by Arkansas Business Staff on Monday, Dec. 28, 2009 12:00 am
No matter the label, recession, economic downturn or financial meltdown, the shadow of bad tidings from 2008 covered 2009. But the lingering darkness in Arkansas wasn't as bad as in other parts of the nation.
President Barack Obama signed the American Recovery & Reinvestment Act in February, and the state's share of the $787 billion war chest was projected at $2.9 billion. Schools, roads and more across the state were the beneficiaries of the taxpayer-backed financial windfall.
The federal government also stepped up its investment in the nation's financial community, and a dozen Arkansas-based lenders chose to participate in Uncle Sam's $250 billion Capital Purchase Program.
Little Rock's Bank of the Ozarks accepted and later repaid $75 million, cutting the roster to 11 financial institutions with more than $128 million in capital in exchange for preferred stock issued to the U.S. Treasury.
Actions by the Office of the Comptroller of the Currency and the Office of Thrift Supervision increased the tally of sanctioned Arkansas lenders to at least eight.
The number is likely higher, but unlike federal regulators, the Arkansas State Bank Department does not disclose the state banks it has sanctioned.
The number of 2009 bank failures across the nation was at 133 and climbing in December, but none was in Arkansas. The single-year body count of lenders is the biggest since 1992 when 181 fell at the tail-end of the S&L Crisis.
Afflicting the balance sheets of more than a few lenders was the overbuilt northwest Arkansas market. New home construction in Benton and Washington counties plummeted by nearly 75 percent compared with 2006 activity.
The real estate market fallout produced high-profile bankruptcies such as Fayetteville developer Brandon Barber's Chapter 7 with $47.8 million of debt.
It also produced litigation aplenty from banks and borrowers alike. Northwest Arkansas developers such as Tom Terminella, Gary Combs and J.B. Hays took their financial battles to court, sometimes filing preemptive lawsuits ahead of foreclosure actions as leverage for settlements.
Eleven Arkansas lenders reported losses of $1 million or more through the first three quarters of 2009, with Little Rock's Metropolitan National Bank generating the biggest loss at $54.8 million.
The red ink in the financial sector extended to Arkansas health care providers, with 52 out of 94 hospitals reporting losses. At 55 percent, that count represented an unhealthy increase from 40 percent in 2008.
Operations at the University of Arkansas for Medical Sciences generated a net loss of $28.5 million, $43.1 million if investment losses were included. That performance topped 10 other hospitals with net losses of $5 million or greater.
Health Care Debate
President Barack Obama said his No. 1 domestic priority was to overhaul the health care system.
Throughout the year, Congress has been hotly debating the best way to cover the nearly 50 million uninsured people across the country.
Sticking points have included the cost and proposals for a government-run insurance program, which the insurance industry has opposed.
The House approved its version of a health care reform bill in November, and it looks as if the legislation will squeak by in the Senate. The differences between the two bills then will have to be reconciled.
Virtually all Republicans in Congress opposed the Democratic approach to health care reform efforts, charging they were too expensive and would only increase taxes and health care costs. Sen. Blanch Lincoln, D-Ark., was one of the few Democratic senators who sided with Republicans when she said that she couldn't support a government-run insurance program, also known as the "public option."
Lincoln, who is up for re-election in 2010, then said she would vote for the Senate version of the bill after the public option was removed. (The public option, however, remains in the House bill.)
Lincoln said in a Dec. 21 statement that reform would expand health care access to more than 400,000 uninsured Arkansans. Her support for the legislation might make her vulnerable in the upcoming election. Several Republicans have said they will challenge Lincoln, who was recently named chairman of the Senate Agriculture Committee.
In Arkansas, health care officials are waiting to see what the final legislation will look like and what its impact will be. Some hospitals could close if Congress doesn't approve a health care reform package, said Paul Cunningham, the senior vice president of the Arkansas Hospital Association.
