UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
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 New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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. [X] Yes [ ] No
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. [X]
The aggregate market value of the common shares (based upon the closing price
on March 1, 1999 of these shares on the New York Stock Exchange) of Fleming
Companies, Inc. held by nonaffiliates was approximately $283 million.
As of March 2, 1999, 38,400,000 common shares were outstanding.
Documents Incorporated by Reference
A portion of Part III has been incorporated by reference from the
registrant's proxy statement in connection with its annual meeting of
shareholders to be held on May 19, 1999.
PART I
ITEM 1. BUSINESS
GENERAL
Fleming Companies, Inc. ("Fleming" or the "company") began operations in 1915
in Topeka, Kansas as a small food wholesaler. Today, Fleming's food
distribution operation ("food distribution") is one of the largest food and
general merchandise distributors in the United States supplying supermarkets
and smaller grocery stores in 42 states. Fleming's retail food operation
("retail food") is a major food retailer in the United States, operating more
than 280 supermarkets in 15 states.
Business Strategy. At the end of 1998, Fleming completed a comprehensive
study of all facets of its operations and employed a new chairman and chief
executive officer. The study resulted in a strategic plan to be implemented
over the next two years that will fundamentally shift Fleming's business by
more clearly focusing on core strategic assets in its food distribution and
retail food segments. The strategic plan involves three key strategies to
restore sales and earnings growth: focus resources to improve performance,
build sales and revenues more aggressively in our wholesale business and
company-owned retail stores, and reduce overhead and operating costs to
improve profitability system-wide.
The three strategies are further defined in the following four major
initiatives:
Consolidate food distribution operations. We have announced that seven food
distribution operating units will be divested. The divestiture of these
seven operating units has the potential to optimize other food distribution
operations and more effectively and efficiently support the company's retail
customers. During 1998, the company completed the divestiture of two
operating units, El Paso, TX and Portland, OR and by mid-1999, five
additional operating units, Houston, TX; Huntingdon, PA; Laurens, IA;
Johnson City, TN; and Sikeston, MO will be divested. The customers at six of
the seven operating units will be transferred and serviced primarily by the
operating units located in Nashville, TN; Memphis, TN; Massillon, OH;
Lincoln, NE; Kansas City, MO; La Crosse, WI; and Garland and Lubbock, TX.
During 1998, the Portland operating unit was sold to Associated Grocers of
Seattle (AG) as part of the formation of a joint venture marketing company
known as AG/Fleming.
Grow food distribution. The strategic growth in food distribution will
consist of the implementation of an aggressive new business development
program that will leverage the power of Fleming's consolidated food
distribution operations to earn a greater share of business from existing
customers and to attract new customers. The growth strategies for each
targeted market are based on detailed market-by-market studies completed
during 1998 and the competitive advantages anticipated from the
consolidations.
Improve retail food performance. In company-owned retail food operations,
the company will concentrate on further developing the top-performing chains
and groups which include Baker's(TM), Rainbow Foods(R) and
Sentry(R) Foods/SuPeRSaVeR(TM). This includes the divestiture of the Hyde
Park Market(TM) chain which consists of 10 stores in Florida and the
Consumers Food & Drug(TM) chain which consists of 21 stores headquartered in
Missouri. To strengthen the top-performing retail food operations, the
company will spend additional capital for new store development and
remodels.
Reduce overhead expenses. To support improved operating efficiency, overhead
expenses will be reduced. Staff functions at all levels of the organization
will be examined and appropriately reset to reflect the configuration of the
food distribution and retail food segments.
As part of the ongoing process of evaluating strategic options, the company
will continue to review the performance of all operating units.
Fleming generated net sales of $15.1 billion, $15.4 billion and $16.5 billion
for 1998, 1997 and 1996, respectively. As a result of a $668 million pre-tax
charge
related to the strategic plan, the net loss for fiscal 1998 was $511 million.
Fleming's businesses generated net earnings of $32 million (before strategic
plan charges), $25 million and $27 million for fiscal 1998, 1997 and 1996,
respectively. Additionally, the company generated net cash flows from
operations of $149 million, $113 million and $328 million for the same
periods, respectively, before payments related to the strategic plan. The
combined businesses generated $421 million, $454 million and $435 million of
adjusted EBITDA for fiscal 1998, 1997 and 1996, respectively. "Adjusted
EBITDA" is earnings before extraordinary items, interest expense, income
taxes, depreciation and amortization, equity investment results and one-time
adjustments (e.g., strategic plan charges and specific litigation charges).
FOOD DISTRIBUTION SEGMENT
The food distribution segment sells food and non-food products to retail
grocers and offers a variety of retail support services to
independently-owned and company-owned retail food stores. Net sales for the
food distribution segment were $11.5 billion for fiscal 1998, excluding sales
to the retail food segment. Sales to the retail food segment totaled $2.1
billion during 1998.
Customers Served. During 1998 the food distribution segment served a wide
variety of retail stores located in 42 states. The segment's customers range
from small convenience outlets to large supercenters with the format of the
retail stores being a function of size and marketing approach. The segment
serves customers operating as conventional supermarkets (averaging
approximately 23,000 total square feet), superstores (supermarkets of 30,000
square feet or more), supercenters (a combination of discount store and
supermarket encompassing 110,000 square feet or more), warehouse stores
("no-frills" operations of various large sizes), combination stores (which
have a high percentage of non-food offerings) and convenience stores
(generally under 4,000 square feet and offering only a limited assortment of
products).
The company also licenses or grants franchises to retailers to use certain
registered trade names such as Piggly Wiggly(R), Food 4 Less(R) (a registered
servicemark of Food 4 Less Supermarkets, Inc.), Sentry(R) Foods, Super 1
Foods(R), Festival Foods(R), Jubilee Foods(R), Jamboree Foods(R),
MEGAMARKET(R), Shop 'N Kart(R), American Family(R), Big Star(R), Big T(R),
Buy for Less(R), County Pride Markets(R), Buy Way(R), Pic-Pac(R), Shop N
Bag(R), Super Save(R), Super Duper(R), Super Foods(TM), Super Thrift(R),
Thriftway(R), and Value King(R).
The company is working to encourage independents and small chains to join one
of the Fleming Banner Groups to receive many of the same marketing and
procurement efficiencies available to larger chains. The Fleming Banner
Groups are retail stores operating under the IGA(R) (IGA(R) is a registered
trademark/servicemark of IGA, Inc.) or Piggly Wiggly(R) banner or under one
of a number of banners representing a price impact retail format. Fleming
Banner Group stores are owned by customers, many of which license their store
banner from Fleming.
The company's top 10 external customers accounted for approximately 17% of
total company net sales during 1998. No single customer represented more than
3.6% of total company net sales. During 1998, Randall's, the company's
largest customer, announced that it would begin complete self-distribution
during 1999. It is currently expected that Randall's will cease doing
business with Fleming during the second or third quarter of 1999. Also during
1998, Furr's, the company's third largest customer, acquired Fleming's El
Paso operating unit. Furr's is now self-distributing all products excluding
general merchandise which Fleming continues to supply. During early 1999,
United Supermarkets, the company's fourth largest customer, announced that it
will be moving to self-distribution in the year 2000.
Pricing. The food distribution segment uses market research and cost
analyses as a basis for pricing its products and services. In all operating
units, Retail Services are individually and competitively priced. The
company has three marketing programs: FlexMate(TM), FlexPro(TM) and
FlexStar(TM).
The FlexMate(TM) marketing program has a presentation to customers of a
quoted sell price. The quoted sell price is generally a selling price that
includes a mark-up. The FlexMate(TM) marketing program is available as an
option in all operating units for
grocery, frozen and dairy products. In all operating units, a price plus
mark-up method is applied for meat, produce, bakery goods, delicatessen
products, tobacco supplies, general merchandise and health and beauty care
products. Under FlexMate(TM) a distribution fee is added to the product price
for various product categories. Under some marketing programs, freight
charges are also added to offset in whole or in part Fleming's cost of
delivery services provided. Any cash discounts, certain allowances, and
service income earned from vendors may be retained by the food distribution
segment. This has generally been referred to as the "traditional pricing"
method.
Under FlexPro(TM), grocery, frozen and dairy products are listed at a price
generally comparable to the net cash price paid by the food distribution
segment. Dealer allowances and service income are passed through to the
customer. Service charges are established using the principles of
activity-based pricing modified by market research. Activity-based pricing
attempts to identify Fleming's cost of providing certain services in
connection with the sale of products such as transportation, storage,
handling, etc. Based on these identified costs, and with a view to market
responses, Fleming establishes charges for these activities designed to
recover Fleming's cost and provide the company with a reasonable profit.
These charges are then added to aggregate product price. A fee is also
charged for administrative services provided to arrange and manage certain
allowances and service income offered by vendors and earned by the food
distribution segment and its customers.
FlexStar(TM) is very similar to FlexPro(TM), but generally uses a less
complex presentation for distribution service charges by using
customer-specific average charges. This averaging mechanism lessens the
volatility of charges to the retailer but does not permit the retailer to
manage his own product costs as fully as with FlexPro(TM).
Fleming Brands. Fleming Brands are store brands which include both private
labels and controlled labels. Private labels are offered only in stores
operating under specific banners (which may or may not be controlled by
Fleming). Controlled labels are Fleming-owned brands which are offered to all
food distribution customers. Fleming Brands are targeted to three market
segments: premium, national quality and value. Each Fleming Brand offers
consumers high quality products within each pricing tier. Fleming-controlled
labels include: Living Well(TM) and Nature's Finest(R), which are premium
brands; BestYet(R), SuperTru(R) and Marquee(R), which are national quality
brands; and Rainbow(R), Fleming's value brand. Fleming offers two private
labels, IGA(R) and Piggly Wiggly(R), which are national quality brands.
Fleming shares the benefit of reduced acquisition costs of store brand
products with its customers, permitting both the food distribution segment
and the retailer to earn higher margins from the sale of Fleming Brands.
Retail Services. Retail Services are being separately marketed, priced and
delivered. Retail Services marketing and sales personnel look for
opportunities to cross-sell additional retail services as well as other food
distribution segment products to their customers. The company offers
consulting, administrative and information technology services to its food
distribution segment customers (including retail food segment operating
units) and non-customers.
Consulting Services. Retailers may call upon Fleming consultants to provide
professional advice regarding most facets of retail operations. Consulting
services include the following:
Advertising. Fleming believes its advertising service group is one of the
largest retail food advertising agencies in the United States, offering full
service advertising production, media buying services, assistance in
promotional development and execution, and marketing consultation.
Development. This retail service uses the latest technology in market
analysis, surveys and store development techniques to assist retailers in
finding new locations, expanding or remodeling existing locations, as well
as gaining operations productivity in existing physical plants.
Pricing. Fleming consultants involve retailers directly in pricing their own
products through pricing strategy development programs utilizing market
surveys and new technology.
Store Operations. Consultants offer assistance in perishables quality
control and standards monitoring, audit training, general supermarket
management, store operations analysis, shrink control and supervision task
outsourcing.
Insurance. Professional consultants are available for reviewing, pricing
and coordinating retail insurance portfolios.
Administrative Services. A retailer may use administrative services provided
by Fleming to outsource functions being performed internally or to install
new programs which are not feasible for the retailer to develop:
Education. Fleming operates retail food education facilities for both
hands-on and classroom training. Among the retail education services
provided are training for all levels of store managers and employees,
including selling skills, general management and perishables department
training, strategic planning and computer based training.
Financial. Fleming helps retailers track their financial performance by
providing full accounting services, operating statements, payroll and
accounts payable systems and tax return preparation. Additionally, it
assists retailers in establishing and managing money order programs,
pre-paid phone card programs and coupon redemption programs.
Category Management. Inventory control programs are being used to more
effectively manage product selection, and to provide instant retail shelf
management, perpetual inventory and computer-assisted ordering capability.
Promotion. Numerous promotional tools are offered to assist retail operators
in improving store traffic, such as frequent shopper programs, kiosk use and
instant savings programs; continuity programs such as games, premium
catalogs, etc.; and controlled markdown programs.
Information Technology Systems. Fleming has invested heavily in creating new
information technology products that offer retailers a competitive systems
edge:
Technology. These services include POS equipment purchasing and leasing
programs with the three largest vendors of scanning equipment; electronic
payment systems; credit/debit/EBT; direct store delivery and receiving
systems; electronic shelf labels; in-store file managers; and total store
technology solutions.
VISIONET(R). The company's proprietary interactive electronic information
network gives retailers access to inventory information, financial data,
vendor promotions, retail support services and on-line ordering.
Facilities and Transportation. At the end of 1998 the food distribution
segment operated 31 full-line food product supply centers which are
responsible for the distribution of national brands and Fleming Brands,
including groceries, meat, dairy and delicatessen products, frozen foods,
produce, bakery goods and a variety of related food and non-food items. Six
general merchandise and specialty food operating units distribute health and
beauty care items and other items of general merchandise and specialty foods.
Two operating units serve convenience stores. All facilities are equipped
with modern material handling equipment for receiving, storing and shipping
large quantities of merchandise. Upon the completion of the divestiture of
the 5 operating units scheduled during 1999, the food distribution segment
will operate 26 full-line food operating units.
The food distribution segment's food and general merchandise operating units
comprise more than 19 million square feet of warehouse space. Additionally,
the food distribution segment rents, on a short-term basis, approximately 4
million square feet of off-site temporary storage space. Upon the completion
of the divestiture of the 5 operating units scheduled during 1999, the food
distribution segment facilities in operation will comprise approximately 17
million square feet of warehouse space and will continue to rent
approximately 4 million square feet of off-site temporary storage space.
Transportation arrangements and operations vary by distribution center and
may vary by customer. Some customers prefer to handle product delivery
themselves, others prefer the company to deliver products, and still others
ask the company to coordinate delivery with a third party. Accordingly, many
distribution centers operate a truck fleet to deliver products to customers,
and several centers also engage dedicated contract carriers to deliver
products. The company increases the utilization of its truck fleet by
backhauling products from suppliers and others, 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.
Capital Invested in Customers. As part of its services to retailers, the
company provides capital to certain customers by extending credit for
inventory purchases, by becoming primarily or secondarily liable for store
leases, by leasing equipment to retailers, by making secured loans and by
making equity investments in customers:
- Extension of Credit for Inventory Purchases. Customary trade credit terms
are usually the day following statement date for customers on FlexPro(TM)
or FlexStar(TM) and up to seven days for other marketing plan customers.
- Store and Equipment Leases. The company leases stores for sublease to
certain customers. At year-end 1998, the company was the primary lessee of
more than 700 retail store locations subleased to and operated by
customers. Fleming also leases a substantial amount of equipment to
retailers.
- Secured Loans and Lease Guarantees. Loans are approved by the company's
business development committee following written approval standards. The
company makes loans to customers primarily for store expansions or
improvements. These loans are typically secured by inventory and store
fixtures, bear interest at rates above the prime rate, and are for terms
of up to 10 years. During fiscal years 1997 and 1996, the company sold,
with limited recourse, $29 million and $35 million, respectively, of notes
evidencing such loans. No loans were sold in 1998. The company believes
its loans to customers are illiquid and would not be investment grade if
rated. From time to time, the company also guarantees the lease
obligations of certain of its customers.
- Equity Investments. The company has equity investments in strategic
multi-store customers, which it refers to as Joint Ventures, and in
smaller operators, referred to as Equity Stores. Certain Equity Store
participants may 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 equity investments are highly leveraged, and the company believes its
equity investments are highly illiquid.
In making credit and investment decisions, Fleming considers many factors,
including estimated return on capital, risk and the benefits to be derived.
At year-end 1998, Fleming had loans outstanding to customers totaling $115
million ($27 million of which were to retailers in which the company had an
equity investment) and equity investments in customers totaling $5 million.
The company also has investments in customers through direct financing
leases, lease guarantees, operating leases or credit extensions for inventory
purchases. The present values of the company's obligations under direct
financing leases and lease guarantees were $172 million and $56 million,
respectively, at year-end 1998. Fleming's credit loss expense from
receivables as well as from investments in customers was $23 million in 1998,
$24 million in 1997 and $27 million in 1996. See "Investments and Notes
Receivable" and "Lease Agreements" in the notes to the consolidated financial
statements.
RETAIL FOOD SEGMENT
Retail food segment supermarkets are operated as 14 distinct local chains or
groups in 15 states, under 13 banners, each with local management and
localized marketing skills. The retail food segment supermarkets also share
certain common administrative and support systems which are centrally
monitored and administered
for increased efficiencies. At year-end 1998, the retail food segment owned
and operated more than 280 supermarkets with an aggregate of approximately
11.5 million square feet of retail space. The retail food segment's
supermarkets are all served by food distribution segment operating units. Net
sales of the retail food segment were $3.6 billion in fiscal 1998.
Formats of retail food segment supermarkets vary from price impact stores to
conventional supermarkets. All retail food segment supermarkets are designed
and equipped to offer a broad selection of both national brands as well as
Fleming Brands 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 or floral departments. Specialty
departments generally produce higher gross margins per selling square foot
than general grocery sections.
The retail food segment's supermarkets are operated through the following
local trade names:
ABCO Foods(TM). Located in Phoenix and Tucson, ABCO(TM) operates 54 stores,
of which a majority are "Desert Market" format conventional supermarkets,
averaging 36,200 square feet.
Baker's(TM). Located primarily in Omaha, Nebraska and Oklahoma City,
Oklahoma, Baker's(TM) operates 22 stores which are primarily superstores in
format with a value-pricing strategy. Baker's(TM) stores average 53,500
square feet.
Boogaarts(R) Food Stores. There are 24 Boogaarts stores, 22 in Kansas and 2
in Nebraska, with an average size of 16,300 square feet. They are
conventional supermarkets with a competitive-pricing strategy.
Consumers Food & Drug(TM). Headquartered in Springfield, Missouri, Consumers
operates 21 combination stores in Missouri, Arkansas and Kansas, with an
average of 42,800 square feet. Consumers employs a competitive-pricing
strategy. As a result of Fleming's strategic plan, Consumers will be
divested.
Hyde Park Market(TM). Located in south Florida, primarily in Miami, there
are 10 Hyde Park Market(TM) stores with an average size of 20,200 square
feet. The stores are operated as conventional supermarkets with a
value-pricing strategy. As a result of Fleming's strategic plan, Hyde Park
will be divested.
