ITEM 1. BUSINESS
Fleming Companies, Inc. (hereinafter referred to as "Fleming," the "registrant" or the "company") was incorporated in Kansas in 1915 and in 1981 was reincorporated as an Oklahoma corporation. Fleming is engaged primarily in the wholesale distribution of food and related products. The company currently serves as the principal source of supply for 4,700 retail food stores, including 2,900 supermarkets, in 36 states in the U.S. and several foreign countries. These supermarkets have a total area of 80 million square feet. These are predominantly independent stores, many of which operate and advertise under a common name to promote greater consumer recognition. Fleming's retail customers (hereinafter referred to as "customers") also include national and regional corporate chains.
The company distributes a wide variety of both national and private brand groceries, meats, dairy and delicatessen products, frozen foods, fresh produce, and a variety of general merchandise and related items. In addition, Fleming offers a full range of support services, including collateralized long-term financing of certain customers, which enables the customers to compete with other types of food stores in their respective market areas.
The company also owns and operates 72 supermarkets. See "Company- Operated Retail Stores". The company's wholesale distribution of food and related products is its dominant business as defined by Statement of Financial Accounting Standards No. 14; therefore, segment information is not required.
On January 18, 1994, the company announced the details of a plan to consolidate facilities and restructure its organizational alignment and operations. Management's objective is to improve company performance by eliminating functions and operations that do not add economic value. As a result, registrant has closed five regional offices and also will close five distribution centers and relocate two operations. When completed, these actions will reduce employment by about 2,000, or 9% of the company's work force, and lower operating costs by approximately $65 million annually.
The plan resulted from a thorough review, which began in October 1993, of all operations and business strategies. The 1993 fourth quarter results reflect a charge of $101.3 million resulting directly from facilities consolidation restructuring. This is in addition to $6.5 million provided for a facilities consolidation in the second quarter. The plan consists of four categories: facilities consolidation, re-engineering, retail-related assets and elimination of regional operations. The actions contemplated by the plan will affect the company's food and general merchandise wholesaling operations as well as certain retailing assets. In early 1994, the company announced that it would close its Fort Worth, Joplin and Tupelo facilities as part of the plan. The pending closing of the Topeka food distribution facility was previously announced. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
DISTRIBUTION FACILITIES. Fleming currently operates 28 food distribution divisions which handle food and related products including groceries, meat, produce, frozen foods, dairy products and certain nonfood items. Five general merchandise divisions distribute general merchandise, health and beauty care items, prescription drug products, and other nonfood items. Two additional divisions distribute dairy, delicatessen and fresh meat products. All are equipped with modern materials handling equipment for receiving, storing and shipping large quantities of merchandise. In total, the company's distribution facilities, including outside storage, comprise approximately 21 million square feet of warehouse space. See "Recent Developments."
PRODUCTS. The company purchases its inventory requirements from numerous processors, manufacturers and growers, and believes it generally has adequate and alternate sources of supply for most of the products handled. Fleming purchases product on a volume basis and strives to maintain optimum inventory turnover rates while optimizing service levels. Most grocery purchases are subject to a cash discount if paid within specified days of receipt of merchandise.
Fleming operates a central procurement program for fresh meats and produce and for products sold primarily under private brands, including canned goods, frozen foods, general merchandise and dairy products. Private brands include Bonnie Hubbard-R-, Captain's Cove-R-, Fleming's-R-, Hyde Park-R-, IGA-R-, Marquee-R-, Montco-R-, P.S. - Personally Selected-R-, Piggly Wiggly-R-, Rainbow-R-, Royal-TM-, Sentry-R-, Sunrise-TM- and TV-R-. Private brands are an important source of sales and are slightly more profitable to Fleming than national brands.
Billings to customers for merchandise are generally based on an agreed price that includes Fleming's defined cost, to which is added a fee determined by the volume of the customer's purchases. A delivery charge is usually added based on order size and mileage. In some geographic areas, billings are determined by percentage mark-up. Payment may be received upon delivery of the order, or within credit terms that generally are weekly or semiweekly. A cash deposit from the customer may be required.
RETAIL STORES SERVED. The retail stores served by Fleming range in size from small convenience outlets to conventional supermarkets to large superstores, combination units and price impact stores. Fleming's principal customers are supermarkets carrying a wide variety of grocery, meat, produce, frozen food and dairy products. Most customers also handle an assortment of nonfood items, including health and beauty care, and general merchandise such as housewares, soft goods and stationery. Many supermarkets also operate one or more specialty departments such as in-store bakeries, delicatessens, seafood and floral departments. Fleming seeks to expand its customer base through a variety of means. See "Services to Customers" and "Capital Invested in Customers".
Sales by store format are comprised of: conventional - 46%; superstore - 23%; price impact - 17%; and combination 14%. Sales for 1993 by the company's operating regions are dispersed as follows: Mid-South - 25%; Western - 24%; Mid-America - 20%; Southern - 19%; and Eastern - 12%. Sales by customer type are comprised of: single-store independents - 20%; multiple-store independents - - 33%; voluntary chains - 5%; corporate chains - 35%; and company-operated locations - 7%. The mix of product sales for 1993 was: groceries - 52%; perishables - 42%; and general merchandise - 6%.
Voluntary chains are retail stores licensed to do business under a common trade name and generally participate in group advertising and promotional activities. See "Franchise Operations."
The company considers a chain as 11 or more stores under common ownership. At 1993 year end, Fleming was serving 810 corporate chain stores, compared to 840 a year ago.
Many of the customers served by Fleming have entered into sales service plan agreements with Fleming which are terminable upon notice by either party. Certain customers also have signed mid-term or long-term supply agreements. The agreements set forth the terms under which Fleming provides products and services to the stores.
SERVICES TO CUSTOMERS. In addition to supplying retail stores with their inventory requirements, Fleming offers a wide variety of services designed to enhance the customer's ability to compete and to attract new retailers. Such services include merchandising and marketing assistance, advertising, consumer education programs, retail electronic services and employee training. The costs of some of these services are included in the fees charged by Fleming in connection with its sale of food products and related items. Charges are made separately for services such as retail accounting, electronic services, leasing and financing.
Another important service that Fleming offers is assistance in the development and expansion of retail stores. Fleming provides, for a fee, site selection and market surveys; store design, layout and decor assistance; and equipment and fixture planning.
Fleming also develops sales promotions for customers including travel, continuity and other incentive programs.
CAPITAL INVESTED IN CUSTOMERS. As part of its services to retailers, Fleming executes prime leases on store locations for sublease to certain customers. Sublease rentals are generally higher than the base rental to Fleming. At the end of 1993, Fleming was the primary lessee of 770 retail store locations subleased to and operated by customers. In certain circumstances, the company has also guaranteed the lease obligations of certain customers.
In addition to extending credit for inventory purchases, Fleming also assists customers by making capital available in the form of loans and equity investments. The composition of Fleming's portfolio of loans to (including current portion) and investments in customers is presented below. Amounts are in millions.
Fleming makes equity investments in certain customers under its equity store program or as business development ventures. Fleming also makes secured loans to these customers. These investments and loans decreased from $209 million to $190 million during 1993. Losses of $12 million were recorded under the equity method associated with such investments in 1993, compared to $16 million recorded in 1992. Equity investments in customers totaled $55 million and $46 million at year end 1993 and 1992, including $12 million and $10 million in 1993 and 1992, respectively, invested in company-owned retail stores held for resale to qualified buyers. Loans to customers in whom the company held an equity interest totaled approximately $135 million at year-end 1993, compared to $163 million at year-end 1992. During 1993, $68 million of notes evidencing loans were sold, compared to $45 million sold in 1992. The loan portfolio is net of reserves of $18 million in 1993 and 1992.
Through its equity store program, the company invests capital in customers. The customer is permitted to purchase the company's investment over a five to ten year period. At year-end 1993, equity investments in 51 customers under this program totaled $15 million compared to $18 million at year end 1992. Loans to these customers were $55 million in 1993 and $49 million in 1992.
Upon review and approval by its board of directors, the company invests in strategic multi-store customers as business development ventures. These customers, many of whom are highly leveraged, are usually medium-sized retail chains who have entered into long-term supply agreements with the company. At year-end 1993, the company had equity investments of approximately $28 million in 10 business development ventures compared to investments of $18 million in 12 ventures in 1992. At the end of 1993, the company had secured loans totaling approximately $78 million to these entities compared to $114 million in 1992. In addition, the company has guaranteed $35 million of loans to one such venture.
