Keystone Co-Op #8: The "New" Option B

posted by chicago pop with deep throat

Mastermind of Co-Op Plan for Commercial Loan

Say what you will about chain grocery stores, about "capital" and all the 1960s phobias that make Co-Op die-hards and Hyde Park isolationists shiver. What we're getting from the community of amateurs lately is no more reassuring.

It consists of a deep paranoia projected onto the University of Chicago when all the evidence makes clear that it is the Co-Op itself that is to blame for its current pickle; a laughable arrogance in the conviction that there are higher moral questions involved in this tale of banal mismanagement and play acting; and a revealing sense of entitlement to a continued existence at the expense of the University and other folks willing to keep the Co-Op on the dole.

The New Option B -- since the first one, the one members probably thought they were voting on, is moot, since that the National Cooperative Bank has rejected Chapter 11 financing -- is all about getting a regular commercial loan, with interest and terms, to help keep gas in the Co-Op's tank while the Co-Op gets its act together. This loan, which will only come on condition of an agreement with the University and Certified, has been seized upon by Co-Op savers as the "Third Way" out of the current crisis.

While we're not sure if there is such a thing as a third way out of a hole you've dug yourself into, we're quite sure that there are three questions that hover over the present strategy of Option B supporters now that a third attempt is being made to secure a commercial loan.

Can the Co-Op even secure a commercial loan? On what terms can it be secured? And can it be serviced in such a way as to do more than defer a resolution of the present crisis to a future point in time?

Rather than making an examination of any of these questions, the "Save the Co-Op" website highlights the very distant possibility of restoring some value to member shares, while glossing over the potential risks involved. The "lure" of Option A that is written off as part of a surreptitious, University-sponsored PR campaign is not that different from the "lure" of redeemed member shares here being proffered with next to no assessment of its real probability.

The risks not mentioned on the website include 1) the likelihood of meeting the conditions of a loan, meaning a payment plan agreed to with the University of Chicago on the Co-Op's back rent, and with Certified Grocers on its lease on 47th Street; and 2) the chances that the Co-Op will default on this loan, leading once again to supplier and liquidity troubles, and the threat of liquidation.

The Save the Co-Op website minimizes any downside to Option B because it counts on the University to provide a bailout in the event of the Co-Op's failure in servicing the new loan. In the bizarro-world of Co-Op Director Mueller, this expression of entitlement to financial rescue is "the more moral option."

Here's the key text outlining the preferred scenario from the Save the Co-Op website:

Option B passes but there is no way possible for the Co-Op to get a loan or go into reorganization. At this point the University will either go back to Option A or disgrace itself by allowing the Co-Op to go into liquidation. The idea that the University would allow the dismemberment of the store, the non-payment of merchants, the community with no place to shop, its mall without a keystone, residents heading north for all their shopping, etc. etc. is completely at variance with dozens of statements made by President Zimmer, Henry Webber and other University representatives for months and months. They would be doing what they claim the Co-Op has done -- but doing it with 100 times greater destructiveness.

Essentially, the Co-Op savers are playing a game of chicken with the University. The claim here is that the University is bluffing, that if the Co-Op membership and Board decided to go for Option B, now that debtor-in-possession financing is off the table, the University would in fact come to the Co-Op's rescue because they don't want a shuttered store in the neighborhood. This plan counts on the hegemonic University saving the Co-Op's insolvent but entitled arse.

Somehow or another, at the end of this queer passage, you get the sense that if the Co-Op goes down, it will somehow be the University's fault, rather than that series of friendly, neighborhood Co-Op Boards staffed by your friendly neighbors, the ones who ran this ship into the ground. In the absence of evidence to the contrary, this is what I see as the true fruit of the "democratic center of community involvement" advertised on the Save the Co-Op website.

Rather than stepping up and shutting down a failed business like responsible adults, the Co-Op Savers are acting like spoiled children -- eager to speed around in the family car knowing that if they crash it, Daddy will just buy them a new one.

It's one thing when amateurs botch up their own accounts. We don't have to live with that.

It's another thing entirely when amateurs botch up an enterprise that is supposed to serve the entire community, hold no accountability for the wildest schemes, and then make claims of moral superiority that would make Hugo Chavez cry.

Leon Shernoff Warns: University Harvesting Organs of Co-Op Members

posted by chicago pop

Co-Op Insider Cracks University Plot, Then Goes Insane

Who is Leon Shernoff? If you don't happen to have your pack of Co-Op baseball cards laid out in front of you, he's the dude who puts together the Evergreen, the "Newspaper of the Hyde Park Cooperative Society." That's right, another astute journalistic organ based right here in Hyde Park.

Up until Vol. 60, #10, December 2007 of the Evergreen, it was a folksy and disarmingly honest little window into the dysfunctionality of a community-run commercial enterprise. (LIES!)

It's how we learned all the Onion-like details of daily management at the Co-Op over the years, like how decades-old POS equipment was aced by a devious squirrel, how various unionized cashiers absconded with untold thousands right under the noses of their altruistic managers, or how various vendors stopped returning phone calls from the Co-Op to service their products. (MORE LIES!)

But all that happy gemütlichkeit seems to have evaporated with this last issue. Because in Volume 60, Number 10 of the Evergreen, Leon Shernoff has gone on a paranoid bender of epic proportions. (A NEW LIE EVERY DAY!)

