<PAGE>
FILE PURSUANT TO RULE 424 (b)(4)
REGISTRATION NO. 33-55369
P R O S P E C T U S
$500,000,000
[LOGO]
$300,000,000 10 5/8% SENIOR NOTES DUE 2001
$200,000,000 FLOATING RATE SENIOR NOTES DUE 2001
-----------------
Interest on the 10 5/8% Senior Notes due 2001 (the "Fixed Rate Notes") will
be payable semiannually on June 15 and December 15 of each year, commencing June
15, 1995. Up to 20% of the initial aggregate principal amount of the Fixed Rate
Notes may be redeemed by Fleming Companies, Inc. ("Fleming" or the "Company") at
any time on or prior to December 15, 1997 within 180 days of a Public Equity
Offering (as defined) with the net proceeds from such offering at a redemption
price equal to 110% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption; PROVIDED that, after giving
effect to such redemption, at least $200 million aggregate principal amount of
the Fixed Rate Notes remains outstanding. Upon a Change of Control Triggering
Event (as defined), in certain circumstances each holder of the Notes will have
the right to require the Company to purchase all outstanding Fixed Rate Notes of
such holder at 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. In addition, the Fixed Rate
Notes may be redeemed, in whole or in part, at any time on or after December 15,
1999 at the redemption prices set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption.
Interest on the Floating Rate Senior Notes due 2001 (the "Floating Rate
Notes") will be payable quarterly on March 15, June 15, September 15 and
December 15 of each year, commencing March 15, 1995. The Floating Rate Notes may
be redeemed by the Company, in whole or in part, on any interest payment date on
or after December 15, 1995 through and including December 14, 1999 at a
redemption price equal to 100.5% of the principal amount thereof and after
December 14, 1999 at a redemption price equal to 100% of the principal amount
thereof, in each case together with accrued and unpaid interest, if any, to the
date of redemption. Upon a Change of Control Triggering Event, in certain
circumstances each holder of the Notes will have the right to require the
Company to purchase all outstanding Floating Rate Notes of such holder at 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of purchase. In addition, mandatory sinking fund payments will
retire, prior to maturity, $1 million principal amount of Floating Rate Notes in
each of 1999 and 2000.
The Fixed Rate Notes and the Floating Rate Notes (collectively, the "Notes")
offered hereby (the "Offering") will be unsecured senior obligations of the
Company, ranking PARI PASSU with all other existing and future senior
indebtedness of the Company and senior in right of payment to any future
indebtedness of the Company that is expressly subordinated to senior
indebtedness of the Company. The Notes, however, will be effectively
subordinated to secured senior indebtedness of the Company with respect to the
assets securing such indebtedness, including indebtedness under the Company's
bank credit agreement (the "Credit Agreement"), which is secured by the capital
stock of substantially all of the Company's subsidiaries, and substantially all
of the inventory and accounts receivable of the Company and its subsidiaries,
and indebtedness under two prior indentures (the "Prior Indentures"), which is
secured by a portion of such collateral. The payment of principal of, premium,
if any, and interest on the Notes is unconditionally guaranteed on an unsecured
senior basis (the "Note Guarantees") by substantially all of the Company's
subsidiaries (the "Subsidiary Guarantors"). The Note Guarantees will rank PARI
PASSU with all other existing and future senior indebtedness of the Subsidiary
Guarantors, and senior in right of payment to any future indebtedness of the
Subsidiary Guarantors that is expressly subordinated to senior indebtedness of
the Subsidiary Guarantors. The Note Guarantees, however, will be effectively
subordinated to secured senior indebtedness of the Subsidiary Guarantors under
the Prior Indentures and the Credit Agreement, each of which is guaranteed by
substantially all of the Subsidiary Guarantors. See "Description of the Notes."
As of October 1, 1994, after giving PRO FORMA effect to the Offering and the use
of proceeds therefrom, senior indebtedness of the Company and its subsidiaries
(including obligations under capitalized leases) would have been approximately
$2.07 billion, of which $1.57 billion would have been secured indebtedness. As
of October 1, 1994, after giving PRO FORMA effect to the Offering and the use of
proceeds therefrom, the Subsidiary Guarantors would have had approximately $1.51
billion of senior indebtedness outstanding (including guarantees with respect to
the Notes and the Credit Agreement and excluding obligations under capitalized
leases), of which $1.00 billion would have been secured indebtedness. As of
October 1, 1994, after giving PRO FORMA effect to the Offering and the use of
proceeds therefrom, the total amount of indebtedness of the Company and its
subsidiaries (including obligations under capitalized leases) ranking PARI PASSU
with the Notes would have been approximately $2.07 billion.
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE
NOTES.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Fixed Rate Note................ 99.9% 2% 97.9%
Total.............................. $299,700,000 $6,000,000 $293,700,000
Per Floating Rate Note............. 100% 2% 98%
Total.............................. $200,000,000 $4,000,000 $196,000,000
<FN>
(1) Plus accrued interest, if any, from December 15, 1994.
(2) The Company and the Subsidiary Guarantors have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,250,000.
</TABLE>
---------------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Notes
will be made in New York, New York on or about December 15, 1994. The offerings
of the Fixed Rate Notes and the Floating Rate Notes, respectively, are not
conditioned upon each other.
---------------------------
MERRILL LYNCH & CO. J.P. MORGAN SECURITIES INC.
------------
The date of this Prospectus is December 8, 1994.
<PAGE>
[MAP TO COME]
<PAGE>
AVAILABLE INFORMATION
Fleming is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Suite
1400, Northwestern Atrium Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at prescribed rates at the principal office
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, such reports, proxy statements and information concerning
the Company can be inspected and copied at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005, the Pacific Stock Exchange, Inc., 301
Pine Street, San Francisco, California 94104 and the Chicago Stock Exchange, 440
South LaSalle Street, Chicago, Illinois 60605.
The Company and the Subsidiary Guarantors have filed with the Commission a
registration statement on Form S-3 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"). This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
25, 1993, the Company's Quarterly Reports on Form 10-Q for the quarters ended
April 16, July 9 and October 1, 1994 (as amended by Form 10-Q/A on November 16,
1994), and the Company's Current Reports on Form 8-K dated July 19 (as amended
by Form 8-K/A on September 2, 1994), September 23, October 19 and November 30,
1994 filed under the Exchange Act (File No. 1-8140) are hereby incorporated in
this Prospectus by reference. All documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
Offering described herein shall be deemed to be incorporated in this Prospectus
and to be a part hereof from the date of the filing of such document. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained herein or in any other
subsequently filed document which is also incorporated or deemed to be
incorporated by reference modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of the Registration Statement or this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
(without exhibits unless such exhibits are specifically incorporated by
reference into such document) of any or all documents incorporated by reference
in this Prospectus. Written requests or requests by telephone for such copies
should be directed to David R. Almond, Senior Vice President, General Counsel
and Secretary, Fleming Companies, Inc., P.O. Box 26647, Oklahoma City, Oklahoma
73126 (telephone (405) 840-7200).
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT REQUIRES OTHERWISE, THE TERM "SCRIVNER GROUP" REFERS TO
HANIEL CORPORATION ("HANIEL") AND ITS SOLE DIRECT SUBSIDIARY, SCRIVNER, INC.,
AND SCRIVNER, INC.'S SUBSIDIARIES; THE TERMS "FLEMING" AND THE "COMPANY" REFER
TO FLEMING COMPANIES, INC. AND ITS SUBSIDIARIES, INCLUDING THE SCRIVNER GROUP
AFTER THE DATE OF THE ACQUISITION OF THE SCRIVNER GROUP (JULY 19, 1994). UNLESS
OTHERWISE INDICATED, PRO FORMA INFORMATION GIVES EFFECT TO SUCH ACQUISITION.
THE COMPANY
GENERAL
The Company is a recognized leader in the food marketing and distribution
industry with both wholesale and retail operations. The Company is the largest
food wholesaler in the United States as a result of the acquisition of the
Scrivner Group in July 1994 (the "Acquisition"), based on PRO FORMA 1993 net
sales of approximately $19 billion. The Company serves as the principal source
of supply for approximately 10,000 retail food stores, including approximately
3,700 supermarkets (defined as any retail food store with annual sales of at
least $2 million) which represented approximately 13% of all supermarkets in the
United States at year-end 1993 and totaled approximately 97 million square feet
in size. 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.
With customers in 43 states, the Company services a geographically diverse area.
The Company's wholesale 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, the Company offers a wide range of
support services to its customers to help them compete more effectively with
other food retailers in their respective markets. Such services include store
development and expansion services, merchandising and marketing assistance,
advertising, consumer education programs, retail electronic services and
employee training.
In addition to its wholesale operations, the Company has a significant
presence in food retailing, owning and operating 345 retail food stores,
including 283 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.
PRO FORMA 1993 net sales from retail operations were approximately $3 billion.
The Company believes it is one of the 20 largest food retailers in the United
States based on PRO FORMA net sales.
COMPETITIVE STRENGTHS
Fleming's net sales grew from approximately $5 billion in 1983 to
approximately $13 billion in 1993, largely as a result of acquisitions of
wholesale food distributors and operations. After giving PRO FORMA effect to the
Acquisition, the Company's 1993 net sales were approximately $19 billion. The
Company believes that its position as a leader in the food marketing and
distribution industry is attributable to a number of competitive strengths,
including the following:
SIZE. As the largest food wholesaler in the United States, the Company has
substantial purchasing power and is able to realize significant economies of
scale.
DIVERSE CUSTOMER BASE. In 1993, chains and multiple-store independent
operators represented 40% and 33%, respectively, of Fleming's net sales,
with the balance comprised of sales to single-store independent operators
and Fleming-owned stores. Approximately one-third of the Scrivner Group's
1993 net sales were to Scrivner Group-owned stores, with the balance
comprised of sales to multi-store independent operators, single-store
operators and chains. In addition, with customers in 43 states, the
Company's sales are geographically dispersed.
EXPERTISE IN PRIVATE LABEL PRODUCTS AND PERISHABLES. The Company offers a
wide range of private label products and perishables and has developed
extensive expertise in handling, marketing and distributing these products.
The Company believes that these products are an important element in
attracting and
4
<PAGE>
retaining consumers. This expertise has permitted the Company to derive 41%
of 1993 PRO FORMA net sales from the sale of perishables. In addition,
private label products and certain perishables (such as produce, frozen
foods and bakery goods) generally produce higher margins than other food
categories.
EFFICIENT DISTRIBUTION NETWORK. Fleming has successfully integrated the
operations of previously acquired food wholesalers, thereby developing an
efficient distribution network, and has recorded 19 consecutive years of
warehouse productivity increases. The Company aggressively pursues
opportunities for the consolidation of distribution centers, seeking to
eliminate duplicative operations and facilities and achieve greater
efficiencies. In addition, the Company believes it is an industry leader in
the development and application of advanced distribution technology.
LONG-TERM SUPPLY CONTRACTS. The Company pursues various means of obtaining
future business, including the formation of alliances with retailers. In
particular, the Company has focused on retailers with demonstrated operating
success, including operators of alternative formats such as warehouse stores
and supercenters. The Company has long-term supply contracts with a number
of its major customers. For example, in December 1993, the Company signed a
six-year supply agreement with Kmart Corporation ("Kmart") to serve its new
Super Kmart Centers in areas where the Company has distribution facilities.
MANAGEMENT TEAM. The Company is led by an experienced management team
comprised of individuals who combine many years in the food marketing and
distribution industry. See "Management."
BUSINESS STRATEGY
The Company's strategy is to maintain and strengthen its position in food
marketing and distribution by: (i) consolidating distribution centers into
larger, more efficient centers and eliminating functions that do not add
economic value; (ii) maximizing the Company's substantial purchasing power;
(iii) building and maintaining long-term alliances with successful retailers,
including both traditional and alternative format operators; (iv) remaining at
the forefront of technology-driven distribution systems; (v) continuing to
capitalize on the Company's expertise in handling private label products and
perishables; and (vi) focusing on the profitability of Company-owned stores on a
stand-alone basis and increasing net sales of such stores through internal
growth and, in the long term, selective acquisitions.
The Company has begun implementing a number of the steps outlined above,
beginning with an announced plan to consolidate facilities, reorganize
management and reengineer operations. See "Investment Considerations -- Response
to a Changing Industry," "Management's Discussion and Analysis -- The
Consolidation, Reorganization and Reengineering Plan" and "Business -- Business
Strategy" and "-- The Consolidation, Reorganization and Reengineering Plan."
THE ACQUISITION
In July 1994, pursuant to a stock purchase agreement between Fleming and
Franz Haniel & Cie. GmbH, Fleming acquired all of the outstanding stock of
Haniel. Haniel, its sole direct subsidiary, Scrivner, Inc., and Scrivner, Inc.'s
subsidiaries are collectively referred to herein as the "Scrivner Group."
Fleming paid $388 million in cash and refinanced substantially all of the
Scrivner Group's existing indebtedness (approximately $670 million in aggregate
principal amount and premium). In connection with the Acquisition, Fleming
refinanced approximately $340 million in aggregate principal amount of its own
indebtedness.
The Acquisition of the Scrivner Group significantly enhanced the Company's
position as a leader in the food marketing and distribution industry. As a
result of its dramatically increased size, in terms of both retail stores served
and Company-owned stores, the Company believes it has gained substantial
purchasing power. Fleming acquired 179 Scrivner Group-owned stores as a result
of the Acquisition. The Company benefits from the Scrivner Group's product mix
which, like Fleming's, is favorably weighted toward perishables and private
label products. In addition, the Acquisition has resulted in a broader, more
geographically diverse customer base with a larger Company-owned retail network.
The Company believes it will be able to utilize the best features of both
Fleming's and Scrivner's investments in technology, a crucial element for the
long-term success of a food marketing and distribution company. The Company
expects to realize substantial savings through facilities consolidation and
reductions in corporate overhead.
5
<PAGE>
To finance the Acquisition and to provide future working capital, the
Company entered into a $2.2 billion credit facility (the "Credit Agreement")
with a group of banks led by Morgan Guaranty Trust Company of New York ("Morgan
Guaranty"). To secure its obligations under the Credit Agreement, the Company
pledged the capital stock of substantially all of its subsidiaries and
substantially all of the inventory and accounts receivable of the Company and
its subsidiaries. A portion of the collateral was also pledged for the equal and
ratable benefit of the holders of debt issued under two prior indentures (the
"Prior Indentures"). See "Certain Other Obligations." The collateral will be
released upon the earlier to occur of the repayment of the borrowings under the
Credit Agreement and the cancellation of the commitments thereunder or the date
on which the Company's senior unsecured debt receives investment grade ratings
from both Standard & Poor's Ratings Group and Moody's Investors Service, Inc.
See "The Credit Agreement."
THE OFFERING
<TABLE>
<S> <C>
NOTES OFFERED
Fixed Rate Notes................ $300,000,000 aggregate principal amount of 10 5/8%
Senior Notes due 2001; and
Floating Rate Notes............. $200,000,000 aggregate principal amount of Floating Rate
Senior Notes due 2001.
FIXED RATE NOTES
Maturity Date................... December 15, 2001.
Interest Payment Dates.......... June 15 and December 15 of each year, commencing June
15, 1995.
Optional Redemption............. The Company may redeem up to 20% of the initial
aggregate principal amount of the Fixed Rate Notes at
any time on or prior to December 15, 1997, within 180
days of a Public Equity Offering with the net proceeds
of such offering, at a redemption price equal to 110% of
the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption;
PROVIDED that, after having given effect to such
redemption, at least $200 million aggregate principal
amount of the Fixed Rate Notes remains outstanding. In
addition, the Company may redeem the Fixed Rate Notes,
in whole or in part, at any time on or after December
15, 1999, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to
the date of redemption. See "Description of the Notes --
Terms Specific to the Fixed Rate Notes -- OPTIONAL
REDEMPTION."
FLOATING RATE NOTES
Maturity Date................... December 15, 2001.
Interest Rate................... A rate per annum, determined quarterly, equal to the
Applicable LIBOR Rate (225 basis points over the LIBOR
Rate). See "Description of the Notes -- Terms Specific
to the Floating Rate Notes -- MATURITY, INTEREST AND
PRINCIPAL."
Interest Payment Dates.......... March 15, June 15, September 15 and December 15 of each
year, commencing March 15, 1995.
Optional Redemption............. The Company may redeem the Floating Rate Notes, in whole
or in part, on any Interest Payment Date on or after
December 15, 1995 through and including December 14,
1999, at a redemption price equal to 100.5% of the
principal amount thereof, and after December 14, 1999 at
a redemption price equal to 100% of the principal amount
thereof, in each case together with accrued and unpaid
interest, if any, to the date of redemption. See
"Description of the Notes -- Terms Specific to the
Floating Rate Notes -- OPTIONAL REDEMPTION."
</TABLE>
6
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<TABLE>
<S> <C>
TERMS COMMON TO FIXED RATE NOTES
AND FLOATING RATE NOTES
Change of Control............... Upon the occurrence of a Change of Control Triggering
Event (as defined in the indentures pursuant to which
the Notes will be issued; the "Senior Note Indentures"),
and after satisfaction by the Company of the
requirements described below, each holder of the Notes
will have the right to require the Company to purchase
all of such holder's Notes at a price equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. Prior
to mailing the notice of a Change of Control Triggering
Event to holders of the Notes, the Senior Note
Indentures require the Company to retire all amounts
outstanding under the Credit Agreement, or to obtain any
necessary consent thereunder. Failure to do so within
the time limits prescribed by the Senior Note Indentures
would constitute a default by the Company under the
Senior Note Indentures and would entitle the holders to
accelerate the obligations due under the Notes. If a
Change of Control Triggering Event occurs, there can be
no assurance that the Company will have available funds
sufficient to redeem the Notes. Each of the Credit
Agreement and the Prior Indentures requires the Company
to repay the Indebtedness under the Credit Agreement
($1.55 billion as of November 1, 1994) and purchase the
outstanding Indebtedness under the Prior Indentures
($196 million as of November 1, 1994), respectively, in
the event of a change of control. If purchase of the
Notes, repayment of the Indebtedness under the Credit
Agreement and purchase of the outstanding Indebtedness
under the Prior Indentures were all triggered at the
same time, it is possible that the Company would be
unable to satisfy these obligations. One of the events
which constitutes a Change of Control Triggering Event
under the Senior Note Indentures is the disposition of
"all or substantially all" of the Company's assets. This
term has not been interpreted under New York law to
represent a specific quantitative test. As a
consequence, in the event holders of the Notes elect to
require the Company to purchase the Notes and the
Company elects to contest such election, there can be no
assurance as to how a court interpreting New York law
would interpret the phrase. See "Description of the
Notes -- Certain Covenants -- PURCHASE OF NOTES UPON A
CHANGE OF CONTROL TRIGGERING EVENT."
Ranking......................... The Notes are unsecured senior obligations of the
Company, and will rank PARI PASSU with all other
existing and future Senior Indebtedness of the Company
and senior in right of payment to any future
Indebtedness of the Company that is expressly
subordinated to Senior Indebtedness of the Company. The
Notes are effectively subordinated to secured Senior
Indebtedness of the Company with respect to the assets
securing such indebtedness, including Indebtedness under
the Credit Agreement, which is secured by the capital
stock of substantially all of the Company's subsidiaries
and substantially all of the inventory and accounts
receivable of the Company and its subsidiaries, and
Indebtedness under the Prior Indentures which
</TABLE>
7
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<TABLE>
<S> <C>
is secured by a portion of such collateral. See "The
Credit Agreement," "Description of the Notes -- Ranking"
and "Certain Other Obligations." As of October 1, 1994,
after giving PRO FORMA effect to the Offering and the
use of proceeds therefrom, Senior Indebtedness of the
Company (including obligations under capitalized leases)
would have been approximately $2.07 billion, of which
$1.57 billion would have been secured Senior
Indebtedness. As of October 1, 1994, after giving PRO
FORMA effect to the Offering and the use of proceeds
therefrom, the total amount of indebtedness of the
Company and its subsidiaries (including obligations
under capitalized leases) ranking PARI PASSU with the
Notes would have been approximately $2.07 billion.
Guarantees...................... The payment of principal of, premium, if any, and
interest on the Notes is unconditionally guaranteed on
an unsecured senior basis (the "Note Guarantees") by
substantially all of the Company's subsidiaries (the
"Subsidiary Guarantors"). Each Note Guarantee ranks PARI
PASSU with all other existing and future Senior
Indebtedness of the Subsidiary Guarantor issuing such
Note Guarantee and senior in right of payment to any
future Indebtedness of such Subsidiary Guarantor that is
expressly subordinated to Senior Indebtedness of such
Subsidiary Guarantor. However, the Note Guarantees are
effectively subordinated to secured Senior Indebtedness
of the Note Guarantors under the Prior Indentures and
the Credit Agreement, the obligations under each of
which are also guaranteed by substantially all of the
Subsidiary Guarantors. See "Description of the Notes --
Ranking" and "-- Guarantees." As of October 1, 1994,
after giving PRO FORMA effect to the Offering and the
use of proceeds therefrom, Senior Indebtedness of the
Subsidiary Guarantors (including guarantees with respect
to the Notes and the Credit Agreement and excluding
obligations under capitalized leases) would have been
approximately $1.51 billion, of which $1.00 billion
would have been secured Senior Indebtedness. As of
October 1, 1994, after giving PRO FORMA effect to the
Offering and the use of proceeds therefrom, the total
amount of indebtedness (excluding obligations under
capitalized leases) of the Subsidiary Guarantors ranking
PARI PASSU with the Notes would have been approximately
$1.51 billion.
Covenants....................... The Senior Note Indentures contain certain covenants,
including, without limitation: (i) limitation on
restricted payments; (ii) limitation on liens; (iii)
requirements for additional guarantees; and (iv)
restrictions on consolidations, mergers and sale of
substantially all assets. In addition, the Company will
be prohibited from incurring additional Indebtedness
(other than Permitted Indebtedness and without regard to
ranking) if after such incurrence the Consolidated Fixed
Charge Coverage Ratio for the immediately preceding four
fiscal quarters, calculated on a PRO FORMA basis, does
not meet or exceed 1.75 to 1. See "Description of the
Notes -- Certain Covenants" and "-- Consolidation,
Merger, Sale of Assets."
</TABLE>
8
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<TABLE>
<S> <C>
Use of Proceeds................. The net proceeds of the Offering will be used by the
Company to reduce a portion of the indebtedness incurred
under the Credit Agreement in connection with the
Acquisition. See "Use of Proceeds."
Absence of Public Market........ There is no public trading market for the Notes, and the
Company does not intend to apply for listing of the
Notes on any securities exchange or quotation of the
Notes on any inter-dealer quotation system. The Company
has been advised by the Underwriters that, following the
completion of the initial offering of the Notes, the
Underwriters presently intend to make a market in the
Notes although the Underwriters are under no obligation
to do so and may discontinue any market making at any
time without notice. No assurances can be given as to
the liquidity of the trading markets for the Notes or
that active trading markets for the Notes will develop.
If active public trading markets for the Notes do not
develop, the market prices and liquidity of the Notes
may be adversely affected.
</TABLE>
INVESTMENT CONSIDERATIONS
For a discussion of certain factors which should be considered by
prospective investors in evaluating an investment in the Notes, see "Investment
Considerations."
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
Set forth below and on the following pages is summary PRO FORMA financial
information for the Company and summary historical financial information for
Fleming and the Scrivner Group. Fleming's consolidated financial statements are
prepared on the basis of a 52 or 53 week year, ending on the last Saturday in
December. Fleming's first fiscal quarter contains 16 weeks and each subsequent
quarter contains 12 weeks; the additional week in each 53 week year is added to
the fourth fiscal quarter. The Scrivner Group's financial information is derived
from Haniel's consolidated financial statements which are prepared on a calendar
year basis.
THE COMPANY -- PRO FORMA
The unaudited PRO FORMA financial information for the Company set forth
below has been derived from the unaudited PRO FORMA financial information
included elsewhere in this Prospectus and gives effect to the Acquisition and
the financing thereof and the Offering and the use of proceeds therefrom, as if
they had occurred at the beginning of the periods presented. The unaudited PRO
FORMA financial information does not necessarily represent what the Company's
results of operations would have been if the Acquisition and the financing
thereof and the Offering and the use of proceeds therefrom had actually been
completed on the dates indicated, and are not intended to project the Company's
results of operations for any future period. The following summary PRO FORMA
financial information should be read in conjunction with the consolidated
financial statements of Fleming and Haniel and related notes thereto and the
unaudited PRO FORMA financial information for the Company included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA 40 WEEKS ENDED
YEAR ENDED OCTOBER 1,
DECEMBER 25, 1993 1994
----------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(A):
Net sales............................... $ 19,109 $ 14,281
Cost of sales(b)........................ 17,497 13,058
Selling and administrative expense(b)... 1,314 1,048
Facilities consolidation and
restructuring charge................... 108 --
------- -------
Income from operations.................. 190 175
Interest expense........................ 202 148
Interest income(c)...................... 69 51
Losses from equity investments.......... 12 11
------- -------
Earnings before taxes................... 45 67
Taxes on income......................... 24 34
------- -------
Earnings before extraordinary item(d)... $ 21 $ 33
------- -------
------- -------
OTHER DATA:
EBITDA(e)............................... $ 528(f) $ 367
Depreciation and amortization........... 174 141
Capital expenditures.................... 108 107
Total debt, including capitalized
leases(g).............................. -- 2,074
Ratio of EBITDA to interest expense..... 2.61x 2.48x
Ratio of earnings to fixed charges(h)... 1.19x 1.38x
<FN>
- ------------------------------
(a) No adjustments have been made to reflect any potential cost savings that
the Company may realize from the Company's plan to consolidate additional
facilities, reorganize management and reengineer operations or which may
result from the Acquisition. See "Management's Discussion and Analysis" and
"Business -- Business Strategy" and "-- The Consolidation, Reorganization
and Reengineering Plan."
(b) PRO FORMA statement of operations data for cost of sales and selling and
administrative expense are affected by classification differences between
Fleming's and Haniel's consolidated financial statements. Certain costs and
expenses included in determining cost of sales for Fleming are classified
as selling, operating and administrative expenses in Haniel's consolidated
financial statements. Subsequent to the Acquisition, account classification
will be conformed to that used by Fleming.
(c) Consists primarily of interest earned on notes receivable from customers.
Also includes income generated from direct financing leases of retail
stores and related equipment.
(d) In 1993, the Company realized an extraordinary after-tax loss of $2.3
million related to the early retirement of indebtedness.
(e) EBITDA represents earnings before extraordinary item before taking into
consideration interest expense, income taxes, depreciation and
amortization, equity investment results and facilities consolidation and
restructuring charge. EBITDA should not be considered as an alternative
measure of the Company's net income, operating performance, cash flow or
liquidity. It is included herein to provide additional information related
to the Company's ability to service debt. The Senior Note Indentures
contain covenants limiting the incurrence of Indebtedness (other than
Permitted Indebtedness) and the making of certain Restricted Payments (as
defined) unless a minimum required consolidated fixed charge coverage
ratio, calculated on a PRO FORMA basis, is met. This ratio, which
approximates EBITDA divided by consolidated interest expense, is 1.75 to 1.
For illustrative purposes, based on PRO FORMA consolidated interest expense
of $202 million for the year ended December 25, 1993, the minimum EBITDA
required for the Company to incur additional Indebtedness (other than
Permitted Indebtedness), to pay dividends or to make certain other
Restricted Payments, was $354 million.
(f) PRO FORMA 1993 EBITDA has been reduced by $13 million to reflect certain
non-recurring items recorded in Fleming's selling and administrative
expense.
(g) Total debt, including capitalized leases, is calculated as if the Offering
and the use of proceeds therefrom had occurred on October 1, 1994. See
"Capitalization."
(h) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
</TABLE>
10
<PAGE>
FLEMING -- HISTORICAL
The following table sets forth certain historical financial information for
Fleming as of and for the periods indicated. The historical balance sheet and
statement of operations data as of and for the years ended the last Saturday in
December 1989 through 1993 have been derived from audited consolidated financial
statements of Fleming. The historical balance sheet and income statement data as
of and for the three quarters (40 weeks) ended October 2, 1993 and October 1,
1994 have been derived from the unaudited consolidated condensed financial
statements of Fleming. The table should be read in conjunction with "Selected
Financial Information," "Management's Discussion and Analysis" and Fleming's
consolidated financial statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
40 WEEKS ENDED
---------------------
YEAR ENDED LAST SATURDAY IN DECEMBER, OCTOBER
------------------------------------------------------------------ OCTOBER 2, 1,
1989 1990 1991 1992 1993 1993 1994(A)
---------- ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 11,992 $ 11,884 $ 12,851 $ 12,894 $ 13,092 $ 9,946 $11,057
Gross margin.................. 690 683 748 727 765 588 762
Selling and administrative
expense...................... 508 473 537 495 558 417 635
Facilities consolidation and
restructuring charge(b)...... -- -- 67 -- 108 7 --
Income from operations........ 182 210 144 232 99 164 127
Interest expense.............. 96 94 93 81 78 59 76
Interest income(c)............ 57 55 61 59 63 48 47
Earnings before taxes......... 139 165 104 195 72 147 87
Earnings before extraordinary
items and accounting
change(d).................... 80 97 64 119 37 85 46
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital............... $ 363 $ 377 $ 424 $ 528 $ 442 $ 409 $ 454
Total assets.................. 2,689 2,768 2,958 3,118 3,103 3,141 4,624
Total debt, including
capitalized leases........... 1,009 1,012 989 1,086 1,078 1,055 2,064
Shareholders' equity.......... 742 814 949 1,060 1,060 1,119 1,079
OTHER DATA:
EBITDA(e)(f).................. $ 303 $ 342 $ 378 $ 380 $ 358 $ 283 $ 276
Depreciation and
amortization................. 78 83 91 94 101 77 102
Capital expenditures.......... 105 51 65 62 53 32 82
Ratio of EBITDA to interest
expense...................... 3.16x 3.64x 4.06x 4.69x 4.59x 4.80x 3.63x
Ratio of earnings to fixed
charges(g)................... 2.14x 2.40x 1.89x 2.85x 1.71x 2.90x 1.90x
<FN>
- ------------------------------
(a) Includes the Scrivner Group since the Acquisition.
(b) See further discussion contained in "Management's Discussion and Analysis
-- The Consolidation, Reorganization and Reengineering Plan."
(c) Consists primarily of interest earned on notes receivable from customers.
Also includes income generated from direct financing leases of retail
stores and related equipment.
(d) In 1992 and 1993, the Company recorded extraordinary after-tax losses of
$5.9 million and $2.3 million, respectively, related to the early
retirement of indebtedness. In 1991, the Company recognized a $9.3 million
charge to net earnings in connection with the adoption of SFAS No. 106 --
Employers' Accounting for Postretirement Benefits Other Than Pensions.
(e) EBITDA represents earnings before extraordinary items and accounting change
before taking into consideration interest expense, income taxes,
depreciation and amortization, equity investment results and facilities
consolidation and restructuring charge. EBITDA should not be considered as
an alternative measure of the Company's net income, operating performance,
cash flow or liquidity. It is included herein to provide additional
information related to the Company's ability to service debt. The Senior
Note Indentures contain covenants limiting the incurrence of Indebtedness
(other than Permitted Indebtedness) and the making of certain Restricted
Payments unless a minimum required consolidated fixed charge coverage
ratio, calculated on a PRO FORMA basis, is met. This ratio, which
approximates EBITDA divided by consolidated interest expense, is 1.75 to 1.
For illustrative purposes, based on PRO FORMA consolidated interest expense
of $202 million for the year ended December 25, 1993, the minimum EBITDA
required for the Company to incur additional Indebtedness (other than
Permitted Indebtedness), to pay dividends or to make certain other
Restricted Payments, was $354 million.
(f) In 1989 and 1990, EBITDA has been reduced to reflect non-recurring pre-tax
gains of approximately $14 million and $6 million, respectively, that
resulted from selling minority equity positions in a former subsidiary. In
1991, EBITDA has been increased by $15 million to reflect non-recurring
pre-tax charges related to litigation settlements and the write-down of a
non-operating asset. In 1992, EBITDA has been reduced to reflect a $5
million non-recurring pre-tax gain related to a litigation settlement. For
each of the year ended December 1993 and the 40 weeks ended October 2,
1993, EBITDA has been reduced by $13 million to reflect the net effect of
certain non-recurring items. All such non-recurring items were recorded in
selling and administrative expense for the relevant period.
(g) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
</TABLE>
11
<PAGE>
THE SCRIVNER GROUP -- HISTORICAL
The following table sets forth certain historical financial information for
the Scrivner Group as of and
for the periods indicated. The historical balance sheet and statement of
operations data as of and for the years ended December 31, 1989 through 1993
have been derived from the audited consolidated financial statements of Haniel.
The historical balance sheet and statement of operations data as of and for the
six months ended June 30, 1993 and 1994 have been derived from the unaudited
consolidated financial statements of Haniel. The table should be read in
conjunction with "Selected Financial Information", "Management's Discussion and
Analysis -- Analysis of the Scrivner Group's Historical Results of Operations"
and the Haniel consolidated financial statements and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- --------------
1989 1990 1991 1992 1993 1993 1994
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................................. $3,765 $5,602 $5,606 $5,685 $6,017 $3,238 $3,224
Gross margin(a)....................................................... 458 748 771 792 849 454 462
Selling, operating and administrative expense(a)...................... 401 646 661 687 752 401 411
Income from operations................................................ 57 102 110 105 97 53 51
Interest expense...................................................... 36 82 72 62 56 31 28
Interest income(b).................................................... 4 7 6 6 6 3 4
Earnings before taxes................................................. 25 27 44 49 47 25 27
Net earnings.......................................................... 13 14 22 25 25 13 13
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital....................................................... $ 194 $ 171 $ 118 $ 234 $ 208 $ 264 $ 198
Total assets.......................................................... 1,347 1,392 1,375 1,387 1,372 1,408 1,317
Total debt, including capitalized leases.............................. 751 759 651 721 662 743 620
Shareholder's equity.................................................. 175 189 211 242 267 254 280
OTHER DATA:
EBITDA(c)............................................................. $ 96 $ 166 $ 175 $ 170 $ 168 $ 91 $ 90
Depreciation and amortization......................................... 35 57 59 59 65 35 35
Capital expenditures.................................................. 50 62 49 42 55 31 25
Ratio of EBITDA to interest expense................................... 2.67x 2.02x 2.43x 2.74x 3.00x 2.94x 3.21x
Ratio of earnings to fixed charges(d)................................. 1.64x 1.30x 1.54x 1.64x 1.65x 1.64x 1.73x
<FN>
- ------------------------------
(a) Certain costs and expenses that Fleming includes in determining its gross
margin are classified as selling, operating and administrative expenses in
Haniel's consolidated financial statements.
(b) Consists primarily of interest earned on notes receivable from customers.
Also includes income generated from direct financing leases of retail
stores and related equipment.
(c) EBITDA represents earnings before taking into consideration interest
expense, income taxes, and depreciation and amortization. EBITDA should not
be considered as an alternative measure of the Scrivner Group's net income,
operating performance, cash flow or liquidity. It is included herein to
provide additional information related to the Scrivner Group's ability to
service debt.
(d) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
</TABLE>
12
<PAGE>
INVESTMENT CONSIDERATIONS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing the Notes offered hereby.
