CoElco Being Investigated by Regulators : SEC, NASD Question Acquisitions Paid For Through Stock Swaps

High-flying CoElco Ltd., the Fountain Valley company that grew from an empty shell into an acquisition-fat conglomerate in the past year, has been grounded by twin investigations by the Securities and Exchange Commission and the National Assn. of Securities Dealers.

The inquiries are the first public showdown for the rapid-growth policies of company Chief Executive David Sterns, whose career has been linked to several troubled Southland companies, and could bring his takeover juggernaut to an abrupt end.

Sterns, 49, who acquired a controlling interest in CoElco one year ago when it had no assets or earnings, acknowledged last week that the SEC action has thrown a crimp in his plans: Because of questions raised about the firm’s assets, he said, lenders have hesitated to do business with CoElco and he had to talk the firm’s insurance company out of canceling its policy.

Perhaps more important, Sterns said the company will refrain from issuing any more common shares while the investigations are pending. Without having shares to swap, five of six pending acquisitions will likely be put on hold, the company said.

Until both watchdog groups complete their inquiries, CoElco’s stock will not be quoted on the NASD’s automated national market, though it can still be traded among brokers in the private over-the-counter market. Brokers still watching the stock said its market price has fallen 75% since a temporary SEC-imposed trading suspension was announced two weeks ago, and the volume trading has slowed to a trickle.

The tumbling stock price and SEC investigation are only Sterns’ latest headaches. He also faces having to defend CoElco in a civil suit brought by one of its bankers, and he is hounded by lingering troubles of Resources International Ltd., the last Southland company he founded, which has fallen into financial ruin amid a flurry of lawsuits by angry creditors and investors.

Although Sterns has enemies who contend that he is a wheeler-dealer responsible for the loss of millions of dollars in investors’ funds, he also has supporters who say that he is a knowledgeable businessman who has suffered un

justly from his association with failing firms.

Neither SEC nor NASD officials would discuss the details of their CoElco inquiries, but both agencies said they are generally concerned over the accuracy of financial information being disseminated by the company. More specifically, both said they are focusing their inquiries on the value of the company’s assets.

Although an SEC 10-day trading suspension was lifted at midnight May 2, the Securities and Exchange Commission’s “informal private investigation” will continue, according to the company’s attorney.

Until that suspension, CoElco stock benefited from active trading. Two and a half weeks ago its stock sold for nearly 50 cents a share, up from only 1 cent a share when the company started offering its shares on the open market last July. But currently the stock is valued at 12 cents a share, said Jerry Rosen, a stock trader with Norbay Securities, a market maker and investment banker in New York.

Sterns, who says he is a certified public accountant, said he believes CoElco is at fault only for tardiness in meeting SEC deadlines to provide financial data. He said CoElco was late in complying with an SEC order to change its method of accounting for the company’s acquisition last July of Western States Plywood Corp. of Santa Fe Springs. He said the SEC required CoElco’s accounting to show that Western States now has voting control of CoElco.

11 Acquisitions

Western States is just one of 11 acquisitions that CoElco has completed over the last year. The acquired companies, scattered over Orange and Los Angeles counties, range from a manufacturer of building materials and components used in the assembly of recreational vehicles to a producer of laser entertainment.

The acquisitions were financed mostly by stock swaps and allowed CoElco to build its assets from zero to $13.2 million as of Feb 28.

Its earnings haven’t kept the same pace.

Sterns said that for the third fiscal quarter ended Feb. 28, CoElco would report net income of $25,000. A year earlier the company was inactive, but in response to an SEC request, CoElco restated its prior results to reflect the operations of Western States Plywood. On that basis, CoElco had a $45,000 loss in last year’s third quarter. Revenues for the quarter were $4.9 million, compared with $1.7 million a year earlier.

For the fiscal nine months, Sterns said, CoElco would report net income of $101,000 after accounting for a $557,000 loss from discontinued operations. A year earlier, restated net income was $89,000. Revenues increased to $9.4 million from $5.3 million the prior year.

The low earnings and burgeoning assets of CoElco triggered the SEC’s concern, according to SEC regional administrator Irving Einhorn. “Our information is that they (CoElco) have not engaged in any business activities since January of 1981 except acquiring for stock the securities of privately held companies,” he said.

20 Million Shares

As of April, the company had 20 million shares of common stock outstanding, held by an estimated 1,600 shareholders. Sterns said he owns 3.15 million shares, or almost 16% of the company’s outstanding shares.