We can only assume that the paranoia that got into this issue is only a fraction of the paranoia that has seized the rogue faction of the Co-Op Board, a minority that has somehow managed, despite their declared affability and simple interest in rutabagas, to shrewdly seize all outlets of communication from the majority and broadcast their strange and none-too-clear tale of intrigue, "illegitimate fact sheets" (FRAUDULENT RESEARCH!) and, best of all "University-sponsored identity harvesting." (BEWARE!)

What is identity harvesting, you ask? Let's ask Leon.

Identity Harvesting by the University
In their frenzy to smear the Co-Op, the university has even resorted to unethical means of information gathering. At the November 26th Board meeting, university administrator Jo Reizner attended and tried to guilt-trip the Co-Op with stories of how many shoppers were leaving the area to avoid shopping at the Co-Op. She said that an unnamed supermarket at Roosevelt Road keeps track of its customers via an identity card, and has shared that information with the university, leading to the revelation that shoppers from the 60615 and 60637 area codes spend about $100,000 a week at this grocer. She proudly revealed this research at the meeting, apparently unconcerned with the massive privacy and confidentiality violations involved.

Now let's step back a bit. You know that little magnetized fob on people's key chains, the one that says "Dominick's" or "Jewel"? The thing that gets you a discount every time you check out? Guess what? It has your ZIP code on it, information that you freely provided when you applied for the fob at Dominick's and Jewel so you could get the discount. Lots of people have one. Ever notice how the computer at the gas station asks for your ZIP code when you pay? (SPIES!) It's the same thing. Is it linked to your name, your Social, or any other privileged information? No. Is it aggregated and sold to market research firms? Yes. (STILL MORE LIES!) Is it part of how we know that millions of dollars a year are being spent outside of Hyde Park? Yes.

Is this unethical? Not at all. Are individuals' privacy compromised? Not in the least; this information is given with consent.

Is it a conspiracy? You decide. (THE UNIVERSITY IS CLONING OPTION A SUPPORTERS!)

As for the $100,000/week spent at an unnamed Roosevelt Road supermarket, there's no news there, we've been talking about leakage at this blog for some time. And most of what we learned came from the Tribune, and they throw much bigger numbers around ("Delivery is oasis in food 'desert'." April 1, 2007).

Shernoff isn't too concerned about that $100,000 number. Why not? "[T]hat $100,000 is about the amount of business the Co-Op does on a Saturday."

Nice job, Leon, losing one day of revenue a week for 52 weeks of the year. Maybe this kind of indifference to losing money is why the Co-Op is insolvent, with twice pledged collateral, and can't get a loan.

By my calculation, that lost revenue amounts to $5.2 million annually.

And that's just money lost to one store. (DISTORTION!)

And it doesn't include all the money going into all those Peapod vans.

Wouldn't that $5.2 million in lost revenue alone be enough to solve most of the Co-Op's problems?

(WE DON'T HAVE PROBLEMS!)

Keystone Co-Op #7: Board Split on Bankruptcy or Buy-Out

posted by deep throat

Bankruptcy Option No Easy Fix for Co-Op

At Sunday's standing-room-only community meeting on the Co-Op's future, two different factions on the board laid out opposing options for the membership to vote on.

No matter which option is ultimately selected, the Co-Op and its democratic community principles will no longer exist, whether the 55th Street store stays in operation or not.

Further, any funds raised in a "capital drive" not only will probably never be refunded, but may very well end up helping to keep alive a store that winds up owned by someone other than the remaining cooperative members.

And, if the die-hard faction's proposal to go into bankruptcy and reject the University's bail-out is chosen, the high risk of eventual liquidation of the Co-Op's assets means that the chances are higher that the neighborhood will go longer without any grocery store at all. No one brought up this potential consequence of the bankruptcy route.

But first, let's review the afternoon's events.

It was cause for some concern that the audience was clearly composed mostly of die-hard Co-Op supporters who did not understand the magnitude of the institution's financial distress, the concrete implications of bankruptcy proceedings, or the complicity of the retail cooperative Certified in the Co-Op's troubles.

The first option presented, also known as "Sorry Charlie" in our earlier post, involves the generous debt workout plan that the University has proposed. This approach would allow the University to buy out the remainder of the 55th Street store lease (through 2013) and forgive the 14 months of back rent that the Co-Op still owes. The 55th Street store would close, and a new grocery store would open within 14 days of the Co-Op's exit. The Co-Op would take the proceeds from the buyout and pay off the 47th Street lease with Certified, and pay off its vendors.

While the University has purportedly had discussions with several grocers, it has clearly stated that whichever grocer ends up moving into 55th Street must make significant improvements to the store space. With this option, the Co-Op's last remaining store would likely be shut by the end of January, and a new grocer would open up in that freshened space within two weeks.

The second option, also known as "Rehab," means the Co-Op would file for Chapter 11 bankruptcy, keep the 55th Street store in operation, and attempt to clean its financial house. However, this option is fraught with 6 very big "ifs."

The 6 Very Big IFs:

Rehab will only work out 1) if the Co-Op is able to get an approximately $2 million loan; 2) if Certified will agree to a $1 million buyout of the 47th Street lease; 3) if the Co-Op can raise "substantial" pledges from the membership for the capital campaign; 4) if General Manager Brandfon stays on and continues to improve operations; 5) if shoppers start spending more food dollars at the store; and 6) if it can pay off all its creditors 100%.

Even if all of the above conditions are met, make no mistake about it: this alternative would only save the existing grocery store at 55th Street -- but not the current cooperative management or ownership structure -- and the store would wind up in the possession of whichever lender is foolhardy enough to loan the Co-Op more money. It does not allow the membership to retain control of the Co-Op during bankruptcy proceedings.