The company also makes loans to customers in which it has no equity investment, primarily for store expansions or improvements. These loans are generally secured by inventory and store fixtures, bear interest at rates at or above prime, and are for terms of up to ten years. Such loans totaled approximately $178 million and $193 million at year-end 1993 and 1992, respectively.
Fleming does not believe its loans to customers would be investment grade if rated. Furthermore, its equity investments are highly illiquid. However, the company has systems and controls in place to monitor the performance of its equity investments and the more than 800 outstanding loans to customers totaling $313 million and $356 million in 1993 and 1992, respectively. For equity stores and business development ventures, the company has active representation on the customer's board of directors. The company also conducts periodic credit reviews and receives and analyzes the customers' financial statements. Retail counselors visit the customers' locations regularly. On an ongoing basis, senior management reviews the company's largest investments and credit exposures.
In making credit and investment decisions, the company considers many factors including anticipated risk, expected return on capital utilized and the benefits to be derived from sustained or increased product sales. Sales to stores served by the company through the equity store program and business development ventures were approximately $1.6 billion in 1993, or approximately 12% of total net sales. Although the company has in the past and may in the future sustain operating losses associated with capital investments in customers, management believes that on balance the economic benefit to the company including the benefit of increased product sales outweighs the increased risk of making such capital investments.
COMPANY-OPERATED RETAIL STORES. At year end, the company operated 72 supermarkets located in four states. The average size of these stores is 38,000 square feet. Company-operated stores do business in a variety of formats, from conventional supermarkets to price impact stores. All locations are served by Fleming distribution divisions.
The number of company-operated stores increased during 1993 and 1992 due to purchases of retail locations in both years. Management intends to continue to increase ownership of company-operated stores. The growth plan includes evaluating markets currently served as well as identifying appropriate acquisition candidates in specific niche markets.
INTERNATIONAL ACTIVITIES. The company has a 49% interest in a joint venture with one of Mexico's largest retailers, Grupo Gigante, to develop and operate price impact supermarkets in Mexico. Four stores were in operation at the end of 1993 and two stores are planned for opening in 1994. The company's pro-rata investment in the venture is $13 million.
In the fall of 1993 the company (35%) and an affiliate of a leading Australian food wholesaler (65%) capitalized a Singapore corporation in order to acquire and develop food distribution businesses throughout Asia. The company has an option to purchase and the Australian shareholder has a right to require the company to purchase an additional 14%. The Singapore corporation holding minority interests has formed joint ventures to operate food distribution centers with local supermarket operators in each of Singapore and Malaysia and plans additional joint ventures in other Pacific Rim countries. The company's committed investment, including the additional 14% interest in the Singapore corporation, is approximately $7.5 million.
The company has export sales aggregating $212 million in 1993. International sales activities have been consolidated under Fleming International, Ltd., a wholly owned subsidiary. Principal areas in which these sales were made are: the Caribbean, Central America, Japan, Mexico, the Pacific Rim, and South America.
The company will continue to explore expansion of its international activities. Fleming currently exports both private label and branded products, and has established working alliances with many companies to expand their international sales through Fleming.
FRANCHISE OPERATIONS. The company offers its customers the opportunity to franchise a concept or license a common trade name. This program helps the customer compete by providing, as part of the franchise or license program, state-of-the-art business concepts, group advertising, private label products and other benefits. Fleming is the franchisor or has the right to license retailers to use certain trade names such as Big Star-R-, Big T-R-, Checkers-R-, Food 4 Less-R-, IGA-R-, MEGA MARKET-R-, Minimax-R-, Piggly Wiggly-R-, Sentry-R-, Shop 'n Bag-R-, Shop 'n Kart-R-, Super 1 Foods-R-, Super Save-R-, Thriftway-R-, United Supers-R- and Value King-R-. While these rights are collectively significant, none of the individual trade names is considered material to the company's operation. At year end 1993, the company franchised or licensed approximately 1,700 stores.
RELATED ACTIVITIES. The company operates dairy facilities in Nashville, Tenn., and Baton Rouge, La. These automated facilities process milk products, including regular and low fat milk, as well as cultured items such as cottage cheeses, sour cream and dips marketed under private and national brands, In addition, these facilites process fruit juices and soft drinks.
The company owns an 80% interest in a limited assortment retail format, Sav-U-Foods-R-. These are small stores located in Southern California that carry fewer varieties of products than conventional stores while offering very competitive pricing. There are currently 20 stores in operation with plans to have at least 50 open by the end of 1994. These stores are supplied from a separate distribution center.
Fleming owns and operates two drug stores, two retail liquor stores and a bakery, all located in Wisconsin.
Most distribution divisions operate a truck fleet to deliver products to customers. The company increases the utilization of its truck fleet by backhauling products from many suppliers, thereby reducing the number of empty miles traveled. To further increase its fleet utilization, the company has made its truck fleet available to other firms on a for-hire carriage basis.
COMPETITION. Fleming competes with several other wholesale food distributors in most of its market areas on the basis of product price, quality and assortment, schedules and reliability of deliveries, the range and quality of services provided and its willingness to invest capital in customers.
The sales volume of wholesale food distributors is dependent on the level of sales achieved by the retail food stores they serve. Retail stores served by Fleming compete with other retail food outlets in their areas on the basis of product price, quality and assortment, store location, sales promotions, advertising, availability of parking, hours of operation, cleanliness and attractiveness.
Fleming believes that the designs and locations of its distribution divisions enable it to serve its customers in an efficient manner and that its purchasing systems and standards enable it to provide such customers with a wide assortment of products at competitive prices.
EMPLOYEES. Fleming had approximately 23,300 associates at year end 1993.
RECENT DEVELOPMENTS. In January 1994, the company announced that it has signed a letter of intent to sell substantially all the assets of its Royal Foods dairy and deli products distribution business located in Woodbridge, New Jersey, to DiGiorgio Corporation. The transaction, at March 24, 1994 is subject to execution of a definitive agreement and receipt of certain third party consents. The company expects to record a pre-tax gain of approximately $3 million on the transaction, $3 million less than the original estimate. Annual sales of the operation are approximately $300 million and future financial results will not be adversely affected as a result of the transaction. The company's Royal Foods distribution center located in Maryland is not part of the proposed sale and will continue to supply perishable products to customers of the Philadelphia division.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth information with respect to Fleming's major distribution facilities.
OUTSIDE STORAGE
Outside storage facilities - typically rented on a short-term basis. 5,160 ----- Total square feet 20,895 ------ ------
(1) Comprise the Lubbock distribution operation. (2) The company has announced that it will close this facility in 1994 and transfer its customers to other company-operated facilities. (3) Comprise the Royal distribution operation.
At the end of 1993, Fleming operated a delivery fleet consisting of approximately 1,800 power units and 3,700 trailers. Most of this equipment is owned by the company.
Company-operated retail stores occupy approximately 2.7 million square feet which is primarily leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
TROPIN V. THENEN ET AL., (INCLUDING MALONE & HYDE, INC., AND FLEMING COMPANIES, INC.) CASE NO. 93-1092-CIV-MORENO. UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA.
WALCO INVESTMENTS, INC., ET AL. V. THENEN, ET AL., (INCLUDING MALONE & HYDE, INC., AND FLEMING COMPANIES, INC.) CASE NO. 93-1092-CIV-MORENO, UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA.
On December 21, 1993, these cases were filed in the United States District Court for the Southern District of Florida. Both cases name numerous defendants, including registrant, its subsidiary Malone & Hyde, Inc., and four former associates of subsidiaries of registrant.
These cases contain similar factual allegations. As to registrant, Malone & Hyde, and the former associates, plaintiffs allege, among other things, that the former associates participated in fraudulent activities by taking money for confirming diverting transactions which had not occurred and that, in so doing, the former associates acted within the scope of their employment. Plaintiffs also allege that Malone & Hyde allowed its name to be used in furtherance of the alleged fraud.
The allegations against registrant and Malone & Hyde include common law fraud, breach of contract, aiding and abetting a violation of Section 10(b) of the Securities and Exchange Act of 1934, negligence, and demand for repayment of monies allegedly received by the confirmers. In addition, allegations were made against Malone & Hyde claiming it violated the federal Racketeer Influenced and Corrupt Organizations Act and comparable state law. Plaintiffs seek damages, treble damages, attorneys fees, costs, expenses and other appropriate relief. While the amount of damages sought under most claims is not specified, plaintiffs allege that hundreds of millions of dollars were lost as the result of the matters complained of.
