CEATECH USA, Inc., owner of a shrimp farm in west Kaua`i, seemed to have it all – a new pond design, disease-free broodstock, a super-efficient waste system, millions in investments, and a large stretch of sunny, flat, land near the sea. All this, combined with and a hungry market for high-quality shrimp, should have been a recipe for success.
But shortages of land and cash, coupled with miscalculated market projections, have led CEATECH into a big black hole of debt within the last few years.
“Since its inception in January 1995, the Company has sustained cumulative net losses of approximately $7.4 million,” states CEATECH’s most recent report to the Securities and Exchange Commission. The company has been kept afloat with funds from stockholders and a $3 million loan from the Bank of America. Although CEATECH says it can produce 1.6 million pounds of shrimp a year in its 40 one-acre ponds, this is not a “sufficient quantity of shrimp to generate positive cash flow,” the SEC report states. “For the year ended January 31, 2002, the Company incurred a net loss of $1,645,280.”
More cash, CEATECH hopes, will come soon. Last October, the state Board of Agriculture approved a $2.5 million loan to CEATECH, which at the time, it seemed like a victory for the company.
But the approval – bitter gall for the chief loan officer with the state Department of Agriculture (DOA), who had recommended denial – has not yet been translated into funds for CEATECH. Seven months later, the company still awaits disbursement of the first penny of the promised loan. And even if the full $2.5 million is received, CEATECH’s problems aren’t over: before the company can begin building the new ponds it says it needs (and for whose construction the loan is intended), it must first obtain a lease from the state for up to 1,500 acres of the former sugar land that lies just across Kaumuali`i Highway from the 136 acres CEATECH occupies in the Kekaha Agriculture Park.
The company is also waiting on a $2.3 million loan for operating capital from Central Pacific Bank (CPB), which was to have been guaranteed by the U.S. Department of Agriculture. In the meantime, CEATECH has payments of $46,210 a month to make on a $3 million loan from the Bank of America. Like the promised CPB loan, this one, too, is backed by the USDA.
CEATECH told the SEC, the company is “pursuing plans for additional financing through a private equity offering.”
One has to ask, how much longer can CEATECH live on credit? More to the point, can it ever live without it?
Doreen Shishido, the state’s administrator of agricultural loan funds, doesn’t think it can, and if she has her way, CEATECH will never receive a dime of state money. Recently the Legislature took $4.8 million from her program to help balance the budget, which she says has left her with practically nothing to give farmers. This makes her division’s loan to CEATECH even more outrageous than before, she says. As she has stated time and again in letters to state DOA administrator James Nakatani and to the local press, CEATECH is a sinking ship and has no business using tax dollars merely to postpone its inevitable death.
Yet CEATECH has managed to convince her higher-ups that it will succeed if given the chance. A local food industry veteran accedes that the market for high quality shrimp is large enough to allow CEATECH to succeed. But, he adds, the historical record of unsuccessful forays into the high-end shrimp market in Hawai`i cannot be ignored, and that record is “worse than awful.”
Whether CEATECH ultimately succeeds or fails, the public has already spent millions of dollars — from federal research funds to subsidized, low-interest loans – to help keep the company afloat.
Bad Bets, Bad Debts
In 2001, the Legislature created a $5 million emergency low-interest loan fund to help agriculture and aquaculture in the Kekaha area. The area had been economically devastated by the closure in February 2001 of the Kekaha sugar plantation.
In attempting to make its case for a loan that would consume all but $500,000 of the fund, CEATECH argued that putting the money in its hands would be a better bet for taxpayers than parking it with Gay & Robinson, which also was seeking a large share of the available funds.
“If sugar interests are interested in this financing,” CEATECH board chairman Gordon Mau wrote to Governor Cayetano last March, “we wonder why the state would further subsidize an industry which despite federal subsidies has difficulty competing in the marketplace.”
But in pointing out the splinter in sugar’s eye — its inability to compete in the marketplace and its dependence on government subsidies – Mau ignored the log in CEATECH’s: CEATECH (and practically the entire aquaculture industry in Hawai`i) is itself the beneficiary of substantial government subsidies. It uses technology whose development has been underwritten by many millions of dollars in government research grants. And despite substantial public and private investment, CEATECH continues to struggle.