New York Retail. The two groups consist of 21 Jubilee Foods(R) stores and 4
Market Basket(TM) stores, operating in western New York and Pennsylvania.
These stores are conventional supermarkets with a competitive-pricing
strategy. The Jubilee Foods(R) stores average 25,200 square feet and the
Market Basket(TM) stores average 9,300 square feet in size.
Penn Retail. This group is made up of 19 conventional supermarkets with a
competitive-pricing strategy. It includes Festival Foods(R) and Jubilee
Foods(R) operating primarily in Pennsylvania with several located in
Maryland. The average size is approximately 36,600 square feet.
Rainbow Foods(R). With 41 stores in Minnesota, primarily Minneapolis/St.
Paul, and Wisconsin, Rainbow Foods operates in a large-combination format,
with a price impact pricing strategy. "Price impact" stores seek to minimize
the retail price of goods by a reduced variety of product offerings, lower
levels of customer services and departments, low overhead and minimal decor
and advertising. The average store size for Rainbow Foods is 58,700 square
feet.
RichMar. Fleming owns a 90% equity interest in RichMar, which operates 8
Food 4 Less(R) supermarkets in California. They are operated as price impact
stores and average 51,700 square feet per store.
Sentry(R) Foods/SuPeRSaVeR(TM). Located in Wisconsin, these two groups
include 13 Sentry(R) Foods stores, which are conventional-format
supermarkets with an average size of 34,500 square feet, and 23
SuPeRSaVeR(TM) stores, which are price impact stores with a
lowest-in-the-area pricing strategy. SuPeRSaVeR(TM) stores average over
62,300 square feet.
Thompson Food Basket(R). Located in Illinois and Iowa, these 13 stores
average 31,400 square feet and are operated as conventional supermarkets
with a competitive-pricing strategy.
University Foods. University Foods is a group of 5 Food 4 Less(R)
supermarkets in the Salt Lake City area, with an average size of 56,600
square feet. The supermarkets use a price impact pricing strategy. Fleming
owned a majority interest in this group for a number of years, and in early
1997 acquired the remaining interest.
Fleming retail food segment supermarkets provide added purchasing power as
they enable Fleming to commit to certain promotional efforts at the retail
level. The company, through its owned supermarkets, is able to retain many of
the promotional savings offered by vendors in exchange for volume increases.
Additional information regarding the company's two operating segments is
contained in "Segment Information" in the notes to the consolidated financial
statements which are included in Item 8 of this report.
PRODUCTS
The food distribution segment and the retail food segment supply Fleming's
customers with a full line of national brands and Fleming Brands, including
groceries, meat, dairy and delicatessen products, frozen foods, produce,
bakery goods and a variety of general merchandise, health and beauty care and
other related items. During 1998 the average number of stock keeping units
("SKUs") carried in full-line food distribution operating units was
approximately 14,200 including approximately 2,300 perishable products.
General merchandise and specialty food operating units carried an average of
approximately 19,500 SKUs. Food and food-related product sales account for
over 90 percent of the company's consolidated sales. During each of the last
three fiscal years, the company's product mix as a percentage of product
sales was approximately 55% groceries, 40% perishables and 5% general
merchandise.
SUPPLIERS
Fleming purchases its products from numerous vendors and growers. As a large
customer, Fleming is able to secure favorable terms and volume discounts on
many of its purchases, leading to lower unit costs. The company purchases
products from a diverse group of suppliers and believes it has adequate
sources of supply for substantially all of its products.
COMPETITION
The food distribution segment faces intense competition. The company's
primary competitors are regional and local food distributors, national chains
which perform their own distribution (such as The Kroger Co. and Albertson's,
Inc.), and national food distributors (such as SUPERVALU Inc.). 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 primary competitors of retail food segment supermarkets and food
distribution segment customers are national, regional and local grocery and
drug chains, as well as independent supermarkets, convenience stores,
restaurants and fast food outlets. 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 1998, the company had approximately 38,900 full-time and
part-time employees, with approximately 11,600 employed by the food
distribution segment, approximately 25,500 by the retail food segment and
approximately 1,800 employed in corporate and other functions.
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.
RISK FACTORS
All statements other than statements of historical facts included in this
report including, without limitation, statements under the captions "Risk
Factors," "Management's Discussion and Analysis" and "Business," regarding
the company's financial position, business strategy and plans and objectives
of management of the company for future operations, constitute
forward-looking statements. Although the company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Cautionary statements describing important factors that could cause actual
results to differ materially from the company's expectations are disclosed
hereunder and elsewhere in this report. All subsequent written and oral
forward-looking statements attributable to the company or persons acting on
its behalf are expressly qualified in their entirety by such cautionary
statements.
Changing Environment.
The food distribution and retail food segments are undergoing accelerated
change as distributors and retailers seek to lower costs and increase
services in an increasingly competitive environment of relatively static
overall demand. The growing trend of large self-distributing chains to
consolidate to reduce costs and gain effeciencies is an example of this.
Eating away from home and alternative format food stores (such as warehouse
stores and supercenters) have taken market share from traditional supermarket
operators, including independent grocers, many of whom are Fleming customers.
Vendors, seeking to ensure that more of their promotional fees and allowances
are used by retailers to increase sales volume, increasingly direct
promotional dollars to large self-distributing chains. The company believes
that these changes have led to reduced sales, reduced margins and lower
profitability among many of its customers and, consequently, at the company
itself. Failure to implement the company's strategies, developed in response
to these changing market conditions, could have a material adverse effect on
the company.
Sales Declines.
Net sales have declined each year since 1995 and the company anticipates that
net sales for 1999 will be lower than for 1998. See Item 7. Management's
Discussion and Analysis. Although Fleming is taking steps to reverse sales
declines and to enhance its overall profitability (see -General), no
assurance can be given that the company will be successful in these efforts.
Leverage.
The company has substantial indebtedness in relation to its shareholders'
equity. The degree to which the company is leveraged could have important
consequences including the following: (i) the company's ability to obtain
other financing in the future may be impaired; (ii) a substantial portion of
the company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness; and (iii) a high degree of
leverage may make the company more vulnerable to economic downturns and may
limit its ability to withstand competitive pressures. Fleming's ability to
make scheduled payments on or refinance its indebtedness depends on its
financial and operating performance, which may fluctuate significantly from
quarter to quarter and is subject to prevailing economic conditions and to
financial, business and other factors beyond the company's control.
If Fleming is unable to generate sufficient cash flow to meet its debt
obligations, the company may be required to renegotiate the payment terms or
refinance all or a portion of its indebtedness, to sell assets or to obtain
additional financing. If Fleming could not satisfy its obligations related to
such indebtedness, substantially all of the company's long-term debt could be
in default and could be declared immediately due and payable. There can be no
assurance that the company
could repay all such indebtedness in such event.
The company's credit agreement and the indentures for certain of its
outstanding indebtedness contain numerous restrictive covenants which limit
the discretion of the company's management with respect to certain business
matters. These covenants place significant restrictions on, among other
things, the ability of the company and its subsidiaries to incur additional
indebtedness, to create liens or other encumbrances, to pay dividends, 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, another entity which is not wholly owned by the company.
Competition.
The food distribution segment is in a highly competitive market. The company
faces competition from local, regional and national food distributors on the
basis of price, quality and assortment, schedules and reliability of
deliveries and the range and quality of services provided. The company also
competes with retail supermarket chains that provide their own distribution
functions, purchasing directly from producers and distributing products to
their supermarkets for sale to the consumer. Consolidation of distribution
operations may produce even stronger competition for the food distribution
segment.
In its retail food segment, Fleming competes with other food outlets on the
basis of price, quality and assortment, store location and format, sales
promotions, advertising, availability of parking, hours of operation and
store appeal. Traditional mass merchandisers have gained a growing foothold
in food marketing and distribution with alternative store formats, such as
warehouse stores and supercenters, which depend on concentrated buying power
and low-cost distribution technology. Market share of stores with alternative
formats is expected to continue to grow in the future. Retail consolidations
not only produce stronger competition in the retail food segment, but may
also result in declining sales in the food distribution segment due to
customers being acquired by self-distributing chains.
To meet the challenges of a rapidly changing and highly competitive
environment, the company must maintain operational flexibility and
effectively implement its strategies across many market segments. The
company's failure to successfully respond to these competing pressures or to
implement its strategies effectively could have a material adverse effect on
the company.
Certain Litigation.
Fleming is involved in substantial litigation which exposes the company to
material loss contingencies. See Item 7. Management's Discussion and
Analysis-Contingencies, Item 3. Legal Proceedings and "Litigation Charges"
and "Contingencies" in the notes to the consolidated financial statements.
Year-2000 Compliance.
The company relies on numerous computer software systems and micro processors
which were initially designed without an ability to correctly recognize 2000
as a valid year. See Item 7. Management's Discussion and
Analysis-Contingencies. Failure to ensure that the company's computer systems
are year-2000 compliant could have a material adverse effect on the company's
operations. Failure of the company's suppliers or its customers to become
year-2000 compliant might also have a material adverse impact on the
company's operations.
Potential Losses From Investments in Retailers.
The company provides subleases and extends loans to and makes investments in
many of its retail customers, often in conjunction with the establishment of
long-term supply contracts. Loans to customers are generally not investment
grade and, along with equity investments in customers, are highly illiquid.
The company also makes investments in customers through direct financing
leases, lease guarantees, operating leases, credit extensions for inventory
purchases and the recourse portion of notes sold evidencing such loans. See
"-Capital Invested in Customers", Item 7. Management's Discussion and
Analysis, and Fleming's consolidated financial statements and the notes
thereto included elsewhere in this report. The company also invests in real
estate to assure market access or to secure supply points. See "Lease
Agreements" in the notes to the consolidated financial statements. Although
the company has strict credit policies and applies cost/benefit analyses to
loans to and investments in customers, there can be no assurance that credit
losses from existing or future investments or commitments will not have a
material adverse effect on the company's results of operations or financial
condition.
ITEM 2. PROPERTIES
The following table sets forth facilities information with respect to
Fleming's Food Distribution segment.
Approximate
Square Feet Owned or
Location ( in 000's) Leased
Food Distribution
Altoona, PA (1) 172 Owned
Buffalo, NY 417 Leased
Ewa Beach, HI 196 Leased
Fresno, CA 326 Owned
Garland, TX 1,180 Owned
Geneva, AL 345 Leased
Houston, TX (3) 662 Leased
Huntingdon, PA (3) 253 Owned
Johnson City, TN (3) 298 Owned
Kansas City, KS 929 Leased
La Crosse, WI 907 Owned
Lafayette, LA 437 Owned
Laurens, IA (3) 368 Owned
Lincoln, NE 304 Leased
Lubbock, TX 400 Owned
Marshfield, WI (1) 157 Owned
Massillon, OH 815 Owned
Memphis, TN 765 Owned
Miami, FL 764 Owned
Milwaukee, WI 600 Owned
Minneapolis, MN 480 Owned
Nashville, TN 734 Leased
North East, MD (2) 128 Owned
Oklahoma City, OK 410 Leased
Peoria, IL 325 Owned
Philadelphia, PA (2) 832 Leased
Phoenix, AZ 912 Owned
Sacramento, CA 719 Owned
Salt Lake City, UT 433 Owned
San Antonio, TX 514 Leased
Sikeston, MO (3) 571 Owned
Superior, WI 371 Owned
Warsaw, NC 334 Owned/Leased
York, PA 450 Owned
17,508
General Merchandise Group
Dallas, TX 262 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
1,614
Outside Storage
Outside storage facilities -
typically rented on a
short-term basis. 4,425
Total for Food Distribution 23,547
(1) Food distribution includes two convenience store divisions.
(2) Comprise the Philadelphia distribution operation.
(3) Locations being divested as part of the strategic plan.
The following table sets forth general information with respect to Fleming's
retail food segment. These retail stores are primarily leased.
Retail Chain Location Number Approximate Combined
or Group of Stores of Stores Square Feet
(in 000's)
ABCO Foods AZ 54 1,954
Baker's NE,OK 22 1,177
Boogaarts KS,NE 24 393
Jubilee Foods NY,PA 25 631
Market Basket NY,PA 4 37
Consumers (4) MO,AR,KS 21 900
Penn Retail PA,MD 19 760
Hyde Park Market (4) FL 10 202
Rainbow Foods MN,WI 41 2,408
Sentry Foods WI 13 449
SuPeRSaVeR WI 23 1,433
Thompson Food Basket IL,IA 13 409
RichMar CA 8 414
University Foods UT 5 283
---- ------
Total for Retail Food 282 11,450
(4) Chains being divested as part of the strategic plan.
Fleming's corporate offices are located in Oklahoma City, Oklahoma in leased
office space totaling approximately 356,000 square feet.
Fleming owns and leases other significant assets, such as inventories,
fixtures and equipment, capital leases, etc., which are reflected in the
company's consolidated balance sheets which are included in Item 8 of this
report.
For information regarding lease commitments and long-term debt relating to
properties or other assets, see "Lease Agreements" and "Long-term Debt" in
the notes to the consolidated financial statements which are included in Item
8 of this report.
ITEM 3. LEGAL PROCEEDINGS
The following describes various pending legal proceedings to which Fleming is
subject. For additional information see "Litigation Charges" and
"Contingencies" in the notes to the consolidated financial statements which
are included in Item 8 of this report.
(1) Class Action Suits. In 1996, the company and certain of its present and
former officers and directors (Robert E. Stauth, R. Randolph Devening, Harry
L. Winn, Kevin J. Twomey and Donald N. Eyler) were named as defendants in
nine purported class action suits filed by certain stockholders (Kenneth
Steiner, Lawrence B. Hollin, Ronald T. Goldstein, General Telcom Money
Purchase Plan & Trust, Bright Trading, Inc., City of Philadelphia, Gerald
Pindus, Charles Hinton and Lawrence M. Wells, among others) and one purported
class action suit filed by a noteholder (Robert
Mark), each in the U.S. District Court for the Western District of Oklahoma
(Mr. Devening was not named in the noteholder case). In 1997, the court
consolidated the stockholder cases as City of Philadelphia, et al. v. Fleming
Companies, Inc., et al. (the noteholder case was also consolidated, but only
for pre-trial purposes). During 1998 the noteholder case was dismissed and
during 1999 the consolidated case was also dismissed, each without prejudice.
The court has given the plaintiffs the opportunity to restate their claims.
The complaint filed in the consolidated cases asserts liability for the
company's alleged failure to properly account for and disclose the contingent
liability created by the David's litigation and by the company's alleged
"deceptive business practices." The plaintiffs claim that these alleged
practices led to the David's litigation and to other material contingent
liabilities, caused the company to change its manner of doing business at
great cost and loss of profit, and materially inflated the trading price of
the company's common stock. The company denies each of these allegations.
The plaintiffs seek undetermined but significant damages.
In 1997, the company won a declaratory judgment in the U.S. District Court
for the Western District of Oklahoma against certain of its insurance
carriers regarding policies issued to Fleming for the benefit of its officers
and directors ("D&O policies"). On motion for summary judgment, the court
ruled that the company's exposure, if any, under the class action suits is
covered by D&O policies written by the insurance carriers (aggregating $60
million in coverage) and that the "larger settlement rule" will be applicable
to the case. According to the trial court, under the larger settlement rule a
D&O insurer is liable for the entire amount of coverage available under a
policy even if there is some overlap in the liability created by the insured
individuals and the uninsured corporation. If a corporation's liability is
increased by uninsured parties beyond that of the insured individuals, then
that portion of the liability is the sole obligation of the corporation. The
court also held that allocation is not available to the insurance carriers as
an affirmative defense. The insurance carriers have appealed.
(2) Derivative Suits. In October 1996, certain of the company's present and
former officers and directors (Robert E. Stauth, Harry L. Winn, Jr., Kevin J.
Twomey, Archie R. Dykes, Carol B. Hallett, Edward C. Joullian III, John A.
McMillan, Guy A. Osborn, Howard H. Leach, R.D. Harrison (subsequently
dismissed), Lawrence M. Jones, R. Randolph Devening, Donald N. Eyler, E. Dean
Werries and James E. Stuard), were named as defendants in a purported
shareholder's derivative suit in the U.S. District Court for the Western
District of Oklahoma (Cauley, et al. v. Stauth, et al.). Plaintiffs'
complaint contains allegations that the defendant breached their respective
fiduciary duties to the company and were variably responsible for causing the
company to (i) become "involved with" Premium Sales Corporation and its
illegal course of business resulting in a $20 million settlement paid by
Fleming; (ii) "systematically misrepresent and overstate" the cost of company
products, resulting in litigation by David's Supermarkets (which was settled
by the company for $20 million), and others, and ultimately leading to the
class action suits discussed above; and (iii) fail to meet its disclosure
obligations under the law resulting in the class action lawsuits and
increased borrowing costs, loss of customers and loss of market value.
In another purported shareholder derivative action filed in October 1996 in
the U.S. District Court for the Western District of Oklahoma (Rosenberg v.
Stauth, et al.), the plaintiff sued the same and additional present and
former officers and directors (E. Stephen Davis, Thomas L. Zaricki, Gerald G.
Austin and Glenn E. Mealman). In this case, the plaintiff alleged the
defendants caused the company to (i) violate certain sale agreements with
David's Supermarkets resulting in the David's litigation, (ii) fail to
disclose to the investing public the risks associated with the David's
litigation, (iii) violate certain sale agreements with Megafoods (a former
customer) in a manner similar to that alleged by David's Supermarkets, and
(iv) defraud persons who invested in the Premium-related entities resulting
in litigation.
Plaintiffs sought damages from the defendants on behalf of Fleming in excess of
$50,000, forfeiture by the defendants of their salaries and other
compensation for the period in which they allegedly breached their fiduciary
duties, retention of all monies held by the company as deferred compensation
or otherwise on behalf of the defendants as a constructive trust for the
benefit of the company, and attorney's fees and costs. On September 30, 1997,
both derivative suits were dismissed, without prejudice, for failure to make
demand on the company's Board of Directors prior to instigating the
litigation. With the leave of the court, plaintiffs filed an amended
complaint in October 1998. On November 4, 1998, a special committee of
Fleming's Board of Directors filed a motion to intervene in the case and
requested ninety days within which to elect to assume control of the case.