Hospitals in Arkansas have seen the number of uninsured patients and people who can't pay for health care continue to rise in 2009. As a result, hospitals hemorrhaged red ink throughout the year.
Baptist Health Medical Center of Little Rock, for example, had a net income of $36 million in 2007, but in 2008 it reported a loss of $20.5 million. In addition, several Arkansas hospitals in 2009 proved they weren't recession-proof and slashed employees' pay, froze benefits or laid off workers.
Climate change remains a political hot potato, but Arkansas farmers can agree on one thing: The climate in 2009 was none too kind to the agriculture industry.
The year began with a massive ice storm, bringing between 3 and 4 inches of freezing rain, sleet and snow to the northern third of the state. The storm caused massive power outages and timber damage and brought business to a standstill.
The storm cut power to about 350,000 homes and businesses, and customers were power for a month. In Fulton County, every single power pole snapped under the weight of the ice. The cost to the electric utilities alone was estimated at $500 million, with the need to replace more than 40,000 poles and 1,500 miles of wire.
The cleanup cost of removing snapped trees was estimated at $125 million. No estimates were available on the resulting losses from closed businesses, but the Arkansas Forestry Commission estimated that the destruction of nearly 5 million acres of timberland cost landowners about $164 million.
In the spring, the rains began. And it rained, and it rained some more and then even more, making for a late planting for farmers. During September and October and into harvest time, the rains came again, cutting crop yield and quality.
In late October, after more than a foot of rain had fallen during the month, Arkansas Farm Bureau President Randy Veach said yield and quality losses for the major row crops could exceed $650 million.
Although the numbers aren't final, economists with the University of Arkansas' Division of Agriculture estimate that this year's heavy rain and flooded fields cost producers $309.3 million. That's a 9.6 percent loss on estimated total gross receipts for corn, cotton, cottonseed, grass hay, rice, sorghum and soybeans. On a per-acre basis, the average loss was $43.
Cotton producers took the biggest hit. Poor yield and quality and additional fieldwork on cotton and cottonseed are estimated to have resulted in a $115.5 million drop in gross receipts. Rice producers saw gross receipts reduced by $50 million. Soybean producers lost an estimated $49 million because of decreased quality and the cost of additional fieldwork.
The record rainfall also led to losses in the production of fruit and timber. The saturated ground made it difficult for loggers to get into the woods, and sawmill owners had to shut down or curtail operations because the loggers couldn't cut. The record rainfall severely curtailed production of blackberries, peaches and grapes.
The telecommunications industry in Arkansas experienced several major changes during 2009.
At the top of the list: A new telecom firm put roots in the state.
Allied Wireless Communications Corp., a subsidiary of Atlantic Tele-Network Inc. of Salem, Mass., formed from divested Alltel assets, announced in December that it would establish its headquarters in Little Rock.
The company expects to add between 200 and 250 jobs and invest more than $200 million in the Little Rock operation. Frank O'Mara, CEO of Allied and former chief marketing officer at Alltel, said he'd like to hire many ex-Alltel folks, adding that the new company would be like getting the band back together.
Allied isn't the only telecom-related firm to form from the fallout of the Verizon-Alltel merger that closed in January; a couple of investment firms specializing in technology also emerged. Westrock Capital Partners LLC, formed by former Alltel CEO Scott Ford, and the Circumference Group, formed by former Alltel Chief Operating Office Jeff Fox, both set up shop in Little Rock this year and hired some ex-Alltel workers.
Meanwhile, Windstream, run by Alltel veteran Jeff Gardner, went on a buying spree and began repositioning itself in the market. Gardner is working to move away from the bleeding landline business and turn what is now Arkansas' second-youngest telecom into a broadband firm.
