Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Fleming Companies, Inc. (hereinafter referred to as "Fleming," the "registrant" or the "company") was incorporated in Kansas in 1915 and in 1981 was reincorporated as an Oklahoma corporation. Fleming is engaged primarily in the food marketing and distribution industry with both wholesale and retail operations. In July 1994, pursuant to a stock purchase agreement between the company and Franz Haniel & Cie. GmbH, Fleming acquired all of the outstanding stock of Haniel Corporation ("Haniel"). Haniel, its sole direct subsidiary, Scrivner, Inc., and Scrivner, Inc.'s subsidiaries are collectively referred to herein as "Scrivner." Fleming paid $388 million in cash and refinanced substantially all of Scrivner's existing indebtedness (approximately $670 million in aggregate principal and premium). In connection with the acquisition, Fleming refinanced approximately $340 million in aggregate principal amount of its own indebtedness.
The company currently serves as the principal source of supply for approximately 10,000 retail food stores, including approximately 3,700 supermarkets. Company supplied supermarkets have a total area of approximately 100 million square feet. The company serves food stores of various sizes operating in a wide variety of formats, including conventional full-service stores, supercenters, price impact stores (including warehouse stores), combination stores (which typically carry a higher proportion of non-food items) and convenience stores. These food stores are predominantly independent stores, many of which operate and advertise under a common name to promote greater consumer recognition. Fleming's retail customers also include national and regional corporate chains. With customers in 43 states and several international markets, the company services a geographically diverse area.
The company's food distribution operations offer a wide variety of national brand and private label products, including groceries, meat, dairy and delicatessen products, frozen foods, produce, bakery goods and a variety of general merchandise and related items. In addition, Fleming offers a wide range of support services to its customers to help them compete more effectively with other food retailers in their respective market areas.
In addition, the company has a significant presence in food retailing, owning and operating 350 retail food stores, including 270 supermarkets with an aggregate of approximately 9.5 million square feet. Company-owned stores operate under a number of names and vary in format from super warehouse stores and conventional supermarkets to convenience stores.
The company operates in two segments: food distribution and retail store operations. Segment information as required by Statement of Financial Accounting Standards No. 14 is presented in Item 8. Financial Statements and Supplementary Data.
THE CONSOLIDATION, REORGANIZATION AND RE-ENGINEERING PLAN
Fleming has determined that its performance during the past several years, along with the performance of a number of its retail customers, has been unfavorably affected by a number of changes taking place within the food marketing and distribution industry, which has become increasingly competitive in an environment of relatively static over-all demand. Alternative format food stores (such as warehouse stores and supercenters) have gained retail food market share at the expense of traditional supermarket operators, including independent grocers, many of whom are customers of the company. Vendors, seeking to ensure that more of their promotional dollars are used by retailers to increase sales volume, increasingly direct promotional dollars to large self-distributing chains. The company believes that these changes have led to reduced margins and lower profitability among many of its customers and at the company itself. Having identified these market forces, Fleming initiated specific actions to respond to, and help its retail customers respond to, changes in the marketplace.
In January 1994, Fleming announced the details of a plan to improve operating performance by consolidating facilities, eliminating regional operations and re-engineering the distribution and pricing of goods and services. The company believes consolidation, reorganization and re-engineering will result in significant cost savings through lower product handling expenses, lower selling and administrative expenses and reduced staffing of retailer services (or increased income from retailers to offset the cost of retailer services). Estimated pre-tax cost savings are expected to grow to at least $65 million per year beginning in 1997 after the plan has been fully implemented. The company believes these expense savings and income offsets will allow it to deliver goods and services to its customers at a lower all-in cost, while increasing the company's profitability. However, unforeseen events or circumstances could cause the company to alter planned work force reductions or facilities consolidations, thereby delaying or reducing expected cost savings.
CONSOLIDATION. In order to improve operating efficiencies, the company closed four distribution centers, with the closing of one more facility to be announced. The business formerly conducted through these closed distribution centers has been transferred to certain other company facilities. During 1994, approximately 450 associate positions were eliminated through facilities consolidation.
OPERATIONAL REORGANIZATION. Historically, Fleming's operations were organized around geographical divisions each of which functioned as a separate business unit. Each division contained sales, merchandising, human resources, distribution, procurement, accounting, store development and management information functions, and provided services to a number of retail stores of various formats located within a certain geographical area. As the first step in its organizational realignment, Fleming closed its regional administrative offices. This resulted in the elimination of approximately 100 associate positions. Staff functions previously performed at the regional offices were moved to corporate headquarters, moved into the divisions or eliminated.
RE-ENGINEERING. Fleming commissioned an internal management task force to re-engineer Fleming's business processes at both the divisional and corporate level. The task force made specific re-engineering recommendations, which were approved by Fleming's Board of Directors, to enhance value-added services and to eliminate non-value-added services.
The company is reorganizing itself around four core business units: customer management, retailer services, category marketing and product supply. Customer management, retailer services, and category marketing represent the marketing functions of the company. Product supply represents the procurement and distribution functions of the company. A fifth unit, support services, will provide a variety of administrative support services to all of the Company's operations.
Through customer management, the company will manage its relationships with customers primarily on the basis of customer type instead of on the basis of geography. This will enable the company to be more effective in serving its diverse customer base. Through retailer services, the company will offer retailers the same services it currently offers, except that these services will be offered on a fee basis to those retailers choosing to purchase such services. In the past, Fleming has offered many services without a direct charge but has indirectly charged all customers for such services. Through category marketing, the company will more efficiently manage its relationships with vendors, manufacturers and other suppliers, working to obtain the best possible promotional benefits offered by suppliers and will pass through directly to retailers 100% of those benefits related to grocery, frozen foods and dairy products. Through product supply, which will be comprised of all food distribution centers and operations, the company will work to provide retailers with the lowest possible "landed" cost of goods (i.e., the total of cost of product and all related charges plus the company's distribution fee).
A new flexible marketing plan for grocery, frozen foods and dairy products will be introduced throughout the company's market areas. The flexible marketing plan will be based on a new pricing policy whereby retailers will pay the company's actual cost of acquiring goods, receiving 100% of available promotional benefits from the vendor arranged by the company, including those derived from forward buying. Customers will pay all costs incurred by the company for transportation (which currently are often subsidized by the company). Instead of paying a basic distribution fee, customers will pay handling and storage charges, which will be higher than the prior distribution fee. Additionally, retail customers will pay for all other retailer services purchased.
The company estimates that the re-engineering process will be substantially completed by the end of 1996. Re-engineering is currently being implemented at certain of the company's operations in the western United States and should be implemented throughout the remainder of the company's operations over the course of 1995 and 1996.
PRODUCTS
The company supplies its customers with a full line of national brand products as well as an extensive range of private and controlled label products, perishables and non-food items. Controlled labels are those which the company controls and private labels are those which may be offered only in stores operating under specific banners, which may or may not be under the company's control. Among the controlled labels offered by the company are TV-R-, Hyde Park-R-, Marquee-R-, Bonnie Hubbard-R-, Montco-R-, Best Yet-R- and Rainbow-R-. Among the private labels handled by the company are IGA-R-, Piggly Wiggly-R-, and Sentry-R-. Controlled label and private label products offer both the wholesaler and the retailer opportunities for higher margins as the costs of national advertising campaigns can be eliminated. The controlled label program is augmented with marketing and promotional support programs developed by the company.
Certain categories of perishables also offer both the wholesaler and the retailer opportunities for improved margins as consumers are generally willing to pay relatively higher prices for produce and bakery goods and high quality frozen foods. Furthermore, retailers are increasingly competing for business through an emphasis on perishables and private label products.
SERVICES TO CUSTOMERS
The company offers value-added services to its customers. These services include, among others, merchandising and marketing assistance, in-house advertising, consumer education programs, retail electronic services and employee training. See also "-- Capital Invested in Customers."
In addition, the company provides its customers with assistance in the development and expansion of retail stores, including retail site selection and market surveys; store design, layout, and decor assistance; and equipment and fixture planning. The company also has expertise in developing sales promotions, including employee and customer incentive programs, such as "continuity programs" designed to entice the customer to return regularly to the store.
SALE TERMS
The company charges customers for products based generally on an agreed price which includes the company's defined "cost" (which does not give effect to promotional fees and allowances from vendors), to which is added a fee determined by the volume of the customer's purchase. In some geographic areas, product charges are based upon a percentage markup over cost. A delivery charge is usually added based on order size and mileage from the distribution center to the customer's store. Payment may be received upon delivery of the order, or within credit terms that generally are weekly or semi-weekly.
As part of the re-engineering process and pursuant to its new flexible marketing plan, the company will begin to charge the actual costs of acquiring its grocery, frozen food and dairy products while passing through to its customers all promotional fees and allowances received from vendors. In addition, the company will charge customers for the costs of transportation and will charge for handling and storage, which charges will be higher than the previous basic distribution fee. The company will also begin charging retailers directly for services for which they formerly paid indirectly. As a result, the company believes it will lower the cost of products to most of its customers while increasing the company's profitability.
DISTRIBUTION
The company currently operates 38 distribution centers which are responsible for the distribution of national brand and private label groceries, meat, dairy and delicatessen products, frozen foods, produce, bakery goods and a variety of related food and non-food items. Six general merchandise distribution centers distribute health and beauty care items and other non-food items. One distribution center serves convenience stores and one distribution center handles only dairy, delicatessen and fresh meat products. Substantially all facilities are equipped with modern material
handling equipment for receiving, storing and shipping large quantities of merchandise. As a result of the acquisition of Scrivner, the company has closed four Scrivner distribution centers, and expects to close an additional five distribution centers during 1995. Pursuant to the consolidation, reorganization and re-engineering plan, the company has closed four distribution centers and will close one additional distribution center.
The company's distribution facilities comprise more than 21 million square feet of warehouse space. Additionally, the company rents, on a short-term basis, approximately 7 million square feet of off-site temporary storage space.
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. During 1994 and early 1995 the company engaged dedicated contract carriers to deliver its products to customers from certain distribution centers.