Registrant and Malone & Hyde, Inc. deny the allegations of the complaints and will vigorously defend the actions.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 4.
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 24, 1994:
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. Devening, Almond and Anderson.
Mr. Devening returned to the company in June 1989 as executive vice president and chief financial officer and was elected to his present position in 1993. From 1979 to January 1987, he was associated with the company, being elected executive vice president-finance and administration in 1982. From January 1987 to June 1989, he was vice president and chief financial officer of Genentech, Inc., a pharmaceutical products company.
Mr. Almond joined the company in May 1989 as senior vice president-general counsel. He assumed the additional role of corporate secretary in 1992. Since 1985 until joining the company, he was senior vice president-general counsel and administration of Wilson Foods Corp., a processor of meat products. In 1990, Wilson Foods Corp. filed for protection under Chapter 11 of the United States Bankruptcy Code and subsequently had a reorganization plan approved by the court.
Mr. Anderson joined the company in his present position in July 1993. Since 1986, until joining the company, he was vice president of McKesson Corporation, a distributor of pharmaceutical and related products, where he was responsible for its service merchandising division.
Mr. Werries will retire effective April 27, 1994 as chairman of the board. Mr. Stauth will then become chairman, president and chief executive officer.
Mr. Stuard will retire effective December 1, 1994.
PART II ------- ITEM 5.
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 December 31, 1993, the 36.9 million outstanding shares were owned by 11,200 shareholders of record and approximately 19,300 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.
Cash dividends on Fleming common stock have been paid for 77 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:
Cash dividends of $.30 per share were paid on each of the above four payment dates in 1992 and 1993.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(a) In 1993 and 1992, the company recorded an after-tax loss of $2.3 million and $5.9 million, respectively, for early retirement of debt. In 1991, the company changed its method of accounting for postretirement health care benefits, resulting in a charge to net earnings of $9.3 million.
The results in 1993 include an after-tax charge of approximately $62 million for additional facilities consolidations, re-engineering, impairment of retail-related assets and elimination of regional operations.
The company instituted a plan late in 1991 to reduce costs and increase operating efficiency by consolidating four distribution centers into larger, higher volume and more efficient facilities. The after-tax charge was $41.4 million.
During 1989, the company sold all of its preferred stock investment and approximately 60% of its common stock investment in the purchaser of White Swan, Inc., resulting in an after-tax gain of $8.2 million. The remaining common stock investment was sold in 1990, resulting in an after-tax gain of approximately $3.6 million.
See notes to consolidated financial statements and the financial review included in Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Fleming continues to experience excellent access to the capital markets.
The company refinanced at lower interest rates $28 million of term debt through borrowings on bank lines and the issuance of medium-term notes. Also, proceeds from the sale of $68 million of long-term retailer notes receivable were applied to the early redemption of $63 million of 9.5% debentures purchased at the required premium. Additional customer notes receivable may be sold in the future with the proceeds used to reduce debt.
The company registered an additional $264 million of debt securities with the Securities and Exchange Commission. Medium-term notes in the amount of $61 million were issued in 1993 with maturities ranging from four to seven years with an average interest rate of 5.9%. The remaining $290 million of registered securities are available for sale from time to time and allow the company to maintain adequate access to the debt capital markets.
In addition, three-year loans totaling $65 million were consummated with three banks. In January 1994, a similar $20 million loan was closed and a maturing loan was extended for 2.5 years.
The company has established public and private commercial paper programs. Two revolving credit agreements, $400 million maturing in October 1997 and $200 million maturing in October 1994, serve as backup lines for the company's commercial paper programs and for borrowings under uncommitted lines, assuring adequate liquidity. These credit facilities, with a strong group of banks led by Morgan Bank, were established in October to replace a similar $500 million facility which was scheduled to expire in November 1994.
During 1993, the company made no borrowings under any of its committed agreements. The interest rate for the facilities is based on various money market rates selected by the company at the time of borrowing. Management intends to renew the $200 million credit agreement prior to its maturity.
The committed credit agreements and seven term bank loans contain various covenants, including restrictions on additional indebtedness, payment of cash dividends and acquisition of the company's common stock. None of these covenants negatively impact the company's liquidity or capital resources at this time. Reinvested earnings of approximately $92 million were available at year end for cash dividends and acquisition of the company's stock. Each of these credit agreements may be terminated in the event of a defined change of control of the company.
Uncommitted bank lines were used during the year when their rates were lower than commercial paper rates. During 1993, borrowings under these lines averaged $170 million, ranging from $81 million to $435 million, and were $145 million at year-end 1993. Commercial paper borrowings averaged $151 million, ranging from $15 million to $226 million, and were $166 million at year end.
The company's long-term debt and commercial paper continue to carry investment grade ratings of BBB/Baa2 and A-2/P-2, respectively. However, the ratings of Baa2 and P-2 were put under review with negative implications in January 1994 by Moody's Investors Service.
Fleming makes investments in and loans to its retail customers, primarily in conjunction with the establishment of long-term supply agreements. Such investments and loans were made at a lesser rate in 1993 than in 1992. At year end these investments and loans of $379 million, combined with total trade receivables of $232 million, were $611 million, an $83 million net decrease from 1992. After a $68 million sale of notes, net investments and loans decreased $33 million. In addition, net trade receivables decreased $50 million.
Cash flow from operations, one of the company's primary sources of liquidity, was $209 million in 1993, up $119 million from 1992. The increase is attributable to reduced trade receivables and inventories. Trade receivables in 1993 had a turnover rate of 45.3 times, up from 43.1 times the prior year. Inventory turns increased slightly to 13.1 times in 1993, compared to 12.8 times the year before.
Capital expenditures were $53 million in 1993 compared to $62 million in 1992. In both years these were for normal additions and replacements of warehouse and transportation equipment and leasehold improvements. Capital expenditures in 1994 are expected to be approximately $100 million, excluding any possible acquisitions. The increase is primarily attributable to expansion projects at several distribution centers to accommodate new customers, including Kmart.
The company's capital structure is as presented below. Amounts include current maturities of long-term debt and current obligations under capital leases.
Long-term debt and capital lease obligations decreased $8 million to $1.08 billion during 1993. Shareholders' equity at the end of 1993 remained $1.06 billion, unchanged from the prior year.
The year-end debt-to-capital ratio decreased to 50.4%, slightly below last year's ratio of 50.6%. The company's long-term target ratio is approximately 50%. Total capital was $2.14 billion at year end, essentially unchanged from the prior year.
The composite interest rate of total debt (excluding capital lease obligations) before the effect of interest rate swaps was 4.8% at year end, a reduction from 5.8% a year earlier, principally due to lower short-term rates and to a lesser extent the company's refinancing activities in the first half of 1993. Including the effect of interest rate swaps, the composite interest rate of debt was 4.9% and 5.9% at the end of 1993 and 1992, respectively.
The dividend payments of $1.20 per common share in 1993 and 1992 were 125% and 38% of primary net earnings per common share in 1993 and 1992, respectively. The payout ratio would have been 44% in 1993 before fourth quarter charges for facilities consolidation and restructuring and debt prepayment and 36% in 1992 before fourth quarter charges for debt prepayment. The company's policy toward cash dividends is to pay out approximately one-third of trailing 12 months earnings.
The company has adequate liquidity to provide for cash needs of approximately $83 million for the facilities consolidation and restructuring plan.
RESULTS OF OPERATIONS
NET SALES
Sales increased 1.5% in 1993 over 1992 compared to a .3% increase in 1992 over 1991. The 1993 sales increase is primarily due to a full year of Baker's in 1993, compared to 12 weeks in 1992, and the addition of the Garland facility in August. Also contributing to the increase were new customers, including Kmart. For 1993, the company again experienced food price deflation of .1% compared to deflation of 1% in 1992 and inflation of .8% in 1991. The company's outlook for 1994 is for a low level of food price inflation.
Tonnage of food product sold in 1993 was essentially the same as 1992. In 1992, tonnage of food product sold versus 1991 increased 1.6%, compared to a 6.1% increase achieved in 1991. The lower tonnage growth rates experienced in 1993 and 1992 reflect sluggish retail food industry sales and the lack of net expansion of the company's customer base as new business was roughly matched by business lost.