In this Chapter 11 debtor-in-possession arrangement, the new (post-bankruptcy petition) creditor will take precedence over pre-petition creditors and shareholders (the membership), and will be in the position to oversee operations of the 55th Street store.

As one Hyde Park resident, Mark Johnson, pointed out in the meeting, the creditors will have a lot of influence on the bankruptcy judge, not the Co-Op members. In this bankruptcy situation, the Co-Op will be answering to its newest creditor, not to its membership. So much for the democratic control that the Co-Op likes to stand for.

If the Co-Op pursues rehab and is not able to secure the considerable financing necessary, then the default would be bankruptcy and liquidation. In this case, the 55th Street store would be shut down, the court would appoint an independent party to liquidate all remaining assets and pay creditors in order of seniority.

This default situation would also likely make it very difficult for the 55th Street landlord, the University, to line up a new grocer on short notice, leaving the neighborhood potentially without any grocery store for longer than 14 days.

Note: the Co-Op has thus far not been able to secure financing for rehab. It must be in place by 12/17/2007, which is when the University is likely to file for foreclosure notice on the 55th Street store.

So, the clock is ticking. The National Cooperative Bank is willing to entertain the possibility of loaning the Co-Op $2 million, which would allow the Co-Op to enter Chapter 11, and will be voting on it Monday 11/19. But before anyone gets too excited, the NCB's loan is itself contingent upon Certified Grocers agreeing to a $1 million buyout of the 47th Street lease. As President Poueymirou pointed out, Certified has not in the past and is not currently willing to negotiate on this point.

In the earlier Keystone Co-Op posts, we had originally thought the board would endorse the rehab option. After the University entered the scene with its extremely generous debt workout offer, we then believed the board was likely to move in that direction. As it turns out, the board is split on these two approaches.

With the University's debt workout plan, the biggest uncertainty is which grocer would move into the 55th Street store space. However, I'm fairly confident that any new grocer would be an improvement on how the 55th Street store has been run over the last five years.

With the rehab option, on the other hand, there is more uncertainty and risk concerning the ultimate outcome. Going down that path could result in 1) a quick liquidation, 2) a long, slow death if the capital campaign fails or if GM Brandfon leaves, or 3) ownership by creditors even after emerging from bankruptcy if the Co-Op fails to pay off its creditors 100%. In this last scenario, the members would be left out in the cold, and their shares would still be worthless.

Interestingly enough, many members who commented in the meeting seemed willing to view the University as the great villain in this drama, but no one was nearly as critical about Certified, which in my view has been the biggest obstacle keeping the Co-Op from regaining any financial footing.

The University has cut the Co-Op plenty of slack, to the tune of 14 months of missing rent payments, while Certified has been quick to cut off food shipments as soon as the 47th Street rent payment is late. As President Poueymirou related, the Co-Op tried to stop its rent payment to Certified only last month, but Certified immediately cut off a food shipment.

As a result, the only reason the Co-Op has been able to continue to stock its shelves and stay in business is because it's stiffing the University on rent in order to keep up with its lease with Certified. In this case, the membership should be thanking the University.

Big kudos go to President Poueymirou, Treasurer Lowenthal, and Alderman Toni Preckwinkle for championing the debt workout plan -- the most realistic option that will bring a new grocer to the neighborhood in an orderly and efficient manner. While they are in a difficult position of having to advocate for the end of a Hyde Park institution, this is the most financially responsible choice for members.

On the other hand, Secretary Withrow and Director Stanek fueled hope and promoted the rehab option, without explicitly outlining the risks associated with that approach. In the vast majority of bankruptcy cases, the pre-petition shareholders -- such as shareholders -- are left with a big fat zero by the end of the reorg. Chances are very slim that members will get any value for their stock, or enjoy the right to participate in the management of the business.

That's because control over the Co-Op during the reorg will reside with the creditors, not the members. For all practical purposes, it will cease to be a cooperative. Rehab promoters ask members to invest more money in the capital campaign, while chances of ever realizing a return are extremely low. If you are inclined to make a pledge, I'd suggest you think of it as a donation.

Needless to say, this vote is very important and all Co-Op members should make sure their voice is heard on the options. Ballots will be mailed starting Wednesday 11/21. Having said that, the membership vote will only be taken into advisory by the board. In the end, the board is authorized to make the decision, and it may have to do so very quickly in those few days before 12/17.

Keystone Co-Op #6: The Co-Operative Spirit in Action

posted by chicago pop

Rogue Faction Disrupts Co-Op Community Meeting

This Sunday's community meeting of the Co-Op membership to decide the fate of the institution promises to be great spectator sport, and we hope they'll be selling popcorn. We're expecting a model display of cooperative sentiment, as die-hards and dead-enders make their last stand against a Board and a frustrated majority of the membership dedicated to guiding the Co-Op gently to the junkyard.

If we're lucky, we may even see some blood on the floor as a few lone Board members attempt to seize control of the insolvent colossus and are beaten down by enraged grocery shoppers who are tired of the ceaseless propagandizing.

We'll begin this installment of Keystone Co-Op by giving credit where credit is due, and quoting directly from the recent to-the-point Maroon editorial collectively authored by that paper's editorial board (the only one in Chicago, we'll point out, that we usually agree with):

It has become increasingly clear that the Co-Op has no sustainable operating plan, and this time it has dug itself a hole too deep to climb out of. The University and the community must learn from the Co-Op debacle and invite outside competition into Hyde Park. Be it Trader Joe’s, Dominick’s, or some other chain store, this neighborhood deserves an affordable, financially stable supermarket. (November 13, 2007)

It should also be noted that today's sepia-tinted story on the front page of the Tribune's "Metro" section captured two of its most supportive quotes from individuals over 90 years old. If there ever was a neighborhood minority, this age cohort is one of them.