LEVERAGE AND DEBT SERVICE
The Company incurred substantial indebtedness in connection with the
financing of the Acquisition and is subject to substantial repayment
obligations. As of October 1, 1994, the Company had total indebtedness
(including capitalized lease obligations) of approximately $2.06 billion and
shareholders' equity of approximately $1.08 billion (on a PRO FORMA basis after
giving effect to the Offering and the use of proceeds therefrom, $2.07 billion
and $1.08 billion, respectively). Although the Company is subject to restrictive
covenants under the Senior Note Indentures and the Credit Agreements (see "--
Restrictive Covenants"), there remains significant borrowing capacity under such
agreements. Although the Company has no present plans to pursue acquisitions, it
may borrow additional amounts to do so in the future, resulting in increased
leverage. See "Use of Proceeds" and "Capitalization."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including: (i) the Company's ability
to obtain additional financing for working capital or other purposes in the
future may be limited; (ii) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of the principal of and
interest on its indebtedness, thereby reducing funds available for operations;
(iii) certain of the Company's borrowings, including the Floating Rate Notes and
all borrowings under the Credit Agreement, will be at variable rates of interest
(subject to the requirement that the Company enter into interest rate protection
agreements for a substantial portion of its borrowings under the Credit
Agreement; see "The Credit Agreement") which could cause the Company to be
vulnerable to increases in interest rates; (iv) the Company may be more
vulnerable to economic downturns and be limited in its ability to withstand
competitive pressures; and (v) all of the indebtedness incurred in connection
with the Credit Agreement will become due prior to the maturity of the Notes
(except for the first $1 million due in connection with the sinking fund
established for the benefit of the Floating Rate Notes). The Company's ability
to make scheduled payments of the principal of, premium, if any, or interest on,
or to refinance, its indebtedness will depend on its future operating
performance and cash flow, which are subject to prevailing economic conditions,
prevailing interest rate levels, and financial, competitive, business and other
factors, many of which are beyond its control. See "Management's Discussion and
Analysis" and "Description of the Notes -- Certain Covenants -- PURCHASE OF
NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT."
Although the Company conducts substantial operations at the parent company
level, the majority of operations are conducted by the Company's subsidiaries.
In order to access funds generated by subsidiary operations, the Company must
either cause such subsidiaries to declare dividends or otherwise must borrow the
funds pursuant to intercompany credit transactions. There are currently no
agreements which restrict any of the subsidiaries' ability to declare dividends
or lend funds to the Company, and the Credit Agreement prohibits such
agreements. The Company believes that, based upon current levels of operations,
it should be able to meet its debt service obligations, including principal and
interest payments on the Notes, when due. If the Company cannot generate
sufficient cash flow from operations to meet its obligations, the Company might
be required to refinance its indebtedness. There can be no assurance that a
refinancing could be effected on satisfactory terms or would be permitted by the
terms of the Credit Agreement, the Prior Indentures or the Senior Note
Indentures.
RESTRICTIVE COVENANTS
The Credit Agreement and the Senior Note Indentures contain numerous
restrictive covenants which limit the discretion of the Company's management
with respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company and the
Subsidiary Guarantors 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, another entity which is not controlled by the Company. See
"The Credit Agreement" and "Description of the Notes -- Certain Covenants" and
"-- Consolidation, Merger, Sale of Assets." The Credit Agreement also contains a
number of financial covenants which require the Company to
13
<PAGE>
meet certain financial ratios and tests. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources" and "The Credit Agreement." A
failure to comply with the obligations contained in the Credit Agreement or the
Senior Note Indentures, if not cured or waived, could permit acceleration of the
related indebtedness and acceleration of indebtedness under other instruments
which contain cross-acceleration or cross-default provisions. If the Company
were obligated to repay all of its senior debt at one time, there is no
assurance that the Company would have sufficient cash to do so or that the
Company could successfully refinance such indebtedness. Other indebtedness of
the Company and its subsidiaries that may be incurred in the future may contain
financial or other covenants more restrictive than those applicable to the
Credit Agreement and the Notes.
ASSET ENCUMBRANCES
The Notes will not be secured by any of the Company's assets or any of the
Subsidiary Guarantor's assets. The obligations of the Company under the Credit
Agreement are secured by the capital stock of substantially all of the Company's
subsidiaries and substantially all of the inventory and accounts receivable of
the Company and its subsidiaries. The obligations of the Company under the Prior
Indentures are secured by the capital stock and the inter-company indebtedness
(including inter-company accounts receivable) of substantially all of the
Company's subsidiaries. If the Company becomes insolvent or is liquidated, or if
payment under the Credit Agreement or other secured indebtedness is accelerated,
the lenders under the Credit Agreement, the Prior Indentures and any other
instruments defining the rights of lenders of secured indebtedness would be
entitled to exercise the remedies available to a secured lender under applicable
law so long as such security remains in place. Accordingly, such lenders may
have a prior claim on a substantial portion of the assets of the Company and its
subsidiaries.
ABILITY TO INTEGRATE THE SCRIVNER GROUP; PROFITABILITY OF COMPANY-OWNED STORES
The Acquisition represents a dramatic increase in the size and complexity of
the Company. Future operations and earnings will be largely dependent upon the
Company's ability to integrate the Scrivner Group effectively. The Company must
identify and close duplicative facilities, while retaining and transferring
related business, and must reduce combined administrative costs and expenses.
There can be no assurance that the Company will successfully integrate the
Scrivner Group, and a failure to do so could have a material adverse effect on
the Company's results of operations and financial condition. Additionally,
integration of the Scrivner Group and servicing the indebtedness incurred in
connection with the Acquisition may limit the Company's ability to successfully
pursue acquisition opportunities for the foreseeable future.
In addition, certain stores acquired in the Acquisition, as well as certain
other Company-owned stores, are not profitable on a stand-alone basis. The
Company has developed a specific retail strategy to improve the profitability of
its retail operations. Failure to implement this strategy successfully could
lead to the continued underperformance of the combined retail operations. See
"Management's Discussion and Analysis."
RESPONSE TO A CHANGING INDUSTRY
The food marketing and distribution industry is undergoing accelerated
change as producers, manufacturers, distributors and retailers seek to lower
costs and increase services in an increasingly competitive 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. In response
to these changes and to feedback from its customers, the Company has initiated a
consolidation, reorganization and reengineering plan to redesign the way in
which the Company markets, distributes and prices its products and services. The
Company will seek to become the low-cost provider of its products by changing
its pricing practices across most of its product line so as to pass through to
its customers promotional fees and allowances received from vendors while fully
recovering its expenses and realizing an adequate return. Additionally, the
Company plans to unbundle certain services and provide only those services which
its
14
<PAGE>
customers want and for which they are willing to pay. See "Business -- The
Consolidation, Reorganization and Reengineering Plan." The Company believes that
its ultimate success will depend on its ability to reduce costs significantly
throughout its operations. Failure to achieve significant cost reductions could
result in reduced margins and profitability. Failure to achieve sufficient
customer receptiveness to the reengineering plan or delays in its implementation
could result in diminished sales and margins while the Company seeks alternative
solutions. Failure to develop a successful response to changing market
conditions over the long-term could have a material adverse effect on the
Company's business as well as the Company's results of operations and financial
condition.
POTENTIAL CREDIT LOSSES FROM INVESTMENTS IN RETAILERS
The Company provides subleases and extends loans to and makes investments in
many of its retail customers, often in conjunction with the establishment of
long-term supply agreements with such customers. Loans to customers are
generally not investment grade and, along with equity investments in such
customers, are highly illiquid. In recent years, the Company has experienced
increasing losses associated with these activities. Credit loss expenses,
including losses from receivables and investments in customers, increased to $49
million for the 40 weeks ended October 1, 1994 from $30 million for the
comparable 1993 period and increased to $52 million for fiscal year 1993 from
$28 million for fiscal year 1992. These increasing losses are due to the
combined effects on customers' financial conditions of sluggish retail sales,
intensified retail competition and lack of food price inflation. At October 1,
1994, the Company's total of loans to customers and equity investments in
customers was $507 million. Such amount excludes investments in customers
through direct financing leases, lease guarantees, operating leases, credit
extensions for inventory purchases and the recourse portion of notes sold
evidencing such loans. During fiscal year 1993, 1992 and 1991, Fleming sold,
with limited recourse, $68 million, $45 million and $82 million, respectively,
of notes evidencing loans to its customers. See "Management's Discussion and
Analysis," "Business -- Capital Invested in Customers" and Fleming's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus. Although the Company has begun to de-emphasize credit
extensions to and investments in customers, there can be no assurances that
credit losses from existing or future investments or commitments will not have a
material adverse effect on the Company's results of operations or financial
condition.
COMPETITION
The food marketing and distribution industry is highly competitive. The
Company faces competition from national, regional and local food distributors on
the basis of price, quality and assortment, schedules and reliability of
deliveries and the range and quality of services provided. The Company also
competes with retail supermarket chains that provide their own distribution
function, purchasing directly from producers and distributing products to their
supermarkets for sale to the consumer.
In its retail operations, the Company competes with other food outlets on
the basis of price, quality and assortment, store location and format, sales
promotions, advertising, availability of parking, hours of operation and store
appeal. Traditional mass merchandisers have gained a growing foothold with
alternative store formats, such as warehouse stores and supercenters, which
depend on concentrated buying power and low-cost distribution technology. Market
share of stores with alternative formats is expected to continue to grow in the
future. To meet the challenges of a rapidly changing and highly competitive
retail environment, the Company must maintain operational flexibility and
develop effective strategies across many market segments.
In addition, food wholesalers have competed by their willingness to invest
capital in their customers. The Company has determined to de-emphasize loans to
and investments in its customers and to enter into such arrangements only with
customers who have demonstrated their ability to be successful operators. The
Company's new practice may cause it to lose business to competitors.
DEPENDENCE ON ECONOMIC CONDITIONS
The slow pace of industry growth and lack of food price inflation have
dampened the Company's sales growth in recent years. In addition, the Company's
distribution centers and retail stores are subject to
15
<PAGE>
regional and local economic conditions. While the Company supplies products and
services in 43 states, there can be no assurance that future regional or local
economic downturns will not have a material adverse effect on the Company's
results of operations and financial condition.
CERTAIN LITIGATION
A subsidiary of the Company has been named in two related legal actions,
each alleging, among other things, that certain former employees of subsidiaries
of the Company participated in fraudulent activities by taking money for
confirming "diverting" transactions (a practice involving arbitraging in food
and other goods to profit from price differentials given by manufacturers to
different retailers and wholesalers) which had not occurred. The allegations
include, among other causes of action, common law fraud, breach of contract,
negligence, conversion and civil theft, and violation of the federal Racketeer
Influenced and Corrupt Organizations Act and comparable state statutes.
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 a result of the allegations contained in the complaint. The Company
denies the allegations of the complaint and will vigorously defend the actions.
The litigation is in its preliminary stages, and the ultimate outcome cannot be
determined. Furthermore, the Company is unable to predict a potential range of
monetary exposure to the Company. Based on the recovery sought, an unfavorable
judgment could have a material adverse effect on the Company. See "Business --
Certain Legal Proceedings."
LABOR RELATIONS
Almost half of the Company's approximately 43,000 full and part-time
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. The Company has 95 such agreements, which expire at various times
throughout the next five years. While the Company believes that relations with
its associates are satisfactory, a prolonged labor dispute could have a material
adverse effect on the Company's business as well as the Company's results of
operations and financial condition.
FRAUDULENT CONVEYANCE CONSIDERATIONS
Each Subsidiary Guarantor's guarantee of the obligations of the Company
under the Notes may be subject to review under relevant federal and state
fraudulent conveyance statutes (the "fraudulent conveyance statutes") in a
bankruptcy, reorganization or rehabilitation case or similar proceeding or a
lawsuit by or on behalf of unpaid creditors of such Subsidiary Guarantor. If a
court were to find under relevant fraudulent conveyance statutes that, at the
time the Notes were issued, (a) a Subsidiary Guarantor guaranteed the Notes with
the intent of hindering, delaying or defrauding current or future creditors or
(b) (i) a Subsidiary Guarantor received less than reasonably equivalent value or
fair consideration for guaranteeing the Notes and (ii) (A) was insolvent or was
rendered insolvent by reason of such Note Guarantee, (B) was engaged, or about
to engage, in a business or transaction for which its assets constituted
unreasonably small capital, (C) intended to incur, or believed that it would
incur, obligations beyond its ability to pay as such obligations matured (as all
of the foregoing terms are defined in or interpreted under such fraudulent
conveyance statutes) or (D) was a defendant in an action for money damages, or
had a judgment for money damages docketed against it (if, in either case, after
final judgment, the judgment is unsatisfied), such court could avoid or
subordinate such Note Guarantee to presently existing and future indebtedness of
such Subsidiary Guarantor and take other action detrimental to the holders of
the Notes, including, under certain circumstances, invalidating such Note
Guarantee.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or state law that is being applied in any such
proceeding. Generally, however, a Subsidiary Guarantor would be considered
insolvent if, at the time it incurs the obligations constituting a Note
Guarantee, either (i) the fair market value (or fair saleable value) of its
assets is less than the amount required to pay the
16
<PAGE>
probable liability on its total existing indebtedness and liabilities (including
contingent liabilities) as they become absolute and mature or (ii) it is
incurring obligations beyond its ability to pay as such obligations mature or
become due.
The Boards of Directors and management of the Company and each Subsidiary
Guarantor believe that at the time of issuance of the Notes and the Note
Guarantees, each Subsidiary Guarantor (i) will be (a) neither insolvent nor
rendered insolvent thereby, (b) in possession of sufficient capital to meet its
obligations as the same mature or become due and to operate its business
effectively and (c) incurring obligations within its ability to pay as the same
mature or become due and (ii) will have sufficient assets to satisfy any
probable money judgment against it in any pending action. There can be no
assurance, however, that such beliefs will prove to be correct or that a court
passing on such questions would reach the same conclusions.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
There is no public trading market for the Notes, and the Company does not
intend to apply for listing of the Notes on any securities exchange or quotation
of the Notes on any inter-dealer quotation system. The Company has been advised
by the Underwriters that, following the completion of the initial offering of
the Notes, the Underwriters presently intend to make a market in the Notes,
although the Underwriters are under no obligation to do so and may discontinue
any market making at any time without notice. No assurances can be given as to
the liquidity of the trading markets for the Notes or that active trading
markets for the Notes will develop. If active public trading markets for the
Notes do not develop, the market prices and liquidity of the Notes may be
adversely affected.
17
<PAGE>
THE COMPANY
The Company is a recognized leader in the food marketing and distribution
industry and is the largest food wholesaler in the United States. Fleming's net
sales grew from approximately $5 billion in 1983 to approximately $13 billion in
1993, largely as a result of acquisitions of wholesale food distributors and
operations. After giving PRO FORMA effect to the acquisition of the Scrivner
Group in July 1994 (the "Acquisition"), the Company's 1993 net sales were
approximately $19 billion.
The Company serves as the principal source of supply for approximately
10,000 retail food stores including approximately 3,700 supermarkets (retail
food stores with annual sales of at least $2 million), which represented
approximately 13% of all supermarkets in the United States at year-end 1993 and
totaled approximately 97 million square feet in size. In addition to its
wholesale operations, the Company has a significant presence in food retailing,
owning and operating 345 retail food stores, including 283 supermarkets (which
are included in the totals set forth above) with an aggregate of 9.5 million
square feet. The Company-owned stores operate under a number of names and vary
in format from super warehouse stores and conventional supermarkets to
convenience stores. PRO FORMA 1993 net sales from retail operations were
approximately $3 billion. The Company believes it is one of the 20 largest food
retailers in the United States based on PRO FORMA net sales.
Fleming was incorporated in Kansas in 1915 and was reincorporated as an
Oklahoma corporation in 1981. The mailing address of the Company's principal
executive office is P.O. Box 26647, Oklahoma City, Oklahoma 73126, and its
telephone number is (405) 840-7200.
USE OF PROCEEDS
The proceeds to the Company from the Offering are estimated to be
approximately $488 million, net of the Underwriters' discount and certain fees
and expenses relating to the Offering. The Company intends to apply the entire
net proceeds of the Offering, together with borrowings under the Company's
revolving credit facility of the Credit Agreement, to retire Tranche B of the
Credit Agreement, a loan facility maturing in July 1996 under which indebtedness
was incurred in connection with the Acquisition ("Tranche B"). As of November 1,
1994, borrowings of $500 million were outstanding under Tranche B at an interest
rate of 6.0%. See "Management's Discussion and Analysis -- Liquidity and Capital
Resources," "The Credit Agreement" and "Underwriting."
18
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of October 1, 1994 and as adjusted to give PRO FORMA effect to the Offering
and the use of proceeds therefrom. See "Use of Proceeds" and Fleming's
consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OCTOBER 1, 1994
--------------------------
PRO FORMA
THE COMPANY FOR THE
HISTORICAL OFFERING
------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
SHORT-TERM DEBT(A): $ 109 $ 108(b)
------ -----------
------ -----------
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES:
Bank debt(c).................................................................. $ 1,413 $ 957(b)
The Fixed Rate Notes(c)....................................................... -- 300
The Floating Rate Notes(c).................................................... -- 200
Long-term obligations under capital leases.................................... 353 353
Other long-term debt.......................................................... 188 156(b)
------ -----------
Total long-term debt(d)..................................................... 1,954 1,966
------ -----------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value 100,000,000 shares authorized; 37,403,000 shares
issued and outstanding....................................................... 93 93
Capital in excess of par value................................................ 493 493
Reinvested earnings........................................................... 505 505
Less guarantee of ESOP debt................................................... (12) (12)
------ -----------
Total shareholders' equity.................................................. 1,079 1,079
------ -----------
Total capitalization.......................................................... $ 3,033 $3,045
------ -----------
------ -----------
<FN>
- ------------------------
(a) Consists of current maturities of long-term debt and current obligations
under capital leases.
(b) On August 16, 1994, the Company made an offer to purchase up to $97.0
million aggregate principal amount of a series of Medium-Term Notes in
accordance with the terms of the indenture under which they were issued.
The offer expired on October 21, 1994, with $33 million of such Notes
tendered. The Company financed the purchase by drawing additional amounts
under the revolving credit facility of the Credit Agreement. See "Certain
Other Obligations."
(c) The offerings of the Fixed Rate Notes and the Floating Rate Notes,
respectively, are not conditioned upon each other. If either such offering
is not completed, a portion of Tranche B of the Credit Agreement will
remain outstanding.
(d) As of October 1, 1994, the Company also had $130 million of contingent
obligations under undrawn letters of credit, primarily related to insurance
reserves associated with its normal risk management activities.
</TABLE>
19
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited PRO FORMA financial information set forth below presents the
PRO FORMA statement of operations of the Company for the 40 weeks ended October
1, 1994 as if the Acquisition and the financing thereof and the Offering and the
use of proceeds therefrom had occurred on December 26, 1993 and the PRO FORMA
statement of operations of the Company for the year ended December 25, 1993 as
if the Acquisition and the financing thereof and the Offering and the use of
proceeds therefrom had occurred on December 27, 1992.
The unaudited PRO FORMA financial information has been prepared on the basis
of assumptions described in the notes thereto and includes assumptions relating
to the allocation of the consideration paid for the Scrivner Group to the assets
and liabilities of the Scrivner Group based on preliminary estimates of their
respective fair values. The actual allocation of such consideration may differ
from that reflected in the PRO FORMA financial statements after valuation and
other studies are completed. The Acquisition has been accounted for using the
purchase method of accounting.
The unaudited PRO FORMA financial information does not necessarily represent
what the Company's results of operations would have been if the Acquisition and
the financing thereof and the Offering and the use of proceeds therefrom had
actually been completed as of the dates indicated, and are not intended to
project the Company's results of operations for any future period. In addition,
such information does not reflect any of the potential cost savings that the
Company may realize from the Acquisition, including those from increased buying
power, facilities consolidation and reduced corporate overhead. Nor does such
information reflect potential cost savings from the Company's plan to
consolidate additional facilities, reorganize management and reengineer
operations. See "Management's Discussion and Analysis" and "Business -- Business
Strategy" and "-- The Consolidation, Reorganization and Reengineering Plan."
The unaudited PRO FORMA financial information should be read in conjunction
with the consolidated financial statements of Fleming and Haniel and the related
notes thereto included elsewhere in this Prospectus.
20
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
INTERIM PERIOD ENDED 1994(A)
--------------------------------------------------
THE SCRIVNER
FLEMING GROUP ADJUSTMENTS PRO FORMA
------- -------------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(B):
Net sales............................................................. $11,057 $3,224 $ $14,281
Cost of sales(c)...................................................... 10,295 2,762 1(d) 13,058
Selling and administrative expense(c)................................. 635 411 1(d) 1,048
2(e)
(1)(f)
------- ------ --- ---------
Income from operations................................................ 127 51 (3) 175
Interest expense...................................................... 76 28 44(g) 148
Interest income(h).................................................... 47 4 51
Losses from equity investments........................................ 11 -- 11
------- ------ --- ---------
Earnings before taxes................................................. 87 27 (47) 67
Taxes on income....................................................... 41 14 (21)(i) 34
------- ------ --- ---------
Net earnings.......................................................... $ 46 $ 13 $(26) $ 33
------- ------ --- ---------
------- ------ --- ---------
OTHER DATA:
EBITDA(j)............................................................. $ 276 $ 90 $ 367
Depreciation and amortization......................................... 102 35 141
Capital expenditures.................................................. 82 25 107
Ratio of EBITDA to interest expense................................... 3.63x 3.21x 2.48x
Ratio of earnings to fixed charges(k)................................. 1.90x 1.73x 1.38x
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1993(A)
-------------------------------------------------
THE SCRIVNER
FLEMING GROUP ADJUSTMENTS PRO FORMA
------- -------------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(B):
Net sales.................................................................. $13,092 $6,017 $ $19,109
Cost of sales(c)........................................................... 12,327 5,168 2(d) 17,497
Selling and administrative expense(c)...................................... 558 752 2(d) 1,314
4(e)
(2)(f)
Facilities consolidation and restructuring charge.......................... 108 -- 108
------- ------ --- ---------
Income from operations..................................................... 99 97 (6) 190
Interest expense........................................................... 78 56 68(g) 202
Interest income(h)......................................................... 63 6 69
Losses from equity investments............................................. 12 -- 12
------- ------ --- ---------
Earnings before taxes...................................................... 72 47 (74) 45
Taxes on income............................................................ 35 22 (33)(i) 24
------- ------ --- ---------
Earnings before extraordinary item(l)...................................... $ 37 $ 25 $(41) $ 21
------- ------ --- ---------
------- ------ --- ---------
OTHER DATA:
EBITDA(j).................................................................. $ 358(m) $ 168 $ 528(m)
Depreciation and amortization.............................................. 101 65 174
Capital expenditures....................................................... 53 55 108
Ratio of EBITDA to interest expense........................................ 4.59x 3.00x 2.61x
Ratio of earnings to fixed charges(k)...................................... 1.71x 1.65x 1.19x
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
<FN>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
(a) PRO FORMA statement of operations data have been prepared by combining the
consolidated statement of operations of Fleming for the 40 weeks ended
October 1, 1994 and the fiscal year ended December 25, 1993 with the
consolidated statement of operations of the Scrivner Group for the six
months ended June 30, 1994 and the year ended December 31, 1993,
respectively, assuming the Acquisition and the financing thereof and the
Offering and use of proceeds therefrom occurred at the beginning of the
respective periods. The Acquisition has been accounted for using the
purchase method of accounting.
(b) No adjustments have been made to reflect any of the potential cost savings
that the Company may realize from the Acquisition, including those from
increased buying power, facilities consolidation and reduced corporate
overhead. Nor have any adjustments been made to reflect potential cost
savings from the Company's plan to consolidate additional facilities,
reorganize management and reengineer operations. See "Management's
Discussion and Analysis" and "Business -- Business Strategy" and "-- The
Consolidation, Reorganization and Reengineering Plan."
(c) PRO FORMA statement of operations data for cost of sales and selling and
administrative expense are affected by classification differences between
Fleming's and Haniel's consolidated financial statements. Certain costs and
expenses included in determining cost of sales for Fleming are classified
as selling, operating and administrative expenses in Haniel's consolidated
financial statements. Subsequent to the Acquisition, account classification
will be conformed to that used by Fleming.
(d) To depreciate the estimated increase in the fair value of property and
equipment acquired over the Scrivner Group's historical cost related to
such property and equipment. Such fair values are based on estimates made
at the time of the Acquisition. Appraisals have not yet been completed.
(e) To reflect the net adjustment resulting from (i) the elimination of the
Scrivner Group's goodwill amortization during the period, and (ii) the
amortization over forty years of the excess of cost over the fair value of
assets and liabilities acquired and assumed in the Acquisition. Such fair
values are based on estimates made at the time of the Acquisition.
Appraisals have not yet been completed.
(f) To eliminate the salaries of former Scrivner Group officers who are not
Company associates and whose functions have been assumed by Fleming
officers.
(g) To reflect the net adjustment for the interim period ended 1994 and the
fiscal year ended 1993 of (i) the elimination of interest expense
associated with approximately $611 million aggregate principal amount of
Scrivner Group indebtedness that was refinanced in connection with the
Acquisition ($26 million and $53 million, respectively); (ii) the
elimination of interest expense associated with approximately $307 million
aggregate principal amount of Fleming indebtedness that was refinanced at
the time of the Acquisition ($11 million and $18 million, respectively);
(iii) the elimination of interest expense associated with $33 million of
Fleming Medium-Term Notes which were purchased in late October 1994 ($2
million and $3 million, respectively); (iv) the net addition of interest
expense associated with indebtedness under the Credit Agreement, based on
applying the interest rates in effect on the date of the Acquisition to PRO
FORMA indebtedness outstanding prior to such date, after taking into
account the effect of interest rate protection agreements the Company has
entered into with respect to $1 billion of indebtedness ($39 million and
$85 million, respectively); (v) the addition of interest expense associated
with the Notes ($38 million and $49 million, respectively), and (vi) the
addition of amortization of deferred debt issuance costs related to the
Notes and the Credit Agreement ($6 million and $8 million, respectively).
See "Management's Discussion and Analysis -- Results of Operations --
Interest Expense."
Each incremental 25 basis point increase or decrease in the assumed
interest rate of the Fixed Rate Notes and the Floating Rate Notes would
increase or decrease annual interest expense on the Fixed Rate Notes and
the Floating Rate Notes by $750,000 and $500,000, respectively.
(h) Interest income consists primarily of interest earned on notes receivable
from customers. Also included is income generated from direct financing
leases of retail stores and related equipment.
(i) To provide for income taxes at an assumed effective rate of 47% for all
adjustments except those relating to goodwill amortization.
(j) EBITDA represents earnings before extraordinary item before taking into
consideration interest expense, income taxes, depreciation and
amortization, equity investment results and facilities consolidation and
restructuring charge. EBITDA should not be considered as an alternative
measure of net income, operating performance, cash flow or liquidity. It is
included herein to provide additional information related to the ability to
service debt. The Senior Note Indentures contain covenants limiting the
incurrence of Indebtedness (other than Permitted Indebtedness) and the
making of certain Restricted Payments unless a minimum required
consolidated fixed charge coverage ratio, calculated on a PRO FORMA basis,
is met. This ratio, which approximates EBITDA divided by consolidated
interest expense, is 1.75 to 1. For illustrative purposes, based on PRO
FORMA consolidated interest expense of $202 million for the year ended
December 25, 1993, the minimum EBITDA required for the Company to incur
additional Indebtedness (other than Permitted Indebtedness), to pay
dividends or to make certain other Restricted Payments, was $354 million.
(k) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
(l) In 1993, the Company realized an extraordinary after-tax loss of $2.3
million related to the early retirement of indebtedness.
(m) 1993 EBITDA has been reduced by $13 million to reflect the net effect of
certain non-recurring items recorded in selling and administrative expense.
</TABLE>
22
<PAGE>
SELECTED FINANCIAL INFORMATION
FLEMING
The following is a summary of certain financial information relating to
Fleming. The information presented below for, and as of the end of, each of the
fiscal years in the five-year period ended December 25, 1993 is derived from
audited consolidated financial statements of Fleming. In the opinion of the
Company, the unaudited financial information presented for the 40 weeks ended
October 2, 1993 and October 1, 1994 contains all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
information included therein. Results for interim periods are not necessarily
indicative of results for the full year. This summary should be read in
conjunction with the detailed information and consolidated financial statements
of Fleming, including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
40 WEEKS ENDED
----------------------
YEAR ENDED THE LAST SATURDAY IN DECEMBER, OCTOBER OCTOBER
------------------------------------------------------------------ 2, 1,
1989 1990 1991 1992 1993 1993 1994(A)
---------- ---------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 11,992 $ 11,884 $ 12,851 $ 12,894 $ 13,092 $9,946 $11,057
Gross margin.................. 690 683 748 727 765 588 762
Selling and administrative
expense...................... 508 473 537 495 558 417 635
Facilities consolidation and
restructuring charge(b)...... -- -- 67 -- 108 7 --
Income from operations........ 182 210 144 232 99 164 127
Interest expense.............. 96 94 93 81 78 59 76
Interest income(c)............ 57 55 61 59 63 48 47
Earnings before taxes......... 139 165 104 195 72 147 87
Earnings before extraordinary
items and accounting
change(d).................... 80 97 64 119 37 85 46
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital............... $ 363 $ 377 $ 424 $ 528 $ 442 $ 409 $ 454
Total assets.................. 2,689 2,768 2,958 3,118 3,103 3,141 4,624
Total debt, including
capitalized leases........... 1,009 1,012 989 1,086 1,078 1,055 2,064
Shareholders' equity.......... 742 814 949 1,060 1,060 1,119 1,079
OTHER DATA:
EBITDA(e)(f).................. $ 303 $ 342 $ 378 $ 380 $ 358 $ 283 $ 276
Depreciation and
amortization................. 78 83 91 94 101 77 102
Capital expenditures.......... 105 51 65 62 53 32 82
Ratio of EBITDA to interest
expense...................... 3.16x 3.64x 4.06x 4.69x 4.59x 4.80x 3.63x
Ratio of earnings to fixed
charges(g)................... 2.14x 2.40x 1.89x 2.85x 1.71x 2.90x 1.90x
<FN>
- ------------------------------
(a) Includes the Scrivner Group since the Acquisition.
(b) See further discussion contained in "Management's Discussion and Analysis
-- The Consolidation, Reorganization and Reengineering Plan."
(c) Consists primarily of interest earned on notes receivable from customers.
Also includes income generated from direct financing leases of retail
stores and related equipment.
(d) In 1992 and 1993, the Company recorded extraordinary after-tax losses of
$5.9 million and $2.3 million, respectively, related to the early
retirement of indebtedness. In 1991, the Company recognized a $9.3 million
charge to net earnings in connection with the adoption of SFAS No. 106 --
Employers' Accounting for Post-retirement Benefits Other Than Pensions.
(e) EBITDA represents earnings before extraordinary items and accounting change
before taking into consideration interest expense, income taxes,
depreciation and amortization, equity investment results and facilities
consolidation and restructuring charge. EBITDA should not be considered as
an alternative measure of the Company's net income, operating performance,
cash flow or liquidity. It is included herein to provide additional
information related to the Company's ability to service debt. The Senior
Note Indentures contain covenants limiting the incurrence of Indebtedness
(other than Permitted Indebtedness) and the making of certain Restricted
Payments unless a minimum required consolidated fixed charge coverage
ratio, calculated on a PRO FORMA basis, is met. This ratio, which
approximates EBITDA divided by consolidated interest expense, is 1.75 to 1.
For illustrative purposes, based on PRO FORMA consolidated interest expense
of $202 million for the year ended December 25, 1993, the minimum EBITDA
required for the Company to incur additional Indebtedness (other than
Permitted Indebtedness), to pay dividends or to make certain other
Restricted Payments, was $354 million.
(f) In 1989 and 1990, EBITDA has been reduced to reflect non-recurring pre-tax
gains of approximately $14 million and $6 million, respectively, that
resulted from selling minority equity positions in a former subsidiary. In
1991, EBITDA has been increased by $15 million to reflect non-recurring
pre-tax charges related to litigation settlements and the write-down of a
non-operating asset. In 1992, EBITDA has been reduced to reflect a $5
million non-recurring pre-tax gain related to a litigation settlement. For
each of the year ended December 1993 and the 40 weeks ended October 2,
1993, EBITDA has been reduced by $13 million to reflect the net effect of
certain non-recurring items. All such non-recurring items were recorded in
selling and administrative expense for the relevant period.
(g) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
</TABLE>
23
<PAGE>
THE SCRIVNER GROUP
The following is a summary of certain financial information relating to the
Scrivner Group. The information presented below for, and as of the end of, each
of the years in the five-year period ended December 31, 1993 is derived from the
audited consolidated financial statements of Haniel. In the opinion of the
Company, the unaudited financial information presented for the six months ended
June 30, 1993 and 1994 contains all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial information
included therein. Results for interim periods are not necessarily indicative of
results for the full year. The summary should be read in conjunction with the
detailed information and consolidated financial statements of Haniel, including
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 3,765 $ 5,602 $ 5,606 $ 5,685 $ 6,017 $ 3,238 $ 3,224
Gross margin(a)................................ 458 748 771 792 849 454 462
Selling, operating and administrative
expense(a).................................... 401 646 661 687 752 401 411
Income from operations......................... 57 102 110 105 97 53 51
Interest expense............................... 36 82 72 62 56 31 28
Interest income(b)............................. 4 7 6 6 6 3 4
Earnings before taxes.......................... 25 27 44 49 47 25 27
Net earnings................................... 13 14 22 25 25 13 13
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................ $ 194 $ 171 $ 118 $ 234 $ 208 $ 264 $ 198
Total assets................................... 1,347 1,392 1,375 1,387 1,372 1,408 1,317
Total debt, including capitalized
leases........................................ 751 759 651 721 662 743 620
Shareholder's equity........................... 175 189 211 242 267 254 280
OTHER DATA:
EBITDA(c)...................................... $ 96 $ 166 $ 175 $ 170 $ 168 $ 91 $ 90
Depreciation and amortization.................. 35 57 59 59 65 35 35
Capital expenditures........................... 50 62 49 42 55 31 25
Ratio of EBITDA to interest expense............ 2.67x 2.02x 2.43x 2.74x 3.00x 2.94x 3.21x
Ratio of earnings to fixed charges(d).......... 1.64x 1.30x 1.54x 1.64x 1.65x 1.64x 1.73x
<FN>
- ------------------------
(a) Certain costs and expenses that Fleming includes in determining its gross
margin are classified as selling, operating and administrative expenses in
Haniel's consolidated financial statements.
(b) Consists primarily of interest earned on notes receivable from customers.
Also includes income generated from direct financing leases of retail
stores and related equipment.
(c) EBITDA represents earnings before taking into consideration interest
expense, income taxes and depreciation and amortization. EBITDA should not
be considered as an alternative measure of the Scrivner Group's net income,
operating performance, cash flow or liquidity. It is included herein to
provide additional information related to the Scrivner Group's ability to
service debt.
(d) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of deferred debt issuance costs, and one-third of
rental expense (the portion considered representative of the interest
factor).