Sales for 1994 will be positively affected by the addition of the recently acquired retail stores in Florida, a full year of operation at the Garland facility and new business resulting in part from the supply agreement signed with Kmart. These sales gains will be offset by the expiration of a contract with Albertson's in Florida in early 1994 and declining business with Wal-Mart.
COMPONENTS OF EARNINGS
Components of earnings, before the early debt retirement in 1993 and 1992, and before the accounting change in 1991, expressed as a percent of sales are:
GROSS MARGIN
Gross margin as a percent of sales improved by 21 basis points, rising to 5.85% in 1993 compared to 5.64% in 1992. The increase in gross margin in 1993 was due to retail operations, which accounted for a 44 point favorable comparison. Retail food operations typically have a higher gross margin than wholesale operations. The margin increase is principally the effect of a full year of Baker's operations compared to only fourth quarter operations in 1992 and, to a lesser extent, the Florida operations acquired late in 1993. Gross margin comparisons for the first three quarters of 1994 will continue to benefit from the effects of the Florida operations. Product handling expense was nine basis points better. Higher product cost accounted for the rest of the difference.
The 18 basis point decrease in gross margin in 1992 compared to 1991 is due to several factors. The absence of company-operated retail stores sold in December 1991 and the presence of Baker's stores acquired at the beginning of the fourth quarter of 1992 caused 14 basis points of the decrease. Increased transportation expenses in 1992 contributed 10 basis points to the decrease in gross margin. This was due principally to the company's facilities consolidation program that resulted in trucks driving farther to deliver product.
Gross margin in the fourth quarter of 1992 was increased by $4.9 million, or four basis points (annual effect) from the favorable resolution of certain litigation. The LIFO method of inventory valuation increased gross margin by $9.3 million, an increase of $4.5 million or four basis points from 1991.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses in 1993 were 4.27% of sales, compared to 3.84% in 1992. Retail operations have higher selling expenses than wholesale operations, and this was the main reason for the $63.4 million increase. Reductions in other selling and administrative categories were more than offset by the increase in credit loss expense discussed below.
During the second quarter of 1993, selling and administrative expenses were affected by several nonrecurring items. The company recorded $11.2 million of pretax income resulting from cash received in the favorable resolution of a litigation matter and a $1.2 million accrual for expected settlements in other legal proceedings. Management estimated that the company's previously disclosed contingent liability for lease obligations exceeded previously established reserves by $2 million and recorded this amount as an expense. A $4.6 million gain from a real estate transaction was also recorded during the quarter.
Selling and administrative expenses in 1991 were increased by $15 million due to unusual charges related to litigation settlements and the write-down of a nonoperating asset. Comparing 1992 to 1991, selling and administrative expenses were reduced by $42.1 million. In addition to the unusual charges, the absence of selling expenses related to company-operated retail stores sold at the end of 1991 and additional selling expenses related to Baker's operation led to a net reduction of $25 million.
Also contributing to the positive result in 1992 compared to 1991 were the effects of cost controls and the benefits of certain completed facilities consolidations. Gains on the sales of customer notes receivable were reductions to selling and administrative expenses of $3.2 million, $2.5 million and $2.7 million in 1993, 1992 and 1991, respectively.
The company invests a significant amount of capital in its customers through various methods consisting of customary or extended credit terms for inventory purchases, secured loans with terms up to ten years, and minority equity investments in qualifying customers under the company's equity store program. In addition, the company may guarantee debt and lease obligations of certain customers. Usually, such capital investments are made in and guarantees are extended to customers with whom the company enjoys long-term supply agreements.
A significant portion of the company's net trade receivables and investments in customer notes receivable is related to multi-store, medium-sized retail chains in which the company holds an equity interest, referred to as business development ventures.
Selling and administrative expenses include credit loss expense of $52 million in 1993, $28.3 million in 1992, and $17.3 million in 1991. The increases in 1993 and 1992 are due to the combined effect on customers' financial conditions of sluggish retail sales, intensified retail competition and lack of food price inflation. Credit losses increased in the fourth quarter of 1993, due to adverse developments in certain of the company's equity store program investments.
Management monitors the status of credit and investment exposure and believes it has provided adequate allowances for potential losses. However, due to the nature of its customers and the highly competitive retail grocery environment, there is no assurance that future losses will not occur.
INTEREST EXPENSE
Interest expense in 1993 declined $3.1 million to $78 million. The improvement is due to lower short-term rates and refinancings in late 1992 and the first half of 1993. The company's borrowing strategy seeks to minimize interest expense while achieving a target range of exposure to floating interest rates and balancing its debt instruments across a range of maturities. The company enters into interest rate hedge agreements to manage interest costs and exposure to changing interest rates.
Interest expense in 1992 improved over 1991, dropping by $12.3 million to $81.1 million as a result of lower interest rates. As a percent of sales, interest expense was .60%, .63% and .73% in 1993, 1992 and 1991, respectively.
INTEREST INCOME
Interest income consists primarily of interest earned on notes receivable from customers. Also included is income generated from direct financing leases of retail stores and related equipment. In 1993, 1992 and 1991, interest income was $62.9 million, $59.5 million and $61.4 million, respectively. The increase in 1993 results from higher outstanding notes receivable and direct financing leases, partially offset by a slight decline in the interest rate. The decrease in 1992 compared to 1991 was due to lower interest rates prevailing in 1992 versus 1991, partially offset by the effect of higher average notes receivable balances.
EQUITY INVESTMENT RESULTS
Losses resulting from investments in certain customers accounted for under the equity method were $11.9 million in 1993 compared to $15.1 million in 1992 and $7.7 million in 1991. The improvement in 1993 is due to improved operating performance by certain of the company's business development ventures. Such ventures were responsible for equity method losses of $6 million in 1993, compared to $11 million in 1992 and $4.1 million in 1991. The increase from 1991 to 1992 resulted from poor performance by certain of the company's business development ventures. For 1994, the continued effects on customers of a lack of food price inflation and intense competition may result in higher losses. However, the benefits to the company outweigh these losses.
FACILITIES CONSOLIDATION AND RESTRUCTURING
On January 18, 1994, the company announced the details of a plan to consolidate facilities and restructure its organizational alignment and operations. Management's objective is to improve company performance by eliminating functions and operations that do not add economic value. The plan resulted from a thorough review, which began in October 1993, of all operations and business strategies. The 1993 fourth quarter results reflect a charge of $101.3 million resulting directly from facilities consolidation and restructuring. This is in addition to $6.5 million provided for a facilities consolidation in the second quarter. The plan consists of four categories: facilities consolidation, re-engineering, retail-related assets and elimination of regional operations. The actions contemplated by the plan will affect the company's food and general merchandise wholesaling operations as well as certain retailing assets. Cash requirements related to the charge are estimated to be $31 million in 1994 and $52 million in 1995 and thereafter. The cash requirements are expected to be provided by internally generated cash flows and through capital raised in the debt markets.
Facilities consolidations will result in the closure of five distribution centers, the relocation of two operations, consolidation of one center's administrative function, and completion of the 1991 facilities consolidation actions. Disclosures of specific facilities affected are made as closing actions commence. Approximately 400 associate positions are expected to be eliminated through facilities consolidations. The closures and relocations are anticipated to be completed primarily in 1994. Expected losses on disposition of the related property through sale or sublease are provided for through the estimated disposal dates.
The total provision for facilities consolidation is approximately $60 million. Detail components include: severance costs - $15 million, impaired property and equipment - $13 million, other related asset impairments and obligations - $11 million, lease and holding costs - $10 million, completion of actions contemplated in the 1991 restructure charge - $7 million and product handling and damage - $4 million. The actions are not expected to result in a material reduction of revenues. Increased transportation expense likely will result due to trucks driving farther to serve customers, although expected savings due to administrative expenses, working capital and productivity improvements will be far more significant.
The costs to complete activities contemplated in the 1991 restructure charge result principally from the deterioration of the California bay area commercial real estate market. Management's 1991 estimate of real estate values and demand has been adversely affected by the decline in sales values and increase in available competing properties. Increased costs in the consolidation were partially offset by a change in management's plans regarding the originally planned construction of a large, new facility in the Kansas City area. The revised plan calls for enlarging and utilizing existing facilities with a lower associated capital outlay.
It is not practical to separately estimate reduced depreciation and amortization, labor or operating costs. Management does anticipate that, in the aggregate, a positive annual pretax earnings impact of approximately $20 million will result once the facilities consolidation plan is fully implemented.