RETAIL STORES SERVED
The company serves approximately 10,000 retail stores ranging in size from small convenience outlets to conventional supermarkets, combination units, price impact stores and large supercenters. Among the stores served are approximately 3,700 supermarkets with an aggregate of approximately 100 million square feet. Fleming's customers are geographically diverse, with operations in 43 states and several international markets. The company's principal customers are supermarkets carrying a wide variety of grocery, meat, produce, frozen food and dairy products. Most customers also handle an assortment of non-food items, including health and beauty care products and general merchandise such as housewares, soft goods and stationery. Most supermarkets also operate one or more specialty departments such as in-store bakeries, delicatessens, seafood departments and floral departments.
The company believes that its focus on quality service, broad product offerings, competitive prices and value-added services enables the company to maintain long-term customer relationships while attracting new customers. The company has targeted self-distributing chains and operators of alternative format stores as sources of incremental sales. These operations have gained increasing market share in the retail food industry in recent years. The company currently serves 980 chain stores, compared to 810 at year-end 1993. In late 1993, Fleming signed a six-year supply agreement with Kmart to serve new Super Kmart Centers in areas where Fleming has distribution facilities.
The company also licenses or grants franchises to retailers to use certain trade names such as IGA-R-, Piggly Wiggly-R-, Food 4 Less-R-, Big Star-R-, Big T-R-, Buy-for-Less-R-, Checkers-R-, Festival Foods-R-, Jubilee Foods-R-, Jamboree Foods-R-, MEGA MARKET-R-, Minimax-R-, Sentry-TM-, Shop 'n Bag-R-, Shop 'n Kart-R-, Super 1 Foods-R-, Super Save-R-, Super Thrift-R-, Thriftway-R-, United Supers-R-, and Value King-R-. There are approximately 2,200 food stores operating under company franchises or licenses.
COMPANY-OWNED STORES
Principally as a result of the acquisition of Scrivner, the number of company-owned stores increased from 72 at December 25, 1993 to 350 at December 31, 1994, including 270 supermarkets with an aggregate of approximately 9.5 million square feet. Company-owned stores are located in 14 states and are all served by the company's distribution centers. Formats vary from super warehouse stores and conventional supermarkets to convenience stores. Generally in the industry, an average super warehouse store is 58,000 square feet, a conventional supermarket is 23,000 square feet and a convenience store is 2,500 square feet. All company-owned supermarkets are designed and equipped to offer a broad selection of both national brands as well as private label products at attractive prices while maintaining high levels of service. Most supermarket formats
have extensive produce sections and complete meat departments together with one or more specialty departments such as in-store bakeries, delicatessens, seafood departments and floral departments. Specialty departments generally produce higher gross margins per selling square foot than general grocery sections.
The company-owned stores provide added purchasing power as they enable the company to commit to certain promotional efforts at the retail level. The company, through its owned stores, is able to retain many of the promotional savings offered by vendors in exchange for volume increases.
Until recently, the company conducted its retail operations primarily as an extension of its wholesale business. Each company-owned retail store was managed by personnel at the distribution center serving such store and did not benefit from any coordinated retail strategy. The company emphasized wholesale operations, and many of its retail stores, while making a positive contribution to overall company profitability through increased wholesale volume, were not profitable on a stand-alone basis.
In 1993, the company determined that its retail operations were underperforming and that, as a part of its overall business strategy, the company would pursue stand-alone profitability in its retail operations. The company recruited a senior officer to assume responsibility for retail operating results for all company-owned stores and to focus on the development of successful retail strategies.
TECHNOLOGY
Fleming has played a leading role in employing technology for internal operations as well as for its independent retail customers. The company may enter into agreements with one or more technology partners to maintain this position.
Over the past three years, Fleming has introduced radio-frequency terminals in its distribution centers to track inventory, further improve customer service levels, reduce out-of-stock conditions and obtain other operational improvements. Most Fleming distribution centers are managed by computerized inventory control systems, along with warehouse productivity monitoring and scheduling systems. Fleming intends to add these technological aids to the Scrivner distribution system. Most of Fleming's truck fleet is equipped with on-board computers to monitor the efficiency of deliveries to its customers.
Additonally, the company has developed and is introducing an advanced on-line communications vehicle, called Visionet, for instant electronic connection of Fleming with vendors and retailers. Visionet is a retail-driven, two-way rapid response communication system that ties vendors, product supply, category managers, local category advisors and retailers together. One of Visionet's features is the Opportunity Wire, which enables Fleming to electronically offer retailers unique opportunities to buy products at advantageous prices as well as assist in coordinating delivery.
SUPPLIERS
The company purchases its products from numerous vendors and growers. As the largest single customer of many of its suppliers, the company is able to secure favorable terms and volume discounts on most of its purchases, leading to lower unit costs. The company purchases products from a diverse group of suppliers and believes it has adequate and alternative sources of supply for substantially all of its products.
CAPITAL INVESTED IN CUSTOMERS
As part of its services to retailers, the company provides capital to customers in several ways. In making credit and investment decisions, the company considers many factors, including estimated return on capital, risk and the benefits to be derived from sustained or increased product sales. Any equity investment or loan of $250,000 or more must be approved by the company's business development committee and any investment or loan in excess of $5 million must be approved by the Board of Directors. For equity investments, the company has active representation on the customer's board of directors. The company also conducts periodic credit reviews, receives and analyzes customers' financial statements and visits customers' locations regularly. On an ongoing basis, senior management reviews the company's largest investments and credit exposures.
The company provides capital to certain customers by becoming primarily or secondarily liable for store leases, by extending credit for inventory purchases, and by guaranteeing loans and making secured loans to and equity investments in customers.
STORE LEASES. The company leases stores for sublease to certain customers. Sublease rentals are generally higher than the base rental to the company. As of December 31, 1994, the company was the primary lessee of approximately 1,000 retail store locations subleased to and operated by customers. In certain circumstances, the company also guarantees the lease obligations of certain customers.
EXTENSION OF CREDIT FOR INVENTORY PURCHASES. The company has supply agreements with customers in which it invests and, in connection with supplying such customers, will, in certain circumstances, extend credit for inventory purchases. Customary trade credits terms are up to seven days; the company has extended credit for additional periods under certain circumstances.
GUARANTEES AND SECURED LOANS. The company guarantees the obligations of certain of its customers. Loans are also made to customers primarily for store expansions or improvements. These loans are typically secured by inventory and store fixtures, bear interest at rates at or above the prime rate, and are for terms of up to ten years. During fiscal year 1993 and 1992 Fleming sold, with limited recourse, $68 million and $45 million, respectively, of notes evidencing such loans. During fiscal years 1993 and 1992, Scrivner sold, with limited recourse, $51 million and $40 million, respectively, of notes evidencing similar loans. Neither Scrivner nor the company sold any notes during 1994. The company believes its loans to customers are illiquid and would not be investment grade if rated.
EQUITY INVESTMENTS. The company has made equity investments in strategic multi-store customers, which it refers to as Business Development Ventures, and in smaller operators, referred to as Equity Stores. Equity Store participants typically retain the right to purchase the company's investment over a five to ten-year period. Many of the customers in which the company has made equity investments are highly leveraged, and the company believes its equity investments are highly illiquid.
The following table sets forth the components of Fleming's portfolio of loans to and investments in customers at year end 1994 and 1993.
The table does not include the company's investments in customers through direct financing leases, lease guarantees, operating leases, loan guarantees or credit extensions for inventory purchases. As of December 31, 1994, the company's undiscounted obligations under direct financing leases and lease guarantees were $213 million and $227 million, respectively.
The company has shifted its strategy to emphasize ownership of, rather than investment in, retail stores. In addition, the company intends to de-emphasize credit extensions to its customers and to reduce future credit loss expense by raising the company's financial standards for credit extensions and by conducting post-financing reviews more frequently and in more depth. Fleming's credit loss expense, including from receivables as well as from investments in customers, was $61 million in the year ended December 31, 1994 and $52 million and $28 million in 1993 and 1992, respectively.
COMPETITION
Competition in the food marketing and distribution industry is intense. The company's primary competitors are national chains who perform their own distribution (such as The Kroger Co. and Albertson's, Inc.), national food distributors (such as SUPERVALU Inc.) and regional and local food distributors. The principal competitive factors include price, quality and assortment of product lines, schedules and reliability of delivery, and the range and quality of customer services. The sales volume of wholesale food distributors is dependent on the level of sales achieved by the retail food stores they serve. Retail stores served by the company compete with other retail food outlets in their geographic areas on the basis of price, quality and assortment, store location and format, sales promotions, advertising, availability of parking, hours of operation and store appeal.
The primary competitors of the company-owned stores are national, regional and local chains, as well as independent supermarkets and convenience stores. The principal competitive factors include price, quality and assortment, store location and format, sales promotions, advertising, availability of
parking, hours of operation and store appeal.
EMPLOYEES
At year-end 1994, the company had approximately 42,400 full time and part-time associates. Almost half of the company's associates are covered by collective bargaining agreements with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, the United Food and Commercial Workers, the International Longshoremen's and Warehousemen's Union and the Retail Warehouse and Department Store Union. Most of such agreements expire at various times throughout the next five years. The company believes it has satisfactory relationships with its unions.
ITEM 2.



ITEM 2. PROPERTIES
The following table sets forth information with respect to Fleming's major distribution facilities.
At the end of 1994, Fleming operated a delivery fleet consisting of approximately 2,300 power units and 4,700 trailers. Most of this equipment is owned by the company.
Company-operated retail stores occupy approximately 9.5 million square feet which is primarily leased.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
TROPIN V. THENEN, ET AL., CASE NO. 93-2502-CIV-MORENO, UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA.
WALCO INVESTMENTS, INC., ET AL. V. THENEN, ET AL., CASE NO. 93-2534-CIV-MORENO, UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA.
On December 21, 1993, these cases were filed in the United States District Court for the Southern District of Florida. Both cases name numerous defendants including a former subsidiary of the registrant and four former employees of former subsidiaries of registrant. The cases contain similar factual allegations. Plaintiffs allege, among other things, that former employees of subsidiaries participated in fraudulent activities by taking money for confirming diverting transactions which had not occurred and that, in so doing, they acted within the scope of their employment. Plaintiffs also allege that a former subsidiary allowed its name to be used in furtherance of the alleged fraud.
