CoElco Seeks Chapter 11 Protection : Company Besieged by Creditors After Aggressive Growth

CoElco Ltd., a year-old conglomerate besieged by creditors and under a Securities and Exchange Commission investigation, has sought protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

According to documents filed Friday at the U.S. Bankruptcy Court in Santa Ana, the Fountain Valley company owes $11.2 million to 831 creditors and has assets of $13.2 million. Named among the company’s 20 largest unsecured creditors are past owners of some of the nine firms that CoElco acquired in the past 12 months, primarily through common-stock swaps, as well as one-time Watergate defendant John W. Dean.

Robert Huston, a director and general counsel with CoElco, said the company’s officers decided to file a Chapter 11 petition to halt the legal actions against it long enough to deal with the financial problems. Chapter 11 protects a company from creditors while it attempts to reorganize and pay its debts.

“The number of lawsuits had become so burdensome it was difficult to sit down and consider business alternatives,” said Huston. He estimated that in the past three months, “18 or 19” suits were filed against the company. Most of the suits were filed by creditors, but other plaintiffs were unhappy owners of firms that CoElco had acquired. He said the company intends eventually to pay back “every cent” it owes.

Huston attributed CoElco’s problems to over-ambitious growth and excessive corporate overhead. “They put together an administrative group geared to a larger company than developed,” he said. “When the growth cycle stopped, the overhead continued.”

Protected One Building

The filing was the second for CoElco since December. Court records signed by CoElco Chairman Leonard H. Crofoot show that just last Dec. 14, the company obtained Chapter 11 protection from the U.S. Bankruptcy Court in Arizona for seven days “in order to protect an important asset” against which it owed $194,000.

Eileen McVeigh Cabrinha, who recently resigned as CoElco’s vice president of real estate, said that the “asset” to which CoElco referred was a building in Phoenix that the company valued at more than $2 million in its SEC financial statements. She said that by using the bankruptcy proceeding last December, CoElco saved the building from foreclosure and paid the creditors involved. But another group of creditors claiming that CoElco owed them $425,931 ultimately foreclosed against the building in May.

Last April, the SEC suspended trading of CoElco stock for 10 days, because of concerns about the timeliness and accuracy of financial information about the company that was being disseminated to potential investors. SEC officials said that action was intended to put investors on guard.

Since the suspension was lifted May 2, the SEC has been investigating CoElco, according to numerous current and former CoElco employees who say they have been interviewed by federal agents. An official of the National Assn. of Securities Dealers in Washington, which no longer quotes CoElco stock on its automated network, recently said that market makers have voluntarily stopped trading CoElco shares.

For the fiscal nine months ended Feb. 28, CoElco posted net income of $101,255, due to an extraordinary gain of $632,199 from the sale of a subsidiary. A year earlier, CoElco reported net income of $82,299.

Without the extraordinary gain, CoElco suffered a loss from continuing operations of $326,743, compared with a loss of $50,537 from continuing operations in the equivalent period a year earlier.

Meanwhile, some CoElco employees have complained that they and CoElco suppliers have been paid with bad checks. Several creditors recently won court orders to attach CoElco assets in order to satisfy outstanding debt. One CoElco creditor, Mission Viejo National Bank, obtained a court order to attach $151,000 of CoElco’s assets after the company failed to make payments on a loan.

And at least two persons who entered into agreements to sell their firms to CoElco have filed lawsuits against the company and some of its officers, contending that CoElco reneged on its promise to assume old debts of the firms it sought to acquire.

Main Property Sold

On June 27, CoElco sold the inventory and equipment of its mainstay company, Western States Plywood Corp., a Santa Fe Springs producer of building materials used in recreational vehicles and manufactured housing. According to a Western States official, the operation accounted for about half of CoElco’s revenues. It was sold to New Orleans-based Plywood Panels to raise $895,758 to help CoElco pay its debt to National Acceptance Corp., which had made loans against the accounts receivable of firms that CoElco acquired, said a CoElco source.

Investors in CoElco said they were attracted by the concept of grouping small, promising entrepreneurial firms under the umbrella of a larger corporation that could supply the financing and know-how that the member firms needed to grow.

Dean, the former White House counsel who is now a Los Angeles business consultant, said he decided to invest in CoElco last January. He said some banker friends of his had “looked at the company and liked it a lot.”

Dean, who describes himself as “not an unsophisticated investor,” said he was also impressed by CoElco’s financial statements and by representations about the company he heard from CoElco’s founder, David Sterns, who resigned as CoElco’s chief executive in May.

Dean Became Involved

Dean said he grew concerned about CoElco’s financial health when officials of the company told him they needed more funds. “They asked me to raise more money for them, and I said I couldn’t and wouldn’t,” he said.

Because of his concerns, Dean said, he began visiting the firm’s corporate headquarters to “monitor” his investment. For a while, he said, he considered joining the company as an officer, but decided against the idea. He said the company hired a consultant he had recommended as a trouble-shooter, but then rescinded the consultant’s contract.

Dean said he finally stopped meeting with CoElco officers. “I decided I had enough when the SEC stopped the stock from trading,” he said.