Debts, Lawsuits Enmesh CoElco Conglomerate : Bitter Battles Engulf Firm That Acquired Nine Area Companies

CoElco Ltd., the fledgling conglomerate that acquired nine Southland companies during the past year, is now struggling to trim expenses, pay off debts and ward off the lawsuits of bitter businessmen who accuse the company of breaking the promises it made when acquiring their firms.

The troubled Fountain Valley company is also the target of a deepening investigation by the Securities and Exchange Commission, which suspended trading of CoElco stock for 10 days in April. Although the SEC will not acknowledge an investigation is taking place, numerous current and former CoElco employees say they either have been interviewed by the SEC or are scheduled to be questioned within the next several weeks.

And although the SEC suspension was lifted May 2, CoElco’s stock, which climbed from 1 cent a share to nearly 50 cents a share before the suspension, has ceased being traded. Market makers in the stock have “backed off because of numerous unanswered questions,” according to Gary Guinn, assistant director of the National Assn. of Securities Dealers, which no longer quotes the stock on its national automated network.

Left holding hundreds of thousands of shares of the CoElco stock are some small entrepreneurs who merged their firms into CoElco in exchange for an ownership interest in the parent company, which they expected to burgeon into a highly profitable and diversified business empire.

Some of these businessmen now are alleging that although CoElco had promised to provide their companies with the financial resources and know-how they needed to grow, the company instead left them without sufficient funds to maintain their businesses. Moreover, they say that CoElco reneged on a guarantee to take responsibility for paying off old debts of the companies it acquired.

“It took 15 years of my life to build up a business, and I lost everything,” said Mike Durham, who recalled that he decided to sell his firm, Impressive Printing, to CoElco in hope of being relieved of financial headaches.

Another small businessman, Serge Zaidman, is waging a court battle to rescind the sale of his firm, McLean Wheels Inc. of Anaheim, to CoElco, because of alleged breach of contract and fraud. He won a preliminary injunction last week to stop CoElco from locking him out of the firm.

Employees of firms in the CoElco fold say that at times both they and CoElco suppliers have been paid with bad checks, and angry creditors have obtained court orders to attach CoElco’s bank accounts. One creditor, the Mission Viejo National Bank, won a court order to attach $151,000 of CoElco’s assets after the company failed to make payments on a loan.

And on May 24 a group of creditors successfully foreclosed on an office building CoElco owned in Phoenix that the company valued in its SEC financial statements at more than $2 million.

The businessmen who stayed on to run the companies they sold to CoElco say they don’t know where the money went. They said all revenue was collected and spent at the corporate level. Current and former company executives interviewed agreed that CoElco has suffered from poor management and exorbitant spending by consultants and corporate officers, some of whom lived free of charge in company-owned homes and many more who drove company-leased cars.

According to some CoElco employees, within the last few weeks a variety of steps have been taken to cut the fat out of CoElco. They say that some of the highest-paid and least-productive staff members have been dismissed, and on May 15 company founder and President David Sterns resigned, although he is still working at CoElco offices.

Sold Mainstay Firm

To raise money to help pay off its debts, CoElco recently sold the inventory and equipment of its mainstay company, Western States Plywood Corp., a Santa Fe Springs producer of building products used in recreational vehicles and manufactured housing. Mac McKendry, who was president of Western States Plywood when it was sold, estimated that the company accounted for about half of CoElco’s revenues.

A CoElco source who asked not to be identified said that the sale of Western States Plywood to New Orleans-based Plywood Panels netted CoElco $895,758. All of the sale proceeds, he said, were applied toward paying off CoElco’s debt to National Acceptance Corp., which had lent money against the accounts receivable of firms that CoElco acquired.

CoElco corporate officials refused to say much publicly about the financial dealings of the company until the SEC’s investigation is completed. “We are just trying to survive with as little notoriety as possible,” one of them explained.

CoElco officials have said that the SEC wants the company to catch up with overdue financial reports and to change the method by which it presents such information to investors.

When the SEC first suspended trading in CoElco’s stock, company officials said the action had raised questions about the value of the company’s assets and made lenders hesitate to do further business with the company.