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
THE CONSOLIDATION, REORGANIZATION AND REENGINEERING PLAN. In January 1994,
the Company announced the details of a plan to consolidate facilities,
restructure its organizational alignment and reengineer its operations. The
Company's objective is to improve its performance by eliminating functions and
operations that do not add economic value. Charges associated with the plan
consist of four categories: facilities consolidation, reengineering, focus on
retail stores and elimination of regional operations. The actions contemplated
by the plan will affect the Company's food and general merchandise wholesaling
operations as well as certain retailing operations. The 1993 fourth quarter
results reflect a charge of $101 million resulting from facilities
consolidation, restructuring and reengineering. This is in addition to a
provision of $7 million for facilities consolidation in the second quarter of
1993. Related cash requirements during the 40 weeks ended October 1, 1994 were
$14 million; additional cash expenditures necessary to fully implement the plan
during the next two years are estimated to total $69 million. Cash requirements
are expected to be met by internally generated cash flows and borrowings under
the Credit Agreement. The consolidation, reorganization and reengineering plan
is expected to produce estimated net pre-tax savings of $65 million per year by
1997, after full implementation. 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.
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, consolidation of one center's administrative
function, and completion of the 1991 facilities consolidations. During the forty
weeks ending October 1, 1994, approximately 700 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 impairments and
obligations -- $11 million; lease and holding costs -- $10 million; completion
of actions contemplated in the 1991 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 a 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 pre-tax earnings impact of approximately $20 million 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 the 1991 restructuring charge result
principally from additional estimated costs related to dispositions of related
real estate assets, which are in process. Such costs are principally the result
of the deterioration of the California Bay Area commercial real estate market
since 1991. Increased costs to complete the 1991 facilities consolidation
actions 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.
The reengineering component of the charge provides for the cash costs
associated with the expected termination of 1,500 associates due to
reengineering. Annual payroll savings are projected to be approximately $40
million. The provision for reengineering is approximately $25 million.
Management believes that the benefits to operating results that will be realized
by reengineering will also apply to the Scrivner Group. Reengineering efforts
with respect to the Scrivner Group will not begin until late 1995. The
Acquisition has resulted in the rescheduling of certain aspects of the
reengineering plan due to the effort required to
25
<PAGE>
integrate the Scrivner Group. No fundamental changes to the plan have occurred.
However, the reengineering actions that will result in a significant reduction
of employees are not expected to occur until 1995. Management expects that all
actions originally contemplated in the plan will be completed.
Thirty retail supermarket locations leased or owned by the Company have been
deemed to 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. Annual savings from these actions are
expected to be $1 million. The provision for retail-related assets is
approximately $15 million.
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 expected to be $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 table presented below reflects changes to the reserves recorded in the
statements of financial position related to facilities consolidation and
restructuring.
<TABLE>
<CAPTION>
REENGINEERING/ CONSOLIDATION
SEVERANCE COSTS/ASSET
TOTAL COSTS IMPAIRMENTS
--------- --------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Charges for year ended December 28, 1991.................................. $ 67.0 $ 11.0 $ 56.0
Expenditures and write-offs............................................... (13.0) -- (13.0)
--------- ----- ------
Balance, December 28, 1991................................................ 54.0 11.0 43.0
Expenditures and write-offs............................................... (24.1) (2.8) (21.3)
--------- ----- ------
Balance, December 26, 1992................................................ 29.9 8.2 21.7
Charged to costs and expenses............................................. 107.8 25.0 82.8
Expenditures and write-offs............................................... (52.2) (8.1) (44.1)
--------- ----- ------
Balance, December 25, 1993................................................ 85.5 25.1 60.4
Expenditures and write-offs............................................... (25.2) (2.6) (22.6)
--------- ----- ------
Balance, October 1, 1994.................................................. $ 60.3 $ 22.5 $ 37.8
--------- ----- ------
--------- ----- ------
</TABLE>
THE ACQUISITION. Results beginning with the third quarter 1994 have been
materially affected by the Acquisition. In 1993, the Scrivner Group had net
sales of approximately $6 billion, income from operations of approximately $97
million and net earnings of approximately $25 million. Interest expense
increased materially as a result of the increased borrowing level and higher
interest rates due to the Acquisition. Amortization of goodwill will
significantly increase as a result of the goodwill created by the Acquisition.
As a result of the Acquisition, the Company has closed three distribution
centers and expects to close seven additional distribution centers of the 49
currently operated. The Company has identified six of such facilities, all of
which are Scrivner Group facilities; the last center to be identified may be
either a Fleming or a Scrivner Group facility. Two of the six facilities
identified, located in Blooming Prairie, Minnesota and Buffalo, New York, will
be closed in 1995. Charges related to the closing of distribution centers
operated by the Scrivner Group have been considered a direct cost of the
Acquisition and are reflected as goodwill as of October 1, 1994. Any charge
related to the closing of a distribution center operated by Fleming prior to the
Acquisition will be allocated to current period earnings. Integration of the
Scrivner Group's operations is expected to take approximately two years.
26
<PAGE>
RESULTS OF OPERATIONS
Set forth in the following table is information regarding Fleming 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, and before the
accounting change in 1991:
<TABLE>
<CAPTION>
40 WEEKS ENDED
YEAR ENDED LAST -------------------
SATURDAY IN DECEMBER, OCTOBER OCTOBER
------------------------------ 2, 1,
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................................................. 100.00% 100.00% 100.00% 100.00% 100.00%
Gross margin.......................................................... 5.82 5.64 5.85 5.91 6.89
Less:
Selling and administrative expense.................................. 4.18 3.84 4.27 4.20 5.74
Interest expense.................................................... 0.73 0.63 0.60 0.59 0.68
Interest income..................................................... (0.48) (0.46) (0.48) (0.48) (0.42)
Equity investment results........................................... 0.06 0.12 0.09 0.06 0.10
Facilities consolidation and restructuring charge................... 0.52 -- 0.82 0.06 --
-------- -------- -------- -------- --------
Total............................................................. 5.01 4.13 5.30 4.43 6.10
-------- -------- -------- -------- --------
Earnings before taxes................................................. 0.81 1.51 0.55 1.48 0.79
Taxes on income....................................................... 0.31 0.59 0.26 0.63 0.38
-------- -------- -------- -------- --------
Earnings before extraordinary items and accounting change............. 0.50% 0.92% 0.29% 0.85% 0.41%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
40 WEEKS ENDED OCTOBER 2, 1993 AND OCTOBER 1, 1994
Earnings in the 40 week period ended October 1, 1994 were $46 million, a
decrease of 46% compared to 1993; earnings in the third quarter of 1994 were $3
million, down 87% from the same period in 1993. Several factors contributed to
the decline and include lack of sales growth (before the addition of Scrivner
Group sales), increased losses from Company-owned retail stores and retail
equity investments, increased credit loss expense (including a $6.5 million
expense due to the bankruptcy of a large customer), higher interest expense due
to the Acquisition, an adverse LIFO effect and a higher effective tax rate.
NET SALES. Net sales for the 40 weeks ended October 1, 1994 increased by
$1.11 billion, or 11.2%, to $11.06 billion from $9.95 billion for the comparable
period in 1993. The increase in net sales was attributable to the $1.35 billion
of net sales generated by Scrivner Group operations since the Acquisition.
Without the Scrivner Group, net sales would have declined by $238 million, or
2.4%, due to several factors, none of which was individually 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 the Royal New Jersey
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 the 40 weeks ended October 1, 1994, food
price inflation was negligible. Tonnage of food product sold in the 40 weeks
ended October 1, 1994, without giving effect to the Acquisition, declined by 6%
compared to the comparable period in 1993, reflecting the difficult retail
environment. Consistent tonnage statistics for the Scrivner Group are not
available.
GROSS MARGIN. Gross margin for the 40 weeks ended October 1, 1994 increased
by $174 million, or 29.6%, to $762 million from $588 million for the comparable
period in 1993 and increased as a percentage of net sales to 6.9% for the 1994
period from 5.9% for the comparable 1993 period. Without Scrivner Group
operations, gross margin would have been 6.3% of net sales. The increase in
gross margin was due to retail stores, principally the 179 stores acquired with
the Scrivner Group as well as the 21 Hyde Park stores and 24 Consumers stores,
which were not included in 1993 results. See "-- Results of Operations --
Other." Retail
27
<PAGE>
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 the 1994 period from the comparable 1993 period 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 resulting from the LIFO method of inventory
valuation in the 1994 period compared to credits to income in the 1993 period.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense for
the 40 weeks ended October 1, 1994 increased by $218 million, or 52.3%, to $635
million from $417 million for the comparable period in 1993 and increased as a
percentage of net sales to 5.7% for the 1994 period from 4.2% in the comparable
period in 1993. This increase was due primarily to the acquisition of the
Scrivner Group, particularly its retail operations, as well as the acquisition
of 21 Hyde Park stores and 24 Consumers stores which were not included in 1993
results. 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.
Credit loss expense included in selling and administrative expense for the
40 weeks ended October 1, 1994 increased by $19 million to $49 million from $30
million in the comparable period in 1993. This increase, after the $6.5 million
credit loss discussed below, was 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 condition.
In August 1994, a customer of the Company, Megafoods Stores, Inc. and
certain of its affiliates ("Megafoods"), filed Chapter 11 bankruptcy
proceedings. As of such date, Megafood's 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 early 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 the 40 weeks ended October 1, 1994
increased $17 million to $76 million from $59 million for the comparable period
in 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 the 1994 period is
estimated to have been approximately the same as the comparable 1993 period.
The Company enters into financial derivatives as a method of hedging its
interest rate exposure. During July 1994, management terminated all of its
outstanding derivative contracts at an immaterial net gain, which will be
amortized over the original term of each derivative instrument. The Credit
Agreement 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.
28
<PAGE>
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
6.794%, 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 3.6 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 4.2 years. 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 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 this risk is minimized as it currently foresees no need to terminate
any hedge agreements prior to their maturity.
On an annualized basis, the $1 billion of interest rate hedge agreements
account for $53 million of fixed annual interest expense. For the quarter ended
October 1, 1994, the interest rate hedge agreements contributed $8 million to
interest expense. The estimated fair value of the hedge agreements at October 1,
1994 was $13 million.
INTEREST INCOME. Interest income for the 40 weeks ended October 1, 1994
declined by $1 million to $47 million from $48 million for the comparable period
in 1993. The decrease was due to a lower average level of notes receivable and
direct financing leases in 1994, combined with lower average interest rates. 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 the 40 weeks ended October 1, 1994 increased by $5
million to $11 million from $6 million for the comparable period in 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. See "Business -- Capital
Invested in Customers."
TAXES ON INCOME. The Company's effective tax rate for the 40 weeks ended
October 1, 1994 increased to 47.5% from 42.5% for the comparable period in 1993
primarily as a result of the lower than expected earnings for 1994, the Scrivner
Group's operations in states with higher tax rates and increased goodwill
amortization with no related tax deduction. The Company's ultimate tax rate for
1994 will depend on annual earnings and may be higher than 47.5%.
OTHER. In August 1994 the Company increased its indirect ownership of
Consumers Markets, Inc. ("Consumers"), the operator of 24 supermarkets located
in Missouri, Arkansas and Kansas with annual sales of $225 million, from 40% to
79%. On October 29, 1994, the Company acquired all of the outstanding stock of
Consumers. Results of operations and financial position of Consumers are not
material.
On November 30, the Company announced that Smitty's Super Valu, a customer
based in Arizona, had challenged the enforceability of its supply contract with
Fleming and may seek alternate arrangements. Smitty's has provided Fleming with
the opportunity to match the terms offered by a competitor. Under the provisions
of its supply contract, Fleming has three months in which to respond. Fleming's
supply contract will expire in 31 months if the Company matches the competing
offer and in 15 months if it does not. Fleming intends to comply fully with the
supply contract and expects Smitty's to do likewise. Smitty's purchased
approximately $290 million of products from Fleming during the past 12 months.
29
<PAGE>
A subsidiary of 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 in
its preliminary stages, and the ultimate outcome cannot be determined.
Furthermore, the Company is unable to predict a potential range of monetary
exposure to the Company. Based on the recovery sought, an unfavorable judgment
could have a material adverse effect on the Company. See "Business -- Certain
Legal Proceedings."
Management believes that several factors affecting earnings in the third
quarter are likely to continue and will depress results in the fourth quarter of
1994 and beyond. Such factors include: flat wholesale sales; lack of food price
inflation; operating losses in Company-owned retail stores; increased interest
expense, goodwill amortization and integration costs related to the Acquisition;
and a higher effective tax rate.
1993, 1992, 1991
NET SALES. Net sales in 1993 increased by $199 million, or 1.5%, to $13.09
billion from $12.89 billion for 1992, and net sales in 1992 remained essentially
unchanged from 1991. The 1993 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 and inflation of 0.8% in 1991. The Company's outlook for 1994 is for a
low level of food price inflation.
Tonnage of food product sold in 1993 was essentially the same as 1992. In
1992, tonnage of food product sold increased 1.6% over the 1991 level. The lower
tonnage growth rate in 1993 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 $727 million for 1992 and increased as a percentage of net
sales to 5.9% from 5.6% in 1992. Gross margin in 1992 decreased by $21 million,
or 2.9%, from $748 million in 1991 and decreased as a percentage of net sales
from 5.8% in 1991. The increase in gross margin in 1993 was due to increased net
sales by Company-owned stores (which included the ten 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.
The decrease in gross margin in 1992 compared to 1991 was due to several
factors, including the absence of the Company-owned Dixieland food stores sold
in December 1991, offset by the presence of the ten Baker's stores acquired at
the beginning of the fourth quarter of 1992. In addition, there were increased
transportation expenses in 1992, due principally to the Company's facilities
consolidation program which resulted in trucks driving farther to deliver
product. Gross margin in 1992 was also increased by $5 million from the
favorable resolution of certain litigation. The LIFO method of inventory
valuation increased gross margin by $9 million, an increase of $5 million from
1991.
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 4.3% from 3.8%. Selling and
administrative expense in 1992 decreased $42 million, or 7.8%, from $537 million
in 1991 and decreased as a percentage of net sales from 4.2% in 1991. The
increase in 1993 was due primarily to the higher selling and administrative
expense associated with a higher number of Company-owned stores (which included
the ten 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
30
<PAGE>
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.
Of the decrease in selling and administrative expense in 1992, $25 million
was due to a reduction in the number of Company-owned stores resulting from the
sale of the Dixieland Food stores at the end of 1991, offset in part by
additional selling expenses related to the ten Baker's supermarkets acquired at
the beginning of the fourth quarter of 1992. The reduction in 1992 was also due
in part to $15 million of selling and administrative expense in 1991 due to
unusual charges related to litigation settlements and the write-down of a
non-operating asset. These benefits were offset in part by a higher credit loss
expense in 1992 of $28 million compared to credit loss expense of $17 million in
1991. The increase in credit loss expense was due to the combined effects on
customers' financial conditions of sluggish retail sales, intensified retail
competition and lack of food price inflation.
Also contributing to the reduction in the selling and administrative expense
in 1992 compared to 1991 were the effects of cost controls and the benefits of
certain completed facilities consolidations. Gains on the sales of customer
notes receivable reduced selling and administrative expense by $3 million in
each of 1993, 1992 and 1991.
INTEREST EXPENSE. Interest expense in 1993 declined $3 million, to $78
million from $81 million in 1992. Interest expense in 1992 decreased by $12
million, from $93 million in 1991. The decrease in 1993 was due primarily to
lower short-term interest rates and lower average borrowing levels. The 1992
decrease in interest expense was due primarily to lower interest rates. 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 $59 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 in 1992 declined by $2 million, from
$61 million in 1991. The decrease was due to lower interest rates, partially
offset by higher average notes receivable balances. 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. Operating losses from investments in such
customers in 1992 increased by $7 million, from $8 million in 1991. The
improvement in 1993 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.
Business Development Ventures were responsible for equity method losses of $6
million in 1993, compared to $11 million in 1992 and $4 million in 1991. The
increase in 1992 was attributable to poor performance by certain Business
Development Ventures. The continued effects on the Company's customers
(including those in which the Company has made equity investments) of a lack of
food price inflation and intense competition has resulted in continuing losses.
The Company's equity investments in its customers are usually coupled with long
term supply agreements. In the past, the Company sought additional incremental
sales resulting from such investments. See, however, "Business -- Capital
Invested in Customers -- EQUITY INVESTMENTS."
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.
31
<PAGE>
TAXES ON INCOME. The effective income tax rate for 1993 increased to 48%
from 39% in 1992 and 38.3% in 1991. The 1993 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. The 1991 rate was lower than the 1992 rate
primarily due to one-time benefits related to the difference between the
financial and tax basis in an insurance subsidiary sold in 1991 and a lower
combined state income tax rate.
OTHER. In 1993, the Company reduced the discount rate assumption used to
determine its obligations for defined benefit pension plans and postretirement
benefits. The 1% decline will cause pension and postretirement benefit expense
recognized in 1994 to increase by approximately $3 million compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operating
activities and bank borrowings. Operating activities generated $325 million of
cash flow for the first 40 weeks of 1994 as compared to $246 million for the
comparable period in 1993. The increase was principally due to larger reductions
of inventory and a larger increase in accounts payable before the effects of the
Acquisition during the 1994 period compared to the 1993 period. Cash flow from
operations was $209 million in 1993, up from $90 million in 1992. The increase
was attributable to reduced trade receivables and inventories.
Working capital was $454 million at October 1, 1994, an increase of $12
million from December 25, 1993. The current ratio decreased to 1.32 to 1.00 at
October 1, 1994 compared to 1.48 to 1.00 at December 25, 1993. The ratio of
total indebtedness, including capitalized lease obligations, to total capital
was 66% at October 1, 1994, compared to 50% at December 25, 1993. Such total
indebtedness at October 1, 1994 increased by $985 million to $2.06 billion from
$1.08 billion at December 25, 1993 principally as a result of the Acquisition.
Capital expenditures for the 40 weeks ending October 1, 1994 and the year
ended December 25, 1993, were approximately $82 million and $53 million,
respectively. The Company expects that 1994 capital expenditures will
approximate $150 million.
The Company incurred substantial indebtedness in connection with the
financing of the Acquisition and is subject to substantial repayment
obligations. At November 1, 1994, the Company had an aggregate of $1.55 billion
borrowed under the Credit Agreement consisting of $250 million borrowed pursuant
to Tranche A (the five-year revolving facility), $500 million borrowed pursuant
to Tranche B (the two-year term loan facility) and $800 million borrowed
pursuant to Tranche C (the six-year amortizing facility). Net proceeds from the
Offering will be used to repay borrowings outstanding under Tranche B. See
"Capitalization," "Use of Proceeds" and "The Credit Agreement." Assuming
consummation of the Offering and the use of proceeds therefrom, the Company's
debt repayment obligations will be approximately $34 million for the balance of
1994, $118 million for 1995, $77 million for 1996, $152 million for 1997, $208
million for 1998, and $497 million for 1999. There are no committed lines of
credit other than the Credit Agreement.
The Credit Agreement contains customary covenants associated with similar
facilities including, without limitation, the following financial covenants:
maintenance of a borrowed funds to net worth ratio of not more than 2.45 to 1;
maintenance of a minimum consolidated net worth of $851 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. As of
November 1, 1994, the restricted payments test would have allowed the Company to
pay dividends or repurchase capital stock in the aggregate amount of $17 million
for the balance of 1994. The borrowed funds to net worth test would have allowed
the Company to borrow an additional $547 million. The fixed charge coverage test
would have allowed the Company to incur an additional $33 million of annual
interest expense. See "Investment Considerations -- Leverage and Debt Service"
and "-- Restrictive Covenants."
32
<PAGE>
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, another entity which is not controlled
by the Company.
From time to time the Company sells, with limited recourse, notes evidencing
certain secured loans made to retailers. The Company also plans to sell a
portion of its investment in direct financing leases during 1995. See "Certain
Other Obligations -- Sales of Certain Secured Loans and Direct Financing
Leases."
At October 1, 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 were drawn, payments would be financed by borrowings
under Tranche A of the Credit Agreement.
The consummation of the Acquisition and the resulting downgrade in the
ratings of the Company's long-term unsecured indebtedness represented a
"repurchase event" under the indenture governing the Company's Medium-Term Notes
which required the Company to offer to purchase one series of such Medium-Term
Notes. On August 16, 1994, the Company made an offer to purchase the notes
issued in this series, which offer terminated October 21, 1994. An aggregate of
$33 million of such Medium-Term Notes were purchased on October 31, 1994, using
borrowings under Tranche A of the Credit Agreement.
The Company believes that cash flows from operating activities and its
ability to borrow under the Credit Agreement will be adequate to meet the
Company's working capital needs, planned capital expenditures and debt service
obligations for the foreseeable future.
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 the Company's 1995 fiscal year. This statement requires
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. Management has not yet determined the impact, if any, on the Company's
consolidated statements of earnings or financial position.
33
<PAGE>
ANALYSIS OF THE SCRIVNER GROUP'S HISTORICAL RESULTS OF OPERATIONS
Set forth below is Fleming's analysis of the Scrivner Group's results of
operations for the three years ended 1993 and for the first six months of 1994
and 1993.
GENERAL
The statement of operations data for the Scrivner Group may not be
comparable to that for Fleming because cost of sales and selling and
administrative expense are affected by classification differences. Certain costs
and expenses included in determining cost of sales for Fleming are classified as
selling, operating and administrative expenses for the Scrivner Group. In
addition, the Scrivner Group-owned stores accounted for approximately 33% of the
Scrivner Group's net sales in 1993 while Company-owned stores accounted for
approximately 7% of Fleming's net sales in 1993.
RESULTS OF OPERATIONS
Set forth in the following table is information regarding Scrivner Group's
net sales and certain components of earnings expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------------------- JUNE 30, JUNE 30,
1991 1992 1993 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.00% 100.00% 100.00% 100.00% 100.00%
Gross margin......................................... 13.75 13.94 14.12 14.01 14.32
Less:
Selling, operating and administrative expense...... 11.80 12.08 12.51 12.38 12.75
Interest expense................................... 1.28 1.09 0.94 0.96 0.86
Interest income.................................... (0.11) (0.11) (0.10) (0.10) (0.12)
----------- ----------- ----------- ----------- -----------
Total............................................ 12.97 13.06 13.35 13.24 13.49
----------- ----------- ----------- ----------- -----------
Income before income taxes........................... 0.78 0.88 0.77 0.77 0.83
Provision for income taxes........................... 0.41 0.43 0.36 0.38 0.41
----------- ----------- ----------- ----------- -----------
Net income........................................... 0.37% 0.45% 0.41% 0.39% 0.42%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
NET SALES. Net sales for the six months ended June 30, 1994 decreased $14
million, or 0.4%, from $3.24 billion to $3.22 billion for the comparable 1993
period. The flat net sales were attributable to low food price inflation
(measured by reference to the Consumer Price Index-Food at Home) and lower
volume in the 1994 period versus the 1993 period, partially offset by an
increase in net sales by the Scrivner Group-owned stores.
GROSS MARGIN. Gross margin for the 1994 period increased $8 million, or
1.8%, to $462 million from $454 million for the comparable 1993 period and
increased as a percent of net sales to 14.3% from 14.0% for the 1993 period. The
increase in gross margin was primarily attributable to increased net sales at
the Scrivner Group-owned stores and a modest shift in the sales mix of such
stores to higher margin items during the 1994 period, offset in part by a small
decrease in gross margin for wholesale operations primarily as a result of lower
food price inflation during the 1994 period. Retail operations typically have a
higher gross margin than wholesale operations.
SELLING, OPERATING AND ADMINISTRATIVE EXPENSE. Selling, operating and
administrative expense increased $10 million, or 2.6%, to $411 million from $401
million for the comparable period in 1993, and increased as a percentage of net
sales to 12.8% from 12.4% in the 1993 period. The increase was primarily
attributable to higher payroll and related benefit expenses and occupancy costs
at the Scrivner Group-owned stores during the 1994 period. Retail operations
typically have higher selling expenses than wholesale operations.
INTEREST EXPENSE. Interest expense during the 1994 period decreased $4
million, to $28 million from $31 million in the 1993 period. The decrease in
interest expense occurred as a result of lower borrowings during the 1994
period, partially offset by higher interest rates.
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<PAGE>
INTEREST INCOME. Interest income for the 1994 period increased $1 million,
to $4 million from $3 million for the comparable period in 1993, as a result of
higher interest rates during the 1994 period.
PROVISION FOR INCOME TAXES. The Scrivner Group's effective tax rate for the
six months ended June 30, 1994 increased to 49.9% from 49.3% for the comparable
1993 period as a result of the higher federal tax rate resulting from a tax law
enacted in 1993.
1993, 1992 AND 1991
NET SALES. Net sales in 1993 increased $332 million, or 5.8%, to $6.02
billion from $5.69 billion in 1992. Net sales in 1992 increased $79 million, or
1.4%, from $5.61 billion in 1991. The 1993 increase was attributable to the
Scrivner Group's purchase of certain assets of the Peter J. Schmitt Company (the
"Schmitt Company") in January 1993 and a modest increase in food prices. The
assets purchased from the Schmitt Company consisted of the inventory at two
distribution centers, seven retail food stores and franchise and lease rights to
twenty-six retail food stores. The 1992 increase resulted from an increase in
net sales by Scrivner Group-owned stores and a slight increase in food prices,
partially offset by the absence of sales from foodservice operations sold in
April 1992.
GROSS MARGIN. Gross margin in 1993 increased by $57 million, or 7.2%, to
$849 million from $792 million in 1992, and increased as a percentage of net
sales to 14.1% from 13.9% in 1992. Gross margin in 1992 increased $21 million,
or 2.7%, from $771 million in 1991, and increased as a percentage of net sales
from 13.8% in 1991. The increase in 1993 was primarily due to increased net
sales at Scrivner Group-owned stores as a result of the inclusion of former
Schmitt Company retail food stores and improvements resulting from remodels and
expansions of Scrivner Group-owned stores. The 1992 increase resulted primarily
from increased net sales at Scrivner Group-owned stores, partially offset by the
absence of sales from foodservice operations sold in April 1992. Retail
operations typically have a higher gross margin than wholesale operations.
SELLING, OPERATING AND ADMINISTRATIVE EXPENSE. Selling, operating and
administrative expense in 1993 increased $65 million, or 9.5%, to $752 million
from $687 million in 1992, and increased as a percentage of net sales to 12.5%
from 12.1% in 1992. Selling, operating and administrative expense in 1992
increased $26 million, or 3.9%, from $661 million in 1991, and increased as a
percentage of net sales from 11.8% in 1991. The 1993 increase was primarily due
to increases in payroll and related expenses and advertising costs at Scrivner
Group-owned stores, one-time costs associated with the purchase of certain
assets of the Schmitt Company and start-up expenses for a new general
merchandise distribution center in Buffalo, New York. The 1992 increase was
primarily attributable to higher payroll and related expenses and product
handling costs in wholesale operations.
INTEREST EXPENSE. Interest expense in 1993 decreased $6 million, to $56
million from $62 million in 1992. Interest expense in 1992 decreased $9 million
from $72 million in 1991. The decrease in both 1993 and 1992 was primarily
attributable to lower interest rates and, with respect to 1993, lower borrowing
levels.
INTEREST INCOME. Interest income remained stable at approximately $6
million during fiscal years 1993, 1992 and 1991 as a result of increased levels
of notes receivable from customers offset by lower interest rates.
PROVISION FOR INCOME TAXES. The effective income tax rates were 46.1%,
49.6% and 51.5% in 1993, 1992 and 1991, respectively. The lower effective income
tax rate in 1993 resulted from a tax credit of $3 million from net operating
loss carryforwards, offset in part by an increase in the federal tax rate of 1%
due to the passage of a new tax law and increases in state taxes.
35
<PAGE>
BUSINESS
The Company is a recognized leader in the food marketing and distribution
industry with both wholesale and retail operations. The Company is the largest
food wholesaler in the United States as a result of the acquisition of the
Scrivner Group in July 1994 (the "Acquisition"), based on PRO FORMA 1993 net
sales of approximately $19 billion. The Company serves as the principal source
of supply for approximately 10,000 retail food stores, including approximately
3,700 supermarkets (defined as any retail food store with annual sales of at
least $2 million) which represented approximately 13% of all supermarkets in the
United States at year-end 1993 and totaled approximately 97 million square feet
in size. 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.
With customers in 43 states, the Company services a geographically diverse area.
The Company's wholesale 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, the Company offers a wide range of
support services to its customers to help them compete more effectively with
other food retailers in their respective markets. Such services include store
development and expansion services, merchandising and marketing assistance,
advertising, consumer education programs, retail electronic services and
employee training.
In addition to its food wholesale operations, the Company has a significant
presence in food retailing, owning and operating 345 retail food stores,
including 283 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.
PRO FORMA 1993 net sales from retail operations were approximately $3 billion.
The Company believes it is one of the 20 largest food retailers in the United
States based on PRO FORMA net sales.
Fleming's net sales grew from approximately $5 billion in 1983 to
approximately $13 billion in 1993, largely as a result of acquisitions of
wholesale food distributors and operations. After giving PRO FORMA effect to the
Acquisition, the Company's 1993 net sales were approximately $19 billion. The
Company believes that its position as a leader in the food marketing and
distribution industry is attributable to a number of competitive strengths,
including the following:
SIZE. As the largest food wholesaler in the United States, the Company has
substantial purchasing power and is able to realize significant economies of
scale.
DIVERSE CUSTOMER BASE. In 1993, chains and multiple-store independent
operators represented 40% and 33%, respectively, of Fleming's net sales,
with the balance comprised of sales to single-store independent operators
and Fleming-owned stores. Approximately one-third of the Scrivner Group's
1993 net sales were to Scrivner Group-owned stores, with the balance
comprised of sales to multi-store independent operators, single-store
operators and chains. In addition, with customers in 43 states, the
Company's sales are geographically dispersed.
EXPERTISE IN PRIVATE LABEL PRODUCTS AND PERISHABLES. The Company offers a
wide range of private label products and perishables and has developed
extensive expertise in handling, marketing and distributing these products.
The Company believes that these products are an important element in
attracting and retaining consumers. This expertise has permitted the Company
to derive 41% of 1993 PRO FORMA net sales from the sale of perishables. In
addition, private label products and certain perishables (such as produce,
frozen foods and bakery goods) generally produce higher margins than other
food categories.
EFFICIENT DISTRIBUTION NETWORK. Fleming has successfully integrated the
operations of previously acquired food wholesalers, thereby developing an
efficient distribution network, and has recorded 19 consecutive years of
warehouse productivity increases. The Company aggressively pursues
opportunities for the consolidation of distribution centers, seeking to
eliminate duplicative operations and facilities and achieve greater
efficiencies. In addition, the Company believes it is an industry leader in
the development and application of advanced distribution technology.
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<PAGE>
LONG-TERM SUPPLY CONTRACTS. The Company pursues various means of obtaining
future business, including the formation of alliances with retailers. In
particular, the Company has focused on retailers with demonstrated operating
success, including operators of alternative formats such as warehouse stores
and supercenters. The Company has long-term supply contracts with many of
its major customers. For example, in December 1993 the Company signed a
six-year supply agreement with Kmart Corporation ("Kmart") to serve its new
Super Kmart Centers in areas where the Company has distribution facilities.
MANAGEMENT TEAM. The Company is led by an experienced management team
comprised of individuals who combine many years in the food marketing and
distribution industry. See "Management."
BUSINESS STRATEGY
The Company's strategy is to maintain and strengthen its position in food
marketing and distribution by: (i) consolidating distribution centers into
larger, more efficient centers and eliminating functions that do not add
economic value; (ii) maximizing the Company's substantial purchasing power;
(iii) building and maintaining long-term alliances with successful retailers,
including both traditional and alternative format operators; (iv) remaining at
the forefront of technology-driven distribution systems; (v) continuing to
capitalize on the Company's expertise in handling private label products and
perishables; and (vi) focusing on the profitability of Company-owned stores on a
stand-alone basis and increasing net sales of such stores through internal
growth and, in the long term, selective acquisitions.
CONSOLIDATE DISTRIBUTION CENTERS; ELIMINATE FUNCTIONS NOT ADDING ECONOMIC
VALUE. In January 1994, the Company's Board of Directors approved a plan
designed to improve the Company's performance by, among other things, developing
larger, more productive distribution centers and by eliminating functions and
operations that do not add economic value. Estimated pre-tax cost savings are
expected to grow to at least $65 million per year beginning in 1997 after the
plan is fully implemented. Such estimates do not include any incremental savings
which may be realized as a result of closing distribution centers made
duplicative by the Acquisition. The plan calls for reorganizing the management
of operations, consolidating facilities and reengineering the way the Company
conducts business. See "-- The Consolidation, Reorganization and Reengineering
Plan."
MAXIMIZE PURCHASING POWER. The Company's position as the largest single
customer of most of its suppliers provides it with substantial purchasing power.
The Company will seek to maximize this purchasing power, which will result in
lower unit costs, through increased use of centralized procurement and increased
volume.
MAINTAIN LONG-TERM ALLIANCES WITH RETAILERS. The Company maintains strong
relationships with successful retailers and has long-term supply contracts with
many of its major customers. Recently, mass merchandisers and warehouse stores
have begun to compete with more traditional forms of retail food stores, gaining
an increasing share of retail food dollars. The Company believes that it is well
positioned to serve these alternative format stores not only through its
extensive product offerings and efficient distribution system, but also through
the various retail services it offers. In December 1993 the Company entered into
a six-year supply agreement with Kmart to serve new Super Kmart Centers
(combination stores with an average of approximately 170,000 square feet of
which approximately 60,000 square feet is devoted to food and related products)
in selected areas. By expanding the Company's network of distribution centers,
the Acquisition has increased the number of potential Super Kmart Centers which
the Company could serve. The Company will pursue other similar contracts in the
future.
REMAIN AT THE FOREFRONT OF TECHNOLOGY-DRIVEN DISTRIBUTION SYSTEMS. The
Company believes its success is in part a result of its ability to identify new
technology for application to food marketing and distribution. The Company
intends to remain at the technological forefront of its industry. To this end,
the Company has been a leader in developing technology related to the Efficient
Consumer Response ("ECR") industry initiative. ECR is a consumer-driven
grocery-industry strategy whereby wholesalers, retailers, and vendors cooperate
to improve responsiveness to consumer needs through greater operating
efficiencies and lower distribution costs. ECR focuses on removing costs from
the entire food distribution system while creating better assortment, in-stock
service, convenience and prices through a leaner, faster and more responsive
37
<PAGE>
supply chain. ECR will make use of computer-to-computer trading relationships
among wholesalers, retailers and vendors to enable automatic replenishment of
inventories. The Company is developing applications to link its customers, the
Company and vendors. The electronic network will better facilitate the movement
of information and products while collecting consumer purchasing data to be used
in marketing and promotion, category management and new product development.
CAPITALIZE ON EXPERTISE IN PRIVATE LABEL PRODUCTS AND PERISHABLES. The
Company believes private label products and perishables are in increasing demand
by many consumers. Additionally, private label products and certain perishables
(such as produce, frozen foods and bakery goods) produce higher margins than
other retail food categories. The Company expects to capitalize on opportunities
for broader distribution of expanded product lines as a result of acquiring the
private label products handled by the Scrivner Group. The Company intends to
further develop its expertise in handling, marketing and distributing private
label products and perishables.
