SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 4, 1998
RICHFOOD HOLDINGS, INC.
(Exact name of registrant as specified in charter)
Virginia 0-16900 54-1438602
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
4860 Cox Road, Suite 300
Glen Allen, Virginia 23060
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 915-6000
--------------
Not Applicable
- --------------------------------------------------------------------------------
(former name or former address if changed since last report)
Page 1 of 28 pages. Exhibit
Index appears on Page 3.
INFORMATION TO BE INCLUDED IN REPORT
Item 2. Acquisition or Disposition of Assets.
On March 4, 1998, FF Acquisition, L.L.C., a wholly-owned subsidiary of
the Registrant ("FF Acquisition"), acquired substantially all of the assets and
assumed certain liabilities of Farm Fresh, Inc., a privately-held supermarket
chain headquartered in Norfolk, Virginia ("Farm Fresh"). The acquisition was
effected through a "prepackaged" Chapter 11 bankruptcy proceeding pursuant to a
Joint Plan of Reorganization (the "Plan"), which was filed by Farm Fresh and FF
Holdings Corporation, Farm Fresh's parent corporation, in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on
January 7, 1998. The Plan was confirmed by the Bankruptcy Court pursuant to an
Order Approving Disclosure Statement, Confirming Debtors' Joint Plan of
Reorganization and Approving Asset Purchase Agreement entered on February 20,
1998.
In connection with the acquisition, FF Acquisition acquired
substantially all of Farm Fresh's owned real property, leases, equipment,
inventory, supplies, contracts, accounts receivable, permits, intangibles and
rights under insurance policies (collectively, the "Assets") and assumed certain
capital lease and other liabilities associated with the Assets. FF Acquisition
did not assume Farm Fresh's indebtedness for borrowed money or lease obligations
for previously closed stores (with the sole exception of one currently closed
store to be reopened) or stores to be closed in connection with the acquisition.
At the time of the acquisition, Farm Fresh was the third largest customer of the
Registrant's Wholesale Division.
The purchase price, which was determined in arms-length negotiations,
consisted of approximately $221.7 million cash, plus $29.5 million in assumed
capital leases, plus 1.5 million warrants for the purchase of the Registrant's
common stock, without par value, at an exercise price equal to $25 per share
with a term of five years following issuance. The amount of cash consideration
is subject to adjustment based on a reconciliation of Farm Fresh's working
capital at the time of closing. The purchase price was financed primarily with
cash on hand and the proceeds of new revolving credit facilities (the "Credit
Facilities") with First Union National Bank, as administrative agent and lender,
and a syndicate of banks. The Credit Facilities permit borrowings of up to an
aggregate $350 million at interest rates that generally will not exceed the
LIBOR rate plus 0.35% on an all-in drawn basis. The Credit Facilities replace
the Registrant's existing committed revolving lines of credit.
Farm Fresh will initially operate 45 supermarkets in the Hampton Roads,
metropolitan Richmond and Shenandoah Valley areas of Virginia. Management
expects to initially operate the acquired assets in substantially the same
manner as they had been operated by Farm Fresh and intends to increase sales by,
among other things, remodeling and upgrading existing stores and opening new
stores. Management also expects to improve Farm Fresh's competitive position in
the Hampton Roads market by enhancing and reinforcing Farm Fresh's reputation
for providing higher service levels, product freshness and variety.
Additional information with respect to the transaction described herein
is set forth in the exhibits hereto, which are incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
a) Financial Statements of Business Acquired
Audited Historical Financial Statements of Farm Fresh, Inc.:
Independent Auditors' Report
Consolidated Balance Sheets as of December 28, 1996 and January 3,
1998
Consolidated Statements of Loss for the years ended December 28,
1996 and January 3, 1998
Consolidated Statements of Stockholder's Deficit for the years
ended December 28, 1996 and January 3, 1998
Consolidated Statements of Cash Flows for the years ended December
28, 1996 and January 3, 1998
2
Notes to Consolidated Financial Statements
b) Pro Forma Financial Information
The Registrant has determined that it is impractical to file the
pro forma financial information concurrently with this Form 8-K.
The Registrant will file such pro forma financial information as
soon as practicable, but in any event not later than May 18, 1998.
c) Exhibits
Number Exhibit
------ -------
2.1 Asset Purchase Agreement, dated as of November 26,
1997, by and among Farm Fresh, Inc., Richfood
Holdings, Inc. and FF Acquisition, L.L.C.
(incorporated herein by reference to Exhibit 2.1
to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended October 18, 1997).
2.2 Letter Agreement, dated as of March 4, 1998, by
and among Farm Fresh, Inc., Richfood Holdings,
Inc. and FF Acquisition, L.L.C.
10.1 Credit Agreement, dated as of February 27, 1998,
by and among Richfood Holdings, Inc., First Union
National Bank, as administrative agent, Crestar
Bank, as syndication agent, and Suntrust Bank,
Atlanta, as documentation agent.
10.2 Credit Agreement, dated as of February 27, 1998,
by and among Richfood Holdings, Inc., First Union
National Bank, as administrative agent, Crestar
Bank, as syndication agent, and Suntrust Bank,
Atlanta, as documentation agent.
23.1 Consent of KPMG Peat Marwick LLP.
3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF FARM FRESH, INC.
Page
----
Independent Auditors' Report 5
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 28, 1996
and January 3, 1998 6
Consolidated Statements of Loss for the years ended December 28, 1996 and
January 3, 1998 8
Consolidated Statements of Stockholder's Deficit for the years ended
December 28, 1996 and January 3, 1998 9
Consolidated Statements of Cash Flows for the years ended December 28, 1996
and January 3, 1998 10
Notes to Consolidated Financial Statements 12
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Farm Fresh, Inc.:
We have audited the accompanying consolidated balance sheets of Farm Fresh, Inc.
and subsidiaries as of December 28, 1996 and January 3, 1998, and the related
consolidated statements of loss, stockholder's deficit and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Farm Fresh, Inc. and
subsidiaries as of December 28, 1996 and January 3, 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Farm Fresh, Inc. will continue as a going concern which contemplates
continuity of its operations, realization of its assets and payment of its
liabilities in the ordinary course of business. As discussed in note 1 to the
consolidated financial statements, on January 7, 1998, Farm Fresh, Inc. filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code and submitted a plan of reorganization to the Bankruptcy Court. The
Bankruptcy filing, Farm Fresh Inc.'s leveraged financial structure and its
recurring net losses resulting in a stockholder's deficit raise substantial
doubt about Farm Fresh, Inc.'s ability to continue as a going concern. As a
result of the reorganization proceedings, Farm Fresh, Inc. may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the accompanying consolidated financial statements. Further,
a plan of reorganization, as finally approved by the Bankruptcy Court, could
materially change the amounts recorded. The accompanying consolidated financial
statements do not reflect any adjustments that might be necessary to the
carrying value of assets and the amounts and classification of liabilities or
stockholder's deficit as a consequence of the bankruptcy proceedings.