The motion is currently pending.
(3) Tobacco Cases. In August 1996, Richard E. Ieyoub, Attorney General of the
State of Louisiana, brought an action in the 14th Judicial District Court of
Louisiana against The American Tobacco Company and numerous defendants
including the company. The suit sought recovery of state health-care and
related expenditures allegedly caused by tobacco products. In 1998, the case
was settled (without liability to Fleming) and releases delivered pending
final court approval.
Notices of suit or intention to sue have been filed by 27 individuals in the
Court of Common Pleas of Philadelphia County, and by 3 individuals in the
Court of Common Pleas of Dauphin County, Pennsylvania; one individual brought
suit in the Circuit Court of Shelby County, Tennessee; one individual brought
suit in the Tenth Judicial District Court for the Parish of Natchitoches,
Louisiana; and one individual brought suit in the 38th Judicial District
Court, Cameron Parish, Louisiana. Each case named as co-defendants at least
one major manufacturer of tobacco products and the company or a current or
former company subsidiary, among others. With respect to each case, the
company is being indemnified and defended by a substantial third-party
co-defendant.
Pursuant to a tolling agreement among the parties, all of the cases which
were already pending in Pennsylvania (save two) were dismissed in 1998
without prejudice and may be refiled at a later date.
(4) Don's United Super (and related cases). In 1998, the company and two
retired executives were named in a suit filed in the United States District
Court for the Western District of Missouri by approximately 20 current and
former customers of the company (Don's United Super, et al. v. Fleming, et
al.). Plaintiffs operate retail grocery stores in the St. Joseph and Kansas
City metropolitan areas. Six plaintiffs who were parties to supply contracts
containing arbitration clauses were permitted to withdraw from the case.
Previously, two cases had been filed in the same court (R&D Foods, Inc. et
al. v. Fleming, et al. and Robandee United Super, Inc. et al. v. Fleming, et
al.) by 10 customers, some of whom are plaintiffs in the Don's case. The
earlier two cases, which principally seek an accounting of the company's
expenditure of certain joint advertising funds, have been consolidated. All
causes of action in these cases have been stayed pending the arbitration of
the causes of action relating to supply contracts containing arbitration
clauses.
The Don's suit alleges product overcharges, breach of contract,
misrepresentation, fraud, and RICO violations and seeks recovery of actual,
punitive and treble damages and a declaration that certain contracts are
voidable at the option of the plaintiffs. Damages have not been quantified.
However, with respect to some plaintiffs, the time period during which the
alleged overcharges took place exceeds 25 years and the company anticipates
that the plaintiffs will allege substantial monetary damages.
In October 1998, a group of 14 retailers (ten of whom had been or are
currently plaintiffs in the Don's case and/or the Robandee case whose claims
were sent to arbitration or stayed pending arbitration) filed a new action
against the company and two former officers, one of whom was a director, in
the Western District of Missouri (Coddington Enterprises, Inc. et al. v. Dean
Werries, et al.). The plaintiffs assert claims virtually identical to those
set forth in the Don's complaint and have not quantified damages.
(5) Storehouse Markets. In 1998, the company and one of its associates were
named
in a suit filed in the United States District for the District of Utah by
three current and former customers of the company (Storehouse Markets, Inc.,
et al. v. Fleming Companies, Inc., et al.). The plaintiffs' allege product
overcharges, fraudulent misrepresentation, fraudulent nondisclosure and
concealment, breach of contract, breach of duty of good faith and fair
dealing and RICO violations and seek declaration of class action status and
recovery of actual, punitive and treble damages. Damages have not been
quantified.
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 1, 1999:
Year
First Became
Name (age) Present Position An Officer
Mark S. Hansen (44) Chairman and
Chief Executive Officer 1998
William J. Dowd (56) President and Chief Operating
Officer 1995
E. Stephen Davis (58) Executive Vice President-
Food Distribution 1981
David R. Almond (58) Senior Vice President-
General Counsel and Secretary 1989
Mark K. Batenic (50) Senior Vice President-Sales and
Business Development, Food
Distribution 1994
Scott M. Northcutt (37) Senior Vice President-Human Resources 1999
Dixon E. Simpson (56) Senior Vice President-Retail
Services 1993
Nancy E. Del Regno (46) Vice President-Communications
and Public Affairs 1995
John M. Thompson (57) Vice President-Treasurer and
Assistant Secretary 1982
Kevin J. Twomey (48) 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. Hansen, Dowd and
Northcutt and Ms. Del Regno.
Mr. Hansen joined the company in his present position in November 1998. From
1997 until joining the company, he was Chairman and Chief Executive Officer
of SAM's Club, a division of Wal-Mart Stores, Inc. From 1989 to 1997, he
served in multiple capacities at PETsMART, Inc., including President and
Chief Executive Officer.
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. Northcutt joined the company in his present position in January 1999.
From 1997 until joining the company, he was Vice President-People Group at
SAM's Club, a division of Wal-Mart Stores, Inc. From 1988 to 1996, he served
as Vice President-Human Resources and later as Vice President-Store
Operations at Dollar General Corporation.
Ms. Del Regno joined the company in her present position in February 1995.
She was with PepsiCo Food Systems where she was Senior Communications Manager
from 1988 to 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Fleming common stock is traded on the New York, Chicago and Pacific stock
exchanges. The ticker symbol is "FLM". As of February 23, 1999, the 38.4
million outstanding shares were owned by 15,700 shareholders of record and
approximately 9,400 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.
1998 1997
Quarter High Low High Low
First $20.63 $13.44 $18.75 $15.75
Second 19.69 17.19 20.38 15.50
Third 17.25 11.63 19.50 15.75
Fourth 12.25 9.13 18.94 13.38
Cash dividends on Fleming common stock have been paid for 82 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 10
May 20 June 10
August 20 September 10
November 20 December 10
Cash dividends of $.02 per share were paid on or near each of the above four
payment dates in 1997 and 1998.
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except
per share amounts) 1998(a) 1997(b) 1996(c) 1995(d) 1994(e)
Net sales $15,069 $15,373 $16,487 $17,502 $15,724
Earnings (loss) before
extraordinary charge (511) 39 27 42 56
Net earnings (loss) (511) 25 27 42 56
Diluted net earnings (loss)
per common share before
extraordinary charge (13.48) 1.02 .71 1.12 1.51
Diluted net earnings (loss)
per share (13.48) .67 .71 1.12 1.51
Total assets 3,491 3,924 4,055 4,297 4,608
Long-term debt
and capital
leases 1,503 1,494 1,453 1,717 1,995
Cash dividends declared
per common share .08 .08 .36 1.20 1.20
See Item 3. Legal Proceedings, notes to consolidated financial statements and
the financial review included in Items 7. and 8.
(a) The results in 1998 reflect an impairment/restructuring charge with
related costs totaling $668 million ($543 million after-tax or $14.33
per share) related to the company's newly adopted strategic plan.
(b) The results in 1997 reflect a charge of $19 million ($9 million
after-tax or $.24 per share) related to the settlement of a lawsuit
against the company. 1997 also reflected an extraordinary charge of $22
million ($13 million after-tax or $.35 per share) related to the
recapitalization program.
(c) Results in 1996 include a charge of $20 million ($10 million
after-tax or $.26 per share) related to the settlement of two related
lawsuits against the company.
(d) In 1995, management changed its estimates with respect to the
general merchandising portion of the 1993 reengineering plan and
reversed $9 million ($4 million after-tax or $.12 per share) of the
related provision.
(e) The results in 1994 reflect the July 1994 acquisition of Scrivner Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The company's performance for the past three years was disappointing and
concerning. In early 1998 the Board of Directors and senior management began
an extensive strategic planning process that evaluated all aspects of the
business. With the help of a consulting firm, the evaluation and planning
process was completed in eight months. On November 30, 1998, a new chairman
and chief executive officer was employed and on December 6, 1998, a new
strategic plan was approved and implementation efforts began. The strategic
plan involves three key strategies to restore sales and earnings growth:
focus resources to improve performance, build sales and revenues more
aggressively in our wholesale business and company-owned retail stores, and
reduce overhead and operating costs to improve profitability system-wide.
The three strategies are further defined in the following four major
initiatives:
- Consolidate food distribution operations. This initially
requires divestiture of seven operating units - two in 1998 and
five in 1999. Although there will be some loss in sales, many
of the customers at these seven operating units will be
transferred and serviced by remaining operating units.
Transferring customer business to a higher volume, better
utilized facility benefits the customer with better product
variety and improved buying opportunities. The company
benefits with better coverage of fixed expenses. Although the
divestitures will proceed as quickly as practical, the company
is very sensitive to customer requirements and will pace the
divestitures to meet those requirements. The capital returned
from the divestitures will be reinvested in the business.
- Grow food distribution sales aggressively. Higher volume,
better-utilized food distribution operations and the dynamics of
the market place represent an opportunity for sales growth. The
improved efficiency and effectiveness of the remaining food
distribution operations enhance their competitiveness and the
company intends to capitalize on these improvements. Growth is
expected from increasing the amount of sales with existing
customers and attracting new customers.
- Improve retail food performance. This not only requires
divestiture of under-performing company-owned retail chains or
groups but also requires increased investments in market leading
chains or groups. New stores and remodels are expected to improve
performance. Improved performance is also expected from the market
leading chains through adoption of best practices.
- Reduce overhead expense. Overhead will be reduced at both the
corporate and operating unit levels through organization and
process changes. In addition, several initiatives to reduce
complexity in business systems are underway. These initiatives are
expected to reduce costs and improve the company's profitability
and competitiveness.
Implementation of the strategic plan will take approximately two years. A two
year time frame design accomodates the company's limited resources and
customers' seasonal marketing requirements. Additional expenses will continue
for some time beyond two years because certain disposition related costs can
only be expensed when incurred.
A pre-tax expense of $668 million was recorded in 1998 related to the strategic
plan. Only $74 million of the expense is expected to require cash expenditures.
The remaining $594 million of the expense consisted of noncash items. The total
$668 million expense consisted of:
- Impairment of assets of $590 million. The impairment components
were $372 million for goodwill and $218 million for other
long-lived assets. The strategic plan process included a
detailed study of current and projected cash flows. This new
information combined with the recent loss of significant
customers and a Food Distributors International (FDI) study on
changes in the food industry were impairment indicators that
prompted the charge.
- Restructuring charges of $63 million. The restructuring
charges consisted primarily of severance, lease liabilities and
pension withdrawal liabilities.
- Other disposition related costs of $15 million. These costs
consist primarily of professional fees, inventory valuation
adjustments and other costs.
After tax, the expense was $543 million in 1998 or $14.33 loss per share.
Additional pre-tax expense of approximately $114 million is expected over the
next two years as implementation of the strategic plan continues.
Approximately $75 million of these future expenses are expected to require
cash expenditures. The remaining $39 million of the future expense relates to
noncash items. These future expenses will consist primarily of severance,
real estate-related divestiture expenses, pension withdrawal liabilities and
other costs expensed when incurred.
The expected benefits of the plan are improved earnings and increased sales.
Based on management's plan, earnings are expected to improve every year
approaching one percent of net sales and exceed $3 per share by the year
2003. Sales are also expected to increase, but the growth will not be evident
in 1999 and 2000 because of the previously announced loss of three
significant customers.
Under the plan being implemented, the company has assessed the strategic
significance of all operating units. Further, the current performance of
several operating units with strategic significance needs improvement and the
strategic plan should result in their improved performance. However, in the
event that improvement is not forthcoming, additional divestitures will be
considered.
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
which are referred to in the accompanying discussion:
1998 1997 1996
Net sales 100.00 % 100.00 % 100.00 %
Gross margin 9.79 9.31 8.99
Less:
Selling and administrative 8.47 7.76 7.73
Interest expense 1.07 1.06 .99
Interest income (.24) (.30) (.29)
Equity investment results .08 .11 .11
Litigation charges .05 .14 .12
Impairment/restructuring charge 4.33 - -
Total expenses 13.76 8.77 8.66
Earnings (loss) before taxes (3.97) .54 .33
Taxes on income (loss) (.58) .29 .17
Earnings (loss) before
extraordinary charge (3.39) .25 .16
Extraordinary charge - .09 -
Net earnings (loss) (3.39)% .16 % .16 %
1998 and 1997
Net Sales. Sales for 1998 decreased by $.3 billion, or 2%, to $15.07 billion
from $15.37 billion for 1997.
Net sales for the food distribution segment were $11.5 billion in 1998
compared to $11.9 billion in 1997. The loss of sales from Furr's as well as
the prospective loss of sales from Randall's and United moving to
self-distribution will result in sales comparisons to prior periods being
negative for some time.
Retail food segment sales were $3.6 billion in 1998 compared to $3.5 billion
in 1997. The increase in sales was due primarily to new stores added in 1998.
This was offset partially by a decrease in same store sales in 1998 compared
to 1997 of 3.6% and closing non-performing stores.
The company measures inflation using data derived from the average cost of a
ton of product sold by the company. For 1998, food price inflation was 2.1%,
compared to 1.3% in 1997.
Gross Margin. Gross margin for 1998 increased by $44 million, or 3%, to $1.48
billion from $1.43 billion for 1997, and increased as a percentage of net
sales to 9.79% from 9.31% for 1997. The increase was due, in part, to an
overall increase in the retail food segment, which has the better margins of
the two segments, and the impact of gains from dispositions that occurred in
1997, but not in 1998. Gross margin also reflects favorable adjustments for
closed stores due to better-than-expected lease buyouts. These increases in
gross margin were partly offset by costs relating to the strategic plan in
1998 primarily relating to inventory valuation adjustments. Product handling
expenses, consisting of warehouse, transportation and building expenses, were
lower as a percentage of net sales in 1998 compared to 1997, reflecting
continued productivity improvements.
Selling and Administrative Expenses. Selling and administrative expenses for
1998 increased by $82 million, or 7%, to $1.28 billion from $1.19 billion for
1997, and increased as a percentage of net sales to 8.47% for 1998 from 7.76%
in 1997. The increase was partly due to increased operating expense in the
retail food segment. Selling expense was higher than the previous year as the
company continues to work at reversing recent sales declines. The increase
was also partly due to costs relating to the strategic plan.
The company has a significant amount of credit extended to certain customers
through various methods. These methods include customary and extended credit
terms for inventory purchases and equity investments in and secured and
unsecured loans to certain customers. Secured loans generally have terms up
to ten years.
Credit loss expense is included in selling and administrative expenses and
for 1998
decreased by approximately $1 million to $23 million from $24 million for
1997. Credit loss expense has consistently improved over the last few years
due to lower sales, tighter credit practices and reduced emphasis on credit
extensions to and investments in customers. Although the company plans to
continue these ongoing credit practices, it is not expected that the credit
loss expense will remain at the levels experienced in 1998 and 1997.
Operating earnings for the food distribution segment decreased by $24
million, or 8%, to $259 million from $283 million for 1997, and decreased as
a percentage of food distribution net sales to 2.26% from 2.38%. 1998
operating earnings were adversely affected by inventory valuation adjustments
and other costs related to the strategic plan as well as lower sales.
Operating earnings for the retail food segment decreased by $18 million, or
23%, to $62 million from $80 million for 1997, and decreased as a percentage
of retail food sales to 1.73% from 2.31%. Operating earnings for the retail
food segment were adversely affected primarily by a 3.6% decrease in
same-store sales and by higher labor costs.
Corporate expenses decreased in 1998 compared to 1997 due to lower incentive
compensation, which was partially offset by severance expense and
professional fees under the strategic plan as well as an increase in the LIFO
charge.
Interest Expense. Interest expense in 1998 was $1 million lower than 1997 due
primarily to a reduction of interest accruals relating to a favorable
settlement of tax assessments. Without this reduction, interest expense in
1998 would have been $2 million greater than 1997 due to higher average
fixed-rate debt balances.
The company's derivative agreements consist of simple "floating-to-fixed
rate" interest rate swaps. For 1998, interest rate hedge agreements
contributed $4.3 million of interest expense compared to $7.2 million in
1997, or $2.9 million lower. This was due to a lower average amount of
notional principal of debt referenced by the hedge agreements. For a
description of these derivatives see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk and "Long-Term Debt" in the notes to the
consolidated financial statements.
Interest Income. Interest income for 1998 was $10 million lower than 1997 due
to lower average balances and interest rates for the company's notes
receivable and investment in direct financing leases.
Equity Investment Results. The company's portion of operating losses from
equity investments for 1998 decreased by approximately $5 million to $12
million from $17 million for 1997. The reduction in losses is due to improved
results of operations in certain of the underlying equity investments.
Litigation Charges. In October 1997, the company began paying Furr's $800,000
per month as part of a settlement agreement which ceased in October 1998.
Payments to Furr's totaled $7.8 million in 1998. In the first quarter of
1997, the company expensed $19.2 million in settlement of the David's
litigation. See "Litigation Charges" in the notes to the consolidated
financial statements.
Impairment/Restructuring Charge. In December 1998, the company announced the
implementation of a strategic plan designed to improve the competitiveness of
the retailers the company serves and improve the company's performance by
building stronger operations that can better support long-term growth. The
pre-tax charge recorded in 1998 for the plan was $668 million. After tax, the
expense was $543 million in 1998 or $14.33 loss per share. The $114 million
of costs relating to the strategic plan not yet charged against income will
be recorded over the next 2 years at the time such costs are accruable.
Taxes On Income. The effective tax rate for 1998 is 14.6% versus 58.0% for
1997. The 1998 effective rate is low due primarily to the impairment of
non-deductible goodwill written off as part of the strategic plan. The
presentation of the 1997 tax is split by reflecting a tax benefit at the
statutory rate of 40% for the extraordinary charge and reflecting the balance
of the tax amount on the taxes on income line. See "Taxes on Income" in the
notes to the consolidated financial
statements.
Extraordinary Charge From Early Retirement of Debt. During 1997, the company
undertook a recapitalization program which culminated in an $850 million
senior secured credit facility and the sale of $500 million of senior
subordinated notes. The recapitalization program resulted in an extraordinary
charge of $13.3 million, after income tax benefits of $8.9 million, or $.35
per share, in the company's third quarter 1997. Almost all of the charge
represents a non-cash write-off of unamortized financing costs related to
debt which was prepaid.