"I love this store, it's a neighborhood institution," said Campbell, 92. "I admire its goals."

Leon Despres, former 5th Ward alderman, was there at the start. One cold day in December 1932, a young man was on his doorstep selling memberships in a food cooperative.

With all the isolationist talk about how much will be lost if profit-oriented chain grocers are "allowed" into the Special Economic Protection Zone known as Hyde Park (special mention here should be given to one Diane Schirf, who loves the Co-Op, hates chains except when they are in Ann Arbor, and doesn't like being called "stupid"), a few things should be pointed out.

A towering irony in this drama is the fact that one of the principle protagonists in the Co-Op's decline into insolvency is a cooperative that is acting like a rent-seeking monopolist. Certified Grocers, the Co-Op's landlord at 47th Street, is itself a cooperative which acts as a distributor to smaller and independent grocery stores. Certified's mission statement declares the wholesaler to be "a conscientious corporate citizen and ethical partner with our suppliers, customers, and employees."

As everyone concedes, Certified's position vis-a-vis the probable debt workout, or "Sorry Charlie" Option B outlined in Keystone Co-Op #5, remains a mystery. What is known and verifiable is that, unlike the Co-Op's landlord the University of Chicago, Certified has displayed very little of the "cooperative spirit" in its unwillingness to cut the Co-Op slack in its rent obligations over the last several years, and in its caginess regarding its participation in any debt buyout.

Certified has made money off an empty store for years now, and hasn't budged on the stranglehold lease at the 47th Street location, despite being approached several times since 2004. The U of C, during the same period, has lost money.

From Certified's perspective -- derived purely from the Rochdale Principles of 1844, no doubt -- it's not such a bad deal letting the rent checks come in from a drowning operation on the South Side, without lifting a finger to help solve the problem. Why should they? They have a sweetheart deal on the lease at 47th Street, and have every incentive to get the University -- the other non-profit in the equation -- to shoulder the problem so Certified can keep the rent checks coming until 2023.

If that's the spirit of cooperatives, then I'll take profit-seeking. At least the customer gets something out of it.

As the Herald sees it, and reminds us fairly often (Editorial of November 14, 2007), "We cannot assume a for-profit business will provide the sort of community support we have enjoyed with the Co-Op."

What kind of support might that be? Certified certainly doesn't seem to care about the Hyde Park community. So why would a Dominick's, or any other grocer, be worse?

Competent management and reliable operations are the most basic services that a business can provide a community. You can be altruistic with what's left over after you've paid your bills and don't owe anybody else -- including your shareholders -- money. But if you don't take care of those essentials, you can't do anything for anybody.

The propagandists at the Herald see it a different way -- that "support for the community" means support for managerial ineptitude and bad strategic decisions, and a tolerance for chronic and worsening indebtedness, declining quality, and poor service. That, and the delivery of some other magical combination of altruistic services besides what customers want, which is a competitively priced, well-stocked, and reliably run grocery store.

I can take or leave the full-time home economist or the sad variety of potato salads at the current deli counter. What I'd much rather have is a supermarket that doesn't lose the deli cook it hired from Whole Foods after a few months due to inadequate kitchen facilities.

Real community support should theoretically include allowing the membership to access the financials in a timely manner. Instead, complete and audited financials for fiscal 2007 were still not available as of November 10. Nor has any public explanation been given of how a legitimate vote can and will be taken based on out-of-date and corrupted membership data.

Support for the community should also include making Hyde Park a desirable place to live for newcomers to the community, including working people with families, not just the folks who were around when the Co-Op was founded during the Great Depression or have the time to run a major commercial institution.

The economy itself has changed in the intervening 8 decades, as well as the organizational structure of businesses and non-profit institutions alike. In the retail foods sector, the changes have been especially dramatic, weighing heavily against smaller-scale operations. This strikes directly at the core of the cooperative's initial competitive advantage, which was to buy and sell in bulk at a discount. While it may be possible for that model to function adequately in other sectors, in retail foods where volume is the name of the game, it's an uphill battle where even a small mistake can lead to disaster.

The surest way for Hyde Park to get over the malaise it has endured for nearly half a century is to become the hub of a rejuvenated South Side, a place where new people want to live and new business wants to locate. Not because it is sticking to institutions invented to solve the problems of the Great Depression or Urban Renewal over half a century ago, but because it is making the neighborhood the place where the best there is to offer from everywhere else wants to be.

Webber's Co-Op Proposal: Buy-Out or Bankruptcy

posted by chicago pop

Ahead of the membership vote on the Co-Op's future, Hank Webber has circulated a memo to University staff and faculty making the University's position clear.

From the University's perspective, it comes down to two options: either the Co-Op Board agrees to let the University buy it out, and pay off the Co-Op's creditors in the process, allowing the University to then try to bring in a new grocery store; or, as Webber says, "the chances of bankruptcy are very high."

Translation: the University may not stand by if the Co-Op membership decides to follow the Herald's advice (outlined in a delusional editorial today, November 7, 2007 ) and initiate a capital campaign, or any other, Terri Shiavo-esque life-support efforts. It would take a lot of folks throwing good money after bad to make up what the Co-Op owes, but that's beside the point.