FOCUS ON PROFITABILITY OF RETAIL FOOD STORES. At July 9, 1994, Fleming
owned 139 retail food stores and, primarily as the result of the Acquisition,
the Company owns 345 retail stores as of November 1, 1994. The Company recently
recruited a senior officer to assume management responsibility for the Company's
retail operating results. Retail operations previously had been conducted as an
extension of the Company's wholesale operations, with each store being managed
by the distribution center personnel supplying it. The Company has initiated a
comprehensive evaluation of its retail operations in order to focus such
operations on stand-alone profitability. The Company intends to increase the net
sales of its retail operations through internal growth and, in the long term,
selective acquisitions.
THE CONSOLIDATION, REORGANIZATION AND REENGINEERING PLAN
Under the leadership of Robert E. Stauth, who was elected President and
Chief Operating Officer in March 1993, Chief Executive Officer in October 1993
and Chairman in April 1994, Fleming 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. See "Investment Considerations -- Response
to a Changing Industry." 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 reengineering the distribution and pricing of goods and services.
The Company believes consolidation, reorganization and reengineering 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. In the 40
weeks ended October 1, 1994, approximately 700 associate positions were
eliminated through facilities consolidation.
38
<PAGE>
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 a first step in its organizational realignment, Fleming determined to
close its regional administrative offices, the last being closed in April 1994.
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.
REENGINEERING. Fleming commissioned an internal management task force to
reengineer Fleming's business processes at both the divisional and corporate
level. The task force made specific reengineering 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 five key value-added functions:
Customer Management, Retailer Services, Category Marketing, Product Supply, and
Support Services. 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.
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 support 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 support 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).
Through Support Services, various functions -- such as Finance, Associate
Support, and Corporate/Business Development -- will provide a variety of
administrative support services more efficiently to all of the Company's
operations.
A new flexible sales plan for grocery, frozen foods and dairy products 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 believes its flexible
sales plan will result in increased promotional benefits being offered through
the Company which will attract new business due to lower landed cost of goods to
the retailer.
Based on customer feedback, the Company believes its customers will support
the new pricing policy and the unbundling of retailer services and that these
changes will add value to customers primarily through cost savings to be derived
through the Company's more efficient organization. The Company estimates that
the reengineering process will be completed by the end of 1996. Certain aspects
of reengineering are currently being tested with implementation to take place at
the Company's operations in the western and midwestern parts of the United
States based on a scheduled roll-out over the course of 1995. Reengineering will
be implemented at the Company's operations in the eastern and southern parts of
the United States over the course of 1996.
39
<PAGE>
PRODUCTS
The Company supplies its customers with a full line of national brand
products as well as an extensive range of private label, including 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 high 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 significant 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.
The Company's PRO FORMA product mix as a percentage of 1993 net sales was
53% groceries, 41% perishables and 6% general merchandise.
SERVICES TO CUSTOMERS
The Company offers value-added services to its retailer customers, thereby
differentiating itself from most of its competitors. 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 retail 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 currently 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 reengineering process, 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. See "--
The Consolidation, Reorganization and Reengineering Plan."
DISTRIBUTION
The Company currently operates 49 distribution centers, including 39
full-service food 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. Seven general merchandise distribution centers
distribute health and beauty care items and other non-food items. Two
distribution centers serve convenience stores and one distribution center
handles only dairy, delicatessen and fresh meat products. Substantially all
facilities are equipped with modern material
40
<PAGE>
handling equipment for receiving, storing and shipping large quantities of
merchandise. The Company believes that the technology currently in place at its
distribution facilities offers a competitive advantage. As a result of the
Acquisition, the Company has closed three distribution centers, has announced
plans to close two distribution centers (Buffalo, New York and Blooming Prairie,
Minnesota), and expects to close an additional five distribution centers.
Pursuant to the consolidation, reorganization and reengineering plan, the
Company has closed four distribution centers and will close one additional
distribution center.
The Company's distribution facilities comprise more than 20 million square
feet of warehouse space. Additionally, the Company rents, on a short-term basis,
approximately seven 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.
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 97 million square feet.
Fleming's customers are geographically diverse, with operations in 43 states.
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 successfully 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 over 1,000 chain stores, compared to 810 at year-end
1993. In December 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 currently supplies 37 Super Kmart Centers and the total
number of Super Kmart Centers supplied is expected to increase to approximately
60 by year-end 1995.
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 1,700 food stores
operating under Company franchises or licenses.
The Company believes that its ten largest customers on a PRO FORMA basis
accounted for approximately 16% of net sales during 1993, with no single
customer representing more than 3.5% of net sales.
COMPANY-OWNED STORES
Principally as a result of the Acquisition, the number of Company-owned
stores increased from 139 at July 9, 1994 to 345 at November 1, 1994, including
283 supermarkets with an aggregate of approximately 9.5 million square feet. The
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
41
<PAGE>
have one or more specialty departments such as bakeries, full service
delicatessens, extensive produce departments and complete seafood and meat
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 aggressively 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. See "Management."
The Company has developed a comprehensive plan to evaluate the retail stores
in each of its markets in order to improve profitability on a stand-alone basis.
The analysis includes evaluation of the management team, the local marketplace,
reporting systems and technology and results in a defined action plan which may
include changes in management, renovation, reduction in overhead and store
closures. The Company has begun to implement its plan in several markets,
including Florida, where management anticipates improved results from its 21
stores in 1995.
The Company intends to increase net sales derived from Company-owned stores
through the implementation of the retail plan described above, internal growth
and, in the long term, selective acquisitions of retail chains in niche markets.
See "-- Business Strategy."
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. See "-- Business Strategy."
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 Group distribution system. Most of Fleming's truck fleet is equipped
with on-board computers to monitor the efficiency of deliveries to its
customers.
Fleming's Retail Technology Group provides value-added services to its
retailers including point-of-sale scanning systems (including hardware and
software, on both a sale and lease basis), in-store personal computers,
electronic shopping programs, electronic order entry and many specific
applications designed for independent supermarket operators. In addition, the
Company has been a leader in developing technology related to the ECR
initiative. The Company's role in the continued development of ECR will further
strengthen its relationship with retail customers and vendors.
SUPPLIERS
The Company purchases goods from numerous vendors and growers. As the
largest single customer of most 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.
42
<PAGE>
CAPITAL INVESTED IN CUSTOMERS
As part of its services to retailers, the Company provides capital to
customers in several ways, although the Company has decided to reduce its
financial exposure to such customers by more selectively allocating capital in
the future. 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
November 1, 1994, the Company was the primary lessee of approximately 1,100
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, 1992 and 1991 Fleming sold,
with limited recourse, $68 million, $45 million and $82 million, respectively,
of notes evidencing such loans. During fiscal years 1993, 1992 and 1991, the
Scrivner Group sold, with limited recourse, $51 million, $40 million and $35
million, respectively, of notes evidencing similar loans. The Company believes
its loans to customers are illiquid and would not be investment grade if rated.
At October 1, 1994, the Company had outstanding $415 million of notes receivable
from customers, of which $31.2 million were greater than 90 days past due. At
that date, the Company had reserves covering 67% of such past due amount.
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.
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<PAGE>
The following table sets forth the components of Fleming's portfolio of
loans to and investments in customers at year end 1993 and 1992.
<TABLE>
<CAPTION>
CUSTOMERS WITH EQUITY INVESTMENTS
-----------------------------------------
CUSTOMERS
BUSINESS WITH NO
DEVELOPMENT EQUITY OTHER SUB EQUITY
VENTURES STORES STORES(A) TOTAL INVESTMENTS TOTAL
----------- ------ --------- ------ ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1993
Loans(b)................................... $ 78 $55 $ 2 $135 $178 $ 313
Equity Investments......................... 28 15 12 55 -- 55
----- ------ --- ------ ----- -----
Total.................................... $106 $70 $14 $190 $178 $ 368
----- ------ --- ------ ----- -----
----- ------ --- ------ ----- -----
1992
Loans(b)................................... $114 $49 $-- $163 $193 $ 356
Equity Investments......................... 18 18 10 46 -- 46
----- ------ --- ------ ----- -----
Total.................................... $132 $67 $10 $209 $193 $ 402
----- ------ --- ------ ----- -----
----- ------ --- ------ ----- -----
<FN>
- ------------------------
(a) Other stores are Company-owned stores pending sale.
(b) Includes current portion of loans, which amounts are recorded as
receivables on the Company's balance sheet.
</TABLE>
The table does not include the Scrivner Group's loans to or equity
investments in customers or 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 25, 1993, the
Company's undiscounted obligations under direct financing leases and lease
guarantees were $424 million and $335 million, respectively. As of October 1,
1994, total loans to and equity investments in customers was $507 million.
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 $49 million in the 40 weeks ended October 1, 1994 and $52
million, $28 million and $17 million in 1993, 1992 and 1991, respectively.
Prior to the Acquisition, the Scrivner Group provided capital to customers
in similar ways. At June 30, 1994, the Scrivner Group's portfolio of credit
extensions to customers (excluding prime lease obligations) consisted of loans
aggregating $72 million, obligations under direct financing leases of $2 million
and equity investments of $418,000. The Scrivner Group's credit loss expense was
approximately $8 million, $6 million and $8 million in 1993, 1992 and 1991,
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 product 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 product price, quality and assortment,
store location and format, sales promotions, advertising, availability of
parking, hours of operation and store appeal. The Company believes it compares
favorably with its competition by virtue of its purchasing power, which results
in more favorable pricing for retail customers, efficient, technologically
advanced distribution centers and value-added services to customers.
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 product price, quality and assortment,
store location and format, sales promotions, advertising, availability of
44
<PAGE>
parking, hours of operation and store appeal. The Company believes its
competitive advantages are its competitive prices, varied store formats,
complete specialty food departments and broad variety of both private label and
national brand food and non-food items.
EMPLOYEES
Upon consummation of the Acquisition, the Company had approximately 43,000
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. The Company has 95
such agreements which expire at various times throughout the next five years.
The Company believes it has satisfactory relationships with its unions. The
Company's work force is expected to decrease by 1,500 associates by the end of
1996. See "-- The Consolidation, Reorganization and Reengineering Plan." In
addition, the Company expects to further reduce associate positions due to
facilities consolidations resulting from the Acquisition and the effects of
applying its reengineering plan to the Scrivner Group's operations.
CERTAIN LEGAL PROCEEDINGS
A Company subsidiary has been named as a defendant in the following related
cases:
TROPIN V. THENEN, ET AL., CASE NO. 93-2502-CIV-MORENO, UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA; and WALCO INVESTMENTS, INC.,
ET AL. V. THENEN, ET AL., CASE NO. 93-2534-CIV-MORENO, UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT OF FLORIDA.
These cases were filed in the United States District Court for the Southern
District of Florida on December 21, 1993. Both cases name numerous defendants,
including, in one case, four former employees of subsidiaries of the Company
and, in the other, two former employees of a subsidiary of the Company. The
cases contain similar factual allegations and the plaintiffs allege, among other
things, that the former employees participated in fraudulent activities by
taking money for confirming "diverting" transactions (a practice involving
arbitraging in food and other goods to profit from price differentials given by
manufacturers to different retailers and wholesalers) which had not occurred and
that, in so doing, the former employees acted within the scope of their
employment. Plaintiffs also allege that the subsidiary allowed its name to be
used in furtherance of the alleged fraud.
The allegations include, among other causes of action, common law fraud,
breach of contract, negligence, conversion and civil theft, and violations of
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 allegations contained in the complaint.
The Company denies the allegations of the complaints and will vigorously defend
the actions. The litigation is in its preliminary stages, and the ultimate
outcome cannot be determined. Furthermore, the Company is unable to predict a
potential range of monetary exposure to the Company. Based on the recovery
sought, an unfavorable judgment could have a material adverse effect on the
Company.
The Company has been designated by the U.S. Environmental Protection Agency
as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA," also known as "Superfund"),
with others, with respect to EPA-designated Superfund sites. While liability
under CERCLA for remediation at such sites is joint and several, the Company
believes that, to the extent it is ultimately determined to be liable for clean
up at any such site, such liability will not result in a material adverse effect
on its consolidated financial position or results of operations.
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.
45
<PAGE>
MANAGEMENT
The following are the members of the Company's management committee. The
management committee is comprised of executive officers of the Company and has
oversight over the operations of the Company.
ROBERT E. STAUTH -- Mr. Stauth has served as President and Chief Operating
Officer of the Company since April 1993, and was named Chief Executive Officer
in October 1993 and Chairman in April 1994. Mr. Stauth has been with the Company
more than 20 years. Prior to being named President and Chief Operating Officer,
Mr. Stauth was named Senior Vice President -- Western Region in 1991, with
responsibility for the Company's eight West Coast operations. In 1992, he was
appointed Executive Vice President -- Division Operations, with responsibility
for Fleming's operations in the Western, Southern, Mid-America and Mid-South
regions. From 1987 to 1991, Mr. Stauth served as Vice President -- Arizona
operations.
GERALD G. AUSTIN -- Mr. Austin was elected Executive Vice President --
Operations in October 1993, after serving three years as Executive Vice
President -- Marketing. Mr. Austin is responsible for the Company's wholesale
food divisions, marketing and general merchandise activities, retail concepts
and store development and planning. Mr. Austin is supervising the implementation
of the Company's reengineering program, having served as a member of the
steering committee that created the plan. Mr. Austin has been an associate of
Fleming for 35 years.
E. STEPHEN DAVIS -- Mr. Davis serves as Executive Vice President -- Scrivner
Group. In addition, Mr. Davis is responsible for integrating the Scrivner Group
into Fleming. Mr. Davis is overseeing executives responsible for operations,
finance, human resources, marketing and management information systems at the
Scrivner Group. Mr. Davis has directed the Company's corporate distribution
function for the past 14 years, most of them as Executive Vice President --
Distribution. Mr. Davis has held numerous positions during his 34 years as a
Fleming associate.
HARRY L. WINN, JR. -- Mr. Winn joined the Company as Executive Vice
President -- Chief Financial Officer in May 1994. Mr. Winn has overall
responsibility for accounting, legal, management information systems, retailer
credit, capital management, tax, audit and planning. He came to the Company from
UtiliCorp United in Kansas City, where he had served as managing senior vice
president and chief financial officer from 1990 to 1993. UtiliCorp is a NYSE
energy company with revenues of $1.3 billion whose operations include gas and
electric utilities in eight states, Canada and New Zealand and unregulated
natural gas and oil operations in the U.S. and the U.K. Prior to joining
UtiliCorp, Mr. Winn was an independent consultant from 1988 to 1990. Prior to
that he held the roles of vice president -- controller of Squibb United States,
vice president -- treasurer of Squibb Corporation, vice president -- treasurer
of Baxter International, treasurer of American Hospital Supply and assistant
vice president of American National Bank.
DARRELD R. EASTER -- Mr. Easter serves the Company as Senior Vice President
- -- Marketing. Mr. Easter is also responsible for Fleming's entire marketing
function, which encompasses the merchandising and procurement of all food
product lines, including groceries, meat, dairy, produce, frozen foods, bakery
goods and private label products, as well as marketing services, sales promotion
and consumer services. Prior to election to his current post in October 1993,
Mr. Easter served three years as Senior Vice President -- Produce, Meat, Bakery
and Deli. Mr. Easter joined Fleming in 1985 as Director -- Produce Procurement
after spending 25 years with a leading retail food chain based in Kansas.
WILLIAM M. LAWSON, JR. -- Mr. Lawson was elected Senior Vice President --
Corporate Development/ International Operations effective August 1, 1994. He is
responsible for identifying business ventures that offer growth opportunities
for the Company such as acquisitions, divestitures, joint ventures (both
domestic and international) and start-up situations. Prior to joining Fleming,
Mr. Lawson had practiced law in Phoenix since 1976.
LARRY A. WAGNER -- Mr. Wagner is Senior Vice President -- Human Resources of
the Company, with responsibility for organizational planning, management
development and training, benefit programs, salary administration and employment
procedures. Mr. Wagner began working for Fleming 15 years ago as
46
<PAGE>
Manager of Human Resources for the Houston division. In 1979, he was promoted to
Regional Director of Human Resources. He was promoted to Vice President -- Human
Resources in January 1989, and to his present position in February 1991.
The following officers of the Company have oversight over the Company's
general merchandise and retail operations at the direction of the management
committee:
RONALD C. ANDERSON -- Mr. Anderson was elected Vice President -- General
Merchandise of the Company in June 1993, with responsibility for the Company's
general merchandise operations. Prior to joining Fleming in June 1993, Mr.
Anderson served as president of the service merchandising division of the
nation's largest wholesale distributor of pharmaceuticals, health and beauty
care products, specialty foods and general merchandise. He also has experience
at many levels of retail business, with 17 years service at a major supermarket
chain based in Salt Lake City.
THOMAS L. ZARICKI -- Mr. Zaricki was elected Senior Vice President -- Retail
Operations of the Company in October 1993. The Company formed the Fleming Retail
Group to oversee operations of all Company-owned stores and has named Mr.
Zaricki President -- Fleming Retail Group. Mr. Zaricki joined Fleming in October
1993 with over 30 years experience in supermarket management, having served most
recently as president of a regional supermarket chain headquartered in Phoenix.
47
<PAGE>
THE CREDIT AGREEMENT
The following discussion of certain of the provisions of the Credit
Agreement is not intended to be exhaustive and is qualified in its entirety by
the provisions of the Credit Agreement contained as an Exhibit to the Company's
Current Report on Form 8-K, dated July 19, 1994, which is incorporated in this
Prospectus by reference.
On July 19, 1994, Fleming executed the Credit Agreement with Morgan
Guaranty, as Managing Agent, and twelve other domestic and foreign banks as
Agents. The Credit Agreement is divided into the following three facilities: (i)
a $900 million five-year revolving credit facility ("Tranche A"), (ii) a $500
million two-year term loan facility ("Tranche B"), and (iii) an $800 million
six-year amortizing term loan facility ("Tranche C"). At November 1, 1994, $250
million was borrowed under Tranche A, $500 million was borrowed under Tranche B
and $800 million was borrowed under Tranche C.
GUARANTEES. The Company's obligations under the Credit Agreement are
unconditionally guaranteed, on a joint and several basis, by substantially all
direct and indirect subsidiaries of the Company. The Company is obligated to
maintain guarantees by its subsidiaries such that the assets of the guaranteeing
subsidiaries, together with the assets of the Company, comprise at least 85% of
the assets of the Company on a consolidated basis.
COLLATERAL. Borrowings under the Credit Agreement (and obligations under
certain Letters of Credit and under certain derivative financial transactions
entered into to hedge the Company's interest rate exposure thereunder) must,
except as described below, be secured by a perfected pledge of substantially all
of the inventory and accounts receivable of Fleming and its subsidiaries.
Obligations under the Credit Agreement are also secured by a pledge of the
capital stock of substantially all of the Company's guaranteeing subsidiaries.
The collateral will be released upon the earlier to occur of (i) all debt
under the Credit Agreement being repaid and all commitments thereunder canceled,
(ii) Fleming's senior unsecured long-term debt being rated investment grade or
higher by Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. and
by Moody's Investors Service, Inc. or (iii) upon the affirmative vote of Banks
holding 85% of the obligations under the Credit Agreement.
MANDATORY PREPAYMENTS. The net proceeds of the Offering, together with
borrowings under Tranche A, will be used to repay Tranche B (see "Use of
Proceeds"). Upon repayment of Tranche B, 50% of the net cash proceeds of any
asset sales, 75% of the net cash proceeds of equity issuances and 100% of the
net cash proceeds of any debt financing will be applied to reduce Tranche C
borrowings. Tranche C amortizes on a quarterly basis, beginning March 31, 1995.
INTEREST RATE. Under the Credit Agreement, the interest rate for any
Tranche may be based on LIBOR, CD rates or prime rates, as selected by the
Company from time to time, plus a borrowing margin. The borrowing margins vary
depending upon the rating of the Company's senior unsecured long-term debt.
INTEREST RATE PROTECTION. The Credit Agreement stipulates that the Company
must enter into interest rate protection agreements for at least 50% of the bank
debt outstanding under Tranche A and Tranche C (less $150 million) until it has
received investment grade credit ratings for its senior unsecured debt. As of
the date of this Prospectus, the Company had fully complied with this provision.
COVENANTS. The Credit Agreement contains customary covenants associated
with similar facilities, including, without limitation: maintenance of a
specified borrowed funds to net worth ratio; maintenance of a minimum
consolidated net worth; maintenance of a specified fixed charge coverage ratio;
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 restricted payments; limitations on
transactions with affiliates; limitations on acquisitions and investments;
limitations on capital expenditures; and limitations on payment restrictions
affecting subsidiaries. The Company is currently in compliance with all
financial covenants under the Credit Agreement. As of November 1, 1994, the
restricted payments test would have allowed the
48
<PAGE>
Company to pay dividends and/or repurchase capital stock in the aggregate amount
of $17 million for the balance of 1994. The borrowed funds to net worth test
would have allowed the Company to borrow an additional $547 million. The fixed
charge coverage test would have allowed the Company to incur an additional $33
million of annual interest expense.
EVENTS OF DEFAULT. The Credit Agreement contains Events of Default,
including, but not limited to, failure to pay principal or interest, failure to
meet covenants, representations or warranties false in any material respect,
cross default to other indebtedness of the Company, and a change of control.
CERTAIN OTHER OBLIGATIONS
THE PRIOR INDENTURES
On March 15, 1986, the Company entered into an Indenture (the "86
Indenture") with Morgan Guaranty, as Trustee, regarding $100 million of 9 1/2%
Debentures due 2016 (the "9 1/2% Debentures"). As of the date of this
Prospectus, approximately $7.0 million in aggregate principal amount of the
9 1/2% Debentures were outstanding. The terms of the Indenture include a
negative pledge obligating the Company to equally and ratably secure the holders
of the 9 1/2% Debentures in the event the Company secures any debt by placing a
lien or other encumbrance upon the shares of stock or indebtedness of certain of
its subsidiaries.
On December 1, 1989, the Company entered into an Indenture (the "89
Indenture") with Morgan Guaranty as Trustee. Pursuant to the 89 Indenture, the
Company issued, from time to time, an aggregate of $275 million of Medium-Term
Notes in three series. As of November 1, 1994, approximately $189 million in
aggregate principal amount of Medium-Term Notes were outstanding. The 89
Indenture contains a negative pledge substantially identical to that found in
the 86 Indenture.
The securing of obligations under the Credit Agreement by the pledge of the
stock of the Company's subsidiaries and the pledge of the accounts receivable of
the Company and its subsidiaries activated the negative pledge covenants under
both Prior Indentures. Contemporaneously with entering into the Credit Agreement
and securing its obligations thereunder, the Company equally and ratably secured
the holders of the 9 1/2% Debentures and the Medium-Term Notes by the pledge of
the capital stock and the inter-company indebtedness (including inter-company
accounts receivable) of substantially all of the Company's subsidiaries.
Additionally, the first series of Medium-Term Notes ("Series A Notes")
contain a provision requiring the Company to offer to purchase such notes (at
par plus accrued but unpaid interest) upon the occurrence of certain "repurchase
events." The consummation of the Acquisition and the resulting downgrade in the
ratings of the Company's long-term unsecured indebtedness represented such a
repurchase event. On August 16, 1994, the Company made an offer to purchase the
Series A Notes in accordance with the provisions of the 89 Indenture, which
offer terminated on October 21, 1994, with $33 million of such notes tendered.
The Company financed the purchase by drawing additional amounts under Tranche A
of the Credit Agreement. Neither the 9 1/2% Debentures nor any of the other
series of Medium-Term Notes contains a similar provision.
SALES OF CERTAIN SECURED LOANS AND DIRECT FINANCING LEASES
From time to time the Company sells notes evidencing certain secured loans
made to retailers. See "Business -- Capital Invested in Customers." Such notes
are typically sold, with limited recourse, directly to financial institutions or
to a grantor trust, with financial institutions purchasing trust certificates
representing an interest in a pool of notes.
The Company leases electronic equipment to certain retailers, including
point-of-sale scanning systems and other computer equipment, related software
and peripherals. Such leases, which had an aggregate book value at October 1,
1994 of approximately $20 million, generally have lease terms of three to five
years with optional renewal provisions. The Company expects to sell, with
limited recourse, an interest in a substantial portion of such leases directly
or indirectly to financial institutions during 1995.
49
<PAGE>
DESCRIPTION OF THE NOTES
The Fixed Rate Notes offered hereby will be issued under an indenture to be
dated as of December 15, 1994 (the "Fixed Rate Note Indenture"), among the
Company, as issuer, each of the Subsidiary Guarantors, as guarantors, and Texas
Commerce Bank, National Association, as trustee (the "Trustee"). The Floating
Rate Notes offered hereby will be issued under an indenture to be dated as of
December 15, 1994 (the "Floating Rate Note Indenture" and, together with the
Fixed Rate Note Indenture, the "Senior Note Indentures"), among the Company, as
issuer, each of the Subsidiary Guarantors, as guarantors, and the Trustee, as
trustee.
Copies of the forms of the Senior Note Indentures are filed as exhibits to
the Registration Statement of which this Prospectus is a part. The Senior Note
Indentures are subject to and governed by the Trust Indenture Act. The following
summaries of the material provisions of the Senior Note Indentures do not
purport to be complete and are subject to, and qualified in their entirety by,
reference to all of the provisions of the Senior Note Indentures, including the
definitions of certain terms contained therein and those terms made a part of
the Senior Note Indentures by the Trust Indenture Act. For definitions of
certain capitalized terms used in the following summary, see "-- Certain
Definitions."
The Fixed Rate Notes and the Floating Rate Notes (collectively, the "Notes")
are identical except as indicated below.
GENERAL
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the office of the Trustee maintained at Texas Commerce Trust
Company of New York, 80 Broad Street, Suite 400, New York, New York 10004);
PROVIDED, HOWEVER, that payment of interest may be made, at the option of the
Company, by check mailed to the Person entitled thereto as shown on the security
register. (Sections 301, 305 and 307) The Notes will be issued only in fully
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. (Section 302) No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith. (Section 305)
TERMS SPECIFIC TO THE FIXED RATE NOTES
MATURITY, INTEREST AND PRINCIPAL
The Fixed Rate Notes will mature on December 15, 2001, and will be unsecured
senior obligations of the Company limited in aggregate principal amount to
$300,000,000. The Fixed Rate Notes will bear interest at the rate set forth
opposite their name on the cover page hereof from December 15, 1994 or from the
most recent interest payment date to which interest has been paid, payable
semi-annually on June 15 and December 15 of each year commencing June 15, 1995,
to the Person in whose name the Fixed Rate Note is registered at the close of
business on the June 1 or December 1 next preceding such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. (Sections 301, 307 and 310 of the Fixed Rate Note Indenture)
OPTIONAL REDEMPTION
The Fixed Rate Notes may be redeemed at the option of the Company, in whole
or in part, at any time on or after December 15, 1999, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest, if any, to the date of redemption, if redeemed
during the 12-month period beginning on December 15 of the years indicated below
(subject to the right of holders of record on relevant record dates to receive
interest due on an interest payment date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -------------
<S> <C>
1999................................................................... 103.0%
2000................................................................... 101.5 %
</TABLE>
50
<PAGE>
In addition, up to 20% of the initial aggregate principal amount of the
Fixed Rate Notes may be redeemed on or prior to December 15, 1997, at the option
of the Company, within 180 days of a Public Equity Offering with the net
proceeds of such offering at a redemption price equal to 110% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of redemption (subject to the right of holders of record on relevant record
dates to receive interest due on relevant interest payment dates); PROVIDED,
that after giving effect to such redemption at least $200 million aggregate
principal amount of the Fixed Rate Notes remains outstanding.
SINKING FUND
The Fixed Rate Notes will not be entitled to the benefit of any sinking
fund.
TERMS SPECIFIC TO THE FLOATING RATE NOTES
MATURITY, INTEREST AND PRINCIPAL
The Floating Rate Notes will mature on December 15, 2001, and will be
unsecured senior obligations of the Company limited in aggregate principal
amount to $200,000,000. The Floating Rate Notes will bear interest from December
15, 1994 or from the most recent interest payment date to which interest has
been paid at the rate described below.
Interest on the Floating Rate Notes will accrue at a rate equal to the
Applicable LIBOR Rate and will be payable quarterly in arrears on March 15, June
15, September 15 and December 15 of each year, or if any such day is not a
Business Day, on the next succeeding Business Day, commencing on March 15, 1995
(each a "Floating Rate Interest Payment Date") to holders of record on the
immediately preceding March 1, June 1, September 1 and December 1. Interest on
the Floating Rate Notes will be calculated on a formula basis by multiplying the
principal amount of the Floating Rate Notes then outstanding by the Applicable
LIBOR Rate, and multiplying such product by the LIBOR Fraction.
"APPLICABLE LIBOR RATE" means for the Initial Quarterly Period and for each
Quarterly Period during which any Floating Rate Note is outstanding, 225 basis
points over the "LIBOR Rate", which shall be the rate determined by the Company
(notice of such rate to be sent to the Trustee by the Company on the date of
determination thereof) equal to the average (rounded upwards, if necessary, to
the nearest 1/16 of 1%) of the offered rates for deposits in U.S. dollars for a
period of three months, as set forth on the Reuters Screen LIBO Page as of 11:00
a.m., London time, on the applicable Interest Rate Determination Date; PROVIDED,
HOWEVER, that if only one such offered rate appears on the Reuters Screen LIBO
Page, the LIBOR Rate will mean such offered rate. If such rate is not available
at 11:00 a.m., London time, on the applicable Interest Rate Determination Date,
then the LIBOR Rate will mean the arithmetic mean (rounded upwards, if
necessary, to the nearest 1/16 of 1%) of the interest rates per annum at which
deposits in amounts equal to $1 million in U.S. dollars are offered by the
Reference Banks to leading banks in the London Interbank Market for a period of
three months as of 11:00 a.m, London time, on the applicable Interest Rate
Determination Date. If on any Interest Rate Determination Date, at least two of
the Reference Banks provide such offered quotations, then the LIBOR Rate will be
determined in accordance with the preceding sentence on the basis of the offered
quotations of those Reference Banks providing such quotations; PROVIDED,
HOWEVER, that if fewer than two of the Reference Banks are so quoting such
interest rates as mentioned above, the Applicable LIBOR Rate shall be deemed to
be the Applicable LIBOR Rate for the next preceding Quarterly Period and in the
case of the Quarterly Period next succeeding the Initial Quarterly Period, the
Applicable LIBOR Rate shall be the Applicable LIBOR Rate for the Initial
Quarterly Period and in the case of the Initial Quarterly Period, the Applicable
LIBOR Rate shall be 8.625%.
"INTEREST RATE DETERMINATION DATE" means, with respect to the Initial
Quarterly Period, December 13, 1994, and with respect to each Quarterly Period,
the second Working Day prior to the first day of such Quarterly Period.
"LIBOR FRACTION" means the actual number of days in the Initial Quarterly
Period or Quarterly Period, as applicable, divided by 360; PROVIDED, HOWEVER,
that the number of days in the Initial Quarterly Period and each Quarterly
Period shall be calculated by including the first day of such Initial Quarterly
Period or Quarterly Period and excluding the last.
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"INITIAL QUARTERLY PERIOD" means the period from and including December 15,
1994 through and including March 14, 1995.
"QUARTERLY PERIOD" means the period from and including a scheduled Floating
Rate Interest Payment Date through the day next preceding the following
scheduled Floating Rate Interest Payment Date.
"REFERENCE BANKS" means each of Barclays Bank PLC, London Branch, the Bank
of Tokyo, Ltd., London Branch, Bankers Trust Company, London Branch, and
National Westminster Bank PLC, London Branch, and any such replacement bank
thereof as listed on the Reuters Screen LIBO Page and their respective
successors, and if any of such banks are not at the applicable time providing
interest rates as contemplated within the definition of the "APPLICABLE LIBOR
RATE," Reference Banks shall mean the remaining bank or banks so providing such
rates. In the event that fewer than two of such banks are providing such rates,
the Company shall use reasonable efforts to appoint additional Reference Banks
so that there are at least two such banks providing such rates; PROVIDED,
HOWEVER, that such banks appointed by the Company shall be London offices of
leading banks engaged in the Eurodollar market (the market in which U.S.
currency, which is deposited by corporations and national governments in banks
outside the United States, is used for settling international transactions).
"REUTERS SCREEN LIBO PAGE" means the display designated as page "LIBO" on
the Reuter Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service for the purpose of displaying London Interbank Offered
Rates of leading banks).
"WORKING DAY" means any day which is not a Saturday, Sunday or a day on
which banking institutions in New York, New York or London, England are
authorized or obligated by law or executive order to close.
OPTIONAL REDEMPTION
The Floating Rate Notes will be redeemable at the option of the Company, in
whole or in part, on any Floating Rate Interest Payment Date on or after
December 15, 1995 and on or prior to December 14, 1999 at a redemption price
equal to 100.5% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption, and after December 14, 1999
at a redemption price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of redemption (subject to
the right of holders of record on relevant record dates to receive interest due
on an interest payment date).
SINKING FUND
The Floating Rate Note Indenture will provide for the redemption on each of
December 15, 1999 and December 15, 2000, of $1 million principal amount of
Floating Rate Notes, at a redemption price equal to 100% of their principal
amount, plus accrued interest to the redemption date. (Section 1401)
TERMS COMMON TO THE FIXED RATE NOTES AND THE FLOATING RATE NOTES
REDEMPTION
CHANGE OF CONTROL. As described below, if a Change of Control Triggering
Event shall occur at any time, then each holder of Notes shall have the right to
require that the Company purchase such holder's Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount of such Notes plus accrued
and unpaid interest, if any, to the date of purchase. See "-- Certain Covenants
- -- PURCHASE OF NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT." (Section 1101)
SELECTION AND NOTICE. In the event that less than all of the Fixed Rate
Notes or Floating Rate Notes, respectively, are to be redeemed at any time,
selection of the Fixed Rate Notes for redemption will be made by the Trustee on
a PRO RATA basis, by lot or by such other method as the Trustee shall deem fair
and appropriate and selection of the Floating Rate Notes for redemption will be
made by the Trustee PRO RATA unless prohibited by applicable law, in which case
by such other method as the Trustee shall deem fair and appropriate; PROVIDED,
HOWEVER, that no Note of a principal amount of $1,000 or less shall be redeemed
in part. Notice of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each holder of Fixed
Rate Notes or Floating Rate Notes to be redeemed at its registered address. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall
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state the portion of the principal amount thereof to be redeemed. A new Note in
a principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On or after
the redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption and accepted for payment. (Sections 1104, 1105, 1107 and
1108)
GUARANTEES
Payment of the principal of, premium, if any, and interest on the Notes,
when and as the same become due and payable (whether at Stated Maturity or
purchase upon a Change of Control Triggering Event, and whether by declaration
of acceleration, a Change of Control Triggering Event, call for redemption or
otherwise), will be guaranteed, jointly and severally, on a senior basis by the
Subsidiary Guarantors. (Section 1201)
RANKING
The Notes will be unsecured senior obligations of the Company, and the
Indebtedness represented by the Notes and the payment of principal of, premium,
if any, and interest on the Notes will rank PARI PASSU in right of payment with
all other existing and future Senior Indebtedness and senior in right of payment
to all future Subordinated Indebtedness of the Company. The Company currently
has no Subordinated Indebtedness. The Notes, however, will be effectively
subordinated to secured Senior Indebtedness of the Company with respect to the
assets securing such Indebtedness, including Indebtedness under the Credit
Agreement which is secured by the capital stock of substantially all of the
Company's subsidiaries and substantially all of the inventory and accounts
receivable of the Company and its subsidiaries and Indebtedness under the Prior
Indentures which is secured by a portion of such collateral. As of October 1,
1994, on PRO FORMA basis after giving effect to the Offering and the use of
proceeds therefrom, Senior Indebtedness of the Company (including capitalized
leases) would have been approximately $2.07 billion, of which $1.57 billion
would have been secured Senior Indebtedness. As of October 1, 1994, on a PRO
FORMA basis after giving effect to the Offering and the use of proceeds
therefrom, the total amount of Indebtedness of the Company and its subsidiaries
(including capitalized leases) ranking PARI PASSU with the Notes would have been
approximately $2.07 billion. See "Investment Considerations -- Restrictive
Covenants; Asset Encumbrances" and "The Credit Agreement."