Certain Accounting Matters. In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and is effective for fiscal
years beginning after June 15, 1999. The company will adopt SFAS No. 133 by
the required effective date. The company has not determined the impact on
its financial statements from adopting the new standard.
Other. Several factors negatively affecting earnings in 1998 are likely to
continue for the near term. Management believes that these factors include
lower sales and operating losses in certain company-owned retail stores.
1997 and 1996
Net Sales. Sales for 1997 decreased by $1.1 billion, or 7%, to $15.37
billion from $16.49 billion for 1996.
Net sales for the food distribution segment were $11.9 billion in 1997
compared to $12.8 billion in 1996. Several factors, none of which are
individually material, adversely affected food distribution's net sales
including: an increasingly competitive environment, stricter credit
practices, and unfavorable media related to adverse litigation.
Retail food segment sales were $3.5 billion in 1997 compared to $3.7 billion
in 1996. Retail food segment sales generated by the same stores in 1997
compared to 1996 decreased by 3.4%. The decrease was attributable, in part to
new stores opened by competitors in some markets and aggressive marketing
initiatives by certain competitors.
For 1997, food price inflation was 1.3%, compared to 2.3% in 1996.
Gross Margin. Gross margin for 1997 decreased by $51 million, or 3%, to $1.43
billion from $1.48 billion for 1996, but increased as a percentage of net
sales to 9.31% from 8.99% for 1996. The decrease in dollars followed the
decline in sales. The increase in gross margin percentage was due to improved
gross margins in both segments of the business brought about by numerous
margin improvement initiatives. The company also achieved food distribution
productivity increases during 1997 of 3.9%.
Selling and Administrative Expenses. Selling and administrative expenses for
1997 decreased by $79 million, or 6%, to $1.19 billion from $1.27 billion for
1996, but increased as a percentage of net sales to 7.76% for 1997 from 7.73%
in 1996. The decrease in dollars was principally due to improvements in
operating efficiencies for company-owned stores and reductions in
administrative and support functions offset in part by an increase in
incentive compensation expense. The increase as a percentage of net sales is
the result of the rate of sales decline being greater than the rate of
expense reduction.
Credit loss expense for 1997 decreased by approximately $3 million to $24
million from $27 million for 1996. 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.
Operating earnings for the food distribution segment decreased by $19
million, or
6%, to $283 million from $302 million for 1996, and decreased as a percentage
of food distribution sales to 2.38% from 2.36%. 1998 operating earnings were
adversely affected by lower sales, offset in part by improved gross margins,
expense controls and lower credit loss expense.
Operating earnings for the retail food segment increased by $30 million, or
60%, to $80 million from $50 million for 1996, and decreased as a percentage
of retail food sales to 2.31% from 1.35%. Operating earnings for the retail
food segment were positively affected in 1997 by improved gross margins and
effective expense control, which were partially offset by lower sales.
Corporate expenses decreased in 1997 compared to 1996 due to improvements in
managing staff expenses.
Interest Expense. Interest expense remained unchanged for 1997 compared to
1996 at $163 million. Lower average debt levels in 1997 compared to 1996
caused interest expense to decline, but this was offset in the last half of
1997 due to interest rates on the new senior subordinated notes being higher
than the rates on the refinanced debt.
The company's derivative agreements consisted of simple "floating-to-fixed
rate" interest rate caps and swaps. For 1997, interest rate hedge agreements
contributed $7.2 million of interest expense compared to $9.6 million in
1996, or $2.4 million lower, primarily due to a lower average amount of
notional principal of debt referenced by interest rate hedges.
Interest Income. Interest income for 1997 was $47 million compared to $49
million in 1996. The company's investment in direct financing leases
decreased from 1996 to 1997 thereby decreasing interest income. Further in
1997 and 1996 the company sold (with limited recourse) $29 million and $35
million respectively, of notes receivable which also reduced interest income.
Equity Investment Results. The company's portion of operating losses from
equity investments for 1997 decreased by approximately $1 million to $17
million from $18 million for 1996. The reduction in losses is due to improved
results of operations in certain of the underlying equity investments.
Litigation Charges. In October 1997, the company began paying Furr's $800,000
per month as part of a settlement agreement which ceased in October 1998.
Payments to Furr's totaled $1.7 million in 1998. In the first quarter of
1997, the company expensed $19.2 million ($9 million after-tax or $.24 per
share) in settlement of the David's litigation. In the first quarter of 1996,
the company accrued $7.1 million as the result of a jury verdict regarding
the David's case. In the second quarter of 1996, the accrual was reversed
following the vacation of the judgment resulting from the jury verdict, and a
new accrual for $650,000 was established. In the third quarter of 1996, the
company accrued $20 million ($10 million after-tax or $.26 per share) related
to an agreement reached to settle the Premium lawsuits.
Taxes On Income. The effective tax rate for 1997 is 58.0% versus 51.1% for
1996. The presentation of the 1997 tax is split by reflecting a tax benefit
at the statutory rate of 40% for the extraordinary charge and reflecting the
balance of the tax amount on the taxes on income line. The 1996 effective
rate was lower than the 1997 rate due primarily to favorable resolutions of
tax assessments in 1996.
Extraordinary Charge From Early Retirement of Debt. During 1997, the company
undertook a recapitalization program which culminated in an $850 million
senior secured credit facility and the sale of $500 million of senior
subordinated notes. The recapitalization program resulted in an extraordinary
charge of $13.3 million, after income tax benefits of $8.9 million, or $.35
per share, in the company's third quarter ended October 4, 1997. Almost all
of the charge represents a non-cash write-off of unamortized financing costs
related to debt which was prepaid.
LIQUIDITY AND CAPITAL RESOURCES
Set forth below is certain information regarding the company's capital
structure at the end of fiscal years 1998 and 1997:
Capital Structure (In millions) 1998 1997
Long-term debt $1,185 55.5% $1,175 44.3%
Capital lease obligations 381 17.8 388 14.6
Total debt 1,566 73.3 1,563 58.9
Shareholders' equity 570 26.7 1,090 41.1
Total capital $2,136 100.0% $2,653 100.0%
Note: The above table includes current maturities of long-term debt and
current obligations under capital leases.
Long-term debt was $10 million higher at year-end 1998 compared to 1997
because cash requirements for capital expenditures, the net increase in
working capital, business acquisitions, fundings of notes receivable and
other items exceeded cash provided from operations, sales of assets,
collections on notes receivable and the decrease in cash. Capital lease
obligations were $7 million lower because repayments exceeded leases added
for new retail stores.
The debt-to-capital ratio at year-end 1998 was 73.3% up from 58.9% at
year-end 1997. The significant increase is due to the reduction in
shareholders' equity caused by the expense related to the strategic plan.
Operating activities generated $141 million of net cash flows for 1998
compared to $113 million for 1997. The difference was due essentially to an
increase in accounts payable offset in part by higher accounts receivable and
lower cash earnings. Working capital was $307 million at year-end 1998, a
decrease from $340 million at year-end 1997. The current ratio decreased to
1.24 to 1, from 1.29 to 1 at year-end 1997.
Capital expenditures were $200 million in 1998, an increase of $71 million
compared to 1997. Total capital expenditures in 1999 are expected to be
approximately $200 million. The company's strategic plan involves the
divesting of a number of food distribution and retail food facilities and
other assets, and focusing resources in the remaining food distribution and
retail food operations. The company intends to increase its retail operations
by making investments in its existing stores and by adding approximately 20
stores per year for the foreseeable future. Acquisitions of supermarket
chains or groups or other food distribution operations will be made only on a
selective basis.
Over the next few years, the implementation of the strategic plan is expected
to result in fewer, higher-volume, more efficient food distribution operating
units; fewer and more profitable retail food stores; reduced overhead
expenses; and substantial increases in net earnings. Cash costs related to
the implementation and completion of these initiatives (on a pre-tax basis)
were $10 million in 1998, and are estimated to be $54 million in 1999, $42
million in 2000, and $43 million thereafter. Management believes working
capital reductions, proceeds from the sale of assets, and increased earnings
related to the successful implementation of the strategic plan are expected
to provide substantially more than enough cash flow to cover these
incremental costs.
The company makes investments in and loans to certain retail customers. Net
investments and loans decreased $31 million in 1998, from $168 million to
$137 million, due in part to the impairment and restructuring charge
applicable to these accounts as well as to a reduced level of investment in
these assets by the company.
In 1998, the company's primary sources of liquidity were cash flows from
operating activities, borrowings under its credit facility, and the sale of
certain assets and investments. The company's principal sources of capital,
excluding shareholders' equity, are banks and other lenders and lessors.
The company's credit facility consists of a $600 million revolving credit
facility, with a final maturity of July 25, 2003, and a $250 million
amortizing term loan, with a final maturity of July 25, 2004. Up to $300
million of the revolver may be
used for issuing letters of credit, and borrowings and letters of credit
issued under the credit facility may be used for general corporate purposes.
Outstanding borrowings and letters of credit are secured by a first priority
security interest in the accounts receivable and inventories of the company
and its subsidiaries and in the capital stock of or other equity interests
owned by the company in its subsidiaries. In addition, the credit facility is
guaranteed by substantially all company subsidiaries. See "Long-Term Debt" in
the notes to the consolidated financial statements. The stated interest rate
on borrowings under the credit agreement is equal to a referenced index rate,
normally the London interbank offered interest rate ("LIBOR"), plus a margin.
The level of the margin is dependent on credit ratings on the company's
senior secured bank debt.
The credit agreement and the indentures under which other company debt
instruments were issued contain customary covenants associated with similar
facilities. The credit agreement currently contains the following more
significant financial covenants: maintenance of a fixed charge coverage ratio
of at least 1.7 to 1, based on adjusted earnings, as defined, before
interest, taxes, depreciation and amortization and net rent expense;
maintenance of a ratio of inventory-plus-accounts receivable to funded bank
debt (including letters of credit) of at least 1.4 to 1; and a limitation on
restricted payments, including dividends. Covenants contained in the
company's indentures under which other company debt instruments were issued
are generally less restrictive than those of the credit agreement. The
company is in compliance with all financial covenants under the credit
agreement and its indentures.
The credit facility may be terminated in the event of a defined change in
control. Under the company's indentures, noteholders may require the company
to repurchase notes in the event a defined change of control coupled with a
defined decline in credit ratings.
At year-end 1998, borrowings under the credit facility totaled $224 million
in term loans and $89 million of revolver borrowings, and $80 million of
letters of credit had been issued. Letters of credit are needed primarily for
insurance reserves associated with the company's normal risk management
activities. To the extent that any of these letters of credit would be drawn,
payments would be financed by borrowings under the revolver.
At year-end 1998, the company would have been allowed to borrow an additional
$431 million under the revolving credit facility contained in the credit
agreement based on actual borrowings and letters of credit outstanding. Under
the company's most restrictive borrowing covenant, which is the fixed charge
coverage ratio contained in the credit agreement, $35 million of additional
annualized fixed charges could have been incurred.
On December 7, 1998, Standard & Poor's rating group ("S&P") announced it had
placed its BB corporate credit rating, BB- senior unsecured debt rating, B+
subordinated debt rating, and BB+ bank loan rating for the company on
CreditWatch with negative implications. The CreditWatch listing followed the
company's December 7, 1998 announcement of its new strategic plan. S&P said
that its action reflected its concern and opinion that, despite the positive
moves included in the new strategic plan, it would be difficult for Fleming
to restore measures of earnings and cash flow protection to levels
appropriate for the current rating.
On December 8, 1998, Moody's Investors Service ("Moody's") announced it had
confirmed its credit ratings of the company and had changed its rating
outlook from stable to negative following the company's December 7, 1998
announcement of its new strategic plan. Moody's confirmed its Ba3 senior
secured bank agreements rating, B1 senior unsecured sinking fund debentures,
medium-term notes, senior notes, and issuer rating, and B3 senior
subordinated unsecured notes rating. In addition, Moody's said failure of the
company to achieve cost reductions or operational disruptions from the
execution of the new strategic initiatives could negatively impact financial
returns and exert downward pressure on the ratings.
Dividend payments in 1998 were $0.08 per share, or $3 million, which was the
same per share and total amount as in 1997. The credit agreement and the
indentures for the $500 million of senior subordinated notes limit restricted
payments, including dividends, to $70 million at year-end 1998, based on a
formula tied to net earnings
and equity issuances.
For the foreseeable future, the company's principal sources of liquidity and
capital are expected to be cash flows from operating activities and the
company's ability to borrow under its credit agreement. In addition, lease
financing may be employed for new retail stores and certain equipment.
Management believes these sources will be adequate to meet working capital
needs, capital expenditures (including expenditures for acquisitions, if
any), strategic plan implementation costs and other capital needs for the
next 12 months.
CONTINGENCIES
From time to time the company faces litigation or other contingent loss
situations resulting from owning and operating its assets, conducting its
business or complying (or allegedly failing to comply) with federal, state
and local laws, rules and regulations which may subject the company to
material contingent liabilities. In accordance with applicable accounting
standards, the company records as a liability amounts reflecting such
exposure when a material loss is deemed by management to be both "probable"
and "quantifiable" or "reasonably estimable." Furthermore, the company
discloses material loss contingencies in the notes to its financial
statements when the likelihood of a material loss has been determined to be
greater than "remote" but less than "probable." Such contingent matters are
discussed in "Contingencies" in the notes to the consolidated financial
statements. An adverse outcome experienced in one or more of such matters, or
an increase in the likelihood of such an outcome, could have a material
adverse effect on the company. Also see Item 3. Legal Proceedings.
Fleming has numerous computer systems which were developed employing six
digit date structures (i.e., two digits each for month, day and year). Where
date logic requires the year 2000 or beyond, such date structures may produce
inaccurate results. Management has implemented a program to comply with
year-2000 requirements on a system-by-system basis including both information
technology (IT) and non-IT systems (e.g., microcontrollers). Fleming's plan
includes extensive systems testing and is expected to be substantially
completed by the third quarter of 1999. Code for the company's largest and
most comprehensive system, FOODS, has been completely remediated, reinstalled
and tested. Based on these tests, the company believes FOODS and the related
systems which run the company's distribution system will be year-2000 ready
and in place at all food distribution operating units. At year-end 1998, the
company was substantially complete with the replacement and upgrading
necessary to make its nearly 5,000 PCs year-2000 ready. Although the company
believes contingency plans will not be necessary based on progress to date,
contingency plans have been developed for each critical system. The content
of the contingency plans varies depending on the system and the assessed
probability of failure and such plans are modified periodically based on
remediation and testing. The alternatives include reallocating internal
resources, obtaining additional outside resources, implementing temporary
manual processes or temporarily rolling back internal clocks. Although the
company is developing greater levels of confidence regarding its internal
systems, failure to ensure that the company's computer systems are year-2000
compliant could have a material adverse effect on the company's operations.
The company is also assessing the status of its vendors' and customers'
year-2000 readiness through meetings, discussions, notices and
questionnaires. Vendor and customer responses and feedback are varied and in
some cases inconclusive. Accordingly, the company believes the most likely
worst case scenerio could be customers' failure to serve and retain consumers
resulting in a negative impact on the company's sales. Failure of the
company's suppliers or its customers to become year-2000 compliant might also
have a material adverse impact on the company's operations.
Program costs to comply with year-2000 requirements are being expensed as
incurred. Total expenditures to third parties in 1997 through completion in
1999 are not expected to exceed $10 million, none of which is incremental.
Through the end of 1998, these third party expenditures totaled approximately
$7 million. To compensate for the dilutive effect on results of operations,
the company has delayed
other non-critical development and support initiatives. Accordingly, the
company expects that annual information technology expenses will not differ
significantly from prior years.
FORWARD-LOOKING INFORMATION
This report includes statements that (a) predict or forecast future events or
results, (b) depend on future events for their accuracy, or (c) embody
assumptions which may prove to have been inaccurate, including the company's
ability to successfully achieve the goals of its strategic plan and reverse
sales declines, cut costs and improve earnings; the company's assessment of
the probability and materiality of losses associated with litigation and
other contingent liabilities; the company's ability to develop and implement
year-2000 systems solutions; the company's ability to expand portions of its
business or enter new facets of its business; and the company's expectations
regarding the adequacy of capital and liquidity. These forward-looking
statements and the company's business and prospects are subject to a number
of factors which could cause actual results to differ materially including
the: risks associated with the successful execution of the company's
strategic business plan; adverse effects of the changing industry environment
and increased competition; continuing sales declines and loss of customers;
exposure to litigation and other contingent losses; failure of the company to
achieve necessary cost savings; failure of the company, its vendors or its
customers to develop and implement year-2000 system solutions; and the
negative effects of the company's substantial indebtedness and the
limitations imposed by restrictive covenants contained in the company's debt
instruments. These and other factors are described in this report under Item
1. Business -- Risk Factors and in other periodic reports available from the
Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company's exposure to pricing risk in the financial markets consists of
changes in interest rates related to its investment in notes receivable, the
balance of debt obligations outstanding, and derivatives employed to hedge
interest rate changes on variable rate debt. The company does not use foreign
currency exchange rate forward contracts or commodity contracts and does not
have any material foreign currency exposure. The company does not use
financial instruments or derivatives for any trading purposes. Fleming uses
derivatives, currently consisting of simple floating-to-fixed interest rate
swap transactions, to hedge its exposure to changing interest rates for its
variable interest rate debt obligations.
In the normal course of business Fleming carries notes receivable because the
company makes long-term loans to certain retail customers (see "Investments
and Notes Receivable" in the notes to the consolidated financial statements).
A portion of the notes receivable carries a variable interest rate, which is
based on a prime rate index published in a major financial publication and is
reset quarterly. The remaining portion carries fixed interest rates
negotiated with each retail customer. No derivatives have been employed to
hedge the company's exposure to variable interest rates on notes receivable
primarily because these notes are considered to be a partial hedge for debt
with variable interest rates.
In order to help maintain liquidity and finance business operations, Fleming
obtains long-term credit commitments from banks and other financial
institutions under which term loans and revolving loans are made. Such loans
carry variable interest rates based on the London interbank offered interest
rate ("LIBOR") plus a borrowing margin for different interest periods, such
as one week, one month, and other periods up to one year. To assist in
managing its debt maturities and diversify its sources of debt capital,
Fleming also uses long-term debt which carries fixed interest rates.
