KASH N' KARRY FOOD STORES, INC.
1995 ANNUAL REPORT<PAGE>
TABLE OF CONTENTS
Letter to Stockholders . . . . . . . . . . . . . . . . . . . . ii
Corporate Information. . . . . . . . . . . . . . . . . . . . . .1
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Selected Financial Data. . . . . . . . . . . . . . . . . . . . .5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . 10
Report of Independent Accountants. . . . . . . . . . . . . . . 19
Balance Sheets as of July 30, 1995 and July 31, 1994 . . . . . 21
Statements of Operations for the fiscal years ended
July 30, 1995, July 31, 1994 and
August 1, 1993. . . . . . . . . . . . . . . . . . . . . . 23
Statements of Stockholders' Equity (Deficit)
for the fiscal years ended July 30, 1995,
July 31, 1994 and August 1, 1993. . . . . . . . . . . . . 24
Statements of Cash Flows for the fiscal years
ended July 30, 1995, July 31, 1994 and
August 1, 1993. . . . . . . . . . . . . . . . . . . . . . 25
Notes to Financial Statements. . . . . . . . . . . . . . . . . 27
Changes in Accountants . . . . . . . . . . . . . . . . . . . . 45
i<PAGE>
[KnK Letterhead]
November 17, 1995
Dear Stockholders:
The past year has been one of major changes for Kash n' Karry.
We completed both operational and financial restructurings and
began to shift the strategic direction of the Company. While the
year has not been an easy one, Kash n' Karry has emerged more
focused and better prepared to capitalize on our strong position in
the West Central Florida market, and our cash flow and balance
sheet show that our restructuring was worth the effort.
OPERATING RESULTS
Sales for fiscal 1995 were $1.03 billion, 3.7% below the sales
of the prior year. The uncertainties surrounding the
reorganization and the opening of twelve new competitive stores
were the primary factors resulting in the decrease in sales.
However, operating cash flow (EBITDA) increased 28% from $42.6
million in 1994 to $54.5 million in 1995 -- primarily the result of
significant reductions in operating costs. For the thirty week
period subsequent to the reorganization (Reorganized Company), net
income was $3.1 million, or $.67 per share.
MAJOR ACCOMPLISHMENTS
The first five months of the fiscal year were dedicated to
completing our financial restructuring and commencing a stringent,
company-wide program to reduce all costs of our business.
Overheads were reduced, all relationships with service providers
were reviewed and renegotiated, and capital expenditures were
limited in order to preserve the Company's liquidity through the
restructuring. With the support of our associates, trade
suppliers, senior lenders, bondholders and stockholders, our
financial restructuring was successfully completed on December 29,
1994, resulting in a reduction in our long-term debt load by more
than $123.0 million.
In January, I was hired by the Board of Directors to serve as
Chief Executive Officer of the Company. I felt that it was
imperative to redefine the Company's mission and establish a vision
for the new Kash n' Karry. With that in mind, we began a
comprehensive review of the Company's strategic strengths and
consumer perceptions in the marketplace, resulting in the
associates of Kash n' Karry establishing a goal to become the
premiere perishables marketer in West Central Florida. The first
step in connection with this change in the strategic
ii<PAGE>
direction of the Company was to organize a new marketing and operations
management team with the expertise to execute our merchandising
plan, and that team is now in place.
The next step in the process was to design a new decor package
to support the new image that we expect to project to our
customers. In September, we unveiled the new decor package in our
first store and broke with a media blitz promoting the Company's
commitment to high quality perishables under the tag line "Kash n'
Karry -- Your Destination for Fresh." In 1996 we will convert an
additional forty stores to the new format.
The third step in the process is to replace or upgrade the
check-out systems in all of our stores to state-of-the-art
technology that will support our image of providing legendary
customer service and to install new application software in the
areas of merchandise procurement, store billings, warehouse
control, accounts payable and labor scheduling. This project began
in June and will be completed during our 1996 fiscal year.
FISCAL 1996 OUTLOOK
The transition year of 1995 is behind us and we believe that
1996 will be a breakthrough year for Kash n' Karry. There are
several reasons for our confidence: Kash n' Karry enters 1996 with
a significantly deleveraged balance sheet and a strong capital
investment program to build new stores and upgrade existing
facilities to support our commitment to perishables; we have
positive sales trends and a clearly defined strategy for
capitalizing on our strengths going forward; and we have a new
five-year agreement to supply groceries to an 18-store chain in the
Orlando area that we estimate could generate revenues of $75.0
million or more per year.
The hard work and dedication of 9,400 associates helped us to
implement many important changes this past year and to reach many
milestones -- including the opening of our 100th food store in
November. With their continued efforts and an organization
designed to support our new mission, I believe we will continue our
positive trends. Please join me and our associates in looking
forward to an even stronger 1996.
/s/ Ronald E. Johnson
-------------------------------
Ronald E. Johnson
Chairman of the Board
President and Chief Executive Officer
iii<PAGE>
CORPORATE INFORMATION
The principal executive offices of the Company are located at
6422 Harney Road, Tampa, Florida 33610, and its telephone number
is (813) 621-0200.
Business Summary
The Company is among the three largest food retailers in west
central Florida, operating 93 multi-department supermarkets, five
conventional supermarkets and 34 liquor stores under the "Kash n'
Karry" name and two super warehouse stores under the "Save 'n Pack"
name, all supported by a centrally-located warehouse and
distribution facility. More than one-half of the Company's stores
are located in the Tampa-St. Petersburg area, which is Florida's
largest retail food sales market, with the balance located between
Gainesville, approximately 130 miles to the north, and Bonita
Springs, approximately 150 miles to the south. The west central
Florida area has a diverse and growing economy, which includes high
technology and financial centers, an insurance industry presence,
retirement communities, coastal resorts and commercial agricultural
activity. The region's population is estimated to be increasing at
an annual rate of approximately 2%.
The Company currently operates two distinct store concepts:
- a large, full-service multi-department supermarket under
the Kash n' Karry name, which is designed to operate
profitably at lower sales levels than certain competi-
tors; and
- a super warehouse store under the Save 'n Pack name de-
signed to serve trade areas with low household income.
The Company has developed, and continues to implement, the
following marketing and operating strategies to promote growth in
revenues and operating cash flow:
Marketing Strategy. The Company emphasizes competitive prices
on everyday items, strong weekly features, high quality perishables
and a broad assortment of both national and corporate brands. The
Company's food stores are open seven days a week, with most
operating 24 hours a day. The Company seeks to be either first or
second among its competitors in assortment of branded merchandise,
stocking over 29,000 SKU's (stock keeping units) of national brand
and corporate brand items. In addition to a full range of grocery
and general merchandise items, most of the Company's multi-
department supermarkets also feature expanded perishable goods
departments, delicatessens and in-store bakeries, and many contain
pharmacies and full-service seafood, full-service floral and video
rental departments.
In 1992, the Company introduced its own corporate brand
merchandise. The Company's corporate brand strategy is to offer a
product comparable in quality to the best-
1<PAGE>
selling national brand at a lower price. The Kash n' Karry brand
item generally sells for approximately 10% less than the competing
best-selling national brand but generates a higher per unit gross
profit contribution to the Company. Over 1,100 SKU's in a wide
variety of product categories carry the Kash n' Karry brand name.
Operations Strategy. The Company believes that up-to-date,
strategically located facilities, well-trained associates and
information management systems are key elements to the Company's
future success. The Company operates a modern, 687,000 square foot
warehouse, distribution and office facility in Tampa with
sufficient capacity to service anticipated store expansion for the
foreseeable future. The warehouse enables the Company to reduce
costs by purchasing in large quantities, taking advantage of
special promotional prices offered by vendors and purchasing prior
to impending price increases, and reducing delivery costs through
cross docking and backhauls. The central location of the warehouse
facility to its stores also provides the Company with operating
efficiencies.
The Company relies on information technology to enhance
operating efficiency. The Company recently entered into an
agreement to outsource its information systems development in order
to minimize costs, accelerate the implementation period for systems
improvements, facilitate future software upgrades, reduce personnel
issues and eliminate equipment lease costs. Specifically, the
agreement provides for the acquisition of new procurement, billing,
labor scheduling and accounts payable systems and new point-of-sale
equipment in the stores within the next 18 months.
The Company also devotes significant resources to personnel
training, utilizes labor scheduling programs to allocate manpower
based on anticipated sales levels, and employs a variety of
strategies to minimize inventory losses. None of the Company's
associates is covered by a collective bargaining agreement.
Information Regarding Common Stock
Market Price. On March 2, 1995 the Common Stock was listed
for trading on the Nasdaq Small Cap Market under the symbol "KASH."
Prior to such date, there was no established public trading market
for the Common Stock. For the period of March 2, 1995 through
October 13, 1995, the range of high and low bids for a single share
of Common Stock was $29.25 - $12.17, as quoted in the Nasdaq Small
Cap Market. The average of the low bid and high ask prices on
October 13, 1995 as quoted on the Nasdaq Small Cap Market was
$23.75. Such over-the-market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. In addition, these
quotations have been adjusted to reflect the 3-for-2 stock split
effected in the form of a stock dividend paid on July 17, 1995.
Record Holders. As of October 13, 1995, there were
approximately 21 holders of record of shares of Common Stock.
2<PAGE>
Dividend Policy. The Company has not in the past paid cash
dividends to its stockholders and does not intend to pay any cash
dividends in the foreseeable future. The Company's ability to
declare cash dividends on its Common Stock is materially limited by
prohibitions or restrictions in its bank credit agreement and
senior debt indentures.
MANAGEMENT
BOARD OF DIRECTORS
Ronald E. Johnson
Chairman of the Board of Directors,
President and Chief Executive Officer
Kash n' Karry Food Stores, Inc.
Everett L. Buckardt John G. Danhakl John J. Delucca
Chairman and Chief General Partner Senior Vice President
Executive Officer Leonard Green & and Treasurer
BEKS Investments, Inc. Associates, L.P. RJR Nabisco
Jennifer Holden Dunbar Ben Evans Thomas W. Harberts
General Partner Consultant President and Chief
Leonard Green & Ernst & Young Executive Officer
Associates, L.P. Cub Foods
Robert Spiegel Peter Zurkow
Retired Managing Director,
High Yield Department
PaineWebber Incorporated
EXECUTIVE COMPENSATION STOCK OPTION
COMMITTEE COMMITTEE
Jennifer Holden Dunbar Jennifer Holden Dunbar
Ben Evans Ben Evans
Peter Zurkow Peter Zurkow
NOMINATING COMMITTEE AUDIT COMMITTEE
Jennifer Holden Dunbar Everett L. Buckardt
Ben Evans Jennifer Holden Dunbar
Peter Zurkow Ben Evans
Thomas W. Harberts
3<PAGE>
EXECUTIVE OFFICERS
Ronald E. Johnson
Chairman of the Board of Directors,
President and Chief Executive Officer
Raymond P. Springer BJ Mehaffey Gary M. Shell
Senior Vice President Senior Vice President Senior Vice President
of Administration, of Operations of Nonperishables
Chief Financial Officer, Marketing
Treasurer and Secretary
Clifford C. Smith, Jr. Richard D. Coleman
Senior Vice President of Vice President, Controller
Perishables Marketing
4<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial information of
the Company as of and for each of the fiscal years ended on the
Sunday nearest to July 31, 1995, 1994, 1993, 1992 and 1991, and is
derived from the audited financial statements of the Company. Such
financial statements, and the reports thereon, for the 1995, 1994
and 1993 fiscal years are included elsewhere in this document, and
should be read in conjunction with this selected financial data and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
As discussed herein, the Restructuring was consummated on
December 29, 1994 (the "Effective Date"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations; The Restructuring." The financial statements as of and
for the 30 weeks ended July 30, 1995 and for the 22 weeks ended
January 1, 1995, respectively, reflect the Company's emergence from
Chapter 11 and were prepared utilizing the principles of fresh-
start reporting contained in the American Institute of Certified
Public Accountants' Statement of Position 90-7, "Financial Report-
ing by Entities in Reorganization Under the Bankruptcy Code."