The allegations against registrant's former subsidiary include common law fraud,
breach of contract and negligence, conversion and civil theft. In addition, allegations were made against the former subsidiary claiming it violated the federal Racketeer Influenced and Corrupt Organizations Act and comparable state law. Plaintiffs seek damages, treble damages, attorneys' fees, costs, expenses and other appropriate relief. While the amount of damages sought under most claims is not specified, plaintiffs allege that hundreds of millions of dollars were lost as the result of the matters complained of.
Registrant denies the allegations and is vigorously defending the actions.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
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 20, 1995:
No family relationship exists among any of the executive officers listed above.
Executive officers are elected by the board of directors for a term of one year beginning with the annual meeting of shareholders held in April or May of each year.
Each of the executive officers has been employed by the company or its subsidiaries for the preceding five years except for Messrs. Anderson, Lawson, Winn and Zaricki.
Mr. Anderson joined the company as Vice President-General Merchandise in July 1993. In March 1995, he was named Senior Vice President-General Merchandise. Since 1986, until joining the company, he was vice president of McKesson Corporation, a distributor of pharmaceutical and related products, where he was responsible for its service merchandising division.
Mr. Lawson joined the company in his present position in June 1994. Prior to that, Mr. Lawson was a practicing attorney in Phoenix for 18 years.
Mr. Winn joined the company in his present position in May 1994. He was with UtiliCorp United in Kansas City, an energy company, where he was managing senior vice president and chief financial officer from 1990 to 1993.
Mr. Zaricki joined the company in his present position in October 1993. Since 1987, until joining the company, Mr. Zaricki was president of Arizona Supermarkets, Inc., a regional supermarket chain headquartered in Phoenix.
PART II
ITEM 5.

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, 1994, the 37.5 million outstanding shares were owned by 11,500 shareholders of record and approximately 23,000 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 78 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 1993 and 1994.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
THE CONSOLIDATION, REORGANIZATION AND RE-ENGINEERING PLAN. In January 1994, the company announced the details of a plan to restructure its organizational alignment, re-engineer its operations and consolidate facilities. The company's objective is to lower product costs to retail customers while providing the company with a fair and adequate return for product supply and value-added services. To achieve this objective, management is making major organizational changes, introducing a new flexible marketing plan and investing in technology. The actions contemplated by the plan will affect the company's food and general merchandise wholesaling operations as well as certain retail operations and are expected to be substantially completed by the end of 1996. The acquisition of Scrivner, described more fully in the next section, has not changed the plan design but has delayed implementation.
The 1993 fourth quarter results reflect a charge of $101 million to cover four categories of charges related to the plan: elimination of regional operations, re-engineering operations, facilities consolidation and focus on company-owned retail stores. This is in addition to a provision of $7 million for facilities consolidation in the second quarter of 1993. Related cash requirements during 1994 were $21 million; additional cash expenditures necessary to fully implement the plan during 1995 and 1996 are estimated to be $50 million. Cash requirements have been and are expected to be met by internally generated cash flows and borrowings under the company's existing credit agreement. The plan is expected to produce approximate annual pretax savings of $65 million, net of incremental expenses. These savings will not be fully realized until after complete implementation. Unforeseen events or circumstances could cause the company to alter the plan, thereby delaying or reducing expected cost savings.
Elimination of the company's regional operations resulted in cash severance payments to approximately 100 associates, as well as the transfer of approximately 60 associates. The annual savings are approximately $4 million, principally in payroll costs. The provision for eliminating regional operations is approximately $8 million, including the write-down to estimated fair value of certain related assets.
The re-engineering component of the charge provides for the cash costs related to the expected termination of approximately 1,500 associates brought about by re-engineering. Annual payroll savings are projected to be approximately $40 million. The provision for re-engineering is approximately $25 million. Management believes that the benefits to operating results will not begin until late 1995.
Facilities consolidation has resulted in the closure of four distribution centers and is expected to result in the closure of one additional facility, the relocation of two operations, and consolidation of administrative functions. During 1994, approximately 450 associate positions were eliminated through facilities consolidations. 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. Estimated components include: severance costs - $15 million; impaired property and equipment - $13 million; other related asset impairment and obligations - $11 million; lease and holding costs - - $10 million; completion of actions contemplated in an earlier restructuring charge - $7 million; and product handling and damage - $4 million. The actions are not expected to result in a material reduction in net sales. Transportation expense is expected to increase as the result of trucks driving farther to serve customers. It is not practical to estimate reduced depreciation and amortization, labor or operating costs separately. Management anticipates that, in the aggregate, a positive annual pretax earnings impact will result from
administrative expense savings and working capital and productivity improvements once the facilities consolidation plan is fully implemented.
The costs to complete activities, including the consolidation and closure of distribution facilities contemplated in an earlier restructuring charge, result principally from additional estimated costs related to dispositions or related real estate assets. Such costs are principally the result of the deterioration of the San Francisco Bay area commercial real estate market since 1991. Increased costs to complete the earlier facilities consolidation were partially offset by a change in management's 1993 plans regarding the consolidation of four existing facilities into a large, new facility to be constructed in the Kansas City area; the revised plan, which calls for enlarging and utilizing existing facilities, is expected to result in lower associated closure costs.
Thirty retail supermarket locations leased or owned by the company 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 locations, and the expected loss on a location closed in 1994. The charge consists principally of cash costs for lease payments and the write-down of property. A positive annual pretax benefit will result from this charge but the annual amount will vary from year to year due to the dynamic nature of the lease and sublease arrangements. The provision for retail-related assets is approximately $15 million.
THE ACQUISITION. Results beginning with the third quarter of 1994 have been materially affected by the acquisition of Scrivner. Sales have increased dramatically and gross margin and selling and administrative expenses as a percent of sales are significantly higher due to the increased ratio of retail food operations in Scrivner. Interest expense increased materially as a result of the increased borrowing level and higher interest rates and expense for the amortization of goodwill also significantly increased, both due to the acquisition.
As of the end of 1994, the company has closed four Scrivner distribution centers and expects to close five more in 1995. Charges related to the closing of the distribution centers operated by Scrivner have been considered a direct cost of the acquisition and are included in goodwill.
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 percentage of net sales, before the effect of early debt retirement in 1993 and 1992.
1994 AND 1993
NET SALES. Net sales for 1994 increased by $2.66 billion, or 20.3%, to $15.75 billion from $13.09 billion for 1993. The increase in net sales was attributable to the $2.76 billion of net sales generated by Scrivner operations since the acquisition. Without Scrivner, net sales would have declined by $100 million, or .7%, due to several factors, none of which individually was material to net sales, including: the expiration of the temporary agreement with Albertson's, Inc. as its distribution center came on line, the sale of a distribution center, the loss of a customer at one of the company's distribution centers and the loss of business due to the bankruptcy of Megafoods Stores, Inc. These losses were partially offset by the addition of business from Kmart, Florida retail operations acquired in the fourth quarter of 1993 ("Hyde Park") and Randall's Food Markets, Inc.
Fleming measures inflation using data derived from the average cost of a ton of product sold by the company; for 1994 food price inflation was negligible. Tonnage of food product sold in 1994, without giving effect to the acquisition, increased .6% compared to 1993, reflecting the difficult retail environment. Consistent tonnage statistics for Scrivner are not available.
GROSS MARGIN. Gross margin for 1994 increased by $381 million, or 49.9%, to $1.15 billion from $765 million for 1993 and increased as a percentage of net sales to 7.28% for 1994 from 5.85% for 1993. The increase in gross margin was due to retail stores, principally the 179 stores acquired with Scrivner as well as the 21 Hyde Park stores and 24 Consumers stores, which were not included for a full year in 1993. Retail operations typically have both a higher gross margin and higher selling expenses than wholesale operations. In addition, product handling expenses, which consist of warehouse, truck and building expenses, decreased as a percentage of net sales for 1994 from 1993 due in part to the positive impact of the company's facilities consolidation program and to higher fees charged to certain customers. These gross margin increases were partially offset by charges to income of $6 million resulting from the LIFO method of inventory valuation in 1994 compared to credits to income of $7 million in 1993.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense for 1994 increased by $405 million, or 72.4%, to $962 million from $558 million for 1993 and increased as a percentage of net sales to 6.11% for 1994 from 4.27% in 1993. This increase was due primarily to the acquisition of Scrivner, particularly its retail operations, as well as the acquisition of 21 Hyde Park stores and 24 Consumers stores which were not included for a full year in 1993. Retail operations typically have higher selling expenses than wholesale operations. Selling and administrative expenses also increased by reason of the provision for additional goodwill amortization, principally related to the acquisition and the absence of several non-recurring items that occurred in 1993. The increase in the operating loss-corporate shown in the Segment Information note to the consolidated financial statements is the result of the aforementioned absence of non-recurring items and the increase in staff expense.
Credit loss expense included in selling and administrative expense for 1994 increased by $9 million to $61 million from $52 million in 1993. This increase, including the $6.5 million credit loss discussed below, was primarily due to the continued difficult retail environment and low levels of food price inflation. Although the company has begun to de-emphasize credit extensions to and investments in customers and has adopted more stringent credit practices, there can be no assurance that credit losses from existing or future investments or commitments will not have a material adverse effect on results of operations or financial position.
In August 1994, a customer of the company, Megafoods Stores, Inc. and certain of its affiliates, filed Chapter 11 bankruptcy proceedings. As of such date, Megafoods' total indebtedness to Fleming for goods sold on open account, equipment
leases and loans aggregated approximately $20 million. The company holds collateral with respect to a substantial portion of these obligations. Megafoods is also liable to the company under store sublease agreements for approximately $37 million, and the company is contingently liable on certain lease guarantees given by the company on behalf of Megafoods. The company is partially secured as to these obligations. Megafoods has alleged claims against the company arising from breach of contract, tortious interference with contracts and business relationships and wrongful set-off of a $12 million cash security deposit and has threatened to seek equitable subordination of the company's claims. The company denies these allegations and will vigorously protect its interests.
