MEGAFOODS, FLEMING SETTLE; CHAIN'S CHAPTER 11 EXIT SEEN

ELLIOT ZWIEBACH

MESA, Ariz. -- Megafoods here and Fleming Cos., Oklahoma City, its former supplier, said last week they have reached a settlement agreement in their legal dispute -- expected to clear the way for Megafoods to emerge from Chapter 11 bankruptcy protection. The agreement is scheduled to be presented to the U.S. Bankruptcy Court for the District of Arizona today as part of the retailer's reorganization plan. Under the agreement, Fleming would gain a 10% ownership stake in Megafoods and pay the retailer $3.5 million in a sale-leaseback arrangement for store equipment, while Megafoods would drop all litigation against the wholesaler, William J. White, Megafoods president and chief executive officer, told SN. Fleming officials declined to comment on the agreement terms. White said he expects the court to approve the agreement today; if no further voting by unsecured creditors is required, he said, he expects the company to emerge from bankruptcy protection in mid-September. But if the changes necessitate a vote by creditors on the reorganization plan, it could delay the chain's emergence a month or two, he added. Megafoods filed for Chapter 11 protection in August 1994 after Fleming stopped shipping groceries to it. Megafoods filed suit against Fleming in October 1995, and it subsequently filed suit in June on the question of equitable subordination, a request to place Fleming below the chain's unsecured creditors for debt purposes. A trial on that request was slated to begin today.

According to White, the settlement includes the following: · Fleming, the chain's only secured creditor, would drop all secured debt and notes and join the unsecured creditors pool, which would own the company.

As part of the unsecured creditors pool, Fleming would get a 10% equity position in Megafoods but with no voting rights that would allow it to exercise any control over the company.

Fleming would pay Megafoods $3.5 million as part of a sale-leaseback for store equipment -- funds Megafoods intends to use to pay back some litigation costs.

Megafoods would drop all suits against Fleming, including its equitable subordination request.

Megafoods operates 38 stores: 17 price-impact units in Arizona and 21 conventional stores in Texas. White said he plans to ask the unsecured creditors committee to reject the leases on one or two units before the company emerges from bankruptcy protection. White also said Megafoods has positive cash flow.