Operations during the period from the Effective Date through
January 1, 1995 had no significant impact on the emergence
transactions and as a result have not been separately identified.
As a result of the implementation of fresh-start accounting,
certain of the selected financial data as of and for the 30 weeks
ended July 30, 1995 and for the 22 weeks ended January 1, 1995 is
not comparable to the selected financial data of prior periods due
to the change in reporting entity resulting from the application of
fresh-start accounting. Therefore, selected financial data for the
"Reorganized Company" has been separately identified from that of
the "Predecessor Company."
The selected store data have been derived from the Company's
management reporting records.
5<PAGE>
Reorganized Predecessor
Company Company
-------- --------
30 Weeks 22 Weeks
Ended Ended
July 30, January 1,
1995 1995
------- --------
(In Thousands, Except
Per Share Amounts)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . . . . $599,320 $426,681
Cost of sales . . . . . . . . . . . . . 471,401 340,802
------- --------
Gross profit. . . . . . . . . . . . . . 127,919 85,879
Selling, general and
administrative expenses . . . . . . . 90,482 68,819
Depreciation and amortization. . . . . . 14,802 10,234
------- --------
Operating income . . . . . . . . . . . . 22,635 6,826
Interest expense (1) . . . . . . . . . . 15,810 13,719
------- --------
Income (loss) from operations before
reorganization items, income taxes,
extraordinary items and change in
accounting principle . . . . . . . . 6,825 (6,893)
Reorganization items . . . . . . . . . -- (4,869)
Provision for income taxes . . . . . . (3,682) --
Extraordinary item - gain on debt
discharge . . . . . . . . . . . . -- 70,166
Cumulative effect of change in
accounting principle - post-
retirement medical benefits . . . . . -- (2,000)
------- --------
Net income. . . . . . . . . . . . . . . $ 3,143 $56,404
======= ========
Income per common share . . . . . . . . . $0.67(2) -- (3)
======= ========
6<PAGE>
Predecessor Company
---------------------------------------------
Fiscal Year Ended Sunday Nearest July 31, (4)
---------------------------------------------
1994 1993 1992 1991
---------- ---------- ---------- ----------
(In Thousands)
Statement of Operations Data:
Sales . . . . . . . . . . . $1,065,165 $1,086,125 $1,071,038 $1,059,636
Cost of sales . . . . . . . 845,597 856,156 848,441 842,687
---------- ---------- ---------- ----------
Gross profit. . . . . . . . 219,568 229,969 222,597 216,949
Selling, general and
administrative expenses . . 176,945 175,177 164,897 159,359
Depreciation and
amortization . . . . . . . 24,112 23,455 20,132 54,435
Store closing and other
costs . . . . . . . . . . . 11,016 -- -- --
---------- ---------- ---------- ----------
Operating income. . . . . . . 7,495 31,337 37,568 3,155
Interest expense (1) . . . . 45,390 43,257 44,869 45,610
---------- ---------- ---------- ----------
Loss from operations before
extraordinary items . . . (37,895) (11,920) (7,301) (42,455)
Extraordinary item - gain
on debt repurchase . . . . . -- -- -- 3,427
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . $(37,895) $(11,920) $(7,301) $(39,028)
========== ========== ========== ==========
7<PAGE>
Reorganized Predecessor
Company Company
---------- ----------------------------------
Fiscal Year Ended Sunday Nearest July 31, (4)
----------------------------------------------
1995 1994 1993 1992 1991
--------- -------- -------- -------- --------
(Dollar Amounts in Thousands)
Balance Sheet Data:
Total assets . . . . . . . . $373,572 $389,893 $423,208 $399,419 $401,860
Inventories . . . . . . . . . 86,840 76,094 95,385 91,226 92,451
Property and equipment, net . 139,967 160,491 164,937 145,372 146,513
Working capital . . . . . . . 13,164 (12,747) 19,137 26,031 15,684
Total long-term debt and
capital leases (including
current maturities) (5) . . 223,694 360,121 351,890 316,220 342,826
Preferred stock . . . . . . . -- 4,650 4,650 4,650 45,991
Total stockholders' equity
(deficit) . . . . . . . . . 49,638 (61,054) (23,159) (11,239) (72,640)
Other Data:
Operating cash flow
(adjusted EBITDA) (6) . . . $54,497 $42,623 $54,792 $57,700 $57,590
Capital expenditures (7). . . 6,247 15,471 37,703 15,385 15,672
Store Data:
Food stores open at end of
period (8). . . . . . . . . 99 100 115 111 113
Avg. selling sq. ft. during
period (in thousands) (9) . 2,913 3,084 3,100 2,970 2,949
Avg. sales per store week (10) $199 $196 $183 $181 $180
8<PAGE>
Notes to Selected Financial Information
(Dollar Amounts in Thousands)
(1) Includes amortization of deferred financing costs of $809 and $1,152 for
the 30 weeks ended July 30, 1995 and the 22 weeks ended January 1, 1995,
respectively, and $2,950, $2,850, $2,932 and $3,017 for the 1994, 1993,
1992 and 1991 fiscal years, respectively.
(2) Reflects the 3-for-2 stock split effected in the form of a stock
dividend paid on July 17, 1995. Based on 4,649,943 shares (the weighted
average number of shares of Common Stock outstanding).
(3) Net income per share of Common Stock is not meaningful prior to January
1, 1995 due to the significant change in the capital structure in
connection with the Restructuring.
(4) The Company's fiscal year is based on a 52/53 week fiscal year ending on
the Sunday nearest to July 31. Therefore, the 1992 fiscal year included
53 weeks of operations. The 1995, 1994, 1993 and 1991 fiscal years each
had 52 weeks of operations.
(5) Total long-term debt includes long-term debt, current maturities of
long-term debt, capital lease obligations and certain other debt.
(6) Represents earnings before interest expense (which includes amortization
of deferred financing costs), provision for income taxes, depreciation
and amortization, store closing and other costs, reorganization items,
extraordinary items, and cumulative effect of change in accounting
principle. Operating cash flow (adjusted EBITDA) is presented here as
a measure of the Company's debt service ability, and should not be
construed as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) or to cash
flows from operating activities (as determined on the Statements of Cash
Flows in the Company's financial statements).
(7) Capital expenditures consist of cash expenditures, additions to capital
leases and, for the 1994, 1993 and 1992 fiscal years, amounts funded
under the capital improvements revolving credit facility under the Old
Credit Agreement (as defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
(8) Data relating to the number of stores is expressed in actual numbers.
(9) Represents the average of the selling square footage of the Company's
stores on the first and last day of the respective periods. Selling
square footage includes adjacent liquor stores where applicable but does
not include backroom and receiving areas.
(10) Represents, for each of the respective periods, sales for such period
divided by the sum of the number of weeks for which each of the
Company's stores was open during such period.
9<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This analysis should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this
document. The Company follows a 52/53 week fiscal year ending on
the Sunday nearest to July 31. Historical results of operations
are given for the Company's 52 week periods of operations ended
July 30, 1995, July 31, 1994 and August 1, 1993 (respectively, the
"1995, 1994 and 1993 Fiscal Years"). The financial statements as
of and for the 30 weeks ended July 30, 1995 reflect the Company's
emergence from Chapter 11 proceedings on December 29, 1994 and were
prepared utilizing the principles of fresh-start reporting
contained in the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" (the "SOP 90-
7").
The Restructuring
During the 1995 Fiscal Year, the Company completed a
comprehensive financial restructuring pursuant to a "prepackaged"
plan of reorganization (the "Restructuring") pursuant to Chapter 11
of the U.S. Bankruptcy Code. The Company filed its prepackaged
plan with the U.S. Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on November 9, 1994 (the "Petition Date").
During the pendency of the bankruptcy case, the Company, with the
approval of the Bankruptcy Court, operated its business in the
ordinary course, and paid all pre-petition and post-petition claims
of its general unsecured creditors, trade creditors and employees
in full. The Restructuring was confirmed by the Bankruptcy Court
on December 12, 1994, and the Company emerged from bankruptcy on
December 29, 1994 (the "Effective Date").
Pursuant to the provisions of the Restructuring, on the
Effective Date:
(1) Each $1,000 principal amount of the Company's $85.0
million Senior Floating Rate Notes due August 2, 1996 (the "Old
Senior Floating Rate Notes") was exchanged for (a) new Senior
Floating Rate Notes due February 1, 2003 (the "New Senior Floating
Rate Notes") in an original principal amount equal to $1,000 plus
100% of the accrued interest under the Old Senior Floating Rate
Notes from and including February 3, 1994, through but not
including the Petition Date, or, at such holder's election, (b) new
11.5% Senior Fixed Rate Notes due February 1, 2003 (the "New Senior
Fixed Rate Notes") in the same original principal amount, or, at
such holder's election, (c) an amount of New Senior Floating Rate
Notes and an amount of New Senior Fixed Rate Notes equal, in the
aggregate, to 100% of such claim;
(2) Each $1,000 principal amount of the Company's $50.0
million 12 3/8% Senior Fixed Rate Notes due February 1, 1999 (the
"Old Senior Fixed Rate Notes") was exchanged
10<PAGE>
for (a) New Senior Floating Rate Notes in an original principal amount equal
to $1,000 plus 100% of the accrued interest under the Old Senior Fixed Rate
Notes from and including February 2, 1994, through but not including
the Petition Date, or, at such holder's election, (b) New Senior Fixed
Rate Notes in the same original principal amount, or, at such holder's
election, (c) an amount of New Senior Floating Rate Notes and an amount
of New Senior Fixed Rate Notes equal, in the aggregate, to 100% of such
claim;
(3) the Company's $105.0 million 14% Subordinated Debentures
due February 1, 2001 (the "Old Subordinated Debentures") were
exchanged for the aggregate amount of 2,634,973 (3,952,443 after
giving effect to the 3-for-2 stock split in July 1995) shares of
newly-issued Common Stock, representing 85 percent of the Common
Stock outstanding on the Effective Date;
(4) Green Equity Investors, L.P. ("GEI") invested $10.0
million cash in exchange for 465,000 (697,500 after giving effect
to the 3-for-2 stock split in July 1995) shares of newly-issued
Common Stock, representing 15 percent of the Common Stock
outstanding on the Effective Date; and
(5) all of the existing preferred stock, common stock, and
options and warrants to purchase common stock of the Company were
extinguished.
