
Moody's and Standard & Poor's have placed the company's rated debt under
review for possible downgrade and CreditWatch with negative implications,
respectively, due in part to the uncertainties created by the judgment.
On March 28, 1996, the Board of Directors cut the quarterly cash dividend
from $.30 per share to $.02 per share for the second quarter of 1996.
The amended bank credit agreement limits dividend payments to $.08 per
share, per quarter beginning in the second quarter of 1996. After
considering the effect of the recently issued letters of credit related to
the supersedeas bond, which are considered a use of the company's borrowing
capacity, and the related bank credit agreement amendment, at year-end 1995
the company would have been allowed to borrow an additional $190 million.
Management believes that the cash flows from operating activities and the
company's ability to borrow under the amended bank credit agreement will be
adequate to meet working capital needs, capital expenditures and other cash
needs for the next twelve months.
The company is currently in compliance with all covenants under the amended
bank credit agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1. Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to pages 3 through 6 of the company's
proxy statement dated March 12, 1996, in connection with its annual meeting
of shareholders to be held on May 1, 1996. Information concerning
Executive Officers of the company is included in Part I herein which is
incorporated in this Part III by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to pages 12 through 20 of the company's
proxy statement dated March 12, 1996, in connection with its annual meeting
of shareholders to be held on May 1, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to page 9 through 11 of the company's
proxy statement dated March 12, 1996, in connection with its annual meeting
of shareholders to be held on May 1, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Page Number
o Consolidated Statements of Earnings -
For the years ended December 30, 1995,
December 31, 1994, and December 25, 1993
o Consolidated Balance Sheets -
At December 30, 1995, and December 31, 1994
o Consolidated Statements of Shareholders' Equity -
For the years ended December 30, 1995,
December 31, 1994, and December 25, 1993
o Consolidated Statements of Cash Flows -
For the years ended December 30, 1995,
December 31, 1994, and December 25, 1993
o Notes to Consolidated Financial Statements -
For the years ended December 30, 1995,
December 31, 1994, and December 25, 1993
o Independent Auditors' Report
o Quarterly Financial Information (Unaudited)
(a) 2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 30, 1995, December 31, 1994, and December 25,
1993
(In thousands, except per share amounts)
1995 1994 1993
Net sales $17,501,572 $15,723,691 $13,096,124
Costs and expenses:
Cost of sales 16,091,039 14,601,050 12,331,099
Selling and administrative 1,189,199 932,588 554,149
Interest expense 175,390 120,071 78,029
Interest income (58,206) (57,148) (58,923)
Equity investment results 27,240 14,793 11,865
Facilities consolidation and (8,982) --- 107,827
restructuring
Total costs and expenses 17,415,680 15,611,354 13,024,046
Earnings before taxes 85,892 112,337 72,078
Taxes on income 43,891 56,168 34,598
Earnings before extraordinary 42,001 56,169 37,480
loss
Extraordinary loss from early --- --- 2,308
retirement of debt
Net earnings $42,001 $ 56,169 $ 35,172
Net earnings per share:
Earnings before extraordinary $1.12 $1.51 $1.02
loss
Extraordinary loss --- --- .06
Net earnings per share $1.12 $1.51 $ .96
Weighted average shares out- 37,577 37,254 36,801
standing
Sales to customers accounted for under the equity method were approximately
$1.5 billion in 1995 and $1.6 billion each year for 1994 and 1993.
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
At December 30, 1995, and December 31, 1994
(In thousands)
Assets 1995 1994
Current assets:
Cash and cash equivalents $4,426 $ 28,352
Receivables 340,215 364,884
Inventories 1,207,329 1,301,980
Other current assets 98,801 124,865
Total current assets 1,650,771 1,820,081
Investments and notes receivable 271,763 402,603
Investment in direct financing leases 225,552 230,357
Property and equipment:
Land 59,364 66,702
Buildings 406,302 366,109
Fixtures and equipment 667,087 656,068
Leasehold improvements 202,751 199,713
Leased assets under capital leases 192,022 167,362
1,527,526 1,455,954
Less accumulated depreciation (532,364) (467,830)
and amortization
Net property and equipment 995,162 988,124
Other assets 132,338 179,332
Goodwill 1,021,099 987,832
Total assets $4,296,685 $4,608,329
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $1,001,123 $ 960,333
Current maturities of long-term debt 53,917 110,321
Current obligations under capital leases 19,452 15,780
Other current liabilities 211,863 237,197
Total current liabilities 1,286,355 1,323,631
Long-term debt 1,347,987 1,641,390
Long-term obligations under capital leases 368,876 353,403
Deferred income taxes 40,179 51,279
Other liabilities 169,966 160,071
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value, authorized -
100,000 shares, issued and outstanding -
37,716 and 37,480 shares 94,291 93,705
Capital in excess of par value 501,474 494,966
Reinvested earnings 501,214 503,962
Cumulative currency translation adjustment (4,549) (2,972)
1,092,430 1,089,661
Less ESOP note (9,108) (11,106)
Total shareholders' equity 1,083,322 1,078,555
Total liabilities and shareholders' equity $4,296,685 $4,608,329
Receivables include $27 million and $37 million in 1995 and 1994,
respectively, due from customers accounted for under the equity method.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 30, 1995, December 31, 1994, and December 25,
1993
(In thousands)
1995 1994 1993
Shares Amount Shares Amount Shares Amount
Common stock:
Beginning of year 37,480 $ 93,705 36,940 $ 92,350 36,698 $ 91,746
Incentive stock and
stock ownership plans 236 586 540 1,355 242 604
End of year 37,716 94,291 37,480 93,705 36,940 92,350
Capital in excess of par value:
Beginning of year 494,966 489,044 482,107
Incentive stock and
stock ownership plans 6,508 5,922 6,937
End of year 501,474 494,966 489,044
Reinvested earnings:
Beginning of year 503,962 492,250 501,231
Net earnings 42,001 56,169 35,172
Cash dividends, $1.20 per share (44,749) (44,457) (44,153)
End of year 501,214 503,962 492,250
Cumulative currency
translation adjustment:
Beginning of year (2,972) (288) ---
Currency translation adjustments (1,577) (2,684) (288)
End of year (4,549) (2,972) (288)
ESOP note:
Beginning of year (11,106) (12,950) (14,650)
Payments 1,998 1,844 1,700
End of year (9,108) (11,106) (12,950)
Total shareholders' equity,
end of year $1,083,322 $1,078,555 $1,060,406
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 30, 1995, December 31, 1994, and December 25,
1993
(In thousands)
1995 1994 1993
Cash flows from operating activities:
Net earnings $ 42,001 $ 56,169 $ 35,172
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 180,796 145,910 101,103
Credit losses 30,513 61,218 52,018
Deferred income taxes 12,052 30,430 (24,471)
Equity investment results 27,240 14,793 11,865
Consolidation and reserve
activities, net (44,375) (29,304) 87,211
Change in assets and liabilities,
excluding effect of acquisitions:
Receivables 7,156 1,964 (16,420)
Inventories 149,676 57,689 58,625
Other assets 38,995 13,346 (48,984)
Accounts payable 6,390 30,691 (38,472)
Other liabilities (46,489) (50,083) (10,883)
Other adjustments, net (4,956) 39 1,779
Net cash provided by
operating activities 398,999 332,862 208,543
Cash flows from investing activities:
Collections on notes receivable 88,441 111,149 82,497
Notes receivable funded (103,771) (122,206) (130,846)
Notes receivable sold 77,063 --- 67,554
Businesses acquired (10,654) (387,488) (51,110)
Proceeds from sale of businesses --- 6,682 ---
Purchase of property and equipment (116,769) (150,057) (55,554)
Proceeds from sale of
property and equipment 29,907 14,917 2,955
Investments in customers (11,298) (12,764) (37,196)
Proceeds from sale of investments 17,649 4,933 7,077
Other investing activities (4,169) (2,793) 197
Net cash used in
investing activities (33,601) (537,627) (114,426)
Cash flows from financing activities:
Proceeds from long-term borrowings 93,000 2,225,751 331,502
Principal payments on long-term debt (452,690) (1,912,717) (373,693)
Principal payments on
capital lease obligations (17,269) (13,990) (11,316)
Sale of common stock under
incentive stock and
stock ownership plans 7,094 7,277 7,541
Dividends paid (44,749) (44,457) (44,153)
Other financing activities 25,290 (30,381) (7,076)
Net cash provided by (used in)
financing activities (389,324) 231,483 (97,195)
Net increase (decrease) in cash
and cash equivalents (23,926) 26,718 (3,078)
Cash and cash equivalents,
beginning of year 28,352 1,634 4,712
Cash and cash equivalents,
end of year $ 4,426 $ 28,352 $ 1,634
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 30, 1995, December 31, 1994, and December 25,
1993
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The company markets food and food-related products to
supermarkets in 42 states, the District of Columbia and several foreign
countries. The company also operates approximately 370 company-owned
stores in several geographic areas. The company's operation encompasses
two major businesses: food and general merchandise distribution, and
company-owned retail operations.
