With a skeptical and worried look, Warren Adamson shook his head slightly as he stood on a tall stool, closed his eyes and prepared to fall backwards into the arms of his employees.
The employees, tentatively cheering him on, looked equally uncertain about their ability to break his fall. "OK, on the count of three," they called out in unison. "One . . . two . . . three!"
Adamson, the 55-year-old president of Ramada Franchise Canada Inc., headquartered in Toronto, then let himself fall, to his amazement, and that of the dozen employees, he landed safely in their arms.
An Exercise in Co-operation: Firms Stress Teamwork
By Rose Simone, The Edmonton Journal - Saturday, March 14, 1998
Warren Adamson is a hotel industry executive with a long relationship with CCWIPP - UFCW Canada's massive multi-employer pension plan. At the time that he participated in the juvenile management "trust-building" game described in the article above, he was President of Ramada Hotels Canada and President of AFM Hospitality Corporation, a major Canadian hotel franchising and management firm in which CCWIPP was a major shareholder.
Today, Adamson is a hotel industry consultant and the President of a company called PRK Holdings Inc. PRK is a subsidiary of Propco Holdings 39 Limited, which in turn is a subsidiary of CCWIPP. It's one of those investment corporations through which CCWIPP's Trustees flow money from the pension fund into the hands of businessmen looking for financing for their ventures.
PRK operates two hotel properties in the Bahamas. Since 1997, CCWIPP has poured about $155 million US into these properties. The hotels have never made money, are badly in debt and are not expected to make a return on investment for a very long time - if ever. This notwithstanding, Propco 39 intends to pour even more millions into the hapless ventures.
CCWIPP first became involved with the two hotels, the British Colonial Hilton and the South Ocean Bay Resort in 1997 when Propco 39 put up $18 million to finance the purchase of the British Colonial Hotel by RHK Holdings - the company operated by ex-Catholic priest Ron Kelly. The following year, another one of CCWIPP's investment corporations, Propco 44, loaned RHK another $18 million to finance the purchase of the bankrupt South Ocean Bay Resort. RHK appears to have bailed out of the two properties sometime in 2000. Propco 39 set up a subsidiary company - PRK Holdings - to contain the damage. PRK took control of the two properties and has been funneling money from CCWIPP to keep them afloat ever since.
The sorry details of these investments came to light recently in a confidential report authored by Adamson to the Bahamian Government.
In the report, which was leaked to the Bahamian media, Adamson candidly discusses the hotels' dismal circumstances and unveils his plan for recovery: A substantial renovation and "right sizing" program which will involve millions more in financing from CCWIPP and the layoff of about 50% of the hotels' workers. He asks for the government's "moral support" (actually for the government's cooperation in obtaining a casino license, changing the location of roadway that bisects the South Ocean property, the waiving of duty charges for imported materials and expediting the paperwork for non-Bahamian workers). He is optimistic that, somewhere in the distant future, the properties will generate a return on investment.
His optimism is predicated upon the continuing support of the Canadian pension fund which controls Propco, which controls PRK. Adamson is certain that Propco support can be counted on. "The current ownership group", he proclaims, "plans to break from this dubious tradition".
The following excerpts from Adamson's report tell a disturbing story about the investment decisions being made by the Trustees of - as Adamson puts it - "a major Canadian Pension Fund with assets in excess of US $1.0 billion" (an inaccuracy - CCWIPP's assets are reported at about $1 billion CDN, a discrepancy of about $500 million).
- Since the late 1980's the resort [South Ocean] has experienced continuing financial difficulty under various owners and has endured a succession of bankruptcies.
- Purchased out of bankruptcy for approximately $18 million by RHK Holdings Ltd. in 1998, the resort is owned by the South Ocean Development Company Limited, a wholly owned subsidiary of PRK Holdings Ltd.
- PRK was established as at December 31, 2000 to resolve various financial defaults of RHK involving RHK's major lender. At that time, RHK was in serious financial difficulty and unable to support SODC without the financial support of its major lender, the Toronto Canada-based company, Propco 39 Ltd. which is a wholly-owned subsidiary of a major Canadian Pension Fund with assets in excess of US $1.0 billion.
- Propco, which controls PRK, has, since the outset of its involvement with RHK and SODC, advanced in excess of $30 million to SODC through PRK. These advances include approximately $10 million for capital improvements to SOGB and $20 million cash to subsidize operating losses of SODC during the five years since the resort's 1998 acquisition. Accordingly, Propco has provided, or is responsible for, the total invested capital in SODC of approximately $50 million, including the BNS loans.
- SODC's accumulated deficit as at December 31, 2002, as per its audited financial statement, was $26.0 million. This deficit includes losses of $4.7 and $3.5 million for the 2002 and 2001 fiscal years, respectively. The anticipated loss for fiscal 2003 is $7.0 million of which $5.0 million will be cash provided by Propco, the balance of $2.0 million being non-cash expenses.
- The anticipated loss for the 2003 fiscal year will exceed forecasted revenues. Notwithstanding this exceedingly bleak expectation and financial history, Propco has funded all losses to date and will continue to underwrite and pay all creditors' claims.
- To put another perspective on the extent of the loss situation, the $5.0 million cash subsidy required of Propco for 2003, will exceed the total annual payroll (including all payroll benefits and gratuities collected from guests and paid over to employees) of the entire resort operation.
At the British Colonial Hotel, things are not much better:
- Similar, albeit larger, capital investments have been made by Propco in the British Colonial Hilton hotel. This property was acquired by RHK, circa 1997, and was established with an ownership and financing structure not unlike that of SODC. The BC Hilton asset ownership is within British Colonial Development Company Limited ("BCDC"). The current ownership structure of BCDC parallels that of SODC.
- Propco, in the absence of RHK's financial capability, is responsible for 100% of the debt of BCDC Which, as at December 31, 2002, amounted to approximately, $105.0 million. This sum includes bank loans totaling approximately $31.0 million plus direct advances from Propco, through PRK, of $74.0 million.
- Since re-opening to the public as the BC Hilton, the hotel has an accumulated deficit from annual operating losses of $34.0 million.
- Upon the onset of RHK's financial difficulties, which pre-dated the completion of the construction of the BC Hilton and the full renovation of SOGB, Propco commenced to provide, and has continued to provide, full loss subsidization as well as the cash necessary for asset replacement and renewal at each hotel.
- Propco has unwaveringly funded the payment of all debts of both BCDC arid SODC as required. It has paid all taxes and government levies, all utility bills of the publicly-owned utility companies amounting to millions of dollars (unlike, apparently, some other, directly competitive resorts in Nassau), and all payrolls, payroll benefits and license fees. In addition, it has made available to the general public the opportunity for local residents, individually or through organizations, to play golf at South Ocean Golf Club, at prices subsidized by the company.
- Since completion [of the renovation], Propco has maintained the physical quality of the building to the intended luxury standards despite the significant losses.
- Propco maintains a growing investment in the Nassau resort industry currently amounting to $155.0 million and expects this investment to increase in the coming year through additional asset purchases and loss subsidies. It should be noted that no interest has been charged by Propco, nor capitalized into the losses of SODC and BCDC, since the formation of PRK.
- [The] economic basics of hotel operations relative to investment explain why each of BC Hilton and SOGB are significantly far-removed, not only from producing annual profits (each is enduring chronic, annual losses), but also from producing any return on invested capital.
- The forgoing statistics show the extent of the gulf between current financial performance and that which is required, not only to achieve a return on capital invested, but also to give the assets an economic market value which is consistent with the $155.0 million invested.
- It can be readily seen that Propco faces a daunting challenge to cause the profitability of these hotels to escalate to acceptable levels.
- As noted above, Propco is currently responsible for $50.0 million in sunk capital which has been invested to date in SODC and upon which, no returns are being realized. When the current right-sizing plan has been fully implemented, circa October 2004, Propco's Investment in capital improvements and loss subsidization will have escalated to approximately $64.0 million. Thus, what might be viewed as a retrograde and value-impairing step of reducing the number of personnel and available guest rooms at SOGB is regarded by the investors as a necessary measure for improving profitability and, in turn, the ultimate value of the assets.
But despite the bleakness of the picture Propco, Adamson states, is committed to maintaining its investment in the two properties and to continue pouring money into them in the hope that one day, in the distant future, it will realize a return on its investment.
- As an entity controlled by a pension fund, Propco maintains a long-term view of its investments. The company has not abandoned its vision to complete the development of the British Colonial site which still stands as an intended, although very lonely, catalyst to downtown development and renewal.
- Propco has commenced the work necessary to improve the conditioning of the [golf] course, has allocated and approved in excess of $5.0 million in capital spending for golf course modernization during the next 15 months...
The good news?
- [Propco/PRK] has made available to the general public the opportunity for local residents, individually or through organizations, to play golf at South Ocean Golf Club, at prices subsidized by the company.
It wasn't just Propco 39 that flowed money into the two Bahamian hotels however. Commencing in 1997, millions of dollars were flowed to RHK's Bahamian properties through four investments corporations - Propco's 34, 39, 44 and 46 - and also through a numbered company 1328434 Ontario Limited. Starting in 2001, PRK Holdings also became a conduit for cash to the hotels. In 2001, loans totaling $129,748 million were converted to cumulative preference shares. This means that the loans that were made to RHK were exchanged for shares in PRK - a company ultimately controlled by CCWIPP.
During this period, other loans were also provided to RHK for hotel properties in Ocho Rios and Kingston Jamaica as well as one other unspecified hotel property (possibly the Hyatt Cayman which RHK owned during the late 1990's). This table (Analysis of Investments related to Ronald Kelly, 1995 - 2001) shows the amounts and the investment corporations that were used to move the funds to RHK. The information in this chart comes from CCWIPP financial statements for the period 1997 through 2001. Both the "cost" and "fair value" of each investment are shown. Notice how:
"It seems like this is some sort of deal where they simply lend money to their friends."
a Bahamas journalist.
- The scale of CCWIPP's investment grows from year to year.
- Despite the hotels' obviously troubled circumstances the costs and fair values of these investments are reported as identical amounts in each year.
- In 2000, the loans that were outstanding to RHK through Propco's 34, 39, 44, 46 and 1328434 Ontario Ltd are converted to shares in PRK Holdings Ltd.
- Notwithstanding RHK Capital's troubled financial situation, CCWIPP continues to invest in its other hotel properties in Jamaica as well as other RHK investments in Canada.
The following chart depicts how money flows from CCWIPP to the Bahamas hotels.
A number of CCWIPP officials are involved in getting the much-needed funds to the Bahamas too. The Directors of the Propco companies that are flowing the funds to PRK Holdings are CCWIPP Investment Committee members Cliff Evans, Eugene Fraser and Howard Preston. Evans is also a Director of 1328434 Ontario Ltd. along with two men named Ray Kurki and David Harvey. Kurki is a CCWIPP investment manager and David Harvey, a close associate of Evans', is the CEO of benefits administration company called Benefit Plan Administrators. For whose benefit are they working? Surely not that of CCWIPP members.
This Dubious Tradition
CCWIPP has a big solvency deficiency; between $400 and $600 million based on what was reported in 2001. The Financial Services Commission of Ontario, the regulatory agency that oversees CCWIPP, is conducting an examination of its practices. As far back as 1997 CCWIPP representatives were assuring the regulator that they were taking steps to get the solvency problems under control but it just kept getting larger and larger.
Thousands of CCWIPP members are paying the price. In recent years their benefits have been reduced to deal with the problem while CCWIPP continues to pay out big dollars to enterprises associated with a small cadre of businessmen whose relationships with CCWIPP stretch back over a decade. These men have enriched themselves by falling backwards into the arms of thousands of hardworking men and women and their retirement savings.
Is CCWIPP's solvency problem just the result of volatile stock markets and lower than expected rates of return on investment as CCWIPP's representatives say that it is? In the context of their Bahamian adventure, this explanation seems hardly adequate. It's hard to imagine the basis on which the CCWIPP Trustees concluded that the two hotels were a prudent investment or why, given CCWIPP's solvency deficiency, they decided to take a flyer on it anyway.
During the 1990's CCWIPP's solvency liability was growing steadily from year to year. By 1996 it stood at $90 million. Yet in 1997, CCWIPP Trustees agreed to float RHK Capital over $18 million in loans to finance the purchase of the British Colonial Hotel. In 1998 they would pour in another $18 million for the purchase of the South Ocean Resort and, in the ensuing five years - as the solvency deficiency grew to almost four times its 1996 level - would pour in another $100 million for renovations and, eventually, to cover operating costs.