Also pursuant to the Restructuring, the Company refinanced its
principal bank indebtedness on the Effective Date by entering into
a new credit agreement with The CIT Group/Business Credit, Inc., as
administrative agent for itself and certain other lenders (the "New
Credit Agreement"). The New Credit Agreement provides the Company
with a 3-year $35.0 million term loan facility and a 3-year $50.0
million revolving credit facility, and is secured by liens upon
substantially all of the Company's real and personal property. As
a result of such refinancing, the obligations of the Company under
the Credit Agreement dated October 12, 1988, as restated on
September 14, 1989, and thereafter amended, with Bank of America
National Trust and Savings Association (as successor by merger to
Security Pacific National Bank), as administrative agent, and
certain other senior lenders (the "Old Credit Agreement"), were
satisfied, and the Old Credit Agreement was terminated. See "--
Financial Condition."
11<PAGE>
Results of Operations
The discussion below compares the results of operations for
the 1995, 1994 and 1993 Fiscal Years. Except as specifically
acknowledged below, management believes that the impact of the
Restructuring and the implementation of fresh-start reporting did
not significantly affect the results of operations for the 1995
Fiscal Year, and that the combined operating results of the
individual 30-week period and 22-week period ended July 30, 1995
and January 1, 1995, respectively, are indicative of the results of
operations for the 52-week period ended July 30, 1995.
The following table sets forth certain items from the
Company's Statements of Operations as a percentage of sales for the
periods indicated:
Reorganized Predecessor
Company Company
-------- ------------------
1995 1994 1993
Fiscal Fiscal Fiscal
Year Year Year
------ ------ ------
Sales 100.0% 100.0% 100.0%
Gross profit 20.8% 20.6% 21.2%
Selling, general and
administrative expenses 15.5% 16.6% 16.1%
Depreciation and amortization 2.4% 2.3% 2.2%
Operating income 2.9% 0.7% 2.9%
Interest expense 2.9% 4.3% 4.0%
Net income (loss) 5.8%(1) -3.6%(2) -1.1%
(1) Net income for the 1995 Fiscal Year includes a non-recurring
gain on debt discharge (6.8% of sales) offset by other
reorganization items (-0.5% of sales) and cumulative effect of
change in accounting principle (-0.2% of sales) recorded for
the 22-week period ended January 1, 1995. Net income, as a
percentage of sales, for the 30 weeks ended July 30, 1995
(post-Restructuring) was 0.5%.
(2) Net income for the 1994 Fiscal Year included expenses of
$11,016, or 1.0% of sales, applicable to store closing and
other costs.
12<PAGE>
Sales
Reorganized Predecessor
Company Company
-------- ------------------
1995 1994 1993
Fiscal Fiscal Fiscal
Year Year Year
-------- -------- --------
Sales (in millions) $1,026 $1,065 $1,086
Number of stores:
Food stores opened or acquired -- 2 8
Food stores closed 1 17 4
Expansion remodels -- 1 2
Total food stores at period end 99 100 115
Average selling square feet
during year (in thousands) 2,913 3,084 3,100
Average sales per store week
(in thousands) $199 $196 $183
Total sales have decreased slightly over the last three years
as a result of operating twelve fewer stores, low overall retail
price increases, and the impact of 41 additional competitive
supermarket openings during this period.
Gross Profit
The improvement in gross profit, as a percentage of sales, for
the 1995 Fiscal Year was primarily due to restoring investment in
forward buy inventory, improved perishable margins, and increased
efficiencies in store-level product preparation and handling costs.
Partially offsetting these improvements was the receipt of
substantially less promotional funds due in part to the credit
restrictions placed on the Company by its vendors during the period
preceding the Company's emergence from bankruptcy.
The decrease in gross profit as a percentage of sales from the
1993 Fiscal Year to the 1994 Fiscal Year was attributable to the
impact of eliminating investment in forward buy inventory
(estimated to be approximately 57 basis points), receipt of fewer
promotional funds, and generally lower retail prices, partially
offset by improved perishable margins and efficiencies in product
preparation and handling.
Selling, General and Administrative Expenses
The reductions of selling, general and administrative
expenses for the 1995 Fiscal Year compared with the 1994 Fiscal
Year were due to lower store labor costs (approximately 0.3% of
sales), reduced corporate overhead expenses (approximately 0.3% of
sales), and lower advertising expenditures (approximately 0.4% of
sales) associated with a comprehensive operational restructuring of
the Company initiated during the year; and the elimination of
operating costs associated with stores that were closed during the
1994 Fiscal Year. These improvements were partially offset by an
increase in workers' compensation insurance reserves.
13<PAGE>
The increase of $1.8 million from the 1993 Fiscal Year to the
1994 Fiscal Year was primarily the result of increased occupancy
costs and other expenses related to stores opened, acquired or
remodeled, and an increase in insurance reserves and advertising
expenses, offset by reduced operating costs due to store closings.
The increase as a percentage of sales was attributable to operating
costs of comparable stores in the aggregate declining at a lesser
rate than the rate of sales decline in those stores.
Depreciation and Amortization
The increase in depreciation and amortization expenses for the
1995 Fiscal Year was primarily attributable to increased
amortization of intangible assets.
The increase in depreciation and amortization expenses from
the 1993 Fiscal Year to the 1994 Fiscal Year was primarily
attributable to the new stores and major remodels.
Store Closing and Other Costs
During the first quarter of the 1994 Fiscal Year, the Company
recorded a non-recurring charge of $11.0 million. This charge
included $1.9 million of costs associated with a proposed public
offering of debt securities and a proposed real estate-based
revolving credit facility, neither of which was consummated, $4.2
million of favorable lease interests written off in connection with
the closing of 12 underperforming stores, $4.0 million representing
an adjustment to the expected lease liability on closed stores, net
of sublease income, and $.9 million of other store closing and
related expenses.
Interest Expense
Reorganized Predecessor
Company
------- -------------------
1995 1994 1993
Fiscal Fiscal Fiscal
Year Year Year
-------- -------- -------
(In Thousands)
Interest expense $27,638 $42,917 $41,211
Amortization of
deferred financing costs 1,961 2,950 2,850
Capitalized interest (70) (477) (804)
-------- -------- --------
Total interest expense $29,529 $45,390 $43,257
======== ======== ========
Interest expense for the 1994 and 1993 Fiscal Years was
primarily comprised of interest under the Old Credit Agreement, the
Old Senior Floating Rate Notes, the Old Senior Fixed Rate Notes,
the Old Subordinated Debentures, and various mortgages and capital
leases. For
14<PAGE>
the 1995 Fiscal Year, interest expense was incurred on
the Old Senior Floating Rate Notes, the Old Senior Fixed Rate
Notes, and the Old Subordinated Debentures through the Petition
Date; and interest expense was incurred on the New Senior Floating
Rate Notes and the New Senior Fixed Rate Notes from the Effective
Date through July 30, 1995. In accordance with the provisions of
the Restructuring, no interest was due to the holders of the Old
Senior Floating Rate Notes, Old Senior Fixed Rate Notes, or Old
Subordinated Debentures for the period between the Petition Date
and the Effective Date, and therefore no interest expense was
recorded for this period. As provided in the Restructuring,
interest accrued from and including February 2, 1994, in the case
of the Old Senior Fixed Rate Notes, and from and including February
3, 1994, in the case of the Old Senior Floating Rate Notes, through
the Petition Date, was paid by issuing additional New Senior
Floating Rate Notes and New Senior Fixed Rate Notes. Interest on
the Old Subordinated Debentures accrued from and including February
2, 1994 through the Petition Date was converted into newly issued
Common Stock.
Reorganization Costs
In accordance with SOP 90-7, income and costs directly related
to the reorganization have been segregated and are separately
disclosed. The major components consist of adjustments to fair
value, provision for store closing costs, provision for severance
benefits, provision for other restructuring activities, and
professional fees.
Gain on Debt Discharge
The gain on debt discharge reflects the conversion of $105.0
million of Old Subordinated Debentures, plus accrued interest from
and including February 2, 1994 through the Petition Date, into
$39.5 million of stockholders' equity, resulting in a $70.2 million
gain. The gain is presented net of write-offs and costs associated
with the debt discharged.
Financial Condition
Prior to the Petition Date, the Company's Old Credit Agreement
provided for a revolving credit facility with individual sublimits
of $30.0 million for working capital loans and $25.0 million for
letters of credit, with a maximum of $50.0 million outstanding
under the total facility at any one time. During the weeks
immediately preceding the bankruptcy filing, the Company, with the
approval of its bank lenders, increased its cash position by fully
drawing the remaining availability under its working capital line.
On the Petition Date, the Bankruptcy Court approved the use of cash
collateral and a letter of credit facility of $17.7 million under
the Old Credit Agreement, and additional debtor-in-possession
financing provided by BankAmerica Business Credit, Inc. of $11.2
million, subject to certain terms and conditions. The outstanding
borrowings under those facilities were refinanced on the Effective
Date, when the Company entered into the New Credit Agreement with
The CIT Group/Business Credit Inc. ("CIT") and certain bank lenders
to provide a 3-year $35.0 million term loan facility and a 3-year
$50.0 million revolving credit facility.
15<PAGE>
Beginning August 1, 1994, the Company implemented a new short-
term business strategy to improve the Company's financial
performance. The focus of this strategy was to conserve capital,
reduce administrative and operating expenses, and direct management
attention toward the operation of existing stores. During the 1995
Fiscal Year the Company significantly improved its liquidity as a
result of the payment moratorium on interest due on the Old Senior
Fixed Rate Notes, Old Senior Floating Rate Notes, and Old
Subordinated Debentures; managing working capital; reducing
operating expenses by approximately $12.0 million on an annualized
basis; and limiting capital expenditures. During the pendency of
its bankruptcy case, the Company operated its business in the
ordinary course, and paid all pre-petition and post-petition claims
of the Company's general unsecured creditors, trade creditors, and
employees in full. The provisions of the Restructuring, which are
discussed in footnote 1 to the accompanying financial statements,
had an immediate beneficial impact on the Company's financial
condition, primarily as a result of significantly deleveraging the
Company's balance sheet, as indicated below:
Reorganized Predecessor
Company Company
--------- ---------
July 30, July 31,
1995 1994
--------- ---------
(Dollar Amounts in Thousands)
Current portion of
long-term debt $ 5,563 $ 42,740
Total long-term debt 223,694 360,121
Operating cash flow
(adjusted EBITDA)(1) 54,497 42,623
Total interest expense 26,814(2) 45,390
Cash interest expense 11,340(2) 42,440
Capital expenditures 6,247 15,471
Long-term debt/operating
cash flow 4.25(3) 8.45
Operating cash flow/
total interest expense 2.03 0.94
Operating cash flow/
cash interest expense 4.81 1.00
(1) Represents twelve month trailing earnings before interest
expense (which includes amortization of deferred financing
costs), provision for income taxes, depreciation and
amortization, store closing and other costs, reorganization
items, extraordinary items, and cumulative effect of change in
accounting principle. Operating cash flow (adjusted EBITDA)
is presented here as a measure of the Company's debt service
ability and should not be construed as an alternative to
operating income (as determined in accordance with generally
accepted accounting principles) or to cash flows from
operating activities (as determined on the Statements of Cash
Flows in the Company's financial statements).