The company started in 1995, when it was incorporated in Colorado under the name Global Access Corp, a “capital market vehicle.” In 1996, after its name changed to Controlled Environment Aquaculture Technology, the company began working toward developing an intensive shrimp farm in Hawai`i. The company has been publicly traded since August 1997.
Also in 1997, it acquired Sunkiss Shrimp Co., a Kekaha company that had worked with the Oceanic Institute under the USDA’s shrimp program. Armed with technology developed by the Oceanic Institute and proven successful by Sunkiss, CEATECH planned to build 104 ponds in Kekaha, where it would grow cleaner, healthier shrimp, would avoid much of the environmental fouling that has plagued the industry worldwide, and would succeed where others in Hawai`i had failed.
To date, the only goal the company has unequivocally met has been the production of superior shrimp. In 2000, CEATECH shrimp won a “Best in Show” culinary award from the American Tasting Institute.
But when it comes to finances, the company still seems poised to join the ranks of Hawai`i’s failed shrimp ventures. Most of the failures stem from shrimp farmers employing a third-world technology – large rectangular earthen ponds – to grow a product that could not compete economically with that grown in the third world and which allowed the spread of diseases that wiped out the shrimp out or stunted their growth. CEATECH has its own set of reasons for not achieving financial success.
A Rocky Road
In 1997, with $3.76 million raised from shareholders and a USDA-guaranteed Bank of America loan of $3 million, CEATECH began its first phase of construction. Although 52 ponds were to be built in this phase, at an anticipated cost of $4.5 million, only 20 ponds were completed over the next two years.
By 1999, CEATECH had begun to sell its shrimp. Almost immediately, company executives realized they had to change their marketing strategy. Initially, the company had planned to sell whole, chilled (not frozen) shrimp to a large, national market. But whole, fresh shrimp have a short shelf life – shorter than the time required to reach large national markets. In addition, although Hawai`i consumers will readily purchase head-on shrimp, the mainland market for this product is limited.
Environment Hawai`i asked CEATECH vice president Paul Bienfang how such a major marketing blunder could have occurred. His email response: “Market assumptions concerning volumes of various product forms proved inaccurate.”
To make a marketable product, then, CEATECH had to build a plant where shrimp could be processed and frozen. It found a state-owned site in nearby Hanapepe, raised $1 million in convertible debentures to finance construction, and completed the facility in May 2001. (Convertible debentures are loans that can be converted to equity, or stock.)
The processing plant was designed to handle the yield of more than 100 ponds, estimated to be some 4 million pounds per year. To optimize plant capacity, then, CEATECH said it needed to build at least 20 more ponds.
Even as the new ponds were being built, shrimp growth rates and pond yields from existing ponds were lower than expected; by April 2001, the company had lost $6.3 million.
The company believed more ponds would stop the financial drain, but did not have the money to build them. Around this time, Amfac/JMB was leaving Kekaha, which in turn, left a number of other farm operations in need of financial assistance, as well. With the existing balances in the state agricultural loan revolving fund not coming close to meeting their needs, the Legislature went to work. With strong lobbying from Sen. Jonathan Chun of Kaua`i, the Legislature set up the $5 million low-interest emergency agricultural loan program for Kaua`i. It was at this point that CEATECH requested a $4.5 million loan from the state DOA and a loan of $5.33 million from Central Pacific Bank. Together, the loans would allow construction of 68 more ponds.
Legally, the Legislature may not designate who should benefit from the program, but Chun made little secret of the fact that he intended that most, if not all, of the funds would go to CEATECH.
A Loan Request
Kevin Yokoyama and Stan Kawamura are loan officers for the state DOA’s Agricultural Loan Division. On July 20, 2001, they recommended to Shishido, their boss, that she deny CEATECH’s loan application. They were concerned that CEATECH seemed to have obtained significantly more capital than it said it needed, yet had been somehow unable to build the required facilities. “Through 4/30/01, it has been funded by approximately $9 million in equity, $1.3 million in convertible debentures (not including an additional $3.6 million committed) and a $3 million USDA guaranteed loan. This total of $13.3 million is substantially more than the original budget of $4.5 million that included the construction of 52 growout ponds,” they wrote.