When RHK Holdings could no longer meet its obligations, they stopped charging interest. When RHK tanked, they set up a subsidiary corporation to take over their investment. The loans that were outstanding to RHK were converted to shares in the new company - a company that CCWIPP controls. Although the properties are not likely to generate a return for a very long time, CCWIPP Trustees plan to pour even more of their members' money into these investments.
Why is this? $155 million (US) is a lot of money. Put into a more traditional lower-risk investment, it is quite likely that it would earn something. Kept in PRK Holdings Bahamian resort properties, it is quite likely to earn nothing. Still CCWIPP Trustees remain wedded to their commitment.
There is nothing about this failing investment that is attributable to stock market volatility or to "lower than expected rates of return on investment". While it is true that the two hotels have generated a lower return than the Trustees must have hoped for, it's hard to imagine what they might have been expecting. Even the most cursory due diligence in 1997 should have sounded alarm bells in the Trustees' heads. A property that has experienced numerous bankruptcies and that has never generated a decent return in over a decade doesn't sound like a prudent investment.
For all the Trustees' talk about volatile stock markets being the main causes of the pension fund's solvency deficiency, there's something that doesn't quite add up. CCWIPP's portfolio investments (investments in stocks and bonds that are managed in by professional firms) have actually generated modest returns over the years. It's the Trustee-directed investments (investments made directly by the Trustees) that have done... not so well. It's impossible to tell, from a reading of CCWIPP's financial statements, just how poorly these investments have done. As mentioned in Part 1 of this series, how accurately the fair value of these investments has been reported over the years is questionable at best.
We do know, however, that as at the end of 2001, CCWIPP had some $440 million tied up in Trustee-directed investments through its various Propco investment corporations. We do know that some of these investments have lost millions of dollars. CCWIPP's investments in the British Colonial Hilton and South Ocean Resort stand out because of their magnitude ($155 million US) and because, thanks to Warren Adamson's candor, we know that these investments were extremely risky from the outset. Do these investments bear any resemblance investments that the CCWIPP Trustees have made?
There are some striking similarities. Many other CCWIPP Trustee-directed investments involve:
- Significant amounts of money.
- High-risk business ventures.
- Loans and mortgages that are converted to equity stakes where the business falls on hard times.
- The flowing of funds through special "single purpose" corporations.
- An escalation of investment in businesses that are experiencing financial problems.
- The takeover of failing business by the investment corporation that is flowing the funds.
- Concentration of investments in certain companies, some of which are businesses in which CCWIPP Trustees or investment committee members have an interest and hold controlling positions.
- An ongoing commitment to investments that clearly are going nowhere - a level of commitment to the entrepreneurs that is quite surprising.
What is quite striking about the Bahamian investments also is that they involve an interconnected circle of players who turn up time and again in a variety of different CCWIPP investments.
Warren Adamson is one of a small circle of businessmen who have been orbiting around CCWIPP and availing themselves of its considerable resources for over a decade now. CCWIPP's relationship with Adamson and PRK resembles its relationships with other entrepreneurs: Relationships that are characterized by an almost slavish dedication by the lender to the borrower. These relationships raise a critical question about the reasons behind the pension fund's enormous solvency deficiency. Would the solvency deficiency be what it is today if CCWIPP Trustees had not become involved in these relationships? How much of the pension fund's current funding problem is directly attributable to the CCWIPP Trustees' dealings with this small circle of businessmen and their multiple pipelines into CCWIPP's resources.
The image of Warren Adamson falling backwards into the trusting arms of his workers is eerily analogous to the relationship of the entrepreneurs that orbit around CCWIPP, its millions and its members.
How did it get this way?
The Canadian Commercial Workers Industry Pension Plan was created in 1979 by way of the merger of two existing multi-employer pension plans in Alberta and Manitoba. In the years that followed, many other pension plans covering UFCW-represented workers would be rolled into the newer, bigger multi-employer plan.
CCWIPP was the brainchild of Cliff Evans who would serve as the UFCW's Canadian Director from 1988 to 1992. During his brief reign, Evans achieved a stature within the Canadian UFCW that would make a cult leader envious. By the UFCW's faithful, he is frequently described as "the man who made the UFCW what it is today" something on which there is agreement between his most dedicated fans and his harshest critics (but for entirely different reasons).
In UFCW lore and promotional materials, he is lauded for his bargaining savvy, his vision and his great achievements on behalf of Canadian workers. Evans "has done more at the bargaining table to protect and improve working conditions for part-time workers than any other leader of any other union in Canadian labour history" is characteristic of the grandiose statements that are often made about him by his followers. It has been said that among UFCW insiders he is sometimes referred to as "god".
Evans was a business unionist from a long way back. During the 1950's and 60's he worked his way up the ladder with the Retail Clerks International Union and was its Canadian Director at the time of the Clerk's merger with the Amalgamated Meatcutters and Butcherworkmen in 1979. That merger created the United Food and Commercial Workers International Union and Evans became one of two UFCW Canadian Directors.
"We have a medieval king in the form of Cliff Evans and a bunch of little fiefdoms underneath him," Reno said during his election campaign in 1988. "His knights are the paid business representatives pillaging the countryside. It's all done on the backs of the serfs, the workers."
UFCW Representative, Bill Reno, in the Toronto Star, 1988
He spent the early part of the 1980's positioning himself to become the sole UFCW Canadian Director and in 1986, ascended the union's Canadian throne. During the first two years of his reign, Evans kept busy putting down dissent and building a structure that would ensure that all power within the union flowed from the top.
On his retirement from the Director's position in 1992, Evans was feted like a departing head of state. He never really retired from the UFCW however. He stepped down as Canadian Director and was promptly appointed Vice President of International Relations for the UFCW, a post that gave him control over the Canadian operation. He would continue on in his role as a Trustee of CCWIPP and Chairman of its Investment Committee.
The UFCW Canada web site lauds CCWIPP as one of Evans' two principle achievements (the other is a training center named in his honour).
An extraordinarily astute and effective negotiator, Evans pioneered many things now taken for granted in UFCW Canada collective agreements and, of particular note... the Canadian Commercial Workers Industry Pension Plan (CCWIPP), an idea of Evans' that has grown from its birth in 1979 to become the largest private sector pension fund in Canada. At last count, well over two-thirds of Canadian workers, full-time and part-time, are present or future beneficiaries of CCWIPP, a completely employer-paid pension plan.
The last sentence of this fawning statement is, of course, completely false. Two-thirds of Canadian workers cannot possibly be present or future beneficiaries of CCWIPP as two-thirds of Canadian workers do not belong to the UFCW or any union for that matter. It is however, a good example of the license that is taken with reality by the UFCW when singing its own praises or that of CCWIPP.
In fairness to Evans, by the mid-1980's, CCWIPP was an impressive pension plan. A consummate wheeler-dealer with longstanding relationships among major grocery industry employers, Evans was able to negotiate substantial increases in the employers' contributions and to enhance the level of benefits provided to CCWIPP members.
In 1986, members could retire at age 60 with unreduced pensions. The percentage reductions for those who retired between 55 and 60 years of age were decreased from ½ percent to ¼ percent. Full and part-time workers were covered. Good benefits, especially considering what was available to workers in the non-union service industry, were provided. By 1988, CCWIPP's membership had grown to almost 90,000 members.
But Evans had bigger plans for CCWIPP. In this 1988 interview, he provided some insight into where he was headed.
Q. Do you see any opportunity for using pension monies for investments to create employment?
A. Yes, we do. We are not yet in the same situation as I think some of the construction unions are, who go out and specify that they're going to build projects and use members of their union and related unions, to work on those projects. But we strongly believe that money should be invested in companies that are not anti-union. WE think that will create jobs in the unionized workforce.
Q. Do you see your union getting involved in a venture like the Solidarity Fund?
A. The CFL [Canadian Federation of Labour] is looking a something along those lines. Some of our locals are participating a solidarity fund. The Canadian Commercial Workers Industry Pension Plan and the other jointly Trusteed pension plans in the country are a potential source of ventures like the Solidarity Fund. The assets are astronomical. If one could just put all the pension funds in Trusteed plans together, one could some innovative investing. There are many problems though. These kinds of innovations require leadership. The laws need to be changed, but that is not a major problem. But, outside of the provinces of Quebec and British Columbia where federations are strong, there is little chance of employees contributing to an investment like the Solidarity Fund.
Canadian Union Movement in the 1980's: Perspectives from Union Leaders, Edited by Pradeep Kumar and Dennis Ryan, Queen's University, 1988
The ventures Evans was talking about were Labour Sponsored Investment Funds, that loaned venture capital from union pension funds to small and mid-sized businesses. The QFL's Solidarity Fund was among the first such fund set up in Canada and it generated a lot of excitement among union leaders. The rationale most frequently used by union leaders for investments in business start-ups was "job creation" - the creation of decent (preferably unionized) jobs. This, the theory went, would strengthen the economy, creating wealth which would be shared with workers.
For those who couldn't get excited about using workers' money to fund workers' jobs, there was the notion of investing in initiatives that would have some broader benefit to society and would improve the overall quality of workers' lives such a affordable housing, green communities and so on.
Evans was as enthusiastic about innovative investing as the next union leader with a fat pension fund at his disposal. Whatever the obstacles may have been in 1988, innovative investing was high on his screen. In fact, by the time Evans gave this interview, he'd already jumped into the game with both feet. As UFCW Director, CCWIPP Trustee and Chairman of its investment committee he had the power to make things happen and he did.
Starting in the late 1980's, the CCWIPP Trustees began investing significant amounts of money directly in specific business ventures. "Controlling the investment destiny of millions of dollars" is how UFCW Canadian Director Tom Kukovica who succeeded Evans in 1992, would put it.
Some of CCWIPP's early direct investments were in the "good works" category but, as we will see, they quickly moved into "job creation", real estate speculation and finally into something far more pragmatic: Buying union members.
CCWIPP's financial records indicate that the first of its investment corporations was set up in British Columbia in 1987. I.F. Propco Holdings (B.C.) 1 was used to funnel money into a land lease at Vancouver International Airport.
Over the next couple of years, more Propco's would be incorporated in B.C. Propco 2, incorporated in 1988, invested in a mortgage and property for sale held by an enterprise called Camosun. Propco 3, set up in 1989, had an unspecified investment in something called REAP No. 1. That same year Propco 4 began funneling money into a number of residential lots in the town of Ladysmith on Vancouver Island. A year later, in 1990, Propco 5, along with a number of other union pension plans, sunk millions into a planned community (which never materialized) on Vancouver Island.
None of these early investments did particularly well. Most are still on the books and show steadily declining fair values. But that didn't stop the CCWIPP Trustees. By the early 1990's, millions more dollars were invested in Ontario, much of it in undeveloped land, and in office complexes in western Canada.
As the years passed, the magnitude of CCWIPP's investments in a variety of ventures escalated dramatically. CCWIPP funds poured into apartment buildings, undeveloped land, shopping malls, offices complexes, a hydro generating plant in Northern Ontario, a berry processing plant in Newfoundland, a golf course in Peterborough, a coffee shop at Toronto's York University, a shoe company in California, a business that finances lawsuits (also in California), and even a restaurant owned by famous illusionist David Copperfield in Walt Disney World.
December 4, 1996
Copperfield captures some Disney magic
LAKE BUENA VISTA, Fla. (AP) -- David Copperfield is hoping some of his magic rubs off on a planned restaurant near Disney's Magic Kingdom.
LateNite Magic Inc., a company formed earlier this year to develop restaurants based on the illusionist's act, has signed a deal to open Copperfield Magic Underground at Walt Disney World Resort in Orlando in early 1998.
"We are very pleased to have the master of illusion, David Copperfield, join with us to bring a spectacular new adventure to our guests," Michael Eisner, Disney chairman and chief executive, said Tuesday.
Copperfield and others formed LateNite in January to develop entertainment restaurants featuring stage magicians and roving performers.
The growth of CCWIPP's direct investments 1991-2000:
But out of all of its investments, it's the money that CCWIPP's Trustees poured into the hotel industry that is especially striking - not only because of the scale of these investments but also because of the cluster of businessmen that they brought into CCWIPP's orbit.