(2) Interest expense for the trailing twelve-month period is not
meaningful due to the payment moratorium on the Old Senior
Notes and Old Subordinated Debentures. Therefore, total
interest expense and cash interest expense as shown here
represent
16<PAGE>
annualized proforma amounts based on reported
interest expense for the third and fourth quarters of the 1995
Fiscal Year.
(3) Assumes long-term debt is increased by the non-cash interest
accrued as of July 30, 1995.
The Company recently completed a financing of three of its
fee-owned store properties and applied the net proceeds of $9.1
million to the outstanding balance of the term loan under the New
Credit Agreement. The Company is still actively pursuing an
additional refinancing transaction on eight other mortgaged store
properties, the sale-leaseback of an additional store facility that
is operating as a ground lease, the sale of an unencumbered real
estate site, and the sale of its beneficial interest in three real
estate trusts, the total of which could provide up to an additional
$10.0 million of net cash proceeds. In addition, in August the
Company exercised its option of paying interest in kind on the New
Senior Floating Rate Notes and the New Senior Fixed Rate Notes, and
has the option of paying in kind the next subsequent semi-annual
interest payment on the New Senior Fixed Rate Notes.
As a result of its increased liquidity and the application of
the proceeds of the financing discussed above, the Company has
prepaid a total of $24.9 million on its term loan. As of October
13, 1995, the outstanding principal balance under the term loan
facility was $4.8 million, and the Company had $21.9 million in
borrowings and $12.5 million in letters of credit outstanding under
the revolving loan facility under the New Credit Agreement. The
Company intends to repay the remaining balance of its term loan
facility with the net cash proceeds from the transactions described
above. Additionally, the Company has received a commitment from
CIT to amend the New Credit Agreement by extending the term through
December 1998 and providing more favorable terms.
Consistent with its short-term business strategy for the 1995
fiscal year, the Company did not open or acquire any new stores
during the year, but spent $6.2 million to upgrade its existing
stores. For the 1996 fiscal year, the Company expects that capital
expenditures of approximately $28.0 million will be used to open
two new stores and complete major and minor remodels of
approximately ten stores and 24 stores.
In March 1995, the Company entered into a ten year agreement
to outsource its information systems. As a result of the
outsourcing agreement, the Company anticipates that its total
annual information systems expenditures through 2000 will range
from approximately $8.6 million to $9.9 million, as compared with
total information systems expenditures of $9.5 million and $9.1
million, respectively, for the 1993 and 1994 Fiscal Years, and
approximately $8.9 million for the 1995 Fiscal Year. The
outsourcing agreement provides for new application software in the
areas of merchandise procurement, store billings, warehouse
control, accounts payable, and labor tracking/scheduling, as well
as new point-of-sale equipment for each store. Absent the
outsourcing agreement, the Company estimates that these system
enhancements would have required approximately $10.0 million in
additional capital outlays during the 1995 and 1996 Fiscal Years.
17<PAGE>
Based upon the Company's ability to generate working capital
through its operations and its $50.0 million revolving credit
facility, the Company believes that it has the financial resources
necessary to pay its capital obligations and implement its business
plan.
Effects of Inflation
The Company's primary costs, inventory and labor, are affected
by a number of factors that are beyond its control, including
availability and price of merchandise, the competitive climate and
general and regional economic conditions. As is typical of the
supermarket industry, the Company has generally been able to
maintain margins by adjusting its retail prices, but competitive
conditions may from time to time render it unable to do so while
maintaining its market share.
FINANCIAL STATEMENTS
The financial statements of the Company begin on page 19.
18<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kash n' Karry Food Stores, Inc.:
We have audited the accompanying balance sheet of Kash n' Karry Food
Stores, Inc. (the Company) as of July 30, 1995 and the related statements
of operations, stockholders' equity and cash flows for the thirty weeks
ended July 30, 1995 and the twenty-two weeks ended January 1, 1995. 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 audit.
We conducted our audit 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 audit
provides 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 Kash n' Karry Food
Stores, Inc. as of July 30, 1995, and the results of its operations and its
cash flows for the thirty weeks ended July 30, 1995 and the twenty-two
weeks ended January 1, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Bankruptcy Court
confirmed the Company's prepackaged Plan of Reorganization dated December
12, 1994, and the Company emerged from bankruptcy on December 29, 1994. On
January 1, 1995 the Company accounted for the reorganization and adopted
"fresh start accounting." As a result, the Company's July 30, 1995 balance
sheet is not comparable to the July 31, 1994 balance sheet, since it
presents the financial position of the reorganized entity.
As discussed in Note 12 to the financial statements, the Company adopted
the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions," as of January 1, 1995.
/s/ Coopers & Lybrand, L.L.P.
- -----------------------------------
Tampa, Florida
September 15, 1995
19<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kash n' Karry Food Stores, Inc.:
We have audited the accompanying balance sheet of Kash n' Karry Food
Stores, Inc. as of July 31, 1994 and the related statements of operations,
stockholders' deficit, and cash flows for the fifty-two weeks ended July
31, 1994 and August 1, 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 audits 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 Kash n' Karry Food
Stores, Inc. at July 31, 1994, and the results of its operations and its
cash flows for the fifty-two weeks ended July 31, 1994 and August 1, 1993,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Kash
n' Karry Food Stores, Inc. will continue as a going concern. However, Kash
n' Karry Food Stores, Inc. has suffered recurring losses from operations
and has a net capital deficiency. As discussed in Note 1 to the financial
statements, Kash n' Karry Food Stores, Inc. filed a pre-packaged petition
under Chapter 11 of the United States Bankruptcy Code on November 9, 1994
and these matters raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
- -----------------------------------
Tampa, Florida
September 16, 1994, except with respect to
Note 1, which is as of November 9, 1994
20<PAGE>
KASH N' KARRY FOOD STORES, INC.
BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Amounts)
ASSETS
Reorganized Predecessor
Company Company
------------ -----------
July 30, July 31,
1995 1994
------------ -----------
(Note 1)
Current assets:
Cash and cash equivalents $ 4,803 $ 6,852
Accounts receivable 6,504 8,084
Inventories 86,840 76,094
Prepaid expenses and other current assets 4,310 12,805
--------- ---------
Total current assets 102,457 103,835
Property and equipment, at cost, less
accumulated depreciation 139,967 160,491
Favorable lease interests, less accumulated
amortization of $1,152 and $13,543 28,802 12,312
Deferred financing costs, less accumulated
amortization of $809 and $22,572 3,684 12,630
Reorganization value in excess of amount allocable
to identifiable assets, less accumulated
amortization of $6,627 94,692 --
Excess of cost over net assets acquired, less
accumulated amortization of $16,288 -- 96,758
Deferred tax asset 1,200 --
Other assets 2,770 3,867
--------- ---------
Total assets $373,572 $389,893
========= =========
See accompanying notes to financial statements.
21<PAGE>
KASH N' KARRY FOOD STORES, INC.
BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reorganized Predecessor
Company Company
------------ -----------
July 30, July 31,
1995 1994
------------ -----------
(Note 1)
Current liabilities:
Current portion of long-term debt $ 5,563 $ 42,740
Accounts payable 39,231 34,908
Accrued expenses 44,499 38,934
--------- ---------
Total current liabilities 89,293 116,582
Long-term debt, less current obligations 218,131 317,381
Other long-term liabilities 16,510 12,334
Old Series B Cumulative Preferred Stock of $.01 par
value and a stated value of $100 a share.
Authorized 50,000 shares; 38,750 shares
outstanding. -- 3,875
Old Series C Convertible Preferred Stock of
$.01 par value. Authorized 100,000 shares;
77,500 shares outstanding. -- 775
Stockholders' equity (deficit):
New Common Stock of $.01 par value.
Authorized 5,500,000 shares; 4,649,943
shares outstanding. 46 --
Old Common Stock of $.01 par value.
Authorized 4,000,000 shares; 2,819,589
shares outstanding. -- 28
New Preferred Stock of $0.01 par
value. Authorized 1,000,000 shares;
no shares outstanding. -- --
Capital in excess of par value 46,449 77,695
Retained earnings (deficit) 3,143 (138,740)
Less cost of treasury stock - 2,437 shares
at July 31, 1994 -- (37)
--------- ---------
Total stockholders' equity (deficit) 49,638 (61,054)
--------- ---------
Total liabilities & stockholders' equity $373,572 $389,893
========= =========
See accompanying notes to financial statements.
22<PAGE>
KASH N' KARRY FOOD STORES, INC.
STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Per Share Amounts)
Reorganized
Company Predecessor Company
---------- ----------------------------------
30 Weeks 22 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended
July 30, January 1, July 31, August 1,
1995 1995 1994 1993
---------- ---------- ---------- ------------
Sales $599,320 $426,681 $1,065,165 $1,086,125
Cost of sales 471,401 340,802 845,597 856,156
---------- ---------- ---------- ----------
Gross profit 127,919 85,879 219,568 229,969
Selling, general and
administrative expenses 90,482 68,819 176,945 175,177
Depreciation and amortization 14,802 10,234 24,112 23,455
Store closing and other costs -- -- 11,016 --
---------- ---------- ---------- ----------
Operating income 22,635 6,826 7,495 31,337
Interest expense 15,810 13,719 45,390 43,257
Income (loss) before ---------- ---------- ---------- ----------
reorganization items,
income taxes, extra-
ordinary item, and change
in accounting principle 6,825 (6,893) (37,895) (11,920)
Reorganization items -- (4,869) -- --
Income (loss) before ---------- ---------- ---------- ----------
income taxes, extraordinary
item and change in
accounting principle 6,825 (11,762) (37,895) (11,920)
Provision for income taxes (3,682) -- -- --
Income (loss) before ---------- ---------- ---------- ----------
extraordinary item and change
in accounting principle 3,143 (11,762) (37,895) (11,920)
Extraordinary item- gain
on debt discharge -- 70,166 -- --
Cumulative effect of change in
accounting principle - post-
retirement medical benefits -- (2,000) -- --
---------- ---------- ---------- ----------
Net income (loss) $ 3,143 $ 56,404 $ (37,895)$ (11,920)
========== ========== ========== ==========
Net income per common
share (A)(B) $ 0.67
==========
(A) Based on a weighted average number of shares of common stock of
4,649,943 outstanding.