On February 20, 1998, the Bankruptcy Court entered an order confirming the plan
of reorganization which includes an agreement to sell substantially all of the
operating assets of Farm Fresh, Inc. The order confirming the plan of
reorganization will become effective on March 4, 1998 if no challenges to the
order are filed. (see note 1)
KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 17, 1998, except as to note 1,
which is as of February 20, 1998
5
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, January 3,
1996 1998
-------------- -----------
ASSETS (notes 1 and 7)
Current assets:
Cash $ 847,665 $ 642,541
Accounts receivable, net of allowance for doubtful
accounts of $1,003,038 at December 28, 1996 and
$1,036,249 at January 3, 1998 14,792,965 14,881,913
Merchandise inventories, net
Assuming the first-in, first-out method 54,164,510 47,636,275
Less adjustment to the last-in, first-out method 3,355,394 4,004,031
-------------- -----------
50,809,116 43,632,244
-------------- -----------
Prepaid expenses and other current assets 1,355,115 1,306,536
-------------- -----------
Total current assets 67,804,861 60,463,234
-------------- -----------
Assets held for sale 9,998,102 3,671,304
Property, plant and equipment (notes 5, 6 and 13):
Land 8,727,365 10,111,014
Buildings 62,675,865 69,354,307
Leasehold improvements 35,955,672 35,414,607
Fixtures and equipment 87,093,915 89,119,457
Transportation equipment 608,037 549,257
Construction in progress 894,515 -
-------------- ----------
195,955,369 204,548,642
Less accumulated depreciation and amortization 91,778,403 103,811,277
-------------- ------------
Net property, plant and equipment 104,176,966 100,737,365
-------------- ------------
Favorable lease rights, net of accumulated amortization
of $7,283,859 at December 28, 1996 and $7,575,145 at
January 3, 1998 3,540,441 2,923,088
Goodwill, net of accumulated amortization of $2,348,851
at December 28, 1996 and $3,621,943 at January 3, 1998 7,227,683 5,954,591
Deferred financing costs, net of accumulated amortization
of $6,301,559 at December 28, 1996 and $8,043,707 at
January 3, 1998 (note 9) 5,785,031 3,918,802
Other, net (note 13) 175,677 997,217
-------------- -----------
$ 198,708,761 $ 178,665,601
============= ============
(continued)
6
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 28, January 3,
1996 1998
-------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT (note 1)
Current liabilities:
Current installments of notes payable (notes 1 and 6) $ 801,467 $ 18,459
Current installments of obligations under capital
leases (notes 5 and 13) 3,040,132 3,368,413
Trade accounts payable 36,149,820 22,683,457
Accrued expenses (note 4) 24,424,898 38,169,161
Accrued costs relating to closed stores,
current portion (note 3) 1,901,305 1,565,424
Debt in default:
Revolving credit facility (notes 1 and 7) - 25,009,566
Notes payable (notes 1 and 6) - 688,463
12.25% senior notes (notes 1 and 8) - 165,000,000
12.25% senior notes, Series A (notes 1 and 8) - 36,780,034
Convertible subordinated debentures (notes 1 and 9) - 4,279,374
-------------- -----------
Total current liabilities 66,317,622 297,562,351
-------------- -------------
Long-term debt, excluding current installments and debt in default:
Notes payable (note 6) 919,698 129,971
Obligations under capital leases (notes 5 and 13) 33,958,653 35,727,082
Revolving credit facility (notes 1 and 7) 24,289,957 -
12.25% senior notes (notes 1 and 8) 165,000,000 -
12.25% senior notes, Series A (notes 1 and 8) 37,074,410 -
Convertible subordinated debentures (notes 1 and 9) 4,380,243 -
-------------- -----------
Total long-term debt, excluding current installments and
debt in default 265,622,961 35,857,053
-------------- -----------
Accrued costs relating to closed stores, excluding current portion (note 3) 7,470,884 6,110,356
Deferred credits and other liabilities (note 15) 3,424,988 2,342,747
-------------- -----------
Total liabilities 342,836,455 341,872,507
-------------- -------------
Stockholder's deficit (notes 7, 8 and 10):
Common stock; $.01 par value; authorized 200 shares,
issued 10 shares - -
Additional paid-in capital 29,423,528 29,381,731
Accumulated deficit (172,442,282) (191,479,697)
FF Holdings stockholder loans (note 13) (1,108,940) (1,108,940)
--------------- ------------
Total stockholder's deficit (144,127,694) (163,206,906)
Commitments, contingencies and subsequent events
(notes 1, 5, 7, 10, 12, 13 and 16) - -
-------------- -----------
$ 198,708,761 $ 178,665,601
============== ==============
See accompanying notes to consolidated financial statements.
7
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
Years Ended
December 28, January 3,
1996 1998
----------------- ----------------
(52 weeks) (53 weeks)
Sales $ 761,493,845 $ 693,224,618
Cost of sales 583,521,074 527,915,183
----------------- ----------------
Gross profit 177,972,771 165,309,435
Depreciation and amortization (20,677,935) (19,476,031)
Other selling, general and administrative expenses (138,607,053) (124,477,383)
Store closure and write down of long-lived assets (notes 2 and 3) (4,253,491) (150,000)
Interest expense (34,547,000) (34,592,528)
Loss on disposition of assets (537,956) (1,480,860)
Reorganization costs (note 1) - (4,180,591)
Other, net (note 9) 322,027 10,543
----------------- ----------------
Net loss $ (20,328,637) $ (19,037,415)
================= ================
See accompanying notes to consolidated financial statements.