FISCAL YEAR: The company's fiscal year ends on the last Saturday in
December. Fiscal years 1995 and 1993 were 52 weeks; 1994 was 53 weeks. The
impact of the additional week in 1994 is not material to the results of
operations or financial position.
BASIS OF PRESENTATION: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
all material subsidiaries. Material intercompany items have been
eliminated. The equity method of accounting is used for investments in
certain entities in which the company has an investment in common stock of
between 20% and 50%. Under the equity method, original investments are
recorded at cost and adjusted by the company's share of earnings or losses
of these entities and for declines in estimated realizable values deemed to
be other than temporary.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of liquid investments
readily convertible to cash with a maturity of three months or less. The
carrying amount for cash equivalents is a reasonable estimate of fair
value.
RECEIVABLES: Receivables include the current portion of customer notes
receivable of $42 million in 1995 and $68 million in 1994. Receivables are
shown net of allowance for credit losses of $35 million in 1995 and $40
million in 1994. The company extends credit to its retail customers
located over a broad geographic base. Regional concentrations of credit
risk are limited.
The company measures its estimates of impaired loans in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 114 - Accounting
by Creditors for Impairment of a Loan, as amended by SFAS No. 118 -
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. The 1995 adoption of SFAS No. 114 and No. 118 did not
materially impact amounts previously reported. Interest income on impaired
loans is recognized only when payments are received.
INVENTORIES: Inventories are valued at the lower of cost or market. Most
grocery and certain perishable inventories, aggregating approximately 80%
of total inventories in both 1995 and 1994, are valued on a last-in,
first-out (LIFO) method. The cost for the remaining inventories was
determined by the first-in, first-out (FIFO) method. Current replacement
cost of LIFO inventories was greater than the carrying amounts by
approximately $22 million and $19 million at year-end 1995 and 1994,
respectively.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost or,
for leased assets under capital leases, at the present value of minimum
lease payments. Depreciation, as well as amortization of assets under
capital leases, are based on the estimated useful asset lives using the
straight-line method. Asset impairments are recorded when events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. Such impairment losses are measured by the excess
of the carrying amount of the asset over its fair value. In 1995, SFAS No.
121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of was issued. The company will adopt SFAS No. 121
in 1996 and does not expect a material impact on the company's financial
position or results of operations.
The estimated useful lives used in computing depreciation and amortization
are: buildings and major improvements - 20 to 40 years; warehouse,
transportation and other equipment - 3 to 10 years; and data processing
equipment - 5 to 7 years.
GOODWILL: The excess of purchase price over the value of net assets of
businesses acquired is amortized on the straight-line method over periods
not exceeding 40 years. Goodwill is shown net of accumulated amortization
of $127 million and $97 million in 1995 and 1994, respectively. Goodwill
is written down if it is probable that estimated undiscounted operating
income generated by the related assets will be less than the carrying
amount.
FINANCIAL INSTRUMENTS: Interest rate hedge transactions and other
financial instruments are utilized to manage interest rate exposure. The
difference between amounts to be paid or received is accrued and recognized
over the life of the contracts. The methods and assumptions used to
estimate the fair value of significant financial instruments are discussed
in the Investments and Notes Receivable and Long-Term Debt notes.
TAXES ON INCOME: Deferred income taxes arise from temporary differences
between financial and tax bases of certain assets and liabilities.
FOREIGN CURRENCY TRANSLATION: Net exchange gains or losses resulting from
the translation of assets and liabilities of an international investment
are included in shareholders' equity.
NET EARNINGS PER SHARE: Earnings per share are computed based on net
earnings divided by the weighted average shares outstanding. The impact of
common stock options on earnings per share is immaterial.
RECLASSIFICATIONS: Certain reclassifications have been made to prior
years' amounts to conform to the current year's classification.
ACQUISITIONS
In July 1994, the company acquired all the outstanding stock of Haniel
Corporation, the parent of Scrivner Inc. ("Scrivner"). The company paid
$388 million in cash and refinanced substantially all of Scrivner's
existing $670 million indebtedness.
The acquisition was accounted for as a purchase and the results of
operations of Scrivner are included in the consolidated financial
statements since the beginning of the third quarter of 1994. The purchase
price was allocated based on estimated fair values at the date of the
acquisition. The excess of purchase price over assets acquired of $583
million is being amortized on a straight-line basis over 40 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and Scrivner as if the
acquisition had occurred at the beginning of 1993, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with related
income tax effects.
(In millions, except per share amounts) 1994 1993
Net sales $ 18,947 $19,113
Net earnings $43 $19
Net earnings per share $1.15 $.53
In late 1995, the company consolidated the results of operations and
financial position of a 71-store supermarket chain with operations in
Arizona, and acquired all of the assets of the operations in January 1996.
In 1994, the company acquired the remaining common stock of a supermarket
operator of a 24-store chain with locations in Missouri and Kansas. In
1993, the company acquired the assets or common stock of three businesses:
distribution center assets located in Garland, Texas, and certain assets
and common stock of two supermarket operators in southern Florida. These
acquisitions were accounted for as purchases. The results of these
entities are not material to the company in the respective years.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
(In thousands) 1995 1994
Investments in and advances
to customers $103,941 $163,090
Notes receivable from customers 142,015 219,852
Other investments and receivables 25,807 19,661
Investments and notes receivable $271,763 $402,603
The company extends long-term credit to certain retail customers. Loans
are primarily collateralized by inventory and fixtures. Interest rates are
above prime with terms up to 10 years. The carrying amount of notes
receivable approximates fair value because of the variable interest rates
charged on the notes.
The company's recorded investment in notes receivable with no related
credit loss allowance is $233 million. Impaired notes, including current
portion, total $28 million, with related allowances of $17 million. There
were no impaired loans without reserves. The average recorded investment
in impaired loans during 1995 was $30 million, with $1 million of related
interest income recognized during the year.
Investments in and advances to customers are shown net of reserves of $14
million and $9 million in 1995 and 1994, respectively.
The company has sold certain notes receivable at face value with limited
recourse. The outstanding balance at year-end 1995 on all notes sold is
$95 million, of which the company is contingently liable for $15 million
should all the notes become uncollectible.
LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) 1995 1994
Term bank loans, due 1996 to 2000,
average interest rates of 6.7% and 6.6% $ 659,497 $ 800,000
10.625% senior notes due 2001 300,000 300,000
Floating rate senior notes due 2001, annual
payments of $1,000 in 1999 and 2000,
interest rates of 8.1% and 8.7% 200,000 200,000
Medium-term notes, due 1997 to 2003,
average interest rates of 7.1% and 6.9% 99,000 155,950
Revolving bank credit, average interest
rate of 6.6% for both years 76,000 280,000
Uncommitted credit lines, average
interest rates of 6.4% 50,000 ---
Mortgaged real estate notes and other debt,
varying interest rates from 4% to
14.4%, due 1996 to 2003 17,407 15,761
1,401,904 1,751,711
Less current maturities 53,917 110,321
Long-term debt $1,347,987 $1,641,390
FIVE-YEAR MATURITIES: Aggregate maturities of long-term debt for the next
five years are as follows: 1996-$54 million; 1997-$126 million; 1998-$177
million; 1999-$216 million; and 2000-$186 million.
REVOLVING CREDIT AND TERM LOAN AGREEMENT: The company has a $1.25 billion
committed revolving credit and term loan agreement with a group of banks.
The bank credit agreement carries an annual facility fee on the total
revolving credit portion and a commitment fee on the unused amount of the
revolving credit portion. Interest rates are based on various money market
rate options selected by the company at the time of borrowing. Borrowings
under the revolving credit portion of the bank credit agreement mature in
1999 and the amortizing term bank loan matures in 2000.
The bank credit agreement and senior note indentures contain customary
covenants associated with similar facilities. The bank credit agreement
contains the following financial covenants: consolidated-debt-to-net-worth
ratio of not more than 2.45 to 1; minimum consolidated net worth of at
least $883 million; and fixed charge coverage ratio of at least 1.25 to 1.
The company is in compliance with all financial covenants under the bank
credit agreement and senior note indentures. At year-end 1995, the
restricted payments test would have allowed the company to pay dividends or
repurchase capital stock in the aggregate amount of $51 million. The
consolidated-debt-to-net-worth test would have allowed the company to
borrow an additional $837 million. The fixed charge coverage test would
have allowed the company to incur an additional $12 million of annual
interest or net rental expense. The fixed charge coverage ratio was
amended in February 1996 to a minimum requirement of 1.1 to 1 beginning in
the first quarter of 1996.
The bank credit agreement and the senior note indentures also place
significant restrictions on the company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain
payments, investments, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate
with, an unaffiliated entity.
The bank credit agreement contains a provision that, in the event of a
defined change of control, the agreement may be terminated. The indentures
for the senior notes provide an option for the note holders to require the
company to repurchase the notes in the event of a defined change of control
and defined decline in credit ratings.
MEDIUM-TERM NOTES: The company has registered $565 million in medium-term
notes. Of this, $290 million may be issued from time to time, at fixed or
floating rates, as determined at the time of issuance. Under the bank
credit agreement, new issues of certain kinds of debt must have a maturity
after December 2000. The security provisions for the bank credit agreement
required the company to equitably and ratably secure the medium-term notes.
Security for the medium-term notes consists of guarantees from most of the
company's subsidiaries and a pledge of intercompany receivables.
INTEREST EXPENSE: Components of interest expense are as follows:
(In thousands) 1995 1994 1993
Interest costs incurred:
Long-term debt $135,254 $ 83,748 $ 44,628
Capital lease obligations 36,132 33,718 31,355
Other 4,712 2,969 2,046
Total incurred 176,098 120,435 78,029
Less interest capitalized 708 364 ---
Interest expense $175,390 $120,071 $ 78,029
EARLY RETIREMENT OF DEBT: In 1993 the company recorded extraordinary
losses for early retirement of $63 million of 9.5% debentures. The loss
was $2 million, after income tax benefits of $2 million, or $.06 per share.
The funding source for the early redemption was the sale of notes
receivable.
DERIVATIVES: The company enters into interest rate hedge agreements with
the objective of managing interest costs and exposure to changing interest
rates. The classes of derivative financial instruments used include
interest rate swaps and caps. The bank credit agreement requires the
company to provide interest rate protection on a substantial portion of the
related outstanding indebtedness. Strategies for achieving the company's
objectives have resulted in the company maintaining interest rate swaps and
caps covering $850 million and $1 billion aggregate principal amount of
floating rate indebtedness at year-end 1995 and 1994, respectively. These
amounts exceed the requirements set forth in the bank credit agreement.
The maturities for hedge agreements range from 1997 to 2000. The
counterparties to these agreements are major national and international
financial institutions.
The interest rate employed on most of the company's floating rate
indebtedness is equal to the London interbank offered rate ("LIBOR") plus a
margin. The average fixed interest rate paid by the company on the
interest rate swaps is 6.95%, covering $600 million of floating rate
indebtedness. The interest rate swap agreements, which were implemented
through six counterparty banks, and which have an average remaining life of
2.9 years, provide for the company to receive substantially the same LIBOR
that the company pays on its floating rate indebtedness. The company has
purchased interest rate cap agreements from an additional two counterparty
banks for an additional $250 million of its floating rate indebtedness.
The agreements cap LIBOR at 7.33% over the next three years.
The notional amounts of interest rate swaps and caps do not represent
amounts exchanged by the parties and are not a measure of the company's
exposure to credit or market risks. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the hedge
agreements. Notional amounts are not included in the consolidated balance
sheet.
The company believes its exposure to potential loss due to counterparty
nonperformance is minimized primarily due to the relatively strong credit
ratings of the counterparty banks for their unsecured long-term debt (A- or
higher from Standard & Poor's Ratings Group or A2 or higher from Moody's
Investor Service, Inc.) and the size and diversity of the counterparty
banks.
The hedge agreements are subject to market risk to the extent that market
interest rates for similar instruments decrease, and the company terminates
the hedges prior to maturity. Changes in the fair value of the hedge
agreements offset changes in the fair value of the referenced debt. In
1995, the company terminated $150 million notional principal of interest
rate swaps at an immaterial cost. These terminations occurred because the
company repaid more referenced debt than scheduled.
Derivative financial instruments are reported in the balance sheet where
the company has made a cash payment upon entering into or terminating the
transaction. The carrying amount is amortized over the initial life of the
hedge agreement. The company had a financial basis of $5 million and $7
million in the interest rate cap agreements at year-end 1995 and 1994,
respectively. In addition, accrued interest payable or receivable for the
interest rate agreements is included in the balance sheet. Payments made
under obligations or received for receivables are accounted for as interest
expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of long-term debt was
determined using valuation techniques that considered cash flows discounted
at current market rates and management's best estimate for instruments
without quoted market prices. At year-end 1995 and 1994, the carrying
value of debt exceeded the fair value by $38 million and $14 million,
respectively.
For derivatives, the fair value was estimated using termination cash
values. At year-end 1995, interest rate hedge agreement values would
represent an obligation of $27 million, and at year-end 1994, an asset of
$32 million.
SUBSIDIARY GUARANTEE OF SENIOR NOTES: The senior notes are guaranteed by
all direct and indirect subsidiaries of the company (except for certain
inconsequential subsidiaries), all of which are wholly owned. The
guarantees are joint and several, full, complete and unconditional. There
are currently no restrictions on the ability of the subsidiary guarantors
to transfer funds to the company in the form of cash dividends, loans or
advances. Full financial statements for the subsidiary guarantors are not
presented herein because management does not believe such information would
be material.
The summarized financial information, which includes allocations of
material corporate-related expenses, for the combined subsidiary guarantors
may not necessarily be indicative of the results of operations or financial
position had the subsidiary guarantors been operated as independent
entities.
(In millions) 1995 1994
Current assets $251 $754
Noncurrent assets $487 $1,405
Current liabilities $104 $501
Noncurrent liabilities $1 $875
(In millions) 1995 1994 1993
Net sales $2,842 $3,318 $11,759
Costs and expenses $2,787 $3,341 $11,674
Earnings (loss) before
extraordinary loss $27 $(12) $44
Net earnings (loss) $27 $(12) $42
During 1995 and 1994, a significant number of subsidiaries were merged into
the parent company, resulting in a substantial reduction in the amounts
appearing in the summarized financial information.