The re-engineering component of the charge provides for the cash costs associated with terminating an expected 1,500 associates displaced by the re-engineering plan, which will be implemented beginning in 1994. Annual payroll savings are projected to be approximately $40 million. The provision for re-engineering is approximately $25 million.
Certain retail supermarket locations leased or owned by the company have been deemed to no longer represent viable strategic sites for stores due to size, location or age. The charge includes the present value of lease payments on these locations, as well as holding costs until disposition, the write-off of capital lease assets recorded for certain of the locations, and the expected loss on a location closed in 1994. The charge consists principally of cash costs for lease payments and write-down of property. Annual savings from these actions are expected to be $1 million. The provision for retail-related assets is approximately $15 million.
Elimination of the company's regional operations in early 1994 will result in cash severance payments to approximately 100 associates, as well as transferring approximately 60 associates. Completion of the actions is expected in mid-1994. The annual savings are expected to be $4 million, principally in payroll costs. The provision for eliminating regions is approximately $8 million, including the write-down to estimated fair value of certain related assets.
The 1991 restructuring plan was initiated to reduce costs and increase future operating efficiency by consolidating several distribution centers into larger, higher volume and more efficient facilities. The charge of $67 million included severance benefits, lease terminations, asset disposals and the impairment of related assets. The plan has resulted in the closing or consolidation of four facilities whose operations were assimilated into other distribution centers. Cash expenditures related to the 1991 facilities consolidation charge were $12 million and $22 million in 1993 and 1992, respectively. It is not practical to specifically quantify the operating efficiencies and economies of scale that resulted from the 1991 consolidation actions. Additional estimated costs, related primarily to asset dispositions in process, were made in the 1993 charge as discussed.
EARLY DEBT RETIREMENT
In the fourth quarters of 1993 and 1992, the company recorded extraordinary losses for early retirement of debt. In 1993, the company retired $63 million of 9.5% debentures at a cost of $2.3 million, after tax benefits of $2.1 million. In 1992, the company recorded a charge of $5.9 million, after tax benefits of $3.7 million. The 1992 costs related to retiring the $172.5 million of convertible notes, $30 million of the 9.5% debentures and certain other debt. Lower future interest costs will result from the actions in both years, as well as the elimination of the dilutive effect associated with the potential issuance of common shares into which the notes were convertible.
TAXES ON INCOME
The effective income tax rates were 48%, 39% and 38.3% in 1993, 1992 and 1991, respectively. The 1993 rate was higher than previous years because of the significance of the facilities consolidation and restructuring charge. Pretax income was reduced, resulting in nondeductible items for tax purposes having a much larger impact on the effective rate. In addition, the federal rate increased by 1% because of the new tax law enacted in 1993. The combined state income tax rate increased by 1% in 1993 compared to 1992 for the same reasons as the federal rate. The 1992 effective rate was reduced because of favorable settlements of possible tax assessments recorded in prior years. The 1991 rate was lower primarily due to one-time benefits related to the difference in the financial and tax basis in an insurance subsidiary sold in 1991 and a lower combined state income tax rate. The expected 1994 effective rate is 44%.
OTHER
In 1993, the company reduced the discount rate assumption used to determine its obligations for defined benefit pension plans and postretirement benefits. The 1% decline will cause pension and postretirement benefit expense recognized in 1994 to increase by approximately $3 million compared to 1993.
Considering the various factors discussed above, management does not anticipate that 1994 earnings from core operations will be improved over those of 1993.
In December 1993, the company and numerous other defendants were named in two lawsuits filed in U. S. District Court in Miami. Because the litigation is in its preliminary stages, management has been unable to conclude that an adverse resolution is not reasonably likely or predict the potential liability, if any, to the company. However, management does not believe that an adverse outcome is likely that would materially affect the company's consolidated financial position.
Statement of Financial Accounting Standards No. 114 - Accounting by Creditors for Impairment of a Loan will be effective for the first quarter of the company's 1995 fiscal year. This statement requires that loans determined to be impaired be measured by the present value of expected future cash flows discounted at the loan's effective interest rate. Management has not yet determined the impact, if any, on the consolidated statements of earnings or financial position.
Statement of Financial Accounting Standards No. 112 - Employers' Accounting for Postemployment Benefits is not applicable to benefits offered to company associates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1. Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to pages 3 through 6 of the company's proxy statement dated March 14, 1994, in connection with its annual meeting of shareholders to be held on April 27, 1994. Information concerning Executive Officers of the company is included in Part I herein which is incorporated in this Part III by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to pages 12 through 20 of the company's proxy statement dated March 14, 1994, in connection with its annual meeting of shareholders to be held on April 27, 1994.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to pages 9 through 11 of the company's proxy statement dated March 14, 1994, in connection with its annual meeting of shareholders to be held on April 27, 1994.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN FORM 10-K (a) 1. Financial Statements:
o Consolidated Statements of Earnings - For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 30
o Consolidated Balance Sheets - At December 25, 1993, and December 26, 1992 31
o Consolidated Statements of Shareholders' Equity - For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 33
o Consolidated Statements of Cash Flows - For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 34
o Notes to Consolidated Financial Statements - For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 35
o Independent Auditors' Report 52
o Quarterly Financial Information (Unaudited) 53
(a) 2. Financial Statement Schedules:
o Independent Auditors' Report on Schedules 52
o Schedule V - Property and Equipment 55
o Schedule VI - Accumulated Depreciation and Amortization of Property and Equipment 56
o Schedule VIII - Valuation and Qualifying Accounts 57
All other financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a), (c) 3. Exhibits: PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO
3.1 Certificate of Incorporation Exhibit 3.1 to Report on Form 10-K for year ended December 28, 1991.
3.2 By-Laws Exhibit 28.2 to Report on Form 8-K dated August 22, 1989.
4.1 $400,000,000 Credit Agreement Exhibit 4.1 to dated as of October 21, 1993, among Report on Form 10-Q the Registrant, the banks listed for the quarter ended in the Agreement and Morgan October 2, 1993. Guaranty Trust Company of New York, as Agent
4.2 Amendment No. 1, dated January 12, 58 1994, to $400,000,000 Credit Agreement
4.3 $200,000,000 Credit Agreement dated Exhibit 4.2 to Report as of October 21, 1993, among the on Form 10-Q for the Registrant, the banks listed in the quarter ended Agreement and Morgan Guaranty Trust October 2, 1993. Company of New York, as Agent
4.4 Amendment No. 1, dated January 17, 63 1994, to $200,000,000 Credit Agreement
4.5 Agreement to furnish copies of 69 other long-term debt instruments
4.6 Rights Agreement dated as of Exhibit 28 to July 7, 1986, between the Report on Form Registrant and Morgan 8-K dated June 24, Guaranty Trust Company of New York 1986.
4.7 Amendment to Rights Agreement Exhibit 28.1 to dated as of August 22, 1989, Report on Form 8-K between the Registrant dated August 22, and First Chicago Trust Company 1989. of New York, as Rights Agent
4.8 Indenture dated as of December 1, Exhibit 4 to 1989, between the Registrant and Registration Morgan Guaranty Trust Company of Statement New York, as trustee No. 33-29633.
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO
10.1 Investment Advisor Agreement Exhibit 10.17 to between the Registrant and The Form 10-K for year First Boston Corporation dated ended December 30, November 27, 1989 1989.
10.2 Investment Advisor Agreement Exhibit 10.18 to between the Registrant and Merrill Form 10-K for year Lynch, Pierce, Fenner & Smith ended December 30, Incorporated dated December 5, 1989 1989.
10.3 Agreement and Plan of Exhibit 2.1 to Reorganization by and among Registration Fleming Companies, Inc., Statement No. Cornhusker Acquisition and 33-51312. Baker's Supermarkets, Inc. dated August 25, 1992
10.4 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.
10.5* 1985 Stock Option Plan Exhibit 28(a) to Registration Statement No. 2-98602.
10.6* Form of Award Agreement for 70 1985 Stock Option Plan (1994)
10.7* 1990 Stock Option Plan Exhibit 28.2 to Registration Statement No. 33-36586.
10.8* Form of Award Agreement for 74 1990 Stock Option Plan (1994)
10.9* Fleming Management Incentive Exhibit 10.4 to Compensation Plan Registration Statement No. 33-51312.
10.10* Directors' Deferred Exhibit 10.5 to Compensation Plan Registration Statement No. 33-51312.