8
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
December 28, 1996 and January 3, 1998
Additional FF Holdings Total
Common Stock Paid-in Accumulated Stockholder Stockholder's
Shares Amount Capital Deficit Loans Deficit
------ ------ ------- ------- ----- -------
Balance at December 30, 1995 10 $ - 29,457,988 (152,113,645) (1,314,037) (123,969,694)
Write down of stockholder loans (note 13) - - - - 205,097 205,097
Dividend to FF Holdings - - (34,460) - - (34,460)
Net loss - - - (20,328,637) - (20,328,637)
-- --- ---------- ---------- --------- ----------
Balance at December 28, 1996 10 $ - 29,423,528 (172,442,282) (1,108,940) (144,127,694)
Dividend to FF Holdings - - (41,797) - - (41,797)
Net loss - - - (19,037,415) - (19,037,415)
-- --- ---------- ---------- --------- ----------
Balance at January 3, 1998 10 $ - 29,381,731 (191,479,697) (1,108,940) (163,206,906)
== ===== ========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
9
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------------
December 28, January 3,
1996 1998
---------- ----------
(52 weeks) (53 weeks)
Cash flows from operating activities:
Net loss $ (20,328,637) $ (19,037,415)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 20,677,935 19,476,031
Store closure and other charges 1,497,284 150,000
Loss on disposition of property and equipment 537,956 1,480,860
Write down of long-lived assets to be disposed 2,756,207 -
Write down of FF Holdings' stockholder loans 205,097 -
Gain on conversion of convertible subordinated
debentures, net (298,536) (6,546)
LIFO charge to earnings 318,498 648,637
Noncash recognition of deferred revenue (1,124,194) (1,082,241)
Amortization of premium on 12.25% senior notes,
series A (263,463) (294,376)
Changes in assets and liabilities that increase
(decrease) net cash provided by operating activities:
Accounts receivable 2,233,269 (88,948)
Merchandise inventories 781,332 5,665,849
Prepaid expenses and other current assets 728,628 48,579
Trade accounts payable 3,249,710 (13,466,363)
Accrued expenses (15,933) 13,744,263
Accrued costs relating to closed stores (2,059,627) (1,846,409)
Deferred credits and other liabilities 192,523 -
Other, net 175,098 (439,142)
---------- ----------
Total adjustments 29,591,784 23,990,194
---------- ----------
Net cash provided by operating
activities 9,263,147 4,952,779
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (18,329,078) (4,893,619)
Proceeds from sale of property and equipment 4,880,711 3,031,905
--------- ---------
Net cash used in investing activities (13,448,367) (1,861,714)
------------ -----------
(continued)
10
FARM FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended
-----------------------------------------
December 28, January 3,
1996 1998
---------- ----------
(52 weeks) (53 weeks)
Cash flows from financing activities:
Borrowings under revolving credit facility $ 151,656,252 $ 108,282,131
Repayments under revolving credit facility (139,535,553) (107,562,522)
Repayments of long-term debt (1,104,515) (815,525)
Repayments of obligations under capital leases (2,188,222) (2,995,406)
Payments upon conversion of convertible
subordinated debentures (4,667,521) (163,070)
Payment of refinancing costs (1,172,970) -
Dividend to FF Holdings (34,460) (41,797)
--------------- ---------------
Net cash provided by (used in)
financing activities 2,953,011 (3,296,189)
--------------- ----------------
Net decrease in cash (1,232,209) (205,124)
Cash at beginning of year 2,079,874 847,665
--------------- ---------------
Cash at end of year $ 847,665 $ 642,541
============== ==============
Supplemental disclosures of cash
flow information -
Cash paid during the year for interest $ 34,352,498 $ 22,728,045
============== ==============
Supplemental information on noncash investing and financing activities:
During the years ended December 28, 1996 and January 3, 1998, the
Company entered into capital lease obligations of $5,765,295 and
$5,092,116, respectively.
See accompanying notes to consolidated financial statements.
11
(1) The Company and Recent Developments
Farm Fresh, Inc. (Farm Fresh or the Company) is a wholly owned
subsidiary of FF Holdings Corporation (FF Holdings), whose principle
asset is the common stock of the Company. Although the Company is not
legally liable for the obligations of FF Holdings, the ability of FF
Holdings to meet its obligations is dependent on the Company's
ability to pay dividends to FF Holdings in an amount sufficient to
service these obligations.
Beginning April 1, 1998, FF Holdings would be required to make level
semiannual cash interest payments of $7.1 million each or $14.1
million annually through the maturity of its 14.25% senior notes (FF
Holdings notes). The Company's limited cash flow, as well as the
restrictive covenants in its debt agreements, preclude the Company
from paying cash dividends to FF Holdings to make its April 1, 1998
interest payment. Without cash dividends from Farm Fresh, FF Holdings
would be unable to make cash interest payments on the notes and, as a
result, upon the expiration of the applicable grace periods, the FF
Holdings noteholders would have the right to acquire a controlling
interest in the Company. A "Change of Control" as defined in the
indentures would result in an acceleration of the maturity of the
Company's senior notes and other indebtedness.
In late 1996, because of significant doubt about the Company's ability
to make dividend payments to FF Holdings to service its debt
obligations, the Company and FF Holdings began to explore strategic
alternatives, including but not limited to, the sale of some or all
of the Company's assets. In September 1997, Farm Fresh and Richfood
Holdings, Inc. (Richfood), a leading wholesale food distributor in
the Mid-Atlantic region and a major supplier of the Company,
announced an agreement in principle regarding the purchase of
substantially all the Company's assets and assumption of
substantially all of the Company's operating liabilities by FF
Acquisition, LLC (FF Acquisition), a Virginia limited liability
company and a wholly-owned subsidiary of Richfood.
On October 1, 1997, the Company failed to make the interest payment on
its 12.25% Senior Notes and 12.25% Senior Notes, Series A
(collectively referred to as the senior notes). Therefore, upon the
expiration of a 30-day grace period, the senior notes were in default
and the bondholders had the right to exercise all rights available to
them under the indentures governing the senior notes. Under cross
default provisions in the instruments governing the Company's other
debt, the revolving credit facility, industrial development revenue
bond and convertible subordinated debentures were also in default.
On November 26, 1997, Farm Fresh, Richfood and FF Acquisition executed
an asset purchase agreement (the Richfood Purchase Agreement) which
established the terms for the purchase of substantially all of the
Company's assets for approximately $220 million in cash, assumption
of certain operating liabilities and 1.5 million warrants to purchase
Richfood common stock. The purchase price is subject to adjustment
based upon actual working capital at the date of closing of the
transaction and certain other terms and conditions.
Also on November 26, 1997, the Company and FF Holdings submitted a
Pre-Petition Solicitation of Votes on the Chapter 11 Joint Plan of
Reorganization (the Plan) to their creditors. Under the Plan, the
Company would sell substantially all of its assets to FF Acquisition
in accordance with the Richfood Purchase Agreement. The Company would
distribute the proceeds from the sale to certain creditors in
proportion to their estimated recovery percentages by class and
category of creditor as more fully defined in the Plan document filed
with the Bankruptcy Court. The Plan contemplated seven major classes
of claims against the Company and FF Holdings plus administrative
claims related to the Bankruptcy filing and certain tax claims. The
claim categories and their estimated recovery percentages under the
November 26, 1997 Plan, either from the proceeds of the Richfood
Purchase Agreement or through assumption by FF Acquisition were as
follows:
12
Estimated Claim Estimated Estimated
Class / Category or Equity Interest Recovery ($) Recovery (%)
-------------------------------------------------------------------------------------------------------
Administrative Claims $ 6,000,000 $ 6,000,000 100%
Tax Claims $ - $ - 100%
1-Priority Claims $ - $ - 100%
2-Secured Claims Against
Farm Fresh:
2A-Revolving Credit
Facility $ 26,688,693 $ 26,688,693 100%
2B-Other Secured Claims $ 1,021,000 $ 1,021,000 100%
3-Unsecured Claims Against
Farm Fresh:
3A-Convertible
Subordinated
Debentures $ 7,203,000 $ 6,499,267 90.23%
3B-Senior Notes $ 212,800,000 $ 192,009,440 90.23%
3C-General Unsecured
Claims $ 5,700,000 $ 5,143,110 90.23%
3D-Trade Claims $ 300,000 $ 300,000 100%
4-Farm Fresh Common
Stock Common Stock $ - 0%
5-Unsecured Claims Against
FF Holdings:
5A-FF Holdings Notes $ 97,247,000 $ - 0%
5B-General Unsecured
Claims $ - $ - 0%
6-Holdings Preferred Stock $ 36,700,000 $ - 0%
7-Holdings Common Stock Common Stock $ - 0%
Note: This table sets forth estimated distributions of assets under
the November 26, 1997 Plan, based upon certain assumptions as
discussed more fully in the Plan document filed with the Bankruptcy
Court. This table is a preliminary estimate based upon assumptions
and other information which may prove to be incorrect. The revolver
has been estimated in the above table as of November 21, 1997. The
remaining amounts of debt were estimated as of September 6, 1997 and
include accrued interest. Actual recovery percentages may be
different and possibly lower.
