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Weekly UpdatesCAROLYN WATSON OF MARSHALL, TEXAS, said she thought having part of her retirement with Affiliated Food Southwest Inc. of Little Rock was a safe investment.
The wholesale food distribution cooperative had been around for more than 50 years and was among Arkansas' largest private companies. But not anymore.
On May 5, Affiliated Foods filed for Chapter 11 bankruptcy protection and the company said it's in the process of liquidating its assets.
While some investors will be hurt because of Affiliated Foods' bankruptcy, other firms stand to benefit from the company's demise.
Meanwhile, Affiliated workers are losing their jobs.
The company had 530 workers at its Little Rock warehouse on May 5. The next day, about half of those employees were gone, said Affiliated Foods spokesman Al Miller.
Another 100 workers were released on May 11, and fewer than 100 employees remained on the payroll last week, Miller said.
Affiliated also operates corporate retail stores, such as Harvest Foods and Piggly Wiggly, with about 900 employees. Miller said last week that those stores were being sold, but he didn't know the status of them or how many stores were left.
In its bankruptcy filing, Affiliated Foods shows it had $47.6 million in assets and $101.5 million in debts. Of its debts, $62.5 million is to creditors, like Watson, holding unsecured claims. And she's not alone. The list of unsecured creditors is 402 pages long.
That isn't good news for Watson, who had more than $265,000 in an unsecured investment in Affiliated, according to the company's bankruptcy filing.
For the 16 years Watson owned Hall Super Store Inc. in Texas and was a member of Affiliated Foods, she said, she had the option of receiving a cash payout if Affiliated had a profit at the end of its fiscal year. Or she could invest the money with Affiliated and receive a "certificate of indebtedness" and count on a monthly interest payment.
Watson chose the certificates of indebtedness.
"I just feel real dumb that I had that much money up there," said the 67-year-old Watson. "I'm hoping and praying that God will show them the way."
Other firms, though, are able to gain revenue from the fallout of Affiliated's financial troubles.
Forrest City Grocery Co. is going to add about 120 customers because of Affiliated Foods' bankruptcy, said its president, David Cohn. The additional clients will mean another $50 million to $60 million in revenue to the food distributor to independent retail grocers, convenience stores and small supermarkets, Cohn said. In 2008, Forrest City Grocery reported revenue of $675 million, up 35 percent from 2007.
The company has already added 75 workers this year and will probably hire an additional 50 to 75 to meet the increased demand. It currently has 280 employees.
In addition, bankruptcy attorneys and consultants are racking up fees.
Between March 1 and May 6, Affiliated Foods paid $92,718 to The Food Partners LLC of Washington, D.C. Food Partners is an investment banking firm focused on the food industry.
As of May 5, Affiliated had run up a bill of $363,000 at the New Orleans law firm of Heller Draper Hayden Patrick & Horn LLC. Heller Draper said in court filings that it charges $225 to $425 an hour for attorneys who work on the case and $80 to $120 an hour for work done by paralegals.
Affiliated's bankruptcy filing also shows that in the last 12 months it paid a $50,000 retainer to the law firm Dover Dixon Horne of Little Rock and a $25,000 retainer to Kurtzman Carson Consult LLC of El Segundo, Calif.
Ted Gammill Jr. of Little Rock also received a $50,000 retainer fee to be Affiliated's chief restructuring officer. He receives $200 an hour and will be reimbursed for his expenses.
Investment Opportunities
For at least 40 years, Affiliated Foods' members had the opportunity to invest in the company, said Affiliated's Miller.
After the fiscal year ended each June 30, the 190 members of the cooperative had the option to receive cash or convert their share of the profit into certificates of indebtedness.
Miller said the interest paid by the COIs varied. But it was attractive to members because "it was better than average," said Jim Acree, a cooperative member and owner of Avilla Mercantile of Alexander. "It was better than what you could get at a bank."
Avilla Mercantile's unsecured claim in bankruptcy court was more than $133,000. But Acree's personal unsecured claim is $287,000.
"We felt like we were investing in our own company," Acree said. "We really didn't feel threatened about it because we'd been doing good for 50 years."
