FLEMING SELLS BONDS TO FINANCE EXPANSION

MARTIN SCHNEIDER

DALLAS -- Fleming here said last week it is going to the bond market to raise the money it needs to grow. At the same time, the company was careful to reassure investors its recent reorganization continues to be on track.

Fleming said it has agreed to sell a $150 million principal amount of 10-5/8% Senior Subordinated notes as an add-on to the company's existing $250 million Senior Subordinated Notes due 2007.

Fleming also reaffirmed that its restructuring efforts in its distribution and retail businesses are nearly complete and growing steadily.

The company said it expects net proceeds from the sale of approximately $146 million, which will be used to repay amounts outstanding under the company's revolving credit facility.

Fleming said it expects to close the transaction on or about today.

Neal Rider, executive vice president and chief financial officer, said, "This transaction is significant in a number of ways. It demonstrates that even in challenging economic times, the American capital markets system is vibrant and supportive of select credit issues. Additionally, the transaction increases the company's capacity to pursue growth through new customers and select acquisitions."

Ted Bernstein, managing director at Dresdner Kleinwort Wasserstein-Grantchester, New York, said, "I wonder what they need the money for; perhaps an acquisition, which could be a good or bad thing. It just concerns me that they are in a hurry to pay down the revolving credit facility."

Fleming told analysts through a conference sponsored by Deutsche Banc Alex. Brown, New York, earlier this month that the company's restructuring efforts on both the distribution and retail sides are proving fruitful.

Rider told conference participants that the company has fully integrated the business from its contract with Kmart, Troy, Mich., and has also made key acquisitions that will allow the company to better pursue business outside of traditional supermarkets.

"We have worked to make the supply chain relevant to where customers want to shop," Rider said. Rider went on to note that in 1998, supermarket business accounted for 73% of revenue, while in 2000 that number dropped to 42%.

Rider also noted that Fleming was the No. 1 distributor to Hispanic markets across the nation, a sector the company feels is an ongoing opportunity for growth.

Net sales increased 16% over the last year, and Rider noted that the new business is split between Kmart and other new businesses picked up in the past year.

"Size and scale does matter," Rider said, attributing the increased sales to luring new customers with the volume business associated with the multibillion dollar Kmart deal. "As we get larger, so do our efficiencies.

"In 1998, each distribution center averaged $389 million in annual volume, as compared to an average of $640 million in 2001. That's quite an improvement," Rider said.

Rider also pointed out that Fleming has achieved massive efficiencies as part of its restructuring in recent years. Rider said that distribution expenses as a percentage of sales is currently 3.87%, down from nearly 5% in 1998. And average sales per distribution center employee rose from $1.22 million in 1998 to $1.62 million in 2001.

Bernstein said, "Fleming should perform well going forward. They seem to be executing their plan exactly as they predicted. We're still a couple quarters away from seeing just how the Kmart business will affect Fleming, but more important, we'll be seeing how Kmart weathers the uncertain economy and how that may affect Fleming, since in a way they are joined at the hip now."

Bernstein did note that he thinks Fleming is still a good defensive business, even if the Kmart alliance makes them a little more vulnerable to a volatile market.

Rider also said that the company has seen greater margins through the completion of its retail restructuring.

"Our retail operation fits in perfectly with our distribution business: high volume and low cost. We are dedicated to focusing exclusively on value formats," Rider said.

Rider noted that Fleming will add up to 75 more price impact stores in the next two years. "However, it will all be discretionary growth. We will be looking only for the right opportunities. Only 20 to 25 of these stores will be from the ground up, the rest will be from acquisition or converting other stores to the format," Rider said.

Matt Hildrith, senior vice president of finance, said that other factors will contribute to better performance and earnings growth for the company in the future, including the fact that restructuring charges are substantially complete, and that all litigation against the company has been settled.