On January 7, 1998, Farm Fresh and FF Holdings filed a petition for
relief under Chapter 11 of the United States Bankruptcy Code (Chapter
11) and submitted the Plan to the Bankruptcy Court. From January 7,
1998, the Company has operated its business as a
debtor-in-possession. On January 7, 1998, the Company, as a
debtor-in-possession, entered into a revolving credit agreement (the
DIP facility) with Fleet Financial Corporation, as agent for the
lenders. The DIP facility provides up to $50 million in financing to
meet the Company's working capital needs and is available through
January 7, 1999 or the confirmation of the Plan, whichever is
earlier. The facility bears interest at the option of the Company at
either the lender's prime rate plus 0.75% or LIBOR plus 1.5%. The DIP
facility also bears a commitment fee of 0.5% on the undrawn
13
availability. At February 20, 1998, there was approximately $21.4
million outstanding on the DIP facility which is expected to be
repaid with the proceeds from the Richfood Purchase Agreement.
The Bankruptcy Court issued an order confirming the Plan (the
Confirmation Order) on February 20, 1998. The Confirmation Order, if
unchallenged, will become effective on March 4, 1998 (the Effective
Date). The confirmed Plan remained substantially unchanged from the
initial Plan, however, the confirmed amended plan allowed certain
legal claims including punitive damages. Under the amended Plan, the
reorganized Farm Fresh will continue to exist as a separate
corporate identity and will be principally responsible for
administration of the Plan. All remaining unsold property of the
Company will vest in the reorganized Farm Fresh. The reorganized
Farm Fresh will perform all obligations and responsibilities
required by the Plan and the Confirmation Order, including, but not
limited to, effecting the asset sale, liquidating all residual
assets, making all distributions required by the Plan, objecting to
the allowance of any improper claims or interests, and prosecuting
any litigation pertaining thereto. This purpose is restricted in
scope and it is anticipated that the reorganized Farm Fresh will not
have any operations or sources of income other than from the
liquidation of its assets. Certain of the Company's executive
officers will be retained by the reorganized Farm Fresh. These
officers have certain incentive compensation and bonus agreements
which will be paid by the reorganized Farm Fresh as discussed in
note 13.
As of the Effective Date under the Plan, FF Holdings will be dissolved
and cease to exist as a separate corporate entity with all of the
assets of FF Holdings distributed to the reorganized Farm Fresh. Each
of the senior notes, the convertible subordinated debentures, the FF
Holdings notes, the Farm Fresh common stock, and the FF Holdings
preferred and common stock will be canceled. The reorganized Farm
Fresh will issue 1,000,000 shares of new common stock with a par
value of $0.01. This common stock will be distributed to the holders
of allowed Class 3B claims that are "accredited investors" pursuant
to the Plan and Confirmation Order.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern which
contemplates continuity of its operations, realization of its assets
and payment of its liabilities in the ordinary course of business.
The Bankruptcy filing, Farm Fresh Inc.'s leveraged financial
structure and its recurring net losses resulting in a stockholder's
deficit raise substantial doubt about Farm Fresh Inc.'s ability to
continue as a going concern. As a result of the reorganization
proceedings discussed above, the Company may sell or otherwise
dispose of assets or settle liabilities for amounts other than those
reflected in the consolidated financial statements. Further, a plan
of reorganization, as finally approved by the Bankruptcy Court, could
materially change the amounts recorded. The consolidated financial
statements do not reflect any adjustments that might be necessary to
the carrying value of assets and the amounts and classification of
liabilities or stockholder's deficit as a consequence of the
bankruptcy proceedings.
During 1997, because of significant doubt about the Company's ability
to make dividend payments to FF Holdings to service its debt
obligations, the Company incurred costs relating to exploring
strategic alternatives, including but not limited to, the sale of all
or some of the Company's assets and filing for bankruptcy. Costs
incurred during 1997 amounted to approximately $4.2 million for
attorneys and other fees relating to resolving these matters.
(2) Summary of Significant Accounting Policies
(a) Nature of Business and Consolidation
The Company is engaged in the retail grocery business under the names
"Farm Fresh," "Rack & Sack," and "3 Stores, 1 Roof. " These
operations include combination stores and super warehouse stores
located in the Hampton Roads, Richmond and Shenandoah Valley areas of
Virginia. As discussed in note 1, the scope of the Company's
operations will be substantially changed if the Confirmation Order
becomes effective.
14
The consolidated financial statements include the accounts of Farm
Fresh, Inc. and subsidiaries. All significant intercompany balances
and transactions of consolidated subsidiaries have been eliminated.
The consolidated financial statements do not include the accounts of
certain joint venture partnerships in which the Company has less
than a 50% interest. These joint ventures were formed to acquire,
renovate, construct and operate various rental properties. The joint
venture partnerships are carried on the equity method.
(b) Definition of Fiscal Year
The fiscal year of the Company ends on the Saturday nearest to December
31. Fiscal year 1996 ended December 28, 1996 and consisted of 52
weeks. Fiscal year 1997 ended January 3, 1998 and consisted of 53
weeks.
(c) Merchandise Inventories
Inventories are stated at the lower of cost or market. For
substantially all of the inventories, cost has been determined on a
last-in, first-out (LIFO) basis. With respect to the remaining
inventories, cost has been determined on a first-in, first-out (FIFO)
basis. Approximately 93% of total merchandise inventories in 1996 and
1997 were costed using the LIFO method. Movies held for rent are
included in merchandise inventories and amortized to their net
realizable value over 90 days.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Buildings and
equipment under capital leases are stated at the lower of the present
value of minimum lease payments at the beginning of the lease term or
fair value of the property at the inception of the lease. Owned
buildings, fixtures and equipment are depreciated over the estimated
useful lives of the respective assets using the straight-line method.