Acquisitions Halt

They also said the SEC’s probe had put a halt to CoElco’s acquisition binge, in which it had bought nine firms--ranging from a chemical distributor to a laser entertainment concern--in less than a year.

But, according to CoElco’s latest financial report, filed May 9 for its fiscal third quarter ended Feb. 28, CoElco’s financial problems predate the SEC investigation.

In that report, the company said it was thinly capitalized and “experiencing a severe liquidity problem” that must be resolved “to maintain the company’s aggregate good-will and ongoing viability.”

As of Feb. 28, the unaudited report said, CoElco had assets of $13.2 million, compared to current liabilities and long-term debt of $11.3 million.

For the first fiscal nine months ending Feb. 28, it posted net income of $101,255, largely because of an extraordinary gain of $632,199 from the sale of a subsidiary. For the similar period a year earlier, the company reported net income of $89,299. For the third quarter of fiscal 1985, CoElco reported net income of $25,425, compared to a loss of $45,05 during the same year-ago period.

Without the extraordinary gain, CoElco was operating at a loss. In the nine-month period, CoElco posted a loss from operations of $326,743, compared with a loss of $50,537 the prior year. For the third quarter, the company’s operating income fell to $25,950, from $63,943 a year earlier.

Blamed Chemicals

The company blamed the fall in operating income on its chemical subsidiaries, which it said have suffered a severe decline in sales stemming from financing problems.

CoElco said that all its other companies had enjoyed revenue gains over the same three- and nine-month reporting periods but that “revenues of all companies, despite reported increases, have been adversely affected by an acute shortage of working capital . . . .”

In its third-quarter report, the company also said its net income had been adversely affected by rising interest costs and by “a disproportionate increase in administrative expenses” that subsequently had been offset by personnel cuts and “improved efficiency levels.”

“We are trying to reduce our debt and increase our asset base so we can again go on the acquisition trail,” said Don Logan, who resigned last month as acting chief executive and as a director at CoElco. Logan still continued to maintain an office at CoElco headquarters after his resignation.

Logan’s departure from CoElco-- which he said does not mean he is at odds with the company--is only one of a series of management changes that CoElco has undergone in a matter of weeks.

Sterns Steps Down

May 15, after CoElco’s stock-trading suspension, Sterns, who acquired a controlling interest in CoElco a year ago when it had no assets or earnings, stepped down as chief executive. Some who were employed at CoElco at the time said Sterns felt pressured to resign when it became widely known that he previously had been linked to several other financially troubled Southland companies. The last company he founded, Resources International Ltd., has fallen into financial ruin amid lawsuits by angry creditors and investors.

After resigning the presidency, Sterns, who is a certified public accountant and a major stockholder in CoElco (he said last May that he owned 16% of the company’s outstanding shares), stayed to sort out CoElco’s finances for the SEC, company employees say.

After Sterns resigned, CoElco’s board hired a pair of consultants to temporarily manage the firm, then rescinded their contract less than four weeks later when they attempted to lead the company into a Chapter 11 bankruptcy to reorganize its debt, according to several former senior executives.

Logan, who sold USA Graphics to CoElco in exchange for stock, agreed to take over temporarily as CoElco’s chief executive on June 10. Now that Logan has resigned, CoElco employees said it is uncertain who will take his place. However, Leonard Crofoot, the founder and previous owner of Western States Plywood, will remain as CoElco’s chairman.

Crofoot and CoElco’s attorney, Robert Huston, refused to comment on CoElco’s current financial dealings or to discuss the lawsuits filed against the company, contending that such discussion would not be appropriate during the SEC investigation. David Sterns would not return phone calls.

Brother Resigns

Among the rather confusing comings and goings of CoElco employees is the resignation of Sterns’ older brother, Veryl Sterns, who has quit as vice president of corporate development to become chairman of a company called Novar International Inc. Veryl Sterns said that Novar had been a “shell corporation” with no assets or liabilities when it was reactivated last April by him and a group of anonymous investors.

However, the secretary of state’s office in Delaware, where Novar International was incorporated Oct. 31, reports that Novar lost its corporate status March 1 for nonpayment of state franchise tax. According to the state’s records, Novar owes Delaware $257,578.

