Analysis : A Colorful Entrepreneur’s Decline

The name alone--World Communications Inc.--says more about marketing entrepreneur Jay M. Kholos than do his dapper clothes, his spacious La Jolla home or the limousine and private plane that transport him hither and yon.

Kholos, still flamboyant at 45, likes to think big, and he likes to think in marketing terms. According to the Kholos philosophy, there is rarely a problem that can’t be solved through marketing.

But last week, when WCI was forced to file Chapter 11 reorganization bankruptcy in Utah (where it operates a mail-order distribution center), it became apparent that good marketing can’t cure all ills. Because when a marketing company grows--WCI says it generated $50 million in sales last year--marketing can’t take the place of corporate management. Marketing should be become a division of a large corporation; but, according to those who know Kholos, marketing was the corporation.

Not that Kholos’ flare for public relations and knack for marketing hadn’t paid off handsomely in the past.

For example, when U.S. Postal Service authorities confiscated $4 million worth of orders for WCI’s Grapefruit 45 diet plan because they alleged that WCI’s television ads were misleading, Kholos responded aggressively and with his strong suit--marketing and public relations.

The Postal Service, he explained, had a vendetta against him, and lawsuits filed in federal court partly supported his contention. Kholos, with skill and aplomb, portrayed himself as the entrepreneurial David to the government’s Goliath.

The government legal spat didn’t deter Kholos, who pushed ahead with his other telemarketing and direct-mail ventures and boldly predicted that revenue this year would approach $75 million.

But when two WCI record albums failed to sell earlier this year, Kholos found himself in a tight cash flow bind.

Direct-mail and telemarketing operations, like all businesses, must sell products before they can pay their bills. So if the products don’t sell, the bills can’t be paid.

At some point in that equation, a marketing approach doesn’t do much good. And not even Kholos, the quintessential marketeer, could stave off last week’s bankruptcy.

Assets totaled about $3 million and liabilities reached $5 million--including $400,000 owed to Harry Fox Agency, a New York firm that collects record licensing fees for music publishers. Harry Fox Agency had threatened to declare the WCI debt in default, which would have prevented Kholos from marketing any more records.

Rather than face that no-win scenario, WCI filed bankruptcy.

Last week, Kholos acknowledged that 1986 sales would fall far short of the $75 million he had earlier projected. One source estimated revenue this year at less than $30 million.

Kholos, ever the optimist, said he hasn’t “lost my spirit” and pledged to steer his firm back to profitability.

Kholos did try the traditional, corporate control method. A year ago, he hired Ed Schmidt, the former president of Capital Bank of Carlsbad and a button-down type, in the hope of bringing some old-fashioned corporate structure to the otherwise free-wheeling WCI.

But the relationship between Kholos and Schmidt soured quickly. Those familiar with the company say that the entrepreneurial Kholos had a hard time accepting Schmidt’s organizational changes.

At the time, Kholos acknowledged the rift, but said there was no animosity between the two. “We’re both right,” he said then. “Except that I own the company.”

Kholos “had a hand in what everybody was doing, and that in itself had a draining effect,” recalled a former employee, once part of the 250-member WCI work force that now numbers fewer than 100. “Major decisions were made in the hallway.”

Last week, Kholos conceded that the “concept” of hiring a conservative management-oriented executive was proper. He said he needed someone “who could take the load off a guy like me, an entrepreneurial type who needs to not get bogged down with day-to-day operations of the business. I need to do what I do best--come up with ideas and be able to have some creative freedom.”

Now, Kholos is going “back to basics . . . and hope that the people we do business with will continue with us.”

The next few weeks and months will “tell the tale” for the company’s future, he said.

“We’re in it to try to make it work. I’m not backing away.”