Venerable NLR Bakery Teeters; State Agency Works to Save Loan.

KOEHLER BAKERY Co., a longtime fixture in North Little Rock, may be on its last legs, and the potential business failure could affect a state agency that bailed it out early this year.

Founded in 1919 in North Little Rock and now on Warden Road in Sherwood, the bakery is the subject of numerous state and federal lawsuits for nonpayment of accounts and is burdened with liens from two state agencies. The business is reportedly for sale, which may be the last alternative to foreclosure by another state agency: the Arkansas Development Finance Authority.

The family-owned bakery sought and received a $2,185 million economic development loan from the ADFA, a decision questioned anew last week by two ADFA board members who doubted the wisdom of the loan in the first place.

In response to a request by Arkansas Business under the state Freedom of Information Act, the ADFA confirmed last week that Koehler hadn't made a monthly payment since July.

Aside from the loss of about 100 jobs, the failure of Koehler Bakery would deprive the North Little Rock area of a community institution and a manufacturer that ships products to retailers in a multistate area. It could also put a chink in the ADFA's Bond Guaranty Fund, affecting the agency's ability to do business, though ADFA officials said one such default would not seriously impact their mission.

Koehler's problems date to 1996, when the company invested about $800,000 in a state-of-the-art oven. The oven's electronic ignition and conveyor systems were designed to allow the company to take advantage of healthy sales increases by speeding production.

But Koehler decided to pay for the technology out of operating capital rather than long-term financing.

Company president Bob Koehler did not return calls for comment on this article, but he acknowledged in a March interview with Arkansas Business that the decision to pay for the oven with existing funds might have been a mistake.

Bad times followed, during which consolidation in the grocery industry drained the bakery of customers and sales, while expenses consumed what was left of Koehler's capital. The company accumulated mounting debt. By the time Mercantile Bank (now Firstar Bank) filed a $600,000 foreclosure lawsuit in May 1999, the company owed about $1.7 million altogether to five banks.

The Arkansas Development Finance Authority was created in 1985 from a predecessor body, the Arkansas Housing Development Agency, which promoted affordable housing through below-market-rate loans. Bill Clinton, the governor at the time, and the General Assembly expanded the agency's charge, renaming it and empowering ADFA to issue bonds and other debt instruments "to provide capital for qualified activities that enhance the quality of life for Arkansans."

The Koehler management, including Bob Koehler; his father, chairman Walter Koehler Jr.; and his brother, vice president Ralph Koehler, met with some skepticism when it approached ADFA for help.

ADFA vice president Gene Eagle, a veteran of 2l years in banking and industrial development, recommended proceeding with the loan at ADFA's Oct. 21, 1999, board meeting. Three of the 11 board members present for the meeting dissented, an unusually high negative vote for a staff-recommended loan.

The loan was approved on the condition that more information be provided. It received final approval at the board's Dec. 16 meeting, and the loan was consummated in late February 2000.

Reservations

Board members Kimberly Tallent Moore, Dick Barclay and Lloyd Lindsey opposed the measure at the October meeting. Moore, a Little Rock certified public accountant whose term then expired in January, declined to comment on her objections to the Koehler loan.

Barclay, automatically on the ADFA board by virtue of his position as director of the Arkansas Department of Finance and Administration, was attending his first meeting when the Koehler loan came up. A former Republican state representative from Rogers and a CPA, Barclay said he has had to adjust his attitude toward loans since joining the board.

"It has been a real experience for me to get used to serving on that board," said Barclay, who was contacted last week at a conference in Tampa, Fla. "It was really an adjustment for me to realize that the purpose of the ADFA board was to look at applications in a little bit different light. [Applicants] come there because they've been denied [financing elsewhere.]"

Barclay, a member of Gov. Mike Huckabee's administration since Huckabee took office, was still wearing his CPA hat at his first meeting, he said.

"I had some concerns initially because of some of the documents," he said. "There was some question as to the ability to repay."

Eventually, Barclay said, collateral and community feeling carried the day.

