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As MNB reported in a Special Alert yesterday, Fleming Companies filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. It was less than two months after it lost its supply contract with Kmart Corp., which represented 20 percent of its business.

The New York Stock Exchange suspended trading in Fleming stock.

In other news that has developed on this story since the first report yesterday:

    • Fleming’s customers reportedly have developed contingency plans, so the Fleming filing will have little impact on their operations.

    •Major manufacturers are considering tightening credit terms to limit their own financial exposure.

    •Questions have been raised about Fleming’s inventory values.

    •Companies such as Fresh Brands quickly issued press releases putting distanced between themselves and Fleming’s problems.

    •Fleming sent out a memo to employees about personnel issues, telling them what is known and not known about the company’s future operations.

    Details below.

The company said it intends to use the Chapter 11 process to restructure its business operations and finances, establishing an improved capital and cost structure, and position itself for long-term success upon emergence from Chapter 11.

Fleming was the nation’s largest grocery distributor after it signed the $4.5 billion Kmart deal, which was supposed to last 10 years. Kmart terminated the pact on Feb. 3. Kmart accounted for some 20 percent of Fleming's sales.

The company listed total assets at $4.22 billion, with liabilities of $3.54 billion.

The company emphasized that it is open and conducting business at all of its facilities. The company is negotiating with its lenders, and continues to receive supplies and service its customers.

"Fleming remains focused on serving its customers and expects to file motions with the bankruptcy court to establish a critical vendor program and to enable the company to pay all of its associates on time and in the usual manner," said Peter Willmott, Fleming's Interim President and CEO. "After a thorough analysis of Fleming's condition, the Board of Directors and senior management concluded that today's court filings were both prudent and necessary.

"In January 2003, Kmart ended a major supply agreement with the company. Against this backdrop, it became clear that filing for Chapter 11 was the only choice that would allow us to continue operating as a going concern, with renewed trade credit support, while negotiating with our creditors toward an adjustment in our debt level that would be more consistent with our operations, assets and current business model.

"From an operational standpoint," Mr. Willmott continued, "we are supplying customers from existing and new inventory and continue to work closely with vendors to coordinate product flow. We applaud the dedication of our associates in continuing to move our customer service forward."

Contingency Plans
  • Dow Jones reports that most of Fleming’s retail customers have developed contingency plans in the event of a bankruptcy filing by the company. Target, fir example, which recently expanded its deal with the wholesaler to include its 1,065 Target stores, in addition to its 102 SuperTargets, doesn’t seem to be concerned because Fleming’s deliveries account for about 2 percent of sales. Target has a plan in place just in case the Fleming shipments cease, but hasn’t had to use it yet.

    Many independent supermarkets, according to Dow Jones, have been using secondary suppliers and will shift their business to them if Fleming stops deliveries.

  • Evaluating Payment Terms
    Major manufacturers such as Kraft, Procter & Gamble, ConAgra, and Campbell Soup are monitoring the company’s financial situation to limit their own financial exposure, with some considering tightening credit terms to assure they get paid for products shipped.

    Inventory Values?
  • Retail consultant Burt Flickinger III told Dow Jones that questions need to be answered about the value of Fleming’s assets, including its inventory. He said that Fleming’s flow of merchandise from food suppliers has slowed and even in some cases stopped over the past few weeks.

  • Creating Distance
  • Fresh Brands Inc. put out a press release saying that none of its 94 Piggly Wiggly stores are associated with Fleming or are affected in any way by its bankruptcy. Fresh Brands said it owns franchise rights to the Piggly Wiggly name in southern and eastern Wisconsin, counties in Northern Illinois and the Upper Peninsula of Michigan, while Fleming owns the rights elsewhere in the country.

  • Memo To Employees
  • In a memo to the company’s management associates, Fleming spelled out various employment-related questions and answers raised in the bankruptcy process, but emphasized that “it is important not to speculate beyond the answers provided. Most decisions, in the event of Chapter 11 would require court approval.”

    The memo read, in part:

      Will there be any more associate layoffs as a result of a filing? If so, how many, and when will they be announced?

      There are no layoffs expected solely as a result of this filing. Fleming has previously announced that it will realign its cost structure – which will include workforce reductions – and this process will continue.

      As usual, the most important things we can do are to continue to support each other, our customers, and drive productivity gains.