On another front, CoElco faces a lawsuit by Mission Viejo National Bank, which is trying to force the company to repay a $150,000 loan. The bank contends that CoElco failed to make any payments on the loan and broke its promise to place accounts of its subsidiaries with the bank. Sterns said last week that he had reached a settlement agreement to repay the loan in small installments. But the bank said CoElco already missed the first settlement payment deadline, so the lawsuit will proceed.

Undaunted, Sterns said he is continuing to search for acquisition prospects. He said he is looking for entrepreneurial firms in related fields that can benefit from the financing, administrative and other services that a larger corporate parent can provide.

The last firm Sterns operated, prior to CoElco, was Resources International Ltd., an oil and gas syndicator and real estate investment company incorporated in Delaware, which has fallen into financial chaos and closed its offices at 4041 MacArthur Blvd. in Newport Beach.

Norm Fiengold, a trader at Carr Securities in New York, said that since Resources International stock hit a high of about $1.50 a share about a year and a half ago, it has been “in one continuous fall.” When it last traded about seven weeks ago, he said, it sold for 25 cents a share.

20 Lawsuits Filed

Resources has been besieged by angry investors and creditors who have filed more than 20 lawsuits against it. Named among the defendants in the three largest suits is Sterns, formerly the firm’s president and chief executive.

At least one creditor who sold Resource International a shopping center primarily in exchange for what, it alleges, proved to be shares of worthless stock, has obtained a court order to attach $655,000 worth of the company’s assets, pending a trial on its claims.

According to sworn depositions, Sterns in 1982 acquired an inactive company with the help of Jack Dean Wilkinson, who had expertise in oil and gas syndications, and Joseph Chambers Sr., a wealthy friend who invested in and personally guaranteed the financing for many of the company’s projects. The company became known as Resources International Ltd.

There is a lot of finger pointing among the current and former management officials of Resources International, with each saying the others are to blame for the company’s downfall.

Sterns said Resources had overcome its start-up pains and was making sizable profits when Joseph Chambers’ son Joseph (Woody) Chambers Jr. took control of the company from Sterns in October, 1983. But Woody Chambers contends that by the time he joined Resources, the company already was in deep legal and financial difficulty.

Borrowing Curbed

In a sworn deposition taken for one of the pending lawsuits against Resources, Wilkinson accused Sterns of making numerous misrepresentations to himself and other investors. He said Sterns raised money for “deals that were supposed to have been put together that just didn’t happen,” an allegation that Sterns denies.

Joseph Cillo, a lawyer who is Resources International’s current president, stressed that since he took over management of the company last May he has not borrowed any more money or put together any more drilling syndications. He said Resources is in a “holding action” while he tries to stave off the lawsuits and sell company assets to raise cash.

Cillo, formerly Resource International’s general counsel, said that when he became president the company was $5.8 million in debt and had less than $3,000 in the bank. He said he had no idea “where the money went” that was raised to finance oil and gas syndications and other business ventures. “For two years the company was not run according to the rules of better business judgment,” he alleged.

In the year ended June 30, 1983, which was the last period for which Resources International filed financial information with the SEC, the company reported that it had incurred a net loss of $5.3 million and that its liabilities exceeded its assets by $3.2 million. In an April, 1984, letter on file with the SEC, an auditor said, “Continuing losses and cash flow deficiencies . . . indicate the company may be unable to continue in existence.”

Sterns said he is saddened by his experience with Resources International because, with some exceptions, “I have been associated with winners all my life.”

In a resume on file with the SEC, Sterns said that his first job, which he held from 1962 to 1971, was for the accounting firm of Arthur Andersen & Co., where he specialized in acquisitions and mergers and in assisting financially troubled companies. At Arthur Andersen, Sterns said, one of his clients was Elixir Industries, a Los Angeles producer of components in the manufacture of recreational vehicles and manufactured housing.

In 1971, Sterns said, he joined Elixir as vice president-finance and eventually rose to become the company’s president and chief executive. In 1978, he said, he resigned his position at Elixir to join in an attempt by an outside consortium to buy the corporation. The attempted acquisition failed.

Bob Montgomery, a lawyer who in 1978 was on Elixir’s board, tells a different story about Sterns’ departure from the company. He said Sterns was fired. Montgomery would not describe the reason, other than to say that Sterns had suffered “a loss of credibility” with the board. Sterns admits only to having been fired as a consultant to Elixir, insisting he voluntarily resigned as president.

Having left Elixir, Sterns linked up with an Elixir competitor, Los Angeles-based Martin Industries. He said he personally guaranteed a $3-million line of credit for Martin, a company that he planned to use to purchase Elixir.

