Creamery to sell LA ice cream plant

Suspends interest and principal payments on notes and securities

Originally published in the "3-19-09" issue.

If you’re in the market for an ice cream plant in Los Angeles, the Humboldt Creamery has a deal for you.

Creamery board members voted on Friday to sell its LA facility to raise cash and acting CEO Len Mayer said he believes, “while we’re aiming to get the best value for the plant, we think it can be a strategic buy for the right party.”

The creamery acquired the plant from West Farm Foods, as well as another in Stockton, in 2004 as part of its major expansion plan announced during its 75th anniversary celebration. The LA plant has 50 employees and produces about 50 million ice cream novelties a year.

As far as the employees at the plant, Mayer said the creamery is actively trying to find a buyer “who will operate the plant intact” and keep the employees.

Meanwhile, the creamery has sent a letter to its note and preferred equity holders stating that interest and principal payments on the notes will be suspended until discussions with lenders conclude.

Payments will also not be made on equity securities, including the approximately $400,000 in Series B Securities sold earlier this year.

Mayer on Monday, froman airplane headed to Denver where he and Board President Jim Renner would meet with CoBank officials to explain the creamery’s current situation and future plans, told The Enterprise that Series A securities are the equity shares bought by Dairy Farmers of America, which owns 25 percent of Humboldt Creamery, LLC. According to the offering memorandum issued in December, as of June 30, 2008 there were 3,500 outstanding Series A units for a total of $4.3 million.

The Series B securities, recently pitched to potential investors, involves about seven people, he said.

Note holders are individuals, most related to dairy families—children, parents, friends — and payments overall are about $6,000 each month, he said.

As of December 31, 2007, according to the offering memorandum, Humboldt Creamery, LLC owed a total of $2.38 million under notes payable. Those notes are “unsecured and subordinated” to the more than $56 million owed to two banks. The interest rates of the notes range from 6.5 percent to 9 percent and mature on various dates from 2008 through 2012.

As to whether those that bought preferred shareswill see their money again, Mayer on Tuesday afternoon said, “much depends on what we can do in light of the fact that banks are secured creditors and equity holders are not.”

Mayer, in his letter to equity and note holders, wrote that “although we knowthe problem we have to overcome is significant, the good news is that other companies have overcome similar or greater challenges. We intend to do so as well.”

He continues, stating that the report the creamery has received from its financial consultant is that the creamery's business is “fundamentally viable.”

“Our customers remain loyal, our banks are working with us, our vendors, while concerned, are by and large supporting us,” he writes. “The creamery intends to continue to do whatever it takes to keep operating and strengthen and rebuild its business.”

Mayer concludes the letter by asking both the creamery's note and equity holders for their “patience and forbearance” and pledges to respond to any questions.

Ironically, the bank that Mayer met with on Tuesday morning and which it owes more than $25 million to, featured Humboldt Creamery in its 2007 report to stockholders.

Under a heading of “Strategic Relationships Division,” the bank touted the creamery’s 20 percent growth in sales over a tenyear period, “even though ice cream consumption in the U.S. has remained relatively flat.

“Most of this growth has come through the acquisition of the customer base and assets of Darigold and Arctic, businesses that were later converted into Humboldt Creamery brand ice cream,” states an article in the report. “These acquisitions, along with the ice cream plant and the coop’s entry into the organic market, weremade possible with CoBank financing.”

Meanwhile, the first of two payments for Februarymilk to producers was made on March 15, said Mayer, with a total of approximately $900,000 in checkswritten. The larger of the two February milk payments is due at the end of the month.

At the end of last month, creamery officials attempted to obtain a bridge loan to pay the 50 producers/members $2.7 million owed them for January milk. They were unable to get the loan and asked their members to defer $2 million.

Various legislative leaders phoned the creamery’s banks, advocating for the bridge loan, including Congressman Mike Thompson.

Last week Thompson’s local field representative Liz Murgia toldThe Enterprise that the congressman had discussed with the creamery the US Department of Agriculture Rural Ag Development Loan Guarantee Program.

Mayer confirmed discussions withUSDA, stating that the federal agency “ has also expressed enthusiasm in a guaranteed loan, so that is one additional option.”

Dane Henshall, public affairs specialist for the rural development section of the USDA agency in Washington,D.C., said she could neither confirmnor deny that any USDA contact had beenmade with a representative(s) fromthe Humboldt Creamery or from anyone else in Humboldt County representing the creamery's interests.

Henshall added that, until a formal application is submitted, "it would be pure speculation to comment on individual cases" that may ormay not eventually end up as formal requests or aid recipients.

She did say, however, that in 2008, $446 million was available for rural disaster funding out of a total budget of $999 million. 2009's total budget is just shy of $1.4 billion, but Henshall said that it's too early to know how, when, or where funds will eventually be allocated.

She stressed that funds from the rural development section of the USDA cover a broad spectrum of rural needs including, but not limited to, transportation, safety (such as fire fighting), and many other issues that do not directly address financial viability.

She did acknowledge the existence of the division's loan guarantee program, saying generally that "It's a cooperative program to help rural industries," but declined to comment on how much funding is currently available to the program.