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When should the state step in?

In the wake of Yarnell's abrupt closure, questions about the state's role in propping the ice cream maker up

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The aftertaste of the failure of Yarnell's Premium Ice Cream has been as bitter as the abrupt closure of the 79-year-old Searcy business June 30, which put more than 200 people out of work.

While hope continues that a buyer might be found for company assets to resume ice cream production, discussions recently have been focused more on the millions spent by the state to prop Yarnell's up. It closed with more than $3.5 million in state loans outstanding — from an Arkansas Development Finance Authority bond issue and loans from the Arkansas Industrial Development Commission. Those loans are now in default.

In an ironic twist, a number of conservative business people — the sort who've been detractors of the Obama administration's stimulus efforts — have risen to the defense of the state for putting money it may now lose into Yarnell's to preserve jobs.

The reflexive defense of the state's effort overlooked, however, the state's repeated willingness to step up as a lender of last resort to Yarnell's when no other private lender was willing to take that risk. Using state subsidies to create new jobs is one thing, using state money to support dying businesses is another.

ADFA, for example, floated bonds for Yarnell's in 2000 when First Commercial Bank didn't want to renew a line of credit. Then, when a balloon payment came due in 2006, ADFA issued new bonds. Again, it justified the action as necessary to preserve jobs.

But by then ADFA knew Yarnell's was troubled. Blue Bell Ice Cream, which arrived in Arkansas in 1997, had taken a big chunk of the ice cream market away from Yarnell's. And fitness concerns have been driving down ice cream demand nationwide, even as the cost of cream and sugar and fuel for delivery trucks has rocketed upward.

ADFA also knew that Yarnell's had reported a negative net worth in 2001 and had lost important production of national label brands for a time in 2004. It had discussed asking suspension of loan payments on a couple of occasions.

AEDC, too, was aware of Yarnell's difficult position. The company had repaid barely $50,000 on a $1.5 million loan. It hadn't paid any principal on that loan for a year.

The family-owned company may have other financial concerns — private lines of credit, for example. But company officials have not made themselves available for interviews and have limited remarks to a prepared statement issued after the 2 a.m. June 30 closing of operations.

"This has been an extremely tough year for the ice cream industry in general, and particularly to regional, independent manufacturers like ourselves," said Christina Yarnell, chief executive officer of Yarnell's. "We have examined many possible avenues to keep the company afloat — actively marketing the company to investors and strategic buyers — the majority of whom are undergoing the same financial distress we are. However, we've been unable to obtain additional financing from our lenders or locate a buyer, and have come to the difficult decision that the appropriate course of action is to shut our doors."

Late last week, ADFA declined to open all documents on the Yarnell loans because it said marketing efforts were ongoing and disclosure of private details could damage the effort competitively. AEDC said the same.

Bryan Scoggins, director of business finance at AEDC, said he had talked within the last week with representatives of potential buyers of the Yarnell's assets. It is too early to say if a deal is cooking. Scoggins said, "We want to be sure they are solid people with a reasonable chance of making things work."

Some 230 workers hope so, about 150 of them workers in the Searcy plant. They were thrown out of work without warning or severance, except for a handful kept on for shut-down operations through August.

Lawyers are likely to stay busy. There's a hazy line of priority on which state agency has first claim on property and equipment assets to be sold to satisfy the state's debt. At one time, ADFA valued its $1.9 million loan at 73 percent of the value of assets, but the closure has forced a drastic write-down in value. Rogers and Albert Yarnell guaranteed the remainder of the ADFA loan. The AEDC loan is only partially secured by property. ADFA's potential loss will come from a bond guaranty fund, not direct taxpayer support, but it's all part of the valuation of a public agency established to grow Arkansas's economy.

Whatever the eventual loss, an editorial in Arkansas Business called it a "no-brainer" for the state to invest in keeping a troubled business open to preserve jobs. In this market, you have to bet there are many troubled businesses that would be happy to have a low-cost state banker to preserve its jobs. The question unanswered still in the Yarnell's case is what makes one company more deserving than others.

ADFA's Gene Eagle could cite only three instances in which the agency had stepped in with financing for job preservation, as opposed to expansion — Yarnell's, Riverside Furniture and a catfish processing plant critical to continuing processing for state catfish farmers.

Yarnell's brand-name familiarity undoubtedly helped its case for state help. Market conditions didn't, particularly that brawny Texas competitor. A grocer who introduced Yarnell's into his Southeast Arkansas grocery in the 1960s, pushing aside Borden's, said Blue Bell now dominated his store sales. "My kids won't eat anything else," he said.

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