CCWIPP Checks In to the Hotel Biz
In the early 1990's CCWIPP's Trustees became involved with a circle of hotel industry entrepreneurs whose ventures have drained the pension plan of hundreds of millions of dollars. Many of these investments continue to the present, even though there is little if any evidence that they have been beneficial to CCWIPP members.
What propelled the CCWIPP Trustees into these relationships? From what we can tell, the chief motivation was the Canadian UFCW's insatiable thirst for new members and the entrepreneurs' thirst for financing.
It started in 1991. The Canadian economy was in a deep economic recession. The hospitality industry was particularly hard hit. Many hotels, restaurants and other service businesses went bankrupt while others struggled along precariously. Many thousands of service industry workers were unemployed.
Hard economic times are only a burden for some. For clever entrepreneurs they can be a blessing - an opportunity to profit. And so it was that a shrewd circle of businessmen saw an opportunity to clean up in the Canadian accommodation industry. All they needed was financial backing for their business venture.
Many hotels were on the market for a fraction of their pre-recession prices. Since economic recessions come and go, the opportunity to pick up hotel properties at fire sale prices would have had a certain appeal to the large accommodation industry chains that operate around North America. A small group of businessmen smelled an opportunity and a tangled web was spun.
The Howard Johnson hotel chain was one of a number of big players in the hotel industry looking to expand its chain of hotels in Canada. Its Canadian franchisor, Orangeroof Canada, had gone bankrupt in 1991. Later that year, a company called Accomodex Franchise Management acquired the Canadian franchise rights for the HoJo chain. All Accomodex needed to get off the ground were some hotels that wanted the Howard Johnson's name. Accomodex was founded by a group of hotel industry entrepreneurs, at least one of whom - Edward McConnell, worked for an investment firm that did work for CCWIPP.
A company called Kelloryn Holdings was formed in 1991 also. It was headed by Ronald Kelly, a man whose enterprises would become CCWIPP's major borrowers. Kelloryn's objective was to buy up defunct hotels at a discount. Once it purchased a property, Kelloryn would obtain franchise rights (to operate as a Howard Johnson hotel) and management services from Accomodex.
All that was needed was the money to buy the hotels and to support Accomodex through its start up and subsequent expansion. Accommodation industry investments are considered higher than average risks. For this reason, traditional sources of financing are not readily available to hotel industry investors. Raising the millions that would be required to purchase hotel properties in a depressed economy would have been a challenge to the fledgling companies. Fortunately Kelloryn and Accomodex found a wealthy financier with a passion of its own for the hotel industry: The United Food and Commercial Workers Union.
The UFCW's interest in the hotel industry took many in the Canadian labour movement by surprise. In the early 1990's the UFCW had a few hotel bargaining units but the industry was the long-established turf of the Hotel Employees and Restaurant Employees Union. For whatever reasons (most likely its objective of expanding it membership), the UFCW wanted into the industry badly. A couple of obstacles, however, stood in its way.
Organizing workers at hotels is a costly proposition with no guarantees of success. Many larger hotels in urban centers were already organized (mostly by HERE) and "raiding" them was prohibited under the Canadian Labour Congress' house rules. The Kelloryn-Accomodex scheme couldn't have come along at a better time. It would allow the UFCW to pick up thousands of new members without the fuss, muss and risk associated with organizing.
From events that would occur over the next few years, we gather that the innovative scheme worked this way:
- CCWIPP would provide Kelloryn with the funds to buy up a number of defunct or troubled hotel properties in Ontario.
- Kelloryn would open its hotels under the Howard Johnson banner and pay a franchise fee to Accomodex.
- Kelloryn would also retain Accomodex to manage the hotels and pay additional fees to Accomodex for its services.
- The UFCW would get voluntary recognition for the workers at Kelloryn's Howard Johnson hotels.
It was a really good deal for all the players. Kelloryn got the financing it needed to scoop up a lot of hotels at bargain basement prices. Accomodex got franchise and management fees from Kelloryn. The UFCW got some new members.
Accomodex would also benefit from this relationship. The as the hotel franchisor expanded its operations, CCWIPP would invest heavily in its business as well.
Over the next several years, the businessmen in this circle would do well out of their association with CCWIPP. Whether CCWIPP members have benefited in any way at all from their pension fund Trustees' association with the businessmen is unknown. It certainly does not appear that they have. As Kelloryn's owner built a real estate empire and AFM expanded its operations in leaps and bounds, their pension fund's solvency deficiency multiplied more than ten fold. By the end of the 1990's, their eligibility to early retire with a full pension was scaled back to pre-1986 levels.
What factors the CCWIPP Trustees considered prior to plunging ahead with their innovative investment strategy is something known only to the Trustees themselves. Certainly, the investments were risky. Buying up bankrupt hotels during an economic recession in the hope that they will generate a return at some point in the future, is a speculative investment strategy. It's not clear, however, that a return on investment to the pension fund was even what the UFCW was looking for. The rationale advanced by the UFCW for these investments - in 1992 - had nothing to do with growing the pension fund and everything to do with growing the membership.
A series of Ontario Labour Relations Board proceedings that took place in 1993 shed a lot of light on CCWIPP's the first major hotel investment involving a bankrupt hotel known as The Triumph on Keele Street in the northwest end of Toronto.
The Keele Street deal has been discussed at some length in other articles on this web site. It's worth revisiting briefly however, as it shows how right from the start, CCWIPP's Trustee-directed investments involved a tangled web of entrepreneurs, CCWIPP officials and their hangers-on. It's a model of relationships that would be repeated in subsequent investments.
The bankrupt Triumph was purchased in 1992 by Kelloryn for $9.5 million. A total of $15 million dollars was funneled from CCWIPP to Kelloryn through two I.F. Propco companies (Propco's 14 and 16) during 1992 and 1993.
Cliff Evans, at that time just retired from his position as Director of UFCW Canada, was a CCWIPP Trustee and Chairman of CCWIPP's Investment Committee. He was also a Director of Kelloryn Holdings and of Propco 14 and Propco 16.
An Ontario Labour Board decision known as Michael McDougal v. Hotel Employees, Restaurant Employees Union Local 75, identifies a number of other key players in the string of companies that flowed money to Kelloryn and the transactions that took place in connection with the financing of the hotel purchase.
- 11. A great deal of evidence was heard which detailed the interrelationship between the various actors in the workplace. The evidence establishes that Kelloryn is a single-purpose corporation, incorporated to purchase the assets of the hotel, The Company was initially incorporated on August 17, 1992, with Ronald Kelly as its sole director. On that same date Ronald Kelly was appointed president, chief executive officer, secretary and, treasurer of the company. Kelloryn has issued one hundred thousand common shares, thirty thousand of which are held by Ronald Kelly, either directly or through a holding company. The remaining seventy thousand common shares are held equally by two companies I.F. Propco Holdings (Ontario) 14 Ltd. and I.F. Propco Holdings (Ontario) 16 Ltd. ("hereinafter referred to as "Propco 14"and "Propco 16", respectively).
- 12. By way of a loan agreement dated October 7, 1992, Propco 14 advanced to the company a loan in the amount of seven million dollars. A shareholders agreement of same date was entered into between Ronald Kelly, Propco 14 and Kelloryn the terms of which were not placed before me, on May 12, 1993, Propco 16 advanced to the company a loan in the amount-of eight million dollars. A shareholder's agreement of same date, which by its terms supersedes the previous shareholder's agreement of October 7, 1292, was at that time entered into between Ronald Kelly, Kelloryn, Propco 14 and Propco 16. The loan was advanced pursuant to a loan agreement between the company and Propco 16 also dated May 12, 1993.
- 13. According to documentation provided by counsel for the responding party, consisting of a Form 1 "Notice of Change" filed by the company with the Ministry of Consumer and Commercial Relations on September 1, 1993, in October and November, 1992, the officers and directors of Kelloryn were altered significantly. On October 16, 1992, Alexander Ahee was appointed Assistant Treasurer of the company. Mr. Ahee is a Prominent counsel in the labour relations community acting for trade unions. On November 24, 1992, Mr. Ahee was also elected as a director of the company, along with five others - Edward McConnell, Clifford Evans, Howard Preston, Ronald Kelly and Hubert Kelly. Mr. Thomas Kukovica, currently the Canadian Director of the United Food & Commercial Workers International union ("the international"), testified under Subpoena that Mr. Ahee is legal counsel for the Canadian Commercial Workers industry Pension Plan ("CCWIPP"), though not for the International. He also advised that Mr. McConnell is an investment manager who works with an investment firm used by CCWIPP. Mr. Ronald Kelly testified that Mr. McConnell was a former business partner of his, that Mr. Preston and Mr. Evans (the latter having been the previous Canadian Director of the International) were appointed to the Board of Directors by Propco's 14 and 16, and that Mr. Hubert Kelly was his brother and partner.
Similar loans would be arranged for Kelloryn for the purchase of six other hotels (in Ottawa, Hamilton, North Bay, Windsor and Aurora, Ontario and Edmonton, Alberta).
With the multi-million dollar loans and mortgages to Kelloryn came voluntary recognition for the UFCW at the hotels. In the case of the Keele Street hotel, workers hired when the hotel re-opened were told to sign UFCW membership cards by their managers and also advised that their union had a financial stake in the property. Similar events took place in Ottawa in 1993 where Kelloryn purchased another bankrupt hotel.
Things did not go as smoothly as the UFCW had hoped. Their innovative investment strategy drew fire from other unions, most notably from HERE (which represented workers at a number of the hotels prior to their bankruptcy and purchase by Kelloryn). A report in the Toronto Star in July of 1993, shed a lot of light on the issue that was causing the discomfort and of Cliff Evan's dismissive reaction to the controversy.
The Toronto Star
BUSINESS TODAY Saturday, July 3, 1993
Workers' pension fund backs hotel chain employer
OTTAWA (CP) - Most unions find new members by signing up a company's employees.
But one big union is taking a radically different approach - its pension fund is helping a new hotel company buy bankrupt property.
And management appears to be encouraging employees to sign union cards.
Kelloryn Hotels has bought four Ontario hotels, including the Howard Johnson Hotel in downtown Ottawa, from creditors of bankrupt Orangeroofs Inc.
Some mortgage funding is coming from the $400-million Canadian Commercial Workers pension fund. It manages pension investment for about 100,000 members of the United Food and Commercial Workers Union.
The unusual approach has a rival union yelling foul.
"The whole situation is a farce and a disgrace to the labor movement," said John Kearney, an organizer with the Hospitality and Service Trades Union.
"How can an employee expect to get fair representation if the union directly or indirectly owns the place?"
But Cliff Evans, retired Canadian director of the United Food and Commercial Workers and a director of the pension fund, said there is no conflict of interest.
He said the union pension fund has only put mortgage financing into Kelloryn Hotel in Toronto. "We have no investment in any hotel in Ottawa."
The union is successfully organizing hotel workers because it has a solid reputation, Evans said.
He said the pension fund is run by an independent board of directors with representatives from union and management. Professional managers make investment decisions.
Union membership of hotel employees is not a condition of financing, he added.
But one employee, who asked not to be identified, said managers distributed union cards to employees at the Ottawa Howard Johnson Hotel the same day the Kelloryn purchase was announced.
"It seems if we didn't sign, we would be out of a job," said the worker. "It's a closed shop."
The UFCW wasn't buying members, Evans said. It was organizing members. Newly appointed UFCW's Canadian Director, Tom Kukovica (who followed Evans) put an even more noble spin on the union's motives. In a 1993 interview with labour-oriented magazine, Our Times, Kukovica said the union was creating jobs - good union jobs.
Besides putting money directly back into the pockets of the membership, the joint Trusteeship of pension plans between the UFCW and its various employers has permitted the union to control the investment destiny of millions of dollars. "With the pension funds we've been mainly concentrating in real estate, such as affordable housing projects," says Kukovica. This month the UFCW, with an equity stake of over 50 per cent, helped to re-open the Triumph Hotel in suburban Toronto, "It was in receivership. Now the hotel will be unionized, so we've created (union) jobs at the same time.
The bubble burst quickly. In 1993, the UFCW lost representation rights for Keele Street hotel when HERE Local 75, which represented workers at the hotel up to the time of its closure in 1991, won a successor's rights bid for the hotel at the Ontario Labour Relations Board. The UFCW narrowly avoided a similar loss in Ottawa that year when HERE agreed to a representation vote as a resolution to its successor rights application and lost.
