SEC LAUNCHES FORMAL INVESTIGATION OF FLEMING ACCOUNTING

Mark Hamstra

DALLAS -- Fleming Cos. here last week detailed the implications of the termination of its supply agreement with Kmart, but the wholesaler could not clear the cloud of uncertainty created by a stepped-up probe of its accounting practices by the Securities and Exchange Commission.

The company said the SEC has elevated its previously reported informal inquiry into the way Fleming accounted for vendor allowances, drop-ship deliveries and same-store sales to a formal investigation.

Fleming said it launched an independent investigation into the matter and into allegations made in previously announced shareholder litigation. The company retained PriceWaterhouseCoopers to assist in the investigation.

Also, Fleming said it would take pretax charges of $290 million for an "operational realignment" related to the loss of its supply business to Kmart, Troy, Mich. The realignment will include the exit from distribution centers in Fort Wayne, Ind., and South Brunswick, N.J.; the consolidation of two other DCs into other divisions; and the elimination of about 1,800 positions.

One analyst, who asked not to be identified, described the SEC investigation as a "wild card" in Fleming's outlook.

"I'm nervous about their accounting side," the analyst said. "I think the aggressive way they have accounted for things over the past few years may come to light."

Fleming has been reported to be among the most aggressive companies in seeking price concessions from vendors, although the company has said it adheres to standard industry practices.

Sources said a formal investigation allows the SEC to obtain more access to documents and company information as part of its inquiry. An SEC spokesman said it is against the commission's policy to either confirm or deny the existence of an investigation, much less comment on any specific inquiries.

Richard Hastings, economist, Vendor Compliance Federation, New York, an educational group focused on vendor-retailer issues, said he thinks the SEC must have found some evidence in its informal inquiry that Fleming may have made some accounting errors.

"They must think they can come up with a good reason to penalize," he said.

Shane Boyd, a Fleming spokesman, said the company "has a focused team of associates cooperating fully" with the investigation, and declined to comment on why the investigation has escalated.

Boyd also provided SN with additional details about the consolidation of the company's divisions. Fleming will shutter its case-pick distribution operations in Lubbock, Texas, and Kansas City, Mo., which employed 150 and 275 employees, respectively. Those figures are included in the total 1,800 staff reductions, which will also include staff at the company's headquarters and other case-pick divisions, he said.

The Lubbock operations will be shifted to existing facilities in Phoenix and Garland, Texas, and the Kansas City operations will be transferred to DCs in Lincoln, Neb., and Tulsa, Okla. The Lubbock and Kansas City operations are expected to wind down in about 60 days, while the South Brunswick and Fort Worth facilities, both of which were leased from third parties, are expected to be vacated shortly after the company ends distribution to Kmart on March 8.

Fleming said the cost savings from these actions would total $60 million on an annualized basis by the fourth quarter of 2003, partially offsetting the loss of the Kmart business.

The company also said it plans to reduce debt by more than $200 million in 2003, partially through the sale of its retail stores and also through a reduction in capital expenditures, to $75 million from a previous plan of $135 million.

In addition, the company said it may have to record charges related to goodwill, deferred tax assets and the book value of its retail operations that could negatively impact its previously reported results for fiscal 2002. In addition, some of the charges related to the restructuring of the distribution centers could affect 2002 results, the company said.