10.11* Supplemental Retirement Plan Exhibit 10.7 to Registration Statement No. 33-51312.
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO
10.12* Godfrey Company 1984 Non- Appendix II to qualified Stock Option Plan Registration Statement No. 33-18867.
10.13* Form of Severance Agreement Exhibit 10.14 to between the Registrant and Form 10-K for year certain of its officers ended December 31, 1988.
10.14* Fleming Companies, Inc. 1990 Exhibit B to Stock Incentive Plan dated Proxy Statement February 20, 1990 for year ended December 30, 1989.
10.15* Phase I of Fleming Companies, Inc. Exhibit 10.16 to Stock Incentive Plan and Form of Form 10-K for year Awards Agreement ended December 30, 1989.
10.16* Phase II of Fleming Companies, Inc. Exhibit 10.12 to Form Stock Incentive Plan 10-K for year ended December 26, 1992.
10.17* Phase III of Fleming Companies, Inc. 80 Stock Incentive Plan
10.18* Fleming Companies, Inc. Directors' Exhibit 10.14 to Stock Equivalent Plan Form 10-K for year ended December 28, 1991.
10.19* Agreement between the Registrant 84 and E. Dean Werries
10.20* Agreement between the Registrant 85 and James E. Stuard
10.21* Agreement between the Registrant 87 Robert F. Harris
11 Earnings per share computation 93
12 Computation of ratio of earnings to 97 fixed charges
21 Subsidiaries of the Registrant 98
23 Consent of Deloitte & Touche 99
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO
24 Power of attorney instruments signed 100 by certain directors and officers of the Registrant appointing R. Randolph Devening, Vice Chairman and Chief Financial Officer, as attorney-in-fact and agent to sign the Annual Report on Form 10-K on behalf of said directors and officers
99 Company Undertaking 102
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
Form 8-K filed December 16, 1993 disclosed that the company's fourth quarter and full year 1993 results will be below expectations. Reasons for the less than expected results include an increase in the provision for credit losses, a significant LIFO charge and weak sales.
Form 8-K filed January 20, 1994 disclosed the press release made by the company on January 18, 1994 announcing details of its planned restructuring. Registrant recorded a pre-tax charge of approximately $101 million in the fourth quarter of 1993 resulting from the restructuring.
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 24th day of March 1994.
FLEMING COMPANIES, INC. /S/ ROBERT E. STAUTH ---------------------------------------- By: Robert E. Stauth (President and Chief Executive Officer)
/S/ R. RANDOLPH DEVENING ---------------------------------------- By: R. Randolph Devening (Vice Chairman and Chief Financial Officer)
/S/ DONALD N. EYLER --------------------------------------------- By: Donald N. Eyler (Senior Vice President and Controller) (Chief 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 25th day of March 1994.
/S/ E. DEAN WERRIES * /S/ ROBERT E. STAUTH * /S/ R. RANDOLPH DEVENING * - ------------------------- ------------------------- -------------------------- E. Dean Werries Robert E. Stauth R. Randolph Devening (Chairman of the Board) (Director) (Director)
/S/ ARCHIE R. DYKES * /S/ CAROL B. HALLETT * /S/ JAMES G. HARLOW, JR. * - ------------------------- ------------------------- -------------------------- Archie R. Dykes Carol B. Hallett James G. Harlow, Jr. (Director) (Director) (Director)
/S/ R. D. HARRISON * /S/ LAWRENCE M. JONES * /S/ EDWARD C. JOULLIAN III* - ------------------------- ------------------------- --------------------------- R. D. Harrison Lawrence M. Jones Edward C. Joullian III (Director) (Director) (Director)
/S/ HOWARD H. LEACH * /S/ JOHN A. MCMILLAN * /S/ GUY O. OSBORN * - ------------------------- -------------------------- ------------------------- Howard H. Leach John A. McMillan Guy O. Osborn (Director) (Director) (Director)
/S/ R. RANDOLPH DEVENING - --------------------------- *By: R. Randolph Devening (Attorney-in-Fact)
*A Power of Attorney authorizing R. Randolph Devening 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 25.
CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 (In thousands, except per share amounts)
Sales to customers accounted for under the equity method were approximately $1.6 billion, $1.3 billion and $1 billion in 1993, 1992 and 1991, respectively.
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS At December 25, 1993, and December 26, 1992 (In thousands, execept per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
Receivables include $48.3 million and $48.9 million in 1993 and 1992, respectively, due from customers accounted for under the equity method.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 (In thousands)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 25, 1993, December 26, 1992, and December 28, 1991 (In thousands)
See notes to consolidated financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR: The company's fiscal year ends on the last Saturday in December.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include all material subsidiaries. Material intercompany items have been eliminated. The equity method of accounting is used for investments in certain customers.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of liquid investments readily convertible to cash with a maturity of three months or less. The carrying amount for cash equivalents is a reasonable estimate of fair value.
RECEIVABLES: Receivables include the current portion of customer notes receivable of $69.9 million (1993) and $67.8 million (1992). Receivables are shown net of allowance for credit losses of $44.3 million (1993) and $25.3 million (1992). The company extends credit to its retail customers located over a broad geographic base. Regional concentrations of credit risk are limited.
INVENTORIES: Inventories are valued at the lower of cost or market. Most grocery and certain perishable inventories are valued on a last-in, first-out (LIFO) method. Other inventories are valued on a first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost or, for leased assets under capital leases, at the present value of minimum lease payments. Depreciation, as well as amortization of assets under capital leases, are based on the estimated useful asset lives using the straight-line method.
GOODWILL: The excess of purchase price over the value of net assets of businesses acquired is amortized on the straight-line method over periods not exceeding 40 years. Goodwill is shown net of accumulated amortization of $74.2 million (1993) and $60 million (1992). Goodwill is written down if it is probable that estimated operating income generated by the related assets will be less than the carrying amount.
ACCOUNTS PAYABLE: Accounts payable include $8.8 million (1993) and $11.2 million (1992) of issued checks that have not yet cleared the company's bank accounts, less deposits in transit.
FINANCIAL INSTRUMENTS: Interest rate hedge transactions and other financial instruments are utilized to manage interest rate exposure. The difference between amounts to be paid or received is accrued and recognized over the life of the contracts.
TAXES ON INCOME: Deferred income taxes arise from temporary differences between financial and tax bases of certain assets and liabilities.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: 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.
FOREIGN CURRENCY TRANSLATION: Net exchange gains or losses resulting from the translation of assets and liabilities of an international investment are included in shareholders' equity.
NET EARNINGS PER COMMON SHARE: Primary earnings per common share are computed based on net earnings, less dividends on preferred stock in 1991, divided by the weighted average common shares outstanding. The impact of common stock options on primary earnings per common share is not materially dilutive. Fully diluted earnings per common share assume conversion of the convertible subordinated notes that were redeemed during 1992.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year amounts to conform to current year classifications.
INVENTORIES
Inventories are valued as follows:
Current replacement cost of LIFO inventories were greater than the carrying amounts by approximately $12.5 million at December 25, 1993, and $19.3 million at December 26, 1992.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
The company extends long-term credit to certain retail customers it serves. Loans are primarily collateralized by inventory and fixtures. Investments and notes receivable are shown net of allowance for credit losses of $18.3 million and $18.2 million in 1993 and 1992, respectively. Interest rates are above prime with terms up to 10 years. The carrying amount of notes receivable approximates fair value because of the variable interest rates charged on the notes.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 114 - Accounting by Creditors for Impairment of a Loan. This new statement requires that loans determined to be impaired be measured by the present value of expected future cash flows discounted at the loan's effective interest rate. The new standard is effective for the first quarter of the company's 1995 fiscal year. The company has not yet determined the impact, if any, on the consolidated statements of earnings or financial position.
The company has sold certain notes receivable at face value with limited recourse. The outstanding balance at year end 1993 on all notes sold is $155.4 million, of which the company is contingently liable for $31.3 million should all the notes become uncollectible. The company guarantees bank debt of $35 million for a customer.
LONG-TERM DEBT
Long-term debt consists of the following:
Aggregate maturities of long-term debt for the next five years are as follows: 1994-$61.3 million; 1995-$140.3 million; 1996-$69 million; 1997-$13.8 million and 1998-$27.8 million.