Things got worse a year later. In 1994 HERE's contract at the Keele Street hotel went into its open period. The UFCW attempted a raid and was able to sign up a sufficient number of workers to apply for certification. But its application for certification was dismissed by the OLRB on the basis that the union's ownership stake in the hotel placed it in too close a relationship with the employer. The decision effectively put an end to the UFCW's efforts at organizing through lending money to employers but it did not end CCWIPP's investments in Kelloryn, Accomodex and a raft of other businesses.
The UFCW's efforts at acquiring members in the hotel industry continued, becoming more innovative still. The strange story of the union's involvement with officials of the HERE local at the Keele Street property is worth mentioning for what it tells us about the UFCW's keen desire to be in the hotel industry and of the lengths to which it was prepared to go in order to get there.
Not long after it won successor rights for the Howard Johnson Plaza in Toronto, something very unusual happened at HERE Local 75. The local's executive board attempted to break away from HERE International and go independent.
In order to fully appreciate the peculiarity of this move, it's important to understand what Local 75 and its leader were all about. Local 75 was an autocratic local of a corrupt international union. Local 75's President ruled the members with a fat fist.
With about 6,200 members, Local 75 was the largest hotel union in Ontario and one of HERE's largest Canadian locals. The majority of its members worked in the hospitality and food service industry - most of them worked in hotels. Local 75's growth was due in large part to a series of mergers of smaller HERE locals that had occurred during the 1980's.
Local 75's President, Jean Guy Belanger, was well known and greatly disrespected in local labour circles. His fondness for expensive suits and gold jewelry made local labour leaders cringe. His alleged connections to organized crime and documented get-togethers with organized crime figures made headlines in the local media. His efforts at putting down democracy drew criticism from HERE members and Local officials alike.
Mainstream labour leaders publicly criticized the local for its shabby track record and undemocratic practices. There was tension between the Local and HERE International. By 1994, an investigation of sorts was underway into the alleged disappearance of $400,000 for the Local's treasury. Belanger may have been motivated to break with the International but it's doubtful that he was motivated by any deep-seeded desire for autonomy for the members. Nor was it clear how he intended to finance his independent union if he was not able to fight off Trusteeship by the International.
Nevertheless, at a general membership meeting held on July 12, 1994, Belanger and his crew of executive officers and business agents attempted to disaffiliate from the International. Trusteeship came quickly.
Belanger boldly resisted the International's efforts at taking control of the local, denying HERE officials access to the local's offices and refusing to turn over documents and records. Ultimately, the Trusteeship would become the subject of considerable litigation. In the end, Belanger and his followers (a group of former Local 75 officials) would lose. Among the most damaging of their losses was the refusal of the Ontario Labour Relations Board to release to them union dues which were being withheld by employers with whom Local 75 had collective agreements. When the OLRB ordered these funds placed in trust pending the outcome of other issues flowing from the Trusteeship, Belanger's source of funding for his new independent union was cut off. That did not stop him from continuing with a prolonged legal battle or from launching his new independent union and embarking on a raid on a number of HERE-represented hotels in the Greater Toronto Area in the mid-1990's.
Belanger certainly had a source of funding but the source would remain a mystery. During the course of OLRB proceedings into the Trusteeship, it was alleged by a HERE official that one of Belanger's followers, Jerry Jones, intimated that the group had "five million dollars at its disposal to finance the new operation". Eventually Belanger would lose his legal battles to retain control of the Local and turn up in - of all places - UFCW Canada headquarters.
By 1995 Belanger and his followers started their own independent union which attempted to raid existing Local 75 hotels as their collective agreements came up for renewal, including a multi-employer master contract that covered approximately a dozen large Toronto hotels. For some period of time, the Belanger group occupied space at 61 International Blvd. in Toronto - the UFCW national office. Their attempts at raiding HERE's hotels did not produce results and the group disbanded sometime in 1995-96.
It has been reported that following the break up of his independent union, Belanger returned to his native Montreal and worked for a while at a local supermarket. At least two of his business agents were hired on as staff reps by the UFCW - one of them, Jerry Jones, currently works as a business rep for Local 206, while the other, Rick Freshette, landed at Local 175. It has also been reported that sometime in the late 1990's, Belanger sued the UFCW for issues related to his parting of ways with them.
Despite its failed experiments in innovative organizing, the UFCW would eventually acquire a fair number of hotels through its merger in 1997 with the Textile Processor's Union. (A listing of UFCW-represented hotels can be found in our Haunted Houses of Labour). Its relationship with Kelloryn Holdings and Accomodex, however, would go on and on.
The OLRB Decisions:
The AFM Crew
Accomodex Franchise Management was set up, along with Kelloryn in the early 1990's as part of the scheme to buy up bankrupt hotels. In 1994, it morphed into AFM Hospitality Corporation. CCWIPP became a major shareholder of AFM - a factor that no doubt contributed to the hotel management firm's rapid expansion in the 1990's. As the years passed, AFM acquired franchise rights for a number of other hotel chains, and spawned a raft of subsidiary companies that provide various services to the accommodation industry.
Today AFM is ranked 48th among the 300 largest accommodation industry companies and bills itself as "One of Canada's largest multi-brand hotel franchisors, as well as one of North America's largest and fastest growing providers of management and consulting services for the hospitality industry and for financial institutions." Its strategic partners include Aeroplan, Petro Canada and the National Post newspaper.
This excerpt from one of its Annual Reports describes the range of AFM's activities:
The Company's business activity is organized into 3 units; hotel franchising, hotel management and hotel purchasing services. The hotel franchising is conducted by three subsidiaries; Howard Johnson Franchise Canada, Inc. ("HJFCI") (formerly Accomodex Franchise Management Inc.), which holds the Canadian master franchise rights for the Howard Johnson brand, Ramada Franchise Canada, Inc. ("RFCI") which holds the Canadian franchise rights for the Ramada brand and Villager Lodge Franchise Canada, Inc. ("VLFCI") which holds the Canadian franchise rights for the Villager Lodge brand.
Hotel management services will be provided by AFM Asset Management Inc. (formerly AFM Hotel Management Inc., a previously inactive subsidiary of the Company) as this business unit becomes increasingly active in soliciting management agreements with owners of Canadian hotels.
... and the range of services it provides:
AFM Asset Management Inc., Canada, a subsidiary of AFM Hospitality Corporation, provides operations and advisory services to property owners, investors and financial institutions who require assistance in special financial restructuring or distressed asset situations.
AFM Asset Management Services Inc., USA, a subsidiary of AFM Hospitality Corporation, maximizes value and equity recovery for financial institutions. It provides management and consulting services through three multi-disciplined companies:
Trigild International, Inc. Receivership/Trustee management and technology services for hotels, restaurants, retail stores, income properties and a variety of nationally franchised service businesses.
Staffing Services International, Inc. Employee leasing company.
Superior Buying Power and Savings. AFM Preferred Alliance Group Inc. is one of Canada's largest purchasing services to the hospitality industry, representing the potential buying power of more than 2700 properties and 300,000 guest rooms.
It's doubtful that AFM would have achieved its present size without CCWIPP's very generous financial backing. Despite it's impressive range of services and sizeable number of hotels, the company's financial performance has never been impressive particularly when compared to the top performers in the accommodation industry. Its stock trades infrequently. Average share prices are in the $2.50 range, occasionally spiking upwards to the $5.00 range.
CCWIPP's financial statement for 2001 indicates that the pension fund has in the neighbourhood of $10 million dollars invested in AFM. AFM's Annual Reports for the years 1997 through 2002 paint a picture of a struggling company, relying on increasingly flexible terms from its major lender, CCWIPP's I.F. Propco 23.
AFM's Annual Report for 1998 lays out its predicament and provides insight into its relationship with its major lender.
1998 Annual Report
Significant levels of traditional bank financing for hotel acquisitions and capital renovations have not been available to the Company throughout its period of purchase and operation of hotel assets. The financial support necessary to achieve the developments and acquisitions which were undertaken, as well as to support operating losses and the investment to acquire the Ramada franchise operation, were provided by debt from a pension fund that is a major shareholder, by an equity contribution from Rushlake Hotels (USA) Inc. and by capital lease financing.
At its peak, the Company had long-term debt of $24,058,000 as at December 31, 1997. This included $10,712,000 of hotel mortgages, $12,308,000 in secured loans, $288,000 in capital leases and $750,000 in preferred shares. As at December 31, 1998, total long-term debt was substantially lower at a balance of $13,581,000, $90,000 of which is payable during 1999.
The Company has been successful in attracting capital to finance its expansion and to fund its operations. In addition, the Company has been successful in extending loan repayment dates, renegotiating mortgage terms and replacing mortgages with favourable results. The Company is confident that additional capital can be obtained on reasonable terms as required, although there is no assurance that such financing will be available if needed. One hundred percent (ninety-two percent as at December 31, 1997) of the Company's long-term debt is at fixed interest rates thereby eliminating its exposure to interest rate fluctuations.
The corporate mission established for the Company in 1994 was to acquire and operate profitably, distressed hotels in superior locations. Programs of physical renovation and market repositioning, including the addition of the Howard Johnson "flag" under franchise agreements with the Company established the hotels to realize the expectations of profitability.
Unfortunately, the lingering effects of the worst recession to hit the Canadian hotel industry since the Great Depression, aggressive competition from more financially enriched competitors and high financing costs within the Company combined to create significant losses from the endeavour.
Therefore, with the acquisition of voting control by Rushlake of 50.1% of the issued shares of the Company in April, 1997, the Company's strategic business plan was changed to include divesting hotel ownership operations and concentrate on franchising and third party management within the Canadian hotel industry.
Accordingly, during March 1998, following the 1997 dispositions of the Company's owned hotels in Morrisburg, Ottawa, Regina and North Bay [the hotels originally purchased by Kelloryn] (the interest in the latter being transformed during 1997 into a partnership interest in the retirement home operation which replaced the hotel operations within the building), the hotels in Aurora and Windsor were sold.
In November 1998, the North Bay partnership interest was sold as well as the Edmonton hotel operation. The Edmonton property was sold through the sale of the shares of the Company's subsidiary which owned the asset. This transaction also included the sale of several other subsidiaries which formerly owned hotel real estate that was previously sold.
The disposition of the three hotels resulted in a net gain of $1,016,000 and the disposition of the North Bay retirement home interest resulted in a net gain of $278,000 for a total gain on disposal of $1,294,000.
As at December 31, 1998, the Hamilton hotel remains as the only hotel owned by the company and efforts continue to seek an orderly disposition of the hotel at not less than its net book value of $6,092,000. In 1998, the Hamilton hotel operation received a favourable property tax reassessment
Management succeeded in reducing other corporate expenses by a significant 55.4% as it transformed the company into a less complex and more efficient operating unit. The rescheduling of corporate long-term debt, which included the deferral of the repayment dates on certain secured loans, an agreement to reduce the interest rate on certain loans and the assumption of new long-term debt to acquire RFCI, were significant transactions which were executed during 1997 and early 1998. These transactions had the desired effects of improving liquidity and overall profitability in 1998, and they contributed to a 19% decrease in interest expense related to continuing operations in fiscal 1998 compared to that incurred in 1997.
During 1997, the Company experienced a loss, as reclassified, from continuing operations of $3,994,000. The change in the Company's strategic focus, the acquisition of RFCI and significant reductions in corporate overheads enabled the Company to reduce its loss from continuing operations by 75.7% to a loss of $970,000. The net loss for the year, including discontinued operations, was $213,000 compared to$5,761,000 during 1997.
It's clear from this report that since its creation AFM was struggling to keep itself afloat. It was running a deficit from year to year and relying on the ongoing support of its major lender for its continuing viability.
The hotels that it acquired through Kelloryn were, by 1998, mostly sold off (with the exception of the Hamilton Royal Connaught which would be sold in 2000). All of those hotels were initially purchased by Kelloryn with financial backing from CCWIPP. The sale of those hotels benefited AFM's bottom line. How did it benefit CCWIPP? The pension fund would increase the level of its support for AFM by extending repayment terms on the millions that it had already loaned to the struggling company and eventually by swallowing a substantial amount of its debt.
In 2000, CCWIPP agreed to an especially generous "debt conversion" arrangement which effectively forgave $2 million of AFM's debt in exchange for some shares in the company. The arrangement worked well for AFM: It allowed the company to eliminate $2 million dollars worth of debt from its books and add $2 million worth of equity.