Each Note Guarantee will be an unsecured senior obligation of the Subsidiary
Guarantor issuing such Note Guarantee, ranking PARI PASSU in right of payment
with all existing and future Senior Indebtedness of such Subsidiary Guarantor
and senior in right of payment to any future Indebtedness of the Subsidiary
Guarantors that is expressly subordinated to Senior Indebtedness of the
Subsidiary Guarantors. (Section 1203) The Subsidiary Guarantors currently have
no Subordinated Indebtedness. Each Note Guarantee issued by a Subsidiary
Guarantor, however, will be effectively subordinated to secured Senior
Indebtedness of such Subsidiary Guarantor with respect to the assets of such
Subsidiary Guarantor securing such Indebtedness, including the guarantee by each
such Subsidiary Guarantor of the Company's Indebtedness under the Credit
Agreement and the Prior Senior Note Indentures. As of October 1, 1994, on a PRO
FORMA basis after giving effect to the Offering and the use of proceeds
therefrom, Senior Indebtedness of the Subsidiary Guarantors (including
guarantees with respect to the Notes and the Credit Agreement but excluding
capitalized leases) would have been approximately $1.51 billion, of which $1.00
billion would have been secured Senior Indebtedness. As of October 1, 1994, on a
PRO FORMA basis, after giving effect to the Offering and the use of proceeds
therefrom, the total amount of Indebtedness of the Subsidiary Guarantors
(excluding capitalized leases) ranking PARI PASSU with the Notes would have been
approximately $1.51 billion. See "The Credit Agreement."
CERTAIN COVENANTS
The Senior Note Indentures will contain the following covenants, among
others:
LIMITATION ON INDEBTEDNESS. The Company will not, and will not permit any
of its Subsidiaries to, create, assume, or directly or indirectly guarantee or
in any other manner become directly or indirectly liable for the payment of, or
otherwise incur (collectively, "incur"), any Indebtedness (including any
Acquired Indebtedness) other than Permitted Indebtedness, unless, at the time of
such event (and after giving effect on a PRO FORMA basis to (i) the incurrence
of such Indebtedness; (ii) the incurrence, repayment or retirement
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of any other Indebtedness by the Company or its Subsidiaries since the first day
of such four-quarter period as if such Indebtedness was incurred, repaid or
retired at the beginning of such four-quarter period; and (iii) the acquisition
(whether by purchase, merger or otherwise) or disposition (whether by sale,
merger or otherwise) of any company, entity or business acquired or disposed of
by the Company or its Subsidiaries, as the case may be, since the first day of
such four-quarter period as if such acquisition or disposition had occurred at
the beginning of such four-quarter period), the Consolidated Fixed Charge
Coverage Ratio of the Company for the four full fiscal quarters immediately
preceding such event, taken as one period and calculated on the assumption that
such Indebtedness had been incurred on the first day of such four-quarter period
and, in the case of Acquired Indebtedness, on the assumption that the related
acquisition (whether by means of purchase, merger or otherwise) also had
occurred on such date with the appropriate adjustments with respect to such
acquisition being included in such PRO FORMA calculation, would have been at
least equal to 1.75 to 1. (Section 1010)
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Subsidiary of the Company to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to, the
holders of, any Capital Stock of the Company (other than dividends or
distributions payable solely in shares of Qualified Capital Stock of the
Company or in options, warrants or other rights to purchase such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any Capital Stock of the Company or any Subsidiary or any
options, warrants or other rights to acquire such Capital Stock;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment,
sinking fund payment or maturity, any Indebtedness of the Company which is
subordinate in right of payment to the Notes or of any Subsidiary Guarantor
that is subordinate to such Subsidiary Guarantor's Note Guarantee;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary of the Company to any Person (other than the Company or any
Wholly Owned Subsidiary of the Company) or purchase, redeem or otherwise
acquire or retire for value any Capital Stock of any Subsidiary of the
Company held by any Person (other than the Company or any Wholly Owned
Subsidiary of the Company);
(v) create, assume or suffer to exist any guarantee of Indebtedness of
any Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company in accordance with the terms of the Indenture); or
(vi) make any Investment (other than any Permitted Investment) in any
Person
(such payments described in clauses (i) through (vi) and not excepted therefrom
are collectively referred to herein as "Restricted Payments") unless at the time
of and immediately after giving effect to the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, as determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall have
occurred and be continuing and (2) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in accordance with the
provisions described under "-- Certain Covenants -- LIMITATION ON INDEBTEDNESS."
(b) Notwithstanding paragraph (a) above, the Company and its Subsidiaries
may take the following actions so long as (with respect to clauses (ii), (iii),
and (iv), below) no Default or Event of Default shall have occurred and be
continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such declaration complied
with the provisions of paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary) of shares of Capital Stock of the Company
(other than Redeemable Capital Stock, unless the redemption provisions of
such Redeemable Capital Stock prohibit the redemption thereof prior to the
date on which the Capital Stock to be acquired or retired was, by its terms,
required to be redeemed);
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(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for or out of the net cash proceeds of a
substantially concurrent issuance and sale (other than to a Subsidiary) of
shares of Capital Stock of the Company (other than Redeemable Capital Stock,
unless the redemption provisions of such Redeemable Capital Stock prohibit
the redemption thereof prior to the Stated Maturity of the Subordinated
Indebtedness to be acquired or retired); and
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for, or out of the net cash proceeds of a
substantially concurrent incurrence or sale (other than to a Subsidiary) of,
new Subordinated Indebtedness of the Company so long as (A) the principal
amount of such new Subordinated Indebtedness does not exceed the principal
amount (or, if such Subordinated Indebtedness being refinanced provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination) of the Subordinated Indebtedness being so purchased,
redeemed, defeased, acquired or retired, PLUS the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Subordinated Indebtedness refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing, PLUS the amount of expenses of the Company incurred in
connection with such refinancing, (B) such new Subordinated Indebtedness is
subordinated to the Notes to the same extent as such Subordinated
Indebtedness so purchased, redeemed, defeased, acquired or retired and (C)
such new Subordinated Indebtedness has an Average Life longer than the
Average Life of the Notes and a final Stated Maturity of principal later
than the final Stated Maturity of principal of the Notes.
LIMITATION ON LIENS. The Company will not and will not permit any
Subsidiary of the Company to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) of any kind upon any
Principal Property or upon any shares of stock or indebtedness of any Subsidiary
of the Company now owned or acquired after the date of the Senior Note
Indentures, or any income or profits therefrom, unless (a) the Notes are
directly secured equally and ratably with (or prior to in the case of Liens with
respect to Subordinated Indebtedness) the obligation or liability secured by
such Lien or (b) any such Lien is in favor of the Company or any Subsidiary
Guarantor. (Section 1012)
PURCHASE OF NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT. If a Change of
Control Triggering Event shall occur at any time, then each holder of Notes
shall have the right to require the Company to purchase such holder's Notes in
whole or in part in integral multiples of $1,000 at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to the
date of purchase (the "Change of Control Purchase Date"), pursuant to the offer
described below (the "Change of Control Purchase Offer") and the other
procedures set forth in the Senior Note Indentures. Reference is made to "--
Certain Definitions" for the definitions of "Change of Control," "Change of
Control Triggering Event," "Rating Agencies," "Rating Decline" and "Investment
Grade." The foregoing rights are triggered only upon the occurrence of both a
Change of Control and a Rating Decline. A Rating Decline is defined as the
occurrence on, or within 90 days after, the date of public notice of the
occurrence of a Change of Control or of the intention of the Company or Persons
controlling the Company to effect a Change of Control (which period shall be
extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies) of the
following: (i) if the Notes are rated by either Rating Agency as Investment
Grade immediately prior to the beginning of such period, the rating of the Notes
by both Rating Agencies shall be below Investment Grade; or (ii) if the Notes
are rated below Investment Grade by both Rating Agencies immediately prior to
the beginning of such period, the rating of such Notes by either Rating Agency
shall be decreased by one or more gradation (including gradations within Rating
Categories as well as between Rating Categories).
Upon the occurrence of a Change of Control Triggering Event and prior to the
mailing of the notice to Holders provided for in the Senior Note Indentures, the
Company covenants to either (x) repay in full all Indebtedness under the Credit
Agreement or offer to repay in full all such Indebtedness and to repay the
Indebtedness of each of the Banks that has accepted such offer or (y) obtain any
requisite consent under the Credit Agreement to permit the purchase of the Notes
pursuant to a Change of Control Purchase Offer as
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provided for in the Senior Note Indentures or take any other action as may be
required under the Credit Agreement to permit such purchase. The Company shall
first comply with such covenants before it shall be required to purchase the
Notes pursuant to the Senior Note Indentures. (Section 1009)
Within 30 days following the occurrence of any Change of Control Triggering
Event, the Company shall notify the Trustee and give written notice of such
Change of Control Triggering Event to each holder of Notes, by first-class mail,
postage prepaid, at the address appearing in the security register, stating,
among other things, the Change of Control Purchase Price and that the Change of
Control Purchase Date shall be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any Note not
tendered will continue to accrue interest; that, unless the Company defaults in
the payment of the Change of Control Purchase Price, any Notes accepted for
payment of the Change of Control Purchase Price pursuant to the Change of
Control Purchase Offer shall cease to accrue interest after the Change of
Control Purchase Date; and certain other procedures that a holder of Notes must
follow to accept a Change of Control Purchase Offer or to withdraw such
acceptance.
The Credit Agreement prohibits the Company from incurring any Indebtedness
which grants to holders thereof the option of requiring the Company to
repurchase such debt prior to the retirement of all amounts outstanding
thereunder. Upon the occurrence of a Change of Control Triggering Event, the
Company is obligated to retire all amounts then outstanding under the Credit
Agreement or to obtain a waiver of such prohibition for the benefit of the
holders of the Notes. Upon such retirement or waiver following a Change of
Control Triggering Event, each holder of the Notes will have the right to
require the Company to purchase all of such holder's Notes at a redemption price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. Failure by the Company to retire all
obligations then outstanding under the Credit Agreement or to obtain a waiver
upon the occurrence of a Change of Control Triggering Event would constitute a
default by the Company under the Senior Note Indentures and would entitle the
requisite holders to accelerate the obligations due under the Notes (although
without a premium). If a Change of Control Triggering Event occurs, there can be
no assurance that the Company will have available funds sufficient to pay the
Change of Control Purchase Price for all of the Notes that might be delivered by
holders of the Notes seeking to accept the Change of Control Purchase Offer and,
accordingly, none of the holders of the Notes may receive the Change of Control
Purchase Price for their Notes in the event of a Change of Control Triggering
Event. Each of the Credit Agreement and the Prior Indentures requires the
Company to repay the Indebtedness under the Credit Agreement ($1.55 billion as
of November 1, 1994) and repurchase the outstanding Indebtedness under the Prior
Indentures ($196 million as of November 1, 1994), respectively, in the event of
a change of control. If a purchase of the Notes, repayment of the Indebtedness
under the Credit Agreement and purchase of the outstanding Indebtedness under
the Prior Indentures were all triggered at the same time, it is possible the
Company would be unable to satisfy these obligations. The failure of the Company
to make or consummate the Change of Control Purchase Offer or pay the Change of
Control Purchase Price when due will give the Trustee and the holders of the
Notes the rights described under "-- Events of Default."
One of the events which constitutes a Change of Control under the Senior
Note Indentures is the disposition of "all or substantially all" of the
Company's assets. This term has not been interpreted under New York law (which
is the governing law of the Senior Note Indentures) to represent a specific
quantitative test. As a consequence, in the event holders of the Notes elect to
require the Company to purchase the Notes and the Company elects to contest such
election, there can be no assurance as to how a court interpreting New York law
would interpret the phrase.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control Triggering Event may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
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In addition to the obligations of the Company under the Senior Note
Indentures with respect to the Notes in the event of a "Change of Control
Triggering Event," the Credit Agreement contains a provision designating as an
event of default a change in control as described therein which obligates the
Company to repay amounts outstanding under the Credit Agreement upon an
acceleration of the indebtedness issued thereunder.
The provisions of the Senior Note Indentures may not afford holders of Notes
the right to require the Company to repurchase such Notes in the event of a
highly leveraged transaction or certain transactions with the Company's
management or its affiliates, including a reorganization, restructuring, merger
or similar transaction involving the Company (including, in certain
circumstances, an acquisition of the Company by management or its affiliates)
that may adversely affect holders of the Notes, if such transaction is not a
transaction defined as a Change of Control. See "-- Certain Definitions" for the
definition of "Change of Control." A transaction involving the Company's
management or its affiliates, or a transaction involving a recapitalization of
the Company, will result in a Change of Control if it is the type of transaction
specified by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Purchase Offer. (Section
1009)
ADDITIONAL GUARANTEES. If the Company or any of its Subsidiaries shall
acquire or form a Subsidiary, the Company will cause any such Subsidiary (other
than an Equity Store or Business Development Venture, PROVIDED that such Equity
Store or Business Development Venture does not guarantee the Senior Indebtedness
of any other Person) that is or becomes a Significant Subsidiary or that
guarantees any Senior Indebtedness of the Company or any Subsidiary Guarantor to
(i) execute and deliver to the applicable Trustee a supplemental indenture in
form and substance reasonably satisfactory to such Trustee pursuant to which
such Subsidiary shall guarantee all of the obligations of the Company with
respect to the Notes issued under such Indenture on a senior basis and (ii)
deliver to such Trustee an Opinion of Counsel reasonably satisfactory to such
Trustee to the effect that a supplemental indenture has been duly executed and
delivered by such Subsidiary and is in compliance with the terms of the
applicable Indenture.
PROVISION OF FINANCIAL STATEMENTS. Whether or not the Company is subject to
Section 13(a), 13(c) or 15(d) of the Exchange Act, the Company will file with
the Commission the annual reports, quarterly reports and other documents that
the Company is or would have been required to file with the Commission pursuant
to such Section 13(a), 13(c) or 15(d) if the Company were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject. The Company will also in
any event within 15 days of each Required Filing Date (within 30 days of such
Required Filing Date for any reports filed on Form 10-K) (i) transmit by mail to
each holder of the Notes, as its name and address appears in the security
register, without cost to such holder and (ii) file with each Trustee copies of
the annual reports, quarterly reports and other documents which the Company is
or would have been required to file with the Commission pursuant to Section
13(a), 13(c) or 15(d) of the Exchange Act if the Company were so subject.
(Section 1014)
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer or lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would result
in a sale, assignment, transfer, lease or disposal of all or substantially all
of the properties and assets of the Company and its Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless at
the time and after giving effect thereto (i) either (A) the Company shall be the
surviving or continuing corporation, or (B) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, conveyance, transfer, lease or
disposition the properties and assets of the Company substantially as an
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entirety (the "Surviving Entity") shall be a corporation duly organized and
validly existing under the laws of the United States, any state thereof or the
District of Columbia and shall, in any case, expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company, under the Notes and the Senior Note
Indentures, and the Senior Note Indentures shall remain in full force and
effect; (ii) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (and treating any Indebtedness not previously
an obligation of the Company or any of its Subsidiaries which becomes an
obligation of the Company or any of its Subsidiaries in connection with or as a
result of such transaction as having been incurred at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (on the assumption that the transaction
occurred on the first day of the four-quarter period immediately prior to the
consummation of such transaction with the appropriate adjustments with respect
to the transaction being included in such PRO FORMA calculation), the Company
(or the Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "-- Certain Covenants -- LIMITATION ON
INDEBTEDNESS" above; (iv) each Subsidiary Guarantor, unless it is the other
party to the transactions described above, shall have confirmed, by supplemental
indenture to each of the Senior Note Indentures, that its respective Note
Guarantees with respect to the Notes shall apply to such Person's obligations
under the Senior Note Indentures and the Notes; (v) if any of the property or
assets of the Company or any of its Subsidiaries would thereupon become subject
to any Lien, the provisions of "-- Certain Covenants -- LIMITATION ON LIENS" are
complied with; and (vi) the Company shall have delivered, or caused to be
delivered, to the Trustee with respect to the Senior Note Indentures, in form
and substance satisfactory to such Trustee, an officers' certificate and an
opinion of counsel, each to the effect that such consolidation, merger, sale,
assignment, conveyance, transfer, lease or other transaction and the
supplemental indenture in respect thereto comply with the provisions in clauses
(i) through (v) of this paragraph and that all conditions precedent herein
provided for relating to such transaction have been complied with.
In the event of any consolidation, merger, sale, assignment, conveyance,
transfer, lease or other transaction described in, and complying with, the
conditions listed in the immediately preceding paragraph in which the Company is
not the continuing corporation, the successor Person formed or remaining shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, as the case may be, and the Company shall be discharged from all
obligations and covenants under the Senior Note Indentures and the Notes;
PROVIDED that, in the case of a transfer by lease, the predecessor shall not be
released from its obligations with respect to the payment of principal (premium,
if any) and interest on the Notes. (Sections 801 and 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Senior Note Indenture pursuant to
which such Notes were issued if any of the following events occurs with respect
to such Senior Note Indenture:
(i) there shall be a default in the payment of any interest on such
series of Notes issued under such Senior Note Indenture when such interest
becomes due and payable, and continuance of such default for a period of 30
days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any series of Notes issued under such Senior Note
Indenture at its Stated Maturity;
(iii) (A) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Subsidiary Guarantor under such
Senior Note Indenture (other than a default in the performance, or breach,
of a covenant or agreement which is specifically dealt with in the
immediately preceding clauses (i) or (ii) or in clauses (B) or (C) of this
clause (iii)) and such default or breach shall continue for a period of 60
days after written notice has been given, by certified mail, (x) to the
Company by the applicable Trustee or (y) to the Company and the applicable
Trustee by the holders of at least 25% in aggregate principal amount of the
outstanding Notes; (B) there shall be a default in the performance or breach
of the provisions described in "-- Consolidation, Merger, Sale of Assets";
or
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(C) the Company shall have failed to make or consummate a Change of Control
Purchase Offer in accordance with the provisions of "-- Certain Covenants --
PURCHASE OF NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT";
(iv) (A) any default in the payment of the principal of any Indebtedness
shall have occurred under any agreements, indentures (including, with
respect to any Notes issued under the Fixed Rate Note Indenture, any such
default under the Floating Rate Note Indenture, and, with respect to the
Floating Rate Notes, any such default under the Fixed Rate Note Indenture)
or instruments under which the Company or any Subsidiary of the Company then
has outstanding Indebtedness in excess of $50 million when the same shall
become due and payable in full and such default shall have continued after
any applicable grace period and shall not have been cured or waived or (B)
an event of default as defined in any of the agreements, indentures or
instruments described in clause (A) of this clause (iv) shall have occurred
and the Indebtedness thereunder, if not already matured at its final
maturity in accordance with its terms, shall have been accelerated;
(v) any Person entitled to take the actions described below in this
clause (v), after the occurrence of any event of default on Indebtedness in
excess of $50 million in the aggregate of the Company or any Subsidiary,
shall notify the applicable Trustee of the intended sale or disposition of
any assets of the Company or any Subsidiary that have been pledged to or for
the benefit of such Person to secure such Indebtedness or shall commence
proceedings, or take any action (including by way of set-off) to retain in
satisfaction of any Indebtedness, or to collect on, seize, dispose of or
apply, any such assets of the Company or any Subsidiary (including funds on
deposit or held pursuant to lock-box and other similar arrangements),
pursuant to the terms of such Indebtedness or in accordance with applicable
law;
(vi) any Note Guarantee of any Significant Subsidiary individually or
any other Subsidiaries if such Subsidiaries in the aggregate represent 15%
or more of the assets of the Company and its Subsidiaries on a consolidated
basis with respect to such Notes shall for any reason cease to be, or be
asserted in writing by the Company, any Subsidiary Guarantor or any other
Subsidiary of the Company, as applicable, not to be, in full force and
effect, enforceable in accordance with its terms, except pursuant to the
release of any such Note Guarantee in accordance with the applicable Senior
Note Indenture;
(vii) one or more judgments, orders or decrees for the payment of money
in excess of $50 million (net of amounts covered by insurance, bond or
similar instrument), either individually or in the aggregate, shall be
entered against the Company or any Subsidiary of the Company or any of their
respective properties and shall not be discharged and either (A) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree or (B) their shall have been a period of 60 consecutive days
during which a stay of enforcement of such judgment or order, by reason of
an appeal or otherwise, shall not be in effect;
(viii) there shall have been the entry by a court of competent
jurisdiction of (A) a decree or order for relief in respect of the Company
or any Significant Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (B) a decree or order adjudging the Company or
any Significant Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Significant Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Subsidiary or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and any such decree or order for
relief shall continue to be in effect, or any such other decree or order
shall be unstayed and in effect, for a period of 60 consecutive days; or
(ix) (A) the Company or any Significant Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (B) the Company or any
Significant Subsidiary consents to the entry of a decree or order for relief
in respect of the Company or such Significant Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding against it,
(C) the Company or any Significant Subsidiary files a petition or answer or
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consent seeking reorganization or relief under any applicable federal or
state law, (D) the Company or any Significant Subsidiary (x) consents to the
filing of such petition or the appointment of, or taking possession by, a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or such Significant Subsidiary or of any substantial
part of its property, (y) makes an assignment for the benefit of creditors
or (z) admits in writing its inability to pay its debts generally as they
become due or (E) the Company or any Significant Subsidiary takes any
corporate action in furtherance of any such actions in this clause (ix).
If an Event of Default (other than as specified in clauses (viii) or (ix) of
the immediately preceding paragraph) shall occur and be continuing with respect
to any series of the Notes, the applicable Trustee, by notice to the Company, or
the holders of at least 25% in aggregate principal amount then outstanding of
such Notes, by notice to the applicable Trustee and to the Company, may declare
such Notes due and payable immediately, upon which declaration, all amounts
payable in respect of such Notes shall be immediately due and payable. If an
Event of Default specified in clause (viii) or (ix) of the immediately preceding
paragraph occurs and is continuing, then all of the outstanding Notes under each
of the Senior Note Indentures shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee
thereunder or any holder of such Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee, the
holders of a majority in aggregate principal amount outstanding of any series of
Notes, by written notice to the Company and such Trustee, may annul such
declaration if (a) the Company has paid or deposited with such Trustee a sum
sufficient to pay (i) all sums paid or advanced by such Trustee under the Fixed
Rate Note Indenture, with respect to such series of Notes, or the Floating Rate
Note Indenture, as the case may be, and the reasonable compensation, expenses,
disbursements, and advances of such Trustee, its agents and counsel, (ii) all
overdue interest on all of the Notes of such series, and (iii) to the extent
that payment of such interest is lawful, interest upon overdue interest at the
rate borne by the Notes of such series; and (b) all Events of Default, other
than the non-payment of principal of such Notes which have become due solely by
such declaration of acceleration, have been cured or waived. (Section 502)
The holders of a majority in aggregate principal amount of the Fixed Rate
Notes and the Floating Rate Notes outstanding, respectively, may, on behalf of
the holders of all of such Notes, waive any past defaults under the Fixed Rate
Note Indenture, or the Floating Rate Note Indenture, as the case may be, except
a default in the payment of the principal of, premium, if any, or interest on
any such Note, or in respect of a covenant or provision which under such
Indenture cannot be modified or amended without the consent of the holder of
each such outstanding Fixed Rate Note or Floating Rate Note. (Section 513)
The Company is also required to notify the Trustee within ten days of the
occurrence of any Default. (Section 515)
The Trust Indenture Act contains limitations on the rights of the Trustee,
acting as trustee with respect to the Notes, should it become a creditor of the
Company or any Subsidiary Guarantor, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claims, as security or otherwise. Such Trustee is permitted to engage in other
transactions, PROVIDED that if it acquires any conflicting interest, it must
eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF SENIOR NOTE INDENTURES
The Company may, at its option and at any time, elect to have the
obligations of the Company and any Subsidiary Guarantor discharged with respect
to any Notes issued under either Senior Note Indenture ("defeasance"). (Section
1301) Such defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by such outstanding Notes, except
for (i) the rights of holders of such outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due or on the redemption date with respect to such Notes, as
the case may be, (ii) the Company's obligations with respect to such Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes, and the maintenance of an office or
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agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the applicable Trustee, and
(iv) the defeasance provisions of the applicable Indenture. (Section 1302) In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Senior Note Indentures ("covenant defeasance") and thereafter
any omission to comply with such obligations shall not constitute a Default or
an Event of Default with respect to such Notes. In the event covenant defeasance
occurs, certain events (not including non-payment, enforceability of any Note
Guarantee, bankruptcy and insolvency events) described under "-- Events of
Default" will no longer constitute an Event of Default with respect to such
Notes. (Sections 1303 and 1304)
In order to exercise either defeasance or covenant defeasance with respect
to the Notes under the Fixed Rate Note Indenture or the Floating Rate Note
Indenture, as the case may be, (i) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the holders of such Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Senior Note
Indentures), or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay and discharge the principal of, premium, if any, and interest on the
Notes outstanding on the Stated Maturity thereof or on an optional redemption
date (such date being referred to as the "Defeasance Redemption Date"), as the
case may be, if in the case of a Defeasance Redemption Date prior to electing to
exercise either defeasance or covenant defeasance, the Company has delivered to
the Trustee an irrevocable notice to redeem all of the outstanding Notes on such
Defeasance Redemption Date; (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States stating that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Senior Note Indentures, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion of
counsel in the United States shall confirm that, the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred; (iii) in the case of covenant
defeasance, the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States to the effect that the holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such covenant defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as clause (viii) and (ix) under the first paragraph
under "-- Events of Default" are concerned, at any time during the period ending
on the 91st day after the date of deposit; (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a Default
under, the Senior Note Indentures or any other material agreement or instrument
to which the Company or any Subsidiary Guarantor is a party or by which it is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of the Notes or any Subsidiary Guarantor over the
other creditors of the Company or any Subsidiary Guarantor or with the intent of
defecting, hindering, delaying or defrauding creditors of the Company, any
Subsidiary Guarantor or others; and (vii) the Company shall have delivered to
the Trustee an officers' certificate stating that all conditions precedent
provided for relating to either the defeasance or the covenant defeasance, as
the case may be, have been complied with. (Section 1304)
SATISFACTION AND DISCHARGE
Each of the Senior Note Indentures shall cease to be of further effect
(except as surviving rights of registration of transfer or exchange of the Notes
issued thereunder, as expressly provided for in each such Indenture) as to all
outstanding Notes issued thereunder when (i) either (A) all Notes issued under
the Fixed Rate Note Indenture or the Floating Rate Note Indenture, as the case
may be, and theretofore authenticated and delivered (except lost, stolen or
destroyed Notes of such series which have been replaced or paid and Notes for
whose payment funds have been deposited in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (B) all
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Notes issued under the Fixed Rate Note Indenture or the Floating Rate Note
Indenture, as the case may be, and not theretofore delivered to the applicable
Trustee for cancellation (x) have become due and payable or (y) will become due
and payable at their Stated Maturity within one year, and either the Company or
any Subsidiary Guarantor has irrevocably deposited or caused to be deposited
with such Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness in respect of such Notes, for principal of, premium, if any, and
interest to the date of deposit; (ii) the Company or any Subsidiary Guarantor
has paid all other sums payable by the Company and any Subsidiary Guarantor
under the applicable Senior Note Indenture; and (iii) the Company has delivered
to the Trustee an officers' certificate and an opinion of counsel each stating
that all conditions precedent to the satisfaction and discharge of such Senior
Note Indenture, as specified therein, have been complied with and that such
satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, such Indenture or any other material agreement or
instrument to which the Company or any Subsidiary Guarantor is a party or by
which it is bound. (Section 401)
MODIFICATION AND AMENDMENTS
Modifications and amendments of the Senior Note Indentures may be made by
the Company, the Subsidiary Guarantors and the applicable Trustee with the
consent of the holders of a majority in aggregate outstanding principal amount
of each series of Notes issued thereunder; PROVIDED, HOWEVER, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note of each series affected thereby; (i) change the Stated Maturity
of the principal of, or any installment of interest on, any Note issued
thereunder or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or change the coin
or currency in which any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
after the Stated Maturity thereof; (ii) amend, change or modify the obligation
of the Company to make and consummate a Change of Control Purchase Offer in the
event of a Change of Control Triggering Event or modify any of the provisions or
definitions with respect thereto; (iii) reduce the percentage in principal
amount of outstanding Notes thereunder, the consent of whose holders is required
for any modification or amendment to such Senior Note Indenture, or the consent
of whose holders is required for any waiver thereof; (iv) modify any of the
provisions relating to supplemental indentures requiring the consent of holders
or relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase the percentage of outstanding Notes issued
thereunder required for such actions or to provide that certain other provisions
of such Senior Note Indenture cannot be modified or waived without the consent
of the holder of each Note affected thereby; (v) except as otherwise permitted
under "-- Consolidation, Merger, Sale of Assets," consent to the assignment or
transfer by the Company or any Subsidiary Guarantor of any of its rights and
obligations under such Senior Note Indenture; or (vi) amend or modify any of the
provisions of such Senior Note Indenture in any manner which subordinates the
Notes issued thereunder in right of payment to other Indebtedness of the Company
or which subordinates any Note Guarantee in right of payment to other
Indebtedness of the Subsidiary Guarantor issuing such Guarantee. (Sections 901
and 902)
The holders of a majority in aggregate principal amount of the Notes issued
under a Senior Note Indenture and outstanding may waive compliance with certain
restrictive covenants and provisions of such Senior Note Indenture. (Section
1015)
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person that
owns, directly or indirectly, 5% or more of such Person's Capital Stock or any
executive officer or director of any such specified Person. For the purposes of
this definition, "control", when used with
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respect to any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through ownership of
Voting Stock, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (A) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (B) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Banks" means the banks and other financial institutions from time to time
that are lenders under the Credit Agreement.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in the City of New York are
authorized or obligated by law or executive order to close.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its Subsidiaries on a Consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interest,
partnership interests, participations or other equivalents (however designated)
of such Person's capital stock whether now outstanding or issued after the date
of the Senior Note Indentures, including, without limitation, all common stock
and preferred stock.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
Board of Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of such Board of Directors then in office; (iii) the
Company consolidates with or merges with or into any Person or conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates with or merges into or with the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where the outstanding Voting
Stock of the Company is not changed or exchanged at all (except to the extent
necessary to reflect a change in the jurisdiction of incorporation of the
Company) or where (A) the outstanding Voting Stock of the Company is changed
into or exchanged for (x) Voting Stock of the surviving corporation which is not
Redeemable Capital Stock or (y) cash, securities or other property (other than
Capital Stock of the surviving corporation) in an amount which could be paid by
the Company as a Restricted Payment as described under "-- Certain Covenants --
LIMITATION ON RESTRICTED PAYMENTS" (and such amount shall be treated as a
Restricted Payment subject to the provisions in the Senior Note Indentures
described under "-- Certain Covenants -- LIMITATION ON RESTRICTED PAYMENTS") and
(B) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act) is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or
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indirectly, of more than 50% of the total outstanding Voting Stock of the
surviving corporation; or (iv) the Company is liquidated or dissolved or adopts
a plan of liquidation or dissolution other than in a transaction which complies
with the provisions described under "-- Consolidation, Merger, Sale of Assets."
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Senior Note Indentures such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Consolidated" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP consistently
applied.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) the sum of Consolidated Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges deducted in computing Consolidated Net Income, in each case, for such
period, of the Company and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP to (b) Consolidated Interest Expense for such
period; PROVIDED that (i) in making such computation, the Consolidated Interest
Expense attributable to interest on any Indebtedness computed on a PRO FORMA
basis and (A) bearing a floating interest rate shall be computed as if the rate
in effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Company, either the fixed or floating rate and (ii) in making such
computation, Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility computed on a PRO FORMA basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period.
"Consolidated Income Tax Expense" means for any period the provision for
federal, state, local and foreign income taxes of the Company and its
Subsidiaries for such period as determined on a Consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, without duplication, for any period,
the sum of (A) the interest expense of the Company and its Subsidiaries for such
period, as determined on a Consolidated basis in accordance with GAAP including,
without limitation, (i) amortization of debt discount, (ii) the net cost under
Interest Rate Agreements (including amortization of discount), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (B) the aggregate amount for such period of dividends on any Redeemable
Capital Stock or Preferred Stock of the Company and its Subsidiaries, (C) the
interest component of the Capital Lease Obligations paid, accrued and/or
scheduled to be paid, or accrued by such Person during such period and (D) all
capitalized interest of the Company and its Subsidiaries determined on a
Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the Consolidated net income
(or loss) of the Company and its Subsidiaries for such period as determined on a
Consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income (loss), by excluding, without duplication, (i) any
net after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (ii) the $101.3 million facilities consolidation and restructuring
charge originally reflected in the Company's Consolidated statement of earnings
for the year ended December 25, 1993; (iii) the portion of net income (or loss)
of the Company and its Subsidiaries determined on a Consolidated basis allocable
to minority interests in unconsolidated Persons to the extent that cash
dividends or distributions have not actually been received by the Company or any
Subsidiary; (iv) net income (or loss) of any Person combined with the Company or
any Subsidiary on a "pooling of interests" basis attributable to any period
prior to the date of combination and (v) net gains or losses (less all fees and
expenses relating thereto) in respect of dispositions of assets other than in
the ordinary course of business and (vi) the net income of any Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time
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permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its shareholders.
"Consolidated Net Tangible Assets" means the total of all the assets
appearing on the Consolidated balance sheet of the Company and its majority or
Wholly Owned Subsidiaries less the following: (1) current liabilities; (2)
reserves for depreciation and other asset valuation reserves; (3) intangible
assets including, without limitation, items such as goodwill, trademarks, trade
names, patents and unamortized debt discount and expense; and (4) appropriate
adjustments on account of minority interests of other Persons holding stock in
any majority-owned Subsidiary of the Company.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash charges of the Company and its
Subsidiaries for such period, as determined on a Consolidated basis in
accordance with GAAP (excluding any non-cash charges which require an accrual or
reserve for any future period).
"Credit Agreement" means the Credit Agreement, dated as of July 19, 1994,
among the Company, the Banks, the Agents listed therein and Morgan Guaranty
Trust Company of New York, as Managing Agent, as such agreement may be amended,
renewed, extended, substituted, refinanced, restructured, replaced, supplemented
or otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of the foregoing).
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Subsidiaries in the
ordinary course of business and designed to protect against or manage exposure
to fluctuations in foreign currency exchange rates.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Equity Store" means a Person in which the Company or any of its
Subsidiaries has invested capital or to which it has made loans in accordance
with the business practice of the Company and its Subsidiaries of making equity
investments in Persons, and making or guaranteeing loans to such Persons, for
the purpose of assisting such Person in acquiring, remodeling, refurbishing,
expanding or operating one or more retail grocery stores and pursuant to which
such Person is permitted or required to reduce the Company's or the Subsidiary's
equity interest to a minority position over time (usually five to ten years).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as applied from time to
time by the Company in the preparation of its consolidated financial statements.
