Raycomm Takes Its Renegade Subsidiary to Court : Bankruptcy: The Southern California company puts Texas-based Flex Staff in Chapter 11 reorganization in an effort to wrest control of it.
Two years ago, Raycomm Transworld Industries in Encino was going broke trying to provide temporary engineers to Southern California’s shrinking aerospace industry. So it bought a labor-supply firm in Houston called Flex Staff, hoping its broader clientele would cushion Raycomm against further losses.
But now, this small acquisition is giving Raycomm a Texas-size headache. It involves allegations of embezzlement, the disappearance of office furniture and secession attempts by a disgruntled subsidiary that refuses to genuflect to its parent company.
Indeed, in a most unusual action filed last week in a Texas court, Raycomm put Flex Staff in Chapter 11 bankruptcy reorganization in an effort to wrest control of a renegade subsidiary. (The parent company, Raycomm, did not file for bankruptcy protection.)
“I came down there and they threw us out,” said Jeff Raymond, chief executive of Raycomm, which a month ago moved its headquarters to Costa Mesa.
Arthur Grider, Flex Staff’s founder and former president, admits he has ignored Raycomm’s orders, including requests for financial records. But Grider, who sold Flex Staff to Raycomm for $400,000 and a share of future profits, says he had good reason.
“Raycomm hasn’t made payments to me as scheduled,” he contends.
When Raycomm bought Flex Staff in the summer of 1991, it was a quiet deal that was supposed to benefit both parties.
In Flex Staff, Raycomm saw a broad-based clientele in several states. Most of Raycomm’s other subsidiaries, including Mainstream Engineering in Encino, supplied temporary technical personnel. But Flex Staff provided technical as well as secretarial, clerical and industrial workers for a variety of companies.
Last year Flex Staff added about $25 million to Raycomm’s revenue, officials said. And while Flex Staff seems to have been profitable--Grider says it earned $900,000--Raycomm lost $1.4 million on sales of $43 million for the six months that ended Sept. 30.
Getting Flex Staff’s operations in order could be crucial to Raycomm, which said in its latest quarterly filing with the Securities and Exchange Commission that the company might have to file Chapter 11 if it can’t get financing. As of Sept. 30, Raycomm had current assets of $8 million and liabilities of $12 million.
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Raycomm says its problems with Flex Staff surfaced last fall. In December, Raycomm’s board fired Grider. But not only did Grider not leave, he barred Raycomm officials from entering the Houston office.
Grider also admits taking furniture from a Flex Staff office to a rival firm across the street owned by his wife, who was on Raycomm’s payroll but who was also fired. But Grider says that furniture belonged to his wife in the first place.
In court papers, Grider claims that Raycomm owes him about $400,000. And over the past few months, Grider has made several attempts in Texas courts to foreclose on Flex Staff or to have a court-appointed receiver “rehabilitate” the parent company. But Raycomm’s attorneys held up those efforts.
Raymond, 34, concedes that Grider might be owed some money. But he accused Grider of embezzling or diverting $1.2 million of company funds.
“He tried to bury the company,” Raymond said, adding that he has notified the FBI about the alleged embezzlement. The FBI in Houston, however, said it was unaware of any such complaint.
Last week, a Texas court ordered Flex Staff to open its offices to Raycomm, and a dejected Grider said he has not been to Flex Staff in a week. But Grider, 53, said softly, “If Raycomm says I embezzled, we are going to get very, very, very nasty.”
Robert Fain, Raycomm’s former CEO who was replaced by Jeff Raymond last summer, insists that “Flex Staff was a good tactical and strategic acquisition.” But who could have known this would happen? said Fain, a New York turn-around specialist who remains Raycomm’s chairman.
“It’s a mess,” said Joseph Raymond, Jeff Raymond’s father and Raycomm’s biggest stockholder. The elder Raymond, who founded Raycomm in 1968 in New Jersey, recently resigned from the company’s board. But he denied that problems with Flex Staff had anything to do with his departure.
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Grider also thought the deal was a good one. The Texas native had worked for temporary-help agencies most of his life, including several years in Los Angeles. In 1986 he started Flex Staff in Houston and soon opened offices in Austin and Pasadena, a Houston suburb. Before Flex Staff’s troubles with its parent company, Grider said Flex Staff provided 1,600 workers to 120 clients and was growing.
Now, both sides agree the fate of Flex Staff rests with the courts. For now, Raycomm has control because it is the debtor in possession. But much damage has already been done. Flex Staff has suspended new business, and Raycomm is trying to get new managers to operate the subsidiary.
“We were blind to their operations,” Jeff Raymond said, noting that subsidiaries aren’t supposed to work against the parent company. “It’s been a strain.”
