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Knudsen Collapse: A Dream Gone Sour

June 22, 1987

LOS ANGELES (AP) _ The collapse of Knudsen Foods Inc., once the West’s largest dairy operator, is a study of a dream gone sour, of empire builders who got overly ambitious and couldn’t handle all the debt they took on to fund their acquisitions.

A federal bankruptcy judge last week sold off virtually the final assets of Knudsen - its dairies in Paragould, Ark., and Joplin, Mo., and its Globe Extracts food-flavorings subsidiary of Hauppage, N.Y. - for $12.65 million.

Essentially, it represented the end for Knudsen, which at its peak had operations in nine states, nearly $1 billion a year in sales and more than 5,000 employees.

Now only some equipment, a few shuttered facilities and minor real estate holdings remain.

The asset sales have raised a total of $137.35 million. That is far below the $422 million value the company put on its asssets when it filed last September for protection from its creditors under Chapter 11 of the federal bankruptcy law.

″This was a liquidation sale,″ attorney Martin Zohn, who represents the unsecured creditors committee, said Tuesday. ″The assets brought only a shadow of what they would have gotten if they had been a going concern.″

Based on the amount of money brought in, Zohn estimated, a banking group led by Citicorp and certain other secured creditors stands to be paid in full.

FD Partners, which sold San Francisco-based Foremost Dairies to Knudsen in 1985 for $50.1 million, will receive only about one-third of the $35 million to $40 million it is still owed, while unsecured creditors will get none of the $100 million due them, Zohn said.

But Zohn pledged to seek a reorganization plan under which secured creditors - voluntarily or otherwise - would yield some of their money to unsecured creditors.

Knudsen’s financial difficulties burst into the open in mid-July 1986. The company said it was stepping up its quiet efforts to find a buyer, was having severe cash-flow problems and might have to seek Chapter 11 protection from creditors.

Thereafter, the situation deteriorated rapidly.

Lenders slapped tight restrictions on available financing. Some suppliers stopped selling milk to the company, fearing they might never get paid. Some stores took their business to other dairies, not wanting to find themselves without a source of dairy products should Knudsen go under. Lawsuits were filed.

Last September, Knudsen filed for Chapter 11 bankruptcy protection.

A month later, its parent, Winn Enterprises, followed suit, but that came as no suprise. Besides Knudsen, Winn had no substantial holdings except Utah- based MountainWest Savings & Loan Association, and that was separated outside the bankruptcy filing.

The trip from obscurity to success to collapse was relatively brief for the three men who ran Winn - chairman and chief executive Ted Nelson, 38, and his twin half-brothers Dee and Lee Bangerter, 42, who served as co-chairmen and held management posts.

Using $1 million, the Fullerton, Calif.-based brothers in 1979 invested in Builders Investment Group, a bankrupt real estate investment trust. By 1983, they built that into $15 million in equity and purchased troubled MountainWest with an eye to turning it around.

The brothers’ troubles began when they decided to venture into the food industry, buying Los Angeles-based Knudsen for $74.8 million.

Two years later, it bought Foremost, retaining both labels but combining them under the Knudsen Foods umbrella to create the largest dairy in the West.

The combined dairies, with operations in California, Hawaii, Nevada, Arizona, Texas, Louisiana, Arkansas and Missouri as well as Globe Extracts in New York, dominated more than 25 percent of the industry in the region and were more than three times larger than their nearest competitor.

But as a result of the empire building, Winn was $266.2 million in debt by late 1985. The brothers were unable to keep up the debt payments as well as pay suppliers, and that’s when their dream foundered.

Although the Bangerters remain on the boards of Winn and Knudsen, all three brothers are gone from management, replaced by corporate crisis specialists brought in to oversee the dissolution of the empire.

The biggest chunk - the bulk of the California and Nevada operations that accounted for about half the company’s total business of nearly $1 billion a year - was sold to a Kraft Foods Inc. of Glenview, Ill., and Hughes Markets Inc. of El Monte, Calif., for $48 million.

All of the pieces of Knudsen have gone to domestic companies except for the Hawaiian operation, which was sold to Household Food Industrial Ltd. of Japan.

With the exception of a few small, unprofitable facilities, all of Knudsen’s operations remain open under new owners, and the Foremost and Knudsen labels remain in grocery dairy cases.

On some occasions, tentative sales agreements were overturned at the last minute when rival bidders showed up at bankruptcy court with slightly higher bids, providing a bit extra for creditors.

Earlier this month, nearly 1,000 dairy farmers who are owed $28.5 million filed suit against a banking group that kept Knudsen afloat after its problems became critical.

The suit claims the banks, led by New York-based Citicorp, misled the dairymen into believing that the situation wasn’t as dire as it seemed and that the diarymen would get paid for their milk.

The suit claims the banks only wanted to keep Knudsen operating long enough to cut their losses and knew from the beginning that Knudsen ″had evrey intention of not paying milk producers.″

End Adv Monday June 22

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