Based on this event, the company took a charge to earnings of $6.5 million in the third quarter of 1994 to cover its estimated net credit exposure. However, the exact amount of the ultimate loss may vary depending upon future developments in the bankruptcy proceedings including those related to collateral values, priority issues and the company's ultimate expense, if any, related to certain customer store leases. An estimate of additional possible loss, or the range of additional losses, if any, cannot be made at this stage of the proceedings. The company estimates that its annualized sales to Megafoods prior to the bankruptcy were approximately $335 million and currently are approximately $170 million pursuant to a short-term arrangement.
INTEREST EXPENSE. Interest expense for 1994 increased $42 million to $120 million from $78 million for 1993. The increase was due to the indebtedness incurred to finance the acquisition and higher interest rates imposed on the company as a result thereof. Without these factors, interest expense for 1994 is estimated to have been approximately the same as 1993.
The company enters into interest rate hedge agreements to manage interest costs and exposure to changing interest rates. During July 1994, management terminated all of its outstanding hedge contracts at an immaterial net gain, which will be amortized over the original term of each hedge instrument. The credit agreement with the company's banks requires the company to provide interest rate protection on a substantial portion of the indebtedness outstanding thereunder. The company has entered into interest rate swaps and caps covering $1 billion aggregate principal amount of floating rate indebtedness. This amount exceeds the requirements set forth in the credit agreement.
The average interest rate on the company's floating rate indebtedness is equal to the London interbank offered interest rate ("LIBOR") plus a margin. The average fixed interest rate paid by the company on the interest rate swaps is 6.79%, covering $750 million of floating rate indebtedness. The interest rate swap agreements, which were implemented through eight counterparty banks, and which have an average remaining life of 3.5 years, provide for the company to receive substantially the same LIBOR that the company pays on its floating rate indebtedness. For the remaining $250 million, the company has purchased interest rate cap agreements from an additional two counterparty banks covering $250 million of its floating rate indebtedness. The agreements cap LIBOR at 7.33% over the next 3.8 years. The company's payment obligations and receivables under the interest rate swap and cap agreements meet the criteria for hedge accounting treatment. Accordingly, the company's payment obligations and receivables are accounted for as interest expense.
With respect to the interest rate hedging agreements, the company believes its exposure to potential credit loss expense is minimized primarily due to the relatively strong credit ratings of the counterparties for their unsecured long-term debt (A+ or higher from Standard & Poor's Ratings Group and A1 or higher from Moody's Investors Service, Inc.) and the size and diversity of the counterparty banks. The hedge agreements are subject to market risk to the extent that market interest rates for similar instruments decrease, and the company terminates the hedges prior to their maturity. However, the company believes the risk is minimized as it currently foresees no need to terminate any hedge agreements prior to their maturity. Also,
interest rates for similar instruments have increased.
For 1994, the interest rate hedge agreements contributed $6 million to interest expense. The estimated fair value of the hedge agreements at December 31, 1994 was $32 million.
INTEREST INCOME. Interest income for 1994 increased by $1 million to $64 million from $63 million for 1993. The increase was due to the acquisition. The company has sold certain notes receivable with limited recourse in prior years and may do so again in the future.
EQUITY INVESTMENT RESULTS. The company's portion of operating losses from equity investments for 1994 increased by $3 million to $15 million from $12 million for 1993. The increase resulted primarily from losses related to the company's investments in small retail operators under the company's equity store program, offset in part by improved results from investments in strategic multi-store customers under the company's business development ventures program.
TAXES ON INCOME. The company's effective tax rate for 1994 increased to 50.0% from 48.0% for 1993 primarily as a result of the lower than expected earnings for 1994, Scrivner's operations in states with higher tax rates and increased goodwill amortization with no related tax deduction.
OTHER. In November 1994, the company announced that Smitty's Super Valu, a customer based in Arizona, had challenged the enforceability of its supply contract with the company and may seek alternate arrangements. Smitty's provided Fleming with the opportunity to match the terms offered by a competitor. The company has determined that the competitor's offer incorrectly excludes freight costs and is not a bona fide offer. The supply contract will expire in 31 months if the company matches any bona fide competing offer and in 15 months if it does not. The company intends to comply fully with the supply contract and expects Smitty's to do likewise. Smitty's purchased approximately $290 million of products from the company during 1994.
The company has been named in two related legal actions filed in the U.S. District Court in Miami in December 1993. The litigation is complex, discovery has not commenced, and the ultimate outcome cannot presently be determined. Furthermore, the company is unable to predict a potential range of monetary exposure, if any, to the company. Based on the recovery sought, an unfavorable judgment could have a material adverse effect on the company.
Management believes that several factors negatively affecting earnings in 1994 are likely to continue. Such factors include: flat wholesale sales; lack of food price inflation; operating losses in certain company-owned retail stores; increased interest expense, goodwill amortization and integration costs related to the acquisition; and a higher effective tax rate.
1993 AND 1992
NET SALES. Net sales in 1993 increased by $199 million, or 1.5%, to $13.09 billion from $12.89 billion for 1992. The net sales increase was primarily due to the following items, none of which individually was material to net sales: the inclusion of a full year of operation of Baker's Supermarkets Inc. in 1993, compared to 12 weeks in 1992, and the addition of the Garland, Texas distribution center purchased in August 1993. Also contributing to the 1993 increase were the addition of new customers, including Kmart. For 1993, the company experienced food price deflation of 0.1% compared to deflation of 1.0% in 1992.
Tonnage of food product sold in 1993 was essentially the same as 1992. The lower tonnage growth rate reflects sluggish retail food industry sales and the lack of net expansion of the company's customer base.
GROSS MARGIN. Gross margin in 1993 increased by $39 million, or 5.3%, to $765 million from $726 million for 1992 and increased as a percentage of net sales to 5.85% from 5.64% in 1992. The increase in gross margin was due to increased net sales by company-owned stores (which included the 10 Baker's Supermarkets Inc. stores acquired in September 1992). Retail operations typically have a higher gross margin than wholesale operations. Product handling expense for 1993 decreased as a percentage of net sales from 1992. The resulting increase in gross margin was offset in part by lower wholesale margins.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense in 1993 increased $63 million, or 12.8%, to $558 million from $495 million in 1992 and increased as a percentage of net sales to 4.27% from 3.84%. The increase was due primarily to the higher selling and administrative expense associated with a higher number of company-owned stores (which included 10 Baker's stores acquired at the beginning of the fourth quarter of 1992). Retail operations generally have higher selling expenses than wholesale operations. In addition, selling and administrative expense included credit loss expense of $52 million in 1993 compared with $28 million in 1992. The increase was due to the combined effects on customers' financial conditions of sluggish retail sales, intensified retail competition and lack of food price inflation. These increases were offset in part by reductions in certain other selling and administrative expense categories.
Furthermore, in 1993, selling and administrative expense was affected by several non-recurring items. The company recorded $11 million of pre-tax income resulting from cash received from the favorable resolution of litigation and a $1 million accrual for expected settlements in other legal proceedings. The company estimated that its contingent liability for lease obligations exceeded its previously established reserves by $2 million and recorded this amount as an expense. A $5 million gain from a real estate transaction was also recorded.
INTEREST EXPENSE. Interest expense in 1993 declined $3 million, to $78 million from $81 million in 1992. The decrease in 1993 was due primarily to lower short-term interest rates and lower average borrowing levels. The company entered into interest rate hedge agreements to manage its exposure to interest rates.
INTEREST INCOME. Interest income in 1993 increased by $3 million, to $63 million from $60 million in 1992. The increase was due to higher outstanding notes receivable and direct financing leases, partially offset by a slight decline in interest rates. Interest income consists primarily of interest earned on notes receivable and income generated from direct financing leases of retail stores and related equipment.
EQUITY INVESTMENT RESULTS. The company's share of operating losses from equity investments in certain customers (including customers participating in the company's equity store program or the business development venture program) accounted for under the equity method in 1993 decreased by $3 million, to $12 million from $15 million in 1992. The improvement was due to improved operating performance by certain of the company's business development ventures partially offset by the company's share of losses from customers participating in the company's equity store program.
EARLY DEBT RETIREMENT. In the fourth quarters of 1993 and 1992, the company recorded extraordinary losses related to the early retirement of debt. In 1993, the company retired $63 million of the 9.5% debentures at a cost of $2 million, net of tax benefits of $2 million. In 1992, the company recorded a charge of $6 million, net of tax benefits of $4 million. The 1992 costs related to retiring $173 million aggregate principal amount of convertible notes, $30 million aggregate principal amount of 9.5% debentures and certain other debt.
TAXES ON INCOME. The effective income tax rate for 1993 increased to 48% from 39% in 1992. The increase was primarily due to facilities consolidation and related
restructuring charges. As a result, pre-tax income was reduced, causing nondeductible items for tax purposes to have a larger impact on the effective tax rate. In addition, both the federal and state income tax rates increased by 1% due to a new tax law enacted in 1993. Moreover, the 1992 effective rate had been reduced due to favorable settlements of tax assessments recorded in prior years.
CERTAIN ACCOUNTING MATTERS. Statement of Financial Accounting Standards No. 114 - Accounting by Creditors for Impairment of a Loan (as amended by Statement of Financial Accounting Standards No. 118 - Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures) will be effective in the first quarter of 1995. These statements require that loans that are determined to be impaired must be measured by the present value of expected future cash flows discounted at the loan's effective interest rate or collateral values. The impact on the consolidated statements of earnings and financial position is expected to be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Includes current maturities of long-term debt and current obligations under capital leases.
Fleming's capital structure changed significantly as a result of the July 19, 1994 acquisition of Scrivner. The acquisition was financed, and a large portion of the existing debt of both Fleming and Scrivner was refinanced, through a $2.2 billion revolving credit and term loan agreement entered into with a group of banks. Upon execution of the new credit agreement the company terminated its $400 million and $200 million bank credit agreements. In December, the company sold $300 million of 10.625% seven-year senior notes and $200 million of floating rate seven-year senior notes in a public offering and retired the $500 million two-year loan tranche of the credit agreement with the proceeds.