In the second half of 2009, Windstream entered into agreements to buy four similar-sized telecoms, totaling more than $2.2 billion in acquisitions. Windstream agreed to buy Lexcom Inc. of Lexington, N.C., for $141 million; D&E Communications of Ephrata, Pa., for $330 million; NuVox Inc. of Greenville, S.C., for about $643 million; and Iowa Telecommunications Services Inc. of Newton, Iowa, for $1.1 billion.
Finally, the July merger between CenturyTel Inc. of Monroe, La., and Embarq Corp. of Overland Park, Kan., created another new company called CenturyLink Inc., which instantly became the second-largest local exchange carrier in Arkansas.
Six of the 19 publicly traded companies headquartered in Arkansas, including the three largest, installed new CEOs in 2009 or announced plans to do so. One company, Tyson Foods Inc. of Springdale, installed two new CEOs this year.
- David Wood succeeded Claiborne Deming as CEO of Murphy Oil Corp. of El Dorado on Jan. 1;
- Michael T. Duke succeeded H. Lee Scott Jr. as CEO of Wal-Mart Stores Inc. of Bentonville on Feb. 1;
- Daniel Cushman replaced Robert Weaver as CEO of P.A.M. Transportation Services Inc. of Tontitown on July 13;
- Randy Sims succeeded John Allison as CEO of Home BancShares Inc. of Conway on July 17;
- Donnie Smith on Nov. 19 succeeded Leland Tollett, who on Jan. 5 succeeded Richard L. Bond as CEO of Tyson Foods; and
- Judy McReynolds will succeed Robert A. Davison as CEO of Arkansas Best Corp. of Fort Smith on Jan. 1, 2010. (She will be the first female CEO of a publicly traded company in Arkansas since the late Vida Lampkin retired as CEO of tiny HCB Bancshares Inc. in 1999.)
Turnover in the corner office wasn't confined to publicly traded companies. Arkansas Blue Cross & Blue Shield of Little Rock, the state's sixth-largest private company in terms of annual revenue, got a new CEO in Mark White on Jan. 1, 2009.
And although he isn't CEO and he actually arrived in 2008, the management hand of Steve Denne became apparent at Heifer International, the global poverty relief charity headquartered in Little Rock. Internally, Denne is viewed as the heir apparent to Heifer's longtime CEO, Jo Luck.
Rough Year for Energy Industry
As if a $10.6 million repair bill and $18 million in lost revenue after an epic ice storm weren't headache enough, Southwestern Electric Power Co. also had to make the case for massive rate hikes in 2009 while fighting environmental challenges to the $2.1 billion coal-burning power plant the company is building in southwest Arkansas.
Hanging in the balance were 110 permanent jobs and an annual $3.9 million in school and county property taxes, not to mention the 600-megawatt capacity of the John W. Turk Jr. plant in Hempstead County west of Hope.
Opposition to that plant - spearheaded by the Audubon Society and the Sierra Club - apparently fed public backlash when Swepco petitioned regulators to allow a $53.9 million rate increase. Hundreds wrote letters objecting to the rate increase, which in November was permitted at a lower $17.8 million base rate increase and $11 million for a Shreveport natural gas plant.
Meanwhile, Swepco beat back challenges to the Turk plant that concerned air permits, potential violations of the Clear Air Act and the power lines that would connect the plant to the power grid.
For now, the plant is rolling ahead. It could face another hurdle before operating if the Environmental Protection Agency mandates that the plant practice carbon capture - its current plan doesn't include plans for carbon capture, only land available to do so - but it's on track to be operational by 2013, slightly behind its original schedule.
The problem with pushing for cheap, abundant energy is that energy can become too cheap and too abundant. Since Arkansas' natural gas operations began to gain momentum in the mid-2000s, there had been no sweeter phrase to many Arkansans than "Fayetteville Shale," the geological formation that promised thousands of landowners steady royalty income, if not a fortune.
This year, though, the hills of north Arkansas are providing less cash. Speculation and new discovery pushed wellhead natural gas prices to a seven-year low, off 68 percent between June 2008 and June 2009. Another byproduct: Disappointing revenue from the state severance tax, which in 2009 was tied for the first time to the value of the gas produced.