"There was sufficient collateral," he said, referring to the bakery plant in Sherwood. "As I recall, Koehler Bakery was very important to the Little Rock community."

Being a northwest Arkansas native, Barclay said, he "didn't have the same feeling" about Koehler as other board members and the ADFA staff.

Lindsey, a Camden CPA whose term extends into 2002, found little to recommend the loan proposal, he said last week.

"There were a number of things that bothered me about it," he said. "I felt like we didn't have adequate enough information to make a decision."

And Koehler wasn't the only private business b benefiting from the proposed state bailout, Lindsey said.

"I don't thin k ADFA's position should be to pull banks out of bad loans that they had made," he said.

A key to the eventual approval of the loan, Lindsey and others have said, was a promise of new management direction.

"As I recall, they had some new management coming in, and the old management was going to step back," Lindsey said. "Apparently, that didn't even work out."

The Vanishing CEO 

Lindsey was referring to the business plan that the Koehlers presented to the ADFA board in December, which included the hiring of an outside CEO. On the basis of that plan, Lindsey and Barclay voted to approve the loan, and. the loan was approved 8-2.

Dissenting were Moore and Freddie Mobley, president of First State Bank in Warren, who had missed the October meeting.

One month after the loan was approved, Koehler hired an industry veteran, Glenn Deakin, as CEO. But shortly after the loan was completed, in late February, Deakin was gone.

"It just wasn't working out," Bob Koehler told Arkansas Business at the time.

Deakin's whereabouts could not be ascertained last week. The phone at his Maumelle residence had been disconnected.

"You wonder sometime if somebody didn't fool us," Lindsey said.

Mobley, one of the dissenters, agreed with Lindsey that the loan appeared to benefit the banks who had made ill-advised loans to Koehler, but he said he mainly opposed the action on practical grounds.

"I just thought they were too far under to pull them out," Mobley said. "I just felt like that was a bad deal to start with."

Mobley also had doubts about the effectiveness of the promised CEO.

"That was one of my concerns going in. If they brought someone in, were they going to give him enough time to make the tough decisions to keep that thing' afloat?"

Back in Court

Aside from its arrears to the ADFA, Koehler's legal troubles are mounting once more. The Arkansas Employment Security Division, claiming that the company owed $2,655.92 in unemployment contributions, filed for a lien against .the business Oct. 12. Dick Barclay's Department of Finance and Administration brought a lawsuit in Pulaski County Circuit Court on June 16, asking for $13,484.38 it says the company owes.

Koehler also faces three lawsuits for nonpayment from different creditors, more than $28,000 altogether. The most recent suit was filed by Kerr Paper Supply Inc. of Little Rock on Oct.26, along with a federal complaint in U.S. District Court in' Little Rock by FFE Transportation Services Inc. of Dallas, claiming that the bakery Owes $7,089.70.

ADFA officials, while acknowledging the sorry state of the loan in light of Koehler's delinquency and financial problems, defended the decision to help the company.

The state is in no danger of losing $2.185 million, because ADFA has the option of foreclosing on the property, which was offered as collateral, according to ADFA president Rush Deacon.

"It's our mission to help Arkansas employers to retain and get new jobs," he said last week. "Well stretch a little further than a typical commercial bank will stretch. They had presented a business plan that would involve the reinvention and resurrection of the bakery business.

Though agreeing with Lloyd Lindsey that the loan had the effect of fixing bad loan decisions for Koehler's creditor banks, he argued that saving the venerable company was a worthy risk, given the agency's mission.

"It's a very healthy program," he said. "It has done a lot of good' and created thousands and thousands of jobs."

The agency's Bond Guaranty Fund, which has made. Koehler's last three loan payments, has grown from $6 million in 1985 to more than $20 million today, Deacon said.

Both Deacon and Eagle, who worked with Koehler to develop the loan and is now negotiating to, in Deacon's words, "help them realize their maximum value through a possible sale, said the company had tried to make good.

"They were attempting in good faith to make changes there," Deacon said.

"We addressed their business plan," Eagle said. "We looked at all aspects of their business plan. It was an effort to try to revitalize a company that was competing in a very tough industry.