Fleming management maintains a written policy statement which governs its
financial risk management activities including the use of financial
derivatives. The policy statement says that the company will engage in a
financial risk management process to manage its defined exposures to
uncertain future changes in interest rates and foreign exchange rates which
impact net earnings. The primary purpose of this
process is to control and limit the volatility of net earnings according to
pre-established targets for exposure to such changes in a manner which does
not result in unreasonable or unmanageable additional risks or expense. The
financial risk management process works under the oversight of a special
management group to ensure certain policy objectives are achieved. Such
objectives include, and are not limited to, the following: to act in
accordance with authority granted by resolution of the Board of Directors,
which specifically permits the use of derivatives to hedge interest rate or
foreign exchange rate risks and which prohibits the use of derivatives for
the purpose of speculation; to define and measure the company's financial
risks associated with interest and foreign exchange rates as well as with
derivatives instruments to be used for hedging; and to establish exposure
targets and to manage performance against those targets.
Changes in interest rates may have a material impact on Fleming's interest
expense and interest income, as well as to the fair values for its investment
in notes receivable, outstanding debt obligations and financial derivatives
used. The table below presents a summary of the categories of Fleming's
financial instruments according to their respective interest rate profiles.
For notes receivable, the table shows the principal amount of cash the
company expects to collect each year according to the scheduled maturities,
as well as the average interest rates applicable to such maturities. For debt
obligations, the table shows the principal amount of cash the company expects
to pay each year according to the scheduled maturities, as well as the
average interest rates applicable to such maturities. For derivatives, the
table shows when the notional principal contracts terminate.
(IN MILLIONS, EXCEPT RATES) SUMMARY OF FINANCIAL INSTRUMENTS
AT 12/26/98 MATURITIES OF PRINCIPAL BY FISCAL YEAR
FAIR VALUE 1999 2000 2001 2002 2003 THEREAFTER
NOTES RECEIVABLE WITH VARIABLE INTEREST RATES
Principal receivable $72.0 $11.4 $11.4 $10.2 $8.7 $7.4 $22.9
Average variable rate receivable 10.6% Based on the referenced Prime Rate plus a margin
NOTES RECEIVABLE WITH FIXED INTEREST RATES
Principal receivable $50.8 $11.4 $5.1 $2.8 $2.1 $1.9 $27.5
Average fixed rate receivable 5.2% 2.4% 3.9% 4.6% 5.2% 6.0% 6.8%
DEBT WITH VARIABLE INTEREST RATES
Principal payable $313.3 $24.9 $34.9 $34.9 $39.9 $128.9 $49.9
Average variable rate payable 6.8% Based on LIBOR plus a margin
DEBT WITH FIXED INTEREST RATES
Principal payable $845.7 $16.2 $36.7 $302.7 $10.5 $5.5 $500.4
Average fixed rate payable 10.3% 7.4% 6.6% 10.6% 8.9% 9.1% 10.6%
VARIABLE-TO-FIXED RATE SWAPS
Amount payable $9.5 $ - $250.0 (not payable)
Average fixed rate payable 7.2% 7.2% 7.2%
Average variable rate receivable 5.2% Based on LIBOR
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 the company's proxy statement in
connection with its annual meeting of shareholders to be held on May 19,
1999. 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 the company's proxy statement in
connection with its annual meeting of shareholders to be held on May 19, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the company's proxy statement in
connection with its annual meeting of shareholders to be held on May 19, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the company's proxy statement in
connection with its annual meeting of shareholders to be held on May 19, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Page Number
- Consolidated Statements of Earnings For the years ended
December 26, 1998, December 27, 1997, and December 28, 1996
- Consolidated Balance Sheets At December 26, 1998, and
December 27, 1997
- Consolidated Statements of Cash Flows For the years ended
December 26, 1998, December 27, 1997, and December 28, 1996
- Consolidated Statements of Shareholders' Equity For the
years ended December 26, 1998, December 27, 1997, and
December 28, 1996
- Notes to Consolidated Financial Statements For the years
ended December 26, 1998, December 27, 1997, and December 28,
1996
- Independent Auditors' Report
- Quarterly Financial Information (Unaudited)
Consolidated Statements of Operations
For the years ended December 26, 1998, December 27, 1997, and December 28,
1996 (In thousands, except per share amounts)
1998 1997 1996
Net sales $15,069,335 $15,372,666 $16,486,739
Costs and expenses (income):
Cost of sales 13,594,241 13,941,838 15,004,715
Selling and administrative 1,276,312 1,194,570 1,273,999
Interest expense 161,581 162,506 163,466
Interest income (36,736) (46,638) (49,122)
Equity investment results 11,622 16,746 18,458
Litigation charges 7,780 20,959 20,650
Impairment/restructuring charge 652,737 - -
Total costs and expenses 15,667,537 15,289,981 16,432,166
Earnings (loss) before taxes (598,202) 82,685 54,573
Taxes on income (loss) (87,607) 43,963 27,887
Earnings (loss) before extraordinary charge (510,595) 38,722 26,686
Extraordinary charge from early retirement
of debt (net of taxes) - (13,330) -
Net earnings (loss) $ (510,595) $ 25,392 $ 26,686
Earnings (loss) per share:
Basic and diluted before extraordinary charge $(13.48) $1.02 $.71
Extraordinary charge - (.35) -
Basic and diluted net earnings (loss) $(13.48) $ .67 $.71
Weighted average shares outstanding:
Basic 37,887 37,803 37,774
Diluted 37,887 37,862 37,777
Sales to customers accounted for under the equity method were approximately
$0.6 billion, $0.9 billion and $1.0 billion in 1998, 1997 and 1996,
respectively.
See notes to consolidated financial statements.
Consolidated Balance Sheets
At December 26, 1998, and December 27, 1997
(In thousands)
Assets 1998 1997
Current assets:
Cash and cash equivalents $ 5,967 $ 30,316
Receivables, net 450,905 334,278
Inventories 984,287 1,018,666
Other current assets 146,757 111,730
Total current assets 1,587,916 1,494,990
Investments and notes receivable 119,468 150,221
Investment in direct financing leases 177,783 201,588
Property and equipment:
Land 49,494 57,746
Buildings 408,739 426,302
Fixtures and equipment 663,724 652,039
Leasehold improvements 225,010 234,805
Leased assets under capital leases 207,917 227,894
1,554,884 1,598,786
Less accumulated depreciation and amortization (734,819) (648,943)
Net property and equipment 820,065 949,843
Deferred income taxes 51,497 -
Other assets 154,524 164,295
Goodwill, net 579,579 963,034
Total assets $3,490,832 $3,923,971
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 945,475 $ 831,339
Current maturities of long-term debt 41,368 47,608
Current obligations under capital leases 21,668 21,196
Other current liabilities 272,573 254,454
Total current liabilities 1,281,084 1,154,597
Long-term debt 1,143,900 1,127,311
Long-term obligations under capital leases 359,462 367,068
Deferred income taxes - 61,425
Other liabilities 136,455 123,898
Commitments and contingencies
Shareholders' equity:
Common stock, $2.50 par value, authorized -
100,000 shares, issued and outstanding -
38,542 and 38,264 shares 96,356 95,660
Capital in excess of par value 509,602 504,451
Reinvested earnings 23,155 536,792
Accumulated other comprehensive income:
Cumulative currency translation adjustment - (4,922)
Additional minimum pension liability (57,133) (37,715)
Accumulated other comprehensive income (57,133) (42,637)
Less ESOP note (2,049) (4,594)
Total shareholders' equity 569,931 1,089,672
Total liabilities and shareholders' equity $3,490,832 $3,923,971
Receivables include $5 million and $17 million in 1998 and 1997, respectively,
due from customers accounted for under the equity method.
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 26, 1998, December 27, 1997, and December 28,
1996 (In thousands)
1998 1997 1996
Cash flows from operating activities:
Net earnings (loss) $(510,595) $ 25,392 $ 26,686
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation and amortization 185,368 181,357 187,617
Credit losses 23,498 24,484 26,921
Deferred income taxes (117,239) 40,301 (5,451)
Equity investment results 11,622 16,746 18,458
Impairment/restructuring and
related charges 668,027 - -
Cash payments on impairment/restructuring
and related charges (7,522) - -
Cost of early debt retirement - 22,227 -
Consolidation and restructuring reserve
activity (4,708) (12,724) (2,865)
Change in assets and liabilities,
excluding effect of acquisitions:
Receivables (156,822) (41,347) (13,955)
Inventories 6,922 31,315 150,524
Accounts payable 114,136 (117,219) (45,666)
Other assets and liabilities (67,243) (53,116) (15,368)
Other adjustments, net (4,365) (4,448) 612
Net cash provided by
operating activities 141,079 112,968 327,513
Cash flows from investing activities:
Collections on notes receivable 38,076 59,011 64,028
Notes receivable funded (28,946) (37,537) (66,298)
Notes receivable sold - 29,272 34,980
Businesses acquired (30,225) (9,572) -
Proceeds from sale of businesses 32,277 13,093 13,300
Purchase of property and equipment (200,211) (129,386) (128,552)
Proceeds from sale of
property and equipment 17,056 15,845 15,796
Investments in customers (1,009) (1,694) (365)
Proceeds from sale of investments 3,529 4,970 15,020
Other investing activities 6,141 1,895 6,843
Net cash used in
investing activities (163,312) (54,103) (45,248)
Cash flows from financing activities:
Proceeds from long-term borrowings 170,000 914,477 171,000
Principal payments on long-term debt (159,651) (982,982) (356,685)
Principal payments on
capital lease obligations (13,356) (20,102) (19,622)
Sale of common stock under
incentive stock and
stock ownership plans 4,830 593 2,195
Dividends paid (3,048) (3,007) (13,447)
Other financing activities (891) (1,195) (6,465)
Net cash used in
financing activities (2,116) (92,216) (223,024)
Net increase (decrease) in cash
and cash equivalents (24,349) (33,351) 59,241
Cash and cash equivalents,
beginning of year 30,316 63,667 4,426
Cash and cash equivalents,
end of year $ 5,967 $ 30,316 $ 63,667
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
For the years ended December 26, 1998, December 27, 1997, and December 28, 1996
(In thousands, except per share amounts)
Accumulated
Capital Other
Common Stock in excess Reinvested Comprehensive Comprehensive ESOP
Total Shares Amount of par value Earnings Income Income Note
Balance at December 31, 1995 $1,083,322 37,716 $94,291 $501,474 $501,214 $(4,549) $(9,108)
Comprehensive income
Net earnings 26,686 26,686 $ 26,686
Other comprehensive income, net of tax
Currency translation
adjustment (net of $0 taxes) (151) (151) (151)
Minimum pension liability
adjustment (net of $16,619 of taxes) (24,897) (24,897) (24,897)
Comprehensive income $ 1,638
Incentive stock and stock ownership plans 2,324 82 203 2,121
Cash dividends, $.36 per share (13,492) (13,492)
ESOP note payments 2,166 2,166
Balance at December 28, 1996 1,075,958 37,798 94,494 503,595 514,408 (29,597) (6,942)
Comprehensive income
Net earnings 25,392 25,392 $ 25,392
Other comprehensive income, net of tax
Currency translation
adjustment (net of $0 taxes) (222) (222) (222)
Minimum pension liability
adjustment (net of $8,556 of taxes) (12,818) (12,818) (12,818)
Comprehensive income $ 12,352
Incentive stock and stock ownership plans 2,022 466 1,166 856
Cash dividends, $0.08 per share (3,008) (3,008)
ESOP note payments 2,348 2,348
Balance at December 27, 1997 1,089,672 38,264 95,660 504,451 536,792 (42,637) (4,594)
Comprehensive income
Net loss (510,595) (510,595) $(510,595)
Other comprehensive income, net of tax
Currency translation
adjustment (net of $0 taxes) 4,922 4,922 4,922
Minimum pension liability
adjustment (net of $12,914 of taxes) (19,418) (19,418) (19,418)
Comprehensive income $(525,091)
Incentive stock and stock ownership plans 5,847 279 696 5,151
Cash dividends, $0.08 per share (3,042) (3,042)
ESOP note payments 2,545 2,545
Balance at December 26, 1998 $ 569,931 38,543 $96,356 $509,602 $ 23,155 $(57,133) $(2,049)
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
For the years ended December 26, 1998, December 27, 1997, and December 28,
1996
Summary of Significant Accounting Policies
Nature of Operations: The company markets food and related products and
offers retail services to supermarkets in 42 states. The company also
operates more than 280 company-owned stores in several geographic areas. The
company's activities encompass two major businesses: food distribution and
company-owned retail food operations. Food and food-related product sales
account for over 90 percent of the company's consolidated sales. No one
customer accounts for 3.6 percent or more of consolidated sales.
Fiscal Year: The company's fiscal year ends on the last Saturday in December.
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 subsidiaries. Material intercompany items have been eliminated. The
equity method of accounting is usually used for investments in certain
entities in which the company has an investment in common stock of between
20% and 50% or such investment is temporary. 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.
Reclassifications: Certain reclassifications have been made to prior year
amounts to conform to current year classifications.
Basic and Diluted Net Earnings (Loss) Per Share: Both basic and diluted
earnings per share are computed based on net earnings (loss) divided by
weighted average shares as appropriate for each calculation subject to
anti-dilution limitations.
Taxes on Income: Deferred income taxes arise from temporary differences
between financial and tax bases of certain assets and liabilities.
Cash and Cash Equivalents: Cash equivalents consist of liquid investments
readily convertible to cash with an original 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 $17 million in 1998 and $18 million in 1997. Receivables are
shown net of allowance for doubtful accounts of $28 million in 1998 and $19
million in 1997. The company extends credit to its retail customers located
over a broad geographic base. Regional concentrations of credit risk are
limited. Interest income on impaired loans is recognized only when payments
are received.
Inventories: Inventories are valued at the lower of cost or market. Grocery
and certain perishable inventories, aggregating approximately 70% of total
inventories in 1998 and 1997 are valued on a last-in, first-out (LIFO)
method. The cost for the remaining inventories is determined by the first-in,
first-out (FIFO) method. Current replacement cost of LIFO inventories was
greater than the carrying amounts by approximately $44 million and $36
million at year-end 1998 and 1997, respectively. In 1998, the liquidation of
certain LIFO layers related to business closings decreased cost of products
sold by approximately $3 million.
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, is based on
the estimated useful asset lives using the straight-line method. 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 and
software - 3 to 7 years.
Goodwill: The excess of purchase price over the fair 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 $176
million and $189 million in 1998 and 1997, respectively.
Impairment: Asset impairments are recorded when the carrying amount of assets
are not recoverable. Impairment is assessed and measured, by asset type, as
follows: notes receivable - fair value of the collateral for each note; and,
long-lived assets, goodwill and other intangibles - estimate of the future
cash flows expected to result from the use of the asset and its eventual
disposition aggregated to the operating unit level for food distribution and
chain or group level for retail food.
Financial Instruments: Interest rate hedge transactions and other financial
instruments are utilized to manage interest rate exposure. 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.
Stock-Based Compensation: The company applies APB Opinion No. 25 -
Accounting for Stock Issued to Employees and related Interpretations in
accounting for its plans.
Comprehensive Income: Comprehensive income is reflected in the Consolidated
Statements of Shareholders' Equity. Other comprehensive income is comprised
of foreign currency translation adjustments and minimum pension liability
adjustments. The cumulative effect of other comprehensive income is reflected
in the Shareholders' Equity section of the Consolidated Balance Sheets.
Pension and Other Postretirement Benefits: In 1998, the company adopted SFAS
No. 132-Employers' Disclosures about Pensions and Other Postretirement
Benefits ("SFAS No 132"). SFAS No. 132 revises the disclosure requirements
for pensions and other postretirement benefit plans.
Impairment/Restructuring Charge and Related Costs
In December 1998, the company announced the implementation of a strategic
plan designed to improve the competitiveness of the retailers the company
serves and improve the company's performance by building stronger operations
that can better support long-term growth ("strategic plan"). The strategic
plan consists of four major initiatives:
- Consolidate food distribution operations. This initially
requires divestiture of seven operating units - two in 1998 and
five in 1999. Although there will be some loss in sales, many
of the customers at these seven operating units will be
transferred and serviced by remaining operating units.
Transferring customer business to a higher volume, better
utilized facility benefits the customer with better product
variety and improved buying opportunities. The company benefits
with better coverage of fixed expenses.
- Grow food distribution sales aggressively. Higher volume,
better-utilized food distribution operations and the dynamics of
the market place represent an opportunity for sales growth. The
improved efficiency and effectiveness of the remaining food
distribution operations enhances their competitiveness and the
company intends to capitalize on these improvements.
- Improve retail food performance. This not only requires
divestiture of under-performing company-owned retail chains or
groups, but also requires increased investments in market leading
chains or groups.
- Reduce overhead expense. Overhead will be reduced at both the
corporate and operating unit levels through organization and
process changes. In addition, several initiatives to reduce
complexity in business systems are underway. These initiatives
should reduce costs and improve the company's profitability and
competitiveness.
The total pre-tax charge of the strategic plan is presently estimated at $782
million. The pre-tax charge recorded in 1998 was $668 million ("1998 charge")
of which $661 million was recorded in the fourth quarter. The remaining $7
million was recorded in previous quarters which have been reclassified to be
consistent with year-end reporting. After tax, the expense was $543 million
in 1998 or $14.33 loss per share. The $114 million of costs relating to the
strategic plan not yet charged against income will be recorded over the next
2 years at the time such costs are accruable.
The $668 million charge was included on several lines of the 1998 Consolidated
Statements of Operations as follows: $9 million was included in cost of sales
and was primarily related to inventory valuation adjustments; $6 million was
included in selling and administrative expense as disposition related costs
recognized on a periodic basis; and the remaining $653 million was included in
the impairment/restructuring charge line. The 1998 charge consisted of the
following components:
- Impairment of assets of $590 million. The impairment
components were $372 million for goodwill and $218 million
for other long-lived assets.
- Restructuring charges of $63 million. The restructuring
charges consisted primarily of severance, lease liabilities and
pension withdrawal liabilities.
- Other disposition and related costs of $15 million. These costs
consist primarily of professional fees, inventory valuation
adjustments and other costs.
The 1998 charge relates to the company's segments as follows: $491 million
relates to the food distribution segment and $153 million relates to the
retail food segment with the balance relating to corporate overhead expenses.