LEASE AGREEMENTS
CAPITAL AND OPERATING LEASES: The company leases certain distribution
facilities with terms generally ranging from 20 to 30 years, while lease
terms for other operating facilities range from 1 to 15 years. The leases
normally provide for minimum annual rentals plus executory costs and
usually include provisions for one to five renewal options of five years.
The company leases company-owned retail store facilities with terms
generally ranging from 3 to 20 years. These agreements normally provide
for contingent rentals based on sales performance in excess of specified
minimums. The leases usually include provisions for one to three renewal
options of two to five years. Certain other equipment is leased under
agreements ranging from two to eight years with no renewal options.
Accumulated amortization related to leased assets under capital leases was
$53 million and $45 million at year-end 1995 and 1994, respectively.
Future minimum lease payment obligations for leased assets under capital
leases as of year-end 1995 are set forth below:
(In thousands) Lease
Years Obligations
1996 $ 24,864
1997 23,676
1998 23,228
1999 22,893
2000 21,582
Later 181,187
Total minimum lease payments 297,430
Less estimated executory costs 226
Net minimum lease payments 297,204
Less interest 131,706
Present value of net minimum lease payments 165,498
Less current obligations 9,246
Long-term obligations $156,252
Future minimum lease payments required at year-end 1995 under operating
leases that have initial noncancelable lease terms exceeding one year are
presented in the following table:
(In thousands) Facility Facilities Equipment Equipment Net
Years Rentals Subleased Rentals Subleased Rentals
1996 $ 176,027 $ 75,682 $31,402 $2,667 $ 129,080
1997 158,496 69,213 20,180 2,328 107,135
1998 147,072 60,393 13,031 1,546 98,164
1999 131,934 48,469 8,169 839 90,795
2000 119,134 38,699 2,895 570 82,760
Later 792,339 170,536 261 61 622,003
Total lease
payments $1,525,002 $462,992 $75,938 $8,011 $1,129,937
The following table shows the composition of total annual rental expense
under noncancelable operating leases and subleases with initial terms of
one year or greater:
(In thousands) 1995 1994 1993
Minimum rentals $199,834 $160,065 $126,040
Contingent rentals 1,654 866 182
Less sublease income 92,108 77,684 57,308
Rental expense $109,380 $ 83,247 $ 68,914
DIRECT FINANCING LEASES: The company leases retail store facilities for
sublease to customers with terms generally ranging from 5 to 25 years. Most
leases provide for a contingent rental based on sales performance in excess
of specified minimums. The leases and subleases usually contain provisions
for one to four renewal options of two to five years.
The following table shows the future minimum rentals receivable under
direct financing leases and future minimum lease payment obligations under
capital leases in effect at year-end 1995:
(In thousands) Lease Rentals Lease
Years Receivable Obligations
1996 $ 43,332 $ 30,782
1997 40,560 30,936
1998 38,848 30,912
1999 35,563 30,817
2000 32,088 29,503
Later 247,768 233,744
Total minimum lease payments 438,159 386,694
Less estimated executory costs 1,727 1,719
Net minimum lease payments 436,432 384,975
Less unearned income 193,454 ---
Less interest --- 162,145
Present value of net minimum
lease payments 242,978 222,830
Less current portion 17,426 10,206
Long-term portion $225,552 $212,624
Contingent rental income and contingent rental expense is not material.
FACILITIES CONSOLIDATION AND RESTRUCTURING
The results in 1993 included a charge of $108 million for facilities
consolidations, reengineering, impairment of retail-related assets and
elimination of regional operations. Components of the charge provided for
severance costs, impaired property and equipment, product handling and
damage, and impaired other assets. Four distribution centers have been
closed and one additional facility will be closed as part of the facilities
consolidation plan. Reengineering has occurred at 17 of the company's
operating units. Most impaired retail-related assets have been disposed or
subleased. Regional operations have been eliminated. In 1995 management
changed its estimates with respect to the general merchandising operations
portion of the reengineering plan and reversed $9 million of the related
provision.
Facilities consolidation and restructuring reserve activities are:
Reengineering/
Consolidation
Severance Costs/Asset
(In thousands) Total Costs Impairments
Balance, year-end 1992 $ 29,892 $ 8,148 $21,744
Charged to costs and expenses 107,827 25,136 82,691
Expenditures and write-offs (52,198) (8,148) (44,050)
Balance, year-end 1993 85,521 25,136 60,385
Expenditures and write-offs (31,142) (2,686) (28,456)
Balance, year-end 1994 54,379 22,450 31,929
Credited to income (8,982) - (8,982)
Expenditures and write-offs (24,080) (6,690) (17,390)
Balance, year-end 1995 $ 21,317 $15,760 $ 5,557
TAXES ON INCOME
Components of taxes on income (tax benefit) are as follows:
(In thousands) 1995 1994 1993
Current:
Federal $24,817 $18,536 $48,742
State 7,022 7,202 10,327
Total current 31,839 25,738 59,069
Deferred:
Federal 9,850 22,188 (20,160)
State 2,202 8,242 (4,311)
Total deferred 12,052 30,430 (24,471)
Taxes on income $43,891 $56,168 $34,598
Deferred tax expense (benefit) relating to temporary differences includes
the
following components:
(In thousands) 1995 1994 1993
Depreciation and amortization $(23,398) $ (4,967) $ 516
Asset valuations and reserves 26,040 20,396 (28,849)
Equity investment results (312) 6,255 (6,767)
Credit losses 2,897 11,728 (5,417)
Prepaid expenses (71) 374 3,200
Lease transactions (1,170) (1,448) (2,307)
Noncompete agreements (100) 388 2,170
Associate benefits 2,249 (4,215) 10,800
Note sales (144) (2,547) 1,880
Acquired loss carryforwards 1,639 1,616 -
Other 4,422 2,850 303
Deferred tax expense (benefit) $12,052 $30,430 $(24,471)
Temporary differences that give rise to deferred tax assets and liabilities
as of year-end 1995 and 1994 are as follows:
(In thousands) 1995 1994
DEFERRED TAX ASSETS:
Depreciation and amortization $ 8,709 $ 6,028
Asset valuations and
reserve activities 75,215 78,622
Associate benefits 68,783 68,595
Credit losses 23,885 26,775
Equity investment results 9,440 10,969
Lease transactions 11,840 11,009
Inventory 15,954 14,993
Acquired loss carryforwards 6,198 10,690
Other 19,183 18,533
Gross deferred tax assets 239,207 246,214
Less valuation allowance (4,514) (4,514)
Total deferred tax assets 234,693 241,700
DEFERRED TAX LIABILITIES:
Depreciation and amortization 128,924 154,688
Equity investment results 2,166 4,036
Lease transactions 1,825 1,743
Inventory 59,113 63,666
Associate benefits 23,402 19,060
Asset valuations and reserve activities 8,025 7,379
Note sales 3,495 3,373
Prepaid expenses 3,578 3,799
Other 17,620 13,876
Total deferred tax liabilities 248,148 271,620
Net deferred tax liability $ (13,455) $ (29,920)
The valuation allowance relates to $4 million of acquired loss
carryforwards that, if utilized, will be reversed to goodwill in future
years. Management believes it is more likely than not that all other
deferred tax assets will be realized.
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
1995 1994 1993
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 7.0 8.9 5.4
Acquisition-related differences 8.4 6.9 6.9
Other .7 (.8) .7
Effective rate 51.1% 50.0% 48.0%
SEGMENT INFORMATION
The following table sets forth the composition of the company's net sales,
operating earnings, depreciation and amortization, capital expenditures and
identifiable assets. Food distribution includes food and general
merchandise distribution.