      Will there be office or facilities closures as a result of a filing?

      While there are no plans to close any office or facility solely as a result of this filing, Fleming has previously announced that it will realign its cost structure including facility closures, if necessary.

      How will a Chapter 11 filing affect associate payroll? When do I get my paycheck?

      Fleming will request court approval to continue to pay salaries and wages in a timely manner, without interruption, in the ordinary course of business. This is standard procedure, and the request is generally granted.

      Will my roles and responsibilities change as a result of a filing?

      Most likely they will not. As previously announced, however, the company will continue to realign its cost structure as business warrants and positions may be eliminated.

      Will there be any merit increases this year?

      We are currently looking at delaying any merit increases for 2003 for all support office and management associates. Hourly production associates in retail and wholesale will be considered for their normal increases as scheduled. We will continue to evaluate the Merit Budget process for the rest of the year and will advise you as soon as a decision is made.

      If I am separated due to a reduction in force, is my severance pay in jeopardy?

      Should we file for Chapter 11, severance payments that are currently owed to past associates will become pre-petition claims, payment of which will be determined through the outcome of the Chapter 11 court process. Severance payments for associates terminated after the Chapter 11 filing would be determined on a case-by-case basis.

      What happens to the Fleming associate pension and 401(k) plans?

      The Fleming pension plan is maintained separately from the company and is protected under federal law. Pension benefits are insured up to a certain amount by the Pension Benefit Guaranty Corporation, an agency of the federal government.

      The 401(k) plan also is maintained separate from the company and is protected by federal regulation. Your 401(k) benefits are not insured by the Pension Benefit Guaranty Corporation. Your benefit depends on the contributions and earnings in your 401(k) plan account. This is your account at Fidelity, and you control what funds you invest in. If you leave Fleming, your 401(k) plan account can go with you.

      In the event of Chapter 11 filing, associates who had elected to invest in Fleming stock through their 401(k) will need to assess that investment. The value of Fleming Stock would be determined by the outcome of a Chapter 11 process.

      What about shares of stock owned by associates? Should I sell my shares?

      Associates who have chosen to purchase stock in the company will be affected in the same manner as other common shareholders, insofar as their investments in Fleming are concerned.

      If the company files Chapter 11, the ultimate value of Fleming common stock would be determined by its outcome. Fleming cannot speculate as to what the terms of its final restructuring plan will be.

      If you own Fleming shares, you should consult with a financial or tax adviser to assess your personal situation. Fleming has not and cannot give financial or investment advice.

      What should associates say to customers, vendors and others outside the company who ask about the filing?

      If your job normally involves speaking with customers, vendors and others outside the company, you will be given a set of talking points that will provide you with all of the information that is currently available. We will provide you with updated information as it becomes available.

      Otherwise, all specific inquiries should be directed to the usual Fleming management representatives. For more information, please refer to the guidelines for communicating with those outside the company.
  • KC's View:
    So the basic message to employees is, if we may be allowed to freely interpret this memo…

      • Try not to say anything to anyone if you can help it.
      • If you own stock in Fleming, and it ends up with the company issuing all new stock when it emerges from bankruptcy (as is happening with Kmart), you’re screwed.
      • Don’t count on any raises.
      • And don’t even count on your job or your place of work staying the same. It’s a bankruptcy folks, and the goal is to do whatever is necessary to get the business back in shape.

    It seems to us that the biggest mistake that Fleming could make at this point is assume that all the work it has to do is organizational and financial. If it makes that assumption, it risks falling into the same trap that we believe Kmart is experiencing -- the trap of not making the fundamental cultural and structural changes that are necessary to survive long-term.

    Don’t forget. There is still a US Securities and Exchange (SEC) probe going on , examining how Fleming deals with vendor allowances and promotional money.

    As we noted in our Special Alert yesterday, Fleming must establish a new and compelling rationale for why companies should do business with it. The economics of the supermarket industry are incredibly out of whack, and there are those who would suggest that Fleming is a poster child for being out of touch with what its retailer customers need.

    We have spoken to far too many retailers in recent days who have lambasted Fleming for being completely removed from their specific needs and market circumstances. The Fleming bankruptcy filing isn’t the problem…it is just a symptom of a far greater problem that affects this company in particular, and other companies as well.