KASH N' KARRY WEIGHS CHAPTER 11

MARK TOSH

TAMPA, Fla. -- Kash n' Karry Food Stores here last week conceded it might file a prepackaged Chapter 11 bankruptcy petition, but also told its suppliers and trade creditors they "will not be affected" if the chain makes that decision.

This marked the first time Kash n' Karry has publicly raised Chapter 11 bankruptcy as an option in its attempt to restructure outstanding debt.

In a two-page memorandum, Ronald J. Floto, chief executive officer, told suppliers "there is a possibility" the company and its bondholders will agree that a prepackaged Chapter 11 filing is the most appropriate route to accomplish the company's recapitalization quickly.

"When we do reach the point of deciding how to implement our recapitalization, the primary factor driving our consideration of the alternatives will be very simple: What is the least disruptive, most efficient and cost-effective way to implement our recapitalization?" Floto said in the memo.

"Most important to you as a supplier is the fact that if we were to choose this alternative, you would not be impacted. As we have said all along, we are seeking to restructure our bond indebtedness, not our trade debt," Floto said. No decision on such a filing has been made yet, Floto added. The company issued the memo to suppliers after a St. Petersburg newspaper reported that Kash n' Karry was considering the prepackaged Chapter 11. Kash n' Karry sent a copy of the memo to SN.

A prepackaged Chapter 11

bankruptcy filing, which requires a majority of a company's creditors to agree to the proposed restructuring, is generally considered a quicker route for a financially troubled company to reorganize its debt than the conventional Chapter 11 process. It also often allows the judge in the case to force a settlement on minority creditors who reject the proposed restructuring.

Kash n' Karry, as reported, called off its search for an equity investor in May and instead proposed to bondholders a restructuring of the company's debt and equity structure.

In the 39 weeks ended May 1, Kash n' Karry reported a net loss of $30.1 million and sales of $814.6 million. This compared with a loss of $6.5 million in the period a year earlier. Kash n' Karry has closed 17 stores in the past year.

The 100-store chain has about $240 million of outstanding public debt. The company previously said it will withhold interest payments of about $13 million due in August "while recapitalization discussions with bondholders are ongoing."

Kash n' Karry is controlled by Leonard Green & Partners, a Los Angeles investment group. Green's officials are currently negotiating the restructuring with a bondholder committee.

Robert Mead, a spokesman for Kash n' Karry, said the bondholder committee's financial and legal advisors are close to completing due diligence and expect to meet within the next two weeks with the company to work out the terms of a consensual restructuring. A recapitalization plan could be agreed on as early as Sept. 30.