Webber's letter (appended below) makes it clear that the University wants a functioning (and modern, clean, well-stocked) grocery store in the neighborhood, partly so that it won't lose faculty and students to competing Top 10 institutions that can offer these things. Bankruptcy is the long road to this goal. Debt consolidation is the short road, but it means the Co-Op membership has to sign on.

If they don't, chances are they'll help even more people lose even more money.

****

To: The University Community
From: Hank Webber, Vice President for Community and Government Affairs
Re: Hyde Park Co-op

You may be interested to note a story in today’s Hyde Park Herald ( http://www.hpherald.com/) about the future of the Hyde Park Cooperative Society. The story outlines a set of extremely challenging financial circumstances that threaten the Co-op’s ability to continue to operate its grocery store at 55^th Street.

The Co-op’s Board of Directors has been in discussions with the University about a possible solution to these serious financial troubles. The board has spent many months considering various options. One of the options under discussion is an agreement among the Co-op, its creditors and landlords that would result in the Co-op closing, payments to its creditors, and a new grocer opening a store in the same location. The board also is looking at the possibility of obtaining a loan and the potential for bankruptcy if neither of the first two options proves feasible.

The University is supportive of the board’s efforts because we believe our community deserves to have a high-quality grocery store. If the Co-op cannot fulfill this role, then we are committed to facilitating a new grocery store coming to the 55^th Street location.

Access to high-quality grocery shopping has a direct impact on the quality of life for our faculty, staff and students, and thus our ability to attract people to our community and retain them once they are here. In fact, when we surveyed our students earlier this year on their retail needs, the most frequently cited desire was for “improved grocery store service.” Having a successful store in this location would keep shoppers and businesses in the neighborhood and bring new business to surrounding retailers.

The University is the landlord for the Hyde Park Shopping Center which includes the 55^th Street store. The Co-op currently owes the University approximately $1.2 million in unpaid rent. As part of the proposed agreement, the University has indicated its willingness to forgive most of the unpaid rent and to supply additional funds in order to substantially repay local vendors to whom the Co-op is in debt. These actions would permit the Co-op to close without the costly process of bankruptcy proceedings and allow a new grocer to begin operations within two weeks of closure. All current Co-op employees would have an opportunity to interview for jobs in the new store as part of the arrangement with a new grocer.

These actions will not happen unless all interested parties, including the Co-op board and its other major creditors, can come to an agreement on the terms. If an agreement is reached, the board has indicated its intention to put the proposal to a vote of the shareholders. If an agreement is not reached, the likelihood of bankruptcy is very high. In either event the University will remain committed to having a new, high-quality grocer at this site.

The Co-op board will discuss its final recommendation at a town hall meeting at 2 p.m. on Sunday, November 18, at the Hyde Park Neighborhood Club, 5480 S. Kenwood Avenue, Chicago. We expect there to be robust community dialogue about the board’s proposed course of action. More information will be available at www.coopmarkets.com.

Keystone Co-Op #5 : The Moment of Truth

posted by deep throat

Is Time Almost Up for the Co-Op?

It looks like the Co-Op board has finally run out of time -- denial of the crushing financial problems and strategic mistakes has ceased to be an acceptable public relations strategy. Now, the current board (and the membership) face some very tough decisions.

Unfortunately, none of the alternatives is particularly attractive for the Co-Op. On November 18, a community meeting will be held and the board will present its recommendation on a course of action, and the membership will vote Yay or Nay on the board's suggestion.

From our perspective, it's about time. The status quo and on-going cash burn situation have turned the Co-Op into a sinking ship.

While some folks might have hoped for the luxury of time to let the 55th Street store continue to generate profits that would be siphoned off to pay for the on-going lease obligations at the 47th Street location and various vendors, the Co-Op has been digging itself into a deeper financial hole as each month passes because what it owes still far outstrips the cash it is able to generate.

Now the board is finally entertaining the drastic solutions that this type of situation calls for.

The board must choose from four options, two of which will allow the Co-Op's 55th Street store to remain in operation, and two that will shut that store down.

Before we assess the four approaches, we have one large caveat that must be voiced. If the board endorses an alternative that allows the 55th Street store to continue operations, the members are being asked to take a leap of faith that this board will govern responsibly, and avoid making the types of bone-headed decisions made by multiple previous boards.

That long history of bad decisions by previous Co-Op boards is what landed the Co-Op in its current situation in the first place. In our view, it is incumbent on this board to demonstrate that it can do differently, before asking for a vote.

Option A - "The Good Samaritan" - Debt Consolidation
This is similar to the low production-value, late-night television ads that offer to help those who are drowning in late payments to the utility companies, credit card companies, and other consumer lenders. It involves consolidating all the Co-Op's various debts to landlords and vendors, and then working out a plan to chip away at that mountain of debt over a long period of time.

This approach would require an entity, like a bank, to step up and take over all the Co-Op's debts and then receive payment little by little. It would also allow the Co-Op to avoid going to bankruptcy court and to continue operating the 55th Street store.

We're skeptical that any bank would actually be stupid enough to take on the consolidated debt of the Co-Op, unless management and the current board truly show that they, unlike previous boards, are ready to make difficult decisions and smart choices going forward.

Option B - "Sorry Charlie" - Creditors Left Holding the Bag
The Co-Op would negotiate with creditors to buy out the Co-Op's current leases, and shut down operations at the 55th Street store. This would not involve the bankruptcy courts.