AFM Hospitality Corporation Approves Debt Conversion And Extension
Major creditor shows confidence in future prospects of Canada's largest multi-brand lodging franchisor
October 30, 2000
TORONTO, ONTARIO-- AFM Hospitality Corporation (TSE: AFM) has announced a voluntary agreement in principle with its major creditor to convert terms of its existing debt, including, among other things, the conversion of a portion of the debt to equity in AFM..
I.F. Propco Holdings (Ontario) 23 Ltd., AFM's major creditor, is beneficially owned by the Canadian Commercial Workers Industry Pension Plan (CCWIPP) which, itself, currently holds 15.8% of the issued and outstanding common shares of AFM. The completion of the proposed debt conversion is subject to regulatory approval.
"The agreement will improve AFM's balance sheet and near-term cash flow, thereby enabling us to execute the Company's growth and strategic plans," says Stephen Phillips, Vice Chairman and CEO of AFM.
"Management appreciates the consideration and confidence shown in AFM by CWIPP, which, along with all other shareholders, will realize the benefits of the growth enabled by the debt conversion during the next few years."
It is anticipated that, subject to regulatory approval, the debt conversion will occur on or prior to Oct. 30, 2000. The announcement of this proposed transaction less than 21 days before the expected closing of the transaction is necessary to complete other strategic initiatives of AFM in accordance with its stated strategic plan and previous news releases.
The debt conversion has been reviewed by the AFM board of directors and the audit committee. All directors approved the terms of the proposed transaction, other than the director related to the major creditor, who abstained. Majority shareholder approval of the terms of the debt conversion has been obtained from shareholders not related to the major creditor, including a shareholder that beneficially controls more common shares of AFM than CCWIPP and is being treated identically to all other shareholders of AFM.
Through its subsidiaries, AFM Hospitality Corporation, which also owns HFS Purchasing Services and AFM Asset Management Inc., is the exclusive Canadian Master Franchisor for ASTON®, Best Inns®, Hawthorn® Suites, Howard Johnson®, Knights Inn®, Ramada® and Villager® Lodge. With over 120 locations committed nationally, AFM Hospitality represents an inventory of more than 12,000 hotel rooms. The company's primary focus is to increase the number of hotels franchised by the respective brands, franchise new brands and acquire other franchise businesses related to the hospitality industry, while making available property management services. AFM Hospitality Corporation is a publicly traded company listed on the Toronto Stock Exchange (TSE:AFM).
(Material terms attached)
AFM DEBT CONVERSION AGREEMENT: Material Terms
The Major Creditor will reduce the outstanding indebtedness by the amount of $2,000,000.00 in consideration of AFM issuing to the Major Creditor 888,888 non-voting preference shares in its capital stock with the following attributes:
- an 8.5% cumulative annual dividend to commence as of the 1st day of October, 2005;
- a right of the holder to convert each preference share for one common share of the Borrower at any time on or after the 1st day of October, 2005; and
- a right of the Borrower to redeem each preference share at a price of $2.25 at any time, subject always to the holder's right to convert as set out above.
- The Major Creditor will extend the maturity date of a further $3,000,000.00 of indebtedness until the 1st day of October, 2005, interest will be increased to 14.15% per annum, there shall be no prepayment privileges and AFM shall grant the additional security of a pledge of the shares of Howard Johnson Franchise Canada Inc. (formerly Accomodex Franchise Management Inc.), a pledge of the shares of Ramada Franchise Canada Inc. and cause its wholly owned subsidiary, Northwest Lodging International (USA) Inc., to give security over all of its assets;
- The Major Creditor will extend the principal repayment of a further $2,000,000.00 currently due the 31st of December, 2000 to the 31st day of July, 2002, and AFM will cause its wholly owned subsidiary, Northwest Lodging International (USA) Inc., to give security over all of its assets;
- AFM will issue to the Major Creditor 888,888 warrants in its capital stock which will entitle the Major Creditor to convert each warrant for one common share of AFM at a price of $2.25 per common share at any time within 5 years from the date of issuance of the warrant.
What is quite intriguing about this arrangement, aside from the considerable benefit to AFM's bottom line, are the conditions attached to redemption of the shares by AMF (which could buy them back at $2.25 per share - whatever it's stock may be worth at the time) and the extension of repayment terms on other loans totaling $5 million.
Two years later, AFM got a further and very generous break from CCWIPP. A media release issued by AFM in December 2002, described the sweet deal that AFM had just negotiated with its major creditor, Propco 23:
AFM has also agreed to redeem for cash 888,888 preference shares held by I.F. Propco Holdings over a three-year period at a price of $2.25 per share. This represents a reduction equivalent to 10.6 per cent of the current float, or 5.6 per cent of the diluted float. After completion of such redemption, I.F. Propco Holdings will still hold 888,888 warrants of AFM and its related significant shareholder will hold 879,714 common shares.
AFM will enjoy further financial flexibility since I.F. Propco Holdings has agreed to reduce the existing annual interest rate in stages from the present 14.15 per cent down to 8.5 per cent (What a break?! How do I get a deal like that?) . AFM will make interest only payments monthly on the remaining debt (it gets even better); the principal will remain due at maturity in October 2005. In addition, AFM will gain a conditional right to pre-pay the remaining debt without bonus or penalty. The flexibility provided by these new financial conditions will allow AFM to continue seeking growth opportunities (Gee, what about growth opportunities for the pension plan?).
Certain senior officers have agreed to limits in compensation and will also covenant not to sell more than 5 per cent of their respective holdings of AFM securities within any 12 month period. AFM will also continue benefiting from the expertise provided by certain directors who, together with the lender, are related to a significant shareholder of AFM (could it be that Cliff Evans and Wayne Hanley are providing their expertise to management?). AFM anticipates that these new terms will only impact positively on its business and affairs (thanks to the poor working stiffs and their beleaguered pension fund). AFM expects to be able to generate sufficient funds from operations to honour its amended obligations.
AFM's Annual Report for 2002 shows a deficit of $19 million dollars. It has posted a deficit of this magnitude since 1997. Clearly, CCWIPP is pouring money into a company that is in financial difficulty and has been for some time. Although AFM Annual Reports contain optimistic "forward looking" information, recent developments do not give us a warm feeling.
In September of this year, Howard Johnson International Inc. accused its Canadian franchise partner (AFM) of failing to pay its franchise fees.
Warren Adamson, AFM's President since 1997, left the company at about that time. Its Chief Financial Officer left in a few months earlier. In the fall of 2003, AFM announced that it was moving from its prestigious offices in downtown Toronto, to somewhat less prestigious digs in a commercial building at 135 Queens Plate Drive in Rexdale, Ontario. CCWIPP's financial statements show approximately $6 million dollars worth of mortgages on this property, called Woodbine Place, through Propco's 18 and 20.
Tangled Webs of Businessmen
The OLRB decision in the Michael McDougal case shed a lot of light on the nature of the transactions, the tangled web of players and the multiple roles that some of these players have in their CCWIPP-related transactions.
In relation to Kelloryn's purchase of the Keele Street Hotel, we know that Cliff Evans was:
- Just barely retired from his position as Director of UFCW Canada, and
- Vice President of International Relations for the UFCW, and
- A Trustee of CCWIPP, and
- Chairman of CCWIPP's Investment Committee, and
- A Director of I.F. Propco's 14 and 16, and
- An Officer of Kelloryn Holdings
As such, Evans was representing the interests of the lender, the borrower and the intermediary corporations all at the same time; a situation loaded with potential for conflicts of interest.
On top of that, we know that other Directors of the two Propco Companies were Alexander Ahee, a lawyer for CCWIPP, Howard Preston, a member of CCWIPP's Investment Committee and CCWIPP Trustee, Bernard Christophe, a CCWIPP Trustee and President of UFCW Local 832 in Manitoba and Victor Pinchin, CCWIPP Trustee and senior executive of Safeway Corporation.
By the time the deal on the Toronto property closed late in 1992, Kelloryn's officers included Alexander Ahee, and Edward McConnell, a former business partner of Kelloryn's principal Ron Kelly), investment advisor to CCWIPP and officer in Accomodex Franchise Management. A business controlled by McConnell, Antrim Holdings, would become a major shareholder in AFM.
McConnell and Evans, along with AFM Directors Warren Adamson and Stephen Philips, were officers of Kelloryn Hotels Hamilton Inc., Kelloryn Holdings Inc. and Kelloryn Hotels (North Bay) Inc., all hotels purchased by Kelloryn with CCWIPP money and eventually passed on AFM.
These kinds of conflict-laden daisy chains crop up time and again in numerous CCWIPP investments. Here's a more recent one:
CCWIPP's financial statement for 1997 shows an investment of approximately $4 million, through I.F. Propco Holdings (Ontario) 15 Ltd., in a business called CIBO Capital Corporation.
Cliff Evans, Chairman of CCWIPP's Investment Committee and Eugene Fraser, also a member of the Investment Committee, are Officers of CIBO. Evans is the President and Fraser is the Vice President.
CIBO's Secretary Treasurer is a Toronto area businessman named Peter Martini. Martini is the owner of a company called Twin Masonry and a mover and shaker in the Toronto construction industry. He's a founding member of the Canadian Masonry Contractors' Association and of Metropolitan Industrial and Commercial Masonry Contractors Inc. Recently awarded an honorary law degree at by McMaster University in Hamilton, Martini serves on the board of directors of over 25 private and public corporations. The registered business address of this company is 19 Connie St., North York, Ontario - the same address as is registered for CIBO Capital Corporation.
In addition to being President and Vice President of CIBO, Evans and Fraser are also President and Vice President of I.F. Propco Holdings (Ontario) 15 Ltd. Howard Preston, the third member of the CCWIPP Investment Committee, is Propco 15's Secretary Treasurer.
Has $4 million worth of CCWIPP funds found its way from CCWIPP to a company controlled by Evans, through an intermediary company also controlled by Evans? It sure looks that way.
Or how about this one:
Raymond Kurki is a name that appears on numerous corporate records related to CCWIPP's I.F. Propco companies. In Ontario, Kurki is shown as the administrative contact for dozens of Propco's. He's also referenced in a 1999 Alberta Pension Commission review of CCWIPP as a CCWIPP investment manager. For several years Kurki was a Director of AFM Hospitality Corporation. He is shown as the administrative contact for Propco 23, the investment corporation which flows CCWIPP money to AFM.
Kurki is the sole director of a company called Sissu Onni Inc. Sissu Onni is into CCWIPP to the tune of $14 million for undeveloped land that it owns in the Greater Toronto Area. CCWIPP's investments in Sissu Onni are through Propcos 3, 6 and 7. Kurki is the administrative contact for those Propco's as well. According to CCWIPP's financial statements, the land owned by Kurki's company has a reported "cost" of about $14 million and fair value of about $2.7 million. Kurki's company has held these investments since the early 1990's. CCWIPP's loans to Kurki have sat on its books for years, as the investments have gradually declined in value.
As if all of that is not enough, Kurki is also a Director of the numbered company that has funneled money to the RHK/PRK/Propco/CCWIPP Caribbean Hotel ventures.
Then there's Eugene Fraser, member of CCWIPP's Investment Committee. Along with Cliff Evans and Howard Preston, he's a Director in practically all of the I.F. Propco companies registered in Ontario. That includes Propco 100 where is Executive Vice President), and Cliff Evans is President. Both Evans and Fraser are Directors of Dynamic Venture Opportunities Fund, a mutual fund in which the UFCW invests.
Then there's Wayne Hanley, a CCWIPP Trustee and President of UFCW Local 175 in Toronto. Wayne's been a Director of AFM Hospitality Corporation since at least 1995. For some period of time he was Chairman of AFM's Board of Directors.
Then there's Warren Adamson, again. President of PRK Holdings, President of AFM Hospitality, falling backwards into the arms of CCWIPP members for over a decade.
Then there's an investment called UPIC (1) Corporation. In 1995, CCWIPP's financial statement shows an investment of $1.3 million in this corporation through Propco 1. The fair value of this investment gradually sinks to $653,000 by 2001. UPIC (1) directors are Cliff Evans, Ray Kurki and Henry Mancinelli (Canadian Director of the Labourers International Union of North America). Mancinelli and Evans are principals in the Dynamic Venture Opportunity Fund. There are 3 other UPIC's as well. All appear to be related to construction projects. One of them went from a fair value of $1 million in 1997 to a fair value of 0 in 1998.
And how about this for something completely different?