Sterns said that Novar bought from CoElco a company called Graphics Network International Inc. in a transaction through which CoElco acquired a 59.4% ownership of Novar. Since then Novar has entered into an agreement to sell Graphics to a private party, according to sources close to the transaction.

Sterns said that, like CoElco, Novar will seek to make a broad range of acquisitions and mergers. He said that Novar does not intend to take over any more CoElco firms and that his brother, David, is not a Novar officer or investor. He would not disclose, however, the names of the other investors in the company.

The elder Sterns said he still is employed as a consultant to CoElco, but that association soon will end. “It seemed best for CoElco and for our (his family’s) own future to start afresh,” he said.

Jack Clifford, who sold Clifford Research and Development to CoElco in a stock swap last October, said he believes the directors of CoElco were well-meaning but were “taken like a lot of sheep to slaughter” by consultants that they began to hire last January to speed up the company’s growth. He said the directors of the company were “looking for the magic person who was going to make millions for them.” Instead, he said, the consultants wasted the company’s money.

House Payments Made

Consultants, however, were not the only high spenders, according to Eileen McVeigh Cabrinha, who recently resigned as CoElco’s vice president of real estate. She said that CoElco was making mortgage payments on four houses, including two occupied by David and Veryl Sterns. She said those who occupied the houses had signed agreements to pay monthly rent ranging from $2,357 to $1,600, but the rents were never collected.

Clifford said he is optimistic that through cost-cutting measures the company can redeem itself and attract the new lenders it vitally needs.

But others say that the damage CoElco has caused some of the companies it acquired may be irreparable. “It is leaving people bankrupt. No question about it,” said Robert Sherman, an Encino attorney representing three businessmen who contend that CoElco has breached its agreements with them.

Sherman said that CoElco attracted small businessmen to it by making “outrageous pledges.” He cited, for example, his client Mike Durham, who says he was offered $175,000 for Impressive Printing, a commercial printing firm, before he chose instead to sell the firm to CoElco.

CoElco’s offer to Durham was “irresistible,” Sherman said. In exchange for Durham’s company, he said, Durham was to receive stock in CoElco that after two years was guaranteed to be worth $400,000 or CoElco would make up the difference.

Sherman said as part of the deal his client also was offered a five-year employment contract to stay on as president of the printing company at an annual salary of $50,000. And Sherman said CoElco promised to take responsibility for paying $145,000 worth of Impressive Printing’s former debts.

Durham signed the sale agreement, but CoElco never got around to signing it, Sherman said. He added that although CoElco took possession of Durham’s printing business and equipment, Durham never received any stock. Last Feb. 18, he said, Durham was removed as president of the firm but was kept on as a corporate-level employee until he was laid off in May.

According to Durham and his attorney, CoElco has been sending Impressive Printing’s creditors to Durham to collect on their bills, contending that the printing firm’s merger with CoElco was never consummated. But, he said, CoElco refuses to return Impressive Printing’s equipment to Durham.

In retrospect, Durham said he had mistakenly trusted CoElco’s top officials, particularly Sterns, who welcomed him as “part of the family.” He said the Sterns’ brothers repeatedly told him that CoElco was “based on the principles found in the Bible” and that “there is a Supreme Being who brought us together.”

Tony Cimo, who sold Synchem Inc., a Huntington Beach chemical distributor, to CoElco in a stock swap, alleges that the CoElco did not live up to its promise to pay off Synchem’s previous debts. According to Sherman, Cimo “is now being sued by all the creditors claiming hundreds of thousands of dollars.”

And Serge Zaidman has filed suit against CoElco and a number of current and former CoElco officers for fraud and breech of contract. He is alleging that CoElco originally agreed to a two-year conditional plan of merger with Zaidman’s company, McLean Wheels Inc. of Anaheim, but then tricked Zaidman into signing an agreement to immediately complete the merger.

Sherman said Zaidman also filed a lawsuit against National Acceptance Corp., a Los Angeles lender, for writing letters that instructed CoElco’s customers to send their money to National Acceptance to repay loans that CoElco had taken using McLean Wheels’ orders as collateral.

Sherman said many of Zaidman’s customers are refusing to make any payments to anyone until a court decides whether CoElco or Zaidman owns McLean’s receipts.

‘It took 15 years of my life to build up a business, and I lost everything.’

Mike Durham

Businessman