Buildings under capital leases, fixtures and equipment under capital
leases and leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or the
estimated useful life of the related asset. The Company uses the
following estimated useful lives for depreciating and amortizing
property, plant and equipment:
Buildings 10-40 years
Leasehold improvements 10 years
Fixtures and equipment 3-8 years
Transportation equipment 3-5 years
(e) Favorable Lease Rights
Favorable lease rights are amortized over the term of the lease using
the straight-line method.
(f) Goodwill
Goodwill represents the excess purchase price over the estimated fair
value at the date of acquisition of the tangible and identifiable
intangible net assets acquired and is amortized over its estimated
recovery period using the straight-line method. The maximum recovery
period used by the Company is 25 years.
(g) Deferred Financing Costs
Deferred financing costs are amortized over the term of the related
financing primarily using the effective interest method.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
15
The Company and its wholly-owned subsidiaries are included in the
Federal income tax return of the consolidated group comprised of FF
Holdings and the Company. The income tax information reflected in the
accompanying financial statements has been calculated as if Farm
Fresh were filing a separate tax return.
(i) Assets Held for Sale
Assets held for sale are carried at estimated net realizable value less
estimated costs to sell. Included in assets held for sale at January
3, 1998 is one building, which is currently leased to a third party
through 2000, and two parcels of land. These assets are expected to
be sold to Richfood as described in note 1. Approximately $4.1
million of the December 28, 1996 balance relating to one store was
reclassified from assets held for sale to property, plant and
equipment at January 3, 1998 as a result of the Company's decision to
reopen the store.
(j) Advertising Costs
Advertising costs, which are included in selling, general and
administrative expenses in the accompanying consolidated statements
of loss, are expensed as incurred. Advertising expenses, net of
cooperative advertising allowances, amounted to $3,296,464 and
$3,099,671, respectively, for the years ended December 28, 1996 and
January 3, 1998.
(k) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangible assets to be held and used for impairment when events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a
write-down to market or discounted cash flow value is required. The
Company reports long-lived assets and certain identifiable
intangibles to be disposed of at the lower of carrying amount or fair
value less costs to sell. The Company recorded a charge of $2.8
million in 1996 for impairment of assets held for disposal. No
impairment losses have been recorded for assets to be held and used.
(l) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(m) Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the year ended December 28, 1996 in order to conform
with the financial statement presentation for the year ended January
3, 1998.
(3) Accrued Costs Relating to Closed Stores
During 1996 and 1997, the Company closed two stores and one store,
respectively. In conjunction with the closures, the Company accrued
future costs of $1.5 million in 1996 and $150,000 in 1997. The costs,
recorded based on discounted cash flows, are directly attributable to
the closed stores. The costs accrued include rent, taxes, utilities,
common area maintenance and other costs associated with the store
locations.
During the years ended December 28, 1996 and January 3, 1998, $2.1
million and $1.5 million, respectively, net of related interest
expense, related to closed facilities were charged against the
liability for accrued costs relating to closed stores in the
accompanying consolidated balance sheets. These costs represent rent,
taxes, utilities, common area maintenance and other costs associated
with the specific closed store locations.
16
(4) Accrued Expenses
Accrued expenses consisted of the following:
December 28, January 3,
1996 1998
---- ----
Accrued licenses and other taxes $ 5,407,620 $ 5,187,968
Accrued interest 7,181,091 19,029,216
Accrued insurance claims 4,125,522 6,626,219
Accrued other 7,710,665 7,325,758
----------- -----------
$ 24,424,898 $ 38,169,161
=========== ===========
(5) Leases
Included in property, plant and equipment are the following amounts
applicable to capital leases:
December 28, January 3,
1996 1998
---- ----
Buildings $ 36,396,380 $ 39,737,818
Fixtures and equipment 4,897,322 6,389,438
----------- ------------
41,293,702 46,127,256
Less accumulated amortization 14,308,039 17,877,306
----------- ------------
$ 26,985,663 $ 28,249,950
=========== ============
Amortization expense of assets under capital leases was $2,709,123 and $3,721,505
for the years ended December 28, 1996 and January 3, 1998, respectively.
Future minimum lease payments under noncancelable operating leases and
the present value of future minimum capital lease payments as of
January 3, 1998 are as follows:
Fiscal Year Capital leases Operating leases
------------ -------------- ----------------
1998 $ 8,363,317 $ 7,543,842
1999 7,757,657 6,950,748
2000 7,197,771 6,556,552
2001 5,972,295 6,376,901
2002 5,711,484 6,059,593
Later years 54,502,327 40,855,188
------------- ------------
Total minimum lease payments 89,504,851 $ 74,342,824
============
Less amount representing interest 50,409,356
Present value of net minimum
capital lease payments 39,095,495
Less current installments of obligations
under capital leases 3,368,413
-------------
Long-term obligations
under capital leases $ 35,727,082
=============
17
Minimum payments under capital leases have not been reduced by minimum
sublease rentals of $450,370 due in the future under noncancelable
subleases.
Rental expense for operating leases and contingent rentals for both
operating and capital leases are as follows:
Years Ended
December 28, January 3,
1996 1998
---- ----
Minimum rentals - operating leases $7,276,377 $ 6,673,808
Contingent rentals - operating leases 200,638 214,130
Contingent rentals - capital leases 180,803 90,666
---------- -------------
$7,657,818 $ 6,978,604
========= =============
Contingent rentals are determined as a percentage of sales in excess of
stipulated amounts for certain stores. Most of the Company's leases
provide for payment of taxes, maintenance, insurance and certain
other operating expenses applicable to leased property.
Minimum payments under capital leases and operating leases do not
include minimum rentals for certain leases assumed by Nash Finch and
the operators of the Tinee Giant stores. The Company is secondarily
liable for these leases in the event of default by the present
lessee. Future minimum lease payments on these leases as of January
3, 1998 are approximately $1,664,000.
The Company sold its North Carolina stores in early 1991 and its Nick's
conventional stores in 1992 to independent operators financed by
Richfood. Under the agreements, Richfood agreed to guarantee the
lease payments for these stores. Therefore, the Company would be
liable under these leases only to the extent that the current lessee
and Richfood default. Future minimum lease payments under these
leases amount to approximately $7,010,000 as of January 3, 1998.
Certain leases are expected to be assumed by FF Acquisition, LLC under
the Richfood Purchase Agreement if the Confirmation Order is approved
as discussed in note 1. Any lease obligations not assumed by FF
Acquisition, LLC are expected to be "rejected contracts" as discussed
more fully in the Chapter 11 filing.