Option C - "The Lindsay Lohan" - Going into Rehab
Like LiLo going to rehab, the Co-Op would file for Chapter 11, gain the bankruptcy court's protection, get time to reorganize its financial affairs, get its hydra-heads as straight as possible, and eventually emerge from bankruptcy in a (hopefully) healthier state.

This alternative isn't wholly unlike the 12-step program and having to apologize to those you have hurt in the past. It involves working out a new plan for paying off creditors, negotiating with every vested party (e.g., vendors, landlords, creditors, unions), and getting their agreement to the new plan.

As a result, this approach tends to involve a lot of lawyers and take a fair amount of time. But, it would allow the 55th Street store to continue operations. When the Co-Op leaves bankruptcy, the pre-petition shareholders (i.e., current members) will likely have no claim on the Co-Op, and it will instead be owned by the post-petition creditors.

In other words, whatever current members paid to buy their shares will almost certainly never come back to them.

Option D - Just Plain Vulture Food
The Co-Op would file for bankruptcy, shut down the 55th Street store, and liquidate all remaining assets. This is usually the best choice when a business is worth more dead than alive.

The Upshot
We believe Options B and D are unlikely to really happen. As with mortgage lenders when they are faced with foreclosing on a home, creditors are generally very reluctant to take ownership of the actual assets, and then put the time and resources into selling them at fire-sale prices, or worse, actually operating them. Banks want to be in the lending business, not the residential real estate business.

Banks only foreclose when it becomes clear that they'll never get their money back. We suspect that Certified and the University don't want to be on the hook for a bunch of leases with empty store space. It would be in their best interest to work out a new payment plan, which may involve smaller payments stretched over a longer period of time.

One rule of thumb: when shareholders equity is negative (as it is in the Co-Op's case), bankruptcy and reorganization is often favored. Another consideration is whether the Co-Op's assets would be put to better use elsewhere.

If so, then liquidation is the best bet for paying off creditors. In this case, it's not clear that many other parties would have use for the Co-Op's assets, which include refrigerator cases, inventory, shelving, and equity in other co-ops.

After weighing these factors, we're laying odds on the board recommending rehab. Britney, Lindsay, move over: here comes the Co-Op.

Keystone Co-Op #4: How Come We're Not Moving?

posted by deep throat

[deep throat left this comment in a previous discussion, and we decided to reproduce it in full here.]

RE the rent situation on 47th Street: though the Co-Op owes $90,000 per month to Certified on that space, it is not clear whether the Co-Op has been able to keep up on those payments, or some portion thereof. And, if there is back-rent due, where is it sitting on the balance sheet? I've noted that there is $960,000 lumped into "other current liabilities" as of the end of FY 2006. Maybe this contains some of the back rent that the Co-Op hasn't been able to pay. However, I doubt the FY 2006 numbers have captured an accurate picture of how much the Co-Op owes its landlords based on President Poueymirou's comments at the annual meeting. He pointed out that the Co-Op's main creditors in that year were vendors (which likely includes Certified). In FY 2007, he contends the mix of creditors has changed (even though the absolute level of debt hasn't shifted materially) such that half is owed to vendors and the other half is owed to landlords (Certified and the University?).

Then, there is the on-going lease commitment on 47th Street that the Co-Op is locked into through FY 2023. That's another 16 years of $1 million in annual rent. There is absolutely no evidence of this liability on the balance sheet because the financial statements only require the Co-Op to recognize a single year's rent expense in each fiscal year.

Yes, it does seem to me that there's a viable business in the 55th Street store. But, whether the new general manager can revive that business and churn out enough profits to satisfy the Co-Op's creditors in a timely manner remains to be seen. In situations of financial distress, time is really the name of the game. The entity will try to bargain for enough time to shed the sink holes and polish up the remaining healthy businesses.

Based on Treasurer Lowenthal's financial report at the annual meeting, it looks like even the 55th Street store has trailed industry benchmarks for the last few years. For example, revenue growth from that store has essentially been flat from FY 2003 through FY 2007. (This was shown in bar chart form, so I don't have actual figures yet).

Just for perspective, supermarket sales typically grow in line with GDP -- unless there have been some changes in the local trading area, like an increase in population. So, we would expect the Co-Op's sales to grow about 2% a year, and we'd throw in another 1% in food inflation (though we expect food inflation to be higher this calendar year thanks to higher feed prices and a worldwide surge in demand for dairy). So, in the absence of any big change in population or nearby competitors, we should be seeing the 55th Street store rack up sales growth in the neighborhood of 3% annually. At the very least, I would have expected to see some modest bump in 55th Street sales in FY 2005 when the 47th Street store closed and shoppers would have shifted to the original location.

We've heard from Neo, the Peapod Guy, that Peapod's business in Hyde Park has increased significantly. So, I would surmise that Peapod is grabbing more share of the Hyde Park stomach.

Elizabeth raises some really good questions about why Certified would put up with this situation or why it hasn't forced the Co-Op into bankruptcy. From what I can tell, there are a lot of intertwining relationships between the two entities. The Co-Op owns some of Certified's common stock, but it also owes Certified over $1 million in notes payable (long-term debt) at the end of FY 2005. Please keep in mind that this LT debt is separate from the $1 million in annual rent the Co-Op owes Certified on 47th Street.

It is sort of a neat little cycle: The Co-Op sells Certified's products, and then sends most of its profits back to Certified in the form of rent, repayment on debt, and payment for inventory.

Certified may have come to the conclusion that it is better off working out some sort of more lenient repayment plan with the Co-Op, than kicking it to the ground.