The 1998 charge included amounts related to workforce reductions as follows:
($'s in thousands) Amount Headcount
1998 Charge $25,441 1,430
Terminations (3,458) (170)
Ending Liability $21,983 1,260
Additionally, the 1998 charge included amounts related primarily to lease
obligations totaling approximately $38 million that will be reduced over the
expected remaining lease terms.
Asset impairments were recognized in accordance with SFAS No. 121 -
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, and such assets were written down to their estimated fair
values based on estimated proceeds of operating units to be sold or
discounted cash flow projections. The operating costs of operating units to
be sold or closed are treated as normal operations during the period they
remain in use. Salaries, wages and benefits of employees at these operating
units are charged to operations during the time such employees are actively
employed. Depreciation expense is continued for assets that the company is
unable to remove from operations.
Litigation Charges
Furr's Supermarkets, Inc. ("Furr's") filed suit against the company in 1997
claiming it was overcharged for products. During 1997, Fleming and Furr's
reached an agreement dismissing all litigation between them. Pursuant to the
settlement, Furr's purchased Fleming's El Paso product supply center in 1998,
together with related inventory and equipment. As part of the settlement,
Fleming paid Furr's $1.7 million in 1997 and $7.8 million in 1998 as a refund
of fees and charges.
The company was sued by David's Supermarkets, Inc. ("David's") in 1993 for
allegedly overcharging for products. In 1996, judgment was entered against
the company for $211 million; the judgment was subsequently vacated and a new
trial granted. At the end of 1996 the company had an accrual of $650,000. The
company denied the plaintiff's allegations; however, to eliminate the
uncertainty and expense of protracted litigation, the company paid $19.9
million to the plaintiff in April 1997 in exchange for dismissal, with
prejudice, of all plaintiff's claims against the company, resulting in a
charge to first quarter 1997 earnings of $19.2 million.
In 1996, the company recorded a charge of $20 million for the settlement,
which occurred in 1997, of two related lawsuits involving an allegedly
fraudulent scheme conducted by a failed grocery diverter, Premium Sales
Corporation.
Extraordinary Charge
During 1997, the company undertook a recapitalization program which
culminated in an $850 million senior secured credit facility and the sale of
$500 million of senior subordinated notes. The recapitalization program
resulted in an extraordinary charge of $13.3 million, after income tax
benefits of $8.9 million, or $.35 per share. Almost all of the charge
represents a non-cash write-off of unamortized financing costs related to
debt which was prepaid. See the "Long-term Debt" note for further discussion
of the recapitalization program.
Per Share Results
The following table sets forth the basic and diluted per share computations
for income (loss) before extraordinary charge.
(In thousands, except per share amounts) 1998 1997 1996
Numerator:
Basic and diluted earnings (loss)
before extraordinary charge $(510,595) $38,722 $26,686
Denominator:
Weighted average shares for
basic earnings per share 37,887 37,803 37,774
Effect of dilutive securities:
Employee stock options - 21 3
Restricted stock compensation - 38 -
Dilutive potential common shares - 59 3
Weighted average shares for
diluted earnings per share 37,887 37,862 37,777
Basic and diluted earnings (loss) per share
before extraordinary charge $(13.48) $1.02 $.71
The company did not reflect 172,000 weighted average potential shares for the
1998 diluted calculation because they would be antidilutive. Options to
purchase 2.4 million shares of common stock at a weighted average exercise
price of $19.37 per share were outstanding during 1997, but were not included
in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
Segment Information
The company derives over 90% of its net sales and operating profits from the
sale of
food and food-related products. Further, over 90% of the company's assets are
based in and net sales derived from 42 states and no single customer amounts
to 3.6% or more of net sales for any of the years reported. Considering the
customer types and the processes for meeting the needs of customers, senior
management manages the business as two segments: food distribution and
company-owned retail food operations.
The food distribution segment represents the aggregation of retail services
and the distribution and marketing of the following products: food, general
merchandise, health and beauty care, and Fleming Brands. The aggregation is
based primarily on the common customer base and the interdependent marketing
and distribution efforts.
The company's senior management utilizes more than one measurement and
multiple views of data to assess segment performance and to allocate
resources to the segments. However, the dominant measurements are consistent
with the company's consolidated financial statements and, accordingly, are
reported on the same basis herein. Interest expense, interest income, equity
investments, corporate expenses, other unusual charges and income taxes are
managed separately by senior management and those items are not allocated to
the business segments. Intersegment transactions are reflected at cost.
The following table sets forth the composition of the segment's and total
company's net sales, operating earnings, depreciation and amortization,
capital expenditures and identifiable assets.
(In millions) 1998 1997 1996
Net Sales
Food distribution $13,561 $13,864 $14,904
Intersegment elimination (2,081) (1,950) (2,123)
Net food distribution 11,480 11,914 12,781
Retail food 3,589 3,459 3,706
Total $15,069 $15,373 $16,487
Operating Earnings
Food distribution $ 259 $283 $302
Retail food 62 80 50
Corporate (122) (127) (144)
Total operating earnings 199 236 208
Interest expense (161) (162) (163)
Interest income 37 47 49
Equity investment results (12) (17) (18)
Litigation charges (8) (21) (21)
Impairment/restructuring charge (653) - -
Earnings (loss) before taxes $(598) $ 83 $ 55
Depreciation and Amortization
Food distribution $107 $105 $107
Retail food 61 55 56
Corporate 17 21 25
Total $185 $181 $188
Capital Expenditures
Food distribution $ 81 $ 51 $ 59
Retail food 118 77 50
Corporate 1 1 20
Total $200 $129 $129
Identifiable Assets
Food distribution $2,502 $2,864 $3,048
Retail food 683 708 627
Corporate 306 352 380
Total $3,491 $3,924 $4,055
Taxes on Income
Components of taxes on income are as follows:
(In thousands) 1998 1997 1996
Current:
Federal $ 23,896 $(4,761) $24,729
State 5,737 (474) 8,609
Total current 29,633 (5,235) 33,338
Deferred:
Federal (94,254) 32,519 (4,388)
State (22,986) 7,782 (1,063)
Total deferred (117,240) 40,301 (5,451)
Taxes on income $(87,607) $35,066 $27,887
Taxes on income in the above table includes a tax benefit of $8,897,000 in
1997 which is reported net in the extraordinary charge from the early
retirement of debt in the consolidated statements of operations.
Deferred tax expense (benefit) relating to temporary differences includes the
following components:
(In thousands) 1998 1997 1996
Depreciation and amortization $ (64,132) $(4,818) $(12,561)
Inventory (6,839) (6,228) (6,586)
Capital losses 251 (357) (2,494)
Asset valuations and reserves 9,302 22,498 13,567
Equity investment results (403) 821 526
Credit losses (7,825) 23,184 3,995
Lease transactions (34,718) (757) (1,298)
Associate benefits 3,200 2,727 (478)
Note sales (217) (1,843) 315
Acquired loss carryforwards - - 1,616
Other (15,859) 5,074 (2,053)
Deferred tax expense (benefit) $(117,240) $40,301 $ (5,451)
Temporary differences that give rise to deferred tax assets and liabilities
as of year-end 1998 and 1997 are as follows:
(In thousands) 1998 1997
Deferred tax assets:
Depreciation and amortization $ 76,175 $ 9,171
Asset valuations and
reserve activities 34,238 39,126
Associate benefits 111,591 93,454
Credit losses 21,656 16,368
Equity investment results 9,196 8,440
Lease transactions 48,340 14,067
Inventory 31,328 22,168
Acquired loss carryforwards 4,997 4,987
Capital losses 4,549 4,798
Other 29,865 17,350
Gross deferred tax assets 371,935 229,929
Less valuation allowance (4,929) (4,920)
Total deferred tax assets 367,006 225,009
Deferred tax liabilities:
Depreciation and amortization 114,878 112,007
Equity investment results 2,867 2,514
Lease transactions 1,551 1,996
Inventory 54,835 52,513
Associate benefits 33,809 25,385
Asset valuations and reserve activities 6,565 2,151
Note sales 3,418 3,412
Prepaid expenses 3,421 3,887
Capital losses 1,090 -
Other 31,703 38,429
Total deferred tax liabilities 254,137 242,294
Net deferred tax asset (liability) $112,869 $(17,285)
The change in net deferred asset/liability from 1997 to 1998 is allocated
$117.2 million to deferred income tax benefit and $12.9 million benefit to
stockholders' equity.
The valuation allowance relates to $4.9 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:
1998 1997 1996
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 6.8 7.9 9.0
Acquisition-related differences 12.3 14.5 6.1
Other (.4) .6 1.0
Effective rate on operations 53.7% 58.0% 51.1%
Impairment/restructuring and related charges (39.1) - -
Effective rate after impairment/
restructuring and related charges 14.6% 58.0% 51.1%
Investments and Notes Receivable
Investments and notes receivable consist of the following:
(In thousands) 1998 1997
Investments in and advances
to customers $30,371 $52,019
Notes receivable from customers 71,751 75,759
Other investments and receivables 17,346 22,443
Investments and notes receivable $119,468 $150,221
Investments and notes receivable are shown net of reserves of $27 million and
$25 million in 1998 and 1997, respectively.
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
certain notes and because of the allowance for credit losses.
The company's impaired notes receivable (including current portion) are as
follows:
(In thousands) 1998 1997
Impaired notes with related allowances $55,031 $16,002
Credit loss allowance on impaired notes (26,260) (10,194)
Impaired notes with no related allowances 366 1,000
Net impaired notes receivable $29,137 $ 6,808
Average investments in impaired notes were as follows: 1998-$59 million;
1997-$13 million; and 1996-$21 million.
Activity in the allowance for credit losses is as follows:
(In thousands) 1998 1997 1996
Balance, beginning of year $43,848 $49,632 $53,404
Charged to costs and expenses 23,498 24,484 26,921
Uncollectible accounts written off,
net of recoveries (20,114) (32,655) (35,693)
Asset impairment - 2,387 5,000
Balance, end of year $47,232 $43,848 $49,632
The company sold certain notes receivable at face value with limited recourse
during 1997 and 1996. The outstanding balance at year-end 1998 on all notes
sold is $43 million, of which the company is contingently liable for $9
million should all the notes become uncollectible.
Long-term Debt
Long-term debt consists of the following:
(In thousands) 1998 1997
10.625% senior notes due 2001 $ 300,000 $ 300,000
10.5% senior subordinated notes due 2004 250,000 250,000
- -
10.625% senior subordinated notes due 2007 250,000 250,000
Term loans, due 1999 to 2004,
average interest rate of 7.0% and 7.3% 224,269 249,731
Revolving credit, average interest
rates of 6.5% and 7.1%, due 2003 89,000 30,000
Medium-term notes, due 1999 to 2003,
average interest rates of 7.2% and 7.3% 69,000 89,000
Mortgaged real estate notes and other debt,
net of asset sale proceeds escrow,
varying interest rates from 4% to
14.4%, due 2001 to 2005 2,999 6,188
1,185,268 1,174,919
Less current maturities (41,368) (47,608)
Long-term debt $1,143,900 $1,127,311
Five-year Maturities: Aggregate maturities of long-term debt for the next
five years are as follows: 1999-$41 million; 2000-$72 million; 2001-$338
million; 2002-$51 million; and 2003-$135 million.
The 10.625% $300 million senior notes were issued in 1994 and mature December
15, 2001. The senior notes are unsecured senior obligations of the company,
ranking the same as all other existing and future senior indebtedness and
senior in right of payment to the subordinated notes. The senior notes are
effectively subordinated to secured senior indebtedness of the company with
respect to assets securing such indebtedness, including loans under the
company's senior secured credit facility. The senior notes are guaranteed by
substantially all of the company's subsidiaries (see -Subsidiary Guarantee of
Senior Notes below).
The senior subordinated notes consists of two issues: $250 million of 10.5%
Notes due December 1, 2004 and $250 million of 10.625% Notes due July 31,
2007. The subordinated notes are general unsecured obligations of the
company, subordinated in right of payment to all existing and future senior
indebtedness of the company, and senior to or of equal rank with all future
subordinated indebtedness of the company. The company currently has no other
subordinated indebtedness outstanding.
The company's $850 million senior secured credit facility consists of a $600
million revolving credit facility, with a final maturity of July 25, 2003,
and a $250 million amortizing term loan, with a maturity of July 25, 2004. Up
to $300 million of the revolver may be used for issuing letters of credit.
Borrowings and letters of credit issued under the new credit facility may be
used for general corporate purposes and are secured by a first priority
security interest in the accounts receivable and inventories of the company
and its subsidiaries and in the capital stock or other equity interests owned
by the company in its subsidiaries. In addition, this credit facility is
guaranteed by substantially all company subsidiaries. The stated interest
rate on borrowings under the credit agreement is equal to a referenced index
interest rate, normally the London interbank offered interest rate ("LIBOR"),
plus a margin. The level of the margin is dependent on credit ratings on the
company's senior secured bank debt.
The credit agreement and the indentures under which other company debt
instruments were issued contain customary covenants associated with similar
facilities. The credit agreement currently contains the following more
significant financial covenants: maintenance of a fixed charge coverage ratio
of at least 1.7 to 1, based on adjusted earnings, as defined, before
interest, taxes, depreciation and amortization and net rent expense;
maintenance of a ratio of inventory-plus-accounts receivable to funded bank
debt (including letters of credit) of at least 1.4 to 1; and a limitation on
restricted payments, including dividends, up to $70 million at year-end 1998,
based on a formula tied to net earnings and equity issuances. Under the
credit agreement, new issues of certain kinds of debt must have a maturity
after January 2005. Covenants contained in the company's indentures under
which other company debt instruments were issued are generally less
restrictive than those of the credit agreement. The company is in compliance
with all financial covenants under the credit agreement and its indentures.
The credit facility may be terminated in the event of a defined change of
control. Under the company's indentures, noteholders may require the company
to repurchase notes in the event of a defined change of control coupled with
a defined decline in credit ratings.
At year-end 1998, borrowings under the credit facility totaled $224 million
in term loans and $89 million of revolver borrowings, and $80 million of
letters of credit had been issued. Letters of credit are needed primarily for
insurance reserves associated with the company's normal risk management
activities. To the extent that any of these letters of credit would be drawn,
payments would be financed by borrowings under the credit agreement.
At year-end 1998, the company would have been allowed to borrow an additional
$431 million under the revolving credit facility contained in the credit
agreement based on the actual borrowings and letters of credit outstanding.
Under the company's most restrictive borrowing covenant, which is the fixed
charges coverage ratio contained in the credit agreement, $35 million of
additional fixed charges could have been incurred. The company's credit
agreement and indentures limit restricted payments, including dividends, to
$70 million at year-end 1998, based on a defined formula.
Medium-term Notes: Between 1990 and 1993, the company registered $565 million
in medium-term notes. During that period, a total of $275 million was issued.
The company has no plans to issue additional medium-term notes at this time.
Credit Ratings: On December 7, 1998, Standard & Poor's rating group ("S&P")
announced it had placed its BB corporate credit rating, BB- senior unsecured
debt rating, B+ subordinated debt rating, and BB+ bank loan rating for the
company on CreditWatch with negative implications. The CreditWatch listing
followed the company's December 7, 1998 announcement of its new strategic
plan.
On December 8, 1998, Moody's Investors Service ("Moody's") announced it had
confirmed its credit ratings of the company and had changed its rating
outlook from stable to negative following the company's December 7, 1998
announcement of its new strategic plan. Moody's confirmed its Ba3 senior
secured bank agreements rating, B1 senior unsecured sinking fund debentures,
medium-term notes, senior notes, and issuer rating, and B3 senior
subordinated unsecured notes rating.
Average Interest Rates: The average interest rate for total debt (including
capital lease obligations) before the effect of interest rate hedges was
10.1% for 1998, versus 10.6% in 1997. Including the effect of interest rate
hedges, the interest rate of debt was 10.4% and 11.1% at the end of 1998 and
1997, respectively.
Interest Expense: Components of interest expense are as follows:
(In thousands) 1998 1997 1996
Interest costs incurred:
Long-term debt $123,054 $121,356 $122,859
Capital lease obligations 37,542 36,414 35,656
Other 1,589 5,922 5,055
Total incurred 162,185 163,692 163,570
Less interest capitalized (604) (1,186) (104)
Interest expense $161,581 $162,506 $163,466
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 have included interest
rate swaps and caps. The company's policy regarding derivatives is to engage
in a financial risk management process to manage its defined exposures to
uncertain future changes in interest rates which impact net earnings.
Strategies for achieving the company's objectives have resulted in the
company maintaining interest rate swap agreements covering $250 million
aggregate principal amount of floating rate indebtedness at year-end 1998.
The agreements all mature in 2000. The counterparties to these agreements are
three major U.S. and international financial institutions.
The interest rate applicable to most of the company's floating rate
indebtedness is equal to LIBOR, plus a margin. The average fixed interest
rate paid by the company on the interest rate swaps at year-end 1998 was
7.22%, covering $250 million of floating rate indebtedness. The interest rate
swap agreements, which were implemented through three counterparty banks, and
which had an average remaining life of 1.4 years at year-end 1998, provide
for the company to receive substantially the same LIBOR that the company pays
on its floating rate indebtedness.
The notional amounts of interest rate swaps did 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 S&P or A3 or higher from Moody's) 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.
Fleming's financial risk management policy requires that any interest rate
hedge agreement be matched to designated interest-bearing assets or debt
instruments. All of the company's hedge agreements have been matched to its
floating rate indebtedness. At year-end 1998, the company's floating rate
indebtedness consisted of the term loans and revolver loans under the credit
agreement.
Accordingly, all outstanding swaps are matched swaps and the settlement
accounting method is employed. Derivative financial instruments are reported
in the balance sheet where the company has made or received a cash payment
upon entering into or terminating the transaction. The carrying amount is
amortized over the shorter of the initial life of the hedge agreement or the
maturity of the hedged item. The company had a financial basis of zero and
$0.3 million at year-end 1998 and 1997, respectively. In addition, accrued
interest payable or receivable for the interest rate agreements is included
in the balance sheet. Payments made or received under interest rate swap
agreements are included in interest expense.
