LITTLE ROCK — There are theories about how Affiliated Foods Southwest Inc. could go from a vibrant regional distributor to bankruptcy in just a few years.
One is that the company was merely caught up in circumstances that did in the Little Rock-based wholesaler.
Affiliated Foods, which filed for bankruptcy protection in May and is being liquidated, was caught in the crosswindsof the national economic recession.
Another theory is that the company was simply mismanaged.
At its zenith in the past few years, Affiliated, which operated for more than a half-century, had annual revenue of more than $870 million and more than 2,700 employees at its Little Rock warehouse and its 50 retail groceries, including Harvest Foods and a few Piggly-Wiggly and Sav-Marts.
Days before Affiliated filed for Chapter 11 bankruptcy on May 5, it had about 550 employees at its distribution center on Interstate 30 in southwest Little Rock and about 1,750 employees throughout the company, including 12 grocery stores.
Affiliated converted its bankruptcy to a Chapter 7 liquidation this month. There are only a handful of employees left, primarily handling matters of the bankruptcy.
Randy Arceneaux, a longtime employee of Affiliated who became president and chief operating officer in March as the organization was foundering, described in an interview what he called major factors in Affiliated's downfall.
The cooperative routinely made loans to its member stores in Arkansas, Texas, Oklahoma, Louisiana, Mississippi and Tennessee for various reasons, Arceneaux said.
Some of that money came out of Affiliated's revenue, hesaid. Affiliated would then typically sell the member loans to its lenders, said Arceneaux, now vice president and chief operating officer for Affiliated Foods Inc. of Amarillo, Texas, a firm unrelated to the Little Rock business.
"Then the economy [was] hit with the credit crunch" in September, Arceneaux said, and Affiliated couldn't get a bank to buy those loans.
"When you have $7 million or $9 million that comes straightout of cash flow, which is about what they had in in-house loans, then it puts a big squeeze on you," he said.
Affiliated exceeded its $27 million line of credit with U.S. Bank about two months before its bankruptcy filing and the bank refused to extend it.
A line of credit is common for wholesale and retail grocers, said Paul Weitzel, managing partner with Willard BishopConsulting of Chicago, a consulting firm that specializes in the food industry.
Virtually "every retailer and every wholesaler was looking [last fall] to be sure they had all their lines of credit protected," said Weitzel, who noted he was unfamiliar with Affiliated's problems.
Others believe there were additional pressures that caused Affiliated's demise.
BIG QUESTION
The big question that "screams to be answered" is how Affiliated went from boom to bankruptcy so quickly, said Al Miller, former director of advertising with the firm and later a public relations consultant.
"How could this happen when only a couple of weeks before [the bankruptcy] management was reporting all was well?" Miller asked. "What happened to the [$50 million to $60 million] worth of assets over the last five years? That is what has all of us scratching our heads. Somewhere over the last five years something went badly wrong that even the board of directors and certainly the shareholders were not aware of."
If members of Affiliated's cooperative had known before the bankruptcy filing that the company was in trouble, it would have caused problems for the firm, Miller said.
Affiliated had $34 million in loans from its members and company executives in the formof "certificates of deposits." Members and company executives used those loans, which paid as much as 9 percent in interest, as savings accounts. The contract for the certificates allowed Affiliated to use those unsecured loans for operating capital.
Had it been known that Affiliated was in danger of failure, it would have caused a run on those certificates, Miller said. And Affiliated would have been unable to pay back $34 million in loans at one time, Miller said.
There hasn't been an official, signed audit of Affiliated presented to its members since the June 2007 statement, Miller said. In September, the company handed out an unofficial audit to its members at the annual meeting, Miller said.
John Mills of Cabot, Affiliated's former president, andCharles Moore of Nashville, Affiliated's former corporate secretary, were sued in July by owners of a $750,000 savings plan with Affiliated, claiming the two authorized the sale of the certificates, which the company used for operating capital.
Affiliated's retail grocery business also contributed to the downfall, Arceneaux said. The grocery stores, primarily Harvest Foods stores, were unprofitable, he said.
"It was draining the cash flow of Affiliated," Arceneaux said. "In other words, the big brother was still paying for the little brother, so to speak. With the credit market the way it came into play, those two big factors hit at the same time. Have you ever heard the saying 'the perfect storm?' That would be the best way to describe it."
CHARISMATIC EXECS
For most of Affiliated's existence, it was guided by two charismatic and innovative executives - first C.E. "Doc" Toland and then Jerry Davis, who took over in 1997 as chairman and chief executive. Davis, who was an executive for the company for more than 30 years, remained in control until his death in 2004. At that time, Mills, who had been chief financial officer, became president.
Affiliated moved into the retail grocery business in 1997 when it bought 17 Harvest Foods stores out of bankruptcy. The retail stores were operated by an Affiliated subsidiary, Supermarket Investors. Except for Affiliated's president and Supermarket Investors' two top executives, no one - including Affiliated board members - knew the details about the operations of Supermarket Investors, Miller said.
Until March, Mills was president of Affiliated. John Miller and Al Upton were the top executives at Supermarket Investors, Al Miller said.
"[John Miller and Upton] answered to only one person, the president and [chief executive], who was Jerry Davis or John Mills," Al Miller said.
It is common for wholesale distributors to own retail grocery stores, Weitzel said. Often there is a different management team that runs the grocery stores than the one that operates the wholesale business, he said.
"Now they all probably report to the same board and theynormally have presidents of the divisions responsible for those divisions," Weitzel said.
Mills has declined to comment about Affiliated since the bankruptcy, and the attorney representing Mills in a recent lawsuit did not return a call seeking comment.
Neither Upton nor John Miller could be reached for comment.
One rationale for the wall between Affiliated and Supermarket Investors was that when a wholesale business owned retail stores that it was considered to be in the best interest for the two to have different management, Al Miller said.
"But there was not a lot of communication between [Supermarket Investors] and Affiliated's members," Al Miller said. "I was in management and I didn't know anything about it. The board of directors didn't know anything about it. The question that begs an answer is, 'Who knew that the retail operations were losing money?'"
An attorney for Affiliated told U.S. Bankruptcy Judge Richard Taylor during a hearing in May that there were problems with the way the company was managed. But the attorney, JanHayden of New Orleans, declined to elaborate on her comment when questioned by a reporter after the hearing.
Supermarket Investors was losing money and Affiliated didn't react properly, Arceneaux noted, concluding: "Call it what you want, but that was poor management - not making a decision to do things differently to limit the losses or to close unprofitable stores."
Business, Pages 65, 71 on 08/23/2009