(B) Net income per common share is not meaningful prior to January 1,
1995 due to the significant change in the capital structure in
connection with the Restructuring.
See accompanying notes to financial statements.
23<PAGE>
KASH N' KARRY FOOD STORES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Fiscal Years Ended July 30, 1995,
July 31, 1994, and August 1, 1993
(Dollar Amounts In Thousands)
Capital
in Excess Retained
Common of Par Earnings Treasury
Stock Value (Deficit) Stock Total
------ --------- ----------- -------- ---------
Predecessor Company:
Balance at August 2, 1992 $ 28 $ 77,691 $ (88,925) $(33) $(11,239)
(2,819,866 shares
outstanding)
Purchase of 2,713 shares
for Treasury -- -- -- (40) (40)
Sale of 2,436 shares
of Treasury Stock -- 4 -- 36 40
Loss for period -- -- (11,920) -- (11,920)
----- ---------- ---------- ----- ---------
Balance at August 1, 1993 28 77,695 (100,845) (37) (23,159)
(2,819,589 shares
outstanding)
Loss for period -- -- (37,895) -- (37,895)
----- ---------- ---------- ----- ---------
Balance at July 31, 1994 28 77,695 (138,740) (37) (61,054)
(2,819,589 shares
outstanding)
Income for period -- -- 56,404 -- 56,404
Extinguishment of
preferred stock in
connection with
bankruptcy -- 4,650 -- -- 4,650
Extinguishment of
stockholders' equity
in connection with
bankruptcy (28) (82,345) 82,336 37 --
----- ---------- ---------- ----- ---------
Balance at January 1, 1995 $ -- $ -- $ -- $ -- $ --
===== ========== ========== ===== =========
Reorganized Company:
Issuance of 4,649,943
shares of common stock $ 46 $ 46,449 $ -- $ -- $ 46,495
at reorganization value
Income for period -- -- 3,143 -- 3,143
----- ---------- ---------- ----- ---------
Balance at July 30, 1995 $ 46 $ 46,449 $ 3,143 $ -- $ 49,638
(4,649,943 shares ===== ========== ========== ===== =========
outstanding)
See accompanying notes to financial statements.
24<PAGE>
KASH N' KARRY FOOD STORES, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
Reorganized Predecessor
Company Company
---------- ----------------------------------
30 Weeks 22 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended
July 30, January 1, July 31, August 1,
1995 1995 1994 1993
--------- --------- --------- ---------
Net cash flows from
operating activities:
Net income (loss) $ 3,143 $ 56,404 $ (37,895) $ (11,920)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization, excluding
deferred financing costs 14,802 10,234 24,112 23,455
Store closing and other
costs -- -- 11,016 --
Amortization of deferred
financing costs 809 1,152 2,950 2,850
Provision for income taxes 3,682 -- -- --
Reorganization items -- 4,869 -- --
Change in accounting
principle -- 2,000 -- --
Gain on debt discharge -- (70,166) -- --
(Increase) decrease in assets:
Accounts receivable (743) 2,322 2,804 (3,778)
Inventories 273 (5,917) 19,291 (4,159)
Prepaid expenses and
other assets (1,241) (194) (278) (5,426)
Increase (decrease) in
liabilities:
Accounts payable 2,522 1,800 (7,653) 3,722
Accrued expenses and
other liabilities 5,359 9,083 (1,565) (3,684)
--------- --------- --------- ---------
Net cash provided by
operating activities 28,606 11,587 12,782 1,060
--------- --------- --------- ---------
Cash provided (used) by investing
activities:
Additions to property and
equipment (5,582) (665) (10,942) (13,103)
Leased asset additions -- -- (4,529) (24,600)
Sale of property and equipment -- -- 504 91
--------- --------- --------- ---------
Net cash used by
investing activities (5,582) (665) (14,967) (37,612)
--------- --------- --------- ---------
See accompanying notes to financial statements.
25<PAGE>
KASH N' KARRY FOOD STORES, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
(In Thousands)
Reorganized Predecessor
Company Company
---------- ----------------------------------
30 Weeks 22 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended
July 30, January 1, July 31, August 1,
1995 1995 1994 1993
--------- --------- --------- ---------
Cash provided (used) by financing
activities:
Borrowings under term and
revolving loan facilities 9,992 50,800 17,700 38,100
Additions to obligations
under capital leases and
notes payable -- -- 5,230 14,867
Sale of Common Stock -- 10,000 -- --
Repayments of term and
revolving loan facilities (26,349) (60,928) (5,488) (12,881)
Repayments of other long-term
liabilities (2,588) (7,363) (9,212) (4,415)
Financing costs (265) (9,294) (1,338) (1,453)
--------- --------- --------- ---------
Net cash provided (used)
by financing activities (19,210) (16,785) 6,892 34,218
--------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 3,814 (5,863) 4,707 (2,334)
Cash and cash equivalents at
beginning of period 989 6,852 2,145 4,479
--------- --------- --------- ---------
Cash and cash equivalents at
the end of period $ 4,803 $ 989 $ 6,852 $ 2,145
========= ========= ========= =========
See accompanying notes to financial statements.
26<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(1) Reorganization and Basis of Reporting.
During the 1995 fiscal year, the Company completed a comprehensive
financial restructuring pursuant to a "prepackaged" plan of reorganization
(the "Restructuring") pursuant to Chapter 11 of the U.S. Bankruptcy Code.
The Company filed its prepackaged plan with the U.S. Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") on November 9, 1994 (the
"Petition Date"). During the pendency of the bankruptcy case, the Company,
with the approval of the Bankruptcy Court, operated its business in the
ordinary course, and paid all pre-petition and post-petition claims of its
general unsecured creditors, trade creditors and employees in full. The
Restructuring was confirmed by the Bankruptcy Court on December 12, 1994,
and the Company emerged from bankruptcy on December 29, 1994 (the
"Effective Date"). Pursuant to the provisions of the Restructuring, on the
Effective Date:
(i) Each $1 principal amount of the Company's Old Senior
Floating Rate Notes was exchanged for (a) new Senior Floating Rate Notes
due February 1, 2003 (the "New Senior Floating Rate Notes") in an original
principal amount equal to $1 plus 100% of the accrued interest under the
Old Senior Floating Rate Notes from and including February 3, 1994, through
but not including the Petition Date, or, at such holder's election, (b) new
11.5% Senior Fixed Rate Notes due February 1, 2003 (the "New Senior Fixed
Rate Notes") in the same original principal amount, or, at such holder's
election, (c) an amount of New Senior Floating Rate Notes and an amount of
New Senior Fixed Rate Notes equal, in the aggregate, to 100% of such claim;
(ii) Each $1 principal amount of the Company's Old Senior Fixed
Rate Notes was exchanged for (a) New Senior Floating Rate Notes in an
original principal amount equal to $1 plus 100% of the accrued interest
under the Old Senior Fixed Rate Notes from and including February 2, 1994,
through but not including the Petition Date, or, at such holder's election,
(b) New Senior Fixed Rate Notes in the same original principal amount, or,
at such holder's election, (c) an amount of New Senior Floating Rate Notes
and an amount of New Senior Fixed Rate Notes equal, in the aggregate, to
100% of such claim;
(iii) the Old Subordinated Debentures were exchanged for
newly-issued common stock of the Company representing 85 percent of the
common stock outstanding on the Effective Date;
(iv) Green Equity Investors, L.P. invested $10,000 cash in
exchange for newly-issued common stock of the Company representing 15
percent of the common stock outstanding on the Effective Date;
(v) the Company entered into a new credit agreement with The CIT
Group/Business Credit, Inc. as Administrative Agent, and the lenders under
its old bank credit agreement; and
(vi) all of the existing preferred stock, common stock, and
options and warrants to purchase common stock of the Company was
extinguished.
27<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Given the automatic stay provisions of the bankruptcy filing, certain
portions of these debt obligations were classified as long-term on the July
31, 1994 balance sheet.
The financial statements as of and for the period ended July 30, 1995
reflect the Company's emergence from Chapter 11 and were prepared according
to the principles of fresh start reporting contained in American Institute
of Certified Public Accountants' Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (the
"SOP 90-7"). Operations during the period from the Effective Date through
January 1, 1995 had no significant impact on the emergence transactions and
as a result have not been separately identified. As a result of the
implementation of fresh start reporting, the Company's financial statements
as of and for the period ended July 30, 1995 are not comparable to the
Company's financial statements of prior periods. Therefore, financial
statements for the "Reorganized Company" have been separately identified
from those of the "Predecessor Company."
The total reorganization value assigned to the Company's assets was
estimated based on a ten-year projection of cash flow before debt service
requirements discounted back to present value using a discount rate of
13.3% (representing the estimated weighted cost of capital), as well as by
analyzing market cash flow multiples and applying a cash flow multiple of
six to the Company's adjusted 12-month trailing cash flows. After
extensive negotiations between independent investment banking firms
representing the Company and an ad hoc committee of bondholders, the
reorganization value was agreed to by the parties and confirmed by the
Bankruptcy Court. The excess of the reorganization value over the value of
the identifiable assets is reported as "Reorganization Value in Excess of
Amount Allocable to Identifiable Assets" and is being amortized over twenty
years. Under the principles of fresh start accounting, the Company's total
assets were recorded at this assumed reorganization value, with the
reorganization value allocated to identifiable tangible and intangible
assets on the basis of their estimated fair value. In addition, the
Company's accumulated deficit was eliminated.
The effect of the Restructuring and the implementation of fresh start
accounting on the Company's balance sheet as of January 1, 1995 was as
follows:
28<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Fresh
Start
Pre-Fresh Balance
Start Balance Adjustments Sheet
Sheet January of Fair Value January
1, 1995 Restructuring Adjustment 1, 1995
(A) (B)
------------- ------------- ---------- --------
Cash and cash equivalents $ 9,166 $ (8,177) $ -- $ 989
Accounts receivable 5,762 -- -- 5,762
Inventories 82,011 -- 5,104 87,115
Prepaid expenses and other
current assets 3,088 -- -- 3,088
--------- ---------- --------- --------
Total current assets 100,027 (8,177) 5,104 96,954
Property and equipment, net 162,754 -- (17,775) 144,979
Favorable lease interests,
net 11,673 -- 18,280 29,953
Deferred financing costs 17,769 (7,456) (6,088) 4,225
Reorganization value in
excess of amount alloc-
able to identifiable
assets -- -- 102,519 102,519
Excess of cost over net
assets acquired 95,560 -- (95,560) --
Other assets 4,360 -- (1,498) 2,862
--------- ---------- --------- --------
Total assets $392,143 $ (15,633) $ 4,982 $381,492
========= ========== ========= ========
Current liabilities, excluding
current portion of long-
term debt $ 82,983 $ (12,617) $ 6,779 $ 77,145
Long-term debt, including
current obligations 366,231 (119,486) (3,959) 242,786
Other long-term liabilities 6,226 -- 8,840 15,066
Redeemable preferred stock 4,650 (4,650) -- --
Common stock 28 18 -- 46
Treasury stock (37) 37 -- --
Capital in excess of par
value 77,695 (31,246) -- 46,449
Accumulated deficit (145,633) 152,311 (6,678) --
--------- ---------- --------- --------
Total liabilities
and stockholders'
equity $392,143 $ (15,633) $ 4,982 $381,492
========= ========== ========= ========
(A) To record the transactions applicable to the Restructuring as outlined
in footnote 1 and eliminate the deficit in accumulated deficit.
