Hyde Park Co-Op Market

Dear Hyde Park Cooperative Society Members,

     You are being asked to cast your ballot and vote for one of two alternatives dealing with the future of the Hyde Park Co-Op. This letter of explanation provides you with the facts and a more detailed explanation of the alternatives.
      As a reminder, ballots must be received by mail to Project LEAP Officials at the address indicated on the ballot no later than December 12, 2007, signed by a member in good standing who can be identified by his/her member number and/or signature. Replacement ballots are available at the Co-Op Membership Desk beginning on November 30.
     Following the Town Hall meeting on November 18, 2007, the Board conducted an informal poll and a two-thirds majority of the Board of Directors of the Co-Op voted to recommend Proposal A – the Debt Workout - to the shareholders. The Board intends to place significant value on your vote, but for legal purposes, this election should be considered as Advisory to the Board. You should also note, however, that Proposal A depends on substantial rent relief and cash infusions from the University of Chicago and the successor Tenant that are only available if Proposal A is approved by the shareholders.
     The vote itself will be received, validated and counted by Project LEAP Officials, an independent and non-partisan organization retained by the Board of Directors to ensure a fair election.

The Facts:

The Co-Op currently has a negative net worth of $1.8 million and has on its books leasehold improvements of $1.65 million that have no value. Therefore, we must borrow in excess of $2.3 million and obtain a $400,000 letter of credit to pay our bills. Over the past 11 months, the Co-Op has been able to survive by ever-mounting debt owed to our vendors, and by not remitting rent owed to our landlord on the 55th Street store, the University of Chicago. While this has enabled a continued flow of product to our store, it has also put the Co-Op further in debt. The rent due is over $1.2 million, and we have $2.3 million in trade payables and accrued expenses that do not have to be paid immediately. In addition, we owe $685,000 related to the empowerment bond for the 47th Street store and a loan of $1.01 million due to Certified Grocers Midwest, Inc.

The 55th Street store earns about $1 million per year. However, we have a lease for the now vacant 47th Street store which runs through 2023 without any escape clause provisions and we are obligated to pay the $1 million in rent to Certified Grocers Midwest, Inc. on that lease per year.

Proposal A – Debt Work Out

The University of Chicago, landlord of the 55th Street store, would forgive back rent of up to $1 million.

Certified Grocers, the landlord of the 47th Street store would forego all future rents (which run at $1 million per year through 2023) for a one time payment of $1 million which includes the release of all outstanding liability by the Co-Op to Certified Grocers.

This proposal would require the closure of the 55th Street store in a short period of time, but would enable the Co-Op to have sufficient cash flow to meet the remaining financial obligations through the controlled and orderly transition to a new grocer.

The University of Chicago and a new tenant at 55th Street would provide sufficient funds to pay off most, if not all of our debts. Thus allowing an exit whereby the Co-Op, after 75 years, can be proud of its past achievements and meet its financial obligations.

The University of Chicago is in final stages of negotiations with a grocer to operate the 55th Street store, and will announce the store as soon as the lease is signed. The proposed tenant will operate a high-quality grocery store, and make significant physical improvements while continuously operating the store.

The proposed tenant will provide the current 40 full time and 140 part time employees an opportunity to interview for employment positions. Due to the overwhelming debt the Co-Op must repay to outside entities, although we would have hoped differently, we do not envision the financial ability to allow members to redeem any of their shares.

Proposal B – Bankruptcy through Chapter 11

This proposal would require filing Bankruptcy under Chapter 11 which would mean the following:

The 55th Street store continues operating with the current management team led by Bruce Brandfon if the conditions below are met.

Under Chapter 11 reorganization, the Co-Op would terminate its lease obligation at the 47th Street store. The cost of such lease termination would be $2.2 million. This amount could be reduced if a new tenant is found quickly once the Co-Op terminates its lease obligation at that site.

A proposal under Bankruptcy gives us the right to accept or reject any leases to which we are currently obligated. Even in rejecting the lease at 47th Street, its provisions obligate us to pay approximately $2.2 million to Certified Grocers.

We would expect to incur approximately $400,000 of costs related to bankruptcy in addition to all other debts to which we have referred.

     Board members who support Proposal B and have analyzed the numbers believe that there would be sufficient cash flow to pay normal trade payables and accrued expenses.
      Should the Co-Op enter into Chapter 11 reorganization, the Co-Op would have to borrow $2.3 million plus obtain a $400,000 letter of credit to pay down its current trade payable to Certified Grocers, the past due rent to the University of Chicago and the pay down all debt owed to LaSalle Bank. It is the projection of the Board members who support Proposal B that the Co-Op will generate a $7 million positive cash flow from earnings and depreciation over the next five years. The Co-Op would have to pay out $2 million in loan payments for the $2.3 million loan, up to $2.2 million in lease termination costs, $400,000 in bankruptcy costs and $700,000 in other normal business balance sheet reductions, totaling $5.5 million versus a positive cash flow of $7 million, leaving $1.5 million available for capital expenditures and contingencies. In addition, this scenario can only work if the Co-Op receives debtor in possession financing. At this time, the Board has received a preliminary term sheet from the National Cooperative Bank; however final terms will require further negotiations and approvals. Success is not assured
     We sincerely appreciate your patronage and all the support you have given us over the years. It is with heavy hearts that we come to you now for your assistance in making this very difficult decision.

Sincerely,
The Board of Directors
The Hyde Park Cooperative Society, Inc.

NB: The following has been added since the letter was composed. It brings up-to-date financial information that has developed in the last few days:

At the public meeting on November 18th it was stated that there were discussions with the National Cooperative Bank about debtor in possession financing. Those discussions have now ended and the NCB has declined to provide such financing. There are presently no active discussions with other potential sources of debtor in possession financing. As stated at the meeting, without such financing, the Co-op cannot reorganize under Chapter 11 of the Bankruptcy Code. If the Co-Op fails to secure debtor in possession financing, the store would close in seven months, and it is impossible to project, at this time, what percentage on the dollar creditors might receive as payment. Under bankruptcy, all other debts must be satisfied before any money can be returned to shareholders, which we believe is highly unlikely.

The proponents of Proposal B have secured a Term Sheet from the National Cooperative Bank(NCB) for a Commercial loan that is contingent upon the successful resolution of two items: (a) negotiating a termination of lease from Certified Midwest Grocers for the 47th Street site and (b) negotiating repayment of the outstanding rent due for the 55th Street site which is presently $1.2 million in arrears .

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