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K&W requests bankruptcy permission to hire financial adviser for potential sale

K&W requests bankruptcy permission to hire financial adviser for potential sale

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K&W CAFETERIA

K&W Cafeteria celebrated its 75th anniversary in 2012.

K&W Cafeterias Inc. is requesting that a federal bankruptcy court judge allow it to hire a financial adviser to assist in finding a buyer.

K&W, a staple of Southern comfort foods for 83 years, filed for Chapter 11 bankruptcy protection Sept. 2 as the latest step in a corporate downsizing that began before the COVID-19 pandemic. It had about 1,400 employees at the time of the filing.

Chapter 11 protection is sought by companies that plan to remain in business, with the format allowing them to reduce or eliminate certain expenses and debts.

The Winston-Salem company said in Friday’s filing it wants to hire SC&H Group Inc., based in Baltimore, “to assist the debtor in connection with a potential transaction or series of transactions … that may involve a sale or transfer of assets of the debtor to a buyer.”

The bankruptcy filing defines buyer as “investor, joint venture or merger partner, lender, equity holder or other acquirer.”

K&W has agreed to pay SC&H a monthly fee of $17,500 and a transaction fee of at least $225,000 that would increase with a potential higher sale price.

For example, the filing lists SC&H receiving 5% of total sale price consideration up to $5 million, or $250,000.

The payment is at 3% of total consideration between $5 million and $10 million, at 2.5% between $10 million and $15 million, and at 1.5% of more than $15 million.

K&W also agreed to pay $20,000 for “reasonable” SC&H out-of-pocket expenses. All fees would be due within three days of the closing of a sale.

The initial K&W bankruptcy filing listed assets of more than $30 million. It has liabilities of more than $22 million, of which $12.56 million is with creditors holding secured claims on property, and the rest unsecured claims. It has between 100 and 199 creditors.

Dax Allred, the company's president, is listed as one of three board members, along with Julie Long and Derek Duggins.

The company has hired Northen Blue LP of Chapel Hill as its primary bankruptcy attorney. The firm has not returned a request for comment on the filing.

Allred released a statement Sept. 14 about the Chapter 11 filing and the company’s plans for operating its 18 restaurants, including three in Winston-Salem and two in Greensboro.

"The company will continue to serve guests during the restructuring, in accordance with all local coronavirus-related operating restrictions," Allred said. "This filing follows the recent closure of six unprofitable locations and will allow the company to reduce its debt and improve liquidity."

“Unfortunately, the impact of COVID-19 and related operating restrictions had a disproportionately negative impact on our loyal guests and cafeteria-style dining. We are hopeful this restructuring will allow our cafeterias to weather the storm and continue serving guests for years to come.”

Allred said the filing represents "a difficult day in our company’s history, but essential for the future of K&W."

"We look forward to serving future generations as we emerge from this stronger.”

Truist Financial Corp. is K&W's largest creditor. The debt includes a $6.73 million Paycheck Protection Plan loan and a $10.95 million lien claim on accounts, inventory, equipment, parts and general intangibles.

The PPP loan to K&W was one of the largest granted to a North Carolina business. The U.S. Treasury Department listed the top PPP loan range at between $5 million and $10 million.

K&W said in its PPP application that it would attempt to preserve at least 500 jobs with the loan.

Truist referred to the bankruptcy filing when asked for comment about the K&W bankruptcy and its financial exposure.

Allred told the News & Observer of Raleigh that without the PPP funds, K&W would have closed restaurants during Phase One of the state’s socioeconomic restrictions in response to the pandemic.

“It absolutely helped,” Allred said. “Without the funds we would not have survived to Phase Two.”

COVID-19’s effect

Before K&W filed for bankruptcy, it closed restaurants in August in Chapel Hill, Goldsboro, Raleigh and Salisbury. It shuttered its experimental K&W Cafe in Clemmons in July 2019 and in High Point in January.

Overall, since celebrating its 75th anniversary in 2012, K&W has shrunk from 35 restaurants to 18.

When K&W closed the two Triangle locations in August, Allred told the News & Observer that its business dropped off about 80% during Phase One, which lasted from March 10 through May 22. Phase One permitted only takeout and delivery sales.

“These were difficult decisions, but they were the right business decisions,” Allred said. “This enables us to refocus our team and refocus our resources on our 18 locations.”

Although Allred said K&W was able to regain some business during Phase Two, which allowed for limited indoor and outdoor service, it continued to struggle since its primary customers are elderly diners who have been advised to stay at home during the pandemic.

“While the coronavirus hasn’t left any segment untouched, we’re particularly impacted, as our clientele is trending towards the elderly,” Allred told the Raleigh newspaper.

“There’s been a disproportionate impact on that guest demographic.”

Donald Allred is listed as having the largest ownership stake in K&W at 24.6%, followed by Duggins at 14.8%, Natalie Smith and Leslie Yates at 12.9% each, Jordan Tucci at 7.8% and Bill Allred and Dax Allred at 6.3% each.

The company listed having $74,800 in cash on hand, a checking account identified as debtor in possession of just under $1.5 million with F.N.B. Corp., and $137,756 for the in-process sale of a condo.

The company is listed as owing $138,935 to the Forsyth County Tax Collector, $31,237 to the Guilford County Tax Collector, and $282,317 to the N.C. Revenue Department.

336-727-7376

@rcraverWSJ

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