(B) To record the adjustments to state assets and liabilities at fair
value, and to record the cumulative effect of $2,000 of adopting SFAS
No. 106 as of the Effective Date in accordance with SOP 90-7.
29<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(2) Summary of Significant Accounting Policies.
Fiscal Year End. The Company follows a 52/53 week fiscal year ending
on the Sunday nearest July 31.
Inventories. Inventories consist of merchandise held for resale and
are stated at the lower of cost or market; cost is determined using average
cost, which approximates the first-in, first-out (FIFO) method.
Prepaid Expenses and Other Current Assets. Prior to 1995, the Company
classified capital expenditures to be refinanced within one year as prepaid
expenses and other current assets. These amounts are classified as
property and equipment at July 30, 1995. At July 31, 1994, prepaid
expenses and other current assets included $9,987 of expenditures for
construction in progress expected to be financed within one year.
Depreciation, Amortization, and Maintenance and Repairs. Depreciation
is provided principally using the composite method based on the estimated
useful lives of the respective asset groups. Amortization of leasehold
improvements is based on the estimated useful lives or the remaining lease
terms, whichever is shorter. Property under capital leases consists of
buildings and fixtures and equipment. Interest costs of property under
development are capitalized during the development period. Capitalized
amounts were $70, $477 and $804 for the fiscal years ended July 30, 1995,
July 31, 1994 and August 1, 1993, respectively. The approximate annual
rates used to compute depreciation and amortization are:
Reorganized Predecessor
Company Company
----------- -----------
Buildings and improvements 3% 5%
Fixtures and equipment 10% 10%
Transportation equipment 12% 25%
Leasehold improvements -- 8%
Maintenance and repairs are charged to expense as incurred. The
Company capitalizes expenditures for renewals and betterments.
Favorable Lease Interests. Prior to January 1, 1995, favorable lease
interests represented the present value of the excess of current market
rental rates over rents that existed under the Company's operating leases
of store locations as of October 12, 1988. Such costs were being amortized
on the straight-line method over the average life of the favorable leases.
On January 1, 1995, the Company's favorable lease interests were adjusted
to reflect the present value of the excess of current market rental rates
over rents that existed under the operating leases of store properties at
that date. Favorable lease interests are amortized on the straight-line
method over the average life of the favorable leases, which is
approximately twenty years.
Deferred Financing Costs. Deferred financing costs represent fees and
expenses related to various financing activities and are amortized on a
straight-line basis over the life of the related debt and classified as
interest expense.
30<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Reorganization Value in Excess of Amount Allocable to Identifiable
Assets. As discussed in footnote 1, under the principles of fresh-start
reporting, the Company allocated total reorganization value to identifiable
tangible and intangible assets on the basis of their estimated fair values.
The remaining amount is classified as reorganization value in excess of
amount allocable to identifiable assets and is being amortized over twenty
years.
Excess of Cost Over Net Assets Acquired. Prior to January 1, 1995,
excess of cost over net assets acquired represented the excess of amounts
paid over the fair value of net assets acquired, and was being amortized
over forty years. The unamortized balance of $95,560 was written off in
connection with the Restructuring.
Advertising Costs. Advertising costs are expensed as incurred.
Costs of Opening and Closing Stores. Preopening costs of new stores
are charged to expense in the year the store opens. These costs are
primarily labor to stock the store, preopening advertising, store supplies
and other expendable items. When operations are discontinued and a store
is closed, the remaining investment, net of realizable value, is charged
against earnings, and, for leased stores, a provision is made for the
remaining lease liability, net of expected sublease income.
Store Closing and Other Costs. During the first quarter of fiscal
1994 the Company recorded a non-recurring charge of $11,016. This charge
included $1,900 of costs associated with unsuccessful financing activities,
$4,159 of favorable lease interests written off in connection with the
closing of twelve underperforming stores, $4,000 representing an adjustment
to the expected lease liability on closed stores, net of sublease income,
and $957 of other store closing and related expenses.
Income Taxes. Prior to January 1, 1995, the Company was in a loss
position for income tax purposes, and, consequently, no income taxes were
provided. The Company adopted Statement of Financial Accounting Standards
No. 109 as of August 2, 1993. Under SFAS 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based upon differences between the financial
statement and income tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Interest Rate Hedge Agreements. The Company enters into interest rate
hedging agreements which involve the exchange of fixed and floating rate
interest payments periodically over the life of such agreements without the
exchange of the underlying principal amounts. The differential to be paid
or received is accrued as interest rates change and is recognized over the
life of the agreements as an adjustment to interest expense.
31<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Cash and Cash Equivalents. The Company considers all highly liquid
investment instruments with a maturity of three months or less when
purchased to be cash equivalents. There were no cash equivalents at July
30, 1995 or July 31, 1994.
Cash interest paid (excluding financing costs) was $12,198, $41,545
and $41,675 for the fiscal years ended July 30, 1995, July 31, 1994 and
August 1, 1993, respectively.
(3) Property and Equipment.
Property and equipment is summarized as follows:
Reorganized Predecessor
Company Company
--------- ---------
July 30, July 31,
1995 1994
--------- ---------
Land $ 13,504 $ 19,543
Buildings and improvements 55,896 63,517
Fixtures and equipment 66,631 100,717
Transportation equipment 902 2,593
Leasehold improvements -- 28,402
Construction in progress 6,193 4,115
--------- ---------
143,126 218,887
Less accumulated depreciation (8,869) (70,196)
--------- ---------
134,257 148,691
Property under capital leases
(less accumulated amortization
of $1,723 and $11,154) 5,710 11,800
--------- ---------
$139,967 $160,491
========= =========
(4) Accrued Expenses.
Accrued expenses consist of the following:
Reorganized Predecessor
Company Company
--------- ---------
July 30, July 31,
1995 1994
--------- ---------
Accrued payroll and benefits $ 9,217 $ 5,579
Accrued interest 10,673 15,849
Taxes, other than income 5,789 6,056
Accrued insurance reserves 6,064 4,886
Other accrued expenses 12,756 6,564
--------- ---------
$ 44,499 $ 38,934
========= =========
32<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(5) Long-Term Debt.
Long-term debt consists of the following:
Reorganized Predecessor
Company Company
--------- ---------
July 30, July 31,
1995 1994
--------- ---------
New term loan and revolving
credit facilities (A) $ 33,143 $ --
Old bank term and revolving
credit facilities (A) -- 59,629
New Senior Floating
Rate Notes (B) 22,953 --
New Senior Fixed Rate
Notes (C) 121,162 --
Old Senior Floating
Rate Notes (B) -- 85,000
Old Senior Fixed
Rate Notes (C) -- 50,000
Subordinated Debentures -- 105,000
Mortgages payable, bearing interest at
rates from 7.5% to 10.35%, in equal
monthly installments of $355, with
maturities from 1999 through 2003 (D) 33,108 34,368
Capital lease obligations and other 13,328 26,124
--------- ---------
Long-term debt including
current portion 223,694 360,121
Less current portion (E) (5,563) (42,740)
--------- ---------
Long-term debt $218,131 $317,381
========= =========
Carrying value is considered a reasonable estimate of the fair value
of the Company's financial instruments.
(A) In connection with the Restructuring, the Company entered into a
new term loan and revolving credit agreement (the "New Credit
Agreement") on December 29, 1994. At July 30, 1995, the
Company's New Credit Agreement provides for borrowings of up to
$15,750 under a term loan facility (with quarterly principal
repayments of $1,750 and a $14,000 repayment due when the
facility terminates on December 29, 1997) and a $50,000 revolving
credit facility with a $25,000 sublimit for letters of credit.
At July 30, 1995, the Company had $17,393 in borrowings under the
working capital line, and had $12,770 of letters of credit issued
against the revolving credit facility. Amounts outstanding under
the term facility bear interest (11.5% at July 30, 1995) equal to
the prime rate (as defined) plus 250 basis points. Amounts
outstanding under the revolving credit facility bear interest
(10.0% at July 30, 1995) equal to the prime rate plus 100 basis
points.
33<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(B) The New Senior Floating Rate Notes mature on February 1, 2003,
and bear interest (7.31% at July 30, 1995) payable August 1,
1995, and semiannually thereafter, at a rate equal to six-month
LIBOR (as defined in the New Senior Floating Rate Note Indenture)
plus 200 basis points. The New Senior Floating Rate Notes are
redeemable in whole or in part, at the option of the Company, on
not less than 30 nor more than 60 days' prior notice in amounts
of $1,000 or an integral multiple thereof, at 100% of the
principal amount and unpaid interest, if any, to the redemption
date. Through August 1, 1995, all interest on the New Senior
Floating Rate Notes may, at the option of the Company, be paid by
issuing in lieu of cash additional New Senior Floating Rate Notes
in an aggregate principal amount equal to the amount of interest
due. The Old Senior Floating Rate Notes bore interest (5.88% at
July 31, 1994) payable semiannually, at a rate equal to six-month
LIBOR plus 250 basis points.
(C) The New Senior Fixed Rate Notes mature on February 1, 2003, and
bear interest at 11.5% per annum, payable semiannually. The New
Senior Fixed Rate Notes are redeemable in whole or in part, at
the option of the Company, on not less than 30 nor more than 60
days' prior notice in amounts of $1,000 or an integral multiple
thereof, at 100% of the principal amount and unpaid interest, if
any, to the redemption date. Through February 1, 1996, all
interest on the New Senior Fixed Rate Notes may, at the option of
the Company, be paid by issuing in lieu of cash additional New
Senior Fixed Rate Notes in an aggregate principal amount equal to
the amount of interest due. The Old Senior Fixed Rate Notes bore
interest, payable semiannually, at an annual rate of 12.375%.
(D) In September 1989, the Company completed a $17,000 mortgage
financing of its warehouse, distribution and office facility; in
November 1989, seven fee-owned store properties were mortgaged
for $13,200; and in January 1990, an additional fee-owned store
property was mortgaged for $2,000. The net proceeds of these
transactions were used to reduce bank debt. Final payments of
$12,529 and $13,895 are due October 1999 and November 1999,
respectively, on these mortgages.
(E) The Company has prepaid the term loan through July 28, 1997.
Therefore, there is no current portion of the term loan.
