Creditors Question Kleid's Practices

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The handling of rental income owed to list owners and managers by the Kleid Co. before it filed for bankruptcy last month has called into question the practice of floating receivables to cover operating expenses.


Bankruptcy filings show Kleid, New York, with debts of $14.6 million owed to more than 200 creditors. Some creditors have said that Kleid failed to report rental income received from mailers and used the money to stay in business. List owners who called renters of their lists were told that payments had been sent to Kleid, but aging reports did not reflect that those payments had been received.


"As brokers paid Kleid for usage of our list, Kleid was not consistently forwarding this money to Outside in a timely manner,'' said Michelle Givens, consumer marketing director for Outside Magazine, Sante Fe, NM, which is owed $225,875. "In a significant number of instances, an accounts receivable report showing mailers who had not paid for usage of our list did not reflect payments that had in fact been made to Kleid many months earlier.''


Other creditors said they had similar grievances.


"Given the amount of money Condé Nast was out and we were out, the collection of receivables wasn't timely. The numbers speak for themselves,'' said Carol Lapair, circulation director for Kiplinger Washington Editors Inc., which is owed $970,333 and is Kleid's second-leading creditor. Condé Nast Publications, New York, is owed $1.6 million.


"I know my list invoices were paid to them,'' said Dean Lage, vice president of circulation for Montcalm Publishing Corp. "They went as far as saying to our list manager a check had been issued, even though it had not been sent.''


Contracts between list owners and managers stipulate the time frame for turning over list-rental income from mailers. In most cases, owners want the income immediately upon payment. Float time is the period between the receipt of mailer payments and their dispersal to owners. In the last year, one owner said Kleid's float time stretched to as much as 90 days.


"I don't think it is a common practice. Does it happen? Yes,'' said one of Kleid's top 20 creditors who asked not to be named. "Probably in their minds, playing the float was the most expedient way to stay alive without hurting current business. Once people realize a blue blood [list company] had been doing it, who's to say some of the other companies aren't?''


John Hughes, Kleid's chief financial officer and its only remaining partner, declined to comment on the allegations except to say: "Let the court do its work. We haven't hidden anything from the courts.''


Former Kleid partner, president and CEO Richard Vergara, who along with former partners Arlene Minick and Jeff Kobil moved to Stevens-Knox & Associates, New York, also declined to comment. He previously had suggested that losing a few major clients would be enough to put a list company in financial jeopardy.


Monica Smith, vice president of list management at Novus Marketing, Tarrytown, NY, which is owed $264,620, said Vergara tried to cover himself by blaming Kleid's difficulties on client defections.


"Where is the money if [Vergara] didn't float it? It had to end up somewhere,'' Smith said. "A list management company cannot hold its list clients responsible for keeping it afloat. That's the image you have to question. Loyalty is the most upsetting thing. Those list owners stood by him, and he burned every single one of them. They were loyal -- and that's an insult to them.''


A creditors' committee has been formed to represent the companies that Kleid owed money to, but some wonder what can be done to prevent a similar circumstance where financial hardship prevents "float money" from ever being received.


"There should be some kind of ethical practice set up,'' Lage said. "When most [list companies] go out of business, we're not the ones that get paid. Everyone in the industry knows what's been going on. Money received from list users is collected, floated for 30 to 90 days to cover expenses and then sent out to list owners and managers. Kleid got caught in a bind.''


Calls to the Direct Marketing Association's committee on ethical business practices were not returned.


Some creditors suggested that one way list managers can partially protect list owners against nonpayment is by purchasing a bond as insurance. List owners would have rights to call in the bond -- which would pay a percentage of income -- should an instance arise when payments for list rental income could not be collected. List owners could request that managers purchase such bonds for each account or to cover all of its accounts.


Another creditor suggested that list-rental income be paid directly to the list owner, thus eliminating the roles of the list manager and broker and the potential for floating money.
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