In 1993 and 1992, the company recorded extraordinary losses for early retirement of debt. In 1993, the company retired $63 million of the 9.5% debentures. The extraordinary loss was $2.3 million, after income tax benefits of $2.1 million, or $.06 per share. The funding source for the early redemption was the sale of notes receivable. In 1992, the company retired the $172.5 million of convertible subordinated notes, $30 million of the 9.5% debentures and certain other debt. The extraordinary loss was $5.9 million, after income tax benefits of $3.7 million, or $.15 per share. Funding sources related to the 1992 early retirement were bank lines, medium-term notes, sale of notes receivable and commercial paper.
The company has two commercial paper programs supported by committed $400 million and $200 million revolving credit agreements with a group of banks. Currently, the company limits
the amount of commercial paper issued at any time plus the amount of borrowing under uncommitted credit lines to the unused credit available through the committed credit agreements. The $400 million credit agreement matures in October 1997. The $200 million credit agreement matures in October 1994, but the company intends to renew the agreement prior to maturity. At year end, the company had no borrowings under the agreements which carry combined annual facility and commitment fees of .25% and .15% for the $400 million agreement and the $200 million agreement, respectively. The interest rate is based on various money market rates selected by the company at the time of borrowing.
The credit agreements contain various covenants, including restrictions on additional indebtedness, payment of cash dividends and acquisition of the company's common stock. None of these covenants negatively impact the company's liquidity or capital resources at this time. Reinvested earnings of approximately $92 million were available at year end for cash dividends and acquisition of the company's stock. The agreements contain a provision that, in the event of a defined change of control, the credit agreements may be terminated.
The company has registered $565 million in medium-term notes. Of this, the remaining $289.6 million may be issued from time to time, at fixed or floating interest rates, as determined at the time of issuance.
The unsecured term bank loans have original maturities of three years and bear interest at floating rates. Unsecured credit lines have original maturities of generally less than one year and bear interest at floating rates. The loans contain essentially the same covenants as the revolving credit agreements and are prepayable without penalty.
The carrying value of assets collateralized under mortgaged real estate notes and other debt was approximately $9.4 million and $123 million at year end 1993 and 1992, respectively.
Components of interest expense are as follows:
The company's employee stock ownership plan (ESOP) allows substantially all associates to participate. The ESOP purchased 640,000 shares of common stock from the company at $31.25 per share, resulting in proceeds of $20 million. The ESOP borrowed the money from a bank. The company guaranteed the bank loan. The loan balance is presented in long-term debt with an offset as a reduction of shareholders' equity. The ESOP will repay the loan with proceeds from company contributions.
The company makes contributions based on fixed debt service requirements of the ESOP loan. The ESOP used $.6 million of common stock dividends for debt service in each of 1993, 1992 and 1991. During 1993, 1992 and 1991, the company recognized $1.1 million, $.9 million and $.8 million, respectively, in compensation expense. Interest expense of $.5 million, $.7 million and $1.3 million was recognized at average rates of 3.7%, 4.4% and 7.7% in 1993, 1992 and 1991, respectively.
The company enters into interest rate hedge agreements to manage interest costs and exposure to changing interest rates. At year end 1993 and 1992, agreements were in place that effectively fixed rates on $70 million and $270 million, respectively, of the company's floating rate debt. Additionally, for both years, $60 million of agreements convert fixed rate debt to floating and a $100 million transaction hedges the company's risk of fluctuation between prime rate and LIBOR. The maturities for such agreements range from 1995 to 1998. The counterparties to these agreements are major national and international financial institutions.
The fair value of long-term debt as of year end 1993 and 1992 was determined using valuation techniques that considered cash flows discounted at current market rates and management's best estimate for instruments without quoted market prices. At year end 1993 and 1992, the fair value of debt exceeded the carrying amount by $13.8 million and $16.5 million, respectively. For interest rate swap agreements, the fair value was estimated using termination cash values. At year end 1993, swap agreements had no fair value. At year end 1992, swap agreements had a fair value of $1.7 million. The company does not have any financial basis in the hedge agreements other than accrued interest payable or receivable.
LEASE AGREEMENTS
CAPITAL AND OPERATING LEASES: The company leases certain distribution facilities with terms generally ranging from 20 to 30 years, while lease terms for other operating facilities range from 1 to 15 years. The leases normally provide for minimum annual rentals plus executory costs and usually include provisions for one to five renewal options of five years.
The company leases company-operated retail store facilities with terms generally ranging from 3 to 20 years. These agreements normally provide for contingent rentals based on sales performance in excess of specified minimums. The leases usually include provisions for one to three renewal options of two to five years. Certain equipment is leased under agreements ranging from 2 to 8 years with no renewal options.
Accumulated amortization related to leased assets under capital leases was $41.7 million and $59.5 million at year end 1993 and 1992, respectively.
Future minimum lease payment obligations for leased assets under capital leases as of year end 1993 are set forth below:
Future minimum lease payments required at year end 1993 under operating leases that have initial noncancelable lease terms exceeding one year are presented in the following table:
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:
At year end 1993, the company is contingently liable for future minimum rental commitments of $335 million.
DIRECT FINANCING LEASES: The company leases retail store facilities for sublease to customers with terms generally ranging from 5 to 25 years. Most leases provide for a contingent rental based on sales performance in excess of specified minimums. Sublease rentals are generally higher than the rental paid. The leases and subleases usually contain provisions for one to four renewal options of two to five years.
The following table shows the future minimum rentals to be received under direct financing leases and future minimum lease payment obligations under capital leases in effect at December 25, 1993:
Contingent rental income and contingent rental expense were not material in 1993, 1992 or 1991.
FACILITIES CONSOLIDATION AND RESTRUCTURING
The results in 1993 include a charge of $107.8 million for additional facilities consolidations, re-engineering, impairment of retail-related assets and elimination of regional operations. Facilities consolidations will result in the closure of five distribution centers, the relocation of two operations, the consolidation of a center's administrative function and completion of the 1991 facilities consolidation actions. The related charge provides for severance costs, impaired property and equipment, product handling and damage, and impaired other assets. The re-engineering component of the charge provides for severance costs of terminating associates displaced by the re-engineering plan. Impairment of retail-related assets provides for the present value of lease payments and assets associated with certain retail supermarket locations leased or owned by the company. These sites are no longer strategically viable due to size, location or age. Elimination of regional operations in early 1994 will result in cash severance payments to affected associates.
The 1991 restructuring plan was initiated to reduce costs and increase operating efficiency by consolidating four distribution centers into larger, higher volume and more efficient facilities. The $67 million charge included associate severance, lease terminations and impairment of related assets. The plan has resulted in the closing or consolidation of four facilities whose operations were assimilated into other distribution centers. Additional estimated costs, related primarily to asset dispositions in process, were made in the 1993 charge.
TAXES ON INCOME
Components of taxes on income (tax benefit) are as follows:
Deferred tax expense (benefit) relating to temporary differences includes the following components:
Temporary differences that give rise to deferred tax assets and liabilities as of December 25, 1993, are as follows:
The effect of the increase in the federal statutory rate to 35% on deferred tax assets and liabilities was immaterial. The
valuation allowance contains $4.5 million of acquired loss carryforwards that, if utilized, will be reversed to goodwill in future years.
The effective income tax rates are different from the statutory federal income tax rates for the following reasons:
SHAREHOLDER'S EQUITY
The company offers a Dividend Reinvestment and Stock Purchase Plan which offers shareholders the opportunity to automatically reinvest their dividends in common stock at a 5% discount from market value. Shareholders also may purchase shares at market value by making cash payments up to $5,000 per calendar quarter. Shareholders reinvested dividends in 174,000 and 157,000 new shares in 1993 and 1992, respectively. Additional shares totaling 9,000 and 13,000 in 1993 and 1992, respectively, were purchased at market value by shareholders.
The company has a shareholder rights plan designed to protect shareholders should the company become the target of coercive and unfair takeover tactics. Shareholders have one right for each share of stock held. When exercisable, each right entitles shareholders to buy one share of common stock at a specific price in the event of certain defined actions that constitute a change of control. The rights expire on July 6, 1996.
The company has severance agreements with certain management associates. The agreements generally provide two years' salary to these associates if the associate's employment terminates within two years after a change of control. In the event of a change of control, a supplemental trust will be funded to provide these salary obligations.
INCENTIVE STOCK PLANS
The company's stock option plans allow the granting of nonqualified stock options and incentive stock options, with or without stock appreciation rights (SARs), to key associates.