Affiliated Foods Bankruptcy
Affiliated Foods Southwest Inc. of Little Rock, one of Arkansas' largest private companies, filed for Chapter 11 bankruptcy protection in May and quickly began laying off workers and selling assets.
The wholesale food distribution company reported debts of $101.5 million and assets of $47.6 million. The company couldn't escape Chapter 11 reorganization, and its bankruptcy was converted in August to a Chapter 7 liquidation.
For the fiscal year that ended June 30, 2007, Affiliated had $763.2 million in revenue and a net income of $4 million. A year later, revenue had fallen to $730 million and its net income was $3.8 million.
But the first signs of trouble occurred earlier this year when Affiliated's primary bank, U.S. Bank, temporarily cut off funding. The bank wouldn't honor anymore of Affiliated's credit requests because it was overdrawn by $11 million.
Founded in 1948, Affiliated had been trying to sell off its corporate-owned stores, including Harvest Foods and Piggly Wiggly locations, but the credit crunch during the recession stalled the sales.
Affiliated is owned by its 190 members, and any profits were returned annually to them. Many owners chose to convert their profits into "certificates of indebtedness" with Affiliated, which typically paid higher interest rates than banks.
Some investors said they didn't realize the company was facing financial trouble until they learned about the bankruptcy filing. By that time, though, it was too late and their investments were frozen.
Investors have sued former President John Mills of Cabot and corporate secretary Charles Moore of Howard County in an attempt to recover their losses. An attorney for the plaintiffs estimated that more than 100 investors had lost more than $30 million from Affiliated.
In their lawsuit, investors accused Mills and Moore of selling unregistered securities. Moore denied the allegations, but Mills took the unusual step in a civil case of invoking his Fifth Amendment right against self-incrimination.
Days of Reckoning
Former Little Rock lawyer Gene Cauley will begin serving an 86-month sentence in federal prison on Jan. 25, just nine months after his theft of more than $9 million from a client trust account was discovered.
Cauley suffered the fastest and most spectacular downfall this year, but he was certainly not the only Arkansan to face a day of reckoning for white-collar crime in 2009.
Cauley, who built a national reputation as a plaintiffs' lawyer in securities cases while still in his 30s, informed his former law partners in April that the final $9.3 million he was supposed to pay clients out of a $65 million settlement account was "not available." The former partners informed the New York federal judge who had entrusted Cauley with the settlement funds, and on June 1 Cauley pleaded guilty to wire fraud and criminal contempt of court.
Despite a financial statement indicating a nine-digit net worth at the beginning of the year, he was only able to come up with $500,000 of the missing money before he was sentenced in November. In the meantime, other claims to whatever was left of his fortune kept cropping up - including bank loans, a repossessed Gulfstream jet, tax delinquencies and, tragically, a $3 million judgment to the family of a 22-year-old man who was electrocuted while working for Cauley's billboard company. Complicating his financial workout plan was his former law partners' claim that they couldn't pay him contingency fees on pending cases because he had surrendered his law license in May.
Also in 2009:
- Rogers businesswoman Dana Washburn admitted she used phony collateral to defraud IberiaBank Corp. out of $3.6 million. She will be sentenced in March.
- Aaron Jones, lawyer and real estate developer, was indicted in October by a federal grand jury for arson, mail fraud and the use of fire in the commission of a federal felony in connection with the May 30, 2008, torching of his house in Little Rock's Chenal Valley neighborhood. He pleaded not guilty and is scheduled for trial in September 2010.
- Hot Springs banker Richard T. Smith pleaded guilty to a single count of filing a false tax return in exchange for two years of probation, 200 hours of community service and a $20,000 fine. The sentence came in November, more than three years after he was indicted on charges related to his dealings with Ponzi schemer M. David Howell of Little Rock, whose investment fraud fell apart in October 2002.