But after the Elixir deal fell through, Martin Industries sank into financial problems and, Sterns said, he pumped $576,000 of his own money into the company to try to keep it afloat. When Martin finally went bankrupt, he said, the repercussions forced him into personal bankruptcy.

In retrospect, Sterns said in an interview, he hadn’t dealt effectively with his financial problems because at the time he was depressed by a divorce and alcoholism. “I was drinking very heavily. A quart to a quart and a quarter of vodka a day . . . . One day I woke up and realized my life was out of control.”

Began Working With Crofoot

After he stopped drinking, Sterns said, he went to work for Disposable Waste Systems Inc., a Santa Ana manufacturer of industrial machines. The owner of Disposable Waste Systems, Joseph Chambers, later provided financial banking for ill-fated Resources International.

Sterns said that after he left Resources International, he immediately began to negotiate with Leonard Crofoot, the principal shareholder in Western States Plywood Corp., to join forces with him in forming CoElco. Sterns said he considered himself “a fallen angel” after his aborted attempt to buy Elixir and because of his former alcoholism. He said he needed Crofoot’s support to give him “credibility.”

Crofoot, 61, said that unlike other companies CoElco has acquired, Western States Plywood was in vigorous financial health when he brought it into the CoElco fold. He said although he is not pleased about the SEC investigation, he realizes that “the SEC has a duty to perform . . . and wouldn’t want a small investor to put money in some sham thing.”

A “casual observer” might think that CoElco is just a series of companies without substance, Crofoot said. But, he stressed, “this is for real. We have real companies with real people and real equipment.”

Tony Cimo, who sold CoElco his 50% ownership in Synchem Inc., a Huntington Beach distributor of chemicals primarily for the cosmetic industry, described Sterns as a “smooth talker,” a “workaholic” and “a pretty bright financial person” whose problems stem from “moving on a fast track.”

Revealed Past

Cimo said that before he struck a deal with CoElco last December, Sterns frankly recounted his business career and his former drinking problem. “David did not try to hide anything from me,” he said. Since the CoElco takeover, Cimo said, the chemical company--now called CoElco Chemicals--has paid down its debt from $650,000 to about $24,000. But because the firm’s receivables are being used to repay the old debt, he said, the company is strapped for cash to finance its current operations and its business has dropped off considerably.

Cimo, whose contract calls for him to remain as president of CoElco Chemicals for a year, said that although he does not always agree with Sterns’ business philosophy, he was glad to sell his company, which for various reasons had become financially troubled. He said that from what he can determine, almost every company that CoElco acquired had problems. “Every company has been at a bargain price.”

Jack Clifford, founder of Huntington Beach-based Clifford Research and Development Corp., a manufacturer of high-performance automotive engine components that CoElco acquired in a stock swap, said that CoElco “acquired a bunch of deadwood and now they have to put the right people in at the right companies to do the job.

Clifford acknowledged that before he sold his company to CoElco last November, it had foundered after a major supplier went out of business. He recalled that Clifford Research badly needed CoElco’s stronger borrowing power to rebuild its business. He is confident that CoElco’s hassle with the SEC will be resolved when the company’s paper work catches up with its hectic growth. And he said he is certain that his CoElco stock someday will be valuable. “It will take four to five years to build the empire to a Fortune 500 company,” he said.

ACQUISITIONS BY COELCO LTD. -Western State Plywood Corp., Santa Fe Springs, manufacturer and marketer of building products used in recreational vehicles and manufactured housing. Estimated book value $419,233.

-Diversified Printing Services, Irvine, printing services. Estimated value $50,950.

-Typeset Unlimited, Irvine, printing services. Estimated value $8,858.

-MME Inc., San Dimas, manufacturer of accessories for recreational vehicles. Estimated value $260,621.

-Office building in Phoenix, Ariz., Estimated value $2.27 million.

-Clifford Research and Development Corp., Huntington Beach, manufacturer of high-performance automotive engine components. Estimated value $28,250.

-Synchem Inc., Huntington Beach, chemical distributor. Estimated value $328,198.

-Laser Images, Van Nuys, producer of laser light shows for entertainment industry. Estimated value $178,076.

-McLean Enterprises Inc., Anaheim, manufacturer of chrome and gold-plated automobile wheels. Estimated value $76,932.

-USA Graphics Inc., Irvine, printing services. Estimated value $261,113.

-Formula I, Carson, manufacturer and distributor of auto-care products. Book value as yet undetermined.

Note: Diversified Printing Services Inc., USA Graphics Inc. were consolidated into Graphics Network International Inc., which in turn was traded for a 70% stake in Novar International Corp., an Irvine company involved in commercial printing, leasing and real estate development.