"Guaranteed Debt" means, with respect to any Person, without duplication,
all Indebtedness of any other Person referred to in the definition of
Indebtedness contained herein guaranteed directly or indirectly in any manner by
such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a creditor
against loss, PROVIDED that the term "guarantee" shall not include endorsements
for collection or deposit, in either case in the ordinary course of business.
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"Indebtedness" means, with respect to any Person, without duplication, (i)
all liabilities of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities arising in the ordinary course of
business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (ii) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness of
such Person created or arising under any conditioned sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
Capital Lease Obligations of such Person, (v) all obligations under Interest
Rate Agreements or Currency Agreements of such Person, (vi) Indebtedness
referred to in clauses (i) through (v) above of other Persons and all dividends
of other Persons, the payment of which is secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Guaranteed Debt of such Person, (viii) all Redeemable Capital Stock valued at
the greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends, and (ix) any amendment, supplement, modification,
deferral, renewal, extension, refunding or refinancing of any liability of the
types referred to in clauses (i) through (viii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with terms of
such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Redeemable Capital Stock, such fair market value is to be
determined in good faith by the Board of Directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements (including, without limitation,
interest rate swaps, caps, floors, collars and similar agreements) designed to
protect against or manage exposure to fluctuations in interest rates in respect
of Indebtedness.
"Investment" means, with respect to any Person, directly or indirectly, any
advance (other than advances to customers in the ordinary course of business,
which are recorded as accounts receivable on the balance sheet of the Company
and its Subsidiaries), loan or other extension of credit or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase,
acquisitions or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities or assets issued or owned by any other Person.
"Investment Grade" means BBB- or higher by S&P or Baa3 or higher by Moody's
or the equivalent of such ratings by S&P or Moody's or in the event S&P or
Moody's shall cease rating the Notes and the Company shall select any other
Rating Agency, the equivalent of such ratings by such other Rating Agency.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Maturity" when used with respect to the Notes means the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Senior Note Indenture pursuant to which such Notes were issued,
whether at Stated Maturity, purchase upon a Change of Control Triggering Event
or redemption date, and whether by declaration of acceleration, Change of
Control, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. or any successor rating
agency.
"Note Guarantee" means any guarantee by a Subsidiary Guarantor of the
Company's obligations under the Fixed Rate Note Indenture or the Floating Rate
Note Indenture.
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"Permitted Indebtedness" means any of the following Indebtedness of the
Company or any Subsidiary, as the case may be:
(i) Indebtedness of the Company and guarantees of the Subsidiary
Guarantors under the Credit Agreement (including Indebtedness of the Company
under Tranche A of the Credit Agreement to the extent that the aggregate
commitment thereunder does not exceed $900 million, the maximum aggregate
commitment for such facility on the date of the Senior Note Indentures, and
any guarantees with respect thereto outstanding on the date of the Senior
Note Indentures and any additional guarantees executed in connection
therewith) in an aggregate principal amount at any one time outstanding not
to exceed $1.7 billion (after giving PRO FORMA effect to the use of proceeds
of the Offering) less mandatory repayments actually made in respect of any
term Indebtedness thereunder;
(ii) Indebtedness of the Company under uncommitted bank lines of credit;
PROVIDED, HOWEVER, that the aggregate principal amount of Indebtedness
incurred pursuant to clauses (i), (ii) and (xi) of this definition of
"Permitted Indebtedness" does not exceed $1.7 billion (after giving PRO
FORMA effect to the use of proceeds of the Offering) less mandatory
repayments actually made in respect of any term Indebtedness thereunder;
(iii) Indebtedness of the Company evidenced by the Fixed Rate Notes and
the Note Guarantees with respect thereto under the Fixed Rate Note
Indenture;
(iv) Indebtedness of the Company evidenced by the Floating Rate Notes
and the Note Guarantees with respect thereto under the Floating Rate Note
Indenture;
(v) Indebtedness of the Company or any Subsidiary outstanding on the
date of the Senior Note Indentures and listed on a schedule thereto;
(vi) obligations of the Company or any Subsidiary entered into in the
ordinary course of business (a) pursuant to Interest Rate Agreements
designed to protect against or manage exposure to fluctuations in interest
rates in respect of Indebtedness or retailer notes receivables, which, if
related to Indebtedness or such retailer notes receivables, do not exceed
the aggregate notional principal amount of such Indebtedness to which such
Interest Rate Agreements relate, or (b) under any Currency Agreements in the
ordinary course of business and designed to protect against or manage
exposure to fluctuations in foreign currency exchange rates which, if
related to Indebtedness, do not increase the amount of such Indebtedness
other than as a result of foreign exchange fluctuations;
(vii) Indebtedness of the Company owing to a Wholly Owned Subsidiary or
of any Subsidiary owing to the Company or any Wholly Owned Subsidiary;
PROVIDED that any disposition, pledge or transfer of any such Indebtedness
to a Person (other than the Company or another Wholly Owned Subsidiary)
shall be deemed to be an incurrence of such Indebtedness by the Company or
Subsidiary, as the case may be, not permitted by this clause (vii);
(viii) Indebtedness in respect of letters of credit, surety bonds and
performance bonds provided in the ordinary course of business;
(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business; PROVIDED that
such Indebtedness is extinguished within five business days of its
incurrence;
(x) Indebtedness of the Company or any Subsidiary consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets;
(xi) Indebtedness of the Company evidenced by commercial paper issued by
the Company; PROVIDED, HOWEVER, that the aggregate principal amount of
Indebtedness incurred pursuant to clauses (i), (ii) and (xi) of this
definition of "Permitted Indebtedness" does not exceed $1.7 billion (after
giving PRO FORMA effect to the use of proceeds of the Offering) less
mandatory repayments actually made in respect of any term Indebtedness
thereunder;
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(xii) Indebtedness of the Company pursuant to guarantees by the Company
or any Subsidiary Guarantor in connection with any Permitted Receivables
Financing; PROVIDED, HOWEVER, that such Indebtedness shall not exceed 15% of
the book value of the Transferred Receivables or in the case of receivables
arising from direct financing leases for retail electronics systems, 30% of
the book value thereof;
(xiii) Indebtedness of the Company and its Subsidiaries in addition to
that described in clauses (i) through (xii) of this definition of "Permitted
Indebtedness," together with any other outstanding Indebtedness incurred
pursuant to this clause (xiii), not to exceed $100 million at any time
outstanding in the aggregate; and
(xiv) any renewals, extensions, substitutions, refundings, refinancings
or replacements (each, a "refinancing") of any Indebtedness described in
clauses (ii), (iii) and (iv) of this definition of "Permitted Indebtedness,"
including any successive refinancings, so long as (A) the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing to an amount greater than such principal amount plus the
lesser of (x) the stated amount of any premium or other payment required to
be paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (y) the amount of premium or other payment
actually paid at such time to refinance the Indebtedness, plus, in either
case, the amount of expenses of the Company or Subsidiary, as the case may
be, incurred in connection with such refinancing and (B) such refinancing
does not reduce the Average Life to Stated Maturity or the Stated Maturity
of such Indebtedness.
"Permitted Investment" means (i) Investment in any Wholly Owned Subsidiary
or any Investment in any Person by the Company or any Wholly Owned Subsidiary as
a result of which such Person becomes a Wholly Owned Subsidiary or any
Investment in the Company by a Wholly Owned Subsidiary; (ii) intercompany
Indebtedness to the extent permitted under clause (vi) of the definition of
"Permitted Indebtedness"; (iii) Temporary Cash Investments; (iv) sales of goods
on trade credit terms consistent with the Company's past practices or otherwise
consistent with trade credit terms in common use in the industry; (v)
Investments in direct financing leases for equipment owned by the Company and
leased to its customers in the ordinary course of business consistent with past
practice; (vi) Investments in existence on the date of the Senior Note
Indentures; and (vii) any substitutions or replacements of any Investment so
long as the aggregate amount of such Investment is not increased by such
substitution or replacement.
"Permitted Liens" means, with respect to any Person:
(a) any Lien existing as of the date of the Senior Note Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes, assessments, governmental charges or levies not yet
delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance; (4) security for the
performance of tenders, leases (including, without limitation, statutory and
common law landlord's liens) and contracts (other than contracts for the
payment of money); (5) zoning restrictions, easements, licenses,
reservations, title defects, rights of others for rights of way, utilities,
sewers, electric lines, telephone or telegraph lines, and other similar
purposes, provisions, covenants, conditions, waivers and restrictions on the
use of property or minor irregularities of title (and, with respect to
leasehold interests, mortgages, obligations, liens and other encumbrances
incurred, created, assumed or permitted to exist and arising by, through or
under a landlord or owner of the leased property, with or without consent of
the lessee), none of which materially impairs the use of any parcel of
property material to the operation of the business of the Company or any
Subsidiary or the value of such property for the purpose of such business;
(6) deposits to secure public or statutory obligations; (7) operation of law
in favor of growers, dealers and suppliers of fresh fruits and vegetables,
carriers, mechanics, materialmen, laborers, employees or suppliers, incurred
in the ordinary course of business for sums which are not yet delinquent or
are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection
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thereof; (8) the grant by the Company to licensees, pursuant to security
agreements, of security interest in trademarks and goodwill, patents and
trade secrets of the Company to secure the damages, if any, of such
licensees, resulting from the rejection of the license of such licensees in
a bankruptcy, reorganization or similar proceeding with respect to the
Company; or (9) security for surety or appeal bonds;
(c) any extension, renewal, refinancing or replacement of any Lien on
property of the Company or any Subsidiary existing as of the date of the
Senior Note Indenture and securing the Indebtedness under the Credit
Agreement in an aggregate principal amount not to exceed the principal
amount of the Indebtedness outstanding as permitted by clause (i) of the
definition of "Permitted Indebtedness" so long as no additional collateral
is granted as security thereby; PROVIDED that this clause (c) shall not
apply to any Lien on such property that has not been subject to a Lien for
30 days;
(d) any Lien on any property or assets of a Subsidiary in favor of the
Company or any Wholly Owned Subsidiary;
(e) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Subsidiary; PROVIDED that such Lien does
not extend to any assets of the Company or any Subsidiary other than the
assets acquired in the transaction resulting in such Acquired Indebtedness
being incurred by the Company or Subsidiary, as the case may be;
(f) any Lien to secure the performance of bids, trade contracts, letters
of credit and other obligations of a like nature and incurred in the
ordinary course of business of the Company or any Subsidiary;
(g) any Lien securing any Interest Rate Agreements or Currency
Agreements permitted to be incurred pursuant to clause (v) of the definition
of "Permitted Indebtedness" or any collateral for the Indebtedness to which
such Interest Rate Agreements or Currency Agreements relate;
(h) any Lien securing the Notes;
(i) any Lien on an asset securing Indebtedness (including Capital Lease
Obligations) incurred or assumed for the purpose of financing all or any
part of the cost of acquiring or constructing such asset; PROVIDED that such
Lien attaches to such asset concurrently or within 180 days after the
acquisition or completion of construction thereof;
(j) any Lien on real or personal property securing Capital Lease
Obligations of the Company or any Subsidiary as lessee with respect to such
real or personal property (1) to the extent that the Company or such
Subsidiary has entered into (and not terminated), or has a binding
commitment for, subleases on terms which, to the Company, are at least as
favorable, on a current basis, as the terms of the corresponding capital
lease or (2) under which the aggregate principal component of the annual
rent payable does not exceed $5 million;
(k) any Lien on a Financing Receivable or other receivable that is
transferred in a Permitted Receivables Financing;
(l) any Lien consisting of any pledge to any Person of Indebtedness owed
by any Subsidiary to the Company or to any Wholly Owned Subsidiary;
PROVIDED, that (i) such Subsidiary is a Subsidiary Guarantor and (ii) the
principal amount pledged does not exceed the Indebtedness secured by such
pledge;
(m) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clause (a) so long as no
additional collateral is granted as security thereby.
"Permitted Receivables Financing" means any transaction involving the
transfer (by way of sale, pledge or otherwise) by the Company or any of its
Subsidiaries of receivables to any other Person, PROVIDED that after giving
effect to such transaction the sum of (i) the aggregate uncollected balances of
the receivables so
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transferred ("Transferred Receivables") PLUS (ii) the aggregate amount of all
collections on Transferred Receivables theretofore received by the seller but
not yet remitted to the purchaser, in each case at the date of determination,
would not exceed $750 million.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the date of
the Indenture, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Principal Property" means any manufacturing or processing plant, office
facility, retail store (other than an Equity Store), warehouse or distribution
center, including, in each case, the fixtures appurtenant thereto, located
within the continental United States and owned and operated now or hereafter by
the Company or any Subsidiary and having a book value on the date as of which
the determination is being made of more than 2% of Consolidated Net Tangible
Assets.
"Public Equity Offering" means a primary public offering of equity
securities of the Company, pursuant to an effective registration statement under
the Securities Act with net cash proceeds of at least $50 million.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Rating Agency" means any of (i) S&P, (ii) Moody's or (iii) if S&P or
Moody's or both shall not make a rating of the Notes publicly available, a
security rating agency or agencies, as the case may be, nationally recognized in
the United States, selected by the Company, which shall be substituted for S&P
or Moody's or both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or equivalent successor
categories); (ii) with respect to Moody's, any of the following categories: Aaa,
Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and
(iii) the equivalent of any such category of S&P or Moody's used by another
Rating Agency. In determining whether the rating of the Notes has decreased by
one or more gradation, gradations within Rating Categories (+ and - for S&P; 1,
2 and 3 for Moody's; or the equivalent gradations for another Rating Agency)
shall be taken into account (e.g., with respect to S&P, a decline in rating from
BB+ to BB, as well as from BB- to B+, will constitute a decrease of one
gradation).
"Rating Decline" means the occurrence on, or within 90 days after, the date
of public notice of the occurrence of a Change of Control or of the intention of
the Company or Persons controlling the Company to effect a Change of Control
(which period shall be extended so long as the rating of the Notes is under
publicly announced consideration for possible downgrade by any of the Rating
Agencies) of the following: (i) if the Notes are rated by either Rating Agency
as Investment Grade immediately prior to the beginning of such period, the
rating of the Notes by both Rating Agencies shall be below Investment Grade; or
(ii) if the Notes are rated below Investment Grade by both Rating Agencies
immediately prior to the beginning of such period, the rating of the Notes by
either Rating Agency shall be decreased by one or more gradations (including
gradations within Rating Categories as well as between Rating Categories).
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is, or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Stated Maturity at the option of the
holder thereof.
"Securities Act" means the Securities Act of 1933, as amended.
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"Senior Indebtedness" means Indebtedness of the Company other than
Subordinated Indebtedness.
"Significant Subsidiary" of the Company means any Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1.02(v) of Regulation S-X
under the Securities Act.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill Inc.,
a New York corporation, or any successor rating agency.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon means the dates specified in such Indebtedness
as the fixed date on which the principal of or premiums on such Indebtedness or
such installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the Notes.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries.
"Subsidiary Guarantor" means, in each case as applicable, any Person that is
required pursuant to the "Additional Guarantees" covenant, on or after the date
of the applicable Senior Note Indenture, to execute a Note Guarantee of the
Fixed Rate Notes pursuant to the Fixed Rate Note Indenture or a Note Guarantee
of the Floating Rate Notes pursuant to the Floating Rate Note Indenture, as the
case may be, until a successor replaces any such party pursuant to the
applicable provisions of the applicable Senior Note Indenture and, thereafter,
shall mean such successor, and, in the case of each such Senior Note Indenture,
the following Subsidiaries of the Company: 109 West Main Street, Inc., 121 East
Main Street, Inc., 27 Slayton Avenue, Inc., 29 Super Market, Inc., 35 Church
Street, Inc., ATI, Inc., Badger Markets, Inc., Baker's Supermarkets, Inc., Ball
Motor Service, Inc., Boogaart Stores of Nebraska, Inc., Central Park Super
Duper, Inc., Commercial Cold/Dry Storage Company, Consumers Markets, Inc., D.L.
Food Stores, Inc., Del-Arrow Super Duper, Inc., Festival Foods, Inc., Fleming
Direct Sales Corporation, Fleming Foods East, Inc., Fleming Foods of Texas,
Inc., Fleming Foods of Tennessee, Inc., Fleming Foods of Virginia, Inc., Fleming
Foods of Alabama, Inc., Fleming Foods of Ohio, Inc., Fleming Foods South, Inc.,
Fleming Foods West, Inc., Fleming Foreign Sales Corporation, Fleming
Franchising, Inc., Fleming Holdings, Inc., Fleming International Ltd., Fleming
Site Media, Inc., Fleming Supermarkets of Florida, Inc., Fleming Technology
Leasing Company, Inc., Fleming Transportation Service, Inc., Food Brands, Inc.,
Food Holdings, Inc., Food Saver of Iowa, Inc., Food-4-Less, Inc., Gateway
Development Co., Inc., Gateway Food Distributors, Inc., Gateway Foods, Inc.,
Gateway Foods of Altoona, Inc., Gateway Foods of Pennsylvania, Inc., Gateway
Foods of Twin Ports, Inc., Gateway Food Service Corporation, Grand Central
Leasing Corporation, Great Bend Supermarkets, Inc., Hub City Transportation,
Inc., Kensington and Harlem, Inc., Ladysmith East IGA, Inc., Ladysmith IGA,
Inc., Lake Markets, Inc., LAS, Inc., M&H Desoto, Inc., M&H Financial Corp., M&H
Realty Corp., Malone & Hyde of Lafayette, Inc., Malone & Hyde, Inc., Manitowoc
IGA, Inc., Moberly Foods, Inc., Mt. Morris Super Duper, Inc., Niagara Falls
Super Duper, Inc., Northern Supermarkets of Oregon, Inc., Northgate Plaza, Inc.,
Peshtigo IGA, Inc., Piggly Wiggly Corporation, Quality Incentive Company, Inc.,
Rainbow Transportation Services, Inc., Richland Center IGA, Inc., Route 16,
Inc., Route 219, Inc., Route 417, Inc., Scrivner, Inc., Scrivner of Alabama,
Inc., Scrivner of Illinois, Inc., Scrivner of Iowa, Inc., Scrivner of Kansas,
Inc., Scrivner of New York, Inc., Scrivner of North Carolina, Inc., Scrivner of
Pennsylvania, Inc., Scrivner of Tennessee, Inc., Scrivner of Texas, Inc.,
Scrivner Super Stores of Illinois, Inc., Scrivner Super Stores of Iowa, Inc.,
Scrivner Transportation, Inc., Scrivner-Food Holdings, Inc., Sehon Foods, Inc.,
Selected Products, Inc., Sentry Markets, Inc., SmarTrans, Inc., South Ogden
Super Duper, Inc., Southern Supermarkets, Inc. (TX), Southern Supermarkets, Inc.
(OK), Southern Supermarkets of Louisiana, Inc., Star Groceries, Inc., Store
Equipment, Inc., Sundries Service, Inc., Switzer Foods, Inc., Thompson Food
Basket, Inc., and WPC, Inc.
"Temporary Cash Investments" means (i) any evidence of Indebtedness issued
by the United States, or an instrumentality or agency thereof, and guaranteed
fully as to principal, premium, if any, and interest by the United States, (ii)
any certificate of deposit issued by, or time deposit of, a financial
institution that is a
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member of the Federal Reserve System having combined capital and surplus and
undivided profits of not less than $500 million, whose debt has a rating, at the
time of which any investment therein is made, of "A" (or higher) according to
Moody's or "A" (or higher) according to S&P, (iii) commercial paper issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized and
existing under the laws of the United States with a rating, at the time as of
which any investment therein is made, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P, (iv) any money market deposit accounts
issued or offered by a financial institution that is a member of the Federal
Reserve System having capital and surplus in excess of $500 million, (v) short
term tax-exempt bonds with a rating, at the time as of which any investment is
made therein, of "Aa2" (or higher) according to Moody's or "AA" (or higher)
according to S&P, (vi) shares in a mutual fund, the investment objectives and
policies of which require it to invest substantially in the investments of the
type described in clause (v) and (vii) repurchase and reverse repurchase
obligations with the term of not more than seven days for underlying securities
of the types described in clauses (i) and (ii) entered into with any financial
institution meeting the qualifications specified in clause (ii); PROVIDED that
in the case of clauses (i), (ii), (iii), (v), (vi) and (vii), such investment
matures within one year from the date of acquisition thereof.
"Transferred Receivables" has the meaning specified in the definition of
"Permitted Receivables Financing" set forth herein.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
Person (irrespective of whether or not at the time stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock (other
than directors' qualifying shares) of which is owned by the Company or another
Wholly Owned Subsidiary.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and J.P. Morgan Securities Inc.
("J.P. Morgan Securities" and together with Merrill Lynch, the "Underwriters"),
the Company has agreed to sell to the Underwriters, and the Underwriters have
severally agreed to purchase, the respective principal amounts of the Notes set
forth after their names below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters will be obligated to purchase all of the Notes if any are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
PRINCIPAL AMOUNT OF
OF FLOATING RATE
UNDERWRITER FIXED RATE NOTES NOTES
- ------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................... $ 270,000,000 $ 180,000,000
J.P. Morgan Securities Inc. ............................................. 30,000,000 20,000,000
------------------ ------------------
Total.......................................................... $ 300,000,000 $ 200,000,000
------------------ ------------------
------------------ ------------------
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering prices set forth on the
cover page of this Prospectus, and to certain dealers at such prices less a
concession not in excess of .5% of the principal amount of the Fixed Rate Notes
and less a concession not in excess of .5% of the principal amount of the
Floating Rate Notes. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of .25% of the principal amount of the Fixed Rate Notes
and a discount not in excess of .25% of the principal amount of the Floating
Rate Notes to certain other dealers. After the initial public offering, the
public offering prices, concessions and discounts may be changed.
There is no public trading market for the Notes, and the Company does not
intend to apply for listing of the Notes on any securities exchange or any
inter-dealer quotation system. The Company has been advised by the Underwriters
that, following the completion of the initial offering of the Notes, the
Underwriters presently intend to make a market in the Notes, although the
Underwriters are under no obligation to do so and may discontinue any market
making at any time without notice. No assurances can be given as to the
liquidity of the trading markets for the Notes or that an active trading market
for the Notes will develop. If active public trading markets for the Notes do
not develop, the market prices and liquidity of the Notes may be adversely
affected.
The Company and the Subsidiary Guarantors have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
As further discussed in "Use of Proceeds," the Company intends to use the
proceeds of the Offering to repay all obligations outstanding under Tranche B of
the Credit Agreement. The offerings of the Fixed Rate Notes and the Floating
Rate Notes, respectively, are not conditioned upon each other. If either such
offering is not completed, a portion of Tranche B of the Credit Agreement will
remain outstanding.
The Underwriters have from time to time provided and may in the future
provide investment banking and financial advisory services to the Company, and
have received and may in the future receive customary fees for such services.
Morgan Guaranty, an affiliate of J.P. Morgan Securities, has from time to time
provided and may in the future provide commercial banking services and financial
advisory services for the Company and has received and may in the future receive
customary fees for such services. Currently, Morgan Guaranty is the managing
agent and a lender to the Company pursuant to the Credit Agreement.
Because more than 10% of the net proceeds of the Offering, not including
underwriting compensation, will be used to repay the Tranche B obligations under
the Credit Agreement for the benefit of Morgan Guaranty, an affiliate of J.P.
Morgan Securities, one of the Underwriters for the Offering, the Offering is
being made pursuant to the provisions of Article III, Section 44(c)(8) of the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
In accordance with these provisions, Merrill Lynch is acting
73
<PAGE>
as a "qualified independent underwriter," and the yield on the Fixed Rate Notes
and Floating Rate Notes, respectively, offered hereby will be no lower than that
recommended by Merrill Lynch. Merrill Lynch has also participated in the
preparation of the Registration Statement of which this Prospectus is a part and
has performed due diligence with respect thereto.
LEGAL OPINIONS
The validity of the Notes offered hereby and the Note Guarantees will be
passed upon for the Company by McAfee & Taft A Professional Corporation, Tenth
Floor, Two Leadership Square, Oklahoma City, Oklahoma 73102, and for the
Underwriters by Shearman & Sterling, 599 Lexington Avenue, New York, New York
10022.
EXPERTS
The consolidated financial statements as of December 25, 1993 and December
26, 1992 and for each of the three years in the period ended December 25, 1993
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. The consolidated financial statements of
Haniel Corporation included in or incorporated by reference in this Prospectus
or the related Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FLEMING COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings for the 40 weeks ended October 2, 1993
and October 1, 1994................................................................. F-2
Consolidated Condensed Balance Sheets as of December 25, 1993 and October 1, 1994.... F-3
Consolidated Condensed Statements of Cash Flows for the 40 weeks ended October 2,
1993 and October 1, 1994............................................................ F-4
Notes to Consolidated Condensed Financial Statements................................. F-5
Independent Auditors' Report......................................................... F-6
Consolidated Statements of Earnings for the three years in the period ended December
25, 1993............................................................................ F-7
Consolidated Balance Sheets as of December 26, 1992 and December 25, 1993............ F-8
Consolidated Statements of Shareholders' Equity for the three years in the period
ended December 25, 1993............................................................. F-9
Consolidated Statements of Cash Flows for the three years in the period ended
December 25, 1993................................................................... F-10
Notes to Consolidated Financial Statements........................................... F-11
Quarterly Financial Information for the years ended December 26, 1992 and December
25, 1993 (unaudited)................................................................ F-24
HANIEL CORPORATION
Report of Independent Public Accountants............................................. F-26
Consolidated Balance Sheets as of December 31, 1992 and 1993 and June 30, 1994....... F-27
Consolidated Statements of Income for the three years ended December 31, 1993 and the
six months ended June 30, 1993 and 1994............................................. F-28
Consolidated Statements of Stockholder's Equity for the three years ended December
31, 1993 and the six months ended June 30, 1994..................................... F-29
Consolidated Statements of Cash Flows for the three years ended December 31, 1993 and
the six months ended June 30, 1993 and 1994......................................... F-30
Notes to Consolidated Financial Statements........................................... F-31
</TABLE>
F-1
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE 40 WEEKS ENDED OCTOBER 2, 1993, AND OCTOBER 1, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994
------------ -------------
<S> <C> <C>
Net sales............................................................................ $ 9,945,559 $ 11,057,167
Costs and expenses:
Cost of sales...................................................................... 9,357,706 10,295,126
Selling and administrative......................................................... 417,365 635,141
Interest expense................................................................... 59,081 75,692
Interest income.................................................................... (47,902) (46,885)
Equity investment results.......................................................... 5,824 11,027
Facilities consolidation........................................................... 6,500 --
------------ -------------
Total costs and expenses......................................................... 9,798,574 10,970,101
------------ -------------
Earnings before taxes................................................................ 146,985 87,066
Taxes on income...................................................................... 62,469 41,356
------------ -------------
Net earnings......................................................................... $ 84,516 $ 45,710
------------ -------------
------------ -------------
Net earnings per share............................................................... $ 2.30 $ 1.23
Dividends paid per share............................................................. $ .90 $ .90
Weighted average shares outstanding.................................................. 36,773 37,204
</TABLE>
Sales to customers accounted for under the equity method were approximately
$1.1 billion in 1994 and 1993.
See notes to consolidated condensed financial statements.
F-2
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 25, OCTOBER 1,
1993 1994
--------------- ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................... $ 1,634 $ 5,625
Receivables............................................................................. 301,514 406,860
Inventories............................................................................. 923,280 1,312,369
Other current assets.................................................................... 134,229 134,363
--------------- ------------
Total current assets.................................................................. 1,360,657 1,859,217
Investments and notes receivable.......................................................... 309,237 418,281
Investment in direct financing leases..................................................... 235,263 234,590
Property and equipment.................................................................... 1,061,905 1,394,381
Less accumulated depreciation and amortization........................................ 426,846 458,290
--------------- ------------
Property and equipment, net............................................................... 635,059 936,091
Other assets.............................................................................. 90,633 186,118
Goodwill.................................................................................. 471,783 989,416
--------------- ------------
Total assets.............................................................................. $ 3,102,632 $ 4,623,713
--------------- ------------
--------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 682,988 $ 1,046,144
Current maturities of long-term debt.................................................... 61,329 94,302
Current obligations under capital leases................................................ 13,172 15,163
Other current liabilities............................................................... 161,043 250,012
--------------- ------------
Total current liabilities............................................................. 918,532 1,405,621
Long-term debt............................................................................ 666,819 1,601,402
Long-term obligations under capital leases................................................ 337,009 352,894
Deferred income taxes..................................................................... 27,500 67,873
Other liabilities......................................................................... 92,366 117,253
Shareholders' equity:
Common stock, $2.50 par value per share................................................. 92,350 93,361
Capital in excess of par value.......................................................... 489,044 493,372
Reinvested earnings..................................................................... 492,250 504,647
Cumulative currency translation adjustment.............................................. (288) (663)
--------------- ------------
1,073,356 1,090,717
Less guarantee of ESOP debt........................................................... 12,950 12,047
--------------- ------------
Total shareholders' equity.......................................................... 1,060,406 1,078,670
--------------- ------------
Total liabilities and shareholders' equity................................................ $ 3,102,632 $ 4,623,713
--------------- ------------
--------------- ------------
</TABLE>
Receivables include $36.7 million and $48.3 million in 1994 and 1993,
respectively, from customers accounted for under the equity method.
See notes to consolidated condensed financial statements.
F-3
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE 40 WEEKS ENDED OCTOBER 2, 1993, AND OCTOBER 1, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994
----------- -------------
<S> <C> <C>
Net cash provided by operating activities............................................. $ 246,409 $ 325,027
Cash flows from investing activities:
Collections on notes receivable..................................................... 68,111 62,341
Notes receivable funded............................................................. (116,794) (93,316)
Purchase of property and equipment.................................................. (35,835) (85,448)
Proceeds from sale of property and equipment........................................ 1,493 5,467
Investments in customers............................................................ (23,398) (12,764)
Proceeds from sale of investment.................................................... 6,054 4,665
Business acquired................................................................... (50,812) (387,488)
Proceeds from sale of businesses.................................................... -- 6,682
Other investing activities.......................................................... (692) (1,584)
----------- -------------
Net cash used in investing activities............................................. (151,873) (501,445)
----------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings.................................................. 331,502 1,665,751
Principal payments on long-term debt................................................ (387,484) (1,425,563)
Principal payments on capital lease obligations..................................... (8,309) (9,916)
Sale of common stock under incentive stock and stock ownership plans................ 5,921 5,339
Dividends paid...................................................................... (33,087) (33,314)
Other financing activities.......................................................... (2,213) (21,888)
----------- -------------
Net cash provided by (used in) financing activities............................... (93,670) 180,409
----------- -------------
Net increase in cash and cash equivalents............................................. 866 3,991
Cash and cash equivalents, beginning of period........................................ 4,712 1,634
----------- -------------
Cash and cash equivalents, end of period.............................................. $ 5,578 $ 5,625
----------- -------------
----------- -------------
Supplemental information:
Cash paid for interest.............................................................. $ 56,908 $ 58,431
Cash paid for taxes................................................................. $ 67,906 $ 36,504
----------- -------------
----------- -------------
</TABLE>
See notes to consolidated condensed financial statements.
F-4
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed balance sheet as of October 1, 1994, and the
consolidated condensed statements of earnings and cash flows for the 12-and
40-week periods ended October 1, 1994, and October 2, 1993, have been prepared
by the company, without audit. In the opinion of management, all adjustments
necessary to present fairly the company's financial position at October 1, 1994,
and the results of operations and cash flows for the periods presented have been
made. All such adjustments are of a normal, recurring nature. Primary earnings
per common share are calculated using the weighted average shares outstanding.
The impact of outstanding stock options on primary earnings per share is not
material.
2. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the company's 1993 annual
report on Form 10-K.
3. The LIFO method of inventory valuation is used for determining the cost
of substantially all grocery and certain perishable inventories. The excess of
current cost of LIFO inventories over their stated value was $14.8 million at
October 1, 1994 and $12.5 million at December 25, 1993.
4. On July 19, 1994, Fleming acquired Haniel Corporation, the parent of
Scrivner, Inc. Fleming paid $388 million in cash for the stock of Haniel and
refinanced substantially all of Haniel's and Scrivner's pre-existing debt
(approximately $680 million in aggregate principal amount and premium). The
acquisition has been accounted for under the purchase method of accounting. The
results of operations reflect the operations of Scrivner since the beginning of
the third quarter. The initial purchase price allocation as of October 1, 1994
has resulted in an excess of purchase price over net assets acquired of
approximately $535 million. Property and equipment appraisals are in process.
The following pro forma summary of consolidated results of operations is
prepared as though the acquisition had occurred at the beginning of the periods
presented.
<TABLE>
<CAPTION>
40 WEEKS ENDED
--------------------
1993 1994
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales..................................................... $ 14,553 $ 14,281
Net earnings.................................................. $ 64 $ 33
Net earnings per share........................................ $ 1.73 $ .89
--------- ---------
--------- ---------
</TABLE>
5. In December 1993, the company and numerous other defendants were named
in two suits in U.S. District Court in Miami. The plaintiffs allege liability on
the part of a subsidiary of the company as a consequence of an alleged
fraudulent scheme conducted by Premium Sales Corporation and others in which
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 in its preliminary stages 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.
F-5
<PAGE>
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 26, 1992 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 25, 1993.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements 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 financial position of Fleming Companies, Inc. and
subsidiaries as of December 26, 1992 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 25, 1993 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 10, 1994 (October 1, 1994 as
to Subsidiary Guarantors note)
F-6
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND DECEMBER 25, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1991 1992 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 12,851,129 $ 12,893,534 $ 13,092,145
Costs and expenses:
Cost of sales..................................................... 12,103,080 12,166,858 12,326,778
Selling and administrative........................................ 537,058 494,983 558,470
Interest expense.................................................. 93,353 81,102 78,029
Interest income................................................... (61,381) (59,477) (62,902)
Equity investment results......................................... 7,690 15,127 11,865
Facilities consolidation and restructuring........................ 67,000 -- 107,827
------------- ------------- -------------
Total costs and expenses........................................ 12,746,800 12,698,593 13,020,067
Earnings before taxes............................................... 104,329 194,941 72,078
Taxes on income..................................................... 39,964 76,037 34,598
------------- ------------- -------------
Earnings before extraordinary loss and cumulative effect of
accounting change.................................................. 64,365 118,904 37,480
Extraordinary loss from early retirement of debt.................... -- 5,864 2,308
Cumulative effect of change in accounting for postretirement health
care benefits...................................................... 9,270 -- --
------------- ------------- -------------
Net earnings........................................................ $ 55,095 $ 113,040 $ 35,172
------------- ------------- -------------
------------- ------------- -------------
Net earnings available to common shareholders....................... $ 51,955 $ 113,040 $ 35,172
------------- ------------- -------------
------------- ------------- -------------
Net earnings per common share:
Primary before extraordinary loss and accounting change........... $ 1.82 $ 3.33 $ 1.02
Extraordinary loss................................................ -- .16 .06
Accounting change................................................. .28 -- --
------------- ------------- -------------
Primary........................................................... $ 1.54 $ 3.16 $ .96
------------- ------------- -------------
------------- ------------- -------------
Fully diluted before extraordinary loss and accounting change..... $ 1.82 $ 3.21 $ 1.02
Extraordinary loss................................................ -- .15 .06
Accounting change................................................. .28 -- --
------------- ------------- -------------
Fully diluted..................................................... $ 1.54 $ 3.06 $ .96
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding.......................... 33,651 35,759 36,801
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Sales to customers accounted for under the equity method were approximately
$1 billion, $1.3 billion and $1.6 billion in 1991, 1992 and 1993, respectively.