Case Financial is a California company that loans money to people who want to sue other people. Case makes its money by getting a portion of any settlement or judgment that their clients are successful in obtaining. In this 2002 media release, Case announces proudly that it's just scored $2 million (U.S., we presume) in financing from CCWIPP through Propco 32. The news release speaks enthusiastically about Case's prospects for profitability. But if you read this document that Case is required to file with the US Securities and Exchange Commission, it becomes apparent that there is considerable risk involved in investing in this business. (The risk-related information starts on page 11 under the heading "Factors That May Affect Results".) On page 8 of a subsequent filing, you'll see that CCWIPP's $2 million investment in Case is uncollateralized (not secured).
What's especially intriguing about Case Financial is that it's the most recent incarnation of a company called WebGalaxy; a now-defunct Internet service provider that was started by Thomas McNutt, Sr., a former President of UFCW Local 400 in Maryland.
The relationships among these players are baffling. Looking at the circles of interconnected businessmen is like looking at an enormous web. At the center of the web are Cliff Evans and Ronald Kelly - CCWIPP's biggest investment partner.
RHK: Doing Unto Others
Kelloryn Holdings was only one of Ron Kelly's businesses. In the early 1990's he also set up RHK Holdings (RHK Capital as of 1999), a company that was to become CCWIPP's biggest investment "partner". By our last estimate, in excess of $200 million of CCWIPP funds are sitting in investments that are either directly related to Kelly and his businesses or in businesses that at one time belonged to Kelly and have since been taken over by CCWIPP's Propco investment corporations.
The CCWIPP Trustees' ongoing association with Kelly is bewildering considering the returns realized on their investments in his enterprises and in light of his scandalous past. In the entire cast of characters associated with CCWIPP none is more loathsome than the former Father Kelly.
In 1979, when Cliff Evans was giving birth to CCWIPP, Father Kelly was copping to ten counts of sexual assault on young boys. Details of his sexual exploitation of his young parishioners can be found in our article Sins of the Father. A fuller picture can be found in Michael Harris's 1991 book Unholy Orders: Tragedy at Mount Cashel which describes in chilling depth the scandalous sexual abuse of young orphans by Catholic clergy at the Mount Cashel Orphanage in Newfoundland. Although Father Kelly was not one of the Christian Brothers at Mt. Cashel, his predatory acts in the small Newfoundland village where he was a parish priest in the 1970's earned him an entire chapter- Fatherly Treatment - in Harris's book). Here's an excerpt that will provide insight into the guy that the CCWIPP Trustees warmed up to.
After talking to the first complainant, who had been fourteen when the priest sexually assaulted him, the RCMP investigators also realized that in all probability one of Father Kelly's favourite community pursuits was young boys. Sitting alone with these boys in their squad car, LeBreton and Urquhart listened in disbelief as a parade of Father Kelly's male victims described their sexual encounters with the often drunken priest.
One sixteen-year-old described how Father Kelly had called his house at 4 a.m. in the fall of 1978 summoning him to the rectory. When he arrived, Kelly who had already been drinking gave his young guest two glasses of rum before taking him upstairs, ostensibly to watch television. Dragging the boy to the bed, the priest tried to put his hand into his reluctant companion's pants. Unsuccessful, Kelly then groped at the boy's privates through his jeans, exclaiming rather quixotically, "I do not love that, but I love your heart."
Another boy told police about an incident that had taken place during De Grau's annual Garden Party in August 1978. The boy was sent home by his parents for fighting. A little while later, Father Kelly showed up and got into bed with him. Almost immediately, the priest tried to force his hand into the boy's pants. Kelly's own pants were undone and he thrust his exposed penis near the face of his prone companion. The boy pretended to be asleep, and half an hour later Father Kelly got up and left. When the boy later told a friend what had happened, he was advised not to repeat the story to anyone, "because a Priest is a high man" and no one would believe him.
A fifteen-year-old who had been with Father Kelly on at least three separate occasions told police that he and the priest had performed mutual fellatio in the rectory, after which the boy was given five dollars. On one of these occasions, Father Kelly showed no signs of having been drinking.
Perhaps the strangest case involved a young boy who had been sexually assaulted by Father Kelly on a number of occasions with the inadvertent blessing of his mother. After showing up drunk at the boy's home one night, Father Kelly was put to bed by the lady of the house. The priest then asked that her thirteen-year-old son be sent to sleep with him. His hostess obliged, and no sooner had the boy got into bed with the priest than Kelly began fondling his genitals. Kelly told the boy how much he loved him and how much money he had in the bank and that it was the anniversary of his entering the priesthood - all the while continuing his unwelcome stroking.
On another occasion, the same boy was awakened at three or four o'clock in the morning by muffled conversation between his family and Father Kelly. The priest presently appeared in the bedroom, and although the boy's mother tried to convince him to sleep in another room, he climbed into the lower bunkbed with the thirteen-year-old and immediately began fondling the boy after his hostess left. Father Kelly also asked his companion's brother, who was sleeping in the upper bunkbed, to join them; he then lay between the two boys fondling their privates and talking to them. On his way out of the house, he gave one of the boys ten dollars.
A few months later, the same two boys watched in growing apprehension as Father Kelly and their parents played cards late into the night. The priest drank steadily from a bottle of Bacardi rum. When their mother sent them to bed at 4:30 A.M., the boys pushed their bed up against the door so the priest couldn't get into their room. But their sleep was soon disturbed by someone banging on the bedroom door. The frightened boys then heard their mother's voice telling them to let the priest in.
After Kelly had gotten under the covers with them, one of the boys got up and, putting on his jeans, told the priest he had to use the washroom. When he returned, he left his Jeans on and purposely lay on top of the covers because Father Kelly was under the blankets, wide awake and waiting for him. Despite his precautions, the young boy soon felt the priest groping at his privates and telling him, "I don't care what's below, it's what's in your heart that counts."
Unholy Orders: Tragedy at Mount Cashel, Michael Harris, 1991
With the intervention of the church and a sympathetic judicial system, Kelly got off light. He received a suspended sentence and a trip to a treatment center for wayward priests outside of Toronto.
Eventually he was sprung into a parish in suburban Mississauga. By 1984 he was acting rector of historic St. Michael's Cathedral and was part of the welcoming committee for the papal visit to Toronto. By 1990, he was Vice-Chancellor of Temporal Affairs in the Archdiocese of Toronto and a key aide to Cardinal G. Emmett Carter. That year his name was raised at the Hughes Inquiry, a Royal Commission into sexual abuse at the Mount Cashel Orphanage. Kelly almost immediately left the church and never looked back. In 1985 he obtained a pardon which cleared his criminal record. Within a few years he would become a real estate tycoon, thanks mainly to the Canadian Commercial Workers Industry Pension Plan.
The following articles, which appeared in the Toronto Sun in 1997 describe in some detail, his rise from disgraced priest to real estate mogul and the people who helped him do it. It was estimated at the time that his net worth was about $500 million.
Ex-Priest Up From Depths; Now Huge Success In Business
By Alan Cairns, and Robert Benzie, Toronto Sun
Toronto Sun, July 20, 1997
He chose to run a consulting company from his tiny Brampton condo. Putting his church experience to work, Kelly advised funeral homes and cemeteries on business plans and raised funds for education projects. Almost by accident, he began helping struggling companies. While driving to meetings across Metro, he often found himself on Keele St., viewing the grandiose Skyline-Triumph hotel, shut down amid financial troubles. Kelly found the $9 million power-of-sale price meant a per-room cost of just $27,000 -- compared to $70,000 elsewhere in Metro. The hotel's convention center alone cost $10 million!
He risked everything -- his life savings, his inheritance, his condo. Family matched his $200,000 stake and he pulled together financing from banks and pension funds.
"It was a leap of faith (and) luck. I don't think anybody comes out of university or out of the priesthood and makes a miracle in real estate," he muses.
Enter Stephen Phillips, now president of the 500-hotel U.S.-based Howard Johnson reservation chain. At the time, Phillips was trying to rejuvenate HoJo's image under his Accomodex Franchise Management (AFM) company. After he offered Kelly a franchise, Phillips told Kelly of an emerging upswing in hotel management; Kelly saw his chance in property. With consultant Ed McConnell, they brought seven hotels under the Howard Johnson banner. Most were picked up under power of sale. They bought a former Red Oak Inn on Windsor's main drag, a hotel on Yonge St. in Aurora, the Empire Hotel and Conference Centre in North Bay, as well as hotels in Morrisburg, Ottawa and Edmonton, Alta. In December 1993, Kelly bought the Royal Connaught in Hamilton under power of sale from Montreal Trust for $4.2 million.
Kelly himself bought properties in Toronto, London and Etobicoke. And when AFM's steady growth pushed it into going public, he sold his shares and moved on.
By the fall of 1994, four years after he quit the priesthood, Kelly was on the verge of the big time. He put down $220,000 on the $580,000 purchase of a palatial Newmarket home -- complete with a huge indoor pool -- once owned by Magna International honcho Frank Stronach.
Around this time he formed RHK Capital and bought 2 Lombard St. outright, knowing it was not only perfect for his business headquarters but also a prime spot for future condos. He sought out a team of hard-working, intelligent go-getters. Treat them well and give them incentives, he reasoned, and they will produce.
"I don't think I'm a greedy person," he offers.
The former alcoholic turned into a workaholic and the RHK portfolio mushroomed.
A key deal was the Airport Marriott Hotel, which RHK bought for $33 million in Sept. 1995 and sold for $42 million six months later.
Bit by bit, he amassed other hotels, malls and office buildings in Toronto, London, Ottawa and Peterboro, as well as Pinestone resort in Haliburton.
Another coup was RHK's purchase for $47 million of three Brampton highrise apartment buildings last year and their subsequent sale for $60 million. Where he once chased the banks for loans, the banks came to him.
Even the Brampton deal has been overshadowed by two gutsy business forays: The $51-million purchase of the 160-store Galleria Mall in London -- which had been built by Robert Campeau for $300 million -- and a $200-million project based around the landmark British Colonial Hotel in Nassau.
The Bahamian hotel is still Kelly's only foreign holding. He was to be part of a $150-million venture to build a hotel in Chongqing, but pulled out when the Chinese didn't deliver guarantees.
Kelly modestly attributes his meteoric rise to being at the right place at the right time.
"When I started in 1992 I had no competition... who knows what's going to happen with the economy. We've been lucky... Sometimes I wake up and say, `what have I done that created this monster?'-- but I did enjoy it."
Expansion's The Name Of The Game
By Alan Cairns And Robert Benzie
Toronto-Sun July 20, 1997
The wheeling and dealings of Ronald Hubert Kelly:
Howard Johnson Plaza Hotel, 2737 Keele St., North York. Scraped together $400,000 in savings and loans from friends and bought closed-down 380-room Skyline Triumph hotel for $9.5 million. Conference centre alone had cost $10 million.
Business offices, 940 East Mall, Etobicoke. Bought 45% of $800,000 office complex at Hwy. 401 and 427. Now has full control. Major tenant is the company he helped to build, AFM, Canadian franchiser for Howard Johnson.
Commercial complex, 2 Lombard St., Toronto. Purchased historic building in 1994 for $2 million. Former owners had installed underpinnings and elevator shafts for future upward expansion. Kelly plans condominiums.
Airport Marriott Hotel, 901 Dixon Rd., Rexdale. Bought the Airport Marriott Hotel for $33 million in summer of 1995. Less than a year later, sold it for $42 million.
11 Yorkville Ave., Toronto Kelly bought "dog's breakfast" of office and residential building for $1.7 million. Spent $5 million on 99%-finished apartments. Has 3,000 tenancy applications.
Rosedale Square, 1055 Yonge St., Rosedale. Bought building for $1 million believing its location in old-money Rosedale would ensure success. Roughly 20 tenants, mostly high-end offices and two restaurants.
Apartment towers at 11 Kensington; 5 King's Cross; 3 and 11 Knightsbridge, Brampton.
Bought apartments and 108 townhouses in sale of defunct Bramalea Ltd. for $47 million -- $3 million under asking price. After one year of rental income, sold all for $60 million.
Pinestone Resort, Haliburton
Paid $3.8 million for golf resort. Many improvements planned. Former owners spent $21 million on improvements.
London Medical Arts Building, 746 Baseline Rd., London Bought 98%-finished London Medical Arts Centre for $2.15 million after builder had stroke. Original cost $12 million.