The company's credit ratings for its senior unsecured long-term debt were downgraded from investment grade to Ba1 and BB+ by Moody's and Standard & Poor's, respectively, as a result of the additional debt incurred in the acquisition. However, in late February 1995, Standard & Poor's placed its rating of Fleming's senior unsecured long-term debt on CreditWatch with negative implications. Standard & Poor's expressed concerns that lower than expected earnings for the third and fourth quarters of 1994, combined with re-engineering costs that are now anticipated to reduce 1995 earnings below Standard & Poor's prior expectations, will limit the company's ability to reduce acquisition-related debt.
The company's principal sources of liquidity are cash flows from operating activities and borrowings under the bank credit agreement. Borrowings under the two remaining tranches of the credit agreement totaled $1.08 billion at the end of 1994, their maximum level for the year. Borrowings under the new agreement, excluding the $500 million two-year tranche, averaged $998 million. At year end, the $800 million six-year amortizing term loan was fully drawn and $280 million was drawn on the $900 million five-year revolving credit facility.
Borrowings under the credit agreement are guaranteed by most of the company's subsidiaries and are secured by the company's accounts receivable, inventories and a pledge of the stock of most subsidiaries. These security provisions will terminate
at such time that the company's credit ratings for unsecured senior long-term debt improve to investment grade status. The company was also required to pledge its intercompany receivables as security for its medium-term notes and its 9.5% debentures and to provide guarantees from most of its subsidiaries. Additionally, it has provided guarantees from most of its subsidiaries in favor of the senior notes.
The credit agreement and the indentures for the senior notes contain customary covenants associated with similar facilities. The bank credit agreement currently contains the following covenants: maintenance of a consolidated-debt-to-net-worth ratio of not more than 2.45 to 1; maintenance of a minimum consolidated net worth of at least $857 million; maintenance of a fixed charge coverage ratio of at least 1.40 to 1; a limitation on restricted payments (including dividends and company stock repurchases); prohibition of certain liens; prohibitions of certain mergers, consolidations and sales of assets; restrictions on the incurrence of debt and additional guarantees; limitations on transactions with affiliates; limitations on acquisitions and investments; limitations on capital expenditures; and a limitation on payment restrictions affecting subsidiaries. The company is permitted to pay dividends or repurchase capital stock in the aggregate amount of approximately $50 million each year. At year-end 1994 the consolidated-debt-to-net-worth test would have allowed the company to borrow an additional $489 million and the fixed charge coverage test would have allowed the company to incur an additional $22 million of annual interest expense. Covenants associated with the senior notes are generally less restrictive than those of the bank facility. At year-end 1994, the company was in compliance with all financial covenants under the credit agreement and the senior note indentures. Continued compliance over the near-term will depend on the company's ability to generate sufficient earnings during the implementation of re-engineering and integration of Scrivner.
Pricing under the credit agreement automatically increases with respect to certain rating declines. Despite the effect of reduced earnings and the CreditWatch action by Standard & Poor's, the company believes that appropriate means are available to maintain adequate liquidity for the foreseeable future at acceptable rates.
The credit agreement may be terminated in the event of a defined change of control. Under the indentures for the senior notes, the noteholders may require the company to repurchase the notes in the event of a defined change of control and defined decline in credit ratings.
In October 1994, the company acquired $33 million of a $97 million series of medium-term notes pursuant to an offer to purchase which resulted from the Scrivner acquisition and the related downgrade of the company's long-term credit ratings. This redemption was funded by borrowings under the credit agreement.
At year-end 1994 the company had $130 million of contingent obligations under undrawn letters of credit, primarily related to insurance reserves associated with its normal risk management activities. To the extent that any of these letters of credit would be drawn, payments would be financed by borrowings under the credit agreement.
Operating activities generated $333 million of net cash flows for 1994 compared to $209 million in 1993. The increase is principally due to the Scrivner acquisition, lower working capital requirements (excluding Scrivner) and higher deferred taxes. Working capital was $496 million at year end, an increase from $442 million at year-end 1993. The current ratio decreased to 1.38 to 1, from 1.48 to 1 at year-end 1993. Management believes that cash flows from operating activities and the company's ability to borrow under the credit agreement will be adequate to meet working capital needs, capital expenditures and cash needs of approximately $50 million for the facilities consolidation and restructuring plan.
Capital expenditures for 1994 were approximately $140 million. The increase over prior year is due to expansion projects at several distribution centers and
additions of normal Scrivner expenditures subsequent to the acquisition. Management expects that 1995 capital expenditures, excluding acquisitions, if any, will approximate $100 million.
Uncommitted bank lines were used prior to the Scrivner acquisition when rates were lower than commercial paper rates. During 1994, borrowings under these lines averaged $115 million and ranged up to $280 million. There were no borrowings outstanding at year-end 1994. Commercial paper borrowings, which ceased prior to the Scrivner acquisition, averaged $41 million during 1994 and ranged up to $166 million.
Fleming makes investments in and loans to its retail customers, primarily in conjunction with the establishment of long-term supply agreements. At year-end 1994 these investments and loans of $471 million, combined with trade receivables of $297 million, totaled $768 million, a $157 million net increase from 1993 due primarily to the Scrivner acquisition. Net investments and loans increased $92 million, from $379 million to $471 million. However, there was no sale of notes in 1994, compared to a $67 million sale in 1993. In addition, net trade receivables increased $65 million, from $232 million to $297 million. These increases primarily resulted from the Scrivner acquisition.
Trade receivables in 1994 had a turnover rate of 50.4 times, up from 45.3 times the prior year. Inventory turns increased slightly to 13.2 times in 1994 compared to 13.1 times the year before. Both of these changes were influenced by the large mix of retail operations of Scrivner.
Long-term debt and capital lease obligations increased $1.04 billion to $2.12 billion during 1994 as a result of the acquisition. Shareholders' equity at the end of 1994 was $1.08 billion.
The year-end debt-to-capital ratio increased to 66.3%, above last year's ratio of 50.4%. The company's long-term target ratio is approximately 50%. Total capital was $3.2 billion at year end, up $1.06 billion from the prior year.
The composite interest rate for total funded debt (excluding capital lease obligations) before the effect of interest rate hedges was 7.6% at year end, versus 4.8% a year earlier, principally due to higher interest rates and to a lesser extent refinancing activities associated with the Scrivner acquisition. Including the effect of interest rate hedges, the composite interest rate of debt was 8.4% and 4.9% at the end of 1994 and 1993, respectively. See the Long-Term Debt note to consolidated financial statements for additional discussion regarding derivatives.
The dividend payments of $1.20 per common share in 1994 and 1993 were 79% and 125% of primary net earnings per share in 1994 and 1993 respectively. The payout ratio would have been 44% in 1993 before fourth quarter charges for facilities consolidation and restructuring and debt prepayment.
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 17, 1995, in connection with its annual meeting of shareholders to be held on May 3, 1995. 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 11 through 20 of the company's proxy statement dated March 17, 1995, in connection with its annual meeting of shareholders to be held on May 3, 1995.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to pages 9 and 10 of the company's proxy statement dated March 17, 1995, in connection with its annual meeting of shareholders to be held on May 3, 1995.
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
(a) 1. Financial Statements: Page No. --------
- Consolidated Statements of Earnings - For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 28
- Consolidated Balance Sheets - At December 31, 1994, and December 25, 1993 29
- Consolidated Statements of Shareholders' Equity - For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 30
- Consolidated Statements of Cash Flows - For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 31
- Notes to Consolidated Financial Statements - For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 32
- Independent Auditors' Report 50
- Quarterly Financial Information (Unaudited) 51
(a) 2. Financial Statement Schedule:
- Schedule II - Valuation and Qualifying Accounts 53
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.
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 (In thousands, except per share amounts)
Sales to customers accounted for under the equity method were approximately $1.6 billion, $1.6 billion and $1.3 billion in 1994, 1993 and 1992, respectively.
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
At December 31, 1994, and December 25, 1993 (In thousands, except per share amounts)
Receivables include $37 million and $48 million in 1994 and 1993, 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 31, 1994, December 25, 1993, and December 26, 1992 (In thousands)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, December 25, 1993, and December 26, 1992 (In thousands)
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1994, December 25, 1993, and December 26, 1992
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR: The company's fiscal year ends on the last Saturday in December. Fiscal year 1994 was 53 weeks; 1993 and 1992 were 52 weeks. The impact of the additional week in 1994 is not material to the results of operations or financial position.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include all material subsidiaries. Material intercompany items have been eliminated. The equity method of accounting is used for investments in certain entities in which the company has an investment in common stock of between 20% and 50%. Under the equity method, original investments are recorded at cost and adjusted by the company's share of earnings or losses of these entities and for declines in estimated realizable values deemed to be other than temporary.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of liquid investments readily convertible to cash with a maturity of three months or less. The carrying amount for cash equivalents is a reasonable estimate of fair value.
RECEIVABLES: Receivables include the current portion of customer notes receivable of $68 million (1994) and $70 million (1993). Receivables are shown net of allowance for credit losses of $40 million (1994) and $44 million (1993). 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. Asset impairments are recorded when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such impairment losses are measured by the excess of the carrying amount of the asset over the fair value of the related asset.
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.
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 $97 million (1994) and $74 million (1993). Goodwill is written down if it is probable that estimated undiscounted operating income generated by the related assets will be less than the carrying amount.
FINANCIAL INSTRUMENTS: Interest rate hedge transactions and other financial instruments are utilized to manage interest rate exposure. The difference between amounts to be paid or received is accrued and recognized over the life of the contracts. The methods and assumptions used to estimate the fair value of significant financial instruments are discussed in the Investments and Notes Receivable and Long-Term Debt notes.
TAXES ON INCOME: Deferred income taxes arise from temporary differences between financial and tax bases of certain assets and liabilities.
FOREIGN CURRENCY TRANSLATION: Net exchange gains or losses resulting from the translation of assets and liabilities of an international investment are included in shareholders' equity.