18
(6) Notes Payable
Notes payable consist of the following:
December 28, January 3,
1996 1998
---- ----
Industrial Development Revenue Bonds (IRB); 65% of
prime, which averaged 5.4% for1996 and
5.5% for 1997, quarterly installments of
$90,000 plus interest, due January 2000 $ 1,138,463 $ 688,463
Obligations under noncompete agreements; 10% to 12%
interest; monthly payments ranging from $2,950 to
$3,462; due November 2003 228,379 148,430
Notes payable:
Prime + 2% notes, which averaged 10% for 1996;
repaid in 1997 198,767 -
Prime + 2% notes, which averaged 10% for 1996;
repaid in 1997 155,556 -
----------- -----------
Total notes payable 1,721,165 836,893
Less current installments of notes payable 801,467 18,459
Less IRB reflected as debt in default - 688,463
----------- -----------
Notes payable, excluding current
installments and debt in default $ 919,698 $ 129,971
=========== ===========
At January 3, 1998, collateral for the industrial development revenue
bond consisted of certain property, plant and equipment against which
the note was issued. The net book value of the related collateral is
approximately $2,690,000 at January 3, 1998. As discussed in note 1,
the Company failed to make its October 1, 1997 interest payment on
its 12.25% Senior Notes. The Company's failure to make its October 1,
1997 interest payment on its senior notes results in a cross default
of the industrial development revenue bond. Therefore, the industrial
development revenue bond has been reflected as debt in default in the
accompanying January 3, 1998 balance sheet.
Aggregate annual maturities of notes payable for fiscal years ending
after January 3, 1998, excluding debt in default, are as follows:
1998--$18,459; 1999--$20,800; 2000--$23,438; 2001--$26,426; 2002 and
thereafter--$59,307.
(7) Revolving Credit Facility
In 1996, the Company renewed its existing revolving credit facility. The
revolving credit facility allowed the Company to borrow up to $40.0
million, less $4.0 million reserved for the redemption of convertible
debentures, subject to certain borrowing base limitations through
January 13, 1998. The availability of the revolving credit facility
was also reduced by outstanding letters of credit amounting to $2.3
million at January 3, 1998.
The revolving credit facility bore interest at prime plus 1.75% or LIBOR
plus 3%, payable quarterly. The actual interest rate on the revolving
credit facility averaged 10% for 1996 and 10.25% for 1997. The
facility was collateralized by accounts receivable, inventory and
substantially all other assets of the Company. In addition, FF
Holdings pledged all of the outstanding capital stock of Farm Fresh
for the repayment of the facility.
19
The agreement governing the revolving credit facility contained
covenants which, among other things, limited the incurrence of
additional indebtedness, capital expenditures, payment of dividends,
transactions with affiliates, mergers and consolidations, prepayment
of other indebtedness and liens and encumbrances. The Company was
also required to maintain a minimum level of cashflow.
The Company's failure to make its October 1, 1997 interest payments on
the senior notes resulted in a cross default of the revolving credit
facility. As a result, the revolving credit facility has been
reflected as debt in default in the accompanying January 3, 1998
balance sheet. On January 7, 1998, Farm Fresh repaid the entire
balance of the revolving credit facility with funds borrowed against
the DIP financing facility described in note 1.
(8) Senior Notes
On October 9, 1992, the Company issued $165,000,000 of senior notes
through a public offering. The notes, which bear interest at 12.25%
payable semiannually each April 1 and October 1, represent general
unsecured obligations of the Company and mature October 1, 2000.
On December 13, 1993, Farm Fresh issued an additional $36,000,000 face
value of 12.25% senior notes, for gross proceeds of $37,800,000, to
finance the acquisition of 12 stores from Safeway Inc. The related
premium is being amortized over the life of the notes using the
effective interest method. The effective rate on the notes is 11.1%.
These notes, labeled Series A in the accompanying balance sheets,
have terms that mirror the previously issued senior notes.
The senior notes are redeemable, at the option of the Company, in whole
or in part, at any time on or after October 1, 1997 at specified
redemption prices, together with interest to the date fixed for
redemption. A sinking fund payment of $100,500,000 is due on October
1, 1999. This sinking fund payment is calculated to retire 50% of the
senior notes originally issued prior to maturity. In the event of a
change of control of the Company, the Company is obligated to make an
offer to purchase all outstanding senior notes at a redemption price
of 101% of the principal amount plus accrued interest to the date of
repurchase. A foreclosure by the FF Holdings noteholders on the
common stock of Farm Fresh would constitute a change of control.
Theindentures governing the senior notes (the Indentures) contain
certain covenants that, among other things, limit the ability of the
Company to incur additional indebtedness, transfer or sell assets,
pay dividends or make certain other restricted payments, create
liens, enter into certain transactions with affiliates or merge or
consolidate.
On October 1, 1997, the Company failed to make its interest payment on
the senior notes which, upon the expiration of a 30-day grace period,
caused the Company to be in default under the indentures. As a
result, the senior notes have been reflected as debt in default in
the accompanying January 3, 1998 balance sheet.
(9) Convertible Subordinated Debentures
In March 1985, $40,000,000 of 7.5% convertible subordinated debentures
(convertible debentures) due in 2010 were issued. Interest is payable
March 1 and September 1. On October 2, 1988, as a result of the
acquisition of Farm Fresh by FF Holdings, the convertible debentures
were written down from their original face value by $18,613,867 to
$21,386,133 to reflect their fair value at the date of acquisition.
Therefore, convertible debentures that would formerly have converted,
at the option of the holder, at $25.25 per share into common stock
converted into $10.50 cash and $3.00 in merger debentures of FF
Holdings per equivalent common share. Subsequent to the
recapitalization in 1992 and the corresponding repayment of the FF
Holdings merger debentures, the convertible debentures now convert
into $13.50 in cash per equivalent common share. For the years ended
December 28, 1996 and January 3, 1998, convertible debentures with
face value of $8,730,000 and $305,000, respectively, were converted,
resulting in cash payments by the Company of $4,667,521 and $163,070,
20
respectively. Due to the significant amount converted in 1996, the
Company also wrote off a proportionate amount of deferred financing
costs associated with issuance of the convertible debentures. This
amount, $85,212 for the year ended December 28, 1996, has been netted
against the gain of $383,748 on conversion and included in other, net
in the accompanying consolidated statement of loss for the year ended
December 28, 1996.
The face value of debentures outstanding was $7,508,000 at December 28,
1996 and $7,203,000 at January 3, 1998. The difference between the
face value of the convertible debentures and the carrying value is
being amortized over the term of the bonds using the effective
interest method. The effective interest rate is 14.7%.
Commencing March 1, 1996, the Company is required to make annual sinking
fund payments of $2,000,000. Under the terms of the indenture, this
requirement can be met through either cash payments or contribution
of retired convertible debentures. As a result, the Company would not
be required to make a sinking fund payment in cash until March 1,
2009, at the earliest.
Although the convertible debentures are convertible on demand, a portion
of the revolving credit facility described in note 7 had been
reserved to finance the conversion of all outstanding debentures as
they occur. As a result, the convertible debentures were classified
as a long-term liability in the December 28, 1996 balance sheet.
The Company's failure to make its October 1, 1997 interest payment on
the senior notes resulted in a cross default under the indenture
governing the convertible subordinated debentures. As a result, the
convertible subordinated debentures have been reflected as debt in
default in the accompanying January 3, 1998 balance sheet.