In 1993 and 1992, options with SARs were exercisable for 35,000 and 46,000 shares, respectively. Options without SARs were exercisable for 841,000 shares in 1993 and 805,000 shares in 1992. At year end 1993, there were 1.5 million shares available for grant under the stock option plans.
Stock option transactions are as follows:
The company has a stock incentive plan that allows awards to key associates of up to 400,000 restricted shares of common stock and phantom stock units. The company has issued 133,000 restricted common shares, net of 10,000 shares forfeited in 1993. These shares were recorded at the market value when issued, $4.4 million, and are amortized to expense as earned. The unamortized portion, $1.8 million and $2.1 million in 1993 and 1992, respectively, is netted against capital in excess of par value within shareholders' equity. 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.
ASSOCIATE RETIREMENT PLANS
The company sponsors retirement and profit sharing plans for substantially all nonunion and some union associates. The company also has nonqualified, unfunded supplemental retirement plans for selected associates. These plans comprise the company's defined benefit pension plans.
Contributory profit sharing plans maintained by the company are for associates who meet certain types of employment and length of service requirements. Company contributions under these defined contribution plans are made at the discretion of the board of directors. Expenses for these plans were $2 million, $1.1 million and $.8 million in 1993, 1992 and 1991, respectively.
Benefit calculations for the company's defined benefit pension plans are primarily a function of years of service and final average earnings at the time of retirement. Final average earnings are the average of the highest five years of compensation during the last 10 years of employment. The company funds these plans by contributing the actuarially computed amounts that meet funding requirements.
The following table sets forth the company's defined benefit pension plans' funded status and the amounts recognized in the statements of earnings. Substantially all the plans' assets are invested in listed stocks, short-term investments and bonds. The significant actuarial assumptions used in the calculation of funded status for 1993 and 1992 are: discount rate - 7.5% and 8.5%, respectively; compensation increases - 4% and 5%, respectively; and return on assets - 9.5% and 10%, respectively.
Net pension expense includes the following components:
Certain associates have pension and health care benefits provided under collectively bargained multiemployer agreements. Expenses for these benefits were $44 million, $40 million and $37.1 million for 1993, 1992 and 1991, respectively.
ASSOCIATE POSTRETIREMENT HEALTH CARE BENEFITS
In 1991, the company adopted SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions. The company elected to recognize immediately the accumulated postretirement benefit obligation, resulting in a charge to net earnings of $9.3 million. The effect of the change on 1991 net earnings, excluding the cumulative effect upon adoption, was not material.
The company offers a comprehensive major medical plan to eligible retired associates who meet certain age and years of service requirements. This unfunded defined benefit plan generally provides medical benefits until Medicare insurance commences.
Components of postretirement benefits expense are as follows:
The composition of the accumulated postretirement benefit obligation (APBO) and the amounts recognized in the balance sheets are presented below.
During 1993, a postretirement benefit obligation was settled. No additional benefit payments will be made for this terminated obligation.
The weighted average discount rate used in determining the APBO was 7.5% and 9.5% for 1993 and 1992, respectively. For measurement purposes in 1993 and 1992, a 14% and 15%, respectively, annual rate of increase in the per capita cost of covered medical care benefits was assumed. In 1993, the rate was assumed to decrease to 8% by 2000, then to 7.5% in 2001 and thereafter. In 1992, the rate was assumed to decrease to 8% by 1999 and remain at 8% thereafter. If the assumed health care cost increased by 1% for each future year, the current cost and the APBO would have increased by 3% to 5% for all periods presented.
The company also provides other benefits for certain inactive associates. Expenses related to these benefits are immaterial.
SUPPLEMENTAL CASH FLOWS INFORMATION
In 1993, the company acquired the assets or common stock of three businesses. In August, the company purchased distribution center assets located in Garland, Texas. In September and November, the company purchased certain assets and the common stock, respectively, of two supermarket operators in southern Florida. The acquisitions were accounted for as purchases. The results of these entities are not material to the company. Cash paid for the acquisitions, net of cash acquired, was $51.1 million. The fair value of assets acquired was $111.1 million, with liabilities assumed or created of $9 million.
In 1992, the company acquired the common stock of Baker's Supermarkets, the operator of 10 supermarkets located in Omaha, Neb. The acquisition was accounted for as a purchase. The results of Baker's operations are not material to the company. The company issued 1,073,512 shares of common stock at a price of $31.79 per share, or $34.1 million. The fair value of assets acquired was $88.7 million, with liabilities assumed or created of $39.8 million. Cash paid for the acquisition, net of cash acquired, was $8.2 million.
LITIGATION AND CONTINGENCIES
In December 1993, the company and numerous other defendants were named in two suits filed in U.S. District Court in Miami. The plaintiffs allege liability on the part of the company as a consequence of an alleged fraudulent scheme conducted by Premium Sales Corporation and others in which unspecified but large losses in the Premium-related entities occurred to the detriment of a purported class of investors which has brought one of the suits. The other suit is by the receiver/trustee of the estates of Premium and certain of its affiliated entities.
Because the litigation is in its preliminary stages, management has been unable to conclude that an adverse resolution is not reasonably likely and its ultimate outcome cannot presently be determined. Accordingly, management cannot predict the potential liability, if any, to the company. However, the company has begun an investigation and, based on available information, management does not believe that an adverse outcome is likely that would materially affect the company's consolidated financial position. The company intends to vigorously defend against the suits.
The company's facilities are subject to various laws and regulations regarding the discharge of materials into the environment. In conformity with these provisions, the company has a comprehensive program for testing and removal, replacement or repair of its underground fuel storage tanks and for site remediation where necessary. The company has established reserves that it believes will be sufficient to satisfy anticipated costs of all known remediation requirements. In
addition, the company is addressing several other environmental cleanup matters involving its properties, all of which the company believes are immaterial.
From time to time the company is named as a potentially responsible party, with others, with respect to EPA-designated superfund sites. Under current law, the company's liability for remediation of such sites may be joint and several with other responsible parties, regardless of the extent of the company's use of the sites in relation to other users. However, the company believes that, to the extent it is ultimately determined to be liable for hazardous waste deposited at any site, such liability will not result in a material adverse effect on its consolidated financial position or results of operations.
The company is committed to maintaining the environment and protecting natural resources and to achieving full compliance with all applicable laws and regulations.
The company is a party to various other litigation, possible tax assessments and other matters, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the company expects that the outcome of these matters will not result in a material adverse effect on its consolidated financial position or results of operations.
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 25, 1993 and December 26, 1992, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 25, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 financial position of Fleming Companies, Inc. and subsidiaries as of December 25, 1993 and December 26, 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 25, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules when considered in relation to the basic consolidated statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche
Oklahoma City, Oklahoma February 10, 1994
QUARTERLY FINANCIAL INFORMATION (In thousands, except per share amounts) (Unaudited)
The first quarter of both years consists of 16 weeks, all other quarters are 12 weeks.
The second quarter of 1993 includes $11.2 million of pretax income resulting from the favorable resolution of a litigation matter and a $1.2 million accrual for charges in other legal proceedings. Also included is a $2 million charge for an increase to previously established reserves related to the company's contingent liability for lease obligations. The company also recorded a $4.6 million gain from a real estate transaction during the second quarter of 1993.
The effective tax rate was increased in the third quarter of 1993 due to the new tax law enacted in August 1993.
See discussion of facilities consolidation and restructuring charges in the notes to consolidated financial statements.
QUARTERLY FINANCIAL INFORMATION (In thousands, except per share amounts) (Unaudited)
The fourth quarter of 1992 reflects $4.9 million of income related to litigation settlement.
SCHEDULE V ---------- FLEMING COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES -----------------------------
SCHEDULE V - PROPERTY AND EQUIPMENT -----------------------------------
YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992, AND DECEMBER 28, 1991 ----------------------------------------
(In thousands)
In general, 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; mechanized warehouse equipment - 15 years; and data processing equipment - 5 to 7 years.
Impairments in 1993 includes $16.7 million of property writedown recognized through facilities consolidation and restructuring charge.
SCHEDULE VI ----------- FLEMING COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES -----------------------------
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT ------------------------------------------
YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991 ---------------------------------------
(In thousands)
Impairments in 1993 includes $1.3 million of accumulated amortization written off through facilities consolidation and restructuring charge.
SCHEDULE VIII ------------- FLEMING COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES -----------------------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS -------------------------------------------------
YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992, AND DECEMBER 28, 1991 ----------------------------------------
(In thousands)