World Communications Files Chapter 11 : Financially Battered by Legal Battle Over Grapefruit 45 Diet Plan

CARLSBAD —  World Communications Inc., financially hammered by an 18-month legal battle with U.S. Postal Service authorities over its controversial Grapefruit 45 diet plan, has filed for Chapter 11 reorganization bankruptcy.

Had WCI not filed for bankruptcy protection, a creditor may have prevented the company from marketing and selling its record products, according to Jay M. Kholos, WCI’s owner and president.

The bankruptcy petition was filed Monday in Salt Lake City, the closest federal district to WCI’s shipping and mail order fulfillment center in Ogden, Utah.

For the past six months, WCI has had “severe cash flow problems” caused, in part, by its longstanding legal battles with the U.S. Postal Service over the company’s controversial Grapefruit 45 diet plan, Kholos said Tuesday.

Authorities contend that Grapefruit 45’s televised ads were misleading and violated a previous consent agreement that prohibited WCI from making false claims. As a result, postal authorities have seized about $4 million worth of customer orders for Grapefruit 45. In addition, the Postal Service is holding about $500,000 in “postal claims” for refunds due and packages not delivered, said Kholos.

The legal squabble with the Postal Service “has definitely had a devastating effect on our momentum and . . . on the people we do business with,” said Kholos.

Twenty-one WCI employees were laid off last Friday, dropping the work force to fewer than 100, said Kholos.

At its peak earlier this year, WCI employed more than 250 people and company officials had predicted 1986 revenue of about $75 million.

Sales this year will total “substantially less than” $75 million, Kholos said Tuesday.

In addition to marketing the Grapefruit 45 diet plan, WCI operates telemarketing, direct mail and television production and distribution ventures.

WCI’s bankruptcy was sparked when a New York music publishing collection agency said it would put WCI in default on a $400,000 bill it was owed by the company. Had the bill gone into default, WCI would have lost its right to license and sell records, said Kholos.

The New York firm, Harry Fox Agency, agreed to “work out a pay schedule” but didn’t guarantee that it wouldn’t put WCI in default, said Kholos.

Last week, Harry Fox Agency notified WCI that the bill was in default. So, “to protect ourselves and our creditors against what would have been a devastating blow to the company,” WCI filed bankruptcy, said Kholos.

The company has assets of about $3 million--not including the $4.5 million held by the Postal Service--but liabilities of nearly $5 million, said Kholos.

“We made no bones about being slow to pay” creditors, said Kholos. “But in the last several months, we’ve gone out and talked to them and worked out agreements to get everybody . . . paid.”

Despite the bankruptcy, Kholos, an upbeat marketing industry veteran, remains optimistic.

“I haven’t lost my spirit (but) I had no other choice than what I did. I don’t have investors; this is all my money.”

The first meeting of WCI creditors is Oct. 23 in Salt Lake City.