“With the latest quarter results showing lower sales and greater losses over the same period for the prior year, there is no evidence that the company can successfully implement its current plan.” Shishido later endorsed her staff’s recommendation that CEATECH’s request for a $4.5 million be denied.
Shishido’s boss, James Nakatani – head of the Department of Agriculture – was not pleased with her recommendation and instructed her to find a way to give CEATECH a loan at a reduced amount of between $2.5 and $3 million. Still, Shishido could not justify it. “The lower loan scenario would actually increase the company’s cash needs as the company would have to borrow additional funds from Central Pacific Bank at a higher interest rate,” she wrote in an October 23 letter to Nakatani.
After reviewing the company’s financial information, she said, she felt that CEATECH had no proven ability to repay the loan, was financially unstable, and lacked a secondary payment source or collateral, she says.
But Nakatani would not be deterred.
When CEATECH’s loan application was considered at an October 26 meeting of the Board of Agriculture held on Kaua`i, Nakatani, breaking with precedent, asked Denis Kam to make the presentation to the board on CEATECH’s loan application. Kam, now retired, used to be senior vice president of credit administration with the Bank of Hawai`i and sits on the state Agribusiness Development Corporation’s board of directors. Shishido, who customarily presents to the Board of Agriculture the department’s recommendations regarding loans, says she was prepared to explain her recommendation of denial to the board, but that Nakatani refused her repeated requests to do so.
In documents supporting her position, Shishido noted that CEATECH’s projected cash flows were not to be trusted. In January 1997, she pointed out, the company budgeted $4.5 million to build 52 ponds. By 2001, the company had managed to raise $18 million, yet had built just 20 ponds. In addition, while CEATECH chairman Mau had indicated to the DOA that the company had sales of $1.54 million for the eight months ending last September, Shishido noted that that figure, too, was about 25 percent below revenues projected as recently as July 2001.
Kam glossed over these facts in his presentation to the board by saying that Central Pacific Bank and the USDA had reviewed and were satisfied with CEATECH’s projections, and that both had “committed to their portion of the requested loan based on projections.” The board voted to approve the loan. The board also gave its BOA chair, Nakatani, the authority to negotiate the loan’s conditions, a job usually done by the DOA loan division.
Shishido said she later found out that several of Kam’s statements to the board were not true. After the board meeting, she spoke with a USDA official, she said, who told her his department had not reviewed CEATECH’s projections and had not even received a loan package.
Shishido is meticulous in every way — from her manicured nails, to her crisp magenta suit, to her chic Sharon Stone haircut – and takes pride in her reputation for being so. To her, no banker in his right mind could crunch CEATECH’s numbers and approve a loan. So when her boss and the board he chairs brushed aside her determination that CEATECH was not worthy of a state loan, she was blown away.
Shishido has worked for the state for 26 years and says she has never seen anything like what happened with CEATECH. (Before going to work for the state Department of Agriculture’s Loan Program in 1994, Shishido supervised loans and grants for the Department of Business, Economic Development and Tourism.)
So why did the BOA do it?
Kam told Environment Hawai`i that despite the company’s dismal financial picture, he truly believes CEATECH has a chance to make it. In his work with the Agribusiness Development Corporation, he is acutely aware of CEATECH’s influence in the larger Kekaha area. Although documents refer to him as a consultant to the DOA, Kam says he never had a contract with the DOA and any work he did – which included drawing up loan conditions for Nakatani’s approval – was pro bono. Nakatani just asked him to make the presentation, he said.
Despite Shishido’s concerns, Kam insists the state money is not a bail-out for CEATECH, which he says can and should repay any loan it receives. “If it were a grant, they would take it and not even say thank you,” he says.
“We’re trying to save jobs,” Kam explains of the loan to CEATECH. Recent figures show the company has 66 employees, 50 full-time. A closer look at CEATECH’s role in Kekaha, however, reveals there are more than jobs at stake.