(F) Approximate principal payments for the next five fiscal years
are:
Year Term Senior Capital
Ending Loans Notes Mortgages Leases Other Total
------ ------- ------ --------- ------- ----- -------
1996 $ -- $ -- $ 960 $3,654 $ 949 $ 5,563
1997 -- -- 1,057 2,100 752 3,909
1998 15,750 -- 1,163 645 640 18,198
1999 -- -- 1,282 203 540 2,025
2000 -- -- 27,058 140 521 27,719
34<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
The New Credit Agreement, which is secured by a pledge of
substantially all assets of the Company, requires the Company to maintain a
minimum net worth and to satisfy certain other financial ratios, and
provides for certain restrictions on nonstock distributions and certain
other restrictions. The New Senior Floating Rate Notes, the New Senior
Fixed Rate Notes, and certain other of the Company's indebtedness also
contain incurrence covenants that are less restrictive than the covenants
under the New Credit Agreement. At July 30, 1995, the Company was in
compliance with all covenants.
(6) Capital Stock.
The authorized capital stock of the Company consists of 5,500,000
shares of Common Stock, par value $.01 per share, and 1,000,000 shares of
Preferred Stock, par value $.01 per share. The authorized Preferred Stock
includes 35,000 shares of Series A Junior Participating Preferred Stock
(the "Series A Preferred").
In April 1995, the Company declared, pursuant to its rights plan, a
dividend of one preferred share purchase right ("Right") for each
outstanding share of Common Stock. Each Right initially entitled the
holder thereof to purchase from the Company one one-hundredth of a share of
Series A Preferred for a purchase price of $76 per one one-hundredth of a
preferred share, subject to certain adjustments. As a result of the 3-for-
2 stock split discussed below, the number of one one-hundredths of a
preferred share issuable upon exercise of each Right was adjusted from one
to 0.6667.
The Rights are not currently exercisable, and would become exercisable
only if a person or group of persons (an "Acquiring Person") acquires 25%
or more of the Common Stock (29% or more in the case of Leonard Green &
Associates, L.P., formerly known as Leonard Green & Partners, L.P. ("LGA")
or any other person or entity which at any time purchases all of the shares
owned by LGA), or certain actions are taken in respect of any such
acquisition. In the event any person or group becomes an Acquiring Person,
each holder of a Right would thereafter have the right to receive upon
exercise thereof that number of shares of Common Stock having a market
value of two times the exercise price of the Right. In addition, if there
is a merger or other business combination between the Company and an
Acquiring Person, each Right would entitle the holder to purchase that
number of shares of common stock of the Acquiring Person which at the time
of such transaction will have a market value of two times the exercise
price of the Right. The Rights, which expire on April 13, 2000, are
redeemable by the Company for a price of $.01 per Right.
The payment of cash dividends and the repurchase or redemption of
capital stock by the Company is restricted by the terms of the New Credit
Agreement and the indentures relating to the Company's New Senior Fixed
Rate Notes and New Senior Floating Rate Notes.
35<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
On June 14, 1995 the Company declared a 3-for-2 stock split effected
in the form of a stock dividend on its Common Stock, paid on July 17, 1995
to stockholders of record on June 26, 1995. All of the share and per share
data in the accompanying financial statements have been adjusted to reflect
the stock split.
(7) Reorganization Items.
Reorganization items included in the accompanying statements of
operations consist of the following items:
Adjustments to fair value $ 5,551
Provision for store closing costs (2,500)
Provision for severance benefits (3,220)
Provision for other restructuring
activities (3,180)
Professional fees (1,520)
--------
$(4,869)
========
In the Company's previous interim reporting, reorganization items
included a gain on extinguishment of preferred stock of $4,650. This
amount has been reclassified as of January 1, 1995 as a direct credit to
capital in excess of par value and resulted in a reduction of $4,650 in net
income for the 22 weeks ended January 1, 1995.
(8) Stock Option Plans.
Certain key employees, including all executive officers, were eligible
to receive nonqualified stock options to purchase Common Stock under the
Restated 1988 Management Stock Option Plan (the "1988 Option Plan") and/or
the 1991 Management Stock Option Plan (the "1991 Option Plan" and, together
with the 1988 Option Plan, the "Old Option Plans"). Options granted under
the 1988 Option Plan had an exercise price of the greater of 85% of fair
market value at the date of grant or $10 per share and options granted
under the 1991 Option Plan had an exercise price of (a) $16.13 per share
for options granted within 30 days of the approval of the 1991 Option Plan
by the stockholders of the Company and (b) thereafter at 100% of the fair
market value at the date of grant. As discussed in footnote 1, in
connection with the Restructuring, all of the outstanding options under the
Old Option Plans were extinguished on December 29, 1994, and the Old Option
Plans were effectively terminated as of that date.
In March 1995, the Company adopted the 1995 Key Employee Stock Option
Plan (the "New Option Plan"), which authorizes the issuance to eligible
participants of options to purchase up to 355,419 shares of Common Stock of
the Company. Options vest in serial increments in the amount of 20% per
year, on the last day of each of the 1995, 1996, 1997, 1998 and 1999 fiscal
years of the Company. However, upon the occurrence of a Merger Event or a
Change of Control (as defined in the New Option
36<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Plan), the options become 100% vested. The options expire, to the extent
not exercised, on the tenth anniversary of the date of grant. However,
upon termination of an optionee's employment with the Company, all unvested
options lapse, and all vested options expire 180 days after the termination
of employment, if such termination is due to the death, disability or
retirement of the optionee, or 45 days after the termination of employment,
if such termination is due to any other reason, other than a termination
for cause. If a termination for cause occurs, all vested and unvested
options expire immediately.
Also in March 1995, the Company adopted the 1995 Non-Employee Director
Stock Option Plan (the "Director Plan"). Options to purchase 27,000 shares
at $10.00 per share, vesting on July 30, 1995 and options to purchase
27,000 shares at $13.33 per share, vesting on July 28, 1996, were granted
under the Director Plan. At the same time, the Company granted to Green
Equity Investors, L.P. ("GEI") (in lieu of granting options under the
Director Plan to the representatives of GEI serving as Directors) options
to purchase 9,000 shares at $10.00 per share, vesting on July 30, 1995 and
options to purchase 9,000 shares at $13.33 per share, vesting on July 28,
1996 (such grants to GEI, together with the Director Plan and the New
Option Plan, the "1995 Option Plans"). All options granted to GEI and to
the non-employee Directors expire on March 8, 2005 or earlier upon the
occurrence of certain events.
A summary of changes in the 1995 Option Plans for the fiscal year
ended July 30, 1995 is presented below:
Stock options outstanding at
beginning of year --
Granted 351,250
Exercised --
Forfeited 30,464
Outstanding at end of year 320,786
Exercisable at end of year 64,157
Average option price per share $ 11.70
Reserved for future grant 34,633
(9) Leases.
The Company leases certain stores, other facilities and equipment
under leases that are not cancelable. Such leases generally contain
renewal options exercisable at the Company's option. In addition to
minimum rental payments, certain leases provide for payments of taxes,
maintenance and percentage rentals based upon sales in excess of stipulated
amounts. The future minimum payments under leases that are not cancelable,
as of July 30, 1995, are:
37<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Operating Capital
Year Ending in leases leases
-------------- --------- --------
1996 $ 23,179 $ 4,114
1997 22,150 2,429
1998 21,369 706
1999 21,597 223
2000 21,472 140
Thereafter 229,418 --
-------- --------
Total minimum lease payments $339,185 $ 7,612
========
Less portion representing interest ( 870)
Present value of net minimum lease payments at --------
July 30, 1995 $ 6,742
========
Total rent expense was $25,738, $26,883, and $25,921 for the fiscal
years ended July 30, 1995, July 31, 1994 and August 1, 1993, respectively.
Included in total rent expense are percentage rents totaling $295, $241 and
$446 for 1995, 1994 and 1993, respectively.
(10) Income Taxes.
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
The components of the provision for income taxes for the 30 weeks
ended July 30, 1995 are as follows:
Current
Federal $ 0
State 0
-------
Total current 0
-------
Deferred
Federal $ 3,142
State 540
-------
Total deferred 3,682
-------
Total tax provision $ 3,682
=======
38<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
Deferred tax assets are comprised of the following:
Reorganized
Company Predecessor Company
----------- ---------------------
July 30, January 1, July 31,
1995 1995 1994
----------- --------- --------
Deferred tax assets:
Net operating loss $18,600 $18,700 $35,000
Charitable contribution
carryforward 3,200 3,100 3,200
Insurance and other reserves 9,000 8,800 8,100
General business carryforward 1,400 1,400 1,600
Other, net 1,200 1,500 2,700
------- ------- -------
Total gross deferred tax assets 33,400 33,500 50,600
Less valuation allowance 32,200 33,500 50,600
------- ------- -------
Net deferred tax assets $ 1,200 $ -- $ --
======= ======= =======
The valuation allowance as of July 30, 1995 has been determined to be
$32,200, resulting in a change in the valuation allowance in the amount of
$18,400 from July 31, 1994. Such change resulted in an increase in net
deferred tax assets (and a corresponding decrease in "Reorganization Value
in Excess of Amount Allocable to Identifiable Assets") of $1,200, with the
balance of the change attributable to the elimination of certain tax assets
and corresponding allowance amounts due to change in ownership requirements
of Section 382 of the Internal Revenue Code (the "IRC").
The provision for income taxes differs from the amount computed by
applying the U.S. federal income tax rate (34%) because of the effects of
the following items:
Tax at U.S. federal income
tax rate $2,320 34.0%
State income taxes, net
of federal tax benefit 248 3.6%
Amortization of goodwill 1,114 16.3%
------ -----
Provision for income taxes $3,682 53.9%
====== =====
The Company reported pretax losses for the 22 weeks ended January 1,
1995 and for its 1994 and 1993 fiscal years and, consequently, no income
tax expense was reported. There was no income tax expense attributable to
the extraordinary gain on debt discharge recognized during the 22-week
period ended January 1, 1995 due to certain provisions of the IRC involving
exchange of stock for debt.
39<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
As of July 30, 1995, the Company had net operating loss carryforwards
for tax purposes of approximately $50,000. Due to certain change of
ownership requirements of Section 382 of the IRC, utilization of the
Company's operating losses is expected to be limited to approximately
$3,300 per year. If the full amount of that limitation in not used in any
year, the amount not used increases the allowable limit in the subsequent
year. Loss carryforwards will expire during the years 2004 through 2010.
If the Company's net operating loss carryforwards and other fresh start
deferred tax asset balances are realized, the tax benefits will reduce
"Reorganization Value in Excess of Amount Allocable to Identifiable
Assets." The existing valuation allowance, if realized, would reduce this
reorganization value. The recognized deferred tax assets are attributable
to temporary differences originating in the short period ending July 30,
1995.
The Company also has general business credit carryforwards of
approximately $1,400, which expire between the years 2004 and 2010. These
credits are also subject to the Section 382 annual limitation. Due to the
ordering rules of IRC Section 382 with respect to net operating losses and
business credits, a valuation allowance has been recognized against the
entire amount of the general business credit carryover.
(11) Supplementary Statements of Operations Information.
