Federal prosecutors are seeking to interview executives from U.S. Foodservice Inc. next week and are beginning to work their way through a cache of documents from the Netherlands, sources familiar with the investigation said yesterday.
The documents from Royal Ahold NV, the parent company of U.S. Foodservice and Giant Food Inc., were collected and turned over to the U.S. attorney's office in Manhattan this week by Ahold's lawyers as part of its effort to cooperate with the investigation, the sources said. They arrived as U.S. Foodservice executives began hiring defense attorneys in preparation for the meetings, sources said.
Columbia-based U.S. Foodservice appears to be at the heart of an accounting blowup that has threatened the future of one of the world's largest food companies. Ahold disclosed last week that it had overstated its earnings by at least $500 million over two years.
U.S. Foodservice was created in 1989 by chief executive James L. Miller. He sold the company to Ahold in 2000, but stayed on to help build the operation into a $17.4 billion business through a series of rapid acquisitions. Both of Miller's sons, Daniel and Kevin, work for U.S. Foodservice. A company spokeswoman declined to say what they do. Miller, who was little known outside the food business until the scandal broke, is still chief executive. He and other U.S. Foodservice executives either declined comment or did not return repeated calls or respond to requests left at their homes for comment.
The accounting problems have caused anxieties within the food company, according to a salesman, who said employees have been told little. Food industry headhunters say they are already hearing from nervous employees, many of whom wonder whether they will receive promised bonuses. Last night, a U.S. Foodservice spokeswoman said bonuses, which were supposed to have been paid last month, have been delayed until the books are closed.
U.S. Foodservice is the second-largest wholesale food distributor in the country, behind Sysco Corp. According to interviews with vendors, food brokers and former and current employees, it has appeared to thrive in a cutthroat business by negotiating aggressively and pushing employees hard.
Anglia Oils Ltd., a cooking oil firm that started doing business with U.S. Foodservice in 1997, said its relationship with the company shows how tough the firm can be in its dealings with vendors. Ian McIntosh, Anglia's managing director, said the relationship with U.S. Foodservice was a good one for years. But in October 2001, a year after Ahold purchased U.S. Foodservice, things soured. U.S. Foodservice accused his company of overcharging for oil and argued that it could get a similar quality oil elsewhere for less.
"They wanted $80,000 back in compensation because they claimed they had paid too much in the past," McIntosh said.
Anglia denied that it had been overcharging and offered to provide an olive oil with different specifications to match the cheaper price quoted by its rival vendor. But U.S. Foodservice declined and then refused to pay $111,000 owed to Anglia for oil already delivered, said McIntosh. Anglia then withheld $45,000 it owed U.S. Foodservice for promotions and other services. But Anglia is still out $66,000, according to McIntosh.
A Royal Ahold spokeswoman declined to comment on McIntosh's vesion of the dispute, which was first reported by Dow Jones News Service.
A key area of interest to prosecutors is the relationship between U.S. Foodservice and its vendors, according to sources. U.S. Foodservice operates its business differently from its competitors, especially in its relationships with food manufacturers, according to Tim McLafferty, a recruiter for the food industry in Minnesota, who worked as an operations and sales manager for a food manufacturer for several years.
U.S. Foodservice selects a "preferred vendor" to be the major provider nationwide for a specific product. Sysco and other distributors generally work with a wide range of food manufacturers, and give their local operations more flexibility in deciding which products to sell.
The "preferred vendor" system makes it hard for vendors not chosen for the program. "We all complain that they try to limit the number of vendors they use," said one such supplier, who spoke on condition he not be named. "They centralize all their buying at corporate headquarters in Columbia and the corporate people work harder than anybody else at these winner-takes-all negotiations. . . . They're very disciplined about it."
If a manufacturer becomes a "preferred vendor," however, it means its products will be aggressively sold to hundreds or thousands of restaurants, hotels and other institutions nationwide. To compete for this prize, manufacturers often are urged to make some kind of advance rebate or cash payment to U.S. Foodservice, according to McLafferty.
The payments that distributors like U.S. Foodservice receive from vendors -- called "shelter" or an "advance rebate" payments -- can often provide more profits than the sales of the products to the restaurants and hotels, according to McLafferty and others in the industry.
Common forms of "shelter" include manufacturer's payments for space in a distributor's warehouse, payments for setting up sales meetings, payments for booths at the distributor's trade shows, payments to reward the distributor's sales employees and payments to carry a manufacturer's entire product line.
But manufacturers sometimes resent the payments. "What the distributor calls shelter, some food manufacturers will refer to as ransom," said McLafferty.
McLafferty said distributors are not entirely to blame. "The problem exists because of what manufacturers have been willing to do," he said. "Manufacturers have created the problem as much as the distributors."
Suppliers also often offer incentives to sales employees to sell their products, according to a U.S. Foodservice salesman.
Restaurants are often unaware of these arrangements. They typically pay for their food on a "cost plus" basis -- the cost of the actual product, plus operating costs of the distributors, plus an agreed-upon percentage, according to several industry sources.
A spokeswoman for Ahold declined to comment on how U.S. Foodservice negotiated and accounted for payments it received.
Sources have also said that prosecutors will be examining Ahold's acquisition accounting. In a June 2001 report, the Center for Financial Research and Analysis Inc., an independent financial analysis firm in Rockville, said that the way Ahold accounted for its acquisitions, although probably legal, was aggressive and helped it boost its operating and net income.
Rather than booking goodwill -- the premium paid in an acquisition over the value of the assets acquired -- over time as an expense from operations, Ahold instead charged it against shareholders' equity. "Thus the company gains the benefit of the acquired operations without any offsetting expense," the report said. The center said Ahold's earnings for 2000 would have been "substantially lower" had it not used the accounting practice. Ahold also began spreading out over three to five years the cost of software it purchased and receivables it might not collect, another way to bolster its earnings, the report said.
At the same time, Ahold altered the way it reported debt on its books, "choosing to alter its formula particularly at the moment when the ratio [of debt to equity], if left unchanged, would potentially have raised the greatest alarm to analysts reviewing [its] financial statements," the report said. An Ahold spokeswoman declined to comment on the report.
Staff writers Brooke A. Masters and Carrie Johnson contributed to this report.