Land Grab
Looking at the CEATECH’s financial picture, Shishido believes it is a foregone conclusion that the company will go down. And when it does, she’ll be able to say, “I told you so.” But the reasons why the state bent over backwards to help CEATECH out are outside her office on Young Street and go beyond the company’s ability to provide the world with good shrimp.
In December, Nakatani defended the Board of Agriculture’s approval of the CEATECH loan in a letter to the editor published in the Honolulu Star-Bulletin. “If we are to encourage the diversification of agriculture and aquaculture, the state needs to take risks with some new enterprises.” What’s more, if CEATECH fails, it would be very bad for the Department of Agriculture, and not just because it would mean losing $2.5 million.
Eighty-six percent of the land in the DOA’s Kekaha agricultural park – 135 of 156 acres – is leased to CEATECH. Organic farmers David Dickinson and Thomas Crocker are the only other tenants, leasing 11 and 10 acres, respectively.
According to its most recent SEC filing, CEATECH plans to use $1.3 million of its proposed $2.3 million CPB loan “to fund the construction of eight additional one-acre grow out ponds and related infrastructure on the two remaining parcels of land in the Kekaha Agriculture Park not yet under lease to the Company.”
This is news to Crocker. “As far as I know, both myself and David Dickinson are still tenants there. Both of us are growing neem.”
While CEATECH has its eyes on the last 21 acres in the ag park, its ultimate goal is to land a piece of the mother lode across the street — several thousand acres of state land abandoned by the Kekaha Sugar Company.
As the primary tenant in the ag park, CEATECH has a significant role in planning the future use of those lands. What’s more, the company’s demise would rattle the fragile management paradigm that has been forged among agricultural tenants and government agencies and in which CEATECH plays a central role.
For more than a century, nearly all the thousands of acres of prime agricultural land in Kekaha was farmed by Kekaha Sugar Company, which in later years became a subsidiary of Amfac/JMB. In February 2001, Amfac pulled out of the area, leaving a juggernaut of an irrigation system to deteriorate. It was already in bad shape, but because Kekaha is a natural floodplain, the system, with its lacework of canals, had to be kept in good repair to protect future agricultural uses against flooding, to say nothing of the Navy’s nearby Pacific Missile Range Facility and residents of Kekaha town.
By the time Amfac had left for good, the Agribusiness Development Corporation had stepped in to help the areas’ remaining tenants (seed corn companies Syngenta Seeds and Pioneer-Hi Bred, Gay & Robinson, CEATECH and farmer Wally Johnson) keep the system going. To maintain and repair the system, last April the ADC contracted with CEATECH, a key employee of which, Landis Ignacio, used to work for the Kekaha plantation and knows the system well.
Without CEATECH, who would collect money from users and keep the system in shape? The ADC, with its Honolulu-based staff of three, already has its hands full running the Waiahole Ditch system on O`ahu. And neither of the two landlords – the state Department of Agriculture and the Department of Land and Natural Resources – has the resources to take on the job. The other major ag tenant, Gay & Robinson, bid for the contract, but could only commit to it for a few months. The ADC, in the end, had no choice but to select CEATECH for the contract.
On April 22, the ADC renewed another contract it has with CEATECH – this one to take care of the Kekaha Irrigation System’s discharge and NPDES permit. The ADC has set aside up to $24,000 to pay CEATECH for water monitoring and to open the drainage canals during floods.
The Future
Despite CEATECH’s strategic position and the Board of Agriculture’s approval of its loan request, Shishido may yet prevail. The loan commitment has expired, she says. Normally, loans are disbursed 30 to 45 days after they are approved, although CEATECH’s first disbursement was supposed to have been in March. But because so much time has lapsed since the approval, the DOA’s loan office needs to look at the company’s financial picture again to make sure there has been “no material adverse change as determined by the DOA since the date of the application, in the financial or any other condition or business operation,” according to one of the conditions of the loan.
