DATE: Wednesday, April 16, 1997             TAG: 9704160536

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER 

DATELINE: NORFOLK                           LENGTH:   85 lines

FARM FRESH LOSES $20 MILLIONGROCER CUTS ANNUAL LOSS BY $5.62 MILLION, BUT STILL FACES AN UNCERTAIN FUTURE BECAUSE OF DEBT AND INCREASED COMPETITION.

Farm Fresh Inc.'s management is preparing for the possibility that the region's leading grocer will be sold, file for reorganization or find another solution for its financial ills, the company's annual filing to the Securities and Exchange Commission shows.

The SEC documents indicate that hefty interest payments and increasing competition continue to take a toll on Farm Fresh. But the retailer managed to trimmed its losses by $5.7 million and says it has sufficient resources to meet its 1997 obligations.

Farm Fresh lost $20.3 million in the year ended Dec. 28, 1996. That compares to a $26 million loss in the year-earlier period. Sales declined 14 percent, from $885.1 million in 1995 to $761.5 million last year.

Ronald Johnson, who earns an annual salary of $400,000 as the retailer's new chief executive officer, will receive an unspecified bonus in the event of a sale or reorganization, according to SEC documents released Monday night.

He's also entitled to a severance payment equal to one year's salary if his employment ends abruptly, which would likely occur if the Norfolk grocer were sold.

Farm Fresh's new chief financial officer, Richard Coleman, has a similar agreement except that his annual salary is $200,000 and his bonus is ``less than the amount that would be payable to Mr. Johnson,'' according to the filing.

The grocer's 17 vice presidents and district managers also recently signed new agreements. As a result, they'll get six months' pay if the company changes hands.

These types of agreements aren't unusual in employment contracts, but the language is more specific in Farm Fresh's agreements because of the retailer's uncertain future, an industry observer said.

Farm Fresh's management-led leveraged buyout in 1988 created a mountain of debt. At last year's end, the retailer had $265 million in long-term debt. Its parent company, FF Holdings Inc., holds that amount plus an extra $85 million in 14.25 percent senior notes.

With a huge payment due a year from now, Farm Fresh hired a New York investment firm in December to review financial options. It's unclear whether anyone has expressed interest in purchasing all of the grocer's assets and liabilities.

Industry observers have speculated that potential buyers might include Hannaford Brothers Co. or Winn-Dixie. Both grocers have been expanding in Hampton Roads.

But Duke Winston, a columnist with the industry publication Food World, believes Richmond wholesaler Richfood Holdings Inc. is more likely to purchase Farm Fresh. Richfood supplies all of Farm Fresh's stores and might lose out if the grocer were purchased.

Johnson declined to discuss specifics, but he said a sale is only one of the possible outcomes.

The retailer said its sales decrease was because of the closing of six stores and the sale of 10 Richmond-area stores in 1995.

As expected, Farm Fresh took a hit as competitors moved into its territory. Newcomers Hannaford Brothers, Harris Teeter and Winn-Dixie began opening grocery stores last year.

In addition, Wal-Mart and Kmart introduced supercenters, which combine discount stores and supermarkets, to Hampton Roads.

But Farm Fresh still is a powerful presence in Hampton Roads. With about 50 grocery stores, including those under the Rack & Sack and ``3 Stores, 1 Roof'' banners, it is the leader in the Hampton Roads market.

Farm Fresh, he said, has benefited by having prime properties across Hampton Roads, while its new rivals sometimes have had to settle for secondary locations.

In other results:

Same-store sales, which represent revenues at stores open at least a year, declined 2.2 percent. These sales figures are considered a better barometer of a company's performance because they eliminate bursts in sales from new stores.

Cash flow declined 14 percent to $39.7 million from $46.1 million.

In the fourth quarter ended Dec. 28, Farm Fresh trimmed its losses to $11.5 million. That compares to a $17.5 million loss in the year-earlier period.

Fourth-quarter sales dropped nearly 10 percent to $221.9 million from $246.3 million. ILLUSTRATION: GRAPHIC

FARM FRESH'S ANNUAL EARNINGS REPORT

SOURCE: Farm Fresh Inc.'s 10-K annual report filinigs to the

Securities and Exchange Commission.

[For a copy of the graphic, see microfilm for this date.]

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