Galleria Mall, downtown core, London. Picked up troubled Galleria from the cash- strapped Reichman's for $51 million in July 1996. Has put $3.5 million into food court. Reichmans spent $300 million to build.
Westin Hotel, city centre, London. Bought Radisson hotel for $9 million and joined with Westin chain. Westin, with convention hotels in Toronto, Ottawa and Detroit, could add traffic through nearby conference centre.
Holland Cross complex, Tunney's Pasture, Ottawa. Purchased retail and service complex in civil service district for $15 million. The only "class A" building in the area was built for $40 million in late 1980s. Houses one of busiest McDonald's outlets in Ontario and is 99% rented.
Chimo Hotel, Joseph Cyr St., Ottawa. Bought east end hotel in 1996 for $16 million on the basis of it being a good property.
Peterboro Square shopping centre, Peterboro, Ont. After buying Peterboro Square shopping and office centre for $7 million, Kelly sold the adjoining Ramada hotel -- which he says was the only money loser -- for $1.7 million.
British Colonial Hotel, central Nassau. After buying half a mile of Nassau waterfront in December 1996, Kelly announced $100-million project based around the landmark. Features offices, waterfront condos.
The purchase of most of these properties was financed by CCWIPP. Ron Kelly did exceedingly well out of the bargain. He made money on the winners - and the losers? Those appear to have gone back to CCWIPP. In 2001, two financially troubled shopping malls (Galleria Mall in London and Holland Cross Landing in Ottawa) were bought back from RHK by a pair of Propco's at eye-popping prices. Propco 31 initially invested $14 million in the Galleria Mall in 1996. By 1999, its investment had ballooned to $22 million. The following year (2000), Propco bought the troubled property from RHK for a reported $42 million. CCWIPP's financial statement for 2001 shows the total cost of its investment in the shopping mall as $45.5 million and a fair value of only $35 million. Coincidentally, or maybe not, CCWIPP took control of the Galleria Mall on the same day as PRK Holdings (which took over RHK's troubled Bahamas hotels) was created.
Similarly, CCWIPP's original investment in the Holland Cross complex in Ottawa started out with a loan of $4 million to RHK by Propco 30 in 1996. By 1999, the investment had grown to about $18 million. Media reports in 2001 indicated that Propco had bought the property from RHK for $28 million. It shows up on CCWIPP 2001 financial as a cost of $18 million with a fair value of $28 million.
The some of the hotels Ron Kelly purchased with CCWIPP's money were eventually acquired by AFM Hospitality which, in turn, sold them off to pay down its own debt. Where's the return to CCWIPP members?
CCWIPP's relationship with Father Ron continues to this day. In 1998, RHK "sold" the Keele Street hotel (Ron Kelly's first purchase) to Royal Host REIT (a large hotel investment firm) for $12 million. As it turns out, Ron Kelly's company only sold a 50% interest to Royal Host. Chimo Hotels "acquired" the other 50%. Chimo Hotels is owned by Ron Kelly. Over $32 million dollars was loaned to him by Propco's 14 and 16 to facilitate this and three other hotels which were previously owned by Kelly's companies as well. That being the case, it seems that Kelly sold a 50% interest in a hotels that he owned - to himself, with $32 million worth of financing from CCWIPP. What became of the $15 million that CCWIPP loaned him when he first purchased the hotel in 1992?
At the time we posted Part One of this series, we estimated that about $259 million of CCWIPP's funds were tied up in investments connected to Ron Kelly's enterprises. Given the more recent news about the investments in RHK's Bahamas hotels, the number should rise to over $300 million. What's in it for the members? We don't know. Few if any of these investments have shown any kind of return.
Apart from profiting on the rents, leases and sales of the various properties he also managed to squeeze some juice out of CCWIPP's partners and a number of Canadian unions. Tenants in buildings he's owned over the years have included AFM Hospitality, locals of the Teamsters Union and the UFCW.
All is not well with RHK Capital these days however. The Bahamian disaster is a strong indicator of that. A note in the CCWIPP financial statement for 2000 refers to the conversion of the loans outstanding to RHK to preferred shares:
2. I.F. Propco Holdings (Ontario) 34, 39, 44, and 46 Ltd. And 1328434 Ontario Limited
The loan principal amounts and all accrued interest as at December 31, 2000 from these Propco investments and 1328434 Ontario Limited were exchanged for 11% cumulative preferred shared of PRK Holdings ("PRK"), a Bahamian company with an equal amount of paid up capital. These shares control PRK through a voting trust and are secured by a second charge against all assets and a guarantee of RHK Capital.
That sounds really good. It sounds as though PRK already has as much money as CCWIPP will be spending on the purchase of shares in PRK and that the loan amounts that have been converted to shares are somehow secured by other assets of RHK. However, in his confidential report to the Bahamas government Warren Adamson, President of PRK Holdings states that:
PRK was established as at December 31, 2000 to resolve various financial defaults of RHK involving RHK's major lender. At that time, RHK was in serious financial difficulty and unable to support SODC without the financial support of its major lender, the Toronto Canada-based company, Propco 39 Ltd. which is a wholly-owned subsidiary of a major Canadian Pension Fund with assets in excess of US $1.0 billion.
What "equal amount of paid up capital" could PRK Holdings possibly have had if it was set up to "resolve the financial defaults of RHK"? Where did PRK get it's "paid up capital"? If RHK was in serious financial difficulty, was assets did it have and how could it guarantee the millions that CCWIPP was going to put up to maintain the struggling hotels?
Over the past year RHK Capital has sold off a number of its Toronto commercial properties. What are CCWIPP's Trustees doing to recover the millions they loaned to RHK for the purchase of the hotels?
Ron Kelly is believed to spend much of his time outside of Canada these days, in Panama and the Bahamas. He also believed to be seriously ill. What will the CCWIPP Trustees do if he dies, with insufficient assets to cover his obligations to CCWIPP?
CCWIPP is governed by Board of Trustees made up of representatives of the UFCW and of the participating employers. The Trustees are responsible for ensuring that the pension fund is managed properly, that investment decisions are made prudently and in keeping with the interests of pension plan members.
The current Board of Trustees consists of the following officials:
- Clifford Evans
- Former Director of UFCW Canada, Director of UFCW International Operations, CCWIPP Trustee and Chairman of the Investment Committee, Evans is arguably the single most influential CCWIPP official. Affectionately known as "god" among UFCW insiders Evans remains, more than a decade after his official retirement, the grand old patriarch at UFCW Canada; a man whose wisdom is sought out by employers and local presidents alike in times of adversity. In addition, Evans' credentials include: Past member of the Ontario Pension Commission (appointed under the NDP government in 1992, Evans resigned from his post after only a few months of a five year term), past Canadian Chairman of the International Foundation of Employee Benefit Plans, General Vice President of the Canadian Labour Congress, member of the International Trade Advisory Committee (appointed by the Minister of International Trade). Evans is a Director in most CCWIPP investment corporations and a Director or Officer of certain companies in which CCWIPP has investments.
- Bernard Christophe
- Executive Assistant to the President, UFCW Local 832, (formerly President of Local 832 for a record 40 years).
- Michael Fraser
- UFCW Canadian Director, UFCW International Vice President, Cliff Evans' nephew.
- Wayne Hanley
- President of the 50,000 (approx.) member UFCW Local 175, Hanley followed his father Bill Hanley into the Presidency of the Local he currently heads. He is a member of the Board of Directors of AFM Hospitality Corporation (during 2001, he was the Chair of the Board of Directors of AFM) and is also a member of AFM's Compensation Committee and Audit Committee. According to a statement in CCWIPP's 1997 Annual Report, Hanley's position on its Board of Directors would entitle him to an annual retainer of $10,000 and a fee of $700 for each Board and Committee meeting attended.
- Anthony Filato
- Secretary-Treasurer, UFCW Local 500
- Gord Cannady
- V.P. Human Resources, Canada Safeway Limited
- Lucy Paglione
- Vice President Pension & Benefits, George Weston Ltd.
- Alain Picard
- Vice President. Human Resources, Metro Richelieu Inc.
- Howard Preston
- Representing Smaller Participating Employers
- Tom Zakrzewski
- Senior Vice President Labour Relations, The Great Atlantic & Pacific Company of Canada Limited
The responsibilities of the Board of Trustees are set out rather succinctly by Cliff Evans in a June 2002 letter to a CCWIPP member:
"All decisions pertaining to the investments of the pension funds are made by the Board of Trustees after having completed the proper due diligence process."
The Investment Committee
CCWIPP's Investment Committee consists of Cliff Evans, Howard Preston and Eugene Fraser. Evans is the former Director of UFCW Canada. He retired from that position in 1992 but has continued to play an influential role within the union.
Howard Preston is billed on CCWIPP's web site as a representative of unnamed "smaller employers". Along with Cliff Evans and Eugene Fraser he is a member of the CCWIPP Investment Committee and Director of numerous Propco Investment Corporations. We found an address for Preston on the Internet a few months ago: Knox United Church Cemetery and the Knox United Church Cemetery Board and contacted him for comment. Preston stated that he did not know much about CCWIPP and referred the journalist who contacted him to Bernard Christophe. He could not shed any light on who the "smaller employers" that he is said to represent might be and stated that he became involved with CCWIPP after the Dominion Stores (hardly a smaller employer) pension plan was transferred to CCWIPP. "Mr. Preston seemed to me to have little knowledge about the investments that he is associated with. He seems closer to Bernard Christophe than he is to Clifford Evans who seems to make the investment decisions".
Eugene Fraser is a businessman from Guelph Ontario, Fraser holds no position with either the UFCW or any of the participating employers. He is, nonetheless a member of CCWIPP's investment committee and a director of numerous Propco investment corporations. He is also a member of the Board of Directors of AFM Hospitality Corporation and a member of the Board of Directors of Dynamic Venture Opportunities Fund, an LSIF in which CCWIPP invests. A brief bio about Fraser in the DVOF prospectus for 2001 describes him as "Executive Vice President of Propco 100 Ltd. (investment operating company), from Jan. 1996 to Dec. 1999, National Sales Manager, McCordick Glove Inc. (distribution company) and prior thereto Senior Product Manager. Fisher Scientific (manufacturing and distribution company)".
It is believed from various CCWIPP documents that the Investment Committee acts as an advisory group for the Board of Trustees.
CCWIPP's side businesses
CCWIPP is the part owner of a company, Prudent Benefits Administration Services Inc., that administers pension benefits for CCWIPP members.
PBAS was originally incorporated in 1987, as a "Society"; a non-profit entity that handled CCWIPP's benefit administration functions. CCWIPP financial statements from the early 1990's show that various advances were made by CCWIPP to PBAS with respect to start up and operating costs. These advances were interest-free and had no specific terms of repayment.
In 1990, CCWIPP also set up a company, 889389 Ontario Ltd., to carry out its administration functions in British Columbia and Quebec. This company was also granted advances (interest-bearing advances in this case).
In 1997, Prudent Benefits Administration Society folded and CCWIPP incorporated Prudent Benefits Administration Services Inc. On January 1, 1998 the operations of PBA Society and 889389 Ontario Limited were transferred into the newly incorporated company.
CCWIPP's financial statements indicate that CCWIPP owns 30% of PBAS. There is no indication who owns the remaining 70%. Corporate records show, however, that the following individuals are PBAS' Directors.
- Antonio Filato (Union Trustee, CCWIPP)
- Alain Picard (Employer Trustee, CCWIPP)
- Thomas A. Zakrzewski (Employer Trustee, CCWIPP)
- Michael J. Fraser (Union Trustee, CCWIPP)
- Wayne E. Hanley (Union Trustee, CCWIPP)
- Lucy J. Paglione (Employer Trustee, CCWIPP)
- Clifford R. Evans (Union Trustee, CCWIPP)
- Howard G. Preston (Employer Trustee, CCWIPP)
- Bernard A. Christophe (Union Trustee, CCWIPP)
- Gord K. Cannady (Employer Trustee, CCWIPP)
- Gilbert M. Whitlock, (President, UFCW Local 247 and formerly President of Local 777)
- Francois Lauzon (President, UFCW Local 500R)
- Brian P. Williamson (President, UFCW Local 1977)
- Judith E. Robinson (Formerly a CCWIPP Trustee and Director of Personnel Services with George Weston Ltd., , Robinson is currently a Director of CCWIPP sub companies PBAS, Benchmark Decisions and Student Benefit Administrators. While serving as a CCWIPP Trustee, Robinson was also a member of the Pension Commission of Ontario (the forerunner of the Financial Services Commission of Ontario) where she commenced a three year term in May 1997 where she served until May 31, 2001.)