On February 2, Shishido’s office asked CEATECH for documents to satisfy that condition and others. Among other things, CEATECH needs to show that its Central Pacific Bank loan conditions can be or have been met. Also, CEATECH must provide the DOA with a construction schedule and a detailed list of sources of funds and their applications.
Shishido told Environment Hawai`i last month that CEATECH had not yet responded to the letter. She added that before CEATECH receives the CPB loan, the Bank of America, as the primary lender, must give its consent.
That may be a problem for CEATECH. Under its loan with BOA, CEATECH must maintain a tangible net worth of $2 million and must maintain a ratio of total “senior liabilities” to total net worth of not greater than 1.7 to 1 – conditions that CEATECH probably does not now meet.
In its SEC report, however, CEATECH notes, “The methodology for computing the ratio of total senior liabilities to total net worth was not specified in the Company’s loan agreement with Bank of America. In addition, the terms of the related United States Department of Agriculture guarantee provide for a ratio that is based on total liabilities rather than just senior liabilities.
“As a consequence, the Company acknowledges that it might be in technical noncompliance with the terms of the loan agreement as of January 31, 2002É. Management of the Company is attempting to change or clarify the terms of the agreements with Bank of America and the United States Department of Agriculture to assure compliance with the loan terms and to render moot any existing issues of noncompliance.”
With regard to the expired commitments, the report states, “The Company is currently addressing these issues in order to restore these loan commitments.”
“We want to be sure [CPB’s] commitment still stands,” Shishido says, as well as the USDA’s commitment to guarantee the CPB loan. Those two elements need to be in place, she says. Without them, she adds, “disbursement [of the state loan] will not occur any time soon.”
Even if CEATECH acquires the funds it needs, that is no guarantee of long-term success. The company desperately needs a lease on the abandoned Kekaha Sugar land, and this may be a long time coming.
Last year, the Board of Land and Natural Resources approved issuing a master lease to the ADC for several thousand acres of the land. A hand-out at the ADC’s April meeting showed that CEATECH plans to reserve 1,500 acres in this area, in hopes of using it to bring the total number of ponds it has to 104.
Why would CEATECH need this much land? To date, it has managed to fit 40 ponds onto roughly 140 acres, with plans to squeeze eight more onto the 21 acres currently occupied by other farmers. With the average one-acre pond requiring a total of 3.25 acres of land, theoretically, the company would not need more than 224 acres for the additional 64 ponds it says it needs to meet its production goals. Why, then, should it have dibs on 1,500 acres?
When the question was posed to vice president Bienfang, he responded: “The adjacent acreage is adequate to permit all reasonable future expansion of activities within the area, including those that might include expansions of farming, hatchery, processing, or water retention for advanced discharge processing. However, there is certainly no intent that the acreage would be filled with ponds. Prudence dictates that the amount of land also allows for establishing buffers (i.e., fallow areas) around the farm and between farming segments to provide a heightened degree of isolation from adjacent and/or internal activities which might be inconsistent within the Company’s operations and/or animal-health-management procedures, and thereby impact sustainability.”
When or whether CEATECH gets its land is up in the air. The ADC is still waiting for the master lease with the Department of Land and Natural Resources to be completed. Without lease terms to work from, the cooperative that CEATECH belongs to has had difficulty completing its own bylaws. Even after the ADC gets its lease, working out subleases to the cooperative members will take time.
CEATECH lost $1.6 million last year and $2 million the year before, and has neither the land nor the money it says it needs to grow. As of mid-May, the most recent financial information Shishido had seen from CEATECH was the SEC report for the fiscal year ending January 31, 2002. The grim picture was expected, she says, adding that it looks worse than the earlier ones she read when first reviewing the company’s fitness for the loan. She still needs to information on what’s happened since January 31, 2002. “A lot of things can happen in three months.”
For more information, read Environment Hawai`i’s first story on CEATECH at [url=http://www.planet-hawaii.com/environment/698cov.htm]www.planet-hawaii.com/environment/698cov.htm[/url] or visit the company’s website, [url=http://www.ceatech.com]www.ceatech.com[/url]
— Teresa Dawson
Volume 12, Number 12 June 2002