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Growth Plans Turned Sour at Knudsen

April 13, 1986|DENISE GELLENE | Times Staff Writer

On a warm day in late January, executives from four large dairy cooperatives gathered for an unusual meeting at the austere Los Angeles headquarters of Knudsen Foods, the biggest dairy operation in the West.

Knudsen Chairman Ted D. Nelson said the company had some cash-flow problems, according to several people who attended the meeting. But Knudsen had no intention of filing for bankruptcy, he reportedly told the dairymen.

Nelson's comments confirmed rumors of financial difficulties that had already led 22 dairy farmers to stop supplying 67-year-old Knudsen, whose dairy products have been familiar to generations of Southern Californians.

What happened next came as a surprise, recalled Richard Mullard, manager of the Los Angeles Mutual Dairymen, a cooperative.

"He said Knudsen is keeping its dairy business in California, Arizona and Nevada, but dairy properties in other states are on the block," Mullard said.

Quietly Seeking Buyers

Others in the dairy industry now say that Knudsen may dispose of about one-third of its properties to help reduce a crushing $266.2-million debt.

Industry sources say Knudsen is quietly seeking a buyer for dairy properties in Missouri, Arkansas, Louisiana, Hawaii and Texas that it acquired when it purchased archrival Foremost Dairies last June. Knudsen also plans to sell its Globe Extracts flavorings business and its Hoagy's Corner convenience store chain in the Pacific Northwest, the sources say.

For his part, Nelson is reluctant to publicly identify which assets are for sale. "Is everything we own outside California for sale? No. Do we have a for sale sign on some of it? Yes," he said in an interview.

Any sale of these businesses would be a setback for Nelson and his two older half-brothers, who together control Winn Enterprises, a publicly traded trust that owns Knudsen.

The brothers, millionaires who made fortunes in health care and real estate, were determined to make Knudsen, which they purchased for $74.8 million in 1983, the first national dairy company.

A more philosophical Nelson now says: "Time has a way of changing our perspectives."

Winn Suffered Loss

The gloomy Jan. 27 meeting with the dairymen, one of several held by Knudsen executives with customers and suppliers, came just six months after Knudsen had nearly tripled its size by acquiring San Francisco-based Foremost for $50.1 million.

Winn Enterprises had borrowed heavily to buy both Knudsen and Foremost, and it was now sorely pressed to make payments to banks and other creditors. Those payments included $16.5 million in interest charges for the third fiscal quarter alone, according to Winn's report for the quarter ended Dec. 31, 1985.

That report also says that Winn lost $3.27 million in the first nine months of its fiscal year that ended March 31, compared to a profit of $6.13 million a year before. Sales fell to $951.9 million from $962.3 million in the nine-month period.

The quarterly report acknowledges that since at least September, Knudsen has been in violation of its loan agreements with its principal bank creditor, Citicorp Industrial Credit Bank. Nelson, in the interview, said efforts to refinance its debt have so far proved unsuccessful. Knudsen is also several months behind on payments due the former owners of Foremost.

Knudsen needed cash so badly last winter that one of the brothers--whom sources identify as Ted Nelson--personally guaranteed a portion of a new $10-million credit line. Nelson said he is trying to renew that loan, which expired March 17.

Nonetheless, the dairymen say they left the meeting last January somewhat relieved. A leaner Knudsen, they reasoned, would have no problem paying dairy farmers for raw milk.

Donald Olson, manager of Hi-Grade Milk Producers Assn. in Chino, wrote a letter to the members of his cooperative indicating that Knudsen's problems were behind them. Mullard was so cheered that he purchased Winn Enterprises stock, which is traded on the American Stock Exchange.

"I felt better. I think we all did," said Ruby Uliana, manager of Cal-Dari, a milk cooperative that supplies Knudsen in Modesto.

Despite the reassurance, however, Knudsen's problems still seem far from over. Company officials acknowledge that a variety of factors, from backlash against its elimination of the Foremost brand name in Northern California to late deliveries of milk, caused the combined operations to lose $35 million of business since the merger.

Distributors Balk

Knudsen's problems were compounded after a number of independent milk distributors near Modesto quit handling Knudsen products last winter. Three distributors told The Times that they took the action after suffering thousands of dollars in losses on milk that turned sour too soon.

Meanwhile, Knudsen's giant milk-processing plant at 231 E. 23rd St. in Los Angeles failed a government sanitary inspection in January, according to a state official. The failure effectively barred Knudsen from shipping products out of state from that plant.

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