See notes to consolidated financial statements.
F-7
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 26, 1992, AND DECEMBER 25, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 4,712 $ 1,634
Receivables................................................................... 349,324 301,514
Inventories................................................................... 959,134 923,280
Other current assets.......................................................... 90,040 134,229
------------ ------------
Total current assets........................................................ 1,403,210 1,360,657
Investments and notes receivable................................................ 344,000 309,237
Investment in direct financing leases........................................... 213,956 235,263
Property and equipment:
Land.......................................................................... 46,293 49,580
Buildings..................................................................... 251,320 268,317
Fixtures and equipment........................................................ 438,068 466,904
Leasehold improvements........................................................ 123,734 133,897
Leased assets under capital leases............................................ 152,737 143,207
------------ ------------
1,012,152 1,061,905
Less accumulated depreciation and amortization................................ 401,446 426,846
------------ ------------
Net property and equipment.................................................. 610,706 635,059
Other assets.................................................................... 79,686 90,633
Goodwill........................................................................ 466,147 471,783
------------ ------------
Total assets................................................................ $ 3,117,705 $ 3,102,632
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 717,484 $ 682,988
Current maturities of long-term debt.......................................... 36,474 61,329
Current obligations under capital leases...................................... 10,927 13,172
Other current liabilities..................................................... 110,051 161,043
------------ ------------
Total current liabilities................................................... 874,936 918,532
Long-term debt.................................................................. 735,565 666,819
Long-term obligations under capital leases...................................... 302,618 337,009
Deferred income taxes........................................................... 39,194 27,500
Other liabilities............................................................... 104,958 92,366
Shareholders' equity:
Common stock, $2.50 par value, authorized--100,000 shares, issued and
outstanding--36,698 and 36,940 shares........................................ 91,746 92,350
Capital in excess of par value................................................ 482,107 489,044
Reinvested earnings........................................................... 501,231 492,250
Cumulative currency translation adjustment.................................... -- (288)
------------ ------------
1,075,084 1,073,356
Less guarantee of ESOP debt................................................. 14,650 12,950
------------ ------------
Total shareholders' equity................................................ 1,060,434 1,060,406
------------ ------------
Total liabilities and shareholders' equity...................................... $ 3,117,705 $ 3,102,632
------------ ------------
------------ ------------
</TABLE>
Receivables include $48.9 million and $48.3 million in 1992 and 1993,
respectively, due from customers accounted for under the equity method.
See notes to consolidated financial statements.
F-8
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND DECEMBER 25, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
--------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock:
Beginning of year......................... 50 $ 50,000
Redemption................................ (50) (50,000)
--------- ----------
End of year............................... -- --
--------- ----------
--------- ----------
Common stock:
Beginning of year......................... 30,548 $ 76,369 35,433 $ 88,584 36,698 $ 91,746
Incentive stock and stock ownership
plans.................................... 285 715 191 478 242 604
Stock issued for acquisition.............. -- -- 1,074 2,684 -- --
Stock offering............................ 4,600 11,500 -- -- -- --
--------- ---------- --------- ------------ --------- ------------
End of year............................... 35,433 88,584 36,698 91,746 36,940 92,350
--------- ---------- --------- ------------ --------- ------------
--------- --------- ---------
Capital in excess of par value:
Beginning of year......................... 287,665 445,501 482,107
Stock offering, net....................... 148,436 -- --
Incentive stock and stock ownership
plans.................................... 9,400 5,165 6,937
Stock issued for acquisition.............. -- 31,441 --
---------- ------------ ------------
End of year............................... 445,501 482,107 489,044
---------- ------------ ------------
Reinvested earnings:
Beginning of year......................... 418,085 431,120 501,231
Net earnings.............................. 55,095 113,040 35,172
Cash dividends:
Common ($1.14 per share in 1991, $1.20
in 1992 and 1993)...................... (38,920) (42,929) (44,153)
Preferred............................... (3,140) -- --
---------- ------------ ------------
End of year............................... 431,120 501,231 492,250
---------- ------------ ------------
Cumulative currency translation adjustment:
Beginning of year......................... --
Currency translation adjustments.......... (288)
------------
End of year............................... (288)
------------
Guarantee of ESOP debt:
Beginning of year......................... (17,665) (16,218) (14,650)
Payments.................................. 1,447 1,568 1,700
---------- ------------ ------------
End of year (16,218) (14,650) (12,950)
---------- ------------ ------------
Total shareholders' equity, end of year..... $ 948,987 $ 1,060,434 $ 1,060,406
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
FLEMING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND DECEMBER 25, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................................. $ 55,095 $ 113,040 $ 35,172
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization.......................................... 91,252 93,827 101,103
Credit losses.......................................................... 17,281 28,258 52,018
Deferred income taxes.................................................. (34,158) 11,343 (24,471)
Equity investment results.............................................. 7,690 15,128 11,865
Facilities consolidation and reserve activities, net................... 53,l50 (31,226) 87,211
Postretirement health care benefits.................................... 15,000 -- --
Change in assets and liabilities:
Receivables.......................................................... (45,094) (75,924) (16,420)
Inventories.......................................................... (74,500) (440) 58,625
Other assets......................................................... (31,124) (10,218) (48,984)
Accounts payable..................................................... 37,166 (41,285) (38,472)
Other liabilities.................................................... 4,251 (16,566) (10,883)
Other adjustments, net................................................. (634) 3,918 1,779
----------- ----------- -----------
Net cash provided by operating activities............................ 95,375 89,855 208,543
----------- ----------- -----------
Cash flows from investing activities:
Collections on notes receivable.......................................... 95,045 88,851 82,497
Notes receivable funded.................................................. (193,643) (168,814) (130,846)
Notes receivable sold.................................................... 81,986 44,970 67,554
Purchase of property and equipment....................................... (67,295) (66,376) (55,554)
Proceeds from sale of property and equipment............................. 4,748 3,603 2,955
Investments in customers................................................. (21,108) (17,315) (37,196)
Businesses acquired...................................................... -- (8,233) (51,110)
Proceeds from sale of investments........................................ 7,156 9,763 7,077
Other investing activities............................................... (8,428) (353) 197
----------- ----------- -----------
Net cash used in investing activities.................................. (101,539) (113,904) (114,426)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings....................................... 353,381 462,726 331,502
Principal payments on long-term debt..................................... (432,364) (383,188) (373,693)
Principal payments on capital lease obligations.......................... (11,565) (10,904) (11,316)
Sale of common stock under incentive stock and stock ownership plans..... 8,870 5,653 7,541
Dividends paid........................................................... (41,979) (42,929) (44,153)
Redemption of preferred stock............................................ (30,900) (19,100) --
Proceeds from common stock sale.......................................... 159,936 -- --
Other financing activities............................................... 588 (4,587) (7,076)
----------- ----------- -----------
Net cash provided by (used in) financing activities.................... 5,967 7,671 (97,195)
----------- ----------- -----------
Net decrease in cash and cash equivalents.................................. (197) (16,378) (3,078)
Cash and cash equivalents, beginning of year............................... 21,287 21,090 4,712
----------- ----------- -----------
Cash and cash equivalents, end of year..................................... $ 21,090 $ 4,712 $ 1,634
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR: The company's fiscal year ends on the last Saturday in
December.
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 $67.8 million (1992) and $69.9 million (1993). Receivables are
shown net of allowance for credit losses of $25.3 million (1992) and $44.3
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.
FIXED ASSET IMPAIRMENT: Fixed asset impairments are recorded when events or
changes in circumstances indicate that the carrying amount of the fixed assets
may not be recoverable. Such impairment losses are measured by the excess of the
carrying amount of the fixed asset over the fair value of the related asset.
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 $60
million (1992) and $74.2 million (1993). Goodwill is written down if it is
probable that estimated operating income, measured on an undiscounted basis,
generated by the related assets will be less than the carrying amount.
ACCOUNTS PAYABLE: Accounts payable include $11.2 million (1992) and $8.8
million (1993) of issued checks that have not yet cleared the company's bank
accounts, less deposits in transit.
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.
TAXES ON INCOME: Deferred income taxes arise from temporary differences
between financial and tax bases of certain assets and liabilities.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: 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.
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.
F-11
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
NET EARNINGS PER COMMON SHARE: Primary earnings per common share are
computed based on net earnings, less dividends on preferred stock in 1991,
divided by the weighted average common shares outstanding. The impact of common
stock options on primary earnings per common share is not materially dilutive.
Fully diluted earnings per common share assume conversion of the convertible
subordinated notes that were redeemed during 1992.
CONTINGENT LIABILITIES: The company has aggregate contingent liabilities
under debt guarantees and future minimum rental commitments of $370 million.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year
amounts to conform to current year classifications.
INVENTORIES
Inventories are valued as follows:
<TABLE>
<CAPTION>
DEC. 26, DEC. 25,
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
LIFO method............................................................ $ 689,358 $ 638,383
FIFO method............................................................ 269,776 284,897
---------- ----------
Inventories.......................................................... $ 959,134 $ 923,280
---------- ----------
---------- ----------
</TABLE>
Current replacement cost of LIFO inventories were greater than the carrying
amounts by approximately $19.3 million at December 26, 1992, and $12.5 million
at December 25, 1993.
INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable consist of the following:
<TABLE>
<CAPTION>
DEC. 26, DEC. 25,
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Investments in and advances to customers............................... $ 176,092 $ 164,292
Notes receivable from customers........................................ 157,655 133,935
Other investments and receivables...................................... 10,253 11,010
---------- ----------
Investments and notes receivable....................................... $ 344,000 $ 309,237
---------- ----------
---------- ----------
</TABLE>
The company extends long-term credit to certain retail customers it serves.
Loans are primarily collateralized by inventory and fixtures. Investments and
notes receivable are shown net of allowance for credit losses of $18.2 million
and $18.3 million in 1992 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. This new statement requires 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. The new standard is effective for the first
quarter of the company's 1995 fiscal year. The company has not yet determined
the impact, if any, on the consolidated statements of earnings or financial
position.
The company has sold certain notes receivable at face value with limited
recourse. The outstanding balance at year end 1993 on all notes sold is $155.4
million, of which the company is contingently liable for $31.3 million should
all the notes become uncollectible. The company guarantees bank debt of $35
million for a customer.
F-12
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DEC. 26, DEC. 25,
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Medium-term notes, due 1994 to 2003, average interest rates of 8.3%
and 7.5%............................................................. $ 194,450 $ 222,450
Commercial paper, average interest rate of 3.3% in 1993............... -- 165,866
Unsecured term bank loans, due 1994 to 1996, average interest rates of
4.2% and 3.7%........................................................ 95,000 160,000
Unsecured credit lines, average interest rates of 3.9% and 3.3%....... 340,000 145,000
9.5% Debentures, due 2010, annual sinking fund payments of $5,000
commencing in 1997................................................... 70,000 7,000
Guaranteed bank loan of employee stock ownership plan................. 14,650 12,950
Mortgaged real estate notes and other debt, varying interest rates
from 3.5% to 8%, due 1994 to 2019.................................... 57,939 14,882
---------- ----------
772,039 728,148
Less current maturities............................................... 36,474 61,329
---------- ----------
Long-term debt........................................................ $ 735,565 $ 666,819
---------- ----------
---------- ----------
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows: 1994 -- $61.3 million; 1995 -- $140.3 million; 1996 -- $69 million;
1997 -- $13.8 million and 1998 -- $27.8 million.
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 $2.3 million, after income tax benefits
of $2.1 million, or $.06 per share. The funding source for the early redemption
was the sale of notes receivable. In 1992, the company retired the $172.5
million of convertible subordinated notes, $30 million of the 9.5% debentures
and certain other debt. The extraordinary loss was $5.9 million, after income
tax benefits of $3.7 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.
The company has two commercial paper programs supported by committed $400
million and $200 million revolving credit agreements with a group of banks.
Currently, the company limits the amount of commercial paper issued at any time
plus the amount of borrowing under uncommitted credit lines to the unused credit
available through the committed credit agreements. The $400 million credit
agreement matures in October 1997. The $200 million credit agreement matures in
October 1994, but the company intends to renew the agreement prior to maturity.
At year end, the company had no borrowings under the agreements which carry
combined annual facility and commitment fees of .25% and .15% for the $400
million agreement and the $200 million agreement, respectively. The interest
rate is based on various money market rates selected by the company at the time
of borrowing.
The credit agreements contain various covenants, including restrictions on
additional indebtedness, payment of cash dividends and acquisition of the
company's common stock. None of these covenants negatively impact the company's
liquidity or capital resources at this time. Reinvested earnings of
approximately $92 million were available at year end for cash dividends and
acquisition of the company's stock. The agreements contain a provision that, in
the event of a defined change of control, the credit agreements may be
terminated.
F-13
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
The company has registered $565 million in medium-term notes. Of this, the
remaining $289.6 million may be issued from time to time, at fixed or floating
interest rates, as determined at the time of issuance.
The unsecured term bank loans have original maturities of three years and
bear interest at floating rates. Unsecured credit lines have original maturities
of generally less than one year and bear interest at floating rates. The loans
contain essentially the same covenants as the revolving credit agreements and
are prepayable without penalty.
The carrying value of assets collateralized under mortgaged real estate
notes and other debt was approximately $123 million and $9.4 million at year end
1992 and 1993, respectively.
Components of interest expense are as follows:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest costs incurred:
Long-term debt............................................. $ 64,068 $ 50,524 $ 44,628
Capital lease obligations.................................. 26,915 29,103 31,355
Other...................................................... 2,539 1,475 2,046
--------- --------- ---------
Total incurred........................................... 93,522 81,102 78,029
Less interest capitalized.................................... 169 -- --
--------- --------- ---------
Interest expense............................................. $ 93,353 $ 81,102 $ 78,029
--------- --------- ---------
--------- --------- ---------
</TABLE>
The company's employee stock ownership plan (ESOP) allows substantially all
associates to participate. 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. The
loan balance is presented in long-term debt with an offset as a reduction of
shareholders' equity. The ESOP will repay the loan with proceeds from company
contributions.
The company makes contributions based on fixed debt service requirements of
the ESOP loan. The ESOP used $.6 million of common stock dividends for debt
service in each of 1991, 1992 and 1993. During 1991, 1992 and 1993, the company
recognized $.8 million, $.9 million and $1.1 million, respectively, in
compensation expense. Interest expense of $1.3 million, $.7 million and $.5
million was recognized at average rates of 7.7%, 4.4% and 3.7% in 1991, 1992 and
1993, respectively.
The company enters into interest rate hedge agreements to manage interest
costs and exposure to changing interest rates. At year end 1992 and 1993,
agreements were in place that effectively fixed rates on $270 million and $70
million, respectively, of the company's floating rate debt. Additionally, for
both years, $60 million of agreements convert fixed rate debt to floating and a
$100 million transaction hedges the company's risk of fluctuation between prime
rate and LIBOR. The maturities for such agreements range from 1995 to 1998. The
counterparties to these agreements are major national and international
financial institutions.
The fair value of long-term debt as of year end 1992 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 1992 and 1993, the fair value of debt exceeded the
carrying amount by $16.5 million and $13.8 million, respectively. For interest
rate swap agreements, the fair value was estimated using termination cash
values. At year end 1993, swap agreements had no fair value. At year end 1992,
swap agreements had a fair value of $1.7 million. The company does not have any
financial basis in the hedge agreements other than accrued interest payable or
receivable.
F-14
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
SUBSIDIARY GUARANTORS
The company plans to issue $500 million principal amount of senior debt (the
"Senior Notes") which will be guaranteed by all direct and indirect subsidiaries
of the company (except for certain subsidiaries which are inconsequential), all
of which are wholly owned. The guarantees will be 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. Set forth below is certain summarized financial
data regarding the subsidiary guarantors on a combined basis.
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.
<TABLE>
<CAPTION>
OCTOBER 1,
1992 1993 1994
--------- --------- -----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C>
Current assets......................................................... $ 1,204 $ 1,168 $ 1,642
Noncurrent assets...................................................... 1,508 1,579 2,543
Current liabilities.................................................... 708 764 1,103
Noncurrent liabilities................................................. 957 936 1,755
</TABLE>
<TABLE>
<CAPTION>
40 WEEKS
ENDED
OCTOBER 1,
1991 1992 1993 1994
--------- --------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales................................................. $ 11,423 $ 11,488 $ 11,759 $ 10,070
Costs and expenses........................................ 11,299 11,321 11,674 9,987
Earnings before extraordinary items and cumulative effect
of accounting change..................................... 77 102 44 44
Net earnings.............................................. 69 97 42 44
</TABLE>
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-operated 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 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
$59.5 million and $41.7 million at year end 1992 and 1993, respectively.
F-15
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
Future minimum lease payment obligations for leased assets under capital
leases as of year end 1993 are set forth below:
<TABLE>
<CAPTION>
LEASE
YEARS OBLIGATIONS
- --------------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1994....................................................................... $ 16,719
1995....................................................................... 16,672
1996....................................................................... 16,554
1997....................................................................... 16,244
1998....................................................................... 15,816
Later...................................................................... 143,209
Total minimum lease payments............................................... 225,214
Less estimated executory costs............................................. 332
--------------
Net minimum lease payments................................................. 224,882
Less interest.............................................................. 101,754
--------------
Present value of net minimum lease payments................................ 123,128
Less current obligations................................................... 5,618
--------------
Long-term obligations...................................................... $117,510
--------------
--------------
</TABLE>
Future minimum lease payments required at year end 1993 under operating
leases that have initial noncancelable lease terms exceeding one year are
presented in the following table:
<TABLE>
<CAPTION>
FACILITY FACILITIES EQUIPMENT NET
YEARS RENTALS SUBLEASED RENTALS RENTALS
- ------------------------------------------------------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994................................................... $ 92,936 $ 46,105 $ 16,407 $ 63,238
1995................................................... 83,905 43,084 10,277 51,098
1996................................................... 77,680 39,733 5,057 43,004
1997................................................... 71,364 36,700 1,219 35,883
1998................................................... 64,559 32,702 347 32,204
Later.................................................. 368,039 165,396 -- 202,643
---------- ---------- ----------- ----------
Total minimum lease payments........................... $ 758,483 $ 363,720 $ 33,307 $ 428,070
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</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:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals.......................................... $ 119,819 $ 123,189 $ 126,040
Contingent rentals....................................... 415 247 182
Less sublease income..................................... 51,506 54,348 57,308
---------- ---------- ----------
Rental expense........................................... $ 68,728 $ 69,088 $ 68,914
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At year end 1993, the company is contingently liable for future minimum
rental commitments of $335 million.
F-16
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
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 to be received under
direct financing leases and future minimum lease payment obligations under
capital leases in effect at December 25, 1993:
<TABLE>
<CAPTION>
LEASE RENTALS LEASE
YEARS RECEIVABLE OBLIGATIONS
- ------------------------------------------------------------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C>
1994.............................................................. $ 41,633 $ 29,375
1995.............................................................. 40,560 29,553
1996.............................................................. 39,083 29,617
1997.............................................................. 36,751 29,646
1998.............................................................. 33,229 29,599
Later............................................................. 293,696 277,785
------------- -----------
Total minimum lease payments...................................... 484,952 425,575
Less estimated executory costs.................................... 2,062 2,055
------------- -----------
Net minimum lease payments........................................ 482,890 423,520
Less unearned income.............................................. 235,813 --
Less interest..................................................... -- 196,467
------------- -----------
Present value of net minimum lease payments....................... 247,077 227,053
Less current portion.............................................. 11,814 7,554
------------- -----------
Long-term portion................................................. $ 235,263 $ 219,499
------------- -----------
------------- -----------
</TABLE>
Contingent rental income and contingent rental expense were not material in
1993, 1992 or 1991.
FACILITIES CONSOLIDATION AND RESTRUCTURING
The results in 1993 include a charge of $107.8 million for additional
facilities consolidations, reengineering, impairment of retail-related assets
and elimination of regional operations. Facilities consolidations will result in
the closure of five distribution centers, the relocation of two operations, the
consolidation of a center's administrative function and completion of the 1991
facilities consolidation actions. The related charge provides for severance
costs, impaired property and equipment, product handling and damage, and
impaired other assets. The reengineering component of the charge provides for
severance costs of terminating associates displaced by the reengineering 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. These sites are no longer strategically viable due to
size, location or age. Elimination of regional operations in early 1994 will
result in cash severance payments to affected associates.
The 1991 restructuring plan was initiated to reduce costs and increase
operating efficiency by consolidating four distribution centers into larger,
higher volume and more efficient facilities. The $67 million charge included
associate severance, lease terminations and impairment of related assets. The
plan has resulted in the closing or consolidation of four facilities whose
operations were assimilated into other distribution centers. Additional
estimated costs, related primarily to asset dispositions in process, were made
in the 1993 charge.
F-17
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
TAXES ON INCOME
Components of taxes on income (tax benefit) are as follows:
<TABLE>
<CAPTION>
1991 1992 1993
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................................. $ 56,634 $ 55,473 $ 48,742
State................................................................ 8,849 11,814 10,327
---------- --------- ----------
Total current...................................................... 65,483 67,287 59,069
---------- --------- ----------
Deferred:
Federal.............................................................. (21,500) 7,280 (20,160)
State................................................................ (4,019) 1,470 (4,311)
---------- --------- ----------
Total deferred..................................................... (25,519) 8,750 (24,471)
---------- --------- ----------
Taxes on income........................................................ $ 39,964 $ 76,037 $ 34,598
---------- --------- ----------
---------- --------- ----------
</TABLE>
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
1991 1992 1993
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation.......................................................... $ (301) $ 2,161 $ 516
Facilities consolidation and reserve activities....................... (20,977) 10,989 (31,519)
Retirement benefits................................................... (350) 517 13,094
Equity investment results............................................. (1,717) (4,292) (6,767)
Credit losses......................................................... 421 (4,539) (5,417)
Prepaid expenses...................................................... -- -- 3,200
Asset dispositions.................................................... 186 3,818 2,670
Lease transactions.................................................... (509) (230) (2,307)
Noncompete agreement.................................................. 2,556 2,552 2,170
Associate benefits.................................................... (6,525) (3,494) (2,115)
Note sales............................................................ 1,038 623 1,880
Other................................................................. 659 645 124
---------- --------- ----------
Deferred tax expense (benefit)........................................ $ (25,519) $ 8,750 $ (24,471)
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-18
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
Temporary differences that give rise to deferred tax assets and liabilities
as of December 25, 1993, are as follows:
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Depreciation........................................................... $ 4,333 $ 88,609
Facilities consolidation and reserve activities........................ 51,942 --
Associate benefits..................................................... 31,878 --
Credit losses.......................................................... 22,579 --
Equity investment results.............................................. 13,848 1,758
Lease transactions..................................................... 8,857 1,623
Inventory.............................................................. 7,743 18,401
Asset dispositions..................................................... 5,580 --
Acquired loss carryforwards............................................ 4,514 --
Retirement benefits.................................................... -- 16,568
Note sales............................................................. -- 3,555
Prepaid expenses....................................................... -- 3,200
Other.................................................................. 8,954 8,582
---------- ----------
Gross deferred taxes................................................... 160,228 142,296
Valuation allowance.................................................... (6,514) --
---------- ----------
Total deferred taxes................................................. $ 153,714 $ 142,296
---------- ----------
---------- ----------
Total deferred taxes, December 26, 1992.............................. $ 112,904 $ 125,957
---------- ----------
---------- ----------
</TABLE>
The effect of the increase in the federal statutory rate to 35% on deferred
tax assets and liabilities was immaterial. The valuation allowance contains $4.5
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:
<TABLE>
<CAPTION>
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Statutory rate.......................................... 34.0% 34.0% 35.0%
State income taxes, net of federal tax benefit.......... 3.1 4.4 5.4
Acquisition-related differences......................... 4.7 2.3 6.6
Possible assessments.................................... 2.1 (1.4) --
Sale of insurance subsidiary............................ (4.8) -- --
Other................................................... (.8) (.3) 1.0
------ ------ ------
Effective rate.......................................... 38.3% 39.0% 48.0%
------ ------ ------
------ ------ ------
</TABLE>
SHAREHOLDER'S 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 157,000 and 174,000 new shares in
1992 and 1993, respectively. Additional shares totaling 13,000 and 9,000 in 1992
and 1993, respectively, were purchased at market value by shareholders.
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.
F-19
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
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.
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 1992 and 1993, options with SARs were exercisable for 46,000 and 35,000
shares, respectively. Options without SARs were exercisable for 805,000 shares
in 1992 and 841,000 shares in 1993. At year end 1993, there were 1.5 million
shares available for grant under the stock option plans.
Stock option transactions are as follows:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
----------- ----------------
(SHARES IN THOUSANDS)
<S> <C> <C>
Outstanding, December 29, 1990.................................... 1,225 $ 4.72 - 42.13
Exercised....................................................... (34) $ 12.88 - 37.06
Canceled and forfeited.......................................... (23) --
----- ----------------
Outstanding, December 28, 1991.................................... 1,168 $ 4.72 - 42.13
Granted......................................................... 4 $ 30.00
Exercised....................................................... (28) $ 12.88 - 29.81
Canceled and forfeited.......................................... (60) --
----- ----------------
Outstanding, December 26, 1992.................................... 1,084 $ 4.72 - 42.13
Exercised....................................................... (59) $ 20.33 - 31.75
Canceled and forfeited.......................................... (42) --
----- ----------------
Outstanding, December 25, 1993.................................... 983 $ 4.72 - 42.13
----- ----------------
----- ----------------
</TABLE>
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. The
company has issued 133,000 restricted common shares, net of 10,000 shares
forfeited in 1993. These shares were recorded at the market value when issued,
$4.4 million, and are amortized to expense as earned. The unamortized portion,
$2.1 million and $1.8 million in 1992 and 1993, respectively, 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
$.8 million, $1.1 million and $2 million in 1991, 1992 and 1993, respectively.
F-20
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
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 1992 and 1993 are: discount rate -- 8.5% and
7.5%, respectively; compensation increases -- 5% and 4%, respectively; and
return on assets -- 10% and 9.5%, respectively.
<TABLE>
<CAPTION>
DECEMBER 26, 1992 DECEMBER 25, 1993
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested.................................................. $ 129,248 $ 11,701 $ 166,474 $ 9,587
Total................................................... $ 135,895 $ 12,444 $ 174,332 $ 16,577
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Projected benefit obligations............................. $ 149,108 $ 13,886 $ 187,833 $ 18,302
Plan assets at fair value................................. 139,989 -- 176,307 --
------------ ------------ ------------ ------------
Projected benefit obligation in excess of plan
assets................................................... 9,119 13,886 11,526 18,302
Unrecognized net loss..................................... (19,800) (5,416) (42,195) (7,672)
Unrecognized prior service cost........................... (2,910) -- (2,293) (777)
Unrecognized net asset (obligation)....................... 1,447 (749) 291 (216)
------------ ------------ ------------ ------------
Pension liability (asset)................................. $ (12,144) $ 7,721 $ (32,671) $ 9,637
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Net pension expense includes the following components:
<TABLE>
<CAPTION>
1991 1992 1993
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................... $ 4,651 $ 4,997 $ 5,323
Interest cost.............................................. 11,955 13,503 14,792
Actual return on plan assets............................... (24,159) (8,159) (19,103)
Net amortization and deferral.............................. 15,170 (5,030) 8,039
---------- --------- ----------
Net pension expense........................................ $ 7,617 $ 5,311 $ 9,051
---------- --------- ----------
---------- --------- ----------
</TABLE>
Certain associates have pension and health care benefits provided under
collectively bargained multiemployer agreements. Expenses for these benefits
were $37.1 million, $40 million and $44 million for 1991, 1992 and 1993,
respectively.
ASSOCIATE POSTRETIREMENT HEALTH CARE BENEFITS
In 1991, the company adopted SFAS No. 106 -- Employers' Accounting for
Postretirement Benefits Other Than Pensions. The company elected to recognize
immediately the accumulated postretirement benefit obligation, resulting in a
charge to net earnings of $9.3 million. The effect of the change on 1991 net
earnings, excluding the cumulative effect upon adoption, was not material.
F-21
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
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:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost..................................................... $ 194 $ 108 $ 140
Interest cost.................................................... 1,210 1,430 1,628
Amortization of net loss......................................... -- -- 138
--------- --------- ---------
Postretirement expense........................................... $ 1,404 $ 1,538 $ 1,906
--------- --------- ---------
--------- --------- ---------
</TABLE>
The composition of the accumulated postretirement benefit obligation (APBO)
and the amounts recognized in the balance sheets are presented below.
<TABLE>
<CAPTION>
1992 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Retirees................................................................ $ 13,824 $ 13,299
Fully eligible actives.................................................. 1,695 1,916
Others.................................................................. 1,485 1,680
--------- ---------
APBO.................................................................... 17,004 16,895
Unrecognized net loss................................................... -- 3,333
--------- ---------
Accrued postretirement benefit cost..................................... $ 17,004 $ 13,562
--------- ---------
--------- ---------
</TABLE>
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 9.5% and
7.5% for 1992 and 1993, respectively. For measurement purposes in 1992 and 1993,
a 15% and 14%, respectively, annual rate of increase in the per capita cost of
covered medical care benefits was assumed. In 1993, the rate was assumed to
decrease to 8% by 2000, then to 7.5% in 2001 and thereafter. In 1992, the rate
was assumed to decrease to 8% by 1999 and remain at 8% 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
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amounts capitalized......................... $ 91,301 $ 82,051 $ 79,634
Income taxes............................................... $ 61,437 $ 65,884 $ 74,320
Direct financing leases and related obligations.............. $ 44,055 $ 27,507 $ 33,594
Property and equipment additions by capital leases........... $ 9,182 $ 22,513 $ 21,011
</TABLE>
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
F-22
<PAGE>
FLEMING COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 25, 1993, DECEMBER 26, 1992 AND DECEMBER 28, 1991
Florida. The acquisitions were accounted for as purchases. The results of these
entities are not material to the company. Cash paid for the acquisitions, net of
cash acquired, was $51.1 million. The fair value of assets acquired was $111.1
million, with liabilities assumed or created of $9 million.
In 1992, the company acquired the common stock of Baker's Supermarkets, the
operator of 10 supermarkets located in Omaha, Neb. The acquisition was accounted
for as a purchase. The results of Baker's operations are not material to the
company. The company issued 1,073,512 shares of common stock at a price of
$31.79 per share, or $34.1 million. The fair value of assets acquired was $88.7
million, with liabilities assumed or created of $39.8 million. Cash paid for the
acquisition, net of cash acquired, was $8.2 million.
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 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, 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 allegations contained in the complaint.
The litigation is in its preliminary stages 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," also known as "Superfund"),
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 such 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.
- --------------------------------------------------------------------------------
F-23
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
1993
Net sales................................. $ 4,044,894 $ 2,964,655 $ 2,936,010 $ 3,146,586 $ 13,092,145
Costs and expenses:
Cost of sales........................... 3,803,545 2,787,087 2,767,074 2,969,072 12,326,778
Selling and administrative.............. 170,893 121,366 125,106 141,105 558,470
Interest expense........................ 23,481 17,804 17,796 18,948 78,029
Interest income......................... (18,548) (14,469) (14,885) (15,000) (62,902)
Equity investment results............... 2,067 805 2,952 6,041 11,865
Facilities consolidation and
restructuring.......................... -- 6,500 -- 101,327 107,827
------------ ------------ ------------ ------------ -------------
Total costs and expenses.............. 3,981,438 2,919,093 2,898,043 3,221,493 13,020,067
------------ ------------ ------------ ------------ -------------
Earnings (loss) before taxes.............. 63,456 45,562 37,967 (74,907) 72,078
Taxes on income (tax benefit)............. 26,081 18,726 17,662 (27,871) 34,598
------------ ------------ ------------ ------------ -------------
Earnings (loss) before extraordinary
loss..................................... 37,375 26,836 20,305 (47,036) 37,480
Extraordinary loss from early retirement
of debt.................................. -- -- -- 2,308 2,308
------------ ------------ ------------ ------------ -------------
Net earnings (loss)....................... $ 37,375 $ 26,836 $ 20,305 $ (49,344) $ 35,172
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net earnings (loss) per share:
Primary before extraordinary loss....... $ 1.02 $ .73 $ .55 $ (1.28) $ 1.02
Extraordinary loss...................... -- -- -- .06 .06
------------ ------------ ------------ ------------ -------------
Primary................................. $ 1.02 $ .73 $ .55 $ (1.34) $ .96
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Fully diluted before extraordinary
loss................................... $ 1.02 $ .73 $ .55 $ (1.28) $ 1.02
Extraordinary loss...................... -- -- -- .06 .06
------------ ------------ ------------ ------------ -------------
Fully diluted........................... $ 1.02 $ .73 $ .55 $ (1.34) $ .96
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Dividends paid per share.................. $ .30 $ .30 $ .30 $ .30 $ 1.20
Weighted average shares outstanding....... 36,722 36,780 36,833 36,896 36,801
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
The first quarter of 1993 and 1992 consists of 16 weeks, all other quarters
are 12 weeks.
The second quarter of 1993 includes $11.2 million of pretax income resulting
from the favorable resolution of a litigation matter and a $1.2 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 $4.6
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.
F-24
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
1992
Net sales................................. $ 3,905,861 $ 2,955,934 $ 2,926,805 $ 3,104,934 $ 12,893,534
Cost and expenses:
Cost of sales........................... 3,678,598 2,796,876 2,773,220 2,918,164 12,166,858
Selling and administrative.............. 151,033 107,633 107,154 129,163 494,983
Interest expense........................ 26,332 18,577 18,626 17,567 81,102
Interest income......................... (17,032) (14,524) (13,585) (14,336) (59,477)
Equity investment results............... 3,486 3,931 4,013 3,697 15,127
------------ ------------ ------------ ------------ -------------
Total costs and expenses.............. 3,842,417 2,912,493 2,889,428 3,054,255 12,698,593
------------ ------------ ------------ ------------ -------------
Earnings before taxes..................... 63,444 43,441 37,377 50,679 194,941
Taxes on income........................... 24,749 16,943 14,573 19,772 76,037
------------ ------------ ------------ ------------ -------------
Earnings before extraordinary loss........ 38,695 26,498 22,804 30,907 118,904
Extraordinary loss from early retirement
of debt.................................. -- -- -- 5,864 5,864
------------ ------------ ------------ ------------ -------------
Net earnings.............................. $ 38,695 $ 26,498 $ 22,804 $ 25,043 $ 113,040
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net earnings per share:
Primary before extraordinary loss....... $ 1.09 $ .75 $ .64 $ .84 $ 3.33
Extraordinary loss...................... -- -- -- .16 .16
------------ ------------ ------------ ------------ -------------
Primary................................. $ 1.09 $ .75 $ .64 $ .68 $ 3.16
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Fully diluted before extraordinary
loss................................... $ 1.04 $ .72 $ .62 $ .83 $ 3.21
Extraordinary loss...................... -- -- -- .16 .15
------------ ------------ ------------ ------------ -------------
Fully diluted........................... $ 1.04 $ .72 $ .62 $ .68 $ 3.06
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Dividends paid per share.................. $ .30 $ .30 $ .30 $ .30 $ 1.20
Weighted average common shares
outstanding.............................. 35,449 35,493 35,541 36,657 35,759
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
The fourth quarter of 1992 reflects $4.9 million of income related to
litigation settlement.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Haniel Corporation:
We have audited the accompanying consolidated balance sheets of Haniel
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1992
and 1993, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Haniel Corporation and
subsidiaries as of December 31, 1992 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the financial statements, the Company changed its
method of accounting for income taxes in 1993 and restated prior year financial
statements to reflect the change. In addition, as discussed in Note 5 to the
financial statements, the Company changed its method of accounting for
postretirement benefits other than pensions, effective January 1, 1993.