Essentially, PBAS is controlled by a group of people that includes the entire CCWIPP Board of Trustees plus three UFCW Local Presidents.
In 1999, yet another company, Benchmark Decisions Ltd., was created to provide consulting services "to the Fund and related benefit trusts".
Benchmark is a shown on CCWIPP's financial statements as wholly owned subsidiary of PBAS. This creative blurb from the PBAS web site, gives some idea of Benchmark's services:
BENCHMARK DECISIONS LTD.
Good benefit consulting, like resourceful cooking, transforms assorted ingredients into unique concoctions that are both appealing, to the consumer, and affordable, for payer. Remove either result, and the service is questionable. Remove both, and it fails.
Exceptional benefit consulting is harder to find than a fine restaurant. The Micheline (sic) Guide doesn't extend that far. But, there are other indicators, such as talent mixed with meaningful experience, and integrity driven by purpose, that should attract plan sponsors.
By way of illustration, most of our consultants -- themselves a blend of talents -- have been mixing clients' needs and resources in successful recipes for years longer than our firm has existed. With backgrounds in insurance underwriting, retirement planning, actuarial science, industrial relations, program design and documentation, and benefit communication, their work is governed by strictly-applied doctrines:
- Patterns of service are dictated by client interests.
- Connected resources are exploited to the client's advantage.
- Consulting fees are defined by the quality of the service, and they are offset by all sources of remuneration.
- Resourceful cooks may be found in many fine restaurants throughout Canada. Exceptional benefit consulting can be arranged through the seven regional offices of Benchmark Decisions Ltd.
Benchmark's Directors are the same cast of characters that control PBAS.
The same crowd also runs another business, Student Benefits Administrators Inc. which provides benefit plans to post secondary student associations.
Over the years, CCWIPP has extended some generous financing to all of these companies in addition to paying millions of dollars annually in fees for their services. In our next segment we'll tell you just how much is flowing from CCWIPP to companies controlled by CCWIPP's Trustees.
Experiencing the Magic
The web of characters involved in CCWIPP's investments is large and complicated. The strands in the web run off in many different directions: To movers and shakers in the business community, to lawyers, pension advisors, benefits consultants and to other unions. The investments made by CCWIPP's Trustees connect them to the Labourers International Union of North America, the Textile Processors, the Teamsters, the Brotherhood of Carpenters and Joiners, the United Association of Plumbers and Pipefitters, the Union of Needletrades, Industrial and Textile Employees (UNITE) and a half dozen or so construction unions.
The interest the connects them is money and the power that comes from having a lot of it at one's disposal. Devout business unionists, they trade in dollars, in real estate and in members and live large while their members make do with less.
CCWIPP members are taking a hit because of their pension fund's staggering solvency liability. But the officials responsible for taking care of their plan are moving and shaking in the company of entrepreneurs, politicians and other fine folk. It gives them a certain legitimacy and distracts from the troubling questions that are dogging the pension fund they oversee.
If you happen to be in Walt Disney World next month, you can catch some of them educating other pension fund Trustees at the 36th Annual Canadian Benefits Conference of the International Federation of Employee Benefit Plans. The IFEBP is a U.S. organization that provides educational services to pension and benefit plan administrators on both sides of the border.
The IFEBP's Canadian Board is a mixed bag of union officials, construction industry managers and benefits consultants. Cliff Evans and Joan Tanaka (PBAS Administrator) are members of the IFEBP Board as well. On page 13 of this IFEBP brochure you'll see a whole cast of CCWIPP-related characters doing a workshop called "Fundamentals for New Trustees". Cliff Evans will be delivering a session on the Selection, Supervision and Measurement of Your Professional Advisors, PBAS Administrator Joan Tanaka will be speaking about "Governance", Evans' associate David Harvey is the moderator for the session.
Here's an interesting session from one of their past conferences.
Session 21--Are you governing your [pension] plan well?
Good plan governance is increasingly important
A review of the new governance self-assessment initiative published jointly by OSFI/ACPM/PIAC
Moderator: Ray Bartolotti, President Teamsters Local Union 938, Mississauga, Ontario
Here's another association of benefits administers where CCWIPP-related players hang out. The Multi-Employer Benefit Plan Council of Canada is a lobby group that represents the interests of "multi-employer pension and benefits plans (MEPs) with provincial and federal governments regarding proposed or existing legislation and policies affecting these plans." PBAS Administrator Joan Tanaka is on MEBCO's Board of Directors, as is Bill Anderson from David Harvey's Benefit Plan Administrators and Dr. Peter Martini of CIBO Capital Corporation, the company that he and Cliff Evans control.
Pension and benefits administration is big business. The players who run the benefits admin companies, consulting outfits, actuarial and accounting companies make a good buck doing what they do. Moving in these monied circles, pension trustees and union officials acquire a certain gold-plated aura, reflecting the prestige and the power that comes with controlling vast quantities of cash. While the high flyers fly off to their conferences and their conventions to experience the magic, who is looking out for the members' interests?
Twenty Questions for CCWIPP Trustees
It's difficult to look at all these innovative investments, circles of connected players, potential conflicts of interest and accept that CCWIPP's staggering solvency liability is purely the result of forces beyond the control of its Trustees. Looking at the numbers one can't help but wonder if there is any correlation between the $400 to $600 million dollar solvency liability and the $500 million or so dollars invested through CCWIPP's investment corporations.
The value of investments in real estate are questionable based on their liquidity. The rate of return is calculated in totality for all investments managed by Mr. Kurki. This is misleading in that, once market value adjustments are taken into account, it does not show that the real estate portion has very low yields and negative returns. There were no written policies in place regarding investments in real estate.
Report to the Board of Directors of The Canadian Commercial Workers Industry Pension Plan on the Plan Examination Conducted by Alberta Employment Pensions March 15 - 19, 1999
It's frightening to learn that a decade after forging ahead with an investment strategy that would see millions upon millions of dollars sunk into undeveloped land, commercial properties and hotels, the CCWIPP Trustees had no written policies in place regarding investments in real estate. We have to ask: Why not?
That is not the only question we are asking, however. These investments and the circle of men that surround them raise a litany of questions for Evans, Fraser, Hanley, Christophe, Filato, Picard, Preston, Zakrzewski, Paglione and Cannady. It's about time they answered.
- Who made these investment decisions and on whose advice?
- What due diligence was carried out prior to committing funds to investments like the Bahamas hotels?
- What is the purpose of the Propco investment corporations and why are there so many of them?
- Was it necessary or cost effective for CCWIPP to create a business (PBAS) to administer its benefits? If PBAS is a separate "for profit" enterprise, why is CCWIPP providing it with advances and interest free loans? Are PBAS' annual administration fees of approximately $4 million competitive? Shouldn't the Trustees be managing the administration of the pension plan in the most cost effective manner?
- Why did CCWIPP Trustees create a business (Benchmark Decisions) to provide consulting services to themselves? What, if any, consideration do CCWIPP Trustees receive for their involvement in these businesses? If they receive any consideration (i.e., make any money) from their involvement with this company, does that not put them in a conflict of interest?
- What is the role of CCWIPP's investment committee? Does the committee simply advise the Trustees or does the committee make investment decisions that the Trustees simply go along with?
- Do CCWIPP Investment Committee members Evans, Preston and Fraser receive any commissions or other payments for their involvement in the Propco's?
- Why is Eugene Fraser, a person with no position with either the UFCW or the contributing employers involved in CCWIPP's investment decisions? What's he doing on the Investment Committee? Why is he an Officer of many of the Propco's?
- What are other Evans' associates, like Ray Kurki and David Harvey, doing sitting as Directors of CCWIPP's investment corporations?
- Do Cliff Evans multiple roles as lender, borrower and intermediary in some of CCWIPP's investments place him in a conflict of interest?
- Why has CCWIPP invested so heavily in Ronald Kelly's businesses? How do the Trustees justify these enormous investments in light of the negligible returns the pension fund has realized from them?
- How many of CCWIPP's current investments in Kelly's (and other) enterprises are unsecured? Why?
- Why does CCWIPP take over and continue to operate Kelly's failing enterprises? Why not seize RHK's other assets and recover monies owed to the pension fund that way?
- At what point do the CCWIPP Trustees intend to pull the plug on the failing Bahamas investments? Is it prudent to continue pouring money into investments that are unlikely to see any return for a very long time (if ever)?
- What explanation is there for CCWIPP's ongoing commitment to AFM Hospitality Corporation in light of that company's continued underperformance? If CCWIPP's Trustees believe that it is prudent to invest in the accommodation industry, why have they decided against investing in accommodation firms with better track records?
- What steps have the CCWIPP Trustees taken to guard against conflicts of interest in investment scenarios that are loaded with potential for just that?
- Are the interests of the UFCW the same as the interests of CCWIPP members? Is the use of members' money for purposes like "job creation" or organizing compatible with the fiduciary responsibilities of CCWIPP Trustees to CCWIPP members? Did the Trustees have an obligation to put the brakes on UFCW Canadian Director Tom Kukovica's "investment destiny" scheme in 1991?
- Assuming that the interests of the UFCW are the same as that of CCWIPP members, how can the UFCW justify the use of members' funds that support activities like "Employee Leasing Services" (one of AFM Hospitality's operations) or the construction of non-union fast food restaurants like McDonald's and Burger King or in ventures that seek to make money off the relaxation of rent controls.
Two privately owned property developers from Toronto have forked out $100-million to pick up one of the country's biggest portfolios of apartments, another sign that easy money and the prospect of relaxed rent control rules are driving investor appetite for apartment buildings.
RHK Capital Inc. and the Wolbrom family each acquired about half of a package of 1,676 apartment and townhouse suites in nine buildings in Brampton, northwest of Toronto, that were formerly owned by defunct Bramalea Inc. Investors go apartment hunting
by Leonard Zehr - Real Estate Reporter, Globe and Mail - July 5, 1996
- For whose benefit has all of this been done?
Surely not that of CCWIPP members. The real estate tycoons have done well out of their association with CCWIPP, so have the hotel industry entrepreneurs, so have the dizzying array of property management firms, investment advisors, law firms and other enterprises. Sooner or later, the party has to end.
Perhaps the next time a parade of needy businessmen lines up to fall into the waiting arms of thousands of hard working women and men, there will be no one there to catch their fall.
In Part 1 of our series we included a table which is contained in documents that the CCWIPP Administrator filed with the FSCO in 2002:
|Members who became Plan members prior to August 1, 1999 and were eligible to retire on March 1, 2001||Members who became Plan members prior to August 1, 1999 and were to eligible to retire on March 1, 2001||Members who became Plan members on or after August 1, 1999|
|First Unreduced Retirement Date||Age 60||Age 65||Age 65|
|First Reduced Retirement Date||Age 50||Age 50||Age 50|
|Early Retirement Reduction Formula||½% for each month that retirement predates age 55 and ¼% for each month between ages 55 and 60||½% for each month that retirement predates age 55 and ¼% for each month between ages 55 and 60 in respect of service prior to March 1, 2001 and ½% for each month that retirement predates age 65 in respect of service on and after March 1, 2001||½% for each month that retirement predates age 65.|
(Source: Notice to members, "Special Provisions Effective from August 1, 1999")
A CCWIPP member recently wrote to us stating that the CCWIPP pension statement which he received for 2002 contained a similar table but with quite different information:
|Members eligible to retire on August 1, 1997||Members not eligible to retire on August 1, 1997|
|First Unreduced Retirement Date||Age 60||Age 65|
|First Reduced Retirement Date||Age 50||Age 50|
|Early Retirement Reduction Formula||½% for each month that retirement predates age 55 and ¼% for each month that predates age 65.||½% for each month that retirement predates age 65.|
The member states he has never heard of the March 1, 2001 eligibility date for early retirement and that, if correct, many more CCWIPP members would be eligible to early retire with full pensions or pensions reduced by a lower percentage.
We have no explanation for this discrepancy or why CCWIPP would be providing different information to the regulator and the members. The information posted in our article was taken directly from a "Notice to Members" filed by the CCWIPP Administrator with the Financial Services Commission of Ontario.
CCWIPP members may want to contact either the CCWIPP Administrator or the FSCO for an explanation.