(In millions) 1995 1994 1993
NET SALES
Food distribution $16,665 $15,543 $13,109
Less sales elimination 2,529 1,953 957
Net food distribution 14,136 13,590 12,152
Retail food 3,366 2,134 944
Total $17,502 $15,724 $13,096
OPERATING EARNINGS
Food distribution $282 $263 $245
Retail food 52 27 19
Corporate (113) (100) (53)
Total operating earnings 221 190 211
Interest expense 175 120 78
Interest income (58) (57) (59)
Equity investment results 27 15 12
Facilities consolidation and
restructuring (9) --- 108
Earnings before taxes $86 $112 $ 72
DEPRECIATION AND AMORTIZATION
Food distribution $115 $ 99 $ 80
Retail food 43 33 15
Corporate 23 14 6
Total $181 $146 $101
CAPITAL EXPENDITURES
Food distribution $66 $107 $ 42
Retail food 30 26 8
Corporate 18 7 3
Total $114 $140 $53
IDENTIFIABLE ASSETS
Food distribution $3,021 $3,262
Retail food 588 547
Corporate 688 799
Total $4,297 $4,608
SHAREHOLDERS' EQUITY
The company offers a Dividend Reinvestment and Stock Purchase Plan which
offers shareholders the opportunity to automatically reinvest their
dividends in common stock at a 5% discount from market value. Shareholders
also may purchase shares at market value by making cash payments up to
$5,000 per calendar quarter. Such programs resulted in 283,000 and 270,000
new shares in 1995 and 1994, respectively.
The company has a rights plan designed to protect stockholders should the
company become the target of coercive and unfair takeover tactics.
Stockholders have one right for each share of common stock held. When
exercisable, each right entitles stockholders (other than any defined
acquiror) to buy one share of common stock at an exercise price of $150
(the "Exercise Price") in the event of certain defined events that
constitute a change of control or to exchange the right upon the payment of
the Exercise Price for that number of shares of company common stock
determined by dividing twice the Exercise Price ($300) by the then current
market price of the common stock. Furthermore, if the company is involved
in a merger or other business combination or sale of a specified percentage
of assets or earning power, the rights (other than those held by the
acquiror) may be used to purchase, for the Exercise Price, that number of
shares of the acquiror's common stock determined by dividing twice the
Exercise Price by the then current market price of the acquiror's common
stock. The rights expire on July 6, 1996.
In February 1996, the company adopted a new rights plan to replace the
current plan upon its expiration. The new plan operates in a manner
substantially identical to the existing plan except that each right
initially entitles the stockholder (other than the acquiror) to purchase
1/100 of a share of new preferred stock and the Exercise Price is $75. The
new rights plan expires on July 6, 2006.
The company has severance agreements with certain management associates.
The agreements generally provide two years' salary to these associates if
the associate's employment terminates within two years after a change of
control. In the event of a change of control, a supplemental trust will be
funded to provide these salary obligations.
The company's employee stock ownership plan (ESOP) established in 1990
allows substantially all associates to participate. In 1990, the ESOP
entered into a note with a bank to finance purchase of the shares. In
1994, the company paid off the note and entered into a note from the ESOP.
The ESOP will repay to the company the remaining loan balance with proceeds
from company contributions. The receivable from the ESOP is presented as a
reduction of shareholders' equity.
The company makes contributions based on fixed debt service requirements of
the ESOP note. Such contributions were approximately $2 million per year
in 1995, 1994 and 1993. Dividends used by the ESOP for debt service and
interest and compensation expense recognized by the company were not
material.
The company's stock option plans allow the granting of nonqualified stock
options and incentive stock options, with or without stock appreciation
rights (SARs), to key associates.
In 1995 and 1994, options with SARs were exercisable for 14,000 and 20,000
shares, respectively. Options without SARs were exercisable for 1,865,000
shares in 1995 and 790,000 shares in 1994. At year-end 1995, there were
208,000 shares available for grant under the stock option plans.
The company has a stock incentive plan that allows awards to key associates
of up to 400,000 restricted shares of common stock and phantom stock units.
At year-end 1995, 81,000 shares were available for grant under the stock
incentive plan. Shares granted are recorded at the market value when
issued and amortized to expense as earned. The unamortized portion was $4
million at year-end 1995 and is netted against capital in excess of par
value within shareholders' equity.
Stock option and stock incentive transactions are as follows:
(Shares in thousands) Options Price Range
Outstanding, year-end 1993 983 $ 4.72 - 42.13
Granted 1,782 $24.81 - 29.75
Exercised (7) $ 4.72 - 25.19
Canceled and forfeited (288) ---
Outstanding, year-end 1994 2,470 $10.29 - 42.13
Granted 118 $19.44 - 26.44
Exercised (10) $10.29 - 24.94
Canceled and forfeited (457) ---
Outstanding, year-end 1995 2,121 $19.44 - 42.13
In the event of a change of control, the company may accelerate the vesting
and payment of any award or make a payment in lieu of an award.
In 1995, SFAS No. 123 - Accounting for Stock-Based Compensation was issued
which establishes a fair value method and disclosure standards for
stock-based employee compensation arrangements such as stock purchase plans
and stock options. The company will continue to follow the provisions of
Accounting Principles Board Opinion No. 25 for such stock-based
compensation arrangements and disclose the effects of applying SFAS No. 123
in the notes to the 1996 financial statements.
ASSOCIATE RETIREMENT PLANS
The company sponsors retirement and profit sharing plans for substantially
all non-union and some union associates. The major plans are funded and
have plan assets that exceed the accumulated benefit obligation.
Contributory profit sharing plans maintained by the company are for
associates who meet certain types of employment and length of service
requirements. Company contributions under these defined contribution plans
are made at the discretion of the board of directors. Expenses for these
plans were $3 million, $6 million and $2 million in 1995, 1994 and 1993,
respectively.
Benefit calculations for the company's defined benefit pension plans are
primarily a function of years of service and final average earnings at the
time of retirement. Final average earnings are the average of the highest
five years of compensation during the last 10 years of employment. The
company funds these plans by contributing the actuarially computed amounts
that meet funding requirements.
The following table sets forth the company's major defined benefit pension
plans' funded status and the amounts recognized in the statements of
earnings. Substantially all the plans' assets are invested in listed
stocks, short-term investments and bonds. The significant actuarial
assumptions used in the calculation of funded status for 1995 and 1994,
respectively are: discount rate - 7.25% and 8.75%; compensation increases
- - 4.0% and 4.5%; and return on assets - 9.5% for both years.
(In thousands) 1995 1994
Actuarial present
value of accumulated
benefit obligations:
Vested $207,731 $169,132
Total $213,390 $176,380
Projected benefit
obligations $229,649 $191,637
Plan assets at
fair value 222,434 185,180
Projected benefit
obligation in
excess of
plan assets 7,215 6,457
Unrecognized net
loss (37,330) (37,980)
Unrecognized prior
service cost (1,039) (1,684)
Unrecognized
net asset 1,391 159
Prepaid pension cost $(29,763) $(33,048)
Net pension expense includes the following components:
(In thousands) 1995 1994 1993
Service cost $ 11,348 $ 7,288 $ 5,074
Interest cost 16,367 15,258 13,432
Actual (return) loss
on plan assets (45,217) 5,064 (19,103)
Net amortization
and deferral 29,807 (17,036) 6,756
Net pension expense $ 12,305 $ 10,574 $ 6,159
The company also has nonqualified supplemental retirement plans for
selected associates. These plans are unfunded with a projected benefit
obligation of $23 million and $17 million; and unrecognized prior service
and actuarial losses of $11 million and $6 million at year-end 1995 and
1994, respectively, based on actuarial assumptions consistent with the
funded plans. The net pension expense for the unfunded plans was $3
million, $2 million and $3 million for 1995, 1994 and 1993, respectively.
Certain associates have pension and health care benefits provided under
collectively bargained multiemployer agreements. Expenses for these
benefits were $75 million, $56 million and $44 million for 1995, 1994 and
1993, respectively.
ASSOCIATE POSTRETIREMENT HEALTH CARE BENEFITS
The company offers a comprehensive major medical plan to eligible retired
associates who meet certain age and years of service requirements. This
unfunded defined benefit plan generally provides medical benefits until
Medicare insurance commences.
