Coleco Industries, Inc
18 Pages Posted: 21 Oct 2008
Acting as chief financial officer (CFO), students try to determine how Coleco can fend off creditors. Coleco is in default on its loans and is in a negative equity position.
Rev. Feb. 10, 2014
Coleco Industries, Inc.
Coleco's chief financial officer, Paul Meyer, had to devise a capital-restructuring plan to put the company back on its feet. Just a couple of years earlier, Coleco could not make its smash-hit Cabbage Patch Kids fast enough to keep up with demand. Now, in March 1988, the Cabbage Patch craze was spent, and Coleco had not come up with any new blockbuster products. The company's annual sales were two‑thirds of what they had been only two years earlier, which resulted in losses that contributed to its negative equity position of $ 84 million.
Coleco's capital position was precarious and impatient creditors were wary of lending any more to the firm, which was going into default on its loans. In its present condition, new equity from outsiders was virtually out of the question. As shown in Exhibit 1, the company's stock price had ranged between $ 22.25 and $ 8.125 from 1984 through 1986 (when the company had a loss of $ 111 million). As losses continued to mount, the stock price fell to its year-end 1987 price of $ 3.625. By March 1988, following announcement of an annual loss of $ 105 million, the stock reached a low of $ 2.50 per share. The issue with which Meyer and the rest of Coleco's board had to wrestle was how to restructure the company's capital in a way that would satisfy its creditors without diluting the stock any further than was necessary.
The Toy Industry
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Keywords: financial policy, liability management, restructuring, working-capital management
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