For the fiscal year that ended June 30, 2007, Affiliated bad $763.2 million in revenue and a net income of $4 million. The next year, the company cleared $3.8 million on revenue that had dropped to $730 million.
The profitability ceased in the current fiscal year. Between July 1, 2008, and March 7, Affiliated lost $6.7 million, the bankruptcy filings showed.
The bankruptcy filings also show that in the last 12 months, Affiliated's officers and directors received nearly $3 million from the company as "investment payback and interest," which isn't considered part of their compensation.
One officer of the company, John Miller, who resigned in January, had received salary of $438,829 and $913,804 in investment payback and interest.
Al Miller, the company's spokesman, said last week that the officers weren't pulling their money out of the company at the end, but received the investment and interest money at a shareholders' meeting back in September.
The filing also shows that John Mills, who was the president and CEO of Affiliated until he was removed on Feb. 19, received salary of $619,753. He didn't receive any payback or interest money in the last 12 months.
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Miller said he didn't know how many people had money tied up in certificates of indebtedness. He said the optional program had been around for years, though, and the investors knew it was unsecured.
Some investors have already written off the money.
Syble Pettit, the owner of Dismuke Affiliated Foods of Humnoke, said she figured she had lost her retirement savings. Dismuke Affiliated listed its unsecured claim against Affiliated at $241,000. (Pettit wasn't named personally in the bankruptcy filing.)
Pettit, 78, has been a member with Affiliated Foods for 31 years. She considered her investment in Affiliated as her retirement fund--her only one.
She said she plans on continuing to work, though.
"I've made it this long," Pettit said. "I'll make it longer."
The Decline
In the bankruptcy filings, Affiliated Foods said it started declining about two years ago.
One of the first signs of the downfall was "a flawed implementation of a warehouse management and Enterprise Retail Package computer system ... [which] resulted in higher warehouse salary cost, increased credits, reduced delivery performance, and increased inventory adjustments," the filing said.
Miller said he didn't know enough about the computer system to comment on it. One of Affiliated's bankruptcy attorneys, Tristan Manthey of Heller Draper, declined to comment.
In addition, the credit crunch in the fall of 2008 hurt Affiliated's chances to sell its grocery stores. The company has been selling off about 30 corporate-owned stores, including Harvest Foods and Piggly Wiggly locations.
And another big blow came on Feb. 27, when U.S. Bank of Minneapolis wouldn't honor any more of Affiliated's credit requests because Affiliated was overdrawn by $11 million.
"You can imagine the inventory that flows through this place," Miller told Arkansas Business on March 12. "So when you bounce one check, you can't just bounce one check. It just starts multiplying."
In March, Affiliated was filling only about 96 percent of member orders, a level that had been as low as 93 percent. Miller said the lowest level that was normally acceptable was 98 percent.
Still, he said on March 12 that Affiliated wasn't planning on filing for Chapter 11. "To tell you we're out of the woods--no, we're not out of the woods," Miller told Arkansas Business at the time.
But Affiliated's "relationships with its primary lender group have continued to deteriorate, with product inventories being reduced drastically, which have resulted in losing a number of key customers," the company said in news release on May 5, the day the company filed for bankruptcy reorganization.
In April, Affiliated depleted inventory at its warehouse and couldn't supply its customers. It did enter secondary supplier contracts with other wholesale companies.
Still, it was under those conditions, the company said, that its board of directors decided to file for bankruptcy in the Eastern District of Arkansas' U.S. Bankruptcy Court.
On May 7, U.S. Bankruptcy Court Judge Richard Taylor approved the sale of some of Affiliated Foods' inventory, worth between $10 million and $19 million, to Associated Wholesale Grocers Inc. of Kansas City, Kan., a wholesale grocery company. AWG will pay at least $9 million for the items, the filing said.
Jim Acree, the co-op member from Alexander, said last week that the bankruptcy was a surprise because there wasn't any indication that there was a financial problem with Affiliated.
"We all kind of found out about the same time," he said. "And by that time, the assets were frozen, so there wasn't any chance of getting out what you had left in there."
By Mark Friedman
mfriedman@abpg.com
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