Creamery’s debt load “relatively high”

Sales pitch for preferred securities states “company believes it will meet debt service obligations”

Originally published in the "3-12-09" issue.

As Humboldt Creamery officials continued meeting with banks this week, negotiating new terms and pitching a business plan to stave off worst-case scenarios, the company’s offering memorandum issued in December of 2008 shows that the company believed it could pay off its loans.

Now, however, it may be asking banks to forgive some of that debt so that the 80-year-old creamery can keep operating.

The memorandum given to “qualified” prospective investors states that Humboldt Creamery Association, LLC owes almost $56 million to CoBank and American AgCredit — both banks operating under the Farm Credit System — a government sponsored enterprise, established in 1916 in an effort to make sure American agriculture could find dependable credit at competitive rates.

The $31 million line of credit and $25 million loan were established in 2005 when the company bought ice cream plants in Stockton and Los Angeles and upgraded its Fernbridge plant. Interest rates on both loans are variable and the line of credit is set to expire in 11 months with a payment of $32 million due. American AgCredit declined to comment on the current creamery situation as did CoBank.

The memorandum also shows that as of December 31, 2007, the company owed a total of $2.4 million to creamery association members — over $3 million as of June 30, 2008 — with notes maturing from 2008 to 2012. The notes are “unsecured and subordinated” to the bank loans.

The creamery memorandum, aimed at soliciting $5 million in investors willing to purchase Series B Preferred Equity Securities, called the company’s ratio of debt to earnings “relatively high.”

There’s doubt now, however, that the creamery can support that debt service with the sudden resignation and departure of its CEO almost three weeks ago. Rich Ghilarducci warned of possible financial “irregularities” and recommend that the sale of the securities be halted. Creamery officials have stated that $400,000 in securities had been sold prior to Ghilarducci’s departure.

Creamery officials also say they believe the association and its recently formed limited liability company are the subjects of alleged fraud by Ghilarducci. No charges have been filed against the former CEO who has relocated to Scottsdale, AZ. Multiple calls by The Enterprise to his lawyer have not been returned.

Late last week, creamery officials said they would release a much anticipated figure on how much money they believe the creamery’s account balance sheet was off. That number, however, has yet to be made public.

Interim CEO Len Mayer told The Enterprise on Monday that the number is “material, significant and large enough to threaten the creamery without the banks’ help.

“When final numbers are vetted and we have a super high degree of confidence in them, I believe the board will release that number,” Mayer said in a statement, adding that the board may release a reorganization plan this week.

Cash flow obviously is in short supply, what with the creamery members having to defer $2 million of a $2.7 million payment due themat the beginning of this month.

The offering memorandumsaid that the company planned to invest approximately $3.7 million in new and upgraded equipment and facilities over the next two years.

It also warned that the loss of “key executives and seniormanagement” could have “an adverse effect on the company’s business and profitability.”

Under the “risks relating to business,” the memorandum refers to a low profit margin.

“Historically, the industry’s and the company’s overall gross margin from product sales has been around 10 percent, making the company’s cash flow and net income vulnerable to evenmoderate price erosion and cost increases,” stated the memorandum. “The company’s strategy is to increase sales of higher margin products relative to lower margin products. There can be no assurance that the company will successfully implement this strategy or that existing productmargins will not decline . . . “

The unaudited balance sheet as of June 30, 2008 showed the company had assets of almost $85 million, which included inventories worth $36million; properties and equipment worth $26 million and accounts receivables worth $19 million.

Mayer has said that financial audits have shown problems in all three of those areas.

The company’s balance sheet for the second half of 2008 was not included in the prospectus. In January of 2009 the price producers are paid for their milk, set by the government, suffered the biggest collapse in more than 50 years. (See February 5th Enterprise.)