Components of postretirement benefits expense are as follows:
(In thousands) 1995 1994 1993
Service cost $ 137 $ 223 $ 140
Interest cost 1,642 1,542 1,628
Amortization of net loss 141 196 138
Postretirement expense $1,920 $1,961 $1,906
The composition of the accumulated postretirement benefit obligation (APBO)
and the amounts recognized in the balance sheets are presented below.
(In thousands) 1995 1994
Retirees $17,197 $16,385
Fully eligible actives 811 1,046
Others 2,216 2,569
APBO 20,224 20,000
Unrecognized net loss (587) (2,010)
Accrued postretirement benefit cost $19,637 $17,990
The weighted average discount rate used in determining the APBO was 7.25%
and 8.75% for 1995 and 1994, respectively. For measurement purposes in 1995
and 1994, a 12% and 14%, respectively, annual rate of increase in the per
capita cost of covered medical care benefits was assumed. In 1995, the rate
was assumed to decrease to 6.5% by the year 2003, then remain level. In
1994, the rate was assumed to decrease to 8% by 2000, then to 7.5% in 2001
and thereafter. If the assumed health care cost increased by 1% for each
future year, the current cost and the APBO would have increased by
approximately 4% to 6% for all periods presented.
The company also provides other benefits for certain inactive associates.
Expenses related to these benefits are immaterial.
SUPPLEMENTAL CASH FLOWS INFORMATION
(In thousands) 1995 1994 1993
Acquisitions:
Fair value of assets acquired $142,458 $1,575,323 $111,077
Less:
Liabilities assumed or created 63,873 1,198,050 9,057
Existing company investment 51,126 (15,281) 50,628
Cash acquired 16,805 5,066 282
Cash paid, net of cash acquired $ 10,654 $ 387,488 $ 51,110
Cash paid during the year for:
Interest, net of
amounts capitalized $171,141 $ 98,254 $ 79,634
Income taxes, net of refunds $ (9,593) $ 40,414 $ 74,320
Direct financing leases
and related obligations $ 28,568 $ 15,640 $ 33,594
Property and equipment
additions by capital leases $ 8,840 $ 30,606 $ 21,011
LITIGATION AND CONTINGENCIES
The company and several other defendants have been named in two suits filed
in U.S. District Court in Miami, Florida. The plaintiffs predicate
liability on the part of the company as a consequence of an allegedly
fraudulent scheme conducted by Premium Sales Corporation and others in
which unspecified but large losses in the Premium-related entities occurred
to the detriment of a purported class of investors which has brought one of
the suits. The other suit is by the receiver/trustee of the estates of
Premium and certain of its affiliated entities. Plaintiffs seek actual
damages, treble damages, attorneys' fees, costs, expenses and other
appropriate relief. While the amount of damages sought under most claims
is not specified, plaintiffs allege that hundreds of millions of dollars
were lost as the result of the allegations contained in the complaints.
The litigation is complex and the ultimate outcome, which is not expected
to be known for over one year, cannot presently be determined.
Furthermore, management is unable to predict a potential range of monetary
exposure, if any, to the company. Based on the large recovery sought, an
unfavorable result could have a material adverse effect on the company.
Management believes, however, that a material adverse effect on the
company's consolidated financial position is less than probable. The
company is vigorously defending the actions.
The company and one of its former subsidiaries were named in a lawsuit
filed in District Court in Johnson County, Texas, in which the plaintiff
alleges liability on the part of the company as the result of breach of
contract, fraud, conspiracy and violation of the Texas Deceptive Trade
Practices Act. Plaintiff seeks actual damages alleged to equal or exceed
$50 million, treble damages, exemplary damages, attorneys' fees, interest
and costs. The case went to trial in February 1996.
Management is unable to predict a potential range of monetary exposure, if
any, to the company, but believes the claims asserted are without merit and
that a material adverse effect on the company's consolidated financial
position is less than probable. However, based on the large recovery
sought, an unfavorable result could have a material adverse effect on the
company. The company is vigorously defending the litigation.
A customer of the company and certain of its affiliates filed Chapter 11
bankruptcy proceedings in the U.S. Bankruptcy Court in Arizona. As of the
date of filing, the debtors' total indebtedness to the company for goods
sold on open account, equipment leases and loans aggregated approximately
$28 million, for which claims have been filed in the bankruptcy
proceedings. The company holds collateral with respect to a substantial
portion of these obligations and will continue to pursue collection of its
claims through the reorganization proceeding. The debtor is also liable or
contingently liable to the company under store sublease or lease guarantee
agreements. The company is partially secured as to these obligations. The
debtor has also filed an adversary proceeding against the company seeking
subordination of the company's claims, return of a $12 million deposit and
affirmative relief for damages. Absent appeal, the ultimate outcome of
these proceedings are expected within one year. The company took a charge
of $6.5 million in 1994 and approximately $3.5 million in 1995. Financial
exposure, if any, with respect to the subordination of the company's claims
and the $12 million deposit could result in a loss of up to $20 million in
excess of the amount accrued.
The company's facilities are subject to various laws and regulations
regarding the discharge of materials into the environment. In conformity
with these provisions, the company has a comprehensive program for testing
and removal, replacement or repair of its underground fuel storage tanks
and for site remediation where necessary. The company has established
reserves that it believes will be sufficient to satisfy anticipated costs
of all known remediation requirements. In addition, the company is
addressing several other environmental cleanup matters involving its
properties, all of which the company believes are immaterial.
The company has been designated by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with
others, with respect to EPA-designated Superfund sites. While liability
under CERCLA for 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 clean up at any site, such liability
will not result in a material adverse effect on its consolidated financial
position or results of operations.
The company is committed to maintaining the environment and protecting
natural resources and to achieving full compliance with all applicable laws
and regulations.
The company is a party to various other litigation, possible tax
assessments and other matters, some of which are for substantial amounts,
arising in the ordinary course of business. While the ultimate effect of
such actions cannot be predicted with certainty, the company expects that
the outcome of these matters will not result in a material adverse effect
on its consolidated financial position or results of operations.
At year-end 1995, the company has aggregate contingent liabilities for
future minimum rental commitments made on behalf of customers with a
present value of approximately $90 million.
SUBSEQUENT EVENTS
The lawsuit filed in Johnson County, Texas (David's Supermarkets, Inc. v.
Fleming Companies, Inc., ("David's"); see Litigation and Contingencies
note) went to trial on February 19, 1996 and on March 14 and 15, 1996 the
jury reached a verdict against the company. The company considered the
claims to be without merit. However, following a four-week trial the jury
found the company's disputed overcharges amounted to $2.8 million and
rendered a verdict against the company. David's filed a motion for
judgment on its claim for $207.5 million for violation of the Texas
Deceptive Trade Practices Act ("DTPA") reserving the right to recover under
any alternative theory supported by the verdict in the event the judgment
on the DTPA is in any way modified or reversed on appeal.
On April 4, 1996, the company and its banks amended the company's credit
agreement to increase the letter of credit subfacility in order for the
company to obtain a supersedeas appeal bond. See Long-Term Debt note.
On April 12, 1996, plaintiff's motion for judgment was granted in the
amount of $207.5 million plus pre-judgment interest of $3.7 million and
post-judgment interest at the rate of 10% per annum. The company posted
the bond immediately after the judgment was granted and will appeal the
judgment.
The company posted the bond amount through arrangements with several
sureties. The bond is secured by letters of credit which are supported
by the bank credit agreement. The cost of the bond and letter of credit
requirements, as well as attorney's fees, is expected to be approximately
$3 million annually which will negatively impact future earnings.
Based on management's present assessment of the ultimate outcome, a charge
of approximately $7 million is expected in the first quarter of 1996.
In view of the large amount of the award, an unfavorable result from the
appellate process would have a material adverse effect on the company.