Then there is also a brothers-in-arms dynamic because Certified itself is a co-operative organization (which is why the Co-Op owns shares). Certified may be willing to cut the Co-Op some more slack in the name of solidarity, even if it takes longer to receive payment.

If it makes people feel any better, I'm lost with the Co-Op's murky financials. And I pick apart financial statements to diagnose companies for a living. This is some of the worst disclosure I've ever run across. The Co-Op is not a privately-held entity where financial conditions can be kept quiet -- it is accountable to its 22,000 members who have an ownership stake in the business.

Keystone Co-Op #3: Dissecting the Debacle

posted by deep throat

Having attended the Co-Op's annual member meeting on Sunday, I have to say that it was heartening to see that the severity of the organization's financial distress has finally begun to penetrate the outer-most layers of the membership. While this dawning realization does not diminish the serious financial issues, at least more members are getting a clue.

I am still in the process of sorting through the historical financial statements, and the very poor disclosure has substantially hampered my efforts. I've got plenty of questions about where the Co-Op is classifying its rent expense, where its liability in back rent payments to the University shows up on the balance sheet, what its debt covenants are, which ones the Co-Op has violated and the ensuing penalties, specific detail on payroll expense, sales/marketing expense, and interest expense, among others. Let's hope the audited financial statements for fiscal year 2007, which should be available after 11/10/2007, will provide a much clear picture of what's going on with the Co-Op.

There has been some disagreement on this blog about just how profitable or unprofitable the Co-Op is. On the one hand, the Co-Op reported net income of $809,299 in fiscal 2006 from continuing operations, which basically means the 55th Street and 53rd Street stores. The audited financial statements did not disclose net income by individual store, so I cannot find any evidence of the $1 million in profits that has been mentioned on the blog before. (If anyone does have knowledge of where I can find these numbers in the audited financial statements, then please point me in the right direction!)

Now, any credit or equity analyst worth his/her salt can tell you that net income is easily manipulated through the various accounting rules. For example, the Co-Op has classified the 47th Street store as a "discontinued operation" back in fiscal 2005, so the on-going and significant rent obligation on that space is not part of the calculation to arrive at last year's $809,299 profit. Unfortunately, just because the Co-Op has discontinued operations doesn't mean it can also discontinue rent payments to Certified. If you disregard the discontinued operations and solely focus the continuing operations of the Co-Op (the 55th Street store), yes it is profitable. However, I would argue that it is simplistic to look at the 55th Street store in isolation. The money-suck originating from the 47th Street store has been sitting in discontinued operations from FY 2005 through FY 2007, and the first three months of FY 2008 – and it doesn't look like this will change any time soon based on President Poueymirou's comments at the Annual Meeting. For this reason, it would be irresponsible to ignore the discontinued operations sink hole when evaluating the financial health of the Co-Op. If you count all the on-going obligations associated with discontinued operations, then the Co-Op is clearly in the red. Obviously, the $809,299 in earnings last year is just a profit on paper – otherwise, it would show up as cash on the balance sheet, as a positive contribution to retained earnings (which drives membership equity toward positive numbers), and the Co-Op should be issuing a nice dividend check to its members.

One key number that seemed to bring the situation home to members at the annual meeting is the Co-Op's negative shareholders equity. For those who aren't accountants, shareholders equity (membership equity, in the case of the Co-Op) can also be thought of as the Co-Op's net worth, or tangible book value. Technically, it is calculated by taking total assets minus total liabilities -- $4,823, 219 in assets - $6,496,066 in liabilities, which leaves -$1,672,847 in membership equity (based on the FY 2006 balance sheet). In this case, since it is negative, that essentially means that the value of the Co-Op's assets have fallen below the value of the liabilities used to obtain those assets. This is analogous to the situation that some homeowners find themselves in, after having bought their homes at the top of the market and taken out big mortgages to finance the deal, but now struggling to pay on a mortgage that exceeds the market value of their home as the housing market dips. Based on the Co-Op's operating performance over the last few years, I am expecting membership equity has slipped further into the red in FY 2007.

Because it's so easy to manipulate the calculation of net income, I prefer to look at the statement of cash flows, where it is generally harder to sweep ugly things under the rug and you can get a better picture of what cash is coming in and going out. Leeway in accounting rules can create paper profits (and provide false reassurance), but its only cash that counts when the music stops because that's how you pay off your obligations and secure what you need to continue operating. The Co-Op generated $296,000 in cash from operations in fiscal 2006 – which is considerably smaller than the $809,299 in profits from continuing operations. This is a major red flag to me. In well-managed entities, cash flow from operations typically exceeds net income, and importantly, growth in cash flow exceeds growth in net income. Since I have not yet received 2003-2004 or 2007 financial statements, I can't comment on the growth trend, but clearly, cash flow from operations is trailing net income in absolute numbers.

Humor me with one last calculation that can provide insight into the financial health of this organization – the cash burn rate. The Co-Op burned through $13,016 each month of fiscal 2006 ($295,971 cash flow from operations - $77,159 in capital expenditure - $375,000 in debt paid off during the year/12 months) = -$13,016). Ideally, this number should be positive, which would indicate the entity is generating net cash and can shoulder investments necessary to improve the business. But, in the Co-Op's case, it's in negative territory, which means the entity is spending $13,016 more than it is generating in cash. In general, unless this condition is corrected, the Co-Op will not be able to pay debts when due, including the upcoming $529,711 portion of long-term debt that must be paid in fiscal 2008.

Since the Co-Op is already insolvent, a discussion of the nuts and bolts of bankruptcy might be helpful in the next installment.