- Little Rock tax attorney Barry Jewell began serving a 30-month sentence at the federal correctional facility at Memphis in July, 10 months after he was convicted of a single count of aiding and abetting tax evasion by a client. (He was acquitted of conspiring to commit wire fraud with his former law partner, Keith Moser, who is serving his 188-month sentence at Forrest City.)
Arkansas Lottery Begins
For sheer inception speed, the Arkansas Scholarship Lottery started out of the gate faster than any other state lottery.
Gov. Mike Beebe signed legislation into law on March 25 creating an independent commission to decide what games get played and how those games would fund college scholarships.
Ernie Passailaigue was hired as executive director of the Arkansas Lottery Commission on June 5. Passailaigue, the former lottery chief of South Carolina, started his new job on June 29.
Ninety-one days later, the first lottery tickets in Arkansas were sold on Sept. 28. That was touted as a record startup that outpaced the 115-day mark set by North Carolina in 2006.
Along the way, folks got antsy about the big salaries Passailaigue and his lottery posse were pulling down. At the top of the organizational chart was Passailaigue at $324,000 with his top two aides, former South Carolina Lottery execs, each drawing an annual salary of $225,000.
Paycheck envy/fiscal concerns aside, few could quibble with the initial performance of the Arkansas lottery. Sales surpassed the $100 million mark on Dec. 9, generating more than $25 million in net proceeds for college scholarships.
The state Legislature has a Feb. 28 deadline to establish the size of the lottery-financed college scholarships that become available starting in the 2010-11 school year.
Lt. Gov. Bill Halter and other lottery boosters have advocated $5,000 scholarships for students attending four-year colleges and $2,500 scholarships for students attending two-year colleges.
The success of the lottery heightened concern that much of the money pouring in was from people who could least afford it and that advertising and cheap games were targeting the state's least affluent.
Passailaigue promised a demographic study of the matter after the first 12 months, with a new study to follow each year.
His projections call for annual lottery ticket sales of $400 million when operations hit full stride in 2010, with a quarter of the revenue devoted to scholarships.
Northwest Arkansas Newspaper Truce
One of the scrappier newspaper wars of the past decade ended not with a surrender but with a cease-fire.
In September, Stephens Media LLC and Arkansas Democrat-Gazette Inc. announced a merger plan that would effectively turn Stephens' daily papers in Springdale, Rogers and Bentonville into zoned editions of the Democrat-Gazette, which had launched its incursion into the booming northwest Arkansas market a decade ago.
On gaining approval from the Justice Department in October, the 50-50 partnership, named Northwest Arkansas Newspapers, held virtually every daily and weekly paper of any consequence in the northwest corner of the state, foremost among them The Northwest Arkansas Times, the Benton County Daily Record, The Morning News and, of course, the local edition of the Democrat-Gazette.
Walter E. Hussman, the publisher of the Democrat-Gazette, won the state's previous newspaper war, one decided in part by his decision to give away classified advertising in the Democrat.
This time, too, he was bleeding, but not by choice: the Democrat-Gazette's ad revenue was down 18.5 percent in the first nine months of 2009, after a plunge of 13.2 percent in calendar 2008. Those losses trended with newspapers' nationwide meltdown; ad revenues were down 17.7 percent in 2008, the third straight year of decline, according to the Newspaper Association of America. The first nine months of 2009 saw ad sales drop another 28.4 percent.
Those numbers couldn't stand. A publisher in northwest Arkansas told the Northwest Arkansas Business Journal in October, "The fundamentals of the newspaper business are changing rapidly and there is no space for profit in competing daily newspapers in a single market."
Projections at the time were appropriately grim for the two companies' nearly 550 area employees: About 40 percent of them, sources said, would eventually lose their jobs in the merger. If you can't beat 'em, the old saying goes, join 'em - then maybe get canned.
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