The Securities and Exchange Commission appears to be taking a closer look at the vendor-related accounting practices of food-distribution companies through informal inquiries it launched earlier this month into Nash Finch Co., Minneapolis, and last week into Fleming, Dallas.
Nash Finch said in a statement that the SEC inquiry, with which it is cooperating, is looking into "practices and procedures relating to certain promotional allowances provided to the company by vendors." It added that the inquiry, along with an internal company review, had caused it to postpone reporting its third-quarter financial results, originally scheduled to be released in October. The results are currently scheduled to be reported tomorrow.
The company did not return repeated phone calls seeking additional comment.
Fleming said in its case the SEC inquiry is focusing on its vendor trade practices and certain accounting calculations.
Fleming's trade practices have been the subject of numerous critical reports, including a front-page Sept. 5 Wall Street Journal article and a subsequent story in SN that asserted Fleming's practice of subtracting discounts from its payments to vendors had strained its relationships with several suppliers.
A Fleming spokesman told SN that the inquiry was not a "disclosable event," but that the company had decided to inform the public about it "in light of recent media speculation and the current investor environment."
Bryan Hunt, vice president, high-yield research, Wachovia Securities, Charlotte, N.C., told SN that in the Nash Finch inquiry, "I believe the timing of promotional allowance recognition could be an accounting gray area that the SEC is attempting to clarify."
He noted that there is a "constant tug-of-war among retailers, distributors and vendors on chargebacks on allowances."
It remains unclear whether the company review and SEC inquiry are related to the issues raised in an unfair termination suit filed against Nash Finch in 2000 by Jack Haedicke, the company's former executive vice president and chief financial and administrative officer.
According to court papers, Haedicke alleged that he was terminated after he "corrected certain irregularities" in the company's financial records and refused orders by another Nash Finch executive "to take certain improper actions regarding those records, which would have had the effect of overstating the income and earnings of the company."
The suit was settled the following year for an undisclosed amount. Reached last week by phone, Haedicke and Thomas A. Keller 3rd, his attorney, said the terms of the settlement did not allow them to comment.
As for the SEC inquiry into Fleming, Hunt said that he didn't believe that Fleming's vendor trade practices went beyond the industry norm.
The other issues the SEC is focusing on in its inquiry into Fleming, according to the company, include the accounting for drop-ship sales transactions in Fleming's discontinued retail operations, the company's calculation of comparable-store sales in its discontinued retail operations and the presentation of its second-quarter 2001 earnings per share in its second-quarter 2001 and 2002 releases.
Hunt said he doubted if any of these issues would affect Fleming's finances. "I believe the only material point in the investigation could be the vendor trade practices," he observed.
It is not unusual for the SEC to conduct informal inquiries into a company's accounting practices, Paul Bessette, an Austin, Texas-based securities attorney and partner in the law firm of Brobeck, Phleger & Harrison, told SN. "They conduct a lot of inquiries, particularly when there's an earnings restatement," he said. He added that the SEC does not announce -- or comment on -- such inquiries.
Earlier this year, two food retailers, Kmart Corp., Troy, Mich., and A&P, Montvale, N.J., had to restate earnings as a result of the manner in which they accounted for vendor allowances, and both companies have said they have changed their accounting practices. Several food distributors have also had to restate their earnings this year, including Fresh Brands, Sheboygan, Wis.; Penn Traffic, Syracuse, N.Y.; Smart & Final, Los Angeles; and Supervalu, Minneapolis. However, in none of those cases were vendor relations or allowances an issue, according to the companies involved.