Keystone Co-Op #2: Extent of Financial Disaster Revealed (Again)

posted by chicago pop with deep throat

By the end of Sunday afternoon's Annual Meeting of the Hyde Park Co-Op Society, the membership had started to get it: they may lose their money. And the Co-Op as an ongoing business. And the community that bought into it. All of it. Because, if the Co-Op declares bankruptcy -- which could happen as soon as any of its many creditors smells blood in the water -- they're out of luck. The only thing keeping the doors open at this shop is a set of very lenient vendors and landlords.

Several members wondered why it had taken this long for a Co-Op Board to outline the gravity of the situation in plain terms, suggesting that previous Boards had been less than forthcoming. A few of them even chided the Board for not publicly putting all options -- including bankruptcy -- on the table. Some of their current accounting practices strike us here at HPP as "aggressive," as we'll explain below -- meaning that they put the best legally possible face on what seems to be a very tenuous financial situation.

Optimists will argue that the 55th Street store just needs to be made to sing, and then the Co-Op will pay down its obligations. Take one look at the magnitude of the abyss that has opened up on 55th Street, however, and you may change your mind:

$3,900,000 Negative Equity

This is the amount the Co-Op is in the hole. Between interest payments and rent expense, the Co-Op is in an extremely precarious situation. If vendors or big landlords demand payment, the Co-Op could hit a liquidity crisis. In other words, they wouldn't be able to pay their bills. Unless someone fronts them money, the only alternative at that point would be bankruptcy.

$18,000,000 [estimated] future obligation on 47th Street rent to 2025 that does not show up on the Co-Op balance sheet

As with a lot of information pertaining to the financial health of the Co-Op, this number is nowhere plainly indicated. We've had to get at it from nuggets buried in different issues of the Evergreen -- another reason why some shareholders are upset with what they feel is a lack of forthrightness and transparency.

This number represents our estimate of the 25-year lease (there are 3 different sources suggesting the lease ends in 2023, 2025, and 2029), assuming a start-date of 2000 for the 47th Street store, and that the Co-Op owes Certified Grocers a rent of $1,000,000/year.

Generally Accepted Accounting Principles do not require that this not-so-hidden liability show up on the balance sheet. As it is, the Co-Op only shows one year of rent as its liability at 47th Street, each year. If the Co-Op is serious about transparency, the total amount of this liability ought to be clearly visible in its financial statements.

How long are members willing to wait while management tries to lease out the 47th Street location? They've been trying for 2 years now. Membership is starting to get a clue, and is rushing to cash out shares. The Co-Op currently owes more to members withdrawing shares than it is taking in from new shareholders. From September, 2006 through to June, 2007, Co-Op members withdrew $39,710.41 worth of shares. For that same time period, net membership transactions -- new shares bought versus old shares cashed out -- ran to -$30,286.27.

This is a rush on the bank. A new tenant for 47th Street is nowhere in sight. Operations at the 55th Street store are a black hole. The Co-Op is a store that can no longer, despite the belief of some of its remaining members, function as a true cooperative buying in bulk and selling at a discount. The organization owes it to Hyde Parkers to make all the numbers public and put all the options on the table.

Keystone Co-Op: New Feature!

posted by chicago pop

In preparation for the upcoming annual meeting of the Hyde Park Co-Op this Sunday, we thought it would be appropriate to roll out our latest feature: Keystone Co-Op! Offering you comic relief in the form of occasional reports on just how bad it really, really is. Even some of the Board members can't believe it, and neither will you!

After going round and round in various discussions about the abysmal state of neighborhood grocery shopping, we found ourselves coming up against the same few statements: the Coop earns $1 million a year, the only problem is the dumb quarter-century lease we signed on 47th Street (which costs $90,000 a month); the produce is lame (because the Co-Op's key vendor canceled some produce shipments); the service is less than stellar (a whooooole separate story, folks); and the prices are high (they don't have buying power so they pay more, and charge you more). Opinions as to why all of this is so are many, of course, and passions run high; and we're not even including all the juicy tidbits we've come across.

But what is really going on inside this organization? Well, the truth is, nobody really knows, and the lack of transparency is a point of contention even within the organization. But, with the help of some professional financial analysis of the Co-Op's business performance, from a source we'll call DEEP THROAT, and a stack of the Co-Op's publicly accessible Evergreen newsletters, we're here to help cut through the spin of exactly how this business loses so much money.

Here's just a taste of this season's hit comedy sketches:

• The buzz from management is that the Co-Op earns $1,000,000 in net income a year. In fact, it's $809,299. More importantly, the Co-Op's cash flow for fiscal 2006 is only $296,000. This is the actual money they have to pay their bills -- which is why they can't -- and it's the figure that analysts look at to assess the health of a business entity. It's harder to manipulate than net income.

• The Co-Op has 3 or 4 people who are supposed to scan for discrepancies in accounting and receipts. None of them noticed when a senior cashier at the former 53rd St. store was processing refunds of $250 to $350 to herself -- basically emptying the cash register -- each day she worked. The Co-Op has not revealed the total amount embezzled.

• When the Co-Op installed a new, "state of the art" front-end system in October, 2006, it marked the first time in over 3 years that all 12 of the cash registers were operational in the 55th Street store.

• Because "the ownership database is so corrupted," Co-Op management and the Board have no idea what percentage of members are active shoppers, and what percentage of shoppers are members.

And, because you should always save the best for last, the following:

• The "original disks for the accounting software were destroyed during a cleaning operation." Did someone put them in the dishwasher?

So there's our teaser. Stick around. There will be more!