DATE: Thursday, October 2, 1997             TAG: 9710020566

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER 

DATELINE: NORFOLK                           LENGTH:   51 lines

FARM FRESH WON'T MAKE INTEREST PAYMENTS

Grocer Farm Fresh Inc., which recently announced plans to be purchased by Richfood Holdings Inc., said it will not make $12.3 million in interest payments that were due Wednesday.

``The decision not to make the interest payment will assure the liquidity of the company throughout this (buyout) process,'' said Ronald Johnson, chief executive officer of Norfolk-based Farm Fresh.

Farm Fresh's action was no shocker to the financial community. Last month, the number-crunchers at Standard & Poor's lowered Farm Fresh's credit rating, citing the grocer's risk of ``imminent default.''

Wednesday's announcement is just one more indication that executives were running out of options before Richfood, a Richmond-based food wholesaler that supplies Farm Fresh, stepped up to the plate.

Overloaded with debt from a 1988 leveraged buyout, Farm Fresh has cut costs, closed stores and delayed renovations to make its hefty interest payments.

Still, it wasn't enough. The company's debt kept growing. And in the last two years, competitors have moved into Hampton Roads, swiping sales from the 47-store chain.

By June 14, the long-term debt at Farm Fresh had ballooned to about $270 million. The company must pay 12.25 percent in interest annually on the biggest chunk - $200 million in senior notes. The semi-annual payments are due Oct. 1 and April 1.

Farm Fresh's parent company, FF Holdings Corp., has an additional $95 million in debt.

Richfood may be Farm Fresh's savior. But it doesn't plan to rescue all of the grocer's investors.

Richfood will pay $220 million in cash and about $30 million in assumed leases for Farm Fresh, which is the wholesaler's third-largest customer. The deal also includes 1.5 million warrants, or rights, to purchase Richfood common stock at $25 within a five-year period.

The buyout should be complete in early 1998.

According to the terms of the agreement, Farm Fresh will likely file for bankruptcy reorganization within the next several months. If the court agrees, Farm Fresh may be able to walk away from some of its debts.

Although Richfood says it doesn't plan to assume Farm Fresh's senior notes, Farm Fresh may find a way to appease investors before any bankruptcy filing.

Officials with both companies declined to comment on the details of the bankruptcy filing and discussions with bondholders.

Industry sources, however, say investors in the operating company's debt will likely get some form of payment. They don't expect Farm Fresh to pay off the holding company's debt. KEYWORDS: FARM FRESH INC.

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