The appellate process may take up to three years, or longer.
In view of the large award in the David's litigation, assertions
of similar allegations could occur in future or continuing litigation.
Management is unable to predict the potential range of monetary exposure,
if any, to the company. However, if successfully asserted, any unfavorable
outcome could have a material adverse effect on the company.
On March 28, 1996, the Board of Directors cut the quarterly cash dividend
from $.30 per share to $.02 per share for the second quarter of 1996.
The bank credit agreement amendment limits dividend payments beginning
in the second quarter of 1996 to $.08 per share, per quarter. After
considering the effect of the recently issued letters of credit related
to the supersedeas bond, which are considered a use of the company's
borrowing capacity, and the related bank credit agreement amendment, at
year-end 1995 the company would have been allowed to borrow an additional
$190 million. Management believes that the cash flows from operating
activities and the company's ability to borrow under the amended bank
credit agreement will be adequate to meet working capital needs, capital
expenditures and other cash needs for the next twelve months. The company
is currently in compliance with all covenants under the amended bank
credit agreement.
Moody's and Standard & Poor's have placed the company's rated debt under
review for possible downgrade and CreditWatch with negative implications,
respectively, due in part to the uncertainties created by the judgment.
From the date of the jury verdict through April 12, 1996, the company and
certain officers, including the chief executive officer, were named as
defendants in three class action lawsuits filed by certain of its stock-
holders and one class action lawsuit filed by certain noteholders, each
in the U.S. District Court for the Western District of Oklahoma, alleging
the company failed to properly disclose and account for the David's
litigation. The plaintiffs seek undetermined but significant damages.
The company denies these allegations and intends to vigorously defend the
actions. Management is unable to predict a potential range of monetary
exposure, if any, to the company. However, an unfavorable outcome would
have a material adverse effect on the company.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Fleming Companies, Inc.
We have audited the accompanying consolidated balance sheets of Fleming
Companies, Inc. and subsidiaries as of December 30, 1995 and December 31,
1994, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended
December 30, 1995. Our audits also included the financial statement
schedule listed in the index at item 14. These financial statements and
financial statement schedule are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Fleming
Companies, Inc. and subsidiaries as of December 30, 1995 and December 31,
1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 30, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Oklahoma City, Oklahoma
February 22, 1996
(April 12, 1996 as to effects of a jury verdict,
other resulting legal proceedings and related matters
discussed in Subsequent Events note)
QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share amounts)
(Unaudited)
1995 First Second Third Fourth Year
Net sales $5,458,982 $4,000,070 $3,898,361 $4,144,159 $17,501,572
Costs and expenses:
Cost of sales 5,020,518 3,676,391 3,599,252 3,794,878 16,091,039
Selling and administrative 364,081 264,817 258,020 302,281 1,189,199
Interest expense 56,397 40,046 38,603 40,344 175,390
Interest income (19,481) (14,393) (11,673) (12,659) (58,206)
Equity investment results 6,473 3,074 6,658 11,035 27,240
Facilities consolidation (8,982) --- --- --- (8,982)
Total costs and expenses 5,419,006 3,969,935 3,890,860 4,135,879 17,415,680
Earnings before taxes 39,976 30,135 7,501 8,280 85,892
Taxes on income 20,428 15,399 3,833 4,231 43,891
Net earnings $19,548 $14,736 $3,668 $4,049 $42,001
Net earnings per share $.52 $.39 $.10 $.11 $1.12
Dividends paid per share $.30 $.30 $.30 $.30 $1.20
Weighted average shares
outstanding 37,497 37,546 37,619 37,675 37,577
1994 First Second Third Fourth Year
Net sales $4,032,176 $2,885,028 $4,125,774 $4,680,713 $15,723,691
Costs and expenses:
Cost of sales 3,780,871 2,701,353 3,808,438 4,310,388 14,601,050
Selling and administrative 198,143 143,018 279,249 312,178 932,588
Interest expense 22,139 16,345 36,929 44,658 120,071
Interest income (15,879) (11,596) (14,125) (15,548) (57,148)
Equity investment results 3,257 2,640 5,130 3,766 14,793
Total costs and expenses 3,988,531 2,851,760 4,115,621 4,655,442 15,611,354
Earnings before taxes 43,645 33,268 10,153 25,271 112,337
Taxes on income 19,248 14,671 7,437 14,812 56,168
Net earnings $ 24,397 $ 18,597 $ 2,716 $ 10,459 $ 56,169
Net earnings per share $.66 $.50 $.07 $.28 $1.51
Dividends paid per share $.30 $.30 $.30 $.30 $1.20
Weighted average shares
outstanding 37,093 37,247 37,332 37,424 37,254
The first quarter of both years consists of 16 weeks; all other quarters
are 12 weeks, except for the fourth quarter of 1994 which was 13 weeks. The
year 1994 was a 53-week year.
The results of Scrivner are included effective at the beginning of the
third quarter of 1994.
Certain reclassifications have been made to conform to 1995
classifications.
See notes to consolidated financial statements, including Subsequent
Events.
SCHEDULE II
FLEMING COMPANIES, INC.
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 1995,
DECEMBER 31, 1994, AND DECEMBER 25, 1993
(In thousands)
Allowance
for
Credit Losses Current Noncurrent
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE, December 26, 1992 $ 43,531 $25,298 $18,233
Charged to costs and expenses 52,018
Uncollectible accounts written off, (32,954)
less recoveries
BALANCE, December 25, 1993 62,595 $44,320 $18,275
Acquired reserves,
Scrivner acquisition, July 19, 1994 25,950
Charged to costs and expenses 61,218
Uncollectible accounts written off,
less recoveries (101,196)
BALANCE, December 31, 1994 48,567 $39,506 $9,061
Charged to costs and expenses 30,513
Uncollectible accounts written off,
less recoveries (25,676)
BALANCE, December 30, 1995 $ 53,404 $35,136 $18,268
(a)3., (c) Exhibits:
Page Number or
Exhibit Incorporation by
Number Reference to
------ ----------------
3.1 Certificate of Incorporation Exhibit 3.1 to
Form 10-K
for year ended
December 28, 1991
3.2 By-Laws Exhibit 28.2 to
Form 8-K dated
August 22, 1989
4.0 Credit Agreement, dated as of Exhibit 4.0 to
July 19, 1994, among Fleming Form 8-K dated
Companies, Inc., the Banks July 19, 1994
listed therein and Morgan
Guaranty Trust Company of
New York, as Managing Agent
4.1 Pledge Agreement, dated as of Exhibit 4.1 to
July 19, 1994, among Fleming Form 8-K dated
Companies, Inc. and Morgan July 19, 1994
Guaranty Trust Company of
New York, as Collateral Agent
4.2 Security Agreement dated as of Exhibit 4.2 to
July 19, 1994, between Fleming Form 8-K dated
Companies, Inc. in favor of July 19, 1994
Morgan Guaranty Trust Company
of New York, as Collateral Agent
4.3 Amendment No. 1 to Credit Exhibit 4.3 to
Agreement, dated as of Form 8-K dated
July 21, 1994 July 19, 1994
4.4 Amendment No. 2 to Credit Exhibit 4.4 to
Agreement dated as of Form 10-K for year
November 14, 1994 ended December 31, 1994
4.5 Amendment No. 3 to Credit
Agreement dated as of
June 30, 1995
4.6 Amendment No. 4 to Credit
Agreement dated as of
February 15, 1996
4.7 Agreement to furnish copies of
other long-term debt instruments
4.8 Rights Agreement dated as of Exhibit 28 to
July 7, 1986, between the Form 8-K dated
Registrant and Morgan June 24, 1986
Guaranty Trust Company of New
York
4.9 Amendment to Rights Agreement Exhibit 28.1 to
dated as of August 22, 1989, Form 8-K dated
between the Registrant August 22, 1989
and First Chicago Trust Company
of New York, as Rights Agent
4.10 Rights Agreement dated as of Exhibit 4.0 to Form
February 27, 1996 between 8-K dated February
Fleming Companies, Inc. and 27, 1996
Liberty Bank and Trust Company
of Oklahoma City, N. A.
