ALP/Freddy's files Chap. 11

Drug Store News, April 5, 1993 by James Frederick

ROCHESTER, N.Y. - Faced with mounting debt pressures and restive creditors in a slow economy, the A. L. Price and Freddy's deep discount drug chains have filed for Chapter 11 protection in U.S. Bankruptcy Court here. All 37 of the two chains' stores in Michigan, New York and Florida remain open, however, and the companies - both of which are majority-owned and managed by president Bill Edwards - have secured court-approved agreements to continue operating with available cash and credit.

In part, the move was precipitated by an almost simultaneous involuntary bankruptcy filing by three of A.L. Price's creditors in Detroit. Among the creditors forcing the chain into Chapter 11 in Michigan was Perry Drug Stores, which three years ago sold A.L. Price to its current owners.

Perry sold its Michigan-based, 16-store deep discount division in 1990 to Edwards and other investors for $14.8 million in cash and promissory notes. Four of those units have since been sold or closed. In 1991 Edwards formed a partnership with another group of investors to purchase 24 Freddy's stores in New York and Florida from Melville Corp., which also remains a creditor.

Subsequently, A.L. Price moved its corporate headquarters and staff to Freddy's central offices near Rochester, N.Y., consolidating the two operations.

Perry, which is still owed $3.5 million, joined with two other creditors in the Detroit petition after concerns arose over the ability of ALP's sister company to meet its debt obligations. Prior to the filing, ALP/Freddy's was negotiating with its creditors - including Perry - to restructure its debt. In a statement, ALP/Freddy's accused Perry and other creditors of "acting in bad faith in filing this involuntary bankruptcy," but both sides indicate they will resume negotiations aimed at working out a reorganization plan and keeping the companies intact.

Since the March 19 filing, ALP/Freddy's has also obtained court approval freeing up the necessary debtor-in-possession financing to continue paying its vendors and employees. "About $8 million in cash is available to us, by court order, which we will use to make current purchases of inventory . . . and to keep our employees and taxes paid," said ALP/Freddy's outside attorney Francis Kenny. "We expect to get things back to normal as quick as possible, and then look at plan of reorganization. We're looking at a lot of different opportunities to refinance."

Edwards, a veteran of off-price and traditional drug chains including F&M, Revco and Xpect, told Drug Store News that stores would shortly be replenished with new inventory shipments as orders resumed. He also reiterated the company's intention to emerge from Chapter 11 intact, with a workable financial structure.

For its part, Perry said its role in the involuntary filing sprang from concerns about future payments on the ALP debt. "We were advised last week . . . that Freddy's was having problems," explained Bob Berlow, Perry senior vice president, general counsel and secretary. "We were afraid that if Freddy's were forced into bankruptcy, it would take A.L. Price with it.

"We're just protecting our interests," he added. "We felt the proper forum for the case would be here in Detroit."

Added Ronald Rose, an attorney with the Detroit law firm of Dykema, Gossett who is representing Perry, "We will argue that the assets and employees of A.L. Price are here, and that it's a Michigan limited partnership. They will argue that the company's books and record-keeping are all based in Rochester. The judge will decide the proper venue."

Nevertheless, he indicated, Perry has no desire to try and force one or both off-price chains into liquidation. "Basically, both companies have the ability to continue to operate," said Rose. "As secured creditors, we're much better off [dealing with APL/Freddy's] as an operating company."

Added Berlow, "Things are not dire for them, by any means. They're able to buy merchandise, and the stores are being shipped.

"We believe there are sufficient assets to pay us off," he added. "The purpose of the filing is to restructure every layer of debt in a way the law requires, and provide the opportunity to develop a [repayment] plan . . . in an orderly way."

Most creditors appear to be behind that effort, as well, according to various sources close to the companies. Said one, "The trade has pretty much turned back on the [supply] spigot."

According to court documents, Freddy's has total assets of $52.2 million and total liabilities of $45.8 million. Assets at A.L. Price total $17.3 million, vs. $15.1 million in liabilities.

Perry was joined in its involuntary bankruptcy petition by Michigan National Bank, which is owed roughly $6 million, and Faygo Beverage Co., which is owed $55,000.