Fair Value of Financial Instruments: The fair value of long-term debt was
determined using valuation techniques that considered market prices for
actively traded debt, and cash flows discounted at current market rates for
management's best estimate for instruments without quoted market prices. At
year-end 1998, the carrying value of debt was higher than the fair value by
$26 million, or 2.2% of the carrying value. At year-end 1997, the carrying
value of debt was lower than the fair value by $44 million, or 3.7% of the
carrying value. The fair value of notes receivable is comparable to the
carrying value because of the variable interest rates charged on certain
notes and because of the allowance for credit losses.
For derivatives, the fair value was estimated using termination cash values.
At year-end 1998 and 1997, interest rate hedge agreement values would
represent an obligation of $9 million.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
- -Accounting for Derivative Instruments and Hedging Activities ("SFAS No
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and is effective for fiscal years beginning after June
15, 1999. The company will adopt SFAS No. 133 by the required effective date.
The company has not yet determined the impact on its financial statements
from adopting the new standard.
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. Financial
statements for the subsidiary guarantors are not presented herein because the
operations and financial position of such subsidiaries are not 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) 1998 1997
Current assets $30 $33
Noncurrent assets $52 $80
Current liabilities $14 $14
Noncurrent liabilities $7 $6
(In millions) 1998 1997 1996
Net sales $362 $379 $298
Costs and expenses $393 $388 $314
Net (loss) $(10) $(4) $(8)
The 1998 loss includes impairment/restructuring and other costs related to
the strategic plan totaling $19 million pre-tax ($15 million after-tax).
Lease Agreements
Capital And Operating Leases: The company leases certain distribution
facilities with terms generally ranging from 20 to 35 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 each.
The company leases company-owned store facilities with terms generally
ranging from 15 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 four renewal options of two to
five years each. Certain 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
$70 million and $71 million at year-end 1998 and 1997, respectively.
Future minimum lease payment obligations for leased assets under capital
leases as of year-end 1998 are set forth below:
(In thousands) Lease
Years Obligations
1999 $ 30,709
2000 29,692
2001 29,147
2002 28,122
2003 27,939
Later 266,813
Total minimum lease payments 412,422
Less estimated executory costs (165)
Net minimum lease payments 412,257
Less interest (204,632)
Present value of net minimum lease payments 207,625
Less current obligations (9,956)
Long-term obligations $197,669
Future minimum lease payments required at year-end 1998 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
1999 $ 146,551 $ (58,122) $16,310 $ (839) $103,900
2000 131,866 (48,588) 10,463 (570) 93,171
2001 121,790 (41,500) 4,644 ( 62) 84,872
2002 114,659 (36,621) 2,213 - 80,251
2003 102,638 (27,352) 158 - 75,444
Later 544,372 (95,464) 49 - 448,957
Total lease
payments $1,161,876 $(307,647) $33,837 $(1,471) $886,595
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) 1998 1997 1996
Minimum rentals $178,294 $192,698 $208,250
Contingent rentals 1,971 2,002 1,874
Less sublease income (71,269) (82,509) (88,014)
Rental expense $108,996 $112,191 $122,110
Direct Financing Leases: The company leases retail store facilities with
terms generally ranging from 15 to 20 years which are subsequently subleased
to customers. Most leases provide for a percentage rental based on sales
performance in excess of specified minimum rentals. The leases usually
contain provisions for one to four renewal options of five years each. The
sublease to the customer is normally for an initial five year term with
automatic five-year renewals at Fleming's discretion, which corresponds to
the length of the initial term of the prime lease.
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 1998:
(In thousands) Lease Rentals Lease
Years Receivable Obligations
1999 $ 34,966 $ 28,278
2000 32,327 27,095
2001 29,989 25,931
2002 28,478 25,763
2003 27,047 25,315
Later 170,865 162,579
Total minimum lease payments 323,672 294,961
Less estimated executory costs (877) (872)
Net minimum lease payments 322,795 294,089
Less interest (128,176) (120,584)
Present value of net minimum
lease payments 194,619 173,505
Less current portion (16,836) (11,712)
Long-term portion $177,783 $161,793
Contingent rental income and contingent rental expense are not material.
Shareholders' Equity
The company offers a Dividend Reinvestment and Stock Purchase Plan which
provides 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 issuing 33,000 and 29,000 new shares in 1998 and 1997,
respectively.
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 the purchase of the shares. In 1994, the company
paid off the note and received 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 to the ESOP based on fixed debt service
requirements of the ESOP note. Such contributions were approximately $2.5
million in 1998 and $2 million per year in 1997 and 1996. Dividends used by
the ESOP for debt service and interest and compensation expense recognized by
the company were not material.
The company issues shares of restricted stock to key employees under plans
approved by the stockholders. Performance goals and periods of restriction
are established for each award.
The fair value of the restricted stock at the time of the grant is recorded
as unearned compensation - restricted stock which is netted against capital
in excess of par within shareholders' equity. Compensation is amortized to
expense when earned. During 1998, the company granted 32,000 shares of
restricted stock with a weighted average grant date fair value of $300,000.
At year-end 1998, 166,000 shares remained available for award under all plans.
Information regarding restricted stock balances is as follows (in thousands):
1998 1997
Awarded restricted shares outstanding 420 638
Unearned compensation - restricted stock $6,199 $11,887
The company may grant stock options to key employees through unrestricted
non-qualified stock option plans. The stock options have a maximum term of 10
years and have time and/or performance based vesting requirements. At
year-end 1998, there were 116,000 shares available for grant under the
unrestricted stock option plans. Stock option transactions are as follows:
(Shares in thousands) Shares Weighted Average Price Range
Exercise Price
Outstanding, year-end 1995 1,887 $28.06 $19.44 - 42.13
Granted 1,005 $16.67 $16.38 - 19.75
Canceled and forfeited (261) $29.07 $24.81 - 42.13
Outstanding, year-end 1996 2,631 $23.93 $16.38 - 42.13
Granted 80 $17.58 $17.50 - 18.13
Exercised (8) $16.38 $16.38 - 16.38
Canceled and forfeited (437) $28.48 $16.38 - 42.13
Outstanding, year-end 1997 2,266 $22.65 $16.38 - 38.38
Granted 550 $10.18 $9.72 - 18.19
Exercised (3) $16.38 $16.38 - 16.38
Canceled and forfeited (403) $25.40 $16.38 - 37.06
Outstanding, year-end 1998 2,410 $19.35 $9.72 - 38.38
Information regarding options outstanding at year-end 1998 is as follows:
All Options
(Shares in thousands) Outstanding Currently
Options Exercisable
Option price $29.75 - $38.38:
Number of options 145 145
Weighted average exercise price $37.08 $37.08
Weighted average remaining life in years 1
Option price $19.44 - $28.38:
Number of options 897 402
Weighted average exercise price $24.71 $24.37
Weighted average remaining life in years 5
Option price $9.72 - $18.19:
Number of options 1,368 431
Weighted average exercise price $13.96 $16.52
Weighted average remaining life in years 9
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.
The company applies APB Opinion No. 25 - Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans. Total
compensation cost recognized in income for stock based employee compensation
awards was $3,160,000, $1,493,000 and $71,000 for 1998, 1997 and 1996,
respectively. If compensation cost had been recognized for the stock-based
compensation plans based on fair values of the awards at the grant dates
consistent with the method of SFAS No. 123 - Accounting for Stock-Based
Compensation, reported net earnings (loss) and earnings (loss) per share,
both before extraordinary charge, would have been $(511.7) million and
$(13.48) for 1998, $37.9 million and $1.00 for 1997 and $26.5 million and
$.70 for 1996, respectively. The weighted average fair value on the date of
grant of the individual options granted during 1998, 1997 and 1996 was
estimated at $4.82, $8.81 and $12.56, respectively.
Significant assumptions used to estimate the fair values of awards using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 1998, 1997 and 1996 are: risk-free interest rate - 4.50% to
7.00%; expected lives of options - 10 years; expected volatility - 30% to
50%; and expected dividend yield of 0.5% to 0.8%.
Associate Retirement Plans and Postretirement Benefits
The company sponsors pension and postretirement benefit plans for
substantially all non-union and some union associates.
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. Substantially all the plans' assets are
invested in listed securities, short-term investments, bonds and real estate.
The company also has unfunded nonqualified supplemental retirement plans for
selected associates.
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.
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans mentioned above.
Other
(In thousands) Pension Benefits Postretirement Benefits
1998 1997 1998 1997
Change in benefit obligation:
Balance at beginning
of year $350,993 $304,723 $16,441 $19,628
Service cost 12,981 11,359 139 137
Interest cost 25,334 23,525 1,052 1,185
Plan participants'
contributions - - 851 775
Actuarial gain/loss 50,009 32,826 2,932 (410)
Amendments 1,132 - - -
Benefits paid (21,892) (25,292) (4,911) (4,874)
SFAS #88 curtailment 47 3,852 - -
Balance at end of year $418,604 $350,993 $16,504 $16,441
Change in plan assets:
Fair value at beginning
of year $262,484 $236,661 $ - $ -
Actual return on assets 31,415 28,007 - -
Employer contribution 44,532 23,108 4,911 4,874
Benefits paid (21,892) (25,292) (4,911) (4,874)
Fair value at end of year $316,539 $262,484 $ - $ -
Funded status $(102,065) $(88,509) $(16,504) $(16,441)
Unrecognized actuarial loss 127,984 93,262 3,781 848
Unrecognized prior
service cost 1,481 704 - -
Unrecognized net transition
asset (588) (856) - -
Net amount recognized $ 26,812 $ 4,601 $(12,723) $(15,593)
Amounts recognized in the
consolidated balance sheet:
Prepaid benefit cost $ - $ 4,129 $ - $ -
Accrued benefit liability (69,714) (62,817) (12,723) (15,593)
Intangible asset 1,304 399 - -
Accumulated other
comprehensive income 95,222 62,890 - -
Net amount recognized $26,812 $ 4,601 $(12,723) $(15,593)
The following year-end assumptions were used for the plans mentioned above.
Other
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
Discount rate
(weighted average) 6.50% 7.00% 6.50% 7.00%
Expected return on
plan assets 9.50% 9.50% - -
Rate of compensation
increase 4.00% 4.00% - -
Net periodic pension and other postretirement benefit costs include the
following components:
Other
(In thousands) Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
Service cost $12,981 $11,359 $11,109 $ 139 $ 137 $ 147
Interest cost 25,334 23,525 21,506 1,052 1,185 1,443
Expected return on
plan assets (25,234) (28,008) (22,986) - - -
Amortization of
actuarial loss 9,105 11,533 11,169 - (44) -
Amortization of prior
service cost 354 549 731 - - -
Amortization of net
transition asset (268) (220) (220) - - -
Cost of termination
benefits - - - - 15 -
Net periodic benefit
cost $22,272 $18,738 $21,309 $1,191 $1,293 $1,590
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $419 million, $385 million, and
$317 million, respectively, as of December 26, 1998 and $351 million, $319
million, and $262 million, respectively, as of December 27, 1997.
For measurement purposes in 1998 and 1997, a 9% annual rate of increase in
the per capita cost of covered medical care benefits was assumed. In both
1998 and 1997, the rate for 1999 was assumed to remain at 9%, then decrease
to 5% by the year 2007 and 2005, respectively, then remain level.
The effect of one-percentage point increase in assumed medical cost trend
rates would have increased the accumulated postretirement benefit obligation
as of December 31, 1998 from $16.5 to $17.4 million, and increased the total
of the service cost and interest cost components of the net periodic cost
from $1.19 million to $1.25 million. The effect of one-percentage point
decrease in assumed medical cost trend rates would have decreased the
accumulated postretirement benefit obligation as of December 31, 1998 from
$16.5 to $15.7 million, and decreased the total of the service cost and
interest cost components of the net periodic cost from $1.19 million to $1.14
million.
In some of the retail operations, contributory profit sharing plans are
maintained by the company 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 and
totaled $3 million in 1998 and $4 million in both 1997 and 1996.
Certain associates have pension and health care benefits provided under
collectively bargained multiemployer agreements. Expenses for these benefits
were $80 million, $81 million and $84 million for 1998, 1997 and 1996,
respectively.
Facilities Consolidation and Restructuring
In 1993, the company recorded 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 food distribution operating units
were closed and one additional facility was to be closed as part of the
facilities consolidation plan. 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 reserve. In 1998, an eight-month study of all facets of the company's
operations was undertaken by the Board of Directors, senior management and an
outside consulting firm. A decision made early in this study was to reverse
the remaining reserve related to the one additional facility that was to be
closed.
Facilities consolidation and restructuring reserve activities are:
Reengineering/ Consolidation
Severance Costs/Asset
(In thousands) Total Costs Impairments
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
Expenditures and write-offs (2,865) (2,642) (223)
Balance, year-end 1996 18,452 13,118 5,334
Expenditures and write-offs (12,724) (10,846) (1,878)
Balance, year-end 1997 5,728 2,272 3,456
Credited to income (3,700) - (3,700)
Expenditures and write-offs (1,008) (2,272) 1,264
Balance, year-end 1998 $1,020 $ - $1,020
Supplemental Cash Flows Information
(In thousands) 1998 1997 1996
Acquisitions:
Fair value of assets acquired $32,080 $9,572
Less:
Liabilities assumed or created (1,792) -
Existing company investment (63) -
Cash paid, net of cash acquired $30,225 $9,572 -
Cash paid during the year for:
Interest, net of
amounts capitalized $182,449 $179,180 $152,846
Income taxes, net of refunds $23,822 $30,664 $32,291
Direct financing leases
and related obligations $9,349 $5,092 $17,062
Property and equipment
additions by capital leases $70,684 $28,990 $11,111
Contingencies
In accordance with applicable accounting standards, the company records a
charge reflecting contingent liabilities (including those associated with
litigation matters) when management determines that a material loss is
"probable" and either "quantifiable" or "reasonably estimable." Additionally,
the company discloses material loss contingencies when the likelihood of a
material loss is deemed to be greater than "remote" but less than "probable."
Set forth below is information regarding certain material loss contingencies:
Class Action Suits.
In 1996, the company and certain of its present and former officers and
directors were named as defendants in nine purported class action suits filed
by certain stockholders and one purported class action suit filed by a
noteholder. In 1997, the court consolidated the stockholder cases (the
noteholder case was also consolidated, but only for pre-trial purposes).
During 1998 the noteholder case was dismissed and during 1999 the
consolidated case was also dismissed, each without prejudice. The court has
given the plaintiffs the opportunity to restate their claims.
The complaint filed in the consolidated cases asserts liability for the
company's alleged failure to properly account for and disclose the contingent
liability created by the David's litigation and by the company's alleged
"deceptive business practices." The plaintiffs claim that these alleged
practices led to the David's litigation and to other material contingent
liabilities, caused the company to change its manner of doing business at
great cost and loss of profit, and materially inflated the trading price of
the company's common stock. The company denies each of these allegations. The
plaintiffs seek undetermined but significant damages. However, if the
district court ruling described below is upheld, Fleming believes the
litigation will not have a material adverse effect on the company.
In 1997, the company won a declaratory judgment against certain of its
insurance carriers regarding policies issued to Fleming for the benefit of
its officers and
directors ("D&O policies"). On motion for summary judgment, the court ruled
that the company's exposure, if any, under the class action suits is covered
by D&O policies written by the insurance carriers (aggregating $60 million in
coverage) and that the "larger settlement rule" will be applicable to the
case. According to the trial court, under the larger settlement rule a D&O
insurer is liable for the entire amount of coverage available under a policy
even if there is some overlap in the liability created by the insured
individuals and the uninsured corporation. If a corporation's liability is
increased by uninsured parties beyond that of the insured individuals, then
that portion of the liability is the sole obligation of the corporation. The
court also held that allocation is not available to the insurance carriers as
an affirmative defense. The insurance carriers have appealed.
Tru Discount Foods.
Fleming brought suit in 1994 on a note and an open account against its former
customer, Tru Discount Foods. The case was initially referred to arbitration
but later restored to the trial court; Fleming appealed. In 1997, the
defendant amended its counter claim against the company alleging fraud,
overcharges for products and violations of the Oklahoma Deceptive Trade
Practices Act. In 1998, the appellate court reversed the trial court and
directed that the matter be sent again to arbitration. Although Tru Discount
Foods has not quantified damages, it has made demand in the amount of $8
million. Management is unable to predict the ultimate outcome of this matter.
However, an unfavorable outcome could have a material adverse effect on the
company.
Don's United Super (and related cases).
In 1998, the company and two retired executives were named in a suit filed by
approximately 20 current and former customers of the company (Don's United
Super, et al. v. Fleming, et al.). Plaintiffs operate retail grocery stores
in the St. Joseph and Kansas City metropolitan areas. Six plaintiffs who were
parties to supply contracts containing arbitration clauses were permitted to
withdraw from the case.
Previously, two cases had been filed in the same court (R&D Foods, Inc. et
al. v. Fleming, et al. and Robandee United Super, Inc. et al. v. Fleming, et
al.) by 10 customers, some of whom are plaintiffs in the Don's case. The
earlier two cases, which principally seek an accounting of the company's
expenditure of certain joint advertising funds, have been consolidated. All
causes of action in these cases have been stayed pending the arbitration of
the causes of action relating to supply contracts containing arbitration
clauses.
The Don's suit alleges product overcharges, breach of contract,
misrepresentation, fraud, and RICO violations and seeks recovery of actual,
punitive and treble damages and a declaration that certain contracts are
voidable at the option of the plaintiffs. Damages have not been quantified.
However, with respect to some plaintiffs, the time period during which the
alleged overcharges took place exceeds 25 years and the company anticipates
that the plaintiffs will allege substantial monetary damages.
In October 1998, a group of 14 retailers (ten of whom had been or are
currently plaintiffs in the Don's case and/or the Robandee case whose claims
were sent to arbitration or stayed pending arbitration) filed a new action
against the company and two former officers, one of whom was a director
(Coddington Enterprises, Inc. et al. v. Dean Werries, et al.). The plaintiffs
assert claims virtually identical to those set forth in the Don's complaint
and have not quantified damages.
The company intends to vigorously defend its interests in these cases.
Although management is currently unable to predict the ultimate outcome of
this litigation, based upon the plaintiffs' allegations, an unfavorable
outcome could have a material adverse effect on the company.
Storehouse Markets.