Supplementary Statements of Operations information is as follows:
Reorganized Predecessor
Company Company
---------- -----------------------------------
30 Weeks 22 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended
July 30, January 1, July 31, August 1,
1995 1995 1994 1993
---------- ---------- ---------- ----------
Amortization of:
Lease interests $ 1,152 $ 639 $ 6,037 $ 2,576
Deferred financing
costs 809 1,152 2,950 2,850
Goodwill 6,627 1,198 2,831 2,832
--------- --------- --------- ---------
Total amortization
of intangible
assets $ 8,588 $ 2,989 $ 11,818 $ 8,258
========= ========= ========= =========
Advertising costs $ 4,896 $ 4,970 $ 14,099 $ 13,530
========= ========= ========= =========
40<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(12) Employee Benefit Plans.
Kash n' Karry Retirement Estates ("KKRE"), a trusteed defined
contribution retirement plan, was authorized by the Company's Board of
Directors in 1988. KKRE is a tax savings/profit sharing plan maintained
primarily for the purpose of providing retirement income for eligible
employees of the Company. KKRE is qualified under Section 401(a) and
Section 401(k) of the Internal Revenue Code of 1986. Generally, all
employees who have attained the age of 21 years and complete one year of
participation service (as defined under KKRE) are eligible to participate
in KKRE. Participants may, subject to certain federal limitations, elect
to defer an amount not to exceed 15% of their base compensation and have
such amount contributed to KKRE. The Company may match all or a portion of
the participant's deferred compensation, but the amount of the matching
contribution may not exceed 3% of such participant's compensation.
Additional non-matching contributions may be made to KKRE by the Company in
such amount as determined by the Company's Board of Directors based on the
Company's operating performance. Funds that participants elect to defer
are invested, at the participant's option, into various investment
accounts. The vested percentage of the amounts allocated to a
participant's account will be payable to the participant upon such
participant's death, disability, retirement, or other separation of service
from the Company. The Company's contributions to KKRE were $505, $573 and
$573 for the fiscal years ended July 30, 1995, July 31, 1994 and August 1,
1993, respectively.
Kash n' Karry Executive Supplemental Retirement Plan ("KESP"), a non-
qualified, unfunded salary deferral plan, was authorized by the Company's
Board of Directors in November 1989. Certain Key Employees (as defined
under KESP) of the Company as selected by its Board of Directors
participate in KESP. Currently, seventeen Key Employees participate in
KESP. Prior to the beginning of each plan year, a participant may elect to
defer an amount not to exceed 15% of such participant's annual base
compensation (as defined under KESP). The Company will match a certain
portion of the amount deferred by the participant, but the amount of the
match may not exceed 6% of such participant's annual base compensation.
The Company will record income to the participant's account at an annual
rate (11% for the 1995, 1994 and 1993 plan years) as determined by the
Company's Board of Directors, but the rate of such income shall not be less
than 8% per annum.
The vested percentage of the amounts recorded in the participant's
account will be paid to the participant upon the earlier of: (i) such
participant's death, disability, retirement, or other separation of service
from the Company; (ii) the date the plan is terminated; or (iii) the date
that a change in control occurs (as defined under KESP). Expense for this
plan was $84, $135 and $149 for the fiscal years ended July 30, 1995, July
31, 1994 and August 1, 1993, respectively.
41<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
The Company has a retiree medical plan under which medical coverage is
available to current retirees and those active employees who, on August 1,
1993, had attained age 65 with at least 15 years of service. In accordance
with SOP 90-7, which the Company adopted on the Effective Date of the
Restructuring, the provisions of Financial Accounting Standards Board
Statement 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" were also adopted as of that date. The following table sets
forth the projected actuarial present value of unfunded postretirement
benefit obligations for the plan at July 30, 1995:
Accumulated postretirement
Benefit obligation:
Retirees $1,908
Fully eligible active
plan participants 85
------
Accrued postretirement
benefit obligation $1,993
======
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0%.
(13) Commitments and Contingencies.
The Company had letters of credit outstanding totaling $12,770 and
$16,358 at July 30, 1995 and July 31, 1994, respectively, which amounts
have been reflected as reductions of the available revolving loan facility
as of those dates. These letters of credit primarily guarantee various
insurance and financing activities.
(14) Related Party Transactions.
During the 1994 and 1993 fiscal years, as consideration for the
provision of financial advisory services, the Company agreed to pay an
annual fee of $554, plus related out-of-pocket expenses, to Leonard Green &
Associates, L.P. ("LGA"), and an annual fee of $232, plus related out-of-
pocket expenses, to Gibbons, Goodwin, van Amerongen, L.P. ("GGvA"). From
September 1993 through December 1994, the Company did not pay the annual
fees to LGA or GGvA, but reimbursed them for out-of-pocket expenses billed
to the Company. Pursuant to the provisions of the Restructuring, on
December 29, 1994 the Company entered into a Management Services Agreement
with LGA, pursuant to which LGA agreed to provide management, consulting,
financial planning and financial advisory services for a two year term, in
consideration for an annual fee of $200. LGA is not required to spend a
fixed number of hours of service to the Company pursuant to the Management
Services Agreement. The amount of the annual fee payable to LGA was
determined in the course of negotiations among LGA, the Company and an
unofficial bondholders committee during the Restructuring. The Company
believes that
42<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
the fee is not in excess of the fee that would be charged by an unrelated
third party in an arms-length transaction for similar services. Total
amounts paid to LGA and GGvA were $117, $143, and $598 for the fiscal years
ended July 30, 1995, July 31, 1994 and August 1, 1993, respectively.
LGA is the sole general partner of Green Equity Investors, L.P., which
owned approximately 60.9% of the Company's outstanding common stock
immediately prior to the consummation of the Restructuring, and which owned
approximately 27.7% of the Company's outstanding New Common Stock as of
July 30, 1995. GGvA is the general partner of The Fulcrum III Limited
Partnership and The Second Fulcrum III Limited Partnership, which
collectively owned 33.8% of the Company's outstanding common stock
immediately prior to the consummation of the Restructuring. One director
of the Company is the controlling shareholder of a general partner of LGA,
and another director of the Company is a general partner of LGA.
(15) Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter(A) Quarter Quarter
-------- -------- -------- --------
1995:
Sales $240,147 $272,889 $269,927 $243,038
Gross profit 48,415 54,879 58,205 52,299
Operating income 1,841 8,194 12,852 6,574
Net income (loss)
before extraordinary
items (8,719) (2,236) 2,721 (385)
Net income (loss) (8,719) 65,930 2,721 (385)
Net income (loss)
per common share(B) -- -- 0.59 (0.08)
1994:
Sales $256,635 $278,166 $279,806 $250,558
Gross profit 52,426 56,460 58,198 52,484
Operating income (9,309) 4,940 8,424 3,440
Net income (loss)
before extraordinary
items (20,450) (6,432) (2,820) (8,193)
Net income (loss) (20,450) (6,432) (2,820) (8,193)
Net income (loss)
per common share(B) -- -- -- --
43<PAGE>
KASH N' KARRY FOOD STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollar Amounts In Thousands, Except Per Share Amounts)
(A) The operating results of the thirteen weeks of operations ended
January 29, 1995 (second quarter 1995) included the results of the
nine weeks of operations ended January 1, 1995 (Predecessor Company)
combined with the four weeks of operations ended January 29, 1995
(Reorganized Company). The net loss before extraordinary items for
this period includes the impact of reorganization items (-$4,869), but
does not include the impact of the gain on debt discharge ($70,166) or
the cumulative effect of change in accounting principle (-$2,000). In
the Company's previous interim reporting, reorganization items
included a gain on extinguishment of preferred stock of $4,650. The
effect of reclassifying this amount as a direct credit to capital in
excess of par value has been included in this presentation. Net
income for the four week period ended January 29, 1995 (post-
Restructuring) was $807, or $.17 per share.
(B) Net income per common share is not meaningful prior to January 1, 1995
due to the significant change in the capital structure in connection
with the Restructuring.
44<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 17, 1995, KPMG Peat Marwick LLP ("KPMG"), the
Company's independent accountants who were previously engaged as
the principal accountants to audit the Company's financial
statements, were dismissed. KPMG's report on the financial
statements of the Company for the past two years contained no
adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles,
except that KPMG's report on the 1994 financial statements of the
Company contained a separate paragraph stating that "Kash n' Karry
Food Stores, Inc. has suffered recurring losses from operations and
has a net capital deficiency. As discussed in note 1 to the
financial statements, Kash n' Karry Food Stores, Inc. filed a pre-
packaged petition under Chapter 11 of the United States Bankruptcy
Code on November 9, 1994 and these matters raise substantial doubt
about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty." The Company's plan of
reorganization was approved by the bankruptcy court on December 12,
1994 and became effective on December 29, 1994.
The decision to change accountants was approved by the Board
of Directors of the Company. During the Company's two most recent
fiscal years and any subsequent interim period preceding the
dismissal, there were no disagreements between the Company and KPMG
on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of KPMG, would have caused KPMG to
make reference to the subject matter of the disagreement in
connection with its report. Also, during the aforementioned
period, there occurred no "reportable event" within the meaning of
Item 304(a)(1)(v) of Regulation S-K of the Commission.
On February 17, 1995, the Company engaged Coopers & Lybrand,
L.L.P. as the principal accountants to audit the Company's
financial statements for the fiscal year ended July 30, 1995. The
Company did not consult with Coopers & Lybrand, L.L.P. regarding
accounting advice prior to its engagement.
THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL
REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K FOR
THE FISCAL YEAR ENDED JULY 30, 1995, UPON THE WRITTEN REQUEST OF
ANY STOCKHOLDER OF RECORD OR BENEFICIAL OWNER AT THE CLOSE OF
BUSINESS ON THE TENTH DAY OF NOVEMBER, 1995. REQUESTS FOR SUCH
REPORT SHOULD BE DIRECTED TO RICHARD D. COLEMAN, VICE PRESIDENT,
CONTROLLER, P.O. BOX 11675, TAMPA, FLORIDA 33680.
45
<PAGE>
[KASH N' KARRY FOOD STORES, INC. LETTERHEAD]
November 17, 1995
To our Stockholders:
On behalf of the Board of Directors and management of Kash n' Karry Food
Stores, Inc., I cordially invite you to attend the Annual Stockholders
Meeting to be held on Wednesday, December 6, 1995 at 9:00 A.M. Eastern Time
at the Sheraton Inn Tampa, 4701 E. Hillsborough Avenue, Tampa, Florida.
The notice of meeting and proxy statement accompanying this letter describe
the specific business to be acted upon.
In addition to the specific matters to be acted upon, there will be an
opportunity for questions of general interest to the stockholders.
It is important that your shares be represented at the meeting. Whether or
not you plan to attend in person, you are requested to vote, sign, date, and
promptly return the enclosed proxy in the envelope provided.
Sincerely yours,
/s/ Ronald E. Johnson
-----------------------
Ronald E. Johnson
Chairman of the Board,
President and Chief
Executive Officer