(10) Common Stock and Additional Paid-In Capital
In October 1988, FF Holdings purchased all of the outstanding common
stock of Farm Fresh. At the time of the acquisition, FF Holdings made
a capital contribution of $55,600,000 to Farm Fresh. Although the
Company is not legally liable for the obligations of FF Holdings, the
ability of FF Holdings to meet its obligations is dependent on the
Company's ability to pay dividends to FF Holdings in an amount
sufficient to service these obligations and to make dividend payments
on the preferred stock. The following paragraphs summarize the terms
of FF Holdings outstanding securities.
In conjunction with the issuance of the Company's senior notes (note 8),
FF Holdings issued senior notes (FF Holdings notes) with a face value
of $50,000,000 and common stock representing 20% of the fully-diluted
ownership of FF Holdings for gross proceeds of $49,000,000. The notes
bear interest at 14.25% payable semiannually in arrears on each April
1 and October 1. FF Holdings has the option to pay interest with
additional securities through the October 1, 1997 interest payment
date. No principal repayments are required until maturity on October
1, 2002. The proceeds from the issuance of these securities along
with a dividend from Farm Fresh were used to redeem in full the FF
Holdings 16.5% merger debentures, which were issued in conjunction
with the acquisition of the Company by FF Holdings.
Also in conjunction with the recapitalization, FF Holdings exchanged
14.25% cumulative preferred stock for all of its existing 16.75%
junior debentures and 16.75% cumulative preferred stock. The
preferred stock is required by its terms to be redeemed in its
entirety on or before October 1, 2004. At January 3, 1998, there was
$39,579,504 of cumulative preferred stock outstanding at the
liquidation value of $100 per share plus accrued and unpaid
dividends.
FF Holdings is a holding company with no operations independent from the
Company. As a result, the ability of FF Holdings to make the debt
service payments on the FF Holdings notes or pay dividends on the
redeemable preferred stock is dependent upon the Company's ability to
pay dividends to FF Holdings in an amount sufficient to satisfy such
obligations. Beginning April 1, 1998, FF Holdings would be required
to make level semiannual cash interest payments of $7.1 million each
or $14.1 million annually through the maturity of the notes. Even if
the Company generated sufficient cash flow to pay the required
21
dividends to FF Holdings, restrictive covenants in the Indentures and
other instruments evidencing the Company's indebtedness restrict the
Company's ability to make cash dividends to FF Holdings. Without cash
dividends from Farm Fresh, FF Holdings will be unable to make cash
interest payments on the notes and, as a result, upon the expiration
of the applicable grace periods, the FF Holdings noteholders would
have the right to acquire a controlling interest in the Company. A
"Change of Control" as defined in the indentures would result in an
acceleration of the maturity of the Company's senior notes and other
indebtedness.
As described in note 1, on January 7, 1998, the Company and FF Holdings
filed a petition for relief under Chapter 11 and submitted the Plan
to the Bankruptcy Court. As of the Effective Date under the confirmed
Plan, FF Holdings will be dissolved and cease to exist as a separate
corporate entity with all of the assets of FF Holdings distributed to
the reorganized Farm Fresh. The FF Holdings notes and the redeemable
convertible preferred stock will be canceled.
(11) Income Taxes
The Company's operating results are included in the consolidated Federal
income tax return of FF Holdings. At January 3, 1998, the
consolidated group had net operating loss carryforwards of $128.3
million expiring at various dates through 2012. The Company, on a
separate tax return basis, had net operating loss carryforwards for
regular Federal income tax purposes which expire as follows:
Year
----
2005 $ 9,100,000
2006 500,000
2007 6,500,000
2008 12,400,000
2009 21,500,000
2010 7,700,000
2011 11,500,000
2012 17,200,000
-------------
$ 86,400,000
================
22
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities of the Company on
a separate tax return basis at December 28, 1996 and January 3, 1998
are presented below:
December 28, January 3,
1996 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 26,334,000 32,873,000
Accrued costs relating to closed stores, deductible
when paid for tax purposes 3,558,000 2,914,000
Capital leases, deductible when paid for tax purposes 3,897,000 4,097,000
General business credit carryforwards 1,798,000 1,798,000
Vacation and bonus accruals, deductible when paid
for tax purposes 731,000 746,000
Allowance for doubtful accounts, deductible as
receivables are written off for tax purposes 560,000 393,000
Noncompete agreements, due to differences
between book and tax amortization periods 411,000 396,000
Other 91,000 92,000
------------- -------------
Total deferred tax assets 37,380,000 43,309,000
Less valuation allowance (26,779,000) (34,031,000)
-------------- --------------
Net deferred tax assets 10,601,000 9,278,000
------------- -------------
December 28, January 3,
1996 1998
---- ----
Deferred tax liabilities:
Property, plant and equipment, due to differences
between book and tax depreciation methods
and adjustments made in purchase accounting
not recognized for tax purposes $ (4,979,000) $ (4,509,000)
Convertible debentures, due to write downs
in purchase accounting not recognized
for tax purposes (1,187,000) (1,110,000)
Goodwill, due to differences between book and tax
amortization periods (432,000) (148,000)
LIFO, due to adjustments made in purchase
accounting not recognized for tax purposes (2,569,000) (2,562,000)
Leasehold rights, due to differences between book
and tax depreciation periods and adjustments
made in purchase accounting (1,146,000) (949,000)
Other (288,000) -
-------------- ------------
Total deferred tax liabilities (10,601,000) (9,278,000)
-------------- --------------
Net deferred tax assets $ - -
============= ============
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Due to
losses incurred historically and the uncertainty of future income,
the Company has recorded a valuation allowance to defer recognition
23
of its deferred tax assets until it is more likely than not the
benefit will be realized. The valuation allowance for deferred tax
assets as of December 31, 1995 was $20,805,000, therefore, an
increase of $5,974,000 was reflected in the year ended December 28,
1996. An increase of $7,252,000 in the valuation allowance was
reflected in the year ended January 3, 1998. Except for amounts for
which a valuation allowance is provided, management believes it is
more likely than not that the deferred tax assets will be realized.
As discussed in note 1, if the Confirmation Order becomes effective, the
Company would sell substantially all of its operating assets to FF
Acquisition. The sale is anticipated to result in a gain for both
financial statement and tax purposes. The tax resulting from the gain
is expected to be significantly reduced through the utilization of
net operating loss carryforwards.
(12) Supply Agreement
Farm Fresh has an agreement with Richfood to purchase store merchandise
and products of at least $350 million annually, subject to adjustment
based on the number of stores in operation. Under the agreement,
which expires in December 2001, Richfood's prices for products sold
to Farm Fresh will not exceed Richfood's prevailing lowest offering
price to its customers, and Richfood will continue to offer to Farm
Fresh billing and payment terms at least as favorable as those
offered to Richfood's ten largest customers.