NET EARNINGS PER SHARE: Primary earnings per share are computed based on net earnings divided by the weighted average shares outstanding. The impact of common stock options on primary earnings per common share is not materially dilutive. Fully diluted earnings per share in 1992 assume conversion of convertible subordinated notes redeemed that year.
ACQUISITIONS
As of July 1994, the company completed the acquisition of all the outstanding stock of Haniel Corporation, the parent of Scrivner Inc. ("Scrivner"). The company paid $388 million in cash and refinanced substantially all of Scrivner's existing indebtedness (approximately $670 million in aggregate principal and premium). In connection with the acquisition, the company refinanced approximately $340 million in aggregate principal amount of its own indebtedness.
The acquisition has been accounted for as a purchase and the results of operations of Scrivner have been included in the consolidated financial statements since the beginning of the third quarter of 1994. The purchase price was allocated based on estimated fair values at the date of the acquisition. At December 31, 1994, the excess of purchase price over assets acquired was $540 million and is being amortized on a straight-line basis over 40 years.
The following unaudited pro forma information presents a summary of consolidated results of operations of the company and Scrivner as if the acquisition had occurred at the beginning of 1993, with pro forma adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects.
In 1994, the company acquired the remaining common stock of a supermarket operator of a 24-store chain with locations in Missouri and Kansas. The acquisition was accounted for as a purchase. The results are not material to the company.
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.
In 1992, the company acquired the common stock of Baker's Supermarkets, the operator of 10 supermarkets located in Omaha, Nebraska. The acquisition was accounted for as a purchase. The results of Baker's operations are not material to the company.
INVENTORIES
Inventories are valued as follows:
Current replacement cost of LIFO inventories were greater than the carrying amounts by approximately $19 million at December 31, 1994, and $13 million at December 25, 1993.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
The company extends long-term credit to certain retail customers. Loans are primarily collateralized by inventory and fixtures. Investments and notes receivable are shown net of allowance for credit losses of $9 million and $18 million in 1994 and 1993, 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 (as amended by SFAS No. 118 - Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures). These new statements require 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 or collateral values. The new standards are effective for the first quarter of 1995. The impact on the consolidated statements of earnings and financial position is expected to be immaterial.
The company has sold certain notes receivable at face value with limited recourse. The outstanding balance at year-end 1994 on all notes sold is $162 million, of which the company is contingently liable for $29 million should all the notes become uncollectible.
LONG-TERM DEBT
Long-term debt consists of the following:
FIVE YEAR MATURITIES: Aggregate maturities of long-term debt for the next five years are as follows: 1995-$110 million; 1996-$58 million; 1997-$136 million; 1998-$191 million and 1999-$234 million.
REVOLVING CREDIT AND TERM LOAN AGREEMENT: In 1994, in connection with the acquisition of Scrivner, the company redeemed a portion of its medium-term notes and repaid all of its borrowings under uncommitted credit lines, commercial paper programs, all term bank loans, the employee stock ownership plan loan and certain other debt. The company also repaid substantially all the debt of Scrivner and its parent. The debt redemptions and repayments, as well as the purchase price of $388 million for the common stock, were financed by borrowing $1.6 billion under a new $2.2 billion committed revolving credit and term loan agreement with a group of banks. Upon execution of the credit agreement, the company terminated its $400 million and $200 million bank credit agreements.
The credit agreement carries an annual facility fee and a commitment fee on any unused amount for the revolving credit portion. Interest rates are based on various money market rate options selected by the company at the time of borrowing. Borrowings under the revolving credit portion of the credit agreement mature in 1999 and the term bank loans mature in 2000.
In December 1994, the company repaid $500 million of term bank loans under the credit agreement upon the sale of the 10.625% $300 million senior notes and $200 million floating rate senior notes.
The credit agreement and senior note indentures contain customary covenants associated with similar facilities. The credit agreement currently contains the following financial covenants: maintenance of a consolidated-debt-to-net-worth ratio of not more than 2.45 to 1; maintenance of a minimum consolidated net worth of at least $857 million; and maintenance of a fixed charge coverage ratio of at least 1.40 to 1. The company is currently in compliance with all financial covenants under the credit agreement and senior note indentures. As of December 31, 1994, the restricted payments test would have allowed the company to pay dividends or repurchase capital stock in the aggregate amount of $50 million. The consolidated-debt-to-net-worth test would have allowed the company to borrow an additional $489 million. The fixed charge coverage test would have allowed the company to incur an additional $22 million of annual interest expense.
The credit agreement and the senior note indentures also place significant restrictions on the company's ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, an unaffiliated entity.
The credit agreement contains a provision that, in the event of a defined change of control, the agreement may be terminated. The indentures for the senior notes provide an option for the noteholders to require the company to repurchase the notes in the event of a defined change of control and defined decline in credit ratings.
Prior to the acquisition of Scrivner, the company employed a financing program for variable financing needs consisting of uncommitted bank credit lines and two commercial paper programs supported by committed bank credit. The agreement effectively restricts borrowings under these facilities.
MEDIUM-TERM NOTES: The company has registered $565 million in medium-term notes. Of this, $290 million may be issued from time to time, at fixed or floating rates, as determined at the time of issuance. The agreement effectively limits any new issues to debt with maturities after December 2000. The security provisions for the agreement required the company to equitably and ratably secure the medium-term notes. Security for the medium-term notes consists of guarantees from most of the company's subsidiaries and a pledge of intercompany receivables.
The carrying value of assets collateralized under mortgaged real estate notes and other debt is not material.
INTEREST EXPENSE: Components of interest expense are as follows:
EARLY RETIREMENT OF DEBT: 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 million, after income tax benefits of $2 million, or $.06 per share. The funding source for the early redemption was the sale of notes receivable. In 1992, the company retired the $173 million of convertible subordinated notes, $30 million of the 9.5% debentures and certain other debt. The extraordinary loss was $6 million, after income tax benefits of $4 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.
SUBSIDIARY GUARANTEE OF SENIOR NOTES: The senior notes are guaranteed by all direct and indirect subsidiaries of the company (except for certain inconsequential subsidiaries), all of which are wholly owned. The guarantees are joint and several, full, complete and unconditional. There are currently no restrictions on the ability of the subsidiary guarantors to transfer funds to the company in the form of cash dividends, loans or advances. Full financial statements for the subsidiary guarantors are not presented herein because management does not believe such information would be material.
The following summarized financial information for the combined subsidiary guarantors has been prepared from the books and records maintained by the subsidiary guarantors and the company. Intercompany transactions are eliminated. The summarized financial information may not necessarily be indicative of the results of operations or financial position had the subsidiary guarantors been operated as independent entities. The summarized financial information includes allocations of material amounts of expenses such as corporate services and administration, interest expense on indebtedness and taxes on income. The allocations are generally based on proportional amounts of sales or assets, and taxes on income are allocated consistent with the asset and liability approach used for consolidated financial statement purposes. Management believes these allocation methods are reasonable.
During 1994, the company merged a significant number of subsidiaries, resulting in a substantial reduction in the amounts appearing in the summarized financial information.
EMPLOYEE STOCK OWNERSHIP PLAN: The company's employee stock ownership plan (ESOP) allows substantially all associates to participate. ln 1989, 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 until 1994, when the company paid off the loan and the ESOP entered into a note with the company. The note terms are the same as the bank loan. The receivable from the ESOP is presented as a reduction of shareholders' equity. The ESOP will repay to the company the remaining loan balance with proceeds from company contributions.
The company makes contributions based on fixed debt service requirements of the ESOP note. The ESOP used approximately $.5 million of common stock dividends for debt service in each of 1994, 1993 and 1992. During 1994, 1993 and 1992, the company recognized $1 million each year in compensation expense. Interest expense of $.8 million, $.5 million and $.7 million was recognized at average rates of 4.2%, 3.7% and 4.4% in 1994, 1993 and 1992, respectively.
DERIVATIVES: The company enters into interest rate hedge agreements with the objective of managing interest costs and exposure to changing interest rates. The classes of derivative financial instruments used include interest rate swaps and caps. The credit agreement requires the company to provide interest rate protection on a substantial portion of the indebtedness outstanding thereunder. Strategies for achieving the company's objectives have resulted in the company entering into interest rate swaps and caps covering $1 billion aggregate principal amount of floating rate indebtedness at year-end 1994. This amount exceeds the requirements set forth in the credit agreement.
The average interest rate on the company's floating rate indebtedness is equal to the London interbank offered rate ("LIBOR") plus a margin. The average fixed interest rate paid by the company on the interest rate swaps is 6.79%, covering $750 million of floating rate indebtedness. The interest rate swap agreements, which were implemented through eight counterparty banks, and which have an average remaining life of 3.5 years, provide for the company to receive substantially the same LIBOR that the company pays on its floating rate indebtedness. For the remaining $250 million, the company has purchased interest rate cap agreements from an additional two counterparty banks covering $250 million of its floating rate indebtedness. The agreements cap LIBOR at 7.33% over the next 3.8 years.
The company believes its exposure to potential credit loss expense is minimized primarily due to the relatively strong credit ratings of the counterparty banks for their unsecured long-term debt (A+ or higher from Standard & Poor's Ratings Group and A1 or higher from Moody's Investor Service, Inc.) and the size and diversity of the counterparty banks.
The hedge agreements are subject to market risk to the extent that market interest rates for similar instruments decrease, and the company terminates the hedges prior to maturity. However, the company believes this risk is minimized as it currently foresees no need to terminate any hedge agreements prior to their maturity. Also, interest rates for similar instruments have increased.
At year-end 1994 and 1993, hedge agreements were in place that effectively fixed rates on $1 billion (referenced above) and $70 million, respectively, of the company's floating rate debt. Additionally, for 1993, $60 million of agreements converted fixed rate debt to floating and a $100 million transaction hedged the company's risk of fluctuation between prime rate and LIBOR. The maturities for hedge agreements covering $1 billion of debt range from 1995 to 2000. The counterparties to these agreements are major national and international financial institutions.
Derivative financial instruments are reported in the balance sheet where the company has made a cash payment upon entering into the transaction. The carrying amount is amortized over the initial life of the hedge agreement. The company has a financial basis of $6.8 million in the interest rate cap agreements at year-end 1994. In addition, accrued interest payable or receivable for the interest rate agreements is included in the balance sheet. At year-end 1993, the company did not have any financial basis in the hedge agreements other than accrued interest payable or receivable.