In 1998, the company and one of its associates were named in a suit filed by
three current and former customers of the company (Storehouse Markets, Inc.,
et al. v. Fleming Companies, Inc., et al.). The plaintiffs allege product
overcharges, fraudulent misrepresentation, fraudulent nondisclosure and
concealment, breach of contract, breach of duty of good faith and fair
dealing and RICO violations and seek declaration of class action status and
recovery of actual, punitive and treble
damages. Damages have not been quantified. However, the company anticipates
that the plaintiffs will seek substantial monetary damages. The company
intends to vigorously defend its interests in this case but is currently
unable to predict the ultimate outcome. Based upon the plaintiffs'
allegations, an unfavorable outcome could have a material adverse effect on
the company.
Y2K.
The company utilizes numerous computer systems which were developed employing
six digit date structures (i.e., two digits each for the month, day and
year). Where date logic requires the year 2000 or beyond, such date
structures may produce inaccurate results. Management has implemented a
program to comply with year-2000 requirements on a system-by-system basis.
Fleming's plan includes extensive systems testing and is expected to be
substantially completed by the third quarter of 1999. Although the company is
developing greater levels of confidence regarding its internal systems,
failure to ensure that the company's computer systems are year-2000 compliant
could have a material adverse effect on the company's operations. In
addition, failure of the company's customers or vendors to become year-2000
compliant could also have a material adverse effect on the company's
operations.
Program costs to comply with year-2000 requirements are being expensed as
incurred. Through the end of 1998, total expenditures to third parties were
approximately $7 million.
Other.
The company's facilities and operations are subject to various laws,
regulations and judicial and administrative orders concerning protection of
the environment and human health, including provisions regarding the
transportation, storage, distribution, disposal or discharge of certain
materials. In conformity with these provisions, the company has a
comprehensive program for testing, removal, replacement or repair of its
underground fuel storage tanks and for site remediation where necessary. The
company has established reserves that it believes will be sufficient to
satisfy the anticipated costs of all known remediation requirements.
The company and others have been designated by the U.S. Environmental
Protection Agency ("EPA") and by similar state agencies as potentially
responsible parties under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or similar state laws, as
applicable, with respect to EPA-designated Superfund sites. While liability
under CERCLA for remediation at such sites is generally joint and several
with other responsible parties, the company believes that, to the extent it
is ultimately determined to be liable for the expense of remediation at any
site, such liability will not result in a material adverse effect on its
consolidated financial position or results of operations. The company is
committed to maintaining the environment and protecting natural resources and
human health and to achieving full compliance with all applicable laws,
regulations and orders.
The company is a party to various other litigation and contingent loss
situations arising in the ordinary course of its business including: disputes
with customers and former customers; disputes with owners and former owners
of financially troubled or failed customers; disputes with employees and
former employees regarding labor conditions, wages, workers' compensation
matters and alleged discriminatory practices; disputes with insurance
carriers; tax assessments and other matters, some of which are for
substantial amounts. However, the company does not believe any such action
will result in a material adverse effect on the company.
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 26, 1998, and December 27,
1997, and the related consolidated statements of operations, cash flows, and
shareholders' equity for each of the three years in the period ended December
26, 1998. 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 at December 26, 1998, and December 27, 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 26, 1998, 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
Oklahoma City, Oklahoma
February 18, 1999
Quarterly Financial Information
(In thousands, except per share amounts)
(Unaudited)
1998 First Second Third Fourth Year
Net sales $4,567,126 $3,505,943 $3,438,766 $3,557,500 $15,069,335
Costs and expenses (income):
Cost of sales 4,118,032 3,158,295 3,108,993 3,208,921 13,594,241
Selling and administrative 371,546 290,025 290,875 323,866 1,276,312
Interest expense 51,202 35,861 37,348 37,170 161,581
Interest income (11,305) (8,308) (8,559) (8,564) (36,736)
Equity investment results 3,589 3,248 2,669 2,116 11,622
Litigation charges 2,954 2,216 2,215 395 7,780
Impair/restructuring charge (267) 916 6,038 646,050 652,737
Total costs and expenses 4,535,751 3,482,253 3,439,579 4,209,954 15,667,537
Earnings (loss) before taxes 31,375 23,690 (813) (652,454) (598,202)
Taxes on income (loss) 16,105 10,051 1,512 (115,275) (87,607)
Net earnings (loss) $ 15,270 $ 13,639 $ (2,325) $ (537,179) $ (510,595)
Basic and diluted net
income (loss) per share $.40 $.36 $(.06) $ (14.11) $(13.48)
Dividends paid per share $.02 $.02 $.02 $.02 $.08
Weighted average shares outstanding:
Basic 37,804 37,859 38,039 38,084 37,887
Diluted 37,972 38,027 38,039 38,084 37,887
1997 First Second Third Fourth Year
Net sales $4,752,031 $3,550,654 $3,453,261 $3,616,720 $15,372,666
Costs and expenses (income):
Cost of sales 4,319,349 3,219,989 3,131,023 3,271,477 13,941,838
Selling and administrative 363,716 274,878 272,826 283,150 1,194,570
Interest expense 48,822 36,223 39,084 38,377 162,506
Interest income (14,354) (10,940) (11,116) (10,228) (46,638)
Equity investment results 4,078 3,239 3,710 5,719 16,746
Litigation charges 19,218 - - 1,741 20,959
Total costs and expenses 4,740,829 3,523,389 3,435,527 3,590,236 15,289,981
Earnings before taxes 11,202 27,265 17,734 26,484 82,685
Taxes on income 5,938 14,450 8,214 15,361 43,963
Earnings before
extraordinary charge 5,264 12,815 9,520 11,123 38,722
Extraordinary charge - - 13,330 - 13,330
Net earnings $ 5,264 $ 12,815 $ (3,810) $ 11,123 $ 25,392
Earnings per share:
Basic and diluted before
extraordinary charge $.14 $.34 $.25 $.29 $1.02
Extraordinary charge - - $.35 - $.35
Basic and diluted net earnings $.14 $.34 $(.10) $.29 $.67
Dividends paid per share $.02 $.02 $.02 $.02 $.08
Weighted average shares outstanding:
Basic 37,801 37,804 37,804 37,804 37,803
Diluted 37,810 37,829 37,840 37,970 37,862
The first three quarters of 1998 have been restated to reclassify certain
expenses related to the strategic plan in the impairment/restructuring charge
line. The fourth quarter of 1998 includes a charge of $661 million ($539 million
after income tax benefit or $14.17 per share) related to the company's strategic
plan.
The first quarter of 1997 includes a charge of $19 million ($9 million after
income tax benefits or $.24 per share) reflecting the settlement of the David's
litigation. The third quarter of 1997 reflects an extraordinary charge of $22
million ($13 million after income tax benefits or $.35 per share) related to the
recapitalization program.
The first quarter of both years consists of 16 weeks; all other quarters are 12
weeks.
(a) 2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(a) 3. (c) Exhibits:
Page Number or
Exhibit Incorporation by
Number Reference to
3.1 Certificate of Incorporation Exhibit 4.1 to
Form S-8 dated
September 3, 1996
3.2 By-Laws Exhibit 3.2 to Form
10-K for year ended
December 27, 1997
4.0 Credit Agreement, dated as of Exhibit 4.16 to Form
July 25, 1997, among Fleming 10-Q for quarter ended
Companies, Inc., the Lenders party July 12, 1997
thereto, BancAmerica Securities,
Inc., as syndication agent, Societe
Generale, as documentation agent and
The Chase Manhattan Bank, as
administrative agent
4.1 Security Agreement dated as of Exhibit 4.17 to Form
July 25, 1997, between Fleming 10-Q for quarter ended
Companies, Inc., the company July 12, 1997
subsidiaries party thereto and
The Chase Manhattan Bank, as
collateral agent
4.2 Pledge Agreement, dated as of Exhibit 4.18 to Form
July 25, 1997, among Fleming 10-Q for quarter ended
Companies, Inc., the company July 12, 1997
subsidiaries party thereto and
The Chase Manhattan Bank, as
collateral agent
4.3 Guarantee Agreement among the Exhibit 4.19 to Form
company subsidiaries party thereto 10-Q for quarter ended
and The Chase Manhattan Bank, as July 12, 1997
collateral agent
4.4 Indenture dated as of Exhibit 4.9 to
December 15, 1994, among Fleming, Form 10-K for year
the Subsidiary Guarantors named ended December 31,
therein and Texas Commerce Bank 1994
National Association, as Trustee,
Regarding $300 million of 10 5/8%
Senior Notes
4.5 Indenture, dated as of July 25, 1997, Exhibit 4.20 to Form
among Fleming Companies, Inc., the 10-Q for quarter ended
Subsidiary Guarantors named therein July 12, 1997
and Manufacturers and Traders Trust
Company, as Trustee, regarding
10 5/8% Senior Subordinated Notes
due 2007
4.6 Indenture, dated as of July 25, 1997, Exhibit 4.21 to Form
among Fleming Companies, Inc., the 10-Q for quarter ended
Subsidiary Guarantors named therein July 12, 1997
and Manufacturers and Traders Trust
Company regarding 10 1/2% Senior
Subordinated Notes due 2004
4.7 First Amendment, dated as of October Exhibit 4.8 to Form
5, 1998, to Credit Agreement dated 10-Q for quarter ended
July 25, 1997 October 3, 1998
4.8 Agreement to furnish copies of
other long-term debt instruments
10.0 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
10.1* 1985 Stock Option Plan Exhibit 28(a) to
Registration
Statement No.
2-98602
10.2* Form of Award Agreement for Exhibit 10.6 to
1985 Stock Option Plan (1994) Form 10-K for year
ended December 25,
1993
10.3* 1990 Stock Option Plan Exhibit 28.2 to
Registration
Statement No.
33-36586
10.4* Form of Award Agreement for Exhibit 10.8 to
1990 Stock Option Plan (1994) Form 10-K for year
ended December 25,
1993
10.5* Form of Restricted Stock Award Exhibit 10.5 to
Agreement for 1990 Stock Option Form 10-K for year
Plan (1997) ended December 27,
1997
10.6* Fleming Management Incentive Exhibit 10.4 to
Compensation Plan Registration
Statement No.
33-51312
10.7* Amended and Restated Supplemental Exhibit 10.10 to
Retirement Plan Form 10-K for year
ended December 31,
1994
10.8* Form of Amended and Restated Exhibit 10.11 to
Supplemental Retirement Form 10-K for year
Income Agreement ended December 31,
1994
10.9* 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,
officers 1994
10.10* Fleming Companies, Inc. 1996 Exhibit A to
Stock Incentive Plan dated Proxy Statement
February 27, 1996 for year ended
December 30, 1995
10.11* Form of Restricted Award Agreement Exhibit 10.12 to
for 1996 Stock Incentive Plan (1997) Form 10-K for year
ended December 27,
1997
10.12* Phase III of Fleming Companies, Exhibit 10.17 to
Inc. Stock Incentive Plan Form 10-K for year
ended December 25,
1993
10.13* Amendment No. 1 to the Exhibit 10.16 to
Fleming Companies, Inc. 1996 Form 10-K for year
Stock Incentive Plan ended December 28,
1996
10.14* Supplemental Income Trust Exhibit 10.20 to
Form 10-K for year
ended December 31,
1994
10.15* First Amendment to Fleming Exhibit 10.19 to
Companies, Inc. Supplemental Form 10-K for year
Income Trust ended December 28,
1996
10.16* Form of Employment Agreement Exhibit 10.20 to
between Registrant and certain Form 10-K for year
of the employees ended December 31,
1994
10.17* Economic Value Added Incentive Exhibit A to Proxy
Bonus Plan Statement for year
ended December 31,
1994
10.18* Agreement between the Exhibit 10.24 to
Registrant and Form 10-K for year
William J. Dowd ended December 30,
1995
10.19* Amended and Restated Exhibit 10.23 to
Supplemental Retirement Form 10-K for year
Income Agreement for ended December 28,
Robert E. Stauth 1996
10.20* Supplemental Retirement Exhibit 10.24 to
Income Agreement of Fleming Form 10-K for year
Companies, Inc. And William ended December 28,
J. Dowd 1996
10.21* Executive Past Service Benefit Exhibit 10.23 to
Plan (November 1997) Form 10-K for year
ended December 27,
1997
10.22* Form of Agreement for Executive Exhibit 10.24 to
Past Service Benefit Plan Form 10-K for year
(November 1997) ended December 27,
1997
10.23* Executive Deferred Compensation Exhibit 10.25 to
Plan (November 1997) Form 10-K for year
ended December 27,
1997
10.24* Executive Deferred Compensation Exhibit 10.26 to
Trust (November 1997) Form 10-K for year
ended December 27,
1997
10.25* Form of Agreement for Executive Exhibit 10.27 to
Deferred Compensation Plan (November Form 10-K for year
1997) ended December 27,
1997
10.26 Fleming Companies, Inc. Associate Exhibit 10.28 to
Stock Purchase Plan Form 10-K for year
ended December 27,
1997
10.27 Settlement Agreement between Exhibit 10.25 to Form
Fleming Companies, Inc. and 10-Q for quarter ended
Furr's Supermarkets, Inc. dated October 4, 1997
October 23, 1997
10.28* Form of Amended and Restated Agreement Exhibit 10.30 to Form
for Fleming Companies, Inc. Executive 10-Q for quarter ended
Past Service Benefit Plan October 3, 1998
10.29* Form of Amended and Restated Agreement Exhibit 10.31 to Form
for Fleming Companies, Inc. Executive 10-Q for quarter ended
Deferred Compensation Plan October 3, 1998
10.30* Amended and Restated Supplemental Exhibit 10.32 to Form
Retirement Income Agreement between 10-Q for quarter ended
William J. Dowd and Fleming Companies, October 3, 1998
Inc. dated August 18, 1998
10.31* Form of Amended and Restated Restricted Exhibit 10.33 to Form
Stock Award Agreement under Fleming 10-Q for quarter ended
Companies, Inc. 1996 Stock Incentive October 3, 1998
Plan
10.32* Form of Amended and Restated Non- Exhibit 10.34 to Form
Qualified Stock Option Agreement 10-Q for quarter ended
under the Fleming Companies, Inc. October 3, 1998
1996 Stock Incentive Plan
10.33* First Amendment to Economic Value Added Exhibit 10.36 to Form
Incentive Bonus Plan for Fleming 10-Q for quarter ended
Companies, Inc. October 3, 1998
10.34* Amendment No. 2 to Economic Value Added Exhibit 10.37 to Form
Incentive Bonus Plan for Fleming 10-Q for quarter ended
Companies, Inc. October 3, 1998
10.35* Form of Amendment to Certain Employment Exhibit 10.38 to Form
Agreements 10-Q for quarter ended
October 3, 1998
10.36* Form of First Amendment to Restricted Exhibit 10.39 to Form
Stock Award Agreement for Fleming 10-Q for quarter ended
Companies, Inc. 1996 Stock Incentive October 3, 1998
Plan
10.37* Settlement and Severance Agreement by Exhibit 10.40 to Form
and between Fleming Companies, Inc. 10-Q for quarter ended
and Robert E. Stauth dated August 28, October 3, 1998
1998
10.38* 1999 Stock Incentive Plan
10.39* Form of Non-Qualified Stock
Option Agreement for 1999
Stock Incentive Plan
10.40* Corporate officer Incentive Plan
10.41* Employment Agreement for Mark Hansen
dated as of November 30, 1998
10.42* Restricted Stock Agreement under
1990 Stock Incentive Plan for Mark
Hansen dated as of November 30, 1998
10.43* Form of Amendment to Employment
Agreement between Registrant and
certain executives dated as of
March 2, 1999
10.44* Amendment No. One to 1990 Stock
Option Plan
10.45* Fleming Companies, Inc. 1990 Stock
Incentive Plan (as amended)
10.46* Fleming Companies, Inc. Amended and
Restated Directors' Compensation
and Stock Equivalent Unit Plan
10.47* Severance Agreement for Thomas L.
Zaricki dated January 29, 1999
10.48* Severance Agreement for Harry L.
Winn, Jr. dated February 22, 1999
12 Computation of ratio of
earnings to fixed charges
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
24 Power of Attorney
27 Financial Data Schedule
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
On November 30, 1998, registrant announced that the Board of Directors
had elected Mark S. Hansen as chairman and chief executive officer.
On December 7, 1998, registrant announced the approval of the strategic
plan by the Board of Directors.
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 12th day of March
1999.
FLEMING COMPANIES, INC.
MARK S. HANSEN
By: Mark S. Hansen
Chairman and
Chief Executive Officer
(Principal executive and
financial officer)
KEVIN TWOMEY
By: Kevin Twomey
Senior 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 12th day of March 1999.
MARK S. HANSEN JACK W. BAKER * HERBERT M. BAUM *
Mark S. Hansen Jack W. Baker Herbert M. Baum
(Chairman of the Board) (Director) (Director)
ARCHIE R. DYKES * CAROL B. HALLETT * EDWARD C. JOULLIAN III *
Archie R. Dykes Carol B. Hallett Edward C. Joullian III
(Director) (Director) (Director)
GUY A. OSBORN * DAVID A. RISMILLER *
Guy A. Osborn Alice M. Peterson David A. Rismiller
(Director) (Director) (Director)
DAVID R.ALMOND
David R. Almond
(Attorney-in-fact)
*A Power of Attorney authorizing David R. Almond 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.
SCHEDULE II
FLEMING COMPANIES, INC.
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 26, 1998
DECEMBER 27, 1997, AND DECEMBER 28, 1996
(In thousands)
Allowance
for
Credit Losses Current Noncurrent
BALANCE, December 30, 1995 $53,404 $35,136 $18,268
Charged to costs and expenses 26,921 19,406 7,515
Uncollectible accounts written-off,
less recoveries (35,693) (29,883) (5,810)
Asset Impairment 5,000 - 5,000
BALANCE, December 28, 1996 $49,632 $24,659 $24,973
Charged to cost and expenses 24,484 11,989 12,495
Uncollectible accounts written-off,
less recoveries (32,655) (17,636) (15,019)
Asset impairment 2,387 - 2,387
BALANCE, December 27, 1997 $43,848 $19,012 $24,836
Charged to cost and expenses 23,498 9,979 13,519
Uncollectible accounts written-off,
less recoveries (20,114) (9,012) (11,102)
BALANCE, December 26, 1998 $47,232 $19,979 $27,253