(13) Related Party Transactions
At January 3, 1998, one store is leased from a real estate partnership
in which Farm Fresh is a general partner. The store is treated as a
capital lease with net assets of $1,060,972 and $996,547 and
long-term obligations of $1,691,341 and $1,682,640 in 1996 and 1997,
respectively. The lease expires in May 2013. Aggregate annual
payments under all related party leases were $650,616 in 1996 and
$308,061 in 1997.
Included in other assets are investments in real estate partnerships in
which Farm Fresh is a general partner. Under the terms of the
partnership agreements, Farm Fresh guarantees a portion of the
partnership debt. In January 1997, Farm Fresh assigned its ownership
interest in one real estate partnership to the other partners. Farm
Fresh guaranteed $4,364,570 and $4,299,863 of notes payable at
December 28, 1996 and January 3, 1998, respectively, relating to the
two remaining partnerships, representing the two partnerships' total
outstanding debt.
Included in stockholder's deficit are loans to certain members of
management and stockholders of FF Holdings amounting to $1,108,940 at
December 28, 1996 and January 3, 1998, which were made to enable them
to purchase securities of FF Holdings. Accrued and unpaid interest
and cash loans have been charged against net loss in the accompanying
1996 consolidated statement of loss.
The Company has employment contracts with certain members of management.
In 1997, the Company amended employment agreements with two of its
key executive officers which provide for annual compensation of
$600,000 per year and bonus payments of $1,500,000 based upon meeting
certain criteria, including the sale of assets to Richfood. In 1997,
a $200,000 bonus was paid out under the employment agreements. As
discussed in note 1, these two contracts will be assumed by the
reorganized Farm Fresh.
The remaining employment contracts provide for severance payments
ranging from six months to one year's salary upon termination without
cause or the occurrence of a change in control of the Company, as
defined in the agreements. If these employees had been terminated as
of January 3, 1998, the Company would be obligated to pay
approximately $680,000 relating to these agreements.
(14) Retirement Savings Plan
Farm Fresh, Inc. Retirement Savings Plan (Plan) is a defined
contribution plan sponsored by the Company. The Plan is designed to
provide employees an opportunity to accumulate capital for their
future economic security. The Plan provides for employee salary
deferral and matching employer contributions.
24
Employees of Farm Fresh become eligible to participate in the Plan when
they attain age 21 and have completed a 12-month period of not less
than 1,000 hours of service. Participation by employees commences at
the beginning of the quarter subsequent to the quarter in which the
above conditions have been met. Participants become fully vested in
the Plan upon normal retirement (age 60 or older), permanent
disability, death or completion of one year of credited service.
Contributions to the Plan accrued by the Company were $1,399,938 and
$1,126,384 for 1996 and 1997, respectively.
(15) Disclosures About Fair Value of Financial Instruments
The following summarizes disclosure regarding the estimated fair value
of the Company's financial instruments at December 28, 1996 and
January 3, 1998. The amounts reflected below do not consider any
adjustments which may result upon the resolution of the Company's
bankruptcy filing described in note 1.
(a) Cash, accounts receivable, accounts payable and accrued expenses
The carrying amount approximates fair value because of the short
maturity of these instruments.
(b) Notes payable
The fair value of the Company's notes payable is estimated based on
the present value of future cash flows discounted using the
Company's revolving credit facility interest rate of prime plus
1 3/4%.
(c) Accrued costs relating to closed stores
The carrying amount of these obligations is determined based upon
discounted future cash flows and, therefore, approximates fair
value.
(d) Revolving Credit Facility
At December 28, 1996, the carrying amount approximates the fair
value since the rate was renegotiated in conjunction with the
renewal of the facility in December 1996. The revolving credit
facility was repaid in full on January 7, 1998 in conjunction
with the bankruptcy filing described in note 1. As a result, the
carrying amount approximates the fair value at January 3, 1998.
(e) Senior notes
At December 28, 1996, the fair value of the Company's senior notes
was based upon recent trading of those securities in public
markets. As described in note 8, the Company's senior notes are
in default at January 3, 1998 due to the Company's failure to
make the October 1997 interest payment. As a result, trading of
the notes on public markets has been suspended and the fair
value at January 3, 1998 is not determinable.
(f) Convertible debentures
At December 28, 1996, the fair value of the Company's convertible
debentures was based upon recent trading of those securities in
public markets. As described in note 9, the Company's
convertible subordinated debentures are in default at January 3,
1998. As a result, trading of the notes on public markets has
been suspended and the fair value at January 3, 1998 is not
determinable.
(g) Letters of credit
The Company has letters of credit outstanding which guarantee
various trade activities. The contract amounts of the letters of
credit approximate their fair value.
25
(h) Financial guarantees
A reasonable estimate of the fair value of the Company's
guarantees of long-term debt and lease obligations of others,
more fully described in notes 5 and 13, could not be made
without incurring excessive costs.
The estimated fair values of the Company's financial instruments are
summarized as follows:
At December 28, 1996
-------------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Cash $ 847,665 $ 847,665
Accounts receivable 14,792,965 14,792,965
Revolving credit facility 24,289,957 24,289,957
Notes payable 1,721,165 1,761,714
Accounts payable 36,149,820 36,149,820
Accrued expenses 24,424,898 24,424,898
Accrued costs relating to closed stores 9,372,189 9,372,189
Senior notes 165,000,000 125,400,000
Senior notes, Series A 37,074,410 27,360,000
Convertible subordinated debentures 4,380,243 4,014,178
Letters of credit - 1,072,501
Financial guarantees, for which
it is not practicable to estimate
fair value - -
At January 3, 1998
-------------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Cash $ 642,541 $ 642,541
Accounts receivable 14,881,913 14,881,913
Notes payable 148,430 157,614
Accounts payable 22,683,457 22,683,457
Accrued expenses 38,169,161 38,169,161
Accrued costs relating to closed stores 7,675,780 7,675,780
Debt in default:
Revolving credit facility 25,009,566 25,009,566
Notes payable 688,463 643,600
Senior notes 165,000,000 -
Senior notes, Series A 36,780,034 -
Convertible subordinated debentures 4,279,374 -
Letters of credit - 2,300,000
Financial guarantees, for which
it is not practicable to estimate
fair value - -
(16) Contingencies
(a) Year 2000 Conversion
Certain of the Company's information systems are not year 2000
compliant. The Company has not completed its analysis to determine
the scope of its year 2000 issues and has not fully developed a year
26
2000 transformation plan. Failure to achieve year 2000 compliance by
the Company or its suppliers could negatively impact the Company's
ability to conduct business for an extended period of time.
(b) Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
proceedings. While the outcome of these matters cannot be predicted
with certainty, it is the opinion of management, based upon the known
facts and circumstances, that the amount of the Company's ultimate
liability is unlikely to have a materially adverse effect on the
Company's financial position, results of operations or liquidity.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RICHFOOD HOLDINGS, INC.
Date: March 18, 1998 By: /s/ John C. Belknap
---------------------------
John C. Belknap
Executive Vice President,
Chief Financial Officer
and Secretary