The company's payment obligations under the interest rate swap and cap agreements meet the criteria for hedge accounting treatment. Accordingly, the company's payment obligations and receivables are accounted for as interest expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of long-term debt as of year-end 1994 and 1993 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 1994, the carrying value of debt exceeded the fair value by $14 million. At year-end 1993, the fair value of debt exceeded the carrying amount by $14 million.
For interest rate agreements, the fair value was estimated using termination cash values. At year-end 1994, the fair value of interest rate hedge agreements was $32 million. At year-end 1993, swap agreements had no fair value.
LEASE AGREEMENTS
CAPITAL AND OPERATING LEASES: The company leases certain distribution facilities with terms generally ranging from 20 to 30 years, while lease terms for other operating facilities range from 1 to 15 years. The leases normally provide for minimum annual rentals plus executory costs and usually include provisions for one to five renewal options of five years.
The company leases company-owned retail store facilities with terms generally ranging from 3 to 20 years. These agreements normally provide for contingent rentals based on sales performance in excess of specified minimums. The leases usually include provisions for one to three renewal options of two to five years. Certain other equipment is leased under agreements ranging from 2 to 8 years with no renewal options.
Accumulated amortization related to leased assets under capital leases was $45 million and $42 million at year-end 1994 and 1993, respectively.
Future minimum lease payment obligations for leased assets under capital leases as of year-end 1994 are set forth below:
Future minimum lease payments required at year-end 1994 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:
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 receivable under direct financing leases and future minimum lease payment obligations under capital leases in effect at December 31, 1994:
Contingent rental income and contingent rental expense is not material.
FACILITIES CONSOLIDATION AND RESTRUCTURING
The results in 1993 include a charge of $108 million for facilities consolidations, re-engineering, impairment of retail-related assets and elimination of regional operations. Facilities consolidations has resulted in the closure of four distribution centers and is expected to result in the closure of one additional facility the relocation of two operations and the consolidation of a center's administrative function. 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.
The table presented below reflects changes to the facilities consolidation and restructuring reserves recorded in the balance sheets.
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 31, 1994 and December 25, 1993 are as follows:
The effect of the 1993 increase in the federal statutory rate to 35% on deferred tax assets and liabilities was immaterial. The valuation allowance contains $4 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:
SHAREHOLDERS' EQUITY
The company offers a Dividend Reinvestment and Stock Purchase Plan which offers shareholders the opportunity to automatically reinvest their dividends in common stock at a 5% discount from market value. Shareholders also may purchase shares at market value by making cash payments up to $5,000 per calendar quarter. Shareholders reinvested dividends in 242,000 and 174,000 new shares in 1994 and 1993, respectively. Additional shares totaling 28,000 and 9,000 in 1994 and 1993, respectively, were purchased at market value by shareholders. In 1994, the company registered an additional 600,000 shares pursuant to this plan.
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.
SEGMENT INFORMATION
The following table sets forth, for each of the last three years the composition of the company's net sales and operating earnings.
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 1994 and 1993, options with SARs were exercisable for 20,000 and 35,000 shares, respectively. Options without SARs were exercisable for 790,000 shares in 1994 and 841,000 shares in 1993. At year-end 1994, there were 208,000 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. At year-end 1994, 62,000 shares were available for grant under the stock incentive plan. Certain restricted common shares issued in 1991 were forfeited and returned to the company since the performance objectives contained in the plans were not met and the plan expired. These shares were recorded at the market value when issued, $4 million, and were amortized to expense as earned. No amounts were expensed in 1993 or 1994, since objectives in those years were not met. In 1993, the $2 million unamortized portion was netted against capital in excess of par value within shareholders' equity. This unamortized portion was eliminated upon expiration of the plan. The shares reverted to treasury shares and $2 million is netted against capital in excess of par value within shareholders' equity.
During 1994, 262,000 restricted shares were awarded. These shares were recorded at market value when issued, $6 million, and will be amortized to expense as earned. Approximately $500,000 of compensation expense was recognized during 1994. The unamortized portion 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 $6 million, $2 million and $1 million in 1994, 1993 and 1992, 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 1994 and 1993 are: discount rate - 8.75% and 7.5%, respectively; compensation increases - 4.5% and 4%, respectively; and return on assets - 9.5% for both years.
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 $56 million, $44 million and $40 million for 1994, 1993 and 1992, respectively
ASSOCIATE POSTRETIREMENT HEALTH CARE BENEFITS
The company offers a comprehensive major medical plan to eligible retired associates who meet certain age and years of service requirements. This unfunded defined benefit plan generally provides medical benefits until Medicare insurance commences.
Components of postretirement benefits expense are as follows:
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 8.75% and 7.5% for 1994 and 1993, respectively. For measurement purposes in 1994 and 1993, a 14% annual rate of increase in the per capita cost of covered medical care benefits was assumed. In both years, the rate was assumed to decrease to 8% by 2000, then to 7.5% in 2001 and thereafter. If the assumed health care cost increased by 1% for each future year the current cost and the APBO would have increased by 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
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. Plaintiffs seek damages, treble damages, attorney's fees, costs, expenses and other appropriate relief. While the amount of damages sought under most claims is not specified, plaintiffs allege that hundreds of millions of dollars were lost as the result of the allegations contained in the complaint.
The litigation is complex, discovery has not commenced and the ultimate outcome cannot presently be determined. Furthermore, management is unable to predict a potential range of monetary exposure, if any, to the company. Based on the large recovery sought, an unfavorable judgment could have a material adverse effect on the company. Management believes, however, that a material adverse effect on the company's consolidated financial position is not likely. The company intends to vigorously defend the actions.
The company's facilities are subject to various laws and regulations regarding the discharge of materials into the environment. In conformity with these provisions, the company has a comprehensive program for testing and removal, replacement or repair of its underground fuel storage tanks and for site remediation where necessary. The company has established reserves that it believes will be sufficient to satisfy anticipated costs of all known remediation requirements. In addition, the company is addressing several other environmental cleanup matters involving its properties, all of which the company believes are immaterial.
The company has been designated by the U. S. Environmental Protection Agency ("EPA") as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with others, with respect to EPA-designated Superfund sites. While liability under CERCLA for remediation at such sites is joint and several with other responsible parties, the company believes that, to the extent it is ultimately determined to be liable for clean up at any site, such liability will not result in a material adverse effect on its consolidated financial position or results of operations.
The company is committed to maintaining the environment and protecting natural resources and to achieving full compliance with all applicable laws and regulations.
The company is a party to various other litigation, possible tax assessments and other matters, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the company expects that the outcome of these matters will not result in a material adverse effect on its consolidated financial position or results of operations.
The company has aggregate contingent liabilities for future minimum rental commitments made on behalf of customers of $227 million in 1994 and $370 million in 1993.
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 31, 1994 and December 25, 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the index at item 14. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Fleming Companies, Inc. and subsidiaries as of December 31, 1994 and December 25, 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Oklahoma City, Oklahoma February 23, 1995
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, except for the fourth quarter of 1994 which was 13 weeks. The year 1994 was a 53-week year, 1993 consists of 52 weeks.
The results of Scrivner are included effective at the beginning of the third quarter. A customer filed for bankruptcy during the third quarter, resulting in a credit loss of $6.5 million.
QUARTERLY FINANCIAL INFORMATION
The second quarter of 1993 includes $11 million of pretax income resulting from the favorable resolution of a litigation matter and a $1 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 $5 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.
SCHEDULE II
FLEMING COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 25, 1993, AND DECEMBER 26, 1992
(In thousands)
(a), (c) 3. Exhibits: PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 3.1 Certificate of Incorporation Exhibit 3.1 to Form 10-K for year ended December 28, 1991.
3.2 By-Laws Exhibit 28.2 to Form 8-K dated August 22, 1989.
4.0 Credit Agreement, dated as of Exhibit 4.0 to July 19, 1994, among Fleming Form 8-K dated Companies, Inc., the Banks July 19, 1994 listed therein and Morgan Guaranty Trust Company of New York, as Managing Agent
4.1 Pledge Agreement, dated as of Exhibit 4.1 to July 19, 1994, among Fleming Form 8-K dated Companies, Inc. and Morgan July 19, 1994 Guaranty Trust Company of New York, as Collateral Agent
4.2 Security Agreement dated as of Exhibit 4.2 to July 19, 1994, between Fleming Form 8-K dated Companies, Inc. in favor of July 19, 1994 Morgan Guaranty Trust Company of New York, as Collateral Agent
4.3 Amendment No. 1 to Credit Exhibit 4.3 to Agreement dated as of Form 8-K dated July 21, 1994 July 19, 1994
4.4 Amendment No. 2 to Credit Agreement dated as of November 14, 1994
4.5 Agreement to furnish copies of other long-term debt instruments
4.6 Rights Agreement dated as of Exhibit 28 to July 7, 1986, between the Form 8-K dated Registrant and Morgan June 24, 1986. Guaranty Trust Company of New York
4.7 Amendment to Rights Agreement Exhibit 28.1 to dated as of August 22, 1989, Form 8-K dated between the Registrant August 22, 1989. and First Chicago Trust Company of New York, as Rights Agent
4.8 Indenture dated as of December Exhibit 4 to 1, 1989, between the Registrant Registration and Morgan Guaranty Trust Statement No. Company of New York, as trustee 33-29633.
4.9 Indenture dated as of December 15, 1994, between the Registrant, the Subsidiary Guarantors and Texas Commerce Bank National Association, as Trustee, regarding $300 million of 10 5/8% Senior Notes
4.10 Indenture dated as of December 15, 1994, between the Registrant, the Subsidiary Guarantors and the Texas Commerce Bank National Association, as Trustee, regarding $200 million of Floating Rate Senior Notes
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 10.0 Stock Purchase Agreement by and Exhibit 2.0 to Fleming Companies, Inc. and Form 8-K dated Franz Haniel & Cie. GmbH dated July 19, 1994 as of July 15, 1994
10.1 Investment Advisor Agreement Exhibit 10.17 to between the Registrant and The Form 10-K for year First Boston Corporation dated ended December 30, November 27, 1989 1989.