ARTHUR ANDERSEN & CO.
Oklahoma City, Oklahoma,
March 11, 1994
F-26
<PAGE>
HANIEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1992 1993 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash....................................... $ 2,703,700 $ 3,252,760 $ 2,461,225
Receivables-
Accounts receivable...................... 147,241,595 154,674,250 148,704,447
Notes receivable......................... 44,092,855 53,877,158 71,630,512
Less-Allowance for doubtful accounts..... (18,208,359) (18,160,262) (22,497,023)
-------------- -------------- --------------
173,126,091 190,391,146 197,837,936
Inventories................................ 441,534,444 415,560,007 372,250,362
Other current assets....................... 22,193,935 16,780,520 12,147,871
-------------- -------------- --------------
Total current assets................... 639,558,170 625,984,433 584,697,394
-------------- -------------- --------------
Direct financing leases, net of current
portion..................................... 2,604,875 2,280,345 2,110,575
Investments.................................. 1,897,725 1,805,165 1,503,210
Property and equipment, at cost
Land and buildings......................... 212,322,536 223,064,269 229,324,212
Furniture, fixtures and equipment.......... 200,407,415 225,683,911 237,002,425
Transportation equipment................... 83,047,275 85,122,869 83,906,755
Leasehold improvements..................... 56,589,307 64,903,194 64,589,031
-------------- -------------- --------------
552,366,533 598,774,243 614,822,423
Less-Accumulated depreciation and
amortization.............................. (218,254,460) (263,480,135) (282,075,739)
-------------- -------------- --------------
334,112,073 335,294,108 332,746,684
Intangible assets............................ 393,343,279 388,586,106 381,788,061
Other assets................................. 15,030,473 17,964,971 14,538,180
-------------- -------------- --------------
408,373,752 406,551,077 396,326,241
-------------- -------------- --------------
Total Assets........................... $1,386,546,595 $1,371,915,128 $1,317,384,104
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable........................... $ 253,759,183 $ 276,628,540 $ 235,885,834
Current portion of long-term debt and
capitalized lease obligations............. 32,862,051 20,048,742 15,821,059
Other current liabilities.................. 118,959,028 121,553,230 135,458,771
-------------- -------------- --------------
Total current liabilities.............. 405,580,262 418,230,512 387,165,664
-------------- -------------- --------------
Long-term debt, net of current portion....... 682,300,947 638,043,771 600,859,660
Capitalized lease obligations, net of current
portion..................................... 5,691,370 3,774,524 3,381,862
Deferred income taxes........................ 49,108,353 42,582,700 42,582,700
Other liabilities............................ 2,173,014 2,374,286 3,096,186
Commitments and Contingencies
Stockholder's Equity:
Common stock, par value $100 per share,
500,000 shares authorized, issued and
outstanding............................... 50,000,000 50,000,000 50,000,000
Additional paid-in capital................. 12,026,436 12,026,436 12,026,436
Retained earnings.......................... 179,666,213 204,882,899 218,271,596
-------------- -------------- --------------
241,692,649 266,909,335 280,298,032
-------------- -------------- --------------
Total Liabilities and Stockholder's
Equity................................ $1,386,546,595 $1,371,915,128 $1,317,384,104
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-27
<PAGE>
HANIEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------------
1991 1992 1993 1993 1994
---------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 5,606,198,504 $ 5,684,888,683 $ 6,016,975,280 $ 3,237,938,862 $ 3,224,344,635
Costs and expenses:
Cost of goods sold......... 4,835,078,213 4,892,604,182 5,167,570,482 2,784,290,579 2,762,698,270
Selling, operating and
administrative expenses... 661,332,632 686,954,018 752,430,781 400,719,857 411,094,534
Interest:
Interest income............ 6,191,346 6,100,801 6,079,193 3,229,956 3,746,665
Interest expense........... (71,520,472) (62,022,838) (56,297,924) (31,150,028) (27,569,099)
---------------- ---------------- ---------------- ---------------- ----------------
Income before income taxes... 44,458,533 49,408,446 46,755,286 25,008,354 26,729,397
Provision for income taxes... 22,890,300 24,490,563 21,538,600 12,337,514 13,340,700
---------------- ---------------- ---------------- ---------------- ----------------
Net income............... $ 21,568,233 $ 24,917,883 $ 25,216,686 $ 12,670,840 $ 13,388,697
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
HANIEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990............ 500,000 $ 50,000,000 $ 6,000,000 $ 131,669,709 $ 187,669,709
Cumulative effect of accounting
change (Note 6).................... -- -- -- 1,510,388 1,510,388
--------- ------------- -------------- -------------- --------------
Balance, December 31, 1990, as
restated............................. 500,000 50,000,000 6,000,000 133,180,097 189,180,097
Net income.......................... -- -- -- 21,568,233 21,568,233
--------- ------------- -------------- -------------- --------------
Balance, December 31, 1991............ 500,000 50,000,000 6,000,000 154,748,330 210,748,330
Net income.......................... -- -- -- 24,917,883 24,917,883
Capital contribution (Note 2)....... -- -- 6,026,436 -- 6,026,436
--------- ------------- -------------- -------------- --------------
Balance, December 31, 1992............ 500,000 50,000,000 12,026,436 179,666,213 241,692,649
Net Income.......................... -- -- -- 25,216,686 25,216,686
--------- ------------- -------------- -------------- --------------
Balance, December 31, 1993............ 500,000 50,000,000 12,026,436 204,882,899 266,909,335
Net income (unaudited).............. -- -- -- 13,388,697 13,388,697
--------- ------------- -------------- -------------- --------------
Balance, June 30, 1994
(unaudited)......................... 500,000 $ 50,000,000 $ 12,026,436 $ 218,271,596 $ 280,298,032
--------- ------------- -------------- -------------- --------------
--------- ------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
HANIEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ----------------------------
1991 1992 1993 1993 1994
-------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 21,568,233 $ 24,917,883 $ 25,216,686 $ 12,670,840 $ 13,388,697
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 46,306,580 46,152,193 50,255,461 26,768,610 26,680,948
Amortization of excess purchase price............ 9,156,576 9,253,793 9,930,338 5,412,126 5,352,524
Amortization of other noncurrent assets.......... 3,613,324 3,482,314 5,003,846 2,428,285 3,066,140
Deferred items................................... (688,696) 2,027,741 (6,324,381) 2,459,212 721,900
Changes in assets and liabilities:
Increase in receivables........................ (575,334) (17,682,429) (17,296,491) (31,660,300) (7,446,790)
Decrease (increase) in inventories............. (33,536,329) (261,128) 25,974,437 18,791,065 43,309,645
Decrease (increase) in other current assets.... 16,932,007 (2,551,500) 5,413,415 (2,520,416) 4,632,649
Increase (decrease) in accounts payable........ 77,406,313 (35,568,099) 22,869,357 (19,043,230) (40,742,706)
Increase (decrease) in other current
liabilities................................... (6,807,629) (7,359,969) 2,594,202 3,450,087 13,905,541
-------------- ------------- -------------- ------------- -------------
Net cash provided by operating activities.... 133,375,045 22,410,799 123,636,870 18,756,279 62,868,548
-------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in long-term investments................... (437,990) 285,414 92,560 48,007 301,955
Proceeds from sale of property and equipment,
net............................................... 24,919,819 3,162,820 3,572,706 396,825 608,104
Capital expenditures............................... (49,333,751) (41,717,059) (55,010,202) (31,483,633) (24,741,628)
Reductions of (additions to) intangible and other
assets............................................ (1,654,937) (11,977,364) (13,111,509) (7,911,559) 1,806,172
-------------- ------------- -------------- ------------- -------------
Net cash used in investing activities........ (26,506,859) (50,246,189) (64,456,445) (38,950,360) (22,025,397)
-------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in direct financing leases................ 437,397 449,513 355,966 188,912 169,770
Repayments of capital lease obligations............ (849,198) (748,314) (1,916,846) (1,620,481) (392,662)
Changes in long-term debt.......................... (107,526,535) 22,371,304 (57,070,485) 23,337,259 (41,411,794
Capital contribution............................... -- 6,026,436 -- -- --
-------------- ------------- -------------- ------------- -------------
Net cash effect of financing activities...... (107,938,336) 28,098,939 (58,631,365) 21,905,690 (41,634,686)
-------------- ------------- -------------- ------------- -------------
Net increase (decrease) in cash.............. (1,070,150) 263,549 549,060 1,711,609 (791,535)
Cash at beginning of period.......................... 3,510,301 2,440,151 2,703,700 2,703,700 3,252,760
-------------- ------------- -------------- ------------- -------------
Cash at end of period................................ $ 2,440,151 $ 2,703,700 $ 3,252,760 $ 4,415,309 $ 2,461,225
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest (net of amounts capitalized)............ $ 70,347,000 $ 59,745,000 $ 58,916,000 $ 32,334,000 $ 26,213,000
Income taxes..................................... 20,243,000 26,523,000 22,537,000 10,887,000 7,865,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
1. ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
Haniel Corporation is a United States subsidiary of Franz Haniel & Cie. GmbH
("Franz Haniel"). Haniel Corporation's principal operations consist of holding
investments in the companies described below. The consolidated financial
statements include the accounts of Haniel Corporation and its wholly owned
subsidiaries, Scrivner, Inc., Hanamerica Energy Corporation and their
subsidiaries, collectively referred to as (the "Company"). All significant
intercompany transactions and balances have been eliminated.
NOTES RECEIVABLE
Notes receivable amounts due beyond one year which total $33,324,000 at
December 31, 1992, $44,747,000 at December 31, 1993, and $55,078,000 at June 30,
1994, are included in current assets, primarily in anticipation of their sale to
banks. The majority of the notes receivable bear interest at prime plus 2% (8%
at December 31, 1993 and 9.25% at June 30, 1994) and are scheduled to mature
over the next five years and thereafter as follows: $16,552,508 in 1994;
$4,748,287 in 1995; $7,401,489 in 1996; $8,795,049 in 1997; $7,468,237 in 1998
and $26,664,942 thereafter.
INVENTORIES
As further discussed in Note 3, wholesale and retail grocery inventories are
priced at the lower of cost or market, with cost being determined by the
last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed primarily on the
straight-line method, based on the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
USEFUL
LIFE IN
YEARS
----------
<S> <C>
Buildings............................................................... 4 - 45
Furniture, fixtures and equipment....................................... 2 - 15
Transportation equipment................................................ 2 - 7
</TABLE>
Leasehold improvements are amortized over the shorter of their useful lives
or terms of their leases.
INTANGIBLE ASSETS
At December 31, 1992 and 1993 and June 30, 1994, unamortized intangible
assets attributable to excess purchase price over net assets acquired were
approximately $352,127,544, $342,502,204 and $337,373,805, respectively, which
are being amortized on a straight-line basis over 10 to 40 years. The remaining
amounts of $41,215,735, $46,083,902 and $44,414,256 as of December 31, 1992 and
1993 and June 30, 1994, respectively, consist of other acquired intangible
assets which are being amortized over 3 to 40 years. Accumulated amortization of
intangible assets was $45,635,636, $57,996,557 and $65,749,961 at December 31,
1992 and 1993 and June 30, 1994, respectively.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," in 1993 and elected to restate its prior
years' financial statements as discussed in Note 6. Deferred income taxes
reflect the estimated future tax effects of differences between financial
statement and tax bases of assets and liabilities at each year-end.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of significant
financial instruments are discussed in the various footnotes.
F-31
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
1. ACCOUNTING POLICIES: (CONTINUED)
POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The Company
will adopt SFAS No. 112 in 1994. The annual postemployment benefit expense
computed in accordance with the new standard will not have a material effect on
the Company's financial position or future results of operations.
INSURANCE
The Company self-insures the first $125,000 of medical coverage provided
certain of its employees, the physical damage coverage on its transportation
equipment and the first $350,000 of its workers compensation, general, and auto
liability coverage.
A provision for self-insured claims is recorded when sufficient information
is available to reasonably estimate the amount of the loss.
CAPITALIZATION OF INTEREST
Interest attributed to funds used to finance major capital expenditures is
capitalized as an additional cost of the related assets. Capitalization of
interest ceases when the related assets are substantially complete and ready for
their intended use.
2. POOLING OF INTERESTS:
Effective June 6, 1992, all of the outstanding stock of Food Holdings, Inc.
was acquired by Franz Haniel for $8,084,046 and contributed to the Company. The
purchase price over the net tangible assets was $6,026,436. Food Holdings'
primary asset is its 50% common stock interest in Gateway Foods, Inc. through a
holding company in which Scrivner holds the remaining 50% common stock interest.
The contribution of Food Holdings' common stock has been accounted for as a
pooling of interests and, accordingly, the financial statements have been
restated to include the accounts and operations of Food Holdings for all periods
beginning September 1989, the date Scrivner and Food Holdings acquired Gateway
Foods.
3. INVENTORIES:
All inventories are valued at the lower of cost or market. Costs are
determined through use of the LIFO and FIFO methods as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1992 1993 1994
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIFO................................................. $ 406,139 $ 399,657 $ 360,493
FIFO................................................. 35,395 15,903 11,757
--------- --------- -----------
$ 441,534 $ 415,560 $ 372,250
--------- --------- -----------
--------- --------- -----------
</TABLE>
Inventories on a FIFO basis would have been stated higher by approximately
$53,781,530 at December 31, 1992, $55,028,898 at December 31, 1993 and
$55,232,785 at June 30, 1994. Accordingly, reported net income would have
increased by approximately $356,000 and $121,000 for the six months ended June
30, 1993 and 1994, respectively, and by approximately $757,000 and $662,000 for
the years ended December 31, 1992 and 1993, respectively.
F-32
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
4. DEBT OBLIGATIONS:
NOTES PAYABLE
The Company has informal agreements with various banks from which it may
borrow up to $385,000,000 (subject to formal approval by the banks).
LONG-TERM DEBT
Long-term debt at December 31, 1992 and 1993 and June 30, 1994, consisted of
the following (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1992 1993 1994
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured notes, at rates approximating prime rate
minus 2%, to 12% due through various dates to
2003................................................ $ 5,298 $ 3,594 $ 2,951
Real estate mortgage notes, at fixed rates ranging
from 4% to 10.5% and variable rates at 60% of prime
rate, due serially through various dates to 2003.... 10,078 9,758 6,248
Amounts covered under revolving credit agreements.... 283,000 237,000 199,750
Amounts payable under Senior Term Notes.............. 166,000 157,000 157,000
Amounts payable under Senior Subordinated Notes...... 150,000 150,000 150,000
Amounts payable under Senior Notes................... 50,000 50,000 50,000
Amounts payable under Subordinated Notes............. 50,000 50,000 50,000
Other................................................ 39 39 39
--------- --------- -----------
714,415 657,391 615,988
Less-Current portion................................. 32,114 19,347 15,129
--------- --------- -----------
Long-term debt, net of current portion............. $ 682,301 $ 638,044 $ 600,859
--------- --------- -----------
--------- --------- -----------
</TABLE>
Scrivner's $180,000,000 revolving credit agreement and Gateway Foods'
$150,000,000 revolving credit agreement and $65,000,000 Senior Term loan were
refinanced with a five-year $430,000,000 revolving credit agreement dated
November 19, 1993.
Under terms of its revolving credit agreement, the Company may borrow up to
the lower of $430,000,000 or a Borrowing Base amount equal to a percentage of
the Company's eligible receivables and inventories, as defined in the agreement,
through November 19, 1998, at principally the prime interest rate, adjusted
certificate of deposit rate or a rate based on the Eurodollar London Interbank
interest rate ("LIBOR"). The Company is required to pay fees of 3/8 of 1% per
annum on the unborrowed portion. There are no requirements for maintaining
compensating balances. At December 31, 1992 and 1993 and June 30, 1994, the
Company had borrowings covered under its revolving credit agreements of
$283,000,000, $237,000,000 and $199,750,000, respectively.
The Company's $157,000,000 of Senior Term Notes at December 31, 1993 and
June 30, 1994 consist of $92,000,000 which bears interest at 10% and $65,000,000
which bears interest at 10.6%. The $92,000,000 Senior Term Note is payable in
annual installments of $8,000,000 in 1994 and $12,000,000 each year thereafter
through 2001. The $65,000,000 note is payable in annual installments of
$5,000,000 through 1996 and $10,000,000 each year thereafter through 2001.
The $150,000,000 Senior Subordinated Notes bear interest at 12.86%. The
notes are payable in annual installments of $30,000,000 beginning September 15,
1997 and each year thereafter through 2001.
F-33
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
4. DEBT OBLIGATIONS: (CONTINUED)
As of December 31, 1991, the Company had outstanding debt of $48,595,048 to
Franz Haniel and Haniel Finance B.V., a subsidiary of Franz Haniel. This debt
consisted of short-term borrowings bearing interest at various rates based on
LIBOR. In 1992, the weighted average interest rate on these borrowings was
approximately 4.85%. The Company incurred interest on its debt to Franz Haniel
and Haniel Finance B.V. of approximately $1,672,000 in 1992 and $3,463,000 in
1991.
In September 1992, Haniel borrowed $100,000,000 from two banks. The proceeds
of these loans were used to retire all notes payable to Haniel Finance B.V. and
Franz Haniel and Food Holdings' outstanding debt and accrued interest of
$43,020,841. The new debt consists of a $50,000,000 subordinated note payable
bearing interest at LIBOR plus 1 1/8% and $50,000,000 senior note payable
bearing interest at LIBOR plus 3/8 of 1%. The subordinated note matures in 1999
while the senior note matures in 1998. No principal payments are due until these
maturity dates.
The revolving credit agreement and the note agreements impose, among other
things, certain restrictions on the payment of cash dividends and provide that
neither the Company nor any subsidiary, without the consent of the holders of
the notes, shall (a) pledge any of its assets, except as provided in the loan
agreements, (b) enter into any merger or consolidation proceedings or dissolve,
sell, dispose of or lease all or substantially all of its assets or (c)
guarantee debt obligations of any other corporation or individual, except as
provided. Under the terms of these agreements, the Company has available
$5,000,000, plus 50% of net income recognized after December 31, 1993, for the
payment of cash dividends.
The real estate mortgage notes are collateralized by property and equipment
(primarily land, buildings and equipment) with a net book value of approximately
$9,238,000 and $8,617,000 at December 31, 1993 and June 30, 1994, respectively.
Payments on long-term debt as of December 31, 1993, for the next five years
are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1994...................................................... $ 19,347
1995...................................................... 18,819
1996...................................................... 18,814
1997...................................................... 53,135
1998...................................................... 337,770
</TABLE>
At December 31, 1993 and June 30, 1994, the Company has interest rate cap
agreements on $170,000,000, which limit the interest rate the Company would pay
on its floating rate debt, from 7.5% to 11.5%.
The Company also enters into interest rate swap and forward rate agreements
in order to hedge the impact of future interest rate increases. At December 31,
1993 and June 30, 1994, the Company had an outstanding forward rate agreement of
$50,000,000, which matures in July 1994. There were no interest rate swap
agreements outstanding at December 31, 1993 or June 30, 1994. The differential
paid on the interest rate swap and forward rate agreements is recognized as
interest expense.
The fair value of long-term debt, interest rate cap and forward rate
agreements as of December 31, 1993, was determined using valuation techniques
that considered cash flows discounted at current market rates for similar types
of borrowing arrangements. At December 31, 1992 and 1993, the fair value of
debt, interest rate cap and forward rate agreements exceeded the carrying amount
by approximately $28,116,000 and $43,993,000, respectively.
F-34
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
5. BENEFIT PLANS:
The Company and its subsidiaries sponsor or contribute to various
contributory and noncontributory defined benefit pension plans and
noncontributory profit sharing plans. These plans provide for certain benefits
upon retirement or termination for all full-time employees not covered by
union-sponsored, collectively-bargained multiemployer pension plans. The Company
also has a nonqualified supplemental retirement plan for selected management
employees. Annual expense for the above-mentioned benefit plans is as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Pension and supplemental plans................................................... $ 676 $ 257 $ 215
Profit sharing plans............................................................. 6,333 7,097 7,053
Multiemployer plans.............................................................. 9,000 9,066 9,732
--------- --------- ---------
Total.......................................................................... $ 16,009 $ 16,420 $ 17,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The pension plan benefits are based on years of service and a percentage of
the participant's compensation during years of employment. The Company makes
annual contributions to the plans that comply with the minimum funding
provisions of the Employee Retirement Income Security Act. Such contributions
are intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The following table sets forth the Company's defined benefit pension and
supplemental plans' funded status and amounts recognized in the Company's
financial statements (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1992 DECEMBER 31, 1993
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested........................................ $ 13,507 $ 130 $ 15,025 $ --
Total......................................... 13,755 3,239 15,247 2,685
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Projected benefit obligations................... 14,646 3,025 16,469 2,557
Plan assets at fair value....................... 17,543 455 17,346 737
------------ ------------ ------------ ------------
Plan assets in excess of or (less than)
projected benefit obligations.................. 2,897 (2,570) 877 (1,820)
Unrecognized net loss (gain).................... 235 127 2,031 (355)
Unrecognized prior service cost................. (52) 1,622 (47) 1,497
Unrecognized net asset.......................... (2,013) -- (1,738) --
------------ ------------ ------------ ------------
Pension asset (liability)....................... $ 1,067 $ (821) $ 1,123 $ (678)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Net pension expense included the following components:
Service cost-benefits earned during the year.......................... $ 1,160 $ 796 $ 605
Interest expense on projected benefit obligation...................... 1,738 1,378 1,499
Actual return on plan assets.......................................... (1,919) (353) (603)
Net amortization and deferral......................................... (303) (1,564) (1,286)
--------- --------- ---------
Net periodic pension expense............................................ $ 676 $ 257 $ 215
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-35
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
5. BENEFIT PLANS: (CONTINUED)
The weighted-average discount rates and rates of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations at December 31, 1993, were 8.25% to 9% and 5%,
respectively. The expected long-term rates of return on assets at December 31,
1993, were 8.75% to 9%. The Company computes pension expense using the projected
unit credit actuarial cost method.
The profit sharing plans maintained by the Company are for employees who
meet certain types of employment and length of service requirements.
Contributions and costs of these profit sharing plans are determined at the
discretion of the Board of Directors. However, the contributions to the profit
sharing plans shall not exceed the maximum amount deductible for Federal income
tax purposes.
For union-sponsored, multiemployer plans, contributions are made in
accordance with negotiated contracts.
The Company provides certain health care and life insurance benefits to
eligible retired employees covered under various group plans. Benefits,
eligibility requirements and cost-sharing provisions for employees vary by group
plan and/or bargaining unit. Generally, the plans pay a stated percentage of
most medical expenses reduced for any deductible and payments made by government
programs and other group coverage. Several of the group plans require retiree
contributions and the majority of the group plan's eligibility for retiree
benefits are frozen. The Company does not pre-fund these benefits and has the
right to modify or terminate certain of these plans in the future.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" as of the beginning of 1993. This new standard
requires that the expected cost of these postretirement benefits must be charged
to expense during the years that the employees render service. The Company has
elected to amortize the unfunded obligations that were measured as of the
beginning of 1993, over a period of 20 years. The effect of this change in
accounting was to decrease 1993 pre-tax income by $378,000. Prior to 1993, the
Company recognized postretirement health care and life insurance costs in the
year that the benefits were paid. Postretirement health care and life insurance
costs charged to expense in 1991 and 1992 were $1,296,000 and $1,267,000,
respectively.
F-36
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
5. BENEFIT PLANS: (CONTINUED)
The following table reconciles the plans' funded status to the accrued
postretirement health care and life insurance cost liability as reflected on the
balance sheet as of December 31, 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1993
---------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.............................................................................................. $ (6,627)
Other fully eligible participants..................................................................... (350)
Other active participants............................................................................. (1,103)
---------
(8,080)
Unrecognized actuarial loss............................................................................. 553
Unrecognized transition obligation...................................................................... 7,149
---------
Accrued postretirement health care cost liability................................................... $ (378)
---------
---------
Net postretirement health care cost for 1993 included the following components:
Service cost -- benefits attributed to service during the period...................................... $ 80
Interest cost on accumulated postretirement benefit obligation........................................ 595
Amortization of transition obligation over 20 years................................................... 376
Net amortization and deferral......................................................................... --
---------
Net postretirement health cost...................................................................... $ 1,051
---------
---------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.25%. A 12.5% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1993; the rate was assumed to
decrease gradually to 6% in year 2006 and remain at that level thereafter. A 1%
increase in the assumed health care cost trend rates would increase the
accumulated postretirement benefit obligation as of December 31, 1993 by
approximately $531,000, and the total of the service and interest cost
components of net postretirement health care cost for the year then ended by
approximately $72,000.
6. PROVISION FOR INCOME TAXES:
The Company adopted SFAS No. 109, "Accounting for Income Taxes," in 1993,
and has elected to apply the provisions retroactively beginning with its year
ended December 31, 1983. It was not practical to restate prior to 1983. SFAS No.
109 utilizes the liability method and deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws. Prior to the implementation of SFAS No. 109, the Company accounted for
income taxes using Accounting Principles Board Opinion No. 11.
As a result of this change, retained earnings at December 31, 1990,
increased by $1,510,000, the cumulative effect of the change in the method of
accounting for income taxes. The effect of adopting SFAS No. 109 was not
material to the Company's statements of income for the years ended 1991, 1992
and 1993, other than the valuation allowance adjustment discussed below.
The Company reduced its valuation allowance by $3,187,000 for the year ended
December 31, 1993, as a result of the recognition of certain net operating loss
carryforwards for financial reporting purposes. The Company's ability to obtain
future benefit of its net operating loss carryforwards is attributable to the
restructuring of subsidiaries implemented in 1993, as discussed in Note 2.
F-37
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
6. PROVISION FOR INCOME TAXES: (CONTINUED)
Provision for income taxes has been made as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.............................................................. $ 16,957 $ 15,104 $ 16,086
Deferred............................................................. 1,650 4,703 3,190
--------- --------- ---------
18,607 19,807 19,276
State (current and deferred)........................................... 4,283 4,684 5,450
--------- --------- ---------
22,890 24,491 24,726
Benefit of operating loss carryforward................................. -- -- (3,187)
--------- --------- ---------
$ 22,890 $ 24,491 $ 21,539
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Income taxes at statutory rate (35% in 1993, 34% in 1992 and 1991)..... $ 15,116 $ 16,799 $ 16,364
Amortization of excess purchase price.................................. 3,028 3,036 3,541
Benefit of operating loss carryforward................................. -- -- (3,187)
State income taxes, net of Federal benefit............................. 2,668 2,965 2,805
Other, net............................................................. 2,078 1,691 2,016
--------- --------- ---------
$ 22,890 $ 24,491 $ 21,539
--------- --------- ---------
--------- --------- ---------
</TABLE>
The 1% increase in the Federal statutory tax rate increased the Company's
1993 provision for income taxes $1,540,000. This consisted of a $468,000
increase in the current tax provision and a $1,072,000 increase in the deferred
tax provision as a result of adjusting the deferred tax asset and liability
accounts recorded in the Company's balance sheets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following table
includes $1,780,000 of net current deferred tax liabilities, which are included
in other current
F-38
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
6. PROVISION FOR INCOME TAXES: (CONTINUED)
liabilities at December 31, 1993 and $4,965,000 of net deferred tax assets,
included in other current assets at December 31, 1992, in the consolidated
balance sheets. The following is a summary of the significant components of the
Company's deferred tax assets and liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards, expiring 2003 to 2008................................... $ 15,566 $ 7,501
Provision for obligations and contingencies to be settled in future periods............... 22,524 20,394
Other..................................................................................... 3,114 6,765
--------- ---------
Total deferred tax assets............................................................... 41,204 34,660
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................................................. 56,441 56,947
Inventories............................................................................... 14,354 14,354
Other..................................................................................... 6,585 7,721
--------- ---------
Total deferred tax liabilities.......................................................... 77,380 79,022
--------- ---------
Deferred tax valuation allowance............................................................ 7,967 --
--------- ---------
Net deferred tax liability.............................................................. $ 44,143 $ 44,362
--------- ---------
--------- ---------
</TABLE>
7. LEASES:
The Company leases certain of its operating facilities under terms ranging
up to twenty-five years. In addition, the Company leases certain equipment used
in its operations under terms ranging up to ten years.
The Company also leases certain facilities which it in turn subleases to
some of its independent retail store operators. Some of these agreements contain
provisions calling for additional rentals based on sales. Amounts attributable
to capitalized subleases have been included in direct financing leases in the
accompanying balance sheets.
The following is a summary of property and equipment under leases that have
been capitalized and included in the accompanying balance sheets (in thousands
of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Land and buildings................................................................. $ 5,224 $ 3,688
Less-Accumulated depreciation.................................................... (2,426) (2,170)
--------- ---------
Net property under capital leases.................................................. $ 2,798 $ 1,518
--------- ---------
--------- ---------
</TABLE>
F-39
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
7. LEASES: (CONTINUED)
The following represents the minimum lease payments remaining at December
31, 1993, under the capitalized leases and the minimum sublease rentals to be
received under the direct financing leases, covering certain facilities which
are sublet to retail customers (in thousands of dollars):
<TABLE>
<CAPTION>
TOTAL DIRECT
CAPITAL FINANCING
LEASES SUBLEASES NET
------------ ----------- ---------
<S> <C> <C> <C>
1994.......................................................................... $ 1,330 $ (593) $ 737
1995.......................................................................... 1,202 (535) 667
1996.......................................................................... 1,060 (482) 578
1997.......................................................................... 777 (360) 417
1998.......................................................................... 732 (350) 382
Later years................................................................... 3,294 (1,859) 1,435
------------ ----------- ---------
Total minimum lease payments.............................................. 8,395 (4,179) $ 4,216
---------
---------
Less-Executory costs........................................................ (360) --
Less-Imputed interest (6% to 13.37%)........................................ (3,558) 1,574
------------ -----------
Present value of minimum lease payments....................................... 4,477 (2,605)
Less-Current maturities..................................................... (702) 325
------------ -----------
Long-term obligations and receivables..................................... $ 3,775 $ (2,280)
------------ -----------
------------ -----------
</TABLE>
Total rental expense for all operating (noncapitalized) leases amounted to
(in thousands of dollars):
<TABLE>
<CAPTION>
LEASE RENTALS 1991 1992 1993
- -------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Minimum............................................................. $ 63,947 $ 76,404 $ 84,133
Contingent.......................................................... 4,650 5,012 3,188
Less-Sublease income.............................................. (36,728) (39,344) (38,737)
---------- ---------- ----------
$ 31,869 $ 42,072 $ 48,584
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The future minimum lease commitments as of December 31, 1993, for all
noncancelable operating leases are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SUBLEASE
EXPENSE INCOME NET
---------- ----------- ----------
<S> <C> <C> <C>
1994.............................................................. $ 85,198 $ (35,897) $ 49,301
1995.............................................................. 81,229 (33,648) 47,581
1996.............................................................. 76,078 (28,004) 48,074
1997.............................................................. 69,798 (23,807) 45,991
1998.............................................................. 63,089 (17,638) 45,451
Later years....................................................... 505,346 (53,435) 451,911
---------- ----------- ----------
$ 880,738 $ (192,429) $ 688,309
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
Most of the real estate and retail store leases have renewal options of up
to twenty-five years.
8. COMMITMENTS AND CONTINGENCIES:
During the year ended December 31, 1992 and 1993 and the six months ended
June 30, 1994, the Company sold $40,591,000, $51,036,000 and $12,138,000,
respectively, of its notes receivable to banks at cost.
F-40
<PAGE>
HANIEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1993 AND 1994 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company is contingently liable, up to approximately $13,630,000 and
$12,620,764, for any future losses experienced by the banks in connection with
sold notes receivable at December 31, 1993 and June 30, 1994, respectively.
The Company has guaranteed the payment of notes and leases made by certain
retail store operators to various banks and lessors. These contingent
liabilities totaled approximately $3,301,000 and $4,160,000 at December 31, 1993
and June 30, 1994. The Company derives interest income as a guarantor of the
notes and leases.
The Internal Revenue Service (the "IRS") has examined the Company's Federal
income tax returns for the years 1983 through 1987, and has issued notices of
proposed tax deficiencies for those years. The Company has formally protested
the IRS proposed deficiencies, and the entire matter is now being reviewed by
the IRS Appeals Office. The significant issues have been tentatively agreed to
for settlement, subject to final approval by the IRS. The Company has accrued
reserves sufficient to provide for the proposed settlement amounts. The Company
believes that the ultimate resolution of these matters will not have a material
adverse effect on its financial position or future results of operations.
F-41
<PAGE>
[PICTURES TO COME]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SUBSIDIARY GUARANTORS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE FIXED RATE NOTES OR THE FLOATING RATE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY OR THE SUBSIDIARY GUARANTORS SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 3
Incorporation of Certain Documents by
Reference..................................... 3
Prospectus Summary............................. 4
Investment Considerations...................... 13
The Company.................................... 18
Use of Proceeds................................ 18
Capitalization................................. 19
Pro Forma Financial Information................ 20
Selected Financial Information................. 23
Management's Discussion and Analysis........... 25
Business....................................... 36
Management..................................... 46
The Credit Agreement........................... 48
Certain Other Obligations...................... 49
Description of the Notes....................... 50
Underwriting................................... 73
Legal Opinions................................. 74
Experts........................................ 74
Index to Financial Statements.................. F-1
</TABLE>
$500,000,000
[LOGO]
$300,000,000 10 5/8% SENIOR NOTES
DUE 2001
$200,000,000 FLOATING RATE
SENIOR NOTES DUE 2001
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
J.P. MORGAN SECURITIES INC.
DECEMBER 8, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX A
TABLE OF ADDITIONAL REGISTRANT
This filing contains an additional co-registrant as set forth below.
<TABLE>
<CAPTION>
EXACT NAME OF SUBSIDIARY GUARANTOR JURISDICTION I.R.S. EMPLOYER
REGISTRANTS AS SPECIFIED IN OF INCORPORATION IDENTIFICATION
THEIR RESPECTIVE CHARTERS OR ORGANIZATION NO. CIK FILE NO.
- ------------------------------------------------------------- ----------------- --------------- -------- --------
<S> <C> <C> <C> <C>
Consumers Markets, Inc....................................... Missouri 44-0559460 0000932744 033-55369-100
</TABLE>
<PAGE>
APPENDIX B
DESCRIPTION OF PRINTED MATERIAL
Page 2 Map of United States showing location of company operated
distribution centers, retail chains and headquarters.
Letterhead "Fleming Companies, Inc." displayed above map.
Inside Back Color photographs of three distribution centers and three
Prospectus retail stores, each with a caption identifying the location
Cover appearing below the photograph.