Effective as of the close of
business on July 6, 1996
4.11 Indenture dated as of December Exhibit 4 to
1, 1989, between the Registrant Registration
and Morgan Guaranty Trust Statement No.
Company of New York, as trustee 33-29633
4.12 Indenture dated as of Exhibit 4.9 to
December 15, 1994, between the Form 10-K for year
Registrant, Subsidiary Guaran- ended December 31, 1994
tors and Texas Commerce Bank
National Association, as
Trustee, regarding $300
million of 10 5/8% Senior Notes
4.13 Indenture dated as of December Exhibit 4.10 to
15, 1994, between the Regis- Form 10-K for
trant, Subsidiary Guarantors year ended
and the Texas Commerce Bank December 31, 1994
National Association, as Trustee,
regarding $200 million of Floating
Rate Senior Notes
4.14 Waiver to Credit Agreement
dated as of April 1, 1996
4.15 Amendment No. 5 to Credit
Agreement dated as of
April 4, 1996
10.0 Stock Purchase Agreement by and Exhibit 2.0 to
among Fleming Companies, Inc. Form 8-K dated
and Franz Haniel & Cie. GmbH July 19, 1994
dated as of July 15, 1994
10.1 Investment Advisor Agreement Exhibit 10.17 to
between the Registrant and The Form 10-K for year
First Boston Corporation dated ended December 30,
November 27, 1989 1989
10.2 Investment Advisor Agreement Exhibit 10.18 to
between the Registrant and Form 10-K for year
Merrill Lynch, Pierce, Fenner ended December 30,
& Smith Incorporated dated 1989
December 5, 1989
10.3 Dividend Reinvestment and Exhibit 28.1 to
Stock Purchase Plan, as Registration
amended Statement No.
33-26648 and
Exhibit 28.3
to Registration
Statement No.
33-45190
10.4* 1985 Stock Option Plan Exhibit 28(a) to
Registration
Statement No.
2-98602
10.5* Form of Award Agreement for Exhibit 10.6 to
1985 Stock Option Plan (1994) Form 10-K for year
ended December 25, 1993
10.6* 1990 Stock Option Plan Exhibit 28.2 to
Registration
Statement No.
33-36586
10.7* Form of Award Agreement for Exhibit 10.8 to
1990 Stock Option Plan (1994) Form 10-K for year
ended December 25, 1993
10.8* Fleming Management Incentive Exhibit 10.4 to
Compensation Plan Registration
Statement No.
33-51312
10.9* Directors' Deferred Exhibit 10.5 to
Compensation Plan Registration
Statement No.
33-51312
10.10* Amended and Restated Supple- Exhibit 10.10 to
mental Retirement Plan Form 10-K for year
ended December 31, 1994
10.11* Form of Amended and Restated Exhibit 10.11 to
Supplemental Retirement Form 10-K for year
Income Agreement ended December 31, 1994
10.12* Godfrey Company 1984 Non- Appendix II to
qualified Stock Option Plan Registration
Statement No.
33-18867
10.13* Form of Amended and Restated Exhibit 10.13 to
Severance Agreement between the Form 10-K for year
Registrant and certain of its ended December 31, 1994
officers
10.14* Fleming Companies, Inc. 1990 Exhibit B to
Stock Incentive Plan dated Proxy Statement
February 20, 1990 for year ended
December 30, 1989
10.15* Fleming Companies, Inc. 1996 Exhibit A to
Stock Incentive Plan dated Proxy Statement
February 27, 1996 for year ended
December 30, 1995
10.16* Phase I of Fleming Companies, Exhibit 10.16 to
Inc. Stock Incentive Plan and Form 10-K for year
Form of Awards Agreement ended December 30,
1989
10.17* Phase II of Fleming Companies, Exhibit 10.12 to
Inc. Stock Incentive Plan Form 10-K for year
ended December 26,
1992
10.18* Phase III of Fleming Companies, Exhibit 10.17 to
Inc. Stock Incentive Plan Form 10-K for year
ended December 25,
1993
10.19* Fleming Companies, Inc. Exhibit 10.14 to
Directors' Stock Form 10-K for year
Equivalent Plan ended December 28,
1991
10.20* Agreement between the Exhibit 10.19 to
Registrant and Form 10-K for year
E. Dean Werries ended December 25,
1993
10.21* Supplemental Income Trust Exhibit 10.20 to
Form 10-K for year
ended December 31, 1994
10.22* Form of Employment Agreement Exhibit 10.20 to
between Registrant and certain Form 10-K for year
of the employees ended December 31,
1994
10.23* Economic Value Added Incentive Exhibit A to Proxy
Bonus Plan Statement for year
ended December 31, 1994
10.24* Agreement between the
Registrant and
William J. Dowd
12 Computation of Ratio of
Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
24 Power of Attorney instruments
signed by certain directors
and officers of the Registrant
appointing Harry L. Winn, Jr.,
Executive Vice President and
Chief Financial Officer, as
attorney-in-fact and agent to
sign the Annual Report on
Form 10-K on behalf of said
directors and officers
27 Financial Data Schedule
99.1 Company Undertaking
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
On January 16, 1996, registrant filed under Item 5. disclosing the
completion of the foreclosure of its security interest in the
assets of ABCO Holding, Inc., and its subsidiary, ABCO Markets,
Inc.
On March 20, 1996, registrant filed under Item 5. disclosing its
announcement that the verdict received in the David's Supermarkets,
Inc. lawsuit will be appealed.
On March 21, 1996, registrant filed under Item 5. disclosing the
adoption of a new rights plan.
On March 28, 1996, registrant filed under Item 5. disclosing a
quarterly dividend declared at a rate lower than its previous
quarterly dividend.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Fleming has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 15th day of
April 1996.
FLEMING COMPANIES, INC.
ROBERT E. STAUTH
By: Robert E. Stauth
Chairman and
Chief Executive Officer
(Principal executive officer)
HARRY L. WINN, JR.
By: Harry L. Winn, Jr.
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
KEVIN J. TWOMEY
By: Kevin J. Twomey
Vice President - Controller
(Principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 15th day of April 1996.
ROBERT E. STAUTH
Robert E. Stauth Archie R. Dykes* Carol B. Hallett*
(Chairman of the Board) (Director) (Director)
James G. Harlow, Jr.* Lawrence M. Jones* Edward C. Joullian III*
(Director) (Director) (Director)
Howard H. Leach* Guy O. Osborn*
(Director) (Director)
HARRY L. WINN, JR.
Harry L. Winn, Jr.
(Attorney-in-fact)
*A Power of Attorney authorizing Harry L. Winn, Jr. to sign the Annual
Report on Form 10-K on behalf of each of the indicated directors of Fleming
Companies, Inc. has been filed herein as Exhibit 24.
INDEX TO EXHIBITS
EXHIBIT METHOD OF FILING
- --------- ------------------------------
4.5 Amendment No. 3 to Credit
Agreement Filed herewith electronically
4.6 Amendment No. 4 to Credit
Agreement Filed herewith electronically
4.7 Instruments Defining the Rights
of Security Holders, Including
Indentures Filed herewith electronically
4.14 Waiver to Credit Agreement Filed herewith electronically
4.15 Amendment No. 5 to Credit
Agreement Filed herewith electronically
10.24 Agreement between the Registrant
and William J. Dowd Filed herewith electronically
12 Computation of Ratio of Earnings
to Fixed Charges Filed herewith electronically
21 Subsidiaries of the Registrant Filed herewith electronically
23 Independent Auditors' Consent Filed herewith electronically
24 Power of Attorney Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
99.1 Form S-8 Undertaking Filed herewith electronically