10.2 Investment Advisor Agreement Exhibit 10.18 to between the Registrant and Form 10-K for year Merrill Lynch, Pierce, Fenner ended December 30, & Smith Incorporated dated 1989. December 5, 1989
10.3 Dividend Reinvestment and Exhibit 28.1 to Stock Purchase Plan, as Registration amended Statement No. 33-26648 and Exhibit 28.3 to Registration Statement No. 33-45190.
10.4* 1985 Stock Option Plan Exhibit 28(a) to Registration Statement No. 2-98602.
10.5* Form of Award Agreement for Exhibit 10.6 to Form 1985 Stock Option Plan (1994) 10-K for year ended December 25, 1993.
10.6* 1990 Stock Option Plan Exhibit 28.2 to Registration Statement No. 33-36586.
10.7* Form of Award Agreement for Exhibit 10.8 to Form 1990 Stock Option Plan (1994) 10-K for year ended December 25, 1993.
10.8* Fleming Management Incentive Exhibit 10.4 to Compensation Plan Registration Statement No. 33-51312.
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 10.9* Directors' Deferred Exhibit 10.5 to Compensation Plan Registration Statement No. 33-51312.
10.10* Amended and Restated Supplemental Retirement Plan
10.11* Form of Amended and Restated Supplemental Retirement Income Agreement
10.12* Godfrey Company 1984 Non- Appendix II to qualified Stock Option Plan Registration Statement No. 33-18867.
10.13* Form of Amended and Restated Severance Agreement between the Registrant and certain of its officers
10.14* Fleming Companies, Inc. 1990 Exhibit B to Stock Incentive Plan dated Proxy Statement February 20, 1990 for year ended December 30, 1989.
10.15* Phase I of Fleming Companies, Exhibit 10.16 to Inc. Stock Incentive Plan and Form 10-K for year Form of Awards Agreement ended December 30, 1989.
10.16* Phase II of Fleming Companies, Exhibit 10.12 to Inc. Stock Incentive Plan Form 10-K for year ended December 26, 1992.
10.17* Phase III of Fleming Companies, Exhibit 10.17 to Inc. Stock Incentive Plan Form 10-K for year ended December 25, 1993.
10.18* Fleming Companies, Inc. Exhibit 10.14 to Directors' Stock Form 10-K for year Equivalent Plan ended December 28, 1991.
10.19* Agreement between the Exhibit 10.19 to Registrant and Form 10-K for year E. Dean Werries ended December 25, 1993. 10.20* Supplemental Income Trust
10.21* Form of Employment Agreement between Registrant and certain of the employees
10.22* Economic Value Added Exhibit A to Proxy Incentive Bonus Plan Statement for year ended December 31, 1994
11 Earnings per share computation
12 Computation of ratio of earnings to fixed charges
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
24 Power of attorney instruments signed by certain directors and officers of the Registrant appointing Harry L. Winn, Jr., Executive Vice President and Chief Financial Officer, as attorney-in-fact and agent to sign the Annual Report on Form 10-K on behalf of said directors and officers
27 Financial Data Schedule
99 Company Undertaking
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
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 28th day of March 1995.
FLEMING COMPANIES, INC.
/s/ Robert E. Stauth --------------------------------- By: Robert E. Stauth (Chairman, President and Chief Executive 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 28th day of March 1995.
/s/ Robert E. Stauth /s/ Archie R. Dykes * /s/ Carol B. Hallett * - ------------------------- ----------------------- ----------------------- Robert E. Stauth Archie R. Dykes Carol B. Hallett (Chairman of the Board) (Director) (Director)
/s/ James G. Harlow, Jr.* /s/ Lawrence M. Jones * /s/ Edward C.Joullian III* - ------------------------- ------------------------ -------------------------- James G. Harlow, Jr. 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/ E. Dean Werries * - ------------------------- E. Dean Werries (Director)
*By /s/ Harry L. Winn, Jr. ------------------------- Harry L. Winn, Jr.
Attorney-In-Fact A Power of Attorney authorizing Harry L. Winn, Jr. to sign the Annual Report on Form 10-K on behalf of each of the indicated directors of Fleming Companies, Inc. has been filed herein as Exhibit 25.
INDEX TO EXHIBITS
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 3.1 Certificate of Incorporation Exhibit 3.1 to Form 10-K for year ended December 28, 1991.
3.2 By-Laws Exhibit 28.2 to Form 8-K dated August 22, 1989.
4.0 Credit Agreement, dated as of Exhibit 4.0 to July 19, 1994, among Fleming Form 8-K dated Companies, Inc., the Banks July 19, 1994 listed therein and Morgan Guaranty Trust Company of New York, as Managing Agent
4.1 Pledge Agreement, dated as of Exhibit 4.1 to July 19, 1994, among Fleming Form 8-K dated Companies, Inc. and Morgan July 19, 1994 Guaranty Trust Company of New York, as Collateral Agent
4.2 Security Agreement dated as of Exhibit 4.2 to July 19, 1994, between Fleming Form 8-K dated Companies, Inc. in favor of July 19, 1994 Morgan Guaranty Trust Company of New York, as Collateral Agent
4.3 Amendment No. 1 to Credit Exhibit 4.3 to Agreement dated as of Form 8-K dated July 21, 1994 July 19, 1994
4.4 Amendment No. 2 to Credit Agreement dated as of November 14, 1994
4.5 Agreement to furnish copies of other long-term debt instruments
4.6 Rights Agreement dated as of Exhibit 28 to July 7, 1986, between the Form 8-K dated Registrant and Morgan June 24, 1986. Guaranty Trust Company of New York
4.7 Amendment to Rights Agreement Exhibit 28.1 to dated as of August 22, 1989, Form 8-K dated between the Registrant August 22, 1989. and First Chicago Trust Company of New York, as Rights Agent
4.8 Indenture dated as of December Exhibit 4 to 1, 1989, between the Registrant Registration and Morgan Guaranty Trust Statement No. Company of New York, as trustee 33-29633.
4.9 Indenture dated as of December 15, 1994, between the Registrant, the Subsidiary Guarantors and Texas Commerce Bank National Association, as Trustee, regarding $300 million of 10 5/8% Senior Notes
4.10 Indenture dated as of December 15, 1994, between the Registrant, the Subsidiary Guarantors and the Texas Commerce Bank National Association, as Trustee, regarding $200 million of Floating Rate Senior Notes
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 10.0 Stock Purchase Agreement by and Exhibit 2.0 to Fleming Companies, Inc. and Form 8-K dated Franz Haniel & Cie. GmbH dated July 19, 1994 as of July 15, 1994
10.1 Investment Advisor Agreement Exhibit 10.17 to between the Registrant and The Form 10-K for year First Boston Corporation dated ended December 30, November 27, 1989 1989.
10.2 Investment Advisor Agreement Exhibit 10.18 to between the Registrant and Form 10-K for year Merrill Lynch, Pierce, Fenner ended December 30, & Smith Incorporated dated 1989. December 5, 1989
10.3 Dividend Reinvestment and Exhibit 28.1 to Stock Purchase Plan, as Registration amended Statement No. 33-26648 and Exhibit 28.3 to Registration Statement No. 33-45190.
10.4* 1985 Stock Option Plan Exhibit 28(a) to Registration Statement No. 2-98602.
10.5* Form of Award Agreement for Exhibit 10.6 to Form 1985 Stock Option Plan (1994) 10-K for year ended December 25, 1993.
10.6* 1990 Stock Option Plan Exhibit 28.2 to Registration Statement No. 33-36586.
10.7* Form of Award Agreement for Exhibit 10.8 to Form 1990 Stock Option Plan (1994) 10-K for year ended December 25, 1993.
10.8* Fleming Management Incentive Exhibit 10.4 to Compensation Plan Registration Statement No. 33-51312.
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 10.9* Directors' Deferred Exhibit 10.5 to Compensation Plan Registration Statement No. 33-51312.
10.10* Amended and Restated Supplemental Retirement Plan
10.11* Form of Amended and Restated Supplemental Retirement Income Agreement
10.12* Godfrey Company 1984 Non- Appendix II to qualified Stock Option Plan Registration Statement No. 33-18867.
10.13* Form of Amended and Restated Severance Agreement between the Registrant and certain of its officers
10.14* Fleming Companies, Inc. 1990 Exhibit B to Stock Incentive Plan dated Proxy Statement February 20, 1990 for year ended December 30, 1989.
10.15* Phase I of Fleming Companies, Exhibit 10.16 to Inc. Stock Incentive Plan and Form 10-K for year Form of Awards Agreement ended December 30, 1989.
10.16* Phase II of Fleming Companies, Exhibit 10.12 to Inc. Stock Incentive Plan Form 10-K for year ended December 26, 1992.
10.17* Phase III of Fleming Companies, Exhibit 10.17 to Inc. Stock Incentive Plan Form 10-K for year ended December 25, 1993.
10.18* Fleming Companies, Inc. Exhibit 10.14 to Directors' Stock Form 10-K for year Equivalent Plan ended December 28, 1991.
10.19* Agreement between the Exhibit 10.19 to Registrant and Form 10-K for year E. Dean Werries ended December 25, 1993. 10.20* Supplemental Income Trust
10.21* Form of Employment Agreement between Registrant and certain of the employees
10.22* Economic Value Added Exhibit A to Proxy Incentive Bonus Plan Statement for year ended December 31, 1994
11 Earnings per share computation
12 Computation of ratio of earnings to fixed charges
PAGE NUMBER OR EXHIBIT INCORPORATION BY NUMBER REFERENCE TO ------- ---------------- 21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
24 Power of attorney instruments signed by certain directors and officers of the Registrant appointing Harry L. Winn, Jr., Executive Vice President and Chief Financial Officer, as attorney-in-fact and agent to sign the Annual Report on Form 10-K on behalf of said directors and officers
27 Financial Data Schedule
99 Company Undertaking
* Management contract, compensatory plan or arrangement.